LEGAL ASPECTS OF BUSINESS

Subject code: 301

MBA I sem and BBA 3rd Semester

Law means a ‘set of rules’ which governs our behaviours and relating in a civilized society. So there is no
need of Law in an uncivilized society.

INDIAN CONTRACT ACT 1872

Indian Contract Act, 1872
Indian Contract Act 1872 is the main source of law regulating contracts in India.
Citation Act No. 9 of 1872
Enacted by Imperial Legislative Council
Date enacted 25 April 1872
Date commenced 1 September 1872
CONTRACT
While all contracts are agreements, all agreements are not contracts. An agreement which is legally
enforceable alone is a contract. Agreements which are not legally enforceable are not contracts but remain as
void agreements which are not enforceable at all or as voidable agreements which are enforceable by only one of
the parties to the agreement. The above observation would raise a question in our minds as to what is the exact
meaning of the words ‘agreements’ and ‘contracts’.
An Agreement is a promise or a commitment or set of reciprocal promises or commitments. An Agreement
involves an offer or proposal by one person and acceptance of such offer or proposal by another person. If the
agreement is capable of being enforced by law then it is a contract.
Now let us take a look at the definitions as per the Act. Section 2(b) while defining a ‘promise’ provides that
“when the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted.
Proposal when accepted becomes a promise”.
Section 2(e) of the Act defines an agreement as ‘every promise and every set of promises forming consideration
for each other’. Section 2(h) of the Act defines the term contract as “an agreement enforceable by law”.
The law relating to contracts in India is contained in Indian Contract Act, 1872. The Act was passed by
British India and is based on the principles of English Common Law. It is applicable to all the states of India
except the state of Jammu and Kashmir. It determines the circumstances in which promises made by the parties
to a contract shall be legally binding on them. All of us enter into a number of contracts everyday knowingly or
unknowingly. Each contract creates some rights and duties on the contracting parties. Hence this legislation,
Indian Contract Act of 1872, being of skeletal nature, deals with the enforcement of these rights and duties on the
parties in India.

 Offer + acceptance = Promise+ consideration = Agreement + enforceability By Law = Contract

IMPORTANT DEFINITIONS

1. Offer (i.e. Proposal) [section 2(a)]:-When person signifies to another his willingness to do or to abstain from
doing anything, with a view to obtaining the assent of the other person to such act or abstinence, he is said to
make a proposal.

2. Acceptance 2(b):- When the person to whom the proposal is made, signifies his assent there to, the proposal is
said to be accepted.

3. Promise 2(b):- A Proposal when accepted becomes a promise. In simple words, when an offer is accepted it
becomes promise.

4. Promisor and promisee 2(c):- When the proposal is accepted, the person making the proposal is called as
promisor and the person accepting the proposal is called as promisee.

5. Consideration 2(d):- When at the desire of the promisor, the promisee or any other person has done or
abstained from doing something or does or abstains from doing something or promises to do or abstain from
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doing something, such act or abstinence or promise is called a consideration for the promise. Price paid by one
party for the promise of the other Technical word meaning QUID-PRO-QUO i.e. something in return.
6. Agreement 2(e):- Every promise and set of promises forming the consideration for each other. In short,

7. Contract 2(h):- An agreement enforceable by Law is a contract. Therefore, there must be an agreement and it
should be enforceable by law.

8. Void agreement 2(g):- An agreement not enforceable by law is void.
9. Voidable contract 2(i):- An agreement is a voidable contract if it is enforceable by Law at the option of one or
more of the parties there to (i.e. the aggrieved party), and it is not enforceable by Law at the option of the other or
others.
10. Void contract: - A contract which ceases to be enforceable by Law becomes void when it ceases to be
enforceable.

Essential Elements of a Valid Contract

According to Section 10, "All agreements are contracts, if they are made by the free consent of the parties,
capacity of parties to contract, for a lawful consideration with a lawful object, and not hereby expressly to be
void."

1. Proper offer and proper acceptance There must be an agreement based on a lawful offer made by person to
another and lawful acceptance of that offer by the letter. Sections 3 to 9 of the Contract Act, 1872 lay down the
rules for making valid acceptance.

2. Lawful consideration An agreement to form a valid contract should be supported by consideration.

Consideration means something in return (quid pro quo). It can be cash, kind, an act or abstinence. It can be
past, present or future. However, consideration should be real and lawful and not fictional.

3. Capacity of parties to Contract In order to make a valid contract the parties to it must be competent to be
contracted. According to section 11 of the Contract Act, a person is considered to be competent to contract if he
satisfies the following criterion:

 The person has reached the age of majority.

 The person is of sound mind.
 The person is not disqualified from contracting by any law.

4. Free Consent To constitute a valid contract there must be free and genuine consent of the parties to the
contract. It should not be obtained by misrepresentation, fraud, coercion, undue influence or mistake.

5. Lawful Object and Agreement The object of the agreement must not be illegal or unlawful.

6. Agreement not declared void or illegal Agreements which have been expressly declared void or illegal by
law are not enforceable at law; hence they do not constitute a valid contract.

7. Intention To Create Legal Relationships When the two parties enter into an agreement, there must be
intimate relationship between them to create a legal relationship between them. If there is no such intention on
the part of the parties. There is no contract between them. Agreements of a social or domestic nature do not
contemplate legal relationship; as such they are not contracts.

8. Certainty, Possibility of Performance

9. Legal Formalities

10. By surety

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Distinction between Contract & Agreement

Section Sec. 2(h) Sec. 2(e)

Definition A contract is an agreement Every promise or every set of
enforceable by law. promises forming consideration for each
other is an agreement.
Enforceability Every contract is enforceable Every promise is not enforceable.
Interrelationship A contract includes an agreement. An agreement does not include a contract.
Scope The scope of a contract is limited, as Its scope is relatively wider, as it
it includes only commercial includes both social agreement and
agreements. commercial agreements.
Validity Only legal agreements are called An agreement may be both legal and illegal.
Contracts.
Legal Obligation Every contract contains a legal It is not necessary for every agreement to
obligation. have legal obligation.

TYPES OF CONTRACT
Now let us discuss various types of contracts

TYPES OF CONTRACTS ON THE BASIS OF

VALIDITY FORMATION PERFORMANCE

VALID CONTRACT EXPRESS CONTRACT EXECUTED CONTRACT

VOIDABLE CONTRACT
VOID CONTRACT
IMPLIED CONTRACT EXECUTORY CONTRACT

QUASI CONTRACT
UNILATERAL CONTRACT
BILATERAL
ILLEGAL CONTRACT
AGREEMENT
1. Void Contracts: Section 2 (j) states as follows: “A contract which ceases to be enforceable by
law becomes void when it ceases to be enforceable”. Thus a void contract is one which cannot
UNENFORCEABLE
be enforced by a court of law.
Example: Mr. X agrees to write a book with a publisher. After few days, X dies in an accident.
Here the contract becomes void due to the impossibility of performance of the contract.
It may be added by way of clarification here that when a contract is void, it is not a contract at all but
for the purpose of identifying it, it has to be called a [void] contract.
2. Voidable Contract: Section 2[i] defines that an agreement which is enforceable by law at the
option of one or more parties but not at the option of the other or others is a voidable contract.
This infect means where one of the parties to the agreement is in a position or is legally entitled or
authorized to avoid performing his part, then the agreement is treated and becomes voidable. Such
a right might arise from the fact that the contract may have been brought about by one of the parties
by coercion, undue influence, fraud or misrepresentation and hence the other party has a right to
treat it as a voidable contract.
At this juncture it would be desirable to know the distinction between a void contract and
avoidable contract. The distinctions lay in three aspects namely definition, nature and rights. These are
elaborated hereunder:
(a) Definition: A void contract cannot be enforced at all. A voidable contract is an agreement
which is enforceable only at the option of one of the parties but not at the option of the other.
Therefore ‘enforceability’ or otherwise, divides the two types of contracts.
(b) Nature: By nature, a void contract is valid at the time when it is made but becomes

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 unenforceable and thus void on account of subsequent developments or events like supervening
impossibility, subsequent illegality etc., Repudiation of a voidable contract also renders the
contract void. Similarly a contingent contract might become void when the occurrence of the
event on which it is contingent becomes impossible.
On the other hand voidable contract would remain valid until it is rescinded by the person who has
the option to treat it as voidable. The right to treat it as voidable does not invalidate the contract until
such right is exercised. All contracts caused by coercion, undue influence, fraud, misrepresentation
are voidable. Generally, a contract caused by mistake is void.
(c) Rights: As regards rights of the parties, in the case of a void contract there is no legal remedy
for the parties as the contract cannot be performed in any way. In the case of voidable contract the
aggrieved party has a right to rescind it within a reasonable time. If it is so rescinded, it becomes
void. If it is not rescinded, it is a valid contract.

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

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 6.Tacit Contracts: Tacit contracts are those that are inferred through the conduct of parties. A
classic example of tacit contract would be when cash is withdrawn by a customer of a bank
from the automatic teller machine [ATM]. Another example of tacit contract is where a contract
is assumed to have been entered when a sale is given effect to at the fall of hammer in an
auction sale.
Further classification of contracts is possible on the basis of their performance. They are:
7. Executed Contract: The consideration in a given contract could be an act or forbearance. When
the act is done or executed or the forbearance is brought on record, then the contract is an executed
contract.
8.Executory Contract: In an executory contract the consideration is reciprocal promise or
obligation. Such consideration is to be performed in future only and therefore these contracts
are described as executory contracts.
9.Unilateral Contract: Unilateral contracts are a one sided contract in which only one party
has to perform his duty or obligation.
10. Bilateral Contracts: A Bilateral contract is one where the obligation or promise is
outstanding on the part of both the parties.

PROPOSAL / OFFER
It has been explained in the previous paragraphs that a proposal or a promise backed by legal
consideration is an agreement and such an agreement, if legally enforceable, becomes a contract. It
would therefore be clear that the starting point of this chain is a proposal or a promise. It is
proposed now to discuss as to what is a proposal/offer, what are the types of offer, etc.
The word ‘proposal’ and the word ‘offer’ mean one and the same thing and therefore are used
interchangeably. In terms of Section 2(a) of the Act “a person is said to make a proposal when he
signifies to another his willingness to do or abstain from doing anything with a view to obtaining
the assent of that other to such act or abstinence”. It must be appreciated that ‘doing an act’ and
‘not doing an act’ both have the same effect in the eyes of the law, though one is a positive act and
the other is a negative act.
Hence there are two important ingredients to an offer. Firstly, it must be expressions of willingness
to do or to abstain from doing an act. Secondly, the willingness must be expressed with a view to
obtain the assent of the other party to whom the offer is made.

This can be illustrated as follows:

(a) Where “A” tells “B” that he desires to marry ‘B’ by the end of 2006, there is no offer made
unless, he also asks “will you marry me?”, conveying his willingness and tries to obtain the
assent of ‘B’ in the same breadth.
(b) Where “A” offers to sell his car to “B” it conveys his willingness to do an act. Through this
offer nor only willingness is being conveyed but also an intention to obtain the assent can be
seen.
Classification of offer: Offer can be classified as general offer, special/specific offer, cross offer,
counter offer, standing/open/continuing offer. Now let us examine each one of them.
(a) General offer: It is an offer made to public at large with or without any time limit. In terms of
Section 8 of the Act, anyone performing the conditions of the offer can be considered to have
accepted the offer (Carlill v. Carbolic Smoke Ball). Until the general offer is retracted or
withdrawn, it can be accepted by anyone at any time as it is a continuing offer.
(b) Special/specific offer: Where an offer is made to a particular and specified person, it is a
specific offer. Only that person can accept such specific offer, as it is special and exclusive to him.
[Boulton v. Jones]
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(c) Cross offer: As per section 2(b), when a person to whom proposal (offer) is made signifies his
assent, the proposal is said to be accepted. Thus, assent can be only to a ‘proposal’. If there was no
proposal, question of its acceptance cannot arise. For example, if A makes a proposal to B to sell
some goods at a specified price and B, without knowing proposal of A, makes a proposal to
purchase the same goods at the price specified in the proposal of A, it is not an acceptance, as B
was not aware of proposal made by A. It is only cross proposal (cross offer). And when two
persons make offer to each other, it cannot be treated as mutual acceptance. There is no binding
contract in such a case [Tin v. Hoffmen & Co. 1873]
(d) Counter offer: Upon receipt of an offer from an offer or, if the offeree instead of accepting it
straightway, imposes conditions which have the effect of modifying or varying the offer, he is said
to have made a counter offer. Counter offers amounts to rejection of original offer.
(e) Standing or continuing or open offer: An offer which is made to public at large and if it is
kept open for public acceptance for a certain period of time, it is known as standing or continuing
or open offer. Tenders that are invited for supply of materials and goods are classic examples of
standing offer.
Rules relating to offer: Following are the rules for a valid and legal offer:
(a) The ‘offer’ must be with intent to create a legal relationship. Hence if it is accepted, it must
result in a valid contract. An invitation to join a friend for dinner is a social activity. This does
not create a legal relationship or right or obligation.
(b) The offer must be certain and definite. It must not be vague. If the terms are vague, it is not
capable of being accepted as the vagueness would not create any contractual relationship. For
example, where ‘A’ offers to sell 100 quintals of oil, without indicating what kind of oil
would be sold, it is a vague offer and hence cannot create any contractual relationship. If
however there is a mechanism to end the vagueness, the offer can be treated as valid. For
example, in the above example if ‘A’ does not deal in any oil but only in gingilee oil and this
is known to everyone, the offer cannot be treated as vague offer. This is for the reason that
the trade in which ‘A’ is, is a clear indicator providing a mechanism to understand the terms
of offer.
(c) The offer must be express or implied.
(d) The offer must be distinguished from an invitation to offer.
(e) The offer must be either specific or general.
(f) The offer must be communicated to the person to whom it is made. Otherwise the offeree
cannot accept the offer. He cannot accept the offer because he is not aware of the existence of
the offer. Such a situation does not create any legal obligation or right on any one.
(g) The offer must be made with a view to obtaining the consent of the offeree.
(a) An offer can be conditional but there should be no term in the offer that non-compliance
would amount to acceptance. Thus the offeror cannot say that if non-acceptance is not
communicated by a certain time the offer would be treated as accepted.
ACCEPTANCE
The significance of “acceptance of a proposal so as to form an agreement has been discussed in
previous paragraphs. Let us analyze various issues concerning ‘acceptance’ now,
Meaning: In terms of Section 2(b) of the Act, “A proposal or offer is said to have been accepted
when the person to whom the proposal is made signifies his assent to the proposal to do or not to do
something”. In short, act of acceptance lies in signifying one’s assent to the proposal.
Relationship between offer and acceptance: According to Sir William Anson “Acceptance is to
offer what a lighted match is to a train of gun powder”. The effect of this observation is that what
acceptance triggers cannot be recalled or undone. But there is a choice to the person who had the
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train to remove it before the match is applied. It in effect means that the offer can be withdrawn
just before it is accepted. Acceptance converts the offer into a promise and then it is too late to
revoke it. This means as soon as the train of gun powder is lighted it would explode. Gun powder
[the train] itself is inert, but it is the lighted match [the acceptance] which causes the gun powder
to explode. The significance of this is an offer by itself cannot create any legal relationship but it is
the acceptance by the offeree which creates a legal relationship. Once an offer is accepted it
becomes a promise and cannot be withdrawn or revoked. An offer remains an offer so long as it is
not accepted, but becomes a contract as soon as it is accepted.
Rules governing acceptance
(1) Acceptance must be absolute and unqualified: As per Section 7 of the Act, acceptance is valid
only when it is absolute and unqualified and is also expressed in some usual and reasonable
manner unless the proposal prescribes the manner in which it must be accepted. If the proposal
prescribes the manner in which it must be accepted, then it must be accepted accordingly. The
above view will be clear from the following example:
‘A’ enquires from ‘B’, “Will you purchase my car for ` 2 lakhs?” If ‘B’ replies “I shall purchase
your car for ` 2 lakhs, if you buy my motorcycle for ` 50000/-, here ‘B’ cannot be considered to
have accepted the proposal. If on the other hand ‘B’ agrees to purchase the car from ‘A’ as per his
proposal subject to availability of valid Registration Certificate / book for the car, then the
acceptance is in place though the offer contained no mention of R.C. book. This is because
expecting a valid title for the car is not a condition. Therefore the acceptance in this case is
unconditional.
(2) The acceptance must be communicated: To conclude a contract between the parties, the
acceptance must be communicated in some perceptible form. Any conditional acceptance or
acceptance with varying or too deviant conditions is no acceptance. Such conditional acceptance
is a counter proposal and has to be accepted by the proposer, if the original proposal has to
materialize into a contract. Further when a proposal is accepted, the offeree must have the
knowledge of the offer made to him. If he does not have the knowledge, there can be no
acceptance. The acceptance must relate specifically to the offer made. Then only it can materialize
into a contract. The above points will be clearer from the following examples,
(a) M offered to sell his land to N for £ 280. N replied purporting to accept the offer but enclosed
a cheque for £ 80 only. He promised to pay the balance of £ 200 by monthly installments of £
50 each. It was held that N could not enforce his acceptance because it was not an unqualified
one. [Neale vs. Merret [1930] W. N. 189].
(b) A offers to sell his house to B for ` 1000/-. B replied that, “ I can pay ` 800 for it. The offer of
‘A’ is rejected by ‘B’ as the acceptance is not unqualified. B however changes his mind and is
prepared to pay ` 1000/-. This is also treated as counter offer and it is upto A whether to
accept it or not. [Union of India v. Bahulal AIR 1968 Bombay 294].
A mere variation in the language not involving any difference in substance would not make the
acceptance ineffective. [Heyworth vs. Knight [1864] 144 ER 120].
(3) Acceptance must be in the prescribed mode: Where the proposal prescribes the mode of
acceptance, it must be accepted in that manner. Where the proposal does not prescribe the manner,
then it must be accepted in a reasonable manner. If the proposer does not insist on the proposal being
accepted in the manner in which it has to be accepted, after it is accepted in any other manner not
originally prescribed, the proposer is presumed to have consented to the acceptance. Sometimes the
acceptor may agree to a proposal but may insist on a formal agreement, in which case until a formal
agreement is drawn up there is no complete acceptance.
(4) The acceptance must be given within a reasonable time and before the offer lapses.
(5) Mere silence is not acceptance. The acceptor should expressly accept the offer. Acceptance
can be implied also. Acceptance must be given only by that person to whom it is made, that
too only after knowing about the offer made to him.
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 (6) Acceptance by conduct: As already elaborated above, acceptance has to be signified either in
writing or by word of mouth or by performance of some act. The last of the method, namely ‘by
some act’ has to be understood as acceptance by conduct. In a case like this where a person
performs the act intended by the proposer as the consideration for the promise offered by him, the
performance of the act constitutes acceptance. In other words, there is an acceptance by conduct.
For example, where a tradesman receives an order from a customer, and the order is executed
accordingly by the trader, there is an “acceptance by conduct” of the offer made by the customer.
The trader’s subsequent act signifies acceptance.
Section 8 of the Act very clearly in this regard lays down that “ the performance of the
condition(s) of a proposal or the acceptance of any consideration of a reciprocal promise which
may be offered with a proposal constitutes an acceptance of the proposal.
CONSIDERATION
The expression ‘consideration’ has to be understood as a price paid for an obligation. In Curie Vs
Misa 1875 10 Ex 130 is was held (in U K) that consideration is “some right, interest, profit or
benefit accruing to one party or forbearance, detriment, loss, or responsibility given, suffered or
under taken by the other”. The judgment thus refers to the position of both the promisor, and the
promisee in an agreement.
Section 2 (d) of the Act defines consideration as ‘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 an act or abstinence or promise is called
consideration for the promise’.
From the above definition it can be inferred that,
Consideration is doing or not doing something, which the promisor desires to be done or not done.
(1) Consideration must be at the desire of the promisor.
(2) Consideration may move from one person to any other person
(3) Consideration may be past, present or future and
(4) Consideration should be real though not adequate
In most cases the promisor for doing an act or not doing an act derives some benefit by way of
consideration. This consideration is identified as quid pro quo from its promise of the promisor.
But it is also possible that there may not be any identifiable benefit towards consideration. For
example ‘A’ promises to carry ‘B’ goods free of charge and B allows ‘A’ to carry the same. Here
‘B’ does not offer any consideration to ‘A’. Is this a valid contract?
The answer to the question is ‘B’ has suffered a detriment or disadvantage while allowing ‘A’ to
carry his goods. Here there is sufficient consideration. This illustration is given essentially
to prove the point that consideration could be not necessarily a gain or advantage to the promisor but
it can even be a loss or detriment to the promisee. That is why ‘consideration’ is referred to as a
concept with ‘double aspect’.
Where Y applies for a loan of ` 10,000/- to X, and if ‘X’ insists on a guarantee by ‘S’ and upon ‘S’
guaranteeing the loan, ‘X’ gives the loan to “Y”. In this case ‘S’ will be the promisor and ‘X’ the
promisee. The benefit in this transaction conferred on ‘Y’ by ‘X’ at the guarantee of ‘S’, is sufficient
consideration for X. In other words ‘X’ has suffered a detriment which is the consideration for the
guarantee of ‘S’ to repay the loan which ‘X’ has given to ‘Y’. Detriment to one is benefit to another.
It can often be seen that consideration is mutual. For instance if ‘A’ promises to sell his house to
‘B’ for ` 5 lakhs ,here “A” is the promisor and “B” is the promisee. In the same transaction where
‘B’ agrees to buy the house for ` 5 lakhs, ‘B’ will be the promisor and ‘A’ will be the promisee.
Here ‘A’ must part with the house and ‘B’ must part with ` 5 lakhs. This proves the point that
consideration is mutual and has two sides.
Whether gratuitous promise can be enforced?
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The word “gratuitous” means ‘free of cost’ or ‘without expecting any return’. It can therefore be
inferred that a gratuitous promise will not result in an agreement in the absence of consideration.
For instance a promise to subscribe to a charitable cause cannot be enforced.

