Any commercial activity requires ‘understanding’ among people concerned.

This
understanding is often reduced into writing to give effect to the intention of the parties. Such
formal versions are known as contracts. These contracts define the rights and obligations of
various parties to facilitate easy performance of the contractual obligations.
The Indian Contract Act, 1872 codifies the legal principles that govern such ‘contracts’. The
Act basically identifies the ingredients of a legally enforceable valid contract in addition to
dealing with certain special type of contractual relationships like indemnity, guarantee,
bailment, pledge, quasi contracts, contingent contracts etc.

1.1 What is a Contract?

While all contracts are agreements, all agreements are not contracts. An agreement which is
legally enforceable alone is a contract. Agreements which are not legally enforceable are not
contracts but remain as void agreements which are not enforceable at all or as voidable
agreements which are enforceable by only one of the parties to the agreement.
The above observation would raise a question in our minds as to what is the exact meaning of
the words ‘agreements’ and ‘contracts’.
An Agreement is a promise or a commitment or set of reciprocal promises or commitments. An
Agreement involves an offer or proposal by one person and acceptance of such offer or proposal
by another person. If the agreement is capable of being enforced by law then it is a contract.
1.2 Business Law, Ethics and Communication

Now let us take a look at the definitions as per the Act. Section 2(b) while defining a ‘promise’
provides that “when the person to whom the proposal is made signifies his assent thereto, the
proposal is said to be accepted. Proposal when accepted becomes a promise”.
Section 2(e) of the Act defines an agreements as ‘every promise and every set of promises
forming consideration for each other’. Section 2(h) of the Act defines the term contract as “an
agreement enforceable by law”.
The above discussion can be diagramatically represented as follows:

proposal

promise

Consideration

Agreement

Legally enforceable Legally not enforceable

contract voidable agreement void agreement

1.2 Essentials of a Valid C ontract

Now let us discuss the various essential elements of a valid contract.
In terms of Section 10 of the Act, “all agreements are contracts if they are made by the free
consent of the parties competent to contract, for a lawful consideration and with a lawful object
and are not expressly declared to be void”.
Thus, in order to create a valid contract, the following elements should be present:
1. Intention to create legal obligation through offer and acceptance should be present.
2. Free consent of the parties is necessary.
3. Competency or capacity of parties to enter into contract must be ensured.
4. Lawful consideration & lawful object should be present, and
5. Agreement not expressely declared to be void.
 The Indian Contract Act, 1872 1.3

The above important elements may be further analysed as under:

1. Offer and Acceptance: In the first place, there must be an offer and the said offer must have
been accepted. Such offer and acceptance should create legal obligations between parties.
This should result in a moral duty on the person who promises or offers to do something.
Similarly this should also give a right to the promise to claim its fulfillment. Such duties and
rights should be legal and not merely moral.
Case law:
In Balfour v. Balfour, a husband promised to pay maintenance allowance every month to his
wife, so long as they remain separate. When he failed to perform this promise, she brought an
action to enforce it. As it is an agreement of domestic nature, it was held that it does not
contemplate to create any legal obligation.
1. Consent: The second element is the ‘consent’ of the parties. ‘Consent’ means
‘knowledge and approval’ of the parties concerned. This can also be understood as identity of
minds in understanding the term viz consensus ad idem. Further such a consent must be free.
Consent would be considered as free consent if it is not vitiated by coercion, undue influence,
fraud, misrepresentation or mistake. Wherever the consent of any party is not free, the
contract is voidable at the option of that party.
Illustration:- A threatened to shoot B if he (B) does not lend him ` 2000 and B agreed to it.
Here the agreement is entered into under coercion and hence voidable at the option of B.
2. Capacity of the parties: The third element is the capacity of the parties to make a valid
contract. Capacity or incapacity of a person could be decided only after reckoning various
factors. Section 11 of the Indian Contract Act,1872 elaborates on the issue by providing that a
person who-
(a) has not attained the age of majority,
(a) is of unsound mind and
(b) is disqualified from entering into a contract by any law to which he is subject,
should be considered as not competent to enter into any contract. Therefore law prohibits (a)
Minors (b) persons of unsound mind [excluding the Lucid intervals] and (c) person who are
otherwise disqualified like an alien enemy, insolvents, convicts etc from entering into any
contract.
3. Consideration: The fourth element is presence of a lawful ‘consideration’.
‘Consideration’ would generally mean ‘compensation’ for doing or omitting to do an act or
deed. It is also referred to as ‘quid pro quo’ viz ‘something in return for another thing’. Such a
consideration should be a lawful consideration.
Example:- A agrees to sell his books to B for ` 100, B’s promise to pay ` 100 is the
consideration for A’s promise to sell his books and A’s promise to sell the books is the
consideration for B’s promise to pay ` 100.
1.4 Business Law, Ethics and Communication

4. Not expressly declared to be void: The last element to clinch a contract is that the
agreement entered into for this purpose must not be which the law declares to be either illegal
or void. An illegal agreement is an agreement expressly or impliedly prohibited by law. A void
agreement is one without any legal effects.
For Example: Threat to commit murder or making/publishing defamatory statements or
entering into agreements which are opposed to public policy are illegal in nature. Similarly any
agreement in restraint of trade, marriage, legal proceedings etc are classic examples of void
agreements.
Key Points

 An agreement enforceable by law is a contract. It creates legal obligations between the

parties.
 Every promise and every set of promises forming consideration for each other is an
agreement.
 An agreement comes into existence when one party accepts a proposal put forward by
other. In other words, agreement is a promise which results from acceptance of a
proposal. Thus agreement, a promise/set of promises is an accepted proposal.
1.3 Typ es of Contract
Now let us discuss various types of contracts

Types of Contracts on the basis of

Validity Formation Performance

Valid contract Express contract Executed contract

Vo d contract Implied contract Executory contract

Void ble contract Ouasi contract Unilateral contract

Illegal agreement Bilateral contract

Unenforceable

1. Void Contract: Section 2 (j) states as follows: “A contract which ceases to be

 The Indian Contract Act, 1872 1.5

enforceable by law becomes void when it ceases to be enforceable”. Thus a void contract is
one which cannot be enforced by a court of law.
Example : Mr. X agrees to write a book with a publisher. After few days, X dies in an
accident. Here the contract becomes void due to the impossibility of performance of the
contract .
It may be added by way of clarification here that when a contract is void, it is not a contract at
all but for the purpose of identifying it , it has to be called a [void] contract.
1. Voidable Contract: Section 2(i) defines that an agreement which is enforceable by law
at the option of one or more parties but not at the option of the other or others is a voidable
contract.
This infact means where one of the parties to the agreement is in a position or is legally
entitled or authorized to avoid performing his part, then the agreement is treated and becomes
voidable. Such a right might arise from the fact that the contract may have been brought about
by one of the parties by coercion, undue influence, fraud or misrepresentation and hence the
other party has a right to treat it as a voidable contract.
At this juncture it would be desirable to know the distinction between a void contract and a
voidable contract. The distinctions lie in three aspects namely definition, nature and rights.
These are elaborated hereunder:
(a) Definition: A void contract cannot be enforced at all. A voidable contract is an agreement
which is enforceable only at the option of one of the parties but not at the option of the other.
Therefore ‘enforceability’ or otherwise, divides the two types of contracts.
(a) Nature: By nature, a void contract is valid at the time when it is made but becomes
unenforceable and thus void on account of subsequent developments or events like
supervening impossibility, subsequent illegality etc., Repudiation of a voidable contract also
renders the contract void. Similarly a contingent contract might become void when the
occurrence of the event on which it is contingent becomes impossible.
On the other hand voidable contract would remain valid until it is rescinded by the person who
has the option to treat it as voidable. The right to treat it as voidable does not invalidate the
contract until such right is exercised. All contracts caused by coercion, undue influence, fraud,
misrepresentation are voidable. Generally, a contract caused by mistake is void.
(b) Rights: As regards rights of the parties, in the case of a void contract there is no legal
remedy for the parties as the contract cannot be performed in any way. In the case of voidable
contract the aggrieved party has a right to rescind it within a reasonable time. If it is so
rescinded, it becomes void. If it is not rescinded, it is a valid contract.
2. Illegal Contract: Illegal contract are those that are forbidden by law. All illegal contracts
are hence void also. Because of the illegality of their nature they cannot be enforced by any
court of law. In fact even associated contracts cannot be enforced. Contracts which are
opposed to public policy or immoral are illegal. Similarly contracts to commit crime like supari
contracts are illegal contracts.
1.6 Business Law, Ethics and Communication

The above discussion shows that illegal contracts are at par with void contracts. The Act
specifies several factors which would render an agreement void. One such factor is unlawful
nature of contract or the consideration meant for it. Though illegal agreements and void
agreements appear similar they differ in the following manner:
(a) Scope: All illegal agreements are void. However void agreements might not be illegal at
the time of entering but would have become void because of some other factors. For
example, where the terms of the agreement are uncertain the agreement would not be
illegal but might be treated as void. An illegal contract would encompass a void contract
where as a void contract may not include in its scope illegal contracts.
(b) Nature and character: Illegal agreements are void since the very beginning they are
invariably described as void ab initio. As already emphasized under the scope, a contract
by nature, which is valid, can subsequently change its character and can become void.
(c) Effect on collateral transactions: In the case of illegal contract, even the collateral
transactions namely transactions which are to be complied with before or after or
concurrently along with main contract also become not enforceable. In contrast in the
case of voidable contracts the collateral transactions can be enforced despite the fact
that the main contract may have become voidable, to the extent the collateral
transactions are capable of being performed independently.
(d) Penalty or punishment: All illegal agreements are punishable under different laws say
like Indian Penal Code etc. Whereas parties to void agreements do not face such
penalties or punishments.
Further classification of contracts according to the formation is also possible. Under this sub-
classification the following contracts fall:
3. Express Contracts: A contract would be an express contract if the terms are expressed
by words or in writing. Section 9 of the Act provides that if a proposal or acceptance of any
promise is made in words the promise is said to be express.
4. Implied Contracts: Implied contracts in contrast come into existence by implication.
Most often the implication is by law and or by action. Section 9 of the Act contemplates such
implied contracts when it lays down that in so far as such proposal or acceptance is made
otherwise than in words, the promise is said to be implied. For instance ‘A’ delivers goods by
mistake at the warehouse of ‘B’ instead of that of ‘C’. Here ‘B’ not being entitled to receive the
goods is obliged to return the goods to ‘A’ although there was no such contract to that effect.
5. Tacit Contracts: Tacit contracts are those that are inferred through the conduct of
parties. A classic example of tacit contract would be when cash is withdrawn by a customer of
a bank from the automatic teller machine [ATM]. Another example of of tacit contract is where
a contract is assumed to have been entered when a sale is given effect to at the fall of
hammer in an auction sale.
Further classification of contracts is possible on the basis of their performance. They are:
6. Executed Contract: The consideration in a given contract could be an act or
 The Indian Contract Act, 1872 1.7

forbearance. When the act is done or executed or the forbearance is brought on record, then
the contract is an executed contract.
7. Executory Contract: In an executory contract the consideration is reciprocal promise or
obligation. Such consideration is to be performed in future only and therefore these contracts
are described as executory contracts.
8. Unilateral Contract: Unilateral contract is a one sided contract in which only one party
has to perform his duty or obligation.
9. Bilateral Contract: A Bilateral contract is one where the obligation or promise is
outstanding on the part of both the parties.
Now let us take a look at yet another type of classification of contracts from the view point of
English Law.
The English law classifies contracts as (i) Formal contracts and (ii) Simple contracts.
Formal contracts are further classified as (a) Contract of Record and (b) Contract under Seal.
(a) Contract of Record: A contract of record derives its binding force from the authority of
court. The authority of court is invariably through judgment of a court or by way of
recognizance. The judgment of a court is technically not a contract as it is not based on the
agreement between parties. However the judgment is binding on all the persons who are
litigants. The judgment creates certain rights on certain persons and obligation on certain
other persons. A recognizance, on the other hand is a written acknowledgement of a debt due
to the state generally in the context of criminal proceedings.
(a) Contract under Seal: A contract under seal is one which derives its binding force from
its form alone. It is in writing, duly signed and sealed and delivered to parties. It is also
referred to as a deed or a specialty contract.
Simple contracts as against formal contracts are devoid of all the formalities referred above.
Key Points

