INDIAN CONTRACT ACT, 1872

CONTRACTS UNDER THIS ACT ARE CLASSIFIED INTO TWO PARTS

GENERAL CONTRACTS SPECIAL CONTRACTS

(SECTION 1 TO 75) (SECTION 124 - 238)

INDEMNITY & GUARANTEE BAILMENT & PLEDGE AGENCY

(SECTION 124 - 147) (SECTION 148 - 181) (SECTION 182 - 238)

 CONTRACT [Section 2(h)] – “An Agreement enforceable by law” (Agreement + Enforceability by law)

 AGREEMENT [Section 2(e)] – “Every promise and set of promises forming the consideration for each other.”
(Promises + Consideration)

 PROMISE [Section 2(b)] – “A promise is an accepted proposal.” (Proposal + Acceptance)

Essentials of a Valid Contract: According to Sec. 10, “All agreements are contract if they are made by the
free consent of parties competent to contract for a lawful consideration and with a lawful object and are not
expressly declared to be void.” Thus, Sections 2(h) and 10 of the Act state that there are some essential elements of a
valid contract. If any of these elements is not satisfied by an agreement, it will affect the validity and will not form a
valid contract.
1. Offer and acceptance: In a contract there must be at least two parties one of them making the offer and the other
accepting it. There must thus be an offer by one party and its acceptance by the other. The offer when accepted
becomes agreement.
2. Legal relationship: Parties to a contract must intend to constitute legal relationship. It arises when the parties
know that if any one of them fails to fulfil his part of the promise, he would be liable for the failure of the
contract. If there is no intention to create legal relationship, there is no contract between parties. Agreements of a
social or domestic nature which do not contemplate a legal relationship are not contracts.
3. Consensus-ad-idem/ Consent: The parties to an agreement must have the mutual consent i.e. they must agree
upon the same thing and in the same sense. This means that there must be consensus ad idem (i.e. meeting of
minds).
4. Competency of parties: The parties to an agreement must be competent to contract. In other words, they must be
capable of entering into a contract.
According to Sec 11 of the Act, “Every person is competent to contract who is of the age of majority according to
the law to which he is subject to and who is of sound mind and is not disqualified from contracting by any law to
which he is subject.”
Thus, according to Section 11, every person with the exception of the following is competent to enter into a
contract:-
(i) A minor,
(ii) A person of unsound mind, and
 (iii) A person expressly declared disqualified to enter into a contract under any Law.
5. Free consent: Another essential of a valid contract is the consent of parties, which should be free. Under Sec. 13,
“Two or more parties are said to consent, when they agree upon the same thing in the same sense.” Under Sec. 14,
the consent is said to be free, when it is not induced by any of the following:-
(i) coercion,
(ii) misrepresentation,
(iii) fraud,
(iv) undue influence, or
(v) mistake.
6. Lawful consideration: Consideration is known as ‘something in return’ or ‘Quid Pro Quo’. It is also essential
for the validity of a contract. A promise to do something or to give something without anything in return would
not be enforceable at law and, therefore, would not be valid. Consideration need not be in cash or in kind.
Besides, the consideration must also be lawful.
7. Lawful objects: According to Sec. 10, an agreement may become a valid-contract only, if it is for a lawful
consideration and lawful object. According to Sec. 23, the following considerations and objects are not lawful:-
i. If it is forbidden by law;
ii. If it is against the provisions of any other law;
iii. If it is fraudulent;
iv. If it damages somebody’s person or property; or
v. If it is in the opinion of court, immoral or against the public policy.
Thus, any agreement, if it is illegal, immoral, or against the public policy, cannot become a valid contract.
8. Agreement not expressly declared void: An agreement to become a contract should not be an agreement which
has been expressly declared void by any law in the country, as it would not be enforceable at law.
Under different sections of the Contract Act, 1872, the following agreements have been said to be expressly void,
viz :-
a. Agreements made with the parties having no contractual capacity, e.g. minor and person of unsound mind
(Sec. 11).
b. Agreements made under a mutual mistake of fact (Sec. 20).
c. Agreements with unlawful consideration or object (Sec. 23).
d. Agreements, whose consideration or object is unlawful in part (Sec. 24).
e. Agreements having no consideration (Sec 25).
f. Agreements in restraint of marriage (Sec. 26).
g. Agreements in restraint of trade (Sec. 27).
h. Agreements in restraint of legal proceedings (Sec. 28).
i. Agreements, the meaning of which is uncertain (Sec. 29).
j. Agreements by way of wager (Sec. 30). And
k. Agreements to do impossible acts (Sec. 56).
9. Certainty and possibility of performance: Agreements to form valid contracts must be certain, possible and
they should not be uncertain, vague or impossible. An agreement to do something impossible is void under Sec.
56.
10. Legal formalities: The agreement may be oral or in writing. When the agreement is in writing it must comply
with all legal formalities as to attestation, registration. If the agreement does not comply with the necessary legal
formalities, it cannot be enforced by law.

TYPES OF CONTRACT:
1. Valid Contract: An agreement which is enforceable by law, written or expressed contract between two parties to
deliver a product or services.
2. Voidable contract: An agreement that is enforceable by law at the option of one or more parties, but not at the
option of the other party or parties, is a voidable contract.
3. Void Contracts: Section 2(i) states that any agreement that is not enforceable by Law is void. It is a contract
without any legal effect and cannot be enforced in court of law. For instance, an agreement with a minor is void.
4. Express Contract: An express contract is an exchange of promises in which the terms by which the parties agree
to be bound are declared either orally or in writing, or a combination of both, at the time it is made.
5. Implied Contract: An implied contract is an agreement created by actions of the parties involved, but it is not
written or spoken. An implied contract is a legal substitute for a contract that is assumed to have been drawn. In
this case, there is neither written record nor any actual verbal agreement.
6. Quasi Contracts: If a man leaves his products with his companion and his companion utilizes the merchandise,
then he is to pay the man for utilizing his merchandise. Hence they are also called as “Almost a contract” or “Just
like contract”. Such sorts of the agreement are semi contracts.
7. Executed Contract: it is a contract that has been fully performed by both the parties.in other words, a contract
whose terms have been completely fulfilled.
8. Executory Contract: An executory contract is a contract that has not yet been fully performed or fully executed.
It is a contract in which both sides still have important performance remaining
9. Contingent Contract: A contract, the performance of which is dependent on the happening or non-happening of
some future uncertain event is known as contingent contract.

Definition of Proposal [Offer]

According to Section 2(a) of the Indian Contracts Act, 1872, when one person signifies to another his
willingness to do or to abstain from doing anything, with a view to obtaining the assent of that other to such act or
abstinence, he is said to make a proposal.
Essential elements of a valid offer:
1. Offer must be communicated: The offer is completed only when it has been communicated to the other party.
Until the offer is communicated, it cannot be accepted. Thus, an offer accepted without its knowledge does not
confer any legal rights on the acceptor.
LALMAN SHUKLA vs. GAURI DUTT – A's nephew had absconded from his home. He sent his servant to
trace his missing nephew. When the servant had left, A then announced that anybody who discovered the missing
boy would be given the reward. The servant discovered the missing boy without knowing about the reward. When
the servant came to know about the reward, he brought an action against A to recover the same. But his action
failed. It was held that the servant was not entitled to the reward because he did not know about the offer when he
discovered the missing boy.
2. Offer must be made with a view to obtain Acceptance: When a person is making an offer it means that he
is making it with a view to obtain acceptance of other party. As soon as the other party accepts it, the offeror is
bound by it.
3. Offer must be definite and not vague: The terms of an offer must be definite, clear and certain. If the terms
of the offer are vague and uncertain, no contract will come into existence.
A offered to sell to B ‘a hundred tonnes of oil’. The offer is uncertain as there is nothing to show what kind of oil
is intended to be sold.
4. Offer must be capable of creating legal relationship: An offer must be such that when accepted it will
result in a valid contract. A mere social invitation cannot be regarded as an offer, because if such an invitation is
accepted it will not give rise to any legal relationship.
BALFOUR vs. BALFOUR
Mr. Balfour and his wife went to England for a vacation, and his wife became ill and needed medical attention.
They made an agreement that Mrs. Balfour was to remain behind in England when the husband returned to
Ceylon (Sri Lanka) and that Mr. Balfour would pay her £30 a month until he returned. This understanding was
made while their relationship was fine; however the relationship later soured.
It was held that the law of contracts is not made for personal family relationships. As there was no intent to be
legally bound when the agreement was agreed upon, there can be no legally binding contract. If the courts were to
 allow all wives to come to court when agreements had been broken with their husbands then the courts would be
overrun with frivolous cases.
5. An invitation to receive an offer is not an offer: An offer is different from invitation to receive an offer. In
case of invitation to receive an offer there is no intention on the part of the person sending out the invitation to
obtain acceptance of the other person to whom search invitation is given. its Aim merely to circulate information
of readiness to negotiate business with anybody who on such information comes to him. In other word it only
invite the other party to make an offer on those terms search invitation is not an offer in the legal send example a
quotation of price or a catalog is not enough by design invitation to receive an offer.
HARVEY vs. FACEY
Harvey was interested in a piece of property (Bumper Hall Pen)owned by Facey. He sent Facey a telegram asking
him the minimum price for which he would sell the property. Facey quoted a price and Harvey sent a telegram
stating that he would pay it. However there was no response from Facey. Harvey sued for specific performance.
Issue: Does a statement of the minimum price at which a vendor will sell constitute an offer?
Rule: A mere statement of the lowest price at which a vendor will sell is not an offer to sell at that price to the
person making the inquiry.
6. Expressed or implied: An offer may be made either by words or by conduct. An offer, which is made by
words spoken or written, is called an express offer. The offer, which is made by the conduct of a person, is called
an implied offer.
7. May be specific or general: When an offer is made to a specified person or group of persons, it is called
specific offer. Such an offer can be accepted only by the person or persons to whom it is made. A general offer,
on the other hand, is one, which is made to public in general and it may be accepted by any person who fulfills the
conditions mentioned in it. Both specified and general offers are valid.
8. May be conditional: An offeror may attach any terms and conditions to the offer he makes. He may even
prescribe the mode of acceptance. There is no contract, unless all the terms of the offer are accepted in the mode
prescribed by the offeror. It must be noted that if the offeror asks for sending the acceptance by telegram and the
offeree sends the acceptance by letter, and the offeror may reject such acceptance.
9. Counter offer: Offer given in response to an offer. It implies rejection of the original offer and puts the ball
back in the court of the original offeror who has three options: to
(1) accept it, expressly (by replying) or by implication (by not replying),
(2) issue another (counter-counter) offer, or
(3) reject it expressly.

 ACCEPTANCE:
The Indian Contract Act 1872 defines acceptance in Section 2 (b) as “When the person to whom the proposal
has been made signifies his assent thereto, the offer is said to be accepted. Thus the proposal when accepted becomes
a promise.” So as the definition states, when the offeree to whom the proposal is made, unconditionally accepts the
offer it will amount to acceptance. After such an offer is accepted the offer becomes a promise. Say for example A
offers to buy B’s car for rupees two lacs and B accepts such an offer. Now, this has become a promise.
An offer does not create any legal obligations, but after the offer is accepted it becomes a promise. And a
promise is irrevocable because it creates legal obligations between parties. An offer can be revoked before it is
accepted. But once acceptance is communicated it cannot be revoked or withdrawn.

Rules for Valid Acceptance

1. Acceptance must be absolute and unconditional: The acceptance made by the offeree cannot be conditional.
However all the conditions laid down by the Offerer must be duly accepted. Qualified and conditional acceptance
amounts to Counter Offer. For example if Aseema wants to sell her bike to Kartika for Rs. 62000/-, Kartika can’t
come back and state that she accepts the offer but she will buy the same for Rs. 55000/-
2. Acceptance must be communicated/ Mental Acceptance is No Acceptance: If the acceptor just accepts the
offer in his head and does not state the same to the offerer whether in an Express manner or an Implied Manner, it
cannot be called as an Acceptance.
3. Acceptance must be in the mode prescribed: There is no particular mode of Communication of Acceptance
prescribed in this Act. However Acceptance sometimes is asked for in a prescribed/specified mode of
communication. For instance Deepak wants the acceptance made orally in person, but Ravi accepts Deepak’s
offer and posts his acceptance to him. This shall not be considered as a valid acceptance.
4. Acceptance must be given within a reasonable amount of time: It’s very rare that an offer will be open to
acceptance at all times and any time. More often than not, the offer states a time limit. In case it doesn’t, the
acceptance shouldn’t take forever.
5. Mere silence is not acceptance: In case the offeree does not respond to an offer made to him, his silence cannot
be mistaken for an acceptance. But, there is an exception to this rule. If it is specified that the non-acceptance has
to be communicated to the offerer within say 3 weeks from the date the offer is made, the silence shall be
communicated as acceptance.
6. Acceptance must be given before the lapse of offer: A valid contract can arise only when the acceptance is
given before the offer has elapsed or withdrawn. An acceptance which is made after the withdrawal of the offer is
invalid, and does not create any legal relationship.
7. Acceptor must be aware of the offerer: Acceptance therefore cannot be given without the knowledge of offer,
as in case of Lalman Shukla v Gauri Dutt.
8. Acceptance must be given by Certain person: An acceptance to be valid must be given only by a person to
whom offer has been given. In other words, acceptance must move from the offeree and no one else. But where
an offer made to uncertain number of persons, no contract arises unless acceptance made by certain person.
(Carlil Vs. Carbolic Smoke Ball Company)