Legal Requirements Regarding Consideration

(i) Consideration must move at the desire of the promisor: Consideration must move at the
desire of the promisor, either from the promisee or some other third party. But consideration cannot
move at the desire of a third party. Where collector had passed an order that any one using the
market constructed by the Zamindar, for the purpose of selling his goods should pay commission to
the Zamindar, it was held that it was not a proper order as the desire to receive consideration had not
emanated from the Zamindar but from a third party namely the collector (Durga Prasad Vs Baldev
(1880) 3, All 221)
(ii) Consideration can flow either from the promisee or any other person: The consideration
for a contract can move either from the promisee or from any other person. This point is made clear
even by the definition of the word “consideration”, according to which at the desire of the promisor,
the promisee or any other person, doing something is consideration.
That the consideration can legitimately move from a third party is an accepted principle of law in
India though not in England. ‘A’ by a deed of gift made over certain property to her daughter with
condition that her brother should be paid annuity by A’s daughter. On the same day A’s daughter
executed a document agreeing to pay annuity accordingly but declined to pay after sometime. A’s
brother sued A’s daughter. It was contended on behalf of A’s daughter, that there was no
consideration from A’s brother and hence there was no valid contract. This plea was rejected on
the ground that the consideration did flow from A’s mother to ‘A’ and such consideration from
third party is sufficient to enforce the promise of A’s daughter to enforce her promise to pay
annuity to A’s brother [Chinya Vs Ramaya(1881) a.mad.137]
Thus a stranger to a contract can sue upon a contract in India and also in England, where a
stranger to a consideration can sue under Indian law though not under English law.
(iii) Executed and Executory consideration: Where consideration consists of performance, it is
called “executed” consideration. Where it consists only of a promise, it is executory. For example
where A pays ` 5000/- to ‘B’ requesting ‘B’ to deliver certain quantity of rice, to which B agrees,
then here consideration for B is executed by ‘A’ as he has already paid ` 5000/- whereas ‘B’s
promise is executory as he is yet to deliver the rice.
Insurance contracts are of the same type. When A pays a premium of ` 5000/- seeking insurance
cover for the year, from the insurance company which the company promises in the event of fire,
the consideration paid by A to the insurance company is executed but the promise of insurance
company is executory or yet to be executed. A forbearance by the promisor should however be
considered as an executed consideration provided the forbearance is sufficient at the time of
contract.
(iv) Past consideration: The next issue is whether past consideration can be treated as
consideration at all. This is because consideration is given and accepted along with a promise
concurrently. However the Act recognizes past consideration as consideration when it uses the
expression in Section 2(d) ‘has done or abstained from doing”. But in the event of services
being rendered in the past at the request or desire of the promisor the subsequent promise is
regarded as an admission that the past consideration was not gratuitous. The plaintiff rendered
services to the defendant at his desire during his minority. He also continued to render the same
services after the dependant attained majority. It was held to be good consideration for a
subsequent express promise by the defendant to pay an annuity to the plaintiff but it was admitted
that if the services had not been rendered at the desire of the defendant it would be hit by Section
25 of the Act. (Sindia Vs Abraham (1985)Z. Bom 755)
(v) Adequacy of Consideration: Consideration need not necessarily be of the same value as of
9
the promise for which it is exchanged. But it must be some thing which can be inadequate as
well. Inadequate consideration would not invalidate an agreement but such inadequate
consideration could be taken into account by the court in deciding whether the consent of the
promisor was freely given.
In Chijjitumal Vs. Rampal Singh AIR, 1968, the Supreme Court reiterated that consideration need not
be material and may be even absent. In the said case, the father had died leaving his house to two
sons. They had agreed to partition the house which did not admit the division in exactly equal parts
and one of the sons had agreed not to construct a door at a certain place in his portion of the house. In
a dispute, the agreement was challenged on the ground that it was without adequate consideration. The
Supreme Court came to the conclusion that the motive for the said agreement at the time when it was
made, was to avoid any dispute in future, and held that it was sufficient consideration.
The above view is in tune with explanation 2 to Section 25 of the Act, which provides that an
agreement to which the consent of the promisor is freely given is not void merely because the
consideration is inadequate. Where there is valuable consideration, Court will not interfere and
inquire into the adequacy of it but leave the matter to the parties to make their own bargain. But
inadequate consideration might raise suspicion about the free will of the promisor. Promisor could be
treated as victim of some imposition but this would not render the agreement void.
(vi) Performance of what one is legally bound to perform: The performance of an act by a
person who is legally bound to perform the same cannot be consideration for a contract. Hence, a
promise to pay money to a witness is void, for it is without consideration. Hence such a contract is
void for want of consideration. Similarly, an agreement by a client to pay to his counsel after the
latter has been engaged, a certain sum over and above the fee, in the event of success of the case
would be void, since it is without consideration.
But where a person promises to do more than he is legally bound to do, such a promise provided it
is not opposed to public policy, is a good consideration. For instance during a civil strike, a
question arose as to how best to protect a coal mine. The police authorities thought that
surveillance by a mobile force would be adequate but the colliery manager desired a stationary
police guard. Ultimately it was agreed that the police authorities would provide a stationary guard
and the manager would pay $2,200 for the service. It was held that the promise to pay the amount
was not without consideration. The police, no doubt, were bound to afford protection, but they
had discretion as to the form it should take. The undertaking to provide more protection than what
they deemed to be necessary was a consideration for the promise of reward. [Classbrook Brothers
vs. Glamorgan Country Council (19250) A.C.270]
(vii) Consideration must not be unlawful, immoral, or opposed to public policy.
1.11 Suit by a Third Party to an Agreement
There is a big difference between a third party to consideration and third party to a contract; while
the first can sue, the second cannot sue. Thus a contract by the purchaser of a mortgaged property
to pay off the mortgage cannot be enforced by the mortgagee who was not a party to the contract
between vendor and vendee.
However there are exceptions to the above principle. These are:
1. In the case of a trust, the beneficiary can sue enforcing his right though he was not a party to
the contract between the trustee and the settler. In Khawja Mohammed Khan Vs Hussain
Begum 371.A. 152, where, the father of the bridegroom promised to pay through a contract
with the father of the bride, an allowance to the bride, if she married his son, the bride sued
her father-in-law after marriage for the allowance which he did not pay as per the contract. It
was held by the Privy Council that though the bride was not a party to the contract between
her father and father in law, she could enforce her claim in equity.
2. In the case of family settlement, if the terms of settlement are reduced in writing, members of
the family who were not a party to the settlement can (also) enforce their claim.(Shuppu Vs
Subramanian 33 Mad.238)
10
3. In the case of certain marriage contracts a female member can enforce a provision for
marriage expense based on a petition made by the Hindu undivided family (Sunder Raja Vs
Lakshmi 38. Mad 788).
4. Where there is an assignment of a contract, the assignee can enforce the contract for various
benefits that would accrue to him on account of the assignment.[Krishanlal Sadhu Vs
Primila Bala Dasi (1928) Cal.1315]

Free Consent

In terms of section 13 of the Act, two or more persons are said to have consented when they agree
upon the same thing in the same manner. This is referred to as identity of minds or “consensus- ad-
idem”. Absence of identity of minds would arise when there is an error on the part of the parties
regarding (a) nature of transaction or (b) person dealt with or (c) subject matter of agreement .In such
cases there would be no consent. However cases of fundamental errors have to be distinguished from
cases of mutual mistakes.
Example: Where the persons refer to a ship of a name in the contract but each of them had a different
ship in mind though of same name, there is no identity of minds and hence there is no consent. That
there is no contract in the absence of consent was considered in the case of Cundy Vs Lindsay. In this
case one Blenkarn in placing order for goods with Cundy closely imitated the address and signature
of another well-known firm known as Blenkiron & Co. Cundy sent the goods to Blenkarn but
thinking that the order was from Blenkiron & Co. Blenkarn in turn sold the goods to Lindsay. Cundy
discovered his mistake, brought a suit against Lindsay for recovery of goods. It was held by the
House of Lords that Cundy was under mistake as he thought he was dealing with Blenkiron & Co,
while he was in fact dealing with Blenkran. Hence there was no contract at all. The agreement was
declared as void in the absence of identity of minds or proper consent. The suit was decreed against
Lindsay.
The consent referred above must be “free consent” as well. Consent is free when it is not caused by
coercion, undue influence, fraud, misrepresentation or mistake (Section 14). When the consent is
caused by mistake, the agreement is void, but when caused by other factors it is voidable.
Now let us discuss each of these factors, which should not influence consent.
(a) Coercion(Section 15): “Coercion” is the committing, or threatening to commit any act
forbidden by the Indian Penal Code 1860, or the unlawful detaining, or threatening to detain any
property, to the prejudice of any person whatever, with the intention of causing any person to enter
into an agreement.
For example, X says to Y ‘I shall not return the documents of title relating to your wife’s property,
unless you agree to sell your house to me for ` 5000’. ‘Y’ says, “All right, I shall sell my house to
you for ` 5000; do not detain my wife’s documents of title”, X has employed coercion; he cannot
therefore enforce the contract. But Y can enforce the contract if he finds the contract to his
benefit. An agreement induced by coercion is voidable and not void. That means it can be
enforced by the party coerced, but not by the party using coercion.
It is immaterial whether the Indian Penal Code,1860 is or is not in force at the place where the
coercion is employed.
Where husband obtained a release deed from his wife and son under a threat of committing
suicide, the transaction was set aside on the ground of coercion, suicide being forbidden by the
Indian Penal Code. (Amiraju Vs. Seshamma (1974) 41 Mad, 33)
A person to whom money has been paid or anything delivered under coercion, must repay or return
it.
(b) Undue influence (Section 16): A contract is said to be induced by “undue influence” where
the relations subsisting between the parties are such that one of the parties is in a position to
dominate the will of the other and uses that position to obtain an unfair advantage of the other. A
11
person is deemed to be in a position to dominate the will of the other, when he holds authority,
real or apparent over the other, or when he stands in a fiduciary relation to other.
The essential ingredients of undue influence are:
One of the parties dominates the will of the other and
(i) he has real or apparent authority over the other;
(ii) he is in a position to dominate the will of the other and
(iii) the dominating party takes advantage of the relation.
Following are the instances where one person can be treated as in a position to dominate the will
of the other.
(i) A solicitor can dominate the will of the client.
(ii) A doctor can dominate the will of his patient having protracted illness, and
(iii) A trustee can dominate the will of the beneficiary.
The burden of proof (in situations like the above) that there is no undue influence in an agreement
would be on the person who is in a position to dominate the will of the other. For instance the
‘father’ should prove that he had not unduly influenced his son in the case of any given agreement.
The stronger party must act in good faith and see that the weaker party gets independent advice.
The following two decisions would enable us to understand the law.
(a) Allahabad High Court set aside a gift of the whole of the property by an elderly Hindu to his
spiritual advisor.
(b) Similarly, Privy Council set aside a deed of gift executed by an old illiterate Muslim lady in
favour of the manager of her estate.
Money lending operations and undue influence: It is often seen that on account of ‘undue
influence’ borrowers end up paying very high rate of interest to the lenders. This is because lenders
are in a position to dominate the will of the borrowers. Such high rate of interest will be treated as
unconscionable where parties are not on same footing.
Difference between Coercion and Undue Influence: Having discussed in detail the concepts of
coercion and undue influence, let us understand the difference between the two:-
(i) Nature of action: Coercion involves physical force and sometimes only threat. Undue
influence involves only moral pressure.
(ii) Involvement of criminal action: Coercion involves committing or threatening to commit any
act prohibited or forbidden by law, or detention or threatening to detain a person or property. In
undue influence there is no such illegal act involved.
(iii) Relation ship between parties: In coercion there need not be any relationship between
parties; whereas in undue influence, there must be some kind of relationship between parties,
which enables to exercise undue influence over the other.
(iv) Exercise by whom: Coercion need not proceed from the promisor. It also need not be
directed against the promisee. Undue influence is always exercised by one on the other, both of
whom are parties to a contract.
(v) Enforceability: Where there is coercion, the contract is voidable. Where there is undue
influence the contract is voidable or court may set it aside or enforce it in a modified form.
(vi) Position of benefits received: In case of coercion, where the contract is rescinded by the
aggrieved party any benefit received has to be restored back. In the case of undue influence, the court
has discretion to pass orders for return of any such benefit or not to give any such directions.
(c) Fraud (Section 17): Fraud means and includes any of the following act committed by a party
to a contract or with his connivance or by his agent with intent to deceive another party thereto or

12
his agent or to induce him to enter into the contract.
(i) the suggestion, as to a fact, of that which is not true by one who does not believe it be true;
(ii) the active concealment of a fact by one, having knowledge or belief of the fact;
(iii) a promise made without any intention of performing it;
(iv) any other act fitted to deceive; and
(v) any such act or omission as to law specially declared to be fraudulent
It is important to note that ‘fraud’ that results in a contract alone is covered by section17 of the
Act. If there is a ‘fraud’ but it does not result in a contract, it would not fall within the purview
of the Act.
The following can be taken as illustration of fraud:
 A director of a company issues prospectus containing misstatement knowing fully well about
such mis-statement. It was held any person who had purchased shares on the faith of such
misstatement can repudiate the contract on the ground of fraud.
 B discovered an ore mine in the Estate of ‘A’ He conceals the mine and the information about
the mine. ‘A’ in ignorance agrees to sell the estate to ‘B’ at a price that is grossly undervalued.
The contract would be voidable of the option of ‘A’ on the ground of fraud.
 Buying goods with the intention of not paying the price is an act of fraud.
 It will be interesting to know that not only Contract Act, but also other Acts have specifically
declared certain acts and omission as fraud. A seller of a property should disclose any material
defect in the property. Concealing the information would be an act of fraud. Any other act
committed to deceive is fraud.
Mere silence would amount to fraud under certain circumstances.
Although a mere silence as to facts which is likely to affect the willingness of a person to enter
into a contract is no fraud, where there is a duty to speak or where his silence is equivalent to
speech, then such silence amounts to fraud. This would be clearly seen from the explanation to
Section 17 of the Indian Contract Act,1872. This situation often arises in Insurance contracts.
In the case of fire insurance contract between person standing in fiduciary relationship, non-
disclosure of certain information would amount to fraud as there is a duty to make special disclosure.
These are also know as uberrimae fidei contract.
In the case of marine insurance policy contract, where a charterer is shipping goods of high value but
fails to disclose such high value of the goods to the underwriter, there is fraud. Similarly the insurer
is not bound by the policy issued by him where he is misinformed about insurance policy previously
taken by the insured.
(d) Misrepresentation [Section 18]: “Misrepresentation’ does not involve deception but is only
an assertion of something by a person which is not true, though he believes it to be true.
misrepresentation could arise because of innocence of the person making it or because he lacks
sufficient or reasonable ground to make it. A contract which is hit by misrepresentation can be
avoided by the person who has been misled.
For example, A makes the statement on an information derived, not directly from C but from
M. B applies for shares on the faith of the statement which turns out to be false. The statement
amounts to misrepresentation, because the information received second-hand did not warrant A
to make the positive statement to B [Section 18 (1)]
Now let us analyse the difference between fraud and misrepresentation.
(i) Extent of truth varies: One of the important difference between fraud and misrepresentation
is that in case of fraud the person making the representation knows it fully well that his statement is
untrue& false. In case of misrepresentation, the person making the statement believes it to be true
which might later turn out to be untrue. In spite of this difference, the end result is that the other
13
party is misled.
(ii) Right of the person concerned who suffers: Fraud not only enables the party to avoid the
contract but is also entitled to bring action. Misrepresentation merely provides a ground for
avoiding the contract and not for bringing an action in court.
(iii) Action against the person making the statement: In order to sustain an action for deceit,
there must be proof of fraud. As earlier discussed fraud can be proved only by showing that a false
statement was made knowing it to be false or without believing it to be true or recklessly without any
care for truth. One is for action against deceit and the other is action for recession of the contract. In
the case of mis-representation the person may be free from blame because of his innocence but still
the contract cannot stand.
(iv) Defences available to persons: In case of misrepresentation, the fact that plaintiff had means
of discovering the truth by exercising ordinary diligence can be a good defence against the
repudiation of the contract, whereas a defence cannot be set up in case of fraud other than
fraudulent silence.
The tenuous difference between fraud and misrepresentation was beautifully brought out in the
famous case of Derry vs. Peek. In the said case the plaintiff brought an action of deceit against the
promoters of a tramway company.
According to him, the promoters in the prospectus had not mentioned that they had not obtained
the permission of the board of trade which was necessary for using mechanical power [to run a
train] and here this was deceit. The plea of the defendant was that it never occurred to them to say
anything about the consent of the Board of trade because they had a right under the Act of
parliament for using steam; they had presumed, they would also get the consent of Board of trade.
The Court verified the position and concluded that there was no deceit and the plea for action for
deceit was dismissed.
1.14 Mistake
The fifth significant element that vitiates consent is ‘Mistake’. Where parties to an agreement are
under a mistake as to a matter of fact which is essential to the agreement, then the agreement is
void. As we all know a void agreement cannot be enforced at all.
Example: ‘A’ agrees to sell certain cargo which is supposed to be on its way in a ship from London
to Bombay. But in fact, just before the bargain was struck, the ship carrying the cargo
was cast away because of storm and rain and the goods were lost. Neither of the parties was aware of
it. The agreement is void. [Couturier vs Hasite 5 H.L.C.673]
Mistake must be a matter of fact and not of law. Where ‘A’ and ‘B’ enter into contract believing
wrongly that a particular debt is not barred by law of limitation, then the contract is valid because
there is no mistake of fact but of law only. However a question on foreign law would become a
matter of question of fact. Similarly the existence of a particular private right though depends
upon rules of law, is only a matter of fact. For instance where a man promises to buy a property
which already belongs to him without him being aware of it, then such a promise is not binding on
him. However a family arrangements or a compromise of doubtful rights cannot be avoided on the
ground of mistake of law.
Yet another issue to remember in mistake is that it must be of an essential fact. Whether the fact is
essential or not would again depend on how a reasonable man would regard it under given
circumstances. A mere wrong opinion as to the value is not an essential fact.
While deciding whether a contract is hit by mistake or not it must be remembered that ‘Mistake’
is not unilateral. Both the parties should be under mistake. A unilateral mistake would not render
the contract invalid. For example where ‘A’ agrees to purchase from ‘B’ 18 caret gold thinking it
to be pure gold but ‘B’ was not instrumental for creating such an impression then contract
between ‘A’ and ‘B’ should be treated as valid.
From the foregoing it is clear that:-
14
a. Mistake should be a matter of fact
b. Mistake should not be a matter of law
c. Mistake should be a matter of essential fact
d. Mistake should not be unilateral but of both the parties and
e. Mistake renders agreement void and neither party can enforce the contract against each other
Capacity to Contract
The next issue for consideration is, who is competent to contract? Every person who (a) has attained
the age of majority (b) is of sound mind and (c) is not otherwise disqualified from contracting, is
competent to contract. Now let us discuss each one of these requirements.
(a) Age of majority: In terms of Indian Majority Act 1875, every domiciled Indian attains
majority on the completion of 18 years of age. However where a guardian is appointed by a court
to protect the property of a minor and the court takes charge of the property before the person
attains 18 years, then he or she would attain majority on completion of 21 years.
Now let us analyze the position with regard to the position of minor’s agreement -
(i) An agreement entered into by a minor is altogether void: An agreement entered into by a
minor is void against the minor and the question of its enforceability does not arise. The Privy
Council in Mohiri Bibee vs. Dharmodos Ghose [1903] LR 30, Cl 5395, decided that an agreement
where minor is a party is altogether void. In this case a minor executed a mortgage in favour of
the husband of Mohiri Bibee. The question for consideration is whether the mortgage is valid.
Interpreting Sections 10 &11 of the Indian Contract Act, 1872 Privy Council held that unless all
the parties to an agreement were competent to contract, the agreement would be void. The main
reason for such a view is that a minor is incapable of performing his part of the contract imposing
a legal obligation.
(ii) Minor can be a beneficiary: Though a minor is not competent to contract, nothing in the
Contract Act prevents him from making the other party bound to the minor. Thus, a promissory
note duly executed in favour of a minor is not void and can be sued upon by him, because he
though incompetent to contract, may yet accept a benefit.
A minor cannot become partner in a partnership firm. However, he may with the consent of all the
partners, be admitted to the benefits of partnership (Section 30 of the Indian Partnership
Act,1932).
(iii) Minor can always plead minority: Any money advanced to a minor cannot be recovered as he
can plead minority and that the contract is void. Even if there had been false representation at the
time of borrowing that he was a major, the amount lent to him cannot be recovered.
This position was upheld by Privy Council in Mohiri Bibee’s case where money was lent to a
minor with full knowledge of the borrower’s infancy and even request for payment of
compensation under sections 38 & 41 of the Specific Relief Act,1963 was refused. Privy Council
concurred with the views of Calcutta High Court that no discretion could be used even under that
Act to grant any kind of relief to the lender of money.
When the mortgage documents had to be cancelled at the instance of minor who mortgaged the
property fraudulently, Courts have ordered compensation under Specific Relief Act,1963 to the
other party to the instrument [Dattaram vs. Vinayak (1903) 28 bom.181., Manmatha Kumar vs.
Exchange Loan Co. 41 C.W.e.N 115]
If a minor had obtained payment fraudulently by concealing his age, he may be compelled to restore
the payment but he cannot be compelled for an identical sum as it would amount to enforcing void
contract.
(iv) Ratification of agreement not permitted: A minor on his attaining majority cannot validate
any agreement which was entered into when he was minor, as the agreement was void. Similarly a
15
minor cannot sign fresh promissory notes on his attaining majority in lieu of promissory notes
executed for a loan transaction when he was minor, or a fresh agreement without consideration.
(v) Liability for necessaries: A person who supplied necessaries of life to a minor or his family, is
entitled to be reimbursed from the properties of a minor, not on the basis of any contract but on the
basis of an obligation resembling a contract. Necessaries of life not only include food and clothing
but also education and instruction. They also include ‘goods’ and ‘services’.
(vi) Contract by guardian are valid: Though an agreement with minor is void, valid contract can be
entered into with the guardian on behalf of the minor. The guardian must be competent to make the
contract and the contract should be for the benefit of the minor. For instance a guardian can make an
enforceable marriage contract on behalf of the minor. Similarly father of bride can enter the contract
with the father of bridegroom for payment of certain allowance to the bride.
But not all contracts by guardian are valid. A guardian cannot bind a minor in a contract to purchase
immovable properties [Mir Sarwarjan vs. Fakharuddan (1912) 39. Cal. 232]. However, a court
appointed guardian can bind a minor is respect of certain sale of property ordered by the court.
1.17 Lawful Object and Consideration
Now let us discuss two other important ingredients of a valid contract namely lawful object and
lawful consideration. Speaking generally all persons enjoy freedom for entering into contracts of
their choice. But this contractual freedom or their right to enter into agreements is not absolute.
There is a limitation on such contractual freedom as they are bound by certain general provisions
of law. The above observation can be illustrated with the following example: suppose ‘A’ agrees
to pay ` 100/- to B on ‘B’ stealing ‘C’s purse, then no Court can compel ‘A’ to pay ‘B’ even if he
manages to steal ‘C’s purse because it would amount to encouraging these things.
While on the subject of ‘object’ and ‘consideration’ it must be said that in practice it is difficult
to distinguish between ‘object’ and ‘consideration’ especially when consideration consists of a
promise to do or, not to do something. Sometimes both ‘object’ and ‘consideration’ are seen for
evaluation. For example, where ‘A’ agrees to sell goods to ‘B’ who is insolvent and B assigns the
benefit of the contract for ` 100/- with a view to defrauding creditors, the consideration for the
assignment viz ` 100/- is lawful but the object namely defrauding creditors is unlawful as it is to
defeat the provision of insolvency law.
Although ‘object’ and ‘consideration’ are sometimes intertwined we have to, where ever it is
possible, separate them and identify whether they are lawful.
1.18 Unlawful Object
In terms of section 23 of the Act ‘consideration’ or object is unlawful if it is forbidden by law; or
it would if permitted, defeat the provisions of any law or is fraudulent or involves injury to the
person or property of another or is immoral or opposed to public policy. Every agreement where
the object or consideration is unlawful is void. Thus section 23 has set out the limits to contractual
freedom. Following are examples of agreement which are void because the object is unlawful.
(i) Where A, B & C enter into an agreement to share equally among themselves certain gains
acquired by fraud or loss acquired by fraud. The agreement is void because the object being
commission of fraud is unlawful.
(ii) Promises to return the stolen property of ‘B’ if ‘B’ would withdraw the criminal case filed
against him, the agreement is void as its object namely withdrawing the case would mean
stifling prosecution.
1.19 Unlawful Consideration
Now let us consider circumstances which would make consideration and the object as well unlawful.
There are seven such circumstances namely -
(i) Agreement forbidden by law: Acts forbidden by law means acts that are punishable under
any Statute or Rules or Regulations made under any Statute.
16
For instance a plantation company that is commenced, for growing, felling and selling timber cannot
enter into any agreement to grow and fell sandalwood trees as felling of sandalwood is prohibited by
law viz Forest Act.
Example: A license to cut grass is given to ‘X’ by Forest Department under the Forest Act. The
license provides for imposition of penalty in the events of ‘X’ choosing to assign his right.
However, if ‘X’ assigns his right, the agreement would still be valid since there is no prohibition
for such assignment as the consideration stipulating penalty is only to regulate the matter as a
matter of administrative measure.
(ii) Consideration defeats the provision of law: Where an agreement is entered into with the
object of defeating any provision of law then it is prohibited. “Law” here should mean any Statute,
Law, regulation etc, in force. This can be illustrated by the following-
(a) Where a debtor agrees not to plead limitation vis-à-vis his creditor, it is an agreement to
defeat Limitation Act.
(b) An agreement between owner of land who has to pay land revenue in arrears and a stranger
that the stranger would purchase his estate for revenue’s sake and reconveys it to the former
on receipt of purchase money is void, as it would defeat the law relating to revenue, which
apparently prohibits defaulting owners from purchasing back the same
Estate already sold due to his default.
(c) An agreement by a Hindu to give his son in adoption in consideration of annual allowance to
natural parents would be in violation of Hindu Law and hence is unlawful.
(d) Any agreement by a Muslim with the wife before their marriage that the wife shall be at
liberty to live with her parents after marriage is void as it would defeat the provisions of
Muslim Law.
(iii) Consideration that would defeat any rule for the time being in force: This is a situation
not very different from point (ii) discussed above. The issue covered by this point can be
explained by following two examples:
(a) A ‘will’ must be proved in order to be probated by a court. A mere consent of parties by way
of agreement to except this requirement of proof of genuineness or proper execution of will is
not lawful and therefore cannot be enforced under C.P.C.
(b) A receiver is a court officer. Therefore his remuneration has to be fixed by the court. Parties to
certain litigations cannot add or deviate of the power of the receiver. Similarly they cannot fix
salary of a receiver without the leave of the court however unconditional it may be. Such an
act would be in contravention of law.
(iv) Where consideration is a fraud: Following are illustrations to prove where the object or
consideration of an agreement is unlawful on the ground of fraud -
(a) ‘A’ is an agent for Zamindar, the principal. He agrees for money to lease of land for ‘B’ from
his principal the Zamindar. The agreement between ‘A’ and ‘B’ is void as the consideration is
fraudulent
(b) ‘A’ & ‘B’ are partners in a firm. They agree to defraud a Government department by
submitting a tender in the individual name and not in the firm name. This agreement is void
as it is a fraud on the Government department.
(v) Where object or consideration is unlawful because it involves or causing injury to a
person or loss of property: The term ‘injury’ means criminal or wrongful harm. Following are
the illustrations where the object or consideration is unlawful as it involves injury either to person
or property.
(a) ‘A’ agrees to buy a property from ‘B’ although A knows ‘B’ had agreed previously to sell the
property to ‘C’. The intention of ‘A’ here is to cause injury to the property of ‘C’
(b) ‘A’ agrees to print a book of ‘B’ which has clearly been published by “W” This agreement is
17
 void as it is not only in violation of Copyright Act but also with the intent to cause injury to
the property of another.
(c) ‘A’ borrowed money from ‘B’. He is unable to pay either the principal or interest. Therefore
he agrees to render manual labour for certain period failing which he agrees to pay exorbitant
interest. This agreement is void as rendering labour as consideration amounts to agreeing to
be a slave. Slavery is opposed to public policy as well. In other

