Law of Contract

Indian Contract Act, 1872

Meaning and essentials of a valid contract
Legality of Objects
Special contracts Indemnity ,
Guarantee, Pledge, Agency
Sale of Goods Act ,1930
Contract of sale
Conditions and warranties
Transfer of ownership of Goods including
sale by non-owners
E-contracts

Law of Contract
PROMISE: S.2(b)
When the person to whom the proposal is made signifies
his assent thereto, the proposal is said to be accepted. A
proposal when accepted becomes a promise
Proposal + Acceptance = Promise
AGREEMENT S.2(e)
Every promise and every set of promises forming the
consideration for each other
Offer +Acceptance +consideration = Agreement
CONTRACT S.2(h)

An agreement enforceable by law

or,
an agreement made with an intention to create a legal obligation
(enforceable by law)

Agreement + Enforceability by law = Contract

Example
P offers Q to sell his car For Rs. 2 lacs
. Q accepts it . (Offer+ Acceptance+
Consideration= Agreement). This
agreement creates an obligation on
both P and Q to deliver the car and to
make the payment respectively. The
agreement is a contract.
A invited B for lunch. B accepted. Its
a promise , not enforceable by law.

Related concepts
Proposal Sec 2(a) also called Offer
when one person signifies to another his
willingness + to do or to abstain from
doing anything +with a view to obtain
assent to such act or abstinence +he is
said to make a proposal.
Promise Sec 2(b)
When the person to whom the proposal is
made signifies his assent thereto + the
proposal is accepted + a proposal when
accepted becomes a promise

 Consideration for Promise- sec 2(d)

when at the desire of the promisor +the
promisee or any other person +has done or
abstained from doing or does or abstains
from doing , or + promises to do or to abstain
from doing something + such act or
abstinence is called consideration for
promise.
A offers B to drive his car and B accepts it for
Rs.4000 per month . Here the amount of
Rs.4000 is the consideration for driving the
car.

 Reciprocal Promise Sec 2(f)

Promises which form the consideration or part of
the consideration for each other .Another promise in
return of a promise.
Therefore Consideration can be in the form of Cash ,
Kind or another promise.
Consensus- ad- idem --- basic requirement for a
contract . Meeting of minds between the parties where
all understand and have accepted the contractual
commitments made by each other.
Example A said to B, I will buy all your stock, by
stock he meant shares in the company , and B said I
will sell all my stock to You, and meant his cattle
stock.
``

What is a Contract?
Sec.2(h) A contract is an agreement
enforceable by law.
The contract must be definite & its
purpose should create a legal
relationship.
The agreements must satisfy two things
viz.,
i) Intention to be bound, &
ii) consideration

Essentials of Contracts
1.
2.
3.
4.
Contract
5.
6.
7.
Void
8.
9.

Agreement
Legal Obligation
Free & Genuine Consent
Parties Competent to
Lawful Consideration
Lawful Object
Agreement not declared
Certainty of Meaning
Possibility of Performance

Agreement
Has 2 elements viz.,
i) A proposal/offer, and
ii) Acceptance of that proposal/offer
Offeror and Offeree 2 parties
Same thing in same sense consent
A contract which is an agreement
enforceable in law has two elements
viz;
i) An agreement
ii) Legal obligation

Essentials of a valid
Offer/Proposal
Expression of offeror to do or abstain
from doing an act + made with a view
to obtaining assent of the offeree of
the proposed act or abstinence.
Communication of Proposal
process of Comm. Completed when it
is communicated(Sec 3).
-- by word of mouth, or by writing or
even by conduct or by omission.

Cont.....
Types --- Implied or Express
Offer/Proposals
Words not the only medium of expression
, conduct can also convey the words of
a promise --- Implied Proposal
Express Proposal one which is
expressed by words written or spoken
An Acceptance may likewise be made
expressly or impliedly Sec 9

Examples of implied or express offer

Express offer A proposes by letter to sell
a house to B at a certain price . This is an
offer by written words (i.e letter).
A proposes over telephone to sell a house
to B at a certain price. This is an offer by an
act(by oral words).
Stepping into an omnibus (Wilkie v
London Transport Board (1947)
Implied offer Creates implied promises to
pay for the benefits employed.

 Example of Implied Offer Steven v

Bromley & Sons (1919) where a charterer
of a ship chartered for loading steel billets,
instead loaded general merchandise, for
which the rate of freight was higher , he was
held to have done so under an implied
promise to pay the higher rate .
Knowledge of Communication- Comm. Of
a proposal is complete when it comes to the
knowledge of the person to whom it is made.

 Example of Knowledge of Comm.

