Contract Act

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Topic of this note is Contract Act.

Nehal A / Delhi

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Qualification: M.A (Amity University, Uttar Pradesh - 2015), B.B.A (Maharshi Dayanand University , Rohtak - 2013)

Teaches: Economics

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Indian Contract Act 1. The law of contracts is not the whole law of agreements nor is it the whole law of obligations." Comment. When one party makes a proposal or offer to the other party and that other party given his consent or acceptance thereto a promise or an agreement comes into existence. The agreement arises only when both the parties agree about the same subject matter in the same sense. Thus when A offers to sell his book to B for Rs. 20 and B accepts it an agreement takes place between A and B. The law of contract deals only with such agreements which give rise to legal obligations i.e. a duty enforceable by law. An agreement is a very wide term an agreement may be a social agreement or a legal agreement. Social agreements such as an agreement to go to a film together or for dinner at a friend house do not give rise to legal obligations because the parties do not intend to create legal obligations. Hence such social agreements will not result into contracts. When the parties intend to create legal relationship in case of a breach of promise the other party shall have a right to go to a court of law to enforce the promise a contract arises. The promise can be enforced only when it was made by the free consent of the parties competent to contract for a lawful consideration and with a lawful object. The word contract is used only for theses agreements which are enforceable by law. The law of contracts is not the whole law of agreement because there are some agreements which are regulated by
special Acts for example the sale of goods Act deals with the arguments to transfer the ownership of good from seller to buyer. Partnership Act deals with the partnership agreement Insurance Act deals with insurance agreements and so no. similarly an agreement made between incompetent parties or where the consent was not free or the object is not lawful shall not become a contract. Therefore we can say that the law of contract is concerned only with those obligations which arise out of an agreement salmond has rightly said that the law of contract is not the whole law of agreements nor it is the whole law of obligations is the law of those agreements which create obligations and those obligations which have their source in agreement. 2. "An agreement enforceable by law is a contract." Discuss the definition bringing out clearly the essentials of a valid contract? A contract has been defined in Sec. 2 (h) of the India contract Act as "an agreement enforceable by law". The agreements which create legal obligations are contracts. According to salmond "contract is an agreement creating and defining obligations between the parties". Sir William Anson defines a contract as "a legally binding agreement two or more persons, by which rights are acquired by one or more to acts or forbiddances on the part of the other or others". Sir Pollock defines contract as every agreement and promise enforceable at law is a contract. The definition given in our Act is based on Pollock's definition. If we analyse the above definition we find that to create a contract there must be an agreement between two or more
persons and this agreement should be enforceable by law. If there is an agreement but if it not enforceable by law it will not become a contract. Thus only such agreements which create legal relationship between two or more persons are contracts. An agreement is defined as "every promise and every set of promises forming the consideration for each other". A promise is defined as "when the person to whom the proposal is made signifies his assent thereto the proposal said to be accepted. A proposal when accepted becomes a promise. Therefore in order to make a contract there must be a proposal and an acceptance of that proposal. A promise may be described as an accepted proposal. Before an agreement takes place it is necessary that both the parties must have agreed about the subject matter of the agreement in the same sense and at the same time. In simple words there must be an identity of minds the parties must be thinking about the same subject matter in the same sense. This is also known as has two fiat cars one is of white colour and the other is of cream colour. He makes a proposal to sell one car to Y. X wishes to sell his white fiat car for Rs. 50,000 Y accepts the offer to buy the car for the stated price. Y was not aware of the fact that X has two cars for and was all the time under the impression that he was buying the cream colored car. Here though apparently there is an agreement between X and Y but legally speaking there is no agreement between them because they have not agreed on the same thing in the same sense both the parties are thinking about different cars. Thus we can say that without the identity of minds there can be no agreement. An agreement will become a contract only when it can be enforced in a court of law it must given rise to legal
obligation. In order to convert an agreement into a contract the essential as given in sec. 10 of the Act should be present. All agreement are contracts if they are made by the free consent of parties competent to contract for a lawful consideration and with any a lawful object and not hereby expressly declared to be void. If any of the essentials is missing it will not given rise to a contract. Essentials of a valid contract Following are essential elements of a valid contract: 1.)Agreement proposal and its acceptance. For a valid contract it is necessary that there must be at least two parties because one person cannot enter into an agreement with himself. There must be a lawful offer by one party and a lawful acceptance of that offer by the other party thus resulting in an agreement. The terms of offer and acceptance must be definite the acceptance must be unconditional and according to the mode prescribed and must be communicated to the proposer. 2.)Intention to create legal relationship. There must be an intention to create legal relationship duty or obligation enforceable by law. Agreements of a social or moral nature do not contemplate legal relations and as such they are not contracts. An agreement to dine at a friend house or to go to a movie together are social agreement and there is no intention to create legal relationship. Agreement between husband and wife are of the domestic nature where there is no intention to create legal relationship. The case of is relevant on this point. In this case the husband who was employed in Ceylon made a promise to his wife to send her 30 every month for her maintenance. Later on the husband failed to send the
money. The wife sued her husband for breach of agreement. She could not succeed because it was not a contract since there was no intention to create legal relationship. The intention of the contracting parties is to be seen from the terms of the agreement and the surrounding circumstances. It is for the law courts to decide whether there was an intention to create legal relationship. In social agreements we always presume that there was never any intention to create legal obligations. But in commercial agreements there is always a presumption to create legal obligations. But even in commercial agreement if the parties have expressly agreed that the agreement shall not give rise to legal consequences than even a business agreement will not becomes a contract. In the agreement contained the clause, this agreement is not entered into as a formal legal agreement and shall not be subject to legal jurisdiction in the law courts", it was held that there was no binding contract as there was no intention to create legal relationship. 3.)Free consent. It is essential for the creation of a valid contract that the consent of the parties must be free. Consent means that the parties must have agreed upon the same thing in the same sense. The consent is said to be free when it is not caused by coercion undue influence fraud, misrepresentation or mistake. If the consent of a party is obtained by any of the first four factors the contract could be avoided by the aggrieved party. If the agreement is caused could by mistake which is material to the agreement then the agreement will be void. 4.) Capacity of parties. For a binding contract the parties must have the legal capacity to enter into a contract. Every
person is competent to contract if he (1) is of the age of majority (2) is of sound mind and (3) is not disqualified from contracting by any law to which he is subject. In other words every person who attained the age of majority who is of sound mind and who is not subject to any legal disqualifications is competent to enter into a contract. The legal presumption is that every party to a contract is competent to contract unless contrary is proved and the presumption is rebutted. In competency must be proved by the party claiming the benefit of it and until proved the ordinary presumption shall hold good. 5.) Lawful consideration. An agreement to be enforceable by law must be supported by consideration. The term consideration in simple words means something in return. It is said to be the price paid by one party for the promise of the other. The agreement shall be enforceable only when both the parties give something and get something in return. The consideration need not necessarily be in cash or in kind. It may be an act (doing something) or forbearance (not doing something) or a promise to do or not to do something. It may be party present or future but the consideration must be lawful. The consideration must be real it must have some value in the eyes of law but it need not adequate. 6.)Lawful object. For a contract to be valid the object of the agreement must be lawful. The object of the agreement must not be must be fraudulent or illegal or immoral or proposed to public policy or must not imply injury to the person or property of another. If the object is unlawful the agreement will be void. Thus if A engages B to cause some damage to the property of X for a consideration of Rs. 1,000. Here the promise cannot be enforced because the object is unlawful.
7.)Not expressly declared void. The agreement must not have been expressly declared to be void under the Act. The Act has specifically declared certain type of agreement to be void for example an agreement in restraint of trade wagering agreement in restraint of marriage gave expressly been declared void by the Act. 8.)Certainty. The agreement must be certain and it must not be vague or uncertain. If the meaning of the agreement is not certain or it cannot be ascertained the agreement shall be void. For example a agrees to sell a horse to B here it is not clear as to which horse is to be sold hence the agreement is void for uncertainty. 9.)Possibility of performance. The agreement should be such that it is capable of performance. If an agreement is made to do an act which is impossible in itself the agreement shall be void. 10.) Legal formalities. A contract may be oral or in writing. But if the law requires a particular contract to be written and registered then it must comply with the formalities. If these legal formalities are not carried out then the contract shall not be enforceable at law. Arbitration Act the arbitration agreement must always be in writing similarly under the transfer of property Act the agreement to be enforceable must be in writing and registered. If any one of the above mentioned essential is missing then the agreement shall not be enforceable.
3. "All agreement is not contracts but all contracts are agreements" comment? The above statement that all agreements are not contracts but all contracts are agreements is absolutely true. When an offer made by one person is accepted by the other person an agreement takes place. The Indian contract Act defines a contract as an agreement enforceable by law. Thus for a contract there must be two things- (a) an agreement and (b) enforceability by law. There can be agreements which are not enforceable by law such as social or they agree to go for a walk together these are social agreement and are not enforceable because they do not create legal relationship. This to become a contract the agreement must be capable of creating legal obligations between the parties. The agreement is a wider term than the contract. All agreements need not necessarily become contracts but all contracts shall always be agreements. All agreements are not contracts. When there is an agreement between the parties it not necessary that they intend to create legal relationship. For example A invites B to see a football match and B agrees. But A could not mange to get the tickets for the match now B cannot enforce this promise against A i.e. no compensation can be claimed because this was a social agreement where there was no intention to create legal relationship. The case of is worth reporting in this connection. (The details of this case are given in answer to the previous question). Lord taking observed while deciding this case that in agreements between husband and wife there is never any intention to create legal
relationship. Thus it is right to say hat all agreement are not contracts. All contracts are agreement. We cannot think of a contract without having an agreement. As we have already discussed that to create a contract there must be can agreement. Therefore it is true to say that all contracts are agreements. Thus we can say that when an agreement is enforceable by law a contract comes into existence. There can be an agreement without it becoming a contract but we can't have a contract without an agreement. 4. Distinguish between void and voidable contract? The basis of a contract is an agreement. An agreement becomes a contract when cretin essential conditions are satisfied such as an offer by one person and its acceptance by the other person, intention to create legal relationship capacity to contract presence of consideration free consent of the party's legality of the object. If all these essentials are satisfied then it becomes a valid contract the agreement is enforceable by law. If one or more of these essentials is missing then the contract is either void able or illegal. Void Contract. Void contract in effect is no contract at all. Literally the word void means not binding in law. As such void contract means a contract which has no legal effect at all it is a nullity and will not create any legal right between the word contract means an agreement enforceable by law so how it can be void at the same time. Anson observes in this
connection "void contract is a contradiction in terms for the words describe a state of things in which despites the intention of the parties no contract has been made". A contract is not void from the very beginning but because of some reasons it may become void subsequently. According to sec.2 (l)' "A contract which ceases to be enforceable by law become void when it ceases to be enforceable." From this it is clear that a void contract is not void from its inception and that it was valid and binding on the parties but because of some sub sequent events it becomes invalid before A could perform his promise private trading in wheat is banned by that government here the contract becomes void. Thus a void contract mesa a contract becoming subsequently void. Void agreement. An agreement not enforceable by law is said to be void. It does not create any legal rights between parties, such an agreement is void from the very beginning for example an agreement made with a minor is void because a minor is not capable of entering into a void contract. A distinction should be made between a void agreement and a void contract. A void agreement is altogether void and no rights are created. A void agreement is altogether void and no rights are created by such agreement. It is a total nullity and is destitute of legal effects whatsoever. A void agreement is void a into. A void contract on the other hand is a contract which was valid at the time of making but because of some subsequent events it ceases to be enforceable by law. A void agreement is void from the very beginning whereas void subsequently.
Void able contract. 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 avoidable contract". Thus a void able contract is one which is enforceable by law at the option of one of the parties and it remains valid till it is repudiated by the party entitled to do so. A contract becomes voidable when the essential element of free consent in a contract is missing. When the consent of one of the parties to the contract is obtained by coercion undue influence or a misrepresentation or fraud the contract is voidable. In a voidable contract a right or option is given to the aggrieved party (the party whose consent is not free) either to repudiate the contract or to abide by it. Thus a void able contract continues to be valid and enforceable till is repudiated by the aggrieved party. Example. A threatens to shoot B if he refuses to sell his horse to A for Rs 500. A agrees. Here the consent of B is obtained by coercion and this contract is void able at the option of B. this contract will remain valid till it is repudiated by B. Section 64 provides that when a person at whose option a contract is voidable rescinds it the other party thereto need not perform any promise therein contained in which he is a promisor. If the party rescinding a voidable contract has received any benefit from another party to such contract he must restore such benefit to the person from whom it was received. Thus in the above example if B avoids the contract he must repay the amount to A. in this connection it must be noted that benefit which is to be restored must have been received under the contract. Thus if some money is received as a security for the due performance of a contract such
deposit need not be refunded in case the promisor fails to fulfill his promise in time. Distinction between void and voidable contracts I void agreement is void from the very beginning while a void contract was valid at the time when it was made but because of some subsequent event such as supervening impossibility or illegality it becomes void later on. A voidable contract on the other hand is voidable at the option of the aggrieved party. Thus a void agreement is void from its inception whereas a voidable contract becomes void subsequent to its formation and that too if the agreement party decides to repudiate it. 2.)A void agreement is a total nullity it cannot be enforced at all whereas a voidable contract can be enforced till it is repudiated. 3.)In case of void agreement restitution is always allowed unless the illegal or the void nature of the agreement was known to the parties at the time of making the agreement. In a voidable contract on the other hand when they rescinded benefit will be restored as far as possible. 4.)In case of void agreement the question of compensation does not arise on account of non performance of the agreement. But in voidable contract if the person rightfully rescinds a contract, he is entitle to compensation for loss or damage suffered by him on account of non- performance.
5.)A voidable contract does not affect the collateral transactions. But where the agreement is void on account of illegality of the object the collateral transactions will also become void. Illegal Agreements. An agreement which is either prohibited by law or otherwise against the policy of law is an illegal agreement. Such an agreement is a nullity and is void. Thus an agreement to commit a dacoity or murder is an illegal agreement and cannot be enforced by law. We should be careful in using the word contract and agreement. It is here that the distinction is very important. We should use the term illegal agreements instead of using illegal contract. Because an agreement enforceable by law cannot be contrary to law. Void and Illegal Agreements. Though the two terms appear to be similar in the sense that in both cases the agreement is void abinitio the two terms have different effects. The term illegal is of wider consequences. All illegal agreement are void but all void agreement are to necessarily illegal. For example an agreement with a minor is void but not illegal. The term illegal agreement is wider in effect in relation to collated transactions than a void agreement. In case of agreement not only the main agreement between parties is void but the collateral transaction are also affected and they also becomes void. A void agreement however does not invalidate collateral transaction. This point can be clarified with the help of following examples:
A borrows Rs. 10,000 from B for the purpose of buying smuggled goods from C. B know of the purpose of the loan. The transaction between A and B is collateral to the main agreement. Because the main agreement between A and C is illegal therefore the collateral agreement between A and B shall also be tainted with illegality and is void. A borrows Rs. 500 from B in order to bet with C as to the result of a horse race. A contract of betting is void being a wagering agreement. In case A loses, C cannot recover the amount from A. but B can recover his money from A because this transaction between A and B is collateral to a void agreement between A and C. Thus a void agreement does not affect a collateral transaction but in case of an illegal agreement the collateral transactions are also affected and they become void. An illegal agreement is like an infectious disease and in fatal not only to the main contract but to collateral agreements as well. 5. Define the 'proposal'? A contract is essentially a bilateral transaction which can only be created by the acts of parties. For its creation it is necessary that one party should make proposal or offer and this should be accepted by the other party. The words proposal and offer are synonymous and are used interchangeably. The term proposal is defined 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 is called the proposal or offer or and the person accepting the proposal is called acceptor or offered. Form the definition the following essentials of a proposal emerge: It is an expression of the willingness or intention to do or to abstain from doing something. It is made to another person because a person cannot make a proposal to himself. It is made with a view of obtaining the assent of the other party. Thus a declaration by a person that he intends to do something does not amount to offer. Example: A offers to sell his house to B for Rs. 50,000 or A offers not to open a shop in a particular area if B given him Rs. 10,000. But a mere statement by A that he intends to sell house will not amount to offer.
6. Distinguish between a proposal and an invitation to offer? An offer must be distinguished from an invitation to offer. An offer is a definite communication to another of one readiness or willingness to do or not to do something while in case of an invitation to offer there is so such intention to obtain the assent of the other party. In an invitation to offer the party is merely inviting offers from others that is he is telling others that he is willing to negotiate business with anybody who on such invitation comes to him. Such invitations are not offers in the eyes of law and do not become promise on acceptance. The display of goods in a shop with price tags attached is only an invitation to offer. The shopkeeper is not bound to sell the goods because by displaying his goods he is only showing his goods and inviting offers to buy his goods. Similarly quotations catalogues price lists are not offers to buy at the indicated prices. The display of goods on the shelves of a self- service store is merely an invitation to offer and the customer makes an offer to buy when he carries the goods to the cashier and makes the payment. When a public company issues a prospectus it is inviting offers from intending investors. It is because of this the company is free to reject any application or to allot a lesser number of shares than applied for. An advertisement inviting tenders is not an offer but a more invitation to offer. It is the person who sends a tender is making an offer. The basic difference between an offer and an invitation to offer is that in case of an offer the offerer shows his
willingness to be bound by his offer if the other party accepts his offer, but in case of an invitation offer he is only informing others the terms on which he is willing to negotiate. 7. Explain the essentials of a valid proposal? The following are the essentials of a valid proposal: I. ) The offer must be capable of creating legal relations. A valid offer must intend to create legal relations. If the offer is not intended to given rise to legal consequences, then it is not intended to given rise to legal consequences, then it is not an offer in the eyes of law. If is because of this reason social, moral or religious agreement do not becomes contracts because in such cases the parties never intend to create relationship. Thus if a invites his friend B for dinner. A after having accepted the claiming compensation from B because the two parties never intended to create legal relationship. The case of Balfour vs. Balfour is well known on this point. In this case Mr. Balfour was employed in Ceylon. He went to England along with his wife on vacation. His wife fell ill and was unable to accompany her an amount of 30 a month so long as she could not join him an refused to send the money. Mr. Balfour filed a suit against her husband for the breach of the agreement. If was held that
she could not sue her husband for the money as there was no intention to create legal relationship. Whether the parties intend to create legal relationship or not is to be ascertained from the terms of the agreement and the surrounding circumstances. In business agreement it is generally presumed that the parties intend to create relationship. But even in a business agreement if the parties have agreed that the breach of the agreement would not confer any right on either party to go to the court of law for enforcing the agreement it will not amount to a valid contract. 2.) The offer must be certain definite and not vague. The terms of the offer must be definite certain or unambiguous. If the meaning of the offer is not clear, no contract will come into existence. Thus a promise to pay a reasonable share of profits of the business is a vague promise because the amount to be paid is uncertain. 3.) The offer may be express or implied. An offer may be either express or implied from the conduct of the parties. When an offer is made expressly by words spoken or written it is called a express offer. Thus where A offers to sell his book to B for Rs. 20 it is an express offer. An implied offer on the other hand is one which may be gathered from the conduct of the parties or the circumstances of the case. Thus when a person gets into a public bus he lakes an implied proposal to pay the fixed fare for the journey. 4.) The offer must be distinguished from mere expression of intention. A declaration by a person that he intends to do some thing will not be bound by it because it is not an
offer. Thus would have a share of his property after his death it was held to be merely a statement of intention. 5.) The offer must be distinguished from an invitation to offer. In an offer there is willingness to do or not to do something whereas in case of an invitation to offer there is no such willingness rather the person concerned is inviting offers from others. 6.)An offer may be specific or general. When an offer is made to a definite person or a body of persons it is called a specific offer. When an offer is made to the whole world it is called general offer. Where A promises to pay Rs.500 to B if he bring back his missing son this is a specific offer and can only be accepted by B but if A given an advertisement in a newspaper to pay Rs. 5000 to any one who bring back his missing son this is a general offer and any member of the public can accept this offer by finding this missing boy. 7.) The offer must be communicated. The offer must be communicated to the person to whom it is made. An offer becomes effective only when it has been communicated to the offeree. Unless the communication of offer is complete there can be no acceptance of the offer. If a person does something without knowing the offer he will not get any rights. The case of relevant in this context. In this case G sent his servant L, to trace his missing nephew. When the servant had left, G announced a reward of Rs. 501 to anyone who finds the boy. L found boy and handed him over to G. when L came to know of the reward, he claimed it. In this came it was held that L will not get the reward because the
offer was not communicated to him and so he cannot accept an offer without knowing it. If there are special conditions in an offer they should also be communicated simultaneously. Such cases arise in respect of general offers such as tickets or receipts given by the drycleaner or such other persons. In such cases the rule id that the party shall not bound by the conditions unless conditions printed are properly communicated. 8.) The offer must be made with a view to obtaining the consent of the offeree. If a person merely makes statement without any intention to be bound by it then it is not a valid offer. Merely making an enquiry does not constitute an offer. 9.)An offer may be condition. An offer can be made subject to certain conditions but such conditions must be brought to the notice of acceptor. If a conditional offer is accepted without fulfilling the condition it is no acceptance and the offer will lapse thus, if A offers to buy 10,000 shares of a company if his son is appointed as manager. The company allots him the shares without appointing his son as the manager. A is not bound by the allotment because his offer was subject to a condition. 10.) The offer should not contain a term the non-compliance of which would amount to acceptance. One cannot say while making the offer that if the offer is not accepted by a certain time (say by 5p.m on next Thursday), it will be presumed to have been accepted. In this case if the party does not reply by the fixed time, no contract will arise because the law doe not permit a party to impose an unnecessary burden on the acceptor to communicate him refusal.
8. Write a short note on standing offers? A standing offer is in the nature of a tender. An offer the continuous supply of a certain article at a certain rate over a definite period is called a standing offer. Such offers though accepted do not give rise to a contract unless an actual order is placed. When large quantities of goods are required from time to time it is usual to call tenders for the supply of such goods. An advertisement inviting tenders is not an offer but a more invitation to offer. It is the person who sends a tender for the supply of such goods is deemed to have made an offer. Example: A coal dealer agrees to supply coal to a Railway company for a period of one year at Rs. 100 per ton up to 10,000 tons. This is a standing offer or a tender which may be accepted by the Railway Company. This does not amount to acceptance in law. Acceptance in the legal sense would be complete as soon as an order is placed by the Railway Company. The company places an order for 100 tons. This is an acceptance of the standing offer. Each order placed creates a separate contract. The offeror can withdraw his offer at any time before an order is placed with him. In above example the Railway Company is not bound to place the order for all the coal which it may require. Similarly the coal dealer is not bound to keep the offer open during the year unless there is some extra consideration to keep it open. The standing offer can be revoked at any time before its acceptance by an order.
9. When is communication of proposal, acceptance and revocation complete? How and on what grounds does a proposal stand revoked? When the contracting parties are face to face there is no problem of communicating because there is instantaneous communication of offer and acceptance. In such a case the question of revocation does not arise since the offer and its acceptance are made instantly. For example a offers to sell his book to B for Rs.20. this offer of A is communicated instantly to B and when B says "Yes, I agree", there is communication of acceptance. The difficulty arises when the contracting parties are at a distance from one another and they utilise the service of the post office or telephone. In such cases it is very much relevant for us to know the exact time when the offer or acceptance is made or complete. Communication of offer. The communication of an offer is complete when it comes to the knowledge of the person to whom it is made. An offer may be communicated either by words spoken or written or it may be inferred from the conduct of the parties. When a proposal is made by post its communication will be complete when the letter containing the proposal reaches the person to whom it is made. For example a makes a proposal to B to sell his house for Rs. Two lakhs. The letter is posted on 10th march. This letter reaches B on 12th instant. The offer is said to have been communicated on 12th when B receives the letter.
Communication of Acceptance. Communication of an acceptance is complete. (a)as against the proposal when it is put in course of transmission to him so as to be out of the power of the acceptor to withdraw the same. (b)As against the acceptor when it comes to the knowledge of the proposer. When a proposal is accepted by a letter sent by post the communication of acceptance will be complete as against the proposer when the letter of acceptance is posted and as against the acceptor when the letter reaches the proposer. In the example given above B accepts A s proposal and sends his acceptance by post on 14th. The communication of acceptance as against A is complete on 14th i.e. When the letter is posted and as against B it will be complete when the letter reaches. Suppose this letter of acceptance was duly posted but was delayed in post or lost in transit even then A will be bound by B's acceptance. The rule is that the proposer becomes bound by the contract from the moment the letter of acceptance is posted by acceptor. But the acceptor will be bound by his acceptance only when the letter acceptance has reached the proposer. Thus loss of letter in post late delivery or miscarriage acts. Will not affect the validity of the contract. But it is necessary that the letter of acceptance should be correctly addressed sufficiently stamped and posted. Communication of Revocation. Revocation means taking back or withdrawal. It may be revocation of offer or acceptance. The communication of revocation is completes as against the person who makes it when it is put into the course of transmission the person to whom it is made, so as
to out of the power of the person who makes it; and as against the person to whom it is made when it comes to his knowledge. In the example given above, A revokes his proposal by telegram. The revocation is complete as against A when the telegram is dispatched. It is complete as against B when B receives the telegram. If B revokes his acceptance by telegram, B's revocation is complete as against B when the telegram is dispatched and as against A when it reaches him. Time for revocation of proposal. A proposal may be revoked at any time before the communication of its acceptance is complete as against the proposer but not afterwards. The letter revoking the offer must be received by the acceptor before he posts the letter of acceptance. Once the letter of acceptance is despatched the offer cannot be revoked. It is immaterial that the proposer has not yet received the letter of acceptance the moment the letter of acceptance is posted it is binding on the proposer. In the example given above where the letter of acceptance is posted by B 14th, a can revoke his proposal at any time before 14th or before the posting of acceptance. Time for revocation of acceptance. An acceptance may be revoked at any time before its communication is complete as against the acceptor but not afterwards. Once the letter of acceptance reaches the propose the acceptance cannot be revoked. Thus acceptance can be revoked before the letter of acceptance reaches the proposer.
The position relating to revocation of proposal and acceptance has been described by Anson in the following words. "Acceptance is to offer what a lighted match is to train of gunpowder. It produces something which cannot be recalled or undone". Here gunpowder stands for offer and the lighted match stands for acceptance. So when a lighted match is shown to a train of gun- powder, it explodes and something happens which cannot be undone similarly an offer once accepted cannot be revoked. But so long a lighted match is not show the gun powder remains inert and can be removed. Thus an offer unless it is accepted does not create any legal relationship between the parties. An offer by itself is inert like a gun powder. It can be revoked before it is accepted. Contracts over Telephone. If the contracting parties are conversing on phone then there is instant communication of offer and acceptance therefore the some rules apply as in the case when contracting parties are face to face. But the acceptor should make sure that his acceptance is properly heard and understood by the proposer. Because while the acceptor was conveying his acceptance, suddenly the telephone goes dead then acceptance is not communicated and there arises no contract. When the parties are making proposal and acceptance on telephone the question of revocation does not arise because there is instantaneous communication.
