Contract Law

Frequently Asked Questions on Contract Law

Ans. History of Law of Contract Act :- Law of Contract in the present form has undertook a long journey. Before passing of any codified law, there were many customs, usages and practices regarding contractual relations but there was no uniformity in such customs etc. in different parts of country and therefore courts in India were facing various difficulties. To overcome this difficulty, by passing Acts separately of Supreme Court of Calcutta in 1971 and for the Supreme Courts of Bombay and Madras in 1781, provisions were made that suits relating to matters of contract were to be decided according to Personal law of parties. However, necessity was felt to have a separate and comprehensive law on contractual relations in view of growth of Industry and business. The Indian Law Commission prepared a bill on Contractual relations on 1866 and thereafter some modifications and changes were made and then "Indian Contract Act 1872" was enacted.

Object of the Indian Contract Act :- The main object of law of contract as evident from the Preamble of Indian Contract Act, 1872, is to provide well defined uniform rules of law to control all contractual relations, so that no one be able to get unfair advantage from other.

Scope of the Act :- Indian Contract Act though contains all rules and regulations on the subject but it is important to point out it is not exhaustive. Section 1 of the Act makes it clear which says "Nothing herein contained shall effect the provisions of any statute, Act or Regulation, not hereby expressly repealed, nor any usage or custom of trade nor any incident of any contract, nor inconsistent with provisions of this Act."

So Indian Contract Act is not exhaustive as it is practically not possible because of different aspects of business, and Industrial transactions. Following are some Acts, provisions of which are in fact supplemental to provisions of Indian Contract Act :-

(i) Transfer of Property Act.

(ii) Sales of Goods Act

(iii) Indian Partnership Act

(iv) Specific Relief Act

(v) Negotiable Instruments Act

(vi) Company Law

Similarly trade customs, usages like (a) Hindu system (b) Carriers system (c) Rules of Pre-emption etc are not inconsistent with provisions of Indian Contact Act so equally necessary. Therefore, Indian Contract Act though provided basic, elementary rules on the subject but are not sufficient in view of wide diversity in different Contractual relations. Scope of Law of Contract thus is much more than what is provided in Act, covering inter-connected acts, regulations to control different situations.

Ans. Proposal. - The word proposal has been defined in Section 2(a) of the Indian Contract Act as -

"When one person signifies to another his willingness to do or abstain from doing anything with a view to obtaining the assent of that other person to such act or abstinence, he is said to make a proposal."

The word `offer' of the English Contract Law is synonymous to the word proposal of the Indian Contract Act. An offer must contain the following characteristics :

(i) An offer must be intended to create legal obligations and must be capable of creating legal obligations.

(ii) It must give rise to legal consequence.

(iii) The proposal must be made with a view to obtaining the assent of the party.

(iv) The terms of an offer must be definite and certain or at least capable of being made definite or certain.

(v) It must be addressed either to the public at large or to a particular person.

(vi) It may be made by words or by conduct.

(vii) It must be communicated to the offeree.

(viii) An invitation for offer is different from a legal offer. So in order that an offer, after acceptance, can result in valid Contract it is necessary that offer should be made with an intention to create legal relationship.

In Harvey v. Facey (1893) A.C. 552 the defendants were the owners of a plot known as "Bumper Hall Pen". Plaintiffs being interested in purchasing the same sent a telegram to defendants "Will you us Bumper Hall Pen ? Telegraph Lowest price". Defendant in reply telegraphed - "Lowest price and 900". Plaintiff sent another telegram, saying. "We agree to buy Bumper Hall Pen for and 900. Please send us your title deeds."

Plaintiffs contended that the second telegram from defendants quoting lowest price was an offer and same had been accepted by plaintiffs and the contract was complete. It was held by Privy Council that exchange of above said telegrams had not resulted in Contract.

(2) Acceptance - As per Section 2(b) when the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted.

In proposal the necessary requirement is that one person express his willingness before another and the intention of the person who signifies his willingness is that the other person should express or signify his willingness which means that the other person agrees to his desire. It then amounts to acceptance of the officer, i.e., the proposal stands accepted and other person agrees to do as suggested or proposed.

Thus when the person before whom the proposal is made agrees to the proposal he is said to have accepted it. His assent is known as his acceptance to the proposal. For example when X proposes to Y that he is ready to sell his Hero Cycle to Y for Rs. 800/- and Y agrees to buy X's Hero cycle for Rs. 800/- then Y's willingness of purchasing X's Hero Cycle for Rs. 800/- amounts to his acceptance of the offer made by X and the proposal made by X is said to be accepted.

(3) Promise - Section 2(b) further speaks that "A proposal when accepted becomes a promise." A promise in law is an accepted proposal. When the offer made by one to another is accepted by other, it becomes a promise which simply means that now it is binding on both parties, it now take the scope of an obligation for both parties.

(4) Promiser and Promisee - Section 2(c) specifies that the person making the proposal is called the promiser and the person accepting the proposal is called the promisee.

For the formation of a contract it is essential that there must be at least two parties to a contract. The party making a proposal which has been accepted is called the promiser and the person accepting the proposal is called the promisee. In the case of reciprocal promises each party is at once the promiser and the promisee.

(5) Consideration - For the formation of a valid contract it is essential that there should be consideration. Term `consideration' is explained in Section 2(d) as under :

"When at the desire of the promiser, the promisee or any other person has done or abstained from doing or does or abstains from doing, or promises to do or to abstain from doing something, such act or abstinence or promise is called a consideration for the promise.:

In Kumari Sonia Bhatia v. State of U.P., AIR 1981 SC 1274, it was observed that "Consideration" means a reasonable equivalent or other Valuable benefit passed on by the promiser to the promisee or by transferor to the transferee. Similarly when the word "adequate" it makes consideration stronger so as to make it sufficient and valuable having regard to the facts, circumstances and necessities of the case.

So from the definition of "Consideration" u/s 2(d) of Act following essentials are required for valid consideration :-

(i) Consideration to be given "at the desire of the promiser".

(ii) Consideration to be given "by the promisee or any other person.

(iii) Consideration may be past, present or future.

(iv) There should be some act, abstinence or promise by promisee, which constitutes consideration for the promise.

6. Agreement. Section 2(e) defines the word agreements follows-

"Every promise or set or promises, forming the consideration for each other, is an agreement."

An agreement enforced by law is a contract while an agreement not enforceable by law is said to be valid. Thus every contract is an agreement but every agreement is not a contract.

The distinction between `agreement' and `contract' made by sub-section (h) is apparently original, it is convenient, and has been adopted by some English writers. The conditions required for an agreement are contained in Section 10 of the Act where it will also be seen that the absence of any such condition makes an agreement void, and certain defects will make a contract voidable.

Ans. Section 2(h) of Indian Contract Act says

"An agreement enforceable by law is a contract." So all agreements does not result into a contract. Contract arises as a result of an agreement purporting to create and define right and obligations between the parties. Therefore an agreement at least between two parties is one of the essentials for creating contract. An agreement arises by an `offer' or `proposal' by one party and the `acceptance of such proposal' by the other party.

Section 2(a) of Contract Act defines "Proposal" as:

"When one person signifies to another his willingness to do or to abstain from doing anything with a view to obtaining the assent of that other to such act or abstinence, he is said to make a proposal." The person making the proposal does not become bound thereby until proposal is accepted by other party. As soon as his proposal is accepted it becomes a promise whereby both the parties become bound. Section 2(b) says:

"When the person to whom proposal is made signifies his assent thereto, the proposal is said to be accepted. A proposal when accepted becomes a promise."

So after the acceptance of an offer, each party becomes legally bound by promise made through medium of an offer and acceptance of it. According to Section 2(e) of Contract Act "Every promise and every set of promises forming the consideration for each other is an agreement." So promises from the two parties to one another is known as an agreement.

As stated above that an agreement enforceable by law is a contract. All such agreements which satisfy the conditions mentioned in Section 10 of Act are contract. Section 10 of Act provides:

"All agreements are contract if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object and are not hereby expressly declared to be void."

So following essentials are needed for a valid contract:

(i) An agreement between the two parties. An agreement is the result of `Proposal' by one party followed by "Acceptance" by the other.

(ii) Agreement should be between parties who are competent to contract.

(iii) There should be a lawful consideration and lawful object of that agreement.

(iv) There should be free consent of the parties, when they enter into the agreement.

(v) Agreement must not be one, which has been expressly declared to be void.

Ans. At the very outset it is pertinent to mention following important principles of Indian Contract Act, relevant here:

(a) Offer is distinguished from Invitation to offer.

(b) It is only when offer. It is accepted, then it becomes promise.

Offer, therefore has to be distinguished from invitation to offer. Merely a person or a book seller sends a catalogue of his books with price mentioned therein, it is not an offer it is infact an invitation to other to make offer upon the price mentioned in catalogue. Similarly goods displayed in a departmental store with price chit.... is a invitation to offer. Customer who carry any goods from store to purchase makes an offer. Section 2(a) of Indian Contract Act defines `Proposal' or `Offer' as:

"When one person signifies to another his willingness to do or abstain from doing with a view to obtaining assent of that another to such act or abstinence, is said to make proposal."

Similarly when an "offer" as defined under Section 2(a) of the Act is made by one person to other, it by itself does not create a contract unless such offer is accepted and communication of such acceptance is not complete. Section 2(b) of the Act reads as under:

"When the person to whom proposal is made, signifies his assent thereto, the proposal is said to be accepted. Proposal when accepted becomes promise."

So it is only when an offer is lawfully accepted, it ripes into a binding agreement between parties.

Turning now to case in hand, `A' sent a price list of goods to B, that in strict sense of law is not an offer but infact is invitation to B to make an offer and it is only when B places order to A for goods specified in the price list, is an offer or proposal. Upon such offer it is the sweet will of A to accept or reject the offer. Here by not supplying the goods it implies that A had not accepted the offer of A and thus when offer is not accepted, it did not result in a contract. Therefore B has not remedy in this case.

Ans. Term `Proposal' has been defined in Section 2(a) of Indian Contract Act as "When one person signifies to another his willingness to do or to abstain from doing anything with a view to obtain assent of that other to such act or abstinence, he is said to make proposal."

Section 2(b) of Act then provides "When the person to whom proposal is made signifies his assent thereto, proposal is said to be accepted. A proposal when accepted becomes a promise."

So when `Proposal' in its strict sense is made and accepted result into a promise, it is important to point out that "Proposal" is different from "invitation to treat". Sometimes a person does not make offer, but only make some statement or give some information with a view to invite other to make offer on that basis.

In Harvey v. Facey (1893) AC 552 Defendant was the owner of a plot of land known as "B.H.P.". Plaintiff being interested in purchasing the same, sent a telegram to the defendant "Will you sell us `B.H.P.' Plot. Telegraph lowest cash price". Defendant in reply telegraphed "Lower price for B.H.P. plot is 900 pounds." Plaintiff sent reply that "We agree to buy B.H.P. plot for 900 pounds asked by you, please send your title deed."

In the suit, plaintiff contended that, telegram of defendant quoting lowest price for plot of land was an `offer' and same was accepted by plaintiff by his second telegram and thus contract was complete. Defendant on the other hand contended that quoting the lowest price was not the `offer'. Privy Council held that exchange of above said telegrams had not resulted in a contract. It was observed that telegram sent by defendant only quoted the lowest price of plot of land, it was not "offer" in its strict sense.

In the case in hand, `A' made an offer to purchase B's Bungalow for Rs. 6,000. B's agent cabled this information to B. B in reply told the agent that Bungalow shall not be sold for less than Rs. 10,000. `A' accepted to purchase Bungalow for Rs. 10,000. Now B's reply that Bungalow will not be sold for less than Rs. 10,000 was not a "offer" but was only `invitation to treat' and thus acceptance of A did not result into any contract. Therefore `A' cannot succeed in the present suit. Facts are identical to the case Machirson v. Appanna AIR 1951 SC 184.

Ans. Section 4 of Indian Contract Act provides:

Communication Of Proposal : Communication of proposal is complete when it comes to the knowledge of the person to whom it is made.

Communication Of Acceptance : Communication of acceptance is complete:

As Against the Proposer, when it is put in course of transmission to him so as to be out of the power of acceptor.

As Against the Acceptor, when it comes to the knowledge of proposer.

Section 5 of the Act deals with revocation of proposal and acceptance and provides that a proposal may be revoked at any time before the communication of its acceptance is complete as against the proposer but not afterwards and acceptance may be revoked at any time before the communication of acceptance is complete as against the acceptor.

So after the perusal of Sections 4 and 5 of contract Act, it is clear that communication of acceptance of an offer is complete as against the acceptor when acceptance comes to the knowledge of proposer (offerer). So if a offer is made to a particular person who initially rejects that offer by sending a letter of rejection, can still change his mind and accept that offer by communicating the acceptance in such a speedier mode, so that offerer (proposer) comes to know about acceptance first.

In the case in hand `A' made an offer to B which was initially rejected by B by sending rejection letter. Subsequently B changed his mind and accepted the offer of A telephonically so that fact of acceptance of an offer comes to the knowledge of A (proposer) first and earlier than reaching letter of rejection and thereby giving a valid acceptance and resultantly giving rise to a valid contract.

Ans. Section 4 of Indian Contract Act says "communication of proposal is complete when it comes to the knowledge of the person to whom it is made..."

Section 5 of the Act lays down that "A proposal may be revoked at any time before the communication of acceptance is complete as against the proposer and not afterwards...."

Section 6 of the Act then provides "A proposal is revoked:

(i) By communication of notice of revocation by proposer to other party.

(ii) By lapse of time prescribed in the proposal for its acceptance and if no time is prescribed, by lapse of reasonable time without communication of the acceptance.

(iii) By failure of acceptor to fulfil the conditions precedent to its acceptance.

(iv) By death or insanity of proposer, if the fact of death or insanity of proposer comes to the knowledge of acceptor before the acceptance."

That being relevant legal provisions, coming now to case in hand. `A' had made an offer to B to sell him radio for Rs. 200. Next day `A' sells that Radio to `C'. Now there was no time prescribed in the offer of `A' to `B' for its acceptance nor `A' sent any communication to `B revoking the offer. It is the next only when `A' sells the radio to `C', so no reasonable time can be said to have elapsed without communication of acceptance, so in the eye of law, offer of `A' to B is still subsisting and B can still accept the offer of `A' although he might have got the knowledge from his friend that A has sold his radio to C.

Ans. A proposal, when accepted results in agreement. It is only after the acceptance of proposal that a contract between the two parties can arise. According to Section 2(b) of Contract Act:

"When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. A proposal, when accepted becomes a promise."

A contract is created only after an offer is accepted. Before the acceptance is made neither party is bound thereby. Therefore it is necessary to know when the communication of an offer and its acceptance is complete and when offer or acceptance as the case may be revoked. Section 4 provides that "Communication of a proposal is complete when it comes to the knowledge of the person to whom it is made. Communication of acceptance is complete: "as against the proposer, when it is put in course of transmission to him so as to be out of the power of acceptor as against the acceptor, when it comes to the knowledge of proposer.."

Section 5 provide as when proposal or acceptance can be revoked and lays down `A proposal may be revoked at any time before the communication of its acceptance is complete as against the proposer but not after words, An acceptance may be revoked at any time before the communication of acceptance is complete as against the acceptor, but not afterwards.

So when acceptance of a proposal is communicated as per Section 4 of Act so as to leave no scope of revoking the acceptance, then the moment offer is accepted it result into binding contract. The effect of acceptance of an offer has been explained by Anson in "Anson's law of contract" in following words :

"Acceptance is to an offer what a lighted match is to a train of gunpower. It produces something which cannot be recalled or undone. But the powder may have laid until it has become damp, or the man who laid the train may remove it before the match is applied. So an offer may lapse for want of acceptance or be revoked before acceptance. Also the offeree may decide to reject the offer. Until an offer is accepted, it creates no legal rights, and it may be terminated at any time."

Ans. Section 2(b) of Indian Contract Act provides that "When the person to whom proposal is made signifies his assent thereto, proposal is said to be accepted. A proposal when accepted becomes a promise."

So from bare perusal of provisions of Section 2(b) Act it is clear that person to whom `proposal' is made, will signify his assent thereto, then proposal is said to have accepted. Moreover Section 7(1) of the Act provides that for a valid acceptance of a proposal it is essential that acceptance should be absolute and unqualified. Section 7(2) further lays down that an acceptance must be `expressed in some usual and reasonable manner unless the proposal prescribes the manner in which it is to be accepted.'

It means that if the manner of acceptance of a proposal has been prescribed, than the acceptance has to be in that prescribed manner and in the absence of any prescribed manner, acceptance of a proposal may be made in usual and reasonable manner. So what Section 7 of Act says that acceptance of a proposal should be expressed either in prescribed manner or in usual manner, but Section 7 does not say that acceptance can be made without expressing at all or by keeping silent. In Bhagwandas v. Girdhari Lal and Co. AIR 1966 SC 543. It was held "In order to create a contract, acceptance of an offer and intimation of acceptance by some external manifestation, which the law regards as sufficient is necessary."

Facts of the case in hand have been taken from English case Felthouse v. Bindley (1863) 7 L.T. 835 in which it was held that since the nephew had not communicated the acceptance of proposal, so no contract had arisen. So it is clear that an offer with condition that failure to reply will be deemed acceptance of an offer and thus no reply will not result into a contract. So A is not entitled to recover any compensation in this case.

Ans. It is well established that it is only when proposal is accepted it becomes promise (Section 2(b). Section 7 however says in order to convert proposal into promise, acceptance must be (1) Absolute or unconditional (2) acceptance must be in usual manner unless proposal prescribe particular manner in which it is to be accepted.

So a conditional acceptance is not a valid acceptance. Conditional acceptance infact is a counter offer which takes the place of original offer. Original offer when replied in counter offer then it ceases.