 Void agreement- Agreement not enforceable by law and is without any legal effect.
 Void contract- Valid at the time of making but becomes void subsequently due to change
in circumstances.
 Voidable contract- Agreement enforceable at the option of the aggrieved party. Until the
party won’t nullify, it remains valid.
 Illegal agreement-An agreement prohibited or forbidden by law.
 Express contract-Where parties orally or written defines terms and conditions of the
contract.
 Implied contract-Contract inferred from act, conduct or from the circumstances of the
case.
1.8 Business Law, Ethics and Communication

 Executed contract- Which has been completely performed by all the parties.
 Executory contract- One in which something remains to be done by all the parties.
 Bilateral contracts- Where the obligations on the part of both the parties are outstanding
at the time of formation of the contract.
 Unilateral contract- Where only one party has to perform his duty or obligation .

1.4 Proposal / Offer

It has been explained in the previous paragraphs that a proposal or a promise backed by legal
consideration is an agreement and such an agreement, if legally enforceable, becomes a contract.
It would therefore be clear that the starting point of this chain is a proposal or a promise. It is
proposed now to discuss as to what is a proposal/offer, what are the types of offer, etc.
The word ‘proposal’ and the word ‘offer’ mean one and the same thing and therefore are used
interchangeably. In terms of Section 2(a) of the Act “a person is said to make a proposal when
he signifies to another his willingness to do or abstain from doing anything with a view to
obtaining the assent of that other to such act or abstinence”. It must be appreciated that ‘doing
an act’ and ‘not doing an act’ both have the same effect in the eyes of the law, though one is a
positive act and the other is a negative act.
Hence there are two important ingredients to an offer. Firstly, it must be expressions of
willingness to do or to abstain from doing an act. Secondly, the willingness must be expressed
with a view to obtain the assent of the other party to whom the offer is made.
This can be illustrated as follows:
(a) Where “A” tells “B” that he desires to marry ‘B’ by the end of 2006, there is no offer made
unless, he also asks “will you marry me?”, conveying his willingness and tries to obtain
the assent of ‘B’ in the same breadth.
(b) Where “A” offers to sell his car to “B” it conveys his willingness to do an act. Through this
offer not only willingness is being conveyed but also an intention to obtain the assent can
be seen.
Classification of offer: Offer can be classified as general offer, special/specific offer, cross
offer, counter offer, standing/open/continuing offer. Now let us examine each one of them.
(a) General offer: It is an offer made to public at large with or without any time limit. In terms
of Section 8 of the Act, anyone performing the conditions of the offer can be considered to
have accepted the offer (Carlill v. Carbolic Smoke Ball). Until the general offer is retracted or
withdrawn, it can be accepted by anyone at any time as it is a continuing offer.
(a) Special/specific offer: Where an offer is made to a particular and specified person, it is a
specific offer. Only that person can accept such specific offer, as it is special and exclusive to
him. [Boulton v. Jones]
 The Indian Contract Act, 1872 1.9

(b) Cross offer: As per section 2(b), when a person to whom proposal (offer) is made
signifies his assent, the proposal is said to be accepted. Thus, assent can be only to a
‘proposal’. If there was no proposal, question of its acceptance cannot arise. For example, if A
makes a proposal to B to sell some goods at a specified price and B, without knowing
proposal of A, makes a proposal to purchase the same goods at the price specified in the
proposal of A, it is not an acceptance, as B was not aware of proposal made by A. It is only
cross proposal (cross offer). And when two persons make offer to each other, it can not be
treated as mutual acceptance. There is no binding contract in such a case [Tin v. Hoffmen &
Co. 1873]
(c) Counter offer: Upon receipt of an offer from an offeror, if the offeree instead of accepting
it straightway, imposes conditions which have the effect of modifying or varying the offer, he is
said to have made a counter offer. Counter offers amounts to rejection of original offer.
(d) Standing or continuing or open offer: An offer which is made to public at large and if it is
kept open for public acceptance for a certain period of time, it is known as standing or
continuing or open offer. Tenders that are invited for supply of materials and goods are classic
examples of standing offer.
Rules relating to offer: Following are the rules for a valid and legal offer:
(a) The ‘offer’ must be with intent to create a legal relationship. Hence if it is accepted, it
must result in a valid contract. An invitation to join a friend for dinner is a social activity.
This does not create a legal relationship or right or obligation.
(b) The offer must be certain and definite. It must not be vague. If the terms are vague, it is
not capable of being accepted as the vagueness would not create any contractual
relationship. For example, where ‘A’ offers to sell 100 litres of oil, without indicating what
kind of oil would be sold, it is a vague offer and hence cannot create any contractual
relationship. If however there is a mechanism to end the vagueness, the offer can be
treated as valid. For example, in the above example if ‘A’ does not deal in any oil but only
in gingilee oil and this is known to every one, the offer cannot be treated as vague offer.
This is for the reason that the trade in which ‘A’ is, is a clear indicator providing a
mechanism to understand the terms of offer.
(c) The offer must be express or implied.
(a) The offer must be distinguished from an invitation to offer.
(d) The offer must be either specific or general.
(e) The offer must be communicated to the person to whom it is made. Otherwise the offeree
cannot accept the offer. He cannot accept the offer because he is not aware of the
existence of the offer. Such a situation does not create any legal obligation or right on
any one.
(f) The offer must be made with a view to obtaining the consent of the offeree.
(g) An offer can be conditional but there should be no term in the offer that non-compliance
1.10 Business Law, Ethics and Communication

would amount to acceptance. Thus the offeror cannot say that if non-acceptance is not
communicated by a certain time the offer would be treated as accepted.
What is invitation to offer?
An offer and invitation to offer are not one and the same. The difference between the two must
be appreciated. An offer is definite. It is an intention towards a contract. An invitation to offer is
an act precedent to making an offer. It is done with intent to generally to induce and negotiate.
An invitation to offer gives rise to an offer after due negotiation and it cannot be per se
accepted.
In an invitation to offer there is no expression of willingness by the offeror to be bound by his
offer. It is only a proposal of certain terms on which he is willing to negotiate. It is not capable
of being accepted as it is.
When there is advertisement by a person he has a stock of books for sale, it is an invitation to
offer and not an offer. This advertisement is made to receive offers and to further negotiate.
In terms of Section 2[a] of the Act, it is very clear that an offer is the final expression of
willingness by the offeror to be bound by the offer if it is accepted by the other party. Hence
the only thing that is required is the willingness of the offeree to abide by the terms of offer.
The test to decide whether a statement is an ‘offer’ or ‘invitation to offer’ is to see the
‘intention’. If a person who makes the statement has the intention to be bound by it as soon as
the other accepts, he is making an offer. If he however intends to do some other act, he is
making only an invitation to offer. Thus the intention to be bound is the important thing, which
is to be seen.
In Harvey vs. Facie [1893] AC 552 Privy Council succinctly explained the distinction between
an offer and an invitation to offer. In the given case, the plaintiffs through a telegram asked the
defendants two questions namely,
(i) Will you sell us Bumper Hall Pen? and
(i) Telegraph lowest cash price.
The defendants replied through telegram that the “lowest price for Bumper Hall Pen is ₤900”.
The plaintiffs sent another telegram stating “we agree to buy Bumper Hall Pen at ₤900…”
However the defendants refused to sell the property at the price.
The plaintiffs sued the defendants contending that they had made an offer to sell the property
at ₤900 and therefore they are bound by the offer.
However the Privy Council did not agree with the plaintiffs on the ground that while plaintiffs
had asked two questions, the defendant replied only to the second question by quoting the
price but did not answer the first question but reserved their answer with regard to their
willingness to sell. Thus they made no offer at all. Their Lordships held that the mere
statement of the lowest price at which the vendor would sell contained no implied contract to
sell to the person who had enquired about the price.
 The Indian Contract Act, 1872 1.11

The above decision was followed in Mac Pherson vs Appanna [1951] A.S.C. 184 where the
owner of the property had said that he would not accept less than ` 6000/- for it. This
statement did not indicate any offer but indicated only an invitation to offer.
Similarly when goods are sold through auction, the auctioneer does not contract with any one
who attends the sale. The auction is only an advertisement to sell but the items are not put for
sale though persons who have come to the auction may have the intention to purchase.
Following are instances of invitation to offer to buy or sell:
(i) An invitation by a company to the public to subscribe for its shares.
(i) Display of goods for sale in shop windows.
(ii) Advertising auction sales and
(iii) Quotation of prices sent in reply to a query regarding price.
Key Points

 Offer-An expression of willingness of offeror to an offreee to do or to abstain from doing

anything,with a view to obtain the assent of an offeree and to enter him into a contract.
 Agreement-An accepted offer/proposal
 Promisor- Person making the proposal.
 Promisee- Person accepting the proposal
 Express Offer-Expressed by written/spoken words
 Implied offer-Expressed other than in written /spoken words
 Specific offer-Offer made to a specific person
 General offer-Offer made to the public at large
 Cross offers- Identical offers made in ignorance to each other.
 Counter offers- Offer accepted on the terms and conditions other than set out by the
offeror.
 Standing offer- Offer open for acceptance over period of time.
 Legal rules for valid offer-Definite and certain, made with an intention to create legal
relations and must be communicated.
 Invitation to an offer-One party invites other party to make an offer i.e.,an offer to make an
offer.
1.5 Acceptance
The significance of “acceptance of a proposal” so as to form an agreement has been
discussed in previous paragraphs. Let us analyse various issues concerning ‘acceptance’
now,
1.12 Business Law, Ethics and Communication