Lalman Shukla v Gauri Datt (1913)- An
announced reward for tracing a missing child could
not be claimed by a person who had traced the
child in ignorance of the announcement.
Offer if not communicated does not fit to be
an offer an offer of 100 pounds to a person who
would swim hundred yards in the harbour on the
first day of the year would not be satisfied a person
who was accidently thrown overboard on that day
and swam the distance only to save his life.

```
Where the offer has been accepted with the
knowledge of the reward, the fact that the informer
was influenced by motives other than the reward
will be immaterail.
Case law Williams v Carwardine (1833)
Walter Carwardine was murdered Mrs Williams
gave the suspects of 2 men but withheld info 2 en
acquitted -- Walters brother announced a reward of
20 pounds for giving info about the murderers of
walter Mrs. Williams again gave a statement and
her husband was convicted she claimed reward
and was entitled to recover.

 Types of Offer Specific and General

Specific To a definite person or a group of persons
Case law Boulton v Jones(1857)
Jones used to have business dealings with Brockle Hurst. He
sent an order (offer) to Brockle Hurst for the purchase of certain
goods. By the time the order reached Brockle Hurst, he had sold
his business to Boulton. Boulton receiving the order sent all the
goods to Jones as per the order without informing Jones of the
changing of the hands of the business. When Jones learnt that
the goods were not supplied by Brockle Hurst, he refused to pay
for the goods. His contention was that he had never placed an
order to Boulton, the offer being made to Brockle Hurst, and
therefore had no intention to make a contract with Boulton.
Held Jones was not liable to pay

 General Offer To the public at large

Case law- Carlill v Carbolic Smoke Ball Co. (1813)
Carbolic smoke ball co. a medicine co.- advertised to give
award of 100 pounds to anyone who contracted influenza
after using smoke balls of the co. For a certain period acc.
to printed directions- Mrs. Carlill contracted influenza after
using the smoke balls accordingly she claimed reward- co.
refused on the ground that the offer was not made to her
and in any case she did not communicate her acceptance
she filed a suit held she could recover as she had
accepted the offer by complying with the terms of the offer.
****** in a general offer , complying to the conditions
of the offer means acceptance

Offer and Invitation to

treat(offer)
The offeror must have expressed his
willingness to contract in terms of his offer
with such finality that the only thing
awaited is the assent of the other
party where a party without expressing
his final willingness, proposes certain
terms on which he is willing to negotiate,
he does not make an offer its an
invitation to receive offers.
Case law Harvey v Facie

The defendants were the owners of the plot of land named Bumper Hall Pen
. The plaintiff being interested in purchasing the same sent a
telegram to the defendants will you sell us Bumper Hall Pen ?
Telegraph lowest cash price .(1st telegram)
The defendants replied also by a telegram lowest price for BHP, 900
asked by you. (2nd telegram)
The plaintiff immediately sent another telegram to defendants we
agree to buy BHP for 900 as asked by you. (3rd telegram)
The defendants subsequently refused to sell the plot of land at that price.
The plaintiffs contained that the telegram from the defendants quoting lowest
price was an offer and the same has been accepted by the plaintiff and thus,
the contract is complete.
The defendants contended that quoting the price was not an offer which could
be accepted.

Held
The Judicial Committee of Privy Council held that the exchange of the above
telegrams have not resulted into a contract. It was observed that the 1st
telegram had asked two questions regarding willingness to sell and the other
regarding the lowest price. In reply only the lowest price was quoted and this
was not an offer but a mere supply of information as desired by the other
party.

The third telegram from the plaintiffs saying he agrees to buy was only an

Acceptance Essentials of a valid

acceptance Sec 2(b)
1. Communication of Acceptance
a) By external manifestation or overt
act There should be some external
manifestation(overt act) of
acceptance. Mere mental
determination to accept without
external indication would not be
sufficient.
Case law Cotton Corporation of
India ltd. V. Bombay Dyeing & Mfg
Co. Ltd(2006)a term in the
proposal that if it is not rejected upto a

2. Communication of Offeror - Must be

communicated to the offeror himself , comm. to any
other person is as ineffectual as if no communication
has been made.
Case law : Felthouse v.Bindley F offered by
means of a letter to purchase his nephews
horse. The letter said If I hear no more about
the horse , I consider the horse mine at 33.15
Pounds. To this letter no reply was sent. The
nephew told the auctioneer(B) , not to sell the
horse as it was already sold to his uncle(F).
The auctioneer(B) by mistake put up the horse
for auction and sold it. F (uncle) sued the