Coming now in present case defendant made offer to sell the land to plaintiff for Rs. 90,000, which was not accepted unconditionally but infact plaintiff made counter offer to purchase it for Rs. 80,000/- which was not accepted by defendant. Plaintiff later sent letter to purchase land 90,000/-. Original offer of defendant to sell the land for 90,000/- had ceased when it was replied by counter offer of plaintiff. So latter accepting the land to purchase for 90,000/ does not in the eye of law amount to acceptance as original offer is no longer in existence, so there was no binding contract between parties and thus plaintiff's action is liable to be dismissed.

Ans. At the very outset it is important to mention following legal provisions of Indian Contract Act which are relevant.

Firstly it is only when the offer is accepted it results in promise, before that parties are not bound to each other. As Section 2(b) provides "When the person to whom proposal is made signifies his assent thereto, proposal is said to be accepted and when proposal is accepted it becomes promise." Question arises when can a proposal is said to be accepted. Section 7 of Indian Contract Act provides that in order to convert a proposal into promise, the acceptance must be (1) Absolute and unconditional (2) be expressed in some usual manner unless proposal prescribes particular manner in which it is to be accepted. Then Section 8 of Act provide performance of conditions of proposal or acceptance of any consideration for reciprocal promise which may be offered with proposal is acceptance of proposal. Coming now to facts of case in hand on 27-12-60. Deceased `A' made proposal for Insurance with Insu. Corp. He had issued cheques of Rs. 300 and 220, which was also encashed during his life time by Insu. Corp. By accepting premium by itself does not amount to acceptance so as to result in a binding promise.

In L.I.C. v. R. Vesi Reddy, AIR 1984 SC 1014 Supreme Court held in certain human relation, silence to proposal may amount to acceptance but in case of contract of Insurance policy, silence or retention of premium by Corp. by itself does not denote acceptance of proposal.

Though in case in hand cheque of Rs. 300 and 220 were accepted by Corp. But was not credited in premium account of deceased, Divisional Manager who is Competent Authority to accept the insurance policy had also not accepted the proposal by signing on insurance paper, during life time of deceased, therefore there was no binding contract between parties and thus widow can not claim Rs. 50,000/- from Insu. Corp.

Ans. Section 10 of the Indian Contract Act provides: "All agreements are contracts if they are made by the free consent of parties competent to contract, for lawful consideration and with a lawful object, and are not hereby expressly declared to be void."

Section 13 of the Act enacts that two or more persons are said to consent when they agree upon the same thing in the same sense. Section 14 of the Act provides that consent is said to be free when it is not caused by:

(1) coercion, as defined in Section 15, or

(2) undue influence, as defined in Section 16, or

(3) fraud, as defined in Section 17, or

(4) misrepresentation, as defined in Section 18, or

(5) mistake subject to the provisions of Sections 20, 21 and 22.

It further states that consent is said to be so caused when it would not have been given but for the existence of such coercion, undue influence, fraud, misrepresentation or mistake.

Not only consent but free consent is declared by Section 10 of the Indian Contract Act to be necessary to the complete validity of contract. Section 14 of the Act defines the term "free consent" as consent is said to be free when it is not caused by coercion, undue influence, fraud, misrepresentation and mistake. If the consent is caused by coercion, undue influence, fraud, misrepresentation, the contract is voidable at the option of the party whose consent has been so obtained. If the consent is the result of mistake as envisaged by Section 20 to 22 of the Act, the contract would be void.

Ans. One of the essentials of a valid contract as mentioned in Section 10 of Indian Contract Act is that the parties to contract should be Competent to make the contract. Section 11 of Indian Contract Act deals with Competency. Section 11 lays down as under :-

"Every person is competent to contract who is of the age of majority, according to law to which he is subject and who is of sound mined and is not disqualified from contracting by any law to which he is subject."

Position of Minor - A person who has not attained the age of majority is a minor. As per Section 30 Indian Majority Act, a person is deemed to have attained majority when he completes the age of 18 years, except in case of person for whose person or property a guardian has been appointed by court, in such case age of majority is 21 years.

Nature of Minor's Agreement - As is evident from Sections 10 and 11 of Indian Contract, a Minor is not competent to contract but what will be the position, if a Minor enter into a contract. Indian Contract Act is silent on this point. In a well-known case Mohori Bihee v. Dharam Das Ghosh, (1903) 30 I.A. 115 (Privy Council), it was held that agreement by Minor is void. In this case Plaintiff Dharamdas Ghosh, while he was minor mortgaged his property in favour of defendant, Dharam Dutt, a money lender, for loan. At the time of transaction, attorney of Money lender was aware of the fact that plaintiff was minor. Thereafter minor brought an action against money lender stating that he was minor when the mortgage was executed and thus same was void and inoperative and be called. The defendant (Money lender) inter-alia contended-

(a) the minor fraudulently mis-represented his age and thus law of estoppel should be applied against him.

(b) If mortgage is cancelled then minor should be directed to refund the amount of Loan under section 64 or 65 of Act.

While rejecting the contentions of defendant, Privy Council, held agreement of minor was void and law of estoppel as provided u/s 115 of Indian Evidence Act cannot be applied because the false statement as to age, was made to a person who was not misled by untrue statement as he knew real facts. It was also observed that Section 64 is not applicable because Section 64 is in respect of voidable contract whereas contract by Minor is void-ab-initio, similarly Section 65 of Indian Contract Act was held to be inapplicable because there never was and never could have been any contract.

So positio is well-established that contract made by minor is void and can not be enforced at all.

Ratification of Minor's Agreement - A minor's agreement being void ab-initio, it is incapable of being validated by subsequent ratification, after minor has attained the majority. A contract by minor is void. A void contract which is dead letter cannot be revived and cannot constitute a valid consideration for a subsequent contract.

In Suraj Narain v. Sukhu Aheer, AIR 1928 All. 440 a person borrowed some money during minority and then made fresh promise after attaining majority to repay the sum with interest. It was held that consideration received by a person during his minority cannot be called consideration within the meaning of section 2(d) and thus can not be valid consideration for fresh promise.

However, contract by minor is void. However a contractual transaction started during minority of party continued even after attaining majority is binding to parties for whole of transaction.

As stated above, Contract of minor is void-ab-initio. However for the necessaries supplied to a minor re-imbursement is permitted to person supplying it. This is due to quasi-contractual relations as recognised in Section 68 of Indian Contract Act which lays down as :-

"If a person, incapable of entering into a contract or any one whom he is legally bound to support, is supplied by another person with necessaries suited to his condition in life, the person who has furnished such supplies is entitled to be reimbursed from the property of such incapable person."

Distinction between English and Indian law :

(i) In India a minor on attaining majority can neither sue nor be used on contracts entered into by him during minority but in England he can sue ok the contract for the damages.

(ii) In India there can be no specific performance by or against the minor unless it is a contract entered into by a guardian on behalf of the minor and for the minor's benefit. In England, there can be no specific performance for want of mutuality in the contract.

Ans. One of the essentials to a valid contract mentioned in Section 10 of Act is that parties to contract should be competent to make the contract. Section 11 of Act inter alia says every person is competent to contract who is of the age of majority. So a contract by minor is a contract void ab initio.

A minor's agreement being void ab initio, it is incapable of being validated by a subsequent ratification, after the minor has attained the age of majority. Consideration furnished in respect of a transaction during minority can not be considered to be valid consideration for subsequent promise after attaining majority thus no ratification is possible of a promise made during minority. In Nazir Ahmad v. Jiwan Das AIR 1938 Lahore 159 It was observed "A contract by minor is void. A void contract which is dead letter cannot be revived and cannot constitute a valid consideration for a subsequent contract and therefore, a transaction entered into by minor during minority cannot be ratified."

Facts of the case are identical to case Suraj Narain v. Sukhu Aheer AIR 1928 All. 440. In this case also it was held that consideration received by a person during his minority cannot be good consideration within the meaning of Sect. 2(d) of Act for a fresh promise by him after attaining majority. Therefore B will not succeed in this case for reasons discussed above.

Ans. Section 10 of Indian Contract Act gives a general rule of law of contract and provides :

"All agreements are contracts which are by free consent of parties, competent to contract for lawful object and for lawful consideration and are hereby not declared expressly to be void." So one of the essential conditions for enforceability of the contract is that parties must have entered into the contract by their free consent.

Section 14 of the Act says "Consent is said to be free when it is not caused by:

(a) Coercion as defined by Section 15.

(b) Undue influence as defined by Section 16.

(c) ......

(d) ......

(e) ......"

Coercion : When the consent of any party to contract is caused by coercion, then consent is not a free consent and then such contract is voidable at the option of party whose consent is so obtained by the coercion in view of Section 19 of Contract Act. Section 15 of Act defines `Coercion' and says:

"Coercion is committing or threatening to commit, any act forbidden by Indian Penal Code or the unlawful detaining or threatening to detain, any property, to the prejudice of any person whatever, with the intention of causing any person to enter into an agreement." Explanation: "It is immaterial whether the Indian Penal Code is or is not in force in the place where the coercion is employed.' In Ranganayakamma v. Alwar Setti I.L.R. (1889) 13 Mad. 214 question involved was regarding the validity of the adoption of a boy by a widow, aged 13 years. On the death of her husband, the husband's dead body was not allowed to be removed from her house, for cremation, by the relatives of the adopted boy until she adopted the boy. It was held that adoption was not binding on the widow as her consent has been obtained by coercion.

Section 16 of Indian Contract Act then defines UNDUE INFLUENCE as "(1) Contract is said to be induced by undue influence when relation subsisting between the parties are such that one of the parties is in a position to dominate the will of other and exercise the use of such position to obtain unfair advantage over the other.

(2) In particular and without prejudice to generality of foregoing principle, a person is deemed to be in position to dominate the will of other:

(a) When he holds a real or apparent authority over the other or where he stands on fiduciary relation to the other.

(b) Where he makes a contract with a person whose mental capacity is temporarily or permanently affected because of age, illness, bodily mental distress.

(3) Where a person who is in position to dominate the will of other, enters into a contract with him and transaction appears on the face of it or upon the evidence to be unconscionable, the burden of proving that contract is not induced by undue influence lies on that person who hold the position to dominate the will of other.

In Lakshmi Amma v. Telengala Narayana Bhatta, AIR 1970 SC 1367 Executant of deed of settlement was a person of advanced age and was suffering from many ailments and whose physical and mental condition was very weak. He executed the deed settling his entire property in favour of one of his grandsons to the exclusion of his own issues and other grand children. He did not make any provision for residence of his wife and also debarred himself from dealing with the property during his life time. He subsequently applied for cancellation of deed on account of undue influence. Supreme Court held that facts and circumstances raised grave suspicion as to genuineness of deed and it was for grandson, who is settlee of the property, to show that said deed had been executed voluntarily and without undue influence.

In Ladli Parshad Jaiswal v. Karnal Distillery Co. Ltd., AIR 1963 SC 1279, it was observed that a transaction may be vitiated on account of undue influence where relations between the parties are such that one of them is in position to dominate the will of other and he uses his position to obtain an unfair advantage over the other. It is menifest that both the conditions have to be established by person seeking to avoid the transaction, he has to prove (a) that the other party to a transaction was in a position to dominate the will and (b) that the other party had obtained an unfair advantage by using that position.

So `Undue Influence' as defined under Section 16 of Act can be termed as "Moral Coercion" as distinguished from "Physical Coercion" or "Coercion" as defined in Section 15 of Act. To make out the case of "undue influence" there must be some relationship between parties which place one party in a position to dominate the will of other, on the other hand existence of such relationship is not necessary in case of "coercion".

Ans. Fraud : Section 14 of Indian Contract Act inter alia provides that consent of party to a contract is said to be free when it is not caused by "fraud" as defined by Section 17."

So Section 17 defines term "Fraud" as "Fraud means and includes any of the following acts committed by a party to a contract or with his connivance or by his agent with the intent to deceive another party thereto or his agent or to induce him to enter into the contract:

(1) the suggestion as a fact, of that which is not true, by one who does not believe it to be true.

(2) the active concealment of a fact by one having knowledge or belief of the fact.

(3) a promise made without any intention of performing it.

(4) any other act fitted to deceive.

(5) any such act or omission as the law specially declares to be fraudulent."

Explanation to Section 17 says "Mere silence as to facts likely to affect the willingness of a person to enter into a contract is not fraud, unless the circumstances of the case are such that, regard being had to them, it is the duty of the person keeping silence to speak or unless his silence is in itself equivalent to speech."

MISREPRESENTATION: Section 14 of Act inter alia also says that consent of a party to contract is said to be free unless it is not caused by "Misrepresentation" as defined by Section 18 of Act.

Section 18 has defined "Misrepresentation" as:

"Misrepresentation means and includes

(1) the positive assertion, in a manner not warranted by the information of the person making it, of that which is not true though he believes it to be true.

(2) any breach of duty which without an intent to deceive gains an advantage to the person committing it, or any one claiming under him, by misleading another to his prejudice or to the prejudice of any one claiming under him.

(3) causing, however innocently, a party to an agreement, to make a mistake as to the substance of the thing which is the subject of the agreement."

So misrepresentation is making false statement without the knowledge of it being false.

DIFFERENCE BETWEEN `FRAUD' AND `MISREPRESENTATION' (1) In `fraud' a false statement is made by one who has knowledge of it to be false but in `Misrepresentation', a false statement is made with the belief that it is true.

(2) In fraud, the intention of person making false statement is to deceive other whereas not such an intention is there in case of misrepresentation.

Ans. Section 17 of Indian Contract Act defines "Fraud" as: Fraud means and includes following acts committed by party to contract or with his connivance or by his agent with intent to deceive other party thereto to induce him to enter into contract:

(i) suggestion of a fact of that what is not true by one who does not believe it to be true.

(ii) active concealment of fact by one having knowledge or belief it to be not true.

(iii) promise made without any intention of performing it.

(iv) any other act fitted to deceive.

(v) any such act or omission as law specially declares it to be fraudulent.

Explanation : Mere silence as to fact likely to effect willingness of person to enter into contract is not fraud unless the circumstances of case are such that regard being had to them it is the duty of person keeping silence to speak or unless silence is in itself equivalent to speech.

So mere silence as to any fact which effect the willingness of other party to enter into contract is not fraud unless circumstances are such that:

(a) It is the duty of person keeping silence to speak or

(b) If his silence is equivalent to speech.

So it depends upon fact and circumstances of each case to see whether the person keeping silence has implied duty to speak. Generally silence is not fraud but where party has implied duty to speak or disclose certain facts to other party which are material and can not be ascertained or known except by former being told about it and if in such situation if he fails to tell or remain silent it amount fraud.

In the case in hand relations between parties are such that there was implied duty of A to disclose to B (his daughter) that horse is of unsound mind. A's silence about this fact, in circumstances of case amount to fraud and thus contract is voidable at the option of B.

Ans. It is one of the essentials for creating a valid contract that the consent of parties should be free consent i.e. consent should not be caused by (i) coercion as defined in Section 15 (ii) Undue influence as defined in Section 16 (iii) Fraud as defined in Section 17 (iv) Misrepresentation as defined in Section 18 and (v) Mistake (Section 14).

Section 17 of Contract Act provides "Fraud" means and includes any of the following acts committed by party to contract or with his connivance or by his agent with the intent to deceive other party thereto or his agent or to induce him to enter into contract:

(a) the suggestion as a fact, of that which is not true, made by person who does not believe it to be true.

(b) the active concealment of a fact by one having knowledge or belief of the fact.

(c) a promise made without any intention of performing it.

(d) any other act fitted to deceive.

(e) any such act or omission as the law specifically declares to be fraudulent.

In the case in hand "A" entered in famous jeweller's shop and purchased some ornaments including diamond ring and after settlement of price, `A' posed himself as one "R" a famous man of Delhi regarding whom jeweller had heard but not seen. "A" gave the cheque by putting the signature of "R" and stated the jeweller that all the ornaments may be sent to him when cheque is encashed but he showed desired to take diamond ring immediately. Jeweller believing `A' to be `R' and let him to take away diamond ring, later cheque was dishonoured. So `A' fraudulently took the diamond ring from jeweller by posing himself to be `R' a famous man of Delhi and also with the knowledge that cheque given to jeweller will not be honoured. So consent of the jeweller was caused by fraud and thus contract was voidable.

On similar facts in Phillips v. Brook Ltd. (1919) 2 K.B. 243 Horridge J. held that agreement was not void on the ground of mistake in so far as plaintiff contracted to sell and deliver the ring to a person who was present in the shop. The contract was only voidable on the ground of fraud. It was observed:

"The minds of the parties met and agreed upon all the terms of the sale, the thing sold, the price and time of payment, the person selling and the person buying. The fact that seller was induced to sell by the fraud of the buyer made the sale voidable but not void."

So there was a concluded contract although voidable at the instance of jeweller. This contract was not rescinded by jeweller at the time when `A' pledged the diamond ring to B for Rs. 2,000 on same day. Therefore B acquired a good title to the ring as he acted in good faith without notice of Pawnor's defect of title. B the pawnee is protected under Section 178A of Indian Contract Act and jeweller can not recover the ring from B.

Ans. In some cases, a contract (though complete and valid in all respects) may be impeached on the ground that the genuineness or consent is affected by the presence of some vitiating element. It may result from mistake also. It renders the contract void "ab initio". Mistake may be said to arise when the parties have not meant the same thing, or one or both, while meaning the same thing, may have formed untrue conclusion as to some essential element in the agreements.

A contract, where the promisor and the promisee both have laboured under a mistake as to the existence of a fact, which is so fundamental that if forms the basis of the contract, is said to be vitiated by common mistake.

Sections 20, 21 and 22 of the Indian Contract Act, deal with the effect of the mistake of the parties contracting on the contract. Section 20 reads as under:

Where both the parties to an agreement are under a mistake as to a matter of fact essential to the agreement, the agreement is void.

Explanation : An erroneous opinion as to the value of the thing which forms the subject matter of the agreement is not to be deemed a mistake as to a matter of fact.