 CONSIDERATION:
According to Section 2(d) of the Indian Contract Act, 1872, consideration is defined as follows:
“When at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or
abstains from doing, or promises to do or abstain from doing something, such act or abstinence is called a
consideration for the promisee.”
Consideration is one of the most important essentials of a valid contract. Consideration is something
that a person gives for something he receives. In other words, it means “something in return” or “Quid Pro Quo” and
agreement to be enforceable must be supported by consideration subject to certain exceptions and agreement made
without consideration is void
The essentials or legal rules of a valid consideration are as under:-
1. It must move at the desire of the promisor: In order to constitute legal consideration the act or abstinence
forming the consideration for the promise must be done at the desire or request of the promisor. Example: A saves
B’s house from the fire without being asked to do so. A cannot demand payment for his services because A
performed this act voluntarily and not at the desire of B.
2. It may move from the Promisee or any other person: The second essential of a valid consideration is that
consideration may move from the promisee or from a third person on his behalf. In other words the act which is to
constitute consideration may be done by the promise or any other person. Example: A, an old lady, gifted her
property to her daughter R on the condition that she should pay certain amount annually to A’s brother C. On
the same day R, entered into an agreement with her Uncle C to pay the amount. Afterwards she refused to fulfill
her promise. C filed a suit. It was held that C was entitled to recover the amo0unt as the consideration on his
behalf had moved from her sister A.
3. It may be past, present or future: It is clear from the definition of consideration that it may be past present or
future. It means that the consideration is an act, which has already been done at the desire of the promisor, or in
progress or is promised to be done in future.
 A. Past Consideration: When the consideration for a present promise was given before the date of the promise it
is called a past consideration. It is not a valid consideration. Example:
a. A has lost his purse and B a finder, delivers it to him. B cannot demand payment for his services
because of past consideration.
b. A teaches the son of B at B’s request in the month of January and in February B promises to pay A
sum of Rs.2000 for his services. The services of A will be past consideration.
B. Present Consideration: When consideration is given simultaneously by one party to another at the time of
contract, it is called Present Consideration. The act constituting the consideration is wholly or completely
performed. Example: A sells a book to B and B pay its price immediately it is a case of present
consideration.
C. Future Consideration: When the consideration on both sides is to be given at a future date, it s called future
consideration or Executory consideration. It consists of promises and each promise is a consideration for the
other. Example: X promises to deliver certain goods to Y for Rs.1500 after a week upon Y’s promise to pay
the agreed price at the time of delivery. The promise of X is supported by promise of Y and the consideration
is Executory on both sides.
4. It need not be Adequate: It is not necessary that consideration should be adequate to the value of the promise.
The law only insists on the presence of consideration and not on its adequacy. It is for the parties to the contract to
consider the adequacy of consideration and the courts are not concerned about it. Example: A agrees to sell his
car worth Rs.200,000 for Rs.50,000 only and his consent is free. The agreement is valid contract.
5. It must be Real & not illusionary: It is necessary that consideration must be real and competent. Where
consideration is physically impossible illegal uncertain or unreal it is not real and therefore shall not be a valid
consideration.

6. Consideration must not be something which the promisor is already bound to do: A promise to do what one
is already bound to do either by any existing law or under an existing law is not consideration for any promise.
Similarly a promise by a public servant to perform a public duty in exchange of consideration is not valid
consideration.
7. Consideration maybe an act to do something or abstinence to act: It means that consideration maybe a
promise to do something or not to do something or refrain from doing something
8. Consideration must be lawful: The consideration to a promise must be lawful. If the consideration is unlawful,
the courts do not allow an action on the contract. The consideration to an agreement is unlawful, if:-
(i) It is forbidden by law; or
(ii) It is of such a nature that, if permitted, it would defeat the provisions of any law; or
(iii) It is fraudulent; or
(iv) It involves or implies injury to a person or property of another; or
(v) The court regards it as immoral or opposed to public policy every agreement of which the
consideration is unlawful is void.

Exceptions to the Rule “NO CONSIDERATION NO CONTRACT”.

Consideration is an integral part of a contract. The rules of consideration state that, it is essential to have
consideration for a contract. But, there are some specific exceptions to the Rule of “No consideration no contract”. As
per Section 10 and Section 25 of the Indian Contract Act, 1872, consideration is essential in a valid contract. In
simple words, no consideration no contract. Hence, a contract is legally enforceable only if there is a consideration.
While considerations are integral to a contract, the Indian Contract Act, 1872 has listed some exceptions whereby an
agreement made without consideration will not be void.
Section 25 states the General Rule “Ex Nudo Pacto Non Oritur Actio” which means “Out of Bare Promise, No
Cause of Action Arises”. It enumerates the exceptions under which the rule of no consideration no contract does not
hold, which are as follows:
A. Agreement made out of Natural Love and Affection: If an agreement is in writing and registered between two
parties in close relation (like blood relatives or spouse), based on natural love and affection, then such an
agreement is enforceable even without consideration. Peter and John are brothers. In his will, their father
nominates Peter as the sole owner of his entire property after his death. John files a case against Peter to claim his
right to the property but loses the case. Peter and John come to a mutual decision where Peter agrees to give half
of the property to his brother and register a document regarding the same. Eventually, Peter didn’t fulfill his
promise and John filed a suit for recovery of his share in the property. The Court held that since the agreement
was made based on natural love and affection, the no consideration no contract rule didn’t apply and John had the
right to recover his share.
B. Promise to pay for Past Voluntary Services: If a person has done a voluntary service in the past and the
beneficiary promises to pay at a later date, then the contract is binding provided:
1. The service was rendered voluntarily in the past.
2. It was rendered to the promisor
3. The promisor was in existence when the voluntary service was done (especially important when the
promisor is an organization)
4. The promisor showed his willingness to compensate the voluntary service
Peter finds Johns wallet on the road and returns it to him. John is happy to find his lost wallet and promises to pay
Peter Rs 2,000. In this case, too, the no consideration no contract rule does not apply. This contract is a valid
contract.
C. Promise to pay a Time-Barred Debt: If a person makes a promise in writing signed by him or his authorized
agent about paying a time-barred debt, then it is valid despite there being no consideration. The promise can be
made to pay the debt wholly or in part. Peter owes Rs 100,000 to John. He had borrowed the money 5 years ago.
However, he never paid a single rupee back. He signs a written promise to pay Rs 50,000 to John as a final
settlement of the loan. In this case, the no consideration no contract rule does not apply either. This is a valid
contract.
D. Creation of an Agency: According to section 185 of the Indian Contract Act, 1872, no consideration is
necessary to create an agency.
E. Gifts: The rule of no consideration no contract does not apply to gifts. Explanation (1) to Section 25 of the
Indian Contract Act, 1872 states that the rule of an agreement without consideration being void does not apply to
gifts made by a donor and accepted by a donee.
F. Bailment: Section 148 of the Indian Contract Act, 1872, defines bailment as the delivery of goods from one
person to another for some purpose. This delivery is made upon a contract that post accomplishment of the
purpose, the goods will either be returned or disposed of, according to the directions of the person delivering
them. No consideration is required to effect a contract of bailment.
G. Charity: If a person undertakes a liability on the promise of another to contribute to charity, then the contract is
valid. In this case, the no consideration no contract rule does not apply. Peter is the trustee of his town’s charity
organization. He wants to build a small pond in the town to enhance greenery and offer the residents a good place
to walk around in the evenings. He raises a charity fund where he appeals to people to come ahead and contribute
to the cause. Many people come forward as subscribers the fund and agree to pay Peter their share of the amount
once he enters into a contract for constructing the pond. After raising half the amount, Peter hires contractors for
building the pond. However, 10 people back out at the last moment. Peter files a suit against them for recovery.
The Court ordered the 10 people to pay the amount to Peter since he had undertaken a liability based on their
promise to pay. Even though there was no consideration, the contract was valid and enforceable by law.

Unlawful Consideration & Unlawful Object:

Section 23 of the Indian Contract Act clearly states that the consideration and/or object of a contract are
considered lawful consideration and/or object unless they are:
a. specifically forbidden by law
b. of such a nature that they would defeat the purpose of the law
c. are fraudulent
d. involve injury to any other person or property
 e. the courts regard them as immoral
f. are opposed to public policy.
So lawful consideration and/or lawful object cannot contain any of the above.
1. Forbidden by Law: When the object of a contract or the consideration of a contract is prohibited by law, then
they are not lawful consideration or object anymore. They then become unlawful in nature. And so such a
contract cannot be valid anymore.
Unlawful consideration of object includes acts that are specifically punishable by the law. This also includes
those that the appropriate authorities prohibit via rules and regulations. But if the rules made by such authorities
are not in tandem with the law than these will not apply. Let us see an example. A received a license from the
Forest Department to cut the grass of a certain area. The authorities at the department told him he cannot pass on
such interest to another person. But the Forest Act has no such statute. So A sold his interest to B and the contract
was held as valid.
2. Consideration or Object Defeats the Provision of the Law: This means if the contract is trying to defeat the
intention of the law. If the courts find that the real intention of the parties to the agreement is to defeat the
provisions of the law, it will put aside the said contract. Say for example A and B enter into an agreement, where
A is the debtor, that B will not plead limitation. This, however, is done to defeat the intention of the Limitation
Act, and so the courts can rule the contract as void due to unlawful object.
3. Fraudulent Consideration or Object: Lawful consideration or object can never be fraudulent. Agreements
entered into containing unlawful fraudulent consideration or object are void by nature. Say for example A decides
to sell goods to B and smuggle them outside the country. This is a fraudulent transaction as so it is void. Now B
cannot recover the money under the law if A does not deliver on his promise.
4. Defeats any Rules in Effect: If the consideration or the object is against any rules in effect in the country for the
time being, then they will not be lawful consideration or objects. And so the contract thus formed will not be
valid.
5. When they involve Injury to another Person or Property: In legal terms, an injury means to a criminal and
harmful wrong done to another person. So if the object or the consideration of the contract does harm to another
person or property, this will amount to unlawful consideration. Say for example a contract to publish a book that
is a violation of another person’s copyright would be void. This is because the consideration here is unlawful and
injures another person’s property, i.e. his copyright.
6. When Consideration is Immoral: If the object or the consideration are regarded by the court as immoral, then
such object and consideration are immoral. Say for example A lent money to B to obtain a divorce from her
husband C. It was agreed one B obtains the divorce A would marry her. But the courts held A cannot recover
money from B since the contract is void on account of unlawful consideration.
7. Consideration is Opposed to Public Policy: For the good of the community, we restrict certain contracts in the
name of public policy. But we do not use public policy in a wide sense in this matter. If that was the case it would
curtail individual freedom of people to enter into contracts. So for the purpose of lawful consideration and object
public policy is used in a limited scope. We only focus on public policy under the law.

Minors Contract:
According to Section 3 of Indian Majority Act, 1875 a minor is a person who has not completed 18 years of age
except in cases where Guardian of a minor or his property or both is appointed, the age of majority is 21 years. The
position of a minor as regards to the agreement or the law relating to contracts by minors has been discussed as
under:
1. Agreement with or by a minor is void – ab – initio: An agreement with or by a minor is void and
inoperative ab initio i.e. from the initial stage. This principle was briefly discussed in “MohriBibee vs.
Dharomdas Ghose”. These agreements are considered to be nullity and non-existent in the eyes of law. These
agreements cannot be enforced against a minor.
2. Minor can be a promisee or a beneficiary: Incompetency of a minor to enter into contract means
incompetency to bind himself by a contract as per Section 11 of the Act. There is nothing which debars him from
becoming a beneficiary, e.g., a payee, an endorsee or a promisee in a contract. Such contracts can be enforced at
his option, but not at the option of the other party. Thus, the law does not regard him as incompetent for accepting
a benefit.
3. Minor’s agreement cannot be ratified by him: An agreement by a minor cannot be ratified by him on
attaining the age of majority. They term ‘ratification’ may be defined as the act of confirming or approving. The
doctrine of no ratification implies that an agreement made by a minor (during the period of minority), cannot be
confirmed by him on attaining majority. This is because, minor’s agreement is void ab initio (i.e., void from the
very beginning) and, therefore, cannot be made valid by ratification. However, if the minor wants to carry out the
agreement, a fresh agreement should be made on attaining majority, it may be noted that a new agreement will
also require fresh consideration. The consideration which was given under the earlier agreement (during minority)
cannot be taken as consideration for the new agreement (during majority).
4. No estoppel against minor: The term ‘estoppel’ may be defined as prevention of a claim or assertion by law.
In other words, when someone makes another person to believe that a particular thing or fact is true, then later on
he cannot be allowed to deny the truth of that thing. There is no such estoppel against the minor. In other words,
when a minor fraudulently enters into a contract, representing that he is a major, but in reality he is not, then later
on he can plead his minority as a defence and cannot be stopped (i.e. prevented) from doing so.
5. No specific performance of the minors agreements: There can be no specific performance of the
agreements, entered into by minors as they are void ab initio. A contract entered into on his behalf by his parent
/guardian or the manager of his estate, can be specifically enforced by or against minor provided that the contract
is:-

a. Within the scope of the authority of the parent /guardian or manager, and
b. For the benefit of the minor.
6. No return of benefits: If a minor has received any benefit under a void agreement, he cannot be asked to
compensate or pay for it. Sec 65, which provides for restitution in case of agreements found to be void, does not
apply to a minor.
7. Minor’s property liable for necessaries: Sometimes, a person supplies necessaries to a minor. In such cases, the
supplier of necessaries can claim reimbursement from the property of minor.
8. Minor as a partner: The partnership of partners results from their agreement. A minor, being incompetent to
enter into a contract, cannot be a partner in the firm. However, he may be admitted only to the benefits of the firm
with the consent of all other partners [Sec 30(1) of the Indian Partnership Act, 1932].
9. The Minor as an agent: An agent is merely a connecting link, between his principal and third person. Therefore,
a minor can be appointed as an agent. But he will not be personally liable for his acts as an agent [Sec. 184]. It
may, however, be noted that the principal will be liable to the third persons for the acts of the minor agent which
he does in the ordinary course of dealings.
10. Minor as an insolvent: A minor cannot be declared as an insolvent. This is so because all agreements with a
minor are absolutely void. Moreover, the minor is not personally liable for any debt incurred during the period of
his minority.