auctioneer(B) on the ground that under the
contract the horse had become his property
and therefore, the defendant's unauthorised
sale amounted to conversion. But the action

Communication from acceptor Information

received from an unauthorised person is ineffective.
Case law Powel v. Lee Powel was the applicant
for the headmastership of a school. The managers
passed a resolution appointing him, but the decision
was not communicated to him. One of the members of
the selection committee informed him in his individual
capacity. The managers later cancelled the resolution
and the plaintiff sued for breach of contract. The court
held , There must be notice of acceptance from the
contracting party in some way. Information by an
unauthorised person is as insufficient as overhearing
from behind the door.
3.

4. When communication not necessary in case

of general offer to public at large ,
communication of acceptance is not necessary
Case : Carlill v Carbolic Smoke ball co.

Case law -Elliason v. Henshaw 1819 A offered to buy

flour from B requesting that an acceptance should be
sent by the wagon which brought the offer. B sent his
offer by post, thinking that this would reach the offeror
more speedily. But the letter arrived after the time of
the wagon. A was held not to be bound by the
acceptance.
6. Acceptance should be absolute To convert a
proposal into a promise , the acceptance should be
absolute and unqualified ; also be expressed in some
usual and reasonable manner.
Counter proposals any departure from the terms of
the offer or any variation is no acceptance , it is counter
proposal.

Legal Obligation

Intention to create legal relationship

Belfour Vs Belfour Case (1919) Parties
didnt intend to create legal relations. A husband
agreed to pay 30 pounds to his wife while he was
abroad he failed wife sued for recovery held she
could not recover it was a social agreementcannot
make a contract binding

Commercial or social, domestic

agreements must have some
presumptions to show legal obligations
to be a contract

Free & Genuine Consent

Contract should not be obtained by

- misrepresentation
- Fraud
- Undue influence
- Coercion
- mistake
If any of above flaw exists in a
contract it will be held as void

Coercion (Sec 15) Consent is said to be caused by

coercion when it is obtained by pressure exerted by
either of the following techniques :(a) Committing or threatening to commit any act
forbidden by Indian penal code
(b)Unlawfully detaining or threatening to detain any
property
1. Chikham Amiraju v. Chikham Seshamma
By threat of suicide , a Hindu induced his wife and
son to execute a deed in favour of his brother in
respect of certain properties which they claimed as
their own. It was held that the threat of suicide
amounted to coercion within sec 15 and the deed
was therefore voidable.
2. Detention of Property Case Law Astley v.
Reynolds (1731) A had pledged his plate with R
for 20 pounds. When he went to redeem it the

Undue Influence- (Sec 16)

1. Ability to dominate the will of others eg A

spiritual guru
2. Relation of dominion over others
(a)Real or apparent authority( an Income tax
officer in case of an assessee or a police officer
or magistrate in case of an accused where a
person does not have any real authority but is
able to approach the other with a show or colour
of authority) over the other or where he stands
in fiduciary relation(eg. Solicitor and client ,
doctor and patient) to the other or,
(b)Where he makes a contract with a person whose
mental capacity is temporarily or permanently
affected by the reason of age, illness , or mental
or bodily distress
case law : A poor Hindu widow , who was in

Misrepresentation (Sec 18) Misstatement of a

fact material to the contract . A contract the
consent to which is induced by
misrepresentation is a contract voidable at the
option of the deceived party.
Acts which constitute misrepresentation :
Positive Unwarranted Statements A statement is
said to be warranted by the info of the person
making it when he receives the info from
trustworthy sources. It should not be hearsay. Case
law : Mohanlal v Sri Gungaji Cotton Mills co.
1990 B told the plaintiff that one C would be the
director of a co. B had obtained this info not from C
directly, but from another person, called L. This info
proved untrue.
Breach of Duty - Sec 18(2) any breach of duty which
without any intent to deceive, gives an adv to the

Inducing mistake about subject matter if one of

the parties leads to other , however , innocently to
make a mistake as to the nature or quality of the
subject matter , there is misrepresentation.
Other info about Misrepresentation
1. Suppression of material facts and vital facts-R v
Kylsant (Lord)
2. Expression of Opinion not a misrepresentation

Fraud (Sec 17) Intentional

misrepresentation of fact making certain misstatements deliberately. It includes the following :

3. There must be representation or assertion
and it must be false Concealment by mere
silence is not fraud when is silence considered a
fraud ?(Contracts uberrima fides) (a) when it

even if it amounts to misrepresentation , will be no

