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INDIAN CONTRACT ACT 1872

I-GENERAL PRINCIPLES OF CONTRACT

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Law is a system of rules and guidelines which are enforced through social institutions to
govern behaviour. Laws are made by governments, specifically by their legislatures. The
formation of laws themselves may be influenced by a constitution (written or unwritten) and
the rights encoded therein.
Law- “ a rule of civil conduct, prescribed by the supreme power of a state, commanding what
is right and prohibiting what is wrong”- Blackstone
Need for law-
 for preservation of peace & orderliness,
 without law, life & business will become a matter of survival of the fittest and of
ruthless. -
 to regulate the transaction of business,
 powerful instrument of social change.
Types of law-
 written (from the legislative branch of govt.eg. constitution, statute, ordinances, acts)
 unwritten –common law/case law-developed by court of law,
 public –concerned with the relation between private parties and the govt. –
 private law is related to the private right of persons against each other e.g. law of
contract.
 Mercantile law-branch of law concerned with the trade and commerce- e.g. law of
contract, sale of goods, partnership, negotiable instruments, insurance carriage and
insolvency
 Civil law: deals with disputes between individuals or organizations, in which
compensation may be awarded to the wronged litigant
 Criminal law: designated as dishonest by the govt. and is imprisoned and fined the
guilty.(e.g. murder)
Indian law is largely based on English common law because of the long period of British
colonial influence during the period of the British Raj. Various legislations first introduced by
the British are still in effect in modified forms today. During the drafting of the Indian
Constitution, laws from Ireland, the US, UK, and France were synthesized into a refined set of
Indian laws. Indian laws also adhere to the United Nations guidelines on human rights law
and the environmental law. Certain international trade laws, such as those on intellectual
property, are also enforced in India. There are about 1221 laws in India as of May 2013. The
authority to make laws in India is Indian parliament (central subjects) and state legislative assemblies
(state subjects)
The first law to be enacted in India was Bengal Indigo Contract Act 1836 and the last one being the
Academy of Scientific and Innovative Research Act 2011.

Law of contractis concerned with right in personam(right against a person: if I let my house to dileep I
and not with right in rem.(right against the world at large: I have a right
have a right to get rent from dileep only and none else)
It is that
to peaceful living in my own house against the whole world at large, Nobody has right to disturb my possession and enjoyment)
branch of law which determines the circumstances in which a promise or an agreement shall
be legally binding on the person making it.
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In India provisions relating to contract is regulated by the Indian Contract Act 1872 (came
into effect on 1-9-1872). It has 2 parts –(1) General principles applicable to all contracts and
(2)- special kinds of contracts such as contract of indemnity and guarantee.

Definitions
Contract :
Sir John Salmond: contract is “an agreement creating and defining obligations between
parties”.
Sir Fredrick Pollock: “every agreement and promise enforceable at law” is contract.
Indian Contract Act sec. 2(h): “an agreement which is enforceable at law is contract”.
An agreement is a promise or set of promises to do or not to do something, forming
consideration to each other.
A proposal when accepted becomes a promise.
When one signifies to another his willingness to do or abstain from doing something with a
view to obtain the assent of that other to such act or abstinence, he is said to make a proposal.

Essential Elements of a contract (Sec.10)

1. Agreement (offer+acceptance): agreement involves a valid offer by one party and a
valid acceptance by the other.
2. Consensus ad idem (Identity of minds): The parties to a contract must agree upon the
subject matter of the contract in the same manner and in the same sense.
3. Capacity of parties: Every person to a contract must be a
 major (18 yrs)
 possess a sound mind.
 Not disqualified from contracting (like foreign enemy)
4. Consideration: It means something in return. Each agreement must be supported by a
lawful consideration. It can be past present or future.
5. Certainty and possibility of performance: The terms of the contract must not be vague
or confusing and it must be capable of performance.
6. Free consent: The consent given by one party to the other must be free and not caused
by coercion, undue influence, fraud, misrepresentation or mistake. If consent is by
mistake, the contract is void and in other cases mentioned, it is voidable.
7. Lawful object: Object of the contract must be lawful. It must not be illegal, immoral or
opposed to public policy i.e., against interest of public.
8. Not declared to be void: The agreement must not have been expressly declared void by
any law in force in the country. E.g. Agreement in restraint of marriage or trade.
9. Intention to create legal relationship: The parties must have an intention to create legal
relationship. Informal promises and social agreements do not make any legal
relationship
10. Writing and registration: Some of the contracts must be in writing and properly
registered. E.g. contract to transfer an immovable property.

Classification of contracts
According to legal effects: 1. Valid, 2. Void, 3. Voidable, 4. Unenforceable, 5. Illegal.
According to their performance: 1.Executed(Unilateral) 2.Executory(Bilateral).
According to their formation: 1. Express 2.Implied/Tacit/Inferred 3. Quasi-contract.

Valid contract: An agreement enforceable at law is a valid contract. It fulfils all essential
requirements of Section (10).
Void contract: An agreement that cannot be enforced in a court. A contract coming from a
void agreement is void ab initio.A contract may become void because of -
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a) Supervening impossibility b) Subsequent illegality c) Repudiation by one of the parties in

case of voidable contracts d) Contingent contracts on non-satisfaction of conditions.

Voidable contract: an agreement enforceable by law at the option of one of the parties there
to.
Unenforceable contract: it cannot be enforced in a court because of some technical defects
such as absence of writing, time barred, want of stamp etc.
Illegal contract: an agreement which is criminal in nature or which is immoral or is against
public policy.
Executed contract: it is a contract where the whole of the contract is performed by both the
parties or by any one of them (Unilateral).
Executory contract: Where both the parties have not yet performed their obligations
(Bilateral).
Express contract: When parties enter in to contract either orally or in writing.
Implied/Inferred/Tacit contract: The behaviour and attitude of the parties will lead to an
inference that they intend to enter into a contract.
Quasi-Contract: Under certain circumstances, the law itself creates legal rights and
obligations against the parties. It is based on the principle that no one becomes rich at the
expense of other. E.g. finder of lost goods.

Difference between agreement and contract

1. Definition: agreement: promise with consideration passing. Contract: agreement that is
enforceable
2. Creation: agreement: offer + acceptance. Contract: agreement + enforceability
3. Binding: agreement: not binding on the parties. Contract : its binding
4. Compensation: agreement: ifnot fulfilled, no compensation. Contract: there is
compensation
5. Concept: all agreements are not contract, all contracts are agreements
Difference between illegal contract and void contract
1.Definition: Illegal:- contract prohibited by law. Void:- contract unenforceable by law.
2.Effect: Illegal:- all collateral contracts void. Void:- all collateral contracts valid.
3.Scope: all illegal contracts are void but all void contracts are not illegal.

