Indian Contract Act, 1872

___________________[A ct 9 o f 1872]_______________

[25th April 1872

Preamble.— Whereas it is expedient to define and amend certain

parts of the law relating to contracts.
It is hereby enacted as follows:

NOTES
In preamble the main objects of the Act are set out, and these are
legitimate aids in construing the enacting parts. Intention of the legisla­
ture can also be gathered from it. The Contract Act, 1872 does not pro­
fess to be a complete code dealing with the law relating to contract. The
Act deals with a particular subject, it is exhaustive upon the same and it
is not permissible to import the principles of English law dehors the statu­
tory provision unless the statute is such that it cannot be understood
without the aid of the English law— Superintendence Company o f India
(P) Ltd. v Krishna Murgai AIR 1980 SC 1717. It appears from the pre­
amble to the Contract Act that it is both an amending and consolidating
Act— Gajanan vM oreshw arM R 1942 Bom 302. Wherever the Contract
Act does not apply in terms of a case, the principles of English law be­
came applicable as rules of justice, equity and good conscience—
Bhagwan Das v Girdharilal & Co. AIR 1966 SC 543.
Preliminary
S. 1. Short title.—This Act may be called the Indian Contract Act,
1872.
Extent, commencement.— It extends to the whole of India except the
State of Jammu and Kashmir; and it shall come into force on the first
day of September, 1872.
Saving.— Nothing herein contained shall affect the provisions of any
Statute, Act or Regulation not hereby expressly repealed, nor any us­
age or custom of trade, nor any incident of any contract, not inconsis­
tent with the provisions of this Act.

NOTES
History of the Law of Contract in India.—The Indian Contract Act
came into force with effect from 1st September, 1872. Before the pass­
ing of this Act the law on the subject was not at all uniform all over the
British India. It was outside the original jurisdiction of the High Courts
and extremely uncertain in its application.

[12] ICA— 1 1
2 Indian Contract Act, 1872 [S.2

The law was limited in its application only within the presidency towns
of Calcutta, Bombay and Madras and was the law of England with cer­
tain modifications. The Indian Law Commissioner observed that a Judge
was to a great extent without guidance of any positive law excepting the
rule that his decision would be such as he thinks to be in consonance
with “justice, equity and good conscious” , in the mofussil area.
The present Act was an attempt to get rid of the unsatisfactory af­
fairs. A Bill was drawn up in 1866 by the Indian Law Commissioners and
became an Act with certain alterations and amendments.
At the beginning this law was full of inconsistencies, inaccuracies
and suffered from inaccuracies. As a result of which it had to face criti­
cism in the hands of eminent jurists and draftsmen. The legislature had
to make the wording of certain provisions of the law more accurately
and arrange them logically and methodically. The Indian Sale of Goods
Act was passed, which was mainly based on English Sale of Goods Act
by repealing the secs. 76-123 (Ch. VII) of the Contract Act in 1930. The
Indian Partnership Act, 1932 has also been repealed secs. 239-266
(Ch. XI) of the Contract Act to make it separate from the Law of Contract
in India.
Applicability.— The Contract Act is both an amending and consoli­
dating Act. But is not exhaustive of the law of contract to be applied in
India— Gajanan v Moreshwar AIR 1942 Bom 302. Wherever the Con­
tract Act does not apply in terms to a case, the principles of English law
become applicable as rules of justice, equity and good conscience—
Bhagwan Das v Girdharilal & Co. AIR 1966 SC 543 ; AIR 1960 Punj
632. Even if the Constitution of India or the Railways Act provide for
particular forms of contract but the provisions of the Contract Act are not
superseded — Union o f India v S.S.H. Syndicate AIR 1976 SC 879.
Where a matter is provided by a statute the Contract Act does not apply.
The Act is meant to cover contracts between the parties and not statu­
tory enactment— 1965 Punj LR (Supp) 70. The Contract Act extends to
the whole of India except the State of Jammu and Kashmir. The Act has
no extra-territorial operation— I.A. Industries v Punjab National Bank MR
1970 All 108.
S. 2. Interpretation-clause.— In this Act the following words and ex­
pressions are used in the following senses, unless a contrary intention
appears from the context:
(a) When one person signifies to another his willingness to do or
to abstain from doing anything, with a view to obtaining the
assent of that other to such act or abstinence, he is said to
make a proposal.
(b) When the person to whom the proposal is made signifies his
S. 2] Indian Contract Act, 1872 3

assent thereto, the proposal is said to be accepted. A proposal,

when accepted, becomes a promise.
(c) The person making the proposal is called the “promisor” , and
the person accepting the proposal is called the “promisee”.
( d) 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 to abstain from doing, some­
thing, such act or abstinence or promise is called a consider­
ation for the promise.
(e) Every promise and every set of promises, forming the consid­
eration for each other, is an agreement.
(/) Promises which form the consideration or part of the consider­
ation for each other, are called reciprocal promises.
(g) An agreement not enforceable by law is said to be void.
(h) An agreement enforceable by law is a contract.
(/) An agreement which is enforceable by law at the option of one
or more of the parties thereto, but not at the option of the other
or others, is a voidable contract.
(/) A contract which ceases to be enforceable by law becomes
void when it ceases to be enforceable.

NOTES
Offer and invitation to offer.—A proposal is an offer to be bound
by a promise— Deep Chandra v Sajjad Ali Khan AIR 1951 All 93. The
terms of an offer must be certain and the offer should be such as in law
is capable of being accepted and gives rise to a relationship. It must not
be vague. The vagueness of the offer would not create a contractual
relationship — Jabbarchand v Mrs. C. OlliverMR 1965 Mys 118. A per­
son in reply to an offer to buy his property states that he would not sell
the property for not less than a certain amount, it does not amount to
offer but an invitation — Macpherson vAppanna AIR 1951 SC 184. A
conditional offer lapses as soon as the condition is not accepted by the
offeree — P.S. Mills Ltd. v P.S. Mills Mazdoor Union AIR 1957 SC 95.
Tender constitutes offer— S.P.C. Engineering Co. v Union of India AIR
1966 Cal 259. A tender for supply of goods as and when ordered is a
standing offer. The contract comes into existence when the order is
placed — Calcutta Paper Industries v Indian Oil Corpn. Ltd. AIR 1978
(NOC) 211 (Cal).
When invitation is made to the other party to make the offer and
there is no unconditional acceptance there is no contract— Badri Prasad
v State o f M.P. AIR 1970 SC 706. A notice inviting tenders is merely an
invitation to make offer— A/.P. Singh v Forest Officer AIR 1962 Mani 47.
4 Indian Contract Act, 1872
___________________________________________________________ (Sjj

The Supreme Court in Ramji Dayawala & Sons (P) Ltd. v Invest
Import MR 1981 SC 2085: (1981) 1 SCC 80: (1981) 1 SCR 899: 1981
Mah LR (SC) 95, has laid down the constituents of a valid offer and
acceptance thereupon. It laid down that it may appear from the fact of a
given case that the acceptance of a suggestion may be sub silentio
reinforced by the subsequent conduct of a party. It is true that the gen­
eral rule is that an offer is not accepted by mere silence on the part of
the offeree. There may, however, be further facts which taken together
with silence of the offeree constitute an acceptance. As an instance of
one such case is where a part of the offer was disputed at the negotia­
tion stage and the original offeree communicated that fact to the offeree
showing that he understood the offer in a particular sense. This commu­
nication will probably amount to a counter-offer in which case it may be
that mere silence of the offerer will constitute his acceptance. Where
there is a mistake as to terms of a document, amendment to the draft
was suggested and a counter-offer was made, the signatory to the original
contract is not estopped by his signature from denying that he intended
to make an offer in the terms set out in the document. In case of the
contract which is in a number of parts it is essential to the validity of the
contract that the contracting party should either have assented or taken
to have assented to the same thing in the same sense or as it is some­
times put, there should be consensus adidem. And from this it follows
that a party may be taken to have assented if he has so conducted
himself as to be estopped from denying that he has so assented. Even
apart from this, it would still be open to the party contending novatio to
prove that he had not accepted a part of the original agreement though
the party has signed the agreement containing that part.
Bid at auction sale.—A bidder at auction merely makes an offer to
buy which he can withdraw until it is accepted — State v Hakim Singh
AIR 1973 MP 24; Venkataswami v Narasayya AIR 1965 AP 191.
Promises.—Where a proposal is accepted it becomes a promise—
Andhra Sugars Ltd. v State ofA.P. AIR 1968 SC 599. The definition of
promise as given in sec. 2(b) shows that there must not only be the
proposal but there must be acceptance of the proposal by the other
side. Conditional offer rejected by the other side does not amount to
promise — Shyam Sundar v Parlakimedi Municipality MR 1964 Ori 111.
After the offer is accepted there is promise — Union of India v Gangadhar
AIR 1962 Pat 372. An offer made during negotiation is no more than an
offer and unless it is accepted it cannot reopen into a completed con­
tract—(1970) 2 LLJ 576 (SC). When a person seeks clarification of the
offer he does not accept the offer— U.P.S.E. Board v Goel Electric Stores
AIR 1977 All 494.
Acceptance of offer must be absolute and unconditional— Immani
Apparao v G. Ramalingamurthi AIR 1962 SC 370. A conditional offer
S. 2] Indian Contract Act, 1872 5

lapses when the condition is not accepted by the offeree— P. S. Mills

Ltd. v P. S. Mills Mazdoor Union AIR 1957 SC 95. When the material
terms are settled at the time of acceptance of the tender, the contract
becomes concluded even if the tenderer has to execute an agreement
after the acceptance of tender— M.M. & M. Refinery v M.S.S.I. Corpn.
AIR 1974 Mad 39. The acceptance of offer by telegram is valid — Chiranji
Lai v Union o f India AIR 1963 Punj 372. A provisional acceptance is no
acceptance — Somasundaram vProv. Govt, of Madras MR 1947 Mad
366 (367). C o n d itio n a l acceptan ce is also no a cce p ta n ce —
Raghunandan v State of Hyderabad AIR 1963 AP 110.
A bid by an auctioneer is not an offer. It is the bid of the bidder which
is the offer. So before acceptance the bidder can revoke his offer— ILR
(1969) 1 Mad 124. When the bid is accepted it constitutes agreement—
Ishwar Payal v Rath Municipality AIR 1980 All 143. When the bid is
accepted only on confirmation of the Chief Commissioner, the bidder
can withdraw the offer as long as the bid is not accepted by the Chief
Commissioner— Perspective Publications v State o f Maharashtra AIR
1971 SC 229.
Promisor and promisee.— “Promisor” or a promisee as defined
under sec. 2(c) of the Act is a person and considering the object of the
Act the word ‘person’ must be given an extended sense that it will also
include Governments — State of U.P. v Kanhaiya Lai AIR 1956 All 383
(DB). The term promisee must include the representative of a deceased
promisee as a person to whom the offer of performance can be made—
(1908) 4 Mad LT 335.
Consideration— Under sec. 2(e) every promise and every set of
promises forming the consideration of each other is an agreement. Con­
sideration means something which is of some value in the eye of law. It
must be real and not illusory, adequate or not adequate being a matter
purely contracting parties to decide to agree up to— Kulasekara Perumal
v Pathakutty AIR 1961 Mad 405. The expression “valuable” is implied
and the consideration shall be something which not only the parties
regard but the law can regard as having some value. It may be negative
or positive— Chidambara v P.S. Ranga AIR 1966 SC 193. Consider­
ation means a reasonable equivalent or other valuable benefit passed
on by the promisor to the promisee— Kusania Bhatia v State AIR 1981
SC 1274. Consideration to one co-promisor is a valid consideration—
Anant Krishna v Sarasvatibai AIR 1928 Bom 316. Consideration may
proceed from a third party— Raja Shiba Prasad Singh v Tincouri Banerji
AIR 1939 Pat 477. A stranger to the agreement cannot sue upon it—
Union of India v Brajen Saha AIR 1953 Cal 366, but a person who is not
a party to a contract subject to certain well-recognised exceptions en­
force the terms of contract; such exceptions are that beneficiaries under
the terms of the contract or where the contract is a part of the family
6 Indian Contract Act, 1872
_________________________________________________________________ JSJ

arrangement may enforce the contract— M. C. Chacko v State Bank

Travancore AIR 1970 SC 504: (1969) 2 SCC 343.
‘ Consideration under English law.— In Curie vM isa (1875) LR 10
Ex 153, at p. 162 Lush J. defined considerations— “A valuable consid­
eration, in the sense of law, may consist either in some right, interest,
profit, or benefit accruing to the one party, or some forbearance, detri­
ment, loss or responsibility given, suffered, or undertaken by the other.”
Anson says in Law of Contract (23rd Ed. p. 82) that gratuitous promises
are thus unenforceable in English law; reciprocity is required by the pres­
ence of consideration.
Consideration—essentials of.—Consideration is said to be what
moves from the promisee whether it be an advantage to the promisor or
detriment suffered by the promisee. Consideration to be valid must be
“good or valuable" in the sense in which the words appear in English
law though these words do not appear in case of Contract Act which
speaks only of unlawful and lawful consideration— Muthukaruppa v Pi
Mu Kathappudayan AIR 1915 Mad 528(DB). The word “valuable” is im­
plied. According to Supreme Court consideration shall be something
which not only parties regard but the law can regard as having some
value; it may be negative or positive. In a case where the mortgagees
under a trust were obliged to pay certain sum to charity and in discharge
of such obligation they transferred to mortgage interest to charity. The
transfer was held to be for valuable consideration— Chidambara v P. S.
Ranga AIR 1966 SC 193. A meritorious and a gratuitous consideration
such as natural love and affection or obedience and submission by way
of respect cannot be a good consideration or valuable consideration of
the nature defined in sec. 2(d) of the Contract Act— Shakuntala v State
AIR 1979 SC 843.
Executory and executed consideration.—Consideration may be
(a) executory, or (b) executed at the moment of making the contract. In
case of executory consideration a promise is made by one party in re­
turn for a promise made by the other, in such a case each promise is the
consideration for the other. In case of an executed contract an act is
performed in return for a promise. An offer of a reward is an example of
such a promise. The Supreme Court has laid down a distinction be­
tween the executed and executory consideration in Union of India v
Chamanlal Loomba & Co. AIR 1957 SC 652. An executory consider­
ation is a promise to do or forbear or suffer in the future. Whereas an
executed consideration is something actually done, foreborne or suf­
fered contemporaneously with the making of the contract. A past con­
sideration generally in English law is insufficient to support a contract,

On a consideration of the definition of the term "consideration" the Indian Act is

wider than its definition under the Elglish law — HR (1914)41 Cal 137.
S. 2] Indian Contract Act, 1872 7

but in India even part consideration is sufficient to support a promise.

Again under English law consideration must first move from the promisee,
but under Indian law it may move from the promisee or any other person
to form a contract.
Adequate consideration.—The Supreme Court in Kusonia Bhatia
v State AIR 1981 SC 1274: (1981) 2 SCC 585 has stated that when the
word ‘consideration’ is qualified by ‘adequate’, it makes consideration
stronger so as to make it sufficient and valuable having regard to the
facts, circumstances and necessities of the case. In case of gift of the
nature as defined in sec. 2 (d) should be made without consideration—
Shakuntala v State of Haryana AIR 1979 SC 843.
“Has done or abstained from doing”—doctrine of past con­
sideration.— Under the English law consideration must be present when
the promise is made and there is no such thing which may be called as
past consideration. A request to the promisee to do an act even to the
detriment of the promisee without simultaneous understanding that it is
to be recommended in future cannot make the act good consideration
for a subsequent promise to pay. But in India the Contract Act does not
require any such understanding— Muthukaruppa Mudali v Pi Mu
Kathappudayan AIR 1915 Mad 528 (DB).
Agreement.—An agreement as defined by sec. 2(e) is essentially
and exclusively consensual in nature. But that is not always the case
with Governmental contract— Sunnam Sattiah v State of A.P. AIR 1980
AP 18.
Every promise as defined by sec. 2(b) is not necessarily an agree­
ment. The acceptance of proposal may bring into existence a promise
but yet to have an agreement there should be a consideration for the
promise. Until there is an agreement the question whether there was
any consideration for promise would not arise at all— P.S. Mills Ltd. v
P.S. Mills Mazdoor Union AIR 1957 SC 95.
Contract.— In view of sec. 2(b) an agreement enforceable by law is
a contract. The agreement not unforceable by law is said to be void
under sec. 2(g).
Offer, acceptance and intimation of acceptance conclude the con­
tra ct— Karan Singh v Collector, Chhatarpur AIR 1980 MP 89;
Bhagwandas v Girdharlal AIR 1966 SC 543.
There may be binding contract in spite of a reference to a future formed
agreement. But if a formal agreement is a term of bargain there shall not
be a concluded contract without the formal agreement— K. Sriramulu v
Aswatha Narayana AIR 1968 SC 1028. When the contract with the Gov­
ernment was by way of correspondence and tender was accepted by the
officer duly authorised contract is valid even though formal agreement
has not been made— State of West Bengal vAjit Kr. Mukherjee AIR 1977
8 Indian Contract Act, 1872 [S. 2

Cal 273; AIR 1977 Kant 24. Unforceable by law means enforceable by
subordinate law and not by procedural law— AIR 1943 PC 110.
Doctrine of privity of contract—burden of proof as to privity.—
In Anson’s Law of Contract (23rd ed. by Guest) the doctrine has been
stated as, the general rule of the common law is that no one but the
parties to a contract can be bound by it, or entitled under it. This prin­
ciple is known as that of Privity of Contract. It is a general rule of English
law that a contract cannot confer any right on one who is not a party to
the contract, even though the very object of the contract may have been
to benefit him. As promisee, he is unable to sue because there is no
privity of contract between him and the promisor. This inability of one
who is not a party to the contract to acquire rights under it follows from
the view that the English law has adopted as to the operation of the
contract generally: it has no particular connection with the doctrine of
consideration (p. 377, 89-90). In Shiv Dayal v Union of India AIR 1963
Punj 538 the court stated that the doctrine implies a mutuality of will and
is interaction of parties and their successors. It creates a legal bond or
tie or vinculum juris personal to the parties. The rule is that no one but
the parties to a contract can be bound by it or entitled under it. ‘This
doctrine which prevents a third party to enforce a contract operates with
equal logic to forbid the contracting parties to enforce obligations against
a strength. So that a contract between A & B cannot impose a liability
upon C ”. A person cannot be subjected to the burden of a contract to
which he is not a party. It is the counterpart of the proposition that a third
party cannot acquire rights under a contract.
The Supreme Court in Khushalbhai vA AIR 1981 SC 977:1980 Supp
SCC 1: 1980 UJ (SC) 446: (1980) 3 SCR 22 has held that in a case
involving privity of contract burden to prove absence of privity of con­
tract shifts on the defendant where supply of goods to defendant by
plaintiff and receipt thereof by the former proves privity of contract be­
tween the parties.
Past consideration in India.— In India past consideration is as good
as present consideration or future consideration and such a transaction
cannot be held to be not supported by consideration if the consideration
for the transaction was a past consideration— Kasturi Bai v Panalal
Pandey 66 CWN 8. Past consideration being an immoral one, it cannot
support a transfer— Ulu Ram v Ram Piyari AIR 1952 Punj 293. In a
case where a concubine and a paramour each rendered service to each
other by their agreement to cohabit. In lieu of her services, he promised
to give his services only and not his properties. Having once operated
as the consideration for his earlier promise, her past services could not
be treated as a subsisting consideration for his subsequent promise to
transfer properties to her under sec. 2 (d) of the Indian Contract Act —
D. Nagaratanamba vKanuku AIR 1968 SC 253.
S. 3] Indian Contract Act, 1872 9

Suit by stranger to a contract—maintainability.— A person who

is not a party to a contract, cannot enforce the term of the contract,
subject to certain well recognised exception under the law. The
recognised exceptions are that the beneficiaries under the terms of the
contract or in a case where the contract is a part of the family arrange­
ment may enforce the covenant— M. C. Chacko v State Bank o f
Travancore AIR 1979 SC 504: (1969) 2 SCC 343.
Contract containing several terms— how to be considered.— In
case of a contract consisting of a number of terms and conditions each
of such conditions does not form a separate contract but is an item in
one contract of which it is a part. The consideration of the contract is
taken as a whole for each of the conditions in case of this nature con­
tract. It is not split up into several considerations apportioned between
each term separately— Chaturbhuj vM ireshwarA\R 1954 SC 236:1954
SCR 817.
Agreement—what is.— An agreement as defined by sec. 2(e) is es­
sentially and exclusively consensual in nature. But that is not always the
case with Government contract— Sunnam Sattiah v State o f A.P. AIR
1980 AP 18. The agreement under the said definition is either a promise
or group of promises. Agreements are of two kinds— executed and ex­
ecutory. In executed agreement one party has already performed his
part of contract whereas the other party has yet to perform his part of
contract. But in executory agreement both parties have to perform their
mutual promises and the fact that they have to perform their part of their
contract does not effect the validity of the contract— Piparaich Sugar
Mills Ltd. v Piparaich Sugal Mills Mazdur Union AIR 1957 SC 95.
Void agreement.— In sec. 2 (g) the words “not enforceable by law”
not refer to a disability to sue arising under any procedural regulations.
The Privy Council in Mahanth v U. Ba Yi AIR 1939 PC 110 has decided
that the unenforceability which is contemplated is one which arises un­
der the provisions of the substantive law. A contract void from its incep­
tion is no contract at all and not enforceable at law.

CHAPTER I
Of the Communication, Acceptance and
Revocation of Proposals
S. 3. Communication, acceptance and revocation of proposals.—
The communication of proposals, the acceptance of proposals, and the
revocation of proposals and acceptances, respectively, are deemed to
be made by any act or omission of the party proposing, accepting or
revoking, by which he intends to communicate such proposal, accep­
tance or revocation, or which has the effect of communicating it.
10 Indian Contract Act, 1872 [S. 3 & 4

NOTES

Sections 3 & 4— scope.— These sections deal with the com m uni­
cation, acceptance and revocation of proposals. The Suprem e Court in
Bhagwandas v Giridhar AIR 1966 SC 543 held that in determ ining the
place where a contract takes place under sec. 2, the interpretation sec­
tion must be taken into account.
S. 4. Communication when complete.— The com m unication of a
proposal is complete when it comes to the knowlege of the person to
whom it is made.
The communication of an acceptance is complete,—
as against the proposer, when it is put in a course of transmission to
him so as to be out of the power of the acceptor;
as against the acceptor, when it comes to the knowledge of the
proposer.
The communication of a revocation is complete,—
as against the person who makes it, when it is put into a course of
transmission to the person to whom it is made, so as to be out of power
of the person who makes it;
as against the person to whom it is made, when it comes to his knowl­
edge.
Illustrations
(a) A proposes, by letter, to sell a house to B at a certain price.
The communication of the proposal is complete when B re­
ceives the letter.
(b) B accepts A ’s proposal by a letter sent by post.
The communication of the acceptance is complete—
as against A when the letter is posted;
as against 8, when the letter is received by A.
(c) A revokes his proposal by telegram.
The revocation is complete as against A when the telegram is des­
patched. It is complete as against 8 when 8 receives it.
8 revokes his acceptance by telegram. B s revocation is complete as
against 8 when the telegram is despatched, and as against A when it
reaches him.

NOTES

Communication what amounts to.— Communication means bring­

ing home effective knowledge of facts. It must be in the language known
to the person— Hari Kisan v State of Maharashtra AIR 1962 SC 911:
(1962) 1 Cr LJ 797.
S. 4] Indian Contract Act, 1872 11

Com m unication when complete.— To conclude a contract and to

bring about contractual relationship between the parties there must be
com m unication of the acceptance of the proposal. A mere resolve on
the part of the offeree to accept an offer, when there is no external mani­
festation by speech, writing or other act of the intuition to do so cannot
result in an enforceable or a concluded contract. Both the offer and ac­
ceptance must be absolute, unqualified and unconditional. If it is condi­
tional parties can withdraw at any amount until absolute acceptance
takes place. The position may, however, be different if there is a statu­
tory rule having a force of law precluding withdrawal of a bid in an auc­
tion sale before its acceptance or refusal is communicated to the bid­
der— T. Linga G o w d e rv State AIR 1971 Mad 28. In the absence of any
express or implied directions from the offeror to the contrary an offer
can be accepted by a letter— Pratap Chandra Koyal v Kali Charan
A cha ryaA \P 1952 Cal 32.
A cceptance of com m unication when com plete.— A cceptance
means the taking and receiving of anything in good part and is as it
were a tacit agreem ent to a preceding act, which might have been d e ­
feated or avoided if such acceptance had not been made (W harton’s
Law Lexicon).
Conditional offer and acceptance.— In the case of M ac P herson v
Appanna AIR 1951 SC 184 : 1951 SCR 161, the Suprem e C ourt held
that a mere statement of lowest price at which the ow ner w ould sell
contains no implied contract to sell at the price to the person making the
enquiry. The owner defendant informing his agent by a cable that the
later won’t accept less than a certain lowest am ount for a deal cannot
be treated as a counter-offer capable of resulting in a concluded con­
tract on its acceptance by the purchaser. In the circum stances there
was no concluded contract. But even in such a case when the intimation
of acceptance does not reach the offerer it has to be.proved that the
letter was correctly addressed — Kalluram v State ofM .P . AIR 1986 MP
204.
There can be no valid proposal until it comes to the knowledge of the
person to whom it is made — Dalpatri v W est End W atch Co. AIR 1953
MB 38; Firm Kanhaiyalal v Dinesh Chandra AIR 1959 MP 234.
The contract is concluded when the offer is accepted— Flepublic
Medico Surgical Co. v Union o f India Al R 1980 Kant 168. As soon as the
acceptance is posted or sent by telegram, the acceptance is com pleted
as against the proposer and the contract is concluded— Sadhoolal v
State ofM .P . AIR 1972 All 137; State v S in ha G ovindji AIR 1967 Del 88;
Bhagwandas v G irdharlal AIR 1966 SC 543.
The post office is the agent of the sender of the letter or telegram and not
of the addressee. So far as the offeror is concerned the communication is
completed when the letter reaches him. Before the letter of acceptance
12 Indian Contract Act, 1872 [S . 5

reached the offeror the offeree sends the telegram cancelling the offer.
There is no concluded contract— D h a n ra j M ills v N a rsin g h P ra s a d A IR
1949 Pat 270. W hen after conditional acceptance of the bid the pa p e rs
are sent to the Governm ent for confirm ation but no confirm ation has been
received the contract is not concluded— C.F. A n g a d i v Y.S. H ira n n a y y a
AIR 1972 SC 242; Karan Singh v C ollector, C h h a ta rp u r AIR 1980 MP
89; G. Srinivasa R eddy v Commr., Excise B o a rd o f R e ve n u e AIR 1973
AP 178.
S. 5. Revocation of proposals and acceptances.— A proposal m a y
be revoked at any tim e before the com m unication o f its a cce p ta n ce is
com plete as against the proposer, but not afterw ards.
An acceptance m ay be revoked at any tim e before the co m m u n ica ­
tion of the acceptance is com plete as against the acceptor, but not a f­
terwards.
Illustration
A proposes, by a letter sent by post, to sell his house to B. B accepts
the proposal by a letter sent by post.
A m ay revoke his proposal at any tim e before or at the m om ent w hen
B posts his letter of acceptance, but not afterw ards.
B m ay revoke his acceptance at any tim e before or at the m om ent
when the letter com m unicating it reaches A, but not afterw ards.
S. 6. Revocation how made.— A proposal is revoked—
(1) by the com m unication of notice of revocation by the p roposer to
the other party;
(2) by the lapse of the tim e prescribed in such proposal fo r its a cce p ­
tance, or, if no tim e is so prescribed, by the lapse of a reasonable tim e,
without com m unication of the acceptance;
(3) by the failure of the acceptor to fulfil a condition preceden t to
acceptance; or
(4) by the death or insanity of the proposer, if the fact of his death or
insanity com es to the knowledge of the acceptor before acceptance.
S. 7. Acceptance must be absolute.— In order to convert a pro­
posal into a promise the acceptance m ust—
(1) be absolute and unqualified;
(2) be expressed in som e usual and reasonable m anner, unless the
proposal prescribes the m anner in which it is to be accepted. If the pro­
posal prescribes a m anner in which it is to be accepted, and the a ccep­
tance is not made in such m anner, the proposer may, within a reason­
able time after the acceptance is com m unicated to him, insist that his
proposal shall be accepted in the prescribed manner, and not o th e r­
wise; but, if he fails to do so, he accepts the acceptance.
S. 8] Indian C ontract Act, 1872 13

NO TES
Acceptance of insurance proposal. — In L ife In s u ra n c e C o rp o ra ­
tion o f India v R a ja V a sire d d y A IR 1984 SC 1014 the S u p re m e C o u rt
laid dow n th a t a c ce p ta n ce o f in su ra n ce prop o sa l is c o m p le te o n ly w h e n
it is co m m u n ic a te d to the offerer. B ut m ere re ce ipt o r re te n tio n o f p re ­
m ium until a fte r the d eath o f the a p p lica n t o r m ere p re p a ra tio n o f th e
policy d o c u m e n t is not a cce p ta n ce . It m ust be s ig nified by so m e a ct o r
acts a g re e d on by the p a rtie s o r from w hich th e law can raise a p re ­
sum ption o f a cce p ta n ce . S ile n ce in th is case d o e s not d e n o te c o n s e n t
and no bin d in g c o n tra c t a rise s until th e p erson to w h o m o ffe r is m ade
says o r d o e s so m e th in g to sig n ify his a cce p ta n ce .
W hat constitutes a concluded contract. — C on d itio n a l a c c e p ta n c e
of bid is not a co n c lu d e d co n tra ct — H a rid w a r v B e g u m A IR 1972 S C
1242: (1973) 3 S C C 889. S o a lso in case o f auction sa le o f a liq u o r sh o p
the co n tra ct o f sa le w a s n o t co m p le te as the fin al bid w a s s u b je c t to
confirm atio n b y C h ie f C o m m is s io n e r— A n y n o o v S ta te o fU .P . A IR 1971
SC 296. W h e re the p a rtie s a re n o t a d id e m th ere c a n n o t be a c o n ­
cluded co n tra ct— F o rt G lo s te r v S e th ia A IR 1968 SC 1308.
S. 8. Acceptance by perform ing conditions, or receiving con­
sideration. — P e rform ance o f th e co n d itio n s o f a p ro p o sa l, o r th e a c ­
ceptance o f any co n sid e ra tio n fo r a re cip ro ca l p ro m ise w h ic h m a y be
offered w ith a proposal, is an a c ce p ta n ce o f the pro p o sa l.