fraud . Case law Haji Ahmed Yarkhan v Abdul
Gani khan the plaintiff could not recover the
expenses incurred over the engagement of his son
which had to be broken off because the girls side
suppressed the fact that the girl was suffering from
epileptic fits. (b) where the circumstances are such
that silence is in itself equivalent to speech where
A says to B , if you do not deny it, I shall assume that
the horse is sound , A says nothing . Here As silence
is equivalent to speech.
2. Active concealment of a fact also amounts to
fraud
3. The fraud must have actually deceived the
other party- an attempt to deceive the other party by
which the other party is not actually deceived , is not

It was held that B was bound to pay because because

he was not actually deceivedhe never examined.
4. The party must have suffered some loss there can
be no fraud without damage and there can be no
damage without injury.

Mistake erroneous belief concerning something

Two types Mistake of Law and Mistake of Fact
Mistake of Law Mistake of Indian Law and
Mistake of foreign law
Mistake of fact bilateral mistake and
unilateral mistake
Mistake of Indian Law does not effect the validity
of contract ignorance of law is no excuse
Mistake of foreign law- taken as mistake of fact
the contract will be void

Mistake of fact
Bilateral Mistake when both the parties are under
the mistake of fact essential to the agreement the
agreement is void .
example A agrees to buy a horse from B . It turns
out that the horse was dead at the time of bargain,
though neither party was aware of the fact. The
agreement is void.
A contract was entered into for the purchase of
certain bails of cotton to arrive by a ship called
Peerless from Bombay. Two ships of the same name
(Peerless) were to sail from Bombay. The buyer
intended to buy the cargo of one ship but the seller
was selling the cargo of the other. The contract was
held to be void.
Important An erroneous opinion as to the
value of a thing which forms the subject

Unilateral mistake where only one party to the

agreement is under a mistake.

Parties Competent to Contract

Who is a competent party?

Of majority age i.e., not a minor
Of sound mind lunatic, idiot,
drunkenness, status
Not disqualified by any law to which he is
subject
Flaw if any, contract becomes
unenforceable, except in exceptional
circumstances

Lawful Consideration
Is price for the promise of the other
need not be in terms of money
If not supported by consideration
bare consideration nudum pactum
contract not enforceable
Must be real & lawful
Each party must promise something
and receive something cash , kind or
a reciprocal promise.

No consideration No
Contract
Case laws
1. Abdul Aziz v Mazum Ali
2. Kedarnath v.Gorie Mohammad

Exceptions
1. Natural love and affection
. Case law Poonoo Bibi v Fyaz Buksh(1874)A
Mohammedan husband , by a registered agreement
promised to pay his earnings to his wife . Held the
agreement though without consideration was valid
. Case law Rajhikhy Dohee v Bhootnath(1900)
A hindu husband after referring quarrels and
disagreements between himself and his wife ,
promised to pay his wife a sum of money for her
maintenance and separate residence, it was held
that the promise was unenforceable .

Promise to compensate for past voluntary

service
3. Promise to pay a time-barred debt the Promise
should be in writing chowksi v chowksi A owes B
Rs.10000 but the debt is barred by the Limitation Act. A
signs a written promise to pay B Rs.8000 on account of
the debt. This is a valid contract.
4. Bailment consideration not necessary
5. Agency
6.Completed Gifts gifts given and accepted
2.

Lawful Object

OBJECT
Not disapproved by law
Does not defeat any provision of
law
Where it is not fraudulent
Not injurious to another person or
property
Not immoral
Not opposed to public policy

Every agreement of which the object or

consideration is unlawful is void.
1. Forbidden by law Case law :- Chandra
Sreenivasa Rao v Korrapati Raja Mohana
Rao,1952money is borrowed for the purpose
of marriage of minor , the consideration for the
contract is loan and the object is marriage.
Marriage is hit by Child Marriage Restraint act
1929.
2. Fraudulent
3. Injurious to person or property
4. Immoral Case law : Fender v St John Mildway
Adultery his wife decree nisi for divorce
promised nurse to get married after decree was
absolute married another woman nurse
sued for compensation for breach of promise.

Examples
1. Trading with enemy
2. Trafficking in public offices agreement which induces
a public officer to act corruptly is contrary to public
policy. Example : an agreement by which a sum of
money was provided to a charity on the condition that
the latter would procure a knighthood for the plaintiff,
was held void and the money irrecoverable.
3. Interference with administration of justice
1. Interference with the course of justice
2. Stifling prosecution
3. Maintenance and Champerty
4. Marriage Brokerage contracts
5. Unfair or unreasonable dealings

Agreement declared Void by the

Indian Contract Act 1872
Although an agreement contains all