(a) A agrees to sell to B a specific cargo of goods supposed to be on its way from England to Bombay. It turns out that, before the day of the bargain, the ship conveying the cargo had been cast away and the goods lost. Neither party was aware of these facts. The agreement is void.

In order to render a contract void on the ground of mistake, there should exist three conditions as under:

(i) Both parties to the contract must be under a mistake. The mistake should not be unilateral.

(ii) Mistake should be one of fact and not of law; and

(iii) Mistake should be essential to the agreement.

Section 21. Effect of mistake as to law : A contract is not voidable because it was caused by a mistake as to and law in force in India, but a mistake as to a law not in force in India has the same effect as a mistake of fact.

A and B make a contract grounded on the erroneous belief that a particular debt is barred by the Indian Law of Limitation. The Contract is not voidable.

Section 22. Contract caused by mistake of one party as to matter of fact. A contract is not voidable merely because it was caused by one of the parties to it being under a mistake as to a matter of fact.

Ans. Void Contract :- Section 2(g) of Indian Contract Act says :-

"An Agreement not enforceable by law is said to be void."

Section 2(J) of Act lays down as :-

"A contract which ceases to be enforceable by law becomes void when it ceases to be enforceable."

So a contract becomes void when it cannot be enforced in court of law. Validity of a contract depends on the fact whether it complies with all the conditions of a valid contract as laid down in Indian Contract Act, if not, it cannot be enforced and thus void, moreover Indian contract Act has specifically laid down list of some contracts which are void-ab-initio.

Agreements Void-ab-initio - Following agreements which are void-ab-initio, i.e., bad from very beginning -

1. An agreement with a minor.

2. An agreement with a person of unsound mind.

3. An agreement with a foreign sovereign, foreign ambassador and alien.

4. An agreement with a person who has been declared, under any law for the time being in force, incompetent to enter into a contract., Section 11

5. When both parties to the agreement are under mistake about the fact material to contract.

6. Agreement made under mistake of foreign law., Section 20

7. Agreement which do not have lawful consideration., Section 21

8. Agreements which are not made for lawful object., Section 23

9. Agreement with consideration of unlawful important, Section 24

10. Agreement with object of unlawful import., Section 24

11. Agreement without consideration., Section 25

12. Agreement in restraint of marriage., Section 26

13. Agreement in restraint of trade., Section 27

(It has some exceptions.)

14. Agreements in restraint of legal proceedings., Section 28

15. Agreements, the meaning of which is not certain or capable of being made certain., Section 29

16. Agreements by way of wager., Section 30

17. Agreements contingent on the happening or non-happening of an event., Sections 32 to 36

18. Agreements contingent on the happening of an event and that happening becomes impossible., Section 32 to 36

Agreement becoming void-later-on - Such agreements which are not void from the very beginning but become so afterwards due to some unavoidable reasons are void and may be described as under :

1. Agreement to do impossible act., Section 56

2. A contract to do an act which after the contract is made, becomes impossible, is void., Section 56

3. Where persons reciprocally promise, firstly, to do certain things which are legal and secondly, under specified circumstances to do certain other things which are illegal, the first set of promises is a contract, but the second is void agreement. Section 57

Voidable Contracts - Voidable contract means a contract which is an agreement enforceable at law at the desire of one party and not at the desire of the other party. An essential ingredient of making an agreement a contract is that the consent of the other party is free. If the consent is not free and it has been obtained by use of force or by undue influence or by playing fraud or by misrepresentation, the agreement is enforceable at law at the option of the person whose consent is obtained in any one of the modes stated above; it is not enforceable at the option of the party who obtained consent in any one of the modes aforesaid.

The term `voidable contract' has been explained in Section 2(i) in following words -

"An agreement which is enforceable by law at the option of one or more of the parties thereto, but not at the option of the other or others, is a voidable contract."

Distinction Between Void and Voidable Contract

Void Contract

Voidable Contract

1. A contract becomes void when it ceases to be enforceable in court of law

1. A contract becomes voidable when consent of parties to it is obtained by coercion

2. A void contract being dead letter does not create any right or liability to any party

2. A voidable contract continues to be valid, at the option of one party to it, it is the desire of one party either to rescind it or continue it.

3. Void contract is defined in section 2(J) and such contracts have been detailed in sections 32, 35 and 56 of Indian Contract Act

3. Voidable contract is defined in Section 2(i) and such contracts have been discussed in section 19 and 19-A, 38, 39, 55 and 64 of Indian Contract Act.

4. Void contract being unenforceable, cannot be validated at all even by consent of parties to it.

4. Voidable contract is not void until rescinded by party at whose option it is voidable therefore continues to be valid until rescinded.

Effect of Flaw In Consent - Section 19 of Indian Contract says :-

"When consent to an agreement is caused by coercion, fraud or mis- representation, the agreement is contract voidable at the option of the party whose consent was so caused.

A party to contract whose consent was caused by fraud or mis- representation, may, if thinks fit, insist that the contract shall be performed and that he shall be put in the position in which he would have been if the representation made had been true."

Then Section 19-A of Act says :-

"When consent to an agreement is caused by undue influence, the agreement is a contract voidable at the option of the party whose consent was so caused.

Any such contract may be set aside either absolutely or if party who was entitled to avoid it, has received any benefit thereunder, upon such terms and conditions as the court may seem just."

Ans. If the consideration or object of the agreement is not lawful, then as per Section 23 of the Act, such agreements are void-ab-initio. Even the agreements of which the object or consideration in part is unlawful the agreement as a whole is void-ab-initio as per Section 24 of the Act. Therefore, it is necessary to know as what considerations and objects are lawful and what not. In this connection, Section 23 specifically lays down as under :

The consideration or object of an agreement is lawful unless :

(i) it is forbidden by law, or

(ii) is of such a nature that if permitted, it would defeat the provision of any law, or

(iii) is fraudulent, or

(iv) involves or implies injury to the person or property of another, or

(v) the court regards it as immoral or opposed to public policy.

In each of these cases, the consideration or object of an agreement is said to be unlawful. Every agreement of which the object or consideration is unlawful is void.

(i) A, B and C enter into an agreement for division among them of gains acquired, or to be acquired by fraud, the agreement is void as object is unlawful.

(ii) A's estate is sold for arrears of revenue under the provisions of an Act, by which the defaulters prohibited from purchasing the estate. B upon an understanding with A, upon receiving from him the price which B has paid. The agreement is void, as it renders the transaction in effect, a purchase by the defaulter and would so defeat the object of the law.

So in view of Section 23 of the Act in following situations the consideration or object is unlawful rendering the contract void.

1. Forbidden By Law :- An agreement to do something which is expressly forbidden by law is void. When a particular act is forbidden by law or declared to be unlawful then obviously any agreement to do such act can never be lawful agreement and thus is void.

In Brij Mohan v. Madhya Pradesh State Road Transport Corp., AIR 1987 SC 29 Agreement by corporation with private vehicle owner allowing him to operate his vehicles under the permit obtained by State Corporation was held to be void being violative of provisions of the Motor Vehicles Act.

2. Defeat The Provisions Of Any Law :- If the object or consideration of an agreement is to defeat any provision of law then such agreement is void, because such object of any agreement can never be lawful.

In Ram Sewak v. Ram Charan, AIR 1982 All. 177 parties agreed to carry on business in partnership. Agreement provided that they would conceal some part of their business activity and would not enter certain items in the books of accounts with a view to evade Income tax and sales tax. One of the partners brought an action against others for accounts and recovery of due amount. It was hold that such agreement was aimed to defeat the provisions of Tax Laws and thus cannot be enforced.

3. Fraudulent Purpose :- If the object of any contract is to defraud some person or to take undue advantage by fraudulent transaction then such contract is void because law does not allow to legalize the fraudulent transactions.

4. Agreement Injurious to Person or Property :- If the object or consideration of an agreement is to cause an injury to the person or property of another, then such agreement is unlawful and thus void.

5. Immoral or Against Public Policy :- If the consideration or object of an agreement is regarded by the court to be immoral or opposed to public policy, the agreement is unlawful and thus declared as `void' u/s 23 of Act.

Expression "IMMORAL" cannot be defined in strait jacket terms it depends upon the prevailing principles and ethics in the society. In Gherulal Parakh v. Mahadeo Das Maiya, AIR 1959 SC 781 scope of immorality was discussed and it was held that wagering contracts cannot be said to be immoral.

Similarly expression "Public Policy" is illusive and Uncertain. In Gherulal Parakh v. Mahadeo Das Maiya, (supra) it was observed :

"Public policy or the policy of the law is an illusive concept. The primary duty of a Court of law is to enforce a promise which the parties have made and to uphold the sanctity of contracts. But in certain cases, the court may relieve them of their duty on a rule founded on public policy; the doctrine of public policy is extended not only to harmful cases butt also to harmful tendencies; this doctrine of public policy is only a branch of common law, and just like any other branch of common law, it is governed by precedents; the principles have been crystallized under different heads and though it is permissible for Courts to expound and apply them to different situations, it should only be invoked in clear and in constable cases of harm to the public."

Ans. Section 23 of Indian Contract Act provides that the consideration or object of an agreement is lawful unless the Court regards it an immoral or opposed to public policy.

The term `Public Policy' cannot be defined with any degree of precision. Certain class of acts are said to be against public policy or against the policy of law when the law refuses to enforce or recognise them on the ground that they have mischievous tendency so as to be injurious to the interest of State of public. Giving or agreeing to give bribe for securing public office is against public policy. Therefore in case in hand agreement between A and B is void on the ground of being against public police under Section 23 of the Act and thus A cannot recover Rs. 1,000 from B.

Ans. In the case in hand, `A' entered into a contract to marry with `X' while A's wife (W) was still living. Later when `W' died `X' filed suit against `A' for breach of agreement and for damages. Question for determination first of all is, whether such agreement between `A' and `X' is enforceable.

Although such contract was contingent one and depending upon the happening of certain unforeseen future event i.e. death of wife of A (W). Now question arises whether, after the death of A's wife `W', is this contract enforceable. Here Section 23 of Indian Contract Act is relevant, which lays down:

"The consideration or object of an agreement is lawful unless:

(a) it is forbidden by law or

(b) is of such nature that if permitted, it would defeat the provision of law.

(c) is fraudulent.

(d) involves or implies injury to a person or property of another.

(e) the court regards it as immoral or opposed to public policy.

In each of these cases consideration or object of an agreement is said to be unlawful. Every agreement of which object or consideration is unlawful is void."

Coming now to case in hand, making agreement to marry with other woman during the life time of a wife is prohibited by society as well as by law being immoral and opposed to public policy. Because it is important that nothing should be allowed to impair the sanctity or trust of matrimonial relation between a husband and wife. In view of the above discussion agreement between `A' and `X' is void being its object is unlawful.

Ans. Section 10 of Indian Contract Act inter alia says that lawful consideration is essential for a valid contract. Section 2(d) of Act has defined "Consideration" as "When at the desire of the promisor, the promisee or any other person has done or abstained from doing or does or abstains from doing or promises to do or to abstain from doing something, such act or abstinence or promise is called a consideration for the promise."

In Currie v. Misa, (1875) L.R. 10 Ex. 162, the term `consideration' has been defined as `some right', interest, profit or benefit accruing to one party, or some forbearance, detriment, loss or responsibility given, suffered or undertaken by any other. The Calcutta High Court observed in the case of Fazaluddin v. Panchu Das, A.I.R. 1957 Calcutta 92, that "consideration is the price of a promise a return or quid pro quo something of value received by the promisee as inducement of the promise. The payment of money is the most common form of consideration. A mudum pactum (without consideration) promise is not enforceable. However sacred and binding in honour it may be it is after all purely gratuitous act and hence cannot create any legal obligation.

Section 25 of Indian Contract Act as a general rule declares that an agreement without consideration is void. Section 25 of Act, however, mentions three exceptions, when there is no need of any consideration for the validity of the contract.

Section 25 of the Contract Act reads as under:

An agreement made without consideration is void, unless

(1) It is in writing and registered : It is expressed in writing and registered under the law for the time being in force for the registration of documents and is made on account of natural love and affection between parties standing in a near relation to each other; or unless

(2) It is a Promise to compensate for something done : It is a promise to compensate, wholly or in part, a person who has already voluntarily done something for the promisor or something which the promisor was legally compellable to do; or unless

(3) It is a Promise to pay a debt, barred by limitation law : It is a promise, made in writing and signed by the person to be charged therewith, or by his agent generally or specially authorised in that behalf to pay wholly or in part, a debt of which the creditor might have enforced payment but for the law for the limitation of suits.

In any of these cases, such an agreement is a contract.

Ans. General rule of law of contract is that an agreement without consideration is void. Section 25 of Indian Contract Act says:

"An agreement made without consideration is void unless

(1) It is expressed in writing and registered under the law for the time being in force for the registration of documents and is made on account of natural love and affection between parties standing in a near relation to each other; or unless

(2) It is a promise to compensate, wholly or in part, a person who has already voluntarily done something which the promisor was legally compellable to do; or unless

(3) It is a promise, made in writing and signed by the person to be charged therewith, or by his agent generally or specially authorised in that behalf, to pay wholly or in part a debt of which the creditor might have enforced payment but for the law for the limitation of suits.

In any of these cases, such an agreement is a contract."

Section 2(d) of Indian Contract Act defines `consideration' as "When at the desire of promisor, the promisee or any other person has done or abstained from doing or does or abstains from doing or promises to do or to abstain from doing something, such act or abstinence or promise is called a consideration for the promise". So Indian Contract Act recognise any such consideration which has been given at the desire of the promisor rather than voluntarily.

In the case in hand, A was treated during his illness by his friend B. Further, B has refused to accept any payment for such professional services rendered by him to A. In other words, this act of B was voluntary and gratuitous. It is also important to note that after treatment, A never made any promise to compensate B within the meaning of Section 23(2) of the Act. However, A promised B's son X, to pay him Rs. 1,000. For this promise, there was no consideration at all. In other words, the promise with X being without consideration does not create any legal obligation, and is void.

Ans. Doctrine Of Privity Of Contract

General rule is that a person stranger to contract or one who is not party to contract, cannot bring any suit in respect of any such contract. When a contract is made between two or more parties upon certain terms and conditions, it is only those parties to contract are entitled to bring suit, complaining breach of any terms or conditions or for enforcement thereof. So doctrine of privity of contract means that only those persons who are parties to the contract can enforce the same. A stranger to the contract cannot enforce a contract even though the contract may have been entered into for his benefit.

Privity Of Contract and Consideration The doctrine of privity of Contract is distinguishable from defination of term "Consideration" u/s 2(d) of Indian Contract Act which says.......

"When at the desire of promiser, the promisee or any other person has done or abstained from doing......"

So consideration is not confined to only party to contract and may pass from the promise or any other person. So the rule that a stranger to contract cannot sue has to be distinguished from the rule that a person who is stranger to consideration can sue. However, under English Law, consideration can pass only from promise and not from any other person or stranger as under Indian Law.

Doctrine of Privity of Contract Under English Law Under English Law it is well settled proposition that only party to contract can enforce it. Well known English case on the subject is Dunlop Pneumatic Tyre Co.Ltd. v. Selfridge and Co.Ltd., (1915) A.C. 847 in which it was observed.......

"In the law of England certain principles are fundamental. One is that only a person who is party to a contract can sue on it......."

Indian Law Doctrine of Privity of Contract is similarly well-established in India. Under Indian law also only party to a contract can enforce it and a stranger to it is not entitled to enforce it. In M.C. Chacko v. State Bank of Travancore, AIR 1970 SC 504, it was observed that a person not a party to contract, cannot subject to certain well-recognized exceptions, enforce the terms of the Contract.

Exceptions To Doctrine Of Privity Of Contract - In following exceptional circumstances doctrine of privity of contract is not applicable :-

(1) Trust of Contractual rights or beneficiary under a Contract

In case of trust, the property of the trust is for the benefit of the beneficiaries : they are not parties to the contract of trusts but they have a right to file the suit for preserving trust property and safeguarding their interests.

In Khawja Muhammad Khan v. Hussaini Begum, I.L.R. (1910) 32 All 410 there was an agreement between fathers of a boy and a girl that if girl (plaintiff) get married with boy, Boy's father (Dependant) would pay "Kharcha-i-pandan" (Personal expenses allowances to girl). It was also settled that certain property was kept aside by father of boy (Defendant) and allowance was to be paid to plaintiff out of income of that property. Plaintiff married the defendant's son but defendant failed to pay the allowance as agreed upon. Plaintiff brought suit claiming said allowance in which defendant contended that contract to pay allowance was entered into by him with father of plaintiff and plaintiff being stranger to contract cannot enforce it. It was held that basis of plaintiff's claim being a specific charge on immovable property in her favour and therefore she is entitled to claim the same as beneficiary.

(2) Charge - When by parties to the contract a charge is created on some property for the benefit of a person who is not a party to the contract the person in whose favour the charge is created has a right to file a suit for ensuring the benefit from charge irrespective of the fact that he is not party to the contract.

(3) Partition - At the time of partition of the joint Hindu family property, if some arrangement is made for the marriage or maintenance of a minor or a girl, such persons can file a suit for their maintenance or for the expenses of marriage although they have not been the parties to the partition agreement.

(4) Marriage agreement - Where the parents of the bride and bridegroom agree that the bride will get a definite amount regularly for her expenses (Kharcha-Pandan), the bride can file a suit for getting the amount if not paid.

(5) When under the contract a promise is made to a person who is not a party to the contract and the contract is mainly based on such promise that third person (stranger) can bring a suit for the performance of the contracts if he fails to get the amount as per promise.

(6) If the court feels that not allowing the stranger to bring an action will amount to or result in injustice the court may authorise such person to bring an action.

Ans. Section 27 of Indian Contract Act reads

"Every agreement by which one is restrained from exercising a lawful profession, trade or business of any kind, is to extent void."