Meaning: In terms of Section 2(b) of the Act, “A proposal or offer is said to have been
accepted when the person to whom the proposal is made signifies his assent to the proposal
to do or not to do something”. In short, act of acceptance lies in signifying one’s assent to the
proposal.
Relationship between offer and acceptance: According to Sir William Anson “Acceptance is
to offer what a lighted match is to a train of gun powder”. The effect of this observation is that
what acceptance triggers cannot be recalled or undone. But there is a choice to the person
who had the train to remove it before the match is applied. It in effect means that the offer can
be withdrawn just before it is accepted. Acceptance converts the offer into a promise and then
it is too late to revoke it. This means as soon as the train of gun powder is lighted it would
explode. Gun powder [the train] itself is inert, but it is the lighted match [the acceptance] which
causes the gun powder to explode. The significance of this is an offer by itself cannot create
any legal relationship but it is the acceptance by the offeree which creates a legal relationship.
Once an offer is accepted it becomes a promise and cannot be withdrawn or revoked. An offer
remains an offer so long as it is not accepted, but becomes a contract as soon as it is
accepted.
Rules governing acceptance
(1) Acceptance must be absolute and unqualified: As per section 7 of the Act, acceptance is
valid only when it is absolute and unqualified and is also expressed in some usual and
reasonable manner unless the proposal prescribes the manner in which it must be accepted. If
the proposal prescribes the manner in which it must be accepted, then it must be accepted
accordingly. The above view will be clear from the following example:
‘A’ enquires from ‘B’, “Will you purchase my car for ` 2 lakhs?” If ‘B’ replies “I shall purchase your car
for ` 2 lakhs, if you buy my motorcycle for ` 50000/-, here ‘B’ cannot be considered to have accepted
the proposal. If on the other hand ‘B’ agrees to purchase the car from ‘A’ as per his proposal subject
to availability of valid Registration Certificate / book for the car, then the acceptance is in place though
the offer contained no mention of R.C. book. This is because expecting a valid title for the car is not a
condition. Therefore the acceptance in this case is unconditional.
(1) The acceptance must be communicated: To conclude a contract between the parties, the
acceptance must be communicated in some perceptible form. Any conditional acceptance or
acceptance with varying or too deviant conditions is no acceptance. Such conditional
acceptance is a counter proposal and has to be accepted by the proposer, if the original
proposal has to materialize into a contract. Further when a proposal is accepted, the offeree
must have the knowledge of the offer made to him. If he does not have the knowledge, there
can be no acceptance. The acceptance must relate specifically to the offer made. Then only it
can materialize into a contract. The above points will be clearer from the following examples,
(a) M offered to sell his land to N for £ 280. N replied purporting to accept the offer but
enclosed a cheque for £ 80 only. He promised to pay the balance of £ 200 by monthly
installments of £ 50 each. It was held that N could not enforce his acceptance because it
was not an unqualified one. [Neale vs. Merret [1930] W. N. 189].
 The Indian Contract Act, 1872 1.13

(a) A offers to sell his house to B for ` 1000/-. B replied that, “I can pay ` 800 for it. The
offer of ‘A’ is rejected by ‘B’ as the acceptance is not unqualified. B however changes his
mind and is prepared to pay ` 1000/-. This is also treated as counter offer and it is upto
A whether to accept it or not. [Union of India v. Bahulal AIR 1968 Bombay 294].
A mere variation in the language not involving any difference in substance would not make the acceptance
ineffective. [Heyworth vs. Knight [1864] 144 ER 120].
(2) Acceptance must be in the prescribed mode: Where the proposal prescribes the mode of
acceptance, it must be accepted in that manner. Where the proposal does not prescribe the
manner, then it must be accepted in a reasonable manner. If the proposer does not insist on the
proposal being accepted in the manner in which it has to be accepted, after it is accepted in any
other manner not originally prescribed, the proposer is presumed to have consented to the
acceptance. Sometimes the acceptor may agree to a proposal but may insist on a formal
agreement, in which case until a formal agreement is drawn up there is no complete acceptance.
(3) The acceptance must be given within a reasonable time and before the offer lapses.
(4) Mere silence is not acceptance. The acceptor should expressly accept the offer.
Acceptance can be implied also. Acceptance must be given only by that person to whom
it is made, that too only after knowing about the offer made to him.
(5) Acceptance by conduct: As already elaborated above, acceptance has to be signified
either in writing or by word of mouth or by performance of some act. The last of the method,
namely ‘by some act’ has to be understood as acceptance by conduct. In a case like this
where a person performs the act intended by the proposer as the consideration for the
promise offered by him, the performance of the act constitutes acceptance. In other words,
there is an acceptance by conduct.
For example, where a tradesman receives an order from a customer, and the order is
executed accordingly by the trader, there is an “acceptance by conduct” of the offer made by
the customer. The trader’s subsequent act signifies acceptance.
Section 8 of the Act very clearly in this regard lays down that “ the performance of the
condition(s) of a proposal or the acceptance of any consideration of a reciprocal promise
which may be offered with a proposal constitutes an acceptance of the proposal.
Key Points

 Acceptance- Assent of offeree to a proposal. On acceptance of proposal, proposer is

called as promisor and offeree as promisee.
 Acceptance is irreversible as once it is given and reaches to the proposer it cannot be
recalled,
 Rules for valid acceptance- It must be absolute and unqualified, communicated, and
must be in the prescribed mode and given within a reasonable time.
1.14 Business Law, Ethics and Communication

1.6 Communication of Offer and Acceptance

The importance of ‘offer’ and ‘acceptance’ in giving effect to a valid contract was explained in
the previous paragraphs. One important common requirement for both ‘offer’ and ‘acceptance’
is their effective communication. Effective and proper communication prevents avoidable
revocation and misunderstanding between parties. The communication part of it assumes
importance because parties are separated by and distance. In which case the modes of
communication like, post/courier, telegram, fax, email, telephone etc., become very relevant
because the method of communication would also decide the ‘time’ of ‘offer’ and ‘acceptance’.
The Indian Contract Act,1872 gives a lot of importance to “time” element in deciding when the
offer and acceptance is complete.
Communication of offer: In terms of Section 4 of the Act, “ the communication of offer is
complete when it comes to the knowledge of the person to whom it is made”. Therefore
knowledge of communication is of relevance. Knowledge of the offer would materialize when
the offer is given in writing or made by word of mouth or by some other conduct. This can be
explained by an example. Where ‘A’ makes a proposal to ‘B’ by post to sell his house for ` 5
lakhs and if the letter containing the offer is posted on 10th March and if that letter reaches ‘B’
on 12th March the offer is said to have been communicated on 12 th March when B received the
letter. Thus it can be summed up that when a proposal is made by post, its communication will
be complete when the letter containing the proposal reaches the person to whom it is made.
Communication of acceptance: There are two issues for discussion and understanding.
They are: what are the modes of acceptance and when is acceptance complete?
Let us, first consider the modes of acceptance. Section 3 of the Act prescribes in general
terms two modes of communication namely, (a) by any act and (b) by omission, intending
thereby to, to communicate to the other or which has the effect of communicating it to the
other.
Communication by act would include any expression of words whether written or oral. Written
words will include letters, telegrams, faxes, emails and even advertisements. Oral words will
include telephone messages. Again communication would include any conduct intended to
communicate like positive acts or signs so that the other person understands what the person
‘acting ‘ or ‘making signs’ means to say or convey.
Communication can also be by ‘omission’ to do any or something. Such omission is conveyed
by a conduct or by forbearance on the part of one person to convey his willingness or assent.
However silence would not be treated as communication by ‘omission’.
Communication of acceptance is also done by conduct. For instance, delivery of goods at a
price by a seller to a willing buyer will be understood as a communication by conduct to
convey acceptance. Similarly one need not explain why one boards a public bus or drop a coin
in a weighing machine. The first act is a conduct of acceptance and its communication to the
offer by the public transport authority to carry any passenger. The second act is again a
conduct conveying acceptance to use the weighing machine kept by the vending company as
 The Indian Contract Act, 1872 1.15

an offer to render that service for a consideration.

The other issue in communication of acceptance is about the effect of act or omission or
conduct. These indirect efforts must result in effectively communicating its acceptance or non
acceptance. If it has no such effect, there is no communication regardless of which the
acceptor thinks about the offer within himself. Thus a mere mental unilateral assent in one’s
own mind would not amount to communication. Where a resolution passed by a bank to sell
land to ‘A’ remained uncommunicated to ‘A’, it was held that there was no communication and
hence no contract. [Central Bank Yeotmal vs Vyankatesh (1949) A. Nag. 286].
Let us now come to the issue of when communication of acceptance is complete. In terms of
Section 4 of the Act, it is complete,
(i) As against the proposer, when it is put in course of transmission to him so as to be out of the
power of the acceptor to withdraw the same;
(i) As against the acceptor, when it comes to the knowledge of the proposer.
Where a proposal is accepted by a letter sent by the post, the communication of acceptance
will be complete as against the proposer when the letter of acceptance is posted and as
against the acceptor when the letter reaches the proposer. For instance in the above example,
if ‘B’ accepts, A’s proposal and sends his acceptance by post on 14 th, the communication of
acceptance as against ‘A’ is complete on 14th, when the letter is posted. As against ‘B’
acceptance will be complete, when the letter reaches ‘A’. Here ‘A’ the proposer will be bound
by B’s acceptance, even if the letter of acceptance is delayed in post or lost in transit. The
golden rule is proposer becomes bound by the contract, the moment acceptor has posted the
letter of acceptance. But it is necessary the letter is correctly addressed, sufficiently stamped
and duly posted. In such an event the loss of letter in transit, wrong delivery, non delivery etc.,
will not affect the validity of the contract. However from the view point of acceptor, he will be
bound by his acceptance only when the letter of acceptance has reached the proposer. So it is
crucial in this case that the letter reaches the proposer. If there is no delivery of the letter, the
acceptance could be treated as having been completed from the viewpoint of proposer but not
from the viewpoint of acceptor. Of course this will give rise to an awkward situation of only
one party to the contract being treated as bound by the contract though no one would be sure
as to where the letter of acceptance had gone.
Communication of special conditions: Sometimes there are situations where there are
contracts with special conditions. These special conditions are conveyed tacitly and the
acceptance of these conditions are also conveyed by the offeree again tacitly or without him
even realizing it.
For instance where a passenger undertakes a travel, the conditions of travel are printed at the
back of the tickets, sometimes these special conditions are brought to the notice of the
passenger, sometimes not. In any event, the passenger is treated as having accepted the
special condition the moment he bought his ticket.
When someone travels from one place to another by air, it could be seen that special
1.16 Business Law, Ethics and Communication

conditions are printed at the back of the air ticket in small letters [in a non computerized train
ticket even these are not printed] Sometimes these conditions are found to have been
displayed at the notice board of the Air lines office, which passengers may not have cared to
read. The question here is whether these conditions can be considered to have been
communicated to the passengers of the Airlines and can the passengers be treated as having
accepted the conditions. The answer to the question is in the affirmative and was so held in
Mukul Datta vs. Indian Airlines [1962] AIR cal. 314 where the plaintiff had travelled from Delhi
to Kolkota by air and the ticket bore conditions in fine print.
Yet another example is where a launderer gives his customer a receipt for clothes received for
washing. The receipt carries special conditions and are to be treated as having been duly
communicated to the customer and therein a tacit acceptance of these conditions is implied by
the customer’s acceptance of the receipt [Lily White vs. R. Muthuswami [1966] A. Mad. 13].
In the cases referred above, the respective documents have been accepted without a protest
and hence amounted to tacit acceptance.
Standard forms of contracts: It is well established that a standard form of contract may be
enforced on another who is subjectively unaware of the contents of the document, provided
the party wanting to enforce the contract has given notice which, in the circumstances of a
case, is sufficiently reasonable. But the acceptor will not incur any contractual obligation, if the
document is so printed and delivered to him in such a state that it does not give reasonable
notice on its face that it contains certain special conditions. In this connection, let us consider
a converse situation. A transport carrier accepted the goods for transport without any
conditions. Subsequently, he issued a circular to the owners of goods limiting his liability for
the goods. In such a case, since the special conditions were not communicated prior to the
date of contract for transport, these were not binding on the owners of goods [Raipur transport
Co. vs. Ghanshyam [1956] A. Nag.145].