FREE CONSENT
In the Indian Contract Act, the definition of Consent is given in Section 13, which states that “it is when two or
more persons agree upon the same thing and in the same sense”. So the two people must agree to something in the
same sense as well. Let’s say for example A agrees to sell his car to B. A owns three cars and wants to sell the
Maruti. B thinks he is buying his Honda. Here A and B have not agreed upon the same thing in the same sense.
Hence there is no consent and subsequently no contract.
 Free Consent has been defined in Section 14 of the Act. The section says that consent is considered free consent
when it is not caused or effected by the following,
A. Coercion
B. Undue Influence
C. Fraud
D. Misrepresentation
E. Mistake
Consent is said to be Free when it is Not Caused Due to –

A. Coercion (Section 15): Coercion means using force to compel a person to enter into a contract. So force or
threats are used to obtain the consent of the party under coercion, i.e it is not free consent. Section 15 of the Act
defines Coercion as “Coercion is the committing or threatening to commit any act forbidden by the law in the
IPC or the unlawfully detaining or threatening to detain any property to the prejudice of any person with the
intention of causing any person to enter into an agreement.” For example, A threatens to hurt B if he does not sell
his house to A for 5 lakh rupees. Here even if B sells the house to A, it will not be a valid contract since B’s
consent was obtained by coercion.

The effect of coercion is that it makes the contract voidable. This means the contract is voidable at the option of
the party whose consent was not free. So the aggravated party will decide whether to perform the contract or to
void the contract. So in the above example, if B still wishes, the contract can go ahead.

Also, if any monies have been paid or goods delivered under coercion must be repaid or returned once the
contract is void. And the burden of proof proving coercion will be on the party who wants to avoid the contract.
So the aggravated party will have to prove the coercion, i.e. prove that his consent was not freely given.

B. Undue Influence (Section 16): Section 16 of the Act contains the definition of undue influence. It states that, “A
contract is said to be induced by undue influence where the relations subsisting between the two parties are such
that one party is in a position to dominate the ill of other party, and uses that position to obtain an unfair
advantage of the other party”.

The section also further describes how the person can abuse his authority in the following two ways,
a. Where a person holds real or even apparent authority over the other person. Or
b. if he is in a fiduciary relationship with the other person
He makes a contract with a person whose mental capacity is affected by age, illness or distress. The unsoundness
of mind can be temporary or permanent. For example A sold his gold watch for only Rs 500/- to his teacher B
after his teacher promised him good grades. Here the consent of A (adult) is not freely given, he was under the
influence of his teacher.

Now undue influence to be evident the dominant party must have the objective to take advantage of the other
party. If influence is wielded to benefit the other party it will not be undue influence. But if consent is not free due
to undue influence, the contract becomes voidable at the option of the aggravated party. And the burden of proof
will be on the dominant party to prove the absence of influence.

C. Fraud (Section 17): Fraud means deceit by one of the parties, i.e. when one of the parties deliberately makes
false statements. So the misrepresentation is done with full knowledge that it is not true, or recklessly without
checking for the trueness, this is said to be fraudulent. It absolutely impairs free consent. So according to Section
17, a fraud is when a party convinces another to enter into an agreement by making statements that are

a. Suggestio Falsi i.e. suggesting a fact that is not true, and he does not believe it to be true
b. active concealment of facts
c. a promise made without any intention of performing it
d. any other such act fitted to deceive
For example. A bought a horse from B. B claims the horse can be used on the farm. It turned out thatthe horse is
lame and A cannot use him on his farm. Here B knowingly deceived A and this will amount to fraud. One factor
 to consider is that the aggravated party should suffer from some actual loss due to the fraud. There is no fraud
without damages. Also, the false statement must be a fact, not an opinion. In the above example if B had said his
horse is better than C’s this would be an opinion, not a fact. And it would not amount to fraud.

D. Misrepresentation (Section 18): Misrepresentation is also when a party makes a representation which is false,
inaccurate, incorrect etc. The difference here is the misrepresentation is innocent, i.e. not intentional. The party
making the statement believes it to be true. Misrepresentation can be of three types -
a. Unwarranted Positive Statement – a person makes a statement on the information from untrustworthy
sources. However he innocently believes the fact represented to be true and such fact is material to the
contract.
b. Breach of Duty – misrepresentation includes breach of duty committed without intention to deceive by
which the person committing it gains an advantage to the prejudice of another i.e. other party suffers loss
because of Breach of duty by one party.
c. Causing innocently a party to make a mistake – if a party causes another party to an agreement to make a
mistake as to the substance of a thing, which is subject of the agreement, it is called as misrepresentation.

E. Mistake (Section 20 & 21): A mistake is an erroneous belief that is innocent in nature. It leads to a
misunderstanding between the two parties. The law identifies two types of mistakes, namely -

A Mistake of Fact A Mistake of Law

1. Mistake as regards to existence Mistake of Law in force in India
2. Mistake a regards to identity Mistake of Foreign Law

Mistake of Law: This mistake may relate to the mistake of the Indian laws, or it can be a mistake of foreign laws.
If the mistake is regarding Indian laws, the rule is that the ignorance of the law is not a good enough excuse. This
means either party cannot simply claim it was unaware of the law. The Contract Act says that no party shall be
allowed to claim any relief on the grounds of ignorance of Indian law. This will also include a wrong
interpretation of any legal provisions. However, ignorance of a foreign law is not given a similar treatment.
Ignorance of the foreign law is given some leeway, the parties are not expected to know foreign legal provisions
and their meaning. So a mistake of foreign law is in fact treated as a mistake of fact under the Indian Contract
Act.

Mistake of Fact - Then there is the other type of mistake, a mistake of fact. This is when both the parties
misunderstand each other leaving them at a crossroads. Such a mistake can be because of an error in
understanding, or ignorance or omission etc. But a mistake is never intentional, it is an innocent overlooking.
These mistakes can either be unilateral or bilateral.

Bilateral Mistake - When both parties of a contract are under a mistake of fact essential to the agreement, such a
mistake is what we call a bilateral mistake. Here both the parties have not consented to the same thing in the same
sense, which is the definition of consent. Since there is an absence of consent altogether the agreement is void.
However, to render an agreement void the mistake of fact should be about some essential fact that is of
importance in a contract. So if the mistake is about the existence of the subject matter or its title, quality, quantity
price etc then it would be a void contract. But if the mistake is of something inconsequential, then the agreement
is not void and the contract will remain in place. For example, A agrees to sell to B his buffalo. But at the time of
the agreement, the buffalo had already died. Neither A nor B was aware of this. And so there is no contract at all,
i.e. the contract is void due to a mistake of fact.
Types of Bilateral Mistake: An agreement is void where there is a bilateral mistake as to the subject matter. A
bilateral mistake as to the subject matter includes the following:
• Mistake as to the existence of subject matter: Sometimes, the subject matter of the agreement would
have ceased to exist before the agreement was made and both the parties may not be aware of this fact. In
such cases, the agreement is void. Example: A agrees to buy a certain horse from B. It turns out that the
horse was dead at the time of bargain, though neither party were aware of the fact. The agreement is void
because there is a bilateral mistake of fact as to the existence of the subject matter.
 • Mistake as to the identity of the subject matter: It usually happens when one party intends to deal in
one thing and the other party intends to deal in another.

Unilateral Mistake - A unilateral mistake is when only one party to the contract is under a mistake. In such a
case the contract will not be void. So the Section 22 of the Act states that just because one party was under a
mistake of fact the contract will not be void or voidable. So if only one party has made a mistake of fact the
contract remains a valid contract.

CONTINGENT CONTRACT
Section 31 - "Contingent contract" is defined as "contingent contract" is a contract to do or not to do
something, if some event, collateral to such contract, does or does not happen. A contract to pay to B Rs. 10,000 if
B's house is burnt. This is a contingent contract. A contingent contract is a conditional contract in nature. When the
performance of a contract becomes due only after the happening or non-happening of some uncertain event, such a
contract is known as a contingent contract.
Essentials of a contingent contract
a. There must be a valid contract: The first requirement is that there must be a valid contract between the parties.
It must fulfill all the essential requirements of a valid contract.
b. The performance of such a contract must depend on happening or non-happening of some future event.
c. The event must be uncertain: The event upon which the performance of the contract depends must be an
uncertain event.
d. The event must be collateral i.e., incidental contract: The event upon which the performance depends should
not form part of reciprocal promises which constitute a contract. The event should be independent or ancillary to
the contract.
e. The Contingent event must not be at the mere will and pleasure of the promisor: For instance, if A promise
to pay B Rs. 20,000 if he so choose, it is not a contingent contract [In fact, it is not a contract at all.

Rules regarding Contingent Contracts (Sections 32-36): The rules regarding enforcement of contingent contracts
are:
a. Contingent contract dependent on the happening of a future uncertain event: Contingent contract to
do or not to do anything, if an uncertain future event happens, cannot be enforced unless and until that event has
happened. If the event becomes impossible, such contract becomes void. Examples: A makes a contract with B to
buy B's horse if A survives C. This contract cannot be enforced unless C dies in A's life time.
b. Contingent contract dependent on the non happening of a future uncertain event: When a contract is
dependent upon the non happening of a future event, it can be enforced oily when that event becomes impossible,
and not before. Example: A agrees to pay B a sum of money if a certain ship does not return. The ship is sunk.
The contract can be enforced when the ship sinks.
c. Contingent Event linked with human conduct: If a contract is contingent as to how a person will act at an
unspecified time, the event shall be considered, to become impossible when such person does anything which
renders it impossible that he should so act within any definite time, or otherwise than under further contingencies.
d. Contract contingent upon happening of a specified event within a fixed time: Contingent contract to
do or not to do anything if a specified uncertain event happens within a fixed time, becomes void, if at the
expiration of the time fixed, such event has not happened, or if before the time fixed, such event becomes
impossible.
e. Contracts contingent upon the non happening of a specified event within a fixed time: Contingent
contracts to do or not to do anything if a specified uncertain event does not happen within a fixed time, may be
enforced by law when the time fixed has expired, and such event has not happened or before the time fixed has
expired, if it becomes certain that it will not happen.
f. Agreements contingent upon an impossible event: Contingent agreements to do or not to do anything if an
impossible event happens, are void, whether the impossibility of the event is known or not known to the parties to
the agreement when it is made.

QUASI CONTRACT
It is implied contract in law. The relations created by a Quasi Contract compel a person receiving benefits to
compensate the person giving benefits. It is an obligation imposed by law upon a person for the benefit of another
even in the absence of a contract between them. It is based on the principle that there should be no unjust enrichment
at the expense of another person.

Important types of Quasi Contract that Sec. 68 to 72 of the Indian Contract Act 1872 deals with are given below:
i. Claim for necessaries supplied to person incapable of contracting (Sec 68): If a person is incapable of
entering into a contract, or anyone whom he is legally bound to support is provided by another person with
necessaries suited to his condition in life, the supplier is entitled to recover the price from the property of such
incapable persons. Example: X supplies the wife and children of Y, a lunatic with necessaries suitable to their
conditions in life. X is entitled to be reimbursed from Y’s property

ii. Payment by an interested person (Sec 69): A person who is interested in the payment of money which another
is bound by law to pay, and who therefore pays it is entitled to be reimbursed by the other. Example: The
consignee suffered loss due to fire in the wagon during transit. The insurer made good the loss. The claim was
allowed as per Section 39.

iii. Obligation to pay for non-gratuitous act (Sec 70): Where a person lawfully does anything for another person,
or delivers anything to him, not intending to do so gratuitously and such other persons enjoys the benefit thereof,
the latter is bound to make compensation to the former in expect of or to restore the thing so done or delivered.
Example: X, a tradesman, leaves goods at Y’s house by mistake; Y treats the goods as his own. He is bound to
pay X for them.

iv. Responsibility of finder of goods (Sec 71): Under Section 71 of the Act, a person who finds goods belonging to
another and takes them into his custody is subject to the same responsibility as a Bailee.

v. Liability for money paid or things delivered by mistake or under coercion (Sec 72): At first Section 72 of
the Indian Contract Act, 1872 provides that a person to whom money has been paid or anything delivered by
mistake or under coercion must repay or return it. Example: A railway company refuses to deliver certain goods
to the consignee, except upon the payment of illegal charge for carriage. The consignee pays the sum charged to
obtain the goods to he is estimated recover so much of the charges as was illegal excessive.

PERFORMANCE OF CONTRACT
The term “Performance of contract” means that both, the promisor and the promisee have fulfilled their respective
obligations, which the contract placed upon them. For instance, A visits a stationery shop to buy a calculator. The
shopkeeper delivers the calculator and A pays the price. The contract is said to have been discharged by mutual
performance. Section 27 of Indian contract Act says that, “The parties to a contract must either perform, or offer to
perform, their respective promises, unless such performance is dispensed with or excused under the provisions of
this Act, or any other law.”

It is the primary duty of each contracting party to either perform or offer to perform its promise. For
performance to be effective, the courts expect it to be exact and complete, i.e., the same must match the contractual
obligations. However, where under the provisions of the Contract Act or any other law, the performance can be
dispensed with or excused; a party is absolved from such a responsibility. Example
A Promises to deliver goods to B on a certain day on payment of Rs 1,000. A expires before the contracted date. A‘s
representatives are bound to deliver the goods to B, and B is bound to pay Rs 1,000 to A‘s representatives.
Types of Performance – Performance, as an action of the performing may be actual or attempted.
A. Actual Performance – When a promisor to a contract has fulfilled his obligation in accordance with the terms of
the contract, the promise is said to have been actually performed. Actual performance gives a discharge to the
contract and the liability of the promisor ceases to exist. For example, A agrees to deliver10 bags of cement at B’s
factory and B promises to pay the price on delivery. A delivers the cement on the due date and B makes the
payment. This is actual performance.

B. Attempted Performance – When the performance has become due, it is sometimes sufficient if the promisor
offers to perform his obligation under the contract. This offer is known as attempted performance or more
commonly as tender. Thus, tender is an offer of performance, which of course, complies with the terms of the
contract. If goods are tendered by the seller but refused by the buyer, the seller is discharged from further liability,
given that the goods are in accordance with the contract as to quantity and quality, and he may sue the buyer for
breach of contract if he so desires. The rationale being that when a person offers to perform, he is ready, willing
and capable to perform. Accordingly, a tender of performance may operate as a substitute for actual performance,
and can effect a complete discharge.