PERFORMANCE AND DISCHARGE OF CONTRACT

Who must perform?

 Sec.37: “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 of any
other law.”
 Representative’s Liability: Promises bind the legal representative of the deceased promisor.

 Ashok promises to deliver goods to Babu on a certain day on payment of Rs.1000. Ashok dies before
that day. Ashok’s representative is bound to deliver the goods to Babu who in turn is bound to pay
the amount to Ashok’s representative.
 Mr.A promises to paint a picture for Mr.B by a certain day, at a certain price. Mr.A dies before the
day. The contract cannot be enforced either by Mr.A’s representative or by Mr.B.

TENDER OF PERFORMANCE

It is also called “offer of performance.” It is when the parties to a contract offer to perform their
respective promises.
ESSENTIALS OF A VALID TENDER OF PERFORMANCE:
 It must be unconditional: X offers to give his house to Y, if Z permits. Offer is conditional, hence not
a valid tender.
 Offer must be made by promisor or representative.
Must be made at reasonable time & place.
 Offer cannot be of the part of performance. For example, a stakeholder not bound to accept less than
what is actually payable.
 Promisor is bound by his promise to deliver the same thing and promisee has opportunity to examine
the same.
 In case of joint promises, the tender is valid.
 It must be made to promisee or his duly authorized agent.

DISCHARGE OF CONTRACTS
A contracts is discharged when the obligations created by it come to an end. A contract may be discharged in
any of the following ways:
1. By agreement.
2. By performance of the contract.
3. By lapses of time.
4. By operation of law.
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5. By material alteration.
6. By subsequent impossibility of the performance.
7. By breach.
1. By Agreement Sec. (62-64)
The parties may agree to terminate the existence of the contract by any of the following ways:- (a) By
Novation (Sec. 62): Substitution of a new contract in place of the old existing one is
known as ‘inovation of contract’. New contract may be either between the same parties or between different
parties, the consideration being mutually the discharge of the old contract.
(i) Substitution of a contract with new terms for an old contract between the same parties.
(ii) Substitution of a new party for an old one, the contract remaining the same. Promisee will now look to the
third party for the performance of the contract. Original promisor is released of the obligations under the old
contract.
Examples
(i) A owes money to B under a contract. It is agreed between A, B and C that B shall henceforth accept C as his
debtor, instead of A. The old debt of A to B is at an end and a new debt from C to B has been contracted.
(ii) A owes B 10,000 rupees. A enters into an arrangement with B, and gives B a mortgage of his (A’s) estate for
5,000 rupees in place of the debt of 10,000 rupees. This is a new contract and extinguishes the old.
(iii) A owes B 1,000 rupees under a contract. B owes C 1,000 rupees. B orders A to credit C with 1,000 rupees
in his books but C does not assent to the arrangement. B still owes C 1,000 rupees, and no new contract has been
entered into.
Novation can take place only with the consent of all the parties. It cannot be compulsory. (Appukuthan V.
Athapa, 1966).
As a result of novation, old contract is completely discharged and law will not entertain any action based upon
the terms of the old contract.
(b) By rescission (Sec. 64) : Rescission means cancellation of the contract. A contract can be rescinded by any
of the following ways :-
(i) By mutual consent :- Parties may enter into a simple agreement to rescind the contract before it’s breach.
(ii) By the aggrieved party :- Where a party has committed a breach of the contract, the aggrieved party can
rescind the contract without in any way effecting his right of getting compensation for the breach of contract.
(iii) By the party whose consent is not free:- In case of a voidable contract, the party whose consent is not free
can, if so decides, rescind the contract.
A contract may also be taken to be impliedly rescinded wherenone of the parties has performed his part till a long
and no party has any complaint against the other.
(c) By alteration: Alteration means change in one or more of the conditions of the contract.
Alteration made by the mutual consent of the parties will be perfectly valid. But any material alteration in terms
of a written contract by the one party without the consent of other party will discharge such party from its
obligations under the contract.
In case of novation a new contract replaces an old contract. The parties may also change. While in case of
alteration only some of the terms of the contract are changed. Parties also continue to be the same.
(d) By remission (Sec. 63) : Remission means acceptance of a lesser performance than what was actually due
under the contract. According to Sec. 63 a party may dispense with or remit, wholly or in part, the performance
of the promise made to him. He can also extend the time of such performance or accept instead of any
satisfaction which he deems fit. A promise to do so will be binding even though there is no consideration for it.

19
Example:
(1) A owes B Rs. 5,000. A pays to B and B accepts in satisfaction of whole debt Rs. 2,000 paid at the time and
place where Rs. 5,000 were payable. The whole debt is discharged.
(ii) A owes B, under a contract, a sum of money., the amount of which has not been ascertained.
A without ascertaining the amount gives to B, and B, in satisfaction therefore, accepts the sum of Rs. 2,000. This
is a discharge of the whole debt whatever may be its amount.
Accord and satisfaction: These two terms are used in English Law. In England, a promise to accept less than
what is actually due under the contract is not enforceable, but if this promise has been actually carried out, it will
give a valid discharge to the other partly.
Example: A is B’s debtor for a sum, of Rs. 500. B agrees to accept Rs. 300 in full satisfaction of his claim. This
promise is unenforceable. However, if A pays Rs. 300 and B accepts the payment, A will be discharged from his
liability for the whole debt.
‘Accord means promise to accept less than what is due under the contract. ‘Satisfaction’ implies the payment or
the satisfaction of the lesser obligation. An accord not followed by satisfaction will be unenforceable. Actual
performance of the new promise and its acceptance by the other party is essentail to discharge the old obligations
by accord and satisfaction. The original cause of action is not discharged so long as the satisfaction, agreed upon,
remains executory.
(e) Owing to the occurrence of an event, on the happening of which it was previously agreed that all rights and
liabilities should cease.
(f) By waiver (Sec. 63) : A contract may be discharged by agreement between the parties to waive their rights
arising from the contract. Thus, in case of waiver, the person who is entitled to any right under the contract,
intentionally relinquishes them without consideration and without a new agreement. Under English law waiver is
possible only by agreement under seal.
Example: A promises to paint a picture for B.B afterwards forbids him to do so. A is no longer bound to perform
the promise.
2. By performance of the contract (Sec. 37)
When parties fulfil their obligations and promises under a contract the contract is said to have been performed
and discharged. Performance should be complete and according to the real intentions of the agreement. Offer of
performance shall have the same effect as performance. A party to a contract shall become free from all
obligations if it had offered to perform his part of the promise but it was not accepted by the other party.
(3) By Lapse of time
Every contract must be performed either within the period fixed or within a reasonable time of the contract.
Lapse of time may discharge the contract by barring the right to bring an action to enforce the contract under the
Limitation Act.
4. By operation of Law
A contract is discharged or terminated by operation of other laws in the following cases:
(a) Merger. Merger implies coinciding and meeting of an inferior and superior right on one and the same person.
In such a case inferior right available to a party under an agreement will automatically vanish.
Examples: A is holding a property under lease. He subsequently buys that property. A’s right as a tenant is
inferior to his right as an owner of the property. The right as a tenant and right as owner have coicided and met in
one persion i.e. A. Thereofre, A’s rights as a lesee will terminate.
(b) Death: In case a contract is of a personal nature, the death of the promisor will discharge the contract. In
other caes, the rights and liabilities of the deceased person shall pass to his legal representatives.
(c) By complete loss of evidence of the existence of the contract.

20
(d) By insolvency. An insolvent is released from performing his part of the contract by law. Order of discharge,
however gives a new lease of life to the insolvent and he is discharged from all obligations arising from all his
earlier contracts.
5. By material alternation
Any material alteration made intentionally in a written contract by the promisee or his agent without the consent
of the promisor entitles the later to regard the contract as rescinded.
An alternation will be taken to be material if it directly or indirectly affects the nature or operation of the contract
or the identity, validity or effect of the document.
6. By supervening impossibility of performance (Sec. 56)
Supervening impossibility arises due to the happening of certain events which were neither in the contemplation
of the parties when they entered into the agreement nor either of the parties are responsible for causing the
performance of the contract impossible. In such a case the contract will be void as soon as such events make the
performance of the contract impossible. The impossibility must be either legal or physical but not commercial.
This is called “Doctrine or Supervening Impossibility”. Section 56 of the Indian Contract Act lays down:
“An agreement to do an impossible act is void”.
A contract to do an act, which after the contract is made, becomes impossible, or by reason of some event which
the promisor could not prevent, becomes void when the act becomes impossible or unlawful. This is called
“Supervening Impossibility”, i.e. impossibility arising subsequent to the formation of the contract. The
supervening impossibility may be due to any of the following causes:
(a) By the destruction of the subject matter. If the subject matter of the contract is destroyed subsequent to the
formation of the contract, without any fault of either of the parties, the contract shall become void.
Example: (i) A music hall was let for a series of concerts on certain days. The hall was burnt down before the
date of the first concert. The contract was held to be void.
(ii) A person contracted to deliver a part of a specific crop of potatoes. The potatoes were destroyed through no
fault of the party. The contract was held to be discharged. Howell V. Coupland,1876).
(b) By the non-existence of a state of things necessary for the performance. If a contract is made on the basis of
continued existence of certain state of circumstances, the contract stands discharged if the state of things ceases
to exist.
Example: (i) H hired a room from K for two days to witness the coronation procession of King Edward VII. K
knew the object of the contract though the contract contained no reference to the coronation. Owing to King’s
illness the procession was cancelled. It was held that H was excused from paying rent for the room, as the
existence of the procession as the basis of the contract and its abandonment discharged the contract. (Krell V.
Henry 1903).
(ii) A and B contracted to marry each other. Before the time fixed for marriage, A goes mad. The contract
become void.
(c) Death or personal incapacity of the promisor. Contracts involving personal skill of the promisor will stand
discharged in the case of his death or personal incapacity.
Example: A contracts to act at a theatre for six months in consideratin of a sum paid in advance by B. On several
occasions A is too ill to act. The contract to act on the occasions becomes void.
(d) Change of law. On account of subsequent change in law, the performance of the contract may become
impossible. The object of the contract may be declared to be unlawful.
Example: (i) A, who is governed by Muslim law and who already had a wife promises to marry B. Subsequent to
this promise and before it is carried out, Special Marriage Act prohibiting polygamy is passed. The contract to
marry becomes void.
Example: (ii) X sold to Y a specific parcel of wheat in a godown. Before delivery could be made, the godown
was sealed by the Government and the entire quantity was requisitioned by the Government under Statutory
21
Power. The contract was held discharged (Re Shipp, Anderson & Co. V. Harrison Brs. and Co’s Arbitration
(1915).
(E) Outbreak of War. A contract entered into with an alien enemy during the war is unlawful and, therefore, void
ab initio contracts made before the outbreak of war either suspended or declared void by the Government. If they
are suspended, they may be performed after the termination of the war.
Example: A contracts to take in cargo for B at a foreign port. A’s Government afterwards declared war against
the country in which port is situated. The contract becomes void when war is declared.
It is worthwhile to not that the word “impossible” under Section 56 has not been used in the physical or literal
sense. A contract may not have become literally or physically impossible to perform but if an untoward event has
happened which has totally upset the very foundations of the contract will be taken to be impossible to perform.
Cases not Covered by Supervening Impossibility
It may be stated that impossibility to perform arising subsequently to the agreement will not, as a rule, relieve the
promisor from performing his part in all cases, because, “Where there is a positive contract to do a thing not in
itself unlawful, the contractor must perform it or pay damages for not doing it, although in consequence of
unforseen accidents, the performance of his contract has become unexpectedly burdensome or even impossible
(Tayler V. Caldwell (1863). Therefore, in the following cases the doctrine of supervening impossibility wll not
apply.
(a) Difficulty in performance. A contract can be avoided on the ground of supervening impossibility only when
the events taking place make the performance of the contract physically or legally impossible as contemplated by
the parties at the time of the making of the contract. Difficulty in performance will not discharge a contract on the
ground of impossibility of performance.
Example: (i) A sold to B a certain quality of Finland timber to be delivered between July and September1914.
Before any timber was supplied, war brokeout in the month of August and transport was disorganised so that A
could not bring any timber from Finland. It was held, B was not concerned with the way in which A was going to
get timber, and, therefore, impossibility of getting timber from Finland did not excuse performances. Blakburn
Bobbin Co. V.T.W. Allen & Sons, 1918).
(ii) X pormised to send certain goods from Bombay to Antwerp in September. In August war brokeout and
shipping space was not available except at very high rates. It was held that the increase of freight rates do not
excuse performance.
(b) Commercial impossibility: A party cannot be discharged from performing his part of the contract simply on
the ground that it will be now-profitable for him to perform the contract.
Example: A agrees to supply certain goods to B. Due to outbreak of war the price of goods suddenly shoots up. A
is not discharged from his liability to supply goods to B.
(c) Impossibility due to behaviour of a third person: A contract, the performance of which depends on the
behaviour of a third person, shall not become impossible of performance merely because the third party acted in a
particular manner agreed upon, on the ground that if a person chooses to answer for the voluntary act of third
person, he must be held to warrant his ability to procure that act.
Example: X enters into a contract with Y for the sale of certain goods to be produced by Z a manufacturer of
those goods. Z does not manufacture the goods. X is liable to Y for damages.
(d) Strikes, lockouts and civil disturbances: Strikes lock-outs and civil disturbances will not discharge a party
from performing his part of the contract unless a specific provision to this effect has been made in the contract.
Example: X agreed to supply certain goods to Y. The goods were to be procured from Algeria. Due to riots and
civil disturbances in that country goods could not be procured. It was held that there was no excuse for the non-
performance of the contract. (Jacobs V. Credit Ilyonnais 1884).
(e) Partial Impossibility: Where there are several purposes for which a contract is made, failure of one of the
objects will not terminate the contract.

22
Example: A company agreed to let a boat to H to view, (i) the naval review at the coronation; and (ii) to cruise
round the fleet. Due to the illness of the King the naval review was cancelled, but the fleet was assembled. The
boat, therefore, could sail round the fleet. Held, the contract was not discharged. (H.B. Steamboat Co. V. Hulton,
1903).
Effects of supervening Impossibility
1. The contract becomes void in case its performance becomes subsequently impossible Parties to the contract
will be released from further performance (Sec. 56 para 2).
2. The person, who has recieved any advantage under a contract which becomes subsequently void is bound to
restore it or to make compensation for it to the person from whom he received it (Sec. 65).
3. Where one person has promised to do something which he knew or with reasonable diligence might have
known, and which the promisee did not know to be impossible or unlawful, such promisor must make
compensation to such promisee for any loss which such promisee sustains through the non- performance of the
promise (Sec. 56 para 3).
Example: A contracts to marry B being already married to C and being forbidden by the law to which he is
subject to practice polygamy. A must make compensation to B for the loss caused to her by the non-performance
of his promise.
7. By Breach
Breach means failure of a party to perform his or her obligation under a contract Breach of contract may arise in
two ways.
1. Actual Breach.
2. Anticipatory Brerach.
Actual Breach : Actual breach means breach committed either; (i) at the time when the performance of the
contract is due; or (ii) during the performance of the contract.
Example: (i) agrees to supply to B on the 1st February, 1975, 1000 bags of sugar. On 1st February, 1975 he fails
to supply. This is actual breach of contract at the time when the peroformance is due. The breach has been
committed by A.
(ii) If on 1st February, 1975 A is prepared to supply the required number of bags of sugar and B without any
valid reasons refuses to accept them, B is guilty of breach a contract.
Anticipatory Breach
Breach of a contract committed before the date of performance of the contract is called anticipatory breach of
contract. (Sec. 39). The contract in this case is repudiated before the time fixed for its performance arrives and is
so discharged.
Example: (i) A agrees to employ B from 1st of March. On 1st February, he writes to B that he need not join the
service, the contract has been expressly repudiated by A before the date of its performance.
(ii) A agrees to marry B. But before the date A marries C. The contract has been repudiated by A by his conduct
before the due date of its performance.
Anticipatory breach of contract does not give rise to a right of action unless the promisee elects to treat it as
equivalent to actual breach.
Remedies in the case of anticipatory breach
Two remedies are open to a promisee in the case of an anticipatory breach of contract. He may exercise any one
of them:
1. To take the anticipatory breach as actual breach and sue for damages and other rights that may be available
to him under the law. Thus, promisee may treat the contract as over without waiting for the arrival the due date of
the performance of the contract.

23
Example: K promised to marry F soon after the death of K’s father. During the father’s lifetime K absolutely
refused to marry F. It was held that through the time of performance of the contract had not arrived. F was
entitled to sue for the breach of promise to marry. (Frost V Knight (1872).
2. To wait till the due date of performance of the contract and then avail of legal remedies in case of breach of
contract available against the party guilty of breach.
If the promisee decides to enjoy the first remedy i.e., termination of the contract at the time when anticipatory
breach of contract is communicated to him, the quantum of damages will be assessed by the difference of prices
prevailing on the date of breach and the contract price. But if the party keeps the contract alive till the due of
performance arrives, damages will be measured by the difference between the contract price and the prices
prevailing on the date fixed for the performance of the contract.
In a case when the promisee keeps the contract alive the contract will remain operative for the benefit of both the
parties. If during the interval i.e. the date of breach and the due date for the performance of the contract, special
circumstances intervene which operate for the benefit of the promisor, the promisor would also be legally entitled
to take advantage of them. He may still perform the contract irrespective of his earlier repudiation (Phul Chand
V. Jugal Kishore).