10. When does an offer come to an end or lapses? An offer may come to an end in any of the following ways; By communication of notice of revocation by the proposer. The proposer can revoke or withdraw his offer at any time before the acceptor posts his letter of acceptance. A notice of revocation to be effective must be communicated to the acceptor. If the notice revoking the proposal reaches the acceptor after he has dispatched his acceptance the revocation of proposal is of no use and the proposer shall be bound by the acceptance. By lapse of time. A proposal will come to an end by the lapse of time prescribed in such proposal for its acceptance and if no time is prescribed then by the expiry of reasonable time. Whet is a reasonable time is a question of fact depending upon the circumstances of each case. Thus where a person applied for shares of a company in June he will not be bound by an allotment made in November. When an offer is kept open for a fixed time it will automatically come to an end on the expiry of the time. It should be noted that an offer agreed to be kept open for a definite period may be revoked even before the expiry of the period unless there is some consideration for keeping it open. By not being accepted in the prescribed mode. If the proposer has prescribed a particular mode of acceptance and the acceptance is not in the prescribed mode the offer may lapse. If no mode is prescribed then offer lapses by not being accepted in some usual and reasonable manner but the offer will not lapse automatically. A duty is placed on the proposer that he should insist that his proposal should be accepted in
the mode prescribed and if he fails to so within a reasonable time it is presumed that he has accepted the acceptance. By non-fulfilment of a condition by acceptor. A proposal comes to an end when the acceptor fails to fulfill a condition prescribed a particular to the acceptance of the proposal. Thus A offers to sell certain gods to B on a condition that B should send Rs. 200 along with his acceptance. If B sends his acceptance but does not send the money the prosper lapses. By the death or insanity of the proposer. A proposal comes to an end by the death or insanity of the proposer if the fact of the death or insanity comes to the knowledge of the acceptor before acceptance. If the proposer dies after the acceptance of the offer the legal representative of the proposer shall be bound by the contract. Thus if an acceptance is given in ignorance of the death or insanity of the proposer the acceptance is valid and a contract comes into existence. By counter offer. A proposal lapses if it has been rejected by the other party or a counter offer is made. A offered to sell his farm to B for 1,000 but B offered 950 for it. A refused to sell for 950. Then B offered 1,000. if was decided that B has rejected the original offer of A by making a counter offer there fore no contract take place even when B offers 1,000. An offer once rejected cannot be revived later on. By subsequent illegality. An offer lapses if the performance of the contract becomes illegal after the offer is made. For example a offers to sell 10 grms of gold to B. Before B could accept the offer on order is promulgated by which private trading in gold is banned here the offer comes to an end.
11. What do you understand by acceptance? What are the legal rules regarding acceptance? When the person to whom is the proposal is made signifies his assent there to it is an acceptance of the proposal. An offer unless accepted cannot becomes an agreement. By giving his acceptance the acceptor agrees to be bound by the terms of the offer. An offer when accepted becomes a promise. A proposal can be accepted only be the person to whom it has been made if it is accepted by someone else it will not create any contract. But if the offer is made to the world at large then it can be accepted by any person or persons who have the knowledge about the offer. The essentials of a valid acceptance are the following if complied with it will convert a proposal into a promise. Acceptance must be absolute and unconditional. An acceptance in order to be binding must be absolute and unqualified. If must be of all the terms of the terms of the offer must be accepted. Conditional or partial acceptance is no acceptance. For example, a offers to sell his land to B for Rs. 50,000. B accepts and sends a cheque for Rs. 30,000 promising to pay the balance within two moths. Here no contract will arise because the acceptance is not absolute and unqualified. Acceptance must be in the mode prescribed. If the proposal prescribes a manner in which it is be accepted the acceptance must be made in the manner prescribed manner the proposer may within a reasonable time after the acceptance is communicated to him insist that his proposal
must be accepted in the prescribed manner. But if the proposer fails to do so it is presumed that he has accepted the acceptance. In case no manner is laid down then it should be accepted in some usual or reasonable manner. Acceptance must be communicated to the proposer. An acceptance to be valid must be communicated to the proposer. If the person to whom the proposal is made remains silent and does nothing to show that he has accepted the proposal no contract is formed. Mental acceptance which is not evidenced by words or conduce is no acceptance. Thus where a person accepts a proposal but forgets to post the letter of acceptance it is no acceptance. Acceptance must be given within a reasonable time and before the offer lapses. If the proposer has prescribed some time limit for acceptance it must be accepted within the limit prescribed and if no time limit is laid down then acceptance must be given within a son able time. When is a reasonable time is a question of fact and depends upon the circumstance of each case. Acceptance given after the offer lapses or it is revoked is of no significance. For example a makes a proposal to B to be accepted within three days. B had given his acceptance on the fourth day. This is not a valid acceptance. Acceptance may be express or implied. When acceptance is given by words spoken or written it is an express acceptance. If it is accepted by conduct it is an implied acceptance. Thus where a person boards a train or bus he impliedly accepts to pay the house and promises to settle some immovable property on her. The niece stayed with her till the time of her death. It was held that niece was entitled to the property because she had accepted the offer of her aunt by conduct by going to her house and staying with her.
Acceptance must be given after knowing about the offer. There can be no acceptance without knowing the offer. Acceptance cannot precede the proposal. The case of relevant here where the servant had found the boy without the knowledge of the reward he could not succeed in getting the reward. Acceptance must be given by the person to whom the proposal is made. An offer can be accepted only by the person to whom it is made. If the offer is made to a particular person then it is the he alone can accept it. If some other person accepts the offer than it will not give rise to a contract. If the offer is made to a particular group of persons than any member of that group may accept the offer. In Bolton Vs. Jones, a sold his business to his manager without disclosing this fact to his customers. An old customer sent an order for the supply of goods to A by name. B received contract between B and C because C placed his order with A and not to B. A proposal once rejected, cannot be accepted unless it is renewed.
12. "Acceptance must be something more than a mere mental assent." Comment. According to section 7 of the India contract Act, order to convert a proposal into a promise the acceptance must be absolute and unqualified and be expressed in some usual and reasonable manner unless the proposal prescribes the manner in which it is to be accepted. Thus it is essential that intention to accept must be communicated to the proposer. A contract will become binding only when the acceptor has done something to signify his intention to accept and not when he has only made up his mind to do so. The communication of acceptance may be either by words spoken or written or by conduct. An offer may also be accepted by accepting the benefit or the service offered by the proposer. Acts done in ignorance of the proposal will not amount to the acceptance of the proposal. It is very essential that the acceptance must be communicated. Acceptance by performance of the conditions of the proposal need not necessarily be communicated to the proposer to establish legal relations because fulfillment of the condition is sufficient to show the acceptance. Effect of silence on acceptance. If the person to whom the proposal has made remains silent his acceptance cannot be presumed. In it was held that silence his acceptance cannot be presumed. In felthouse Vs. Bindley it was held that silence cannot be prescribed as a mode of acceptance. In this case a person offered to purchase a particular horse for 30 and wrote to him if I don't hear anything from you I shall consider the horse as mine for 30. The other person did not sent any reply though he has instructed his manager not to sell that
particular horse to anyone else. It was decided that mere mental acceptance uncommunicated to the proposer cannot be a valid acceptance. Silence cannot be prescribed as a mode of acceptance because if that was so the acceptor will be put to a great deal of inconvenience because he will have to write in clear terms that he is not accepting the proposal. Similarly in another case of was a candidate for the post of a headmaster in a school. The managing committee of the school passed a resolution appointing the plaintiff. The resolution however was not communicated to the resolution. The suit was dismissed on the ground that in the absence of any communication to him, there was no contract. 13. What do you understand by 'competence to contract'? Competence to contract or capacity to contract means the legal ability of a person to enter into a valid contract. One of the essentials of a valid contract is that the contracting parties must be competent to contract. Sectionll of the India contract Act provides that every person is competent to contract who is of the age of majority according to the law to which he is subject and who is of sound mind and is not disqualified from contracting by any law to which he is subject. From this section it is clear that every person is competent to contract who- is of the age of majority according to the law to which he is subject, is of sound mind,
is not disqualified from contracting by any law to which he is subject. Age of Majority. According to section 3 of the India Majority Act every person domiciled in India shall be deemed to have attained his majority when he completes his age of 18 years and not before. If the property of the minor is under the management of court of wards or a guardian is appointed by court he attains majority only on his completing 21 years. Any person less than this age even by a day would be a minor in the eye of law. In the case of Mohri Bibi Vs. dharamo Das Ghosh the privy couneil held that a contract by a minor is not only voidable but is absolutely void. A contract made with a minor is a nullity. A minor cannot even ratify the contracts made by him during the period of minority on attaining the age of majority. But if a contract is beneficial to a minor it can be enforced by him. If necessaries of life are supplied by someone to a minor or to any person whom he is legally bound to support, the price can be recovered from the minor. But here again a minor is not personally liable the price can be recovered from his property only. Sound Mind. A person is said to be of sound mind for the purpose of making a contract if at the time when he makes it he is capable of understanding it and of forming a rational judgement as to its effect upon his interests. Unsoundness of mind may arise due to insanity or lunacy, idiocity or drunkenness and similar other factors. The law requires that a person should be of sound mind at the time of making the contract. Thus a person who is usually of unsound mind but occasionally thus a person who is usually of unsound mind but occasionally of sound mind may make a contract when he is of sound mind.
Persons disqualified by any other law. The following persons are disqualified from contracting: Alien enemy. An alien (citizen of a foreign country) enemy with whose country our relations are not friendly is declared to be incompetent to enter into a contract. A convict is incapable of making a valid contract while undergoing a sentence. An insolvent person during the period of insolvency can not deal with his property. A corporation being an artificial person created by law can not make contracts which are beyond the powers given to the company by its memorandum of association. 14. Discuss the validity of contracts by minors? According to the India majority Act a person becomes a major on the completion of 18 years of his age. Where person or property he is deemed be a minor till he completes the age of 21 years. Under English law the minor attains the age of majority on completing 21 years. Section 11 of the Indian contract Act provides that every person is competent to contract who is of the age of majority. The clearly means that a minor is not capable of making a valid contract. A minor is absolutely incompetent to contract. An agreement made with a minor is void from the very beginning. In the leading case of a minor had borrowed Rs. 8,000 from the husband of mohri bibi and had executed a mortgage bound of Rs 20,000 in his favor. The minor filed an application in the court for setting aside the mortgage on the
ground that he was minor. The mortgagee wanted refund of money which had actually been paid to the minor. The Privy Council held that an agreement with a minor is absolutely void and even the money actually lent cannot be recovered. The position of a minor may be stated as under: An agreement with a minor is absolutely void and inoperative. Law protects the person and property of the minors because their mental faculties are not developed fully and they cannot decide as to what is good and what is bad for them. A minor cannot ratify the agreement even on attaining the age of majority. Since an agreement with a minor is void the minor cannot ratify it even after attaining the majority. Thus if a minor has borrowed some money and given a promissory note given another promissory note on attaining the age of majority the second note cannot be enforced against the minor. But if on attaining the age of majority he takes up a fresh loan and gives a note for the total mount he shall be liable to pay the amount of the note because there is fresh consideration for the note. The rule of Estoppel does not apply to a minor. Even if a minor makes a fraudulent misrepresentation as to his age agreements with him are void and he is not estopped from pleading his minority in defense. The court may however require the minor to compensate the other party on the ground of equity. This is based on the principle that a minor can have no privilege to cheat persons. For example a minor by misrepresenting is age purchases a scooter on credit and refuses to pay the price. The seller may recover the scooter if it is still in the possession of
the minor. If the minor has sold the scooter then he may be asked to handover the money realised by him but if he has spent the money nothing can be recovered from him. A minor can be a promise or a beneficiary. Contracts which are beneficial to a minor can be enforced by him, thus a minor can be a beneficiary. For example if a minor gets some rights under a sale or a mortgage or is a payee or promise of a negotiable instrument he can enforce these agreements which are for his benefit. A minor can enforce a contact in his favour which imposes no obligation on him. Specific performance of an agreement cannot be demanded from a minor. A minor agreement being absolutely void there can be no question of the specific performance of such an agreement. But where a contract is made by a competent guardian on behalf of a minor it can be specifically enforced by or against the minor provided the contract is for the benefit of the minor and that the guardian has acted within the scope of the authority however a contract of service by the guardian on behalf of a minor cannot be specifically enforced against him. Minor's liability for necessaries. Although agreements with minors are void yet he is liable for necessaries supplied to him or to anyone dependent on him. Section 68 provides that if necessaries suited to his condition in life are supplied to a minor or to any other person whom such minor is legally bound to support, then the price can be recovered from the property of the minor. There is no personal liability of the minor even for necessaries, it is only his property that has been made liable. This if a minor has no property or it is insufficient to pay the full
price of the necessaries, the supplier will have to suffer the loss. A minor cannot enter into a contract of partnership. A minor being incompetent to contract cannot be a partner in a partnership firm but under section 30 of the Indian partnership Act he can be admitted to the benefits of partnership. The liability of the minor partner is limited to his share in the partnership. A minor can he appointed as an agent. He can bind his principal by his acts done in the course of agency but he cannot be held liable for any negligence etc. A minor can not be adjudged insolvent. Because agreement with a minor are absolutely void he cannot contract debts there fore even for necessaries supplied to him he cannot be declared insolvent. Minor shareholder. If the articles of a company do not prohibit a minor can becomes a shareholder of the company. But because a minor is not liable to pay for the calls that may be made by the company the Articles generally prohibit the allotment or transfer of partly paid up share to a minor. However fully paid up share can be transferred in the name of a minor. Surety for a minor shall be liable. In case an adult person has given the guarantee for a loan advanced to a minor the surety will be liable to the creditor though the minor is not liable. No liability of minor on negotiable instruments. A minor may draw endorse deliver and negotiate such instruments
so as to bind all the concerned parties except himself. A minor cannot be held liable for an instrument drawn by him but he can be a promise payee or endorsee. Parents are not liable for minor contracts. The parents or guardian of a minor are not liable for contracts made by minor even though the contract is for the supply of necessaries to him. A contract with a minor's parents or guardian is valid and be enforced by or against them provided: (a) The parent or guardian is entitled to enter into that agreement and. (b) Such an agreement is for the benefit of the minor. But a guardian cannot purchase immovable property on behalf of a minor without the consent of the court. 15. Explain the effects of agreements made by persons of unsound mind? As per section 11 of the contract Act one of the conditions for the validity of the contract is that each party to it must be of sound mind. What is a sound mind? Section 12 of the contract Act defines the term sound mind as follows: 'A person is said to be of sound mind for the purpose of making a contract if at the time when he makes it he is capable of understanding it and of forming a rational judgment as to its effects upon his interests.
A person who is usually of unsound mind but occasionally of sound mind may make a contract when he is of sound mind. A person who is usually of sound mind but occasionally of sound mind may make a contract when he is of sound mind. Illustrations: (a) A patient in a lunatic asylum who is at intervals of sound mind may make a contract during these intervals. (b) A sane man who is delirious from fever or who is so drunk that he cannot understand the terms of the contract or form a rational judgment as to its effect on his interests cannot contract while such delirium or drunkenness lasts. The question whether a party to a contract is of sound mind or not is a question of fact to be decided by the court. The presumption is that the parties are of sound mind. If a person says that he was of unsound mind at the time of making the contract then he must prove it to the satisfaction of the court. Unsoundness of mind may arise from the following: Idiocy- Idiots are those persons who are devoid of any sense due to some congenital defect. His mental powers are completely lost and he has no period of sanity. Idiocy is of a permanent nature. The agreement with an idiot is void. Lunacy or Insanity- A person who is mentally deranged due to some mental stress or other reasons is called a lunatic. He may have some lucid intervals when he is of sound mind. Such persons may enter into contracts during their lucid. Such person may enter into contracts during their lucid interval. They can always plead insanity as a ground
for avoiding the contract. It is for the plaintiff to prove that the contract was entered into during the lucid interval of the defendant. For example A is a person who is sometimes sane and sometimes insane. B enters into an agreement with A. a may set up the plea of insanity. If B wants to enforce the agreement he must prove that A was sane at the time of making the agreement. Drunkenness-A drunken person loses his senses only for a short period therefore the incapacity to contract of a temporary nature. The position of a drunken person is exactly like that of a lunatic discussed above. Effects of agreements made by person of unsound mind. An agreement made with a person who is of unsound mind at the time of making it is absolutely void and inoperative as against him. But according to section 68 of the contract Act just like minors, the property of such persons remains liable for the necessaries supplied to him or to any one whom he is legally bound to support. 16. Explain 'consideration' as an essential element of a valid contract?
Consideration is an essential element of a valid contract. It is a technical word meaning thereby quid pro quo something in return. If nothing is received for a promise then such a promise cannot be enforced e.g. a promises to pay Rs. 100 to B. this promise cannot be enforced by B because he is not giving anything to A for this promise. If A agrees to sell his books to B for Rs.100, B's promise to pay Rs. 100 is the consideration for A's promise to sell his books and A's promise to sell the books is the consider action for B's promise to pay Rs. 100. The term consideration is defined in different ways by different persons. According to Blackstone consideration is the other. In the words of Pollock, 'consideration is the price for which the promise of the other is bought. A gratuitous promise may form a subject of a moral obligation and may be binding in honour but it does not cause a legal responsibility. Consideration is necessary because promises made without consideration are made rashly and without due deliberations it will create many problems for contracting parties. A valuable consideration is legal consideration emanating from some injury or inconvenience to the one party or from some benefit to the other party. In an English case the term consideration is defined as, "A valuable consideration in the sense of the law may consist either in right, interest profit or benefit accruing to one party or some forbearance detriment loss or responsibility given suffered or undertaken by the other. Thus consideration must result in a benefit to one party and a detriment or loss to the other party or a detriment to both.
Section 2 of the Indian contract Act defines consideration as under: "when at the desire of the promise the promise or any other person has done or abstained from doing or does or abstains from doing or promise to do or abstain from doing something such act or abstinence or promise is called a consideration for this promise. On an analysis of the above definition the following points merge: consideration must always be at the desire of the promisor: it must come from promise or any other person on his behalf: it may be past present or future: it may be an act or abstinence or promise: it must be real and valuable in the aye of law. Essentials of Valid Consideration. Consideration must always move at the desire of the promisor. The act or abstinence of the promise or any other person must any act done at the desire or request of the promisor. It means that any act done at the desire or request of the third party or voluntary acts would not constitute a valid consideration. The desire of the promisor may be express or implied from the conduct of the parties. If a person renders some services voluntarily without being asked for by the promisor he can't claim any remuneration for it. It is not necessary that what is done by the promise by way of consideration should benefit the promisor. It is enough if the act or abstinence constituting consideration is done at the desire of the promisor. In Durga Prasad Vs. Baldeo, D had built at his own expense, a market at the request of the collector of the District. The shopkeepers in the market agreed to pay D a commission on the goods sold by them. Later on the shopkeepers refused to
pay the commission to D. it was held that D was not entitled to claim commission from shopkeepers because he had constructed the market at the request of the collector and not at the request of shopkeepers. Similarly if A teaches B's son for two months and demand payment from B here B not liable to any pay anything since A has performed the service voluntarily and not at the desire B.) Consideration may move from the promise or any other person. The consideration may come either from the promise or any other person. It means that a stranger to a consideration can sue on a consideration may move from a stranger but it must move at the desire of the promisor. The leading case on his point is that of in this case A had transferred some property to his daughter B with a direction that she should pay an annuity to her uncle C. on the same day the daughter executed a writing in favour of her uncle agreeing to pay the annuity. Later she refused to pay the annuity on the ground that no consideration had moved from the uncle. It was held that uncle is entitled to claim the annuity though no consideration had moved from the uncle but indirectly the consideration has moved from A. In the above case it should be carefully observed that although uncle was a stranger to the consideration but he was not a stranger to the contract as there was a separate contract between the promises alone. Consideration may be past present or future. The words has done or abstained from doing; does or abstains from doing or promises to do or to abstain from doing;" indicate that the consideration may be past present or future.
Past consideration. When the consideration was given before the date of the promise it is said to be past consideration but is must be at the request of the promises. For example where render some service to B today and after a month B promises compensate him for the services rendered to him it will be a past consideration. Under English law past consideration is no consideration. Present consideration. When the consideration for a promise is given simultaneously with the promise it is called present can sedation. A present consideration consists in doing or abstaining from doing something. A promise to give time to a debtor is good consideration. The best example of present consideration is cash sale. Future consideration. When the consideration from one party to another is to move at some future date it is called future consideration. A promises to deliver ten bags of rice to B promises a fortnight and B promises to make the payment one week after the delivery. In this case the consideration is future. Consideration must be something of value. Another essential of a valid consideration is that it must be of some value. For the validity of a contract what is more important is that there must be some consideration. The law does not require that consideration must be adequate. Inadequacy to sell his scooter worth Rs. 8,000 for Rs. 500 only to B, it is a valid contract even though the consideration is inadequate. Explanation 2 to Section 25 of the Contract Act also clearly provides that an agreement to which the consent of the promisor is freely given is not void merely because the consideration is inadequate; but the inadequacy of consideration may be taken into account by the court in
determining the question whether the consent of the promisor was freely given. In the above example if A wants to avoid the contract on the ground that his consent was not free the court while deciding the case will take into account the inadequacy of consideration. Consideration must be real. Though consideration need not be adequate it must be real and not illusory. Thus a promise to do that which a person is by law bound to do does not amount to consideration. If it is physically impossible vague or legally impossible the contract cannot be enforced. Thus a promise to enclose some area by drawing two parallel lines or to put life into someone who is dead is impossible. But a promise not to sue for some time is a good consideration. Consideration must not be illegal, immoral or opposed to public policy. The consideration for an agreement must be lawful it is unlawful then the agreement cannot be enforced. The consideration of an agreement is unlawful if: it is forbidden by law; or (b) it is of such a nature that if permitted it would defeat the provisions of any law; or (c) it is fraudulent ; or (d) it involves or implies injury to the person or property of another; or (e) the court regard it as immoral or opposed to public policy. 17. Consideration need not be adequate but it must have some value in the eyes of law". Comment? Consideration in simple words something in return this something need not be adequate to the promise. Insufficiency
of the consideration means that one of contracting parties is getting less than what he is giving. Thus if A agreement to sell his car worth Rs. 50,000 to B for only Rs. 5,000 here the consideration for A is inadequate because he is receiving only Rs 5,000 f00r a car worth Rs.50,000. The law only requires that must be consideration it does not require that it must be adequate. The parties are free to make their own bargains. Thus if a person to sell his car for insufficient merely because the consideration inadequate. However if the consideration is grossly or shockingly inadequate and if one of the party pleads that his consent was not free then in deciding whether the consent was free or not the court may consider the fact of inadequacy of consideration while deciding the case. Thus an agreement supported by inadequate consideration remains enforceable. But it must be remembered that for a contract to be valid there must exist some consideration. A contract without consideration is void (except under special circumstances as laid down in Sec.) The consideration need not be adequate but it must have some value in the eyes of law. Can duration must be competent. It must not be illegal immoral impossible or opposed to public policy. An agreement to given a dead man for Rs. 5,000 is an impossible task therefore the consideration is not real. 18. "A stranger to consideration can sue but a stranger to a contract cannot sue." Comment? It is a general rule of law that rights and obligations under a contract are conferred upon only the contracting parties and a
person who is not a party to a contract does not acquire any right and cannot enforce a promise even though it may be for his benefit. Stranger to a consideration means a person who has not given any consideration for the promise made to him. Under Indian law the consideration may move either from the promise or any other person thus a stranger to consideration can sue on a contract provided he is a party to the contract. The leading case is worth mentioning on his this point. Under English law however a stranger to consideration cannot sue as consideration must move from the promise himself. Stranger to a contract A stranger to a contract means a person who is not a party to the contract. It is a general rule of law that a person who is not a party to the contract cannot sue on it. A stranger to a contract cannot sue in England as well as in India though it may be made for his benefit. There must be only the party can sue upon it. Privity contract means relationship subsisting between the parties who have entered into contractual obligations. It means that no one but the parties to a contract can be bound by it or be entitled under it. The law relating to stranger to contract is the same in India as well as in England stranger to contract cannot sue. The simple reason for this rule is that no one can impose obligation on anyone without his consent. Exceptions. There are certain exceptions to the rule that stranger to a contract cannot sue. Following are the important exceptions under which a stranger to the contract can bring a suit to enforce his rights arising from a contract.
When a trust is created. When a trust is created the beneficiary can enforce his rights given to him under the trust even though he was not a party to the contract between the settler and the trustees. For example A transfers some property in favour of B to be held by him trust for the benefit of X. X can enforce the agreement even though he is a stranger to the contract. Where a provision is made in the marriage settlement. Where an agreement is made in connection with marriage and a provision is made for the benefit of a person he may take advantage of that agreement although he is not a party to it. Family settlement. Where a provision is made in a partition or family arrangement for the benefit of any member of the family such a member may sue to enforce the agreement even though he is not a party to the agreement. Example two brothers in a partition deed agreed to pay Rs. 300 in equal shares to their mother for maintenance. Subsequently they refused to pay. On a suit filed by the mother is was held that she could recover the amount even though she was a stranger to the contract. Where a charge is created on some specific immovable property. For the benefit of a third party such a charge can be enforced by that person in whose favour the charge had been created. By acknowledgement or etsoppel. Where privity of contract is created by conduct with a stranger the stranger can sue. For example A pays Rs. 500 to B to be given to C. B acknowledges to C that he holds the amount for him. C can recover the amount from B.