Who can perform a Contract?

Three sections of the Indian Contract Act, 1872 define who performs a contract – Section 40, 41, and 42.
Section 40 of the Indian Contract Act, 1872 states that, If the nature of a contract indicates that either of the parties
intended that the promise contained in the contract must be performed by the promisor himself then the promisor is
obligated to perform the promise else the promise can be performed by the promisor or his representatives or an
employed agent. E.g. Peter promises to pay Rs 50 to John. In this case, Peter can perform the promise himself by
paying the money to John or can ask someone else to pay him. Also, if Peter dies before fulfilling his promise, then
his representatives are required to perform the promise or employ someone to do the same.
Following persons can perform the contract:
A. Promisor – If a contract indicates that the parties intended for the promisor to fulfill the promise himself, then the
promisor is obligated to perform the promise. Usually, these include promises which involve personal skills,
experience, or expertise and are usually based on trust between the promisor and the promisee.
B. Agent of the Promisor – If the contract does not require the personal consideration of the promisor, then the
promisor can employ a competent person to perform the promise.
C. Legal Representatives Perform the Promise – If the promisor dies before performing the promise, then the
legal representatives become responsible for the same. If the promise involves utilization of personal skills or
expertise, then the consideration ceases with the death of the promisor. However, in all other scenarios, the legal
representatives are obligated to perform the promise unless the contract has a contrary intention specified. Also,
the liability of the legal representatives is limited to the value of the property inherited by them.
D. Third Party – If the promisee accepts the performance of a promise from a third person, then he cannot enforce it
against the promisor at a later date. Hence, the performance of the promise by a third-party discharges the
promisor of his obligations even if he has not authorized the third-party to perform the promise.
E. Joint Promisor – If the promisors agree to perform a promise together – joint promise – then they are jointly
obligated to fulfil the promise, unless the contract specifies a contrary intention. Also, if any of the promisors die,
then their legal representatives must fulfil the promise jointly with the surviving promisors. If all the promisors
die, then the legal representatives of each of them must perform the promise jointly.
Discharge of Contract – A contract creates certain obligations on one or all parties involved. The discharge of a
contract happens when these obligations come to an end. There are many ways in which a contract is discharged. In
this article, we will look at various such scenarios.
1. Discharge by Performance – When the parties to a contract fulfill the obligations arising under the contract
within the time and manner prescribed, then the contract is discharged by performance. Example: Peter agrees to
sell his cycle to John for an amount of Rs 10,000 to be paid by John on the delivery of the cycle. As soon as it is
delivered, John pays the promised amount. Since both the parties to the contract fulfill their obligation arising
under the contract, then it is discharged by performance.
2. Discharge by Mutual Consent / Agreement – If all parties to a contract mutually agree to replace the contract
with a new one i.e. Novation or annul i.e. Waiver or rescind i.e. Recession, then it leads to a discharge of the
original contract due to a mutual agreement. Example: Peter owes Rs 100,000 to John and agrees to repay it
within one year. They document the debt under a contract. Subsequently, he loses his job and requests John to
accept Rs 75,000 as a final settlement of the loan. John agrees and they make a contract to that effect. This
discharges the original contract due to mutual consent.
3. Discharge by the Impossibility of Performance – If it is impossible for any of the parties to the contract to
perform their obligations, then the impossibility of performance leads to a discharge of the contract. If the
impossibility exists from the start, then it is impossibility ab-initio. However, the impossibility might also arise
later due to:
a. An unforeseen change in the law
b. Destruction of the subject-matter essential to the performance
c. The non-existence or non-occurrence of a particular state of things which was considered a given for
the performance of the contract.
d. A declaration of war
Example: Peter enters into a contract with John to marry his sister Olivia within one year. However, Peter meets with
an accident and becomes insane. The impossibility of performance leads to a discharge of the contract.
4. Discharge of a Contract by Lapse of Time – The Limitation Act, 1963 prescribes a specified period for
performance of a contract. If the promisor fails to perform and the promisee fails to take action within this
specified period, then the latter cannot seek remedy through law. It discharges the contract due to the lapse of
time. Example: Peter takes a loan from John and agrees to pay installments every month for the next five years.
However, he does not pay even a single installment. John calls him a few times but then gets busy and takes no
action. Three years later, he approaches the court to help him recover his money. However, the court rejects his
suit since he has crossed the time-limit of three years to recover his debts.
5. Discharge of a Contract by Operation of Law – A contract can be discharged by operation of law which
includes insolvency or death of the promisor.
6. Discharge by Breach of Contract – If a party to a contract fails to perform his obligation according to the time
and place specified, then he is said to have committed a breach of contract. Also, if a party repudiates a contract
before the agreed time of performance of a contract, then he is said to have committed an anticipatory breach of
contract. In both the cases, the breach discharges the contract. In case of an actual breach, the promisee retains his
right of action for damages & in case of an anticipatory breach of contract, the promisee cannot file a suit for
damages. It also discharges the promisor from performing his part of the contract.
7. Discharge by Material Alterations – in case of any material alteration in the terms of contract by one party to
the contract without the consent of the other party, the contract is discharged as it alters rights and liabilities of the
parties to the contract.

Remedies for Breach of Contract - When a promise or agreement is broken by any of the parties we
call it a breach of contract. So when either of the parties does not keep their end of the agreement or does not fulfill
their obligation as per the terms of the contract, it is a breach of contract. There are a few remedies for breach of
contract available to the wronged party. Let us take a look.

1. Suit for Damages – Section 73 clearly states that the party who has suffered, since the other party has broken
promises, can claim compensation for loss or damages caused to them in the normal course of business. Such
damages will not be payable if the loss is abnormal in nature, i.e. not in the ordinary course of business. There are
two types of damages according to the Act,

a. Suit for Damages: Sometimes the parties to a contract will agree to the amount payable in case of a
breach. This is known as liquidated damages.
b. Unliquidated Damages: Here the amount payable due to the breach of contract is assessed by the courts
or any appropriate authorities.
2. Sue for Specific Performance – This means the party in breach will actually have to carry out his duties
according to the contract. In certain cases, the courts may insist that the party carry out the agreement. So if any
of the parties fails to perform the contract, the court may order them to do so. This is a decree of specific
performance and is granted instead of damages. For example, A decided to buy a parcel of land from B. B then
refuses to sell. The courts can order B to perform his duties under the contract and sell the land to A.

3. Injunction – An injunction is basically like a decree for specific performance but for a negative contract. An
injunction is a court order restraining a person from doing a particular act. So a court may grant an injunction to
stop a party of a contract from doing something he promised not to do. In a prohibitory injunction, the court stops
the commission of an act and in a mandatory injunction, it will stop the continuance of an act that is unlawful.

4. Suit upon Quantum Meruit – Quantum meruit literally translates to “as much is earned”. At times when one
party of the contract is prevented from finishing his performance of the contract by the other party, he can claim
quantum meruit. So he must be paid a reasonable remuneration for the part of the contract he has already
performed. This could be the remuneration of the services he has provided or the value of the work he has already
done.

CONTRACT OF INDEMNITY
The term Indemnity literally means “Security against loss”. In a contract of indemnity one party – i.e. the indemnifier
promise to compensate the other party i.e. the indemnified against the loss suffered by the other.

The English law definition of a contract of indemnity is – “it is a promise to save a person harmless from the
consequences of an act”. Thus it includes within its ambit losses caused not merely by human agency but also those
caused by accident or fire or other natural calamities. The definition of a contract of indemnity as laid down in
Section 124 – “A contract by which one party promises to save the other from loss caused to him by the conduct of
the promisor himself, or by the conduct of any other person, is called a contract of indemnity. The definition
provided by the Indian Contract Act confines itself to the losses occasioned due to the act of the promisor or due to
the act of any other person. Under a contract of indemnity, liability of the promisor arises from loss caused to the
promisee by the conduct of the promisor himself or by the conduct of other person.
The term Indemnity literally means “Security against loss”. In a contract of indemnity one party – i.e. the indemnifier
promise to compensate the other party i.e. the indemnified against the loss suffered by the other.
The English law definition of a contract of indemnity is – “it is a promise to save a person harmless from the
consequences of an act”. Thus it includes within its ambit losses caused not merely by human agency but also those
caused by accident or fire or other natural calamities.
The definition provided by the Indian Contract Act confines itself to the losses occasioned due to the act of the
promisor or due to the act of any other person. Under a contract of indemnity, liability of the promisor arises from
loss caused to the promisee by the conduct of the promisor himself or by the conduct of other person.

Essentials or features of a contract of indemnity – A valid contract of indemnity should fulfill the following
conditions:
i. Anticipated loss: A contract of indemnity is a security for an anticipated loss.
ii. Requirements of valid contract: Contract of indemnity being a species of contract must have all essentials of a
valid contract like free consent, competence of the parties, consideration, etc.
iii. To save other party: There must be a promise to save the other party from some loss.
iv. Covers only the actual loss: It covers only the actual loss may be due to the promisor himself or any other person
and it covers only the loss caused by an event mentioned in the contract. The event mentioned in the contract
must happen.
v. May be express or implied: The contract of indemnity may be express or implied. An express promise is one
where a person promises to compensate the other party in express term. Implied promise is one where the conduct
of the promisor shows his intention to indemnify the other party from loss.
Rights of Indemnified or Indemnity Holder:
1. All damages for which he may be forced to pay in any suit subjected to any matter to which the promise to
indemnify is applicable;
2. All costs which he may be forced to pay in any such suit if, in carrying or protecting it, he didn’t negate the
commands of the promisor, and went about as it might have been judicious for him to act without any agreement
of reimbursement, or if the promisor commissioned him to carry or defend a suit;
3. Every sum which he may have paid under the terms of any bargain of any such suit, if the bargain was not in spite
of the requests of the promisor, and was one which it might have been reasonable for the promisee to make
without any agreement of indemnity, or if the promisor sanctioned him to bargain the suit.

CONTRACT OF GUARANTEE
A ‘Contract of Guarantee” is a contract to perform the promise or discharge the liability, of a third person in case
of his default. The contract of guarantee may be either written or oral (Sec. 126).
A Contract to perform the promise, or discharge the liability, of a third person in case of his default is called Contract
of Guarantee. A guarantee may be either oral or written.
a. The person who gives the guarantee is called the Surety
b. The person on whose default the guarantee is given is called the Principal Debtor
c. The person to whom the guarantee is given is called the Creditor
Essentials of a Contract of Guarantee
1. Concurrence of All the Parties – All the three parties namely, the principal debtor, the creditor and the surety
must agree to make such a contract.
2. Liability – In a contract of guarantee, liability of the surety is secondary i.e., the creditor must first proceed
against the debtor and if the latter does not perform his promise, then only he can proceed against the surety.
3. Existence of a Debt – A contract of guarantee pre-supposes the existence of a liability, which is enforceable at
law. If no such liability exists, there can be no contract of guarantee. Thus, where the debt, which is sought to be
guaranteed, is already time barred or void, the surety is not liable.
4. Consideration – There must be consideration between the creditor and the surety so as to make the contract
enforceable. The consideration must also be lawful. In a contract of guarantee, the consideration received by the
principal debtor is taken to be the sufficient consideration for the surety. Anything done, or any promise made, for
the benefit of the principal debtor may be sufficient consideration to the surety for giving the guarantee – Sec. 127
of Indian Contract Act, 1872. Thus, any benefit received by the debtor is adequate consideration to bind the
surety. But past consideration is no consideration for a contract of guarantee. There must be a fresh consideration
moving from the creditor.
5. Writing not necessary – A contract of guarantee may either be oral or written. It may be express or implied from
the conduct of parties. Note: A Contract of Guarantee must always be in writing under English Law.
6. Essentials of a Valid Contract – It must have all the essentials of a valid contract such as offer and acceptance,
intention to create a legal relationship, capacity to contract, genuine and free consent, lawful object, lawful
consideration, certainty and possibility of performance and legal formalities.
7. No Concealment of Facts – The creditor should disclose to the surety the facts that are likely to affect the
surety’s liability. The guarantee obtained by the concealment of such facts is invalid. Thus, the guarantee is
invalid if the creditor obtains it by the concealment of material facts.
8. No Misrepresentation – The guarantee should not be obtained by misrepresenting the facts to the surety. Though
the contract of guarantee is not a contract of uberrimae fidei i.e., of absolute good faith, and thus, does not require
complete disclosure of all the material facts by the principal debtor or creditor to the surety before he enters into a
contract. But the facts, that are likely to affect the extent of surety’s responsibility, must be truly represented
Rights of a surety
I. As against the Creditor – According to the Indian Contract Act, 1872,
a. Sec. 133 - The creditor shall not vary terms of the contract between the creditor and the principal debtor without
the surety's consent. Any such variance discharges the surety as to transactions subsequent to the variance.
However if the variance is for the benefit of the surety or does not prejudice him or is of an insignificant
character, it may not have the effect of discharging the surety.
b. Sec. 134 - The creditor should not release the principal debtor from his liability under the contract. The effect of
the discharge of the principal debtor is to discharge the surety as well. Any act or omission on the part of the
creditor which in law has the effect of discharging the principal debtor puts an end to the liability of the surety.
c. Sec. 135 - If an agreement is made between the Creditor and Principal debtor for compounding the later's liability
or promising him extension of time for carrying out the obligations or promising not to sure, discharges the surety
unless he assents to such a contract.
d. Sec. 139 - The surety is discharged if the creditor impairs the surety's eventual remedy against the principal
debtor.
II. As against the Principal Debtor
Right of subrogation - The surety on payment of the debt acquires a right of subrogation.
Sec 140 - The surety cannot claim the right of subrogation to the creditor's securities if he has signed up as a security
for a part of the agreement and security has been held by the creditor for the whole debt.