1.7 Communication of Performance

We have already discussed that in terms of Section 4 of the Act, communication of a proposal
is complete when it comes to the knowledge of the person to whom it is meant. As regards
acceptance of the proposal, the same would be viewed from two angles. These are (i) from
the viewpoint of proposer and (ii) the other from the viewpoint of acceptor himself. From the
viewpoint of proposer, when the acceptance is put in to a course of transmission, when it
would be out of the power of acceptor. From the viewpoint of acceptor, it would be complete
when it comes to the knowledge of the proposer.
At times the offeree may be required to communicate the performance (or act) by way of
acceptance. In this case it is not enough if the offeree merely performs the act but he should
also communicate his performance unless the offer includes a term that a mere performance
will constitute acceptance. The position was clearly explained in the famous case of Carlill Vs
Carbolic & Smokeball Co. In this case the defendant a sole proprietary concern manufacturing
a medicine which was a carbolic ball whose smoke could be inhaled through the nose to cure
 The Indian Contract Act, 1872 1.17

influenza, cold and other connected ailments issued an advertisement for sale of this
medicine. The advertisement also included a reward of $100 to any person who contracted
influenza, after using the medicine (which was described as ‘carbolic smoke ball’). Mrs. Carlill
bought these smoke balls and used them as directed but contracted influenza. It was held that
Mrs Carlill was entitled to a reward of $100 as she had performed the condition for
acceptance. Further as the advertisement did not require any communication of compliance of
the condition, it was not necessary to communicate the same. The court thus in the process
laid down the following three important principles:
(i) an offer, to be capable of acceptance, must contain a definite promise by the offer or that he
would be bound provided the terms specified by him are accepted;
(i) an offer may be made either to a particular person or to the public at large, and
(ii) if an offer is made in the form of a promise in return for an act, the performance of that act,
even without any communication thereof, is to be treated as an acceptance of the offer.
Key Points

 One important common requirement for both ‘offer’ and ‘acceptance’ is their effective
communication. The Indian Contract Act,1872 gives a lot of importance to “time” element
in deciding when the offer and acceptance is complete.
 Communication of offer is complete- When it comes to the knowledge of the person to
whom it is made.
 Communication of acceptance is complete- (i) Against the proposer-when it is put into the
course of transmission to the proposer.(ii) Against the acceptor—when it comes to the
knowledge of the offeror.

1.8 Revocation of Offer and Acceptance

If there are specific requirements governing the making of an offer and the acceptance of that
offer, we also have specific law governing their revocation.
In term of Section 4, communication of revocation (of the proposal or its acceptance) is
complete.
(i) as against the person who makes it when it is put into a course of transmission to the person
to whom it is made so as to be out of the power of the person who makes it, and
(i) as against the person to whom it is made, when it comes to his knowledge.
The above law can be illustrated as follows:- If you revoke your proposal made to me by a
telegram, the revocation will be complete, as for as you are concerned when you have
dispatched the telegram. But as far as I am concerned, it will be complete only when I receive
the telegram.
As regards revocation of acceptance, if you go by the above example, I can revoke my acceptance
 1.18 Business Law, Ethics and Communication

(of your offer) by a telegram. This revocation of acceptance by me will be complete when I
dispatch the telegram and against you, it will be complete when it reaches you.
But the important question for consideration is when a proposal can be revoked? And when
can an acceptance be revoked?. These questions are more important than the question when
the revocation (of proposal and acceptance) is complete.
In terms of Section 5 of the Act a proposal can be revoked at any time before the communication of
its acceptance is complete as against the proposer. An acceptance may be revoked at any time
before the communication of acceptance is complete as against the acceptor.
Revocation of proposal otherwise than by communication: When a proposal is made, the proposer
may not wait indefinitely for its acceptance. The offer can be revoked otherwise than by
communication or sometimes by lapse.
Following are the situations worth noting in this regard
(i) When the acceptor fails to fulfill certain conditions precedent to acceptance:- Where the
acceptor fails to fulfill a condition precedent to acceptance the proposal gets revoked. This principle
is laid down in Section 6 of the Act. The offeror for instance may impose certain conditions such as
executing a certain document or depositing certain amount as earnest money. Failure to satisfy
any condition will result in lapse of the proposal. As stated earlier ‘condition precedent’ to
acceptance prevents an obligation from coming into existence until the condition is satisfied.
Suppose where ‘A’ proposes to sell his house to be ‘B’ for ` 5 lakhs provided ‘B’ leases his land to
‘A’. If ‘B’ refuses to lease the land, the offer of ‘A’ is revoked automatically.
(i) When the proposer dies or goes insane: Death or insanity of the proposer would result in
automatic revocation of the proposal but only if the fact of death or insanity comes to the
knowledge of the acceptor
When time for acceptance lapses: The time for acceptance can lapse if the acceptance is not given within the
specified time and where no time is specified, then within a reasonable time. This is for the reason that proposer
should not be made to wait indefinitely. It was held in Ramsgate Victoria Hotel Co Vs Montefiore (1866 L.R.Z.
Ex 109), that a person who applied for shares in June was not bound by an allotment made in November. This
decision was also followed in India Cooperative Navigation and Trading Co Ltd Vs Padamsey Prem Ji.
However these decisions now will have no relevance in the context of allotment of shares

Key Points
Communication of revocation as against the person who makes it, completes- when it is put
into the course of transmission to the person to whom it is made
 Communication of revocation as against the person to whom it is made, completes- when
it comes to his knowledge.
 Revocation of proposal and acceptance is complete- at any time before the
communication of proposal and acceptance is complete as against the proposer and the
acceptor, but not afterwards.
The Indian Contract Act, 1872 1.45
 UNIT – 4 : PERFORMANCE OF CONTRACT
Learning objectives
After studying this unit, you would be able to -
Understand how obligations under a contract must be carried out by the parties.
Be familiar with the various modes of performance.
Be clear about the consequence of refusal of performance or refusal to accept performance, by
either of the parties.
Understand rights of joint promisees, liabilities of joint promisors, and rules regarding
appropriation of payments.
A contract being an agreement enforceable by law, creates a legal obligation, which subsists
until discharged. Performance of the promise or promises remaining to be performed is the
principal and most usual mode of discharge. This unit explains, who must perform his
obligation; what should be the mode of performance; and what shall be the consequences of
non performance.
Basic tenet of performance: In a contract where there are two parties, each one has to
perform his part and demands the other to perform. This obligation is the primary tenet. The
parties would be treated as having been absolved only under the provisions of any law or by
the conduct of the other party. Until such time, the performance is neither excused nor
dispensed with. Not only the promisor has a primary duty to perform, even the representative
in the event of death of a promisor, is bound by the promise to perform, unless a contrary
intention appears from the contract [Section 37].

1.21 By Whom a Contract may be Performed

The promise under a contract can be performed by any one of the following:
(i) Promisor himself: Invariably the promise has to be performed by the promisor where
the contracts are entered into for performance of personal skills, or diligence or personal
confidence, it becomes absolutely necessary that the promisor performs it himself.
(ii) Agent: Where personal consideration is not the foundation of a contract, the promisor or
his representative can employ a competent person to perform it.
(iii) Representatives: Generally upon the death of promisor, the legal representatives of the
deceased are bound by the promise unless it is a promise for performance involving
personal skill or ability of the promisor. However the liability of the legal representative is
limited to the value of property inherited by him from the promisor.
(iv) Third Person: The question here is whether a total stranger to a contract who is
identified as a third person can perform a promise. Where a promisee accepts
performance from a third party he cannot afterwards enforce it against the promisor.
1.46 Business Law, Ethics and Communication

Such a performance, where accepted by the promisor has the effect of discharging the
promisor though he has neither authorized nor ratified the act of the third party.
(v) Joint promisors: Where two or more persons jointly promise, the promise must be
performed jointly unless a contrary intention appears from the contract.
Where one of the joint promisors dies, the legal representative of the deceased along with the
other joint promisor(s) is bound to perform the contract.
Where all the joint promisors die, the legal representatives of all of them are bound to perform
the promise.
The law set out above can be illustrated with the following examples:
1. A promises B to pay ` 1000/- on delivery of certain goods. A may perform this promise either
himself or causing someone else to pay the money to B. If A dies before the time
appointed for payment, his representative must pay the money or employ some other
person to pay the money. If B dies before the time appointed for the delivery of goods,
B’s representative shall be bound to deliver the goods to A and A is bound to pay
` 1000/- to B’s representative.
1. A promises to paint a picture for B for a certain price. A is bound to perform the promise
himself. He cannot employ some other painter to paint the picture on his behalf. If A
dies before painting the picture, the contract cannot be enforced either by A’s
representative or by B.
2. A delivered certain goods to B who promise to pay ` 5000/-. Later on B expresses his
inability to clear the dues. C, who is known to B, pays ` 2000/-to A on behalf of B.
Before making this payment C did tell B nothing about it. Now A can sue B only for the
balance and not for the whole amount.

1.22 Distinction between Succession and Assignment

This discussion arises in the context of the observation that the obligations of a promisor
would bind the legal representative also (only) to the extent of value of property inherited by
them. This became the law that legal representatives are successors.
Succession: When the benefits of a contract are succeeded by a process of law, both the
burden and the benefit would some times devolve on the legal heir. For example ‘B’ is the son
of ‘A’. Upon A’s death ‘B’ will inherit all the assets and liabilities of ‘A’ [These assets and
liabilities are also referred to as debts and estates]
Thus ‘B’ will be liable to all the debts of ‘A’, but if the liabilities inherited are more than the
value of the estate [assets] inherited it will be possible to pay only to the extent of assets
inherited.
Assignment: Unlike succession, the assignor can assign only the assets to the assignee and
not the liabilities. Because when a liability is assigned, a third party gets involved in it. The
debtor cannot through assignment relieve himself of his liability to creditor.
 The Indian Contract Act, 1872 1.47

However there cannot be any assignment of benefit of a contract coupled with a liability or
when a personal consideration has entered into making of the contract then the contract
cannot be assigned. In Zaffer Mehar Ali vs Budge Budge Jute Mills Company Ltd. 33 Cal., ‘A’
agreed to sell certain gunny bags to ‘B’ which were to be delivered in monthly installments for
a period of 6 months and the contract contained certain options for the buyer as regards
quality and packing. It was held that the clause relating to the buyer’s option did not preclude
the assignment of the contract.