In case of agency. Contracts entered into by the agent can be enforced by the principal. In case of assignment of rights under a contract the assignee can enforce the benefits of the contract. For example, assignee of an insurance policy can enforce the claim even though he was not a party to the contract. 19. "No consideration, no contract". What are the exceptions to this rule? Every agreement to be enforceable at law must be supported by valid consideration. An agreement made without any consideration is void. A gratuitous promise cannot create any obligations. No consideration no contract is the general rule. Section 25 of the Indian contract Act provides some exceptions to this rule where an agreement without consideration will be valid and binding. These exceptions are as follows: a.) Agreement made on account of natural love and affection. Where an agreement is expressed in writing and registered under the law for the time being in force for the registration of the documents and is made on account of natural love and affection between the parties standing in a near relation to each other such an agreement shall be enforceable even if there is no consideration There are four essential requirements: (a) the agreement must be in writing; (b) it must be registered; (c) it is
made on account of natural love and affection and (d) it is between parties standing in a near relation to each other. All these essentials must be present to enforce an agreement made without consideration. The presence of only one or some of them will not suffice. It should be noted that nearness of relationship does not necessarily mean that there is natural love and affection. Thus where a husband after referring to frequent quarrels between the two made a promise to pay Rs.500 to his wife this promise was in writhing and also registered. It was held that the agreement was void because the promise was not made out of natural love and affection. (b) Compensation for voluntary services. An agreement made without consideration is also valid if it is a promise to compensate wholly or in part a person who has already voluntarily done some thing for the promisor or done something which the promisor was legally compellable to do. Example: (a) A find B's purse and gives it to him. B promises to give A Rs.50. this is a valid contract. (c)A saves the life of B who was drowning in a river. B promises to pay Rs.5000 to A. A can recover the money. (d) A supports B 's infant son. B promises to pay A's expenses in so doing. This is a valid contract. This rule is applicable only (a) of the act was done voluntarily; (b) for the promisor or something which the promisor was legally compellable to do; (c) the promisor must be in existence at the time when the act was done; (d) the promise must agree now to compensate the promise; (e) the promisor to whom the services' has been
rendered need not be competent to contract at the time when the service was rendered. The promisor must be in existence at the time when the services were rendered. Work done by the promoters of a company before incorporation cannot be said to have been done for the company. (c) Time barred debts. A promise to pay a time barred debt is also enforceable. Sec 25 (3) provides that where there is an agreement made in writing and signed by the debtor or by his agent to pay wholly or in part a time barred debt the agreement is valid and binding even though there is no consideration. Thus an oral promise to pay a time barred debt is unenforceable. Similarly an acknowledgement of a debt is not covered by this rule. The promise must be a definite or express promise to pay the debt which must be an ascertained sum of money. The logic behind this exception that by lapse of time the debt is not but only the remedy was lost. This exception revives this remedy. (e)Example: A owes B Rs.l, 000 but the debt is barred by the limitation Act. A signs written promises to pay B Rs. 500 on account of the debt. This is a valid contract. Contract of agency. No consideration is necessary to crate an agency. Completed gift. In case of a completed gift which has actually been made no consideration is necessary. Explanation to Sec.25 provides "nothing in his section shall affect the validity as between the donor and donee of any gift actually made". Thus if a person transfers
some property by a duly written and registered deed ad a gift he cannot claim back the property subsequently on the ground of lack of consideration. Remission by the promise of performance of the promise. According to sec 63 a promise may dispense with or remit wholly or in part the performance of the promise made to him for this no consideration is necessary. If a creditor a agrees to accept Rs 500 from Bin full satisfaction of the debt of Rs 1000. A, subsequently cannot claim the amount of Rs. 500 which he had remitted. 20. "Two or more persons are said to consent when they agree upon the same thing in the same sense." Explain. It is essential for the creation of a contract that parties to it should agree to the same thing in the same sense. The contracting parties should have the identity of mind this is called consensus ad idem. In is absolutely necessary that the contracting parties must understand the subject matter of the contract in the same sense. Sec 13 of the India contract Act lays down that "two or more persons are said to consent when they agree upon the same thing in the same sense." This means that there can be not agreement unless the two parties have identical views. When each party has a different thing in mind or understands the thing in a different way there is no consent between the two and no contract will arise. If the parties think of different objects or understands different meanings of the language used in the contract there
is no consent and to valid contract. For example an illiterate woman executed a deed under the impression that by executing the deed she was authorizing her nephew to manage her estate while in fact it was a deed of gift. It was held that the deed was void because the woman never intended to execute the deed of gift her mind and pen did not go together. A bsence of consent may be there because of several reasons such as an error to the nature of the contract itself or it may be a mistake regarding the subject matter of the contract or the identity of the person contracted with. Thus to form valid contract there must be a meeting of the minds of the parties, without consent there can be no agreement and without any agreement no contract can ever arise. 21. Define 'consent'. What is consent said to be free? Explain Section 13 of the India contract Act defines the term consent as, "two or more person are said to consent when they agree upon the same thing in the same sense." It means that the contracting parties must have identity of minds i.e. consensus
ad idem they must thinking about the same subject matter in the same sense. If for any reason there is no identity of minds there is no agreement and so no contract can ever arise. Example, A has got two fiat cars one sky blue and the other grey coloured one. A offers to sell one of the cars to B. A thinks that he made the offer to sell the blue coloured car while B thinks that he is buying the grey coloured car. Here apparently there may be an agreement but because both of them are thinking about different cars, there is no identity of minds and hence no valid contract arises. According to sec. 10 all agreement are contracts if they are made by the free consent of the parties. It means that not only there should be consent but the consent of the parties must also be free. One of the essentials of a valid contract is free consent of the parties. Free consent means that the parties have given their consent of their own accord without being under any threat or influence. Now we discuss briefly the various flaws which may affect consent: Coercion. Coercion is committing or threatening to commit any act forbidden by the India penal code or an unlawful detaining or threatening to detain any property to the prejudice of any person what ever with the intention of causing any person to enter into an agreement. It is immaterial whether the Indian penal code is or is not applicable at the place where coercion is employed. For example A threatens to shoot B, if he refuses to sent of B is caused by coercion. Here the contract can be repudiated by B. Undue influence. A contract is said to be induced by undue influence where the relations subsisting between the parties are such that one of the parties is in a position to
dominate the will of the other and uses that position to obtain an under advantages over the other. Undue influence is moral pressure as opposed to physical pressure under coercion. Where a person in a position to dominate the will of the other and the transaction appears to be unconscionable the burden of proving that the contract is not induced by undue influence lies upon the person who could dominate the will of another. Thus a doctor by exercising his influence over his patient obtains a promise to pay Rs. 10,000. Here the doctor has used his position to obtain the unfair advantage. This contract is voidable the option of the patient. Fraud. When a person makes a wrong statement willfully with a view to deceive the other party he is said to have committed fraud. When the consent of a party is obtained by fraud his consent is not free. For example a sells a machine to B by saying that it is brand new machine while in fact it was not a new machine but an old one which is repainted. Here the consent of B is obtained by fraud. The real test is that if he had known the truth he would not have made the contract. If the consent is obtained by fraud the contract is voidable at the option of the aggrieved party. Misrepresentation. If a person makes a wrong statement innocently he honestly believes it to be true but in fact it is not true the consent is affected by misrepresentation. In such a case the contract can be terminated by the aggrieved party. A informs B that 100 units are made in his factory everyday. B believes the statement to be true although he did not have sufficient ground for the belief. Later on is discovered that only eight units are made in a
day. Here the consent of B is obtained by misrepresentation and he can avoid the contract. Mistake. Mistake is a misconception or error. A mistake means that parties intending to do one thing by error do something else. In this case there is no consent altogether and the contract is void. A agrees to buy from B a certain horse. It is discovered that the horse was dead at the time of making the contract but neither party was aware of the fact. Here the agreement is void on the ground of mistake regarding the subject matter of the contract. 22. When is consent said to be given under coercion? Explain the effect of coercion on the validity of a contract? Sec 15 of the India contract Act defines coercion as the committing or threatening to commit any act forbidden by the India 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 the explanation to this section says that it is immatenal whether the India penal code is or not in force in the place where the coercion is employed. On analyzing the definition following acts would amount to coercion: Committing of any act forbidden by Indian penal code. If a party to the contract commits any act which is forbidden by the Indian penal code it would amount to using coercion. Committing a murder kidnapping causing hurt
rape or preventing the disposal of the dead body are some of the examples of the acts forbidden by the Indian penal code. In the case of Ranganayakamma Vs. alwarsetti a young widow of 13 years was compelled to adopt it boy by the relatives of her husband otherwise the dead body of her husband would not be removed for cremation. The widow adopted the boy but later on applied for cancellation of the adoption. It was held that her consent was not free but was induced by coercion because preventing a dead body from being removed is an offence under the Indian penal code. Threatening to commit any act forbidden by Indian penal code. Not only the committing of an act forbidden by the Indian penal code amounts to coercion but even a threat to commit such an act amounts to coercion. A threat to shoot murder a threat to cause bodily injury are some of the examples of acts forbidden by the Indian penal code. A threatens to shoot B, if he refuses to sell his house to him. B agrees to sell the house to A .here the consent of B is not free. The test to be applied is that had there been no such threat he would not have entered into the contract. Unlawful detaining of any property. If a person unlawfully detains the property of another person and forces him to enter into a contract the consent is said to be induced by coercion. For example an agent refused to hand over the account books of the business at the end of his term unless the principal released him from all liabilities. The principal had to execute a release deed as demanded. It was heid that the release deed was voidable at the option of the principal.
Threatening to detain any property unlawfully. If threat is given to detain any property of another person, this amounts to coercion. In state the state gave a threat of a fine due from B, the son of A. A paid the fine. It was held that the contract was induced by coercion. The act of coercion must be done with the object of inducing or compelling any person to enter into an agreement. Threat to commit suicide. Under Indian law committing or threatening to commit suicide is not punishable only an attempt to commit suicide would amount to coercion was consider by Madras High court in the case of. In this case a person held out a threat to commit suicide to his wife and son if they did not execute a release in his favor. The wife and son executed the relies. It was held that this amounted to coercion. The court held that though threat to commit suicide was not punishable under the Indian penal code it must be deemed to be forbidden as an attempt as an attempt to commit suicide is punishable. Effect of coercion. When the consent of a party to an agreement is obtained by coercion the contract becomes voidable at the option of the party whose consent was not free. If the aggrieved party wants to abide by the contract then the other party can be compelled to perform his promise. If the aggrieved party elects to avoid the contract then he must restore any benefit received by him under the contract to the other party from whom received. The burden of proving that consent was induced by coercion lies on the party who wants to avoid the contract the aggrieved party has to prove that he would not have entered into this contract had coercion been not applied.
23. When is a contract said to be induced by 'undue influence'? What are its effects on contracts? Undue influence is the improper use of any power possessed over the mind of the contracting party. It creates a mental or moral pressure over the other party. Section 16 (1) defines undue influence as a contract is said to be induced by undue influence where the relations subsisting between the parties are such that one of the parties is in position to dominate the will of the other and uses that position to obtain an unfair advantage over the other. From the above definition two essentials of undue influence become clear: The relations subsisting between the parties should be such that one of them is in a position to dominate the will of the other. The dominant party should have used his position obtain an unfair advantage over the other. Both these characteristic must be simultaneously present. The presence of one without the other will not invalidate the contract on the ground of undue influence. Persons deemed to be in a position to dominate the will of another. Sec. 16 (2) provides that a person is deemed to be in a position the will of another- Where he holds a real or apparent authority over the other examples of such cases are relations between master and the servant parent and the child. For example A having advanced money to his son B during his minority upon B 's
coming of age obtains by misuse of parental influence a bond from B for a greater amount then the sum due in respect of the advance. A employs undue influence. Where he stands in a fiduciary relationship to the other. By fiduciary relation we mean relationship based on trust such as relationship between guardian and the ward solicitor and client, doctor and patient religious Guru and his disciple's trustees and beneficiaries are considered to be a fiduciary one. Where he makes a contract with a person whose mental capacity is temporarily or permanently affected by reason of age, illness or mental or bodily distress. Persons of weak intelligence, old age illiterate or of indifferent health can easily be influenced therefore the law given them the protection. Burden of proof. Where it is proved that one of the party is in a position to dominate the will of another enters into a contract and the trasaction appears to be unconscionable the burden of proving that the contract is not influence lies example A being in debt to B the money lender of his village contracts a fresh loan on terms which appear to be unconscionable or unreasonable. Now it is for B to prove that he has not exercised any undue influence. The mere fact that the rate of interest charged by the creditor is high does note make the transaction unconscionable because it is quite usual to charge high rates of interest in tight money market conditions. For example A applies to a banker for a loan at a time when there is stringency in the money market. The banker declines to make the loan except at an unusually high rate of interest. A accepts the loan on these terms. This is a transaction in the ordinary course of business and the contract is not induced by undue influence. But if the rate of interest charged is too high then the burden
of proving that was no undue influence will lie on the creditor. Effect of undue Influence. When the consent of a party to the contract is obtained by undue influence the contract is voidable at the option of the party whose consent was not free. Such a contract may be set aside either absolutely or if the party who was entitle to avoid it has received any benefit there under upon such terms terms and condition as the court may deem just. Example: A, a money lender advances Rs. 100 to B, an agriculturist and by undue influence induces B to execute a bond for Rs.200 with interest at 6 p.c. per month. The court may set the bound aside ordering B to repay Rs.100 with such interest as it may deem just. 24. Distinguish between coercion and undue influence? [First explain briefly the meaning of coercion and undue influence as given on the previous pages.] In both the cases of coercion and undue influence the consent of one of the party is not free and the contract is voidable at the option of the party whose consent was not free.
Following are the main points of distinction: Coercion involves the physical force or threat whereas in undue influence moral or mental pressure is exercised. In coercion the aggrieved party is compelled to make the contract against his will but in case of undue influence the aggrieved party believes that he or she should make the contract. Coercion involves the committing or threatening to commit an act forbidden by Indian penal code or detaining or threatening to detain any property of another person while in case of undue influence no such illegal act is committed or a threat is given out. In case of coercion it is not necessary that there must be some sort of relationship between the parties while in case of undue influence some sort of relationship between the parties is absolutely necessary. Coercion need not proceed from the promise nor need it be directed against the promisor. It may move from a stranger to a contract and may be directed against a stranger. But undue influence is always exercised between the contract. Where the consent of a party is obtained by coercion the contract is voidable at his option. But where the consent is induced by undue influence the contract is either voidable or the court may set it aside or enforce it in a modified form. In case of coercion when the contract is rescinded by the aggrieved party as per sec.64 any benefit received by the aggrieved party has to be restored to the other party. But when a contract is set aside on the ground of undue
influence under sec. 19-A the court has discretion to direct the aggrieved party to return the benefit in whole or in part or not to give any such directions. 25. Define the term 'misrepresentation'. What is its effect on the validity of a contract? A representation means statement of fact made by one party to the other either before or at the time of making the contract. A false or wrong statement may be made by a person either willfully or innocently. If a person makes a wrong statement willfully with a view to deceive the other party it is called fraud (discussed in later pages), but when a wrong statement is made innocently by a person who honestly believes it to be true then it is called misrepresentation. For example a while selling his camera tells B that the camera is an imported one. B purchased the camera. Later on it is found that the camera was not an imported one. This is a case of misrepresentation by A. According to sec. 18 of Indian contract Act misrepresentation means and includes: (a) 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. A positive untrue assertion means a positive assertion not warranted by the information of the person making it as to that which was not true though he believed it to be true. The words "positive assertion' Imply an explicit statement. It should be distinguished from mere expression of opinion.
For example, A while selling his farm to B tells him that 100 quintals of rice is produced in his farm. A honestly believes the statement to be true though he did not have sufficient grounds for the belief. Later on it is found that only 80 quintals of rice is produced. Here A has made a misrepresentation. Any breach of duty while 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. This is known as constructive fraud. For example, A who wanted himself to be insured gives him age as 24 years in the proposal form while in fact he was of 27 years of age at the time. A was not aware about his correct age he gave his age as per his school certificate. Here a has gained some advantage in the sense that lower premium was charged from him. Here A has committed a breach of duty which gives him some advantage so it amounts to misrepresentation. Causing however innocently a party to an agreement to make a mistake as to substance of the thing which is the subject of the agreement. If one of the parties leads the other however innocently to make a mistake as to the nature or quality of the subject matter there is misrepresentation. Essentials of misrepresentation. There must be a representation or breach of duty. The representation must be of facts material to the contract. The representation must be untrue. The representation must be made with a view to inducing the other party to enter into contract.
The other party must have acted on the faith f the representation. The person making the representation honestly believes it to be true. Effect of Misrepresentation When a misrepresentation is made the aggrieved party has the following rights: He can avoid or rescind the contract. This right to avoid the contract is available only when he was not in a position to discover the truth with ordinary diligence. If the truth could be discovered with ordinary diligence he cannot avoid the contract. Example: A by a misrepresentation leads B erroneously to believe that five hundred maunds of indigo are made annually at A's factory. B examines the accounts of the factory which show that only four hundred maunds of indigo have been made. After this B buys the factory. Here the contract cannot be avoided by B on the ground of misrepresentation. The aggrieved party can insist that the contract should be performed and that he should be placed in the position in which he would have been if the representations made had been true. Loss of right to avoid contract.
The aggrieved party shall have no right to avoid the contract in the following cases: If he could discover the truth with ordinary diligence. If his consent is not induced by misrepresentation. If he after coming to know about the misrepresentation expressly affirms the contract or acts in such a manner which shows that he has accepted it. If before the contract is avoided the third party acquires some right in the subject matter in good faith and for some consideration. From this if follows that the aggrieved party should avoid the contract at his earliest after discovering misrepresentation. If the parties cannot be restored to their original positions. 26. Define "fraud". Point out its effects on the validity an agreement? Fraud means willful misrepresentation. Fraud may be committed by a party to a contract or by anyone with his connivance or by his agent but not by strangers to the contract. Fraud is committed with a view to deceive the other party.
According to Sec. 17, '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 intent to deceive another party thereto or his agent or to induce him to enter into the contract: A suggestion as to a fact of that which is not true by one who does not believe it to true. A wrong statement made recklessly without inquiring whether it is true of false would amount to fraud. For example A while selling his machine to B tells him that the machine is in good working condition. But A knows very well that the machine has recently been repaired and is not in good working condition here A has committed fraud. An active concealment of a fact by one having knowledge or belief of the fact. The concealment or suppression of material information amounts to fraud. For example A a horse dealer sold a mare to B. A knew that the mare had a hollow hoof. A knew this fat and he got it filled up in such a way as to defy detection. The buyer discovers the defect subsequently. It was held that the contract could be avoided by B as his consent was obtained by fraud. A promise made without any intention of performing it. If a person enters into a contract without any intention of performing his promise he commits fraud. For example A orders and taken possession of goods without any intention of paying for them commits fraud. Any other act fitted to deceive. This is a general clause and includes all such cases which do not fall in any of the other clauses provided the act is fitted to deceive. For example a person of poor means represents himself to be a
wealthy person and obtains some goods on credit. He commits fraud. Any such or omission as the law specially declares to be fraudulent. For example the company law provides that a false statement given in the prospectus amounts to fraud. Similarly the insolvency law provides that if the debtor transfers any of his property with a view to defraud his creditors this amounts to fraud. Essentials of fraud. From the above definition of fraud the following essentials emerge: There must be a false representation. The representation must be of fact. A mere expression of opinion or commendatory expression is not fraud. The fraud may be committed either by a party to a contract or with his connivance or by his agent. Thus fraud by a stranger to the contract does not affect the contract. The act must be committed with the intention of deceiving the other party. The act must have deceived the other party. For example a purchases some shares of a company from the market on the recommendation of his friend. On coming to know some misstatements were made in the prospectus A wants to avoid the contract. A will not succeed because his consent was not induced by the misstatement in the prospectus since he has purchased shares from the market and not from the company. The other party must have suffered some loss. If the other party does not suffer any damage there is no fraud. The general rule is that there is no fraud without damages. Effect of fraud. The aggrieved party has the following rights: (a)He can avoid or rescind the contract.
(b) He can insist on the performance of the contract on the condition that he should be placed in the position in which he would have been had the representation made been true. (c)He can sue for damages. It should however be noted that if truth could be discovered by ordinary diligence or the consent is not induced by fraud or the party cannot be placed in is earlier position the contract cannot be avoided. Similarly when fraud is detected the contract should be avoided as early as possible because if a third party acquires some right or interest in the subject matter in good faith and for consideration before it is avoided then the aggrieved party loses his right to avoid the contract. 27. "An attempt at deceit which does not deceive is not fraud" comment? Fraud is the willful misrepresentation made by a party to the contract with the intent to deceive the other party or to induce such party to enter into a contract. It means a false statement made willfully or without belief in its truth or recklessly without caring whether it is true or false. In order to constitute fraud it is necessary that the other party must have acted upon the basis of the false representation. If the other party or promise has not acted upon or did not rely
on the representation the contract cannot be avoided on the ground of fraud. A contract can be avoided only when the consent of the other party is obtained by fraud. A deceit which does not deceive is not fraud by fraud the other party must have actually been deceived. It the other party knew the truh or has the means to find out the truth with ordinary diligence he cannot avoid the contract. A person cannot avoid the contract on the ground of fraud if the false representation has not come to his notice. A person cannot complain of having been misled by a statement of facts which did not lead him at all. Example: A, while selling an unsound horse to B puts on the stable door a forged certificate from a veterinary surgeon that the horse is sound. B did not notice the certificate and bought the horse B cannot avoid the contract on the ground of fraud. here A has tried to deceive B by putting the forged certificate on the stable's doer but B is not deceived thereby because he sis not notice the certificate. Where the party to whom the false representation is made had the opportunity to test its accuracy but did not do so the aggrieved party cannot avoid the contract on the ground of fraud. A very important feature of fraud is that the aggrieved party must have relied on the false representation must have been induced to act upon it. So we can say that an attempt at deceit which does not deceive is not fraud.
28. "Mere silence as to facts does not amount to fraud". Comment? Mere silence of a party about certain material facts does not generally amount to fraud. The general rule is that party to the contract is under no obligation to disclose the whole truth the other party or to give him the whole information in his possession. For example a sells by auction to B a horse which A knows to be unsound. A says nothing to B about the horse's unsoundness. This is not fraud in A. Caveat emptor let the buyer beware is the general rule applicable to contracts. In such cases therefore there is no duty to speak and silence does not amount to fraud. Explanation to Sec. 17 provides that mere silence as to facts likely to affect the willingness of a person to enter into a contract is not fraud. To this rule the following two exceptions are provided: Where the circumstances of the case are such that regard being had to them it is the duty of the person keeping silence to speak. Duty to speak arises where one contracting party reposes trust and confidence in the other. But there is no obligation to disclose things which are already known or which are within the power of the other party to know. For example, A sells by auction a horse to B his daughter who has just come to age. Here the relation between the parties are such that it becomes A's duty to tell B about the unsoundness of the horse. Duty to speak also arises in those cases where one of the party has to depend on the good sense of the other party. For example in all contracts of insurance it is the duty of the proposer to make full disclosure of all material facts to the insurance company. If an insured conceals the fact that his
father died of tuberclosis the insurance company can avoid the contract on the ground of fraud. All contracts of insurance are called the contracts of utmost good faith. Sometimes a representation is true when made but because of changed circumstances it becomes false when it is actually acted upon. In such case it becomes the duty of the person who made the representation to communicate the change in circumstances. For example, A, a trader agrees to sell his business to B and says to B that his monthly sales are worth Rs. One lakh. The representation, when made was true. But subsequently because of serious illness of A the sales have come down to Rs. 10,000 per month. Here it is the duty of A to inform B about the changed situation. Facts which are required to be disclosed by the custom or usage of trade must also be disclosed. (b) Where the silence is in itself equivalent to speech. Silence is sometimes itself equivalent to speech. For example, where B says to A, "if you do not deny it I shall assume that the horse is sound." A says nothing. Here A's silence is equivalent to speech. 29. Distinguish between misrepresentation and fraud? Misrepresentation and fraud many points in common for example in both the cases the contract is voidable there is false representation in both. Yet misrepresentation differs from fraud in the following respects:
1.) Intention. Both misrepresentation and fraud imply a false statement but in misrepresentation there is no intention to deceive whereas in fraud the false statement is made willfully or recklessly with the clear intention of deceiving the other party. Fraud is always intentional while misrepresentation is innocent. 2.) Rights. Misrepresentation renders the contract only voidable at the option of the aggrieved party. But in case of fraud the aggrieved party besides avoiding the contract can also claim damages suffered by him. 3.) Defence. In case of misrepresentation the fact that the aggrieved party had the means of discovering the truth is a good defence but if consent is caused by fraud the contract is voidable even though the party defrauded had the means of discovering the truth. 30. Discuss the law relating to the effect of "mistake" on contracts. It is essential for the creation of a contract that both the parties should agree to the same thing in the same sense. Thus if two persons enter into a contract each of them thinking about a different subject matter no contract will arise. If there is no identity of mind no contract will arise. Sec. 20 provides that "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.'
Mistake may be of two kinds- (a) mistake of law and (b) mistake of fact. Mistake of law. Mistake of law may be of two types: Mistake of law of the country. Everybody is supposed to know the law of this country. Ignorance of law is no excuse and a person who does not know the law of his country must suffer the consequences arising out of his ignorance. Thus a mistake of law will not render the contract void. For example 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 void able. But if the mistake of law is caused through the inducement of another whether innocent or otherwise the contract may be avoided. But if the mistake of law is caused through the inducement of another whether innocent or otherwise the contract may be avoided. Mistake of forigen law. A person is supposed to know the law of his country but one is not expected to know the law of other countries. Therefore a mistake of foreign law is excusable. Mistake of foreign law is treated as mistake of fact and a contract can be avoided. Mistake of fact. Mistake of fact may6 be two types. Bilateral mistake and (b) Unilateral mistake. Bilateral mistake. Where the contracting parties misunderstood each other and are at cross purposes there is a bilateral or mutual mistake. In such cases there is no agreement at all between the parties. Where bout the parties to an agreement are under a mistake as to a matter of fact
essential to the agreement the agreement is void. An agreement shall be void if the following two conditions are satisfied: Both the parties must be under a mistake. The mistake must be mutual or common. For example: a has got two cars an ambassador and the other one fiat. A offers to sell his ambassador to B who believes that A has only fiat car agrees to buy the car. Here the two parties are thinking about different subject matter so there is no real consent and the agreement is void. Mistake must relate to an essential fact. It is necessary that the mistake must relate to a matter of fact which is essential to the agreement. For example A agrees to buy from B a certain horse. It turns out that the horse was dead at the time of the bargain, though neither party was aware of the fact. The agreement is void because the mistake relates to something the horse which is essential for the contract. Explanation to Sec.20 provides that an erroneous opinion as to the value of the thing which forms the subject matter of the agreement is not deemed to be a mistake as to a matter of fact. For example a buys a painting believing it to be worth Rs.l, 000 while actually it is worth Rs.200 only. The agreement cannot be avoided on the ground of mistake. Bilateral mistake may be (a) mistake as to the subject matter (b) mistake as to the possibility of performance. Mistake as to subject matter. Where both the parties are working under a mistake relating to the subject matter of the contract the contract is void. It may be of the following types:
Mistake regarding existence of the subject matter. Where both the parties are under a mistake regarding the existence of the subject matter the contract is void thus if there is an agreement between A and B for the purchase of a certain horse. But the horse is dead at the time of the agreement and this fact was not known to either of the parties the contract is void. Mistake regarding identity of the subject matter. Where the parties have different subject matter in mind the agreement will be void. In the case of where the seller was selling the goods coming from ship whereas the buyer was thinking about the other ship the contract was held void. Mistake regading title to the subject matter: where unknown to the buyer is already the owner of that thing which the seller wants to sell to him the agreement is void. In the case of a agreed to take a fishery on lease from B. both of them believed that B was the owner. But it was discovered that in fact A was the owner. The contract was held to be void Mistake regarding quality of the subject matter. If the subject matter is something essentially different from that which the parties thought it to be the agreement is void. For example, A sold a painting to B saying that it is an original work of picaso. But unknown to both of them the original painting was stolen and its copy was placed there. Here the parties are working under a mutual mistake regarding the quality of the subject matter. Mistake regarding price of the subject matter. Where a seller while writing the price of the goods intending to write Rs. 2,250 by mistake writes Rs. 1,250 the agreement is void.
Mistake as to the possibility of performance. If the contracting parties believe that the contract can be performed but as a result of some event the performance for the hiring of a room for witnessing the coronation procession had already been cancelled. Unilateral Mistake Where only one of the party to a contract is under a mistake it is called unilateral mistake. Section22 provides that if only one party is under a mistake of fact the contract will not becomes void. If a person due to his own negligence or carelessness does not ascertain what he is contracting about he must bear the consequences. However in the following cases unilateral mistake will render a contract void: Mistake as to the identity of the person contracted with. If there is a mistake regarding the identity of the person contracted with even if the mistake is caused by fraud or misrepresentation of another party the contract will be void. In boulten Vs. Jones A sold his business to B. C, who used to buy goods from A, placed an order for some goods in the name of A. b supplied the goods without informing him about the change in the ownership of the business. It was held that B cannot recover the price form C because C never wanted to contract with B. But an agreement with a person identified by sight and hearing cannot be avoided on the ground of the mistake. In a person North entered the shop of jeweler selected jewellery and signed the cheques in the name of Sir G.B.a man of good credit. North pledged the jewellery with brooks who had no knowledge of the from brooks on the ground that he committed the mistake regarding the identity of the person. It
was held that the contract cannot be avoided on the ground of mistake because the jeweler has actually contracted with the person present in his shop and not with Sir G.B. From above thus it becomes clear that in case of a mistake regarding the identity of the person contracted with even if the mistake is committed because of misrepresentation or fraud of another party the contract is absolutely void. But in case of fraud or misrepresentation there is no mistake but only thing is that the consent is not free so the contract is only voidable. In the contract before it is repudiated one can pass a good title to a bonafide buyer for value. Mistake as to the nature of the contract. If a party does not discloses the true nature of the other party to sigh it who believes that he is signing some other document in such a case there is no real agreement. It is so because the mind of the person signing did not accompany the signature. Thus if a gift deed is signed under the impression that it is only a power of attorney the deed will be void and inoperative. 31. Discuss the doctrine of public policy. What are those agreements which are opposed to public policy? Public policy is a wide term and includes political economic and social considerations of the state. It is as difficult to define it as it is to manage an unruly horse. The term public courts do not generally go beyond the decided case on the subject. But in a modern progressive society with rapid changes in education the religious thoughts of the people and a change in the social value new heads of policy can be evolved wherever considered necessary.