Kinds of Guarantee:
A contract of guarantee may be for an existing liability or for future liability. A contract of guarantee can be a
specific guarantee (for any specific transaction only) or continuing guarantee.
A. Specific Guarantee: A specific guarantee is for a single debt or any specified transaction. It comes to an end
when such debt has been paid.
B. Continuing Guarantee: A continuing guarantee is a type of guarantee which applies to a series of transactions.
A continuing guarantee applies to all the transactions entered into by the principal debtor until it is revoked by the
surety. A continuing guarantee can be revoked anytime by surety for future transactions by giving notice to the
creditors. However, the liability of a surety is not reduced for transactions entered into before such revocation of
guarantee.

Revocation of Continuing Guarantee

A. By Notice – A continuing guarantee may be revoked by the surety at any time by giving notice to the creditor. In
the notice, the surety must clearly and specifically state that he intends to revoke his guarantee. By Notice, the
guarantee is revoked only as regards to future transactions. The liability of the surety ceases from the date of his
notice to the creditor. However the surety remains liable for the past transactions which have already taken place
before the date of the notice.
B. By Death of Surety – The death of surety automatically revokes a continuing guarantee, in respect of future
transactions, unless there is any contract to the contrary. Future transactions here would mean the transactions that
might take place between the creditor and the principal debtor after the death of the surety.
C. By Discharge of Principal Debtor
a. Variance in terms of contract (Sec. 133): “Any variance, made without the surety’s consent in the terms of
the contract between the principal debtor and the creditor, discharges the surety as to transactions subsequent
to the variance.” Thus a surety is discharged from liability when, without his consent, the creditor makes any
change in the terms of his contract with the principal debtor (no matter whether the variation is beneficial to the
surety or is made innocently or does not materially affect the position of the surety) because a surety is liable
only for what he has undertaken in the contract.
b. Release or discharge of principal debtor (Sec. 134): This Section provides for the following two ways of
discharge of surety from liability:
(a) The surety is discharged by any contract between the creditor and the principal debtor, by which the
principal debtor is released. Any release of the principal debtor is a release of the surety also.
 (b) The surety is also discharged by any act or omission of the creditor, the legal consequence of which is the
discharge of the principal debtor.
c. Arrangement by creditor with principal debtor without surety’s consent (Sec. 135): Where the creditor,
without the consent of the surety, makes an arrangement with the principal debtor for composition, or promises to
give him time or not to sue him, the surety will be discharged. But in the following cases, a surety is not
discharged:
(a) Where a contract to give time to the principal debtor is made by the creditor with a third person, and not with
principal debtor, the surety is not discharged (Sec. 136). Illustration (To Sec. 136):
C, the holder of an overdue bill of exchange drawn by A as surety for B and accepted by B, contracts with M
to give time to B. A is not discharged.
(b) Mere forbearance on the part of the creditor to sue the principal debtor, or to enforce any other remedy against
him, does not discharge the surety, unless otherwise agreed (Sec. 137). Illustration (To Sec. 137): B owes to C
a debt guaranteed by A. The debt becomes payable, C does not sue B for a year after the debt has become
payable. A is not discharged from the surety ship.
(c) Where there are co-sureties, a release by the creditor of one of them does not discharge the others; neither
does it free the surety so released from his responsibility to the other sureties (Sec. 138).
(d) Creditor’s act or omission impairing sureties eventual remedy (Sec. 139): “If the creditor does any act which
is inconsistent with the rights of the surety, or omits to do any act which his duty to the surety requires him to
do, and the eventual remedy of the surety himself against the principal debtor is thereby impaired, the surety
is discharged.” In short, it is the duty of the creditor to do every act necessary for the protection of the rights
of the surety and if he fails in this duty, the surety is discharged.
D. By misrepresentation (Section 142): Surety is discharged from his liability if his consent to the contract of
guarantee is obtained by the creditor or with the knowledge and assent of the creditor by misrepresenting material
facts of the transaction.
E. By Concealment (Section 143): Surety is discharged if the creditor obtains the guarantee fromhim by keeping
silent as to material circumstances and facts.

Differentiation between contract of indemnity and contract of guarantee

There is a difference between the two special types of contracts, contract of indemnity and contract of guarantee
which is as follows: –
1. In a contract of guarantee, there are three parties to a contract namely surety, principal debtor and creditor
whereas in case of indemnity there are only two parties to a contract, promisor, and promisee.
2. In case of the contract of guarantee, the liability of the surety is secondary whereas in a contract of indemnity the
liability of promisor is primary.
3. Surety provides guarantee only when requested by the principal debtor in a contract of guarantee. Indemnifier is
not required to act at the request of the debtor, in a contract of indemnity.
4. In a contract of guarantee, there is an existing liability for debt or duty, surety guarantees the performance of such
liability. In a contract of indemnity, the possibility of incurring a loss is contingent against which indemnifier
undertakes to indemnify.
5. Surety is eligible to proceed against the principal debtor on payment of debt, in case principal debtor fails to pay
the debt. Indemnifier cannot sue third parties in his own name.

CONTRACT OF BAILMENT
Under Section 148 "Bailment", "Bailor" and "Bailee" is defined as, A "bailment" is the delivery of goods by one
person to another for some purpose, upon a contract that they shall, when the purpose is accomplished, be returned or
otherwise disposed of according to the directions of the person delivering them. The person delivering the goods is
called the "bailor". The person to whom they are delivered is called the "Bailee".
Essentials or Features of Bailment:-
1. Contract:- It is the basic essential for the bailment. For the delivery of goods contract between the two parties is
necessary. Contract may be oral or written, implied or expressed.
2. Moveable Property:- It is the main feature of bailment that it is only for the moveable property and not for the
immoveable property.
3. Delivery of Goods:- It is also necessary that goods should be delivered by one person to another.
4. Change of Possession:- Bailment contract also brings change in the possessions of the goods. Only b without
possession is not sufficient for this contract.
5. Purpose of Bailment :- The object of bailment may be for the safety of goods or for hire or for the use.
6. Temporary Delivery :- The delivery of the goods may not be for the permanent purpose. it is essential that
delivery must be made for the temporary purpose.
7. Ownership :- right of ownership remains with bailor and it does not change by the delivery of goods to other
person.
8. Change In Shape :- If bailed goods shape changes in the mean time even then it remains a contract of bailment.
9. Parties of the Contract:- In the contract of bailment there are two parties, the bailor and the bailee.
10. Returnable :- It is very important feature of the bailment. The bailee should return the goods to the bailor or
disposed according the directions of the bailor.
TYPES OF BAILMENT
1. Gratuitous Bailment - A Bailment made without any Consideration for the benefit of the bailor or for the benefit
of the Bailee is called Gratuitous Bailment. In simple words A bailment with no consideration is Gratuitous
bailment.
2. Non-Gratuitous Bailment: Non Gratuitous is a bailment for reward. It is for the benefit of both the bailor and
Bailee.
3. Pledge – When goods are delivered to another as a security for money borrowed, it is called as Pawn or Pledge.

Duties of a Bailee
1. Take proper care of goods - According to section 151, it is the duty of a bailee to take care of goods bailed to
him. Bailee should take care of these goods as an ordinary man will take care of his goods of the same value,
quality, and quantity. Thus, if the bailee takes due care of goods then he will not be liable for any loss,
deterioration of such goods. Also, the bailee needs to take the same degree of care of goods whether the bailment
is for reward or gratuitous. However, the bailee is not liable for any loss due to the happening of any act by God
or public enemies though he agrees to take special care of the goods.
2. Not to make unauthorized use - As per section 153, the Bailee shall not make any unauthorized use of goods
bailed. In case he makes any unauthorized use, then bailor can terminate the bailment. Bailor can also claim for
damages caused to goods bailed due to unauthorized use as per Section 154.
3. Keep goods separate - The bailee needs to keep the goods separately from his own goods. He should not mix the
goods under bailment with his own goods. In case bailee mixes the goods with his own goods without the consent
of the bailor, then: Bailor also has an interest in the mixture.
a. If the goods can be separated or divided, the property in the goods remains with both the parties. But, the
bailee bears the expenses of separation or any damages arising from the mixture.
b. If it is not possible to separate the goods, bailee shall compensate the bailor for the loss of goods.
4. Not set adverse title - A bailee must not set an adverse title to the goods bailed.
5. Return Goods - A bailee is under the duty to return the goods without demand on the accomplishment of the
purpose or the expiration of the time period. In case of his failure to do so, he shall be liable for the loss,
destruction, deterioration, damages or destruction of goods even without negligence.
6. Return increase or profits - A bailee shall return the goods along with any increase or profit accruing to the
goods to the bailor, in the absence of any contract to the contrary. For example, A leaves a hen in the custody of
B. The hen gets a chick. B shall deliver the hen along with the chick to A.

Duties of a bailor are as follows:

1. It is the duty of a bailor to disclose all faults. If bailor fails to disclose such faults then he will be responsible for
the damage caused to goods or loss suffered by the bailee.
2. Also, bailor is under the duty to pay the extraordinary expenses incurred by the bailee for such bailment.
3. It is the duty of the bailor to accept the goods after the purpose for which such goods were bailed is accomplished.
4. It is the duty of the bailor to indemnify the bailee for cost incurred due to the defective title of goods bailed to the
bailee.

Rights of a Bailor
As such Indian Contract Act, 1872 does not provide for Rights of a Bailor. But Rights of a Bailor is same as Duties of
the Bailee i.e. Rights of Bailor = Duties of Bailee. So the rights of bailor are:
1. Enforcement of Bailee’s Duty: Since Right of the bailor is same as the right of the Bailee, therefore on the
fulfilment of all duties of Bailee the bailor’s right is accomplished. For example, it is the duty of the Bailee to
give the accretions and it is the right of bailor to demand the same.
2. Right to claim damages: If the Bailee fails to take care of the goods, the bailor has the right to claim damages for
such loss. (Section 151)
3. Right to Termination the Contract: If the Bailee does not comply with the terms of the contract and acts in a
negligent manner in such case the bailor has the right to rescind the contract. (Section 153)
4. Right to claim compensation: If the Bailee uses the goods for an unauthorized purpose or mixes the goods
which cause loss of goods in such case bailor has the right to claim compensation.
5. Right to demand the return of goods: It is the duty of the Bailee to return the goods and the bailor has the right
to demand the same.

Rights of a Bailee
1. Right to recover expenses: In the contract of Bailment, the Bailee incurs expenses to ensure the safety of
goods. The Bailee has the right to recover such expenses from the bailor. (Section 158)
2. Right to remuneration: When the goods are bailed to the Bailee he is entitled to receive certain remuneration
for services that he has rendered. But in case of gratuitous bailment, the Bailee is not awarded any
remuneration.
3. Right to recover compensation: At times a situation arises wherein bailor did not have the capacity to
contract for bailment. Such a contract causing loss to the Bailee, therefore the Bailee has the right to recover
such compensation from the bailor. (Section 168)
4. Right to Lien: Bailee has the right over Lien. By this, we mean that if the bailor fails to make payment of
remuneration or does not pay the amount due, the Bailee has the right to keep the goods bailed in his
possession till the time debtor dues are cleared. Lien is of two types: particular lien and general lien. (Section
170-171)
5. Right to suit against a wrongdoer: After the goods have been bailed and any third party deprives the Bailee
of use of such goods, then the Bailee or bailor can bring an action against the third party. (Section 180)

Pledge
Pledge is a kind of bailment. Pledge is also known as Pawn. It is defined under section 172 of the Indian Contract
Act, 1892. By pledge, we mean bailment of goods as a security for the repayment of debt or loan advanced or
performance of an obligation or promise. The person who pledges the goods as security is known as Pledger or
Pawnor and the person in whose favour the goods are pledged is known as Pledgee or Pawnee.
Essentials of Pledge
Since Pledge is a special kind of bailment, therefore all the essentials of bailment are also the essentials of the pledge.
Apart from that, the other essentials of the pledge are:
1. There shall be a bailment for security against payment or performance of the promise,
2. The subject matter of pledge is goods,
3. Goods pledged for shall be in existence,
4. There shall be the delivery of goods from pledger to pledgee,
5. There is no transfer of ownership in case of the pledge.
Exception: In exception circumstances pledgee has the right to sell the movable goods or property that are been
pledged.

Rights of Pawnor
As per Section 177 of the Indian Contract Act, 1872 the Pawnor has the Right to Redeem. By this, we mean that on
the repayment of the debt or the performance of the promise, the Pawnor can redeem the goods or property pledged
from the Pawnee before the Pawnee makes the actual sale. The right of redemption is extinguished once the actual
sale is done by the Pawnee as per his right under section 176 of the Indian Contract Act, 1872.
Rights of a Pawnee – The rights of the Pawnee as per Indian Contract Act, 1872 are:
1. Right to retain the goods: If the Pawnor fails to make the payment of a debt or does not perform as per the
promise made, the Pawnee has the right to retain the goods pledged as security. Moreover, Pawnee can also retain
goods for non-payment of interest on debt or non-payment of expenses incurred. But Pawnee cannot retain goods
for any other debt or promise other than that agreed for in the contract. (Section 173-174)
2. Right to recover extraordinary expenses: The expenses incurred by Pawnee on the preservation of goods
pledged can be recovered from Pawnor. (Section 175).
3. The right of suit to procure debt and sale of pledged goods: On the failure to make repayment to Pawnee of
the debt, the Pawnee has two right:
i. either to initiate suit proceedings against him or
ii. sell the goods.
In the former case, the Pawnee retains the goods with himself as collateral security and initiate the court
proceedings. He need not provide any notice of such proceedings to the Pawnor. And in the latter case, the
Pawnee can sell the goods after giving due notice of sale to the Pawnor.
4. If the amount received from the sale of goods is less than the amount due then the rest amount can be recovered
from Pawnor.
5. And if the Pawnee gets more amount than the due amount then such surplus is to be given back to Pawnor.
(Section 176)

CONTRACT OF AGENCY

An Agency is defined as a relationship between two parties called PRINCIPAL and AGENT, whereby, the function
of the agent is to create a contract/s between the principal and third parties or to act as the representative of the
principal in other ways. Agency is the relationship that subsists between the principal and the agent, who has been
authorized to act for him or represent him in dealing with others. Thus, in an agency, there is in effect two contracts
i.e.
a) Made between the principal and the agent from which the agent derives his authority to act for and on behalf
of the principal; and
b) Made between the principal and the third party through the work of the agent.