the elements yet, certain
agreements are declared illegal or
void agreements, such as;
Restraining marriage(Sec 26)
Restraining trade(Sec 27)
Restraining legal proceedings(Sec
28)
Wagering agreements(Sec 29)

 The agreement which restricts a person to marry is

void-ab-initio.
Case law: A Suryanarayan Murthi v P.Krishna Murthy
1957(Widow re-marriage)
Case Law: Badu v Badarnessa 1919 (husband geting
remarried the first wife will get the right to divorce
him)
Indian constitution allows every individual to pursue
any legal business, profession or vocation. Whether
the agreement in restraint of a legal trade or
business is absolute or partial, it is void and in no
case enforceable.
An agreement which stops a person from obtaining
the court of justice, is void.
Case Law: Hakam Singh v Gammon (India) Ltd. 1971

 Wagering Agreements : The term wager indicates to

a person who agrees to pay some money to other on
the occurrence or non-occurrence of an event. Also
referred to as a Betting Agreement.
Example of Purely Wagering events : Lotteries
Exceptions : Horse racing competition, Skill
Competition

Certainty of Meaning

Specific (say cloth, oil type)

Shouldnt be vague
Punit Beriwala Vs. Suva Sanyal
(1998) Agreement to agree

Possibility of Performance
Agreement to do an act impossible cannot be
enforced
Eg; Discover treasure by magic
Based on the maxim Law does not compel to do what
is impossible
(Lex non cogit ad aimpossibilia)
At the time of entering into contract, was capable of
being performed, but subsequently become impossible
or unlawful Known as doctrine of supervening
impossibility, doctrine of frustration- court has the
power to declare it void.- where the performance
becomes physically impossible or where the subject of
the contract fails or is beyond performance.

Necessary Legal
formalities
Contract may oral or in writing
However, certain cases documented, comply
with formalities of writing, registering,
attestation, stamp duty
Made in presence of a witness
Agreements which must be writing
- time barred debt
- arbitration agreement
- lease agreement for more than 3 yrs.
- contract of insurance
- negotiable instruments
- memorandum & article of association
- transfer of immovable property & so on

Necessary Legal
formalities
Contracts which must be registered:
- promise w/o consideration out of natural
love & affection between parties of near
relation
- documents u/s 17 of Registration Act
- transfer of immovable properties under
TPA,1882
- Memorandum & Art. Of Association,
Mortgage and Charges under Co.Act,1956

Bailment and Pledge

Requisites of Bailment:
Contractexpress or implied
Delivery of possession-actual or constructive
ONLY POSSESSION and not TRANSFER OF
(property)OWNERSHIP
For some purpose
Return of specific goods (Goods as defined in Sale
of Goods Actevery kind of movable property
other than money and actionable claims)
Consideration normally in the form of money.
However, consideration is not necessary at the
time of return of goods.

Bailment and Pledge

Duties of the Bailor:
a)To disclose known facts; b) To bear the
extraordinary expenses; c) To indemnify the bailee
for loss in case of premature termination of the
gratuitous bailment.; d) To receive back the goods;
e) To indemnify the bailee for defective title
Duties of the Bailee:
a)To take reasonable care of the goods; b) Not to
make any unauthorised use of the goods; c) Not to
mix the goods with other goods; d) Not to set up
an adverse title; e) To return any accretion; f) To
return the goods
50

Bailment and Pledge

Rights of the Bailor:
a) Enforcement; b) Avoidance
(if the bailor is
convinced that the bailee has done something
inconsistent with the contract); c) return of the
goods
lent
gratuitously
at
any
time;
d)compensation from the wrong-doer
Rights of the Bailee:
a)Delivery of goods to one of the several joint bailors
is sufficient delivery; b) Delivery of the goods to
the bailor without title ( in good faith) not
reponsible for the true owner; c) right to apply to
court to stop delivery; d) right of action against
trespassers; and e)bailee has a right of lien.
51

Bailment and Pledge

PLEDGE:
--Bailment of goods as a security for payment of
debt or performance of a promise is known as
PLEDGE.
--Delivery may be actual or constructive (delivery of
keys of a safe) .
--Person delivering the goods as security is known
as PAWNOR (Pledgor) and the financier is known
as the PAWNEE (Pledgee)
Example: Gold Loan, Loans against approved share
certificates or National Savings Certificates or
against any movables where the possession
passes on to the lender. Where the possession
continues
with
the
borrower,
it
is
52
HYPOTHECATION.

Bailment and Pledge

Rights of Pawnee:
a)Right of retention; b)Right of retention for
subsequent advances; c) Right to extraordinary
expenses; d) Right against the true owner, when
the pawnors title is defective; e) pawnees rights
when pawnor makes defaultfiling a suit; sell the
goods pledged; recover any shortfall after selling
or auctioning (right to sue and right to sell are
concurrent rights)
Rights of Pawnor:
a) Right to get back goods; b) right to redeem debt;