REMEDIES FOR BREACH OF CONTRACT

In the case of breach of contract on the part of one party, the aggrieved or injured party has the following
remedies available:-
1. Rescission of the contract.
2. Damages.
3. Quantum meruit.
4. Specific Performance.
5. Injunction.
Rescission of the Contract
Rescission means the setting aside of the contract. The aggrieved party may be allowed by the court of treat the
contract at an end and thereby, terminate all his liabilities under the contract. The court, however, will not allow
recession of the contract in the following cases:
(i) Where the party wishing to set aside the contract has expressly or impliedly ratified the contract.
(ii) Where only a part of the contract is sought to be set aside and that part cannot be separated from the rest of
the contract.
(iii) Where without fault of either party, there is a change in the circumstances since the making of the contract,
on account of which the parties canot be substantially restored to the position in which they were before the
contract was made.
(iv) Where during the subsistence of the contract, third parties have acquired rights in the subject matter of the
contract in good faith and for value.
The party rescinding the contract will have to restore all benefits received by him under the contract to the other
party. Of course, he will be entitled to get compensation for the loss suffered by him on account of non-
fulfillment of the contract.
Damages
Damages mean monetary compensation payable by the defaulting party to the aggrieved party in the event of the
breach of a contract. The object of providing damages is to put the aggrieved party in the same position, so far as
money can do, in which he would have been, had the contract been performed.
Types of Damages

24
Damages may be.
1. Ordinary damages.
2. Special damages.
3. Exemplary or vindictive damages.
4. Nominal damages.
1. Ordinary damages: Damages which arise in the ordinary course of events from the breach of contract are
called ordinary damages. These damages constitute the direct loss suffered by the aggrieved party. They are
estimated on the basis of circumstances prevailing on the date of the breach of the contract. Subsequent
circumstances tending to change the quantum of damages are ignored.
2. Special damages: They are those which result from the breach of the contract under special circumstances.
They constitute the indirect loss suffered by the aggrieved party on account of breach of the contract. They can
be recovered only when the special circumstances responsible for the special losses were made known to the
other party at the time of the making of the contract.
3. Exemplary or vindictive damages: They are quite heavy in amount and are awarded only in two cases:
1. Breach of a contract to marry.
2. Dishonour of a customer’s cheque by the bank without any proper reason. These damage are awarded with
the intention of punishing the defaulting party. They are of a different nature and their object is to prevent the
parties from committing breach. In the case of breach of contract to marry damages will include compensation
for the loss of the feelings and the reputation of the aggrieved party. In the case of dishonour of a cheque
damages are awarded taking into consideration the loss to the prestige and goodwill of the customer and the
general rule is that the smaller the cheque the greater is the amount of damages.
(4) Nominal Damages: These damages are quite small in amount. They are never granted by way of
compensation for the loss. In such usually actual loss is very negligible. They are awarded simply to recognize
the right of the party of claim damages for breach of the contract.
Rules regarding the determination of damages (Sec. 73)
The rules regarding damages have been very explained in an English case of Hadley V. Baxendale.
The case is discussed below:
“His mill was stopped on account of the breakage of a crankshaft B, a common carrier was entrusted with the
delivery of this machine part for taking it to its makers at Green which as a pattern for a new one. B, did not have
this information that delay in carrying the machine would result in loss of profits. The delivery was delayed
beyond a reasonable time by some neglect on the part of B. H. claimed from B compensation for the wages of
workers and depreciation charges which were incurred during the period the factory was idle for the delayed
delivery and for loss of profit which might have been made if the factory was working the first two items were
allowed because they were the natural consequences of breach but the loss of profit was disallowed as it was
special or remote loss which could be recovered only when the party had information of it.”
Alderson, J. Observed in the above case as follows.
“Where two parties have made a contract which one of them has broken, the damages which the other party
ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered
either arising naturally, i.e. according to the usual course of things, from such breach of contract itself or such as
may reasonably be supposed to have been in the contemplation of the parties, at the time they made the contract
as the probable result of the breach of it.”
Rules regarding the ascertainment of the amount of damages can be summarised as follows:
1. The principal upon which damages are to be assessed is that where a party sustains a loss by reason of breach
of contract, he is, so far as money can do it, to be placed in the same situation with respect to damages if the
contract had been performed. Aggrieved party shall be allowed compensation only for the actual loss suffered by
him.
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2. A party who sustains loss by the breach of a contract is entitled to recover from the party breaking it,
compensation for any loss or damages caused to him:
3. Compensation can be claimed for damages:-
(a) Which arise naturally in the usual course of things from breach of contract itself. (Hadley V. Baxendale,
1854) Damages are paid only for the proximate consequences of the breach of a contract; or
(b) As may reasonably be supposed to have been in the contemplation of both the parties, at the time they made
the contract, as the probable result of the breach of it.
Claim for damages must be fair and reasonable.
4. Special or indirect loss can be recovered only when the special circumstances have been made known to the
other party. Examples (1) A contracts to buy of B, at a stated price, 50 maunds of rice, no time being fixed for
delivery. A afterwards informs B, that he will not accept the rice if tendered to him. B is entitled to receive from
A, by way of compensation, the amount, if any, by which the contract price exceeds that which B can obtain for
the rice at the time when A informs B that he will not accept it.
(ii) A contracts with B to pay B Rs. 1,000 if he fails to pay B Rs. 500 on a given day. A fails to pay B Rs. 500 on
that day. B is entitled to recover from A such compensation, not exceeding Rs. 1,000 as the court considers
reasonable.
5. The party suffering from the breach is expected to take reasonable step to minimise the loss. He cannot claim
as damages any loss which he has suffered due to his own negligence.
Example
A fires B’s ship to go to Bombay, and agrees to take on board on the first of January, a cargo which A is to
provide, and to bring it to Calcutta, the freight to be paid, when earned. B’s ship does not go to Bombay, but A
has opportunities of procuring suitable conveyance for the cargo upon terms as advantageous as those on which
he had chartered the ship. A avails himself of those opportunities; but is put to trouble and expense in doing so. A
is entitled to receive compensation from B in respect of such trouble and expense.
6. Damages are given by way of restitution and compensation and not by way of punishment. Aggrieved party
can recover only the actual pecuniary loss sustained by him and not exemplary damages, except in the
circumstances already stated in the previous pages.
7. Nominal damages may be granted when breach of a contract is committed without any real loss.
8. In contracts of sale and purchase of goods the measure of damages will be the sum by which the contract price
falls short of the price at which the purchaser might have obtained goods of life quality at the time and place that
they should have been delivered. When no date has been fixed for the performance of the contract and the
promisor commits a breach, the measure of damages will be the difference between the contract price and the
market price at the date of the refusal to perform.
It is to be noted that in case of such a contract if the promisor (seller) retains the goods after the breach of the
contract by the promisee (buyer), he cannot recover from the buyer and further loss if the market fails, nor will be
liable to have his damages reduced if the market rises, (Jamal V. Molla Dawood and Sons (1916).
Example
A agreed to sell certain shares to B to be delivered on 30th December. On account of heavy fall in the value of
shares on the date B declined to accept the delivery of shares. Subsequently A sold the shares at a price higher
than that prevailing on 30th December. Since his shares had picked up in the mean time. In a suit brought A it
was held that he was entitled to recover from B the difference between the contract price of the shares and their
market price on 31st December and B was not entitled to the benefits of the profits accured after the breach.
9. As regards damages arising from the breach of contracts for the payment of money on a particular date,
interest on the principal sum from the date on which the sum was agreed to be paid till the actual date of payment
will be sufficient compensation to the aggrieved party.

26
10. If a sum is named in the contract as the amount to be paid in case of its breach if the contract contains any
other stipulation by way of penalty for failure to perfrom his part of the obligation under a contract, court will
allow reasonable compensation not exceeding the amount so named in the contract, (Kemble V. Farren 1829).
11. Damages for breach of services contracts by the employers will be determined with reference to the usual
terms of wages for the employment contracted for and the time that would be lost before similar employment can
be obtained.
12. A carrier of goods can be held responsible for damages arising from deterioration caused by delay even
without any prior notice. deterioration in the value of goods includes both physical damage to the goods as well
as damages arising from the loss of special opportunity for sale. (Wilson V. Luncashire and Yorkshire Rly. Co.)
Quantum Meruit
Literally speaking the words “Quantum Meruit” mean “as much as merited” or “as much as earned”. It is
principle which provides for payment of compensation under certain circumstances, to a person who has
rendered goods or services to another person under a contract which could not or has not been fully performed.
Example (i) :A person renders some service to a company under contract of employment which is duly approved
by the Board of Directors of that compnay. Subsequently the constitution of Board of Director’s found to be
illegal and, therefore, the contract of employment becomes void. The employee who has rendered some service
to the company shall be entitled to claim remuneration for his service under the doctrine of quantum meruit.
(ii) X forgets certain goods at Y’s house. He had no intention to have them with him gratuitously.Y
uses those goods for his personal benefit. X can compel Y to pay for those goods. Doctrine of Quantum meruit is
however, subject to the following limitation:
(a) In a contract which is not divisible in to parts and a lumpsum of money is promised to be paid for the
complete work, past performance will not entitle the party to claim any payment.
Example: A mate was engaged on the term that he would be paid in a lumpsum for a complete voyage. He died
before that voyage was completed. It was held that his representatives could not recover the lumpsum neither
could they sue for payment for the services rendered by the deceased. (Cutter V. Powel, 6: TR.320).
(b) A person, who himself is guilty of breach of contract, cannot be allowed claim any payment under the
doctrine of quantum meruit.
Example: A, a builder, undertakes to build a house on the land of X for a lumpsum. After A has done part of the
work he refuses to finish it, and X completes the building using some fo the materials left on the premises by A.
Can A recover compensation for the work he has done and for the materials used by X?
A contract being a complete entity no action lies against X, either on the original contract or on a quantum meruit
respecting the work done. The fact that X completes the work is no evidence of an undertaking to pay for what he
has been following the rule in Sumpter V. Hedges (1878).
If in completing the premises X uses the materials belonging to A, A will have a good claim in respect of the
value of the materials used.
But the above rule is subject to the following exception:-
(i) In case of a divisible contract, part performance will also entitle the defaulting party to claim compensation
the basis of quantum meruit if the other party has taken the benefit of what has been done.
(ii) If a lumpsum is to be paid for the compensation of an entire work and the work has been completed in full
though, badly the defaulting party can recover the lumpsum less a deduction for bad workmanship.
(c) Any claim based upon the doctrine of quantum meruit cannot be entertained unless there is an evidence of
express or implied promise to pay for the work which has already been done.
Following two remedies are available to the aggrieved party under equity for breach of a contract.

27
Specific performance: Law courts can at their discretion, order for the specific performance of a contract
according to the provisions of the Specific Relief Act in those cases where compensation will not be an adequate
remedy or actual damages cannot accurately be assessed.
Specific performance means the actual carrying out by the parties to contract, and in proper cases the court will
insist on the parties carrying out their agreement. Specific performance of agreement will not be granted in the
following cases:-
(1) Where the agreement has been made without consideration.
(2) Where the court cannot supervise the execution of the contract e.g. a building contract.
(3) Where the contract is of a personal nature.
(4) Where on of the parties is a minor.
Specific performance is usually granted in contracts connected with land or sale of rare articles. It is, however, to
be noted that the plaintiff who seeks specific performance must, in his term perform all the terms of the contract
which he ought to have performed at the date of the action (Pudi Lazarus V. Rev. Johnson Edard. 1976 A.P.
243).
Injunction:
Where a contract is of a negative character, i.e., a party has promised not to do come thing and he does it, and
thereby commits a breach of the contract, the aggrieved party may under certain circumstances, seek the
protection of the court and obtain an injunction forbidding the party from committing breach. An injunction is an
order of the court instructing a person to refrain from doing some act which has been the subject matter of a
contract, Courts, at their discretion, may grant a temporary or a perpetual injunction for an indefinite period.
For example: A agreed to sing at B’s theatre and to sing nowhere else for a certain period. Afterwards A made a
contract with E to sing at E’s theatre and refused to sing at B’s theatre. The court refused to order specific
performance as the contract was of a personal nature but granted an injunction to restrain the breach of A’s
promise not to sing else where.
Equitable rights of specific performance or injunction may be lost by laches. Equity is for the benefit of the
diligent and not for the sleepy.

QUASI CONTRACTS
The name ‘Quasi Contracts’ is given by the English Law to such transactions in which there is in fact no contract
between the parties, but the rights and obligations are created similar to those created by a ‘contract’.
For a contract there must be offer and acceptance, free consent, lawful consideration and object and such other
elements described under Sec. 10 of the Indian Contract Act. But Quasi Contracts do no have such essential
elements of a contract and, therefore, Indian Contract Act has now here used the term ‘Quasi or Implied’
Contracts’. Instead it has referred to “certain relations resembling those created by Contract” under Chapter V of
the Act. Such relations are deal with in the Contract Act under Sections 68-72.
You may raise a question here. When the essential conditions are not fulfilled an agreement remains
unenforceable at Law, this is a rule. Then why these relations dealt with under Sections 68-
72 are recognised by the Indian Contract Act. The answer to your question is based upon the law of Equity.
Where you have received an advantage or got a benefit from some other party which you were not entitled to
receive it becomes your duty to compensate fully the other party. Therefore, the Contract Act also, by its Sections
68-72, has given recognition to these relations. These five sections are based upon equitable considerations that
such obligations should be fairly compensated. A person who has received the benefit is under an obligation to
compensate the person giving the benefit.
In an American case, Miller V. Schloss (218 N.Y. 400, N.E. 337) it has been stated that, “A quasi or constructive
contract rests upon the equitable principle that a person shall not be allowed to enrich himself unjustly at the
expense of another. In truth, it is not a contract at all. It is an obligation which the law creates, in the absence of
any agreement, when and because the act of the parties or others have placed in the possession of one person
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money or its equivalent, under such circumstances that in equity and good conscience he ought not to retain it,
and which ex ae quo bono (in justice & fairness) belongs to another. Duty and not a promise or agreement or
intention of the person sought to be charged, defines it. It is fictitously deemed contractual in order to fit the
cause of action to the contractual remedy.”
The types of relations dealt here in the Contract Act in these sections are stated as below:
1. Supplier of necessaries to minors. Lunatics, married women etc. (S. 68).
2. Person paying moneys due by another (S.69).
3. Person enjoying benefit to non-gratutious act or Quantum Meruit. (S. 70).
4. Finder of goods (S.71).
5. Person receiving money or goods belonging to another under mistake or under coercion (S.72). Let us now
take these cases one by one
1. Claim for necessaries suppled to a person Incapable of contracting (Section 68)
If a person, incapable to entering into a contract, or anyone whom he is legally bound to support, is supplied by
another person with necessaries suited to his life, the person who has furnished such supplies is entitled to be
reimbursed from the property of such incapable person.
Illustration
(a) A supplies B, a lunatic, with necessaries suitable to his conditions in life. A is entitled to be reimbursed from
B’s property.
(b) A supplied the wife and children of B lunatic with accessaries suitable to their conditions in life A is entitled
to be reimbursed from B’s property.
The situation discussed by the above section is covered by Section 11 of the Act also, which deals with
agreements with persons incompetent to contract. The two illustrations given above here also state the same
position. However, the situation arises only in dealing with the incapable persons. Two points here are to be kept
in mind.
(1) The amount is recoverable from the property and not from the person. Such person is not personally liable. If
he has got any property, then only the creditors shall be able to get their re- imbursement. If no property belongs
to such person or persons the creditors shall not be left with any right.
(2) The object supplied must be necessities of life. The word necessities of life is used here in its technical sense,
and has a wide scope. It does not only concern with food, and clothes but with every thing which the
circumstances permit. In England, in one case an engagement ring for one’s Finance has been treated as a
necessity, but vanity bag has not been included, under this term. (Elkington & Co. V. Amery 1936).
In India, the term necessities, has also included in its perview the costs of defending a suit on behalf of a minor,
in respect of his property (Watkins V. Dhunoo,) moneys lent for marriage expenses of a minor and others, say his
sisters (Nardan Prasad V. Ajhudhia Prasad) and also a loan to the minor to save his property from execution.
(Kedarnath V. Ajhudhia, 1883). Thus the term ‘necessities’ is to be viewed in its proper perspective.
The following conditions are to be satisfied for the use of the term ‘necessaries’ (a) Things supplied must be
suited to the minor’s conditons in life;
(b) These must be ncessary for minor’s requirements, when actually sold or delivered; and
(c) The minor must be having such things in sufficient quantity at the time of such supply.
Non-fulfilment of any of these above stated conditions shall effect adversely the rights of the other party.
Nature of Remedy: Remember, a supplier of necessaries has been granted a remedy under this section against the
property of the person and not the person himself.
2. Reimbursement to person paying money due by another in payment of which he is interested (Section 69).

29
A person who is interested in the payment of money another is bound by law to pay and who, therefore, pay it, is
entitled to be reimbursed by the other.
Illustration:
B hold land in Bengal, on a lease granted by A, the zamindar. The revenue payable by A to the Government
being a arrear, his land is advertised for sale by the Government. Under the revenue law, the consequence of such
sale will be the annulement of B’s lease to prevent the sale and the consequent annulement of his own lease, pays
to the Government the sum due from A. A is bound to make good to B the amount so paid.
The above illustration is based on the decision given in Faiyazunissa V. Bajrang Bahadur Singh (1927).
The above case taken up under Sec. 69 is an exception to the rule regarding consideration Sec.
2 (d) of the Act defining the term ‘Consideration’, starts with “When at the desire of the promisor, the promisee
or any other person has done.....”, If there is no desire of the promisor, the act or abstinence of the stranger or
even the promiser shall not amount to consideration and in the absence of lawful consideration, there shall not be
any contract. It is clear from the above illustration, that the payment of the revenue by B to the Government has
not been made with the concurrence of A. Yet, Principles of Equity has created an obligation upon A to
reimburse B, the payment made by him to the Government.
Section 69, lays down three important conditions for its operation:
(a) The person who is interested in the payment of money, should have paid for the protection of his own
interest. If the payment is not bonafide for the protection of his own interest, but is made without any such notice,
then he shall be having no right for reimbursement.
Let us make our point more clear with the help of the following examples:
(i) A purchases property from B, and the sale is fictitious. A cannot recover from B money paid by him to save
the property from being sold in execution of a decree against B. (Janki Prasad Singh v. Baldeo Prasad (1908).
But where the sale is bonafide, he shall be entitled to recover the amount from B.
(ii) A’s goods are wrongfully attached in order to releae arrears of Government revenue due by B, and A pays
the amount of save the goods from sale, A is entitled to recover the amount from B. (Tulsa Kunwar V. Jageshwar
Prasad (1906). Another case on the point is Abid Hussain V. Ganga Sahai (1928).
It is sufficient to show that the person claiming the benefit had an interest in paying the money at the time of the
payment. In a case decided by Madras High Court, a similar decision is given. Sami Pillai V.B. Naidu (1972) a
mortgagee of a tenant’s crop paid the amount due to Government in respect of a loan given to the tenant
(Mortgagor) and raised the attachment. The mortgagee being interested in payment at the time of payment and
therefore, was entitled to recover from the mortgagor (tenant) the amount so paid to the Government. Remember,
this section does not require from the person interested in payment to have legal propritory interest in the
property in respect of which the payment has been so made. Decision in Govindram v. State of Gandal (1950),
Bombay bears in testimony to this point.
(b) The payment should be a voluntary one. If the payment is made voluntarily, the other party then is not under
an obligation to make the payment back. While deciding in Ram Tuhul Singh V. Biseswar Lal the judicial
Committee, observed,” It is not in every case in which a man has benefitted by the money of another that an
obligation to repay that money arises. The question is not to be determined by nice considerations of what may
be fair or proper according to the highest morality. To support such sa suit there must be an obligation in the case
of a voluntary payment by A of B’s debt.
Example
A canal company owned a canal and was under a statutory duty to keep the bridge on the canal under repair. The
bridge fall into disrepair and the plaintiffs, the highway authority called upon the canal company to repair it.
When the canal company failed to do so, the plaintiff’s themselves repaired the bridge and broughtan action to
recover the money paid. Held, the plaintiff could not recover as they act as mere volunteers. (Macclesfiled
Corporation V. Great Central Rly. 1911).