An agreement is said to be opposed to policy when it is injurious to the welfare of the society or tends to prejudice the welfare of the society. The general rule of law is that no person shall do anything which might prove to be injurious or detrimental to the public or welfare of the community. The contract is to be treated as opposed to pubic policy only if its harmful tendency is clear. Thus if there is only a fear that it may cause some injury to the public the contract cannot be said to be opposed to public policy. On the basis of decided cases on the subject the following agreements have been held to be void being against the public policy. Trading with an alien enemy. Trading with an enemy is clearly against the public policy in so far as it helps the enemy to the detriment of the country. But where a contract is made during peace time and then war breaks out then the performance is suspended or the contract is dissolved depending upon the intention of the parties. Agreements for stifling prosecution. An agreement to prevent proceedings or to compromise a prosecution is illegal an void. The parties are not free to decide themselves as to what should be done when some unlawful act is committed. The rule is that a person who has committed a crime must be prosecuted and punished. Thus if A makes an agreement with B to drop a prosecution which he has instituted against B for robbery and B promises to restore the stolen property then the agreement shall be void. But an agreement for compounding of a compoundable offence shall not be void. Similarly an agreement to refer a dispute for arbitration shall not be void.
Agreements encouraging litigation. Any agreement which improperly promotes litigation is opposed to public policy. Such agreements may be either maintenance or champerty. Maintenance manse an agreement to promote litigation in which a person has no interest of his own. Champerty on the other hand means an agreement whereby one party agrees to assist another in recovering property in a suit and to share such proceeds. Under English law both these agreements are void. But in India such agreement shall be void only if they are unconscionable or they are not made in order to help someone in protecting his rights. Traffic in public offices. Agreement for sale or trafficking in public offices or Appointments are void as being opposed to public policy the reason being that the best and qualified persons should be selected for the posts. For example, a promise to obtain for b an appointment in the public service and b promises to pay Rs. 1,000 to A. the agreement is for the sale of public office and hence void. Agreements tending to create interest against duty. Such cases usually arise when public servants are asked to do something which is against their duty. Marriage brokerage agreements. An agreement to pay money or money's worth in consideration of bringing about a marriage is void. Thus if A pays B' a certain are sum of money to procure a wife for him the agreement cannot be enforced by A as it is opposed to public policy. Agreement interfering with marital duties. Any agreement which interferes with the performance of marital duties is void. For example an agreement that the husband shall
always live at the wife's parent's house was held to be void. Agreement restraint of marriage. An agreement in restraint of marriage of any person other a minor is void. Every person has the freed freedom to marry any agreement which puts some restriction from marrying anyone or from marrying anyone except a particular person is void. Agreement in restraint of personal freedom. An agreement which restricts the personal freedom of a person shall be void on the ground of being opposed to public policy. For example A borrowed money from a moneylender and agreed that he will not without the lender written consent leave his job, borrow money dispose of his property or move from house. The agreement was held to be void. Agreements in restraint of parental rights. A father and in his absence the mother is the legal guardian of his her minor child. This right of the parent over their child cannot be taken away by an agreement. Agreement in restraint of legal proceeding. An agreement by which a person is restrained from going to the court of law to enforce his rights is void on grounds of public policy. Thus any clause in an agreement which provides that neither party shall have the right to enforce the agreement by legal proceedings is void. Sec 28 provides that an agreement by which a party is restricted absolutely from enforcing his legal rights arising under a contract by the usual legal proceedings in the ordinary tribunals is void. Agreement to vary periods of limitation. An agreement which restricts or limits the time within which the contractual rights may be enforced is void. According to the Indian
Limitation Act an action for breach of contract may be taken within three years of the date of the breach. If a clause in the agreement provides that no action can be brought after two years, the clause is void. Agreement in restraint of trade. An agreement which restrains a person from carrying on any lawful profession trade or business is to that extent void. Agreement tending to create monopolies. An agreement the object of which is to create monopoly is illegal and void as being opposed to public policy. Agreement to defraud revenue authorities. The agreement the object of which is to defraud the revenue authorities are void on the ground of being opposed to public policy. For example an employee gets an expenses allowance grossly in excess of the expenses actually incurred by him this is clearly a case of fraud on revenue authorities. 32. "An agreement in restraint of fared is void". Examine this statement mentioning exceptions, if any? Freedom of trade and commerce is a fundamental right protected by the constitution of India. Public policy requires that every person should be at liberty to work for himself and should not be at liberty to deprive himself or the state the benefit of his labour or skill by any contract that he may enter into. Section 27 of the Indian contract Act provides that "every agreement by which any one is restrained from exercising a lawful profession trade or business of any kind is to that extent void." In Madhub Chander Vs. Raj Coomar, A and B
were rival shopkeepers in a locality in Calcutta. A agreed to pay a sum of money to B if the would close his business in that locality. A closed his shop. On A's refusal to pay the amount the court held that the agreement was void under Sec.27 of the Act. Indian law is different from the English law in the sense that under English law only absolute restraint of trade are void while the Indian law has made no India law has made no distinction between the general and partial restraint. Thus in India all agreement in restraint of trade whether general or partial qualified or unqualified are void. It does not matter if the restraint is limited in point of time or place. In Shaikh Kalu Vs. Ramsaran Bhagal out of 30 makers of combs in the city of patna, 29 agreed with R to supply him with combs and not to sell combs to any one else leaving R free to reject the goods if the found there was no market for them in patna, Calcutta or elsewhere the agreement was held void. Exceptions Sale of Goodwill. On the sale of the goodwill of a business, the seller of goodwill may agree not to carry on similar business within specified local limits so long as the buyer or any person deriving title to the good will from him carries on the similar business provided such restrictions appear to the court reasonable. The object of this exception is to protect the interest of the buyer of goodwill. For example a sells has business along with goodwill to B. now A can be restrained from carrying on similar business in that area for a reasonable time. If such restrictions are not made valid then A will open another shop the next day in that locality and solict B's customers.
Therefore some restriction on the liberty of the seller becomes necessary. It should be noted carefully that the seller can be restrained from carrying on a similar business i.e. he cannot be restrained from carrying on any other business. The restrictions imposed or the seller must appear to be reasonable to the court. Restrictions Under Partner ship Act. Under Sec. 11 (2) of the partnership Act partners may enter into an agreement that a partner will not carry on similar business while he is a partner. Sec.36 enables them to put restrictions on the outgoing partner. It provides that an outgoing or retiring partner may agree with his other partners that he will not carry on any business similar to that of the firm within a specified period or within a specified local limits. The agreement shall be valid if the restrictions are reasonable. Upon or in anticipation of dissolution of a partnership firm some or all the partners may agree not to carry on a business similar to that of the firm within a specified period or within specified local limits [Sec. 54 of partnership Act.] provided the restrictions imposed are reasonable. Sec. 55(3) of the partnership Act provides that a partner may upon the sale of goodwill of the firm make an agreement with the buyer that such partner will not carry on any business similar to that of the firm within a specified period or within specified local limits. Such agreement
shall be valid only if the restrictions imposed are reasonable. Trade combinations. An agreement among members of trade associations or chambers of commerce ect to regulate their business is not void under Sec. 27 .combinations of this kind are desirable in the interest of trade self and also for the promotion of public interest. Thus combinations of ice manufacturer's grain merchants sugar producers etc to regulate the prices are perfectly valid. But if the object is not to regulate business but an attempt is made in disguise to create monopoly such agreement shall be void. Service Agreements. Agreement of service often contain a clause by which the employee is prohibited from working any where else during the term of the agreement such agreement are valid. For example a agrees to serve as a surgeon for a period. A cannot serve any other person during this period of three years and can be restrained from doing so. But after the expiry of three years he may serve anywhere or start his own practice. In Lumley Vs. Wagner where Miss A agreed to sing at the theatre of B for 3 moths and not to sing elsewhere the court held that A can be restrained from singing elsewhere during the period of 3 months. But an agreement which restrain an employee from accepting similar jobs after the termination of employment will not be valid. In Brahamputra Tea Co. Vs. E. Scarth, it was held that an agreement restraining an employee from accepting similar assignments within 40 miles from Assam for a period of five years after the termination of his service was void even though the restrictions only extended to a distance of 40 miles from the previous place
of work. Similarly in Oakes & Co agreed not to employ himself in any similar concern within a distance of 800 miles from madras after leaving the company's service. The restraint was held void. 33. Under what circumstances the consideration and object of an agreement are said to be unlawful? Explain with examples. For a valid contract it is essential that the object or consideration of the agreement must be lawful. According to Sec 23 an agreement of which the object or consideration is unlawful is void. The word 'object' and 'consideration' have different meanings the word 'object' means the purpose or design. In some cases the consideration may be lawful but the object of the agreement may be unlawful in such cases the agreement shall be void. For example a person in insolvent circumstances transfers some property to one of his creditor here though the consideration is lawful but the object of the transfer is to defraud other creditors, therefore the agreement is unlawful and void. Both the object and consideration of an agreement must be lawful. Section 23 of Indian contract Act lays down the following cases where the object or consideration of an agreement is considered unlawful: If it is forbidden by law. Such acts which are punishable by the criminal law of the country or any special legislation in India are considered to be forbidden by law. An agreement by A to transfer his opium licence to another is unlawful. A distinction however should be made between the
agreement which are illegal and others for which a penalty is prescribed. The holder of a licence for collecting tolls subleased it to another without the permission of the collector. For this breach a fine of Rs.200 can be imposed. Here the sub-lease agreement shall remain valid. Examples: A promises B to drop a prosecution which he has instituted against B for robbery and B promises to restore the value of the things taken. The agreement is void as its object is unlawful. A promises to obtain for B an employment in the public service and B promises to pay 1,000 rupees to A. the agreement is void as the consideration for it is unlawful. If it of such a nature that if permitted it would defeat the provisions of any law. If the object or consideration of an agreement is not forbidden by law but is such that if permitted it would defeat the provisions of some law then also the agreement is void. For example, A's estate is sold for arrears of revenue under the provisions of an Act of the legislature by which the defaulter is prohibited from buying the estate B upon an understanding with A becomes the purchaser and agrees to convey the estate to 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 provisions of the law. An agreement to give an annual allowance to the parents of an adopted. Hindu boy in consideration of his agreeing to give away his child is void as being opposed to the provisions of Hindu law.
If it fraudulent. Agreements which are entered into to promote fraud are void. For example A, B and C enter into an agreement for the division among them of gains acquired or to be acquired by them by fraud. The agreement is void as its object is unlawful. If it involves or implies injury to the person or property of another. An agreement to cause some injury to the person or property of another is void. Thus an agreement to pull down another house is unlawful. Similarly, A agrees to pay Rs. 100 to B if B beats up C. this agreement is void. If the court regards it as immoral. Agreement which offend against the principle of morality are void. What is moral is not left to the discretion of a party, but is to be decided by the court. Morality here means sexual morality. For example A agrees to let her daughter for hire to B for concubine. The agreement is void because it is immoral. Similarly if a person lets out his house to a prostitute to enable her to carry on her vocation there cannot recover the rent because he is encouraging sexual immorality. If the court regards it as being opposed to public policies. The agreement shall be unlawful if the court regards it as being opposed to public policy. Any agreement which tends to promote corruption or injustice or is against the interests of the public is considered to be opposed to public policy. An agreement to trade with an alien enemy an agreement in restraint of legal proceedings an agreement to secure a public office for money, agreement in restraint of marriage are some of the examples of agreements which are opposed to public policy.
34. Define a wagering agreement. Is an insurance contract a wagering one? A wager is an agreement to pay money or money's worth on the happening or ascertainment of some uncertain event in which the parties have no interest. There is an equal chance of winning or losing the wager. For example A agrees to pay Rs.500 to A, if it does not rain. Both A and B may win or lose depending upon the happening of an uncertain event i.e. falling of rain. A wager is a game of chance in which the chance of either winning or losing is wholly dependant on an uncertain event. The chance of gain or the risk of loss should not be one sided. The essence of a wagering agreement is that neither of the parties should have any interest in the contract other than the sum which he will win or lose. According to Sec 30 of the Indian contract Act agreement by may 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 the result of any game or other uncertain event on which any wager is made. Example if A and B enter into a wagering agreement and each deposits Rs.200 with P instructing him to hand over the total amount to the winner no suit can be brought by the winner for recovering the bet money from P,the stake holder. If P pays the money to the winner the loser cannot fill a suit for recovering his money either against the winner or against P, even if P, the stake holder has received definite instructions from the loser not to pay the money to the winner. But if the money has not money from the stake holder. But in
maharahtra and Gujarat where wagering agreements are declared illegal on action can be taken against anyone. Essential features of a wager There must be a promise to pay money or money's worth. The promise must be conditional dependant on the determination of an uncertain event. The event must be uncertain neither party should have any control over the event. Each party must stand to win or lose. Neither party should have any interest in the event except the amount or stake he will win or lose. Commercial transactions and wagers. An agreement for the actual sale and purchase of goods is not a wagering agreement. But sometimes it becomes difficult to determine whether a particular transaction is by way of wager or a genuine business transaction. For example A agrees to sell ten bags of wheat to B at Rs.500 per bag the bags are to be delivered after two moths. Here it may be difficult to judge whether it is a perfectly genuine business transaction with the intention of giving and taking delivery of goods or it is simply a speculative or wagering transaction with the intention of settling it by paying difference in prices. An agreement becomes wagering only when there is a common intention to wager. The intention to wager must be on the part of both the contracting parties. If only one of the parties to the agreement had the intention to settle the transaction by paying the difference and the other party was not aware of the fact the agreement shall be enforceable.
Lotteries. A lottery is a game of chance therefore an agreement to buy a lottery ticket is a wagering agreement. Lotteries are prohibited under Sec. 294-A of the Indian penal code and are illegal. If the lottery is authorized by government it does not cease to be a wagering transaction the only effect of such sanction is that the persons conducting the lottery will not be prosecuted under the penal law. Exceptions. The following transactions are however not wagers: Horse race. An agreement to subscribe or contribute for or towards a plate prize or a sum of money of the value of Rs. 500 or above to be awarded to the winner of a horse race is valid. Crossword competitions. In crossword competitions and games of skill skill and intelligence plays a substantial part in the result and prizes are given according to the merits of the solution then it is not a wagering transaction. But even in such cases the amount of prize must not exceed Rs. 1,000 otherwise they shall become wager under prize competition Act, 1955. If in crossword competition the winning of the prize depends upon the tallying of competitor's entry with the solution kept with the editor of the magazine then it is a wagering transaction. Share market transactions. In the share market if the intention is to take and give delivery of shares it is a valid transaction. Insurance contracts. Insurance contracts are not wagering even though the money is payable on the happening of a future uncertain event. Effects of wagering agreements. All agreements by way of wager are void in India but they are declared illegal also in
the states of Maharashtra and Gujarat. According to Sec 30 the winner cannot file a suit against the loser for recovering the amount won. In India (except the state of Maharashtra and Gujarat) wagering agreements are declared void, therefore collateral transactions are not effected and they remain valid but in Maharashtra & Gujarat they are declared illegal so collateral transactions are also affected and they also become void. Insurance contracts and wagering agreements. Insurance Contracts are not wagering even though the insurer is to pay the money on the happening of an uncertain event. Following are the points of difference between the two: In insurance contract the assured has an insurable interest in the subject matter while in wagering agreements the parties have no interest in the agreement except the stake. Insurance contracts are social security measures which are beneficial to the public while wagering transactions do not promote public welfare in any way rather they encourage gambling which is injurious to the interest of public. A contract of insurance except life insurance is a contract of indemnity i.e. in the event of loss only actual loss is to be made god whereas in wagering agreement the amount to be paid decided before hand. A contract of insurance is based on scientific actuarial calculation of risks while wagering transactions are a pure gamble or game of chance.
Define the contingent contract. State the rule regarding contingent contracts? A contract may be absolute or contingent. A contract is said to be absolute when the promisor undertakes to perform the contract in all events. A contingent contract, on the other hand "is a contract to do or not to do something if some event, collateral to such contract does not happen" (sec.3 1). it is a contract in which the performance becomes due only upon the happening of some event which may or may not happen for example, A contracts to pay B Rs. 10,000 if B's house is burnt. This is a contingent contract. The particular event on the happening of which the performance of the contract will fall due must be uncertain even collateral to such contract. The collateral event means that it must be independent of the contract and must not form part of the consideration on a particular event essential to the transaction which is to take place in future and is uncertain. A contingent contract may be dependent on some act of a party to the contract for of a third party. But if the performance of a promise is dependent upon the discretion of the promisor the contract will be invalid. Thus a contract to pay for services what ever the promisor thinks right or reasonable shall be invalid because the performance of the promise is dependent upon the will or pleasure of the promisor. But a promise to pay that amount which shall be fixed up by a third party shall be valid and binding. Contracts of insurance indemnity and guarantee are the common instances of contingent contracts. Essentials of contingent contract
There must be contract to do or not to do something. The performance of such contract must depend upon the happening or non- happening of an uncertain future event. The event must be collateral or incidental to the contract. Rules regarding the performance of contingent contracts 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 contracts becomes void (Sec32) Examples: (a) A makes a contract with B to buy B's horse if A survives C. this contract cannot be enforced by law unless and until C dies in A's lifetime.(b) A contract to pay B a sum of money when B marries C, C dies without being married to B. the contract becomes void. Contingent contracts to do 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 (Sec.3). For example A agrees to pay B sum of money if a certain ship does not return. The ship is sunk. The contract can be enforced when the ship sinks, because the return of the ship is no longer possible. If a contract is contingent upon how a person will act at an unspecified time, the event shall be considered to becomes impossible when such person does anything which renders it impossible that he should so act within any definite time or otherwise than under further contingencies (sec. 34). Example: 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.
If a contract is made contingent on the happening of a specified uncertain event within a fixed time it becomes void if at the expiration of the time so fixed the specified event does not happen. The contract becomes void when the said event becomes impossible even within the said fixed time. (Sec. 35 Para I). Example: A promises to pay B a sum of money 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. 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 not happen (Sec.35 Para 11). Example: A promises to pay B a sum of money if a certain ship does not return within the year. The contract may be enforced if the ship does not return within the year or is burnt within the year. Contingent agreement 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 (Sec.36) Example: A agrees to pay B Rs 1,000 if two straight lines should enclose a space. The agreement is void. This section is based on the principle that persons cannot contract to do impossible things or make their contracts depend upon the happening of an impossible event.
Distinguish between a contingent contract and a wagering agreement? The main points of distinction between the two are as under. In contingent contracts it is not necessary that there should be mutual promises but in case of wagering agreements there must be mutual promises. In a contingent contract the parties are really interested in the happening or non-happening of the event but in a wager the parties are not interested in the event but are interested in only the bet money. In a contingents contract the future uncertain event is only collateral whereas in a wagering agreement the future uncertain event is the sole determining factor of the agreement. In the contingent contracts the parties intend to perform their obligations but in a wager neither party intends to perform the contract. All contingent contracts are valid unless they are declared bad by law but a wagering agreement is absolutely void. All contingent contracts are not by way of wager but all wagering agreement are contingent.
What do you understand by performance of a contract? State who can demand performance and by whom contracts must be performed? When a contract is made it creates an obligation which must be fulfilled by both the parties. Performance of a contract means the carrying out of the legal obligations or the fulfillment of the terms of the contract by the concerned parties. Section 37 of the Act provides that "the parties to a contract must either perform, or offer to perform their respective promises unless such performance is dispenses with or excused under the provisions of this Act or of any other law' Thus, performance may be either (a) actual or (b) attempted. By actual performance is meant when a party has done what he undertook to do there is nothing left for him to do. When a contract is duly performed by both the parties the contract comes to an end. On the other hand attempted performance or tender means when one of the parties is ready and willing to perform his promise but the other party refuses to accept the performance. In such cases the liability of the party (who was willing to perform) comes to an end he acquires a right of action against the other party. Who can demand performance? The performance of a contract can be demanded only by the promise or his agent. If the contract is for the benefit of a third party then except under certain circumstances the performance cannot be demanded by such third party. In cases of death of the promise his legal representatives can demand the performance.
Example: A promises to deliver goods to B on a certain day on payment of Rs. 1, 000. The performance can be demanded by B or his legal representatives. Another person X cannot demand performance from A because he is a stranger to the contract. By whom contracts must be performed? By the promisor himself. Sec.40 of the Act provides that, "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 contracts where personal skill is involved the contract must be performed by the promisor himself i.e. he cannot get it performed by his agent or legal representatives. Example: A promises to paint a picture for B. the nature of the promise is such that it must be performed by A alone. In the event of A; s death his legal representatives shall not be bound by A; s promise. By the promisor or his agent. In contracts where personal skill is not involved the promise can be performed by the promisor or his agent. Example: A promises to deliver certain goods to B on a certain day. The contract can be performed either by A or his agent. By the legal representatives. Unless a contrary intention appears from the contract promises bind the representative of the promisors in case of the death of such promisors. In
the above example if A dies, before the said day, A's legal representatives will be liable to deliver the goods to B. By third person. If the promise accepts the performance of the contract from a third party he cannot afterwards enforce it against the promisor. Thus where a creditor has accepted party payment from a third person in full satisfaction of his claim he cannot later on sue the debtor for the balance [Lala Kapur Chand V.s Azamjah]. In case of joint promisors. When a two or more persons have made a joint promise then unless a contrary intention appears from the contract all such person during their lifetime, must jointly fulfill the promise. If any of the joint provisors die, his legal representatives will be jointly liable for the performance along with the surviving promisors. If the entire joint promisors die, then the legal representatives of all such promisors will be joint responsible to perform the promise. In the absence of any contract to the contrary the liability of joint promisors is "joint and several". It means that the promise may compel any one or more of such joint promisors to perform the whole of such promise. For example, A, B and C jointly promise to pay D, Rs.3, 000. D may compel either A or B or C to pay him Rs.3, 000. Where one of the several joint promises has performed the whole of such promise, he is entitled to claim equal contribution from other joint promisors. In the above example, if A pays Rs. 3,000 to D then A is entitled to receive Rs. 1,000 from B and Rs. 1,000 form C. If any of the joint promisor makes default in such contribution the remaining joint promisors must share the
loss equally. In the above example if C is unable to pay anything then A is entitled to receive Rs. 1,500 from B. If the promise releases anyone of the joint promisors, this does not mean the discharge of other joint promisors. However, the liability of the joint promisor so released continues towards the other joint promisors. Discuss the law relating to assignment of contracts? Generally the obligations and benefits of a contract pass to the legal representatives of the contracting parties by and operation of law. But parties can also transfer contractual rights and obligations to a third party by assignment. Assignment of contract means transfer of rights and obligations under a contract to a third party with or without the concurrence of the other party to the contract. An assignment to be complete and effective must be effected by an instrument in writing. Actually there are no specific provisions in the contract Act dealing with assignment it is a term used in the transfer of property act.
The law relating to assignment of contracts may be discussed as under: Contractual obligations involving personal skill taste or ability cannot be assigned. For example, a contract to paint a picture a contract to marry or a contract to sing cannot be assigned. The liabilities or obligations under a contract cannot be assigned. It means that the promisor cannot compel the promise to accept some other person as the promisor in his place. For example, A owes B Rs.500 and A is to recover Rs. 5000 from P. A cannot compel B to recover the money from P. but in this connection it should be remembered that the promisor may transfer his liability to a this person with the above A can transfer his liability to P with the consent of B and P. this is known as "novation' If the contract does not expressly or impliedly provides that the contract shall be performed by the promisor only then the contract can be performed by some competent person but even then the promisor remains liable to the promise for proper performance. The rights and benefits under a contract are assignable provided the contract is not of a personal nature, but even then the assignee takes the assignment subject to all equities between the original parties. This means that when assignee takes some action against debtor then the debtor can raise against him all such pleas which he could have raised against the assignor. An actionable claim can always be assigned but the assignment in order to be complete and effective must be made by an instrument in writing. It is also necessary that the notice of assignment should be given to the debtor. In the event of death or insolvency of a party to the contract the assignment takes place by operation of law. Upon the death of a party to the contract his rights and obligations
devolve upon his heirs or legal representatives (except in the case of contracts requiring personal skill or ability). In case of insolvency all rights and obligations pass on the official receiver or assignee as the case may be. What are reciprocal promises? Explain in brief the provisions of the India contract Act relating to the performance of reciprocal promises? 'Promises which form the consideration or part of the consideration for each other are called reciprocal promises' Where one party gives a promise in consideration of other party's promise, both the promises are called reciprocal promises. In such cases there is an obligation on each party to perform his own incomes and to accept performance of the other's promises. Rules regarding performance of reciprocal promises are given as under:
Mutual and concurrent. Where two promises are to be simultaneously performed they are known as mutual and concurrent. Section 51 provides that when reciprocal promises are to be performed simultaneously, a promisor need not perform his party unless the promise is also ready and willing to perform his party. Example, A and B contract that A shall deliver goods to B to be paid for by B on delivery A need not deliver the goods unless B is ready and willing to pay for the goods on delivery. B need not pay for the goods unless A is ready and willing to deliver on payment. Order in which reciprocal promises are to be performed. Section.52 of the contract Act provides that where the order in which reciprocal promises are to be performed is expressly fixed by the contract they shall be performed in that order shall be performed in their natural order. Example, A and B contract that A shall build a house for B at a fixed price. A's promises to build the house must be performed before B's promise to pay for it. Effect6 of one party preventing the other from performing his promise. Where a contract contains reciprocal promises and one party to the contract prevents the other performing his promise the contract becomes voidable at the option of the party so prevented and he is entitled to compensation from the other party for the loss. Example, A and B contract that B shall execute certain work for A for Rs.l, 000. A is ready and willing to execute the work accordingly but A prevents him from doing so. The contract is voidable at the option of B; and if he elects to rescind it he is entitle to recover from A compensation for any loss which he has incurred by its non-performance. Mutual and dependent promises. Where the performance of the promise by one party depends on the prior performance of the promise by the other party the promises are mutual and dependent. Where in case of
reciprocal promises the nature of the promise is such that one of them cannot be performed of its performance cannot be claimed till the other is performed and the promisor of the last mentioned promise fails to perform his promise such promisor cannot claim performance from the other party. He must also make compensation to the other party for his own non- performance of the contract. Example. A contract with B to execute certain builder's work for a fixed price, B supplying the scaffolding and timber necessary for the work. B refuses to furnish any scaffolding or timber, and the work cannot be executed. A need not execute the work and B is bound to make compensation to A for any loss caused to him by the non- performance of the contract. Reciprocal promises one legal and the other illegal. Where a contract consists of two parts one part legal and the other illegal and the legal party is separable from the illegal lone, then the legal party can be enforced. However if the legal party cannot be separated from the illegal party then the whole contract is void. Alternative promise, one branch being illegal. In the case of an alternative promise one branch of which is legal and the other illegal the legal branch alone can be enforced. Example. A and B agree that A shall pay B rupees one thousand for which B shall afterwards deliver to A either rice or smuggled opium. This is a valid contract to deliver rice and a void agreement as to the opium. Discuss the law relating to time and place of performance of the contract?