Difference between void contracts and voidable contracts

Basis of distinction Void contract Voidable contract
1. Meaning A contract which ceases to be Enforceable at the option of
enforceable one of the parties
2. Enforceability It cannot be enforced Can be enforced
3. Validity Valid and binding at the time Contract become voidable
of formation. Bud because consent of one of the
subsequently became void parties was not free
4. Option No party gains any option and One party gains option either
it has no legal force to exercise or to cancel
5. Condition It is void in itself It can be made void
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2-OFFER AND ACCEPTANCE

Offer: when one person signifies to another his willingness to do or to abstain from doing
anything, with a view to obtaining the assent of that other to such act or abstinence he is said
to make an offer.
Acceptance: when the person to whom the proposal is made signifies his assent thereto, the
proposal is said to be accepted.
Essential characteristics of valid offer
1. The terms of an offer must be clear and certain and not indefinite, loose or vague.
2. Offer must be communicated to the offeree.
3. Offer must be made with an intention to create legal obligation.
4. Invitation to an offer is not an offer. E.g. Quotations, advt. for tender, price tags.
5. Special terms attached to an offer must be communicated.
6. Offer may be to an individual or to the public at large.
7. Offer may be expressed or implied.
8. Offer must be made with a view to obtain the assent of the other party.
9. Offer may be conditional.
10.Offer should not contain a term, the non-compliance of which would amount to an acceptance.
Different Kinds of Offers
Specific offer: An offer addressed to a specific individual.
General offer: An offer addressed to the world at large i.e. to an uncertain body of individuals
Standing offer: An offer for a continuous supply of a certain article at a certain rate over a
definite period.
Counter offer: A conditional acceptance made by an offeree is known as counter offer.
Cross offer: Identical offers made by two parties in ignorance of each others'.
Lapses of an offer
Revocation/cancellation by communication of notice by the offeror himself.
By lapse of prescribed time/reasonable time.
Death of the offeror before acceptance.
Insanity of the offeror before acceptance.
Non-fulfilment of conditions prescribed by the offeror.
Offer not accepted according to the mode specified.
Rejection by making a counter offer.
ACCEPTANCE
When the person to whom the proposal is made signifies his assent thereto, the proposal is
said to be accepted.
Essentials of valid acceptance
 Acceptance must be unconditional
 Acceptance must be communicated to the offeror except in the case of unilateral contracts,
in which the offeror makes an offer to the world which can be accepted by some act e.g. advt. offer
 Communication must be in some usual and reasonable manner
 Acceptance must be made within a reasonable time
 Acceptance may be express or implied
 Acceptance must be made by the offeree
 Acceptor must be aware of the proposal
 Acceptance must be made only after the offer
Law regarding communication of offer and acceptance through post/courier (disjointed
communication)
1. An offer is complete when it reaches the offeree but not when it is posted(put in a course of
transmission)
2. An offer sent by post may also be accepted by post unless otherwise specified.
3. An acceptance is complete when it is posted properly addressed and stamped. But as
against acceptor, the communication of acceptance is complete only when it comes to the
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knowledge of the offeror. That means, acceptor can revoke the acceptance any time before it
reaches the offeror.

3. CONSIDERATION
Consideration means something in return. An agreement must have a flow of material benefit
from both the sides. According to sec.2 (d) of the Indian Contract Act "when at the desire of
the promisor, the promisee or any other person has done or abstained from doing, or promises
to do or to abstain from doing something, such act, abstinence or promise is called a
consideration for the promise".
e.g. Rajesh will prepare a software to Vishal for a fee of Rs. 1 lac, / Ria will prepare a
software to Vishal and Vishal in turn will permit Ria to use his computer facilities for one
year/ Sushil will prepare a software for Vishal and Vishal will not evict Sushil from his house
for next three years where Sushil is tenant of Vishal. Thus consideration is a benefit to the
party, which can be in cash/kind/goods/service/tangible/intangible. whether party benefit from
it or not is not taken into account. for e.g. X promises Y Rs.1000 if he swim across the river.
An agreement not supported by consideration is called Nudum pactum (bare agreement)
Essentials of a consideration
 Consideration must move at the desire of the promisor
 Consideration my move from promisee or any other person- if moved from a third party
it is called ‘constructive consideration’
 Consideration may be past, present or future
 Consideration need not be adequate
 Consideration must be real and not illusory i.e. Possible and certain. e.g. to perform promise on
a date already expired
 Consideration must be lawful. It is unlawful if it is a) forbidden by law or 2) if permitted
would defeat any provisions of any law or 3) if it is fraudulent or 4) it involves or
implies injury to the person or property of another or 5) it is regarded by court as
criminal or against public policy.
 It must be something which the promisor is not already bound to do either by general
law or by existing contract. A promised B who received summons from court, to pay Rs.500 for appearing and giving
evidence.
Different kinds of Consideration
1. Executed Consideration: i.e., already done in response to a promise
2. Executory Consideration: when it is to be done in future
3. Past Consideration: when it is already done before making an agreement but not in
response to a promise.
Privity of contract
Doctrine of privity of contract states that the contract confers right and obligations on
contracting parties only. Therefore a stranger to a contract cannot sue on the contract.

Exceptions to the rule of privity of contract

1. When a trust is created: The beneficiary can sue to enforce the trust in his favour.
2. Contracts through an agent: principal can enforce the contract
3. Where a charge is created on a specific immovable property in favour of a person.
4. In case of family arrangements between male members of a Hindu Undivided Family
making provision for the maintenance or for expenses of marriage of female members.
5. Assignee (holder in due course) of a negotiable instrumente.g. endorsee of a cheque
6. Covenants running with the land. Purchaser is bound by conditions and covenants created by an
agreement with previous owner.A "covenant running with the land", imposes duties or restrictions
upon the use of that land regardless of the owner. but racial covenants are illegal. for e.g. pathway
given to the adjoining property

Exceptions to the rule "No consideration, no contract"

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1. Agreement based upon love and affection if it is written and registered and parties
stand in near relation to each other.
2. Agreement to pay Consideration for past voluntary services.
3. Agreement to pay a time-barred debt if it is written and registered
4. Completed gifts- the donor cannot take back in absence of consideration.
5. Agency- no consideration is necessary to create an agency
6. Contribution to charity
7. Remission: to accept lesser than what is due (for compromising a due debt)
8. Offer to donate is not supported by consideration hence cannot be enforced. But if a
liability has been incurred to the other party he will be obliged to pay.

