SCOPE OF THE ACT:

The Contract Act came into force on 1 September

1872. It was passed and implemented to control
various kinds of commercial and business
contracts.
The law of contract creates jus in personam and
not jus in rem. Jus in personam means personal
rightsthe rights against a person or a party with
whom you have entered into a contract. Therefore,
it can be said that jus in personam provides the
right to a contracting party to claim against
another.

WHAT IS A CONTRACT?
Section 2(h) of the Indian Contract Act, 1872 states
that 'an agreement enforceable by law is contract
We can summarize it as under.
Contract = An agreement + enforceable by law
Agreement:
According to section 2(e), An agreement means
every promise & every set of promises, forming
consideration for each other
Promise
As per Section 2(b) of the Contract Act, a proposal
when accepted becomes a promise.
Promise = Proposal by one person + its acceptance
by another person

Consensus-ad-idem:
Before there can be an agreement, both the
parties must agree upon the subject matter of the
agreement(same thing) in the same sense & at
the same time.

ESSENTIAL ELEMENTS OF VALID

CONTRACTSSECTION 10
1. Offer and Acceptance
An offer is a starting point for any contract. The offer
must be accepted to form a valid contract.
2. Intention to Create Legal Relation
There must be an intention to create a legal
relation. In all social, domestic, moral, religious or
political agreements, the usual presumption is that
the parties do not intend to create the legal
obligations. However, in business agreements, the
usual presumption is that the parties intend to
create the legal obligations.

Example
A invites B to a dinner and B accepts it. If A tails to
serve the dinner, B cannot go to court. The
invitation for dinner is a social agreement.
Lawful Consideration
The lawful consideration means something in
return. As a contract contains the reciprocal set of
promises, a consideration is necessary. The
consideration must be lawful and should have a
commercial value.
Example
A promises to pay $50,000 on a certain date to B
without any promise in exchange. This is not a
valid contract.

Free Consent
It is essential for every contract that, there must be a
free & genuine consent of all the parties.
According to Section 14, A consent is said to be free,
if it is not caused by coercion, undue influence, fraud,
mis representation or mistake.
The parties should be of same mind on all material
terms of the contract.
Example
A has two carsone black and the other white. He
offers to sell one of his cars to B. A intends to sell the
black one while B accepts the offer believing that it is
for the white car. Here, A and B are not thinking in the
same sense of a particular thing. In this situation,
there is a mistake, so it cannot be said to be a free
consent.

Lawful Object
Every agreement has some objects or purposes.
The object of an agreement should not be illegal,
immoral or opposed to the public policy. In simple
words, we can say that the object of an agreement
must be lawful.
Example
A promised to pay Rs. 1 lakh to B to kill C. The
killing of a person is punishable under the IPC.
Therefore, the promise is unlawful and void.

Capacity of Parties
Every person is not competent to enter into a
contract. Person who has attained the age of
majority with a sound mind and not disqualified
under any act is competent to enter into a
contract.
Agreement Must Not Be Expressly Declared
Void or Illegal
If a certain agreement is expressly declared to be
void by the law of country then such an
agreement, if entered into, shall not be
enforceable by the court.

Certainty of Meaning
An agreement contains terms as decided by the
parties. The terms of agreement must be certain
and unambiguous. If the terms of an agreement
are uncertain, it is not a valid contract.
Example
A agreed to pay Rs. 5 lakh to B for an ultramodern decoration of his drawing room. The
agreement is void because the meaning of the
term ultra-modern' is not certain.

Possibility to Perform
Every agreement contains reciprocal promises.
The promises under the contract must be possible
to perform. If the parties have agreed on the
contract which contains any promise not possible
to perform in real life, the contract will not be
considered as a valid contract.
Example
A agrees to discover treasure by magic for B. The
agreement is void because the act in itself is
impossible to be performed from the very
beginning.

Legal Formalities
In some cases, the document in which the contract
is incorporated has to be stamped. In some other
cases, a contract, besides being a written one, has
to be registered. Thus, where there is a statutory
requirement that the contract should either be
made in writing or registered, the required
formalities must be complied with.
Therefore, we can say that an agreement will
become a contract when it satisfies all the
essentials of a valid contract. If any one of the
elements of a valid contract is missing, it is treated
as an invalid contract. All the agreements may or
may not be a contract but all the contracts are
basically agreements.

TYPES OF CONTRACT OR CLASSIFICATION OF

CONTRACT
Valid Contract
If the contract entered into by the parties and satisfies
all the essential elements of a valid contract as per the
act, it is said to be a valid contract.
Void Contract
A contract which ceases to be enforceable by law is
known as a void contract. A contract may be valid in
the beginning but later on, due to some reason, it
does not remain enforceable & become void.
Example: A Playback singer enters into a contract to
give program at a Music concert. But He dies before
the date of performance of contract. Here,
performance of this contract becomes impossible. So,
it becomes void.

Voidable Contract
When the contract is entered into without the free
consent of party, it is considerate as a voidable
contract. The definition of the act states that a
voidable contract is enforceable by law at the
option of one or more parties but not at option
of the other parties. Voidable contract will be
considered as valid if it is not cancelled by the
aggrieved party within a reasonable time.

Illegal Agreement
An illegal agreement means that which is immoral
or criminal in nature or which is opposed to public
policy.
Example: An agreement to supply smuggled
goods.
Unenforceable Contract
It is that contract which is not enforceable in the
court of law, due to some legal or technical defect.
Eg. Absence of writing, lack of stamp etc.

Express Contract
An express contract is a contract made by the use
of words spoken or written.
Implied Contract
An implied contract is a contract which is made
otherwise than by the words spoken or written. It
came into existence on account of an act or
conduct of the parties.