NO TES
Acceptance of offer and its lim itation. — T h e Indian la w in th is re ­
spect is g u ided by E nglish law w h e re th e re is no sta tu to ry p ro v is io n in
India. C o n tra ct is m ade a t a p lace w he re a c c e p ta n ce is re ce ive d a n d
part of ca u se o f a ctio n fo r su it fo r d a m a g e s fo r bre a ch a ris e s a t th a t
p lace — B h a g w a n d a s v G ird h a rla l A IR 1966 S C 543.
External m anifestation of acceptance. — In tim a tio n b y e x te rn a l
m a n ifesta tio n is n e ce ssa ry to m ake a co n clu d e d co n tra ct. T h e rule o f
a cce p ta n ce o f o ffe r o ve r te le p h o n e o r by te le x has be e n a c c e p te d by
th e S upre m e C o u rt in B h a g w a n d a s v G irid h a ri L a i’s ca se by a m a jo rity
ve rd ict o f the court. A cce p ta n ce by post o r te le g ra m is a lso ta k e n to be
e ffe ctive and c o m p le te w hen the le tte r is put in the po st o r th e te le g ra m
is h a nde d o v e r fo r d e sp a tch to th e te le g ra p h o ffic e — B h g w a n d a s v
G ird h a rla l A IR 1966 SC 543.
W ithdraw al of auction bid by telegram If valid — It h a s b e e n h e ld
by the S u p re m e C o u rt in M. L a tch io n S e th y v C o ffe e B o a rd A IR 1981
SC 162 that telegraph ic instructions regarding bids and co n d itio n s o f th e
B angalore C offee Board auction for export in the co ntext of the c o n d itio n
w as held not to include w ithdraw al or retraction of bids by te le g ra m s.
14 Indian Contract Act, 1872 [S. 9

Revocation of proposal and acceptance.— A person who makes

an offer is entitled to withdraw it before its acceptance is intimated to
him — Rajendra Kumar v State AIR 1972 MP 131. A person who offers
to be bound by the statement of the opposite party cannot resile from
the offer after the other party has agreed to make such statement—
Florabel Skinner vJ.B. K. M. Ramlila Mandat AIR 1980 Punj 284 (FB).
A bidder at an auction sale only makes an offer which he can withdraw
before the fall of hammer— T. Linga Gowder v State AIR 1971 Mad 28.
The tender submitted by the party has been accepted by the Govern­
ment and the letter of acceptance is posted. After the letter of accep­
tance has been posted the party informs by telegram revoking tender,
the agreement was concluded before the telegram was received by the
Government— Sadhoolal v State ofM.P. AIR 1972 All 137.
S. 9. Promises, express and implied.— In so far as the proposal or
acceptance of any promise is made in words, the promise is said to be
express. In so far as such proposal or acceptance is made otherwise
than in words, the promise is said to be implied.
CHAPTER II
Of Contracts, Voidable Contracts, and Void Agreements
S. 10. What agreements are contracts.—All agreements are con­
tracts if they are made by the free consent of parties competent to contract,
for a lawful consideration and with a lawful object, and are not hereby
expressly declared to be void.
Nothing herein contained shall affect any law in force in India, and
not hereby expressly repealed, by which any contract is required to be
made in writing or in the presence of witnesses, or any law relating to
the registration of documents.

NOTES
Essentials of a valid contract.—All agreements are contracts if they
are made by the free consent of parties competent to contract, for a
lawful consideration and with a lawful object and are not expressly de­
clared by the Contract Act to be void— State o f Punjab vH.P. Board AIR
1960 Punj 585.
Intention of the parties is a matter of inference from the conduct of
the parties to the contract — Bikram Kishore vBenudharJena AIR 1976
Ori 4. But in the case of written contracts intention has to be gathered
from the terms of the contract and not from subsequent conduct of the
parties— State o f Gujarat v Variety Body Builders AIR 1976 SC 2108;
Jaykumar v Om Prakash AIR 1970 MP 119. To ascertain intention sur­
rounding circumstances may be considered — Govindram v Chetumal
AIR 1970 Bom 251.
S. 11] Indian Contract Act, 1872 15

A contract may be oral. An oral contract by which the parties in­

tended to be bound is valid and enforceable— AIR 1946 PC 97.
There must be two parties in the contract. It can only be bilateral— S.
Magnus v I. T. Commr. AIR 1958 Bom 467. There must be reciprocity as
to the binding nature of the agreement between the parties—AIR 1971
Pat 253. There the law has prescribed certain formalities for the con­
tract to be entered into, such formalities has to be performed— New
Delhi Municipal Committee v H. S. Rikhy AIR 1956 Punj 181; K.L. Gupte
v Corporation o f Greater Bombay AIR 1968 SC 308. Substantial com­
pliance of the statute is enough— Benarsi Das v Cane Commissioner,
L/.P. AIR 1956 All 725.
Construction of contracts.—When the terms of the contract are
clear the court need not see hypothetical consideration or supposed
intention of parties to construe a contract— G. V. Naidu & Co. I. T. Commr.
AIR 1959 SC 362. In construing a contract the natural and usual mean­
ing to the terms should be imputed— C.C. Exporters vB. R. C. Mills AIR
1961 SC 1295; Sohanlal Pachisia & Co. v Bilasray Khemani AIR 1954
Cal 179. In interpreting a written contract the court should not ordinarily
resort to negotiation for clarifying any ambiguity in the contract. Court
need not look to presumptive intention of the parties in cases where
terms of the contract are clear— Union of India vKishorilal AIR 1959 SC
1362:1960 SCJ 317. The subsequent conduct of the parties in the per­
formances of the contract cannot change the true effect of the clear and
unambiguous terms of the contract— Union of India v Kishorilal AIR
1959 SC 1362.
Consent.— There must be free consent of the parties. A consent
induced by false representation may not be free. So the transaction
becomes voidable— Central National Bank v United Industrial Bank AIR
1954 SC 181. However only because the document is written in the
language unknown to the executant it does not necessarily lead to the
conclusion that the executant did not understand the contents thereof—
Rameswar Nathany v Nurual Huq Choudhury AIR 1949 FC 78. Where
a pardanashin lady is the executant the court must be satisfied that the
lady clearly understood the contents of the deed — T. V. V. v Narasimham
v State of Orissa AIR 1963 SC 1230. When the principal has appointed
an agent, the agent can give the consent on behalf of the principal—
Central National Bank v United Industrial Bank AIR 1954 SC 181. Ac­
cording to sec. 14 a consent is free unless it is not caused by coercion
under influence, fraud misrepresentation or mistake.
S. 11. Who are competent to contract.— Every person is compe­
tent to contract who is of the age of majority according to the law to
which he is of sound mind and is not disqualified from contracting by
any law to which he is subject.
16 Indian Contract Act, 1872 [S.12

NOTES

Person competent to contract— Person must be of sound mind in

order to enter into contract. Contract by lunatic is void — (1955)1 MLJ
310. The question whether a person is of unsound mind is a question of
fact— Chunilal Bhoopal v Amarendra Chandra Dutta AIR 1953 Assam
94.
Contract by a minor— A contract by a minor is void. A contract with
a minor is also void—AIR 1919 PC 129. But a guardian of the minor can
enter into a contract is enforceable against a minor if he has reaped the
benefit of the contract—AIR 1919 PC 135. A minor has not even the
competency to authorise another he enter into a contract on his be­
half— Suryaprakasam vA ke Gangaraju AIR 1956 AP 33 (FB).
S. 12. What is a sound mind for the purposes of contracting.— A
person said to be of sound mind for the purpose of making a contract if,
at the time when he makes it, he is capable of understanding it and of
forming a rational judgment as to its effect upon his interests.
A person who is usually of unsound mind, but occasionally of sound
mind, may make a contract when he is of sound mind.
A person who is usually of sound mind, but occasionally of unsound
mind, may not make a contract when he is of unsound mind.
Illustrations
(a) A patient in a lunatic asylum, who is at intervals of sound mind,
may contract during those intervals.
(b) A sane man, who is delirious from fever, or who is so drunk
that he cannot understand the terms of a contract, or form a
rational judgment as to its effect on his interests, cannot con­
tract whilst such deliriu or drunkenness lasts.
S. 13. “Consent” defined.—Two or more persons are said to con­
sent when they agree upon the same thing in the same sense.

NOTES
Essential to a consent.—To create a contract the parties to it should
agree to the same thing in the same sense. The parties should be ad
idem i.e., they must be of the same intention on the same matter agreed
upon. They should come to the same determination. In Raffles v
Wichelhans (2 H&C 906:133 RR 853) the court decided that if two per­
sons enter into an apparent contract concerning a particular person or
ship, and it turns out that each of them, misled by a similarity of name,
had a different person or ship in his mind, no contract would exist be­
tween them.
S. 14. “Free consent” defined.—Consent is said to be free when it
is not caused by—
 S. 15] Indian Contract Act, 1872 17

(1) coercion, as defined in section 15, or

(2) undue influence, as defined in section 16, or
(3) fraud, as defined in section 17, or
(4) misrepresentation, as defined in section 18, or
(5) mistake, subject to the provisions of sections 20,21 and 22.
Consent is said to be so caused when it would not have been given
but for the existence of such coercion, undue influence, fraud, misrep­
resentation or mistake.

NOTES
Free consent.—Consent is free when it is not caused by coercion,
undue influence, fraud, misrepresentation or mistake— Central National
Bank v United Industrial Bank AIR 1954 SC 181. In a case decided by
the Supreme Court it was held that a cane-grower in the factory zone
makes offer for sale of his cane to occupier of the factory, the occupier
is bound to accept it under Andhra Pradesh Sugarcane (Regulation of
Supply and Purchase) Act, 1961 and Rules framed thereunder. The
’ consent of the occupier is free as defined in sec. 14 of the Contract Act
though he is bound by law to enter into an agreement—Andhra Sugars
Ltd. v State ofA.P. AIR 1968 SC 599.
S. 15. “Coercion” defined.—“Coercion” is the commiting, or threat­
ening to commit, any act forbidden by the Indian Penal Code (45 of
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.
Explanation—It is immaterial whether the Indian Penal Code (45 of
1860) is or is not in force in the place where the coercion is employed.
Illustrations
A, on board an English on the high seas, causes B to enter into an
agreement by an act amounting to criminal intimidation under the Indian
Penal Code (45 of 1860).
A afterwards sues B for breach of contract at Calcutta.
A, has employed coercion, although his act is not an offence by the
law of England, and although section 506 of the Indian Penal Code (45
of 1860) was not in force at the time when or place where the act was
done.

NOTES
Coercion.— In dealing with a case of coercion the court should de­
cide whether the alleged act of coercion amounts to offence under the
Indian Penal Code— ILR 1973 Cal 508. Threat to commit an offence
under Indian Penal Code is necessary—Purabi v Basudeb AIR 1969
[12] ICA — 2
18 Indian Contract Act, 1872

Cal 293. The threat of an ejectment suit or institution of such suit does
not amount to coercion — J. Mazumdar v P. Porey 67 CWN 456. The
compulsion which is legal does not amount to coercion —Andhra Sug­
ars Ltd. vState ofA.P. AIR 1968 SC 599. However threatening to kill or
to commit suicide is coercion—Purabi v Basudeb AIR 1969 Cal 293.
S. 16. “Undue influence” defined.— (1) A contract is said to be in­
duced 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
over the other.
(2) In particular and without prejudice to the generality of the fore­
going principle, a person is deemed to be in a position to dominate the
will of another—
(a) where he holds a real or apparent authority over the other, or
where he stands in a fiduciary relation to the other; or
(b) where he makes a contract with a person whose mental ca­
pacity is temporarily or permanently affected by reason of age,
illness, or mental or bodily distress.
(3) Where a person who is in a position to dominate the will of an­
other, enters into a contract with him, and the transaction appears, on
the face of it or on the evidence adduced, to be unconscionable, the
burden of proving that such contract was not induced by undue influ­
ence shall lie upon the person in a position to dominate the will of the
other.
Nothing in this sub-section shall affect the provisions of section 111
of the Indian Evidence Act, 1872 (1 of 1872).
Illustrations
(a) A having advanced money to his son, B, during his minority,
upon B ’s coming of age obtains, by misuse of parental influ­
ence, a bond from B for a greater amount than the sum due in
respect of the advance. A employs undue influence.
(b) A, a man enfeebled by disease or age, is induced, by B 's influ­
ence over him as his medical attendant, to agree to pay B an
unreasonable sum for his professional services. B employs
undue influence.
(c) A, being in debt to B, the money-lender of his village, contracts
a fresh loan on terms which appear to be unconscionable. It
lies on B to prove that the contract was not induced by undue
influence.
(d) A applies to a banker for a loan at a time when there is strin­
gency in the money market. The banker declines to make the
loan except at an unusually high rate of interest. A accepts the
S. 17] Indian Contract Act, 1872 19

loan on these terms. This is a transaction in the ordinary course

of business and the contract is not induced by undue influ­
ence.

NOTES
Undue influence— In order to constitute undue influence the rela­
tion shall be such that the donee is in a position to dominate the will of
the donor and that the donee used the position in order to obtain unfair
advantage — Subhas Chandra v Ganga Prasad MR 1967 SC 878. But
no presumption of undue influence will arise merely because parties
were nearly related to each other or because the donor was weak or old
— P. Saraswati v Lakshmi AIR 1978 Mad 361; Subhas Chandra v
Ganga Prasad AIR 1967 SC 878. But the burden of proof that there is
no undue influence is upon the person who can dominate the will —
Subhas Chandra v Ganga Prasad AIR 1967 SC 878. But particulars of
undue influence must be specifically pleaded —Ladli Prasad v KamaI
Distillery Co. AIR 1963 SC 1279. Undue influence and coercion has to
be separately pleaded. The particulars have to be pleaded — Bishundeo
Narain v Seogeni Rai AIR 1951 SC 280; Afsar Shaikh v Soleman Bibi
AIR 1976 SC 163: (1976)2 SCC 142. An old lady who was uneducated
and knew only to sign her name and was suffering from cancer gifted
her entire estate to a society for her maintenance and medical treatment
till her death. The court held that the transaction of gift was of uncon­
scionable nature and came under sec. 16(2)(£>) to prove that the trans­
action was not induced by undue influence upon the defence— Ladli
Parshad v KamaI Distillery Co. AIR 1963 SC 1279; Tapindar Singh v
State o f Punjab AIR 1970 SC 1567.
In case of allegation of undue influence upon a Pardanashin lady the
burden shall always rest upon the person who seeks to sustain a trans­
action entered into with that lady to establish that the said document
was executed by her after clearly understanding the nature of the trans­
action, not only by her physical but also mental act. The same was
explained to her and that she understood it — Kharbuja Kuer v
Jangbahadur Rai AIR 1963 SC 1203: (1963)1 SCR 456.
S. 17. “Fraud” defined.—“Fraud” means and includes any of the
following acts committed by a party to a contract, or which his conniv­
ance, or by his agent, with intent to deceive another party thereto or his
agent, or to induce him to enter into the contract—
(1) the suggestion, as a fact, of that which is not true, by one who
does not believe it to be true;
(2) the active concealment of a fact by one having knowledge or
belief of the fact;
(3) a promise made without any intention of performing it;
(4) any other act fitted to deceive;
(5) any such act or omission as the law specially declares to be fraudulent.
20 Indian Contract Act, 1872 [S.18

Explanation.—Mere silence as to facts likely to affect the willingness

of a person to enter into a contract is not fraud, unless the circumstances
of the case are such that, regard being had to them, it is the duty of the
person keeping silence to speak, or unless his silence is, in itself, equiva­
lent to speech.
Illustrations
(a) A sells, by auction, to S, a horse which A knows to be un­
sound. A says nothing to B about the horse's unsoundness.
This is not fraud in A.
(b) B is A's daughter and has just come of age. Here, the relation
between the parties would make it A's duty to tell B if the horse
is unsound.
(c) B says to A — “If you do not deny it, I shall assume that the
horse is sound”. A says nothing. Here, A’s silence is equivalent
to speech.
( d) A and B, being traders, enter upon a contract. A has private
information of a change in prices which would affect, B s will­
ingness to proceed with the contract. A is not bound to inform
B.

NOTES
Fraud.— Particulars of fraud have to be specifically pleaded— P. C.K.
Muthia Chettiar v Shanmugham AIR 1969 SC 552. Deliberate conceal­
ment of fact may amount to fraud— Mithoolal v LIC o f India AIR 1962 SC
814. When there is fraudulent representation of the character of the
document, the document is void. But when there is fraudulent represen­
tation of the contents of the document is voidable— Ningawwa vByrappa
AIR 1968 SC 956; Pratap vPuniya B aiAIR 1977 M P 108; HavldarSingh
v Aditya Singh AIR 1978 All 266. When the parties to the document
were parties to the fraud and fraud was committed the plaintiff cannot
take advantage of his own fraud and can regain possession of the prop­
erty— Immani Appa Rao v G. Ramalingamurthi Al R 1962 SC 370. The
defendant can avoid a contract on the ground of fraud even without
avoiding the contract— Gosto Behari v Ramesh Chandra AIR 1978 Cal
235. When there is fraudulent and wilful suppression of material facts
by the assured, the Insurance Company can avoid the policy— Mithoolal
v U C o f India AIR 1962 SC 814; V. Srinivasa Pillai v LIC o f India AIR
1977 Mad 381.
S. 18. “Misrepresentation” defined.— “Misrepresentation" means
and includes—
(1) the positive assertion, in a manner not warranted by the inform
tion of the person making it, of that which is not true, though he believes
it to be true;
S. 19] Indian Contract Act, 1872 21

(2) any breach of duty which, without an intent to deceive, gains an

advantage to the person committing it, or any one claiming under him;
by misleading another to his prejudice, or to the prejudice of any one
claiming under him;
(3) causing, however innocently, a party to an agreement, to make .a
mistake as to the substance of the thing which is the subject of the
agreement.

NOTES
Misrepresentation.— Particulars of misrepresentation have to be
pleaded in the plaint— Maharu Walad v Khandu Walad AIR .924 PC
186. The burden is on him who alleged misrepresentation to prove mis­
representation— Kuppuswami v Arumugam AIR 1967 SC 1395. When
there is misrepresentation of a material fact by the insured, the insurer
can avoid the policy— H.G. Ins. Society v Punam Chand AIR 1971 Cal
285. When there is misrepresentation as to the character of the trans­
action, the transaction is void— Havaldar Singh vAditya Singh MR 1978
All 266; Pratap v Puniya Bai AIR 1977 MP 108. To constitute the falsity
of misrepresentation it should be found false in substance as well as in
facts— R.C. Thakkar v Gujarat Housing Board AIR 1973 Guj 34.
In the case of insurance contract it is the duty of the insured to dis­
close to the insurer all the material facts known to him before the con­
tract is concluded and the failure to make such disclosure may compel
the insurer to avoid the contract— V. Srinivasa Pillai v LIC o f India AIR
1977 Mad 381. But failure to disclose in personal statement by the in­
sured that he was suffering from diabetes and carbuncle does not amount
to misrepresentations to make contract of insurance invalid.
S.19. Voidability of agreement without free consent.— When con­
sent to an agreement is caused by coercion, fraud or misrepresenta­
tion, the agreement is a contract voidable at the option of the party whose
consent was so caused.
A party to contract, whose consent was caused by fraud or misrepre­
sentation, may, if he thinks fit, insist that the contract shall be performed,
and that he shall be put in the position in which he would have been if
the presentations made had been true.
Exception.— If such consent was caused by misrepresentation or by
silence, fraudulent within the meaning of section 17, the contract, nev­
ertheless, is not voidable, if the party whose consent was so caused
had the means of discovering the truth with ordinary diligence.
Explanation—A fraud or misrepresentation which did not cause the
consent to a contract of the party on whom such fraud was practised, or
to whom such misrepresentation was made, does not render a contract
voidable.
22 Indian Contract Act, 1872

Illustrations
(a) A, intending to deceive 8, falsely represents that five hundred
maunds of indigo are made annually at A s factory, and thereby
induces 8 to buy the factory. The contract is voidable at the
option of B.
(b) A, by a misrepresentation, lead B erroneously to believe that
five hundred maunds of indigo are made annually at A s fac­
tory. 8 examines the accounts of the factory, which show that
only four hundred maunds of indigo have been made. After this
8 buys the factory. The contract is not voidable on account of
A s misrepresentation.
(c) A fraudulently informs 8 that A s estate is free from incum­
brance. 8 thereupon buys the estate. The estate is subject to a
mortgage. 8 may either avoid the contract, or may insist on its
being carried out and the mortgage debt redeemed.
(d) 8, having discovered a vein of ore on the estate of A, adopts
means to conceal, and does conceal the existence of the ore
from A. Through A s ignorance 8 is enabled to buy the estate
at an under-value. The contract is voidable at the option of A.
(e) A is entitled to succeed to an estate at the death of 8, 8 dies:
C, having received intelligence of 8 's death, prevents the in­
telligence reaching A, and thus induces A to sell him his inter­
est in the estate. The sale is voidable at the option of A.

NOTES
Contract voidable.—This section is applicable in case of fraudulent
misrepresentation as to character of document as the transaction is
void. But as to contents of the document it is merely voidable where the
misrepresentation is both the transaction is void— Ningawwa v Byrappa
AIR 1968 SC 956. Under secs. 19 and 19A of the Act an agreement
entered into as a result of coercion, fraud or undue influence is not void
but voidable at the instance of the aggrieved party — Harbans Singh v
Bawa Singh AIR 1952 Cal 73. A licence obtained by misrepresentation
is not void, but voidable — East India Commrl. Co. v Collector of Cus­
toms MR 1962 SC 1893.
Even a mistake induced by innocent, misrepresentation is sufficient
to justify the repudiation of the contract — Governor o f Orissa v
Shivaprasad AIR 1963 Ori 217. When the vendor was an illiterate tribal
woman and there was no convicing proof about independent advice,
payment of consideration, reading over the document to her, the sale
by her entire property is liable to be set aside on the ground of undue
influence and fraud — Koze v Makhan Singh AIR 1973 MP 252. Inad­
equacy of consideration must be extreme to make the contract uncon­
scionable— Vinayakappa vDulichand AIR 1986 Bom 193.
S. 20[ Indian Contract Act, 1872 23

If the transaction which is voidable is admitted by the party who can

avoid if it cannot be questioned by the third party—M. Venkatasubbiah v
M. Subbamma AIR 1956 AP 195.
When there is no disclosure of material defect in the property and
title the non-disclosure amounts to fraud and misrepresentation and
vendee can rescind the contract— ILR (1974)1 Del 689.
Even the party defrauded may avoid contract by alleging fraud the
written statement if the suit is filed by the other party to contract— Gosto
Behari v Ramesh Chandra AIR 1978 Cal 236. When a voidable trans­
action is avoided the avoidance takes effect from the date of original
contract— Official Receiver v Jugal Kishore AIR 1963 All 459. Section
19 does not require that rescission shall be recorded in any particular
form. Notice of rescission of contract by a defrauded party to a bank
acting as the agent of the defrauding party is notice to the defrauding
party— Official Receiver v Jugal Kishore AIR 1963 All 459.
Contract when voidable/void.— Illegality of a contract need not be
pleaded. But, when a contract is said to be voidable by reason of any
coercion, misrepresentation, or fraud, the particulars thereof are required
to be pleaded — Ranganayakamma vK.S. Prakash (2008)15 SCC 673
(para 43); relies inter alia, upon Maharashtra SEB v Suresh (2005)10
SCC 465 (para 5). It is a well-settled principle of law that a void docu­
ment is not required to be avoided whereas a voidable document must
be (supra, para 37); relies upon Prem Singh v Birbal (2006)5 SCC 353.
S. 19A. Power to set aside contract induced by undue influ­
ence—When consent to an agreement is caused by undue influence,
the agreement is a contract voidable at the option of the party whose
consent was so caused.
Any such contract may be set aside either absolutely or, if the party
who was entitled to avoid it has received any benefit thereunder, upon
such terms and conditions as to the Court may seem just.
Illustrations
(a) A's son has forged B ’ s name to a promissory note. B under
threat of prosecuting A’s son, obtains a bond from A for the
amount of the forged note. If B sues on this bond, the Court
may set the bond aside.
(b) A, a money-lender, advances Rs. 100 to B, an agriculturist,
and, by undue influence, induces Bto execute a bond for Rs.
200 with interest at 6 per cent per month. The Court may set
the bond aside, ordering Bto repay the Rs. 100 with such inter­
est as may seem just.
S. 20. Agreement void where both parties are under mistake as
to matter of fact.—Where both the parties to an agreement are under a
mistake as to a matter of fact essential to the agreement, the agreement
is void.
24 Indian Contract Act, 1872 [S. 21

Explanation.— An erroneous opinion as to the value of the thing which

forms the subject-m atter of the agreem ent, is not to be de e m e d a m is­
take as to a m atter of fact.
Illustrations
(a) A agrees to sell to 6 a specific cargo of goods suppose d to be
on its w ay from England to Bom bay. It turns out that, before the
day of the bargain, the ship conveying the cargo had been cast
away and the goods lost. N either party w as aw are of these
facts. The agreem ent is void.
(b) A agrees to buy from B a certain horse. It turns out that the
horse w as dead at the tim e of bargain, though neither party
was aware of the fact. The agreem ent is void.
(c) A, being entitled to an estate fo r the life of B, agrees to sell it to
C. B w as dead at the tim e of the agreem ent, but both parties
w ere ignorant of the fact. The agreem ent is void.