1.23 Effects of Refusal to Accept Offer of Performance

In any promise, the promisor should act first by offering performance also known as ‘tender’.
In terms of section 38 of the Act, where the promisee has not accepted the offer or tender of
performance by the promisor then the promisor is not responsible for non performance. In this
case the promisor does not also lose his rights under a contract.
The promisor should however ensure that his tender or offer to perform his part should satisfy
following conditions.
(i) the offer is unconditioned.
(ii) the offer is made at a proper time and place under such circumstances that the person to
whom it is made may have a reasonable opportunity of ascertaining that the person by
whom it is made is able and willing to do what he is bound to do, then and there.
(iii) if the offer is an offer to deliver any thing to the promisee, then the promisee must have a
reasonable opportunity of seeing that the thing offered is the thing that the promisor is
bound by his promise to deliver.
The above legal principles were settled in the famous English case Start up vs.Macdonald
1843 6 Man. & G. 593, 610 thus “The law considers a party who has entered into a contract to
deliver goods or pay money to another as having substantially performed it, if he has tendered
the goods or money to the party to whom the delivery or payment was to be made, provided
only that the tender has been made under such circumstances that the party to whom, it has
been made, has had a reasonable opportunity of examining the goods or the money tendered
in order to ascertain that the thing tendered is really what that it is purported to be”.
An offer to any one of the several joint promisees has the same legal consequence as an offer
to all of them.

1.24 Effect of a Refusal of a Party to Perform Promise

Where a party to a contract has refused to perform the promise he has made or had disabled
himself from performing his promise in its entirety, the promisee may put an end to the
contract, unless his acquiescence in the continuance of the contract has been conveyed either
by words or by deeds [conduct] [Section 39]. Thus from the above it could be seen that the
following two rights accrue to the aggrieved party- (i) to terminate the contract and (ii) to
indicate by words or conduct that he is interested in its continuance.
1.48 Business Law, Ethics and Communication

In case the promisee decides to continue the contract, he would not be entitled to put an end
to the contract on this ground immediately. In either case, the promisee would be able to
claim damages that he suffers as a result of the breach for it is not incumbent on the promisee
to decide immediately in case of an anticipated breach that the contract may be ended. He
may, however, choose to do so. In that event, the loss (if any) suffered by him will have to be
made good by the promisor. On the other hand, if he indicates that he is interested in the
performance of the contract, then he would be entitled to claim damages which accrue on the
date the contract is due to be performed. It would, therefore, be clear that the rights that we
have just stated above accrue to a promisee when the promisor decides not to perform the
promise.
It has been held by the Privy Council in Muralidhar Chatterjee vs. International Film Company
47 Cal.W.N.407 that when a promisee puts an end to a contract being rightly entitled to do so,
it shall be deemed as if he has rescinded a voidable contract. In view of Section 64 of the Act,
the promisee, in the events of his putting an end to the contract, is bound to return all the
benefits received under the contract and in turn is entitled for compensation for all damages
sustained by him for breach of contract by the promisee.

1.25 Liability of Joint Promisor & Promisee

The legal liability of a joint promisor, joint promisee and other connected issues are set out in
Sections 42, 43 & 44 of the Indian Contract Act,1872.
In terms of Section 42 of the Act “when two or more persons have made a joint promise then
unless a contrary intention appears from the contract, all such person, during their joint lives,
and after the death of any one of them, his representative jointly with the survivor or survivors
and after the death of last survivor, representatives of all jointly must fulfill the promise”.
The above law can be illustrated with the following example. Where ‘A’, ‘B’ and ‘C’ jointly
borrow a sum of money from ‘X’ all of them are jointly liable to repay the amount. Where in
the above example, ‘A’ dies, his legal representative, ‘L’ would be liable to repay the loan
along with ‘B’ and ‘C’, the remaining joint borrowers.
Now let us consider the position whether the promisee can enforce his right against any one of
the joint promisors and if so what are the rights and duties of the other promisors to make
contributions.
In terms of Section 43 of the Act,
(i) when two or more persons make joint promise, the promisee can compel any one of the
joint promisors to perform the whole of promise.
(ii) in the above situation, the performing promisor can enforce contribution from other joint
promisors, in the absence of express agreement to the contrary.
Example: Where A,B and C have jointly signed a promissory note for ` 3000/-, and where ‘A’
is compelled to pay the entire amount of ` 3000/- , he is entitled recover by way of
contribution of ` 1000/- each from the other two joint promisors namely B and C unless
 The Indian Contract Act, 1872 1.49

agreed to otherwise mutually.

In the above situation again, if one of the joint promisors namely ‘B’ is unable to contribute `
1000/-, ‘A is entitled to recover ` 1500/- from ‘C’ who is the remaining joint promisor instead of
` 1000.
From the above, it is clear that the liability of joint promisors is joint and several and in the
absence of any special contract to the contrary, the amount due can be recovered from any
one of the joint promisors.
For example X,Y and Z jointly borrow from P, ` 3000/-, Because the liability of the borrower is
joint and severed, ‘P’ can recover the amount either from X or from Y or from Z or from all of
them jointly. A joint promisor cannot claim that he be sued along with all other joint promisors
only. If, however the promisee sues one of the promisors and obtains a decree against him,
he is precluded from bringing a fresh suit against the remaining borrowers.
In the matter of release of one of the joint promisors, by another joint promisor, it must be
understood that such a release does not discharge other joint promisors nor does the released
joint promisor would stand released to other joint promisor or promisors. [Section 44 of the
Act].

1.26 Rights of Joint Promisees

The rights of two or more promisees who are known as joint promisees is discussed in Section
45 of the Act. In terms of the said section “When a person has made a promise to two or more
persons jointly, then unless a contrary intention appears from the contract, the right to claim
performance rests, as between him and them, with them during their joint lives, and after the
death of any of them with the representatives of such deceased person jointly with the survivor
or survivors, and after the death of the last survivor, with the representatives of all jointly”.
For example, A, in consideration of ` 5,000 lent to him by B and C, promises B and C jointly
to repay the sum with interest on a specified day but B dies. In such a case right to demand
payment shall rest with B’s legal representatives, jointly with C during C’s lifetime and after the
death of C, with the legal representatives of B and C jointly as ‘B’ and ‘C’ both are joint
promisees”.
The above principle of joint promises is applicable for partners, joint mortgagees and members of a
Hindu Undivided Family. In all these cases there is no single promisee. Therefore in order to enforce a
promise all the joint promisees should sue the promisor. If any one of the joint promisees refuses to
sue the promisor he would not be a plaintiff but be treated as defendant. [Ashinsa Bibi vs Abdul
Kadar (1902) 25.Mad 26,35, Mohammed, Isaq vs. Shekh Haq (1908) 12 C.W.N. 84, 86, 93].

1.27 Time and Place for Performance of the Promise

Sections 46 to 50 of the Act deal with this issue of “Time and place” for performance of a
promise. Following are the rules of performance where the promisee has not applied for
1.50 Business Law, Ethics and Communication

performance. Where no time is specified for performance of a promise, it must be performed

within a reasonable time. What is reasonable time would depend on the facts and circumstances of
each case [section 46]. Where a promise is to be performed on a specified date but no time
is mentioned, then it can be performed any time on that day but during business hours only.
A promisee may refuse to accept delivery (of goods), if it is delivered after business hours.
For example if the promisor wishes to deliver goods at a time which is beyond business hours,
the promisee can refuse.
As regards the place of performance, where no place is fixed for the performance of a
promise, it is the duty of the promisor to ask the promisee to fix a reasonable place. No
distinction is made between an obligation to pay money and an obligation to deliver goods or
discharge any other obligation. But generally the promise must be performed or goods must
be delivered at the usual place of business.
Where the promisor has not undertaken to perform the promisee without an application
by the promisee and the promise is to be performed on a certain day, it is the duty of the promisee to
apply for performance at a proper place and with in usual hours of business.
The above are subject to the position that promisor can perform any promise at any place, in any
manner, at any time which the promisee prescribes or sanctions.

1.28 Performance of Reciprocal Promise

The law relating to reciprocal promise as set out in Sections 51 to 54 of the Indian Contract
Act,1872.
General observation: A contract may consist of (i) an act and a promise or (ii) two promises
one being the consideration for the other.
The second type of contract which involves two promises, one promise from each to the other
party is known as “Reciprocal promise”. This can be illustrated with the following.
When ‘A’ sells 500 quintals of rice to ‘B’ and ‘B’ promises to pay the price on delivery, the
contract would consist of two promises one by ‘A’ to ‘B’ and another by ‘B’ to ‘A’. These
promises are reciprocal promises. Here the promise of ‘A’ is the consideration for the promise
of ‘B’ and vice versa.
The above is in contrast to another situation. In the above example if ‘B’ promises to pay the
price after a month, the contract would have two parts one is the act of ‘A’ and the second is
promise of ‘B’. This is not a reciprocal promise.
The performance of reciprocal promise can take in different forms-
(i) Simultaneously performance of reciprocal promise [Section 51]: In this case,
promises have to be performed simultaneously. The conditions and performances are
concurrent. If one of the parties does not perform his promise, the other also need not
perform his promise. For example where ‘A’ promises to deliver rice and ‘B’ promises to pay
 The Indian Contract Act, 1872 1.51

the price on delivery, both have to be performed simultaneously. Here both ‘A’ and ‘B’ must
be willing and ready to perform their accepted part.
(ii) Performance of reciprocal promise where the order is expressly fixed: Where the
order of performance is expressly fixed, the promise must be performed in that order only.
Where ‘A’ promises to build a house for ‘B’ and ‘B’ promises to pay after construction, here ‘A’
must perform his promise before he can call upon ‘B’ to fulfill his promise of payment of
money. A’s performance of the promise is a condition precedent to ‘B’ performing his part of
the promise. Any breach of promise by ‘A’ would enable ‘B’ to avoid the contract.
(iii) Performance of reciprocal promise by implication: Where the performance of
reciprocal promise is not fixed expressly, some times the order is understood by implication.
For example where ‘A’ agrees to make over certain stock in trade to ‘B’ and ‘B’ agrees to
provide certain security for the value of stock in trade, then ‘A’ need not make over the stock
until ‘B’ provides the security as by implications ‘B’ is required to perform his part first;
otherwise ‘A’ in the absence of any security will not make over the stock to ‘B’.
(iv) Effect of one party preventing another from performing promise [Section 53]: When
in a contract consisting of reciprocal promises one party prevents the other from performing
his promise, the contract becomes voidable at the option of the party so prevented. The
person so prevented is entitled to get compensation for any loss he may have sustained for
the non-performance.
The above can be illustrated with the following illustrations by way of two case laws.
(a) Where there is a contract for sale of standing timber and as per the terms seller is
expected to cut and cord the standing timber before the buyer takes delivery but seller
cords only a part of it, but neglects to cord the rest of it, then the buyer has a right to
avoid the contract and claim compensation for any loss sustained.
(a) In the well known case of O ‘Nell vs. Armstrong, an Englishman was engaged by the
Captain of a Japanese ship to act as fireman on a voyage from England to Japan.
During the course of the voyage Japan declared war against China. The Englishman had
to leave service because had he continued in service he would have incurred penalties
under Foreign Enlistment Act. In effect because of the war, the Englishman was
prevented from discharging his part of the contract. The suit filed by him was decreed in
his favour in spite of being opposed by the Japanese shipping company. It should be
appreciated that the Captain of Japanese ship could not have brought a case against the
Englishman for non-performance as the Japanese themselves were responsible for
preventing the Englishman from performing his part of the contract.
Sometimes the parties would be prevented from discharging a part of the contract but not the
entire contract. In such a case, the party so prevented need not avoid the full contract but
perform the rest of it.
(v) Effects of default as to promise to be performed first: Section 54 of the Act provides
that promises may be such that:
1.52 Business Law, Ethics and Communication