It is for the parties to a contract to decide the time and place for the performance of the agreement. As per contract Act the rules regarding the time and place of performance are as given below: Where time and place of performance are prescribed by the promise. If in the contract itself the time and place of performance are prescribed by the promise then the contract must be performed at the specified place and at the prescribed time. Where no application is to be made by the promise and no time is specified. Where by the contract a promisor is to perform his promise without application by the promise and no time for performance is specified the contract must be performed within a reasonable time. The question, 'what is a reasonable time" is in each particular case a question of fact. Failure to perform the contract within a reasonable time entitles the other party to put an end to the contract. The promise should be performed on a working day and within usual hours of business. Example- A promises to deliver goods at B's warehouse on the first January. On that day A brings the goods at B's warehouse but after the usual hours for closing it and they are not received. Here A has not performed his promise. Where no application is to made by the promise but time of performance is specified. When a promise is to be performed on a certain day, and the promisor has undertaken to perform it without application by the promise the promisor may perform his promise on that particular day during the usual hours of business and at the place at which the promise ought to be performed. Where an application for performance is to be made by the promise. In the above cases the promisor undertakes to perform the promise without any application by the
promise. But when a promise is to be performed on a certain day but the promisor has not undertaken to perform it without application by the promise the promise is bound to apply for performance as a proper place and within the usual hours. What is a proper time and place is a question of fact in each case. For example when a depositor wants his money it his duty to visit the bank during working hours and make an application for the money. It is not the duty of the bank to make the payment at depositor's place. Place for performance of promise where no application to be made and no place fixed for performance. When a promise is to be performed without application by the promise and no place is fixed for the performance of it, it is the duty of the promisor to apply to the promise to fix a reasonable place for the performance of the promise and to perform it at such place. Example: A undertakes to deliver a thousand quintals of jute to E on a fixed day. A must apply to B to appoint a reasonable place for the purpose of receiving it and must deliver it to him at such place. Where the place for payment of a debt is not fixed by the contract the debtor must then apply to the creditor for payment at a proper place. It is the debtor in the absence of any special stipulation e.g., a promise to pay on demand to seek out the creditor. Thus the debtor has no excuse for non-payment. Performance in manner or at time prescribed or sanctioned by promise. The performance of any promise may be made in any manner, or at any time which the promisee prescribes or sanctions. The promisor is discharged from his liability if he performs the promise in the manner and time prescribed by the promise. Example — (1) B owes A rupees 2,000. A desires B to pay the amount to A's account with C, a banker. B who also has and account with C bank orders the amount to be transferred to A's credit and this is done by the banker.
Afterwards and before A knows of the transfer the bank C fails. There has been good payment by B. (2) A owes B Rs. 2,000. B accepts some of A's goods in reduction of the debt. The delivery of the goods operates as a party payment What are the effects of failure to perform the contract within the stipulated time? When a party promises to perform his obligation by a specified time it gives the other party a right to expect that it shall be performed by that time. The effects of failure to perform may be discussed under the following headings: When time is of the essence of the contract. The expression 'time is of the essence of the contract" means that the time agreed for the performance of the contract must be strictly observed. Where time is of the essence of a contract and a party to a contract promises to do a certain thing at or before a specified time fails to do so the contract becomes voidable at the option of the other party. Example: A agreed to sell and deliver 10 bales of jute to B on 10th August 1986. But he failed to deliver the goods by that
time. The contract is voidable at the option of B. if the other party elects to rescind the contract, then besides avoiding the contract he can also sue for breach. When time is not of the essence of the contract. Where time is not of the essence of the contract the contract cannot be avoided on the ground of failure to perform by a specified time. But the promise is entitled to compensation from the promisor for any loss caused to him by such failure. Even where time is not of the essence of the contract it must be performed within a reasonable time otherwise the promise can repudiate it. When delayed performance is accepted. Where the promise accepts performance of a promise at any time other than that agreed the promise cannot compensation for any loss caused by the delay unless at time of accepting the delayed performance he gives notice to the promisor of his intention to do so. Time is the essence of the contract." Comment? When parties to the contract have prescribed the time for the performance of the contract, the contract should be performance at the prescribed time. The question arises that if one of the party fails to perform his promise in time then can the other party rescind the contract? This can be answered by nuding out whether in such a case time was or was not the essence of the contract. The expression 'time is the essence of the contract' means that the time agreed for the performance of a contract must be strictly observed. Where time is of essence of a contract and a party fails to perform his promise in time the contract becomes voidable at the option of the other party.
A mere promise to do something at or before a certain time may make time the essence of the contract. Whether time was the essence of the contract or not can be gathered only from the terms of the contract. Time is always considered to be the essence of the contract in the following cases: Where the parties have expressly agreed to treat it as of essence of the contract; Where delay operates as an injury; Where the nature and necessity of the contract requires it to be performed within the specified time. Generally speaking in mercantile transactions unless a different intention appears from the terms of the contract the time fixed for the delivery of the goods is considered to be the essence of the contract but not the time for the payment of the price. This is so because the prices of goods keep on fluctuating so rapidly that if punctuality is not observed it may result in heavy losses. Moreover in business after entering into a contract the businessman on the basis of that contract may make other contracts with other parties. So if the first contract is not performed the whole schedule of the businessman gets upset. On the other hand in case of those goods where the prices remain more or less stable e.g. land or immovable property the time is not considered as the essence of the contract. In those contracts where time is not of essence the contract cannot be rescinded if the other party fails to perform in times but the injured party has the right to claim damages for delayed performance.
Explain the rules relating to appropriation of payment made by a debtor to his creditor? Appropriation of payment means application of payment. When a debtor owes several debts to the same creditor and makes a payment to the creditor the question may arise against which debt the payment is to be applied. In England, the law on the subject was laid down in Clayton's case. The rule provides that if a man owes another two debts upon distinct causes, and pays him a sum of money the payer has a right to say to which account the money so paid is to be appropriated. In India, the rules regarding appropriation of payments are given in section 59 to 61 of the contract Act they are as under: Appropriation by he debtor. Section 59 provides that where a debtor owing several distinct debts to one person makes a payment to him either with express intimation or under circumstances implying that the payment is be applies to the discharge of some particular debt the payment if accepted must be applied accordingly. Example: (a) A owes to B among other debts the sum of 567 rupees. B writes to A and demands payment of this sum. A send to B Rs. 567. This payment is to be applied to the debt for which a demand was made. A owes B among other debts Rs.l, 000 upon a promissory note which falls due on 1 st June. He owes B no other debts of that amount. On the 1 st June A pays to B Rs. 1,000. The
payment is to be applied to the discharge of the promissory note. From the above it is clear that if the creditor does not want to apply the payment as per the express or implied direction of the debtor, He must refuse to accept the payment. In no case the creditor can alter the appropriation after accepting the payment. In is necessary that debtor's instructions must synchronise with the payment. Appropriation by the creditor. According to sec. 60 if the debtor fails to inform the creditor at the time of payment as to the debt towards the payment of which the money is to be applied or there are no circumstances indicating to which debt the payment is to be applied then the creditor has got the option to apply the payment to any debt lawfully due from the debtor including even the time barred debts. The creditor can exercise his option of appropriation until the very last moment. But when once an appropriation is made by the creditor and the debtor is informed, the creditor cannot change his option later on. Where neither party appropriates. (sec. 16) where neither the debtor nor the creditor makes any appropriation the payment shall be applied in discharge of the debts in order of time whether or not they are time-barred. If the debts are of equal standing, the payment shall be applied in discharge of each proportionately. Where money are received by the creditor without any definite appropriation on either side the money so received must first be applied in payment of interest and then in payment of principal.
Write a note on discharge of a contract by tender? Tender is not actual performance but is only an offer to perform the obligation under the contract. Where the promisor has made an offer to perform his promise and the other party refuses to accept the performance the promisor is not responsible for non-performance nor does he thereby loses his rights under the contract. An offer to perform or an attempt to perform is also known as "tender". If a debtor tenders money the due under a debt and the creditor refuses to accept the valid tender the liability of the debtor to pay the amount continues but his liability for interest on the amount ceases. Essentials of a valid tender Every offer of performance or tender to be valid must fulfill the following conditions: It must be unconditional. In case of conditional tender, the other party is not bound to accept it. It must be made at a proper time and place. It the contract provides for the time and place of performance then it must be performed accordingly. In case no place is agreed upon then generally the place of business of the promise shall be the proper place to make tender. Where no time is fixed then it is valid to make the tender at any reasonable time. What is the proper time and place is a question of fact depending upon the circumstances of the case. A tender before the due date is not valid. It must be of the whole obligation. A piecemeal tender of goods or to pay the amount due in instilments is not a valid tender. For example, A agreed to deliver to B 100 bags of rice on a certain day. If on the agreed day and place A offers to deliver 80 bags only. This is not a valid offer and A is not discharged from his obligation.
It must be made to the proper person. Tender made to a stranger would be invalid. In case of tender relating to the delivery of goods the promise must be given a reasonable opportunity of inspection of goods so as to satisfy himself as to whether the thing offered is what was promised. A tender made at a late hour is not valid because the promise is not given any time to insect them. In case of payment of money tender must be of the exact amount due and it must be in the legal tender money and not in any other form such as foreign currency or cheques. A tender by cheques is not valid. The party making the tender must be ready and willing to fulfill the promise. If the tender is of cash payment actual cash must be available for payment. If it is found that he has no cash available for payment then a mere offer by post to pay the amount is not a valid tender. A tender made to one of the several joint promises has the same legal effect as a tender to all of them. Tender of money by cheques tender before the due date tender after business hours or at such odd hours which may not permit inspection of goods are not valid tenders. What are the various ways in which a contract may be discharged? A contract is said to be discharged when the obligations arising there from come to an end. A contract may be discharged in ay one of the following ways. By performance. By agreement or consent.
By lapse of time. By operation of law. By supervening impossibility. By breach of contract. Discharge by performance. Performance of a contract is the principal and most usual mode of discharge of a contract. When the parties to the contract fulfill their obligations under a contract the contract is said to have been performed and the contract comes to an end. If only party performs his promise, he alone is discharged and he gets the right of action against the party who is guilty of breach. The performance may be either actual or an attempt to per firm. Where a party has made a valid tender or offer to perform, he is discharged from his obligation. Discharge by agreement or consent. Just as a contract arises out of an agreement similarly the contract can be terminated by mutual agreement. The parties may agree to terminate the contract by any one of the following ways: Novation. It means substituting a new contract for the existing one either between the same parties or between different parties; the consideration mutually being the discharge of the existing one all the parties to the existing contract must agree to it. The new contract must be valid and enforceable. If there is any legal flaw, on account of which it becomes unenforceable, then the original contract continues. Example: A owes money to B under contract and B is indebted to C. by mutual agreement it was decided that thenceforth C will treat A as his debtor. This is Novation involving change of parties.
Alteration. It manse change in one or more of the terms of a contract with the consent of all the parties. The alteration must be a material one. If material alterations are made in the contract with the consent of the parties the original contract will come to an end and in it place a new contract in altered form comes into existence. Alteration is different from novation in the sense that in novation the parries may change whereas in alteration the parties remain the same. Rescission. If by mutual consent the parties agree to rescind the contract, the contract is discharged. A contract can be rescinded before the performance become due. Non performance of a contract by both the parties for a long period without complaint amount to implied rescission. Remission. It means the acceptance of a lesser sum than what was contracted for or a lesser fulfillment of the promise made. For example, A owes Rs.5, 000 to B. a pays Rs. 2,000 to B and B accepts it in full satisfaction of the debt. Here the whole debt of Rs.5,000 is discharged. Waiver. abandonment or intentional It means relinquishment of a right under the contract. When a party to a contract waives his rights under it the other party is released from his obligation. For example, A promises to paint a picture for B.B afterwards forbids him to do so. A is no longer to perform the promise. Discharge by lapse of time. The limitation Act lays down that a contract should be performed within a specified per. For example, A promises to paint a picture for B.B afterwards forbids him to do so. A is no longer to perform the promise.
Discharge by lapse of time. The limitation Act lays down that a contract should be performed within a specified period otherwise the contract shall be terminated. For example if the creditor fails to take any action against the debtor for the recovery of loan for a period of three years the debt becomes times barred and the debtor is discharged of his obligation to pay the debt. Discharge by operation of law. A contract may be discharged by operation of law in the following cases: Death. Contracts where the personal skill of the promisor is important come to an end with the death of the promisor. In other contracts the rights and liabilities of the deceased party passes on to his legal representatives. Insolvency. The insolvency of the promisor discharges him from all obligations. Merger. Where an inferior rights accruing to a party is a contract merges into the superior rights accruing to the same party the earlier contract is discharged. Unauthorized alteration. If a party to a contract makes any material alteration in the contract without the consent of the other party the party can avoid the contract. Immaterial alterations such as correcting the clerical errors or the spelling of a name has no effect on the validity of the contract.
Discharge by supervening impossibility. Impossibility of performance results in the discharge of the contract. If the parties knowingly make a contract to do an impossible act the contract is void ab-initio. If the performance of the contract was possible at the time of making it but because of some supervening even over which the parties have no control the performance becomes physically or legally impossible the contract becomes void and the parties are discharged from their obligation to perform the contract. Discharge by breach of contract. When any party to a contract fails to perform his promise a breach of contract takes place and the other party need not perform his party of the contract. The breach may be either actual or anticipatory. The aggrieved party can treat the contract as discharged and sue the party at fault for damages for breach of contract. "Impossibility of performance is as a rule not an excuse for non performance of a contract"? The law relating to impossibility of performance is contained is Sec.56 of the Act. It provides that, "an agreement to do an act impossible in itself is void." Thus if the performance is impossible whether it is known or not known to both the parties the agreement is void. For example a agrees with B to discover treasure by magic. The agreement is void. If however the promisor alone knows of the impossibility of the performance at the time of the contract he shall have to
compensate the promise for any loss which such promise sustains through the non-performance of the promise. For example A contracts to marry B, being already married to C, and being for-biden by the law to which he is subject to practice polygamy. A must make compensation to B for the loss caused to her by the non-performance of his promise. Supervening impossibility Impossibility which arises subsequent to the formation of the contract is called supervening impossibility. The contract was capable of performance at the time of making it but subsequently because of some event (over which neither party has any control) the performance becomes impossible the contract becomes void and the parties are discharged from their obligations under the contract i.e. the contract need not be performed further. Sec. 56, Para Il provides, "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' This is also known as the doctrine of supervening impossibility. In order to apply this doctrine the following three conditions must be satisfied: The act should have becomes impossible. The impossibility should be by reason of some event which the promise could not prevent. The impossibility should not be self- induced by the promisor. The impossibility must supervene after the contract is made. It should not have existed before or at the time when the
contract was made. The events taking place must make the performance of the contract physically or legally impossible as originally contemplated by the parties. The performance of the contract may become subsequently impossible due any of the following reasons: Destruction of the subject- matter. If the subject- matter of a contract is destroyed after making the contract, without the fault of either party the contract is discharged. Example: (a) A music hall was agreed to be let out on certain dates but before those dates the hall was destroyed by fire. The contract was held to be void on the ground of impossibility of performance (Taylor Vs. Caldwell). (b) A agreed to sell his crop of potatoes to B. the crop was destroyed by floods. A is released from his obligation under the contract (Howell Vs. Coupland). But destruction of only a part of the subject matter does not releases the promisor from his obligation to perform in respect of the part which has not been destroyed. Death or personal incapacity. Where the performance of contract depends upon the personal skill or continued good health of a person the contract is discharged on the death or illness of the person concerned. For example an artist promised to sing at a theatre on a particular day. But because of serious illness the artist could not sing on the agreed day. It was held that the artist was not liable for damages. Change of law. A contract which was lawful at the time of making it but becomes unlawful by reason of subsequent change in law, the performance becomes impossible and the contract is diseharged. For example, a agreed to supply
100 bags of where to B at Kanpur. At that time trading in wheat was perfecty lawful but later on the government prohibited the private trading in food grains. Now as a result of this the performance has become impossible and A is discharged. Non- existence or non- occurrence of a particular state of things. Where a contract is made on the basis of continued existence or occurrence of a particular sate of things the contract comes to an end if the state of thing ceases to exist or changes. The leading case on his point is that of Krell Vs. Henry. In this case, A took a room on hire in a hotel for viewing the coronation procession of King Edward V Il. Because of king's illness the procession was cancelled. It was held that A was not liable to pay the rent of the room because the very purpose of hiring the room (i.e. to view the procession) was lost. Outbreak of war. A contract entered into before the outbreak of war remains suspended during the war. The contract may be revived after the end of war. Impossibility of performance not an excuse. The general rule is that if a person has promised to do some thing, he must fulfill his promise unless the performance becomes absolutely impossible. In the following cases a contract is not discharged on the ground of supervening impossibility: Difficulty of performance. A contract is not discharged simply because the performance has becomes more difficult, more expensive or less profitable. For example, a agreed to supply coal to B within certain dates. Due to
strike by transport workers, A could not receive coal in time from collieries. The coal was however available in the marker at high rates. A is not released from his obligation to supply coal. Commercial impossibility. Performance cannot be excused on the ground of commercial impossibility. If the performance has becomes less profitable than anticipated the contract does not become void. For example, A agreed to supply certain goods to B on a later date. As a result of longer profitable for A to supply the goods at the agreed rate. A cannot be excused for non performance. Impossibility due to the failure of a third person so whose work the promisor relied. If the contract cannot be performed because of the default of a third person on whose work the promisor relied the promisor is not discharged. For example, A agreed with B to supply cotton sarees to be made by C.C failed to supply gods to A. here A is not discharged and is liable to pay damages to B. Strikes, lock- outs, riots etc. a strike by workmen or a lock- out employer or riots etc. will not excuse the parties from performing the contract unless there is a specific mention to this effect in the contract. For example, A agreed to supply certain goods to B no a certain date. Because of strike by workers he could not manufacture the goods in time. The non- performance by B cannot be excused. Partial impossibility. If a contract is made for several objects, the failure of one of them does not discharge the contract. For example A agreed to let out a boat to B for viewing a naval review on the occasion of the coronation of King Edward V Ill and to sail around the fleet. Because of King's illness the naval review did not take place but the fleet was assembled. The boat could be used for one of the objects i.e. sailing round the fleet it was held that the
contract was not discharged on the ground of partial impossibility. Effect of impossibility When the performance of a contract becomes impossible or unlawful subsequent to its formation the contract becomes void. The impossibility releases the parties from further performance. If any money is paid before the avoidance of the contract on the ground of supervening impossibility it can be recovered, If however a contract has been performed partially and then the performance became impossible the promisor who has done something under the contract can recover fair compensation for the work done provided the promise has received some benefit there from. What are the rights of the promise in case of anticipator breach of contract? Anticipatory breach. When a party to a contract refuses to perform his part of the contract, before the due date of performance it is known as anticipatory or constructive breach of contract. This may happen in the following two ways: By express renunciation. Here a party to a contract expressly renounces his obligation under the contract before the due date of performance. For example, A agrees to deliver a particular horse to B on 1 st May. Before 1 st May (say on 20th April), A informs B that he shall not deliver the horse on 1 st May. This is an express repudiation of the contract.
Implied repudiation. Here a party by his own act disables himself from performing the contract i.e. he acts in such a manner that it becomes impossible for him to perform his promise. In the example given above if A sells that very horse to C on 20th April, he breaks the contract by his conduct. Rights of the promise. In case of anticipatory breach of contract, the promise has the following rights: He may treat the contract as repudiated and sue the other party for damages for the breach of contract without waiting until the due date of performance. In this case the promise will be absolved from further performance of his promise. He may decide to wait till the due date of performance and then hold the defaulting party liable for consequences of the breach. If the promise decides to wait till the due date of performance the contract remains alive for the benefit of both the parties and he rue the following risks: The party who has previously expressed his intention not to perform the contract may change his mind and perform the contract on the due date of performance. The promise will be bound to accept this performance. The party who has previously expressed his intention not to perform the contract may take the advantage of any supervening circumstances which would justify him in declining to complete it.
In the example given above if B (the promise) decides to wait till the date of performance (1 st May). He is incurring the risk that A May change his mind and perform the contract in 1 st may, now B will have to accept the performance or if during the period of 20th April and 1 st may, some event happens as a result of which the performance becomes impossible say the horse dies now B cannot take any action against A for non- performance. Thus it is in the interest of the aggrieved party to treat this breach as actual breach and treat the contract as repudiated. Anticipatory breach does not discharge the contract automatically. The aggrieved party has to decide as to when he wants to treat the contract discharged. Amount of damages If the promise decides to treat the contract terminated at the time when anticipatory breach takes place, the amount of damages will be the difference between the price prevailing on the date of breach and the contract price. If the promise decides to wait till the date of performance the amount of damages will be the difference between the price prevailing on the date of performance and the contract price. What remedies are available to an aggrieved party on the breach of a contract? Parties to a contract are bound to perform their respective promises. But when one of the parties terminates the contract by refusing to perform his promise he is said to have
committed a breach of contract. In case of breach of contract, the aggrieved party has the following remedies: Rescission of the contract. Suit for damages, Suit upon quantum meruit. Suit for specific performance of the contract. Suit for injunction. Rescission of the contract. When there is a breach of contract by one party the aggrieved party may rescind the contract and need not perform his part of the contract. The aggrieved party has to file a suit for rescission. When recission is granted the aggrieved party is absolved from all his obligations under the contract. For example, A promises to deliver a dining table to B on 5th May and B promises make the payment on delivery. If A does not deliver the table on the fixed date need not make the payment. Suit for damages. Damages mean compensation in money which is a awarded to the aggrieved party. The main object of awarding damages is not to punish the guilty but to compensate the injured party. Damages are intended to compensate the injured party so far as money can do. The object of awarding damages is to put the aggrieved party in the same financial position in which he would have had there been performance and not breach. Sec. 73 of the Indian contract Act dealing with the principles regarding the measure of damages is based on the decision given in Hadley Vs. baxendale. It provides that when a contract has been broken the party who suffers by such breach is entitled to receive:
such damages which naturally arose in the usual course of things from such breach; such damages which the parties knew, when they made the contract, to be likely to result from the breach; such compensation is not be given for any remote and indirect loss or damages sustained by reason of the breach. It is the duty of the aggrieved party to take the necessary steps to minimize the losses. Suit upon Quantum meruit. The phrase quantum meruit literally means "as mush as is earned" or "according to the quantity of work don." When a person has begun the work and before he could complete it if the impossible for the other party to complete the contract he can claim for the work done under the contract. The right to claim quantum meruit arises when the contract can be divided into parts so that payment for each completed part can be claimed. Suit for specific performance. In some cases where damages are not an adequate remedy or actual damages cannot be measured on a petition filed by the aggrieved party the court may direct the party who has broken the contract to actually perform his promise. Specific performance of the contract may be directed by the court in the following circumstances: Where damages are not an adequate relief. This happens in cases where the subject matter of the contract is unique or rare and no substitute is available in the market. Where it is not possible to ascertain the amount of damages specific performance may be ordered.
But the court shall not order specific performance where the aggrieved party can be compensated by damages or where the contract is of a personal nature or where it is not possible for courts to supervise its performance. Suit for Injunction. An injunction is on order of the court restraining a person form doing a particular act. In case where the contract is about to be broken by a party, the aggrieved party may obtain from court an injunction order, restraining him from doing something which he promised not to do. For example A agreed to sing at B's restaurant for one month and to sing for no one else during this one month. Subsequently A decided to sing at C's restaurant. On a suit filed by B, the court may issue an injunction order restraining A from singing elsewhere. Write a note on damages as a remedy for breach of a contract? The term damages is used here to mean monetary compensation as a substitute for the promised performance. Damages for the breach of a contract are intended to compensate the aggrieved party and not to punish the guilty of breach. The primary purpose of awarding damages is to put the aggrieved party in the same position in which he would have been had the contract been performed. Section 73 provides that when a contract has been broken the party who suffers by such breach is entitled to receive from the party who has broken the contract (1) compensation for any loss or damage caused to him thereby, (2) which naturally arose in the usual course of things from such breach
(3) or which the parties knew when they made the contract to be likely to result from the breach of it. Such compensation is not to be given for any remote or any indirect loss or damages sustained by reason of the breach. In case the injured party does not suffer any loss no damages will be awarded. In estimating the loss or damage arising from a breach of contract the means which existed to remedy the inconvenience caused by the non-performance of the contract must be taken into account. Sec. 73 is based on the judgement given in the case of Hadley Vs. bexendale. In this case the plaintiffs owners of a flour mill, sent a broken shaft to the defendants (common carriers) to be carried by them to the manufacturers and the only information given to them was that "the article to be carried was the brokens haft of the mill and that the plaintiffs were millers of that mill" by some neglect on the part of defendants the delivery of the shaft was delayed beyond a reasonable time and the mill remained closed. The plaintiffs filed a suit for damages for loss of profits caused by the undue closure of the mill. It was held that the defendants were not liable for loss of profits because the circumstances communicated to the defendants did not show reasonably that the delay would result in loss of profit for the plaintiffs might have had another shaft or the machinery of the mill might have been defective in other respects also. Different kinds of damages. Damages are of four types: (a) Ordinary or general damages, (b) Special damages, (c) Exemplary or vindictive and (d) Nominal damages.
Ordinary or general damage. When a contract has been broken the injured party has a right to receive such damages as naturally and directly arose from the breach. The amount of damages is measured by the difference between the contract price and the market price on the date of breach. Example: A agrees to sell 50 quintals of wheat to B at a certain price to be paid on delivery. A breaks his promise. B had to purchase wheat from the market and had to pay Rs.2 per quintal extra. B can claim Rs. 100 as damages. In contracts for sale and purchase, even if the price rise on falls afterwards the promise can still recover the damages on the basis of market price prevailing on the date of breach when price has rise by Rs. 2 but buys after a week when the price has risen by Rs. 5 per quintal he can claim only Rs.100 and not Rs.250. similarly if after a fortnight the price might fall by Rs.l per quintal B can still claim Rs.100. From sec. 73 it is clear that remote and indirect losses cannot be claimed. For example, A promised to pay a certain sum of money to B on a certain day. A does not pay the money on the said day. B in consequence of not receiving the money on that day is unable to pay his debts and is totally ruined. Here A is liable for ordinary damages only i.e. principal amount plus the interest upto the day of payment. Special damages. Special damages are this resulting drench of contract under some special circumstances and the existence of special circumstances must be known to the party who has broken the contract knowledge of special circumstances must be on the date of the create any special liability.
Example: A delivers some goods to a carries B for taking them to Kanpur where an exhibition is going to be held. A informs B about the special circumstances and directs B to deliver the goods before a certain day. Because of some delay the goods could not be delivered on that day but were actually delivered after the exhibition was over. Here A can claim special damages from B. Exemplary or vindictive damages. They are awarded with a view to punish the guilty or to set an example for others. Generally vindictive damages are not awarded for breach of contract such damages are given in two case- (a) breach of a promise to marry and (b) when a banker wrongfully refuse to honour the cheques of his customer. Exemplary damages can be claimed by a trader who suffers in his reputation. In such case the actual loss resulting from breach cannot be measured therefore very heavy damages can be claimed. Nominal damages. They are awarded in cases where there is a technical breach but the injured party has not suffered any loss. In order to establish the right of the injured party such damages are awarded. For example A has contracted to buy wheat from B on a certain day. B refuses to deliver on the said day. A purchases the wheat from the market at the same rate at which B had agreed to supply. Here actually A has not suffered any loss, so nominal amount such as one rupee may be awarded as damages. It is the duty of the person claiming damages to take all reasonable steps to mitigate or reduce the loss consequent upon a breach and cannot claim as damages any sum which is due to his own neglect. An injuired party cannot be allowed to accumulate damages by his own inaction.