NOTES
Mistake of fact.— W here both the parties to the agreem ent are un­
der a m istake as to a m atter of fact essential to the agreem ent the a gree­
ment is void.
A contract can certainly be avoided on the ground of m istake of fact
but the sam e principle does not apply to a decree passed by court—
State o fJ & K v Sanna Ullah AIR 1966 J& K 45.
To attract sec. 20 the m istake m ust be m utual — 1977 ALJ 880. The
m istake m ust be of the material fact. A m istake not as to the subject-
m atter of the contract but only as to its quality does not render the co n ­
tract ab initio void— Bilasrai & Co. v Tolaram N athm all 52 C W N 858.
S. 21. Effects of mistakes as to law.— A contract is not voidable
because it was caused by a m istake as to any law in force in India; but
a m istake as to a law not in force in India has the sam e effect as a
m istake of fact.
Illustration
A and B make a contract grounded on the erroneous belief that a
particular debt is barred by the Indian Law of Lim itation. T he contract is
not voidable.

NOTES
Effect of mistake of law.—A m istake with regard to the e ffect of the
law of registration upon the validity of an assignm ent deed w ould be at
beat a m istake of law and not of fact rendering the contract void under
sec. 20 — K alyanpur Lim e Works v State o f B ihar AIR 1954 SC 165.
M oney paid under the m istake of law can be recovered — S hiba P ra sa d
vS n'sh Chandra AIR 1949 PC 297; Dwarka Das v S h o la p u r Sp. & Wv.
Co. Ltd. AIR 1954 SC 135.
S. 23] Indian Contract Act, 1872 25

If m ista ke of law leads to the formation of a contract, sec. 21 enacts

that the contract is not voidable on that ground— Union of India v Lalchand
& Sons M R 1967 Cal 310.
A com prom ise made by parties cannot be set aside on the ground
th a t the sam e has been made in ignorance of law — Allahbux Pindok v
Nasserwanji & Co. AIR 1936 Sind 99.
S. 22. Contract caused by mistake of one party as to matter of
fact. — A contract is not voidable merely because it was caused by one
of the parties to it being under a mistake as to a m atter of fact.
S. 23. What considerations and objects are lawful, and what
not.— T he consideration or object of an agreem ent is lawful, unless—
It is forbidden by law; or
is of such a nature that, if permitted, it would defeat the provi­
sions of any law; or
is fraudulent; or
involves or implies, injury to the person or property of another;
or
the C ourt regards it as immoral, or opposed to public policy.
In each of these cases, the consideration or object of an agreem ent
is said to be unlawful. Every agreem ent of which the object or consider­
ation is unlawful is void.
Illustrations
(a) A agrees to sell his house to B for 10,000 rupees. Here, B 's
prom ise to pay the sum of 10,000 rupees is the consideration
fo r A s prom ise to sell the house and A s prom ise to sell the
house is the consideration for 8 s prom ise to pay the 10,000
rupees. These are lawful considerations.
(b) A prom ises to pay 8 1,000 rupees at the end of six months, if
C, w ho ow es that sum to B, fails to pay it. 6 prom ises to grant
tim e to C accordingly. Here, the prom ise of each party is the
consideration for the promise of the other party, and they are
lawful considerations.
(c) A prom ises, fo r a certain sum paid to him by 8, to make good
to 8 the value of his ship if it is wrecked on a certain voyage.
Here, A s prom ise is the consideration for 8 s payment, and 8 s
paym ent is the consideration for A ’ s promise, and these are
lawful considerations.
(d) A prom ises to m aintain 8 's child, and 8 promises to pay A
1,000 rupees yearly for the purpose. Here, the promise of each
party is the consideration for the prom ise of the other party.
They are lawful considerations.
26 Indian Contract Act, 1872 [S. 23

(e) A, B and C enter into an agreem ent for the division am ong
them of gains acquired or to be acquired, by them by fraud.
The agreem ent is void, as its object is unlawful.
( f) A prom ises to obtain for B an em ploym ent in the public service
and B prom ises to pay 1.000 rupees to A. The a g re e m e n t is
void, as the consideration for it is unlawful.
(g) A, being agent for a landed proprietor, agrees fo r m oney, w ith ­
out the know ledge of his principal, to obtain fo r B a lease of
land belonging to his principal. The agreem ent betw een A and
B is void, as it im plies a fraud by concealm ent, by A, on his
principal.
(h) A prom ises B to drop a prosecution w hich he has instituted
against B fo r robbery, and B prom ises to restore the value of
the things taken. The agreem ent is void, as its object is u nlaw ­
ful.
(/) A ’s estate is sold fo r arrears of revenue under the provisions of
an A ct of the Legislature, by which the defaulter is prohibited
from purchasing the estate. B, upon an understanding w ith A,
becom es the purchaser, and agrees to convey the estate to A
upon receiving from him the price which B has paid. The agree­
m ent is void, as it renders the transaction, in effect, a purchase
by the defaulter, and w ould so defeat the object of the law.
(/) A, who is B s mukhtar, prom ises to exercise his influence, as
such, with B in favour of C, and C prom ises to pay 1,000 ru­
pees to A. The agreem ent is void, because it is im m oral.
( k) A agrees to let her daughter to hire to B for concubinage. The
agreem ent is void, because it is immoral, though the letting
m ay not be punishable under the Indian Penal C ode (45 of
1860).

NOTES
Illegal contracts.— A contract involving contravention o f the p rovi­
sions of the Motor Vehicles Act or the rules made thereunder is illegal—
Vallabbhai v B ai J iv i AIR 1969 SC 1193. Though w ager is void and
unenforceable it is not forbidden by law — G herulal v M ahadeodas AIR
1959 SC 781. A partnership to deal in excise goods on a licence granted
to one of the partners is void — M ahapatra B handa r v I. T. C o m m is­
sio n e r AIR 1965 Ori 160; C.S. & Co. v L a i & Co. AIR 1960 AP 444.
Cases of void contract.— A contract by unregistered firm is void—
AIR 1976 Gau 12.
A contract between landlord and tenant to increase rent m ore than
that allowed by law is void— ILR 24 Cal 895. Excess paym ent of rent
than the rent agreed upon may be adjusted when there is no elem ent of
S. 23] Indian Contract Act, 1872 27

com pulsion or exploitation and both parties have consciously done so

for their m utual benefit — Budhwanti v Gulab Chand AIR 1987 SC 1484.
Transfer of excise business by licence for a consideration is a void
transfer and the licensee cannot second the annual payment realisable
under the contract — S. L. Fernandes v Victor M. Fernandes AIR 1981
Goa 18. The contract which is immoral is void under this section. But
im m orality as m entioned in sec. 23 is sexual immorality — Gherulal
Parakh v M ahadeodas AIR 1959 SC 781. A lease of a house for running
a brothel is illegal — Pranballav v Tulsibala Dasi AIR 1958 Cal 719. When
the lease is for a purpose prohibited by law recovery of possession can­
not be granted on the ground of public policy— Parul Bala Chandra v
Jam una Bala 74 CW N 749. A loan given to procure a seat in a medical
college is not recoverable as the agreem ent is against public policy—
N.V. P. Pandian v M.M. R oy AIR 1979 Mad 42. A contract of lease in
violation of a statute is void and unenforceable— Waman Shriniwas v
R.B. & Co. AIR 1959 SC 689. An agreem ent providing special period of
lim itation for notice prior to suit defeating the provisions of sec. 10 of the
C arriers Act is void— 1983 SCC 61. Contract involving transfer of ration
docum ents in contravention of the rationing order is opposed to public
policy— Ram Baran v Ram M ohit AIR 1967 SC 744. An agreem ent to
stifle a criminal prosecution is void— Sumitra Agarwalla v Sutekha Kundu
AIR 1976 Cal 196; V. Narasim haraju v Gurum urthy Raju AIR 1963 SC
107. A cham pertous agreem ent between an advocate and his client for
the form er being remunerated proportionately to the result of the suit is
unenforceable — In the m ater o f G ’, Senior Advocate, S.C. AIR 1954
SC 557. W hen the term in the contract of employment of the employees
of a G overnm ent com pany is unconscionable, arbitrary and opposed to
public policy it is void under this section— Central Inland W ater Trans­
p o rt Corpn. v B rojo Nath G anguly (1986)3 SCC 156. A rule authorising
the authority for term ination of service merely giving a notice of term ina­
tion is void — S hri Sachidananda Pandey v State o f W. B. AIR 1987 SC
1111.
Prohibited contract.— Acts punishable by Indian Penal Code and
acts prohibited by special legislation are acts forbidden by law — Gherulal
Parakh v M ahadeodas AIR 1959 SC 781.
Public policy.— Public policy requires that the parties cannot be
perm itted to contract out of legislative mandate — Natraj Studios (P)
Ltd. v N avrang Studios AIR 1981 SC 537. The court can itself consider
the legality of contract and refuse to enforce an illegal contract —
S urasaiba lini v Phanindra Mohan AIR 1965 SC 1364. The question of
public policy is one of Law and even when the facts have not been fully
pleaded by the parties the court will deduce them from evidence and
w ould apply the doctrine — Ouseph Poulo v Catholic Union Bank AIR
1965 SC 166. The doctrine of public policy can be invoked to harmful
28 Indian Contract Act, 1872 [S. 24

cases and the agreem ent which has the unm istakable, te n d e n cy to harm
the public is void — G herulal Parakh v M ahadeo das A IR 1959 S C 781.
Demand of higher charges for consum ption of e lectricity b e yo n d p e r­
missible limits is not opposed to public policy— (1988)3 M ad LJ 197
(SC).
Doctrine of p a ri delicto public policy is not the policy of a p a rticu la r
G overnm ent. It connotes som e m atters which concerns public g o o d —
C entral Inland W ater Transport Corpn. v Brojo N ath G a n g u ly M B 1986
SC 1571. The doctrine of p a ri delicto is attracted only w here the cause
of action is itself found on som e illegal or fraudulent transaction to w hich
both the parties are parties — D al C hand v B abu Ram AIR 1981 All 335.
The court jwill refuse to enforce an illegal agreem ent at the instance of
the party w ho is him self a party to the illegality. But there are exceptions
— Sita R am v Radha B a i AIR 1968 SC 534. In a case a stage carriage
perm it in favour of Road Transport C orporation w as issued. But the said
corporation entered into an agreem ent with a private vehicle o w n e r a l­
lowing him to operate the vehicle under perm it obtained by corporation
as its nom inee. The Suprem e C ourt decided that the agreem ent w as
not valid — B rij M ohan v M .P.S.R. T. Corporation AIR 1987 SC 29.
Transactions covered by section 23.— The transactions covered
by sec. 23 are the transactions w here the consideration or object of
such transaction is forbidden by law or the transaction is of such a na­
ture that, if perm itted, would defeat the provisions of any law or the trans­
action is fraudulent or the transaction involves or im plies injury to the
person or property of another or w here the court regards it im m oral or
opposed to public policy. W hether a particular transaction is contrary to
a public policy would ordinarily depend upon the nature of transaction.
W here experienced businessm en are involved in a com m ercial con­
tract and the parties are not of unequal bargaining power, the agreed
term s m ust ordinarily be respected as the parties m ay be taken to have
had regard to the m atters known to them — P hulchand E xport v O.O.O.
P atriot (2011)10 SCC 300.
Void agreem ents
S. 24. Agreements void, If considerations and objects unlawful
in part.— If any part of a single consideration fo r one or m ore objects, or
any one or any part of any one of several considerations fo r a single
object, is unlawful, the agreem ent is void.
Illustration
A prom ises to superintend, on behalf of B, a legal m anufacture r of
indigo, and an illegal traffic in other articles. B prom ises to pay to A a
salary of 10,000 rupees a year. The agreem ent is void, the object of A s
promise, and the consideration for B 's prom ise, being in part unlaw ful.
S. 25] Indian Contract Act, 1872 29

NOTES
The Suprem e Court held that if in a case agreem ent is considered
void, the w hole of it m ust be considered as non-existent — Firm of N.
Peddanna V. K. v S. S. Sons AIR 1954 SC 26.
S. 25. Agreement without consideration, void, unless it is in writ­
ing and registered or is a promise to compensate for something
done or is a promise, to pay a debt barred by limitation law.— An
agreem ent m ade w ithout consideration is void, unless—
(1) it is expressed in writing and registered under the law for the time
being in force for the registration of documents, and is m ade on account
of natural love and affection between parties standing in a near relation
to each other; or unless
(2) it is a prom ise to com pensate, wholly or in part, a person who has
already voluntarily done something for the promisor, or something which
the prom isor w as legally com pellable to do; or unless
(3) it is a prom ise, made in writing and signed by the person to be
charged therew ith, or by his agent generally or specially authorized in
that behalf, to pay w holly or in part a debt of which the creditor might
have enforced paym ent but for the law for the lim itation of suits.
In any of these cases, such an agreem ent is a contract.
Explanation 1.— Nothing in this section shall affect the validity, as
betw een the donor and donee, of any gift actually made.
Explanation 2 .— An agreem ent to which the consent of the prom isor
is freely given is not void m erely because the consideration is inad­
equate; but the inadequacy of the consideration may be taken into ac­
count by the C ourt in determ ining the question w hether the consent of
the prom isor w as freely given.
Illustrations
(a) A prom ises, for no consideration, to give to B Rs. 1,000. This is
a void agreem ent.
(b) A, fo r natural love and affection, prom ises to give his son, S,
Rs. 1,000. A puts his prom ise to B into writing and registers it.
T his is a contract.
(c) A finds B ’s purse and gives it to him. B prom ises to give A Rs.
50. This is a contract.
(d) A supports B ’s infant son. B prom ises to pay A's expenses in
so doing. This is a contract.
(e) A ow es B Rs. 1,000, but the debt is barred by the Lim itation
Act. A signs a written promise to pay B Rs. 500 on account of
the debt. This is a contract.
30 Indian Contract Act, 1872 [S. 26

(f) A agrees to sell a horse worth Rs. 1,000 for Rs. 10. A's con­
sent to the agreement was freely given. The agreement is a
contract notwithstanding the inadequacy of the consideration.
(g) A agrees to sell a horse worth Rs. 1,000 for Rs. 10. A denies
that his consent to the agreement was freely given.
The inadequacy of the consideration is a fact which the Court should
take into account in considering whether or not A s consent was freely
given.
S. 26. Agreement in restraint of marriage, void.— Every agree­
ment in restraint of the marriage of any person, other than a minor, is
void.
S. 27. Agreement in restraint of trade, void.— Every agreement by
which any one is restrained from exercising a lawful profession, trade or
business of any kind, is to that extent void.
Exception 1.— Saving of agreement not to carry on business of which
goodwill is sold—One who sells the goodwill of a business may agree
with the buyer to refrain from carrying on a similar business, within speci­
fied local limits, so long as the buyer, or any person deriving title to the
goodwill from him, carries on a like business therein, provided that such
limits appear to the Court reasonable, regard being had to the nature of
the business.

NOTES
Agreement in restraint of trade.—Agreement in restraint of trade
is void. Section 27 is exhaustive and exceptions other than those en­
acted in the statute cannot be engrafted. Therefore restraint on trade
imposed on the employee after expiry of contract is void—Krishan Murgai
v Superintendence Co. of India AIR 1979 Del 232. This decision was
affirmed by Supreme Court in Superintendence Co. of India vKrishan
Murgai MR 1980 SC 1717: (1981)2 SCC 246. When an agreement is
challenged on the ground that it is a restraint on trade, the duty of the
court is first to see the agreement itself and ascertain according to ordi­
nary rules of construction what is the fair meaning of the agreement —
Superintendence Co. of India v Krishan Murgai AIR 1980 SC 1717.
Restraint on trade whether general or partial may be good if shown to
be reasonably necessary for freedom of trade. A restraint reasonably
necessary for the protection of the convenantee must prevail unless
some specific ground of public policy can be clearly established against
it — N. S. Golikari v Century S. & M. Co. AIR 1967 SC 1008.
Agreement in restraint of trade cannot be enforced unless it is rea­
sonable between the parties and consistent with the interest of the pub­
lic— Imperial Act 27 of 1933 AIR 1934 PC 101. Law will not allow a
restraint more than the protection of interest requires. Therefore, a con-
S. 28] Indian Contract Act, 1872 31

tract merely to avoid a competition is void — Gopal Paper Mills v S.K.B.

Malhotra AIR 1962 Cal 61. But an agreement with an employee not to
give service or advice to any other person or company during the con­
tinuance of employment for 11 years is not in restraint of trade —
Kaileswar Singh v Upendra Nath Koyal 76 CWN 388. An agreement not
to carry on similar business in adjoining premises is a reasonable re­
striction — Hukmi Chand v Jaipur Ice & Oil Mills AIR 1980 Raj 155.
The English court held in Home Counties Dairies Ltd. v. Skilton
(1970)2 All E R 1227, that the first principle in constructing written docu­
ment for agrement in restraint of trade to consider the circumstances at
the time when they were made and the position of the parties to them. It
was further held that an agreement in partial restraint of trade may be
upheld if advantageous to both parties in the long run.
Neither the test of reasonableness nor the principle of restraint being
partial is applicable unless it falls within the Exception appended to sec.
27. The reasonableness of the restraint is not envisaged by sec. 27.
Under sec. 27 Contract Act — restrictive covenant extending beyond
the term of the contract is void and not enforceable. That the doctrine of
restraint of trade does not apply during the continuance of the contract
of employment; and it applies only when the contract comes to an end,
is not confined to a contract for employment, but is also applicable to
other contracts. In other words, the doctrine of restraint of trade is the
same for the contracts of employment as well as the other contracts and
the restrictive covenant in the agreement to operate beyond the con­
tract period is void and hit by sec. 27 Contract Act. Restrictive covenant
is to apply during the period of contract, but shall fall under sec. 27 of
the Contract Act where it is to operate after the contract was ended —
Zaheer Khan v Percept D'Mark AIR 2004 Bom 362.
S. 28. Agreements in restraint of legal proceedings, void.— '[Ev­
ery agreement,—
(a) by which any party thereto is restricted absolutely from enforc­
ing his rights under or in respect of any contract, by the usual
legal proceedings in the ordinary tribunals, or which limits the
time within which he may thus enforce his rights; or
(b) which extinguishes the rights of any party thereto, or discharges
any party thereto, from any liability, under or in respect of any
contract on the expiry of a specified period so as to restrict any
party from enforcing his rights,
is void to that extent.]
Exception 1 — Saving of contract to refer to arbitration dispute that
may arise.—This section shall not render illegal a contract, by which
two or more persons agree that any dispute which may arise between
them in respect of any subject or class of subjects shall referred to arbi-
1. Substituted by Act 1 of 1997, published in the Gazette of India. Extraordinary,
Part II, dated 8th January, 1997.
32 Indian Contract Act, 1872 [S.28

tration, and that only the amount awarded in such arbitration shall be
recoverable in respect of the dispute so referred.
Exception 2 —Saving of contract to refer questions that have already
arisen— Nor shall this section render illegal any contract in writing, by
which two or more persons agree to refer to arbitration any question
between them which has already arisen, or affect any provision of any
law in force for the time being as to references to arbitration.
1[Exception 3 —Saving of a guarantee agreement of a bank or a
financial institution.— This section shall not render illegal a contract in
writing by which any bank or financial institution stipulate a term in a
guarantee or any agreement making a provision for guarantee for extin­
guishment of the rights or discharge of any party thereto from any liabil­
ity under or in respect of such guarantee or agreement on the expiry of
a specified period which is not less than one year from the date of oc­
curring or non-occurring of a specified event for extinguishment or dis­
charge of such party from the said liability.
Explanation —
(/) In Exception 3, the expression “bank” means—
(a) a “banking company" as defined in clause (c) of section 5 of
the Banking Regulation Act, 1949 (10 of 1949);
(b) “a corresponding new bank” as defined in clause (da) of
section 5 of the Banking Regulation Act, 1949 (10 of 1949);
(c) “State Bank of India” constituted under section 3 of the State
Bank of India Act, 1955 (23 of 1955);
(d) “a subsidiary bank” as defined in clause (k) of section 2 of
the State Bank of India (Subsidiary Banks) Act, 1959 (38 of
1959);
(e) “a Regional Rural Bank” established under section 3 of the
Regional Rural Banks Act, 1976 (21 of 1976);
(f) “a Co-operative Bank” as defined in clause (cci) of section
5 of the Banking Regulation Act, 1949 (10 of 1949);
(g) “a multi-State co-operative bank” as defined in clause ( cciiia)
of section 5 of the Banking Regulation Act, 1949 (10 of 1949);
and
(/'/) In Exception 3, the expression “a financial institution” means
any Public financial institution within the meaning of section 4A
of the Companies Act, 1956 (1 of 1956)].

NOTES
Rescission of contract.— Rescission of a contract discharges both
parties from any further liability to perform their respective primary obli­
gations under the contract— /. V. Ward Ltd. v Bignall (1967)2 All ER 449.
1. Inserted by the Banking Laws (Amendment) Act, 2012 (4 of 2013), sec. 17 and
Schedule.
S. 29] Indian Contract Act, 1872 33

In Grandhi Subramanayam v Vissamsetti AIR 2002 AP 71 (FB), the

plaintiff, in terms of an agreement to purchase two rolling machines,
paid part of consideration amount. Later on, he filed a suit for refund.
But the defendant being all along ready and willing to perform his part of
contract, held that there cannot be any refund as there was no rescis­
sion of contract.
Ousting of jurisdiction of court by agreement—The Supreme
Court in A.B.C. Laminart (P) Ltd. v A.P. Agencies (1989)2 SCC 163,
observed that where there may be two or more competent courts which
can entertain a suit consequent upon a part of the cause of action hav­
ing arisen therewith, if the parties to the contract agree to vest jurisdic­
tion in one such court to try the dispute which might arise between them,
the agreement would be valid — Balaji Coke Industry (P) Ltd. v Maa
Bhagwati Coke Gujarat (P) Ltd. (2000)9 SCC 403 (para 28).
Agreement in restraint of legal proceeding.—Section 28 makes
void only those agreements which absolutely restrict a party to a con­
tract from enforcing the right under that contract in ordinary tribunals. It
has no application. When a party only agrees to a selection of one of
those ordinary tribunals in which ordinarily a suit may be brought —
National Tar Products v H.P.S.E. Board, Simla AIR 1979 Del 255;
Surajmall v Kalinga Iron Works AIR 1979 Ori 126; Balsukh Refractories
& Ceramics v Hindusthan Steel AIR 1977 Cal 20. Condition in the bank
guarantee that suit or legal proceeding to be filed within six months from
the date of expiry guarantee is not hit by sec. 28 — Kerala Electrical &
Allied Eng. Co. v Canara Bank AIR 1980 Ker 151. Supreme Court in a
decision held a limitation clause in an insurance policy to the effect that
the insurer will not be liable for any loss if the claim is made on expira­
tion of 12 months after the loss — Vulcan Insurance Co. v Maharaj
Singh AIR 1976 SC 287.
S. 29. Agreements void for uncertainty.—Agreements, the mean­
ing of which is not certain, or capable of being made certain, are void.
Illustrations
(a) A agrees to sell to B “a hundred tons of oil”. There is nothing
whatever to show what kind of oil was intended. The agree­
ment is void for uncertainty.
(b) A agrees to sell to B one hundred tons of oil of a specified
description, known as an article of commerce. There is no un­
certainty here to make the agreement void.
(c) A, who is a dealer in coconut oil only, agrees to sell to B “one
hundred tons of oil”. The nature of A's trade affords an indica­
tion of the meaning of the words, and A has entered into a
contract for the sale of one hundred tons of coconut oil.

[12] ICA — 3
34 Indian Contract Act, 1872 [S. 30

(d) A agrees to sell to B “all the grain in my granary at Ramnagar”.

There is no uncertainty here to make the agreement void.
(e) A agrees to sell to B “one thousand maunds of rice at a price
to be fixed by C As the price is capable of being made cer­
tain, there is no uncertainty here to make the agreement void.
(/) A agrees to sell to B “my white horse for rupees five hundred
or rupees one thousand”. There is nothing to show which of
the two prices was to be given. The agreement is void.

NOTES
Agreement void for uncertainty.— A contract to re-convey the prop­
erty on paym ent of price, costs of execution of deed and o th e r neces­
sary and indispensible expenditure is not void for uncertainty — Dasarath
v Satyanarayan AIR 1963 Cal 325. The purpose of sec. 29 is to ensure
that this parties to the contract should be aware of the precise nature
and scope of their mutual rights and obligations under the contract —
Chandra Sheikhar v Gopi Nath AIR 1963 All 248. An absence o f the
term s of the agreem ent as to w hat is to happen on the plaintiff's failure
to purchase the property is not a circum stance which would render the
agreem ent void for u n ce rta in ty— Sohbat Dei vD e vi Phal AIR 1971 SC
2192. A contract which is otherw ise good but om its to m ention som e
term s explicitly does not becom e void or uncertain if the uncertainty can
otherwise be m ade certain.Suprem e Court held in Sohbat v Devi AIR
1971 SC 2192: (1972)2 SCC 495 that term s of agreem ent as to w hat to
happen on plaintiff's failure to purchase the property is not a circum ­
stance which would render the contract void for uncertainty.
S. 30. Agreements by way of wager, void.— Agreem ents by w ay of
w ager are void; and no suit shall be brought for recovering anything
alleged to be won on any wager, or entrusted to any person to abide the
result of any game or other uncertain event on which any w ager is made.
Exception in favour o f certain prizes for horse-racing.— This section
shall not be deemed to render unlawful a subscription or contribution, or
agreem ent to subscribe or contribute, made or entered into fo r or to­
w ard any plate, prize or sum of money, of the value or am ount of five
hundred rupees or upwards, to be awarded to the w inner o r w inners of
any horse-race.
Section 294A of the Indian Penal Code not affected.— Nothing in this
section shall be deemed to legalize any transaction connected with horse­
racing, to which the provisions of section 294A of the Indian Penal Code
(45 of 1860) apply.