(i) one of them cannot be performed or

(i) its performance cannot be demanded till the other has been performed.
Example: Where ‘B’ a ship owner agrees to convey A’s cargo from Calcutta to Mauritius for a
freight. Here the beginning part of the transaction is on ‘A’ as he has to provide the cargo to
‘B’ to enable ‘B’ to perform his promise. Thus until cargo is handed over by ‘A’. A cannot
expect ‘B’ to perform his promise nor would ‘B’ be in a position to perform his promise. This
peculiar position arises because of default on the part of one of the parties. Here ‘B’ is
entitled to put an end to the contract and claim compensation for any loss he may have
suffered.
(vi) Position of legal and illegal parts of Reciprocal promises: Reciprocal promise to do
certain things that are legal and certain others that are not legal –
Section 57 of the Act provides that if reciprocal promises have two parts, the first part being
legal and the second part being illegal, the legal part is a valid contract and the illegal part is
void.
Example: Where ‘A’ agrees to sell his house to ‘B’ for ` 50000/- and further ‘A’ insists and it is
agreed that if the house is used as a gambling house, then ‘B’ would pay another ` 75000/-.
In this case the first part is valid as it is legal, the second part is void as it is illegal.
(vi) Alternative promise one branch being illegal: “In the case of the alternative promise,
one branch of which is legal and the other illegal, the legal branch alone can be enforced”.
For example, in the nearest reversionary heir of B, agreed to transfer his inheritance to C, if he
succeeded to B; and he did not transfer his own estate to C. It was held that first promise was
not enforceable, as it amounted to an agreement to transfer an estate on the mere chance of
succession prohibited by Section 6 of the Transfer of Property Act, but the second promise
was enforceable under Section 58 as an alternative promise. [Mahadeo Prasad Singh vs.
Mathura 132 L.C. 321 A]

1.29 Effects of Failure to Perform at a Time Fixed in a Contract in

which Time is Essential
Section 55 of the Act regulates the position of performance of contract where time is of
essence. In terms of this Section, where it is understood between parties that time is an
essential element, and where one party is unable to perform his part of the promise either in
full or in part within the time specified, then the contract is voidable at the option of the party
either in full or in part to the extent of non performance of the contract within the time. In
these cases the contract is not voidable if time is not of essence of the contract, but the
promisee is entitled for compensation for loss if any suffered on account of such failure.
In a contract where time is of essence and promisor is unable to perform his part within the
time, as already stated the contract becomes voidable at the option of the other party.
However the other party agrees that the promisor would perform his part subsequently after
 The Indian Contract Act, 1872 1.53

the time fixed, the promisee cannot claim any compensation for loss or damage or injury
unless he gives any notice to the promisor of his intention to do so.
The next question for consideration is how to determine whether time is essence of a
contract?
Ordinarily from a plain examination of a contract it would be difficult to ascertain from the
terms of the contract whether time is essence of the contract. A promisee may have failed to
perform his contract within the specified time. Yet time may not be treated as essence of the
contract in that case. Whether time is essence of a contract has to be decided from the terms
of the contract.
In mercantile contracts, as business world is ruled by ‘time’ and ‘money’ any stipulation as to
‘time’ and ‘money’ is an essential condition.
The general principles that are followed can be enunciated as under.
(i) In transaction on sale of gold, silver, blue chip shares, time of delivery is of essence.
Here time will be treated as essence of contract.
(i) In transaction involving sale of land, redemption of mortgages, though certain time frame
is fixed, any delay is not valued seriously provided justice can be done to parties. Of
course even in sale of land, time can be made as on essence of contract by express
words.
Contract cannot be avoided where time is not of essence: When there is delay in
performing promise on executing a contract where the time is not of essence, parties
concerned cannot avoid the contract. However in such cases promises must be performed
with in a reasonable time other wise it becomes voidable at the option of the promisee.
Effect of acceptance of performance out of time: Even where time is of essence, the party
who is entitled to avoid the contract can waive the condition relating to “performance within
time”; but in such cases he cannot claim any compensation for loss if any suffered unless he
has put the other party on notice.
Key Points

 Performance of contract- It is the performing of all the promises and fulfilling all the
obligations by all the parties as per the term of the contract.
 Actual performance- When both the parties to a contract perform their promises and
nothing remains to be done in future by them.
 Attempted performance- When tender or offer of performance of goods/ services is not
accepted or rejected by the promisee, In such situation the promisor is discharged from
his obligation. However, where promisee fails to accept tender of money/price, the
promisor is not discharged from his obligation to pay.
 Contract can be performed by the parties personally, through agent, representative or
third party.
1.54 Business Law, Ethics and Communication

 In case of joint promise- Promisee may compel any of the joint promisors to perform
unless otherwise agreed by the parties.
 Where no time for performance of contract- The contract must be performed within a
reasonable time.
 Where time is essence- Failure to perform the contract at an agreed time will amount to a
breach of condition of the contract and will be voidable.
 Reciprocal promises- Where one promise form the consideration/ part of consideration
for each other.

1.30 Impossibility of Performance

Agreements become void when it becomes impossible to perform them due to a variety of
reasons. This is known as “impossibility of performance” and dealt with by section 56 of the
Act
In terms of Section 56 of the Act “An agreement to do an act impossible in itself is void. A
contract to do an act which, after the contract is made, becomes impossible, or, (by reason of
some event which the promisor could not prevent,) unlawful, becomes void when the act
becomes impossible or unlawful.
Where one person has promised to do something which he knew, or with reasonable
diligence, might have known, and which the promisee did not know to be impossible or
unlawful, such promisor, must make compensation to such promisee for any loss which such
promisee sustains through the non-performance of the promise”.
(1) Impossibility existing at the time of contract: Even at the time of entering into the
agreement, it may be impossible to perform certain contracts at the beginning or inception
itself. The impossibility of performance may be known or may not be known to the parties
(i) If the impossibility is known to the parties : Where ‘A’ agrees to pay ‘B’ ` 5000/- to ‘B’ if
he would swim from Bombay in Indian ocean to ‘Aden’ in 7 days time, this is an agreement
where both the parties known that it is impossible to swim the distance between ‘Bombay’ to
‘Aden’ in 7 days time and hence is void.
(ii) If unknown to the parties: Even where both the promisor and the promisee are ignorant
of the impossibility the contract is void.
(iii) If known only to the promisor: Where the promisor alone knows it is impossible to
perform or even if he does not know but he should have known about the impossibility with
reasonable diligence, the promisee is entitled to claim compensation for the loss suffered
because of failure of the promisor to perform.
(2) Supervening impossibility: When performance of a promise becomes impossible on
account of subsequent developments of events or change in circumstances, which are beyond
the contemplation of parties, the contract becomes void. Supervening impossibility can arise
due to a variety of circumstances as stated below.
 The Indian Contract Act, 1872 1.55

(i) Accidental destruction of the subject matter of the contract : ‘A’ had agreed with ‘B’ to hire
for rent his music hall for holiday concerts on certain specified dates. The music hall was
destroyed before the specified dates and hence it became impossible to hold stage concerts.
It was held that as the music hall ceased to exist; it is a case of supervening impossibility and
both the parties were excused from the performance of the contract [Taylor vs. Caldwell
3B&S826].
(ii) Non-existence or non occurrence of a particular state of things: It was agreed to by the
defendant through a contract to have from the plaintiff a flat for specified days for witnessing
the coronation procession of King Edward VII. The said procession was cancelled and it did
not take place. Therefore the defendant refused to pay the balance rent. It was held that the
foundation of the contract had totally failed and here the balance of rent amount cannot be
recovered from the defendant. [Krell vs. Henry 2 KB. 740]
(iii) Incapacity to perform a contract of personal services: In case of contract of personal
service, disability or incapacity to perform, caused by an Act of God e.g. illness, constitutes
lawful excuse for non-performance of the contract [Robinson vs. Davison L.R.6Ex.269]
(iv) Change in law: Performance of a contract may also become impossible due to change in
law subsequently. The law passed subsequently may prohibit the act which may form part as
basis of contract. Here the parties are discharged from their obligations. For example ‘A’ and
‘B’ may agree to start a business for sale of lottery and contribute capital for the business. If
the business of sale of lottery ticket is banned by a subsequent law, parties need not keep up
their legal obligations.
(v) Outbreak of war: Out break of war may affect the enforceability of contracts in many
ways like
(a) emergency legislations controlling prices
(a) relaxation of trade restrictions and
(b) prohibiting or restraining transaction with alien enemy.
Doctrine of Frustration: The idea of “supervening impossibility” is referred to as ‘doctrine of
frustration’ in U.K. In order to decide whether a contract has been frustrated, it is necessary to
consider the “intention of parties as are implied from the terms of contract”.
However in India the ‘doctrine of frustration’ is not applicable. Impossibility of performance must
be considered only in term of section 56 of the Act. Section 56 covers only ‘supervening impossibility
and not implied terms’. This view was upheld by Supreme Court in Satyabrata Ghose vs Mugneeram
Bangur A.I.R.(1954) S. C. 44 and Alopi Prasad vs Union of India A.R. 1960 S.C.588.
What would not constitute ground of impossibility: Various decisions which have identified certain
situations as not constituting grounds of impossibility -
(a) ‘A’ promised to ‘B’ that he would arrange for ‘B’s marriage with his daughter. ‘A’ could not
persuade his daughter to marry ‘B’. ‘B’ sued ‘A’ who pleaded on the ground of
1.56 Business Law, Ethics and Communication

impossibility that he is not liable for any damages. But it was held that there was no
ground of impossibility. It was held that ‘A’ should not have promised what he could not
have accomplished. Further ‘A’ had chosen to answer for voluntary act of his daughter
and hence he was liable.
(a) The defendant agreed to supply specified quantity of ‘cotton’ manufactured by a mill with
in a specified time to plaintiff. The defendant could not supply the material as the mill
failed to make any production at that time. The defendant pleaded on the ground of
impossibility which was not approved by the Privy Council and held that contract was not
performed by the defendant and he was responsible for the failure. [Hamandrai vs
Pragdas 501A]
(b) The defendant agreed to procure cotton goods manufactured by Victoria Mills to plaintiff
as soon as they were supplied to him by the mills. It was held by Supreme Court that the
contract between defendant and plaintiff was not frustrated because of failure on the part
of Victoria Mills to supply goods [Ganga Saran vs Finn Rama Charan, A.I.R 1952 S.C.9]
(c) A dock strike would not necessarily relieve a labourer from his obligation of unloading the
ship within specified time.
(d) In Satyabrat Ghosh vs Mugneeram Bangur & Co. A.I.R 1954 S.C.44, Calcutta High court
held in a context of impossibility of performance that “having regard to the actual
existence of war condition, the extent of the work involved and total absence of any
definite period of time agreed to the parties, the contract could not be treated as falling
under impossibility of performance. In the given case the plaintiff had agreed to
purchase immediately after outbreak of war a plot of land. This plot of land was part of a
scheme undertaken by the defendant who had agreed to sell after completing
construction of drains, roads etc. However the said plot of land was requisitioned for war
purpose. The defendant thereupon wrote to plaintiff asking him to take back the earnest
money deposit, thinking that the contract cannot be performed as it has become
impossible of being performed. The plaintiff brought a suit against the defendant that he
was entitled for conveyance of the plot of land under condition specified in the contract.
It was held that the requisition order did not make the performance impossible.
While judging the impossibility of performance issue, the Courts would be very cautious since
contracting parties often bind themselves to perform at any cost of events without regard to
price prevailing and market conditions.
Key Points:
A contract is discharged by impossibility of its performance.
 Impossibility may be of two types :
(i) Initial Impossibility-existed at the time of making the agreement.
(ii) Subsequent or supervening impossibility-arises after formation of contract.
 The contract becomes void when the performance of the contract becomes impossible.
 The Indian Contract Act, 1872 1.57

 Doctrine of frustration applies in the case of supervenning impossibility, where- the

performance of contract has become impossible, and where the object of the contract
has failed.
 This doctrine does not apply- where the performance simply becomes difficult
/commercially impossible/ impossibility induced by the act or the conduct of any person
etc.