Accord and Satisfaction

Accord means the subsequent agreement to accept a different thing or performance than what
is due under the old contract and give up the original performance.Satisfaction means the
actual fulfilment of the subsequent agreement.
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4. CAPACITY TO CONTRACT
Capacity/competency to contract means legal ability of a person to enter into a valid contract.
Every person is competent to enter into a contract if a) he is of the age of majority b) he is of
sound mind c) he is not expressly disqualified by any law from contracting.
Minors
A person who has not completed his 18th year of age is considered to be a minor. If a minor is
under the care and custody of the court and the court appoints a guardian for the minor, in
such case, the minor becomes major only on the completion of the age of 21 years.
Law regarding minor's agreement
1. An agreement by or with a minor is void ab initio
2. Minor is not bound to return the benefits received
3. A minor cannot ratify his act after attaining the age of majority
4. Restitution(refund) of the property from a minor in case of fraud is possible only if it
is identifiable and still is in his possession.
5. The principle of estoppel is not applicable to minors. The principle of estoppel is that
when one person by his false and fraudulent representations makes another person to
believe a thing to be true, such person, in subsequent proceedings, will not be allowed
to deny the truth of that thing.
6. A minor is liable(not personally but his property) for necessaries supplied for him and his
dependents. The necessaries may vary depending on the conditions in which the minor
is living. E.g. car may be necessary for some while luxury for others.
7. A minor is liable for services rendered which is beneficial to him (like education,
training)
8. Minor can be a promisee/beneficiary
9. Minor can be an agent. But the principal cannot claim any compensation for a minor's
default.
10. Minor can be a partner for the benefits of the partnership with the consent of other
partners. His liability is confined only to his share and not to his private estate.
11. Minor cannot be declared as insolvent.

Persons of unsound mind

A person is said to be of sound mind for the purpose of making a contract if, at the time when
he makes it, he is capable of understanding it and of forming a rational judgment as to its
effect upon his interests. Idiots, lunatics and drunken persons are considered to be persons of
unsound mind.
Idiot: A person who has completely lost his mental powers caused by lack of development of
brain and who is incapable of forming a rational judgment is called an idiot. All agreements
other than those of necessities of life, with idiots are absolutely void.
Lunatics: A person whose mental powers are disturbed-due to some mental strain or serious
mental shock or any highly tragic event- is called a lunatic. All agreements other than those of
necessities of life with lunatics are void. But those agreements made during the lucid intervals
are valid. But he can always plead madness to avoid a contract.
Drunken person: drunken person is one who is in a state of intoxication and is incapable of
entering into contract. The position of a drunken person is similar to that of a lunatic.
However he can affirm the agreement, made under drunkenness after the influence of alcohol
is completely over.
Persons disqualified by any law from contracting
1. Alien enemies: an alien (foreign citizen) whose country is in war with India is known as
alien enemy. The contract will remain suspended during the course of the war or will
be dissolved if they are against national interest.
2. Corporations or companies: a company being an artificial person having legal existence
can enter in to the contract through its directors. But it is subject to certain limitations.
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For e.g., the contract must be under its seal and it must be permitted by its
Memorandum of Association.
3. Felons or convicts: they cannot enter into a contract or cannot sue when they are
undergoing sentence until they are released. Law of limitation will be held in abeyance
during his sentence.
4. Insolvent: when a debtor is adjudged as insolvent his property vests in the Official
Receiver appointed by court. Hence an insolvent is not competent to enter in to a
contract relating to his property.
5. Married woman: she is competent to enter into a contract with respect to her personal
property in any way she likes. For the necessaries of life, she can even transact with her
husband’s properties for which her husband will be liable. Her capacity to contract as
agent of her husband is limited to necessaries of her life.
6. Foreign ambassadors: they enjoy a special privilege, by which they cannot be sued in
Indian courts without prior permission of Central Govt. However they can enter into a
contract and enforce such contracts in Indian courts.
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5. FREE CONSENT
Two or more persons are said to consent when they agree upon the same thing in the same
sense. Consent is said to be free when it is not caused by 1.Coercion 2. Undue influence
3.Fraud 4.Misrepresentation or 5.Mistake.

Coercion: Coercion is committing or threatening to commit any act forbidden by Indian Penal
Code or the unlawful detaining or threatening to detain any property belonging to a person
with the intention of causing any person to enter into an agreement. It is immaterial, whether
the IPC is in force in the place where the coercion is employed. Where the consent of the
contract is obtained through coercion the contract is voidable at the option of the party whose
consent was so caused. But the benefits received must be returned if the contract is made void.

The term duress used in English law is similar to coercion in Indian law.
Difference between coercion and duress
1. Coercion may be used against any person including a stranger to an agreement. But
duress can be used only against a party to the contract or his family members.
2. Coercion may proceed from any person including a stranger to an agreement. But duress
must proceed from a party to the contractor his agent.
3. Unlawful detention of goods is coercion but it is not duress.
4.Coercion need not cause immediate violence. But duress must cause immediate violence.
Undue influence:
When the relationship between parties of a contract is such that one of them can dominate the
will of other and uses the position to claim an unfair advantage, the contract is caused by
undue influence. For example, parent and child, guardian and ward, trustee and beneficiary,
advocate and client, doctor and patient, master and servant, manager and worker, income tax
officer and assessee, principal and teacher, teacher and student, spiritual leader and disciple.
Where the consent is obatained through undue influence the contract is voidable or the court
may set aside it.
Essentials of undue influence
1. Relationship between parties must be such that one of them can dominate the will of other.
2. Dominant party should obtain an unfair advantage over the other.
3. Dominant party must use his dominant position to claim that unfair advantage.
In case of husband and wife (other than pardanashin women), creditor and debtor, landlord
and tenant, principal and agent there is no presumption of undue influence unless otherwise
proved.
In case a contract is made with a pardanashin womanthe court must satisfy upon evidence that
 The deed was executed actually by her with full understanding of what she was about
to do
 She had full knowledge of nature and effect of transaction
 She had independent and disinterested advice in the matter.

Difference:Coercion and Undue influence

Coercion Undue influence
How Caused by an offence forbidden Caused by misusing a dominant
by IPC position
Nature Involves physical pressure Involves mental pressure
Who? May be from a stranger Must be from a party to contract
Relationship Is not necessary Is necessary
between parties
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Fraud:
Fraud is a wilful representation made by a party to a contract or by his agent with the intention
to deceive the other party so that to induce such party to enter into a contract. It means a false
statement made knowingly and without believing it to be true.
Essentials of fraud.
1. Fraud must be committed by a party to the contract or by his connivance (allow a bad thing to
happen even though you know about it)or by his agent.
2. It must be aimed at the party or his agent and to induce him to enter into an agreement.
3. The act must be committed with an intention to deceive other and must have actually
deceived
4. The representation must relate to a fact and not just an opinion.
5. Any one of the following acts must be committed.
 Suggestion as to a fact which is not true by one who does not believe it to be true.
 active concealment of a fact by one having belief or knowledge of the fact
 Promise made without any intention of performing it.
 Any other act fitted to deceive.
 Any such act or omission the law specially declares to be fraudulent. (for e.g. Transfer of
Property Act 1882 insist that the seller of immovable property should disclose any material defect in the
property or in the seller’s title)
Silence a fraud or not?
Mere silence of a party as to certain facts does not generally amount to fraud.
Exceptions:
 Where circumstances create a duty on the part of the person keeping silence to speak.
For e.g. In a contract of ‘utmost good faith’ like contract of insurance, marriage,
partnership, sale of immovable property etc. silence will amount to fraud.
 Where silence in itself is equivalent to speech
A party whose consent to an agreement was caused by fraud has three remedies.
a) He can avoid the contract but within a reasonable time
b) He can file a suit for damages.
c) He can insist that the contract shall be performed on the condition that he shall be placed
in the same position in which he would have been if the representation made had been
true.
A contract shall not be voidable merely because merely because consent is caused by fraud if:
1. The party could discover the truth with ordinary diligence
2. Where party was not defrauded
3. The party after becoming aware of the fraud, didn’t show the intention to avoid the
contract
4. Where parties cannot be restored to their original position.