Creation of Agency
I. By express appointment by the principal – Generally an authority is conferred by the Principal to the Agent. If the
agent exceeds this authority, then the principal will not be bound and the agent will be personally liable to the
third party for breach of warranty of authority. However the common law may extend the scope of the agent’s
authority beyond this, to protect an innocent third party. The principal will then be bound to the third party, but
the principal can sue the agent for overstepping his actual authority, if it’s a breach of the agency contract.

II. By implied appointment by the principal – The law can infer the creation of an agency by implication when a
person by his words or conduct acts as if he has such authority and the principal acknowledges that he was
entitled to act accordingly. Implied authority, is not specifically mentioned by contract but assumed or implied by
 the nature of the relationship, are presumed to be given to an agent if that authority is necessary to perform the
duties or responsibilities otherwise assigned to the agent or representative. For example where one person allows
another person to order goods on his behalf and habitually pays for them, an agency may be implied. In such a
case, he will be bound by the contracts as if he has expressly authorized them.

III. Apparent / Ostensible authority – While actual authority arises from an agreement, apparent authority is that
which the law regards the agent as having, although principal may not have consented to the agent having such
authority. Apparent authority can happen in two situations:

a) Where principal by words/ conduct, makes a third party to believe that ‘agent’ has authority to make contract
for the principal
b) Where the agent previously had authority to act, but that authority was terminated by the principal and the
principal did not inform third parties that he has terminated it

IV. By necessity – The origins of the doctrine of necessitous intervention by someone who is in a legal relationship
with the defendant lie in the principle of agency of necessity, where an agent went beyond his or her authority by
intervening on behalf of the principal in an emergency. Because of the circumstances of necessity, particularly the
impracticability of the agent communicating with the principal, the courts were prepared to treat the agent as
though he or she had the necessary authority to do what was reasonably necessary to save the principal’s property.
If an agency of necessity was established, the agent would be reimbursed for the expense incurred in rescuing the
principal’s property.

An agency of necessity may be created if the following three conditions are met:
a) It is impossible for the agent to get the principal’s instruction.
b) The agent’s action is necessary, in the circumstances, in order to prevent loss to the principal to prevent them
from rotting.
c) The agent must have acted in good faith.
In an urgent situation, an agent has authority to act in the best interest for the purpose of protecting his principal fro m
losses.

V. By Estoppel – A person cannot be bound by a contract made on his behalf without his authority. However, if he
by his words and conduct allows a third party to believe that that particular person is his agent even when he is
not, and the third party relies on it to the detriment of the third party, he (principal) will be estopped or precluded
from denying the existence of that person’s authority to act on his behalf.

VI. Ratification by the Principal – Agency by ratification can arise in any one of the following situations:

1. An agent who was duly appointed has exceeded his authority; or

2. A person who has no authority to act acted as if he has the authority.
When one of the above said situations arise, the principal can either reject the contract or accept the contract so
made. When the principal accepts and confirms such a contract, the acceptance is called ratification. Ratification
may be expressed or implied. The effect of ratification is to render the contract as binding on the principal as if
the agent had been properly authorized before hand.

Duties of an Agent to his Principal – Duty of an agent is list down from s 164 to s 178 of the Contract Act 1950.
a. To obey principal’s instruction
b. To exercise care and diligence in carrying out his work and use such skill as he possesses
c. To render proper accounts when required
d. To pay to his principal all sum received on hi behalf
e. To communicate with the principal
f. Not to let his own interest conflict wit his duty
g. Not to make an secret profit out of the performance of his duty
h. Not to disclose confidential information or documents
 i. Not to delegate his authority

Duties of Principal to His Agent – The duties of a principal to his agent are provided in sections 175 to 178.
a. To pay the agent the commission or other agreed remuneration unless the agency relationship is gratuitous.
b. Not to willfully prevent or hinder the agent from earning his commission.
c. To indemnify and reimburse the agent for acts done in the exercise of his duties.

Termination of Agency – Sections 154 to 163 of the Contracts Acts states the various ways an agent’s authority may
be terminated.

I. By act of the party

a) By mutual consent (both party agree)
b) By revocation by Principal
c) By renunciation by Agent
All the above can be done by giving notice (reasonable notice in the case of revocation and renunciation)
d) By the performance of the contract of agency. This happens when agency is created for single specific
transaction. (sc 154 CA)
e) By the expiration of the period fixed/implied in the contract

II.By operation of law –

a. By the death of either principal or agent. Because relationship between principal and agent is confidential and
personal. (Sec 161 Illust. CA). Section 162 CA states when the principal dies, the agent must take all
reasonable steps to protect and preserve the interests entrusted to him.

b. By the subsequent insanity of either principal or agent. A person of unsound mind cannot enter into contract
to appoint an agent or to act as an agent.

c. By the bankruptcy/insolvency of principal.

d. By the happening of an event which renders the agency unlawful. This is an application of the doctrine of
frustration to contracts. For agency contracts, there are examples of termination when the principal becomes
an enemy alien because of war or where the subject matter is lost/destroyed.

RIGHTS OF AGENTS
I. Right to remuneration– an agent is entitled to get an agreed remuneration as per the contract. If nothing is
mentioned in the contract about remuneration, then he is entitled to a reasonable remuneration. But an agent is not
entitled for any remuneration if he is guilty of misconduct in the business of agency.
II. Right of retainer– an agent has the right to hold his principal’s money till the time his claims, if any, of
remuneration or advances are made or expenses occurred during his ordinary course of business as agency are
paid.
III. Right of lien– an agent has the right to hold back or retain goods or other property of the principal received by
him, till the time his dues or other payments are made.
IV. Right to indemnity– an agent has the right to indemnity extending to all expenses and losses incurred while
conducting his course of business as agency.
V. Right to compensation– an agent has the right to be compensated for any injury suffered by him due to the
negligence of the principal or lack of skill.
The Sale of Goods Act 1930
Object & Scope of the Act
The Sale of Goods Act, 1930 governs the contracts relating to sale of goods. It applies to the whole of India
except the State of Jammu & Kashmir. The contacts for sale of goods are subject to the general principles of the law
relating to contracts i.e. the Indian Contact Act. A contract for sale of goods has, however, certain peculiar features
such as, transfer of ownership of the goods, delivery of goods rights and duties of the buyer and seller, remedies for
breach of contract, conditions and warranties implied under a contract for sale of goods, etc. These peculiarities are
the subject matter of the provisions of the Sale of Goods Act, 1930.
FORMATION OF CONTRACT OF SALE
A contract of goods is a contract whereby the seller transfers or agrees to transfer the property to goods to the
buyer for a price. There may be a contract of sale between one part-owner and another [Sec. 4(1)]. A contract of sale
may be absolute or conditional [Sec 4(2)].
The term ‘contract of sale’ is a generic term and includes both a sale and an agreement to sell.
Sale and agreement to sell: when under a contract of sale, the property in the goods is transferred from the seller to
the buyer, the contract is called a ‘sale’, but where the transfer of the property in the goods is to take place at a future
time or subject to some conditions thereafter to be fulfilled, the contract is called an ‘agreement to sell’ [Sec. 4(3)].
An agreement to sell becomes a sale when time elapses or the conditions, subject to which the property in the goods
is to be transferred, are fulfilled [Sec. 4(4)].

ESSENTIAL ELEMENTS OF A CONTRACT OF SALE

1. Two parties: there must be 2 distinct parties i.e. a buyer and a seller, to affect a contract of sale and they must be
competent to contract. ‘Buyer’ means a person who buys or agrees to buy goods [Sec. 2(1)]. ‘Seller’ means a
person who sells or agrees to sell goods [Sec. (13)].
2. Goods: there must be some goods the property in which is or is to be transferred from the seller to the buyer. The
goods which form the subject-matter of the contract of sale must be movable. Transfer of immovable property is
not regulated by the Sale of Goods Act.
3. Price: Price is an essential ingredient for all transactions of sale and in the absence of the price or the
consideration, the transfer is not regarded as a sale. The transfer by way of sale must be in exchange for a price. It
has been held that price normally means money. The price can be paid fully in cash or it can be partly paid and
partly promised to be paid in future. The price can be fixed by the agreement between the parties before the
conveyance of the property
4. Transfer of general property: There must be a transfer of general property as distinguishes from special property
in goods from the seller to the buyer. For e.g. if A owns certain goods he has general property in the goods. If he
pledges them with B, B has special property in the goods.
5. Essential elements of a valid contract: All essential elements of a valid contract must be present in the contract of
sale.

EFFECT OF DESTRUCTION OF GOODS:

Goods perishing before making of contract (Sec 7): A contract for the sale of specific goods is void if at the time
when the contract was made, the goods have, without the knowledge of the seller, perished. The same would be the
case where the goods become so damaged as no longer to answer to their description in the contract.
Goods perishing after the agreement to sell but before the sale is effected (Sec.8): An agreement to sell specific
goods becomes void if subsequently the goods, without any fault on the part of the seller or the buyer, perish or
become so damaged as no longer to answer to their description in the agreement before the risk passes to the buyer,
‘Fault’ means wrongful act or default [Sec 2(5)]
Classification of Goods
The classification of goods in business law can be tricky to understand. In business law, the term "goods" refers to all
movable property apart from actionable claims and money. This includes growing crops, grass, and other things
attached to land or forming a part of the land, as well as stocks and shares. There are three main types of goods:
existing goods, future goods, and contingent goods.
I. Existing Goods – Existing goods are goods that physically exist and belong to the seller at the time of contract of
sale. Existing can be further divided into two categories:
a. Specific Goods: These are goods that are specifically agreed upon between the seller and buyer at the time of
making the contract of the sale. For example, the seller may agree to sell the buyer a specific item bearing a
specific number. These are sometimes known as "ascertained goods." This distinction becomes important
because of the rules regarding the transfer of property between parties.
b. Unascertained goods: These are goods that are agreed upon at the point of making the contract of sale but are
not specifically identified in the contract. For example, a seller may agree to sell a buyer one out of a number
of items of the same type (e.g., bags of sugar) without defining which specific item the buyer will receive. As
soon as the specific item is defined, for example when being prepared for delivery, this becomes specific, or
ascertained goods.
II. Future Goods – Future goods are goods that are not yet in existence or that do not yet belong to the seller when
the contract of sale is made. This could be goods that are yet to be manufactured or that the seller has not yet
acquired. For example, a farmer may agree to sell a buyer all of the milk produced by his/her cows in the coming
year. This is called an "agreement to sell." Because the milk does not yet exist at the point of making the contract,
it is an example of future goods.
III. Contingent Goods – Although contingent goods are a type of future goods, they differ in that they are dependent
on a specific contingency. For example, a seller may agree to sell a buyer some specific goods that are due to
arrive on a particular ship. If, when the ship arrives, it does not contain those goods, the buyer will still have
fulfilled his agreement, because the sale was contingent on the ship containing those specific goods

Distinguish between Sale and Agreement to Sell

1. The ownership rights are transferred to the buyer immediately under Contract of Sale. Whereas the ownership
rights are transferred to the buyer only in future in Agreement to Sale.
2. In Sale, if the goods are destroyed, the loss will fall on the buyer even if the goods are in the possession of the
seller. In Agreement to Sell, if the goods are destroyed, the loss will fall on the seller even if the goods are in the
possession of the buyer.
3. In Sale, If the buyer fails to pay the price, the seller can sue him for the price. In Agreement to Sell, In a similar
case, the seller can only sue the buyer for damages.
4. In Sale, The seller cannot re-sell the goods (if he is keeping possession). If he does so, the second buyer does not
get a good title. In Agreement to Sell, in case of re-sale by the seller, the second buyer gets a good title provided
he buys in good faith. The first buyer can only sue the seller for damages.
5. In Sale, It creates 'jus in rem' (right against the world) i.e., right to enjoy the goods against the whole world. In
Agreement to Sell, It creates 'jus in personam' (right against a person) i.e., right to the buyer to sue the
seller for damages.
6. In Sale, If the buyer becomes insolvent before paying the price, the seller can get only a rateable dividend from
the buyer's estate towards the price. In Agreement to Sell, If the buyer becomes insolvent before paying the price,
the seller is not bound to part with the goods.
7. In Sale, If the seller becomes insolvent, the buyer can recover the goods from the Official Receiver. In Agreement
to Sell, If the buyer has already paid the price and the seller has become insolvent, the former can claim only a
rateable dividend from the latter's estate and not the goods.