c) preservation and maintenance of the goods; d)
rights of an ordinary debtor
53

Distinction Between Bailment and

Pledge
Pledge
Bailment
Delivery of goods for some
specified purpose
Where the title to the
goods are defective, rights
of the bailor and bailee
differ from those of a
pawnor and a pawnee

Delivery
security

Where the title to the

goods are defective, rights
of the bailor and bailee
differ from those of a
pawnor and a pawnee

Right to sue and right to

sell are not concurrent
rights. Creditors may first
be asked to sell the goods
and then file the suit for
the shortfall

Right to sue and right to

sell are concurrent rights

of

goods

as

54

INDEMNITY AND GUARANTEE

Indemnity:
A contract by which one party promises to save
the other from loss caused to him by the conduct
of the promisor himself or by the conduct of any
other person.
The promisor is known as INDEMNIFIER and the
promisee is known as INDEMNIFIED (INDEMNITY
HOLDER)
The Indian Contract Act has not included certain
contracts like a) implied promises to indemnify; b)
claims arising from accidents and events not
depending on the promisor or any other person;
c) Contract of insurance. Still they are contracts
of INDEMNITY;

55

INDEMNITY AND GUARANTEE

Rights of Indemnity holder:
a) All damages which he may be compelled to pay
in any suit; b) all costs which he may be
compelled to pay in bringing or defending ay
such suit (provided he acted prudent); c) all
sums which he would have paid under the terms
of compromise of any such suit (compromise
shall not be against the orders of the
indemnifier)

56

INDEMNITY AND GUARANTEE

Guarantee:
A contract to perform the promise or discharge
the liability of a third person in case of his
default.
Person giving the guarantee is known as
GUARANTOR OR SURETY
The person on whose behalf the guarantee is
given is known as PRINCIPAL DEBTOR or simply
DEBTOR
Person to whom the guarantee is given is known
as CREDITOR
Guarantee may be express or implied or by the
course of the conduct of the parties.

INDEMNITY AND GUARANTEE

Guarantee: Essential Features:
Three parties
Guarantors primary liability
Essentials of a valid contract must be presentall
parties to the contract of guarantee shall have the
capacity to contract
Consideration received by the principal debtor is a
sufficient consideration for the contract of guarantee.
Contract in Writing not necessary Some contracts
are implied
Guarantee is not a contract WHERE ONE SHALL
DISCLOSE ALL MATERIAL FACTS BY THE PRINCIPAL
DEBTORIt is the guarantors primary liability on
the debts of the principal debtor.

Distinction between Indemnity and Guarantee

INDEMNITY

GUARANTEE

TWO PARTIES
Indemnifiers liability is primary and
independent

Only one contract

Not necessary to act at the request

of the indemnified

Liability arises only in contingencies

An Indemnifier cannot sue a third
party as there is no privity of
contract between such third party
and himself

THREE PARTIES
Guarantors or Suretys liability is
secondary or collateral, primary
liability being that of the principal
debtor
Three contracts: a) Guarantor
and guarantee; b) Creditor and
debtor and c) guarantor and the
debtor
It is essential that the surety shall
give the guarantee at the request
of the principal debtor
Liability can be existing or future
debts
Surety gets into the shoes of the
creditor once he performs his
obligations
59

INDEMNITY AND GUARANTEE

Extent of suretys liability:
It is co-extensive with that of the principal debtor which
means that the quantum of obligation of a surety is the
same as that of the principal debtor. Example, in case of
dishonour of a Bill of exchange, the surety is also
responsible for all the interest and expenses.
Sometimes the suretys liability may be fixed less than the
responsibility of the principal debtor. That means liability of
the principal debtor may be higher than the guarantors
promise. This can be done by specific clauses in the
contract
Gaurantee may be for a single debt or a series of debts or
for a time period: (single transaction guarantee or
continuing guarantee)

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INDEMNITY AND GUARANTEE

Kinds of Guarantee:
Specific Guarantee
Continuing Guarantee
Performance Guarantee
Deferred payment Guarantee
Continuing Guarantee can be revoked as to future
transactions: a) by giving notice; b) by death of the surety;
c) by other modes like NOVATION, variations in the terms of
contract, by release or discharge of the principal debtor; by
compounding with the principal debtor; by creditors act or
omission impairing suretys remedies or by loss of security

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INDEMNITY AND GUARANTEE

Rights of surety: a) Rights against the Creditor
Before the payment of the guaranteed debt: require the
creditor to first proceed (sue) against the principal debtor
Right of set-off (steps into the shoes of the debtor)
On payment of the guaranteed debt: surety is subrogated
to all the rights of the creditor. Surety can claim the
securities lying in the hands of the creditor (time by which