Misrepresentation:
It is a wrong statement or assertion made by one party to another either before or at the time
of contract regarding some matters relating to the contract. Misrepresentation may be innocent
or fraudulent. Fraudulent misrepresentation is known as fraud. Innocent misrepresentation is a
false statement made by a person who honestly believes it to be true. If consent is caused by
an innocent misrepresentation, the contract is voidable.
Essentials of misrepresentation
1. There must be an assertion or representation
2. It must relate to a matter of fact and not just an opinion
3. It must subsequently become untrue.
4. It must induce other to enter into an agreement.

Difference between misrepresentation and fraud

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1. Fraud is made with an intention to deceive. But no such intention in case of

misrepresentation
2. Fraud is a civil wrong but misrep. is not a civil wrong.
3. In case of misrep. the aggrieved party can avoid the contract. But in case of fraud he can
not only avoid the contract but also claim damages.
4. In case of misrep. the aggrieved party cannot avoid the contract if he had ways and means
to discover the truth with ordinary diligence.

Mistake:
Mistake may be defined as an erroneous belief concerning something. Mistakes in the
formation of a contract may be of three kinds viz., unilateral mistake, bilateral mistake and
common mistake. Mistake may be (a) mistake of law or(b) mistake of fact.

Mistake of law:-means erroneous belief regarding law of a country.

It may be of two types.
a) Mistake of Indian law:- Everyone is deemed to know the laws of his country, and hence
mistake of law of the country does not give right to the parties to avoid the contract.
Ignorance of law is not an excuse.
b) Mistake of foreign law:- It is similar to mistake of fact. Here the agreement is void in case
of bilateral mistake.
Mistake of fact: mistake relating to terms and conditions or any fact essential to the
agreement is known as mistake of fact. For.e.g. a car which is being transacted has been stolen
the previous day and this fact was unknown to the parties.
It may be of two types viz., bilateral mistake and unilateral mistake.
Bilateral mistake:-Where both parties to an agreement are under a mistake as to a matter of
fact essential to an agreement, the agreement is void.
Conditions for bilateral mistake
1. Both the parties must be under a mistake.
2. The mistake must relate to a matter of fact
3. The fact must be essential to an agreement
Types of bilateral mistake
Mistake as to identity of subject matter or regarding existence of subject matter
Mistake regarding title of subject matter
Mistake regarding quantity/quality / price of subject matter.
Mistake regarding possibility of performance
Unilateral mistake:-Unilateral mistake is the mistake of one of the parties to contract as to a
matter of fact. If a man due to his own negligence does not ascertain what he is contracting
about, he must take the consequences. Hence it is not voidable except under the following
circumstances.
1. Mistake as to identity of the parties(A procured a ticket through B for a film show, for the theatre
owner does not want A to enter his theatre, contract is void)
2. Mistake as to character of a written document: when a person is induced to sign a written
document containing a contract fundamentally different in nature than what he thinks he is
signing, the contract shall be void.
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6-LEGALITY OF OBJECT AND CONSIDERATION

The object and consideration of an agreement must be lawful, in order to make the agreement
a valid contract. The illegality may be present in the formation, in the performance, in the
consideration or in the purpose for which the contract is entered into. The consideration and
object is lawful unless it is
 Forbidden by law.
 If permitted, would defeat the provisions of any law
 Fraudulent act.
 Involves injury to person or property of another.
 If the court regards it as immoral
 If the court regards it asopposed to public policy.
If it is forbidden: Forbidden means punishable by the criminal law if such act is done. E.g.
smuggling, A promise to obtain a govt. job for a consideration of `50000. or an agreement to
sublet telephone of BSNL. An agreement to marry a girl when his lawful wife is alive.
If permitted would defeat the provisions of any other law: though such act is not directly
forbidden by law, such act would violate the provisions of any other law in force in our
country. For e.g. An agreement to give annual allowance to the parents of an adopted boy in
order to induce them to consent to the adoption is void. An agreement between husband and
wife who are muslims that wife shall have the liberty to stay with her parents after marriage.
Fraudulent Act. Agreement which are entered into to promote fraud. e.g. transfer property to
another to cheat creditors, agreement to share profits of fraud.
Involves injury to person or property of another. Injury means criminal or wrongful harm.
Loss which causes to a trader as a result of competition by a rival trader is not injury within
the meaning of this clause. An agreement with a news paper to publish a defamatory article
against B and promises to pay `500000, the agreement is void. An agreement to work for A
free of cost by B who has borrowed a sum from A, until the debt is cleared.
If the court regards it as Immoral: immoral means inconsistent with what is right. E.g. rent
due in respect of a flat let out to a prostitute for the purpose of her business cannot be
recovered. Money given to a married woman to obtain divorce from her husband.
If the court regards it as opposed to public policy. : Any agreement which is considered
injurious to the welfare of the society will be deemed to opposed to public policy. Any
agreement which tends to promote corruption or injustice or is against the interest of the
public is also considered to be opposed to public policy. E.g.
1. Trading with alien enemy
2. Agreements for stifling criminal prosecution
3. Agreement in restraint of legal proceedings
4. Maintenance and champerty
5. Suicide
6. Traffic relating to public offices: e.g. agreement to apply for voluntary retirement to pave
way to a fresh appointment.
7. Agreement in restraint of parental rights
8. Agreement in restraint of marriage
9. Marriage brokerage agreements
10. Agreement tending to create monopolies.
11. Agreement in restraint of personal freedom
12. Agreement in restraint of trade except sale of goodwill, partnership agreements, service
agreements and price maintenance agreements.
Maintenance and Champerty
Maintenance means the promotion of litigation in which a person has no interest of his own.
Champerty is a bargain whereby one party is to assist another in recovering property and, in
turn, is to share in the proceeds of the action. Under English Law both of these agreements are
illegal. But these are not illegal in India.
 13

7-VOID AGREEMENTS
An agreement not enforceable by law is said to be void. Agreement by or with an incompetent
person, agreement made under bilateral mistake of fact, agreement without consideration or
unlawful consideration etc. are some of the examples of void agreements
Expressly declared void agreements
1. Agreement in restraint of marriage other than with a minor.
2. Agreement in restraint of trade
3. Agreement in restraint of legal proceedings
4. Agreement to do impossible acts
5. Agreement made between incompetent parties
6. Agreement entered into through mutual mistake
7. Agreement made without consideration
8. Agreement with unlawful consideration and object
9. Uncertain agreements
10. Reciprocal promises to do things legal and also other things illegal.
11. Wagering agreements
12. Agreement contingent on impossible events.