Quasi-contract
It means a contract which does not arise from any
formal agreement but is imposed by law. It is
based upon the principle of equity means no one
should grow rich out of another persons cost. It is
similar to a contract in which a legal obligation is
imposed on a party who is required to perform it.
Example: T, a tradesman, leaves goods at Cs
house by mistake. C treats the goods as his own.
C is bound to pay for the goods.

Executed Contract
In an executed contract both the parties have
performed their promises under a contract. It is a
contract where, under the terms of contract,
nothing remains to be done by the parties.
Example
A sells his car to B for 1 lakh. A delivered the car
and B paid the price. This is an executed contract.

Executory Contract
In an executory contract both the parties are yet to
perform their promises. In other words, it is a
contract where parties have to still perform their
obligation in the future.
Example
A sells his car to B for 1 lakh. If A is still to deliver
the car and B is yet to pay the price, it is an
executory contract.

Partly Executed and Partly Executory Contract

In a partly executed and partly executory contract,
one party has already performed his promise and
the other party has yet to execute his promise.
Example
A sells his car to B. Though A has delivered the
car, B has yet to pay the price. For A it is an
executed contract, whereas it is an executory
contract on the part of B since the price has yet to
be paid.

Unilateral Contract
A unilateral contract is also known as a one-sided
contract. It is a contract where only one party has
to perform his promise. In such a contract, the
promise on one side is exchanged for an act on
the other side. After the formation of a unilateral
contract, only one party remains liable to perform
his obligation because the other party has, already
performed his obligation.
Example
Alap promises to pay 1000 to anyone who finds
his lost cellplone. Bansi finds and returns it to
Alap. From the time Bansi found the cell phone,
the contract came into existence. Now Alap has to
perform his promise, i.e., the payment of 1000.

Bilateral Contract
In a bilateral contract both the parties have to
perform their respective promises. It is also known
as a two-sided contract. Here, the obligation is
outstanding on the part of both the parties.
They are similar in nature to Executory contracts.

PROPOSAL AND ACCEPTANCE

A proposal is an offer by one person to
another to enter into a contract. The term
proposal is defined under Section 2(a) as under:
'When one person signifies to another, his
willingness to do or abstain from doing anything
with a view to obtaining the assent of the other, to
such an act or abstinence, he is said to make a
proposal'.

LEGAL RULES AS TO OFFER

The offer is the first step in a valid contract. If the
offer itself is not valid, the contract can never be
valid. Following are the legal rules of an offer.
1. Offer should not contain terms, noncompliance of which may be assumed as
acceptance.

2. Offer Must Be Definite, Unambiguous and

Certain
3.

Offer Must
Relationship

Be

Made

to

Create

Legal

4. Offer must be communicated

Unless the offer is communicated, there can be no
acceptance, because the offeree does not know
what he has to accept.
5. Offer must be made with a view to obtaining
the assent of the other party, to whom it is
made.
6. Offer must be distinguished from(a) a
declaration of Intention (b) Invitation to Offer
( c ) a statement of price.

Acceptance

As per Section 2(b) 'when the person to whom the

proposal is made signifies his assent thereto, the
proposal is said to be accepted. The proposal
when accepted, becomes a promise'.

LEGAL RULES FOR THE ACCEPTANCE

1. Acceptance
Must
Be
Absolute
and
Unconditional
2. Acceptance Must Be Communicated
3. Acceptance must be according to the mode
prescribed or as per usual & reasonable mode.
4. Acceptance must be given within a reasonable
time (before the offer lapses or before the offer
is withdrawn)
5. Acceptance can not precede an offer
6. Acceptance May Be Express or Implied
7. Mere Silence Is Not Acceptance of an Offer
8. Acceptance Subject to Contract Is No Acceptance

MEANING OF CONSENT
Two persons are said to consent, when they agree
upon the same thing in the same sense.
FREE CONSENTSECTION 14
A consent is said to be free, when it is not
obtained by
CoercionSection 15
Undue influenceSection 16
FraudSection 17
MisrepresentationSection 18
MistakeSections 20, 21 and 22

CoercionSection 15
Definition:- According to Section 15, Coercion is
1.The committing or threatening to commit, any act
forbidden by the Indian Penal code (IPC), or
2.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.
When a consent is obtained by coercion, the contract
is voidable at the option of the aggrieved party and
any benefit received by the other party under coercion
must be paid back. If the aggrieved party has suffered
from any loss, he can recover the loss from the
defaulting party.

UNDUE INFLUENCE
According to section 16(i)
A contract is entered on undue influence when
relations that exist between the parties are such
that one of them is in a position to dominate the
will of the other, and the dominant party uses his
position to obtain unfair advantage over the other.
When a contract is made with undue influence, the
contract is voidable. The aggrieved party can
recover the damages, if he has suffered front loss
because of undue influence.

FraudSection 17

Fraud may be defined as an intentional, deliberate or willful

mis-statement of facts, which are material for the formation of
a contract.
The fraud means and includes the following acts:
1. Suggestion of facts which is not true by one person who does
not believe it to be true.
2. Active concealment of the fact.
Example
Furniture dealer conceals the cracks in furniture by polish work.
3. A promise made without any intention of performing it.
4. Any act or omission, specifically declared as fraudulent by law.
5. Any other act to deceive.

The aggrieved party can ask for a specific performance. The

aggrieved party can sue for damage, if he has suffered a loss.

A mere silence as to facts is not fraud.

MisrepresentationSection 18
Mis representation is a false statement which
made by a person innocently (without any
intention to deceive the other party). Here, the
person making statement, honestly believes that it
is true.
It also includes non-disclosure of a material fact or
facts, without any intention to deceive the other
party.
The aggrieved party can cancel the contract. It
means a contract is voidable at the option of the
aggrieved party but he cannot sue for damages.

MistakeSections 20, 21 and 22

means an erroneous belief about some facts. A
mistake can either be (a) mistake of law and (b)
mistake of fact.
(a) Mistake of Law
it means there is mistake in understanding the
provision of any law by the party to contract.
Mistake of Indian Law Everyone is supposed to
know the law of land. Ignorance of law is no
excuse. Therefore, if there is a mistake of Indian
law, the contract is not void or voidable.