The Section is more strictly worded than the rule of English Law. The Section does not make the whole agreement void but void only to the extent that it is opposed to the policy of law. This would give a discretion to the court to separate the good part from the bad part of the contract.

Every agreement, by which any one is restrained from exercising a lawful profession, trade or business of any kind is void. The reason is that, in India, industry is still in the infancy and requires every protection at the hands of the law.

The Section declares that all agreements in restraint of trade are void, being opposed to public policy, because they tend to create monopolies and discourage industry.

Section 27 has no application in certain exceptional circumstances which are incorporated in Sections 11(2), 36(2), 54 and 55(3) of Indian Partnership Act which are being discussed below:

Exceptions : (1) In case of the sale of goodwill of business, an agreement in restraint of business is valid subject to the following conditions:

(i) the seller can be restrained only from carrying on a similar business;

(ii) the restraint can apply only so long as the buyer is carrying on a similar business;

(iii) it can operate only within specified limits; and

(iv) such limit must appear to the court to be reasonable regard being had to the nature of business.

(2) Contracts determining the mutual rights and duties of the partners of a firm may provide that a partner shall not carry on any business other than that of the firm while be is a partner. (Section 11 cl. 2 of Partnership Act).

(3) A partner may make an agreement with his partner that on ceasing to be a partner, he will not carry on any business similar to that of the firm, within a specified period and within specified local limits provided the restrictions imposed are reasonable (Section 36 of Partnership Act).

(4) Partners may upon dissolution of the firm, agree by deed that some or all of them will not carry on a business similar to that of the firm within a specified period or local limits, and such agreement shall be valid, provided the restriction imposed seem to the court to be reasonable (Section 54 of Partnership Act).

(5) Any partner may, upon the sale of a goodwill of the firm make an agreement with the buyer that such partner will not carry or the business similar to that of the firm within a specified period or specified local limits, and such agreement shall be valid provided the restrictions imposed are reasonable (Section 55(3) of Partnership Act).

Section 27 declares a general rule that all agreements in restraint of trade are void, except in the circumstances stated above, the object being to protect the trade which is in its infancy in India.

So provisions of Section 27 of Indian Contract Act can be reconciled with provisions of Indian Contract Act on the ground of legal necessity.

Ans. Section 27 of Indian Contract Act is relevant for the decision of case in hand which provide: "Any agreement which restrain any person from lawful exercise of profession, trade or business of any kind, is to that extent, void."

So any agreement which debar any person either partially or completely from practicing any profession, trade or business which otherwise is lawful, is to that extent void. When a person under contract of service makes an agreement that he will serve only his employer only for particular period is valid, though such agreement involving personal service is not specifically enforceable u/s 41 of Specific Relief Act, but is valid contract. But any contract which curtail the freedom to do lawful business, trade or business, that agreement has been declared to be void by Indian Contract Act.

Coming now to case in hand, any agreement between A and B that B would not serve any where during his employment to A would have been valid, after the termination of contract of service A has not lawful authority over B to restrain him to practice as Dr. within radius of 3 km of his (A's) clinic therefore A's suit for damages is liable to be dismissed.

Ans. If the parties enter into an agreement for restraint in legal proceedings, such an agreement is void. In this connection Section 28 of the Act provides as under -

"Every agreement by which a party thereto is restricted absolutely from enforcing his rights under or in respect or any contract by the usual legal proceedings in the ordinary tribunals, or which limits the time within which he may thus enforce his rights, is void to that extent."

Thus the agreement restricting the rights of the parties of prosecuting legal proceedings and the agreements limiting the time by which proceedings be started are void under this section. However, this section has the following two exceptions :

Exception 1 : This section shall not render illegal a contract by which two or more persons agree that any dispute which may arise between them in respect of any subject or class of subjects shall be referred to arbitration and that only the amount awarded in such arbitration shall be recoverable in respect of the dispute so referred.

Exception 2 : Now shall this section render illegal any contract in writing, by which two or more persons agree to refer to arbitration any question between them which has already arisen, or affect any provision of any law in force for the time being so as to refer to arbitration.

Thus the general rule is that an agreement for restraint in legal proceedings has two exceptions, i.e., Arbitration agreement for referring any future dispute to arbitration and arbitration agreement in matter or dispute which has already arisen.

In ------------------------------AIR 1989 SC 1239, it was held where parties to a contract agreed to submit the disputes arising from it to a particular jurisdiction of court, which would otherwise also be a proper jurisdiction under the law, their agreement to the extent they agreed not to submit to other jurisdiction was not violative to provisions of Section 28 of Indian Contract Act.

Ans. Wager :- A wager means a bet, the subject matter of the bet may be anything. It is a game of chance by which one will either gain or losse wholly dependent upon some future uncertain event.

According to Sir W. Anson "It is a promise to give money or money worth upon the determination or ascertainment of an uncertain event."

According to Justice Hawkins - "A wagering contract is one by which two persons, professing to hold opposite views touching the issue of future uncertain event, mutually agree that, dependent on the determination of that even, one shall win from the other and that other shall pay or hand over to him, a sum of money or other stakes, neither of the contracting parties have any other interest in that contract that the sum or stake so won or lost, there being no other real consideration for making of such contract by either of the parties. It is essential to a wagering contract that each party may, under it, either win or lose, whether he will win or lose being dependent on the issue of the event, and therefore, remaining uncertain until that issue is known. If either of the parties may win but cannot lose, or may lose but can not win, it is not a wagering contract."

Section 30 of Indian Contract Act, 1872 deals with wagering agreements. It says;

Agreement by way of wager, are void and no suit shall be brought, for recovering anything alleged to be won on any wager, or entrusted to any person to abide by the result of any game or other uncertain event on which any wager is made.

Exception in favour of certain prizes for horse racing : This section shall not be deemed to render unlawful a subscription or contribution, or agreement to subscribe, made or entered into for or toward any plate, prize or sum of money, of the value or amount of five hundred rupees or upwards, to be awarded to the winner or winners of any horse race.

So a wagering contract is one by which two persons professing to hold opposite views touching the issue of a future uncertain event, mutually agree that, dependant on the determination of that event, one shall pay or hand over to him, a sum of money or other stake, neither of the contracting parties having any other interest in that contract that the sum of sake he will so win or lose.

Essentials of Wagering Agreement (1) Opposite views about an uncertain Event ; First essential of wagering agreement is that performance of it, depends upon an uncertain future event regarding which one party to it has one view and other party has opposite view. In Carlill v. Carbolic Smoke Ball (1892) 2 Q.B. 484 it was observed that parties should have opposite views touching the issue of a "future uncertain event". Such opposite views could be in respect of past or present fact or event, only thing needed is that there should be uncertainty in the minds of parties about the determination of the event one way or other.

(2) Chances of gain or Loss to the Parties ; Another important essential of wager agreement is that parties to it should be at the risk of winning or losing money or money' worth at the determination of some uncertain future event. Where there is no such chances of gain or loss, there is no wager.

(3) No other Interest in the Event except the Amount of Bet; In wagering contract neither of the contracting parties have any other interest in that contract than the sum or stake he will so win or lose and there is no other real consideration for the making of such contract by either of the parties.

Ans. (i) Insurance Contract Concept of insurance bears a superficial resemblance to wagering contracts but they are infact two different transactions. Insurance is contract of indemnity. Its object is to indemnify the insured from the loss caused to him whereas wagering agreement's object is not to indemnify any party to it but it results in gain to one party and loss to other, therefore Insurance Contract is not wagering contract.

(ii) Lottery :

The lottery business is a wagering transaction. Therefore, sale and purchase of ticket in a lottery is invalid and if lottery draws a prize, the ticket- holder, if he wins the prize will not be allowed to enforce his claim for the prize in a court of law. Where a lottery is authorised by the Government, even then the purchase and sale of the ticket will not be valid. The only effect of permission of the Government will be that the holder of the lottery will not be guilty under Section 294-A of the Indian Penal Code.

(iii) Cross-word Puzzles :

A cross-word puzzle competition constitutes a lottery inspite of the fact that the competitions do exercise a certain amount of skill as the result depends upon the chance. It was considered to be a literary competition as a sealed solution had been deposited with the editors and it was mostly a matter of chance with the competitors, who had to reach nearest to the solution.

(iv) Teji-Mandi Transaction :

A Teji Mandi transaction is a "transaction" which consists of an ostensible sale by `A' to `B' of double option of becoming either the purchaser from A or seller to him, certain goods on some future date at a price fixed at the time when transaction was entered into

For example. - A by paying a certain premium or commission per bag to B is given an option by B to purchase or sell 100 bags of wheat at Rs. 200 per bag on Ist January next. If the price of wheat on Ist January comes down i.e. to Rs. 180, A can exercise the option to sell the wheat at agreed price of Rs. 200 per bag. On the other hand if price of wheat rises i.e. to Rs. 225 per bag, A may exercise the option to purchase the same at agreed price of Rs. 200.

In case of such transactions the validity of the contract would depend on the fact whether the parties intended to actually effect the delivery of the goods or not. If the intention is to settle by paying the differences only, the agreement would be a wager and thus void.

(v) Speculative Contracts :

Speculative transactions are generally valid. There is no law against speculation as there is against gambling. The speculation is with reference to the rise and fall in the market. If the agreement is for the purchase of certain goods at a particular rate on a future date, then, the buyer would be entitled to claim the goods on that date at the speculated price even if the market rate on that day is higher than the previously agreed price. It is a legitimate business transaction. Such forward transaction is common in gold, silver, stock etc.

Ans. Section 31 of the Indian Contract Act defines contingent contracts as under :

"A contingent contract is a contract to do or not to do something, if some event collateral to such contract, does or does not happen."

As per this definition, it can be said that the contingent contracts are such contracts which deal with doing or not doing something on the happening or not happening of an event; for example, A contracts to pay B Rs. 1,000/- if B's house is burnt - this is a contingent contract.

So a distinction is to be drawn between a contract under which a present obligation is created but performance is postpond to a future date and a contract under which there is no present obligation at all and the obligation is to arise by reason of some condition being complied with or some contingency arising in future. When the performance of the contract is not dependent on the happening of some future uncertain event, collateral to the contract it is an absolute contract and not a contingent contract.

Following are the essential elements of such types of contract:

1. In such contracts, one party agrees to do or not to do something for the other.

2. Such an act or abstinence is dependent upon happening or not happening of some future event.

3. The event is collateral to that agreement.

4. The event should not be in the control of the party.

Rules Relating to contingent contracts - Rules relating to contingent contracts defined in Section 31 of the Act are embodied in Sections 32 to 36, which may be divided in the following categories :

1. Contract contingent on an event happening. Section 32

2. Contract contingent on an event not happening. Section 33-34

3. CO = act contingent on the future conduct of a living person

4. Contract contingent on an event happening with in fixed time.

5. Contract contingent on event not happening within a fixed time. Section 35

6. Agreement contingent on impossible events.

1. Contract Contingent on an event happening ; Section 32 of Indian Contract lays down :-

"Contingent contracts to do or not to do anything if an uncertain future event happens cannot be enforced by law unless and until that event has happened.

If the event becomes impossible, such contract become void."

(i) A makes a contract with B to buy B's house if A survives C. This contract cannot be enforced by law unless and until C dies in A's life time.

(ii) A makes a contract with B to sell a horse to B at a specified price if C to whom the horse has been offered refuses to buy him. The contract cannot be enforced by law unless and until C refuses to buy the horse.

2. Contracts Contingent on the event not happening ; Contingent contracts to do or not to do anything if an uncertain future event does not happen, can be enforced when the happening of that event becomes impossible, and not before."

For example, A agreed to pay B a sum of money if a certain ship does not return. This ship is sunk. The contract can be enforced when the ship sinks."

3. Contract contingent on the future conduct of a living person - If the future event on which a contract is contingent is the way in which a person will act at an unspecified time, the event shall be considered to become impossible when such person does anything which renders impossible that he should so act within any definite time, or otherwise than under future contingencies.

A agrees to pay B a sum of money if B marries C. C marries D. The marriage of B to C must now be considered impossible, although it is possible that D may die, and that C may afterwards marry B.

4. Contracts contingent on happening of specified event within fixed time. Contingent contracts to do or not to do anything, if a specified uncertain event happens within a fixed time, become void if, at the expiration of the time fixed, such event has not happened, or if, before the time fixed, such event becomes impossible.

Illustration; A promises to pay B a sum of money if a certain ship returns within a year. The contract may be enforced if the ship returns within the year, and becomes void if the ship is burnt within the year.

5. Contracts contingent on not happening of specified event within a fixed time; Contingent contracts to do or not to do anything if a specified uncertain event does not happen within a fixed time, may be enforced by law when the time fixed has expired and such event has not happened, or, before the time fixed has expired, if it becomes certain that such event will not happen.

6. Agreement Contingent On Impossible Event ; Section 36 of Indian Contract Act says contingent agreements to do or not to do anything if an impossible event happens are void, whether the impossibility of the event is known or not to the parties to the agreement at the time when it is made.

Illustration - A agrees to pay B 1,000 rupees if B will marry A's daughter, C. C was dead at the time of the agreement. The agreement is void.

Ans. The parties to a contract shall be discharged from the obligation created by the contract normally by performance of the obligation of the parties concerned.

Section 37 of the Indian Contract Act reads as under -

"The parties to a contract must either perform, or offer to perform their respective promises unless such performance is dispensed with or excused under the provisions of the Act, or of any other law."

The normal method of discharge of a contract is when both the parties perform their obligation under the contract. Then both the parties are free from further liability under it and the relationship comes to an end. There must be a complete and proper performance. According to Section 38 of Act like actual performance an offer of performance (or tender) by promisor discharges a promisor from his obligation under the contract.

The parties to contract, however need not be perform their promise, where :-

(a) such performance is dispensed with or

(b) excused under the provisions of this Act or of any other law

Offer Of Performance Or Tender ; When the promisor is willing to perform the contract and he offers to perform the same, the promisee has duty to accept the performance of the contract. If the offer of performance is not accepted by promisee, the promisor can not be blamed for the non-performance of the contract. Section 38 of Indian Contract Act says in this regard -

"Where a promisor has made an offer of performance to the promisee, and the offer has not been accepted, the promisor is not responsible for non- performance, nor does he thereby lose his rights under the contract.

Every such offer must fulfil the following conditions :-

(1) It must be unconditional;

(2) It must be made at a proper time and place, and under such circumstances that the person to whom it is made may have a reasonable opportunity of ascertaining that the person by whom it is made is able and willing there and then to do the whole of what he is bound by his promise to do;

(3) If the offer is an offer to deliver anything to the promisee, the promisee must have a reasonable opportunity of seeing that the thing offered is the thing which the promisor is bound by his promise to deliver.

An offer to one of several joint promisees has the same legal consequences as an offer to all of them."

By Whom Contract Should Be Performed ; Section 40 of Indian Contract Act contains the general rule, which lays down:-

"If it appears from the nature of the case that it was the intention of the parties to any contract that any promise contained in it should be performed by the promisor himself, such promise must be performed by the promisor. In other cases the promisor or his representatives may employ a competent person to perform it."

So from Section 40 of Act it is clear that if the performance of contract depends upon personal volition, talent or upon exercise of personal skill of promisor then it should be performed by promisor only and nonelse but in any other case contract can be performed by promisor or his agent. However it is pertinent to mention that once performance of contract (whatever may be its nature) by other is accepted by promisee, he cannot thereafter complain that contract should have been performed by promisor only. Section 41 of Act says :

"When a promisee accepts performance of promise from a third person he cannot afterward enforce it against the promiser."

Ans. The rules relating to the time and place for the performance of the contract have been specified in Sections 46 to 50 of the Act as follows :

(1) When no time is specified., Section 46

(2) When day is fixed., Section 47

(3) Performance on a certain day on application., Section 48

(4) When no place is fixed., Section 49

(5) Performance in manner or at time prescribed or sanctioned by promisee., Section 50

(1) When no time is specified. - Section 46 of the Act specifies the rule about the time for the performance of the promise where no application is to be made by the promisee in this respect and no time is specified in the agreement. The provision is that where, by the contract, a promiser is to perform his promise without application by the promisee and no time for performance is specified, the agreement must be performed within a reasonable time and the question as to what is a reasonable time is, in each particular case, a question of fact which is decided by taking into consideration all surrounding circumstances.

(2) When day is fixed - Section 47 of the Act lays down that when a promise is to be performed on a certain day, and the promiser has undertaken to perform it without application by the promiser, the promiser may perform it at any time during the usual hour of business of such day not at the place at which the promise ought to be performed.

(3) Performance on a certain day on application - Section 48 of the Act lays down that when a promise is to be performed on a certain day and promiser has not undertaken to perform it without application by the promisee, it is the duty of the promisee to apply for performance at a proper place and within the usual hours of business and explanation to this section makes it clear that the question as to what is a proper time and place is in each particular case a question of fact which is to be decided by taking all surrounding circumstance into consideration.

(4) When no place is fixed - The point, about the place for the performance of a promise in a case where no application is to be made by the promisee and no place is fixed for the performance can be settled according to the rule laid down in section 49 of the Act which provides that when a promise to be performed without application by the promisee and no place is fixed for the performance of it, it is the duty of the promiser to apply to the promisee to appoint a reasonable place.

Illustration ; A undertakes to deliver a thousand quintal of jute to B on a fixed day. A must apply to B to appoint a reasonable place for purpose of receiving it, and must deliver it to him at such place.

(5) Performance in manner or at time prescribed or sanctioned by promisee - Section 50 of the Act specifies that the performance of the promise, in a case where the manner or the time of the performance is presented or sanctioned by the promisee, must be in accordance with that manner or at that time.

Section 50 lays down that -

"The performance of any promise may be made in any manner or at any time which the promise prescribes or sanctions."

The section specifies about the prescribed or sanctioned manner and time. It may be in any manner as prescribed or sanctioned; similarly it may be at any time as prescribed or sanctioned.