Sometimes the parties agree about the damages for breach of contract in such a case the amount of damages shall be limited to the agreed amount. Distinguish between liquidated damages and penalty? Sometimes the parties themselves provide for damages to be awarded in the event of breach of contract. Where a contract provides for damages that would be payable by one party to the other in case of breach the question often arises whether the provision amounts to what is called "liquidated damages' or to a "penalty' Liquidated damages means a sum fixed up in advance which is a fair and genuine pre- estimate of the probable loss that is likely to result from the breach. Penalty on the other hand means an amount fixed up in advance which is disproportionate to the amount of loss suffered by the injured party. Penalty is provided to prevent a party from committing a breach. Indian law does not make any distinction between liquidated damages and penalty. Sec74 provides that the injured party can claim only reasonable compensation not exceeding the amount agreed to by the parties.
Examples: (a) A contracts with B to pay B Rs.l, 000 if he fails to pay B Rs.500 on a given day. A fails to pay B Rs. 500 on that day. B is entitled to recover from A such compensation not exceeding Rs. 1,000 as the court considers reasonable. (b) A gives B a bond for the repayment of Rs.1,000 with interest at 12 per cent, at the end of six months, with a stipulation that in case of default interest shall be payable at the rate of 75 per cent from the date of default. This is a stipulation by way of penalty and B, is only entitled to recover from A such compensation as the court considers reasonable. It is very difficult to draw a clear line of distinction between the two. The basic difference between the two is that liquidated damages is a fair and honest calculation of the probable loss whereas penalty is the amount provided which is far in excess of the probable. The question whether a particular stipulation is liquidated damages or penalty is a question of construction to be decided upon the terms and circumstances of each case. The court must find out whether the sum fixed in the contract is in truth a liquidated damages or penalty. What are quasi contracts (certain relations resembling those crated by contracts)? Enumerate the quasi contracts dealt with under the Indian contract Act?
A contract is the result of an agreement enforceable by law. It comes into existence from the action of the parties but sometimes there is no intention on the part of the parties to enter into a contract but from their conduct and relationship, the law implies that there is a promise imposing an obligation on one party and conferring a right in favour of the other the English law and certain relations resembling those created by contracts' under the Indian law. Such contracts technically speaking are not contracts at all but they are treated as contracts. A quasi contract rest on the ground of equity that a person shall not be allowed to enrich himself unjustly at the expense of another. It is a kind of contract by which one party is bound to pay money in consideration of something done or suffered by the other party. Section 68 to 72 of the Indian contract Act deals with the following types of quasi contracts: Claim for necessaries supplied to a person incapable of contracting (sec. 68). If a person incapable of entering into a contract or anyone whom he is legally bound to support is supplied by another person with necessaries suited to his condition in life, the supplier is entitled to recover the price from the property of the incapable person. Examples: (a) A supplies B, a lunatic or a minor with necessaries suitable to his condition in life. A is entitle to be reimbursed from B 's property. (b)A supplies the wife and children of B, a lunatic or a minor with necessaries suited to their condition in life. A is entitled to be reimbursed from B's property.
From the above it is clear that though a lunatic or a minor cannot make a valid contract but his property is held liable to pay a reasonable price for the necessaries supplied. Reimbursement of person 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 entitle to be reimbursed by the other (sec. 69). Example: B holds land in Bengal on a lease granted by A, the zamindar. The revenue payable by A to the government being in arrear his land is advertised for sale by the government. Under the revenue law, the consequence of such sale will be the annulment of Bs' lease. B to prevent the sale and the consequent annulment of his own lease pays to the government the sum due from A. A is bound to make good to B the amount so paid. For this section to apply it is necessary that: A person must by law be bound to pay some money. Another person must be interested in the payment and That other person must have actually paid the money because of such interest. Obligation of person enjoying benefit of non-gratuitous act. 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 (sec. 70).
Example: A. a tradesman leaves goods at B's house by mistake. B treats the goods as his own. He is bound to pay A for them. For the application of this section it is necessary that (a)The thing must have been done lawfully in good faith. (b) It must have been done by a person not intending to act gratuitously; and (c)The person for whom the act is done must have enjoyed the benefit of it. 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 (sec. 71). A finder of goods is bound to take as much care of the goods found as a man of ordinary prudence would take of his own goods under similar circumstances. He must not make an unauthorise use of the goods found. He must take appropriate steps to trace the owner of the goods. The finder is entitled to retain the goods until he receives compensation from the owner of goods. If the owner refuses to pay the lawful expenses of the finder or if the owner cannot be found with reasonable efforts the finder may sell the goods. Liability of persons 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 (sec. 72). Example: A and B jointly own 100 rupees to C. A alone pays the amount to C and B not knowing this fact pays 100 rupees over again to C. C is bound to repay the amount to B.
This section does not make any distinction between a mistake of fact and of law. Payments made under coercion can also be recovered. Thus money paid as income tax under threat of attachment can be recovered. Quantum meruit. In addition to the above types of quasi contracts expressly provided in the act, a claim can also be made on the basis of quantum meruit. Where a person has rendered some service to another under the circumstances which indicate that it is to be paid for though no remuneration was fixed the law implies a promise to pay for the amount of the work actually done. It means payment in proportion to the amount of work done. Explain the position of finder of goods? The term 'finder of goods' means a person who has found some goods belonging to another. When a person comes across some article he is under no duty to pick them up but if he picks them up he becomes a finder of goods and is subject to the same responsibility as a bailee. The liabilities or obligations of a finder of lost goods are as following: He must take reasonable care of the goods. By reasonable care we mean that much care as a man of ordinary prudence would take of his own goods under similar circumstances. If he takes that much care the finder shall not be responsible for any loss, destruction or deterioration of the thing found.
He must not use the goods for his own purpose. He must not mix them with his own goods. He must make appropriate efforts to find the true owner of goods. Rights of the finder of goods 1 .)Right to retain goods. The finder can retain the goods against the true owner until he receives compensation for trouble and expenses incurred by him in preserving the goods and finding out the owner. This right is known as the finder lien on the goods. But the finder cannot file a suit against the true owner for the recovery of such expenses. 2.)Right to sue for reward. If the owner has offered some reward for the return of goods and the finder has the knowledge of such reward he can file a suit for the recovery of the award. 3.)Right of sale. Sec. 169 permits the finder to sell the goods in the following cases: (a)if the owner cannot be found after reasonable search; or if found owner refuses to pay the lawful charges of the (b) finder; or (c)if the thing is in danger of perishing or losing the greater party of their value; or if the lawful charges of the finder amount to two- thirds (d) of their value. A finder of goods has a right to keep the goods with him against the whole world except the true owner. Define contracts of indemnity and guarantee and distinguish between the two?
A contract by which one party promises to save the other from loss caused him by the conduct of the conduct of any other person is called a contract of indemnity (sec. 124). The person who promises to make good the loss is called the 'indemnifier' and the person whose loss is to be made good is called the 'indemnified' or 'indemnity- holder'. Example: A contracts to indemnify B against the consequences of any proceedings which C may take against B in respect of a certain sum of Rs.200. this is a contract of indemnity. A is the indemnifier (promisor) and B is the indemnified (promise). To indemnify means to compensate or make good the loss. The contract of indemnity is entered into with the object of protecting the promise against anticipated losses. A contract of indemnity is like any other contract and must therefore fulfill all the essentials of a valid contract e.g. consideration, free consent competency of parties lawful object etc. The definition given in the India in the contract Act is not exhaustive because it does not include the losses caused by accidents. Strictly speaking according to our definition a contract of insurance is not a contract of indemnity because loss may not arlse as a result of the act of the promisor or any other person. Time of commencement of the indemnifier's liability The India contract Act has not specified any time for the commencement of the indemnifier's liability. But it is well settled now that an indemnity holder is entitled to sue the indemnifier even before he has suffered any damage provided an absolute liability has been incurred by him. This the moment
the indemnified become liable to pay or incurs some liability the liability of indemnifier arises. Contracts of guarantee A contract of guarantee is as contract to perform the promisor or discharge the liability of a third person in case of his default. The person who gives the guarantee is called the 'surety'; the person in respect of whose default the guarantee is given is called the 'principal debtor' and the person to whom the guarantee is given is called the 'creditor' (sec. 126). A contract of guarantee involves three parties the creditor the surety and the principal debtor. For example A advances a loss of Rs.10, 000 to B and C promises to A that if B does not repay the loan C will pay it. This is a contract of guarantee. Here A is the creditor B is the principal debtor and C is the surety. A contract of guarantee per-supposes the existence of a liability enforceable by law. If no such liability exists there can be not contract of guarantee. A contract of guarantee like ant other valid contract must have all the essentials of a valid contract. But if the principal debtor is a minor the surety will still be liable to pay. The object of the contract of guarantee is to provide security to the creditor. A contract of guarantee may be written or oral; it may be express or even implied form the conduct of the parties. Consideration for a contract of guarantee. A contract of guarantee must be supported by consideration. It is not necessary that there should be direct consideration between the surety and the creditor. Sec. 127 clearly states that "anything done or any promise made for the benefit of the principal debtor may be a sufficient consideration to the surety for giving the
guarantee. Thus any benefit received by the debtor is adequate consideration for a contract of guarantee. Distinction between a contract of indemnity and a contract of guarantee. The following are the important points of difference: (a)ln a contract of indemnity there are two parties i.e. the indemnifier and the indemnified while in a contract of guarantee there are three parties i.e. the creditor the debtor and the surety. (b)ln a contract of indemnity the liability of indemnifier is primary in nature while the liability of surety is collateral or secondary. (c)ln a contract of indemnity the liability of the indemnifier arises only on the happening of the contingency while in the case of contract of guarantee there is an existing debt or duty the performance of which is guaranteed by the surety. (d)lt a contract of indemnity the indemnifier cannot sue the third party even after making good the loss unless there is an assignment in his favour. But in a contract of guarantee the surety can after paying the creditor sue the principal debtor in his own name. (e)lt is not necessary that the indemnifier should act at the request of the indemnified but it is necessary that the surety should give the guarantee at the request of the debtor. (f) A contract of indemnity is for the reimbursement of a loss while the contract of guarantee is for the security of the creditor. (g)ln a contract of indemnity there is only one contract between the indemnifier and the indemnified while in a contract of guarantee there are three contracts. One
between the creditor and the principal debtor second between the creditor and the surety and the third between the surety and the principal debtor. Discuss the nature and extent of surety's liability? Section 128 of the India contract Act defines the nature and extent of surety's liability. Ti provides that "the liability of the surety is co- extensive with that of the principal debtor unless it is otherwise provided by the contract." In simple word, the liability of the surety will be the same as that of the principal debtor however; by an agreement the surety may place a limit on his liability. But in no case the surety's liability will be greater than that of the principal debtor. Example: A guarantees to B the payment of a bill of exchange by C, the acceptor. The bill is dishonoured by C. A is liable not only for the amount of the bill but also for any interest and notarial charges which may have become due on it. The expression "co-extensive with that of the principal debtor" shows the maximum extent of surety's liability. The surety may declare that his guarantee is limited to a fixed amount, say, Rs.10,000 then the surety cannot be held liable for any amount exceeding Rs. 10,000 though the principal debtor may be liable to pay Rs. 15,000. The nature of surety's liability can be given as under: a. The liability of the surety arises only when the principal debtor makes a default. In this sense his liability is secondary.
b. The liability of surety arises immediately on the default of the principal debtor. Unless specially agreed, the surety cannot demand a notice of default from the creditor, because it is the responsibility of the surety to see that the principal debtor makes the payment. Therefore the creditor may take the necessary action against the surety immediately on default by the principal debtor without proceeding against the principal debtor. But if before the default the surety becomes insolvent the creditor cannot prove against the surety's assignee in insolvency. c. The creditor need not exhaust his remedies against the principal debtor before he proceeds against the surety. If the principal debtor becomes insolvent the creditor may sue the surety for the full amount. The surety cannot ask the creditor to first proceed against the principal debtor. d. If the creditor holds some security from the principal debtor for his debtor the creditor need not first resort to these securities before suing the surety unless otherwise agreed. How ever, the surety will get benefit of such securities in the hands of the creditor whether the surety was or was not aware of such securities. e. The contract between the surety and the creditor is an independent contract. If it discovered that the contract between the creditor and the debtor is void or voidable and for the debtor is discharged, the surety is not discharged. For example where the surety has given the guarantee for a minor though the minor is not liable but the surety shall be liable. The liability of a surety does not come to an end upon the death of the principal debtor. Similarly a discharge of the principal debtor by the operation of law does not discharge the surety.
f. If the creditor has obtained the guarantee by misreport sentation or by concealing some material information then the guarantee shall be invalid and the surety will not be liable. From the above it is clear that the liability of the surety will neither be more nor less that of the principal debtor, though by special arrangement it may be made less than that of the principal debtor but never greater. What is a continuing guarantee? How can it be revoked? According to sec. 129 "a guarantee which extends to a series of transactions is called a continuing guarantee." This type of guarantee is not limited to a single transaction but it is intended to cover a number of transactions over a period of time. A specific guarantee given for a particular transaction comes to an end as soon as the liability under that transaction ends. Example: (a) A guarantees payment to B, a tea dealer, the amount of Rs.l, 000 for any tea he may from time to time supply to C. b supplies C with tea worth Rs. 1,000 and C pays B for it. Afterwards B supplies C with teas worth Rs.800. c fails to pay. Here the guarantee given by A was continuing guarantee, and he is accordingly liable to B for Rs.800. (b) A guarantees payment to B of the price of five sacks of flour to be delivered by B to C and to be paid for in a moth. B delivers five sacks to C. C pays for them. Afterwards B delivers four sacks to C, which C does not pay for. Here the guarantee
given A was not a continuing guarantee and accordingly he is not liable for the price of the four sacks. The essence of a continuing guarantee is that it applies not to a specific transaction but to a series of transactions that may take place within the stipulated period. Whether or not a guarantee is a continuing one depends on the terms of the contract and the surrounding circumstances. Revocation of Continuing Guarantee A continuing guarantee may be revoked in the following ways: a.)By notice of revocation by the surety. Sec. 130 provides that a continuing guarantee may at any time be revoked by the surety as to future transaction, by notice to the creditor. In such a case the surety continues to be liable for such transactions that have already taken place. But the surety will not be responsible for future transactions which may take place after the notice of revocation. Example: A guarantee payment to B, a trader for goods sold to C upto Rs. 10,000 for one year. B supplies goods to C for Rs. 4,000 in the first three months. A revokes his guarantee. Here A shall not be liable for any goods supplied to C after his revocation but A is liable to for Rs.4, 000 on default of C. A guarantee for the good behaviour of a person is not a continuing guarantee and cannot be revoked by notice as long as that person continues in the job. "Between co-sureties there is equality of burden and benefit? b.)By death of the surety. According to sec131 in the absence of a contract to the contrary, the death of the surety operates as a revocation of a continuing guarantee so far as regards
future transactions. Here also the termination becomes effective only for the future transactions. But it is not necessary that the creditor must have notice of the death of the surety. The for any transaction taking place after the death of the surety the surety's heirs cannot be held liable whether the creditor knew about the death or not. c.)By other modes. A continuing guarantee is also revoked in the same manner as the surety is discharged such as: (a)By variance in terms of contract without surety's consent (b)By release or discharge of principal debtor. (c)By making a compensation, extension of time or a promise not to sue principal debtor, (d)By creditors act or omission impairing surety's eventual remedy. (e)By loss of security which was in the hands of creditor. "Between co-sureties there is equality of burden and benefit." Where a debt has been guaranteed by more than one person they are called co-sureties. In such a case all the sureties are liable jointly or severally. It would be unjust and unfair if one co-surety is compelled to pay the entire debt of the principal debtor. In such a case, in the absence of any agreement, the co-surety can claim contribution for the excess amount paid by him. Equity of burden is the basis of co-surety ship. Where there are several sureties for the same debt and the principal debtor makes a default, each surety is liable to
contribute equally to the extent of default, and are entitled to share the benefit of securities if any held by any co-surety, equally. This principal will apply whether their liability is joint or several, under the some or different contracts, and whether with or without the knowledge of each other. This principal of contribution between co-sureties shall not apply to those persons who become sureties not for the some debt but for different debts. Example: A, B and C are sureties to D for the sum of Rs.3, 000 lent to E.E makes default in payment. A, B and C are liable, as between themselves, to pay Rs.l, 000 each. The above mentioned principal of equal contribution is, however not applicable where the co-sureties have given the guarantee for different amounts. Sec. 147 provides that where the co-sureties have given the guarantee for different sums they should contribute equally but not exceeding the sums which they have agreed to pay. Example: A, B and C are three sureties for a debt. A under takes to be liable for Rs.l, 000, B upto Rs.2, 000 and C for Rs. 4,000. The principal debtor makes a default if Rs.3, 000. Each surety will contribute Rs.l, 000. But if the default is of Rs.4, 200, then according to the principal of equal contribution, each would be liable for Rs.l, 400; but this is more than the limit of A. Therefore, A will contribute Rs.l, 000 and the balance of Rs.3, 200 will be shared equally by B and C. If a co-surety is in possession of some securities, then the benefit of such securities must be given to all the co-securities whether they were aware of such securities or not. Thus it is rightly said that between co-sureties there is equality of burden and benefit.
What is the right of a surety as against the (1) Creditor (2) principal debtor, (3) co-surety? Rights of the surety against the creditor. Before payment of the principal debt. When the guaranteed falls due, the surety can file a suit for declaration that the principal debtor shall be the person finally libel to pay the amount. This declaration helps the surety in claiming the amount from the principal debtor. In case of fidelity guarantee, the surety can ask the employer (creditor) to dimiss the employee (principal debtor) in the event of his proved dishonesty. On payment of the guaranteed amount. Section 141 of the contract Act provides the following rights to a surety against the creditor: (a)a surety is entitled to the benefit of every security which the creditor has at the time when the contract of surety is entered into irrespective of whether the surety knows of the existence of such security or not; and (b) 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.
It is the duty of the creditor to keep intact the securities so that they may be available to the surety in the event of the default being made by the principal debtor. But if the security is lost due to an act god or enemies of the state or unavoidable accident the liability of the surety will not come to an end. From the above, it should be noted that the above rule shall not apply to the security advanced subsequent to the making of the contract of guarantee. Thus, if subsequently acquired securities are given away by the creditor, then the liability of the surety would not be reduced in any manner. Example: (a) C advances to B his tenant, Rs2, 000 on the guarantee of A, C also has a further security for the 2,000 rupees by a mortgage of B's furniture. C cancels the mortgage, B becomes insolvent and C sues A on his guarantee. A is discharged from liability to the amount of the value of the furniture. (b) A as surety for B, makes a bound jointly with B to C, to secure a loan from C to B. Afterwards C obtains from B a further security for the some debt. Subsequently, C gives up the further security. A is not discharged. Right to claim set off. The surety is also entitled to the benefit of the principal debtor's set-off against the creditor if it arises out of the same transaction. Right of subrogation. When the surety pays off the guaranteed debt then he gets all such rights which the creditor had against the principal debtor. In simple words on making the payment the surety steps into the shoes of the creditor. Rights against the principal detor.
Rights of subrogation. When a default is made by the principal debtor and the surety pays off or discharges the liability of the principal debtor the surety gets all such rights of the creditor which he can himself exercise against the principal debtor. This right of the surety is called the right of subrogation. This right of subrogation is available only when the surety makes the payment of all that he is liable for. Example: A mortgages his house with B and obtains a loan. C given the guarantee for B. A fails to pay. B recovered the amount from C. C can get into the shoes of the creditor B and enforce the mortgage itself against A. Right to indemnity. (sec. 145). in every contract of guarantee there is an implied promise by the principal debtor to indemnify the surety; and the surety is entitled to recover form the principal debtor whetever sum he has rightfully paid under the guarantee, but no sums which he has paid wrongfully. Example: B is indebted to C and A is surety for the debt. C demands payment from A and on his refusal sues him for the amount. A defends the suit having reasonable grounds for doing so, but he is compelled to pay the amount of the debt with costs he can recover from B the amount paid by him for costs as well as the principal debt. There are three limitations as to what the surety can claim under this section: (a)He cannot claim more than what he ahs actually paid to the creditor. (b) He cannot claim the amount which he paid due to his own negligence; and (c)He cannot claim amounts which he paid wrongfully.
Right of surety against co-sureties Where a debt is guaranteed by more than one surety, they are called co-sureties. In such a case it would be unfair if one co- surety is compelled to p-ay the entire debt of the principal debtor. In such cases, the surety can claim contribution for the excess amount paid by him. Equality of burden is the basis of co-surety ship. In this connection the rules are as following: When they are sureties for the same debt for similar amount. In the absence of any contract to the contrary, the co-sureties shall be liable to contribute equally. For example, A, B and C are sureties to D for the sum of Rs.3, 000 lent to P.P makes a default in payment. A, B and C are liable as between themselves to pay Rs.l, 000 each. In case C is insolvent and could pay only Rs.500, then A and B will contribute equally i.e. Rs.l, 250 each. This right of contribution shall not be available to persons who become sureties not for the same bebt but for different dents. Where they are sureties for the same debt but for different amounts. The principal of equal contribution is however, subject to the maximum limit fixed by a surety to his liability. Co-sureties who have given the guarantee for the same debt but for different amounts are liable to pay equally (and not proportionately) upto the amount of their guarantee. For example, A, B and C as sureties for D, enter into three separate bonds each for a different amount namely A for Rs.10, 000, B for Rs.20, 000 and C for Rs.40, 000. In case (a) D makes default to the extent Rs.30, 000. A, B and C are each liable for Rs.10,000 the maximum amount and B and C shall contribute equally for remaining amount i.e. B and C Shall each pay Rs. 15,000. (c) D markets a default of Rs. 60,000, then A is liable for Rs. 10,000, b for Rs.20, 000 (maximums limit) and C for Rs. 30,000.
When there are co-sureties a release by the creditor of one of them does not discharge the others, neither does it free the surety so released from his responsibility to other sureties (sec. 138) State the circumstances in which surety is discharged from liability? A surety is said to be discharged when his liability comes to an end. A surety is discharged from his liability under any one of the following circumstances: Notice of revocation. Where the guarantee relates to a single transaction and the liability has already been incurred such guarantee cannot be revoked. But a continuing guarantee can be revoked at any time by the surety by giving a notice to the creditor, such revocation is valid. In such a case the surety shall not be liable for transactions taking place after giving the notice of revocation. He shall however be liable for transactions already entered into Death of surety. The death of surety operates, in the absence of any contract to the contrary as a revocation of a continuing guarantee so far as regards future transactions. For any transaction taking place after the death of the surety the deceased surety's property will not be liable even though the creditor has no knowledge of the death. Variation of contract. If some variation is made in the terms of the contract between the principal debtor and the creditor
without the surety's consent the surety is discharged from his obligation as to transaction subsequent to the variance (sec. 133). But if the surety has given the guarantee for several distinct contracts or debts, a change in one of them will not discharge the surety as to the remaining transactions. The where the payment of rent was guaranteed and rent was increased without the consent of surety, the surety is discharged. Release or discharge of principal debtor. Sec. 134 provides for two kinds of discharge from liability. (a)lf the creditor makes any contract with the principal debtor by which the debtor is released the surety is discharged. But if the debtor is discharged in insolvency, the surety will not be discharged from his liability. Thus if the creditor accepts some property from the debtor and releases the debtor the surety is also discharged. (b) If the creditor does any act or omission the legal consequence of which is the discharge of the principal debtor the surety will also be discharged. For example A contracts with B for a fixed price to build a house for B within a stipulated time B supplying the necessary timber. C guarantees. A's performance of the contract. B fails to supply the timber. C is discharged form his surety ship. Compounding by creditor with principal debtor. A contract between the creditor and the principal debtor by which the creditor makes a composition with, or promises to give time to or not to sue the principal debtor, discharges the surety unless the surety assents to such contract. But a surety is not discharged in the following cases: (a)Where a contract to give time to the principal debtor is made by the creditor with a third person, and not with the principal debtor the surety is not discharged. Example, C the holder of
an overdue bill of exchange drawn by A as surety for B, and accepted by B, contracts with M to give time to B. a is not discharged. (b) Mere forbearance on the party of the creditor to sue the principal debtor or to enforce any other remedy against him does not, in the absence of any provision in the guarantee to the contrary, discharge the surety. Example: A owes to C a debt guaranteed by A. the debt becomes payable. C does not sue B for a year after the debt has becomes payble. A is not discharged from his surety ship. (c)Where there are co-sureties, a release by the creditor of one of them does not discharge the others; neither does it free the surety so released from his responsibility to other sureties. Creditor's act or omission impairing surety's eventual remedy. If the creditor does any act which is inconsistent with the right of the surety or omits to do any act which his duty to the surety requires him to do and the eventual remedy of surety against. Thus where the integrity of a cashier is guaranteed and the employer undertakes to check his work once in a month but neglects to do so the cashier misappropriates, the surety is not liable. Loss of security. A surety is entitled to the benefit of every security which the creditor has against the principal debtor at the time the contract of surety ship is entered into, whether the surety knows of the existence of such security or not. 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. Guarantee obtained by misrepresentation or concealment. Where a guarantee is obtained by misrepresentation or
concealment by the creditor concerning a material party of the transaction the surety is discharged. Example: A engages B as clerk to collect money for him. B fails to account for some money. A asks B to furnish security. C gives the guarantee for B. A does not acquaint C with B's previous conduct. B afterwards makes default. The guarantee is invalid. Guarantee on contract that creditor shall not act on it until co- surety joins. Where a person gives a guarantee upon a contract that the creditor shall not act upon it until another person has joined in it as co-surety the guarantee is not valid if that other person does not join, i.e. the surety is discharged if that other co- surety does not join. . What is 'bailment'? How does it differ from sale? Sec. 148 of the Indian contract act defines bailment as, 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 goods is called the bailor'. The person the whom they are delivered is called the 'bailee.' A 'bailment is thus the delivery of goods for some specific purpose under a contract on the condition that the same goods are to be returned to the bailor or are to disposed of according to the perfections of the bailor. In bailment only the possession of the goods is given to the bailee and the ownership rights remain with the bailor. Example: (a) A delivers a price of cloth to a tailor to be stitched into shirt.
(c)A lends his book to his friend B. (d) A gives his watch for repair to B a watch repairer. Essential features. From the definition given above, the following are the essential features of bailment: Delivery of goods. A contract of bailment requires the delivery of goods by one person to another. It involves only the change of possession and not the change of ownership. Mere custody of goods without possession will not constitute bailment. A servant or a guest using his master or host's gods will not be a bailee. The delivery of goods may be actual or constructive. When goods are physically handed over by one person to another, it amounts to actual delivery. In case of constructive delivery, the goods are not physically handed over, they remain where they are but something done which has the effect of putting them in the possession of the bailee. If a person already in possession of the goods of another contracts to hold them as a bailee he thereby becomes the bailee, and the owner becomes the bailor of such goods although they may not have been delivered by way of bailment. For example a purchases some goods from B and allows the goods to remain in the possession of B. here B is holding the goods in the capacity of a bailee and A is the bailor of goods though no actual delivery of goods has taken place. Delivery of goods must be for some purpose and upon a contract. In bailment the goods are given for some purpose that they shall be returned when the purpose is accomplished. The bailment always arises out of a contract the contract may be express or implied. A Finders of goods, custom authorities who have seized some goods are bailee.
Return of goods. In bailment the goods are given on the condition that when the purpose for which they are is accomplished they shall be returned to the bailor or disposed of according to his directions. The goods may be returned in their original form or an altered form. Movable goods. Only movable goods can be he subject matter of bailment. This is so because 'delivery' is an important feature and only movable goods can be delivered. Difference between bailment and sale. In a contract of sale the ownership of the goods passes on to the buyer for a consideration called 'price'. The main difference is that in bailment the bailor continues to be the owner of the goods whereas in sale the seller cases to be the owner of the goods. In bailment the goods are or be returned on the accomplishment of the purpose while in sale the goods are not to be returned. Similarly when money is deposited in a bank the bank is under no obligation to return the same notes for coins the relationship is that of the debtor and the creditor. An agent who receives money on behalf of his principal is not the bailee. Discuss the rights and duties of a bail or? Duties of bailor. Following are the duties of a bailor: To disclose known defects in the goods. According to sec. 150 a distinction has been made between a gratuitous bailor and a bailor for reward.