Mistake of Foreign Law

A mistake of foreign law is treated, as if it were a
mistake of facts, because person cannot be
expected to know the law of the other country.
(b) Mistake of Fact
A mistake of facts can be classified either as a
bilateral mistake or a unilateral mistake.
Bilateral Mistake
It means both the parties are at mistake related to
the essential part of agreement. If an agreement is
entered into on the ground of bilateral mistake, the
agreement is void.

Unilateral Mistake
A unilateral mistake means one party is at
mistake. A contract is neither void nor voidable
except that it is mistake as to the nature of the
contract or a mistake with regard the identity of the
person.

Capacity or competency to contract

Capacity means competence of the parties to
enter into a valid contract, according to section 10,
an agreement becomes a contract, if it is entered
into between the parties who are competent to
contract.
According to section 11, every person is
competent to contract: who is of the age of majority according to the law,
to which he is subject,
Who is of sound mind
Who is not disqualified from contracting by any
law to which he is subject.

Thus, according to Section 11, following persons

are not competent to contract:
Minor
Persons of Unsound Mind
Persons disqualified from contracting by any law

Legal Position of Minor:1. An agreement with minor is void ab initio means it

has no legal existence from very beginning.
2. A minor can be a promisee or beneficiary but can
not be a promisor. This means if minor has
entered into an agreement with other person, the
other party cannot bind him by the contract.
3. As minors agreement is void from the very
beginning, it cannot be ratified by him on attaining
majority.
4.If he has received any benefit under a void
agreement, he can not be asked to compensate or
pay for it.

5. A minor can always plead minority, even in

those cases, where he has done misrepresentation. If a minor represents himself as a
major and enters into an agreement, he can
escape from his liability by arguing his minority.
However, if minor has obtained some money or
property by misrepresentation, the court will direct
him to restore the money or property received.
6.There can be no specific performance of
minors agreement because it is void from the very
beginning.
7. A minor can not become a partner in a firm.
But, he can be a beneficiary. So, he can be
admitted to the benefits of an existing partnership,
with the consent of the other partners.

8. A minor cannot he adjudged (declared) insolvent.

because he is incapable of contracting debt.
9. A minor is always liable for necessaries supplied
or necessary services rendered to him or to his
dependents: Necessaries Include:
Necessary goods, as well as
Certain services, such as education, training,
medical & legal advice etc.
If a person supplies some necessaries of life to
minor or to his dependents to whom he is legally
bound to support, then, minor is always liable to
pay its price. The supplier has a right to recover
the price of necessaries supplied.

If the minor has some property, the supplier can

recover price out of it. But, if he has no property,
he can not be punished.
10.A minor can be an agent: An agent is merely a
connecting link between the principal & the third
person. Hence, so long as the principal is major, a
minor can be an agent, and he can bind his
principal by his acts, without incurring any
personal liability.
11.His parents or guardian are not liable for the
contracts, entered into by him, even though the
contract is for supply of necessaries to minor.
However, when minor is working as an agent of
his parents, they are liable.

12. A minor is liable in tort (a civil wrong)

Eg. A 14-year old boy drives a car carelessly and
injures B. He is liable for the accident

PERSON OF UNSOUND MIND

An agreement by a person of unsound mind is void.
Following are the categories of persons
considered as persons of unsound mind.
1. An Idiot
2. Delirious Persons
3. Hypnotized Persons
4. Mental Decay
5. Drunken Person

PERSON DISQUALIFIED BY LAW

1. Body Corporate or Company or Corporation
A company cannot enter into any contract which is
beyond its memorandum or which is personal in
nature as it is an artificial person.
2. Alien Enemy
An alien means a person who belongs to a foreign
state. An alien can be an enemy or a friend. When he
is a citizen of any country which was against India in
war, he is known as alien enemy. If any contract is
entered into with the alien enemy and the war breaks
out with that country, the contract is suspended until
the war is over. During the war, the contract can be
entered into with the alien enemy with the permission
of the central government.

3. Convict
A convict cannot enter into a contract while he is
undergoing imprisonment. But he can enter into a
contract with the permission of central government
while undergoing imprisonment. However a
convict can enter into a contract when is released
from jail or he has been granted bail.
4. Insolvent
When any person is declared as an insolvent his
property vests in the receiver and therefore, he
cannot enter into a contract relating to his
property. Again he becomes capable to enter into
a contract when he is discharged by the court.

Performance of Contract: When the parties to the contract fulfill their

obligations
arising under the contract within
prescribed time and in the prescribed manner, it is
performance of contract.
Some times, the promisor offers to perform his
duty or obligation under, the contract at proper
time and place, but the promisee does not accept
the performance. This is known as attempted
performance or tender.
A tender of performance is equivalent to actual
performance. It relieves the promisor from the
liability of further performance and gives him a
right to sue the promisee for the breach of
contract.

Essentials / Requisites of a Valid tender:

It must be unconditional. It becomes conditional
when it is not according to the terms of the
contract.
It must be of the whole quantity contracted for or
of the whole obligation. If the contract requires full
payment and if the tender is of installment, it is not
a valid tender.
It must be by a person, who is in a position and
who is willing to perform his promise.
It must be made at proper time and place. So a
tender of goods after business hours or a tender of
goods or money before the due date is not a valid
tender.

It must be made to the proper person (the promisee

or his duly authorized agent). It must be also in proper
form.
It may be made to one of several joint promisees. In
such case, it has the same effect as a tender to all of
them.
In case of tender of goods, it must give a reasonable
opportunity to the promisees for inspection of goods.
In Legal Tender Money: In case of a tender of money,
the tender must be in legal tender money. Legal
tender money means current currency notes or coins.
The tender of money in the form of foreign currency is
not a valid tender, unless it is agreed between the
parties. A payment by a cheque is the valid tender, if
the person to whom it is made is ready and willing to
accept it.