CONDITION
The Sale of Goods Act 1930 provides the definition for a Condition as – “A condition is a stipulation essential to the
main purpose of the contract, the breach of which gives rise to a right to treat the contract as repudiated”
A Condition forms the core of the contract i.e. considered as an essential to the main purpose of the contract.
Therefore, the repercussion would be repudiation of the contract or claim for damages or both depending upon the
breach and case. Breach of a Condition makes a contract voidable on the part of non-defaulting party to the contract.
The Sale of Goods Act 1930 provides the definition for a Warranty as – “A warranty is a stipulation collateral to the
main purpose of the contract, the breach of which gives rise to a claim for damages but not to a right to reject the
goods and treat the contract as repudiated”
A Warranty is treated as collateral to the main purpose of a contract and therefore, the repercussions of breach
of warranty by one of the parties would be only a claim for damages by the non-defaulting party. The same position is
further, clarified by section 59 of Sale of Goods Act, which provides that when there is a breach of warranty by the
seller, this breach does not provide the buyer with the right to breach the contract, he may only sue the seller for
breach of Warranty in diminution or extinction of the price. Whether a particular stipulation in the contract is a
Condition or a Warranty depends on the case to case.
Situations under which Breach of Condition can be treated as Breach of Warranty
(Section 13) – A breach of warranty by one party cannot be treated as one of breach of condition; however, a breach
of a Condition by one of the parties to the contract can be treated as a breach of Warranty. The Sale of Goods Act
provides for the situations when a breach of a Condition by one of the parties can be treated as breach of warranty
under a contract of sale of goods. Those situations being: –
1. When the buyer himself waives the Condition, which gives right to the buyer to repudiate the contract on breach
of that particular stipulation; or
2. When the buyer treats the Condition as a Warranty and does not repudiate the contract on the basis of such
breach; or
3. Where the contract is non-severable and the buyer has accepted either the whole goods or any part under the
contract; or
4. Where the law itself excuses the fulfillment of a Condition.
TYPES OF CONDITION & WARRANTY
A. EXPRESSED CONDITION & WARRANTY – When both the buyer and seller agree to provide for certain
terms and Conditions, either by words or by spoken and written, they are known as Express condition &
Warranty.
B. IMPLIED CONDITION & WARRANTY – Section 14-17 of the Sale of Goods Act, 1930 deal with the
implied conditions and warranties attached to the subject matter for the sale of a good which may or may not be
mentioned in the contract.
I. Implied Condition -
a. Condition as to Title [Section 14(a)] – Section 14(a) of the Sale of Goods Act 1930 explains the implied
condition as to title as ‘in the case of a sale, he has a right to sell the goods and that, in the case of an agreement to
sell, he will have a right to sell the goods at the time when the property is to pass’.
This means that the seller has the right to sell a good only if he is the true owner and holds the title of the goods or
is an agent of the title holder. When a good is sold the implied condition for the good is its title, i.e. the ownership
of the good. If the seller does not own the title of the said good himself and sells it to the buyer, it is a breach of
condition. In such a situation the buyer can return the goods to the seller and claim his money back or refuse to
accept the good before delivery or whenever he learns about the false title of the seller.
b. Sale by Description (Section 15) – Section 15 of the Sale of Goods Act, 1930 explains that when a buyer intends
to buy goods by description, the goods must correspond with the description given by the buyer at the time of
formation of the contract, failure in which the buyer can refuse to accept the goods.
c. Sale by Sample (Section 17) – W hen the goods are to be supplied on the basis of a sample provided to the seller
by the buyer while the formation of a contract the following conditions are implied:
i. Bulk supplied should correspond with the sample in quality
ii. Buyer shall have a reasonable opportunity to compare the goods with the sample
iii. The good shall be free from any apparent defect on reasonable examination by the buyer.
d. Sale by sample as well as Description (Section 15) – When the sale of goods is by a sample as well as a
description the bulk of the goods should correspond with both, i.e. description and sample provided to the seller in
the contract and not only sample or description.
e. Condition as to Quality or Fitness (Section 16) – The doctrine of Caveat Emptor is applicable in the case of
sale/purchase of goods, which means ‘Buyer Beware’. The maxim means that the buyer must take care of the
 quality and fitness of the goods he intends to buy and cannot blame the seller for his wrong choice. However,
section 16 of the Sale of Goods Act 1930 provides a few conditions which are considered as an implied condition
in terms of quality and fitness of the good:
i. When the buyer specifies the purpose for the purchase of the good to the seller, he relied on the sound
judgment and expertise of the seller for the purchase there is an implied condition that the goods shall
comply with the description of the purpose of purchase.
ii. When the goods are bought on a description from a person who sells goods of that description (even if he
doesn’t manufacture the good), there is an implied condition that the goods shall correspond with the
description. However, in case of an easily observable defect that is missed by the buyer while examining the
good is not considered as an implied condition.
f. Condition as to Merchantability – Where the goods are bought by description from a seller, who deals in goods
of that description (whether or not as the manufacturer or producer) there is an implied condition that the goods
shall be of merchantable quality. Merchantable quality ordinarily means that the goods should be such as would
be commercially saleable under the description by which they are known in the market at their full value.
g. Condition as to Wholesomeness – In case of sale of eatable provisions and foodstuff, there is another implied
condition that the goods shall be wholesome. Thus, the provisions or foodstuff must not only correspond to their
description, but must also be merchantable and wholesome. By 'wholesomeness' it means that goods must be for
human consumption.
II. Implied Warranty -
a. Enjoy Possession of the Goods [Section 14(b)] – Section 14(b) of the Act mentions ‘an implied warranty that
the buyer shall have and enjoy quiet possession of the goods’ which means a buyer is entitled to the quiet
possession of the goods purchased as an implied warranty which means the buyer after receiving the title of
ownership from the true owner should not be disturbed either by the seller or any other person claiming superior
title of the goods. In such a case, the buyer is entitled to claim compensation and damages from the seller as a
breach of implied warranty.
b. Goods are free from any charge or encumbrance in favour of any third party [Section 14(c)] – Any charge
or encumbrance pending in favour of the third party which was not declared to the buyer while entering into a
contract shall be considered as a breach of warranty, and the buyer is be entitled to compensation and claim
damages from the seller for the same

UNPAID SELLER (Section 45)

An unpaid seller is one to whom the whole of the price has not been paid or a bill of exchange or such other
negotiable instrument given to him has been dishonored.
I. Rights of Unpaid Seller against Goods –
A. Rights of Lien (Section 47) - According to subsection (1) of Section 47 of the Sale of Goods Act, 1930, an
unpaid seller, who is in possession of the goods can retain their possession until payment. This is possible in the
following cases:
1. He sells the goods without any stipulation for credit
2. The goods are sold on credit but the credit term has expired.
3. The buyer becomes insolvent.
Subsection (2) specifies that the unpaid seller can exercise his right of lien notwithstanding that he is in possession of
the goods acting as an agent or bailee for the buyer.
B. Right of Stoppage in Transit – This right is an extension to the right of lien. The right of stoppage in transit
means that an unpaid seller has the right to stop the goods while they are in transit, regain possession, and retain
them till he receives the full price. If an unpaid seller has parted with the possession of the goods and the buyer
becomes insolvent, then the seller can ask the carrier to return the goods back. This is subject to the provisions of
the Act.
C. Right of Resale (Section 54) – The right of resale is an important right for an unpaid seller. If he does not have
this right, then the right of lien and stoppage won’t make sense. An unpaid seller can exercise his right of resale
under the following conditions:
1. Goods are perishable in nature
2. Seller gives a notice to the buyer of his intention of resale
3. Unpaid seller resells the goods post exercising his right of lien or stoppage
4. Resale where the right of resale is reserved in the contract of sale
5. Property in the goods has not passed to the buyer
D. Right of withholding Delivery – Where the property in the goods has not passed to the buyer, the unpaid seller
has the right to withhold delivery of the goods, which is similar to and co-extensive with his rights of lien and
stoppage in transit which he would have had if the property had passed.
II. Rights of Unpaid Seller against Buyer – When the buyer of goods does not pay his dues to the seller, the seller
become an unpaid seller. And now the seller has certain rights against the buyer. Such rights are the seller
remedies against the breach of contract by the buyer. Such rights of the unpaid seller are additional to the rights
against the goods he sold.
1. Suit for Price - Under the contract of sale if the property of the goods is already passed but he refuses to pay for
the goods the seller becomes an unpaid seller. In such a case the seller can sue the buyer for wrongfully refusing
to pay him his due. But say the sales contract says that the price will be paid at a later date irrespective of the
delivery of goods, and on such a day the if the buyer refuses to pay, the unpaid seller may sue for the price of
these goods. The actual delivery of the goods is not of importance according to the law.
2. Suit for Damages for Non-Acceptance – If the buyer wrongfully refuses or neglects to accept and pay the
unpaid seller, the seller can sue the buyer for damages caused due to his non-acceptance of goods. Since the buyer
refused to buy the goods without any just cause, the seller may face certain damages. The measure of such
damages is decided by the Section 73 of the Indian Contract Act 1872, which deals with damages and penalties.
Take for example the case of seller A. He agrees to sell to B 100 liters of milk for a decided price. On the day, B
refuses to accept the goods for no justifiable reason. A is not able to find another buyer and the milk goes bad. In
such a case, A can sue B for damages.
3. Suit for Interest – If there is a specific agreement between the parties the seller can sue for the interest amount
due to him from the buyer. This is when both parties have specifically agreed on the interest rate to be paid to
seller from the date on which the payment becomes due. But if the parties do not have such specific terms, still
the court may award the seller with the interest amount due to him at a rate which it sees fit.

AUCTION SALE (Section 64) – In the case of sale by auction-

(1) where goods are put up for sale in lots, each lot is prima facie deemed to be the subject of a separate contract of
sale;
(2) the sale is complete when the auctioneer announces its completion by the fall of the hammer or in other
customary manner; and, until such announcement is made, any bidder may retract his bid;
(3) a right to bid may be reserved expressly by or on behalf of the seller and, where such right is expressly so
reserved, but not otherwise, the seller or any one person on his behalf may, subject to the provisions hereinafter
contained, bid at the auction;
(4) where the sale is not notified to be subject to a right to bid on behalf of the seller, it shall not be lawful for the
seller to bid himself or to employ any person to bid at such sale, or for the auctioneer knowingly to take any bid
from the seller or any such person; and any sale contravening this rule may be treated as fraudulent by the buyer;
(5) the sale may be notified to be subject to a reserved or upset price;
(6) if the seller makes use of pretended bidding to raise the price, the sale is voidable at the option of the buyer.
The Negotiable Instrument (Amendment) Act, 2015
As per Section 13, a “Negotiable Instrument” means a Promissory note, Bill of Exchange or Cheque
payable either to order or to bearer. A negotiable instrument is actually a written document. This document specifies
payment to a specific person or the bearer of the instrument at a specific date. So we can define a bill of exchange as
“a document signifying an unconditional promise signed by the person giving promise, requiring the person to whom
it is addressed to pay on demand, or at a fixed date or time, a certain sum to or to the order of a specified person, or to
bearer.”

Features of Negotiable Instruments

1. Easily Transferable: A negotiable instrument is easily and freely transferable. There are no formalities or much
paperwork involved in such a transfer. The ownership of an instrument can transfer simply by delivery or by a
valid endorsement.
2. Must be Written: All negotiable instruments must be in writing. This includes handwritten notes, printed,
engraved, typed etc.
3. Time of Payment must be Certain: If the order is to pay when convenient then such an order is not a negotiable
instrument. Here the time period has to be certain even if it is not a specific date. For example, it is acceptable if
the time of payment is linked with the death of a specific individual. As death is a certain event.
4. Payee also must be certain: The person to whom the payment is to be made must be a specific person or
persons. Also, there can be more than one payee for a negotiable instrument. And “person” includes artificial
persons as well, like body corporates, trade unions, chairman, secretary etc.

Types of Negotiable Instruments

A. Promissory Note: In this case, the debtor is the one who makes the instrument. And he promises unconditionally
to the creditor (or the bearer of the document) a certain sum of money on a specific date.
B. Bills of Exchange: This is an order from the creditor to the debtor. This instrument instructs the drawee (debtor)
to pay the payee a certain amount of money. The bill will be made by the drawer (creditor).
C. Cheque: This is just another form of a bill of exchange. Here the drawer is a bank. And such a cheque is only
payable on demand. It is basically the depositor instructing the bank to pay a certain amount of money to the
payee or the bearer of the cheque.
D. Others: There are other instruments such as government promissory notes, railway receipts, delivery orders etc.
These can be negotiable instruments by custom or practice of the trade

PROMISSORY NOTE
Section 4 of The Negotiable Instruments Act, 1881 defines “Promissory note” as —A “promissory note” is an
instrument in writing (not being a bank-note or a currency-note) containing an unconditional undertaking signed
by the maker, to pay a certain sum of money only to, or to the order of, a certain person, or to the bearer of the
instrument.

Illustrations A signs instruments in the following terms:—

(a) “I promise to pay B or order Rs. 500.”
(b) ‘‘I acknowledge myself to be indebted to B in Rs. 1,000, to be paid on demand, for value received.”
(c) “Mr. B. I.O.U. Rs. 1,000.”
(d) “I promise to pay B Rs. 500 and all other sums which shall be due to him.”
(e) “I promise to pay B Rs. 500 first deducting there out any money which he may owe me.”
(f) “I promise to pay B Rs. 500 seven days after my marriage with C.”
(g) “I promise to pay B Rs. 500 on D’s death, provided D leaves me enough to pay that sum.”
(h) “I promise to pay B Rs. 500 and to deliver to him my black horse on 1st January next.” The instruments
respectively marked (a) and (b) are promissory notes. The instruments respectively marked (c), (d), (e), (f), (g) and
(h) are not promissory notes.
CHARACTERISTICS / ESSENTIAL FEATURES OF PROMISSORY NOTE

The essential elements of promissory notes are as follows:

1. IN WRITING - A promissory note must be in writing. It cannot be verbal promise to pay or in any other way.
2. PROMISE TO PAY - It is a promise to pay It cannot be an order or request for the payment Of money
3. UNCONDITIONAL PROMISE - A promissory note contains an unconditional promise to pay.
4. SIGNED BY THE MAKER - This document must be signed by the maker. If it is not signed by the maker it
cannot become a promissory note. If the maker cannot sign he can put his thumb mark.
5. FIXED AMOUNT - The amount of a promissory note is fixed and certain. A document containing the words “l
promise to pay B a sum of money which shall be due to him” is not a promissory note.
6. PAYABLE IN MONEY - The amount of promissory note is payable in money and money only. It cannot be paid
in goods or something else.
7. PAYMENT PERIOD - The promissory note is payable on demand or at some determinable future time.
8. MAKER MUST BE CERTAIN PERSON - The maker must be a certain person. The maker may be one or more
persons. When promisors are more than one, they may bind themselves jointly or jointly and severally.
9. PAYEE MUST BE CERTAIN - A promissory note must be payable to a certain person whose name is written on
the document or to his order. If it is endorsed by him, it becomes payable to the bearer. It cannot be payable to the
maker of the note himself.
10. PLACE AND DATE - The place and date of issue are usually given on the instrument, but they are not essential
in the eyes of law.
11. STAMPED – for authenticity and admissibility as evidence in the court of law in case of any disputes relating to
it, it is mandatory to affix the requisite stamp in accordance with the provisions of the Indian stamp act.