Ans. An anticipatory breach of contract means the repudiation of contract by one of the party to it before the arrival of prescribed date of its performance.

For example : "A agrees to give 100 ton of wheat in bags to B after 3 months of making agreement with B. After month of contract A refused to supply above said consignment to B. This is a case of anticipatory breach of contract."

Section 39 of Indian Contract Act provide regarding anticipatory breach of contract as:

"When a party to a contract has refused to perform or disabled himself from performing, his promise in its entirety, the promisee may put the contract to an end unless he has signified by his words or conduct his acquiescence in its continuity."

It is important to note that this rule apply only to an executory contract and not to a case in which time for performance has arrived and there has been a breach (See Kumaraswami v. Kuruppuswami AIR 1953 Mad. 38).

So following points emerge regarding anticipatory breach of a contract:

(i) Anticipatory breach of contract can be made by promisor either by refusing to perform his promise under the contract, or

(ii) By disabling himself from performing his part of promise under the contract before the arrival of date of performance.

(iii) It is only when promisor refuse or disable himself to perform his part of promise in its entirety, then only there is anticipatory of contract.

(iv) Upon Anticipatory breach of Contract by promisor, promisee has option either (a) to put the contract to an end immediately before waiting for date of performance and when promisee so elects he is discharged from performing his promise under the contract or (b) promisee may not put the contract to an end but treat it still subsisting and wait for the performance of contract on appointed date.

Ans. Section 40 of Indian Contract Act is relevant in this case. Section 40 of Act provides :

"If it appears from the nature of case that it was the intention of parties to contract that any promise contained in it should be performed by promisor himself such promise must be performed by the promisor.

In other cases promisor or his representatives may employ a competent person to perform it." It means that if the contract is one which is based on personal confidence or involves exercise of personal skill it would be apparent that intention of parties is that it should be performed by promisor himself and nobody else.

Section 37 of Act will make intention of legislature more clear which provides that when a contract is based on personal confidence and skill and promisor dies before performing the same, the contract comes to end thereby.

So what is very clear that in a contract which involves exercise of personal skill or confidence, it can be enforced only against promisor. Coming now to case in hand contract was one for personal service said to be rendered by plaintiffs as plaintiff himself had done nothing for defendant, there was no consideration for contract and as such defendant cannot be held liable to pay anything under the agreement to plaintiff.

Ans. Section 50 of Indian Contract Act is relevant to the case in hand. Section 50 of Act provides that "performance of promise shall be made in any manner or at any time which the promisee prescribes or sanctions. That means in the absence of any usual manner of performance of promisee, if promisee prescribes particular manner in which or at any time sanction by promisee promisor must perform it in such manner or at such time.

Illustration A describes B who owes him Rs. 100 to send him a note for Rs. 100 by post. Debt is discharged as soon as B puts into the post a letter containing the note duly addressed to A.

In Comm. of Income Tax Bombay v. Ogale Glass Works Ltd., AIR 1954 SC 429 Supreme Court observed : "There can be no doubt that as between sender and addressee, it is the request of addressee that the cheque be sent by post that makes post office the agent of addressee. After this request addressee cannot be heard to say that post office was not his agent therefore loss of cheque in transit must fall on sender. Apart from it there is another principle which makes delivery of cheque to post office at the request of addressee a delivery to him and by posting the cheque in pursuance of request of creditor the debtor performs his obligation in the manner prescribed and sanctioned by creditor and thereby discharged the contract by performance."

Underlying principle thus of Section 50 of Act is that when debtor has done in manner as prescribed by the creditor, then debtor has discharged himself of contract by the performance. If something afterwards has happened that is not in the control of debtor and thus debtor cannot be made liable for it. Coming into case in hand creditor carrying business in Delhi wrote to debtor at Chandigarh that favour of cheque for due amount within week shall oblige. So necessary inference which can be drawn from the facts is that creditor require the debtor to send cheque of due amount by post from Chandigarh to Delhi. If debtor has performed accordingly and sent the cheque by post to Delhi, from that moment debtor is discharged from contract by performance. If during transit, cheque is stolen and misappropriated by some one else, debtor can not be made liable in view of provision of Section 50 of Act.

Ans. Discharge of Contract Every Contract create certain right in favour of one party to it and certain obligation upon other party and each party is to perform this part of obligation. When each party fulfils his promise, the contract is said to be discharged. There are following ways by which contract is said to be discharged :-

(i) By performance

(ii) By breach of contract

(iii) By impossibility of performance

(iv) By waiver or Novation

(i) By Performance; As stated above when each party to contract perform its part of promise, then contract is discharged and each party is satisfied. Section 37 and 38 of Indian Contract Act lays down the rules as to performance of contract.

(ii) By Breach of Contract ; When a party having duty to perform a contract fails to do that or does an act by which performance of contract by him becomes impossible or when he refuses to perform the contract, it is a breach of contract. When one party to contract commits breach of contract other party is discharged from performing his part of promise under the contract and he also becomes entitled to sue the party committing breach of contract for damages for loss arisen due to breach of contract. Breach of contract may be:-

(A) Actual i.e. refusal to performance of contract on date of performance.

(B) Anticipatory i.e. refusal of performance of contract even before due date of performance.

(iii) Discharge by Impossibility of Performance ; When the performance of contract become impossible because of certain reasons beyond the control of either party to contract then each party to it, stands discharged from performing their part of promise under the contract. Section 56 of Indian Contract Act deals with impossibility of performance of Contract which is also known as "Doctrine of frustration". As per section 56 there can be two kind of impossibility :-

Istly :- Impossibility existing at the time of making of contract

IIndly :- Impossibility of performance which become so, after contract was entered into, due to some supervening event.

(iv) By Waiver and Novation etc. ; Parties create contract by their agreement and in the same way, by their agreement, the parties may bring a contract to an end. This type of ending of the contracts is known as the discharge of the contract by agreement. The discharge of the contract by agreement may be in any one of the following ways :

(a) By Waiver,

(b) By Novation,

(c) By alteration in terms of contract.

(a) By Waiver - Where a party to contract having some right, gives up its right, the other party to the contract stands relieved from its liability and the contract comes to an end. A party to the contract having certain rights may relieve the other party by accepting consideration less than the agreed consideration. Thus, by agreement one party may relieve another party by giving up its right in full or by accepting less than the agreed consideration.

(b) By Novation - If by an agreement one party is relieved of its liability and its liability is taken over by the new party, it is said that the old contract has come to an end. It is known as novation of the contract and the old contract comes to an end.

(c) By alteration in terms of Contract - If a change in the terms of contract is made in such a way that a new contract comes into force in place of old one then, old contract is deemed to have come to an end.

Ans. Simple question involved in the case in hand, for determination is that whether the time is essence of the contract between `A' and `B' or not.

Section 55 of Indian Contract Act is relevant here which reads as under:

"When a party to contract promises to do certain thing at or before specified time or certain things at or before specified times and fails to do any such thing at or before specified time, the contract or so much of it as has not been performed, becomes voidable at the option of the promisee, if the intention of the parties was that time should be of the essence of contract."

So when a promisor promises to perform his part of the promise under the contract at or before specified time but fails to perform at or before such specified time then such contract becomes voidable at the option of promisee if the intention of parties are that time is of essence of the contract. Whether time is essence of contract or not depends upon intention of parties and nature of transaction. If parties have not expressed their intention then it depends upon nature of contract and conduct of parties.

In Chand Rani v. Kamal Rani AIR 1993 SC 1742 Supreme Court observed "In case of sale of immovable property there is no presumption as to time being the essence of the contract". Similarly recently in Swarnam Ramachandran v. Aravacode Chakungal Jayapalan AIR 2000 Bombay 410, it was observed "Ordinarily time is not the essence of a contract for sale of immovable property. The parties, in a given case, may make time of the essence either expressly in terms which unmistakably provide that they intended to so. Alternately, making of time as the essence of contract may be inferred from the nature of the contract, the property or the surrounding circumstances. A mere stipulation in a contract lying down the time for performance is not sufficient to make time the essence of the contract for sale of immovable property. A party to a contract cannot by his unilateral act make time of the essence unless the circumstances are such as would establish that the other party to contract had delayed or defaulted in the performance of his obligation under the agreement."

Turning now to case in hand, it is an admitted fact that although a date was specified to complete the sale, but after accepting a further amount, the vendor extended the period for completion of the sale. There was no expressed stipulation in this regard nor circumstances and conduct of parties are such to intimate that it was the intention of parties that time was of the essence of contract. Moreover there was no evidence to show that vendor was badly in need of money by the stipulated date and he had to tie up his difficulties relying upon the purchaser nor there is any evidence to show that vendor had to make other arrangements for securing funds for his immediate needs, under these circumstances necessary conclusion is that time is not essence of contract and if the purchaser is otherwise qualified to obtain a decree of specific performance of contract, his right can not be determined by act of vendor by giving notice of cancellation of agreement and then selling the immovable property to third party.

Ans. Section 56 (para 2) makes the following provision regarding the validity of such contracts:

"A contract to do an act which after the contract is made, becomes impossible, or, by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful."

It means that every contract is based on the assumption that the parties to the contract will be able to perform the same when the due date of performance arrives. If because of some event the performance has either become impossible or unlawful, the contract becomes void.

In Satyabrata Ghose v. Mugneeram AIR 1954 SC 47 Supreme Court observed "When changed circumstances make the performance of a contract impossible then parties are absolved from further performance as they did not promise to perform an impossibility..... the doctrine of frustration is really an aspect or part of law of discharge of contract by reason of supervening impossibility or illegality of act agreed to be done and hence comes within the purview of Section 56 of Contract Act."

In the case in hand, the female singer A took icecream one day earlier to her scheduled programme, due to which her voice cracked. Taking of icecream is a normal foodhabit. If A knew that taking of ice cream would result in cracking her voice, as might have occurred in the past as well, then her act of taking icecream a day before her scheduled programme would definitely amount to self-induced frustration, and she would be liable in damages for breach of the contract. But the facts show that she never knew that such consequences would arise by taking icecream. At the most it can be said that there was some carelessness or negligence on her part; but the same cannot be termed as `self-induced frustration'. Since B has failed to prove that the voice of A was cracked due to her intentional fault, the defence of frustration succeeds and the contract is discharged. B is not entitled to recover any damages from A.

Ans. Section 56 of Indian Contract Act provides: An agreement to do an act impossible in itself is void.

Contract To Do Act Afterwards Becoming Impossible Or Unlawful : A contract to do an which after the contract is made becomes impossible or by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful...."

Impossibility of performance is one of the modes in which a contract is discharged. The impossibility may be of such a nature as existing unknown to the parties at the time of making the contract. If the contract is impossible in itself, it is void ab initio. It is based on the principle lex non cogit ad impossibilia, i.e., the law does not compel the impossible.

In Sushma Devi v. Hari Singh AIR 1971 SC 1756 it was observed that to hold that performance of contract has become impossible, the supervening event should take away the basis of contract and it should be of such a character that it strikes at the root of the contract.

In the case in hand `A' agreed to give the use of hall for a concert at a prescribed date to B but before the arrival of prescribed date hall was destroyed because of fire. So act agreed to be done under the contract became impossible and thus contract is void in view of Section 56 of Contract Act and contract is discharged.

Ans. Novation : Section 62 of the Indian Contract Act lays down: "If the parties to a contract agree to substitute a new contract for it, or to rescind or alter it, the original contract need not be performed."

A owes money to B under a contract. It is agreed between A, B and C that B shall thenceforth accept C as his debtor, instead of A. The old debt of A to B is at an end, and a new debt from C to B has been contracted.

Where the parties to a contract agree to substitute a new contract for it, it is known as novation or novatio. It takes place when there being a contract in existence some new contract is substituted for it either between the same parties or between different parties, the consideration mutually being the discharge of the old contract.

In Lata Constructions and other v. Dr. Ramesh Chandra Ramnik Lal Shah and others, AIR 2000 SC 380 Supreme Court observed: "One of the essential requirements of `Novation' as contemplated by Section 62 is that there should be complete substitution of a new contract in place of the old. It is in that situation that original contract need not be performed. Substitution of a new contract in place of old contract which would have the effect of rescinding or completely altering the terms of the original contract, has to be by agreement between parties."

Accord and Satisfaction : Section 63 of the Indian Contract Act runs as under: "Every promisee may dispense with or remit, wholly or in part, the performance of the promise made to him, or may extend the time for such performance, or may accept instead of it any satisfaction which he thinks fit."

Under this Section the performance, the whole or in part, of a contract may be effectually dispensed with by the promisee, without either an agreement with the promisor, or consideration for the dispensation.

A promisee may if he so chooses agree to accept a smaller amount in full discharge of the whole amount due to him and that no consideration is necessary for the same; he may remit wholly the performance of the contract. Where a promisor has paid a smaller amount and the promisee has accepted it, it will be a question of fact whether the promisee had really agreed to accept the amount in full satisfaction for the debt. Therefore, where there has been a true accord under which the creditor voluntarily agrees to accept a lesser sum in satisfaction and the debtor acts upon that accord by paying the lesser sum and the creditor accepts it, then it is inequitable for the creditor afterwards to insist upon the balance. See Union of India v. Kishori Lal Gupta and Bros., AIR 1959 S.C. 1362. It may also be stated that an agreement to remit in future clearly requires consideration if it is to be a binding contract. See Ramaswami v. Rudrappa, AIR 1939 Mad. 688. See illustrations (b) and (c) to Section 63 of the Act.

Ans. Quasi Contract : Sections 68 to 72 deal with what is called in English Law as quasi contract. Quasi contracts are exceptional kind of contracts by which one party is bound to pay money in consideration of something done or suffered by the other party. They are not founded on actual promises, but one person has done something or paid money for another and the court comes forward on the ground of equity saying that the person receiving benefit must make compensation to the other. In other words, they are certain types of transactions in which, in fact, there being no contract between the parties the law, by special rule creates rights and obligations between them which are analogous to those created by a contract. Quasi contracts are not contracts because the obligation does not arise from volition of the parties. There is no agreement at all. In the case of quasi contacts certain obligations are imposed by law on the parties concerned. They do not result from:

(i) Any express agreement.

(ii) Any agreement which can as a matter of fact, be implied.

This type of relation is commonly known as quasicontract.

The quasi contracts are the following:

(i) a minor's or lunatic's liability to pay for necessaries supplied to him (Section 68);

(ii) Payment of money due to another (Section 69);

(iii) Doing a non-gratuitous act for another (Section 70);

(iv) The case of a finder of goods (Section 71), and

(v) Case of money paid by mistake or coercion (Section 72).

Now we will deal with each head alongwith its relative Section of the Indian Contract Act.

Section 68. Claim for necessaries supplied to a person incapable of contracting or on his account: If a person, incapable of entering into a contract, or any one whom he is legally bound to support, is supplied by another person with necessaries suited to his condition in life, the person who has furnished such supplies is entitled to be reimbursed from the property of such incapable person.

Section 69. Reimbursement of person paying money due by another, in payment of which he is interested: A person who is interested in the payment of money which another is bound by law to pay, and who therefore pays it is entitled to be reimbursed by the other.

Obligation of person enjoying benefit of non-gratuitous act. Section 70 of the Indian Contract Act, provides that where a person lawfully does anything for another person, or delivers anything to him, not intending to do so gratuitously, and such other person enjoys the benefit thereof, the latter is bound to make compensation to the former in respect of, or to restore, the thing so done or delivered.

The following three conditions must be established before a right of action under this Section can arise:

(1) the goods are to be delivered lawfully or anything has to be done for another person lawfully;

(2) the thing done or the goods delivered is so done or delivered not intending to act gratuitously; and

(3) the person for whom the act is done or to whom the goods are delivered must enjoy the benefit thereof. (Union of India v. Sita Ram Jaiswal, AIR 1977 SC 329).

So what Section 70 prevents is "unjust enrichment" and it applies as much to individuals as to corporations and Government. (Panna Lal v. Deputy Commissioner, Bhandara, AIR 1973 SC 1174). But in all such cases not only the two conditions but also the third condition must be fulfilled that the other party has accepted the thing delivered and has enjoyed the benefit thereof. (State of West Bengal v. M/s B.K. Mandal and Sons, AIR 1962 SC 779).

Section 71 says about Responsibility of finder of goods "A person who finds goods belonging to another, and takes them into his custody, is subject to the same responsibility as a bailee."

Section 72 provides about Liability of person to whom money is paid, or thing delivered, by mistake or under coercion : "A person to whom money has been paid, or anything delivered, by mistake or under coercion, must repay or return it."

Ans. (a) In case of breach of contract by one party, the aggrieved party has following remedies:

(A) Damages (B) Quantum mruits (C) Specific performance and injunctions.

In case of breach of contract, most common remedy is the compensation on account of loss or damages caused by such breach of contract. Section 73 of Indian Contract Act lays down:

"When a contract has been broken, the party who suffers from such breach of contract is entitled to receive from the party who has broken the contract, the compensation for any loss or damages which naturally arose in usual course of things from such breach or which the parties knew when the contract was made to be likely to result from the breach of it."

Such compensation is not to be given for any remote or indirect loss or damages caused by breach of contract.

Compensation For Failure To Discharge Obligation Resembling Those Created By Contract : When an obligation resembling those created by contract is incurred and has not been discharged then the person who is injured by such failure is entitled to receive the same compensation from party in default as if such person has broken the contract.

So from Section 73 of Act following points are clear:

(i) Compensation for breach of contract can be received in respect of only those losses or damages which arose naturally in usual course of things or

(ii) Compensation for breach of contract may be received in respect of all those loses or damages which, parties to the contract knew at the time of making of the contract to be likely result of breach of contract.

(iii) Compensation can not be received for any indirect or remote losses or damages in consequence of breach of contract.