NOTES
Wagering contract — “W a g e r means what is indicated by the words
“gaining and wagering” in English Law— ILR 29 Cal 461 (PC). A trans-
S. 31] Indian Contract Act, 1872 35

action in the nature of forward contract is not a wagering contract when

delivery of goods is intended in each transaction — P. Kishanlal v L.C.
Sohanlal 63 CW N 745. W hen the parties are not interested in goods but
only in the difference of price, it is a wagering contract — Gherulal Parakh
v Mahadeodas AIR 1959 SC 781. A suit for recovery of money on ac­
count of w agering contract is not maintainable — Badridas Kothari v
Meghraj Kothari AIR 1967 Cal 25. The question whether the transac­
tions betw een the parties are wagering contracts are the questions of
facts — Ismail Lebbe Marikar Ebrahim Lebbe Marikar v Bartleet & Co.
AIR 1942 PC 19. A speculative contract is not necessarily a wagering
contract. Every forward contract is speculative. But merely on that ground
it is not necessarily a gam bling one — B & G Exchange Ltd. v State of
Punjab AIR 1961 SC 268. An agreem ent merely to engage in specula­
tion on the rise and fall of prices of the goods is not necessarily a wager­
ing contract — Firm Pratapchand Nopaji v Firm Kotrike Venkatasetty
AIR 1975 SC 1223.
CHAPTER III
On Contingent Contracts
S. 31. “Contingent contract” defined.— A “contingent contract” is
a contract to do or not to do something, if some event, collateral to such
contract, does or does not happen.
Illustration
A contracts to pay B Rs. 10,000 if B s house is burnt. This is a contin­
gent contract.

NOTES
Contingent contracts.— Life insurance policy is a contingent con­
tra c t— Chandulal Harjivandas v I.T. Commr., Gujarat AIR 1967 SC 816.
W hen the perm ission of an authority to transfer is necessary under a
statute the agreem ent to transfer is subject to such permission— Nathulal
v Phoolchand AIR 1970 SC 546. But a contract to supply goods on
receipt of supply from the mill is not a contingent contract— Ganga Sa-
ran v Firm Ram Charan AIR 1952 SC 9. Agreem ent to sell property is
not a contingent contract— Bhairon Prasad v Tara Dew'AIR 1980 All 36
(FB). W hen in a deed of sale there is a stipulation that balance of con­
sideration w ould be payable as soon as possible but when the vendee
would be able to pay is not a contingent contract. The balance would be
payable within a reasonable tim e by virtue of sec. 46— Sohan Singh v
State Bank of India AIR 1964 Punj 123.
In case of execution of a sale deed where it was a pre-condition to
obtain perm ission of authorities to use it as village site. The contract
m ade for the transaction was not a contingent contract— Ramjibhai v
Narottamdas AIR 1986 SC 1912.
36 Indian Contract Act, 1872 [S.3J

S. 32. Enforcement of contracts contingent on an event hap.

pening.— Contingent contracts to do or not to do a n yth in g if an uncer-
tain future event happens, cannot be enforced by law u n le s s and until
that event has happened.
If the event becom es im possible, such contracts b e co m e void.
Illustrations
(a) A m akes a contract with B to buy B s horse if A survives C.
This contract cannot be enforced by law unless and until c
dies in A’s lifetime.
(b) A m akes a contract with B to sell a horse to B a t a specified
price, if C, to whom the horse had been offered, refuses to buy
him. The contract cannot be enforced by law unless and until C
refuses to buy the horse.
(c) A contracts to pay B a sum of m oney when B m arries C. Cdies
w ithout being married to B. The contract becom es void.
S. 33. Enforcement of contracts contingent on an event not hap­
pening.— C ontingent contracts to do or not to do anything if an uncer­
tain future event does not happen, can be enforced when the happen­
ing of that event becom es impossible, and not before.
Illustration
A agrees to pay B a sum of money if a certain ship does not return.
The ship is sunk. The contract can be enforced when the ship sinks.
S. 34. When event on which contract is contingent to be deemed
impossible, if it is the future conduct of a living person.— If the fu­
ture event on which a contract is the way in which a person will act at an
unspecified time, the event shall be considered to becom e im possible
when such person does anything which renders it im possible that he
should so act within any definite time, or otherwise than under further
contingencies.
Illustration
A agrees to pay B a sum of money if B m arries C. C m arries D. The
marriage of B to C must now be considered im possible, although it is
possible that D may die and that C m ay afterw ards m arry B.
S. 35. When contracts become void, which are contingent on
happening of specified event within fixed time.— Contingent con­
tracts to do or not to do anything’ if a specified uncertain event happens
within a fixed time, become void if, at the expiration of the tim e fixed,
such event has not happened, or if, before the tim e fixed, such event
becomes impossible.
When contracts may be enforced, which are contingent on specified
event not happening within fixed time.— C ontingent contracts to do or
 Indian Contract Act, 1872 37

not to do anything, if a specified uncertain event does not happen within

a fixed tim e, m ay be enforced by law when the time fixed has expired
and such event has not happened, or, before the time fixed has expired,
if it becom es certain that such event will not happen.
Illustrations
(a) A prom ises to pay B a sum of money if a certain ship returns
w ithin a year. The contract may be enforced if the ship returns
w ithin the year; and becomes void if the ship is burnt within the
year.
(b) A prom ises to pay B a sum of money if a certain ship does not
return within a year. The contract may be enorced if the ship
does not return within the year, or is burnt within the year.
S. 36. Agreements contingent on impossible event void.— Con­
tingent agreem ents to do or not to do anything, if an impossible event
happens are void, w hether the impossibility of the event is known or not
to the parties to the agreem ent at the time when it is made.
Illustrations
(a) A agrees to pay B 1,000 rupees if tw o straight lines should
enclose a space. The agreem ent is void.
(b) A agrees to pay B 1,000 rupees if B will marry A s daughter C.
C w as dead at the tim e of the agreement. The agreem ent is
void.
CHAPTER IV
Of the Performance of Contracts
Contracts which must be performed
S. 37. Obligation of parties to contract.— The parties to a contract
m ust either perform , or offer to perform, their respective promises, un­
less such perform ance is dispensed with or excused under the provi­
sions of this Act, or of any other law.
Prom ises bind the representatives of the promisors in case of the
death of such prom isors before performance, unless a contrary inten­
tion apears from the contract.
Illustrations
(a) A prom ises to deliver goods to B on a certain day on payment
of Rs. 1,000. A dies before that day. A s representatives are
bound to deliver the goods to B, and B is bound to pay the
Rs. 1,000 to A s re p re se n ta tive s.
(b) A prom ises to paint a picture for B by a certain day, at a certain
price. A dies before the day. The contract cannot be enforced
either by A s representatives or by B.
38 Indian Contract Act, 1872 [S. 38

NOTES

Performance of contracts— Parties to the contract m ust e ith e r per-

form, or perform their respective prom ises unless such perform ances
are dispensed with or excused under the provisions of the C o n tra ct Act
or of any other law. In a suit for specific perform ance of co n tra ct the
plaintiff must plead that he has been and is still ready and w illing to
peform his part of contract— (1970)2 SCJ 703. A cheque fo r am ount
which is short of am ount actually payable with a condition that it should
operate as a com plete discharge of liability cannot be valid te nder— S.
Tin Factory v S.W.F. Product Co. AIR 1965 Cal 541. A contract of pre­
emption can be enforced against the legal representative as also against
a transferee with notice of the contract — Flam Baran v Ram M ohit AIR
1967 SC 747.
As a rule the obligations under a contract cannot be assigned except
with the consent of the prom isee and w hen such consent is given it is
really a novation resulting in substitution of liability. On the other hand
rights under a contract assignable unless the contract is personal in
nature or the rights are incapable of assignm ent either under the law or
under the agreem ent between the parties — Khardah Co. Ltd. v Raymon
& Co. AIR 1962 SC 1810. In case of sale with an agreem ent of repur­
chase when the vendor offers to re-purchase and the purchaser repudi­
ates agreem ent to reconvey form al tender of price by the vendor is not
necessary — International Contrctors Ltd. v Prasanta Kum ar M R 1962
SC 77. Breach of contract by one party does not autom atically term i­
nate obligations under the contract. The injured party has the option —
State o f Kerala v C.C. Refineries AIR 1968 SC 1361; Chaudhary
Rambabu v Dalip Kumar M R 1981 MP 159.
In a building contract no alteration in specification by the G overn­
m ent fo r w hich no rates were previously fixed and the contractor gave
notice about rates to be charged, as per arguments, for the change in the
w ork to be done. The Suprem e Court held that the contractor is under
no obligation until rates are settled for the altered work and the mere
fa ct of non-exercise of liberty to cancel given by the contract itself does
not result in an agreem ent as to new rates proposed by contractor—
Bom bay Housing Board v Karbhase AIR 1975 SC 763 :(1975)1 SCC
828.
S. 38. Effect of refusal to accept offer of performance.— W here a
p rom isor has made an offer of perform ance to the promisee, and the
o ffe r has not been accepted, the prom isor is not responsible fo r non­
perform ance, nor does he thereby lose his rights under the contract.
Every such offer must fulfil the following conditions:
(1) It m ust be unconditional;
(2) It m ust be made at a proper tim e and place, and under such
S. 39] _________________ Indian Contract Act, 1872___________________ 39

circum stances that the person to whom it is made may have a

reasonable opportunity of ascertaining that the person by whom
it is made is able and willing there and then to do the whole of
w hat he is bound by his promise to do;
(3) If the offer is an offer to deliver anything to the promisee, the
prom isee m ust have a reasonable opportunity of seeing that
the thing offered is the thing which the promisor is bound by his
prom ise to deliver.
An offer to one of several joint promisees has the same legal conse­
quences as an offer to all of them.
Illustration
A contracts to deliver to B at his warehouse, on the first March, 1873,
100 bales of cotton of a particular quality. In order to make an offer of
perform ance w ith the effect stated in this section. A must bring the cot­
ton to B s w arehouse, on the appointed day, under such circumstances
that B m ay have a reasonable opportunity of satisfying himself that the
thing offered is cotton of the quality contracted for, and that there are
100 bales.

NOTES
In a sale of a property with an agreement to repurchase by a vendor
and vendor offering repurchase of the same, the purchaser cannot re­
pudiate agreem ent to reconvey by saying that formal tender of price by
vendor is necessary— International Contractor Ltd. vPrasanta AIR 1962
SC 77: (1961)3 SCR 579.
In a case w here delivery was not taken on purchase of cotton bales.
T ransaction was carried forward to next settlement. The purchaser was
benefited by transactions as the carry forward charges were paid to the
vendor. T he Supreme Court held that carry forward charges should be
debited to his account only— Mst. Rukmini v Narsinghdas 1987 (Supp)
SCC 278.
S. 39. Effect of refusal of party to perform promise wholly.—
W hen a party to a contract has refused to perform, or disabled himself
from perform ing, his promise in its entirety, the promisee may put an
end to the contract, unless he has signified, by words or conduct, his
acquiesce nce in its continuance.

Illustrations
(a) A, a singer, enters into a contract with S, the manager of a
theatre, to sing at his theatre two nights in every week during
the next tw o months, and B engages to pay her 100 rupees for
each night's performance. On the sixth night A wilfully absents
herself from the theatre. B is at liberty to put an end to the con­
tract.
40 Indian Contract Act, 1872 [S. 40

(b) A, a singer, enters into a contract w ith B, the m a n a g e r of a

theatre, to sing at his theatre tw o nights in every w e e k during
the next two months, and B engages to pay h e r at the rate of
100 rupees for each night. On the sixth night, A w ilfu lly absents
herself. With the assent of 6, A sings on the se ve n th night. A
has signified his acquiescence in the continua nce of the con­
tract, and cannot now put an end to it, but is entitled to com ­
pensation for the dam age sustained by him through A s failure
to sing on the sixth night.

NOTES
Building contract.— In a building contract tim e w as m entioned as
essence of contract for works. The contractor was liable to pay com ­
pensation for delay in execution of the w ork am ounting to the w hole of
the security money deposited for the contract or if the contractor aban­
doned the w ork for the reason of his illness, death or any other cause.
The contractor failed to perform the contract as stipulated and his secu­
rity deposit was confiscated on recession of the contract by Executive
Engineer. The contractor claimed refund of the security deposit and dam ­
ages by a suit. The Suprem e Court ultim ately held that recession of the
contract and consequent forfeiture of the security deposit w as proper
within the term s of the contract— Sfafe v Digam barM R 1979 SC 1339:
(1979) 2 SCC 217: (1979) 3 SCR 188.
Tender process.— If the tender notice specifically added that the
work has to be ‘satisfactorily com pleted’, the tender-contractor’s liability
extends not only up to the stage of ‘com pletion’ but also up to the stage
of ‘completion satisfactorily’ — Electrical Manufacturing Co. Ltd. v Power
Grid Corporation o f India (2009)4 SCC 87.
Arbitration clause on termination of agreement.— Merely because
the contract has com e to an end by its term ination due to breach, the
arbitration clause does not perish nor is rendered inoperative; rather it
survives for resolution of disputes arising “in respect o f ’ or “with regard
to” or “under” the contract — Union of India v Kishorilal Gupta Al R 1959
SC 1362; Branch Manager v Potluri Madhavilata (2009)10 SCC 103.
By whom contracts must be performed
S. 40. Person by whom promise is to be performed.— If it ap­
pears from the nature of the case that it was the intention of the parties
to any contract that any promise contained in it should be perform ed by
the prom isor himself, such promise m ust be perform ed by the promisor.
In other cases, the promisor or his representatives may em ploy a com ­
petent person to perform it.
Illustrations
(a) A promises to pay B a sum of money. A may perform this prom ­
ise, either by personally paying the money to B, or by causing
it to be paid to B by another; and, if A dies before the tim e
S. 42] Indian Contract Act, 1872 41

appointed for payment, his representatives must perform the

prom ise, or em ploy some proper person to do so.
(b) A prom ises to paint a picture for B. A must perform this prom­
ise personally.

NOTES

Contract by whom to be performed.— A contract in the absence

of any intention to the contrary express or implied, is enforceable against
parties, th e ir heirs and legal representatives and assignees— AIR 1967
SC 744.
There is an im plied contract among the joint promisors inter se to
contribute equally tow ards the performance of the contract. A promisee
cannot absolve a joint prom isor from his liabilities— Narendra Chandra
v Pashupati Nath AIR 1949 Cal 242. In respect of joint promise, in the
absence of an agreem ent to the contrary the liability is joint and several
and the prom isee m ay sue any one or some— Jainarain Ram vSurajmull
Sagarmull AIR 1949 FC 211. But when the promisee has received pay­
m ent in full satisfaction of the claim from a third party he cannot sue the
prom isor fo r the balance — Lata Kapurchand v Himayatalikhan AIR 1963
SC 250. Prom isee m ay sue any one of the deceased promisor— Mawaji
Ramji v Prem ji Kumbha AIR 1967 Ori 158.
Liability of person not party to agreement.— In a case the Su­
prem e C ourt held that where mills were the lessors but not parties to the
agreem ent betw een the lessees and the State the lessors cannot be
held liable fo r business of the lessees. So no decree can be passed
against the lessors for any liability of the lessees to the State— Nand
Kishore v State AIR 1974 SC 1988: (1973)2 SCC 770.
Contribution. — W hen a joint promisor pays the whole claim he can
claim co n trib u tio n of his paym ent irrespective of the fact that the pay­
m ent is vo lu n ta ry or com pulsory— Nani Lai De v Tirthalal De AIR 1953
C al 513. C laim fo r contribution lies where the debt was alive against
him w h o paid. T he liability of the co-promisor need not be subsisting—
Punjab National Bank v Hind Textile Ltd. AIR 1969 Cal 390; Gopendra
Narayan v Golokendra Kumar AIR 1955 Cal 62. Where the right to con­
tribution arises out of mortgage sec. 82 of Transfer of Property Act ap­
plies and not sec. 43— Kedar Lai Seal v Hari Lai Seal AIR 1952 SC 47.
S. 41. Effect of accepting performance from third person.—When
a prom isee accepts performance of the promise from a third person, he
cannot afterw ards enforce it against the promisor.
S. 42. Devolution of joint liabilities.—When two or more persons
have m ade a jo in t promise, then, unless a contrary intention appears by
the contract, all such persons, during their joint lives, and, after the death
of any of them , his representative jointly with the survivor or survivors,
42 Indian Contract Act, 1872 [S.43

and, after the death of the lost survivor, the re p re se n ta tive s o f all jointly,
must fulfil the promise.
S. 43. Any one of joint promisors may be compelled to perform.—
W hen two or more persons m ake a jo in t prom ise, the p ro m ise e m ay, in
the absence of express agreem ent to the contrary, co m p e l a n y one or
more of such joint prom isors to perform the w hole o f the prom ise.
Each promisor may compel contribution.— Each of tw o o r m ore joint
prom isors may com pel every other jo in t prom isor to co n trib u te equally
with himself to the perform ance of the prom ise, unless a co n tra ry inten­
tion appears from the contract.
Sharing o f loss by default in contribution.— If any one of tw o o r more
joint prom isors m akes default in such contribution, the rem aining joint
prom isors m ust bear the loss arising from such default in equal shares.
Explanation.— Nothing in this section shall prevent a surety from re­
covering, from his principal, paym ents made by the surety on behalf of
the principal, or entitle the principal to recover anything from the surety
on account of paym ents made by the principal.
Illustrations
(a) A, B and C jointly prom ise to pay D 3,000 rupees. D m ay com ­
pel either A or B or C to pay him 3,000 rupees.
( b) A, B and C jointly prom ise to pay D the sum of 3,000 rupees. C
is com pelled to pay the whole. A is insolvent, but his assets
are sufficient to pay one-half of his debts. C is entitled to re­
ceive 500 rupees from A's estate, and 1,250 rupees from B.
(c) A, B and C are under a joint prom ise to pay D 3,000 rupees. C
is unable to pay anything, and A is com pelled to pay the whole
A is entitled to receive 1,500 rupees from B.
(d) A, B and C are under a joint prom ise to pay D 3,000 rupees. A
and B being only sureties for C. C fails to pay. A and B are
com pelled to pay the whole sum. They are entitled to recover it
from C.

NOTES
Scope of.— According to sec. 43 in case of a lease deed m entioning
share of each lessee and annual rent for the purpose of indicating w hat
am ount would be contributed by each of them, tow ards rent jointly p a y­
able by them. The Supreme Court held that in such cases the lessees
were jointly and severally liable to pay the rent— fla m Shankar v Mst.
Shyamlata AIR 1970 SC 716: (1969) 2 SCR 360. In a suit based on a
prom issory note where liability of the defendants were joint and several.
The Suprem e Court held that there was no equitable principle or sta tu ­
tory provision for realisation of the decretal am ount first from one d e fe n ­
dant and for the balance if any by execution of the decree from the other
defendant.
S. 46] Indian Contract Act, 1872 43

S. 44. Effect of release of one joint promisor.— Where two or more

persons have m ade a joint promise, a release of one of such joint promi­
sors by the prom isee does not discharge the other joint promisor or joint
prom isors, neither does it free the joint promisors so released from re­
sponsibility to the other joint promisor or joint promisors.
S. 45. Devolution of joint rights.— When a person has made a prom­
ise to tw o or m ore persons jointly, then, unless a contrary intention ap­
pears from the contract, the right to claim performance rests, as be­
tw een him and them , with them during their joint lives, and, after the
death of any of them , with the representative of such deceased person
jointly w ith the survivor oi*survivors, and, after the death of the last sur­
vivor, w ith the representatives of all jointly.
Illustration
A, in consideration of 5,000 rupees lent to him by B and C, promises
B and C jo in tly to repay them that sum with interest on a day specified.
B dies. The right to claim performance rests with B s representative jointly
with C during C s life, and, after the death of C, with the representatives
of S a n d C jo in tly .

NOTES
Scope of.— T his section deals with the devolution of the rights of
jo in t prom isees. So in a suit by one out of two joint promisees making
the oth e r as proform a defendant is maintainable — Jahar v PremjitA\R
1977 SC 2439: (1977)4 SCC 562.
Time and place for performance
S. 46. Time for performance of promise, where no application is
to be made and so time is specified.— Where, by the contract, a promi­
sor is to perform his promise without application by the promisee, and
no tim e fo r perform ance is specified, the engagement must be performed
w ithin a reasonable time.
Explanation.— The question “what is a reasonable time” is, in each
particular case, a question of fact.

NOTES
Tim e of performance.— W here no time is fixed for performance of
contract, it m ust be implied that it is to be performed within a reasonable
period— Arun Kumar v State of W.B. AIR 1972 SC 1862: (1972)3 SCC
684.
T im e is not ordinarily an essence of the contract. Where power is
given to the authority to extend time, time is not the essence of con­
tract— Govind Prasad v Hari Dutt AIR 1977 SC 1005. But parties by
agreem ent can do it— Krisna Chandra v Khan Mamud 40 CWN 659. In
a contract fo r sale of land time is not essence of contract unless it is
44 Indian Contract Act, 1872 [S.46

otherw ise expressly provided or nature of property o r s u rro u n d in g cir­

cu m sta n ce s m akes tim e essence of c o n tra c t— D ip n arain S inha v
Dinanath Singh AIR 1981 Pat 69; Labanya Ray v P.M. M ukherjee 68
CW N 611. W hen the payee presents cheque beyond re a so n a b le time
the liability of the drawee is discharged— Regional P.F. Commr. v Shibu
Metal Works AIR 1965 SC 1079. In m ercantile contract the tim e is the
essence of the contract— C.C. Exporters v B.R.C. Mills A IR 1961 SC
1295.
Reasonable time’, meaning of and ascertainment. — W h a t is rea­
sonable’ to one person m ay not be so to another person. W hen one
speaks of ‘reasonable tim e’, the opinions m ay vary from one person to
another. Necessarily, there cannot be a straitjacket form ula in this re­
gard. When, concededly, the tim e is not the essence of the contract, the
plaintiff is required to approach the court within a ‘reasonable tim e ’. It is
true that in determ ining this issue, the court will act on his subjective
satisfaction, yet the court cannot be totally oblivious of the p laintiff’s own
understanding of reasonable time. As such, there cannot be an exact
definition of ‘reasonable’. The reason varies in its conclusion according
to the idiosyncrasy of the individual and the tim e and circum stances in
which he thinks.
In P. Ram anatha A iyar’s Law Laxicon it is defined to mean:
“A reasonable time, looking at all the circum stances of the
case; a reasonable tim e under ordinary circum stances; as
soon as circum stances will permit; so m uch tim e as is neces­
sary under the circum stances, conveniently to do w hat the
contract requires should be done; some more protracted space
than “directly” ; such length of tim e as may fairly, and properly,
and reasonably he allowed or required, having regard to the
nature of the act or duty and to the attending circum stances;
all these convey m ore or less the sam e idea” [this is quoted
with approval in Veerayee Ammal v Seeni Am m al (2002)1
SCC 134]. In Black’s Law Dictionary 6th Ed. it is defined as
“such tim e as is necessary conveniently to do w hat a contract
requires to be done, and as soon as circum stances will per­
mit.”
If there is difficulty in defining "reasonable tim e” , its determ ination is
perhaps more difficult because of its intrinsic character. A C onstitution
Bench in Chand Ram v Kamal Rani (1993)1 SCC 519 has held that in
case of sale of im m ovable property there is no presum ption as to tim e
being of the essence of the contract. Even if it is not of the essence of
contract, the court may infer that it is to be perform ed in a reasonable
tim e if the conditions are (/) from the express term s of the contract; (//)
from the nature of the property; and (///) from the surrounding circu m ­
stances, for example, the object of making the contract. For the pur-
S. 49] Indian Contract Act, 1872 45

poses of granting relief, the reasonable tim e has to be ascertained from

all the facts and circum stances of the case. See also Veerayee Ammal
v Seeni Ammal (2002)1 SCC 134.
In determ ining w hat is a “reasonable tim e” for performance, the court
should consider such factors as relationships between the parties, sub­
ject-m atter of contract, and the time that a person of ordinary diligence
and prudence would use under sim ilar circum stances - see Glen Cove
Marina Inc. v Vessel Little Jennie, D.C.N. Y. 269 F Supp 877 (879).
W hat shall be the reasonable tim e is a question of fact— Jnanada
Debi v Nath Bank AIR 1979 Cal 1246. In a contract of purchase of shares
reasonable period for its com pletion would be two months — Bank of
India vJ.A. H. Chinoy AIR 1950 PC 90. If there is unnecessary delay by
a party to perform his part of contract the other party may put an end to
it by giving a notice before its termination— Dau Alakhram v Kulwantin
Bai AIR 1950 Nag 238. Patna High Court has held that when the con­
tract is not perform ed by one party within reasonable time, the other
party is not bound to give a prior notice to perform the contract within a
specified tim e before treating the contract as cancelled or revoked—
Official Receiver v Baneswar Prasad AIR 1962 Pat 155.
S. 47. Time and place for performance of promise, where time is
specified and no application to be made.— When a promise is to be
perform ed on a certain day, and the promisor has undertaken to per­
form it w ithout application by the promisee, the promisor may perform it
at any tim e during the usual hours of business on such day and at the
place at which the prom ise ought to be performed.
Illustration
A prom ises to deliver goods at B ’s warehouse on the first January.
On tha t day A brings the goods to B ’ s warehouse, but after the usual
hour fo r closing it, and they are not received. A has not performed his
prom ise.
S. 48. Application for performance on certain day to be at proper
time and place.— W hen a promise is to be performed on a certain day,
and the prom isor has not undertaken to perform it without application by
the prom isee, it is the duty of the promisee to apply for performance at a
proper place and w ithin the usual hours of business.
Explanation. — T he question “what is a proper time and place” is, in
each particu la r case, a question of fact.
S. 49. Place for performance of promise, where no application
be made and no place fixed for performance.— When a promise is to
be perform ed w ithout application by the promisee, and no place is fixed
for the perform ance of it, it is the duty of the promisor to apply to the
prom isee to appoint a reasonable place for the performance of the prom­
ise, and to perform it at such place.
46 Indian Contract Act, 1872 [S. 50

Illustration
A undertakes to deliver a thousand m aunds of ju te to B on a fixed
day. A must apply to S to appoint a reasonable place fo r the p u rpose of
receiving it, and m ust deliver it to him at such place.

NOTES

Place of performance.— W hen no place of perform ance is m en­

tioned in the contract, express or im plied, the debtor is to seek the credi­
tor. The place of paym ent m ay be fixed by necessary im plication from
the nature and term s of the contract— State o f Punjab vA .K . Raha AIR
1964 Cal 418. A tenant has to pay rent of the place w here the landlord
resides — Narayan Rajaram v Shankar Diwakar AIR 1955 N ag 202.
The rule that “ Debtor m ust seek the creditor” is not a pplicab le to a
pro-note payable on dem and— Jagadish Chandra v Smt. Shantimoyee
AIR 1961 Cal 321; W.P. Horsburgh v Chandroji AIR 1957 M B 90. W hen
the debtor has sent the cheque at the request of the creditor and the
cheque is lost in transit, this loss of cheque m ust fall on the creditor. But
in the absence of the request of the creditor the post office is the agent
of the sender w hen the paym ent is made by the debtor to the creditor by
post— I.T. Commisioner, Bombay v Oagle Glass Works Ltd. AIR 1954
SC 429.
Delivery of goods.— In a decided case the Suprem e C ourt take the
view that the High C ourt w as fully justified in taking the negative view
w here an appellant took the plea that goods in question w ere already
delivered to the ow ner who had dealings with bank. The High Court's
view was based on the view that the Bank as the holder in due course of
docum ents of title w as entitled to claim delivery of goods in question—
1987 (Supp) SCC 63.
S. 50. Performance in manner or at time prescribed or sanctioned
by promisee.— The perform ance of any prom ise m ay be m ade in any
m anner, or at any tim e which the prom isee prescribes or sanctions.
Illustrations
(a) B ow es A, 2,000 rupees. A desires B to pay the am ount to A s
account w ith C, a banker. B, who also banks w ith C, orders the
am ount to be transferred from his account to A s credit, and
this is done by C. Afterwards, and before A know s of the trans­
fer, C fails. There has been a good paym ent by B.
(b) A and B are m utually indebted. A and B settle an account by
setting off one item against another, and B pays A the balance
found to be due from him upon such settlem ent. This am ounts
to a paym ent by A and B, respectively, of the sum s which they
ow ed to each other.
(c) A owes B 2,000 rupees. B accepts some of A 's goods in re-
S. 51] Indian Contract Act, 1872 47

duction of the debt. The delivery of the goods operates as a

part payment.
(d) A desires B, who owes him Rs. 100, to send him a note for Rs.
100 by post. The debt is discharged as soon as B puts into the
post a letter containing the note duly addressed to A.