BILL OF EXCHANGE
As per Section 5- A "Bill of exchange" is an instrument in writing containing an unconditional order, signed by
the maker, directing a certain person to pay a certain sum of money only to, or to the order of, a certain person or
to the bearer of the instrument.
A promise or order to pay is not "conditional" within the meaning of this section and section 4, by reason of the time
for payment of the amount or any installment thereof being expressed to be on the lapse of a certain period after the
occurrence of a specified event which, according to the ordinary expectation of mankind, is certain to happen,
although the time of its happening may be uncertain.
The sum payable may be "certain", within the meaning of this section and section 4, although it includes future
interest or is payable at an indicated rate of exchange, or is according to the course of exchange, and although the
instrument provides that, on default of payment of an installment, the balance unpaid shall become due.
The person to whom it is clear that the direction is given or that payment is to be made may be "certain person",
within the meaning of this section and section 4, although he is misnamed or designated by description only.

CHARACTERISTICS / ESSENTIAL ELEMENTS OF BILL OF EXCHANGE

a. IT IS AN ORDER - It is an order by the drawer to the drawee. It cannot be a promise or a request. The drawer
gives an order to the drawee to sign the document to certain money to the drawer.
b. UNCONDITIONAL - A bill of exchange contains an unconditional order. No condition can be attached with
payment of the bill.
c. IN WRITING - A bill of exchange is an unconditional order in writing. It cannot be verbal or in any other way.
d. DRAWER’S SIGNATURE - The bill must be signed by the drawer of the document if it is not signed by the
drawer, it will not be a valid bill.
e. PARTIES OF THE BILL - There are three parties in a bill of exchange. They are the drawer, drawee and the
payee. Sometime the drawer and payee is the same person.
f. FIXED SUM - The amount of bill of exchange is the fixed sum written clearly in words and figures on the bill.
g. PAYABLE IN MONEY - The amount of the bills is payable only in the form of money It cannot be paid in goods
or something else.
h. PAYMENT PERIOD - The bill of exchange like the promissory note is payable on demand or at some
determinable future time.
i. PAYEE MUST BE CERTAIN PERSON - A bill of exchange must be payable to a certain person whose name is
written on the document, or to his order. If it is endorsed by him it becomes payable to the bearer.
j. PLACE AND DATE - The place and date of issue are also given on the bill of exchange but these are not
essential in the eyes of law.
k. ACCEPTANCE BY DRAWEE - A bill of exchange is drawn by the drawer and accepted by the drawee (debtor).
Until it is not accepted, it cannot be a bill of exchange.

KINDS OF BOE
1. Accommodation Bills – Accommodation Bills are drawn and accepted with no consideration passed or received.
The Bill, which is drawn just to oblige a friend, who is in need of money, of course without any trading activities,
with sole intention of raising funds required for ready cash is known as Accommodation Bill. The
accommodating party, i.e., the drawee accepts the Bill drawn by the accommodated party (drawer). That is the
Drawer of the accommodation bill can be called accommodated party and drawee can be called accommodating
party. After the Bill is accepted, the drawer discounts it with a bank and obtains the cash.
Before the due date of the Bill, Drawer provides funds to the Acceptor, who honours the Bill. Since the
acceptance is given without consideration and to help the accommodated party to raise the funds, the
accommodated party has to discharge the Bill by himself or provide funds to accommodating party.

2. ESCROW bill – This is a kind of bill where:

a. Payment depends upon a condition to be fulfilled – in this case the holder of an ESCROW cannot make
the parties to the bill liable unless and until conditions are fulfilled.
b. It is drawn and given as collateral security – in this case the holder cannot make the parties liableas there
was no intention of transferring the property at any time.
c. Delivered for safe custody
3. FICTITIOUS BILL - A bill is fictitious when both the drawer and payee are fictitious persons. Where the
drawer is also the payee of the bill, without any intention that payment shall be in conformity with the instrument,
the instrument is fictitious. Also when payee is non-existing, the instrument is fictitious. A fictitious bill in the
hands of a holder in due course becomes a good bill. The acceptor is liable to a holder in due course, if the holder
in due course can show that the signature of the supposed drawer and that of the first endorser or payee are under
the same hand. The liability of the holder in case of a fictitious bill is only towards the holder in due course.
4. INCHOATE STAMPED INSTRUMENT (Sec 20) - An inchoate stamped instrument is a paper signed and
stamped in accordance with the law relating to negotiable instruments and either wholly blank or containing an
incomplete negotiable instrument. The person signing the instrument is liable on it to any holder in due course.
E.g. Vikas signs his name on a blank but stamped instrument and gives the paper to Jitender with authority to fill
it up as a promissory note for Rs 500 only. But Jitender fraudulently fills the paper for Rs.1000, the stamp put on
it being sufficient to cover this amount. He then hands it to Ritesh for Rs 1000 who takes it in good faith for
value.
5. AMBIGUOUS INSTRUMENT - An instrument which in form is such that it may either be treated as bill of
exchange or a promissory note is an ambiguous instrument. It is a Vague instrument as the treatment of the bill is
unclear.
6. INLAND INSTRUMENT – A promissory note, a Bills of exchange or a Cheque drawn or made in India and
made payable in India or drawn upon any person resident in India, shall be deemed to be an Inland instrument.
7. FOREIGN INSTRUMENT – Any such instrument not so drawn, made or made payable shall be deemed to be a
foreign instrument.
HOLDER IN DUE COURSE
Section 9 of N.I. Act, 1881, defines holder in due course as under – “Holder in due course means any person who
for consideration became the possessor of a promissory note, Bills of exchange or cheque, if payable to bearer, or
the payee or indorsee thereof, if payable to order, before the amount mentioned in it becomes payable, and without
having sufficient cause to believe that any defect existed in the title of the person from whom he derived his title”
Holder in due course is a person who takes a negotiable instrument for the value receivable by him in good faith and
taken due care and caution while taking such instrument and he had no suspicion or reason to believe any defect
existed in the title of the person, from whom he derived title possession of the instrument. Thus, a person claim to be
a 'holder in due course should satisfy the following conditions.
a) He must acquire the instrument for a consideration.
b) The instrument acquired should be before it is matured for payment. An instrument payable on demand is treated
as current, subject to it has not been in circulation for the unreasonable length of time.
c) It is most important that the holder in due course had no cause to believe that any defect existed in the title of the
person to whom he has acquired the instrument.
d) A person accepting an inchoate instrument cannot be a holder in due course.
e) The instrument should be complete and regular while taking its possession.
f) Forged signature conveys no title; as such there cannot be a holder in due course under forged endorsement.
Privileges of a Holder in Due Course – A holder in due course enjoys the following privileges under the Negotiable
Instrument Act:
1. Better title than that of the transferor. Title of the holder is subject to all the defects in the title of the transferor
but a holder in due course enjoys a better title than that of the transferor.
2. Privilege in case of an inchoate stamped instrument. An inchoate instrument is one which is incomplete in some
respects. A person delivering an inchoate instrument is estopped from asserting, as against a holder in due course,
that the amount filled by the holder was in excess .of the authority given, provided the amount is sufficiently
covered by the stamp affixed thereon.
3. Privilege against prior parties to a holder in due course. Every prior party to a negotiable instrument is liable
thereon to a holder in due course until the instrument is duly satisfied. The term 'prior party' means the maker or
drawer, and all the intervening endorsers.
4. Privilege in case of a fictitious bill. An acceptor of a bill drawn in fictitious name and payable to the drawer's
orders is not relieved from his liability to a holder in due course on the ground that such name is fictitious.
5. No effect of conditional delivery. If a bill of exchange or promissory note is negotiated to a holder in due course,
the other parties of the instrument cannot escape liability on the ground that the delivery of the instrument was
conditional or for a special purpose only.
6. Prior defects. A holder of a negotiable instrument who derives title from a holder in due course has the rights
thereon of a holder in due course. Once a negotiable instrument passes through the hands of a holder in due
course, it gets cleared of its defects.
7. Presumptions as to title. Every holder is deemed to be a holder in due course and the burden of proving his title
does not lie on him.
8. Estoppel against denying the original validity of the instrument. No maker of a promissory note, and drawer of a
bill or cheque, and no acceptor of a bill of exchange for the honor of the drawer shall, in a suit thereon by a holder
in due course, be permitted to deny the validity of the instrument as originally made or drawn.
9. Estoppel against denying the capacity of the payee to endorse the instrument. No maker of a promissory note and
no acceptor of a bill of exchange payable to order is in a suit thereon by a holder in due course, be permitted to
deny the payee's capacity, at the date of the note or bill, to endorse the same.
10. Estoppel against denying the signature or capacity of prior party. No endorser of a negotiable instrument shall, in
a suit thereon by a subsequent holder in due course, be permitted to deny the sig nature or capacity to contract of
any prior party to the instrument.

CHEQUES
As per Negotiable Instrument Act, 1881, A “cheque” is a bill of exchange drawn on a specified banker and not
expressed to be payable otherwise than on demand.
There are three parties in Cheque Transaction – Drawer, Drawee and Payee.
a. Drawer (Maker of Cheque) – The person who issue the cheque or hold the account with bank.
b. Drawee – The Person who is directed to make the payment against cheque. In case of cheque, it is bank.
c. Payee – A person whose name is mentioned in the cheque or to whom the drawee makes payment. If drawer has
drawn the cheque in favour of self then drawer is payee.

Essential characteristics of a cheque – If one takes a close look at the definition of a cheque, it becomes clear
that a cheque has the following 10 essential elements or characteristics.
1. It must be in writing: A cheque must be in writing. An oral order to pay does not constitute a cheque.
2. It should be drawn on banker: It is always drawn on a specified banker. A cheque can be drawn on a bank
where the drawer has an account, saving bank, or current.
3. It contains an unconditional order to pay: A cheque cannot be drawn so as to be payable conditionally. The
drawer’s order to the drawee bank must be unconditional and should not make the cheque payable dependent on a
contingency. A conditional cheque shall be invalid.
4. The check must have an order to pay a certain sum: The cheque should contain an order to pay a certain sum
of money only. If a cheque is drawn to do something in addition to, or other than to pay money, it cannot be a
cheque. For example, if a cheque contains ‘Pay USD 500 and a TV worth USD 500 to A‘ it is not a cheque.
5. It should be signed by the drawer and should be dated: A cheque does not carry any validity unless signed by
the original drawer. It should be dated as well.
6. It is payable on demand: A cheque is always payable on demand i.e. only when the cheque is presented to bank
for payment. If the cheque is not presented then it is not payable.
7. Validity: A cheque is normally valid for six months from the date it bears. Thereafter it is termed as stale cheque.
A post-dated or antedated cheque will not be invalid. In both cases, the validity of the cheque is presumed to
commence from the date mentioned on it.
8. It may be payable to the drawer himself: Cheques may be payable to the drawer himself/herself. It may be
drawn payable to bearer on demand unlike a bill or a pro-note.
9. Banker is liable only to the drawer: The banker on whom the cheque is drawn shall be liable only to the drawer.
A holder or bearer has no remedy against the banker if a cheque is dishonored.
10. It does not require acceptance and stamp: Unlike a bill of exchange, a cheque does not require acceptance on
part of the drawee. There is, however, a custom among banks to mark cheques as ‘good’ for the purpose of
clearance. But this marking is not an acceptance. Similarly, no revenue stamp is required to be affixed on
cheques.

Different Types of Crossing

1. General Crossing :- Generally, cheques are crossed whe
a) There are two transverse parallel lines, marked across its face or
b) The cheque bears an abbreviation "& Co. "between the two parallel lines or
c) The cheque bears the words "Not Negotiable" between the two parallel lines or
d) The cheque bears the words "A/c. Payee" between the two parallel lines.
 e) A crossed cheque can be made bearer cheque by cancelling the crossing and writing that the crossing is
cancelled and affixing the full signature of drawer.
2. Special or Restrictive Crossing:- When a particular bank's name is written in between the two parallel lines the
cheque is said to be specially crossed. In addition to the word bank, the words "A/c. Payee Only", "Not
Negotiable" may also be written. The payment of such cheque is not made unless the bank named in crossing is
presenting the cheque. The effect of special crossing is that the bank makes payment only to the banker whose
name is written in the crossing. Specially crossed cheques are more safe than a generally crossed cheques.
Grounds on which Banks may dishonor a cheque
1. Funds Insufficient / Exceeds Arrangement – It is a very common mistake or reason due to which bank return
the cheque unpaid. Sometime, you write the cheque against salary to be credited on a specific date. But if salary is
not credited or get late then cheque is presented for payment, Bank will return it unpaid. So, confirm or maintain
bank balance in your account before issuing. In case of overdraft account, Cheque is dishonored with the reason
“Exceeds Arrangement”.
2. Amount in Words and Figures – Bank dishonors the Cheque if amount written in words and figures are
different. So, avoid this mistake.
3. Payee Name – If payee name is absent then bank can dishonor the Cheque with the reason that “Payee Name
Required”.
4. Signature Differ – Sometime you forget your signatures as you did while opening your bank account. Bank will
dishonor the Cheque if your(drawer) signature don’t match with specimen available in bank record.
5. Alterations / Overwriting – Bank will not honor the Cheque in case you overwritten / altered something on
Cheque. So avoid overwriting and alternation on Cheque.
6. Post Dated Cheque – When date written on Cheque is yet to come is called post dated Cheque. Suppose, Date
written on Cheque is 04th June 2018, But you present it for payment on 1st June 2018. Bank will dishonor the
Cheque and return it unpaid as bank cannot honor it before the date mentioned on Cheque.
7. Instrument Out-Dated / Stale Cheque – A Cheque is valid for three months from the date written on Cheque. If
a Cheque is presented after three months of the date written on Cheque then Cheque is called Stale Cheque. Bank
can not make the payment of Stale Cheque and return it unpaid with the reason “Stale Cheque or Instrument”.
8. Payment Stopped by Drawer – Mostly drawer stop the payment in case of Cheque is lost or stolen or other
reason may be. In this case, Bank dishonor the Cheque and return it unpaid with the reason that payment stopped
by drawer.
9. Dormant / Inoperative Account – If account is dormant or inoperative then bank can dishonor the Cheque.
10. Account Number – If account number is not mentioned in Cheque clearly or it is absent. Then bank dishonor the
Cheque.