By whom the contract must be performed:1.Promisor himself:- This means a contract, which
involves use of personal skill of promisor, must be
performed by the promisor himself.
Eg. A contract to sing a song at a musical event.
2. Agent: When the performance of the contract does
not require personal skill, it may be performed by
the promisor or by his representative.
Eg. A promise to pay Rs. 10,000 to B for his
personal service. This payment may be done by
either A or his agent.

3. Legal representatives:- (when a contract involves use

of personal skill or it is based on personal
considerations, it comes to an end on the death of the
promisor.)
But, in other contracts the legal representatives of the
deceased promisor are bound to perform the duties,
under a contract. But their liability under a contract is
limited to the extent of the property they inherit from
the deceased.
4.Joint promisors:- When two or more persons have
made a joint promise, then unless a contrary intention
appears from the contract, all such persons must
jointly fulfill the promise. If any of them dies, his legal
representatives must jointly with the surviving
promisors, fulfill the promise. If all the promisors die,
the legal representatives of all of them must fulfill the
promise jointly.

Who can demand performance:

It is the only promisee, who can demand
performance of the promise under a contract. It
makes no difference whether the promise is for the
benefits of promisee or any other person.
Eg. A promises B to pay Rs.500 to C. A does not
pay the amount to C. Here, C can not take any
action against A. It is the only B who can enforce
the promise against A.
In case of death of promisee his legal
representatives can demand performance.

DISCHARGE OF CONTRACT
A contract is said to be discharged when the
obligations created by it come to an end. The
various modes of discharge of a contract are as
follows :
1. Discharge by performance. Discharge of a
contract by performance takes place when the
parties to the contract fulfill their obligations
arising under the contract within the time and in
the manner prescribed. The performance may be
(i) actual performance, or
(ii) attempted performance.

2.Discharge by agreement or consent. A contract

rests on the agreement of the parties. As it is
agreement which binds them, so by their
agreement or consent they may be discharged.
The discharge by consent may be express or
implied. Discharge by implied consent takes place
by
1.Novation: means a new contract is substituted for
an existing one, either between the same parties
or between one of the parties and a third party, In
such a case, the old contract comes to an end.
2. Alteration: means a change in any of the terms of
the contract by the mutual consent of all the
parties to the contract. In such a case, the old
contract comes to an end.

3.Rescission: means all or some of the terms of the

contract are cancelled, In such a case, the old
contract comes to an end.
4.Remission: means to accept less performance (to
accept lesser sum in full payment) of the promise
made. In such a case, the old contract comes to an
end.
5.Waiver: It takes place when the parties to a contract
agrees that they shall no longer be bound by the
contract. Thus waiver means to forgo or to sacrifice
the rights under a contract. In such a case, the old
contract comes to an end.
6.Merger: When a right under an earlier contract is
merged (joined) with right of the another contract, the
earlier contract comes to an end. This is known as
merger.

3.

Discharge by impossibility. Impossibility of

Performance may be
Initial impossibility:- An agreement to do an act
impossible in itself is void.
Supervening impossibility:- Impossibility which arises
subsequent to the formation of a contract is called
subsequent or supervening impossibility,
A contract is discharged by supervening impossibility in
following cases:

(a) Destruction of subject-matter of contract;

(b) Non-existence or non-occurrence of a particular state

of things;

Eg. A & B contract to marry each other. Before the time of

marriage, B goes mad. The contract becomes void.

(c) Death or Personal Incapacity;

(d) Change of law or stepping in of a person with
statutory authority;
Eg. A agreed to sell his land to B. But, after the
formation of contract, the govt. issued a
notification and acquired the land. The contract is
discharged.
(e) Outbreak of war.
The contract is discharged in all of the above
cases.

The following cases are not covered by supervening

impossibility :

(a) Difficulty of a performance;

contemplated delays or events)

(due

to

some

un

(b) Commercial impossibility; (It has become less profitable

or costly)
(c) failure of a third person on whose work the promisor
relied;
(d) strikes, lock-outs and civil disturbance;
(e) failure of one of the objects.
The contract is not discharged in all of the above cases.

4.Discharge by Lapse of time:- If a contract is not

performed within the period of limitation and if no
action is taken by the promisee in a Law Court,
the contract is discharged.
5.Discharge by operation of law. This includes
discharge by
(a) Death of promisor,
(b)Merger of original contract into another
contract,
(c) Insolvency of the promisor,
(d)Unauthorised alteration of the terms of contract,
and
(e)Rights and liabilities becoming vested in the
same person.

6. Discharge by breach of contract:

If a party breaks his obligation which the
contract imposes, there takes place breach of
contract.
Actual breach of contract: It may occur (a) at the
time when the performance is due or (b) during
the performance of the contract.
Anticipatory breach of contract: It occurs when a
party repudiates his liability or obligation under the
contract before the time for performance arrives.

Remedies for breach of contract:

A remedy is the means given by law for the
enforcement of a right. When there is a breach of
contract by one party, following remedies are
available to the injured party:
1. Rescission
2. Suit for Damages
3. Suit upon Quantum Meruit
4. Specific Performance of Contract
5. Injunction

1. Rescission: when there is a breach of contract by

one party, the other party may rescind the contract
and refuse further performance. In such case, he
becomes free from all his obligations under the
contract.
Example: D promises P to supply 10 bags of wheat
on a certain day. P agrees to pay the price after the
receipt of the goods. D does not supply the goods. P
is discharged from liability to pay the price.
Effects:
When one party rescinds the contract, he is liable to
restore (to return) any benefits, which he has received
under the contract,
But, if a person rightfully rescinds a contract, he can
claim compensation for any loss, arising to him, due
to non performance of the contract by the other party.