1.31 Appropriation of Payments

Where a person [Debtor] owes a number of debts to another person [Creditor], and when he
releases certain payments, then the question arises as to how to adjust the receipt against so
many dues. This issue is considered and answered in Sections 59, 60 and 61 of the Act
under the heading ‘Appropriation of payments’.
(i) Application of payment where debt to be discharged is indicated: In term of section
59 of the Act “Where a debtor, owing several distinct debts to one person, makes a payment
to him either with express intimation or under circumstances implying that the payment is to be
applied to the discharge of some particular debt, the payment, if accepted, must be applied
accordingly”.
Where a debtor owes a number of debts and he pays an amount with express or implied
instructions towards appropriation, the debtor is at will to appropriate to any debt and the
creditor is bound by it. This is set out in the Latin Maxim of “quicquid sovitur, sovit
sectionundum modum solventis” meaning that whatever is paid, is paid according to intention
or manner of party paying. The right of debtor to decide the appropriation is also known as
decision in Clayton’s case.
What is the position if the debtor does not expressly state the method of appropriation? Then
we have to go by the circumstances of the case. For example a debtor who owes among
other debts ` 2000/- to a creditor and pays ` 2000/- on a given day when the debt of ` 2000/-
falls due, then the amount must be accordingly applied and the debt be discharged
accordingly.
(ii) Application of payment where debt to be discharged is not indicated: “Where the
debtor has omitted to intimate and there are no other circumstances indicating to which debt
the payment is to be applied, the creditor may apply it at his discretion to any lawful debt
actually due and payable to him from the debtor whether its recovery is or is not barred by the
law in force for the time being as to the limitation of suits”.
From the above it can be seen that the creditor enjoys the right to appropriate even to a debt
which is barred by limitation.
It was held by Lord Macnaughten in Cory Bros. & Co. vs. Owner of the Mecca (1817) A.C.286 &
293, that if the debtor does not make any appropriation, at the time of payment, the right devolves on
the creditor. Creditors have a right to decide till the very last moment. The above
1.58 Business Law, Ethics and Communication

decision was followed in a number of important cases including in the famous case of
Vinkatadri Appa Rao vs Parthasarthi Appa Rao [(1921) L.R. 48. I.A. 150; 44 Mad 570 and
573.. In the said case it was held that creditor can decide at his discretion on the appropriation
of payment towards any lawful debt even if barred by limitation. If there is any debt carrying
interest and if there are no express or implied instructions the amount paid should be
appropriated towards payment of interest and then to capital.
(iii) Application of payment when neither party appropriates: In terms of section 61 of the
Act, where neither party appropriates-
(a) the payment shall be applied in discharge of debts in order of time, and
(a) if the debts are of equal standing the payment shall be applied in discharge of each
proportionately.
The above appropriation takes place whether or not the debt is barred by limitation.
For example where there are two debts one ` 500/- and another ` 700/- falling due on the
same day, and if the debtor pays ` 600/- the appropriation shall be prorata of ` 250/- and
` 350/- for the two debts.

1.32 Contract, Which Need not be Performed

A contract would not require performance under circumstances spelt out in Sections 62 to 67
of the Act. These circumstances are (i) novation, (ii) rescission,(iii) alteration and (iv)
remission.
Section 62 of the Act provides that “if the parties to a contract agree to substitute a new
contract for it or to rescind or alter it, the original contract need not be performed”.
(a) Effect of novation: Novation means substitution. Where a given contract is substituted
by a new contract it is novation. The old contract, on novation ceases. It need not be
performed. Novation can take place with mutual consent. However novation can take place
by substitution of new contract between the same parties or between different parties.
Novation results in discharge of old contract. This can be illustrated as follows -
A owes money to B under a contract. It is agreed between A, B and C that B shall thenceforth
accept C as his debtor, instead of A. The old debt of A to B is at an end, and a new debt from
C to B has been contracted.
(b) Effect of rescission: In case of rescission, the old contract is cancelled and no new
contract comes in its place. A contract is also discharged by rescission. Some times parties
may enter into an agreement to rescind the previous contract. Sometimes, the contract is
rescinded by implication or by non- performance for a long time without each other
complaining about it.
Difference between novation and rescission: While novation involves rescission, there is
no novation in rescission. Both in novation and rescission the contract is discharged by mutual
agreement. In both cases parties enter into a new contract to come out of the old contract.
 The Indian Contract Act, 1872 1.59

The new agreement is the consideration for rescission.

(a) Effect of alteration: Where the contract is altered, the original contract is rescinded.
Hence the old one need not be performed whereas the new one has to be performed.
Alteration involves both rescission and novation. The line of difference between alteration and
novation is very thin. While there can be very minor alterations, there can not be unilateral
material alteration to a contract. If it is done it will be void.
Novation and alteration: Both in novation and in alteration the old contract need not be performed.
The main difference between the two are:
Novation Alteration
Novation involves changes in the terms of In alteration there are only changes in the
contract. It also sometimes means term of contract by mutual consent. The
change in the parties to contract. It infact parties to contract remain the same. There is
operates as a substitution of the old no substitution of old terms; only some terms
contract. and conditions change. There are remission
of performance in alteration.

Remission means waiver. Section 63 of the Act deals with remission. It provides that “every
promisee may dispense with or remit wholly or in part, the performance of the promise made
to him or may extend the time for such performance or may accept instead of it any
satisfaction which it thinks fit”. Thus the promisee can waive either in full or in part the
obligation of the promisor or extend the time for performance. For example where ‘A’ owes ‘B’
a sum of ` 1 lakh, ‘B’ may accept a part of it in full and final settlement of the due or waive his
entire claim.
While granting the time to the promisor, the promisee cannot do so for his benefit but can do
so only for the benefit of the promisor. For example where ‘A’ promises ‘B’ that he would
deliver certain goods by a certain date, ‘B’ can extend the time but he cannot take advantage
to charge interest on the extended time.
Similarly a promisee can accept any other performance to his satisfaction instead of the
specified stipulated performance.
For example where A promises to sell his horse for a consideration of ` 5000/- to ‘B’, ‘A’ may
instead of cash consideration of ` 5000/-may accept jewellery worth Rs 5,000/-in full
satisfaction of the consideration. In a situation like this the essential element of ‘satisfaction’
is that the promisee must accept the consideration unequivocally. If a promisor tenders some
thing in full satisfaction but the promisee does not accept it or accepts in part performance,
such satisfaction will fall outside the ambit of section 63 of the Act. [ Shyamnagar tin Factory
vs Snow White Food Products, A.I.R (1965) Cal 54]
It should be noted that novation, rescission or alteration cannot take place without
consideration but in case of part or complete rescission no consideration is required. The
promisee can dispense with performance without consideration and without a new agreement.
1.60 Business Law, Ethics and Communication

1.33 Restoration of Benefit under a Voidable Contract

It has already been seen that certain contracts referred to in Sections 19, 19A, 39, 51, 54 & 55
are voidable. The question for consideration is what is the effect of recession of contract by
that person at whose option the contract is voidable. The following are the effects of such an
action-
(i) The other party need not perform the promise
(ii) Any benefit received by the person rescinding it must restore it to the person from whom
it was received.
A voidable contract which is voidable either at its inception or subsequently comes to an end
when it is avoided by the party at whose option it is avoided. In such a case, not only the
contract need not be performed there is also restoration of benefit.
(a) the injured party on account of non performance of the contract is entitled to recover
compensation for damages suffered and
(b) benefits received must be restored.
In Murlidhar vs. International Film Co. A.I.R 1943 P.C. 34, the plaintiff having wrongfully
repudiated the contract, the defendants rescinded it u/s 39 of the Act. The plaintiff brought a
suit to recover ` 4000/- paid to the defendant. Held defendant was bound to restore the
amount after setting off such damages.
When an insurance company has rescinded the policy because the policy holder could not
disclose material information, it should refund the premium after making necessary
adjustments for expenses already incurred.

1.34 Obligations of Person who has Received Advantage under Void

Agreement or one Becoming Void.
In terms of section 65 of the Act, where
(a) an agreement is discovered to be void or
(b) a contract becomes void
any person who received an advantage must
(a ) restore it or
(b) pay compensation for damages in order to put the position prior to contract.
In Dhuramsey vs. Ahgmedhai (1893) 23 Bom 15, the plaintiff hired a godown from the
defendant for 12 months and paid the advance in full. After about seven months the godown was
destroyed by fire, without any fault on the part of plaintiff. When the plaintiff claimed refund of the
advance, it was upheld that he was entitled to recover the rent for the unexpired term.
 The Indian Contract Act, 1872 1.61

The next issue is the benefit which has to be returned must have been received under the
contract. Any benefit received which is ancillary to main contract need not be returned. For
example, the deposit paid for a transaction of sale of house between parties, need not be
returned just because the sale transaction could not take place. This was on the ground that
the deposit is only a security and not part of main contract.

1.35 Discharge of a Contract

A contract may be discharged in eight ways as discuss hereunder.
(a) Discharge by performance: Discharge by performance will take place when there is (i)
Actual performance or (ii) Attempted performance
Actual performance / discharge takes place when parties to the contract fulfill their obligations
within time and in the manner prescribed. Here each party has done what he has to do under
the contract. In attempted performance the promisor offers to perform his part but the
promisee refuses to accept his part. This is also known as tender.
(a) Discharge by mutual agreement: Discharge also takes place where there is
substitution [novation] rescission, alteration and remission. In all these cases old contract
need not be performed.
(b) Discharge by impossibility of performance: A situation of impossibility may have
existed at the time of entering into the contract or it may have transpired subsequently (also
known as supervening impossibility)
Impossibility can arise when
(i) there is an unforeseen change in law.
(ii) destruction of subject matter.
(iii) non-existence or non occurrence of a state of thing to facilitate happening of the
agreement.
(iv) personal incapacity of the promisor.
(v) declaration of war.
(c) Discharge by lapse of time: Performance of contract has to be done within certain
prescribed time. In other words it should be performed before it is barred by law of limitation.
In such a case there was no remedy for the promisee. For example, where then the debt is
barred by law of limitation.
(d) Discharge by operation of law: Where the promisor dies or goes insolvent there is a
discharge by operation of law.
(e) Discharge by breach of contract: Where there is a default by one party from
performing his part of contract on due date then there is breach of contract. Breach of
contract can be actual breach or anticipatory breach. Where a person repudiates a contract
before the stipulated due date, it is anticipatory breach. In both the events, the party who has
 1.62 Business Law, Ethics and Communication

suffered injury is entitled for damages. Further he is discharged from performing his part of
the contract.
(f)A promisee may remit the performance of the promise by the promisor. Here there is a
discharge. Similarly the promisee may accept some other satisfaction. Then again there is a
discharge on the ground of accord and satisfaction
(g) When a promisee neglects or refuses to afford the promisor reasonable facilities or
opportunities for performance, promisor is excused by such neglect or refusal.
Key Points

 Peformance of contract leads to discharge of contract. There are other alternative

methods of discharge where a contract would not require performance These
circumstances are (i) novation, (ii) rescission,(iii) alteration and (iv) remission. A contract
may also be discharged by agreement of the parties or by lapse of time for performance
or by operation of law,or impossibility of performance or by breach of contract.
 A voidable contract which is voidable either at its inception or subsequently comes to an
end when it is avoided by the party at whose option it is avoided. In such a case, no
contract need to be performed but there is a restoration of benefit.
 Any agreement which is discovered to be void or a contract which becomes void, there
any person who received an advantage must restore it or pay compensation for damages
in order to put the position prior to contract.