A gratuitous bailor is under a duty to disclose the faults in the goods bailed. Of which the bailor is aware and if he fails in the duty, the bailor shall be liable for damages arising to the bailee directly from such faults. Thus a gratuitous bailor shall not be responsible for the faults which are not within his knowledge. Example: A lends a horse, which he knows to be vicious; to B. he does disclose fact that the horse is vicious. The horse runs away. B is thrown and injured. A is responsible to B for damage sustained. In case the goods are bailed for hire or reward, the responsibility of the bailor is still greater. In such a case it is the duty of the bailor to see that the goods are reasonably safe for the purpose of bailment. The bailor shall be responsible for all defects in the goods bailed whether he was or was not aware of such defects in the goods bailed. Example: A hires a carriage of B. the carriage is unsafe, though B is not aware of it and A is injured. A is responsible to A for the injury. When the bailor delivers some goods to another for carriage and if the goods are of dangerous nature, the bailor must warn the bailor about the nature of goods. For example. A delivers a case containing some explosive material to B but fails to warn B. While handling the case in an ordinary manner it explodes and causes some damage to other goods. Here A shall be liable to B for damages. To bear ordinary expenses. In a gratuitous bailment, where the goods are to be kept or to be carried or to have work done upon them by the bailee for the bailor. The bailor shall repay to the bailee the. Thus if a horse is given for safe custody then it is the
duty of the bailor to pay all the ordinary expenses such as feeding expenses. To bear extraordinary expenses in case of non-gratuitous bailment. Where the goods are bailed for reward or remuneration, the ordinary expenses are not to be borne by the bailor, but if there are some extraordinary expenses incurred, then it becomes the duty of the bailor to pay such extraordinary expenses. Thus where a cow is given for safe custody and the bailee is to receive Rs. 24 per day for looking after the cow; the bailor is not liable to pay for ordinary expenses. But if the cow falls ill and some medical expenses are incurred by the bailee to safeguard the life of the cow, then the bailor must repay such extraordinary expenses. To indemnify bailee. If the title of the bailor over the goods is defective and as a result thereof the bailee suffers some loss the bailor shall have to indemnify the bailee. To receive back the goods. If is the duty of the bailor to accept the goods when they are returned by the bailee after the purpose is accomplished. If the bailor fails to accept back the goods he shall be responsible for any loss or damage to the goods and shall also be responsible to bailee for necessary expenses which the bailee might have incurred in keeping the goods safely. Rights of bailor To enforce bailee's duties. The bailor has a right to enforce the duties of the bailee such as: (a)right to claim damages for loss caused to the goods by the negligence of bailee; right to claim compensation for loss caused by an (b) unauthorise use of the goods bailed'
(c)right to claim damages arising out of mixing the goods of the bailor with his own goods. To terminate the contract of bailment. The bailor has a right to terminate the contract of bailment if the bailee does any act with regard to the goods bailed inconsistent with the conditions of the bailment. For example, A lets to B, for hire a horse for his own riding. B drives the horse in his carriage. A has a right to terminate the bailment. To demand back goods. In case of gratuitous (without reward) bailment of goods the bailor can demand back the goods at any time even though the goods were bailed for a specified time or purpose. But if the bailee had acted in such a manner that the return of the goods before the stipulated time would cause loss exceeding the benefit which he has derived from using the goods, the bailor is duty bound to compensate the bailee. To claim increase or profit from goods bailed. In the absence of any contract to the contrary, the bailee is bound to deliver to the bailor any increase or profit which may have accrued from the goods bailed. What are the duties of a bailee? Duties. Following are the duties of every bailee: To take reasonable care of the goods bailed. In all cases of bailment the bailee is bound to take as much care of the goods bailed to him as a man of ordinary prudence would under similar circumstances take of his own goods of the same bulk, quality and value as the goods bailed. If the bailee has taken that
much care of the goods as a reasonably careful man can be expected to take, the bailee will not be responsible for the loss, destruction or deterioration of the thing bailed. The bailee shall not be liable for loss if it is caused by an act of god e.g., fire lightening flood etc., or by communal riots. If the goods bailed are stolen and the negligence of the bailee can be proved then the bailee shall be liable to make goods the loss. In Ram pal Vs. Gouri shanker, the bailee kept the bailer's ornaments in a locked safe and kept the key in a cash box in the same room. The room was situated in the ground floor and being lockd from outside, was easily accessible to burglars by removing the latch. The ornaments were stolen. The bailee was held liable for the loss since he failed to take reasonable care of the goods bailed. Even if the goods have been stolen from the bailee's custody, he must take all reasonable steps to recover them. If the bailee makes no efforts either by informing the police or the real owner to recover the goods, the bailee shall be deemed to have not taken reasonable care and therefore shall be liable to make good the loss to the bailor. Not to make unauthorized use of goods bailed. It is the duty of the bailee to use the goods strictly according to the terms of bailment. If the bailee makes any use of the goods bailed, which is not according to the conditions of bailment he is liable to make compensation to the bailor for any damage arising to the goods from or during such use of them. This liability is absolute and will arise even if the bailee is not guilty of negligence and the loss might have been caused by an accident. Examples: (a) A lends a horse to B for his own riding only. B allows C, a member of his family to ride the hors. C rides with
care but the horse accidentally falls and is injured. B is liable to make compensation to A for the injury done to the horse. (b)A takes a car on hire for the purpose of going to Faridabad but instead he proceeds to karnal. The car meets with an accident. Here A will be liable to make good the loss since the car was used in an unauthorized manner. Not to mix goods bailed with own goods. The bailee should not mix goods bailed with other goods of his own. This can be discussed as following: (a)Mixture With bailer's consent. If the bailee mixes his own goods with that of the bailor with the consent of the bailor, then_there is no breach of duty and the bailor and the bailee shall have an interest, in proportion to their respective share, in the mixture thus produced. (b) Mixture without bailer's consent when goods can be separated. If the bailee, without the consent of the bailor mixes the goods of the bailor with his own goods, and the goods can be separated or divided, the property in the goods remains in the parties respectively; but the bailee is bound to bear the expenses of separating or dividing the goods and also for and damage arising from the mixture. Example: A bails 100 bales of cotton marked with a particular mark to B. B, without A; s consent mixes the 100 bales with other bales of his own, bearing a different mark; a is entitled to have his 100 bales returned and B is bound to bear all the expenses incurred in separation of the bales and any other incidental damage. (c)Mixture without bailer's consent when the goods cannot be If the bailee, without the consent of the bailor, mixes the goods of the bailor with his own goods in such a
manner that it is impossible to separate the goods bailed from other goods and deliver them back the bailor is entitled to be compensated by the bailee for the loss of goods. For example, A bails a barrel of cape flour worth Rs.45 to B. B, without A's consent mixes the flour with country flour of his own worth only Rs. 25 per barrel B must compensate A for the loss of his flour. Duty to return the goods. If the duty of the bailee to return, or deliver according to the bailor's directions the goods bailed, without demand, as soon as the time for which they were bailed has expired, or the purpose for which they were bailed has been accomplished. The bailess has no right to keep the goods and he must return them without waiting for a demand. When the bailee fails to return the goods at the proper time, the bailee will be responsible for any loss, deterioration or destruction of the goods from that time. Thus, the bailee shall be responsible for the loss even without his negligence, after the time for the return if goods. Where there are several joint owners of goods bailed, then in the absence of any contract to the contrary the bailee may return the goods to one joint owner without the consent of all the owners. If the bailor has no title to the goods and the bailee in good fish delivers them back to or according to the directions of the bailor the bailee is not responsible to the owner in respect of such delivery. To retun any accretion to the goods. In the absence of any agreement to the contrary, the bailee must return to the bailor natural increase or profit accruing to the goods during the period of bailment. For example, A leaves a cow in the custody of B to be taken care of. The cow has a calf. B is bound to deliver the calf as well as the cow to A.
Not to set up any adverse title against the bailor. Bailee must not set up a title adverse to that of the bailor. The bailee is estopped from denying the right of the bailor to bail the goods and to receive them back. The bailee shall not be liable for conversion to the true owner if he delivers back the goods to the bailor. The person who claims the ownership over goods bailed may apply to the court to stop delivery of the goods to the bailor, and to decide the title to the goods. Rights of bailee. To enforce bailor duties. The duties of the bailor are the rights of the bailee. The bailee has the right: to claim compensation for any loss arising from non disclosure of known defects in the goods; to claim extra- ordinary expenses; to claim indemnification for any loss or damage as a result of defective title of the bailor. To deliver goods to one of several joint owners. If several joint owners of goods bail them the bailee may deliver them back to; or according to the directions of, one joint owner without the consent of all in the absence of any agreement to the contrary. Delivery of goods to bailor without title. If the bailor has no title to the goods, and the bailee, in good faith, delivers them back to the bailor, the bailee is not responsible to the true owner in respect of such delivery. Right of lien. The bailee has a right to claim his lawful charges and if they are not paid the bailee is given the rights to retain the goods until the charges due in resects of those goods are paid. This right is known as bailee's rights of lien. This right is a
possession right and can be exercised only when the bailee is in possession of the goods of the bailor: Right of action against third parties. If a third person wrongfully deprives bailee of the use or possession of the goods bailed, he has a right of action against such third parties in the same manner as the true owner has against third persons. The bailee has the right to retain only those goods in respect of which he is to receive remuneration i.e. the bailee cannot retain other goods belonging to the bailor. A bailee has only a right of particular lien over the goods. Explain what relief is available to the bailer in case of bailer's goods being mixed with that of the bailee? Lien means the right of a person, who has possession of the goods belonging to another person to retain such possession of the goods until some debt due to him or claim is satisfied. Lien is a possessory right and can be exercised only when one person is in possession of some goods belonging to another. If the goods are not in possession or the possession over the goods is lost, then the right of lien is also lost. Lien gives to a person only a right to retain the goods and not to sell them. Liens are of two types- particular lien and general lien. Particular lien. This type of lien means the right to retain only that particular property in respect of which the claim is due. Persons entitled to particular lien are carriers, mechanics, repairers, unpaid seller of goods, agents, bailee etc.
Sec. 170 confers the rights of particular lien on the bailee. It says that, "where the bailee has, in accordance with the purpose of the 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 receive due remuneration for the services he has rendered in respect of them' Before a bailee can exercise his right of particular lien, the following conditions must be satisfied: (a) The bailee must have rendered some service in respect of the goods bailed involving the exercise of labour or skill and the bailee must be entitled to some remuneration for it. The labour or skill exercised by the bailee must have improved the goods. Example: A delivers a rough diamond to B, a jeweler 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. Thus where a bailee only keeps the goods in safe custody or maintains them, he has no right of particular lien. In Hutton Vs Car Maintenance Co. the owner of a car gave it to a company for maintenance for three years on some fixed payment. When some a mount becomes due the company claimed lien on the car, it was decided that here the bailee has not improved the car but has only maintained it therefore the Co. cannot claim lien over the car. (b) The labour or skill have been exercised in accordance with the purpose of the bailment. The service must have been performed in full by the bailee. Where a bailee has done only a part of the work contracted for he cannot claim for part payment. For example, a gives his TV. Set for repair to B. b
promises to complete the job within one week. After ten days B informs A that he could not compete the repair as he is going out of the country but wanted to be paid for the work done. Here B cannot exercise the right of lien over the T. V set as the work is not done fully. (c) T he bailee can retain only those goods on which he has exercised some labour or skill. It means a bailee cannot retain any other goods belonging to the bailor which may be in his possession for example, A gives a piece of cloth to B a tailor to make a shirt for him. B cannot retain the shirt for the non- payment of a previous balance due from A. (d) The right of lien arises only when the remuneration has become due. Thus if the bailee has given a period of credit to bailor, lien can be exercised only on the expiry of the credit period. For example, A gives doth to B a tailor to make into a coat. B gives a three months' credit for the charges. Here B is not entitled to retain the coat until he is paid. The right of lien will arise only after the expiry of the credit period. (e) The lien can be exercised only when the bailee is in possession of the goods once possession is lost, the right of lien is also lost. (f) The bailee can exercise the right of particular lien only when there is no contract to the contrary. Because by an agreement a particular lien may be converted into a general lien. In this connection it should be noted that bailee retaining the article for enforcing his right of particular lien cannot claim any charges for keeping the article. The bailee cannot exercise the right of particular lien for recovering the extraordinary expenses, for this he will have to file a suit.
General lien. It is a right retains goods belonging to another not only for the discharge of a debt or liability incurred in respect of those goods but also for a general balance of account. According to this right a person who is in possession of some goods belonging to another person can retain all such goods until all claims against the owner of goods are satisfied. The right of general lien is a privilege and by sec 171 is given to certain class of persons namely bankers, factors, what fingers, attorneys of a high court and policy brokers. (a)A particular lien gives a right to a person to retain only such goods in respect of which charges are due, while a general lien is a right to detain any goods belonging to another person for a general balance of amount. (b) A particular lien can be exercised only when some labour or skill has been expanded on the goods which have improved their value while a general lien can be exercised even though no labour or skill has been used in respect of the goods. (c)A particular lien is given to a bailee while the general lien can be exercised only by the person named in sec 171. A bailee may get a right of general lien provided there is an agreement to this effect. Define 'Pledge'. Distinguish between 'Bailment' and 'Pawn'? Pledge is a special kind of bailment. Sec 172 of the India contract act defines pledge as, 'the bailment of goods as security for payment of a debt or performance of a promise.'
The bailor is in this case called the "pawnor" and the bailee is called the "pawnee' Example: A is in need of money he borrows Rs. 500 from B and gives his costly ring as security for the payment of the debt. It is a contract of pledge, A is the pawnor and B is the pawnee. Essential of Pledge Delivery of goods. Like bailment delivery of goods is essential to constitute a contract of pledge. In pledge the possession of hoods is given and the ownership rights remain with the pledgor. The delivery of goods to the Pawnee may be actual or constructive. Delivery of the key of the godown where the goods are stored is the example of constructive delivery of goods. Though delivery of goods is an essential requirement of pledge, sometimes the goods may be allowed to remain in the possession of the pledgor for a special purpose. In bank of Chittor Vs. Narasimbulu, a cinema projector to was pledged with the bank. The bank allowed the projector to remain with the pledgor so that he can continue to run the cinema. The pledger sold the projector to someone else. The court held that the sale was subject to pledge. Goods are given by way of security. In pledge the goods are given as a security for the payment of a debt or the performance of a promise. Goods must be movable. Only movable goods which are saleable can be pledged. This is necessary because if the pawnor fails to pay the debt in time the pledge may recover his money by selling the goods. Thus money cannot be pledged.
Difference between bailment and pledge. Pledge is a special kind of bailment the main features are similar but there are the following main differences: (a) Purpose. The purpose of pledge is to give some goods as a security for the performance of a promise but in case of bailment this is not the purpose of delivering the goods. In bailment this is not the purpose of delivering the goods. In bailment the goods maybe done with them or for safe custody but not as security. (b) Use of goods. In a contract of bailment, generally speaking the bailee can use the goods but in a pledge, the pledge has no right to use the goods pledged with him. (c)Right in case of default. In bailment the bailee has a right of lien over the goods if his lawful dues are not paid by the bailor; the bailee has no right to sell them. But in pledge if a default is made by the pledgor, the pledge may sell the goods to recover his dues after giving a reasonable notice to the pledgor. (d) Custody of goods. In bailment the goods remain with the bailee till purpose of bailment is achieved but in pledge sometimes the goods may be allowed to remain with the pledgor for some special purpose. State the Rights of pawned? The pledge or Pawnee has the following rights:
Right of retainer. The Pawnee may retain the goods pledged, not only for payment of the debt or the performance of the promise but for the interest on the debt and all necessary expenses incurred by him in respect of the possession or for the preservation of the goods pledged. Right of retainer for subsequent advances. The pledge can retain the goods only for the payment of that particular debt for which the goods were pledged and they cannot be used as a security for subsequent advances, unless there is contract to the contrary. Sec. 174 provides that if pledgor lends money to the same debtor after the date of pledgor without any further security it shall be presumed that the right of retainer extends to subsequent advances. Example: A borrows Rs. 200 from B by pledging his watch. Subsequently A borrows another Rs. 100; form B. B can retain the watch even if A has paid Rs. 200 as a security for the subsequent advance of Rs. 100. This is known as tagging. Right to recover extraordinary expenses. The Pawnee is entitled to receive from the pawnor extraordinary expenses incurred by him for the preservation of the goods_pledged. The Pawnee has a right to receive extraordinary expenses has no lien for extraordinary expenses, he can file a suit for the recovery of such expenses. Right in case of default by the pawnor. If the pawnor makes default in payment of the debt or performance at the stipulated time of the promise the Pawnee has the following rights. (a)Pawnee may bring a suit against the pawnor for the recovery of the amount and may retain the goods pledged as a collateral security; or
(b) He may sell the goods pledged on giving the pawnor reasonable notice of sale. The Pawnee's rights to sue or to sell the goods pledged are alternative rights i.e. he can exercise either of them. In case the pawnee decides to sell the goods pledged he must give a reasonable notice of his intention to sell to the pawnee. The requirement of giving a reasonable notice's a statutory obligation and therefore cannot be excluded by a contract to the contrary. Thus a sale without notice is void. If the proceeds of such sale are less than the amount due in respect of the bebt the pawnor is still liable to pay the balance i.e. the pawnee can recover the balance from pawnor. But if the sale proceeds are greater than the amount due the pawnee cannot keep the surplus he will have to pay over the surplus to the pawnor. State the rights of Pawnee when pawn or makes default? Generally the goods can be pledged by the owner or by any person with owner authority. This rule is based on the principal that no one can pass a better title than he himself has. This principal is necessary to protect the individual interest in the ownership of goods. But in the following cases pledge made by non-owners will also be valid: Pledge by mercantile agents. Mercantile agent means an agent having in the customary course of business such authority to sell or buy goods or raise money on the security of goods. A pledge by mercantile agent will be valid if the following conditions are satisfied;
(a)The mercantile agent is in possession of goods or the documents of title to goods. (b) Such possession must be with the consent of the owner of goods: (c)The mercantile agent must be acting in the ordinary course of business; The pawnee acts in good faith; and (d) (e)The pawnee has no notice of the pawnor defective title. If all the above conditions are fulfilled then a pledge by mercantile agent shall be valid. Thus a servant who is in possession of goods of his master cannot pledge them. Pledge by person in possession under voidable contract. When the pawnor has obtained possession of the goods pledged by him under a voidable contract he can make a valid contract of pledge provided the contract is not rescinded at the time of pledge and the pawnee the received the goods in good faith. Phillips Vs. Brooks case is relevant in this connection. In this case a person obtained a costly ring from a jeweler pretending himself to be a man of credit. Before the fraud could be detected he pledged the ring. The pledge was held valid. But if a person is in possession of goods under a void contract he cannot make a valid contract of pledge for example, a pledge by a thief will not be valid. Pledge by a person having interest. When a person who has limited interest in the goods pledges them, the pledge is valid to the extent of his interest. For example. A finds a was and spends Rs. 20 on his repair. He pledges the watch for Rs.50. the true owner can recover his watch from the pawnee by paying Rs.20
Pledge by co-owner in possession. When there are several owners of the goods but the goods are the possession of one of the co-owner with the consent of other co-owners, then a pledge made by such a co-owner shall be valid provide d the pawnee accepts the goods in good faith. Pledge by seller in possession of goods after sale. If seller who has sold the goods is in possession of the goods pledges them and the pawnee accepts them in good faith then it is a valid pledge. The buyer of goods cannot recover the goods from pawnee. Pledge bp a buyer in possession of goods under an "agreement to sell". Quite often a person is given passion of goods under an agreement to sell i.e. the buyer has not yet become the owner of goods but he is possessing them if such a person pledges the goods and the pawnee accepts the goods in goods faith, it is a valid pledge. For example, a buys a radio from B on hire purchase system. a has not yet become the owner because he has not paid the full price. If a pledges that radio set with C, it is a valid pledge provided C has no knowledge about the detective title of A. Define a contract of agency? A person who is competent to make a contract may do so (a) either by himself, or (b) through another person. When he contracts through another person he is said to be making a contract through an agent. The person who acts on behalf of another or who represents a person in dealing with third parties is called as an agent and the person on whose behalf he acts or who is thus represented is called as 'principal'. The contract
which created the relationship pf principal and agent is called an agency' According to section 182 of the Indian contract act "an agent is a person employed to do any act for another or to represent another in dealing with third persons. The person for whom such act is done, or who is so represented is called the principal. From the above definition it is clear that every person who acts for another is not an agent. A person can become agent only when he is authorized to act as such by the principal. A person who gives advice to his friend in matters of business cannot be called as an agent. Agency is a relation between two parties created by an agreement express or implied. Agency may arise out of an agreement which does not become a contract because one of the parties is incompetent to contract. It is for this reason that sec. 184 states that "as between the principal and third persons any person may becomes an agent.' The concept of agency emphasizes that the agent brings about a contractual relationship between the principal and third parties. In this sense, agent is merely a connecting link. After entering into a contract on behalf of the principal with a third party, the agent drops out and the contract binds the principal and the third party as if they have made it themselves. General rules of agency. There are two important rules: (a)Wherever a person competent to contract may do by himself he may do through an agent except for acts involving personal skill and qualification. For example, a person cannot marry through an agent cannot paint a picture through an agent because these contracts are of a personal nature.
The acts of the agent are for all legal purposes the acts (b) of the principal. Sec. 226 of the act provides that the contracts entered into by an agent on behalf of his principal shall bind the principal towards the third parties, as if the contract is made by the principal himself. Test of agency. In order to determine whether a person is an agent or not we have to find out whether he has the authority to represent his principal in dealings with third parties. In case he has the necessary authority to bind his principal then only he is an agent. A person who is rendering some personal service to his master or is working in his establishment cannot be called as an agent because in these cases he is not representing his principal. Thus when a person has the authority to represent his principal then only he can be called an agent. Who a contract of agency? How does he differ frame a servant? Can a minor (1) appoint an agent? (2) Be appointed an agent? Section 182 of the act defines an agent as a person employed to do any act for another or to represent another in dealings with third persons. For example, A appoints B to buy 10 bags of rice on his behalf. If B purchases the rice from T. then this is a contract between A and T. here A is the 'principal' and A is the principal and B is the 'agent. Difference between an agent and a servant A servant acts under the direct control and supervision of his master and is bound to obey the orders of this master. A servant must work according to the instructions of his master. But an
agent, though he must work within the scope of the authority given; need not work under the direct control and supervision of his principal. A servant is employed to work for his master he does not create relations between his master and third parties. But an agent is appointed to create contractual relations with third parties. In specific cases a servant may be authorized to represent him principal then to that extent he is an agent. A servant is to told how a job is to done where as an agent is only to be told as to what is to be done. Thus an agent is superior to a servant. An agent is not a servant, but a servant may for some purpose, be the agent of his master. Can a minor appoint an agent? Section 183 provides that "any person who is of the age of majority according to the law to which he is subject and who is of sound mind may employ an agent." It is clear therefore that a minor a lunatic cannot appoint an agent. Can a minor be appointed an agent? Sec 184 of the act provides that "as between the principal and third persons any person may become an agent". Thus even a minor or a lunatic can be appointed as agent and the principal shall be bound by the acts of such agents. When a minor is appointed as agent the principal shall be bound by the acts of such agent, but if the agent violates the authority or acts negligently then the principal cannot take any action against such a minor agent. Example: Mohan appoints Ram, a minor as his agent and authorizes him to sell his scooter for a price not below Rs. 4,000 Ram sells the scooter to Arun for Rs.3, 5000 only. Mohan shall be bound to Arun. Here Mohan incurs a loss of Rs.500, but he cannot recover this loss from his agent Ram because he is a
minor. Had the agent been a competent person, then Mohan could recover Rs. 500 from his agent for violating the instruction of his principal. Briefly explain the various modes by which an agency may be created? An agency may be created in different ways. It need not always be created by an express agreement, it may arise impliedly i.e. may be inferred from the circumstances and the conduct of the parties. An agency may be created in any one of the following ways: Agency by express agreement. An agency may be created by words spoken or written. When a principal appoints an agent by words spoken or written to represent him, an express agency is created. For this no particular form or set of words is required. When an agency is created in this manner the scope of the authority of the agent is also clearly spelt out so that there is no confusion later on. Agency by implied agreement. When an agent is not appointed expressly but from the circumstances of the case, or the conduct of the parties it appears that a person is acting as an agent then an agency arises impliedly. Implied agency may be either by estoppel or by holding out; or by necessity. principal of estoppel says that, 'where a person by his words or conduct has willfully led another person to believe that certain set of circumstances or facts exists, and that other person has acted on that belief,
then he is estopped from denying the truth of such statements subsequently.' Section 237 of the contract act which deals with agency by estoppel, provides that, "when an agent has, without authority, done acts or incurred obligations to the third parties on behalf of his principal the principal is bound by such acts or obligations, if he has by his words or conduct induced such third person to believe that such acts and obligations were with in the scope of the agent's authority.' When a person either by his conduct or statement leads another person to believe that a certain person is his agent, then he is estopped from saying that such a person is not his agent. Example: A tells B in the presence and within the hearing of P that he (a) is P 's agent P does not contradict this statement and keeps quiet. Later on B supplies some goods on credit to A, believing A to be P 's agent. Here P will be liable to pay for the goods even though a was not in fact an agent of P. (b) Agency of holding out. It is a variation of agency by estoppel. In this type of agency some affirmative or positive act by the principal is necessary. The principal shall be bound by the acts of the agent if he given the impression that the said acts are done with his authority. Example: A allows his servant to buy goods for him on credit from B and he used to pay for them later on. On several occasions the goods were thus bought by the servant and the payment was made by A. then A sends his servant to buy goods from B for cash. The servant misappropriates the money and buys the goods on credit. Here A shall be liable to pay for the goods, because in the past he has held out to B that his servant has the authority to buy goods on credit.