2. Suit for Damages:- When there is a breach of contract

by one party, it may result into loss to other party. Here,
the injured party can sue for damages.
Damages are the monetary compensation allowed to the
injured party by the court for the loss or injury suffered by
him.
The main object of awarding damages is to put the injured
party in the same position in which he would have been, if
there had been performance of contract & not the breach.
Its purpose is to compensate the aggrieved party and not
to punish the party at fault. This is known as the doctrine
of restitution.
While determining the damages, the court takes the
following points into account:
Inconvenience caused by the non performance of the
contract
Motive of breach of contract
Manner of breach of contract

3.Suit upon Quantum Meruit: The term Quantum

Meruit means as much as earned.
When a person has done some work under a
contract and the other party repudiates (cancels)
the contract or due to some event the further
performance becomes impossible, then the party
who has done some work can claim proportionate
remuneration for the work done.
Example: A agrees to write articles for B the
publisher of a magazine. A writes articles for 6
months but thereafter B stops to publish the
magazine. In such a case, A can claim
proportionate remuneration for the articles written
by him for 6 months.

4. Specific Performance of Contract: In certain

cases, the court may give directions to the party
( in breach) to perform his promise according to
the terms of the contract.
The specific performance may be ordered by the
court in the following situations:
When the goods are of a unique nature or special
value (not easily available in the market).
Where the actual damages arising from the
breach of contract are not measurable.
Where the monetary compensation is not an
adequate remedy.

5. Injunction: The injunction may be defined as an

order of the courts restraining a person from doing
something which he promised not to do. It means
a stay order granted by a court. Where there is a
breach of contract by one party and the order of a
specific performance is not granted by the court,
the injunction may be granted. The injunction is
granted by the courts at their discretion.
Example: A film actress agreed to act exclusively
for Yash Raj films for one year and for no one
else. During the same year, she contracted to act
for Mani Ratnam.

INDEMNITY CONTRACT
A contract of indemnity is a special contract. All
the general principles of the contract are equally
applicable to it.
The contract by which one party promises to save
the other from the loss caused to him by the
conduct of the promisor himself or by the conduct
of any other person is called a 'contract of
indemnity' Section 124.
The person who promises to make good the loss
is called the indemnifier (Promisor) and the person
whose loss is to be made good is called the
indemnified or indemnity holder (Promisee). A
contract of indemnity is really a class of
contingent contracts.

Example: A and B claim certain goods

from a railway company as rival owners.
A takes delivery of the goods by
agreeing to compensate the railway
company against loss in case B turns
out to be the true owner. There is a
contract of indemnity between A and the
railway company.

ESSENTIAL ELEMENTS OF AN INDEMNITY

CONTRACT
All the essentials of a valid contract must also be
present in the contract of indemnity. The contract
of indemnity is possible by the express or implied
manner. It is a class of contingent contract.
Following are the essential elements of the
indemnity contract:
1 Loss to One Party
A person can indemnify another person, only if
such other person incurs some loss or is about to
incur some loss. Therefore, a contract of
indemnity can be performed only when the
loss has incurred to the promisee or the loss
to the promisee has become certain.

2. Indemnity by the Promisor

The purpose of the contract of indemnity is to
protect the indemnity holder from any loss that
may be caused to the indemnity holder in future
(i.e., such a loss has not already been caused to
the indemnity holder).
3. Reason for Loss
The contract of indemnity may specify that the
indemnity holder shall be protected from the loss
caused due to the action of the promisor, or the
action of any third party or any act, event or
accident, which is not in the control of the parties
(act of God).

RIGHT OF AN INDEMNITY HOLDERSECTION 125

The indemnity holder has the right to recover the following from
the indemnifier by the way of compensation:
1. Right to Recover Damages
The indemnity holder is entitled to recover from the indemnifier all
the damages which he is compelled to pay in any suit in respect
of any matter covered by the contract of indemnity.
2. Right to Recover Costs
The indemnity holder is entitled to recover from the indemnifier all
the costs which he is compelled to pay in bringing or defending
such suit. It may be noted that the indemnity holder must act
within the scope of his authority and while bringing or defending
the suit, he must act as a prudent person.
3.Right to Recover Sums Paid in Compromise
The indemnity holder is entitled to recover from the indemnifier all
the amount which he has paid under the terms of a compromise
of the suit. However, he must act within the scope of his authority.
While in a compromise, he must act like a prudent man.

GUARANTEE
A contract of guarantee' is a contract to perform
the promise, 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'.
A guarantee may be either oral, or written (Section
126). The contract of guarantee may be express,
or implied, and may even be inferred from the
course of conduct of the parties concerned.

Example
Sagar requests Chetan to lend ? 500 to Paresh
and guarantees that if Paresh fails to pay the
amount, he will pay. This is a contract of
guarantee. Sagar, in this case, is the surety,
Chetan, the creditor and Paresh, the principal
debtor.
The contract of guarantee is a tripartite agreement
which contemplates the principal debtor, the
creditor, and the surety.

Here, the following three collateral contracts may

be distinguished:
As between the creditor and the principal debtor,
there is a contract out of which the guaranteed
debt arises.
As between the surety and the creditor, there is a
contract by which the surety guarantees to pay to
the creditor, the principal debtor's debt, in case of
his debtors default.
As between the surety and the principal debtor,
there is a contract that the debtor shall indemnify
the surety, in case the surety pays, in the event of
a default by the principal debtor. This contract if it
is not expressed between the parties is always
implied.

ESSENTIAL ELEMENTS OF CONTRACT OF

GUARANTEE
The essential elements of the contract of guarantee
are discussed as under:
1 Concurrence
A contract of guarantee requires the concurrence of
all the three parties to it viz., the principal debtor, the
creditor and the surety.
2 Primary Liability in Some Person
There must be a primary liability in some person other
than the surety. The word 'liability', as used in the
definition of guarantee, means a liability which is
enforceable at law. If that liability does not exist, there
cannot be a contract of guarantee. But a guarantee
given for the debt of a minor is an exception to this
rule.