So in any action brought for damages in respect of breach of contract, court will decide following issues:

Firstly : Whether the loss or damages resulted by breach of contract is proximate result of breach of contract or mere remote consequence of breach of contract. If loss or damages are not special damages arose because of special circumstances, then court has to see whether such special loss or damages were in contemplation of parties at the time, when they entered into the contract.

Secondly : Upon determining the first issue the court has to see how damages, in the facts and circumstances of each particular case, has to be awarded to meet the end of justice.

The rule with regard to the measure of damages has thus been laid down in the leading case of Hadley v. Baxemdale, (1854) 9 Ex. 341:

"Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be either such as may fairly and reasonably by considering arising naturally, i.e., according to the usual course of things, from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties at the time they made the contract as the probable result of the breach of it."

Liquidated Damages And Penalty : Section 74 of the Indian Contract Act provides for when a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, or if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damages or loss is proved to have been caused thereby to receive from the party who has broken the contract reasonable compensation not exceeding the amounts so named, or as the case may be, the penalty stipulated for.

In Roshan Lal v. Manohar Lal AIR 2000 Delhi 31, it was observed "Section 74 of the Indian Contract Act deals with measure of damages in two classes of cases (i) where the contract names a sum to be paid in case of breach and (ii) where the contract contains any other stipulation by way of penalty. Jurisdiction of the court to award compensation in case of breach of contract is unqualified except as to the maximum stipulated but law imposes upon the court duty to award compensation according to settled principles. The Section undoubtedly says that the aggrieved party is entitled to receive compensation from the party who has broken the contract whether or not actual damage or loss is proved to have been caused by the breach. Thereby it merely dispenses with proof of "actual loss or damages", it does not justify the award of compensation when in consequence of breach no legal injury at all has resulted because compensation for breach of contract can be awarded to make good the losses or damages which naturally arose in usual course of things or which parties knew when they made the contract to be likely to result from the breach."

(b) Section 73 of Contract Act guides the court to determine the amount of compensation payable to aggrieved party by party responsible for breach of contract. Following principles have to be borne in mind:

(A) Compensation is to be given for only those losses or damages which naturally arose in usual course of things in consequence of breach of contract.

(B) Compensation may be given for those special losses or damages which were in contemplation of parties, when they entered into contract, to be likely consequence of breach of it.

(C) Court will not award compensation for remote or indirect loss or damages arising by breach of contract.

In Trojan and Co. v. Nagappa Chettiar AIR 1953 SC 235, it was held that in case of breach of contract of service by employer general damages for "humiliation" etc. can not be claimed, person aggrieved is entitled only to such damages as will compensate him for loss suffered to the extent that such loss or damages were reasonably foreseeable as likely to result."

Therefore in case in hand `A' could have been dismissed only by giving 6 months notice. But he has been wrongfully dismissed by B in harsh and humiliating manner, so `A' is entitled to receive remuneration for 6 months to be calculated as per terms of contract of his employment.

Ans. Section 74 of Indian Contract Act is relevant in his case which provides :

"When a contract has been broken, if a sum is named in the contract the amount to be paid in case of such breach or if contract contains any other stipulation by way penalty, the party complaining of breach is entitled whether or not actual damage or loss is proved to have been caused thereby to receive from party who has broken the contract, reasonable compensation not exceeding the amount so named or as the case may be penalty so stipulated for."

So Section 74 of Act makes it clear that if in contract parties have before hand agreed for certain sum to be payable to aggrieved party by way of liquidated damages or any other stipulation by way of penalty in the event of breach of contract, Court shall decide reasonable compensation not exceeding amount so decided or any penalty so stipulated for to aggrieved party irrespective of fact whether actual damage or loss caused by such breach is proved or not.

So that being legal position case in hand contract is enforceable.

Ans. Section 73 of Indian Contract Act is relevant for the case in hand which provides as under:

"When a contract is broken the party suffers loss by such breach is entitled to receive from the party who has broken the contract, compensation for any loss or damages caused to him thereby which naturally arose in usual course of things from such breach or which the parties knew when they made contract to be likely to result from breach of it. Such compensation is not be given for any remote or indirect loss or damages sustained by such breach."

So following principles can be enunciated from this Section 73 : The party who sustain loss or damages by breach of contract is entitled to:

(A) Any loss or damages which naturally arose in usual course of things, as a result of breach.

(B) For loss or damages which were in contemplation of parties when they entered into contract, to be likely to sustain by breach of it or in other words those special damages which though ordinarily does not flow because of breach but because of some special reason have occurred and parties were well aware from very beginning of such special circumstances.

Section 73 provides aggrieved party will not be entitled to receive compensation for any remote or indirect loss or damages sustained by breach of contract. Now question arises which are said to be remote or indirect losses and which are not. Basic authority in this regard is Handley v. Boxendale (1854) which determine whether damages are proximate or remote consequence of breach of contract.

"When two parties have made a contract, which one of them has broken, the other party ought to receive in respect of such breach of contract, such damages as may fairly and reasonably considered either arising naturally i.e. according to usual course of things from such breach of contract or such losses as may reasonably be supposed to be in contemplation of parties at the time of making of contract."

Coming now to case in hand, Tailor when delivered the sewing machine and cloths for transmission to railway co. did not tell his special purpose of earning profit at festival, eventually goods reached at distinction much after the festival was over and thus plaintiff could not earn that profit. However special purpose of earning profits during festival was not known to railway co. therefore plaintiff in view of Section 73 of Act is entitled to compensation only for those loss which he sustained naturally i.e. in usual course of thing by breach of contract. He cannot claim that loss of profit which he could have earned, if goods had been reached at destination well in time.

Ans. In simple words "Indemnity" means protection to a person from loss. It contemplates a promise from one person to other that in the eventuality of any loss to latter either because of promisor or third person, promisor will compensate for such loss.

According to Section 124 of Indian Contract Act

"A contract of indemnity means a contract by which one party promises to save other from loss caused to him by conduct of promisor himself or by conduct of any other person."

Illustration ; A contracts to indemnify B against the consequence of any proceedings which C may take against B in respect of a certain sum of Rs. 200. This is a contract of indemnity.

Whether "Insurance" is Contract of Indemnity : As provided u/s 124 of Act contract of indemnity is one whereby promisor promises to promisee to compensate him for any loss arising out of conduct of promisor or any third person. Section 124 of Act does not contemplates compensation for any loss not arising due to human agency. Therefore contract of insurance is not contract of indemnity because in Insurance Contract promiser promises to pay compensation for event by fire etc. Such contract is not indemnity.

In contract of indemnity person who promises to indemnify is called "Indemnifies" and person in whose favour promise is made is called "Indemnifies" or "Indemnity holder."

Rights of Indemnity Holder When Sued ; Section 125 of Indian Contract Act is relevant, which provides indemnity holder can bring an action against indemnifier to recover damages and costs etc. The Indemnity holder acting within the scope of his authority has following rights :-

(1) An indemnity-holder is entitled to claim all damages which he may have been compelled to pay.

(2) An indemnity-holder is entitled to recover all costs reasonably incurred in resisting or reducing or ascertaining the claim. But the party indemnified cannot recover costs when he has not acted as a prudent man in defending the action against him or has not been authorised by the indemnifier to defend the suit or where the costs incurred have been unreasonable in amount.

(3) An indemnity-holder can compromise a claim on the best terms he can and then bring an action on the contract of indemnity.

Ans. Contract of Gurantee :- Section 126 of Indian Contract Act says-

"Contract of guarantee is a contract to perform the promise or to discharge the liability of a third person in case of his default.

The person who gives the guarantee is called the "Surety" and person in respect of whose default the guarantee is given "principal debtor" and the person to whom guarantee is given is called the "creditor"

So the object of contract of guarantee is to provide additional security for repayment of loan to creditor.

In Nagpur N.S. Bank v. Union of India, AIR 1981 A.P. 153 it was observed that.

In every contract of guarantee there are three parties, the creditor, the principal debtor and the surety. There are three contracts in a contract of guarantee. Firstly, the principal debtor himself makes a promise in favour of the creditor to perform a promise, etc. Secondly, the surety undertakes to be liable towards the creditor if the principal debtor makes a default. Thirdly, an implied promise by the principal debtor in favour of the surety that in case the surety has to discharge the liability on the default of the principal debtor, the principal debtor shall indemnify the surety for the same.

Basic Features of Contract of Guarantee 1. Contract may be either Oral Written ; Under Indian law, contract of guarantee may be either oral or written, however under English law contract of guarantee must be in writing and signed by parties.

2. There should be a Principal debt ; One of essential feature in a contract of guarantee is existence of principal debt or liability, which at first instance is required to be discharged by principal debtor. Surety is liable under the contract, only when principal debtor fails to discharge his obligation. If principal debt is not there and one party makes promise to other to compensate for loss, it will be a contract of indemnity and not the contract of indemnity.

3. Benefit to the principal debtor is sufficient consideration. - As in any other contract, the consideration is also needed for a contract of guarantee. For the surety's promise it is not necessary that there should be direct consideration between the creditor and the surety, it is enough that the creditor has done something for the benefit of the principal debtor. Benefit to the principal debtor constitutes a sufficient consideration to the surety for giving the guarantee.

4. Consent of the surety should not have been obtained by misrepresentation or concealment. - The creditor should not obtain guarantee either by any misrepresentation or concealment of any material facts concerning the transaction. If the guarantee has been obtained that way, the guarantee is invalid. The position is explained by Sections 142 and 143 which run as follows :

"142. Guarantee obtained by misrepresentation invalid. - Any guarantee which has been obtained by means of misrepresentation made by the creditor, or which his knowledge and assent, concerning a material part of the transaction, is invalid."

"143. Guarantee obtained by concealment invalid. - Any guarantee which the creditor has obtained by means of keeping silence as to material circumstance is invalid."

Distinction Between Contracts of Indemnity and Guarantee (1) There are two parties in contract of indemnity i.e. indemnifier and indemnity holder. In a contract of guarantee there are three parties i.e. surety, principal debtor and creditor

(2) Contract of indemnity consists of one contract whereby indemnifier promises to indemnify the indemnity-holder for certain loss, whereas in contract of guarantee there are three contracts between parties inter-se. One between principal debtor and creditor in respect of debt or obligation to be discharged by principal debtor. Second contract whereby surety undertakes to perform same obligation if principal debtor fails to perform and third contract, which is implied one, is between principal debtor and surety whereby principal debtor is bound to indemnify the surety for payment of debt or discharge of obligation, made by surety under the contract of guarantee.

(3) The object of contract of guarantee is provide additional security to creditor for debt or liability. A contract of indemnity is to protect the promisee against some likely loss.

(4) In contract of guarantee, the liability of surety is only a secondary one and arises only when principal debtor fails to discharge is obligation under the contract, but once surety had discharged his liability on behalf of principal debtor surety steps into the shoes of creditor and can realise the payment made by him from principal debtor, whereas in contract of indemnity, liability of indemnifier is primary one and he can not recover amount paid by him from any one.

Ans. Section 128 of Indian Contract Act lays down -

"The liability of surety is co-extensive with that of principal debtor unless it is otherwise provided by the contract".

So term "Co-extensive" indicates that Surety and principal debtor stands at par as far as liability towards creditor is concerned. Surety is as much liable for debt or any liability as the principal debtor is liable. So if the liability of Principal debtor is scaled down then liability of surety will also be reduced.

Illustration ; A guaranteed to B the payment of a bill of exchange by C the acceptor. The bill is dishonoured by C, the acceptor. A is liable not only for the amount of bill but also for any interest and charges which may have become due on it.

In Kelappan Nambiar v. Kunbi Raman, AIR 1957 Mad. 176, it has been held that a surety guarantees a debt by minor, he incurs no liability as his liability is co-extensive with that of principal debtor, whose contract is void.

So in view of provisions of Section 128 of the Act the liability of surety is joint and several with the principal debtor, if principal debtor makes a default in discharging his liability, creditor can enforce it from surety or both. Creditor can sue surety alone without even exhausting his right to sue principal debtor, unless, however contrary is agreed upon under the contract.

In Bank of Bihar v. Damodar Persad, AIR 1969 SC 297, plaintiff bank advanced loan to `D' (Principal debtor) and `P' was surety upon failure of repayment of loan by `D' and `P'. Bank filled suit for recovery against with principal debtor and surety (D and P). Suit was decreed with condition that creditor (Plaintiff) shall enforce its dues against surety only after having exhausted it's remedies against principal debtor. This condition was challenged till Supreme Court and Apex Court while accepting the appeal Hon'ble Sh. Bachawat J. observed -

"Before payment, the surety has no right to dictate terms to creditor and ask him to pursue his remedies against the principal debtor in the first instance. In the absence of some special equity, the surety has no right to restrain an action against him by the creditor on the ground that the principal debtor is solvent or that creditor may have relief against the principal debtor in some other proceeding."

So as a general rule liability of surety is co-extensive or joint and several with principal debtor. However there can be limit on surety's liability upon express term or condition, under the contract.

Ans. Section 129 of Indian Contract Act provides that : A guarantee which extends to a series of transactions, is called, a continuing guarantee.

A guarantee may be an ordinary guarantee or a continuing guarantee. In case of ordinary guarantee the surety is liable only in respect of a single transaction but in case of continuing guarantee the surety is liable in respect of any of the successive transactions which come within its scope. Thus, in consideration that B will employ C in collecting the rent of B's zamindari, promises B to the responsible, to the amount of 5,000/- rupees for the due collection any payment by C of those rents. This is continuing guarantee.

But it is not always easy to decide whether a guarantee is confined to one particular transaction only or extends to a series of transactions. In difficult cases the proper course always is to ascertain the intention of the parties and the intention is best ascertained by looking at the relevant position of the parties at the time of the instrument.

Revocation of continuing guarantee. - (1) A continuing guarantee may, at any time, be revoked by the surety as to future transaction by notice to the creditor.

Example. - A, in consideration of B's discounting, at A's request, a bill of exchange for C, guarantees to B, for twelve months the due payment of all such bills to the extent of 5,000 rupees. B discounts bills for C to the extent of 2,000 rupees. Afterwards at the end of three months. A revokes the guarantee. This revocation discharges A from all liability to B for subsequent discount. But A is liable to B for the 2,000 rupees on default of C.

(2) The death of surety operates, in the absence of any contract to the contrary, as revocation of continuing guarantee, so far as future transactions. (Section 13)

Ans. Discharge of Surety from Liability When the liability which surety had undertaken under the contract is extinguished or comes to an end, he is said to be discharged from his liability. A surety can be discharged from his liability by any of following ways :-

(a) Revocation by the surety (Section 130)

(b) Upon Surety's death. (Section 131)

(c) By Variance in terms of the Contract (Section 133)

(d) By release or discharge of principal debtor. (Section 134)

(e) When creditor compounds with Principal debtor (Section 135)

(f) Upon creditor's acts or omission impairing Surety's remedies. (Section 139)

(g) By loss of security by creditor. (Section 141)

134 of Indian Contract Act says -

"The surety is discharged by any contract between the creditor and principal debtor by which the principal debtor is released or by any act or omission of creditor, the legal consequence of which is the discharge of principal debtor."

Illustration ; A gives a guarantee to C for goods to be supplied by C to B. C supplies goods to B and afterwards B becomes embarrassed and contracts with his creditors (including C) to assign to them his property in consideration of their releasing him from their demands. Here B is released from his debt by contract with C and A is discharged from his suretyship.

Delhi High Court in Charan Singh v. Security Finance Pvt. Ltd., AIR 1988 Delhi 130 has held that settlement made between creditor and principal debtor after passing of joint decree against surety and principal debtor would not absolve the surety because provisions of Section 133 to 139 apply only when rights of parties have not crystallised or merged in decree of court of law.

(a) By Revocation by Surety ; As per Section 130 of Indian Contract Act a continuing guarantee may a any time be revoked by the surety as to future transactions, by notice to the creditor.

So Section 130 apples in case of continuing guarantee. Surety in such cases can be discharged under the contract by giving written notice indicating his intention of revoking his guarantee for future transactions.

(b) By Surety's Death ; According to Section 131 of Indian Contract Act, death of surety operates as revocation of continuing guarantee, in the absence of any contract to contrary.

(c) By Variance In terms of Contract ; Section 133 of Indian Contract Act says -

"Any variance, made without the surety's consent in terms of the contract between principal debtor and the creditor, discharges the surety as to transactions subsequent to variance."

A variation in the contract between the principal debtor and the creditor without the consent of the surety would absolve the surety from liability as to transaction subsequent to the variance. But the variation must be such as materially affects the position of the surety. But where a surety is responsible for the performance of several and distinct contracts or duties, a change in one of those contracts or duties will not affect the surety's liability as to the rest.

Illustration ; A becomes surety to C for B's conduct as manager in C's bank. Afterwards, B and C contract, without A's consent that B's salary shall be raised and that he shall become liable for 1/4th of the losses on over drafts. B allow a customer to over draw and the bank loses a sum of money. A is discharged from his suretship by the variance made without his consent, and is not liable to make good the loss.

(d) By Release or Discharge of Principal debtor ; As Section 128 of Act provides that liability of surety is co-extensive with that of principal debtor. So if principal debtor is released or discharged by creditor then creditor can not enforce the debt from surety. Surety will also be discharged.

(e) When Creditor Compounds with Principal debtor ; Section 135 of Indian Contract Act says that contract between creditor and principal debtor discharges the surety -

(i) when the creditor makes composition with the principal debtor,

(ii) when creditor promises to give time to principal debtor

(iii) when the creditor promises not to sue the principal debtor.

(f) Upon Creditor's Acts or Omission Impairing Surety's Remedy As per Section 139 of Act when acts or omissions of creditor are inconsistent with the interest of surety or which results in impairing surety's remedy against principal debtor, then surety will be discharged.

(g) By Loss of Security by Creditor Section 141 of Indian Contract Act says that surety is entitled to all the securities which the creditor has against principal debtor, if creditor loses or without consent of surety parts with the security surety is discharged to the extent of value of security.