These agreements are only void and not illegal.

UNCERTAIN AGREEMENTS:
An agreement, the meaning of which is not certain or not capable of being made certain are
void. The uncertainty may be in respect of quantity, price and title of the subject matter of the
agreement. For e.g. an agreement to sell oil, if the nature of oil is not mentioned, is void. But
an agreement with a coconut oil dealer to sell oil is valid because it is understood from the
nature of the contract.
RECIPROCAL PROMISES TO DO THINGS LEGAL AND ALSO OTHER THINGS
ILLEGAL
Where there is a reciprocal promise firstly to do certain things which are legal and secondly to
do certain other things which are illegal and the legal part can be separated from the illegal
part the legal part is contract and the illegal part is void agreement.
For e.g. X and Y agree that X will sell a house to Y for `50,000 but that if Y uses it as a
gambling house he will pay X `150,000. The second set is for an unlawful object and hence it
is void. The first set is valid since it can be separated.
 14

8-WAGERING AND CONTINGENT CONTRACTS

Wager (bet)
According to Anson wager or bet means, “promise to give money or money’s worth upon the
determination of an uncertain event in which the parties have no material interest and with
mutual chances of gain or loss”. E.g. A and B enters into an agreement that A shall pay `100
to B if it rains on Monday, and to pay the same amount by B to A if it does not rain.
It is void (illegal in the states of Maharashtra and Gujarath). So winner of a bet cannot file a
suit to recover the money.
Essentials
1. There must be two persons with opposite views about an uncertain event.
2. Mutual chances of gain or loss
3. No party has control over the event
4. Parties have no other interest in the happening or non happening of the event
5. There must be a promise to pay money or money’s worth
6. The bet money should come from the pockets of the parties themselves.
7. There must be a common intention to bet at the time of making such agreement
Exceptions
Wagering agreements of the following nature will be valid.
1. Agreement to sell or purchase of any commodity is not wagering agreement. But if the
intention of the parties is to pay or get the difference in price the agreement is
wagering agreement and hence void.
2. Speculative transactions:are valid unless it is proved that there is no intention for the
parties to take delivery of shares/goods
3. Horse racing: any subscription or contribution made for a prize to be awarded to the
winner of a horse race is not unlawful if the value of such prizemoney is `500 or more.
4. Lotteries: is valid if it is state lottery or authorised by state government.
5. Prize competition/ Athletic competition: sometimes skill and intelligence plays a
major part for the successful solution of certain competitions such as cross word
puzzles, picture puzzles, quiz competition, athletic competions etc. Such contest will
not be wagers.
6. Contract of insurance: insurance is a contract between two parties whereby one party
undertakes to indemnify the loss of other on happening of an uncertain event, in
consideration of a certain payment called premium.
Insurance contract is different to the wagering contract in the following respects.
1. Insurance is a contract of indemnity whereas wagering is not.
2. No winning or losing in insurance but it is there in wagering.
3. The holder of an insurance policy must have an insurable interest in the event. But there is
no such interest in wagering.
4. There are scientific and actuarial calculations of risk in insurance contracts, but there are
no such scientific calculations in wager.
5. Insurance contracts are beneficial to the public, where as wagering do not serve any useful
purpose.
6. Insurance contract is legal and enforceable but wagering is void.

Contingent contracts

Contracts may be absolute or contingent. It is absolute when the promisor binds himself to
performance of an obligation independent of any conditions. It is contingent when its
performance depends upon happening or non-happening of a future uncertain event.
 15

Features of contingent contracts

1. Performance of contingent contract depends upon some future event.
2. Happening of future event must be uncertain
3. The event shouldn’t form an essential part of contract, but should only be collateral to it.
4. Happening or non-happening must be beyond the powers of the contracting parties.
Difference-wagering and contingent contracts
 Contingent contract is valid where as wagering is void.
 In contingent contracts parties do have real interest in the happening or non-happening of
event. But in wagering the interest is only in winning or losing the bet amount.
 In contingent contracts the future uncertain event is merely collateral whereas in a
wagering agreement it is the sole determining factor of the agreement.
 All wagers are contingent, whereas all contingent contracts are not wagers.

9- QUASI CONTRACT
These are not contracts in the strict sense for the reason that a contract comes into existence
by an offer and acceptance. But under certain special circumstances obligations resembling
those created by a contract are imposed by law although the parties have never entered into a
contract.. Thus the obligations which are created and imposed by law in the absence of any
contract to that effect are called ‘quasi contracts’. (Quasi means ‘almost’/ ‘to an extend’)
Quasi contracts are based on the maxim that ‘no persons shall be allowed enrich him at the
expense of another’.
Different kinds of quasi-contracts are:
1. Claim for necessaries supplied to a person incapable of contracting. The person who
has supplied is entitled to be reimbursed from the property of such incapable person.
2. Reimbursement of person paying money due by another, in payment of which he is
interested. For e.g. building tax paid by tenant to avoid sale of property by the govt.,
can be reimbursed from the owner of building.
3. Obligation of person enjoying benefit of non-gratuitous acts: A saves B’s property
from fire. The expenses incurred by A in connection with this is bound to be
reimbursed provided such as act was done non-gratuitously.
4. Responsibility of a finder of lost goods: According to sec 71, a person who finds
goods belonging to another and takes them into his custody is subject to the same
responsibility as of bailee. So he is to take care of the found goods as if it is his own
goods and take reasonable effort to hand it over to its real owner.
5. Liability of person to whom money is paid, or things delivered by mistake or under
coercion. The person who has got the same must repay it.
 16