3. Essentials of a Valid Contract

A contract of guarantee must have all the essential
elements of a valid contract like free consent, capacity of
parties, lawful object and consideration. But the following
two points should be noted:
All the parties must be capable of entering into a valid
contract though the principal debtor may be a person
suffering from the incapacity to contract. In such a case,
the surety is regarded as the principal debtor and is liable
to pay personally, even though the principal debtor (e.g., a
minor) is not liable to pay.
A consideration received by the principal debtor is
sufficient for the surety and it is not necessary that it must
necessarily result in some benefit to the surety himself. It
is sufficient if something is done or some promise is made
for the benefit of the principal debtor.
4. Writing Not Necessary
A guarantee may be either oral or written.

KINDS OF GUARANTEE
A guarantee may either be prospective or retrospective
guarantee.

1. Retrospective Guarantee
A guarantee given for an existing debt or obligation is
called the 'retrospective guarantee'.
2. Prospective Guarantee
A guarantee given for a future debt or obligation is called
the 'prospective guarantee'.
3. Specific Guarantee
When a guarantee extends to a single transaction or debt,
it is called the specific guarantee. The specific guarantee
is also known as a simple guarantee. On the completion
of a specific transaction, the guarantee is discharged.

4.Continuing GuaranteeSection 129

When a guarantee extends to a series of
transactions, it is called the continuing guarantee.
The continuing guarantee does not come to an
end on the performance of a single transaction, or
the discharge of debt but it will be enforceable for
the subsequent transactions also.
Example:
'A' becomes the surety of 'C for B's conduct as a
manager in C's bank, and 'B' is appointed on the
faith of this guarantee. 'A' is precluded from
annulling the guarantee so long as B acts as a
manager in C's bank.

SURETY'S LIABILITYSECTION 128

Section 128 of Contract Act, 1872 explains about
the surety's liability as under:
1. Liability Is Secondary and Conditional
As soon as the debtor has made a default in the
payment of a debt, the surety is immediately
liable. But until the default, the creditor cannot call
upon the surety to pay. In this way, the nature of
the surety's liability is secondary.
If the principal debtor performs the contract in part,
the surety shall be liable only in the respect of that
part of the contract, which has not been performed
by the principal.

2. Liability Is Coextensive with Liability of Principal

Debtor
The liability of the surety is co-extensive with that of
the principal debtor. It means the surety is liable for all
the debts, payable by the principal debtor to the
creditor. Accordingly, the interest, damages and costs
which may be recovered from the principal debtor
may also be recovered from the surety.
The principal debtor and the surety are jointly and
severally liable. If the principal debtor is not liable on
the principal debt, the surety also shall not be liable. If
the principal debt is illegal or is unenforceable, the
principal debtor as well as the surety shall not be
liable. If the principal debtor is discharged by the
creditor's breach, the surety shall also be discharged.

3. Surety's Liability May Be Limited

Generally, the liability of the surety is the same as
that of the principal debtor. However, the surety
may limit his liability by the express provision in the
contract of guarantee. Thus, the contract of
guarantee may provide that the surety shall not be
liable
Beyond a fixed amount (where the guarantee is
fixed on amount)
For any amount due after a fixed date (where the
guarantee given with reference to the time period
may be fixed during which the guarantee shall
remain effective).

DIFFERENCE BETWEEN A CONTRACT OF

INDEMNITY
AND
A
CONTRACT
OF
GUARANTEE
1.In a Contract of Indemnity, there are two parties
to the contract viz., the indemnifier (promisor) and
the indemnified (promisee).
In a Contract of Guarantee, there are three
parties to the contract viz., the creditor, the
principal debtor and the surety.
2.In a Contract of Indemnity, Liability of the
indemnifier to the indemnified is primary and
independent.
In a Contract of Guarantee, Liability of the
surety to the creditor is collateral or secondary, the
primary liability being that of the principal debtor.

3. There is only one contract in the case of a

contract of indemnity, i.e., between the indemnifier
and the indemnified.
In a contract of guarantee, there are three
contracts, between the principal debtor and the
creditor, between the creditor and the surety, and
between the surety and the principal debtor.
4. In a Contract of Indemnity, It is not necessary for
the indemnifier to act at the request of the
indemnified.
In a Contract of Guarantee, it is necessary that
the surety should give the guarantee at the
request of the debtor.

5. In a Contract of Indemnity, The liability of the

indemnifier arises only on the happening of a
contingency.
In a Contract of Guarantee, there is usually an
existing debt or duty, the performance of which is
guaranteed by the surety.
6. In a Contract of Indemnity, An indemnifier
cannot sue a third party for the loss in his own
name because there is no privity of contract.
In a Contract of Guarantee, a surety, on
discharging the debt due by the principal debtor,
steps into the shoes of the creditor. He can
proceed against the principal debtor in his own
right.

Example
Amar guarantees to Balram, the payment of a bill
of exchange by Chetan, the acceptor. The bill is
dishonored by Chetan. Amar is liable not only for
the amount of the bills but also for any interest and
charges which may have become due on it.
In the above Example, Amar can proceed against
chetan after paying his dues but if it was a contract
of indemnity, Amar can not proceed against chetan
as there is no privity of contract between Amar &
Chetan.

Bailment:
Sec. 148 defines bailment as the delivery of
goods by one person to another person for a
specific purpose with a condition to return the
goods when the purpose is over or otherwise
disposed off according to the direction of the
person delivering them.
The person who delivers the goods is known as
the 'Bailor' and the person who receives the goods
is known as the 'Bailee' and the transaction is
known as the 'Bailment'.
Example
Arun gives a cloth to his tailor for stitching. It is a
bailment of the cloth. As soon as the cloth is
stitched, it will be returned to Arun.