NOTES
Manner, time and place of performance.— This rule is elementary
in respect of performance of any contract. Obligation to pay dividend
arises at the registered office of a company— Hanuman Prasad vHiralal
AIR 1971 SC 206. Promise has to be performed at the place in the
m anner agreed upon— Hanuman Prasad v Hiralal AIR 1971 SC 206.
A new look is required to be given and the rigour of the rule is re­
quired to be relaxed by the courts as regards the principle that time is
not the essence of contract in case of immovable properties as when
the said principle was evolved the prices and values were stable and
inflation was unknown — K.S. Vidyanadam v Vairavan (1997)3 SCC 1.
Unlike English law, Indian law considers the delay in the context of
the facts of each case. In appropriate cases, Indian law holds that some
delay in a particular case may not bar the reliefs — Mademsetty
Satyanarayana vG . Yelloji Rao AIR 1965 SC 1405.
In appropriate cases, the court orders payment of higher prices for
perform ance of the contract — Nirmala Anandv Advent Corpn. (P) Ltd.
(2002)8 SCC 146.
Performance of reciprocal promises
S. 51. Promisor not bound to perform, unless reciprocal prom­
isee ready and willing to perform.— When a contract consists of re­
ciprocal prom ises to be simultaneously performed, no promisor need
perform his prom ise unless the promisee is ready and willing to perform
his reciprocal promise.
Illustrations
(a) A and B contract that A shall deliver goods to B to be paid for by
B o n delivery.
A need not deliver the goods, unless B is ready and willing to pay for
the goods on delivery.
B need not pay for the goods, unless A is ready and willing to deliver
them on paym ent.
(b) A and B contract that A shall deliver goods to B at a price to be
paid by instalm ents, the first instalment to be paid on delivery.
A need not deliver, unless B is ready and willing to pay the first instal­
m ent on delivery.
48 Indian Contract Act, 1872 [S J52

8 need not pay the first instalm ent, unless A is ready and w illing to
deliver the goods on paym ent of the first instalm ent.

NOTES

Performance of reciprocal promises.— The aw ard provides that 8

shall pay a certain sum to D a n d D shall deliver certain num ber of shares
to 8 and in default of paym ent within a fortnight 8 is to pay interest. It
has been held that paym ent by B is not dependant upon the tender of
shares by D — Brahma Swaroop v Diwan Chand AIR 1963 Cal 583. In
a contract of reconveyance, tender or deposit of m oney is not condition
precedent to the enforcem ent of contract— Manik Lai v Shankar Lai AIR
1962 Cal 103. In the absence of contract to the contrary delivery of
goods and paym ent of price is to be perform ed sim ultaneously— Manik
Lai v Shankar Lai M B 1962 Cal 103.
In a case of sim ultaneous perform ance the plaintiff proved his readi­
ness and willingness. The Suprem e Court held that the decree fo r spe­
cific performance should be granted— Haji Sarafat Hussain vB adri Bishal
AIR 1976 SC 2325 :(1976) 2 SCC 783. To prove readiness and w illing­
ness in a transaction the purchaser need not produce m oney vouch a
concluded schem e for financing the same — Nathulal v Phoolchand
AIR 1970 SC 546: (1969)3 SCC 120. Such readiness and w illingness is
a question of fact— Bank o f India vJ.A. H. C hinoyM B 1950 PC 90.
S. 52. Order of performance of reciprocal promises.— W here the
order in which reciprocal prom ises are to be perform ed is expressly
fixed by the contract, they shall be performed in that order; and where
the order is not expressly fixed by the contract, they shall be perform ed
in that order which the nature of the transaction requires.
Illustrations
(a) A and B contract that A shall build a house for 8 at a fixed
price. A's promise to build the house must be perform ed before
8 s prom ise to pay for it.
(b) A and 8 contract that A shall m ake over his stock-in-trade to 8
at a fixed price, and 8 promises to give security for the pay­
ment of the money. A's promise need not be perform ed until
the security is given, for the nature of the transaction requires
that A should have security before he delivers up his stock.
S. 53. Liability of party preventing event on which contract is to
take effect.— W hen a contract contains reciprocal prom ises, and one
party to the contract prevents the other from performing his promise,
the contract becomes voidable at the option of the party so prevented;
and he is entitled to compensation from the other party for any loss
which he may sustain in consequence of the non-perform ance of the
contract.
s. 55] Indian Contract Act, 1872 49

Illustration
A and B contract that B shall execute certain work for A for a thou­
sand rupees. B is ready and willing to execute the work accordingly, but
A prevents him from doing so. The contract is voidable at the option of
S; and, if he elects to rescind it, he is entitled to recover from A compen­
sation for any loss which he has incurred by its non-performance.
S. 54. Effect of default as to that promise which should be first
performed, in contract consisting of reciprocal promises.— When
a contract consists of reciprocal promises, such that one of them cannot
be perform ed, or that its performance cannot be claimed till the other
has been perform ed, and the prom isor of the promise last mentioned
fails to perform it, such prom isor cannot claim the performance of the
reciprocal prom ise, and must make compensation to the other party to
the contract for any loss which such other party may sustain by the non­
perform ance of the contract.
Illustrations
(a) A hires B s ship to take in and convey, from Calcutta to the
Mauritius, a cargo to be provided by A, B receiving a certain
freight for its conveyance. A does not provide any cargo for the
ship. A cannot claim the performance of B s promise, and must
m ake com pensation to B for the loss which B sustains by the
non-perform ance of the contract.
(b) A contracts with B to execute certain builder’s work for a fixed
price, B supplying the scaffolding and timber necessary for the
work. B refuses to furnish any scaffolding or timber, and the
w ork cannot be executed. A need not execute the work, and B
is bound to make compensation to A for any loss caused to
him by the non-performance of the contract.
(c) A contracts with B to deliver to him, at a specified price, certain
m erchandise on board a ship which cannot arrive for a month,
and B engages to pay for the merchandise within a week from
the date of the contract. B does not pay within the week. A's
prom ise to deliver need not be performed, and B must make
com pensation.
(d) A prom ises 6 to sell him one hundred bales of merchandise, to
be delivered next day, and B promises A to pay for them within
a m onth. A does not deliver according to his promise. B s prom­
ise to pay need not be performed, and A must make compen­
sation.
S. 55. Effect of failure to perform at fixed time, in contract in
which time is essential.— When a party to a contract promises to do a
certain thing at or before a specified time, or certain things at or before
specified tim es, and fails to do any such thing at or before the specified

[12] ICA — 4
50 Indian Contract Act, 1872 [S.55

time, the contract, or so much of it as has not been performed, becomes

voidable at the option of the promisee, if the intention of the parties was
that time should be of the essence of the contract.
Effect of such failure when time is not essential—If it was not the
intention of the parties that time should be of the essence of the con­
tract, the contract does not become voidable by the failure to do such
thing at or before the specified time; but the promise is entitled to com­
pensation from the promisor for any loss occasioned to him by such
failure.
Effect of acceptance of performance at time other than that agreed
upon—If, in case of a contract voidable on account of the promisor's
failure to perform his promise at the time agreed, the promisee accepts
performance of such promise at any time other than that agreed, the
promisee cannot claim compensation for any loss occasioned by the
non-performance of the promise at the time agreed, unless, at the time
of such acceptance, he gives notice to the promisor of his intention to
do so.

NOTES
Time when essence of contract.— The Suprem e Court in
Gomathinayagam Filial v Palaniswami Nadar [AIR 1967 SC 868: (1967)1
SCR 227] held that fixation of a period does not make stipulation as to
time essence of a contract. On the other hand a default clause in a
contract evidences intention to make time essence of contract. Time is
essence of contract if parties intend it to be so and that intention may be
evidenced either by express stipulation or by circumstances which are
sufficiently strong to displace ordinary presumption that in contract for
sale of land stipulation to time is not of essence. In the case of sale of
immovable property there is a presumption against time being the es­
sence of the contract— Govind Prasad v Hari Dutt AIR 1977 SC 1005.
Stipulation as to the time giving an option for renewal are essence of
contract. Here delay on the part of lessee to apply for renewal of lease
due to his oversight is not entitled to renewal— Caltex (India) Ltd. v
Bhagwan Dew'AIR 1969 SC 405: (1969) 2 SCR 238. In a commercial
contract time is of essence of contract— Mahabir Prasad v Durga Datta
AIR 1961 SC 990.
Time, if an essence of contract in agreement for sale.—The stan­
dard agreements of sale normally provide for payment of earnest money,
deposit or an advance at the time of execution of agreement and the
balance of consideration payable at the time of execution/registration of
the sale deed. In the absence of contract to the contrary, the purchaser
is bound to tender the balance consideration only at the time and place
of completing the sale — Saradamani v S. Rajalakshmi AIR 2011 SC
3234.
S. 56] Indian Contract Act, 1872 51

S. 56. Agreement to do impossible act.—An agreement to do an

act impossible in itself is void.
Contract to do act afterwards becoming impossible or unlawful.—A
contract to do an act which, after the contract is made, becomes impos­
sible, or, by reason of some event which the promisor could not prevent,
unlawful, becomes void when the act becomes impossible or unlawful.
Compensation for loss through non-performance of act known to be
impossible or unlawful—Where one person has promised to do some­
thing 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.
Illustrations
(a) A agrees with B to discover treasure by magic. The agree­
ment is void.
(b) A and B contract to marry each other. Before the time fixed for
the marriage, A goes mad. The contract becomes void.
(c) A contracts to marry B, being already married to C, and being
forbidden by the law to which he is subject to practise polygamy.
A must make compensation to B for the loss caused to her by
the non-performance of his promise.
(d) A contracts to take in cargo for B at a foreign port. A's Govern­
ment afterwards declares war against the country in which the
port is situated. The contract becomes void when war is de­
clared.
(e) A contracts to act at a theatre for six months in consideration
of a sum paid in advance by B. On several occasions A is too ill
to act. The contract to act on those occasions becomes void.

NOTES
Performance impossible.—Section 56 does not cover every case
of frustration of contract. It applies only to cases of physical impossibil­
ity. A subsequent unforeseen event or contingency for which neither
party is responsible and for which they have not provided may some­
times operate to avoid the contract—Alopi Parshad v Union of Idnia AIR
1960 SC 588. When subsequent change of law makes performance
impossible the contract is void —Boothalinga Agencies v V.T.C.
Poriaswami AIR 1969 SC 110. When time is made essence of contract
and the performances become unlawful and unlawfulness continues dur­
ing the whole period for which the contract is to be performed the con­
tract is void. When the contract is to be performed within reasonable
time and unlawfulness ceases after some determinate period, the con-
52 Indian Contract Act, 1872 &S7

tract is not discharged— Mugneeram B & Co. v Gurbachan Singh AIR

1965 SC 1523. Doctrine of frustration of contract does not apply to a
lease— Shyam Kumari v Ejaz Ahmad AIR 1977 All 376. D octrine of frus­
tration also does not apply to the case of self-induced frustration— y
Narasimha Raju v Gurumurthy Raju AIR 1963 SC 110. D octrine of frus­
tra tio n do e s not a p p ly to c o m p le te d tra n s a c tio n s — D h ru v Dev v
Harmohinder Singh AIR 1968 SC 1024. It applies only to executory con­
tract— H.V. Rajan v C.N. Gopal AIR 1975 SC 261. C ontract of silver
cannot be executed on account of base im posed later on. So the con­
tract is void— Union of India v C. Damani & Co. AIR 1980 SC 1149. As
an instance of frustration of contract the Suprem e C ourt held in Shanti v
Princess AIR 1980 SC 17 that when the contract cannot be performed
because of injunction issued by court it is definitely frustrated.
S. 57. Reciprocal promise to do things legal, and also other things
illegal.— W here persons reciprocally promise, firstly, to do certain things
which are legal, and, secondly, under specified circum stances, to do
certain other things which are illegal, the first set of prom ises is a con­
tract, but the second is a void agreement.
Illustration
A and B agree that A shall sell B a house for 10,000 rupees, but that,
if B uses it as a gam bling house, he shall pay A 50,000 rupees for it.
The first set of reciprocal promises, namely, to sell the house and to
pay 10,000 rupees fo r it, is a contract.
The second set is fo r an unlawful object, namely, that B m ay use the
house as a gam bling house, and is a void agreement.

NOTES
Spread over work— whether entitled to extra payment.— In a
G overnm ent contract due to less budget provision the co n tra cto r was
requested to spread over the w ork fo r two years m ore w hich was
originally fixed to be com pleted within one year. The contractor agreed
on condition that extra paym ent would have to be m ade for increased
rates. But the Governm ent did not intim ate its unwillingness. The con­
tractor completed the work during the spread over tim e and dem anded
extra payment. The Suprem e Court held in the instant case that the
contractor was entitled to extra paym ent— Hyderabad Municipal Corpn.
vM . Krishnaswami MudaliarA\R 1985 SC 607 : (1985) 2 SCC 9.
S. 58. Alternative promise, one branch being illegal.— In the case
of an alternative promise, one branch of which is legal and the other
illegal, the legal branch alone can be enforced.
Illustration
A and B agree that A shall pay B 1,000 rupees, for which B shall
afterwards deliver to A either rice or smuggled opium.
S. 61] Indian Contract Act, 1872 53

This is a valid contract to deliver rice, and a void agreement as to the

opium.
Time is the essence of the contract.— In a contract for sale of im­
m ovable property, normally it is presumed that time is not the essence
of the contract. Even if there is an express stipulation to that effect, the
said presumption can be rebutted. It is well settled that to find out whether
tim e was the essence of the contract, it is better to refer to the terms and
conditions of the contract itself — N. Srinivasa v Kuttukaran Machine
Tools Ltd. (2009)5 SCC 182 (para 27). W hether time is of the essence
of the contract would be a question of fact to be determined in each
case and merely expression of the stipulated time would not make time
an essence of the contract — M.P. Housing Board v Progressive Writ­
ers and Publishers (2009)5 SCC 678 (para 27); see also, Narinder v
Surinder (2009)8 SCC 743 (para 21). It is well settled proposition of law
by now that tim e is not to be of essence in case of sale of immoveable
property. In Chand Rani v Kamal Rani AIR 1993 SC 1742, the court
clearly held that in the case of sale of immoveable property, there is no
presum ption as to tim e being the essence of the contract.
Appropriation o f Payments
S. 59. Application of payment where debt to be discharged is
indicated.— W here a debtor, owing several distinct debts to one per­
son, makes a paym ent to him, either with express intimation, or under
circum stances implying, that the payment is to be applied to the dis­
charge of som e particular debt, the payment, if accepted, must be ap­
plied accordingly.
Illustrations
(a) A owes S, among other debts, 1,000 rupees upon a promis­
sory note, which falls due on the first June. He owes B no other
debt of that amount. On the first June A pays to B 1,000 ru­
pees. The paym ent is to be applied to the discharge of the
prom issory note.
(b) A ow es to S, among other debts, the sum of 567 rupees. B
w rites to A and demands payment of this sum. A sends to B
567 rupees. This payment is to be applied to the discharge of
the debt of which B had demanded payment.
S. 60. Application of payment where debt to be discharged is
not indicated.— W here the debtor has omitted to intimate, and there
are no other circum stances indicating to which debt the payment is to
be applied, the creditor may apply it at his discretion to any lawful debt
actually due and payable to him from the debtor, whether its recovery is
or is not barred by the law in force for the time being as to the limitation
of suits.
S. 61. Application of payment where neither party appropriates.—
Where neither party makes any appropriation, the payment shall be
54 Indian Contract Act, 1872 [S. 62

applied in discharge of the debts in order of time, w h e th e r they are or

are not barred by the law in force for the time being as to the lim itation of
suits. If the debts are of equal standing, the payment sh a ll be applied in
discharge of each proportionably.

NOTES

Debts.— Sections 59 to 61 contain general rules fo r a ppropriation of

payment towards several distinct debts and not tow ards various heads
of one debt — Industrial Credit & Development Syndicate v S.H. Patel
(1999)3 SCC 80: AIR 1999 SC 1036.
Debtor may exercise his right to specify his appropriation and specify
his appropriation expressly or his intention may be im plied as show n by
other circum stance indicating that his intention at tim e of paym ent was
to appropriate am ount deposited by him to a specific debt or account
towards his debt — Prem Nath Kapur v National Fertilizers Corpn. of
India Ltd. (1996)2 SCC 71.
Sections 59 to 61 get attracted only when more than one debt is due
from a debtor to the creditor. They do not get attracted w hen there is
only one debt due. Nor have they any direct application in a case where
the debt due has merged in a decree — Gurpreet Singh v Union o f India
(2006)8 SCC 457.
Contracts which need not be performed
S. 62. Effect of novation, rescission, and alteration of contract —
If the parties to a contract agree to substitute a new contract for it, or to
rescind or alter it, the original contract need not be perform ed.
Illustrations
(a) A owes m oney to B under a contract. It is agreed between A, B
and C, that B shall thenceforth accept C a s his debtor, instead
of A. The old debt of A to 6 is at an end, and a new debt from
C to B has been contracted.
(b) A owes B 10,000 rupees. A enters into an agreem ent with B,
and gives B a mortgage of his (A's), estate fo r 5,000 rupees in
place of the debt of 10,000 rupees. This is a new contract and
extinguishes the old.
(c) A owes B 1,000 rupees under a contract. B owes C 1,000
rupees, B orders A to credit C w ith 1,000 rupees in his books,
but C do e s not assent to the agreement. B still owes C 1,000
rupees, and no new contract has been entered into.

NOTES
Novation of contract.— The basic principle behind the concept of
novation is the substitution of a contract by a new one only through the
consent of both the parties to the same. Such consent m ay be expressed
s. 63] Indian Contract Act, 187? 55

as in w ritten agreem ents or implied through their actions or conduct -

H.R. Basavaraj v Canara Bank (2010)12 SCC 458.
Section 62 deals with novation of contract. It comes into operation
w hen a new contract is substituted for the contract in existence—
Kedarnath v Sheonarain AIR 1957 Pat 408. Essence of novation lies
not in dissim ilarity of the forms between the two contracts but in the
intention of the parties to supersede the old by the new— Vishram Arjun
v I. Shankariah AIR 1957 AP 784. If after a contract is concluded and its
term s settled, further negotiations are started with regard to new mat­
ters that would not prevent full effect being given to the contract already
existing, unless it is established as a fact that the contract was rescinded
or varied with the consent of both the parties or that both the parties
treated it as incom plete or inconclusive— Joynarayan v Surajmal AIR
1949 FC 211. The question whether there is novation of contract or not
is a question of fact— Vishram Arjun v I. Shankariah AIR 1957 AP 784.
If a contract is clear and unambiguous its true effect cannot be changed
m erely by the course of conduct adopted by the parties in acting under
it— Ottoman Bank v Chakarian AIR 1938 PC 26. But when the parties
by entering into new arrangement intended to substitute the original con­
tract of sale by substituted arrangement consisting of deed of guaran­
tee, deed of pledge and the irrevocable power of attorney, this substitu­
tion operates as novation of original contract of sale. The arbitration
clause in the original contract of sale also goes— Dadri Cement Co. v
Bird & Co. AIR 1974 Del 223.
W here the clause in a settlement, in express terms declares that the
earlier contracts shall be finally concluded in terms of the settlement
and no party w ould have any claim against the other, there is novation
of the old contract by the substitution of the new contract— Union of
India v Kishorilal AIR 1959 SC 1362. If the original contract is substi­
tuted by a new contract the arbitration clause in old contract also fails —
Union o f India v Kishorilal AIR 1959 SC 1362.
M aterial alteration in a contract amounts to variation in the rights,
liabilities o r legal position of the parties as ascertained by the deed origi­
nally. The alteration is not material when it does not otherwise prejudice
the party liable thereunder— Kalinna vPalani AIR 1970 SC 1942: (1970)1
SCC 56. R epudiation by one party alone does not have effect of rescis­
sion of contract. So the arbitration clause in the contract remains in­
tact— D am odar Valley v K.K. Kar AIR 1974 SC 158; Lalchand v A.J.
Mills AIR 1973 Cal 243.
S. 63. Prom isee may dispense with or remit performance of
promise.— E very prom isee may dispense with or remit, wholly or in
part, the perform ance of the promise made to him, or may extend the
time for such perform ance or may accept instead of it any satisfaction
which he th in ks fit.
56 Indian Contract Act, 1872 [S. 64

Illustrations
(a) A prom ises to paint a picture fo r B. B afterw ards forbids him to
do so. A is no longer bound to perform the prom ise.
(b) A ow es B 5, 000 rupees. A pays to B, and B accepts, in satis­
faction of the w hole debt, 2,000 rupees paid at the tim e and
place at w hich the 5,000 rupees w ere payable. The w hole debt
is discharged.
(c) A ow es 6 5,000 rupees. C pays to B 1,000 rupees, and B ac­
cepts them , in satisfaction of his claim on A. This paym ent is a
discharge of the w hole claim.
(d) A ow es B, under a contract, a sum of m oney, the am ount of
w hich has not been ascertained. A, w ithout ascertaining the
am ount, gives to B, and B, in satisfaction thereof, accepts the
sum of 2,000 rupees. This is a discharge of the w hole debt,
w hatever m ay be its amount.
(e) A ow es B 2,000 rupees, and is also indebted to other creditors.
A m akes an arrangem ent with his creditors, including B, to pay
them a com position of eight annas in the rupee upon their re­
spective demands. Payment to S o f 1,000 rupees is a discharge
of S ’s dem and.

NOTES
Waiver of contract.— It has been held in Jagat Bandhu v Smt. Nilima
Rani (1971)1 SCJ 38 that sec. 63 em bodies principles of w aiver of
contractual obligation. To constitute w aiver neither agreem ent nor ‘con­
sideration’ is necessary. It is nothing more than intention not to insist on
the right of pre-emption. Acquisance in the sale by a positive act am ount­
ing to relinquishm ent of a pre-em ption right would be w aiver— Jagat
Bandhu v Nilima Rani AIR 1969 (NSC) 168: (1969)3 SCC 445: (1971)1
SCJ 38.
W here proposal to extend tim e for the perform ance of the contract
was subject to two conditions and one of them is not accepted by the
other party, there is no valid or binding extension of tim e — Keshavlal
Lallubhai v Lalbhai Trikumlal Mills AIR 1958 SC 5 1 2 :1 9 5 9 SCR 213.
Damage, if can be claimed even after accepting final bill.— Ac­
ceptance of final bill cannot stand in the w ay of claim ing further dam ­
ages if the plaintiff had incurred additional am ount and w as able to prove
the same by acceptable m aterials — R.L. Kalathia v State o f Gujarat
AIR 2011 SC 754.
S. 64. Consequences of rescission of voidable contract.— When
a person at whose option a contract is voidable rescinds it, the other
party thereto need not perform any prom ise therein contained in which
he is the promisor. The party rescinding a voidable contract, shall, if he
S. 65] Indian Contract Act, 1872 57

has received any benefit thereunder from another party to such con­
tract, restore such benefit, so far as may be, to the person from whom it
was received.

NOTES
Restoration of benefit on rescission of contract.— Under sec. 64
the obligation to restore the benefit is cast on the party rescinding a
voidable contract and not on the other party even though it was the
other party’s default that led to the rescission— G.N. Behere vN.B. Rice
Mills AIR 1966 Assam 95; Union of India v Bungo Steel Furniture AIR
1963 Cal 70. But the principle of refund of earnest money is independant
of the considerations laid down in secs. 64, 65 and 74 of the Contract
Act— Habib Ali v Rafikuddin AIR 1968 Assam 26. Where a contract is
rescinded by mutual consent the question of refund of money received
by one from the other under the original contract does not fall under sec.
64 — Rameswarlal vBezonjiBarjorji AIR 1950 Cal 236; GauriShanker v
Mayadhardas AIR 1959 MP 39. When in a bid notice there was some
incorrect statement, the bidder cannot claim damages when he was
allowed to inspect. But he may rescind the contract and get instalment
of money refunded— Syed Israr Masood v State of M.P. AIR 1981 SC
2010. In case of rescission of the contract of sale the seller is to refund
the purchase money to the purchaser if the seller retains the land or
sells to som ebody else without any loss — Surendranath v Lolit Chandra
AIR 1975 Gau 58.
S. 65. Obligation of person who has received advantage under
void agreement, or contract that becomes void— When an agree­
m ent is discovered to be void, or when a contract becomes void, any
person w ho has received any advantage under such agreement or con­
tract is bound to restore it, or to make compensation for it to the person
from w hom he received it.
Illustrations
(a) A pays B 1,000 rupees, in consideration of B ’s promising to
m arry C, A’s daughter. C is dead at the time of the promise.
T h e agreem ent is void, but B must repay A the 1,000 rupees.
(b) A contracts with B to deliver to him 250 maunds of rice before
th e first of May. A delivers 130 maunds only before that day
and none after. B retains the 130 maunds after the first of May.
H e is bound to pay A for them.
(c) A, a singer, contracts with B, the manager of a theatre, to sing
at his theatre fo r two nights in every week during the next two
m onths, and B engages to pay her a hundred rupees for each
night's perform ance. On the sixth night, A wilfully absents her­
self from the theatre, and B, in consequence, rescinds the con­
tract. B m ust pay A for the five nights on which she had sung.
(d) A co n tra cts to sing for B at a concert for 1,000 rupees, which
58 Indian Contract Act, 1872 [S. 66

are paid in advance. A is too ill to sing. A is not bound to make

compensation to B for the loss of profits which B w ould have
made if A had been able to sing, but m ust refund to B the 1,000
rupees paid in advance.

NOTES
Obligation to refund benefit under void agreement.— W hen the
contract becomes impossible of performance due to supervening cir­
cumstances each party is to restore benefit received— State v Bundi
Electric Supply Co. AIR 1970 Raj 36. Section 65 enunciates the prin­
ciple of restitution and should be liberally construed in order to do equity
and justice between the parties. The intention of the section is to pre­
vent party from avoiding a contract and at the same time retaining the
benefits received under it — N. Purkayastha v Union of India AIR 1955
Assam 33. Section 65 applies where the contract is void from its incep­
tion but the parties at least the plaintif enters into it bona fide and this
contract is later discovered to be void— L.l.C. of India v Rajmata AIR
1978 SC 1447; Walamji v Anil Charan AIR 1975 Cal 92; Lakhiram v
Brojolal AIR 1974 Ori 49. The words “discovered to be void” in sec. 65
refer to the agreem ent which was void ab initio but was not known to the
parties at the tim e of its creation— Budhulal v Deccan Banking Co. AIR
1955 Hyd 69 (FB); Uttamchand v Mohandas AIR 1964 Raj 50. Section
65 applies only to a case where the benefit or advantage is derived
under an agreem ent before it is discovered to be void and not to an
advantage received afte r the sam e is discovered to be void — N.
Purkayastha v Union o f India AIR 1955 Assam 33.
Measure of dame.— When the com pany’s contract with the G overn­
m ent granting monopoly rights to quarry stone was a void contract, the
net profits realised by the com pany as a result of the various activities in
the quarry cannot be the measure of damages. The proper com pensa­
tion m ay be the reasonable royalty payable by the com pany to the G ov­
ernment— State o f Rajasthan v Associated Stone Industries (Kotah) Ltd.
AIR 1985 SC 466: 1985 SCC 466.
S. 66. Mode of communicating or revoking rescission of void­
able contract.— The rescission of a voidable contract may be com m u­
nicated of revoked in the same manner, and subject to the same rules,
as apply to the com m unication or revocation of a proposal.
S. 67. Effect of neglect of promisee to afford promisor reason­
able facilities for performance.— If any promisee neglects or refuses
to afford the prom isor reasonable facilities for the performance of his
promise, the prom isor is excused by such neglect or refusal as to any
non-performance caused thereby.
Illustration
A contracts with B to repair B ’s house.
S. 68] Indian Contract Act, 1872 59

B neglects or refuses to point out to A the places in which his house

requires repair.
A is excused for the non-performance of the contract, if it is caused
by such neglect or refusal.