10-PERFORMANCE OF CONTRACTS

A contract creates legal obligations. Performance of a contract means the carrying out of these
obligations. The contract may be performed by the a) promisor himself, b) his agent or c) his
legal heirs.
If it appears from the nature of the case that it was the intention of the parties to any contract
that the promise contained in it should be performed by the promisor himself such promise
must be performed by the promisor himself. E.g. contract involving exercise of personal skill
like singing, painting etc.
Where the personal skill of the promisor is not necessary the work could be done by his agent.
For E.g. sale of goods.
Where the personal skill is not necessary and the promisor dies before the performance of the
contract his legal heirs who inherit the property of the deceased promisor are bound to
perform it. But their liability is limited to his estate.
Performance of joint promises
When two or more individuals are bound to perform a contract jointly it is called joint
promise. Rules regarding the performance of joint promises are as follows.
 The liability of each promisor is always joint and several
 Right of contribution i.e. one of the promisors can proceed against the others to recover
the amount, which he has paid more than his share.
 If one defaults, others are liable to bear the loss in equal shares.
 If one dies, his legal heirs with surviving joint promisors should perform the contract.
 The release of any one of the joint promisors from his liability by the creditor does not
mean release of all.
Performance of reciprocal promises
Promises which form the consideration for each other are called reciprocal promises or
bilateral contracts. E.g. A promises to deliver his car to B and B promises to give his flat to A
Rules regarding the performance of reciprocal promises are as below.
 Mutual and independent promises:- as fixed in the contract.
 Mutual and dependent promises:- one of them need not perform till others’ performance.
 Mutual and concurrent:- the promisor need not perform his promise if other is not ready
to perform.
 When one prevents the other:- the contract is voidable at the option of the party so
prevented.
Time and place of performance
 Where time and place is prescribed by the promisee then it is to be performed at the
place and time so specified by him.
 Where the place is not prescribed the promisor must ask the promisee to fix a
reasonable place to perform the contract.
 Where time is not prescribed it is to be performed during normal business hours within
a reasonable time.
Effects of failure to perform at time
a) Where time is essence of contract the contract is voidable and can sue for breach.
b) Where time is not essence of contract it is not voidable but can claim compensation.
c) If promisee receives a delayed performance, then he cannot claim any compensation
unless he gives due notice of his intention to do so.
When contract need not be performed
1. When a contract is void ab initio.
 17

2. When contract become illegal

3. When one contract is substituted by another
4. When promisee releases from its obligation.
5. In case of voidable contract, when one of the parties rescinds it.
6. When promisee refuses to arrange reasonable facilities for performance.
Law relating to appropriation of payments
It is the law regarding the discharge of debts wherein the debtor owes a number of debts.
1. Debtors express instruction must be followed since appropriation is a right given to the
debtor for his benefit.
2. Debtors’ implied intention must be followed.
3. If there is no express or implied direction by the debtor regarding appropriation, then the
creditor may appropriate the payment to any lawful debt due from debtor.
4. Where neither the debtor nor the creditor has made any appropriation, then according to
law, the payment is to be applied in discharge of the debts in the order of time.
5. If payment has been made without expressly stating whether it is towards interest or
principal, payment is to be applied to interest first, and then to principal.

Tender (attempted performance)

Where the promisor offers to perform his part of the contract, but is unable to do so because
the promisee does not accept the performance, it is called tender. It is not actual performance
but is only an attempt to perform. For e.g. A offered to sell B 100 bags of cement. But when A
sent a lorry load to B he refused to take delivery.
A tender may be of two kinds, namely,(i) tender of money and (ii) tender of goods. A valid
tender is equivalent to performance except tender of money.
Essentials of a valid tender
1. Tender must be unconditional
2. It must be made at proper time and place.
3. It must be made for the whole obligation contracted for and not for part.
4. In case of tender of goods, a reasonable opportunity must be given to the promisee for the
inspection of goods.
5. It must be made by a proper person willing to perform the contract.
6. It must be made to the proper person i.e. to the promisee or his agent.
7. If there are several joint promisees, an offer to any one of them is a valid tender.
8. In case of tender of money, exact amount should be tendered in the legal tender money.
i.e. not larger or smaller amount.
Assignment of contracts
If any contracting party transfers his rights or liabilities to a third party, it is technically called
assignment of contract or assignment of chose-in-action.
A contractual liability cannot be transferred but with the following exceptions.
 If the transfer is with the consent of the promisee
 If the performance does not involve personal skill/ability.
Assignment of rights and liabilities may take place by operation of law. i.e. a) when one of the
parties dies or b) when one of them becomes insolvent.
 18

11-DISCHARGE OF CONTRACT
Discharge of contract means termination of the contractual relationship between the parties. A
contract may be discharged by any of the following ways:
1. By performance-actual or attempted.
The usual mode of discharge of a contract is by performance within the time and in the
manner specified. Where the parties to the contract actually performs their part of the contract
it is actual performance and where the promisor offers to perform his part of the contract, but
is unable to do so because the promisee does not accept the performance, it is called attempted
performance or tender.
2. By mutual consent or agreement
Contract may be discharged by agreement in the following ways.
a) Novation:- substituting with a new contract before expiry of existing one and with the
consent of both the parties. Here old contract is discharged.
b) Alteration in one or more terms of the contract.In novation there may be change in the
parties to the contract, but in alteration there is no change in the parties but only in terms.
c) Rescission (total or partial):- means cancellation of the contract expressly or impliedly.
d) Remission:- means to accept a lesser performance than what is contracted for.
e) Waiver:- here both the parties deliberately agree to abandon their respective rights.
f) Merger:- a new contract with superior rights is made e.g. tenant owns the land, then
contract to pay rent for the land is discharged.
3. By lapse of time
Time specified in the contract expires.
4. By operation of law
Law itself discharges the contract in the case of death or insolvency of either party and in the
case of unauthorized alterations in the terms of contract.
5. By impossibility of performance
Impossibility at the time of or subsequent to the contract leaves the contract discharged.
Examples of subsequent or supervening impossibility are destruction of subject matter, death
of promisor, subsequent illegality and non-existence of particular state of things.
6. By breach of contract
It includes both actual breach (at the time of contract or during performance) and anticipatory
breach of contract (both express and implied). In both the circumstances contract remains
discharged.

Doctrine of Frustration
It is also known as doctrine of supervening impossibility. Frustration means premature
termination of the contract owing to change in circumstances which are beyond the control of
the parties. It may happen because of the following reasons
 Destruction of subject matter
 Death / incapacity of the party
 Change of law
 Declaration of war
Impossibility is not an excuse in the following cases
 Difficulty of performance
 Commercial impossibility
 Impossibility due to failure of third persons
 Strikes/lock outs
 Failure of one of the objects of the contract
 19