Ans. (1) Rights against the principal debtor. - The surety who pays on default of the debtor stands in the shoes of the creditor and is invested with all the rights which the creditor had against the principal debtor. When surety seeks to enforce his remedy he shall be in the same position as if he were the original creditor still unpaid.

A surety who discharged the obligation by paying less than the full amount due can claim only the amount actually paid by him and not the whole amount for which he is a surety. (Section 140).

(2) Rights against the creditor. - If the surety has paid the debt of the principal debtor, he is entitled to the benefit of every security which the creditor has against the principal debtor at the time when the contract of suretyship was entered into whether the surety is aware of the existence of the security or not ; and if the creditor loses, or without the consent of the surety, parts with such security, the surety is discharged to the extent of the value of the security. (Section 141). The equity between the creditor and the surety is that the creditor not do anything to deprive the surety of that right. [Goverdhandas v. Bank of Bengal, (1891) 15 Bom. 841].

(3) Rights against co-sureties. - If there are two or more co-sureties and one of them has paid debt, he can recover from the other the excess of what he has paid above his share. They are liable to contribute equally provided they are for the same debt. The fact of their being sureties, jointly or severally, or being, so under different contracts, or without the knowledge of each is immaterial. They are to pay as between themselves in equal shares the part left unpaid - subject to the maximum of their obligation. (Sections 146- 147).

Ans. Bailment ; Bailment means handing over or delivery of moveable property by owner to another for some specific purpose and then return of such moveable property to it's owner after the purpose is fulfilled. Section 148 of Indian Contract says :-

"A bailment" is the delivery of goods by one person to another for some purpose upon a contract that they shall, when the purpose is accomplished, be returned or otherwise disposed of according to the directions of the person delivering them. The person delivering the goods is called the "bailor", the person to whom they are delivered is called the "bailee" Main characteristics of bailment. - The main characteristics of the bailment are :

(1) It consists in the delivery of goods. Delivery of possession is essential. If there be a transfer of ownership the transaction may be a sale or exchange but is not a bailment.

(2) The delivery of possession is temporary but it is for some purpose. The bailor reserve a right to claim a re-delivery of the goods deposited. Whenever there is a delivery of property on a contract for an equivalent in money or some other valuable commodity and not for the return of the identical subject-matter on its original form, it is a sale.

(3) The goods are delivered to be returned in specie or disposed of according to the direction of the bailor when the purpose is accomplished.

Only movable properties can be bailed.

Example. - Where lends some ornaments to B to be used in a marriage, the transaction is one of bailment. In such a case there is an implied contract for the return of the ornaments within a reasonable time.

In Trustees, Port Trust of Bombay v. Premier Automobiles, AIR 1981 SC 1982 it was observed that if a person assumes the custody of another person's goods even without any formal arrangement, this is sufficient to constitute bailment.

Kinds of bailment. - In Coggs v. Burnard, (1704) I Sm. I.C. (12th E.L.D.) 191, Lord Holt mentioned six kinds of bailment as under :-

(1) Deposit. - A simple bailment of goods by one man to another to keep for the bailor's use.

(2) Commodatum. - The goods lent to a friend gratis to be used by him.

(3) Hire. - When goods are delivered to the bailee for hire.

(4) Pawn. - When goods are delivered to another by way of security for money borrowed.

(5) When goods are delivered to be carried or something to be done about these for reward, to be payable to the bailee.

(6) When goods are delivered to be carried or something to be done about without rewards.

Ans. Bailor's Duties and Liabilities Bailor's Duty of Disclosure Section 150 of Indian Contract Act mentions the following duty of a bailor in respect of goods bailed by him :-

(a) The bailor is bound to disclose to bailee faults in the goods bailed of which bailor is aware and which materially interfere with the use of them or expose the bailee to extra-ordinary risks and if he does not disclose such defects, he is responsible for damage arising to bailee directly from such defects.

(b) If the goods are bailed for bire, the bailor is responsible for such damages, whether he was or was not aware of existence of such defect in the goods bailed.

Example : `A' lends a horse, which he knows to be vicious, to `B'. He does not disclose the fact that the horse is vicious. The horse runs away. B is thrown and injured. `A' is responsible to `B' for damage sustained.

Duties of Bailee ; Bailee has following important duties under the contract of bailment :-

(i) To take reasonable care of goods bailed (Section 151-152)

(ii) Not to make unauthorised use of goods bailed (Section 153-154)

(iii) Not to mix bailor's goods with own (Section 155-157)

(iv) to return the goods on fulfillment of purpose (Section 159-161, 165-167)

(v) to deliver to bailor profits on goods (Section 163)

(1) To Take Reasonable Care of Goods Bailed ; Section 151 of the Act says that "In all cases of bailment the bailee is bound to take as much care of goods bailed to him as a man of ordinary prudence would, under similar circumstances, take of his own goods of same bulk, quality and value as the goods bailed."

So bailee should take as much care of goods bailed to him, as a man of ordinary prudence would take of his own goods in similar circumstances.

In Calcutta Credit Corporation Ltd. v. Prince Peter of Greece, AIR 1964 Cal. 374 - it was observed that degree of care needed varies with the kind of engagement, the words "as a man of ordinary prudence would take of his own goods" do not mean that if bailee's own goods are lost together with goods bailed, kept at same place, bailee cannot be blamed for not take due care of goods bailed.

Section 152 of the Act provides as to when bailee is immune from liability. It says "The bailee in the absence of any special contract is not responsible for loss, destruction or deterioration of thing bailed, if he has taken the amount of care of it described in Section 151."

(2) Not To Make Unauthorised Use of Goods bailed ; Under the contract of bailment, bailee is bound to use the goods, only for the purpose, for which goods are delivered to bailee and for no other use. If bailee makes unauthorised of goods bail, bailor is entitled to :-

(a) terminate the bailment (Section 153)

(b) recover compensation for loss arising due to unauthorised use of goods (Section 154)

(3) Not To Mix Bailor's Goods with his Own Goods ; If the bailee, without the bailor's consent, mixes his own goods with that of the bailor, and the goods so mixed can be separated, e.g., bales of cotton, the bailee is bound to bear the expense of separation or division, and any damage arising from the mixture. (Section 156)

When the goods of the bailor and the bailee, which have been so mixed by the bailee, cannot be separated, e.g., flour of different kinds, the bailor is entitled to be compensated by the bailee for the loss to the goods. (Section 157)

(4) To Return the Goods On fulfilment of Purpose ; As soon as the time for which goods were bailed has expired, or the purpose for which they were bailed has been accomplished, it is duty of the bailee to return or deliver, according to the bailor's directions the goods bailed, without demand. (Section 160). If, by the default of the bailee, the goods are not returned, or tendered at proper time he is responsible to the bailor for any loss, destruction or deterioration of the goods from that time. (Section 161).

(5) To Deliver to Bailor Profits on Goods Bailed ; According to Section 163 "in the absence of any contract to the contrary, the bailee is bound to deliver to the bailor or according to his directions, any increase or profits which may have accrued from the goods bailed."

In Standard Chartered Bank v. Custodian, AIR 2000 SC 1488 it was held that if shares or debentures are pledged, bonus shares, dividend or interest thereon are to be regarded as accretions. Such accretions are to be returned; at the time of redemption of property.

Ans. Section 148 of Indian Contract Act says: A "bailment" is the delivery of goods by one person to another for some purpose, upon a contract that they shall, when the purpose is accomplished, be returned or otherwise disposed of according to the directions of the person delivering them. The person delivering the goods is called the "bailor". The person to whom they are delivered is called the "bailee". Then Section 159 of the Act provides: "The lender of a thing for use may at any time require its return, if the loan was gratuitous, even though he lent it for a specified time or purpose, the borrower has acted in such a manner that the return of the thing lent before the time agreed upon would cause him loss exceeding the benefit actually derived by him from the loan, the lender must, if he compels the return, indemnify the borrower for the amount in which the loss so occasioned exceeds the benefit so derived."

In view of the provisions of Section 159 reproduced above, A can ask and compel B to return the scooter, since the lending was gratuitous at the request of B. However, if B can prove that on the faith of such lending for the specified time of seven days, he has acted in such a manner that the return of the scooter before the expiry of the agreed period would cause him loss exceeding the benefit actually derived by him with the help of the scooter, A is liable to indemnify B for the loss so occasioned which exceeds the benefit so derived. If the plea of B is accepted as it is, A is liable to identify B to the extent of Rs. 300 only.

Ans. Section 151 of Indian Contract Act says that in all cases of bailment, the bailee is bound to take as much care of goods bailed to him as a man of ordinary prudence would under similar circumstances take of his own goods of same bulk, quality and value as goods bailed.

Section 152 of Act further provides that bailee in the absence of any special contract is not responsible for any loss, destruction, deterioration of thing bailed, if he has taken the amount of care as described in Section 151 of the Act.

In the case in hand, Goldsmith had kept the gold in his safe and has taken due care by posting watchman outside the room in which safe was kept, so goldsmith took as much care as a man of ordinary prudence would have taken in his own case under similar circumstances so goldsmith is not liable to pay anything for Gold of `A' which has been taken away by dacoits along with other properties of goldsmith.

Ans. Section 148 of the Indian Contract Act defines `bailment' as: "A `bailment' is the delivery of goods by one person to another for some purpose, upon a contract that they shall, when the purpose is accomplished, be returned or otherwise disposed of according to the directions of the person delivering them. The person delivering the goods is called the "bailor". The person to whom they are delivered is called "bailee". Section 149 provides: "The delivery to the bailee may be made by doing anything which has the effect of putting the goods in the possession of the intended bailee or of any person authorised to hold them on his behalf". Thus, to constitute bailment delivery of the article to the bailee is essential.

In the present case, the plaintiff remained in possession of the half made jewels every evening and also control thereof by keeping the key of the box. It is evident that the plaintiff was in possession and control of the jewels when the same were stolen. Thus, there was no bailment at that time. The plaintiff is to suffer the loss, and has no remedy against the defendant.

Ans. Under the contract of bailment, baildee of the goods has following rights :-

(a) Right to recover necessary expenses incused on bailment (Section 158)

(b) Right to recover compensation from the bailor (Section 164)

(c) Right of lien on goods bailed (Section 170-171)

(d) Right of suit against a wrongdoer (Section 180) (a) Right To Recover Necessary Expenses ; Section 158 of Indian Contract Act says :-

"Where by conditions of bailment, the goods are to be kept or be carried or to have work done upon them by the bailee for the bailor and bailee is to receive no remuneration the bailor shall repay to the bailee the necessary expenses incurred by him for the purpose of bailment."

So even when the bailment is gratuitous, the bailee is entitled to recover necessary expenses incurred by him for the purpose of bailment.

(b) Right To Recover Compensation ; Bailee is entitled u/s 164 of Indian Contract Act to receive compensation from bailor for any loss to bailee due failure of bailor to receive back the goods or when bailor was not entitled to make bailment.

(c) Right of Lien On the Goods Bailed ; Lien is a right of one person to retain that which is in his possession, belonging to another until certain demands of the person in possession are satisfied. Section 170 confers on the bailee a lien on the goods bailed for remuneration due to him for services rendered involving the exercise of labour or skill in respect of the goods bailed. For example, A delivers a rough diamond to B a jeweller, to be cut and polished which is accordingly done. B is entitled to retain the stone till he is paid for the services he has rendered.

A bailment for custody does not give a right of lien. This right cannot be exercised unless the service has been performed and the remuneration is due.

The Act recognize two kinds of lien :-

(i) Particular Lien

(ii) General Lien

Particular Lien ; The particular lien extends only to the value of the work done on the particular thing and not for the general balance of accounts of other claims, which the bailee may have against the bailor. The bailee's particular lien may be exercised on all goods delivered under one single contract though at different times. But it cannot be exercised if the remuneration has not yet become payable, or if the service has been partly rendered. The particular lien of the bailee does not extend to remuneration for services other than those rendered for the goods bailed.

Section 170 of Act says "Where the bailee has in accordance with the purpose of bailment, rendered any service involving the exercise of labour or skill in respect of the goods bailed, he has in the absence of a contract to the contrary, a right to retain such goods until he receives due remuneration for the services he has rendered in respect to them."

General lien ; A general lien entitles a person in possession of goods to retain them until all claims or accounts of the persons in possession against the owner of the goods are satisfied. He can detain goods for a general balance of account. Section 171 authorises bankers, factors, wharfingers, attorneys of High Court and policy-brokers to retain goods as a security for a general balance of account.

Section 171 of Act lays down :-

"Bankers, wharfingers, attorneys of a High Court and policy brokers may, in the absence of a contract to contrary, retain as a security for a general balance of account any goods bailed to them, but no other persons have a right to retain as a security for such balance, goods bailed to them, unless there is an express contract to that effect."

In Board of Trustees v. Shriyansh Knitters, AIR 1983 Bom. 88, it was observed that it is a right to detain goods belonging to another not only for the discharge of a debtor's liability incurred in respect of the goods bailed but also for the general balance of account subsisting between the owner and the person detaining them.

(d) Right of suit against a wrongdoer ; When the goods have been bailed, if a third person wrongfully deprives the bailee of their use or possession, or causes an injury to the goods, such third person can be sued either by the bailee or the bailor, for such wrongful act done by him. (Section 180)

Ans. Position of finder of goods. - The finder of goods occupies the position of a bailee of the goods, against the true owner. His duty of care and other responsibilities are the same as those of a bailee. The finder of goods has no right to sue the owner for compensation for trouble and expenses voluntarily incurred by him to preserve the goods and to find out the owner; but he may retain the goods against the owner until he receives compensation for trouble and expenses voluntarily incurred by him to preserve the goods and to find out the owner. When the owner of the goods has offered a specific reward, the finder can sue him for the same, and he can also exercise lien on those goods for reward. (Section 168) The finder of goods has also a right to sell the goods found by him if the owner of the goods cannot after reasonable search be found or he refuses to pay the lawful charges of the finder, or the goods are likely to perish, or when the lawful charges of the finder in respect of those goods amount to two-third of their value. (Section 169)

Ans (a). Pledge ; Section 172 of Indian Contract Act says :-

"The bailment of goods as security for payment of a debt or performance of promise is called "pledge". The bailor is in this case called "pawner". The bailee is called the "pawnee"

So when goods are delivered by one person to another under the contract of bailment for purpose of security for payment of loan it is a pledge. There are following requirements for constituting pledge :-

(a) There should be bailment of goods.

(b) The purpose of such bailment is to make the goods bailed serve as security for payment of loan or performance of a promise.

Bailment and Pledge Distinguished (a) Bailment is wider expression, under which, delivery of goods is made from one person to another for some purpose and upon completion of such purpose, goods are returned back to person who had originally given the goods, such bailment becomes the "Pledge" when the purpose of bailment is to treat the goods bailed as security for the payment of loan or performance of any promise.

(b) In case of bailment, if bailor does not pay the lawful charges due to bailee, bailee has right of lien over the goods bailed i.e. he is entitled to possession of goods whereas in "pledge" upon the failure of pawner of not paying back the loan or to perform promise, the pawnee has right to sell the goods "pledged".

Right of the pawnee in respect of the things pledged :

(1) The pawnee has a right of retainer for the payment of the debt, interest and cost incurred by him in respect of the possession or for the preservation of the thing pledged.

(2) He may retain the goods as collateral security pending his own suit for recovery of the debt.

(3) He may sell the goods pledged on giving the pawner reasonable notice.

(4) Even if the pawner's title is defective under a voidable contract, the pawnee's title is not affected by it provided he had no notice of the defect.

Normally, the owner of goods, pledges the goods, however in following exceptional circumstances, persons who are not owner of goods, can pledge the goods :-

(i) Pledge by a mercantile agent (Section 178)

(ii) Pledge by person in possession under voidable contract (Section 178-A)

(iii) Pledge by person with a limited interest (Section 179)

(iv) Pledge by seller in possession after sale (Section 30(1) of Sales of Goods Act

(v) Pledge by buyer in possession after sale (Section 30(2) of Sales of Goods Act

(i) Pledge By a Mercantile Agent ; When the pledge is made by the mercantile agent who is in possession of the goods or document of title with the consent of the owner and the pledge is made by the mercantile agent while acting in the ordinary course of business of mercantile agent, and the pawnee acts in goods faith and without notice that the pawner has no authority to pledge. Section 178 authorises only the mercantile agents and hence a pledge by a mere servant or wife is not valid even though in possession of goods with the consent of the owner.

(ii) Pledge By Person in Possession Under a Voidable Contract ; Section 178-A of Indian Contract Act says that a person who has obtained the possession of goods under a voidable contract u/s 19 or 19-A of Act but contract has been rescinded at the time of pledge such pledge is legal provided pledge acting in good faith and without notice of pledger's defect.

(iii) Pledge By a Person With Limited Interest ; According to section 179 where a person pledges goods in which he has only limited interest, the pledge is valid to the extent of interest of pledger or pawnor.

(iv) Pledge By Seller In Possession After Sale ; Section 30(1) of Sales of Goods Act provided that if a seller having sold the goods is still in possession thereof or of document of title pledge by him convey a good title to transferee provided transferee is acting in good faith and without any notice of previous sale.

(v) Sale By Buyer In Possession After Sale; Section 30(2) of Sales of Goods Acts says a buyer who may have obtained the possession of the goods or document of title of goods but has not yet become the owner of those goods, if pledges the goods, it will be valid pledge provided pawnee acted in good faith and without notice of any lien or other rights of original seller over the goods.

Ans (A). Agent; Section 182 of Indian Contract Act lays down :-

"An `agent' is a person employed to do any act for another or represent another in dealings with third person. The person for whom such act is done or who is so represented, is called the "principal".