NOTES
Novation.— In the original contract there was an arbitration clause in
case of any dispute between contracting parties. Thereafter a settle­
ment agreement was signed by the parties omitting the arbitration clause.
The arbitrator cannot decide the dispute between the parties whether
the settlem ent agreem ent was executed under coercion or misrepre­
sentation or threat. Only a civil court is competent to decide such an
issue — S.K. Sharma v Union of India AIR 2009 (NOC) 2057 (Del).
W hen an agreem ent has been entered into by two parties, each party
com prising several persons, it is a joint contract. In any litigation arising
out of such joint contract any person may enter into compromise seek­
ing refund of earnest money and damages. In such an event that con­
tract w ould be incapable of performance specifically — G. Jayashree v
Bhagwandas S. Patel (2009)3 SCC 141.
W hen tw o contracts, old and new, are inconsistent and cannot stand
together, there is no substitution of old contract by new contract — Lata
Construction v R. R. Shah (2000)1 SCC 586: AIR 2000 SC 380.
Doctrine of fairness.— Doctrine of fairness has been evolved to en­
sure fair action where the function is administrative. But the same cannot be
invoked to amend, alter or vary the express terms of the contract between
the parties — Excise Commissioner v Issac Peter (1994)4 SCC 104.
W here a public authority is exempted from the operation of a statute,
it is im plied that the same is coupled with the duty to act fairly and rea­
sonably — Dwarkadas Marfatia & Sons v Board of Trustees of Port of
Bom bay (1989)3 SCC 293; Shrilekha Vidyarthi v State of U.P. (1991)1
SCC 212; S.K. Jain v State of Haryana (2009)4 SCC 357.
CHAPTER V
Of certain relations resembling those created by contract
S. 68. Claim for necessaries supplied to person incapable of
contracting, or on his account.— If a person, incapable of entering
into a contract, or any one whom he is legally bound to support, is sup­
plied by a n o th e r person with necessaries suited to his condition in life,
the person w h o has furnished such supplies is entitled to be reimbursed
from the pro p e rty of such incapable person.
Illustrations
(a) A su p p lie s B, a lunatic, with necessaries suitable to his condi­
tion in life. A is entitled to be reimbursed from B ’s property.
60 Indian C ontract Act, 1872 [S. 69

(b) A s u p p lie s the w ife and c h ild re n o f 8 , a lu n a tic , w ith n e c e s ­

sa rie s su ita b le to th e ir c o n d itio n in life. A is e n title d to be re im ­
b u rse d fro m 8 's property.
S. 69. Reim bursem ent of person paying m oney due by another
in paym ent of which he is interested. — A p e rso n w h o is in te re s te d in
th e p a y m e n t o f m o n e y w h ich a n o th e r is bo u n d by la w to p ay, a n d w ho
th e re fo re pays it, is e n title d to be re im b u rse d by th e o th e r.
Illustration
B ho ld s land in B engal, on a le a se g ra n te d by A, th e z a m in d a r. The
revenue p a ya b le b y A tc th e G o v e rn m e n t be in g in a rre a r, his land is
a d ve rtise d fo r sale by th e G o ve rn m e n t. U n d e r th e re v e n u e law , th e c o n ­
se q u e n c e o f su ch sale w ill be th e a n n u lm e n t o f B s lease. 8 , to p re ve n t
the sale and th e c o n s e q u e n t a n n u lm e n t of his ow n lease, p a y s to the
G o ve rn m e n t th e sum d u e from A. A is bound to m a ke g o o d to 8 the
a m o u n t so paid.

NO TES
Scope and applicability. — S ectio n 69 a p p lie s w h e re a p e rso n pays
m o n e y w h ich a n o th e r is bound by law to pay. T h e o b lig a tio n to repay
th e m o n e y w h ich a n o th e r has paid and on w h ich a p e rso n ha s been
b e n e fite d d o e s not a rise in e ve ry c a s e e xce p t th o se w h ich fall u n d e r
sec. 69 a n d u n d e r sec. 70— B anw arilal v Raj Kishore A IR 1946 N ag 21.
T h e g e n e ra l p u rp o rt o f th is se ctio n is to afford to a p e rso n w h o pays
m o n e y in fu rth e ra n c e of so m e e xistin g interest an in d e m n ity in re sp e ct
of the p a ym e n t a g a in s t a n y o th e r person w ho, ra th e r than he c o u ld have
been lia b le in law to m ake the p a ym e n t— G ovind G ondal v S tate A IR
1950 PC 99. T h e d o ctrin e o f u n ju st e n ric h m e n t co m p e ls a p e rso n w ho
g e ts u n ju stifica lly e n rich e d a t the e xp e n se of a n o th e r to m a ke re s titu ­
tion. B ut a person w h o o fficio u sly con fe rs a b e n e fit upon a n o th e r is not
e n title d to re stitu tio n th e re fo r— Thomas A braham v N a tio na l Tyre &
R ubber Co. A IR 1974 SC 602 ; M uppudathi v K rishnasw am i A IR 1960
M ad 1 (FB); M.V. Mfg. Co. v K.J. M ills A IR 1969 C al 496.
Interest. — Interest con te m p la te d in sec. 69 is so m e p e c u n ia ry in te r­
e s t b u t n o t le g a l p ro p rie ta ry in te re s t— C h e ntilnathan v P e ri V.S.P.
M anickam A IR 1966 M ad 426; Baijnath v B ijadhar A IR 1961 P at 103.
T h e inte re st co n te m p la te d by sec. 69 is an in terest re stin g n o n -a p p re ­
hension o f so m e pe cu n ia ry loss, in co n ve n ie n ce o r d e trim e n t a n d n o t an
inte re st b ased on g ro u n d s o f m ere se n tim e n t o r m oral o r s o cia l o b lig a ­
tio n — Sundaram ma v Suryanarayana A IR 1950 M ad 274.
Suits for contribution.— The right and d uty o f co n tribution is fo u n d e d
on the d octrine o f equity and does not d epen d on co n tra ct. T h e re fo re
sec. 69 d o e s not ap p ly to suits for co n trib u tio n — S hanker/al v M o tila l
A IR 1957 Raj 267; Baijnath v Bijadhar AIR 1961 P at 103. T h is s e c tio n
S. 70] Indian C ontract Act, 1872 61

d o e s n o t a p p ly to s u its fo r contribution u/s. 82 of Transfer of Pioperty

A ct — G o p i v R aghu A IR 1949 Pat 522.
S. 70. O b lig atio n of person enjoying benefit of non-gratuitous
act. — W h e re a p e rs o n la w fu lly d oes anything for another person, or de­
live rs a n y th in g to him , not intending to do so gratuitously, and such other
p e rs o n e n jo y s th e b e n e fit thereof, the latter is bound to m ake com pen­
s a tio n to th e fo rm e r in re sp e ct of, o r to restore, the thing so done or
d e liv e re d .
Illustrations
(a) A, a tradesm an, leaves goods, at B s house by mistake. Streats
th e goods as his own. He is bound to pay A for them.
(b) A saves B s property from fire. A is not entitled to compensation
from B , if the circum stances show that he intended to act
gratuitously.

NOTES
S cop e and applicability. — S ection 70 m ay com e into play if three
c o n d itio n s a re sa tisfie d . T h e y are (1) the person m ust have done the
th in g la w fu lly ; (2) he m u st not have don e the thing gratuitously; and (3)
su c h o th e r p e rso n m u st have enjoyed the benefit — Khander Khan v
D oraisw am i A IR 1974 M ad 371. All the three conditions are to be pleaded
in th e p la in t— U.O.I. v Sitaram A IR 1977 SC 329. If the condition s of
a p p lic a tio n u/s 70 are p leade d the appella te court can grant relief even
in a p p e a l — G overnm ent o f Madras v Zenith Lamps AIR 1973 SC 724.
S e ctio n 70 co n te m p la te s an eq u ita b le principle o f restitution w hich is
in te n d e d to p re ve n t u n ju s t e n rich m e n t — Molam Chand v State o f M.P.
A IR 1968 S C 1218. If the p la in tiff acts bona fide with genuine intention
o f s u p p ly in g g o o d s o r d o in g the w o rk he should be com pensated—
M adasam i v Virudhunagar A IR 1977 M ad 147. The ju ristic basis o f the
o b lig a tio n e m b o d ie d in sec. 70 is n ot founded on any contract o r tort but
upon a th ird c a te g o ry o f law, nam ely, quasi-contract or restitution—
Keshab Kishore v State A IR 1971 Pat 99. A person w hose co ntract is
void fo r n o n -c o m p lia n c e o f Art. 299(1) o f the C onstitution w ould be e n ­
title d to c o m p e n s a tio n u n d e r sec. 70— Union o f India v Sahab Singh AIR
1977 All 277; M olam Chand v State o f M.P. AIR 1968 SC 1218; V.R.
Subram anyam v B. Thayappa A IR 1966 SC 1034.
In the a b se n ce of a n y c a se se t up in the plaint, the plaintiff ca n n o t fall
b ack on a n y lia b ility u n d e r sec. 70 w hen the supplies w ere obviously
not actu a lly m a d e by the p la in tiff — Hansraj Gupta & Co. v Union o f India
A IR 1973 S C 2724: (1973)2 S C C 637.
T h e b a sis o f lia b ility u/s. 70 is the absence of contract — Union o f
India v Lal C hand & Sons A IR 1967 C al 310.
62 Indian Contract Act, 1872 [S .7i

Section 70 applies not only to individuals but also to corporate bod­

ies and G overnm ent— Pannalal v D.C., Bhandara AIR 1973 SC 1174.
There is, however, no obligation to pay in case of voluntary paym ent—
Lata Man Mohan Das vJanki Prasad AIR 1945 PC 23.
A nother im portant condition for the applicability of sec. 70 is that the
person to whom the benefit is done enjoys the benefit voluntarily, that is
to say, that he has the option of refusing to enjoy the benefit— M.S.
Deroraj v Krishnamurthi AIR 1969 Mys 350; State o f West Bengal v
B.K.Mondal AIR 1962 SC 779. W hen the G overnm ent of India has de­
rived the benefit from the supply of steel by a com pany because the
G overnm ent itself directed to supply the sam e to the third party, the
Governm ent cannot escape the liability to pay the price of steel so sup­
plied— Union o f India vJ.K. Gas Plant AIR 1980 SC 1330.
W hen the landlord voluntarily accepts the benefit of the construction
m ade for the tenant, sec. 70 is attracted— Haji Abdulla v T. V. Hameed
AIR 1985 Ker 93.
S. 71. Responsibility of finder of goods.— A person who finds goods
belonging to another, and takes them into his custody, is subject to the
sam e responsibility as a bailee.
S. 72. Liability of person to whom money is paid, or thing deliv­
ered, by mistake or under coercion.— A person to whom m oney has
been paid, or anything delivered, by mistake or under coercion, must
repay or return it.
Illustrations
(a) A and B jointly owe 100 rupees to C, A alone pays the am ount
to C, and B, not knowing this fact, pays 100 rupees over again
to C. C is bound to repay the am ount to B.
(b) A railway com pany refuses to deliver up certain goods to the
consignee except upon the paym ent of an illegal charge for
carriage. The consignee pays the sum charged in order to ob­
tain the goods. He is entitled to recover so much of the charge
as was illegally excessive.

NOTES
Scope and applicability.— Suprem e Court held in the case of Sales
Tax Officer v Kanhaiyalal AIR 1959 SC 1 3 5:1 9 5 9 SCR 1350, that the
scope of this section is wide enough to cover not only a m istake of fact
but also a mistake of law. So suit for refund of tax illegally collected is
maintainable under the Act — B.M. Lakhani v Malkapur Municipality
AIR 1970 SC 1002: (1970)1 SCC 753. But in a case w here paym ent of
rent was not shown to have been collected under m istake of law this
S. 72] Indian Contract Act, 1872 63

section w ill not a pply— Union o f India vJ. Rustamji AIR 1970 SC 1490:
(1970) 3 S C C 368. T his section has no application to a case where
m oney w a s paid to a bank fo r credit of a constituent as the money so
paid is the m oney of the constituent and the bank in the case is merely
an agent, it ca n n o t reverse the entry of payment without the consent of
the constituen t, even if it w as paid under a mistake— Sales Tax Officer v
Kanhaiyalal A IR 1959 SC 135: 1959 SCR 1350. A tax paid to Govern­
m ent by a party under mistake of law is refundable u/s. 72. Refusal by
G overn m e n t to refund such money may result unjust enrichment in
som e ca se s— State o f Karnataka v Rameshwara Rice Mills AIR 1987
SC 1359.
Payment by mistake or by coercion.— Payment by mistake in sec.
72 m ust refer to a paym ent which was not legally due and which could
not have been enforced — Siva Prasad v Srishchandra AIR 1949 PC
297. Section 72 has no application where property is neither delivered
by m istake or under coercion — Lohia Trading Co. v Central Bank of
India AIR 1978 Cal 468; Sales Tax Officer v Kanhaiyalal AIR 1959 SC
135. Coercion in sec. 72, is to be understood in the ordinary sense. It
includes every kind of complusion even if it does not measure up to
coercion as defined by sec. 15— T.G.M. Asadi v Coffe Board AIR 1969
M ys 230. There is no distinction between mistake as to fact and to law
for the purpose of this section— Siva Prasad v Srishehandra AIR 1949
PC 297. Paym ent under the mistake of law is also recoverable. No plea
or estoppel is m aintainable — Sales Tax Officer v Kanhaiyalal AIR 1959
SC 135. But sec. 72 does not apply when one pays the money and the
other receives it on behalf of the person paying it— Commissioner,
Ahmedabad v Lakhiram Ramdas AIR 1967 SC 340.
Distinguished from secs. 21 and 22.— It has been held by the
Suprem e Court in the Sales Tax Officer v Kanhaiyalal AIR 1959 SC
135: 1959 SCR 1350, that there is no conflict between provisions of
sec. 72 on the one hand and secs. 21 and 22 on the other. The principle
is that if one party under mistake, whether of fact or of law pays to
another m oney which is not due by contract or otherwise that money
must be repaid.
Confirm ation of sale is the final stage of court auction. But if the same
is made subject to a condition, that condition has to be fulfilled — Navalkha
& Sons v Ramayan Das (1969)3 SCC 537.
J n a case under the Company law, the Company Judge directed fresh
auction on the ground that in the proclamation of sale certain particulars
could not be added. On fresh auction bid raised further by another bid­
der, but the original bidder was not given an opportunity to raise his
earlier bid. Being thus prejudiced, the original bidder was ordered to be
suitably com pensated — FCS Software Solutions Ltd. v LA Medical
Services Ltd. (2008)10 SCC 440.
64 Indian Contract Act, 1872 [S. 73

Even confirm ed sale can be set aside in appropriate facts and cir­
cum stances — Divya M anufacturing Co. (P) Ltd. v Union B a n k o f India
(2000)6 SCC 69.
CHAPTER VI
Of the consequences of breach of contract
S. 73. Compensation for loss or damage caused by breach of
contract.— W hen a contract has been broken, the party w ho suffers by
such breach is entitled to receive, from the party w ho has broken the
contract, com pensation fo r any loss or dam age caused to him thereby,
which naturally arose in the usual course of things from such breach, or
which the parties knew, when they m ade the contract, to be likely to
result from the breach of it.
Such com pensation is not to be given for any rem ote and indirect
loss or dam age sustained by reason of the breach.
C om pensation fo r failure to discharge obligation resem bling those
created b y contract.— W hen an obligation resembling those created by
contract has been incurred and has not been discharged, any person
injured by the failure to discharge it is entitled to receive the sam e com ­
pensation from the party in default, as if such person had contracted to
discharge it and had broken his contract.
Explanation.— In estimating the loss or damage arising from a breach
of contract, the m eans which existed of remedying the inconvenience
caused by the non-perform ance of the contract must be taken into ac­
count.
Illustrations
(a) A contracts to sell and deliver 50 maunds of saltpetre to B, at a
certain price to be paid on delivery. A breaks his prom ise. B is
entitled to receive from A, by way of com pensation, the sum, if
any, by which the contract price falls short of the price for which
B m ight have obtained 50 maunds of saltpetre of like quality at
the tim e when the saltpetre ought to have been delivered.
(b) A hires B ’s ship to go to Bombay, and there takes 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 him self
of those opportunities, but is put to trouble and expense in do­
ing so. A is entitled to receive com pensation from B in respect
of such trouble and expense.
(c) A contracts to buy of B, at a stated price, 50 maunds of rice, no
 Indian Contract Act, 1872 65
S. 73]

tim e being fixed for delivery. A afterwards informs Sthat he will

not a cce p t the rice if tendered to him. 8 is entitled to receive
fro m A, by w ay of compensation, the amount, if any, by which
th e c o n tra ct price exceeds that which B can obtain for the rice
at the tim e w hen A informs B that he will not accept it.
(d) A contracts to buy B ’s ship for 60,000 rupees, but breaks his
prom ise. A m ust pay to B, by way of compensation, the ex­
cess, if any, of the contract price over the price which B can
obtain fo r the ship at the time of the breach of promise.
(e) A, the ow ner of a boat, contracts with B to take a cargo of jute
to M irzapur, for sale at that place, starting on a specified day.
The boat, owing to some avoidable cause, does not start at the
tim e appointed, whereby the arrival of the cargo at Mirzapur is
delayed beyond the time when it would have arrived if the boat
had sailed according to the contract. After that date, and be­
fore the arrival of the cargo, the price of jute falls. The measure
of the com pensation payable to B by A is the difference be­
tw een the price which B could have obtained for the cargo at
M irzapur at the time when it would have arrived if forwarded in
due course, and its market price at the time when it actually
arrived.
( f) A contracts to repair B 's house in a certain manner, and re­
ceives paym ent in advance. A repairs the house, but not ac­
cording to contract. B is entitled to recover from A the cost of
making the repairs conform to the contract.
(g) A contracts to let his ship to B for a year, from the first of
January, for a certain price. Freights rise, and, on the first of
January, the hire obtainable for the ship is higher than the con­
tract price. A breaks his promise. He must pay to B, by way of
com pensation, a sum equal to the difference between the con­
tract price and the price for which B could hire a similar ship for
a year on and from the first of January.
(/?) A contracts to supply 8 with a certain quantity of iron at a fixed
price, being a higher price than that for which A could procure
and deliver the iron. B wrongfully refuses to receive the iron. B
must pay to A, by way of compensation, the difference be­
tween the contract price of the iron and the sum for which A
could have obtained and delivered it.
(/) A delivers to S, a common carrier, a machine, to be conveyed
w ithout delay, to A s mill, informing S that his mill is stopped for
want of the machine. S unreasonably delays the delivery of the
machine, and A, in consequence, loses a profitable contract
with the Government. A is entitled to receive from S, by way of

[12] 1CA — 5
66 Indian Contract Act, 1872 [S.73

compensation, the average am ount of profit w hich would have

been made by the working of the mill during the tim e that deliv­
ery of it was delayed, but not the loss sustained through the
loss of the Governm ent contract.
(/) A, having contracted with B to supply B with 1,000 tons of iron
at 100 rupees a ton, to be delivered at a stated tim e, contracts
with C fo rth e purchase of 1,000 tons of iron at 80 rupees a ton,
telling C th a t he does so for the purpose of perform ing his con­
tract with B. C fails to perform his contract with A, w ho cannot
procure other iron, and S, in consequence, rescinds the con­
tract. C must pay to A 20,000 rupees, being the profit which A
would have made by the perform ance of his contract with B.
(/c) A contracts with B to make and deliver to B, by a fixed day, for
a specified price, a certain piece of m achinery. A does not de­
liver the piece of m achinery at the tim e specified, and, in con­
sequence of this, B is obliged to procure another at a higher
price than that which he was to have paid to A, and is pre­
vented from performing a contract which B had m ade with a
third person at the tim e of his contract with A (but which had
not been then com m unicated to A), and is com pelled to make
com pensation for breach of that contract. A m ust pay to B, by
way of compensation, the difference between the contract price
of m achinery and the sum paid by B for another, but not the
sum paid by B to the third person by way of com pensation.
(/) A, a builder, contracts to erect and finish a house by the first of
January, in order that B may give possession of it at that time
to C, to whom B has contracted to let it. A is inform ed of the
contract between B and C. A builds the house so badly that,
before the first of January, it falls down and has to be re-built
by B, who, in consequence, loses the rent which he was to
have received from C, and is obliged to make com pensation to
C fo rth e breach of his contract. A must make com pensation to
B for the cost of rebuilding the house, for the rent lost, and for
the compensation made to C.
(m) A sells certain merchandise to B, warranting it to be of a par­
ticular quality, and 6, in reliance upon this warranty, sells it to C
with a sim ilar warranty. The goods prove to be not according to
the warranty, and B becomes liable to pay C a sum of money
by way of compensation. B is entitled to be reim bursed this
sum by A.
(n) A contracts to pay a sum of money to B on a day specified. A
does not pay the money on that day. B, in consequence of not
receiving the money on that day, is unable to pay his debts,
and is totally ruined. A is not liable to make good to B anything
s. 73]
Indian Contract Act, 1872 67

exce p t the principal sum be contracted to pay, together with

interest up to the day of payment.
(o) A co n tra cts to deliver 50 maunds of saltpetre to S on the first of
Jan u a ry, at a certain price. S, afterwards, before the first of
January, contracts to sell the saltpetre to C at a price higher
than the m arket price of the first of January. A breaks his prom­
ise. In estim ating the compensation payable by A to S, the
m arket price of the first of January, and not the profit which
w ould have arisen to S, from the sale to C, is to be taken into
account.
(p) A contracts to sell and deliver 500 bales of cotton to 6 on a-
fixed day. A knows nothing of S ’s mode of conducting his busi­
ness. A breaks his promise, and S, having no cotton, is obliged
to close his mill. A is not responsible to 6 for the loss caused to
S by the closing of the mill.
(q) A contracts to sell and deliver to B, on the first of January,
certain cloth which S intends to manufacture into caps of a par­
ticular kind, for which there is no demand, except at that sea­
son. The cloth is not delivered till after the appointed time, and
too late to be used that year in making caps. B is entitled to
receive from A, by way of compensation, the difference be­
tween the contract price of the cloth and its market price at the
tim e of delivery, but not the profits which he expected to obtain
by making caps, nor the expenses which he has been put to in
making preparation for the manufacture.
(/) A, a ship-owner, contracts with B to convey him from Calcutta
to Sydney in Als ship, sailing on the first of January, and B pays
to A, by way of deposit, one-half of his passage-money. The
ship does not sail on the first of January, and B, after being, in
consequence, detained in Calcutta for some time, and thereby
put to some expense, proceeds to Sydney in another vessel,
and, in consequence, arriving too late in Sydney, loses a sum
of money. A is liable to repay to S h is deposit, with interest, and
th6 expense to which he is put by his detention in Calcutta, and
the excess, if any, of the passage-money paid for the second
ship over that agreed upon for the first, but not the sum of money
which B lost by arriving in Sydney too late.