12.REMEDIES FOR BREACH OF CONTRACT

When one of the parties to the contract fails to perform his part of the contract, he is said to
have committed breach of contract. The various remedies available to an injured in the case of
breach of contract are:
a) Rescission (cancellation) of the c) Suit for specific performance
contract d) Suit for injunction
b) Suit for damages e) Suit upon quantum meruit
Rescission:Where one of the parties to contract commits breach, the other party can treat the
contract as cancelled and refuse the further performance. Now he is free from all the
obligations under the contract. In addition he can claim compensation for the damage he has
suffered. The party who is rescinding the contract is bound to restore any benefits he has
received under the contract.
Suit for damages/compensation:When the contract is broken, the injured party can claim
damages (monetary compensation) from the other party. The object of awarding damage is
not as a punishment but to put the injured party in the same financial position as if the contract
had been performed.
Kinds of damages
i) Compensatory/general/ordinary damages. These are such damages as may fairly and
reasonably be considered as arising naturally and directly in the usual course of things from
the breach of contract itself.
ii) Special damages. Those damages which arise from the breach of contract under special
circumstances. It includes indirect loss also. But the special circumstance must be known to
the other party against whom special damages are claimed.
iii) Exemplary / vindictive / punitive damages: it has no place in law of contract as it is
punitive in nature. But it is allowed in two cases. (a) Breach of contract to marry (b) dishonour
of cheque by a banker when there is sufficient fund in credit. It is allowed to punish and not to
compensate.
iv) Nominal damages: It is allowed to recognize the right of the party to claim damages. This
is allowed when there is only a technical violation but not an actual loss. It is allowed neither
as a compensation and nor as a punishment.
v) Liquidated damages or Penalty: Liquidated damages means a sum fixed up in advance,
which is a fair and genuine pre-estimate of the probable loss that is likely to result from the
breach. Penalty means a sum fixed up in advance, which is disproportionate and large in
amount in comparison with the loss that would arise from the breach.
Suit for specific performance:It means actual carrying out of the contract as agreed. Specific
performance is granted where monetary compensation is not an adequate relief, where there is
no standard for ascertaining actual loss and where it is not probable to get compensation in
money.
Suit for injunction:Injunction is an order of a court preventing a person from doing a
particular act (where he is doing something which he promised not to do). It may be
temporary or perpetual.
Suit upon quantum meruit (as much as merited or earned): when a person has done some
work under a contract and the other party repudiates the contract or some event happens
which makes the further performance of the contract impossible, then the party who has
performed the work can claim remuneration for the work he has already done. This is called
doctrine of quantum meruit.
 20

Special types of contracts

13.INDEMNITY AND GUARANTEE
Contract of indemnity and guarantee, contract of bailment and pledge and contract of agency
are SPECIAL types of contracts.
Indemnity is a contract by which one party (indeminifier) promises to save the other
(indemnity holder/indemnified) from the loss caused to him by the conduct of the indeminifier
himself or by the conduct of any other person. The object of the contract of indemnity is
essentially to protect the indemnified from the anticipated loss. (E.g. insurance)
Guarantee is a contract to perform the promise or discharge the liability of a third person in
case of his default. Three parties involved in this contract are creditor, surety and principal
debtor.
Difference between indemnity and guarantee.
a) There are two parties in indemnity and three parties in guarantee
b) There is only one contract in indemnity and three contracts (between creditor and
principal debtor, surety and creditor, surety and principal debtor) in guarantee.
c) Liability of the promisor is primary in indemnity and secondary in guarantee.
d) Indemnity is for reimbursement of loss. Guarantee provides surety to the creditor.
e) Indemnifier cannot sue third parties in his name. Surety can sue principal debtor in his
own right.
Kinds of guarantee
1. Retrospective: when a guarantee is given for an existing debt it is called retrospective
2. Prospective: when a guarantee is given for a future debt it is called prospective
3. Specific: when a guarantee is given for a single and specific debt it is specific.
4. Continuing: when a guarantee extends to a series of transaction it is continuing: A
continuing guarantee may be revoked by serving a proper notice, on the death of surety,
by novation of the contract or by the release of the principal debtor.
Rights of surety
1. Against creditor
Before payment he can ask the creditor to sue the principal debtor, but should meet all
expenses resulting there from. On payment of debt he is subrogated and gets all the rights of
creditor against principal debtor.
2.Against principal debtor
i. Right to compel payment, ii. Right of subrogation and iii. Right of indemnity.
3.Against co-sureties- Right of equal contribution
Discharge of surety’s liability
A surety may be discharged from liability
1. By the revocation of the contract of guarantee after serving a proper notice (only if it is a
continuing guarantee) or by the death of surety or by substituting the old contract by a new
one.
2. By conduct of the creditor like variations in terms of contract without the consent of surety
or by releasing the principal debtor or by making some composition with debtor without
surety’s consent or by any acts or omissions of creditor impairing surety’s remedy or by loss
of securities in the hands of creditor etc.
3. By invalidation of contract.Where guarantee is obtained by misrepresentation or by
concealment of material fact or by the failure of consideration the surety is discharged from
his liability.
 21

14-BAILMENT AND PLEDGE

Bailment is delivery of goods (movable property) by one person to another for some purpose,
upon a contract that they shall, when the purpose is accomplished, be returned or otherwise
disposed off according to the person delivering them.
Bailor: person who deliver the goods
Bailee: person to whom delivery of goods is made
Characteristics
1. There must be an actual or constructive (symbolic) delivery of goods (other than money).
Mere custody of goods like that of a home-servant is not a bailment.
2. Delivery is for some purpose. Where goods are delivered by mistake it is not bailment
3. The goods must be returned after accomplishing the purpose.
4. Ownership is not transferred.
Kinds of bailment
From the benefit point of view
1. Bailment for the exclusive benefit of bailor
2. Bailment for the exclusive benefit of bailee
3. For the mutual benefit of bailor and bailee.
From the reward point of view
1. Gratuitous bailment (when no remuneration passes)
2. Non-gratuitous bailment
Difference- sale & bailment
In sale there is absolute transfer of ownership but not in bailment
In sale goods delivered need not be returned.
Consideration is not always necessary in bailment.
Duties of bailee
1. to take reasonable care of goods
2. not to mix goods with his own goods
3. not to make unauthorized use of bailed goods
4. not to set up adverse title.
5. to return goods after the purpose is accomplished
6. to return additions or profits to the bailor.
Duties of bailor
1.to disclose known defects of the goods
2.to bear extra ordinary expenses of bailment
3.to indemnify bailee for any loss due to his imperfect title in goods bailed.
4.to receive back the goods

Duties of bailor are rights of bailee and duties of bailee are rights of bailor.

LIEN
Lien means right of a person to retain the possession of goods of another until the sum due to
him is paid. Lien is of two kinds viz., particular lien and general lien.
Particular lien: where bailee has rendered any service involving labour and skill, he has a
right to retain the goods until he receives due remuneration.
General lien: it is a right to retain any goods belonging to the other as security for a general
balance of accounts. The persons who are entitled to general lien are bankers, factors,
wharfingers, attorneys of high court and marine insurance policy brokers.

Bailees’ lien is particular lien.