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The payment made by such as the other party was bound by law to pay. The liability for which payment may be
made under this section need not be statutory. Contractual liability is not a necessary element. Let us make the
point clear with the help of the following Examples:-
(i) W was the owner of a warehouse. G imported certain goods and kept them in the ware house. The goods
were stolen without any negligence on the part of W. The authorities made a demand on W for the payment of
the custom duties which W paid. Held W could recover the amount from G. (Brook’s Wharf Ltd. V. Goodman
Bros. 1937).
(ii) The goods belonging to A are wrongfully attached in order to realise areas of Government revenue due by G.
A pays the amount to save the goods from sale. A is entitled to recover the amount from G. (Abid Hussain V.
Ganga Sahai, 1928).
Obligation of a person enjoying benefit of non-gratuitous act (Sec.70)
Where a person lawfully does anything for another person or delivers anything to him not intending to do so
gratuitiously, and such other person enjoys the benefit thereof, the latter is bound to make compensation to the
former in respect of, or to restore the thing so done or delivered.
Illustrations:
(i) A, trademen, leaves goods at B’s house by mistake. B treats the goods as his own. He is bound to pay A for
them.
(ii) A saves B’s property from fire. A is not entitled to compensation from B, if the circumstances show that he
intended to act gratutiously. A maneges the estate of his wife and sisters-in-law and is under the impression that
he will receive remuneration for his services. He is entitled to get reasonable remuneration.
(iii) The right of action this section arises only after the fulfilment of the following three conditions:- (a) The
thing must be done lawfully;
(b) The thing must be done by a person not intending to act gratuitously; and
(c) The person for whom the act is done must enjoy the benefit of it.
(a) The thing must be done lawfully. Here the word ‘lawfully’ is quite significant. It indicates that after
something is done or delivered to one person by another and the thing is accented and enjoyed by the former, a
lawful relationship occurs between the two. Such decision has been given in Chaturbhuj Vilthaldas V.
Moreshwar (1954). However, it should be noted that the thing done or delivered must not have been delivered or
done with fraud or dishonesty.
(b) The thing should not be done or delivered gratuitously. If the benefit to the other person has been done by a
person gratuitously i.e., without any intention to get a reward, he shall not be able to give any right under this
section. The section requires other person to use his right of rejecting the thing, if he so likes. The section is
applicable for those acts only which are done with the intention of being paid for. Services freely rendered,
without any co-operation of a reward for them do not lie under the preview of this section.
A saves B’s property from fire. He does the act on the basis of humanity and fellow-feeling. Here A cannot get
any reward from B under section 70. On the other hand if the Salvage Crops of an Insurance Co. with which the
property is insured renders its services for saving the house property from fire, from the objective is for getting
the payment of the services so rendered, although no such agreement has taken place.
(c) the person for whom the act is done must enjoy the benefit of it. If such person has not enjoyed such benefit,
he shall not be liable to pay for it.
Examples
(i) A village was irrigated by a tank. The Government effected certain repairs to the tank for its preservation
and had no intention to do so gratuitously for the zamindars. The zamindars enjoyed the benefit thereof. Held,
they were liable to contribute. (Damodar Mudaliar V. Secretary of State for India, 1894).
(ii) A Railway Company had constructed a culvert near Madura, which in 1938 it widened at considerable
expense, on a requisiton in that behalf being made by the Provincial Government. The company had done the

31
work under protest, alleging that the order was illegal and that they would claim to recover the expenditure, from
the government or the Madura municipality, or both. These two latter, however, had repudiated their liability. In
a subsequent suit on behalf of the Railway Company against the Madura municipality, it was held by P.C. that
Sec. 70 could not be invoked to assist the Railway, for through the work was done lawfully and without
intending to do it gratutiously, the defendants could not made liable, therefore, as it was not done for the
defendants, nor had the defendants enjoyed benefit of it (Pallonji Edulji & Sons V. Lonavla Municipality)
Remember Section 70 does not apply to persons who are incompetent to contract. In Simohaj Khan V. Bangi
Khan (1931) it has been made clear that Section 70 refers to circumstances in which the law implies a Promise to
pay, and where there could not have been a legally binding contract, a promise to pay cannot be implied.
Quantum Meruit
It is a phrase which means, “payment in proportion to the amount of work done”. Quantum meruit literally
means, “as much as earned” or as much as merited. “Under English Law a party who for some reason can not
claim under the contract, may under certain circumstances claim way of Quantum merit i.e., reasonable
remuneration for work done. Thus Quantum is a remedy and not any alternate to the form of damages. When the
party injured by the breach, has at the time of breach done part, but not all of that which he is bound to do under a
contract, and is seeking to be compensated for the value of the work done, he can get a remedy under this
concept, for example when the contract provides that payment is to be made on completion of the work, the party
can not demand any remuneration under the contract as the work has not been completed. But he can claim on
the basis of quantum meruit for the work done by him.
Lord Atkin has explained this concept in very simple words with the help of an example in the case of Steven V.
Bromby & Son (1919). To quote him, “If I order from a wine merchant 12 bottles of whisky at so much a bottle,
and he sends me ten bottles of whisky and two of brandy, and I accept them, I must pay a reasonable price for the
brandy”.
Lest us take on more example:-
The defendant proposed to erect and let seats to view the funeral of the Duke of Wellington. It agreed that the
plaintiff should advertise the seats outside England and sell tickets, and that he should receive a commission on
all the tickets thus sold. The plaintiff prepared advertisements and paid printers, but, before he had sold any
tickets, the defendant wrongfully revoked his authority.
It was held in De Bernardy V. Harding (1853) be Alderson B. that the plaintiff could could one in quantum
meruit for the work already done.
Alderson B. said “Where one party has absolutely refused to perform or has rendered himself incapable of
performing, his part of the contract, he puts it in the power of the other party either to sue for a breach of it or to
rescind the contract and sue on a quantum meruit for the work actually done.”
The objective of Quantum meruit is differ it from that of awarding damages. Damages are awarded to put the
party in the same position as if the contract as if the contract was performed by the other side and to compensate
the injured party for the injury suffered by the breach. On the other hand, remedy under quantum meruit is to
compensate a party for the work he had done and to place him in the same positioin as if there was no contract
between the parties.
The right of claiming Quantum Meruit, like damaged does not arise out of contract. It is a right conferred by law.
It is a Quasi-Contractual right and not a contractual right.
Claims on Quantum Meruit
Claim on Quantum Meruit arises under the following cases:
(1) Work done under void contracts (Sec. 65): Where a person redners services under an agreement which
later on is being discovered as void or has rendered services on pursuance of a transaction, supposed by him to be
a contract, but the contract in truth, is without legal validity, he gets a right to be compensated for the advantage
received by the other party from him.
Craven Ellis V. Canons Ltd. (1936) serves a good example for elucidating this point.

32
The plaintiff was appointed managing director of a company by an agreement under the company’s seal which
provided for his remuneration, By the articles of association each director was required to obtain certain
qualification shares within two months of his appointment. Neither the plaintiff nor the other directors ever
obtained these shares. The plaintiff nevertheless, purporting to act under the agreement rendered services for the
company and sued for the sums specified in the agreement, or, alternatively, for a reasonable remuneration on a
quantum meruit.
(2) Work done with on non-gratutious basis (Sec. 70) : When a person does some work or renders some
serivce, with an intention not to do so gratutiously and the other person takes the benefit of such work or service,
the person rendering such service or doing such work can claim compensation from the person enjoying such
benefits, or get the goods so delivered back from him.
Example
A, a trader, leaves some goods at B’s house by mistake. B. Treating the goods as his own uses them. He is bound
to pay A for them.
(3) Abandonment or refusal of performance of a contract: When one of the parties abandons the work or
refuses to perform the contract, the other party can get compensation for the work done by him. Decision given
by C.J. Tindal in the case of Planche V. Colbut (1831) is a good example to illustrate this point. The facts of the
case are:-
The plaintiff had agreed to writer for “The Juvenile Library”, a series published by the defendants, a book on
Costume and Ancient Armour. He was to receive £100 on the completion of the book. He collected material and
wrote part of the book, and then the defendants abandoned the series. There were negotiations for the publication
of the books as a separate work, but these fell through, apparently as the plaintiffed that he had written especially
for children and that to publish his work as a magnum opus would injure his reputation. He claimed alternatively
on the original contract and on a quantum meruit.
(4) Divisible Contract: Where a contract is divisible and the party not in default has recieved the advantage out
of it, the defaulting party can get compensation under quantum Meruit. But remember, the party in default can
not get this right in case of indivisible contract on the basis of this principle.
The case of Sumpter V. Hedges (1898) provides a good example on this point.
S undertook to build a house for H for Rs. 50,000. After completing half of the work, S abandoned the
construction work. He afterwards got the house constructed by some one else. It was decided, S could not recover
the remuneration for the construction work done by him since the payment was to be made only after the
completion of the building.
(5) Badly performed indivisible contracts: Where an indivisible contract has been performed the work is badly
done, the performance can get the remuneration, but the other party also gets a right to make deduction for the
bad work.
The case of Hoemig V. Isaacs (195) serves a good examples to illustrate the point.
A, a decorator undertook to decorate B’s flat for a lumpsum of Rs. 10,000. B. laid down certain requirements. A
completed the work but B pointed out certain defects in the work done A. B got those defects removed from C at
a cost of Rs. 500/- Held A could recover (10,000-500=)9,500/- from B.
Responsibility of a finder of goods (Section 71)
A person who finds goods belonging to another, and takes them into his custody, is subject to the same
responsibility as bailee.
Hollins V. Fowler, is a good case over the point. The facts of the case are :
H picked up a diamond on the floor of K’s shop and handed it to K to keep it till the owner appeared. In spite of
wide advertisement in the newspapers no one appeared to claim it. After the lapse of some weeks, A tendered to
K the cost of advertisement and an identity bond and requested him to return the diamond to H.K. refused. K is
liable for damages. His entitled to retain the goods as against every one except the true owner, so if after wide

33
advertisement the real owner does not turn up and if H is prepared to given indemnity to K, K must deliver the
diamond to H.
The position of finder of Good is s akin to that of a Bailee. Section 71 charges the finder of goods with certain
obligations. But Sec. 168 and 169 strengthen him with certain rights.
Obligations:
The finder of goods must take all reasonable measures to find out the true owner and take all reasonable care for
the protection of the goods. If he does not make reasonable efforts for finding out the true owner, he shall be
liable of wrongful conversion of property.
Rights :
The finder of goods has a right to retain the goods so found till he finds out the true owner, has got a right to
claim for the reward if any from the true owner. He has got a right to claim for the reasonable expenditures
incurred by him. He can also sell out such goods under the following circumstances.
(a) Where the goods are perishing.
(b) Where the owner has not been found out even after great diligence.
(c) Where the owner is found out, but he refused to pay the reasonable expenses incurred by the finder of goods,
for finding out the owner, as well as for preserving the goods.
(d) Where the reasonable charges so incurred by him, amount to more than two thirds of the value of the thing
found.
5. Liability of person to whom money has been paid or anything delivered, by mistake or under correction
(Secton 72) : A person to whom money has been paid, or anything delivered by mistake or under coercion must
repay or return it.
Illustrations.
(a) A and B jointly owe to 100 Rs. to C. A alone pays the amount to C, and B not knowing this fact, pays 100
Rs. over again to C.C is bound to repay the amount to B.
(b) A railway refused to deliver certain goods to the consignee, except upon the payment of illegal charge for
carriage. The consignee pays the sum charged in order to obtain the goods. He is entitled to recover so much of
the charges as was illegally excessive.
(c) K paid sales tax on his forward transactions of bullion. Subsequently this tax was declared ultra vires. Held
K. could recover the amount of Sales Tax and that Section 72 is wide enough to cover not only a mistake of fact
but also a mistake of law. (Sales Tax Officer, Benaras V. Kanakiya of Saraf 1959).
The above examples clearly state the scope of Section 72. The principle involved in this Section is applicable
regardless of the fact whether a privity of contract does or does not exist between the parties. The principles is
based on equity.
The person enjoying the benefit is made liable to compensate the aggrieved party, not on the basis of any contract
between the concerned parties but on the basis of advantage taken by him due to mistake of or coercion on
another. The mistake may relate to facts or even of law (See Example ‘c’ above).
The liability to repay money under this Section can be enforced either by the person who has paid the money or
by the person who becomes aggrieved due to non-discharge of such liability. Many cases have been decided over
these issues by the various High Courts of India.

CONTINGENT CONTRACTS
According to the Contract Act a contingent contract is one whose performance us uncertain. The performance of
the contract which comes under this category depends on the happening or non- happening of certain uncertain-
events. On the other hand, an ordinary or absolute contract is such where performance is certain or absolute in
itself and not dependent on the happening or non-happening of an event. A contingent contract is defined as a

34
contract to do or not to do something, if some event, collateral to such contract, does or does not happen (sec.
31).
Example-
(A) A contracts to pay Rs. 50,000 if B’s house is destroyed by five. This is a contingent contract as the
performance depends on the happening of an event.
(B) A asks B to give loan to M and promises that he (A) will repay the loan if M does not return it in time.
Characteristics of a Contingent Contract
A Contingent Contract must have three essential characteristics. There are:
(1) The performance of the contract depends on he happening or non-happening of a certain event in future. This
dependence on a probable future event distinguishes a contingent contract from an ordinary contract.
(2) This event must be uncertain, that means happening or non-happening of the future event is not certain, i.e.,
it may or may not happen. If the event is hundred percent sure to happen, and the contract in that case has to be
performed any way, such a contract is not called a contingent contract.
(3) The event must be collateral or incident to the contract.
Therefore, contracts of indemnity, guarantee and insurance are the most common instances of a contingent
contract.
Rules regarding contingent contracts
To enforce the performance of a contingent contract the following rules have to be followed:
1. Where the performance of a contingent depends on the happening of an uncertain future event, it cannot be
enforced till the event takes place. And if the happening of the event becomes impossible, such contracts become
void (sec. 32).
Example- A contracts to sell B a piece of land if he (A) wins the legal case involving that piece of land. A loses
the case. The contract becomes void.
2. Where the performance of a contingent contract depends on the non-happening of a future event, the contract
can be enforced if the happening becomes impossible (sec. 33).
Example- A agrees to sell his house to B if Y dies. This contract cannot be enforced till Y is alive.
3. If the contract is dependent on the manner in which a person will act at an unspecified time, the event shall
be considered to become impossible when such person does anything which makes it impossible that he should
so act within any definite time or otherwise than under further contingencies (sec. 34).
4. Contingent contract to do or not to do anything, if a specified uncertain event happens within a fixed time,
becomes void if the event does not happen and the time expires or its happening becomes impossible before the
time expires [sec. 35(1)].
5. Contingent contract to do or not to do anything, if a specific event does not happen within a specified time,
may be enforced when the time so specified expires and such event does not happen, or before the time so
specified it becomes certain that such event will not happen [sec. 35(1)].
6. Contingent agreements to do or not to do any thing, if an impossible event happens, are void, whether or not
the fact is known to the parties at the time when it is made (sec. 36).

CONTRACT OF AGENCY
Definition of agency
Principal—the party who employs another person to act on his or her behalf Agent—the party who agrees to
act on behalf of another Agency—the principal/agent relationship The law of agency is governed by Part X
of the Contracts Act 1950. An agent is defined as a person employed to do any act for another or represent

35
another in dealings with third person. The person for whom such act is done, or who is so represented, is
called the “principal”
In other words, agency is the relationship which subsists between the principal and the agent, who has been
authorized to act for him or represent him in dealings with others
e.g. Azzizul appoints Samdan to sign the agreement on his behalf, here Azzizul is called the principal and Samdan
is his agent.

Thus in agency there are in effect two contracts:-

I. The first made between the principal and the agent from which the agent derives his authority to act for and
on behalf of the principal; and
ii. The second, made between the principal and the third party through the work of the agent.

Who can be come an agent/principal

Section 136 CA - Any person who is eighteen years old and above and who is of sound mind may be a
principal. As between the principal and third persons, any person may be come an agent, but persons of
unsound mind and who are below 18 years of age are not liable towards their principal for acts done by
them as agents.
Eg. If An employs B (a minor) to buy some goods from C on his behalf and C supplies the goods, A
cannot allege that he is not liable to pay for the goods just because B is not at the age of majority. A is still
liable to pay C for the goods.

B. CREATION OF AGENCY
Like any other contracts, a contract of agency can be expressed or implied for the circumstances and the
conduct of the parties. In other words, the authority of an agent may be expressed (given by words spoken
or written) or implied (inferred from things spoken or written or from the ordinary course of dealings.)

Eg. X lives in Ipoh and owns a shop in Kuantan. The shop is managed by Y who normally orders goods
from Z in X’s name for the purpose of the shop and Y then pays for the goods out of X’s fund with X’s
knowledge.

TYPES OF AGENCY
 Express agency-an agency that occurs when a principal and an agent expressly agree to enter into an agency
agreement with each other.
 Implied agency-an agency that occurs when a principal and an agent do not expressly create an agency, but
it is inferred from the conduct of the parties.
 Apparent agency-an agency that arises when a principal creates the appearance of an agency that in actuality
does not exist; the principal's actions, not the agent's, create the agency.
 Agency by ratification-an agency that occurs when a person misrepresents him or herself as another's
agent when in fact he or she is not and the purported principal ratifies the agency.

Duties of Principal and Agent

the rights and duties of the principal and agent depend on the express or implied terms of the contract of
agency. Where there is no such contract of agency, the rights and duties of an agent to his principal and vice
versa are laid down in Section 164 – 176 of the Contracts Act 1950

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a) Section 164 – Agent’s duty in conducting principal’s business
b) Section 165 – Skills and diligence required from the agent
c) Section 166 - Agent’s account
d) Section 167 – Agent’s duty to communicate with the principal
e) Section 168 – Right of principal when agent deals, on his own account, in business of agency without the principal
f) Section 169 – Principal’s right to benefit gained by agent dealing on his own account in business of agency
g) Section 170 – Agent’s right to retainer out of sums received on principals account
h) Section 171 – Agent’s duty to pay sums received for the principal

Mahesan v Malaysian Government Officers Co Operative Housing Society Ltd [1978] 1 MLJ 149
The appellant who was a director and secretary of the respondent co operative society bought land at the price
of RM 944,000 on behalf of the respondent. The appellant knew that the vendor had earlier paid RM
456,000 for it but did not inform the respondent accordingly. It turned out that the appellant had received
RM 122,000 as a bribe or secret profit from the vendor.
Held: The respondent could recover either the bribe or the amount of the actual loss suffered by it as a result
of entering into the contract.
I. Section 172 – When agent’s remuneration becomes due.
j.Section 173 – Agent not entitled to remuneration for business misconduct.
k. Section 174 - Agents’ lien on principal’s property.
l. Section 175 – Agent to be indemnified against consequences of lawful acts.
m. Section 176 – Agent to be indemnified against consequences of acts done in good faith.

G. DUTY OF PRINCIPAL TO AGENT

The duties of principal to agent is provided under section 175 – 178
Section 175 – agent to be indemnified against consequences of lawful acts
Section 176 - agent to be indemnified against consequences of acts done in good faith
Section 177 – non liability of employer of agent to do criminal act
Section 178 – compensation to agent for injury caused by principal’s negligent.

H. THE AUTHORITY OF AN AGENT

An agent’s authority may be actual or apparent. Actual authority is authorized expressly given by the
principal (orally or written) or implied from the express authority given, from the circumstances of the
case, custom or usage of trade, and the conduct of parties.

I. TERMINATION OF AGENCY
Section 154 – 163 of Contract Act 1950 deal with the manner which an agent may be terminated.

J. TERMINATION BY THE ACT OF THIRD PARTY.

When both parties agree that the agency shall terminate, the agency is terminated. The principal may
revoke the authority of the agent at any time before it has been exercised to bind the principal.
When the agency is for an indefinite period of time, the agent can terminate the agency by giving
reasonable notice of termination to the principal - Section 159.

K. TERMINATION BY OPERATION OF LAW

An agency may be revoked by operation of law in any of the following circumstances.-
I. When the contract of agency has been performed
ii. Upon the expiry of the period fixed in the contract
iii. Death of the principal or agent
IV. When the principal or agent become insane
v. When the principal or agent become insolvent
VI. Upon the happening of an event which renders the agency unlawful.

KINDS OF AGENTS
A. Based on Authority 1. 2. General Agent 3. Universal Agent
Special Agent

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 (a) Appointed to perform a (a) Appointed to do all acts (a) Appointed to do all
particular transaction, e.g. sale of connected with a particular trade, acts for the Principal.
a house property. business or employment. (b) Authority is unlimited
(b) Agent has limited authority (b) Authority is wide and continues (c) All acts of Agent bind
(c) Agent cannot bind Principal till agency is terminated. his Principal provided that
for acts other than for which he (c) Principal may limit his acts are legal and
is employed. his authority. agreeable as per law of
(d) Principal is bound by all acts land.
unless it is beyond authority of
Agent.

B. Based on Nature of work 2. Non – Mercantile Agents.

1. Commercial or Mercantile Agents
(a) One who is authorized to sell goods or consign (a) Not engaged in business of selling or
goods for the purpose of sale or to buy gods or to buying goods, but act in their respective
raise money on the security of goods. professional capacities. i.e. render
(b) Includes Banker, Factor, Auctioneer, professional services for their Principal
Broker, Commission Agent, & Del (b) Includes Solicitors, Attorneys, C & F
Credere Agent. Agents,
Insurance Agents, etc.

DUTIES OF AN AGENT
 To conduct the business in accordance with the directions given by the principal
 To work with reasonable diligence, care and skill.
 To render proper accounts to the principal on demand.
 To communicate with his principal in case of difficulty and seek his instructions.
 Not to deal on his own account unless all the material facts have been disclosed to the principal and consent of
the principal has been obtained.
o If the agent, without the knowledge of the principal, deals in the business of agency on his own account,
the principal has the following rights:
o He may repudiate the transaction, if the agent dishonestly conceals any material facts or the dealings of
the agent prove to be disadvantageous to him.
o He may claim from the agent the agency business other than the agreed remuneration.
 Not to make any secret profit out of the agency business other than the agreed remuneration
 To remit to the principal all the sums received in the principal’s accounts in accordance with the terms and conditions
of contract of agency.
 Not to delegate authority or appoint sub – agent.
 To protect and preserve the interest on behalf of the principal’s representative in case of his death or insolvency of
the principal.
 Not to use information obtained in the course of the agency against the principal.

RIGHTS OF AN AGENT
 To retain money out of the sums received in agency business for advances made or expenses incurred and
remuneration due to him.
 To receive the agreed remuneration. If the remuneration is not fixed, then he has the right to recover such
remuneration as is usual and customary in such business.
 Right of lien on principal’s goods, papers and other property until the amount due to him in respect of the same is
paid.
 An agent has the right to be indemnified by the principal against the consequences of all lawful acts done in
exercise of the authority conferred on him.
 An agent has the right to be indemnified by the principal against consequences of acts done in good faith that
caused an injury to third person.
 To claim compensation for injury caused because of principal’s neglect or want of skill.

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 BAILMENT
MEANING OF CONTRACT OF BAILMENT
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.
1. To conduct the business in accordance with the directions given by the principal
2. To work with reasonable diligence, care and skill.
3. To render proper accounts to the principal on demand.
4. To communicate with his principal in case of difficulty and seek his instructions.
5. Not to deal on his own account unless all the material facts have been disclosed to the principal and consent of the principal
has been obtained.
If the agent, without the knowledge of the principal, deals in the business of agency on his own account, the
principal has the following rights:
(a) He may repudiate the transaction, if the agent dishonestly conceals any material facts or the dealings of the agent prove to
be disadvantageous to him.
(b) He may claim from the agent the agency business other than the agreed remuneration.
6. Not to make any secret profit out of the agency business other than the agreed remuneration
7. To remit to the principal all the sums received in the principal’s accounts in accordance with the terms and conditions of
contract of agency.
8. Not to delegate authority or appoint sub – agent.
9. To protect and preserve the interest on behalf of the principal’s representative in case of his death or insolvency of the
principal.
10. Not to use information obtained in the course of the agency against the principal.