NOTES
Compensation for loss or damage caused by breach of con­
tract.— The general principle which is emodied in sec. 73 is that when
there is a breach of contract the party who suffers by the breach is
entitled to recover compensation from the other party for the loss caused
to him by such breacn — Chunnilal v Mohanlal AIR 1964 MP 126; D.S.
68 Indian Contract Act, 1872 [S. 7 3

Rao & Bros, v F irm K. Venkatarao AIR 1955 AP 148. Section 73 applies
to all contracts but not to contracts w hich are void fo r any reason —
G reat Eastern Shipping Co. v Union o f India AIR 1971 Cal 150. When,
however, the contract had not becom e im possible of perform ance, the
plaintiff was entitled to dam ages fo r breach of contract — D.R. Mehta v
Tin Plate D ealers Association AIR 1965 Mad 400.
Damages when can be awarded.— W hen a building contract with
the G overnm ent stipulated written notice to the contractor, at the failure
of the G overnm ent to give notice prior to stopping of the w ork by the
contractor is entitled to claim dam ages for breach of contract— Bombay
H ousing B oard v K arbhase N aik & Co. AIR 1975 SC 763. But when in a
building contract the G overnm ent had the right to change the specifica­
tions, the contractor is not entitled claim dam ages for loss arising from
such change in the nature of the w ork— B om bay H ousing B oard v
K arbhase N aik & Co. AIR 1975 SC 763. W hen the student executed
bond in favour of State G overnm ent fo r prosecuting studies in USA at
G overnm ent expenses G overnm ent is entitled to claim dam ages for the
breach of conditions of bond — M. Sham Singh v State o f M ysore AIR
1972 SC 2440. W hen the delay in loading was an account of default of
the claim ant the claim fo r dem urrage or damage is not m aintainable —
Timber Irmaos Ltd. vJ.A.M . Sequeria AIR 1977 SC 734. When the plaintiff
purchases the property knowing, fully well the defect in vendor's title he
is not entitled to claim dam ages for the said defect— Bhagyatham m ai v
D hanabagyatham m al AIR 1981 Mad 303. W hen the G overnm ent en­
tered into contract to supply im ported goods from the contractor but the
contractor defaulted and the Governm ent had to purchase the goods
from another, and in the m eantim e Rupee devalued, the contractor is
liable to make good the loss to the Governm ent— S. N. Goenka v Union
fo India AIR 1981 (NOC) 44 (Del). W here the agent sold goods lower
than the rate fixed by the principal without the latter's consent and the
principal suffered loss, the agent is liable to make good the loss of the
principal — P a n iB a i v S ire K anw ar AIR 1981 Raj 184. W hen the defen­
dant term inated the contract prem aturely on the breach of obligation of
the plaintiff the plaintiff can claim dam ages — G. L. K ilikar v State of
Kerala AIR 1971 SC 1196. In case of breach of a G overnm ent contract
dam age is payable to the Governm ent and such dam ages can be re­
covered as arrear of land revenue— State o f Karnataka v Kuppuswam y
G ow nder Al R 1987 SC 1357.
Quantum of damage.— In case of breach of contract for sale of
goods the difference between the contract rate and the m arket rate after
the date of breach is the measure of dam ages— State v P.K. Jain AIR
1981 Pat 280; Trustees, Calcutta Pot v D hanrajm al Gobindram Al R 1978
Cal 369. In case of dam age for non-delivery of goods the m easure of
dam ages shall be fixed on the basis of ruling price as at the date on
S. 73] Indian Contract Act, 1872 69

which d e live ry o u g h t to have been made — Union o f India v Jolly Steel

Industries A IR 1980 SC 1346. In order to claim damages from a lessee
under the G o ve rn m e n t fo r breach of contract, the compensation cannot
be aw arded unless a prelim inary investigation as to the quantum of loss
is m ade by the C ollector— M asum Hussain v State o f M.P. AIR 1981
SC 1680. T h e plaintiff m ust prove the quantum of damages sustained
by him — M u rlid h a r v M /s Harischandra AIR 1962 SC 366. When the
plaintiff fails to prove actual loss, nominal damage may be recovered —
P ravudaya l A g a rw a la v R am kum ar AIR 1956 Cal 41. In case of dam­
age fo r non-delivery, in the case of absence of any market at the place
of delivery the m arket rate of the nearby market can be taken into ac­
count— B ungo S te e l Furniture v Union o f India AIR 1967 SC 378. When
the m arket rate at the date of delivery is fixed in the contract the com­
pensation at that rate can be awarded— Union o f India v W.P. Factories
AIR 1966 SC 395. But the court is not bound to award compensation on
the rate stipulated in the contract — Fatechand v Balkishan Dass AIR
1963 SC 1405. Interest may be allowed when money was obtained or
retained by fraud — Trojan & Co. v RM. N. N. Nagappa AIR 1953 SC
235. But claim fo r interest of damages is not recoverable ordinarily—
D e-S m et (India) Pvt. Ltd. v B.P. Industrial Corpn. AIR 1980 All 253;
M aneka G andhi v Indira Gandhi AIR 1985 Del 115. When the wrong­
doer m ade use of goods for his own purpose the owner is entitled to
claim reasonable hire even if he did not sustain actual loss for such
w rong retention — Telco Ltd. v Bharat Mining Corpn. AIR 1980 Bom
168. W hen no reliable evidence was produced that a portion of the goods
were received in damaged condition no compensation for the alleged
dam age can be amended under sec. 73 — Biswanath v U.P. Forest
Corpn. AIR 1986 Cal 334 (DB).
W hen the contract with the contractor by the Government was to
supply cem ent but no cement was supplied without any reason and
thereafter contract was cancelled for not starting the work the Govern­
ment is guilty of breach of contract and liable for damages — AIR 1985
Ker 49. When the Governm ent was guilty of breach of contract having
unjustifiably rescinded the contract, the contractor was entitled to dam­
ages and as of the contract was performed and for balance of work
huge machinaries were brought from Poona to Rajkot the contractor
should be awarded Rs. 2 lacs under the head “loss of expected profit”
for breach of contract by the Government— Brij Paul Singh v State of
Gujarat AIR 1984 SC 1703.
Anticipatory breach of contract.— In the case of Jaw harlal v
Haripada (1989)1 SCC 76, the Supreme Court held that when one party
to a contract com m its an anticipatory breach of the contract, the other
party to the contract may treat the breach as putting an end to the con­
tract and sue for damages. The option open to the other party, viz., the
70 Indian Contract Act, 1872 [S. 74

aggrieved party, is that he may choose to keep the co n tra ct alive till the
time for perform ance and claim specific perform ance. But, in that event,
he cannot claim specific perform ance of the contract unless he shows
his readiness and willingness to perform the contract.
Breach of contract being contrary to law and term s o f agreement,
erring party liable to com pensate other party to agreem en t — Dwarka
Das v State o f M.P. (1999)3 SCC 500 : AIR 1999 SC 1031.
On facts contract rate payable held reasonable on principle of quan­
tum m eruit also — Gautam Constructions a n d Fisheries Ltd. v National
Bank fo r Agriculture & Rural Developm ent (2000)6 SCC 519.
Damages for mental agony not payable in case of breach of ordinary
com m ercial contract. R em oteness of dam ages com es into play —
G haziabad Developm ent A uthority v Union o f India (2000)6 SCC 113:
AIR 2000 SC 2003.
In absence of proof of actual loss damages cannot be awarded.—
The party to a contract taking security deposit from the other party to
ensure due perform ance of the contract is not entitled to forfeit the de­
posit on ground of default when no loss is caused to him in consequence
of such default. Hence dam ages cannot be awarded — Union o f India v
R am pur D istillery & C hem ical Co. Ltd. AIR 1973 SC 1098; P.K. Abdulla
v State o f Kerala AIR 2002 Ker 108; in order to claim dam age or com­
pensation the party has to prove that he has suffered actual loss. He is
not entitled to com pensation for any indirect loss or rem ote dam age —
Jalpaiguri Zilla P arishad v Shankar Prasad AIR 2006 Cal 1.
A person is entitled to receive compensation in term s of m oney only,
if he has actually suffered damage or loss on account of breach of con­
tract by the other party. The assessm ent of damage can be m ade by
actual proof of damage or loss suffered; or it may be a reasonable sum
which court thinks fit, but not exceeding the am ount nam ed in contract
where it is not possible to assess the same on the basis of m aterials on
record. The party aggrieved may be absolved of the burden of proving
the amount of actual damage or loss; but nevertheless is responsible to
prove that breach of contract had actually caused dam age or loss to it
— M/s. Kam il v Central Dairy AIR 2008 All 33; Maula B ux v Union of
India AIR 1970 SC 1955; Union o f India v R am pur D istillery AIR 1973
SC 1093 and ONGC v SAW Pipes AIR 2003 SC 2629 re lie d on.
S. 74. Compensation for breach of contract where penalty stipu­
lated for.— When a contract has been broken, if a sum is nam ed in the
contract as the amount to be paid in case of such breach, or if the con­
tract contains any other stipulation by way of penalty, the party com ­
plaining of the breach is entitled, whether or not actual dam age o r loss is
proved to have been caused thereby, to receive from the party w ho has
broken the contract reasonable compensation not exceeding the amount
so named or, as the case may be, the penalty stipulated for.
S. 74] Indian Contract Act, 1872 71

E xp la n a tio n .— A stipulation for increased interest from the date of

default m a y be a stipulation by w ay of penalty.
E xc e p tio n .— W h e n an y person enters into any bailbond, recogni­
zance o r o th e r instru m e n t of the same nature, or, under the provisions
of any law , o r un d e r the orders of the Central Government or of any
State G o ve rn m e n t, gives any bond for the performance of any public
duty o r a c t in w hich the public are interested, he shall be liable, upon
breach of th e condition of any such instrument, to pay the whole sum
m entioned therein.
E xp la n a tio n .— A person who enters into a contract with Government
does not necessarily thereby undertake any public duty, or promise to
do an act in w hich the public are interested.
Illustrations
(a) 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.
(b) A contracts with B that, if A practices as a surgeon within
C alcutta, he will pay B Rs. 5.000. A practices as a surgeon in
Calcutta. B is entitled to such compensation, not exceeding
Rs. 5,000, as the Court considers reasonable.
(c) A gives a recognizance binding him in a penalty of Rs. 500 to
appear in Court on a certain day. He forfeits his recognizance.
He is liable to pay the whole penalty.
(d) A gives B a bond for the repayment of Rs. 1,000 with interest
at 12 per cent, at the end of six months, with a stipulation that,
in case of default, interest shall be payable at the rate of 75 per
cent, from the date of default. This is a stipulation by way of
penalty, and B is only entitled to recover from A such com pen­
sation as the Court considers reasonable.
(e) A, who owes money to 6, a m oney-lender, undertakes to re­
pay him by delivering to him 10 maunds of grain on a certain
date, and stipulates that, in the event of his not delivering the
stipulated am ount by the stipulated date, he shall be liable to
deliver 20 maunds. This is a stipulation by way of penalty, and
B is only entitled to reasonable compensation in case of breach.
(/) A undertakes to repay S a loan of Rs. 1,000 by five equal
monthly instalments, with a stipulation that, in default of pay­
ment of any instalment, the whole shall become due. This stipu­
lation is not by way of penalty, and the contract may be en­
forced according to its terms.
(g) A borrows Rs. 100 from B and gives him a bond for Rs. 200
payable by five yearly instalm ents of Rs. 40, with a stipulation
72 Indian Contract Act, 1872 [S.74

that, in default of paym ent of any instalm ent, the w hole shall
becom e due. This is a stipulation by w ay of penalty.

NOTES

Determination of penal stipulation in contractual agreements—

The question as to w hether any particular stipulation in a contract is
penal in nature or not is to be determ ined by the court. The determ ina­
tion is to be based on som e relevant factors, such as the character of
the transaction and its special nature, if any, the relative situation of the
parties, the rights and obligations accruing from such a transaction un­
der the general law and the intention of the parties in incorporating in
the contract the particular stipulation which is contended to be penal in
nature. If the court finds that stipulation incorporated in the contract is
burdensom e or oppressive in character and may operate in terrorem
over the prom isor so as to drive him to fulfil the contract, then the provi­
sion will be held to be one of penalty— K.P. Subbarama vK.S. Raghavan
AIR 1987 SC 1257: (1987)2 SCC 424.
Compensation where penalty stipulated for.— W here the liquidated
dam ages are entered into the contract as payable in the event of breach
then in order to be entitled to dam ages the plaintiff shall have to prove
his dam ages irrespective of the specified am ount stated in the contract
— K ailesw ar Singh v Upendra 76 CW N 338. The legal position with
regard to the claim for liquidated dam ages is as follows: (1) no claim for
dam ages is m aintainable unless the prom isee is proved to have sus­
tained loss due to default of the promisor; (2) whatever the quantum of
the loss so sustained the claim cannot exceed the sum stipulated in the
contract; (3) only reasonable sum can be awarded as dam ages which
in a given situation m ay be less than the sum stipulated; (4) w hat is
reasonable sum depends on facts; (5) court may proceed on the as­
sum ption that the sum stipulates reflected the genuine pre-estim ate of
the parties as to the probable losss and such clause was intended to
dispense with the proof thereof; and (6) it will always be open to the
prom isor to show that no loss was suffered or that the estim ate so made
is falsified by the change in the situation or that the loss suffered was
less — ILR 1975 Bom 580.
The stipulation for payment of interest in the event of default is pen­
alty — K.C. G ajapati Narayan Deo v State o f Orissa AIR 1953 SC 376.
Extension of period of time for paym ent of instalm ent in a com pro­
mise decree with default clause could not be permitted in case of grossly
belated payment made by the defendant — Sova R ay v Gostha Gopal
D ey AIR 1988 SC 981.
The stipulation of unliquidated dam ages given in the contract does
not entitle the promisee to recover the damages. The provisee has to
prove the loss and the court has to assess the dam ages — U nion o f
S. 74] Indian Contract Act, 1872 73

India v R am an Iron Foundary AIR 1974 SC 1265. Earnest money is

part of purchase price and it is forfeited when the transaction falls through
due to fault of the vendee— Maula Bux v Union o f India AIR 1970 SC
1955.
Distinction between liquidated damages and penalty.— The es­
sence of penalty is a paym ent of money stipulated in the contract as in
terrorem.
On the other hand, the liquidated damage is a genuine covenanted
pre-estim ate of dam age. When there is no evidence that the amount
specified in the contract as damage unreasonable, unconscionable or
excessive, the agreem ent estimating the damage is itself evidence and
even in the absence of other evidence it may be considered sufficient—
State o f O rissa v C alcutta Co. Ltd. AIR 1981 Ori 206; Bali Ram v
Bhupendra AIR 1978 Cal 559. The penal clause in a compromise is a
penalty and sec. 74 is attracted— Nanjibhai vRam kishan AIR 1977 MP
112. In case of forfeiture of earnest money, if the amount is reasonable
it is not penalty and sec. 74 is not attracted. When the amount is exces­
sive it is penalty and consequently sec. 74 is attracted— Hem Chand v
D.C. & G. M ills AIR 1977 SC 1986; Dharam Chand v Sunil Ranjan AIR
1981 Cal 323. W hen the amount stipulated is found not liquidated dam­
ages but penalty, the court is not bound to award the stipulated penalty
but only reasonable compensation— Fatechchand vBalkishan AIR 1963
SC 1405. Sim ilarly security deposit cannot be forfeited on the ground of
default unless the loss was caused on account of default— Union of
India v Ram pur D &C Co. AIR 1973 SC 1098. When the consideration
for agreem ent was Rs. 60,000 and damages for Rs. 50,000 was recov­
erable under the contract for breach it amounts to penalty and cannot
be recovered except on proof of actual damage— Gurubax Singh v
Begum Rafiya AIR 1979 MP 66.
Agreement to pay damages according to statutory provision.—
W hen the parties agree to pay damages in case of breach of contract
according to any statutory provision the quantum of damages must be
determined with reference to the provision as it stood not on the date of
agreem ent but on the date on which the breach was made— Padma
Srinivasan v Prem ier Insurance Co. AIR 1982 SC 836: (1982)1 SCC
613.
Where agreement specifying damages for certain types of breach
of contract.— There is no impediment or any obstacle for the parties to
a contract to m ake provision of liquidated damages for specific breaches
only, leaving other types of breaches to be dealt with as unliquidated
dam ages. There is no principle which requires that once the provision
of liquidated dam ages has been made in the contract, in the event of
breach by one of the parties, such clause has to be read covering all
types of breaches although parties may not have intended and provided
74 Indian Contract Act, 1872 [S. 75

for compensation in express term s for all types of breaches — Steel

Authority o f India v Gupta Brothers S teel Tubes Ltd. (2009)10 SCC 63.
Stipulation by way of penalty, if recoverable.— A plain reading of
sec. 74 would show that it deals with the m easure of dam ages in two
classes of cases (/) where the contract names a sum to be paid in case
of breach, and (//) where the contract contains any other stipulation by
way of penalty.
It is true that if there be a clause in the contract for reim bursem ent of
the price of the goods paid by the buyers to the seller, the said clause of
reim bursem ent or repaym ent in the event of delayed delivery/arrival or
non-delivery is not to be regarded as damages. Even in the absence of
such clause, where the seller has breached his obligations at threshold,
the buyer is entitled to the return of the price paid and for damages.
There is no reason why the sellers should not be bound by it and the
court should not enforce such term. No way such a clause is in the
nature of threat held over the sellers in terror — Phulchand Export v
O.O.O. Patriot (2011)10 SCC 300; see also Fateh C hand v Balkrishan
AIR 1963 SC 1405.
Nature of CIF contract.— The obligations upon a seller under a CIF
contract are well known, some of which are in relation to goods and
som e of which are in relation to documents. In relation to goods, the
seller m ust ship goods of contract description on board a ship bound to
the contract destination. If there is a late shipm ent or the seller has put
goods on board a ship not bound to the contract destination as stipu­
lated, the logical inference that m ust necessarily follow is that the seller
has not put on board goods conform ing to a contract destination —
Phulchand Exports v O.O.O. Patriot (2011)10 SCC 300.
S. 75. Party rightfully rescinding contract, entitled to compen­
sation.— A person who rightfully rescinds a contract is entitled to com ­
pensation for any damage which he has sustained through the non-
fulfilm ent of the contract.
Illustration
A, a singer, contracts with B, the m anager of a theatre, to sing at his
theatre for two nights in every week during the next two months, and B
engages to pay her 100 rupees for each night’s perform ance. On the
sixth night, A wilfully absents herself from the theatre, and B, in conse­
quence, rescinds the contract. B is entitled to claim com pensation for
the damage which he has sustained through the non-fulfilm ent of the
contract.
CHAPTER VII
Sale of goods
Sections 76— 123 [Rep. by the Sale o f Goods Act, 1930 (3 o f 1930)
S. 6 5 ].
S. 126] Indian Contract Act, 1872 75

CHAPTER VIII
Of Indemnity and Guarantee
S. 124. “Contract of indemnity” defined.— A contract by which
one party, p rom ises to save the other from loss caused to him by ihe
conduct of the pro m iso r himself, or by the conduct of any other person,
is called a “c o n tra ct of indem nity” .
Illustration
A contracts to indem nify B against the consequences of any pro­
ceedings w hich C m ay take against B in respect of a certain sum of 200
rupees. This is a contract of indemnity.
S. 125. Rights of indemnity-holder when sued.— The promisee in
a contract of indem nity, acting within the scope of his authority, is en­
titled to recover from the promisor—
(1) all dam ages which he may be compelled to pay in any suit in
respect of any matter to which the promise to indemnify ap­
plies;
(2) all costs which he may be compelled to pay in any such suit if,
in bringing or defending it, he did not contravene the order of
the promisor, and acted as it would have been prudent for him
to act in the absence of any contract of indemnity, or if the
prom isor authorized him to bring or defend the suit;
(3) all sum s w hich he may have paid under the terms of any
compromise of any such suit, if the compromise was not con­
trary to the orders of the promisor, and was one which it would
have been prudent for the promisee to make in the absence of
any contract of indemnity, or if the promisor authorized him to
compromise the suit.
S. 126. “Contract of guarantee”, “surety”, “principal debtor” and
“creditor”.— A “contract of guarantee” is a contract to perform the prom­
ise, or discharge the liability, of a third person in case of his default. The
person who gives the guarantee is called the "surety” ; the person in
respect of whose default the guarantee is given is called the “principal
debtor” , and the person to whom the guarantee is given is called the
“creditor” . A guarantee may be either oral or written.

NOTES
Contract of indemnity and contract of guarantee.— In the con­
tract of indemnity the promisor is to be primarily and independently li­
able for another person’s conduct. In such case liability arises from loss
caused to the promisee by the conduct of the promisor himself or by
some other person. In the contract of guarantee concurrence of princi-
76 Indian Contract Act, 1872 [S. 127

pal debtor, surety and creditor is necessary. O bligation of the surety

depends substantially on the principal debtor’s default— Punjab National
Bank v B.C. M ills AIR 1970 SC 1973: (1970)2 SCR 462. A contract of
guarantee is tripartite w hereas the contract of indem nity is bilateral. But
tripartite contract between debtor, creditor and surety is not alw ays nec­
essary. After a contract betw een the principal debtor and creditor takes
into effect a contract of guarantee m ay be constituted between the credi­
tor and surety — P rasanjit M ahtha v United C om m ercial B ank AIR 1979
Pat 151. Principal debtor need not be expressly a party to the docum ent
of guarante e and m ay be a party by im p lica tio n — N a g p u r N agarik
Sahakari B ank v Union o f India AIR 1981 AP 153. Provisions of sec.
126 do not apply to surety bond. But the principles apply— D alichand v
State AIR 1976 Raj 112.
In a case of im port of goods from a foreign firm bank furnished guar­
antee on behalf of the party of this land in favour of carrier in consider­
ation of delivering of the goods to the party of this land w ithout docu­
m ents reaching from the foreign firm. The Supreme C ourt held that the
carrier can enforce guarantee for violation of condition— C entax (India)
Ltd. v Vinm ar Inpex Inc. AIR 1986 SC 1924.
A com posite decree is passed against the principal debtor, guaran­
tor and m ortgaged property. In that case decree holder is to proceed
against m ortgaged property and then proceed against the guarantor—
Union B ank o f India v M anku Narayana AIR 1987 SC 1078.
S. 127. Consideration for guarantee.— Anything done, or any prom­
ise made, fo r the benefit of the principal debtor, may be a sufficient con­
sideration to the surety for giving the guarantee.
Illustrations
(a) B requests A to sell and deliver to him goods on credit. A agrees
to do so, provided C will guarantee the paym ent of the price of
the goods. C prom ises to guarantee the paym ent in consider­
ation of A's prom ise to deliver the goods. This is a sufficient
consideration for C ’s promise.
(b) A sells and delivers goods to B. C afterwards requests A to
forbear to sue B fo r the debt for a year, and promises that, if he
does so, C will pay for them in default of payment by B. A agrees
to forbear as requested. This is a sufficient consideration for C '
s promise.
(c) A sells and delivers goods to B. C afterwards, w ithout consid­
eration, agrees to pay for them in default to B. The agreem ent
is void.
S. 128. Surety’s liability.— The liability of the surety is co-extensive
w ith that of the principal debtor, unless it is otherwise provided by the
contract.
 Illustration
A gua ra n te e s to B the paym ent of a bill of exchange by C, the accep­
tor. The bill is dishono ured b y C. A is liable, not only for the amount of
the bill, but also fo r any interest and charges which may have become
due on it.

NOTES

Surety’s liab ility — The liability of surety is co-extensive with that of

principal debtor— B a n k o f B ihar v D amadar Prasad AIR 1969 SC 297.
C ontract can be enforced against the surety in absence of contract to
contrary w ithout proceeding against the principal debtor— Asharfibai v
P arshadila l AIR 1959 MP 26. Surety is a “favoured debtor’. Rigid adher­
ence to the term of obligation under the bond is not necessary. He can­
not be equated with the insurer— Nagpur Nagarik Sahakari Bank v Union
o f India AIR 1981 AP 153. Where a bond was created for collection for
a particular period the surety cannot be made liable for the post-liabili­
ties of the debtor arising out of misappropriation of money collected
during previous years when he was not a surety— Chittaranjan v Dy.
Commr. o f Lakhim pur AIR 1980 Gau 62 (FB).
Bank guarantee.— When the bank guarantee has been furnished by
the purchaser to the seller the purchaser cannot get injunction restraining
the bank from making payment to seller— India Cable Co. v Plastic Prod­
ucts Engg. Co. AIR 1979 Cal 370. When a guarantee has been given by
Bank to pay a part on first demand notwithstanding the dispute between
such parts and the party for whom guarantee has been furnished as to
the orderly performances of contract by the latter the bank can pay that
party in terms of the guarantee bond — Texmaco Ltd. v State Bank of
India Al R 1979 Cal 44. Liability under the letters of credit, bank guarantee,
perfo rm a n ce bonds are g e n e ra lly a b so lu te — H arprasad & Co. v
Sudarshan Steel Mills AIR 1980 Del 174. The Bank’s liability under the
banks guarantee is absolute and unconditional and does not depend upon
any prior proof of any default on the part of the company— M.S.E.B.
Bombay v Official Liquidator, Ernakulam High Court AIR 1982 SC 1497.
Bank guarantee is very much like a Letter of Credit. The Supreme Court
held that it should not be prevented from implementation by a court—
United Commercial Bank v Bank of India AIR 1981 SC 1426.
S. 129. “Continuing guarantee”.— A guarantee which extends to a
series of transactions, is called a “continuing guarantee” .
Illustrations
(a) A, in consideration that B will employ C in collecting the rents
of B ’s zam indari promises B to be responsible, to the amount
78 Indian Contract Act, 1872 [S. 130

of 5,000 rupees, for the due collection and p a ym ent by C of

those rents. This is a continuing guarantee.
(b) A guarantees paym ent to S, a tea-dealer, to the am ount of £
100 for any tea he may from tim e to tim e supply to C. B sup­
plies C with tea to above the value of £ 100, and C pays 6 fo r it.
Afterwards, B supplies C w ith tea to the value of £ 200. C fails
to pay. The guarantee given by A was a continuing guarantee,
and he is accordingly liable to B to the extent of £ 100.
(c) A guarantees paym ent to B of the price of five sacks of flour to
be delivered by 6 to C and to be paid for in a m onth. B delivers
five sacks to C. C pays for them . A fterw ards B delivers four
sacks to C, which C does not pay for. The guarantee given by
A was not a continuing guarantee, and accordingly he is not
liable for the price of the four sacks.
S. 130. Revocation of continuing guarantee.— A continuing guar­
antee m ay at any time be revoked by the surety, as to future transac­
tions, by notice to the creditor.
Illustrations
(a) A, in consideration of B ’s discounting, at A’s request, bills of ex­
change for C, guarantees to B, for twelve months, the due paym ent of
all such bills to the extent of 5,000 rupees. B discounts bill fo r C to the
extent of 2,000 rupees. Afterwards, at the end of three months, A re­
vokes the guarantee. This revocation discharges A from all liability to B
for any subsequent discount. But A is liable to B for the 2,000 rupees,
on default of C.
( b) A guarantees to B, to the extent of 10,000 rupees, that C shall
pay all the bills that B shall draw upon him. B draws upon C, C accepts
the bill. A gives notice of revocation. C dishonours the bill at m aturity. A
is liable upon his guarantee.
S. 131. Revocation of continuing guarantee by surety’s death.—
The death of the surety operates, in the absence of any contract to the
contrary, as a revocation of a continuing guarantee, so fa r as regards
future transations.
S. 132. Liability of two persons, primarily liable, not affected by
arrangement between them that one shall be surety on other’s de­
fault.— W here two persons contract with a third person to undertake a
certain liability, and also contract with each other that one of them shall
be liable only on the default of the other, the third person not being a
party to such contract, the liability of each such two persons to the third
person under the first contract is not affected by the existence of the
second contract, although such third person may have been aw are of
its existence.
S. 133] Indian Contract Act, 1872 79

Illustration
A and B m ake a jo in t and several prom issory note to C. A makes it,
in fact, as sure ty fo r B, and C knows this at the time when the note is
made. The fa ct th a t A, to the knowledge of C, made the note as surety
for B, is no a n sw e r to a suit by C against A upon the note.
S. 133. Discharge of surety by variance in terms of contract.—
Any variance, m ade w ithout the surety’s consent, in the terms of the
contract betw een the principal debtor and the creditor, discharges the
surety as to tra n sa ctio n s subsequent to the variance.
Illustrations
(a) A becom es surety to C for B ’s conduct as a manager in C ’s
bank. Afterwards, S and C contract, without A's consent, that B ’s
salary shall be raised, and that he shall become liable for one-
forth of the losses on overdrafts. B allows a customer to over­
draw, and the bank loses a sum of money. A is discharged
from his suretyship by the variance made without his consent,
and is not liable to make good this loss.
(b) A guarantees C against the misconduct of B in an office to
w hich B is appointed by C, and of which the duties are defined
by an Act of the Legislature. By a subsequent Act, the nature of
the office is m aterially altered. Afterwards, B misconducts him­
self. A is discharged by the change from future liability under
his guarantee, though the misconduct of B is in respect of a
duty not affected by the later Act.
(c) C agrees to appoint B as his clerk to sell goods at a yearly
salary, upon A’s becoming surety to C fo r B ’s duly accounting
for moneys received by him as such clerk. Afterwards, without
A ’s knowledge or consent, C and B agree that B should be
paid by a commission on the goods sold by him and not by a
fixed salary. A is not liable for subsequent misconduct of B.
(d) A gives to C a continuing guarantee to the extent of 3,000 ru­
pees for any oil supplied by C to B on credit. Afterwards B be­
com es embarrassed, and, without the knowledge of A, B and
C contract that C shall continue to supply B with oil for ready
money, and that the payments shall be applied to the then, ex­
isting debts between B and C. A is not liable on his guarantee
for any goods supplied after this new arrangement.
(e) C contracts to lend B 5, 000 rupees on the 1st March. A guar­
antees repayment. C pays the 5,000 rupees to B on the 1st
January, A is discharged from his liability, as the contract has
been varied, inasmuch as C might sue B for the money before
the first of March.
80 Indian Contract Act, 1872 [S. 134

S. 134. Discharge of surety by release or discharge of principal

debtor.— The surety is discharged by any contract betw een the credi­
tor and the principal debtor, by which the principal d e b to r is released, or
by any act or omission of the creditor, the legal consequence of which is
the discharge of the principal debtor.
Illustrations
(a) A gives a guarantee to C fo r goods to be supplied by C to B .C
supplies goods to S, and afterw ards B becom es embarrassed
and contracts with his creditors (including C) to assign to them
his property in consideration of their releasing him from their
demands. Here B is released from his debt by the contract with
C, and A is discharged from his suretyship.
(b) A contracts with B to grow a crop of indigo on A ’s land and to
deliver it to 6 at a fixed rate, and C guarantees A ’s performance
of this contract. B diverts a stream of w ater w hich is necessary
for the irrigation of A ’s land, and thereby prevents him from
raising the indigo. C is no longer liable on his guarantee.
(c) A contracts with B for a fixed price to build a house for B within
a stipulated time. B supplying the necessary tim ber. C guaran­
tees A ’s perform ance of the contract. B om its to supply the
tim ber. C is discharged from his suretyship.