An agent is a person employed to do any act for another or to represent another in dealing with third persons. But a person who merely gives advice to another in matters of business, does not thereby become his agent. The essential point about an agent's position is his power of making the principal answerable to third persons. The acts done by the agent within his authority are binding on the principal who is represented for all lawful purpose of the agency by the agent till the latter's authority is terminated. So there should be well defined relationship of Agent and Principal under the contract. Mere use of word `Agency' does not necessarily mean that there is relationship of agency between parties, as in Loon Karan v. John and Co., AIR 1967 All. 308 it was observed that "Court must examine the true nature of agreement and subsequent dealings between the parties and then to decide whether it established a relationship of agency under the law......."

Some Features of a Contract of Agency

(1) The principal should be competent to contract (Section 183)

(2) The agent may not be competent to contract (Section 184)

(3) No consideration is necessary to create an agency (Section 185)

1. Principal Should be Competent To Contract ; It is well-established that parties to the contract should be competent to contract i.e. parties should have attained age of majority, should be of sound mind and should not be debarred by law to contract. Section 183 of Act specifically provide for `Principal' as "any person who is of age majority according to the law to which he is subject and who is of sound mind, may employ an agent."

2. Agent May Not Be Competent To Contract ; Section 184 of Act says -

"As between the principal and a third person, any person may become an agent, but no person who is not of the age of majority and of sound mind can become an agent so as to be responsible to his principal according to the provisions in that behalf herein contained."

So Section 184 says any person can settle the dealings as between his principal and third person, even a minor or otherwise incompetent person can do so, but in order to create binding relation between Agent and principal inter se it is necessary that agent is competent to contract.

3. No Consideration is Necessary To Create An Agency ; Section 185 provides that no consideration is required to create an agency. By peculiar nature of Principal-agent relationship, principal will automatically be binding for permissible acts and conducts of agent.

Ans. (B) Kinds of Agents Keeping in consideration nature of work undertaken by Agent, following are different kinds of agents :-

(i) Auctioneers :- An auctioneer is an agent who sells the goods of principal by auction i.e. in open market. He is a mercantile agent within the meaning of section 2(9) of Sales of Goods Acts.

(ii) Factors : A factor is a mercantile agent who is entrusted with the possession of the goods for purpose of sale. He has also the power to sell the goods on credit. If the owner has put a factor in possession of goods or the document of title without authorising him to sell the goods, according to section 27 of Sales of Goods Act, the sale of goods by him will convey a good title of a bona fide buyer.

(iii) Broker :- Broker is an agent who has power to negotiate with third party or to purchase or sell the goods on behalf of principal even if he is not in possession of goods. He is primary job is make two parties to enter into any transaction or contract, and for that he charge commission.

(iv) Del credere agent. - A del credere agent is one who for an extra remuneration, called a del credere commission undertakes the liability to guarantee the due performance of the contract by the other party. Because he charges an extra commission he assumes responsibility for the solvency and performance of their contracts by the other parties and thus indemnifies his employer against loss. A del credere agent is liable to pay the seller only if owing to insolvency of the buyer or other analogous cause the seller is unable to recover the price from the buyer; but not if the buyer though solvent has refused to pay on the ground that the seller has not duly performed the contract.

Ans. Relation of agency i.e. Principal - Agent relationship simply means that agent deal with third party on behalf of principal and thus acts of agent binds the principal however, it is not every acts and conducts of an agent bind principal, it is in following situations agent binds the principal:-

(1) By conferring (either expressly or impliedly) actual authority on agent

(2) By Agent's authority to act in "Emergency" on behalf of Principal

(3) By Creation of agency on the basis of law of Estoppel

(4) By Ratification of Agent's act by principal

(5) By presumption of agency in Husband-Wife relationship

(1) By Conferring Actual Authority on Agent Expressly or Impliedly ; A principal is bound by acts done by his agent with his authority. Authority to agent may be expressed or may be inferred by acts and course. Authority is expressed when it is given by principal by words spoken or written and it is implied when it is to be inferred from circumstances or course of dealing. (Section 187)

A owns a shop in Serampur, himself living in Calcutta, and visiting the shop occasionally. The shop is managed by B and he is in the habit of ordering goods from C in the name of A for the purpose of the shop, and of paying for them out of A's fund with A's knowledge. B has an implied authority from A to order goods from C in the name of A for the purpose of the shop.

Section 188 of Indian Contract Act says about extent of agent's authority-

"An agent having an authority to do an act has authority to do every lawful thing which is necessary in order to do such act. An agent having an authority to carry on business has authority to do every lawful thing necessary for the purpose or usually done in course of conducting such business."

Illustration ; A is employed by B residing in London to recover at Bombay a debt due to B. A may adopt legal process necessary for the purpose of recovering the debt and may give a valid discharge for the same.

In Harshad J. Shah v. L.I.C., AIR 1997 SC 2459 If an L.I.C. agent is expressly prohibited from collecting the premium, and the rules also prohibit the same, collection of premium cannot be considered as necessary for or incidental to the effective execution of the express authority granted to him.

(2) Agent's Authority In An Emergency ; Section 189 of Act says -

"An agent has authority in an emergency, to do all such acts for the purpose of protecting his principal from loss as would be done by a person of ordinary prudence in his own case, under similar circumstances."

Illustration ; A consigns provisions to B at Calcutta, with directions to send them immediately to C at Cuttack. B may sell the provisions at Calcutta if they will not bear the journey to Cuttack without spoiling.

It was observed by Baron Park in Hawantazen v. Bourne, 7 M. and W. 595 the master of a ship can by instrument of hypothecation, pledge the ship, if necessary during the voyage to guard against accidents, to repair the vessel, and to provide the means of continuing the voyage to destination. He can without the owner's knowledge, bind him by contracting a loan for such purposes; but he must show that the necessity for such step was forced upon him and that he had no funds belonging to his employers and that he was unable to procure the funds in any other way than by hypothecation.

(3) Principal bound by estoppel. ; Sometimes, an agent has no authority to act on behalf of the principal, but the principal by his conduct creates an impression in the mind of the third person that the agent has an authority to act on his behalf. In such a case, the principal is liable towards the third person for the acts done by the agent, on the ground of the application of the law of estoppel. (Section 237) The basis of the action is what appears to the third person to be an authority i.e., apparent or ostensible authority conferred on the agent.

(4) Principal Bound By Ratification ; When principal has not conferred on agent actual authority expressly or implied, still principal can be bound by acts done by agent if principal ratifies those acts of agent, which means when principal subsequently approves acts done by agent without authority. Section 196 of the Act provides :-

"Where acts are done by one person on behalf of another, but without his knowledge or authority, he may elect to ratify or to disown such acts. If he ratifies them, the same effects will follow as if they had been performed by his authority.

Essentials Of Valid Ratification (a) The Act Should be Done On Behalf of Another Person - One of the important requirement for valid ratification is that act ratified must have been done, on behalf of person who subsequently ratify it. Once acts done by one, are ratified by another on whose behalf it was done, person who has done the act becomes the agent, even if there was no agency at the time of doing such act and the person on whose behalf it was done and who ratify it, becomes principal.

(b) Principal Should Be In Existence and Competent To Contract - When a principal ratifies an act, the validity of act comes back from the time of doing of act by agent and becomes as much binding as if it was done with actual authority, however for proper ratification it is necessary that person who ratify the act (principal) must have been in existence and competent to contract.

(c) Ratification May Be Expressed or Implied - Ratification may be express or implied in the conduct of the person on whose behalf the acts are done. (Section 197) For example, A, without authority, buys goods for B. Afterwards, A sells them to C on his own account. B's conduct implies a ratification of the purchase made for him by A. [Illustration (a) to section 197]

(d) Ratification with full knowledge of facts. - No valid ratification can be made by a person whose knowledge of the facts of the case is materially defective. (Section 198)

(e) Ratification of the whole transaction. - A principal cannot ratify only those parts of the transaction which are favourable to him, and disown others. If he makes ratification, it is deemed to be ratification of the whole act. (Section 199)

(f) Ratified act should not be injurious to a third person. - If ratification of an act done without the authority of a person would result in injury to the interest of a third person, the ratification would be invalid. (Section 200) For example , A holds a lease from B, terminable on three months' notice. C, an unauthorised person, gives notice of termination to A. The notice cannot be ratified by B, so as to be binding on A. [Illustration (b) to section 200]

(g) Ratification within a reasonable time. - For a valid ratification, it is necessary that the same must be done within a reasonable time.

(5) Agency In Husband Wife Relationship; The implied authority to the wife to bind the husband, arises when the husband and wife are cohaliting, if man and woman are living together as husband wife, wife may receive supply of goods and services which may be required for domestic use, and husband is bound to pay for them.

Ans. Relationship of Principal and Agent Inter-se Relation of agency is such that agent can bind the principal for all of his acts (whether legal or not) if done within purview of his authority. It is therefore essential to fix the rights and responsibilities of agent and principal, apart from mutual rights and duties as may be determined by principal and agent by their contract. Law provides following rights and duties between them.

Duties Of Agent (1) Duty Not to Delegate His Duties - As a general rule, Agent can not delegate his obligations or in other words Agent can not make sub-agent for performing his duties on behalf of principal. This rule is contained in maxim "Delegations non potest delegree" i.e. Agent who has been delegated some authority cannot further delegate that authority to another person. As a general rule the maxim delegatus non potest applies so as to prevent an agent from establishing the relationship of principal and agent between his own principal and third person; but this maxim when analysed, merely imports that an agent cannot without authority from his principal devolve upon another an obligation to the principal, which he has himself undertaken to personally fulfil, and that, inasmuch as confidence in the particular person employed is at the root of the contract of agency, such authority cannott be impled as an ordinary incident in the contract. But the exigencies of business do from time to time render necessary to carrying out of the instructions of a principal, by a person other than the agent originally instructed for the purpose; where such is the case, the reason of the thing requires that the rule should be relaxed, so as, on the one hand, to enable the agent to appoint what has been termed a "sub-agent" or "substitute agent" and, on the other hand, to constitute, in the interests and for the protection of the principal, a direct privity of contract between him and such principal.

Section 190 of Act says "An agent cannot lawfully employ another to perform acts which he has expressly or impliedly undertaken to perform personally, unless by ordinary custom of trade a sub-agent may or from the nature of agency, a sub-agent may be employed."

Section 119 of Act then says that a sub-agent is a person employed by and acting under the control of, the original agent in business of agency.

Responsibility of Agent and Sub-Agent - If a sub-agent has been properly appointed, his acts and conducts bind the principal towards third person. Section 192 of Act provides :-

"Where a sub-agent is properly appointed, the principal is, so far as regards third persons, represented by sub-agent, and is bound by and responsible for his acts, as if he were an agent originally appointed by the principal.

Agent's Responsibility For Sub-Agent - The agent is responsible to the principal for the acts of the sub-agent.

The sub-agent is responsible for his acts to the agent, but not to the principal, except in cases of fraud or wilful wrong."

So there is privity of Contract between :-

(i) Sub-Agent and Agent

(ii) Agent and Principal

Sub-agent is directly responsible to agent and not to Principal and Agent is directly responsible to principal, there is no direct contract between sub- agent and principal. When the principal appoints an agent to do some work and agent prefers to get the work done from the sub-agent it is agent's duty to see that sub-agent is performing properly for any misconduct of sub-agent, resulting loss to principal, agent is liable. Section 193 of Act then declares that if agent has improperly delegated his authority to sub-agent, then agent is liable to principal as well as to third person with whom sub- agent has made dealing.

Substituted Agent ; tion 194 of Indian Contract Act lays down :-

"Where an agent, holding an express or implied authority to name another person to act for the principal in business of the agency, has named another person accordingly, such person is not sub-agent but an agent of the principal for such part of the business of the agency as is entrusted to him."

A directs B his solicitor, to sell his estate by auction and to employ an auctioneer for this purpose. B names C an auctioneer, to conduct the sale. C is not a sub-agent, but is A's agent for the conduct of the sale.

So Agent when having expressed or implied authority, can name a person to act on behalf of principal, in his place such agent will be substituted agent and not sub-agent. In selecting a substituted agent, Section 195 of Act declares that Agent will exercise same amount of discretion and care as a man of ordinary prudence would exercise in his own case if he does so then he will not be responsible to principal for the acts of negligence of agent so selected.

(2) Duty to Follow Principal's Directions An agent is bound to conduct the business of the principal according to the directions given by the principal. In the absence of any directions, the agent should conduct the business according to the custom which prevails in doing business of the same kind at the place where the agent conducts the business. When the agent does not act as stated above, if any loss is sustained by the principal, he must make it good to his principal, and if any profit accrues, he must account for it. (Section 211)

If an agent is required by his principal to store the goods in godown `A' but the agent stores the goods in godown `B', the agent will be liable for even an accidental loss to the goods while they are in godown `B', and it will be no defence that the agent was not negligent. (Lilley v. Doubleday).

(3) Duty to Show Proper Skill and Care Section 212 of Indian Contract Act lays down :-

"An agent is bound to conduct the business of the agency with as much skill as is generally possessed by persons engaged in similar business, unless the principal has notice of his want of skill. The agent is always bound to act with reasonable diligence, and to use such skill as he possesses and to make compensation to his principal, in respect of the direct consequences of his own neglect, want of skill or misconduct but not in respect of loss or damage which are indirectly or remotely caused by such neglect, want of skill or misconduct."

(4) Duty to Render Proper Accounts The agent is under a duty to render proper accounts to the principal on demand. (Section 213) Although the Act does not specify that the agent can ask the principal to render accounts but if the accounts are kept by the principal and the commission due to the agent can't be determined without them, he may ask the principal to render accounts.

(5) Duty to communicate with Principal.

The agent has a duty, in cases of difficulty to use all reasonable diligence in communicating with his principal, and in seeking to obtain his instructions. (Section 214)

(6) Duty not to deal on his own Account.

An agent is under a duty not to deal on his own account in the business of agency, unless the principal consents thereto. If the agent deals on his own account without the principal's prior consent, the principal may : (i) repudiate the transaction, by showing either any material fact has been dishonestly concealed from him by the agent, or that the dealings of the agent have been disadvantageous to him. (Section 215); (ii) claim from the agent any benefit which may have resulted to him from this transaction. (Section 216)

(7) Duty to pay sums received for Principal.

Agent is also under a duty to pay to his principal all sums received by him on principal's account. (Section 218) Before making the payment to his principal, the agent is entitled to deduct out of the same the sums as are lawfully due to him (Section 217)

Rights Of Agent And Duties Of Principal 1. Right to Remuneration. - An agent is entitled to remuneration for the work of agency done by him, but an agent's remuneration does not become due to him until the completion of the act assigned to him. This rule is subject to any special contract between the principal and the agent. (Section 219) If the agent's efforts are the effective cause of making the contract, he is entitled to his commission.

An agent, who is guilty of misconduct in the businesses of agency, is not entitled to any remuneration in respect of that part of the business which he has misconducted. (Section 220)

2. Right to retain sums. - The agent has a duty to pay to his principal all sums received on principal's account. But he has also a right to retain, out of any sums received on account of the principal, all moneys due to himself in respect of advance made on expenses properly incurred by him in conducting such business, and also such remuneration as may be payable to him for acting as agent. (Section 217)

3. Right of lien on principal's property. - In the absence of a contract to the contrary, an agent has a lien on principal's property with him, until commission, etc. due to him has been paid. (Section 221)

4. Right to be indemnified. - The principal is bound to indemnify an agent against the consequences of all lawful acts done by such agent in the exercise of the authority conferred upon him. (Section 222) The agent is also entitled to indemnity against consequences of act done in good faith, even though the act causes an injury to the rights of third persons, for example, it is a tort. (Section 223)

Section 224 of Act says where one person employs another to do act which is criminal, the employer is not liable to the agent either upon an express or an implied promise, to indemnify him against the consequences of that act.

5. Right To Compensation Due To Principal's Neglect ; According to Section 225 of the Principal must make compensation to his agent in respect of injury caused to such agent by the principal's neglect or want of skill.

Ans. Obligations of the principal for the contracts of his agent. - A principal is held bound by the obligations incurred on his behalf by his agent. Sections 226 to 228 lay down the rule of law regarding obligation of the principal for the contracts of his agent.

Contracts entered into through an agent, and obligations arising from acts done by an agent, may be enforced in the same manner, and will have the same legal consequences as if the contract had been entered into and the acts done by the principal in person.

Illustration ; A being B's agent with authority to receive money on his behalf, receives from C a sum of money due to B. C is discharged of his obligation to pay the sum in question to B.

When an agent does more than what he is authorised to do and when the part what he does, which is within his authority can be separated from the part which is beyond his authority, the principal is liable only for so much part of what he does as is within the agent's authority.

For example, A being the owner of a ship and cargo, authorises B to procure an insurance for 4,000 rupees on his ship. B procures a policy for 4,000 rupees on the ship, and another for the like sum on the cargo. A is bound to pay premium for the policy on the ship, but not the premium for the policy on the cargo.

In State Bank of India v. Shyama Devi (AIR 1978 SC 1263) the plaintiff's husband gave some cash and cheques to his friend, who was an employee in the defendant bank for being deposited in the plaintiff's account. The amount and cheques were given to him in his private capacity as a friend were obtained. The said employee misappropriated the amount. It was held by the Supreme Court that the employee when he committed the fraud, was not acting in the scope of the bank's employment and, therefore, the defendant bank could not be made liable for the same.

Where the excess of the agent's authority is not separable from the transaction, the principal is not liable for the transaction.

Ans. The ascertainment of rights and liabilities of an agent and principal is done on the basis of:

(a) disclosure regarding the name and existence of principal by the agent.

(b) non-disclosure of name and existence of the principal.

Where the existence of the principal is disclosed, Section 226 applies. The acts done by an agent within the course of his employment make the principle liable in the similar fashion as the act has been done by the principal himself.

Undisclosed principal is a person whose existence is not disclosed by the agent nor the representative character is expressed by the agent. In such transactions the agent is personally liable being a party to contract. He may be sued or may sue the third party. In such cases the principal has a right to come forward to attain his seat or position as an undisclosed party. Section 230(2) clearly admits this provision and as an exception agrees that a presumption.