RIGHTS OF AN AGENT
 To retain money out of the sums received in agency business for advances made or expenses incurred and
remuneration due to him.
 To receive the agreed remuneration. If the remuneration is not fixed, then he has the right to recover such
remuneration as is usual and customary in such business.
 Right of lien on principal’s goods, papers and other property until the amount due to him in respect of the same is
paid.
 An agent has the right to be indemnified by the principal against the consequences of all lawful acts done in
exercise of the authority conferred on him.
 An agent has the right to be indemnified by the principal against consequences of acts done in good faith that
caused an injury to third person.
 To claim compensation for injury caused because of principal’s neglect or want of skill.

BAILMENT
Based on Benefit Based Exclusive benefit Mutual Benefit Gratuitous Non gratuitous
on Reward Exclusive of Bailee of both Bailment Bailment
benefit of Bailor
J, neighbour of K, agrees to Z lends a book to Y Hires furniture Neither Bailor Bailor or Bailee
look after K’s per while he for reading. Y is from B, by nor Bailee gets gets remuneration
is out of station. K is benefited. payment of hire any e.g. G gives his
benefited. charges, Both A remuneration, television set for
and B are e.g. A lends repair to H, a
benefited. his book to his technician. H gets
are friend. paid for the

ESSENTIALS OF A VALID CONTRACT OF BAILEMENT

 Contract
39
There must be a contract.
The contract may be expressed or implied.
Goods
Bailment can be made of goods only.
Delivery
There must be delivery of goods by one person to another person.
 Purpose of delivery
The goods must be delivered for some purpose. The purpose may
be expressed or implied.
 Return or disposal of goods
A) The delivery of goods must be conditional
B) The condition shall be that the goods shall be – returned (either in original form or in any altered from); or
disposed of according to the directions of the bailor, when the purpose is accomplished.

CLASSIFICATION OF BAILMENT
 Gratuitous bailment
A) Bailment without any charges or reward, i.e. – No hire charges are paid by bailee; and No
custody charges are paid by bailor.
 Non – gratuitous bailment Bailment for some charges or reward, i.e.- Hire charges are paid by bailee; or
Custody charges are paid by bailor.

DUTIES OF A BAILOR
Disclose faults in goods [Sec. 150]: Bailor is bound to disclose to Bailee, faults in the goods bailed, of which he has
knowledge. He should also disclose such information which – (a) materially interferes with the use of goods, or (b)
expose the Bailee to extraordinary risk.
Liability for Defects in Goods
In case of Gratuitous bailment In case of Non – Gratuitous Bailment
Bailor is liable only for those losses which arise Bailor is liable for damages whether or not he was
due to non – disclosed risks. aware of the existence of faults.
Example: A owning a motorcycle, allows B, his friend, to take it for a joy ride. A knows that its brakes were not proper but
does not disclose it to B. B meets with an accident. A is liable to compensate B for damages. But when A had lent the
motorcycle on hire, he is liable to B even if he did not know of the failure of his brakes.
Bear expenses [Sec.158]
Expenses of Bailment
In case of Gratuitous bailment In case of Non – Gratuitous Bailment
Bailor shall repay to Bailee, all necessary expenses Bailor is liable to repay only extra – ordinary
incurred by him for the purpose of Bailment. expenses, and not the ordinary expenses.

Example: M lends his car to N and it runs out of petrol. N can recover the amount paid for refueling (ordinary
expenses). If in case, the car suffers a breakdown, N can recover such charges as are paid by him in bringing it back to
condition (extra – ordinary expenses). He M hired the car to N, he shall be liable only for the repair charges, being extra
ordinary expenses.
Indemnify the bailee for defective title
The bailor shall indemnify the bailee for any loss caused to bailee due to defective title of bailor.

Indemnify the bailee for premature termination

If – the bailment is gratuitous; and for a specific period.
Then – (a) the bailor may compel the bailee to return the goods before expiry of the period of bailment; but (b) the
bailor shall indemnify the bailee for any loss incurred by the bailee.
Receive back the goods
It is the duty of the bailor to receive back the goods, when returned by bailee.
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If the bailor wrongfully refuses to receive back the goods, he shall be liable to pay ordinary expenses of custody of goods
incurred by the bailee.

DUTIES OF A BAILEE
Take reasonable care
• The bailee must take such case of goods as a man of ordinary prudence would take care of his own goods.
• The bailee shall not be liable for any loss or destruction of goods, if –
(a) He is not negligent; or
(b) The loss was caused due to an act of God or other unavoidable reasons.
Not to make unauthorized use of goods
• The bailee must not make any unauthorized use of the goods.
• If the bailee makes any unauthorized use of goods, then –
(a) The bailment becomes voidable at the option of the bailor; and
(b) The bailee shall be liable for any loss or damage even if such loss is caused due to an act of God or other unavoidable
reasons.
Not to mix goods
 Goods are mixed with bailor’s consent
The parties shall have a proportionate interest in such mixture.
 Goods are mixed without bailor’s consent, but the goods are separable
The bailee shall pay the expenses of separation. The bailee shall pay
damage incurred by the bailor.
 Goods are mixed without bailor’s consent, and goods are not separable
The bailee shall compensate the bailor for any loss caused to him.
Return the goods
• The bailee must return the goods, without waiting for demand from bailor, if –
(a) The time specified in the contract has expired; or
(b) The purpose specified in the contract is accomplished.
• If the goods are not so returned, then –
(a) The goods shall be at the risk of the bailee;
(b) The bailee shall be liable for any loss or damage, even if such loss is caused without any fault or negligence of
the bailee or due to an act of God or other unavoidable reasons.
Return accretion to goods
The bailee must return to the bailor any accretion (i.e., addition) to the goods bailed.
Not to set up an adverse title
The bailee has no right to allege that the bailor had no authority to bail the goods.

RIGHTS OF A BAILOR
Terminate the bailment
If – The bailee does any act inconsistent with the terms and conditions of the contract of bailment.
Then – The bailment becomes voidable at the option of the bailor.
□Demand back the goods
If – The bailment is gratuitous; and for a specific period.
Then –
(a) The bailor may compel the bailee to return the goods before expiry of the period of bailment; and
(b) The bailor shall indemnify the bailee for any loss incurred by the bailee.

File suit against wrongdoer

The bailor has the right to sue –
A third party who does any damages to the goods; or

41
A third party who deprives the bailee from using the goods
Sue the bailee
The bailor may sue the bailee to enforce his duties.

RIGHTS OF A BAILEE
 Right to compensation
The bailee has the right to be indemnified by the bailor, if –
The bailor has no title to the goods; and
As a consequence, the bailee suffers some loss.
 Return the goods
It is the duty as well as the right of the bailee to return the goods to the bailor. In case of joint bailor,
the goods may be returned to any of joint bailors.
 Recover charges incurred
Extra ordinary expenses
The bailor is liable to pay the extraordinary expenses.
The bailee may recover the extraordinary expenses paid by him. Ordinary expenses
If the bailment is gratuitous, the bailor is liable to pay the ordinary necessary expenses, i.e., the bailee has the right to recover
the ordinary necessary expenses incurred by him.
 Suit for deciding the title
The bailee may apply to the Court for deciding the title to goods, if a person other than the bailor claims that the goods
belong to him.
 File suit against wrongdoer
The bailee has the right to sue –
A third party who does any damages to the goods; or A third party who deprives the bailee from using The goods.
 Right of lien
The bailee has the right to retain the goods delivered to him until the charges due to him are paid by the bailor.

THE SALE OF GOODS ACT, 1930

Buyer – Sec 2 (1) A person, who buys or agrees to buy the goods.
Delivery Sec (2) it means voluntary transfer of possession from one person to another.

Delivery State Sec 2(3) Goods are said to be in delivered state, when they are in such state that the
Buyer would be bound to take the delivery of them in accordance with the contract.

Documents of title to Goods 2(4) A document of the title to goods may be described as any document used as proof of the
possession or control of goods, authorizing or purporting to authorize, either by endorsement or by delivery, the possessor of
the document to transfer or receive goods thereby represented.
Section 2(4) of the Sale of Goods Act, 1930 recognizes the following as
documents of title to goods:
(i) Bill of lading,
(ii) Dock warrant,
(iii) Warehousekeeper’s certificate,
(iv) Wharfinger’s certificate,
(v) Railway receipt,
(vi) Multi – modal transport document,
(vii) Warrant or order for the delivery of goods, and
(viii) Any other document used in the ordinary course of business as document of title (as described in
the preceding paragraph).
Goods – Sec 2 (7) Goods mean every kind of movable property.
 Other than actionable claims and money, and it includes.
 Stock and shares, growing crops, grass and things attached to or forming part of land which are agreed to be severed
before sale or under the contract of sale.
 You may notice that ‘money’ and ‘actionable claims’ have been expressly excluded from the term ‘goods’. ‘Money’
means the legal tender. ‘Money’ does not include old coins and foreign currency. They can, therefore, be sold
42
 or bought as goods. Sale and purchase of foreign currency is, however, also regulated by the foreign Exchange
Management Act,
 ‘Actionable claims’, like debts, are things which a person cannot make use of, but which can be claimed by him by
means of a legal action. Actionable claims cannot be sold or purchased like goods; they can only be assigned, as per
the provisions of Transfer of property Act.
 Grass, growing crops, trees to be cut and their log wood to be delivered, malba of a building to be demolished, etc.
are goods. Similarly, things like goodwill, copyright, trade mark, patents, water, gas electricity are all goods and may
be the subject matter of a contract of sale.
Seller – Sec 2 (13) A person, who sells or agrees to sell the goods,.
Agreement to sell Where transfer of property in goods takes place at future date.
Sale Where transfer of property in goods takes place at the time of contract.
ESSENTIAL ELEMENTS OF VALID CONTRACT OF SALES
Formation. The contract of sale may provide for any of the following methods.
• Immediate delivery of goods.
• Immediate payment of price but delivery at some future date.
• Immediate payment of price and immediate delivery of goods.
• Delivery or payment or both made in installments.
• Delivery or payment or both will be made at future date.
The following are the essentials of valid contract of sale:
There must be two parties, one seller and other buyer.
Seller and buyer must be different.
Part owner can sell goods to another part owner.
Partners are not regarded as separate persons for the purpose of sale of the partnership property. They are the
joint owners of the goods and as such they cannot be both sellers and buyers [State of Gujarat v.
Ramanlal S & W. (1965)]. But, a partner may buy goods from the firm or sell goods to the firm.
There must be movable goods as subject matter of contract.
There must be a transfer of property in goods. It means general property. (i.e. ownership)
There must be price involved. Price means money consideration for sale of goods.
Exchange of goods for goods is barter.
If Exchange is for partly goods and partly for money it is sale.
All essential elements of valid contract must be observed.
The contract of sale can be entered into, expressly or impliedly.
TRANSFER OF “PROPERTY IN GOODS”
Property means general property in goods and not merely special property in goods. It means ownership of goods.
Special property in goods means possession of goods.
 Cases where property in goods is not transferred: Bailment, Creating charge or pledge
Difference Between Sale and Agreement to Sell
Sale Agreement to Sell
 Immediate transfer of ownership to buyer  Ownership remains with the seller
 It is executed contract  It is an executory contract
 It creates right for buyer  It provides right in personam for buyer and
 Seller can use
becomes for price – if not buyer
insolvent seller
 Risk passes to buyer if buyer becomes
Delivery to receiver  Seller can sue for damages
 Buyer can get
insolvent goods
before theeven if seller
payment has
of price  Risk doesn’t passes to buyer
 Buyer can get proportionate share in money
CONDITIONS AND WARRANTIES
but can’t get goods
 Generally, at the time of sale, the seller makes some representation, statements of stipulations for the praise of his
 Delivery can be refused by seller if buyer
goods. Some of representations are in nature of opinion others are in nature of facts. Representation as to fact
becomes insolvent
which becomes a part of contract of sale is called as stipulation.
 Stipulation may be condition or warranty depends upon its importance in relation to contract.
 Stipulation which is essential to the main purpose of contract is known as condition. Breach of condition
gives the aggrieved party right to terminate the contract.
 Stipulation which is collateral to the main purpose of the contract is warranty. Breach of warranty gives rise to
the aggrieved party right to claim damages but contract cannot be terminated.
 The conditions and warranties may be express or implied.

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  Express conditions and warranties are those, which the parties agree expressly, i.e. orally or in writing.
 Implied conditions are those, which are implied by the law in the absence of any agreement to the contrary.

IMPLIED CONDITIONS

The following are the implied conditions which are contained in the Sales of Goods Act:
Conditions as to title – sec 14(a)
There is an implied condition on the part of the seller that In the case of sale, the seller has a right to sell the goods,
and in the agreement to sell, the seller will have a right to sell the goods at the time of passing of ownership in goods. If
the title of seller out to be defective, the buyer must return the goods to the true owner and recover the price from the
seller.
Conditions as to description – Sec 15
Where the goods are sold by description, there is an implied condition that the goods shall correspond to the description.

Example;
A machine was sold. The buyer has not been the machine, but the seller described it as a new one. However, it was
found to be a very old one. Held, the machine was not according to the description.
Sale by sample – Sec 17
Where the goods are sold by sample, the following are implied conditions.
 The bulk shall correspond to sample in quality.
 The buyer shall be given a reasonable opportunity to compare the goods with the sample.
 The goods shall be free from any defect, rendering them un – merchantable. It is to be noted that this implied
condition applies only in the case of latent defects, i.e. those defects which cannot be discovered by ordinary
inspection. In fact, such defects are discovered when the goods are put to use or by examination in laboratories.
The seller is not liable for apparent or visible defects which can be discovered by examination.
Sale by description as well as sample – Sec 15
If the sale is by sample as well as description, both conditions shall be satisfied. Goods must correspond with sample as
well as description.
Example:
An agreed to sell to C some oil described as “Foreign refined oil” and warranted only equal to sample. The goods
supplied were equal to sample, but contained a mixture to hemp oil. Held, C could reject the goods. Conditions as
to quality and fitness for buyer’s purpose –Sec 16
Where the buyer, expressly or impliedly, tells the seller the particular purpose for which he needs the goods and relies
on the skill or judgment of the seller, there is an implied condition that the goods shall be reasonably fit for such
purpose. When the article can be used only for one particular purpose, the buyer need not inform the seller the
purpose for which the goods are required.
Example:
A purchased a hot water bottle from a chemist. While the bottle was being used by A’s wife, it burst and injured A’s wife.
Held, the seller was liable for damages as the bottle was not fit for the purpose for which it was meant – Priest vs. Last.
Exceptions to the implied condition as to quality or fitness
The condition as to quality or fitness’ well not apply, if the buyer is suffering from an abnormality, which renders the goods
unsuitable for a particular purpose and the buyer does not inform the seller about that abnormally.
Example
A purchased a coat. He had abnormally sensitive skin, by wearing the coat, he got skin complaint. Held, there was no
breach of condition, as he had not disclosed the abnormally of his skin. Where the goods can be used for a number of
purposes, the buyer should inform the particular purpose for which such goods were required. If the does not disclose,
there is no such conditions of quality or fitness.
Conditions as to merchantability
Where goods are bought by description from a seller, who deals in goods of that description, there is an implied
conditions that the goods shall be of merchantable quality.
‘Merchantability’ means that there is no defect in the goods, which renders them unfit for sale. Thus, a watch that will not
keep time and a pen that will not write cannot be regarded as merchantable.

44
Example:
A radio set was sold to a layman. The set was defective. It did not work in spite of repairs, Held, the buyer could return the
set and claim refund.
Condition as to wholesomeness
In the case of eatable and food – stuff, there is an implied condition that the goods shall be wholesomeness, i.e.,
free from any defect which renders them unfit for human consumption.
Example:
Purchased milk from B, a milk dealer. The milk contained typhoid germs. A’s wife on taking the milk got infected and died.
Held, A was entitled to get damages – Frost vs Aylesbury Dairy Co. Ltd.

IMPLIED WARRANTIES

The following are the implied warranties which are contained in the Sales of Goods Act:
Warranty as to quiet possession – Sec 14
In the absence to any contract showing contrary intention, there is an implied warranty that the buyer shall
have and enjoy quiet possession of the goods. If the buyer is disturbed in the enjoyment of the goods, he can
claim damages from the seller.
Warranty against encumbrances – Sec 14
Unless the circumstances of the case are such as to show a contrary intension, there is an implied warranty that the
goods shall be free from any charge or encumbrance in favour of any party not declared to the buyer before or at the
time contract is made. However, there will not be any such warranty if charge is declared to buyer at the time of sale.
Warranty as to quality and fitness by usage of Trade – Sec 16
An implied warranty as to quality or fitness for a particular purpose may be annexed by the usage of trade.
Warranty to disclose the dangerous nature of goods
In case of sale of dangerous goods, the seller is under an obligations to warn the buyer about the probable
danger. Failure to do so will make the seller liable to pay damages.

Example :
A sold a tin of disinfectant to B, knowing that it was likely to be dangerous to the tin, whereupon disinfectant powder went
into her eyes, causing her injury. Held, A was liable in damages to B, as he failed to warn B of the probable danger.
Difference between Condition and
Warranty
Matter Condition Warranty
Stipulation Essential to main purpose of contract Collateral (subsidiary) to main purpose of
If breach? Buyer has right to cancel contract contract.
Treatment Breach of condition may be treated as breach of warranty Buyer has no right to cancel the contract .
Can claim damages
Breach of warranty can’t be treated as
breach of condition

DOCTRINE OF CAVEAT EMPTOR

The doctrine of ‘Caveat Emptor’ means “let the buyer beware”.
□ It means that the buyer while purchasing goods must act with a “third eye and ear”,
i.e.,
He should be careful to see that the goods purchased will serve his purpose well.If the buyer is not careful and he finds
later on that the goods do not serve his purpose, he cannot hold the seller liable for it. The seller is under no obligation
to tell the defects of his articles.
TRANSFER OF OWNERSHIP
Transfer of property from seller to Buyer 20-22
A) unasertined goods

45
  Goods are Ascertained
 Appropriati of Goods unconditionally
B) assertined goods (Specific Goods)
 Deliverable state Price determined
 Deliverable State Price not determined
 Non – deliverable state
C) sale on approval
 On approval.
 Adopting the transactions.
 Retains without notice of rejection for a long time
Ownership is transferred immediately at the time of making the contract if all the
following conditions are satisfied:
 Contract is for specific goods.
 Goods are in deliverable state.
 Goods are not required to be weighed or measured for determining price.
Example : A sold to B, 100 bales of cotton lying in his godown. Before the bales could be identified and separated,
all bales were destroyed in fire. Here, seller is liable for damage because ownership is not transferred.
PERFORMANCE OF A CONTACT
OF SALE
Meaning Sec.2(2): Delivery means voluntary transfer of possession from one person to another.
2. Duty of Seller Sec. 31: It is the duty of the Seller to deliver the goods and of the buyer to accept and pay for them in
accordance with the contract of Sale.
3. Mode of delivery : Sec. 33: Delivery of Goods sold may be made by –
(a) doing anything which the parties agree shall be treated as delivery ; or
(b) which has the effect of putting the Goods in the possession of the Buyer or of any person authorized to hold them on
his behalf.
It is a delivery where goods are handed over to the buyer or his authorized agent. It means goods are physically put in
possession of the buyer.
When goods are not physically delivered to the buyer but some symbol of the real possession or control over goods is
handed over to buyer.
Example
Delivery of key of the car.
Where the third party who is in possession of goods, acknowledge to hold goods on behalf of the buyer is known as
construction delivery.

Example:
A sells 100 bags of cement lying in B’s godown. B agrees to hold the 100 bags of cement on behalf of A.

TYPES OF DELIVERY
Actual Delivery Symbolic Delivery Constructive Delivery
It is a delivery where goods are when goods are not physically Where the third party who is in
handed over to the buyer or his delivered to the buyer but some possession of goods, acknowledge
authorized agent. It means goods symbol of the real possession or to hold goods on behalf of the
are physically put in possession of control over goods is handed over to buyer is known as construction
the buyer. buyer. delivery.
Example Example:
Delivery of key of the car. A sells 100 bags of cement lying
in B’s godown. B agrees to hold
the 100 bags of cement on behalf
of A.
Forward Delivery
Where delivery is to be made in future, and not at the time contract is entered into.

46
Payment and delivery are concurrent
Sec 32. RULES REGARDING DELIVERY
General rule suggest that the delivery of goods and payment of price are concurrent conditions.
However, parties may provide otherwise. Part Delivery Sec34.