 22

Termination of bailment

1. On the expiry of the specified period

2. On accomplishment of purpose
3. Destruction of subject matter
4. Inconsistent use of goods bailed
5. Death of bailor or bailee
6. Demand of goods by gratuitous bailor
Finder of lost goods
A person who finds goods belonging to another and takes them into custody is called a finder
of lost goods.
Rights of the finder of lost goods
a) Right of lien until he receives compensation for troubles or expenses incurred.
b) Right to sue for reward if owner has offered any reward
c) Right to sell the goods i) if he does not find out the owner ii) if owner refuses to pay
lawful charges iii) if goods are of perishing nature and iv) if lawful charges come to
two-third of its value.
Duties of finder of lost goods
1. Take reasonable care
2. Try to find out real owner and hand over the lost goods
3. Not to make use of the articles for his personal use
4. Not to mix the goods with his own goods
PLEDGE /PAWN
Pledge is the bailment of goods as security for payment of a debt or performance of a promise.
Two parties to a pledge are pawner (who give security) and pawnee (who receives security).
Rights of Pawnee
1. To retain goods until his dues are paid.
2. To retain for any subsequent advances
3. To extra ordinary expenses incurred for pledged property.
4. Rights when pawner defaults. (a) to file a suit (b) to retain goods (c) to sue for sale of goods and
realize money (d) to sell the goods pledged after proper notice (e) to recover any deficiency.
Difference between bailment and pledge
Pledge is for specific purpose, as guarantee. Bailment may be for any purpose
In case of non-payment bailee cannot sell the goods where pawnee can.
Bailee can use the goods where Pawnee cannot.
Consideration is compulsory in pledge where is in bailment it is not compulsory
 23

15-LAW OF AGENCY
‘Agent’ is a person employed to do any act for another or to represent another in dealing with
third parties. The person for whom such act is done, or who is so represented, is called the
‘principal’. The contract by which he is appointed is called agency.
But every person who acts for another is not an agent. For e.g. a domestic servant, though she
is rendering personal services to his master, will not be an agent as she is not acting for
another in dealing with third parties.
Essential features
a) There must be an express/implied agreement between principal and agent.
b) The principal must be competent to contract
c) Any person (even an incompetent) can become an agent.
d) No consideration is necessary to create an agency.
Creation of agency
Agency may be created in the following ways.
1. Agency by express agreement (by words spoken or written). When written it is called
power of attorney.
2. Agency by implication. The agency can be inferred from the nature of business, the
circumstances of the case, the conduct of the principal or the course of dealing between
the parties. Implied agency includes estoppels, holding out and necessity.
 Agency by Estoppel. Estoppel means to prevent a person from denying a fact. Where a
person has, by his words or conduct led another to believe that a particular fact is true (that
a particular person is his agent), he cannot afterwards be permitted to deny that fact.
 Agency by holding out. It is a branch of estoppel. In this case some affirmative conduct
(long course of conduct) by principal is necessary.
 Agency by necessity. Sometimes extra ordinary circumstances require that a person who is
not really an agent should act as an agent of another. (E.g. neighbour’s house catch fire)
3. Agency by ratification. Ratification means subsequent acceptance (express or implied) by
the principal in respect of an act done by the agent without authority.( Ex-post facto
agency)
4. By operation of law: in this case the law presumes a person as agent of another. E.g. every
partner is agent of the firm.
Ratification
Ratification is an approval of a previous act done without authority. The effect of ratification
is that all the acts done by the agent will bind the principal as if they had been performed by
his authority. The agency comes in to existence the moment the agent does the act and not
from the time when the principal ratified that act.
Essentials of ratification
1. The agent must purport to act as agent for a principal
2. The principal must be in existence at the time of the contract.
3. The principal must have contractual capacity both at the time of entering in to contract
and at the time of ratification.
4. Ratification must be with full knowledge of fact.
 24

5. Ratification must be done within a reasonable time

6. The act to be ratified must be lawful
7. The whole transaction can only be ratified and not a part of it.
8. Ratification must be communicated

Termination of agency
1. By the act of parties.
a) By mutual agreement between principal and agent
b) By revocation by the principal (after serving notice in case of continuous agency)
c) By renunciation of agent (after serving a notice)
2. By operation of law
a) On the completion of business
b) On the expiry of time
c) By destruction of subject matter
d) Insolvency of the principal
e) Death or insanity of principal or agent
f) Dissolution of the company
g) Principal becoming an alien enemy

Different kinds of agents

On the basis of purpose of forming agency and also on the basis of duties and powers of
agents, agents are classified in several ways and they are as follows.
1. Special agent: appointed only for a particular purpose, E.g. to sell a house
2. General agent: to act in all matters concerning a trade or profession. E.g. manager of a
firm
3. Universal agent: can do anything that is legal as well as agreeable to the law of the land.
His authority is unlimited.
4. Mercantile (Commercial) agent: one having authority either to sell goods or to consign
goods or to raise money on the security of goods.
a) Auctioneer: one who is authorized to sell goods of his principal by auction. An
auction is a process of buying and selling goods or services by offering them up for
bid, taking bids, and then selling the item to the highest bidder. He is entrusted with
the possession of goods.
b) Broker: one who is appointed to negotiate and make contracts either to buy or sell
goods. He is not entrusted with goods. Remuneration paid to him is ‘brokerage’.
c) Factor: he is an agent who is entrusted with the possession of goods for the purpose of
sale. He can sell goods in his own name.
d) Del credere agent: where an agent takes responsibility of bad debts, he is called del
credere agent. He gets extra commission (for shouldering extra risk) called del credere
commission.
 25

e) Banker: banks act as an agent of its customer while clearing cheques, paying insurance
premium or telephone bills.
f) Commission agent: one who secures buyers for a seller and sellers for a buyer of
goods in return for a commission on the sale.
5. Non-mercantile agents: Leasing agents, law agents and wives come under this category.
Sub Agent
Where an agent having authority to delegate his authority appoints another person to act in the
matter of the agency, such other person is called a sub agent. A sub agent is employed by and
acting under the control of original agent.
Substituted Agent
The substituted agent is a person named (and sometimes appointed) by the agent to act for
principal with the knowledge and consent of the principal. There is a direct privity of contract
between substituted agent and principal.
Difference Sub agent and Substituted agent
I. Sub agent works under agent while substituted agent, under principal
II. Privity of contract is established between principal and substituted agent where as
there is no privity of contract between principal and sub agent.
III. Sub agent is responsible to the agent alone and not to the principal
IV. The agent is responsible for the acts of the sub agent where as he is not responsible for
the act of substituted agent.
V. In case of substituted agent the agent’s duty ends once he has named him but he
remains liable for the acts of sub agent as long as sub agency continues.
Rights of an agent
1. Rights to remuneration
2. Right to retain money until his remuneration and other claims are paid
3. Right of lien.
4. Right to be indemnified against consequences of lawful acts
5. Right to be indemnified against consequences of acts done in good faith
6. Right of compensation for injury caused by negligence of principal.
Duties of an agent
1. Duty to follow directions of his principal
2. Duty to take reasonable care and skill
3. Duty to render accounts
4. Duty to communicate in case of difficulty
5. Duty to pay overall monies
6. Duty not to set up adverse title
7. Duty to pass information to principal
8. Duty not to delegate authority
9. Duty not to disclose confidential information
10. Duty to protect interest of principal
11. Duty not to make any secret profit.
Note: Rights of an agent are duties of principal and duties of agent, rights of principal.
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