It should be noted that where an agent is held out as having only a limited authority to do acts, the principal is not bound by an act outside his authority. (c)Agency by necessity. Sometimes extraordinary circumstances may require a person to act as an agent for another without obtaining the consent of that other person. Such an agency is called an agency by necessity. It is not created by parties but by the exigencies of circumstances. For creating an agency by necessity the following conditions should be fulfilled: (a)There should be a real and definite necessity for acting on behalf of the principal. (b) It should be impossible to communicate with the principal within the time available. (c)The person acting as agent should act bonafide in the interest of the principal. Example: A consignment of butter was in complete danger of becoming useless due to delay in transit. The railway officials sold it at the best possible price. The sale was binding on the owner of goods as there was no time for obtaining principal's instructions. The master of the ship has the authority to borrow money on the security of the ship or cargo to carry out urgent repairs to the ship. Agency by Ratification. Where an agent exceeds the authority given to him or acts without any authority the principal may either disown such acts or decide to adopt them. If he adopts them, he is said to have ratified the act of the agent and an agency by ratification comes into existence. When the principal
ratifies the acts, it has the same effect as if the acts are done with his prior authority. Example: A buys a scooter on behalf of B. B did not appoint A as his agent. On coming to know about this transaction, b accepts it. Here A will be treated as B's agent. It should be noted that ratification related back to the date when the act was done by the agent, i.e. ratification has got retrospective effect. The agency comes into existence from the moment the agent acted and not from the time when the principal ratified the act. Discuss the legal position of a wife as her husband's agent? The general principal is that the wife is not the agent of her husband and similarly husband is not the agent of his wife. This rule is based on the principal that marriage by itself does not create the relation of principal and agent. The position of wife can be discussed under the following two heads: When the wife lives with her husband. When the wife is living with her husband she has the implied authority of the husband to buy articles of household necessity. The word "necessaries" include articles suited to the style in which husband decides to live. Thus if the wife purchases goods which are beyond the status in which they live, then husband shall not be liable. In Girdhari lal Vs. Crawford, the Allah bad high court has held that the husband can be held liable only when it can shown that
he has expressly or impliedly sanctioned what the wife has done. The husband can escape liability by proving the following: (a)that he has expressly forbidden his wife from buying things on credit or borrowing money; that he has expressly warned the tradesmen not to (b) supply goods on credit to his wife; (c)that the tradesman knew that she has been given sufficient money to buy the goods; that the wife was already supplied with sufficiency of (d) the articles in question; (e)that the goods purchased were not necessaries; When the wife lives separately. When the wife is not living with her husband then the question arises as to whether she is living separately of her own accord or is compelled to live separately. Where the wife is compelled to live separately from her husband. She can pledge her husband credit for buying necessaries of life this is so because under law a husband is bound to maintain his wife. In such a case wife is treated as the implied agent of her husband. In such a situation the husband cannot even escape liability by telling his wife not to pledge his credit or by warning the tradesman not to supply her necessaries on credit. But if the wife is living separately of her own accord and without any justifiable cause, she cann00t pledge her husband's credit even for necessaries because then the husband is under not obligation to maintain her.
What is agency by ratification? What are the requisites of a valid ratification? Ratification means the subsequent adoption and acceptance by the principal of an act originally done without his authority or instructions. The principal is bound by such acts of his agent which falls within the scope of authority given to him. This means that the principal is not bund by such acts of the agent which are beyond the scope of his authority. However the principal may in such a case either adopt or reject the act of the agent. In case the principal decides to adopt or accept the acts of the agent done without his authority he is said to have ratified that act. When the principal ratifies the acts of the agent then he becomes bound by them. Section 196 deals with the effect of ratification. It provides that 'where acts are done by one person on behalf of another, but without his knowledge or authority he same effects will follow as if they had been performed by his authority.' Example: A without authority, buys goods for B. When B comes to know about this transaction he can either accept it or reject it .if B accepts it the act is ratified and A becomes his agent with retrospective effect. Ratification may be express or implied. sec. 197 provides that 'ratification may be expressed or may be implied in the conduct of the person on whose behalf the acts are done.'
Examples: (a) A without authority, buys goods for B. afterwards B sells them to C on his own account; B's conduct implies a ratification of the purchase made for him by A. (b)A, without B's authority, lend B's money to C. Afterwards B accepts interest on the money from C. B's conduct implies a ratification of the loan. It means that acceptance of a benefit of transaction is a clear evidence of ratification. Ratification tantamount to prior authority. In simple words it means that ratification relates back to the time when the act was done by the agent. The agency comes into existence not from the time when the act of the agent was ratified but it comes from the time when the agent acted on behalf of the principal. When the unauthorized act of the agent is ratified by the principal, it has the same effect as if the act was within the authority. The leading case on this point is Bolton partners Vs. Lambert. In this case the managing director of a company purporting to act as agent on behalf of the company. But without its authority, accepted an offer made by l. subsequently L withdrew the offer but the company ratified the managing director's act. It was held that L was bound. The ratification relates back to the time when the managing director accepted the offer, so the question of revocation of offer does not arise becomes an offer once cannot be withdrawn. Effects of ratification. It establishes the relationship of principal and agent between the person ratifying and the person doing the act.
It establishes a contractual relationship between the principal and the third party. Requisites of a valid ratification For a ratification to be valid and binding the following conditions must be fulfilled: The agent must profess to act as an agent for an identifiable 2.du.cipg!. The act must have been done for and in the name of the supposed principal. Acts done by a person on his own account cannot be ratifies. It is not necessary that the principal should be named but he must be identifiable. The principal must be in existence at the time of the contract. Since the ratification relates back to the date and time of making of contract it is necessary that the principal must be in existence at the time when the original contract was made. It is for this reason that the contracts made by promoters on behalf of the company before its incorporation are not binding on the company i.e. the company cannot ratify such acts which took place before incorporation. The principal must be competent to contract. The principal should have contractual capacity both at the time when the act was done and also at the when it was ratified. It is for this reason that minor cannot ratify the acts on attaining the age of majority. Only lawful acts can be ratified. An act which is void from the very beginning cannot be ratified. Also there can be no ratification of illegal acts.
The principal must have full knowledge of all the material (acts. Sec 198 provides that 'no valid ratification can be made by a person whose knowledge of the facts is materially defective". The principal must be informed about all the material facts at the time of ratification. Example: A authorized his agent B to purchase grain for him. B sold his grain to A at a price higher than the market rate. A ratified the transaction. Afterwards, when A comes to know that the grain belonged to B the ratification is not binding on A because A was not informed about this fact that B was selling his own grain to A. Whole transaction must ratified. Ratification to be valid must be for the whole transaction a partial ratification is not valid. A person cannot ratify a part of the transaction which is beneficial to him and repudiate the rest. Once a part is accepted it is an implied acceptance of the whole. Ratification must not injure a third person. No ratification can be made, where the effect of ratification is to subject a third person to damages or of terminating any right or interest of a third person. Example: A holds a lease from B, terminable on three moth's 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. Ratification must be made within a reasonable time. The ratification to be effective must be made within a reasonable time after the contract is made. If a time is fixed for the performance of the contract ratification must be made before that time.
Ratification must be communicated. There can be no valid ratification of an act unless it is communicated to the other party. If the ratifier decides to ratify but fails to communicate his decision there is so no ratification. Ratification can be of the acts which the principal had the power to do. Such acts which the principal is not empowerd to do cannot be ratified. A company for example cannot ratify the acts of the directors which are ultra vires the powers of the company. What is the extent of agent's authority? The authority of an agent means his capacity to bind the principal. The principal is liable for the acts of the agent with third parties provide the acts are within the scope of the authority of the agent. The authority of the agent may be express or implied. The authority is said to be express, when it is given by words spoken or written. A power of attorney given to an agent is an example of express authority. An authority is said to be implied when it is to be inferred from the circumstances of the case. Authority may be implied from the situation of the parties the circumstances of the particular case the usage of trade or business or the conduct of principal. The principal is also bound by such acts of the agent as within agent's ostensible or apparent authority: provided third party acts bonafide and without knowledge of the are the the
limitation of the agent's apparent authority. Ostensible or apparent authority means that the agent has the authority to do all such things which are usually done in that type of business. Thus if it is the usual practice in the business to buy goods on credit then buying goods on credit by the agent shall be deemed to be within the scope of his apparent authority and the principal will be bound by such purchases. Section 188 of the contract act defines the extent of the authority of an agent. It provides that "an agent having 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 a business has authority to do every lawful thing necessary for the purpose or usually done in the course of conducting such business' Example: (a) A is employed by B residing in London to recover at Bombay a debt due to B. a may adopt any legal process necessary for the purpose of recovering the debt, and may give a valid discharge for the same. (b)A appoints B as his agent to carry on his business of a shipbuilder B may purchased timber and other materials, and hire workmen, for the purpose of carrying on the business. In case the apparent authority of the agent is curtailed then this curtailment shall not be effective till third parties are informed about it. It the agent acts in excess of his actual authority the principal will still be bound by the act if it is within the scope of the agent's apparent authority provided the third parties vided the third parties vided the third parties vided the third parties vided the third parties vided the third parties vided the third parties vided the third parties vided the third parties vided the third parties vided the third parties vided the third parties act bonfire. For example the principal has restricted the power of
his agent to buy goods on credit for an amount of Rs. Five thousand. A supplier who was not aware of this restriction supplied goods worth rupees ten thousand on credit. Here the principal will bound to pay rupees ten thousand. Authority in emergency. An agent has authority in an emergency to so all such acts for the purpose of protecting his principal from loss as would be done by a person of oridinary prudence in his own case under similar circumstances. For example. A consigns provisions to B at Calcutta with directions to send them immediately to C at Cuttack. Be may sell the provisions at Calcutta, if they will not bear the journey to Cuttack without spoiling. What is the extent of the liability of the principal when the agent exceeds has authority? When the agent exceeds the authority given to him, the principal may either disown the unauthorized acts or may ratify them. In case he ratifies the unauthorized acts then the principal becomes bound by them. If the principal decides to disown such acts, then we have to see whether the excess is separable or not. When excess is separable. Where the excess is separable from the authorized portion the principal is liable only for the authorized portion. For example, A appoints B as his agent to purchase five bags of wheat. B purchases five bags of wheat and also two bags of rice. Here A is bound for bags of wheat only. When excess is not separable. Where the agent has exceeded his authority and the contract is such that the excess cannot
separated from the authorized portion, then the principal is not bound by the entire contract. If in the example given above the agent purchases five bage of wheat and two bage of rice for two thousand rupees then the principal can repudiate the whole transaction and the agent shall be personally liable for that. How far a principal is liable to third parties for the acts of the agent? Explain. When agent acts within the scope of his authority. When an agent is appointed then his principal is bound by all the acts of the agent done within the scope of his actual or apparent authority. Such acts of the agent may be enforced in the same manner and will have the same legal effect as if they were the acts of the principal. If the third parties dealing with the agent have actual or constructive notice of the restrictions on the agent apparent authority then the principal will not be bound. When the agent exceeds his authority. Ordinarily the principal is liable for such acts of the agent which are within the scope of his actual or apparent authority. Where an agent exceeds his authority, actual or apparent the principal is not bound by the excess work but where the excess is separable from the authorized work the principal is bound to that extent. But where the excess cannot be separated from the authorized work, the principal may repudiate the whole of the transaction. Principal is bound by notice given to agent. The principal is bound by notice given to the agent in the course of the business. Knowledge of the agent is the knowledge of the principal. Thus the knowledge of a manager of a bank is knowledge of the bank; similarly knowledge of a partner is knowledge of all the partners in the firm. But if the knowledge or information is not acquired by the agent in the course of his employment it cannot be imputed to the principal. However this rule will not apply if the agent is out to commit a fraud on the principal because it
cannot be reasonably presumed that an agent would ever communicate his own fraud to the principal Liability principal by estoppel. A principal is liable where he has by words or conduct induced a belief in the contracting party that the act of the agent was within the scope of this authority. Here the liability of the principal is not based on any real authority, but is by estoppel. Liability for misrepresentation fraud by an agent. The principal is liable for misrepresentation or fraud of his agent acting within the scope of his actual or apparent authority during the course of the agency business. It is immaterial whether the fraud is committed for the benefit of the principal or that of the agent. Example: A being B's agent for the sale of gods, induces C to buy them by a misrepresentation which he was not authorized by B to make. The contract is viodable between B and C, at the option of C. But if such misrepresentation or fraud committed by the agent are outside his authority the principal is not liable. Where the principal is unnamed. When an agent discloses the existence of the principal but does not disclose the name of the principal in such cases the principal is liable for the acts of the agent. In such cases, the third party can sue the principal and the agent shall not liable personally unless there is trade custom making the agent personally liable. If however, the agent refuses to disclose the identity of his principal he will become personally liable on the contract.
Explain the effect of a contract made by an agent with a third party when he acts for (a) an unnamed principal (b) an un- disclosed or concealed principal? When agent acts for an unnamed principal. Unnamed principal means that the agent discloses the fact that he is acting as an agent but does not discloses the name of the principal. In such a case the principal shall be liable for the contract made by the agent unless there is a trade custom making the agent personally liable. Afterwards when the name of the principal is discovered by third parties, they can proceed against him for the contract made by the agent. The point to be noted carefully is that the unnamed principal should be in existence and should be competent to contract at the time when the agent market the contract. If the agent refuses to disclose the indentity of the principal when asked by the third parties he will become personally liable on the contract. When agent acts for an undisclosed or concealed principal. When an agent enters into a contract with a third party in his own name without disclosing the existence of his principal such a principal is known as undisclosed or concealed principal. In such a case the agent gives the impression to the third party as if he is making the contract for himself though in reality he is only acting as an agent.
In case of an undisclosed principal, the legal position of the principal agent and the third party are as following: Where the agent does not disclose the identify and existence of principal he is personally liable for the contract. On such a contract he can sue or be sued in his own name because in the eyes of law he is the real contracting party. When the principal is subsequently discovered by the third party or he himself intervenes, the third party may sue either the principal or the agent, or both. The liability of principal "joint and several" in such a case. The undisclosed principal by disclosing his identity may require the performance of the contract. But in the case the third party shall have as against the undisclosed principal the same rights which he would have had against the agent if the agent had been the principal. The third party will be entitled to claim from the principal the benefit of all payments made by him to the agent. The object of this rule is that the third party should not be put to any disadvantage by the intervention of the principal. Example: A who owes Rs.500 to B sells one thousand rupees worth of rice to B. A is acting as the agent of C in the transaction but B has no knowledge nor reasonable ground of suspicion that A is the agent C cannot compel B to take the rice without allowing him to set- off A's debt of Rs.500. If the principal discloses himself before the contract is completed the third party may refuse to fulfill the contract if he can show that he would not have entered into the contract if he had known who the principal was or that the agent was not the principal.
Who is a sub-agent? When can an agent appoint a sub- agent? The term sub-agent is defined in Sec. 191 as, "a subagent is a person employed by and acting under the control of the original agent in the business of agency." Thus a sub- agent is an agent appointed by the agent. The relation of the sub-agent to the original agent is that of the agent and the principal. Example: A appoints B as his agent. B further appoints C as his agent. Here C is the sub-agent. The relation between B and C is that of the principal and agent. The general rule law is that an agent cannot delegate his powers to another without the consent of the principal. The contract of agency is of a fiduciary character. It is based on the confidence reposed by the principal in the agent. Therefore, agent has no authority to further delegate his authority to another person. Section 190 of the contract act provides that an agent cannot lawfully employ another to perform acts which he has expressly or impliedly undertaken to perform personally. To this rule there are some exceptions. In the following cases the agent may appoint a sub- agent: Where the principal has expressly allowed the appointment of a sub- agent.
Where the principal knows that the agent intends to appoint a sub-agent but he does not object to it. This is considered as implied consent of the principal. Where the custom of trade permits the appointment of a sub- agent. If the nature of work is such that it cannot be done without appointing a sub agent then a sub agent may be appointed. For example a banker authorized to let out a house and collect rents may entrust the work to an estate agent. Where the act to be done is purely ministerial and does not involve the exercise of discretion or any skill. For example, for routine clerical type of work a sub agent may be appointed. Where unforeseen emergencies arise which makes the appointment of sub-agent necessary. If a sub agent is appointed in any of the above circumstances. Then he is known as the properly appointed sub agent". Consequences of the appointment of sub agent Sec. 192 and 193 of the contract act deals with the legal consequences of the appointment of a sub agent. We study the consequences under two heads i.e. when the appointment is proper and when it is not proper. Where a sub agent is properly appointed. In case a sub agent is properly appointed the following are the effects: (a)The principal is bound and is liable to third parties for the acts of sub agent as if he were an agent originally appointed by the principal.
(b) The agent is responsible to the principal for the acts of the sub- agent. If for example the sib agent has misappropriated the principal' property or this sale proceeds the agent is liable for the same to the principal. Because there is no privity of contract between the principal and the sub agent the principal cannot sue the sub agent except for fraud and willful wrong. (c)The sub agent is responsible for his acts to the agent and not to the principal. The sub agent is liable to the principal only in case of fraud or willful wrong. Even in case of willful fraud, the principal has the choice to sue other the agent or the sub agent. Where sub agent is improperly appointed. In case the appointment of sub agent is not authorized the following are the effects: (a)The principal is not represented by such sub agent and hence he is not bound by the acts of the sub agent. The agent is responsible to the principal as well as to (b) third parties for the acts of the sub agent. The agent stands in the position of principal to words sub agent. (c) The sub agent is not responsible to the principal at all. He is answerable only to his employer i.e. the agent. Substituted Agent Section 194 of the contract act provides that when an agent has an express or implied authority of his principal to name a person to act for him and the agent has accordingly named a person, such person is not a sub agent but he becomes an agent for the principal in respect of the business which is entrusted to him. Thus a substituted agent is a person who is named by the agent. A substituted agent is deemed to be the agent of the principal
and not his sub agent. A privity of contract is established between the principal and the substituted agent. When the substituted agent is appointed the original agent drops out altogether from the scene. Example: A directs B, his solicitor to sell his estate by auction and to employ an auctioneer for the purpose. B names C, an auctioneer to conduct the sale. C is not a sub agent but is A's agent for the conduct sale. The agent is not responsible about the work of the substituted agent. His only duty is to take reasonable care while selecting a substituted agent. Section 195 provides that "in selecting such agent for his principal, an agent is bound to exercise the same in his own case; and if he does this he is not responsible to the principal for the acts or negligence of the agent so selected". In substituted agent must use discretion and prudence. But he is not he fails to exercise such care, he become liable to the principal for the negligence of the agent so selected. Example: A instructs B, a merchant to buy a ship for him. B employs a ship surveyor of good reputation to choose a ship for A. the surveyor makes the choice negligently the ship turns out be to unseaworthy and is lost. The surveyor is liable to A. Difference between a sub- agent and a substituted agent. (a)A sub agent does his work under the control of agent but a substituted agent works under the instruction of his principal. (b) There is no privity of contract between the principal and the sub agent but there is the privity of contract between the principal and substituted agent. (c)The sub agent is responsible to the agent alone and is not generally responsible to the principal. But a substituted agent
is responsible to the principal and not to the original agent who named him. (d) The agent is responsible to the principal for the acts of the sub agent but an agent is not responsible to the principal for any act or negligence of the substituted agent. (e)The agent delegates a part of his work to sub agent but the agent does not delegates his work to the substitute's agent. Explain the provisions of the contract Act dealing with rights of the agent against the principal? Right to retain money due to himself. An agent has a right to retain his principal money until his claims in respect of remuneration or advances made or expenses properly incurred in conducting the business of agency are paid. But he can exercise this right only when he is in possession of the principal money. Rights of lien. In the absence of any contract to the contrary an agent is entitled to retain goods papers and other property whether movable or immovable of the principal received by him until the amount due to himself for commission disbursements and services in respect of the same has been paid or accounted for to him. The agent can only retain the goods he has no right to sell them. Right to receive remuneration. In the absence of any special contract payment for the performance of any act is not due to the agent until the completion of such act. In sheikh farid baksh vs. hargulal Singh an agent was appointed to introduce a customer to purchase principal property. The agent introduced one customer the sale was settled and the earnest money paid. Because of the customer's inability to find money, the sale
could not materalise. It was held that the agent was entitled for his remuneration because he has done what he was required to do. It should however be noted that an agent who is guilty of misconduct in the business of agency is not entitled to any remuneration in respect of that part of the business which he has conducted. Example: A employs B to recover Rs. 1,000 from C. through B's misconduct the money is not recovered, B is entitled to no remuneration for his services and must make the goods loss. Right of indemnification. The employer of an agent is bound to indemnify him against the consequences of all lawful acts done by such agent in exercise of the authority conferred upon him. The principal is liable for only such losses and damages as directly and naturally flow from the execution of the agency provided there is no personal default of the agent himself. Right to be indemnified against consequences of acts done in goods faith. Where an agent does an act in goods faith, the employer is liable to indemnify the agent against the consequences of that act even though such act causes injury to the rights of third person. But the agent cannot claim indemnity, in respect of acts which he knows to be unlawful. Thus where the agent buys smuggled goods for the principal the principal is not bound to pay. This right of indemnity is not available for criminal acts of the agent even though they are authorized by the principal. Example, A employs B to beat C and agrees to indemnify him against all consequences of the act. B thereupon beats C and has to pay damages to C for so doing. A is not liable to indemnify B for those damages.
Right for compensation. The principal must make compensation to his agent in respect of injury caused to such agent by the principal neglect or want of skill. Example: A employs B as a bricklayer in building a house and puts up the scaffolding himself. The scaffolding is unskillfully put up and B is in consequence hurt. A must make compensation to B. Right of stoppage of goods in transit. An agent can stop the goods in transit under the following two cases: Where he bought the goods for his principal either with his own money or by incurring a personal liability. Where the agent is personally liable to the principal for the price of the goods sold and the buyer becomes insolvent. When is an anent personally liable for contracts entered into by him on behalf of his principal? An agent is appointed to establish contractual relationship between his principal and third parties. So it is only the principal who can enforce and be held liable on a contract except where there is a contract to the contrary. An agent cannot personally enforce contracts entered into by him on behalf of the principal nor can such contracts be enforced against him. An agent is personally liable in the following cases: Where the contract expressly provides. Third party may at the time of entering into a contract with an agent stipulate that the agent should agree to make himself personally liable on the contract. If the agent agrees to this stipulation he will be personally liable for any breach of the contract.
Where the agent acts for a foreign principal. Where an agent contracts for the sale or purchase of goods for a merchant esiding abroad the presumption is that the agent is personally liable. The agent can escape liability only when he has expressly excluded his personal liability. Where the agent acts for an undisclosed or concealed principal. When the agent does not discloses that he is acting as an agent for someone and he contracts in his own name he becomes personally liable to third parties. Where the agent acts for a principal who cannot be sued. An agent is presumed to incur personal liability where he contracts on behalf of a principal who though disclosed cannot be sued. An agent who acts for a minor the minor being not liable the agent becomes personally liable. Where agent authority is coupled with interest. Where an agent has an interest in the subject matter of the contract entered into by him then the agent is personally liable to the extent of his interest because he is the principal to the extent of such interest. Where an agent acts for a non existing principal. Where an agent makes a contract on behalf of a fictitious or no existing principal such a person is presumed to have contracted in his own name. Thus a promoter who makes a contract with a third party on behalf of the company yet to be formed is personally liable. Where the agent exceeds his authority. Where an agent exceeds his authority or represents to have a kind of authority which he in fact does not have he will be personally liable to the third party for the excess party if it can be separated from authorized portion otherwise for the whole transaction.
Where the agent signs the negotiable instrument in his own name. Where the agent signs a bill of exchange promissory note or cheques in his own name without indicating thereon that he is signing as an agent he becomes personally liable on the instrument. Where there is a trade usage or custom. An agent is personally liable where there is a trade usage or custom to that effect. 79 "The liability of the principal and the agent is alternative and not joint." Comment. The general rule of law is that the principal is bound by the acts of the agent done within the scope of his actual or apparent authority. The agent is merely a connecting link he only brings his and the third party together, for that it is only the principal who can or be sued on such contracts, but there are some exceptions to his rule wherein the agent is held personally liable. These excrptions have been discussed in detail in the preceding question. Now the question arises that when the agent is personally liable on a contract whether the liability of the principal is joint or alternative. Sec 233 clearly provides that can both be sued. "In cases where the agent is personally liable, a person dealing with him may hold either him or his principal or both of them liable." Example: A enters into a contract with B to sell him 100 bales of cotton and afterwards discovers that B was acting as agent for C. A may sue either B or C, or both for the price of the cotton.
It should however be noted that though both principal and the agent can be sued but a decree can only be obtained against either of them. In this sense liability is alternative. Discuss the different modes in which the authority of an agent may terminate? The authority of an agent may be terminated- A by act of the parties B by the operation of law Termination by the act of parties: an agency like any other contract may be terminated by mutual agreement between the parties. It may be terminated at any time by mutual agreement. Revocation by the principal. The principal has the power to revoke the authority given to his agent at any time before the authority has been exercised so as to bind the principal unless the agent has an interest in the subject matter of the agency. Revocation may be expressed or implied in the conduct of the principal. For example A empowers B to let A's house afterwards A let it himself. This is an implied revocation of B's authority. Revocation by the principal is however subject to the following conditions: (a)When the authentic has been party exercised it cannot be revoked with regard to acts already done in the agency. But the principal can revoke for future transactions. (b) Where the agency is for a fixed period a reasonable notice of revoking the authority must be given to the agent
and also to third parties. If reasonable notice is not given then compensation must be paid by the principal to the agent. (c)Where the agency is for a fixed period and the principal revokes the authority of the agent before the expiry of the period without sufficient cause the principal is bound to pay compensation to the agent even if reasonable notice is given. (d) Where an agent has himself an interest in the business of agency the authority of the agent cannot be revoked unless there is an express contract to the contrary. Renunciation by agent. An agency may also be terminated by the agent by an express renunciation but a reasonable notice must be given to the principal. If the agency is for a fixed period and the agent renounces it without sufficient cause before the expiry of the period he shall have to compensate the principal Termination by operation of law An agency will come to an end by operation of law in the following cases: Completion of the business of agency. When the purpose for which agency was created is completed the agency comes to napped automatically. Thus for example the authority of an agent appointed to sell goods ceases when the good are sold. Death or insanity of the principal or agent. An agency comes to an end automatically on the death or insanity of the principal or agent. On the death or insanity of the principal an agent has a duty to protect the interests of his principal. Expiry of time. Where the agency is for a fixed period it will terminate on the expiry of the said period it is immaterial whether the purpose of agency has been accomplished or not. Insolvency of the principal. On the insolvency of the principal the agency terminates. The act is however silent on the point whether the insolvency of the agent terminates agency or not. But the accepted view is that the insolvency of the agent also terminates agency.
Destruction of the subject matter. Where the subject matter for which an agency was created ceases to exist the agency also terminates. For example where an agent is appointed for the sale of certain goods the agency will terminate on the destruction of goods Dissolution of company. When the principal or agent is an incorporated company the agency will come to an end on the dissolution of the company. 79 When termination of agency takes effect? As between the principal and agent the termination of agency is effective only when it becomes known to the agent. Thus where an agent is authorized to sell some goods on behalf of B. B revokes the authority of the agent by a letter. A, after the letter is sent but before he receives it sells the goods. The sale is binding on the principal. But as regards third parties the agency will come to an end only when they come to know of it. Therefore, the principal must give a public notice terminating the authority of the agent. Thus, if an agent knowingly enters into a contract with a third party after the termination i.e. without knowing that the authority of the agent has been terminated the principal will be bound by the acts of the agent. 80 When is agency irrevocable? There are certain circumstances when the authority of the agent cannot be terminated. An agency is irrevocable in the following cases: Where the agency is coupled with interest. The agency is said to be coupled with interest when agency is created for securing
some benefit to the agent over and above his remuneration as an agent. When an agent has himself an interest in the business of agency, the agency cannot in the absence of an express contract be terminated to the prejudice of such interest. Example: A gives authority to B to sell A's land and to pay himself out of the proceeds of the debts due to him from A. A cannot revoke this authority. It is important to note that the doctrine of agency coupled with interest is applicable only when the interest of the agent exist at the time of the creation of agency. It therefore, cannot apply where the interest arises after the creation of agency. An agency coupled with interest also does not come to an end on the death, insanity or insolvency of the principal. Where the agent has incurred a personal liability. If the business of agency the agent has incurred some personal liability then the principal cannot revoke the authority of the agent. This is based on the rule that the principal cannot be allowed to withdraw leaving the agent to bear the loss. Example: A authorizes B to buy ten bags of wheat for him. B buys ten bags of wheat in his own name so as make himself personally liable for the price. Here A cannot revoke the authority of B because B has incurred a personal liability. Where the agent has partly exercised his authority. Where the agent has partly exercised his authority such authority cannot be revoked so far as regards such acts and obligations arising from acts already done in the agency.
Example: A authorizes B to buy ten bags of wheat on his account B buys of wheat in the name of A. A cannot revoke this authority.

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