the securities came into the possession of the creditor is
irrelevantall existing securities on the date of payment of
the debt by the guarantor)
Right to equities against all parties to the transaction
Rights of surety: b) Rights against the Principal
Debtor:
Right to be relieved of the liability
Right to indemnity (implied promise or a written agreement
to that effect)
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INDEMNITY AND GUARANTEE

Rights of surety: c) Rights against the Cosureties

Right of contribution: Equal contribution from co-sureties

when one of the sureties make the payment to the creditor
The share of each surety could be determined by specific
contracts before or at the time the contract of guarantee.
However, each surety is liable to pay equal amount subject
to the maximum amount he has agreed.
Release of a Co-surety by the creditor does not discharge
other sureties

DISCHARGE OF SURETIES:
Refer Chart on page 166 of the text book N D Kapoor

63

Contract of Agency
A person who has capacity to contract with another
person either by himself or through another
person. When contracts are entered through
another person/s, the contracts are said to have
been entered through agents.
An agent is a person employed to do any act for
another or to represent another in dealings with
third persons.
The person on whose behalf the acts are done is
known as the PRINCIPAL. The person who
represents another is known as the AGENT.
It implies an agreement not necessarily a contract.
So a minor can be an agent. But the principal must
be a person competent to contract.
64
Intention of the Agent is a question of fact.

Contract of Agency
The test of An Agency is whether the agent can bind the
principal (for legal relationships with the third parties) by
his acts and make the principal answerable.
An agent establishes the privity of contract between the
Principal and the third parties
The relationship of Agent and Principal may be express or
implied or by ratification or by operation of law
Express terms: Where there the agency is through a
power of attorney (though oral agreements are welcome,
written form is more popular). The power of attorney may
be general or specific.
Implied Agency: By relationship or conduct of the
parties. Two Brothers with the knowledge of both hire out
a building belonging to one of them, and the other
brother collects the rent and remits, there is an agency
65

Contract of Agency

Implied agency: Agency by estoppel: Once you make the third

party believe that you are stating that Mr X is your agent by your
words or conduct, you cannot later deny stating that Mr X was not
your agent. This is known as Agency by Estoppel. You are stopped
from denying the fact and your position is reversed to the original
position. The same is applicable where the agent acts without
authority and the principal is in the knowledge of things and makes
the third parties to believe then the agency is agency by estoppel
Implied Agency: Agency by Necessity or Emergency: Sale of
perishable by a transporter where there is a continuous strike or
where the animal is transported, the animals are to be fed, there is
an agency for the expenses incurred for feeding the animals.
Implied Agency: Husband and Wife: Husband is supposed to
maintain (supposed to supply necessities of life according to his
status). If the wife purchases some necessities, the husband is
responsible. Even where the husband deserts the wife, the wife can
bind the husband. This has to be properly interpreted where the wife
has independent income.
66

Contract of Agency
Agency
by
ratification:
A
subsequent
acceptance or rejection of an existing contract
entered into by an agent without authority of the
principal is known as Agency by Ratification.
Agency by Operation of Law: In a new
company, the promoters are agents by operation
of law (company being an artificial person).
Thereafter, the BOD may delegate certain duties
or powers to various officers. All the officers who
are authorised to bind the company are agents of
the company.

67

Contract of Agency
Classification of agents:
Special agent (particular task)
General agent ( business in the normal course)
Universal agent
( unlimited authority of the
agent to bind the principal: Universal Agents may
be: a) mercantile agents(factors, auctioneers,
brokers, commission agent and DEL CREDRE
AGENTS (works for an extra commission and
guarantees performance of the third parties to his
principal); b) Bankers and c) Non-Mercantile
agentssolicitors, attorneys, insurance agents,
Clearing and forwarding agents, husband and
wife etc
68

Contract of Agency
Duties of an Agent:

Follow the principals directions

Reasonable care, skill and diligence
Render proper accounts to the principal
Communicate with principal in case of difficulty
Not to deal in his own account
Pay sums due to the principal duly recovering his
commission and expenses
Protect and preserve the interests of the Principal in case of
his death or insolvency or becoming of unsound mind
Not to enter into competition against the interests of the
principal