ESSENTIALS OF A VALID BAILMENT

The essential features of a valid bailment are as
under:
Delivery of Possession
Under the bailment, the possession of goods is
delivered by the bailor to the bailee. If the
possession is not delivered, it is not a bailment.
Contract Between the Parties
A bailment is usually created by agreement
between the bailor and the bailee. The agreement
may be expressed or implied. Sometimes, the
bailment may arise even without the contract, i.e.,
a finder of goods is treated as a bailee.

Delivery for Some Purpose

The delivery of goods must be for some purpose.
If goods are delivered by mistake to a person,
there is no bailment.
Return or Disposal of Goods
The goods must be delivered to the bailee for
some purpose and subject to the condition that
when the purpose is achieved, the goods shall be
returned to the bailor or disposed off according to
his direction. The return of goods may be in the
original or altered form.

TYPES OF BAILMENT
Gratuitous Bailment
It is a bailment where no consideration passes
between the bailor and the bailee.
Eg. Where A lends a book to his friend.
Non-gratuitous Bailment
It is a bailment where consideration passes
between the bailor and the bailee.
Eg. When A gives his bicycle to B for repair, or
when A gives his car to B on hire.

DUTIES OF A BAILOR
The following are the duties of a bailor.
1.Duty to Disclose FaultSection 150
It is the duty of the gratuitous bailor to disclose the
known defects in the goods. The bailor should
compensate the bailee if the bailer fails to disclose
such defects and as a result, the bailee suffers
from any loss.
However, it must be noted that a non-gratuitous
bailer would be liable for known as well as
unknown defects.

2. Duty to Bear Extraordinary ExpensesSection

158
The bailor is liable to reimburse, to the bailee, all the
necessary and extraordinary expenses incurred by
the bailee in case of a gratuitous bailment.
But in case of non-gratuitous bailment, the bailor is
liable to reimburse the extra-ordinary expenses
incurred by the bailee.
3.Duty to Indemnify Bailee for Loss in case of
Premature Termination of gratuitous Bailment
Section 159
In case of a gratuitous bailment, the bailer may
prematurely terminate the bailment. If the loss caused
to the bailee due to the premature termination is more
than the benefit obtained by the bailee, it is the duty of
the bailer to compensate the bailee for such an
excess loss.

4. Duty to Receive Back the GoodsSection 164

If the bailor wrongfully refuses to take back the
custody of the goods, he is liable to pay to the
bailee, the necessary expenses of the custody.
5.Duty to Indemnify the Bailee for Any Loss
Section 164
If the bailor does not have any title to deliver the
goods on the bailment, he would be liable to
indemnity to the bailee for any loss which the
bailee has paid to the original owner.

DUTIES OF A BAILEE
1.Duty of CareSections 151 and 152
The bailee should take reasonable care of the
goods which are in his possession. The degree of
care required by the bailee is similar to that of a
man of ordinary prudence would take of his own
goods under the similar circumstances.
If he has taken such care, he is not liable, even if
the goods are lost or damaged. He is also not
liable for the destruction or the loss of goods due
to an act of God.

2. Compensation for an Unauthorized Use

Section 154
The bailee should not use the goods for an
unauthorized purpose. He can use the goods as
per the terms of the bailment.
If the bailee makes any unauthorized use of
goods, he shall be liable for any loss or
destruction of the goods even if he was not
negligent. On any unauthorized use of goods, the
bailor may terminate the contract of bailment.

3.Duty Not to MixSections 155-157

The bailee should not mix the bailor's goods with
his own goods.
If the bailee mixes his own goods with the bailor's
goods with the bailor's consent, the bailor and the
bailee shall have an interest in the proportion to
their respective shares in the mixture thus
produced.
When the bailee mixes the bailor's goods without
the bailors consent and the goods are separable,
the bailee is bound to bear the cost of separation
but if they cannot be separated, the bailor is
entitled to be compensated.

4.Duty to Return GoodsSections 160 and 161

On the achievement of the object or completion of
the purpose or expiry of the contract period, the
bailee should return the goods to the bailor.
In case, if the bailee fails to return the goods to
the bailor, he is responsible to the bailor for any
loss notwithstanding the exercise of reasonable
care on his part.
5.Duty to Return any Increase or Profit to the
goodsSection 163
In the absence of any contract to the contrary, the
bailee is bound to deliver to the bailor, or according
to his directions, any increase or profit which may
have accured from the goods bailed.

Duty Not to Set Up Adverse Title

The bailee should not use the goods in such a
way that it impairs the right of the bailor.
PLEDGE
A pledge is a special kind of bailment. Here, the
goods are delivered as a security for the payment
of debt or for the performance of a promise. The
person who delivers the goods is known as the
Pledger or Pawner and the person who receives
the goods is known as the Pledgee or Pawnee. In
the pledge, there is no change in the ownership of
the property.

DIFFERENCE BETWEEN BAILMENT AND

PLEDGE
1. The pledge is a variety of bailment. Under a
pledge, the goods are bailed as a security for a
loan or a performance of a promise. Bailment, on
the other hand, is for a purpose of any kind.
2. In case of default by the pledger to repay the
debt, the pledgee may, after giving notice to the
pledger, sell the goods pledged with him.
The bailee may either retain the goods or sue for
his charges.
3. In case of pledge, the pledgee has no right to use
the goods pledge with him. In case of bailment,
the bailee may do so if the terms of bailment so
provide

RIGHTS OF A PAWNOR/Pledger:
1. Right to get back goods.
On the performance of promise or repayment of
loan and interest, if any, the pawnor is entitled to
get back the goods pledged.
2. Surplus on Sale
The pawnor has the right to take back any
increase alone with the goods. But the pawnor can
get it back only on the payment of debt or other
charges.
3. Right to see preservation and maintenance
of the goods pledged.
4. Rights of an ordinary debtor which are
conferred on him by various statues meant for
the protection of debtors.