A delivery of part of goods with an intention of giving the delivery of the whole amounts to the delivery of the whole for the
purpose of transfer of ownership of goods but a delivery of part of goods with an intention of separating it from the whole lot
does not amount to the delivery of the whole of the goods.
Buyer’s duty to Demand the Goods Sec. 35
 It is seller’s duty to be ready and willing to deliver the goods to the buyer. But he is not bound to deliver goods
unless the buyer makes a demand for delivery of the goods.
 If the buyer fails to demand the delivery of goods, the seller is not liable for breach; Buyer must demand
delivery within a reasonable time. However, contract may provide otherwise.
Rules as to Delivery [Sec. 36]
Place of delivery: Situation Place where goods are to be delivered
If contract specified the place of delivery  At the place specified
Contract does not specify the place of delivery;  At the place at which goods are at the time
In case of sale of sale
In case of agreement of sell  At the places at which goods are at the
(i) In respect of existing goods time of agreement of sell.
(ii) In respect of future goods  At the place at which goods are
manufacture, produce or acquire
Time of Delivery
 If the contract specified time of delivery, goods shall be delivered within such time.
 If no time is specified in contract as to time of delivery of goods, it should be delivered within reasonable time.
Delivery when the Goods in Possession of third party 36(3):
 Unless and until such third person acknowledge to the buyer that the holds the goods on his behalf However this
provision shall not affect the operation of the issue or transfer of any documents of the title of the goods.
Time is tender of delivery
 Demand or tender of delivery may be treat is reasonable unless made at reasonable hour. That is reasonable
hour is a question affects.
Expenses of delivery
 All expenses of making delivery of goods shall be paid by seller Buyer shall be the expense for receipt of goods.
Unless otherwise agreed.
Delivery by Installment Sec 38
Delivery of Wrong quantity
Sec 37
 If the seller has delivered excess quantity, the buyer has the following options:
To accept the whole of the goods delivered to him. To reject the
whole of the goods delivered of him.
To accept contracted quantity and reject the excess.
 Seller has delivered short quantity, buyer has following options.
To accept the goods delivered to him.
To reject whole quantity delivered to him.
 Right to reject the goods in excess of the contract does not apply where the
variation is negligible.
Further, the right to reject the goods is not similar to the right to cancel the contract. If the buyer
rejects the goods (either because they are less than or in excess of the quantity contracted for), the seller has a
right to tender again the contract quantity and the buyer is bound to accept the same.
Delivery of Mixed Quality – Quantity
47
  The seller is bound to deliver goods of exact quality – quantity otherwise buyer may:
 Reject the whole.
 Reject the goods not complying with quality or quantity and accept the rest.
[Contract is not repudiated] – means subsisting Delivery by installment is not valid except when the contract
provides so or buyer accepts the delivery in installment.
 Delivery to Carrier or Wharfinger –Sec 39
 Risk where goods are delivered at distant place Sec 40
 Buyer’s right to examining goods Sec 41
 Acceptance of Delivery – Sec 42
 Buyer’s not bound to return the rejected good Sec 43.
 Liability of the Buyer for refusal of delivery of goods Sec 44
Delivery to carrier or wharfinger amounts as delivery to buyer if the following conditions satisfy:
1. Buyer has made reasonable contract with carrier.
2. Seller is required to give notice to buyer to enable him to insure goods. If not to do then his risk.
If seller makes valid delivery of goods, buyer has following duties:
 To accept the goods.
 To pay the unpaid price.
Where goods are sent by sea route, seller shall give notice to buyer to insure goods other wise he will be liable for loss.
Where the seller agrees to deliver the Goods at his own risk at a place other than at which they are sold, the Buyer
shall bear the risk of deterioration necessarily incident to the course of transit, unless otherwise agreed. Delivered to
buyer – not previously examined reasonable opportunity.
Seller is bound on request to afforded the buyer a reasonable opportunity of examine the good. Delivery
doesn’t mean acceptance of goods, Buyer has deemed to have accepted the goods under the following
circumstances:
 When he intimates the seller about acceptance of goods.
 After receipt of goods, he does some act of affirmation.
 When he doesn’t inform seller about rejection of goods within a reasonable time.
He is required to intimate the seller about rejection. (Buyer’s not bound to return the rejected goods) If the buyer
wrongfully refuses to take delivery of goods, he is liable for damages and expenses like storage cost and transportation
cost to the seller.

UNPAID SELLER
A seller of goods is deemed to be unpaid in the following cases:
 The price must be due but not paid. (When the whole of the price has not been paid or tendered)
 A negotiable instrument, like cheque, bill of exchange etc., was received, but the same has been dishonored.
 Seller who has obtained a decree for the price of the goods will also be an unpaid seller, if the decree has not been
satisfied.
 When the seller has been paid the large amount but small portion of payment remains to be paid.
 Seller must have an immediate right of action for the price.

Right of an Unpaid Seller

Unpaid seller has the right against goods as well as

against the buyer: Rights of unpaid seller
against the goods:
 Where ownership is transferred
o Right of lien – Sec 47 – 49
o Right to stoppage in transit – Sec 50 – 52
o Right to resale of the goods
o Where ownership is not transferred to the buyer, seller has the right to with hold delivery of goods.
Right of an unpaid seller against the goods Sec 46

Condition for exercising lien

 Condition – Unpaid seller – actual possession
48
  Buyer not paid the price of the good. The unpaid seller can exercise lien even through.
 The property is goods has passed to the buyer
 He is in the possession of the goods as an agent or bailee for the buyer.

Right of Lien
 It means the right to retain the possession of goods until full price is received.
 Seller can exercise his right of lien on the following two conditions:
 He must be in possession of the goods.
o He is the unpaid seller.
o If buyer becomes insolvent, lien can be exercised by unpaid seller.
Right of unpaid seller against buyer Suit for price [sec 55]
 55 (1) – Property has passed to the buyer
- Buyer wrongfully neglector refuses to pay price of goods
 55 (2) - property has not passed to the buyer
- Price is payable on a particular date irrespective of delivery.
- Buyer wrongfully neglects or refuses to pay price of goods
 Suit for damages for non acceptance (56)
 When buyer wrongfully neglects or refuses to accept and pay for the goods, the seller may sue him for damages for
non acceptance.
 Suit for damages for Breach (60)
 Repudiation of contract before due date: Where the contract is repudiated by the buyer before the date of delivery the
seller may treat the contract as rescind and sue for damage for the breach.
 Suit for interest [61(2) (d)]
 Specific agreement between seller and buyer as to interest on price of goods from the date on which payment
becomes due the seller may recover the interest from the buyer.
 This right is in addition to other remedies available to the seller.
 The buyer has following remedies against the seller:
 Suit for damage for non – delivery Sec 57
 Buyer is ready and willing the take delivery of goods but seller wrongfully neglects or refuses delivery of goods, buyer
may sue seller.
 Suit for specific performance Sec 58
 Where seller wrongfully refuses to deliver specific or ascertained goods, court may direct specific performance
order.
 Suit for breach of warranty Sec 59
 If there is breach of warranty, buyer may claim damages from the seller. Buyer may deduct the amount of damage
from price payable if price is not paid. Buyer may recover the damages if price paid.
 Right to repudiate the contract
 If the seller declares his intention of non – delivery of goods, buyer may repudiate the contract and immediately sue
for damages.
 Suit for Interest
 In the absence of any contract to the contrary no interest shall be payable by the buyer on the delay payment. If ,
there is no such agreement, the seller may give notice to the buyer of his intention to charge interest on delayed
payment.

UNIT-3
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When two or more persons join hands to set up a business and share its profits and losses it is called Partnership.
Section 4 of the Indian Partnership Act 1932 defines partnership as the ‘relation between persons who have
agreed to share the profits of a business carried on by all or any of them acting for all’.

49
Partners are the persons who have entered into partnership individually with one another. Partners collectively
are called ‘firm’. The essential features of the partnership are as follows.

Two or More Persons

There should be at least two persons coming together to form the partnership for a common goal. In
other words, the minimum number of partners in a partnership firm can be two.

Indian Partnership Act, 1932 has put no limitations on maximum numbers of partners in a firm. But however,
Indian Companies Act, 2013 puts a limit on a number of the partners in a firm as follow:

 For Banking Business, Partners must be less than or equal to 10.

 For Any Other Business, Partners must be less than or equal to 20.

 If the number of partners exceeds the limits, the partnership becomes illegal.

Agreement
The partnership is an agreement between two or more persons who decided to do business and share its profits
and losses. To have a legal relationship between the partners, the partnership agreement becomes the basis. The
agreement can be in written form or oral form. An oral agreement is equally valid. But, preferably the partners
should have a written agreement, in order to avoid disputes in future.

Business
To carry on some business there should be an agreement. Mere co-ownership of a property does not amount to
the partnership. The business must also be legal in nature, a partnership to carry out illegal business is not valid.

Mutual Agency
The business of a partnership firm may be carried on by all the partners or any of them acting for all. This
statement has two important implications. First, to participate in the conduct of the affairs of its business, every
partner is entitled. Second that a relationship of mutual agency between all the partners exists.

For all the other partners, each partner carrying on the business is the principal as well as the agent. He can bind
other partners by his acts. And also is bound by the acts of other partners with regard to the business of the firm.

Sharing of Profit
The agreement between partners must be to share profits and losses of a business. Sharing of profits and losses
is important. The partnership is not for the purpose of some charitable activity.

Liability of Partnership
Each partner is liable jointly with all the other partners. And also when is a partner, severally liable to the third
party for all the acts done by the firm. Liability of the partner is not limited. This implies that for paying off the
firm’s debts, his private assets can also be used.

Partnership Deed

50
Agreement to carry on a business between the partners, partnership comes into existence. The partnership
agreement can be either oral or written. The Partnership Act does not require that the agreement must be in
writing. But when the agreement is in written form, it is called ‘Partnership Deed’. Partnership deed should be
duly signed by the partners, stamped & registered.

Partnership deed generally contains the following details:

 Names and Addresses of the firm and its main business;

 Names and Addresses of all partners;

 A contribution of the amount of capital by each partner;

 The accounting period of the firm;

 The date of commencement of partnership;

 Rules regarding an operation of Bank Accounts;

 Profit and loss sharing ratio;

 The rate of interest on capital, loan, drawings, etc;

 Mode of auditor’s appointment, if any;

 Salaries, commission, etc, if payable to any partner;

 The rights, duties, and liabilities of each partner;

 Treatment of loss arising out of insolvency of one or more partners;

 Settlement of accounts on the dissolution of the firm;

 Method of a settlement of disputes among the partners;

 Rules to be followed in case of admission, retirement, a death of a partner; and

 Any other matter relating to the conduct of business. Normally, all the matters affecting the relationship
of partners amongst themselves are covered in partnership deed.

Partnership
A partnership is a kind of business where a formal agreement between two or more people is made and
agreed to be the co-owners, distribute responsibilities for running an organization and share the income or
losses that the business generates.
In India, all the aspects and functions of the partnership are administered under ‘The Indian Partnership Act
1932’. This specific law explains that partnership is an association between two or more individuals or
parties who have accepted to share the profits generated from the business under the supervision of all the
members or behalf of other members.

Features of Partnership:
Following are the few characteristics of a partnership:

 Contract or Formation – A firm having multiple owners must have a legal agreement between all
the partners. So, it is compulsory to have a partnership contract to establish a partnership firm.
51
  Unlimited Liability – All the partners are liable for the payment of the debts, even if they have to
liquidate their personal assets.
 Continuity – In the context of death, bankrupt, and retirement of any partners, etc., the partnership
will be dissolved and the remaining partners must make a fresh agreement amongst each other.
Similarly, a son cannot inherit his father’s partnership, but with the agreement of other partner
members, he can be added as a new partner.
 Number of Members – There is no specific number as to the maximum number of members a
partnership firm can have. However, according to the Companies Act, 2013, for banking only 10
members are allowed. For companies, the maximum member should not exceed more than twenty.
 Mutual Agency- This means all the partners should take responsibility for a company’s operation.
But sometimes one partner on behalf of the rest of the partners can supervise or take actions.

Types of Partnerships
A partnership is divided into different types depending on the state and where the business operates. Here
are some general aspects of the three most common types of partnerships.

 General Partnership
A general partnership comprises of two or more owners to run a business. In this partnership, each partner
represents the firm with equal right. All partners can participate in management activities, decision making,
and have the right to control the business. Similarly, profits, debts, and liabilities are equally shared and
divided equally.
In other words, the general partnership definition can be stated as those partnerships where rights and
responsibilities are shared equally in terms of management and decision making. Each partner should take
full responsibility for the debts and liability incurred by the other partner. If one partner is sued, all the other
partners are considered accountable. The creditor or court will hold the partner’s personal assets. Therefore,
most of the partners do not opt for this partnership.

 Limited Partnership
In this partnership, includes both the general and limited partners. The general partner has unlimited
liability, manages the business, and the other limited partners. Limited partners have limited control over the
business (limited to his investment) and are not associated with everyday operations of the firm.
In most of the cases, the limited partners only invest and take a profit share, and they do not have any
interest in participating in management or decision making. This noninvolvement means they don’t have the
right to compensate the partnership losses from their income tax return.

 Limited Liability Partnership

In Limited Liability Partnership (LLP), all the partners have limited liability. Each partner is guarded against
other partners legal and financial mistakes. A limited liability partnership is almost similar to a Limited
Liability Company (LLC) but different from a limited partnership or a general partnership.

 Partnership at Will
Partnership at will can de be defined as when there is no clause mentioned about the expiration of a
partnership firm. Under section 7 of the Indian Partnership Act 1932, the two conditions that have to be
fulfilled by a firm to become a Partnership at Will are:

 The partnership agreement should have not any fixed expiration date.
 No particular determination of the partnership should be mentioned.

52
Therefore, if the duration and determination are mentioned in the agreement, then it is not a partnership at
will. Also, initially if the firm had a fixed expiration date, but the operation of the firm continues beyond the
mentioned date that it will be considered as a partnership at will.

Indian Partnership Act 1932

Most of the businesses in India adopt a partnership business, so to monitor and govern such partnership The
Indian Partnership Act was established on the 1st October 1932. Under this partnership act, an agreement is
made between two or more person who agrees to operate the business together and distribute the profits they
gain from this business.
The five important elements of The Indian Partnership Act 1932 are:

 Agreement for Partners – It is an association of two or more individuals and a partnership arises
from an agreement or a contract. The agreement (accord) becomes the basis of the association
between the partners. Such an agreement is in the written form. An oral agreement is evenhandedly
legitimate. In order to avoid controversies, it is always good, if the partners have a copy of the
written agreement.
 Two or More Persons – In order to manifest a partnership, there should be at least 2 persons
possessing a common goal. To put it in other words, the minimal number of partners in an enterprise
can be 2. However, there is a constraint on their maximum number of people.
 Sharing of Profit – Another significant component of the partnership is, the accord between partners
has to share gains and losses of a trading concern. However, the definition held in the Partnership
Act elucidates – partnership as an association between people who have consented to share the gains
of a business, the sharing of loss is implicit. Hence, sharing of gains and losses is vital.
 Business Motive – It is important for a firm to carry some kind of business and should have a profit
gaining motive.
 Mutual Business – The partners are the owners as well as the agent of their firm. Any act
performed by one partner can affect other partners and the firm. It can be concluded that this point
act as a test of partnership for all the partners.

Advantages of Partnership:

 Easy Formation – An agreement can be made oral or printed as an agreement to enter as a partner
and establish a firm.
 Large Resources – Unlike sole proprietor where every contribution is made by one person, in
partnership firm partners can contribute more capital and other resources as required.
 Flexibility – The partners can initiate any changes if they think it is required to meet the desired
result or change circumstances.
 Sharing Risk – All loss incurred by the firm is equally distributed amongst each partner.
 Combination of different skills – The partnership firm has the advantage of knowledge, skill,
experience, and talents of different partners.

Partnership Firm Formation and Registration in India

Two or more people when come together with a common idea of business by infusing the sources and funds
together with the common goal of earning profit is termed as Partnership. Partnership Firm is one of the
common forms of business in India as it does not require stringent procedure to be followed and avails the
flexibility in administration to the Partners.

53
The formation of Partnership Firm shall be with mutual consent of Partners to the business. The firm shall
be formed and registered by following the procedure prescribed in this regards under Indian Partnership Act,
1932.

TYPE OF PARTNERSHIP FIRMS:

Indian Partnership Act allows a firm to be formed and executed by entering into Partnership Agreement.
Further, it provides types of Partnership Firm as Unregistered Partnership Firm or Registered Partnership
Firm. Whether the firm is registered or not the Partnership firm is legal in the eyes of Law.

 Unregistered Partnership Firm:

The Unregistered Partnership Firm is established by entering into agreement by the partners of the proposed
firm. The Unregistered Partnership Firm as stated to be legal allows the Partners to carry on the business in
manner stated and provided in the agreement.

 Registered Partnership Firm:

The Partnership Firm is to be registered with the Registrar of Firm (RoF) having jurisdiction over the Place
of Business of the Firm. The registration of Partnership firm involves payment of Government fees to
Registrar, varied from state to state according to the State Law.

The registration of partnership firm is preferable as the unregistered Partnership Firm cannot sue the third
party or contracting party and vice-versa. Also, the Partners, in case of internal disputes or issues, cannot
approach the Court and shall resolve the disputes with the help of arbitrator or alternate dispute resolution
mechanism. Furthermore, the registration also helps the expansion and conversion of the Firm into any other
form of Business.

An unregistered Partnership Firm at any stage can be registered in order to remove the deficiencies as
prescribed above.

How to and Steps:- Partnership Firm Formation and Registration:

 Preparation and Execution of Partnership Deed:

The Partnership Deed shall contain the covenants such as the name and business place of the firm, business
activities to be carried on, the contribution and profit sharing ratio of the Partners or any other conditions
required.

 Payment of Stamp Duty and Notary:

The Partnership Deed prepared shall be executed by the payment of stamp duty as applicable in accordance
with the respective state law. One may either opt for execution on non-judicial paper or franking i.e.
payment of stamp duty from banking channel. Subsequently the deed shall be notarised after providing the
signature of all partners along with witnesses to agreement.

 Registration of Partnership Firm with RoF:

The registration of Partnership Firm is voluntary, however is preferable by the businessmen. The registration
procedure prescribed by the respective Government shall be followed with payment of requisite Government
Fees and submitting the documents required.

 Application for PAN:

54
The application for allocation of PAN shall be made to the Income Tax department as the department
identifies the Partnership different from its Partners.

 Opening Bank Account:

The current account in the name of the Partnership Firm shall be opened in order to regulate the transaction
of the Firm.

Documents required to register a Partnership Firm:

 Self-attested copy of PAN card of Partners

 Self-attested copy of Address Proof of Partners
 Utility Bill as Business Address Proof
 Rent or lease Agreement of Business Address (if place is rented)
 NOC from the owner of Business Place (if place is rented)
 Original Partnership Deed
 Application form in the prescribed format
 Any other documents as required by Registrar

The Partnership Firm is best suitable for starting any business having small scale of operations and requires
flexibility in operations. Also, where the business idea involves higher risk of discontinuation or failure of
products, can be started with Partnership Firm, which afterwards can be converted into any other form of
business with the stability and growth of the business.

The introduction of LLP has caused erosion of popularity of Partnership Firm in India as LLP allows benefit
of flexibility and tax advantages along with the benefit of Body Corporate.

Dissolution of Partnership Firm and Settlement of Accounts

Dissolution of partnership firm is a process in which relationship between partners of firm is dissolved or
terminated. If a relationship between all the partners of firm is dissolved then it is known as dissolution of firm.
In case of dissolution of partnership of firm, the firm ceases to exist. This process includes the discarding and
disposing of all the assets of firm or and settlements of accounts, assets, and liabilities. Learn more about
Dissolution of partnership firm, legal provisions, and settlement of accounts.

Dissolution of Partnership Firm

As we know that after the dissolution of partnership firm the existing relationship between the partner’s
changes. But, the firm continues its activities. The dissolution of partnership takes place in any of the following
ways:

1. Change in the existing profit sharing ratio.

2. Admission of a new partner

3. The retirement of an existing partner

4. Death of an existing partner

5. Insolvency of a partner as he becomes incompetent to contract. Thus, he can no longer be a partner in

the firm.

6. On completion of a specific venture in case, the partnership was formed specifically for that particular
venture.

55
 7. On expiry of the period for which the partnership was formed.
Section 39 of the Indian Partnership Act 1932 states that the dissolution of partnership firm among all the
partners of the partnership firm is the Dissolution of the Partnership Firm. The dissolution of partnership firm
ceases the existence of the organization.

After this, the partnership firm cannot enter into any transaction with anybody. It can only sell the assets to
realize the amount, pay the liabilities of the firm and discharge the claims of the partners.

However, the dissolution of a firm may be without or with the intervention of the court. It is noteworthy here
that the dissolution of partnership may not necessarily result in the dissolution of the firm.

But, dissolution of partnership firm always results in the dissolution of the partnership.

Browse more Topics under Dissolution Of Partnership Firm

 Accounting Treatment of Dissolution

Following are the ways in which dissolution of a partnership firm takes place:

1. Dissolution by Agreement
A firm may be dissolved if all the partners agree to the dissolution. Also, if there exists a contract between the
partners regarding the dissolution, the dissolution may take place in accordance with it.

2. Compulsory Dissolution
In the following cases the dissolution of a firm takes place compulsorily:

 Insolvency of all the partners or all but one partner as this makes them incompetent to enter into a
contract.

 When the business of the firm becomes illegal due to some reason.

 When due to some event it becomes unlawful for the partnership firm to carry its business. For
example, a partnership firm has a partner who is of another country and India declares war against that
country, then he becomes an enemy. Thus, the business becomes unlawful.

3. When certain contingencies happen

The dissolution of the firm takes place subject to a contract among the partners, if:

 The firm is formed for a fixed term, on the expiry of that term.

 The firm is formed to carry out specific venture, on the completion of that venture.

 A partner dies.

 A partner becomes insolvent.

4. Dissolution by Notice

56
When the partnership is at will, the dissolution of a firm may take place if any one of the partners gives
a notice in writing to the other partners stating his intention to dissolve the firm.

5. Dissolution by Court
When a partner files a suit in the court, the court may order the dissolution of the firm on the basis of the
following grounds:

 In the case where a partner becomes insane

 In the case where a partner becomes permanently incapable of performing his duties.

 When a partner becomes guilty of misconduct and it affects the firm’s business adversely.

 When a partner continuously commits a breach of the partnership agreement.

 In a case where a partner transfers the whole of his interest in the partnership firm to a third party.

 In a case where the business cannot be carried on except at a loss

 When the court regards the dissolution of the firm to be just and equitable on any ground.

Settlement of Accounts

In a case where the partners do not have an agreement regarding the dissolution of the firm, the following
provisions of the Indian Partnership Act 1932 will apply:

 The firm will pay the losses including the deficiency of capital firstly out of the profits, secondly out of
the partner’s capital and lastly by the partners individually in their profit sharing ratio.

 The firm shall apply its assets including any contribution to make up the deficiency firstly, for paying
the third party debts, secondly for paying any loan or advance by any partner and lastly for paying back
their capitals. Any surplus left after all the above payments is shared by partners in profit sharing ratio.

Negotiable Instruments Introduction Act

A negotiable instrument is a piece of paper which entitles a person to a sum of money and which is transferable
from person to person by mere delivery or by endorsement and delivery. The person to whom it is so transferred
becomes entitled to the money also to the right to further transfer it. Thus, negotiable instruments play a major
role in the trade world.
The maxim of law nemo dat quod non-habet (no one can transfer a better title than he himself has). This is the
general principle relating to transfer of property is that no one can become the owner of any property unless he
purchases it from the true owner or with his authority.
According to professor Goode, instrument is described as a document of title of money Therefore an
instrument is a document which physically expresses the payment obligation. An instrument will be in deliverable
state only if it is signed by the possessor or it should be with the authority of that person. The instrument clearly
states the contractual right to payment and the right will be transferred only after the complete delivery. The
person who has that entitlement and posses the instrument is consider as the true owner.
Purpose
Main purpose of negotiable instruments is to avoid the carriage of higher amount of money and to reducing the
risk of theft; robbery etc.
57
To give legal effect to negotiable instruments there is legislation and the name of that legislation is The
Negotiable Instruments Act, 1881.