UNIT – 6: CONTINGENT AND SPECIAL CONTRACTS

Learning objectives
After studying this unit, you would be able to -
Have clarity about the basic characteristics of 'Contingent contract' and 'Quasi-contract' so that you
are able to distinguish between a contract of any of these types and a simple contract.
Be familiar with the rules relating to enforcement of these in order to gain an understanding of
rights and obligations of the parties to the contract.
In this unit we shall briefly examine
(a) ‘Contingent contracts’ and the rules regarding their enforceability and
(b) Quasi contracts

1.42 Contingent Contract

In terms of Section 31 of the Act contingent contract is a contract to do or not to do something,
if some event collateral to such contract does or does not happen. Contracts of indemnity and
contracts of insurance fall under this category.
For instance if ‘A’ contracts to pay ‘B’ ` 100000/- if B’s house is destroyed by fire then it is a
contingent contract.
Essentials of a contingent contract
(a) The performance of a contingent contract would depend upon the happening or non-
happening of some event or condition. The condition may be precedent or subsequent
(a) The event referred to is collateral to the contract. The event is not part of the contract.
The event should be neither performance promised nor a consideration for a promise.
Where ‘A’ agrees to deliver 100 bags of wheat and ‘B’ agrees to pay after delivery, this is
a conditional contract and not a contingent contract. Similarly where ‘A’ promises to pay
‘B’ ` 10000/- if he marries ‘C’ is not a contingent contract but a conditional contract.
(b) The contingent event should not be a mere ‘will’ of the promisor. The event should be
contingent in addition to being the will of the promisor.
For example if ‘A’ promises to pay ‘B’ ` 10000/- if ‘A’ left for Delhi from Mumbai on a particular
day, it is a contingent contract because though ‘A’s leaving for Delhi is his own will, it cannot
happen only at his will.

1.43 Rules Relating to Enforcement

The rules relating to enforcement of a contingent contract are laid down in sections 32, 33, 34
and 36 of the Act.
1.70 Business Law, Ethics and Communication

(a) Contingency is the “happening of an event”: Where a contract identifies happening

of a future contingent event, the contract cannot be enforced until and unless the event
‘happens’. If the happening of the event becomes impossible, then the contingent contract is
void. For instance ‘X’ enters into a contract to buy ‘Y’s car provided ‘Y’ survives ‘A’. Here ‘Y’
surviving ‘A’ or ‘A’ dying before ‘Y’ is the event on which the contract is contingent and they
cannot be enforced until ‘A’ dies.
(a) Contingency is the non-happening of an event: Where a contingent contract is made
contingent on a non-happening of an event, it can be enforced only when its happening
becomes impossible. For example where ‘P’ agrees to pay ‘Q’ a sum of money if a particular
ship does not return, the contract becomes enforceable only if the ship sinks so that it cannot
return.
(b) Contingent on the future conduct of a living person: A contract would cease to be
enforceable if it is contingent upon the conduct of a living person when that living person does
some thing to make the ‘event’ or ‘conduct’ as impossible of happening. For example where
‘A’ agrees to pay ‘B’ a sum of money if ‘A’ marries ‘C’. ‘C’ marries ‘D’. This act of ‘C’ has
rendered the event of ‘A’ marrying ‘C’ as impossible; it is though possible if there is divorce
between ‘C’ and ‘D’.
(b) Contingent on an impossible event: A contingent agreement to do a thing or not to do
a thing if an impossible event happens is void and hence is not obviously enforceable. The
situation would not change even if the parties to the agreement are not aware of such
impossibility. ‘A’ agrees to pay ‘B’ ` one lakh if sun rises in the west next morning. This is an
impossible event and hence void.
Difference between a contingent contract and a wagering contract
1. A wagering agreement is a promise to give money or money’s worth with reference to an
uncertain event happening or not happening.
A contingent contract is a contract to do or not to do something with reference to a
collateral event happening or not happening.
1. A wagering agreement consists of reciprocal promises whereas a contingent contract
may not contain reciprocal promises.
2. In a wagering contract the uncertain event is the core factor whereas in a contingent
contract the event is collateral.
3. A wagering agreement is essentially contingent in nature whereas a contingent contract
may not be wagering in nature.
4. In a wagering agreement, the contracting parties have no interest in the subject matter
whereas it is not so in a contingent contract.
5. A wagering contract is a game, losing and gaining alone matters whereas it is not so in a
contingent contract.
6. A wagering agreement is void where as a contingent contract is valid.
 The Indian Contract Act, 1872 1.71

Key Points

 A contract may be either absolute or contingent.

 Contingent contract- Where the promisor undertakes to perform the contract which is
depended on the happening/ non-happenning of a specified future uncertain event, which
is collateral to the contract. Also termed as conditional contract because of its uncertain
nature.
 Contract of indemnity, guarantee and insurance are contingent contracts, even LIC to a
certain extent is contingent contract.
 All wagering agreements are basically contingent agreements but all the contingent
contracts are not wagering agreements.
1.44 Quasi – Contracts
Even in the absence of a contract, certain social relationships give rise to certain specific
obligations to be performed by certain persons. These are known as quasi contracts as they
create same obligations as in the case of regular contract.
Quasi contracts are based on principles of equity, justice and good conscience.
Salient features of quasi contracts are:
(a) In the first place, such a right is always a right to money and generally, though not
always, to a liquidated sum of money.
(a) Secondly, it does not arise from any agreement of the parties concerned, but it imposed
by the law; and
(b) Thirdly, it is a right which is available not against all the world, but against a particular
person or persons only, so that in this respect it resembles a contractual right.

1.45 Types of Quasi Contract

There are five circumstances which are identified by the Act as quasi contracts. These five
circumstances do not result in regular contracts.
(a) Claim for necessaries supplied to persons incapable of contracting: Any person
supplying necessaries of life to persons who are incapable of contracting is entitled to claim
the price from the other person’s property. Similarly where money is paid to such persons for
purchase of necessaries, reimbursement can be claimed.
For example if ‘A’ supplies necessaries of life to ‘B’ a lunatic or to his wife or child whom ‘B’ is
liable to protect and maintain, then ‘A’ can claim the price from the property of ‘B’. For such
claim to be valid ‘A’ should prove the supplies were to the actual requirements of ‘B’ and his
dependents. No claim for supplies of luxury articles can be made. If ‘B’ has no property ‘A’
obviously cannot make his claim.
1.72 Business Law, Ethics and Communication

(a) Right to recover money paid for another person: A person who has paid a sum of
money which another is obliged to pay, is entitled to be reimbursed by that other person
provided the payment has been made by him to protect his own interest.
Here the person who makes the payment must honestly believe that his own interest demands payment.
[Muni Bibi vs. Trilokinath].
In a case the plaintiff agreed to purchase certain mills and to save it from being sold to
outsiders paid certain arrears of municipal dues. Here the payment made by the plaintiff was
held to be recoverable as he had interest in the property as prospective buyer.
(b) Obligation of person enjoying benefits of non-gratuitous act: In term of section 70
of the Act “where a person lawfully does anything for another person, or delivers anything to
him not intending to do so gratuitously and such other person enjoys the benefit thereof, the
latter is bound to pay compensation to the former in respect of, or to restore, the thing so done
or delivered.
The above can be illustrated by a case law where ‘K’ a government servant was compulsorily
retired by the government. He filed a writ petition and obtained an injunction against the
order. He was reinstated and was paid salary but was given no work and in the mean time
government went on appeal. The appeal was decided in favour of the government and ‘K’ was
directed to return the salary paid to him during the period of reinstatement. [Shyam Lal vs.
State of U.P. A.I.R (1968) 130]
(c) Responsibility of finder of goods: In terms of section 71 ‘A person who finds goods
belonging to another and takes them into his custody is subject to same responsibility as if he
were a bailee’.
Thus a finder of lost goods has:
(i) to take proper care of the property as men of ordinary prudence would take
(ii) no right to appropriate the goods and
(iii) to restore the goods if the owner is found.
Where ‘P’ a customer in ‘D’s shop puts down a brooch worn on her coat and forgets to pick
it up and one of ‘D’s assistants finds it and puts it in a drawer over the week end. On
Monday, it was discovered to be missing. ‘D’ was held to be liable in the absence of ordinary
care which a prudent man would have taken.
(b) Liability for money paid or thing delivered by mistake or by coercion: In terms of
Section 72 of the Act, “a person to whom money has been paid or any thing delivered by
mistake or under coercion, must repay or return it. Every kind of payment of money or delivery
of goods for every type of ‘mistake’ is recoverable. [Shivprasad vs Sirish Chandra A.I.R. 1949
P.C. 297]
A payment of municipal tax made under mistaken belief or because of mis- understanding of
the terms of lease can be recovered from municipal authorities. The above law was affirmed
 The Indian Contract Act, 1872 1.73

by Supreme Court in cases of Sales tax officer vs. Kanhaiyalal A.I.R.1959 S.C.835
Similarly any money paid by coercion is also recoverable. The word coercion is not
necessarily governed by section 15 of the Act. The word is interpreted to mean and include
oppression, extortion, or such other means [Seth Khanjelek vs National Bank of India].
In a case where ‘T’ was traveling without ticket in a tram car and on checking he was asked to
pay ` 5/- as penalty to compound transaction. T filed a suit against the corporation for
recovery on the ground that it was extorted from him. The suit was decreed in his favour.
[Trikamdas vs. Bombay Municipal Corporation A.I.R.1954]
In all the above cases the contractual liability arose without any agreement between the
parties.
Key Points

 Quasi contracts / Constructive contracts are the contract presumed by law. These are the
contracts which are imposed by law and the Act describes such contract as “Certain
relations resembling those created by contracts”.
 Quasi contract may be exercised under following five conditions-
- Necessaries of life supplied to incapable person and to his dependents.
- Person pays money on behalf of the one, who is legally bound to pay.
- Person enjoying the benefits of non-gratuitous act.
- Person finds goods belonging to other.
-Person to whom money has been paid or anything delivered by mistake or under
coercion.