RIGHTS OF A PAWNEE
1.Right of a RetainerSections 173 and 174
The pawnee may retain the goods pledged until
his dues are paid. He may retain them not only for
the payment of the debt or the performance of the
promise, but also for the (a) interest due on the
debt and (b) all necessary expenses incurred by
him in respect of the possession or preservation of
the goods pledged.
2.Right of a Retainer for subsequent advances:
When the pawnee lends money to the same
pawnor after the date of the pledge, it is presumed
that the right of retainer over the pledged goods
extends to subsequent advances also.

3.Right to extraordinary expensesSection 175

The pawnee is entitled to receive from the pawnor
extraordinary expenses incurred by him for the
preservation of the goods pledged.
4.Right against true owner, when the pawnors
title is defective:
Even though the pawners title is defective, the
pawnee acquires a good title to the goods,
provided he acts in good faith and without notice
of the pawnors defect of title.

5.Rights when a Pawnor DefaultsSection 176

If the pawner makes a default, the pawnee has a
right to sell the goods after giving notice of his
intention to sell goods.
If sale proceeds of goods by the pawnee are less
than the amount of debt, the pawnee can recover
such deficit from the pawnor.
The pawnee has the right to file a suit for the
recovery of debt or promise and may retain the
goods pledged as a security.

CONTRACT OF AGENCY
A person cannot do every business transaction by himself
because of time constraint and business complexity
Therefore, business people perform many activities
through another person. The person who carries out the
transaction on behalf of another is known as an agent.
This arrangement is known as contract of agency.

1 Agent
A person employed to do any act for another or to
represent another in dealings with a third person is known
as an agent.

2 Principal
The person for whom such an act is done or who is so
represented is called the principal.

Example
Devdas appoints Paro to buy liquor on his behalf.
Devdas is the principal and Paro is the agent. The
relationship between Devdas and Paro is called 'an
agency'.
There are two important rules on which the agency is
based
Whatever a person can do personally, he can do
through the agent.
He, who does an act through another, does by
himself. Consequently, all the acts of the agent are
the acts of the principal.
In other words, the agent is merely a connecting link
between the principal and the third parties.

ESSENTIALS FOR A VALID AGENCY

1.Agreement Between the Principal and the
Agent
An agency is created by an agreement between
the principal and the agent. The agency may be
express or implied.
2.Agent Must Act in a Representative Capacity
The agent must have the power to create a legal
relationship of his principal with the third person.
Thus, the agent need not be a competent person.
Even a minor or a lunatic can act as the agent.
3. Consideration
The contract of agency can be created without
consideration.

4. Capacity of a Party
For a valid contract of agency, the principal must
be a competent person to enter into a contract.
Thus, a minor or a person of unsound mind cannot
appoint the agent.
On the other hand, any person may become the
agent and he need not to be competent to
contract. It means even a minor or a person of
unsound mind may be appointed as the agent.

MODE OF CREATING AN AGENCY

The relationship of the principal and the agent
may be created in anyone of the following ways:
1. Agency by an Express Agreement
- by word of mouth or by an agreement in writing.
2. Agency by an Implied Agreement
- by inference from the circumstances of the case.
Implied agency includes:
2.1. Agency by Estoppel Where a person by his
conduct or by his statement leads wilfully to
another person to believe that a certain person is
his agent, he is estopped from denying
subsequently that the person is not his agent.

2.2 Agency by Necessity When a person acts in

some emergency as an agent for another person
without his consent or authority, Such an agency is
created by necessity.
2.3.Agency by Ratification When a person
subsequently accepts the act of the agent done
without his consent, it is agency created by
ratification.

SUB-AGENTSECTION 191
A 'sub-agent' is a person employed by and acting
under the control of the original agent in the business
of the agency. The sub-agent is the agent of the
original agent. As between the original agent and the
sub-agent, the relationship is that of the principal and
the agent.
SUBSTITUTED AGENT OR CO-AGENTSECTION
194
A substituted agent is an agent named by the original
agent to act on behalf of principal. Thus, the sub
stituted agent is the agent appointed by the original
agent to act for the principal. The substituted agent
acts under the direct control of the principal and not
under the original agent. The agent is not concerned
with the efficiency of the substitute.

DUTIES OF AN AGENT
Duty to Follow the Instruction of PrincipalSection
211
Duty to Carry Work with Care and SkillSection 211
Duty to Render Accounts to the PrincipalSection
213
Duty to Communicate with the Principal in case of
difficultySection 214
Duty Not to Deal on His Own AccountSection 215
Duty Not to Make Secret ProfitSection 216
Duty to Pay Sums Received for the Principal
Sections 217 and 218
Duty to Protect Interests of the Principal in Case of
His Death or InsolvencySection 209
Duty Not to Delegate his authority to some other
person.

RIGHTS OF AN AGENT
Right to a RetainerSection 217
The agent may retain out of any sums received on
account of the principal in the business of the
agency, all money due to himself in respect of his
remuneration and advances made or expenses
properly incurred by him in conducting such
business.
Right to Receive the RemunerationSections
219 and 220

Right of LienSection 221

In the absence of any contract to the contrary, the
agent is entitled to retain the 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.
Right to Be IndemnifiedSection 222
The principal is bound to indemnify the agent against
the consequences of all the lawful acts within his
authority.
Right of CompensationSection 225
The agent has the right to receive compensation for
the loss suffered due to the principal's negligence or
want of skill.

Duties of Principal:
1. To indemnify the agent against the
consequences of all lawful acts.
2. To indemnify the agent against the
consequences of acts done in good faith
3. To indemnify agent for injury caused by
principals neglect.
4. To pay the agent the commission or other
remuneration agreed.

Rights of Principal:
1. To recover damages
2. To obtain an account of secret profits and
recover them and resist a claim for remuneration.
3. To resist agents claim for indemnity against
liability incurred.