Introduction To Negotiable Instruments Act, 1881

The Negotiable Instruments Act was enacted, in India, in 1881.Prior to its enactment, the provision of the English
Negotiable Instrument Act were applicable in India, and the present Act is also based on the English Act with
certain modifications. It extends to the whole of India except the State of J&K.

What are Negotiable Instruments?

Documents of a certain type, used in commercial transactions and monetary dealings, are called Negotiable
instruments. The word 'negotiable' means transferable from one person to another and the term 'instrument'
means 'any written doc. by which a right is created in favor of some person.' Thus, the negotiable instrument is a
doc. by which rights vested in a person can be transferred to another person in accordance with the provisions
of the Negotiable Instruments Act, 1881.

Definition:
According to section 13 of Negotiable Instruments Act, 1881- A 'negotiable instrument' means a promissory
note, bill of exchange or cheque payable either to order or to bearer.

Main Features of A Negotiable Instrument

An instrument may be negotiable either by
# Statute - Promissory notes, bills of exchange and cheques are negotiable instruments under the Negotiable
Instruments Act, 1881; or
# By usage - Bank notes, bank drafts, share warrants, bearer debentures, dividend warrants, scripts and
treasury bills.
# An instrument is to be called 'negotiable' if it possesses the following characteristic features:
# Freely transferable - Transferability may be by
1. delivery, or
2. By endorsement and delivery.

a. Holder's title free from defects: The holder (of the negotiable instrument) in due course acquires a good title
not withstanding any defect in a previous holder's title.
b. The Holder can sue in his own Name - Another characteristic feature of a negotiable instrument, is that its
holder in due course, can sue on the instrument in his own name.
c. A negotiable instrument can be transferred infinitum, i.e., can be transferred any number of times till its
maturity.
d. A negotiable instrument is subject to certain presumptions.

Presumptions
1. Consideration: Every negotiable instrument is deemed to have been drawn and accepted, endorsed,
negotiated, or transferred for consideration.
2. Date: Every negotiable instrument must bear the date on which it is made or drawn.
3. Acceptance: Every bill of exchange was accepted within a reasonable time after the date mentioned therein
and before the date of its maturity.
4. Transfer: Every transfer should be made before the expiry.

Meaning of Endorsement:
# When a maker or holder writes the person’s name on the face or back of the instrument & puts his
signatures thereto for the purpose of negotiation, it is called ‘endorsement’.
# Person who signs – endorser
# To whom it is endorsed – endorsee.

Essentials of valid endorsement:

1, On the back or face of the instrument.
2, Must be made by maker or holder.
3, Must be properly signed by the endorser
4, It must be for the entire negotiation instrument.
5. No specific form of words is necessary for endorsement.

Effects of Endorsement:
58
• The property in instrument is transferred from endorser to endorsee.
• The endorsee gets right to negotiate the instrument further.
• The endorsee gets the right to sue in his own name to all other parties.[2]

Promissory Note [Section 4]:

Definition According to section 13 of Negotiable Instruments Act, 1881- 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 to, or to the order of, a certain person or to the bearer of the instrument.
A promissory note is a promise in writing by a person to pay a sum of money to a specified person or to his
order.[3]
Maker: The person who makes the promissory note and promises to pay is called the maker.
Payee: The person to whom the payment is to be made is called the payee.

Essentials or Characteristics of a Promissory Note:

From the definition, it is clear that a promissory note must have the following essential elements.
1. In writing - A promissory note must be in writing. Writing includes print and typewriting.
2. Promise to pay - It must contain an undertaking or promise to pay. Thus, a mere acknowledgement of
indebtedness is not sufficient. Notice that the use of the word ‘promise’ is not essential to constitute an
instrument as promissory note.
3. Unconditional - The promise to pay must not be conditional. Thus, instruments payable on performance or
non- performance of a particular act or on the happening or non-happening of an event are not promissory
notes.
4. Signed by the Maker – The promissory note must be signed by the maker, otherwise it is of no effect.
5. Certain Parties - The instrument must point out with certainty the maker and the payee of the promissory note.
6. Certain sum of money - The sum payable must be certain or capable of being made certain.
7. Promise to pay money only - If the instrument contains a promise to pay something in addition money, it
cannot be a promissory note.
8. Number, place, date etc. - These are usually found in a promissory note but are not essential in law. If a
promissory note does not bear a date, it is deemed to have been made when it was delivered.
9. Installments - It may be payable in installments.
10. It may be payable on demand or after a definite period - Payable 'on demand' means payable immediately or
any time till it becomes time-barred. A demand promissory note becomes time barred on expiry of 3 years from
the date it bears.
11. It cannot be made payable to bearer on demand or even payable to bearer after a certain period
12. It must be duly stamped under the Indian Stamp Act - It means that the stamps of the requisite amount must
have been affixed on the instrument and duly cancelled either before or at the time of its execution. A promissory
note, which is not so stamped, is a nullity.[4]

Bill Of Exchange [Section 5]:

According to section 5 of Negotiable Instruments Act, 1881- 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.
It is also called a Draft.

Characteristic Features of a bill of exchange:

1. It must be in writing.
2. It must contain an order to pay and not a promise or request.
3. The order must be unconditional.
4. There must be three parties, viz., drawer, drawee and payee.
5. The parties must be certain.
6. It must be signed by the drawer.
7. The sum payable must be certain or capable of being made certain.
8. The order must be to pay money and money alone.
9. It must be duly stamped as per the Indian Stamp Act.
10. Number, date and place are not essential.

Parties To A Bill Of Exchange:

# Drawer: The maker of a bill of exchange is called the drawer.
# Drawee: The person directed to pay the money by the drawer is called the drawee.
# Payee: The person named in the instrument, to whom or to whose order the money are directed to be paid by
the instruments are called the payee.
59
Cheque [Section 6]
According to section 6 of Negotiable Instruments Act, 1881- A cheque is defined as 'a bill of exchange drawn on
a specified banker and not expressed to be payable otherwise than on demand’.
Thus, a cheque is a bill of exchange with two added features, viz.:
# it is always drawn on a specified banker; and
# It is always payable on demand and not otherwise.

Essentials Of Cheque:
1. In Writing: The cheque must be in writing. It cannot be oral.
2. Unconditional: The language used in a cheque should be such as to convey an unconditional order.
3. Signature of the Drawer: It must be signed by the maker.
4. Certain Sum of Money: The amount in the cheque must be certain.
5. Payees Must be certain: It must be payable to specified person.
6. Only Money: The payment should be of money only.
7. Payable on Demand: It must be payable on demand.
8. Upon a Bank: It is an order of a depositor on a bank. [5]

Parties To A Cheque
# Drawer: Drawer is the person who draws the cheque.
# Drawee: Drawee is the drawer‟s banker on whom the cheque has been drawn.
# Payee: Payee is the person who is entitled to receive the payment of a cheque.

Difference Between Cheque And Bill Of Exchange: [6]

Basis For
Cheque Bill of Exchange
Comparison
A document used to make easy
payments on demand and can be A written document that shows the
Meaning
transferred through hand delivery is indebtedness of the debtor towards the creditor.
known as cheque.
Section 6 of The Negotiable Instrument Section 5 of The Negotiable Instrument Act,
Defined in
Act, 1881 1881
Validity Period 3 months Not Applicable
Payable to bearer Cannot be made payable on demand as per RBI
Always
on demand Act, 1934
Not Applicable, as it is always payable
Grace Days 3 days of grace are allowed.
at the time of presentment.
Acceptance A cheque does not require acceptance. BOE needs to be accepted.
Stamping No such requirement. Must be stamped
Crossing Yes No
Drawee Bank Person or Bank
Noting or If the cheque is dishonored it cannot be If a BOE is dishonored it can be noted or
Protesting noted or protested. protested.

Difference B/W Bill Of Exchange And Promissory Note: [7]

Basis For Comparison Bill Of Exchange Promissory Note
A promissory note is a written
BOE is an instrument in writing showing
promise made by the debtor to pay a
Meaning the indebtedness of a buyer towards the
certain sum of money to the creditor
seller of goods.
at a future specified date.
Section 5 of Negotiable Instrument Act, Section 4 of Negotiable Instrument
Defined in
1881. Act, 1881.
Parties Three parties, i.e. drawer, drawee and payee Two parties, i.e. drawer and payee
Drawn by Creditor Debtor
Liability of Maker Secondary and conditional Secondary and conditional
60
Can maker & payee be the
Yes No
same person?
Promissory Note cannot be drawn
Copies Bill can be drawn in copies
in copies
Notice is necessary to be given to all the Notice is not necessary to be given
Dishonor
parties involved. to the maker.

Difference B/W Cheque And Promissory Note:[8]

Basis For
 Cheque Promissory Note
Comparison
A promissory note contains promise to
Order And Promise It contains order to pay.
pay.
In case of cheque there may be three parties, the In case of promissory note are only
Number Of Parties
drawer, drawee and payee. two parties, the maker and the payee.
Cheque is used because it is a simple and easy
It is used for receiving and giving
Object medium of exchange and serving of metallic
credit.
money.
Crossing A cheque may be crossed. A pro-note cannot be crossed.
A pro-note cannot be drawn payable to
Payable To Bearer A cheque is often drawn as payable to bearer.
bearer.
Its payment can be stopped by giving the notice A pro-note payment cannot be stopped
Stop Payment
to the bank. if once issued.
In case of cheque when it is dishonored, the In case of promissory note liability is
Liability Nature
drawer is liable. primary.
Promissory note may be drawn on any
It is drawn on a printed form issued by a
Use Of Form paper and there is no need of any
particular bank.
particular form.
A cheque is always drawn to a particular bank A promissory note can be drawn on
Drawee
where account is available. any person.
In case of cheque drawee and payee can be the In case of pro-note there are two
Drawer and Payee
same person. parties and maker cannot be the payee.

General Agreement on Tariffs and Trade (GATT)

The General Agreement on Tariffs and Trade (GATT) was a free trade agreement between
23 countries that eliminated tariffs and increased international trade. As the first1

worldwide multilateral free trade agreement, GATT governed a significant portion of

international trade between January 1, 1948 and January 1, 1995. The agreement ended
2

when it was replaced by the more robust World Trade Organization (WTO). 3

Key Takeaways

 The General Agreement on Tariffs and Trade was a treaty created after World War II
to help the economies of countries affected by the war.
 This agreement would pave the way to the creation of the World Trade Organization.
 With countries becoming increasingly integrated economically, war between member
countries dropped.
 GATT did have drawbacks when it came to the amount of autonomy some countries
gave up, with global goals prioritized over local ones.

61
Purpose

The purpose of GATT was to eliminate harmful trade protectionism. That had sent global
trade down 66% during the Great Depression. GATT restored economic health to the world
4

after the devastation of the Depression and World War II.

Three Provisions

GATT had three main provisions. The most important requirement was that each member
must confer most favored nation status to every other member. All members must be
treated equally when it comes to tariffs. It excluded the special tariffs among members of
the British Commonwealth and customs unions. It permitted tariffs if their removal would
cause serious injury to domestic producers.

Second, GATT prohibited restrictions on the number of imports and exports. The
exceptions were:

 When a government had a surplus of agricultural products

 If a country needed to protect its balance of payments because its foreign exchange
reserves were low
 Emerging market countries that needed to protect fledgling industries

In addition, countries could restrict trade for reasons of national security. These included
protecting patents, copyrights, and public morals.

The third provision was added in 1965, addressing developing countries joining the GATT.
Developed countries agreed to eliminate tariffs on imports from developing countries to
boost those economies. Lower tariffs had benefits for developed countries, as well. As the
GATT increased middle-class consumers throughout the world, there was an increased
demand for trade with developed countries. 5

History

GATT grew out of the Bretton Woods Agreement. The summit at Bretton Woods also
created the World Bank and the International Monetary Fund to coordinate global growth.

The summit almost led to a third organization. It was to be the highly ambitious
International Trade Organization (ITO).

The 50 countries that started negotiations wanted it to be an agency within the United
Nations that would create rules, not just on trade, but also employment, commodity
agreements, business practices, foreign direct investment, and services. The ITO charter
was agreed to in March 1948, but the U.S. Congress and some other countries'
legislatures refused to ratify it. In 1950, the Truman Administration declared defeat, ending
the ITO.6

At the same time, 15 countries focused on negotiating a simple trade agreement. They
agreed on eliminating trade restrictions affecting $10 billion of trade or a fifth of the world’s
total. A total of 23 countries signed the GATT deal on October 30, 1947, clearing the way
for it to take effect on June 30, 1948.
62
GATT didn’t require the approval of Congress. That's because, technically, GATT was an
agreement under the provisions of the U.S. Reciprocal Trade Act of 1934. It was only
7

supposed to be temporary until the ITO replaced it.

Throughout the years, rounds of further negotiations on GATT continued. The main goal
was to further reduce tariffs. In the mid-1960s, the Kennedy round added an Anti-
Dumping Agreement. The Tokyo round in the seventies improved other aspects of trade. The
8

Uruguay round lasted from 1986 to 1994 and created the World Trade Organization.
9

GATT and WTO

GATT lives on as the foundation of the WTO. The 1947 agreement itself is defunct. But,
9

its provisions were incorporated into the GATT 1994 agreement. That was designed to
keep the trade agreements going while the WTO was being set up. So, the GATT 1994 is
itself a component of the WTO Agreement.

Member Countries

The original 23 GATT members were Australia; Belgium; Brazil; Burma, (now called
Myanmar); Canada; Ceylon, now Sri Lanka; Chile; China; Cuba; Czechoslovakia, now
Czech Republic and Slovakia; France; India; Lebanon; Luxembourg; Netherlands; New
Zealand; Norway; Pakistan; Southern Rhodesia, now Zimbabwe; Syria; South Africa; the
United Kingdom and the United States. The membership increased to more than 128
countries by 1994. 10

Pros and Cons

Pros

 GATT encouraged international trade.

 Countries with trading agreements are less likely to go to war with one another.
 The success of GATT inspired other international deals and organizations.
 Trade increases communication.

Cons

 Domestic industries that can't compete globally will likely fail.

 The globalization of industries exposes more of the world to risks within that
industry.
 Trade agreements could overrule domestic law, forcing governments to cede some
level of control over their citizens.
 Small economies and businesses may struggle to compete with large economies
and businesses.

Pros

For 47 years, GATT reduced tariffs. This boosted world trade by 8% a year during the
1950s and 1960s. That was faster than world economic growth. Trade grew from $302
billion in 1970 to $3.8 trillion in 1993.
11

63
It was such a success that many more countries wanted to join. By 1995, there were 128
members, generating an extremely large percent world trade. 12

By increasing trade, GATT promoted world peace. In the 100 years before GATT, the
number of wars was 10 times greater than the 50 years after GATT. Before World War II,
the chance of a lasting trade alliance was only slightly better than 50/50.

By showing how free trade works, GATT inspired other trade agreements. It set the
13

stage for the European Union. Despite the EU's problems, it has prevented wars between
its members.

GATT also improved communication. It provided incentives for countries to learn English,
the language of the world's largest consumer market. This adoption of a common language
8

reduced misunderstanding. It also gave less developed countries a competitive advantage.

English gave them insight into the developed country's culture, marketing, and product
needs.

For example, most Indians know English. It allows them to work in call centers that support
U.S. companies. This has been a major reason for call center outsourcing.

Cons

Low tariffs destroy some domestic industries, contributing to high unemployment in those
sectors. Governments subsidized many industries to make them more competitive on a
global scale. U.S. and EU agriculture were major examples. During the early 1970s, the
textile and clothing industries were exempted from GATT. 14
When the Nixon
Administration took the U.S. dollar off the gold standard in 1973, it lowered the value of the
dollar compared to other currencies. That further lowered the international price of U.S.
exports.15

By the 1980s, the nature of world trade had changed. GATT did not address the trade of
services that allowed them to grow beyond any one country's ability to manage them. For
example, financial services became globalized. Foreign direct investment had become
more important. As a result, when U.S. investment bank Lehman Brothers collapsed, it
threatened the entire global economy. Central banks scrambled to work together for the
first time to address the 2008 financial crisis.
16
They were forced to provide liquidity for
frozen credit markets.

Like other free trade agreements, GATT reduced the rights of a nation to rule its own
people. The agreement required them to change domestic laws to gain the trade benefits.
For example, India had allowed companies to create generic versions of drugs without
paying a license fee. This helped more people afford medicine. GATT required India to
remove this law.17
That raised the price of drugs to a level out of reach for many Indians.

Trade agreements like GATT often destabilize small, traditional economies. Countries like
the United States that subsidize agricultural exports can put local family farmers out of
business. Unable to compete with low-cost grains, the farmers migrate to cities looking for
work, often in factories set up by multi-national corporations. 18
Often these factories
subsequently move onto other countries with lower-cost labor, leaving the farmers unemployed.

64
Farmers that stay often grow opium, coca, or marijuana, just because they can't grow
traditional crops and stay in business. Violence from the drug trade may force them to
emigrate to protect themselves and their children.

Foreign Exchange Management Act (FEMA) & Foreign Exchange

Regulation Act (FERA)
Foreign Exchange Management Act, 1999 (FEMA) came into force by an act of Parliament. It was enacted
on 29 December 1999. This new Act is in consonance with the frameworks of the World Trade Organisation
(WTO). It also paved the way for Prevention of Money Laundering Act, 2002 which came into effect from
July 1, 2005. This topic would be of importance in the IAS Exam for both Prelims and Mains.

Quick Facts about FERA & FEMA for UPSC

What is FEMA?
It is a set of regulations which empowers Reserve Bank of India to pass regulations and enables Government
of India to pass rules relating to foreign exchange in tune with foreign trade policy of India.
Which Act did FEMA replace?
FEMA replaced an act called Foreign Exchange Regulation Act (FERA).
What is FERA and when was it passed?
FERA (Foreign Exchange Regulation Act) legislation was passed in 1973. It came into effect on January 1,
1974. FERA was passed to regulate the financial transactions concerning foreign exchange and securities.
FERA was introduced when Forex reserves of the country were very low.
Why was FERA replaced?
FERA did not comply with the post-liberalization policies of the Government.
What is the main change brought in FEMA compared to FERA?
It made all the criminal offences as civil offences.
For comprehensive information on Difference between FERA and FEMA, visit the given link.

Main Features of Foreign Exchange Management Act, 1999

1. It gives powers to the Central Government to regulate the flow of payments to and from a person
situated outside the country.
2. All financial transactions concerning foreign securities or exchange cannot be carried out without the
approval of FEMA. All transactions must be carried out through “Authorized Persons.”
3. In the general interest of the public, the Government of India can restrict an authorized individual
from carrying out foreign exchange deals within the current account.
4. Empowers RBI to place restrictions on transactions from capital Account even if it is carried out via
an authorized individual.
5. As per this act, Indians residing in India, have the permission to conduct a foreign exchange, foreign
security transactions or the right to hold or own immovable property in a foreign country in case
security, property or currency was acquired, or owned when the individual was based outside of the
country, or when they inherit the property from individual staying outside the country.

Categories of Authorized Persons under FEMA

Category Authorized Authorized Authorized Full Fledged

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 Dealer – Dealer Dealer Money
Category I Category – II Category – Changers
III

Entities 1.Commercial 1. Upgraded 1. Select 1. Department

Banks FFMC Financial and of Post
2.State Co- 2. Co-operative other 2.Urban Co-
operative Banks Banks Institutions operative
Banks
3.Urban Co- 3. Regional
operative Banks Rural Banks 3. Other FFMC
(RRB’s), others

Activities As per RBI All activities Foreign Purchase of

Permitted guidelines, all permitted to exchange, foreign
current and FFMC and transactions exchange and
capital account specified non- related sale for private
transactions trade related and business
current account visits abroad
transactions
Structure of FEMA.

1. Head Office of FEMA, also known as Enforcement Directorate, headed by Director is located in
New Delhi.
2. There are 5 zonal offices in Delhi, Mumbai, Kolkata, Chennai and Jalandhar, each office is headed
by Deputy Director.
3. Every 5 zones are further divided into 7 sub-zonal offices headed by Assistant Directors and 5 field
units headed by Chief Enforcement Officers.

Difference between FERA and FEMA

Difference between Foreign Exchange Regulation Act (FERA) and Foreign Exchange Management Act
(FEMA) is explained here in detail. This topic is important from the perspective of Indian Economy
Syllabus. FERA was an act promulgated, to regulate payments and foreign exchange in India, on the
contrary FEMA is an act to promote orderly management of the foreign exchange in India. The differences
between FERA and FEMA given here can help the UPSC Civil Service exam aspirants to understand the
basics better and know their comparisons thoroughly.
Aspirants would find this article very helpful while preparing for the IAS Exam.

Difference between FERA and FEMA –

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The major differences between FERA and FEMA are:

Foreign Exchange Regulation Act Foreign Exchange Management Act

(FERA) (FEMA)

Parliament of India passed the Parliament of India enacted Foreign Exchange

Foreign Exchange Regulation Act in Management Act (FEMA) on 29 December
1973 1999 replacing FERA.

FERA came into force from January FEMA came into force from June 2000.
1, 1974.

FERA was repealed in 1998 by FEMA succeeded FERA

Vajpayee Government

FERA has 81 sections FEMA has 49 sections

FERA was conceived with the notion FEMA was conceived with the notion that
that Foreign Exchange is a scarce Foreign Exchange is an asset.
resource.

FERA rules regulated foreign FEMA focused on increasing the foreign

payments. exchange reserves of India, focused on
promoting foreign payments and forein trade.

The objective of FERA was The objective of FEMA is Management of

conservation of Foreign Exchange Foreign Exchange

The definition of “Authorized The definition of “Authorized Person” was

Person” was narrow. widened

Banking units did not come under Banking units came under the definition of
the definition of Authorized Person. Authorized Person.

If there was a violation of FERA If there was a violation of FEMA rules, then it
rules, then it was considered as is considered as civil offence
Criminal offence.

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A person accused of FERA violation A person accused of FEMA violation will be
was not provided legal help. provided legal help.

There was no provision for Tribunal, There is provision for Special Director
the appeals were sent to High Courts (Appeals) and Special Tribunal

For those guilty of violating FERA For those guilty of violating FEMA rules, they
rules, there was provision for direct have to pay a fine, starting from the date of
punishment. conviction, if the penalty is not paid within 90
days, then the guilty will be imprisoned.

If there was a need for transferring of For External trade and remittances, there is no
funds for external operations, then need for prior approval from the Reserve Bank
prior approval of the Reserve Bank of India (RBI).
of India (RBI) is required.

There was no provision for IT There is provision for IT

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