Not to make secret profits
Not to set up an adverse title
69

Contract of Agency
Duties of an Agent:
a)Follow the principals directions; b) Reasonable care, skill
and diligence; c) Render proper accounts to the principal; d)
Communicate with principal in case of difficulty; e) Not to
deal in his own account; f) Pay sums due to the principal
duly recovering his commission and expenses; g) Protect
and preserve the interests of the Principal in case of his
death or insolvency or becoming of unsound mind; h) Not to
enter into competition against the interests of the principal;
i) Not to make secret profits; j) Not to set up an adverse
title; k) Duty of full disclosure of conflicting interests; l) Not
to delegate authority
Rights of an Agent:
a) Right of retention; b) Right of receiving remuneration; c)
Right of lien; d) Right of indemnification; e) Right of
compensation; f) Right of stoppage in transit
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Contract of Agency
Duties and Rights of the Principal:
Duties: a) To indemnify the agent against the consequences of all
lawful acts; b) to indemnify the agent against the consequences of
acts done in good faith; c) to indemnify the agent for injury caused by
principals neglect; d) to pay the commission and other remuneration
Rights: a) To recover damages; b) to obtain proper accounts; c) to
obtain an account of secret profits and d) to resist agents claim
where the agent has acted himself as the principal.
Personal Liability of Agent: a) where the contract expressly provides;
b) agent acting on behalf of the foreign principal; c) agent acting on
behalf of an undisclosed principal; d) agent acting on behalf of a
principal who cannot be sued (incapacity to enter into contracts); e)
agent signing contracts in his own name; f) principal not existing
( company yet to be formedpreliminary operations); g) breach of
warranty of authority; h) receives money by mistake or fraud; i) clash
of conflicting interests; j) trade usage

71

Contract of Agency
Termination of Agency:
By the Act of parties: a)Agreement; b) Principals
revocation; c) Agents revocation
By Operation of Law: a) Performance; b) Expiry of
Time; c) Death or Insanity or Insolvency of either
party; d) Destruction of subject matter; e) Principal
becoming an alien enemy; f) Dissolution of a company;
and g) Termination of a sub-agents authority
Irrevocable Agency: Agency coupled with interest:
Agency securing some benefits over and above his
remuneration. Such agencies cannot be terminated
detrimental to the agents interests or where such
agents have incurred a personal liability or where such
agents have partly exercised authority.
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Types of Contracts
Contracts are classified in terms of
their :
1. Validity or enforceability
2. Mode of formation
3. Performance

1. Validity or enforceable
contracts
Valid Contract
- Has all essential elements
Voidable Contract
Void Contract
Illegal Contract
Unenforceable Contract
- Some elements are missing

Voidable Contract

Affected by a flaw, say

misrepresentation, fraud, coercion,
undue-influence, mistake
which may repudiated at the option of
of aggrieved party
Till it is set aside, it remains valid &
binding
(patient-medical attdt-undue infl.)

Void Contract - S.2(i)

An agreement not enforceable by either

of the parties to it, is void (restitution)
Such agreement is w/o any legal effect
ab-initio (eg; engaging auditorium, destroyed fire before
function)

eg, contract with minor, mistake of fact,

unlawful object/consideration, w/o
consideration, restraint of
marriage/trade/legal proceedings,
uncertain /wagering/impossible
agreements, agreement to entering into
agreement in future
Contract valid at formation, becoming
void later subsequent
impossibility/illegality

Illegal Contract

Where object or consideration is:

Forbidden by law
Defeats provision of a law

(Contract for wheat-

Govt. ordnanace-sale wheat only from fair price shop)

Fraudulent
Involves injury to person/property
Immoral under law
Opposed to public policy
Wagering agreement (in Mumbai)
(agreemnt div. of gains acqrd by fraud/promise-employt for
payment)
(A bets with B, losses, reqst C 4 loan, C pays B/settles As loss. C
cannot recover from A)

Unenforceable Contract

They are neither void or voidable

Cannot be enforced in court as it
lacks some item of evidence such
as writing, registration or stamping
Unstamped /under stamped, if
stamp required for merely revenue,
defect can be cured by affixing
required stamp/penalty.
Technical defects cannot be cured.
Remains unenforceable eg, unstamped negotiable instrument

2. Mode of Formation
Express Contract
Where the terms of the contract are
stated clearly in words written or
spoken
Implied Contract
Where terms of contract are inferred
from conduct of parties or circumstances
(Bus travel)

Quasi-contracts
(Essence of a valid contract is on agreement)
Sometimes, obligation is created by law, where
an obligation is imposed on a party & action is
allowed to be brought by another party
(providing necessaries for minor/ leaving goods in anothers