NOTES

Discharge of surety.— Even if the claim against the principal is

barred the surety is not discharged unless so stipulated in the bond—
D ass Bank Ltd. v K ali Kum ari AIR 1958 Cal 530. A grant of tim e or
acceptance of additional surety does not necessarily discharge the
surety— A m ritlal v State Bank o f Travancore AIR 1968 SC 1432. But a
guarantor cannot be made liable beyond the term s of the contract—
Bank o f B ihar v D am odar Prasad AIR 1969 SC 297. M aterial alteration
unauthorisedly on any part of guarantee renders the bond invalid— S.
Perum al R eddiar v Bank o f Baroda AIR 1981 Mad 180. W hen the fidel­
ity of an employee was guaranteed by a fidelity bond, the surety is dis­
charged if the employer retains the employee in service even after proved
dishonesty of the employee— Radhakanta v U nited B ank o f India AIR
1955 Cal 217. But enforcement of surety bond against one surety or
release of one surety does not operate as discharge of the rest—
Srichand v Jagdish Pershad AIR 1966 SC 1429.
The failure of the creditor to bring a suit within the period of limitation
against the principal debtor is not an act or omission within the meaning
of sec. 134. So surety is not discharged for such failure to sue the prin­
cipal debtor within the period of limitation unless there is specific term to
s. 139] Indian Contract Act, 1872 81

that effect in the bon d — A ziz Ahm ad v Sher Ali AIR 1956 All 8 (FB).
Acknowledgment of debt keeps the liability of guarantor alive— Wandoor
Jupiter Chips (P) Ltd. vK .P . Mathew AIR 1980 Ker 190.
S. 135. Discharge of surety when creditor compounds with, gives
time to, or agrees not to sue, principal debtor.— A contract between
the creditor and the principal debtor, by which the creditor makes a com­
position w ith , or prom ises to give time to, or not to sue, the principal debtor,
discharges the surety, unless the surety assents to such contract.
S. 136. Surety not discharged when agreement made with third
person to give time to principal debtor.— W here a contract to give
time to the principal debtor is made by the creditor with a third person,
and not w ith the principal debtor, the surety is not discharged.
Illustration
C, the holder of an overdue bill of exchange drawn by A as surety for
6, and, accepted by B, contracts with M \o give time to B. A is not dis­
charged.
S. 137. C re d ito r’s forbearance to sue does not discharge
surety.— M ere forbearance on the part of the creditor to sue the princi­
pal debto r or to enforce any other remedy against him does not, in the
absence of any provision in the guarantee to the contrary, discharge the
surety.
Illustration
B ow es to C a debt guaranteed by A. The debt becomes payable. C
does not sue B for a year after the debt has become payable. A is not
discharged from his suretyship.
S. 138. Release of one co-surety does not discharge others.—
W here there are co-sureties, a release by the creditor of one of them
does not discharge the others; neither does it free the surety so re­
leased from his responsibility to the other sureties.
S. 139. Discharge of surety by creditor’s act or omission impair­
ing surety’s eventual remedy.— If the creditor does any act which is
inconsistent with the rights of the surety, or omits to do any act which
his duty to the surety requires him to do, and the eventual remedy of the
surety himself against the principal debtor is thereby impaired, the surety
is discharged.
Illustrations
(a) B contracts to build a ship for C fo r a given sum, to be paid by
instalm ents as the work reaches certain stages. A becomes
surety to C fo r B's due performance of the contract. C, without
the knowledge of A, prepays to B the last two instalments. A is
discharged by this prepayment.

[12] ICA — 6
82 Indian Contract Act, 1872 [S. 140

(b) C lends money to S on the security of a jo in t and several prom­

issory note made in C ’s favour by 8, and by A as surety for 8,
together with a bill of sale of S ’s furniture, which gives power to
C to sell the furniture, and apply the proceeds in discharge of
the note. Subsequently, C sells the furniture, but, owing to his
misconduct and wilful negligence, only a small price is real­
ized. A discharged from liability on the note.
(c) A puts M a s apprentice to B, and gives a guarantee to S fo r M ’s
fidelity. 6 promises on his part that he will, at least once a month,
see M m ake up the cash. 8 omits to see this done, as promised,
and M embezzles. A is not liable to S o n his guarantee.
S. 140. Rights of surety on payment or performance.— W here a
guaranteed debt has become due, or default of the principal debtor to
perform a guaranteed duty has taken place, the surety upon paym ent of
performance of all that he is liable for, is invested with all the rights
which the creditor had against the principal debtor.
S. 141. Surety’s right to benefit of creditor’s securities.— A surety is
entitled to the benefit of every security which the creditor has against the
principal debtor at the time when the contract of suretyship is entered into,
whether the surety knows of the existence of such security or not; and if the
creditor losses, or, without the consent of the surety, parts with such secu­
rity, the surety is discharged to the extent of the value of the security.
Illustrations
(a) C advances to B, his tenant, 2,000 rupees on the guarantee of
A. C has also a further security for the 2,000 rupees by a mort­
gage of 8 ’s furniture. C cancels the mortgage. 8 becomes
insolvent, and C sues A on his guarantee. A is discharged from
liability to the amount of the value of the furniture.
( b) C, a creditor, whose advance to B is secured by a decree,
receives also a guarantee for that advance from A. C after­
wards takes B’s goods in execution under the decree, and then,
without the knowledge of A withdraws the execution. A is dis­
charged.
(c) A, as surety for 8, makes a bond jointly with 8 to C, to secure
a loan from C to 8. Afterwards, C obtains from 8 a further se­
curity for the same debt. Subsequently, C gives up the further
security. A is not discharged.
S. 142. Guarantee obtained by misrepresentation, invalid.— Any
guarantee which has been obtained by means of misrepresentation made
by the creditor, or with his knowledge and assent, concerning a material
part of the transaction, is invalid.
S. 143. Guarantee obtained by concealment, invalid.— Any guar­
antee which the creditor has obtained by means of keeping silence as
to a material circumstances, is invalid.
S. 145] Indian Contract Act, 1872 83

illustrations
(a) A engages 8 as clerk to collect m oney for him. B fails to ac­
count for some of his receipts, and A in consequence calls upon
him to furnish security for his duly accounting. C gives his guar­
antee for B's duly accounting. A does not acquaint C with B 's
previous conduct. 8 afterwards makes default. The guarantee
is invalid.
(b) A guarantees to C paym ent for iron to be supplied by him to B
to the am ount of 2,000 tons. B and C have privately agreed
that B should pay five rupees per ton beyond the market price,
such excess to be applied in liquidation of an old debt. This
agreem ent is concealed from A. A is not liable as a surety.
S. 144. Guarantee on contract that creditor shall not act on it
until co-surety joins.— W here a person gives a guarantee upon a con­
tract that the creditor shall not act upon it until another person has joined
in it as co-surety, the guarantee is not valid if that other person does not
join.
S. 145. Implied promise to indemnify surety. — In every contract of
guarantee there is an implied promise by the principal debtor to indemnify
the surety, and the surety is entitled to recover from the principal debtor
w hatever sum he has rightfully paid under the guarantee, but no sums
which he has paid wrongfully.
Illustrations
(a) B is indebted to C, and A is surety for the debt. C demands
paym ent from A, and on his refusal sues him for the amount. A
defends the suit, having reasonable grounds for doing so, but
he is com pelled to pay the am ount of the debt with costs. He
can recover from 8 the am ount paid by him for costs, as well
as the principal debt.
(b) C lends 8 a sum of money, and, A, at the request of 8, accepts
a bill of exchange drawn by 8 upon A to secure the amount. C,
the holder of the bill, dem ands payment of it from A, and, on
A's refusal to pay, sues him upon the bill. A, not having reason­
able grounds fo r so doing, defends the suit, and has to pay the
am ount of the bill and costs. He can recover from 8, the amount
of the bill, but not the sum paid for costs, as there was no real
ground fo r defending the action.
(c) A guarantees to C, to the extent of 2,000 rupees, payment for
rice to be supplied by C to 8. Csupplies to 8 rice to a less amount
than 2,000 rupees, but obtains from A payment of the sum of
2,000 rupees in respect of the rice supplied. A cannot recover
from 8 m ore than the price of the rice actually supplied.
84 Indian Contract Act, 1872 [S. 146

S. 146. Co-sureties liable to contribute equally.— W here two or

more persons are co-sureties for the same debt or duty, either jointly or
severally, and whether under the same or different contracts, and whether
with or without the knowledge of each other, the co-sureties, in the ab­
sence of any contract to the contrary, are liable, as between themselves,
to pay each an equal share of the whole debt, or of that part of it which
rem ains unpaid by the principal debtor.
Illustrations
(a) A, B and C are sureties to D for the sum of 3,000 rupees lent to
E. E makes default in payment. A, B and C are liable, as be­
tween them selves, to pay 1,000 rupees each.
(b) A, B and C are sureties to D for the sum of 1,000 rupees lent to
E, and there is a contract between A, B and C that A is to be
responsible to the extent of one-quarter, B to the extent of one-
quarter, and C to the extent of one-half. E makes default in
payment. As between the sureties, A is liable to pay 250 ru­
pees, S 2 5 0 rupees, and C 5 0 0 rupees.
S. 147. Liability of co-sureties bound in different sums.— Co­
sureties who are bound in different sums are liable to pay equally as far
as the limits of their respective obligations permit.
Illustrations
(a) A, B and C, as sureties for D, enter into three several bonds,
each in a different penalty, namely, A in the penalty of 10,000
rupees, B in that of 20,000 rupees, C in that of 4 ,000 rupees,
conditioned for U s duly accounting to E. D makes default to
the extent of 30,000 rupees. A, B and C a re each liable to pay
10,000 rupees.
(b) A, B and C, as sureties for D, enter into three several bonds,
each in a different penalty, namely, A in the penalty of 10,000
rupees, B in that of 20,000 rupees, C in that of 40,000 rupees,
conditioned for U s duly accounting to E. D makes default to
the extent of 40,000 rupees. A is liable to pay 10,000 rupees,
and B and C 15,000 rupees each.
(c) A, B and C, as sureties for D, enter into three several bonds,
each in a different penalty, namely, A in the penalty of 10,000
rupees, B in that of 20,000 rupees, C in that of 40,000 rupees,
conditioned for U s duly accounting to E. U makes default to
the extent of 70,000 rupees. A, B and C have to pay the full
penalty of his bond.

NOTES
Of indemnity and guarantee.— Plaintiff asks for perpetual injunc­
tion against enforcement of bank guarantee. He has not asked for dec-
S. 147] Indian Contract Act, 1872 85

laration that he has complied with obligation under the main contract
with the defendant. Relief in respect of performance or non-performance.
Thus, it is not made a subject-matter of suit. Injunction cannot be granted
either against principal debtor or the guarantor bank. Further suit is not
maintainable in view of sec. 41(h) of the Specific Relief Act which pro­
vides an alternative remedy — S.l. Wire Ropes v Usha Martin AIR 2007
Kant 59.
Guarantor’s liability.— A guarantor’s liability depends upon the terms
of contract. A continuing guarantee is different from an ordinary guaran­
tee. There is also a difference between a guarantee which stipulates
that the guarantor is liable to pay only on a demand by the creditor; and
a guarantee which does not contain such a condition. Further, depend­
ing on the term s of guarantee, the liability of a guarantor may be limited
to a particular sum, instead of the liability being to the same extent as
that of the principal debtor. The liability to pay may arise on he principal
debtor and guarantor, at the same tim e or at different points of time. A
claim may even be time barred against the principal debtor, but still
enforceable against the guarantor. The parties may agree that the liabil­
ity of a guarantor shall arise at a later point of time than that of the
principal debtor— Syndicate Bank v Channaveerappa AIR 2006 SC 874.
Bank granted gold loans to petitioner on pledge of gold ornaments.
Petitioner had stood guarantor fo r the loan granted to one proprietor
M/s. Bim ala Bhandar. Bank cannot refuse to return the gold ornaments
of the petitioner despite repaym ent of gold loans on the plea that the
loan fo r which he stood as a guarantor had not been repaid — Alekha
Sahoo v P uri Urban Co-opt. B ank AIR 2004 Ori 142.
The guarantee deed specifically states that the guarantors agree to
pay and satisfy the Bank on demand; and interest will be payable by the
guarantors only from the date of demand. In a case when the guarantee
is payable on dem and — limitation begins to run when the demand is
made and the guarantor com m its breach by not complying with the de­
mand — Syndicate B ank v Channaveerappa AIR 2006 SC 1874.
If the debt has already becom e tim e-barred against the principal
debtor, the question of creditor demanding payment thereafter for the
first tim e against the guarantor will not arise where guarantor becomes
liable in pursuance of a dem and validly made in time. The creditor may
sue the guarantor within three years, even if the claim against the prin­
cipal d e b to r g e ts su b se q u e n tly tim e barred — Syndicate Bank v
Channaveerappa AIR 2006 SC 1874.
Corporation can proceed against property of guarantor or surety for
realisation of loan taken by the principal borrower — G. Kailasam v T.N.
Industrial Investm ent AIR 2005 Mad 297.
The guarantee bond states that the guarantors agree to pay and satisfy
86 Indian Contract Act, 1872 [S. 148

the Bank “on demand”. Limitation will run from the date of such demand
and re fu s a l/n o n -c o m p lia n c e th e r e o f — S y n d ic a te B a n k v
Channaveerappa (2006)11 SCC 506: AIR 2006 SC 1874.
The guarantor is also a debtor— E.P. G eroge v B a n k o f India AIR
2001 Ker 107.
Surety’s liability to pay loan am ount is co-extensive w ith that of prin­
cipal debtor. Bank can even proceed only against the guaranto r without
making the principal debtor a party or without first proceeding against
him — Darshan Kum ar v State B ank o f India AIR 2009 (NOC) 1982
(P&H).
Suit abates against principal debtor—whether surety can be held
liable.— Once the suit abates against the principal debtor, there remains
no case for the creditor to proceed against the surety — Syndicate Bank
vP . Somaiah AIR 2002 AP 12.
Caveat emptor.— It is not the duty of the seller to inform the pur­
chaser of the defects in the goods he is selling: it is the duty of the
purchaser to examine them and rely on his own judgm ent. The principle
applicable in such cases is “caveat emptor” (let the purchaser beware)
— Tamil Nadu Civil Supplies Corpn. v O swal S olvent E xtraction AIR
2002 Mad 35.

CHAPTER IX
Of bailment
S. 148. “Bailment”, “bailer”, and “bailee” defined.— A “bailment"
is the delivery of goods by one person to another for som e purpose,
upon a contract that they shall, when the purpose is accom plished, be
returned or otherwise disposed of according to the directions of the per­
son delivering them. The person delivering the goods is called the “bailor” .
The person to whom they are delivered is called the "bailee” .
Explanation.— If a person, already in possession of the goods of an­
other, contracts to hold them as bailee, he thereby becom es the bailee,
and the owner becomes the bailor, of such goods, although they may
not have been delivered by way of bailment.

NOTES
Bailee, who is a.— A seller becomes a bailee if he agrees to hold the
goods as such. When money is deposited in a bank on the condition
that same is to be paid against the future supplies to th e depositor, in
that case the bank becomes bailee— S hanti P rasad v D irector o f En­
forcement M R 1962 SC 1764: (1963) 2 SCR 297.
S. 149. Delivery to bailee how made.— The delivery to the bailee
may be made by doing anything which has the effect of putting the goods
in the possession of the intended bailee or of any person authorized to
hold them on his behalf.
S. 152] Indian Contract Act, 1872 87

S. 150. Bailor’s duty to disclose faults In goods balled— The

bailor is bound to disclose to the bailee faults in the goods bailed, of
w hich the bailor is aware, and which materially interfere with the use of
them , or expose the bailee to extraordinary risks; and if he does not
m ake such disclosure, he is responsible for damage arising to the bai­
lee directly from such faults.
If such goods are bailed for hire, the bailor is responsible for such
dam age, w hether he was or was not aware of the existence of such
faults in the goods bailed.
Illustrations
(a) A lends a horse, which he knows to be vicious, to B. He does
not disclose the fact that the horse is vicious. The horse runs
away. B is thrown and injured. A is responsible to B for dam­
age sustained.
(b) A hires a carriage of B. The carriage in unsafe, though B is not
aw are of it, and A is injured. B is responsible to A for the injury.
S. 151. Care to be taken by bailee.— In all cases of bailment the
bailee is bpund to take as much care of the goods bailed to him as a
man of ordinary prudence would, under sim ilar circumstances, take of
his own goods of the sam e bulk, quantity and value as the goods bailed.
S. 152. Bailee when not liable for loss, etc., of thing bailed.— The
bailee, in the absence of any special contract, is not responsible for the
loss, destruction or deterioration of the thing bailed, if he has taken the
am ount of care of it described in section 151.

NOTES
Duties of a bailee.— The duties of a bailee are to take all reasonable
precautions to obviate the risk which may be reasonably apprehended
and to take all proper m easures for the protection of the goods when
such risks are im m inent or had actually happened— C.C.C. Corpora­
tion v H.R.H. Prince P eter 68 CWN 554. A bailee is not an insurer of
goods. But once it is proved that he has failed to take reasonable care
the onus of show ing that he had taken reasonable care and the damage
had been caused because of factors beyond his power and that no
am ount of care would have averted the damage is upon him— C.C.C.
C orporation v H.R.H. Prince P eter 68 CWN 554. When the bailee ad­
duces no evidence and bailor adduces evidence to show negligence
the bailee is liable fo r the loss suffered for the bailor— N.R. Srinivasan
Iyer v N e w India A ssurance Co. AIR 1983 SC 899. By virtue of special
contract bailee m ay be liable for loss even if had taken care like a pru­
dent man — P a tn a ik & Co. v State o f Orissa AIR 1965 SC 1655.
In N. R. S rinivasan v N ew India Assurance Co. Ltd., Madras AIR
1983 SC 899: (1983)3 SCC 458, a m otor car which was insured with
88 Indian Contract Act, 1872 [S.153

the insurance com pany in respect of accident, loss or dam age. But the
car suffered dam age in accident due to a fire when the car was taken to
the work-shop for repair. The Suprem e Court held that the insurer and
the repairer being bailee and sub-bailee respectively are liable to ex­
plain the am ount of care taken by them and how they handled the mat­
ter. If the insurer fails to show that the repairer has failed to take proper
amount of care the repairer would be liable, if he (insurer) fails to explain
he will be liable.
Contract of bailment how arises.— There can be no bailm ent with­
out any enforceable contract— State of Gujarat v Memon Mahomed Haji
Hasan AIR 1967 SC 1885. But no consent is absolutely necessary for
the relationship of bailor and bailee — State o f Gujarat v Memon
Mahomed Haji Hasan AIR 1967 SC 1885. W hen deposit is made in
bank on condition that the money is to be the deposited, the bank is the
bailee — Shanti Prasad v Director of Enforcement AIR 1962 SC 1764.
S. 153. Termination of bailment by bailee’s act inconsistent with
conditions.— A contract of bailment is voidable at the option of the bailor,
if the bailee does any act with regard to the goods bailed, inconsistent
with the conditions of the bailment.
Illustration
A lets to B, for hire, a horse for his own riding. B drives the horse in
his carriage. This is, at the option of A, a termination of the bailment.
S. 154. Liability of bailee making unauthorised use of goods
bailed.— If the bailee makes any use of the goods bailed, which is not
according to the conditions of the bailment, he is liable to make com ­
pensation to the bailor for any damage arising to the goods from or dur­
ing such use of them.
Illustrations
(a) A lends a horse to B for his own riding only. B allows C, a
member of his family, to ride the horse. C rides with care, but
the horse accidentally falls and is injured. B is liable to make
compensation to A for the injury done to the horse.
( b) A hires a horse in Calcutta from B expressly to m arch to
Benaras. A rides with due care, but m arches to Cuttack in­
stead. The horse accidentally falls and is injured. A is liable to
make compensation to B for the injury to the horse.
S. 155. Effect of mixture, with bailor’s consent, of his goods
with bailee’s.— If the bailee, with the consent of the bailor, mixes the
goods of the bailor with his own goods, the bailor and the bailee shall
have an interest, in proportion to their respective shares, in the mixture
thus produced.
S. 160] Indian Contract Act, 1872 89

S. 156. Effect of mixture, without bailor’s consent, when the

goods can be separated.— If the bailee, without the consent of the
bailor, m ixes the goods of the bailor with his own goods, and the goods
can be separated or divided, the property in the goods remains in the
parties respectively; but the bailee is bound to bear the expense of sepa­
ration or division, and any dam age arising from the mixture.
Illustration
A bails 100 bales of cotton m arked with a particular mark to B. B,
without A 's consent, mixes the 100 bales with other bales of his own,
bearing a different mark. A is entitled to have his 100 bales returned,
and B is bound to bear all the expense incurred in the separation of the
bales, and any other incidental damage.
S. 157. Effect to mixture, without bailor’s consent, when the
goods cannot be separated.— If the bailee, without the consent of the
bailor, m ixes the goods of the bailor with his own goods, in such a man­
ner that it is im possible to separate the goods bailed from the other
goods, and deliver them back, the bailor is entitled to be compensated
by the bailee for the loss of goods.
Illustration
A bails a barrel of Cape flour worth Rs. 45 to B. B, without A ’s con­
sent, m ixes the flour with country flour of his own, worth only Rs. 25 a
barrel. B must com pensate A for the loss of his flour.
S. 158. Repayment, by bailor, of necessary expenses.— Where,
by the conditions of the bailment, the goods are to be kept or to be
carried, or to have work done upon them by the bailee for the bailor, and
the bailee is to receive no remuneration, the bailor shall repay to the
bailee the necessary expenses incurred by him for the purpose of the
bailment.
S. 159. Restoration of goods lent gratuitously.— The lender of a
thing for use may, at any tim e require its return, if the loan was gratu­
itous, even though he lent it for a specified time or purpose. But if, on the
faith of such loan made for a specified time or purpose, the borrower
has acted in such a m anner that the return of the thing lent before the
time agreed upon w ould cause him loss exceeding the benefit actually
derived by him from the loan, the lender must, if he compels the return,
indem nify the borrow er for the am ount in which the loss so occasioned
exceeds the benefit so derived.
S. 160. Return of goods bailed, on expiration of time or accom­
plishment of purpose.— It is the duty of the bailee to return, or deliver,
according to the bailo r’s directions, the goods bailed, without demand,
as soon as the tim e fo r w hich they were bailed has expired, or the pur­
pose for w hich th e y w ere bailed has been accomplished.
90 Indian Contract Act, 1872 [S. i6 i

S. 161. Bailee’s responsibility when goods are not duly re­

turned.— If, by the fault of the bailee, the goods are not returned, deliv­
ered or tendered at the proper time, he is responsible to the bailor for
any loss, destruction or deterioration of the goods from that time.
S. 162. Termination of gratuitous bailment by death.— A gratu­
itous bailment is terminated by the death either of the bailor or of the
bailee.
S. 163. Bailor entitled to increase or profit from goods bailed.—
In the absence of any contract to the contrary, the bailee is bound to
deliver to the bailor, or according to his directions, any increase or profit
which may have accrued from the goods bailed.
Illustration
A leaves a cow in the custody of B to be taken care of. The cow has
a calf. B is bound to deliver the calf as well as the cow to A.
S. 164. Bailor’s responsibility to bailee.— The bailor is responsible
to the bailee for any loss which the bailee may sustain by reason that
the bailor was not entitled to make the bailment, or to receive back the
goods, or to give directions respecting them.
S. 165. Bailment by several joint owners.— If several joint owners
of goods bail them, the bailee may deliver them back to, or according to
the directions of, one joint owner without the consent of all, in the ab­
sence of any agreement to the contrary.
S. 166. Bailee not responsible on redelivery to bailor without
title.— If the bailor has no title to the goods, and the bailee, in good faith,
delivers them back to, or according to the directions of, the bailor, the
bailee is not responsible to the owner in respect of such delivery.
S. 167. Right of third person claiming goods bailed. — If a per­
son, other than the bailor, claims goods bailed, he m ay apply to the
Court to stop delivery of the goods to the bailor, and to decide the title to
the goods.
S. 168. Right of finder of goods, may sue for specific reward
offered.— The finder of goods has no right to sue the ow ner fo r com ­
pensation for trouble and expense voluntarily incurred by him to pre­
serve the goods and to find out the owner; but he m ay retain the goods
against the owner until he receives such com pensation; and w here the
owner has offered a specific reward for the return of goods lost, the
finder may sue for such reward, and may retain the goods until he re­
ceives it.
S. 169. When finder of thing commonly on sale may sell it.—
When a thing which is commonly the subject of sale is lost, if the owner
cannot, with reasonable diligence, be found, or if he refuses, upon de­
mand, to pay the lawful charges of the finder, may sell it—
S. 172] Indian Contract Act, 1872 91

(1) when the thing is in danger of perishing or of losing the greater

part of its value, or
(2) when the lawful charges of the finder, in respect of the thing
found, am ount to two-thirds of its value.
S. 170. Bailee’s particular lien.— W here the bailee has, in accor­
dance with the purpose of the bailment, rendered any service involving
the exercise of labour or skill in respect of the goods bailed, he has, in
the absence of a contract to the contrary, a right to retain such goods
until he receives due remuneration for the services he has rendered in
respect of them.
Illustrations
(a) A delivers a rough diamond to B, a jeweller, to be cut and polis­
hed, which is accordingly done. B is entitled to retain the stone
till he is paid for the services he has rendered.
(b) A gives cloth to B, a tailor, to make into a coat. B promises A to
deliver the coat as soon as it is finished, and to give a three
m onths’ credit for the price. B is not entitled to retain the coat
until he is paid.
S. 171. General lien of bankers, factors, wharfingers, attorneys
and policy-brokers.— Bankers, factors, wharfingers, attorneys of a High
Court and policy-brokers may, in the absence of a contract to the con­
trary, retain as a security for a general balance of account, any goods
bailed to them ; but no other persons have a right to retain, as a security
fo r such balance, goods bailed to them, unless there is an express con­
tract to that effect.

NOTES
Of bailment.— Litigation papers and files cannot be equated with
“goods bailed” . Legal practitioner having no lien over such papers and
files fo r realising fee m ust return same to client on demand — R.D.
Saxena v B.P. Sharma (2000)7 SCC 264: AIR 2000 SC 2912.
Bank has a lien over the tw o F.D.Rs. Even otherwise, having regard
to the m ercantile custom as judicially recognised, the banker has such
a general lien o ver all form s of deposits and securities made by or on
behalf of th e custom er in the ordinary course of banking business —
Syndicate Bank v Vijay Kum ar (1992)2 SCC 330: AIR 1992 SC 1066;
J&K Bank Ltd. v Abdul Samad AIR 2008 J&K 1.
Bailments o f pledges
S. 172. “ Pledge”, “pawnor”, and ’’pawnee” defined.— The bail­
ment of g oods as security for paym ent of a debt or performance of a
prom ise is called “pledge” . The bailor is in this case called the “pawnor”.
The bailee is called the “paw nee” .
92 Indian Contract Act, 1872 [S .173

NOTES
Pledge.— To constitute a valid pledge must be (a) contract in rela­
tion to and identified chattel to be delivered to the pledgee as security,
and (b) actual delivery of possession of the identified chattel in pursu­
ance of the contract — Appa Rao v Salem Motors AIR 1955 Mad 505. A
pledge is the delivery of goods by the pledgee or to the pledgee by way
of security upon a contract that they shall, when the debt is paid or
promise is performed, be returned or otherwise disposed of according
to the direction of the pledgor — M. D. Sultan v Firm Rampratap Kannyalal
AIR 1964 AP 201. A bond, a promissory note for the loan and endorse­
ment of the R.R. in favour of the creditor together make the transaction
pledges of goods — Morvi Mercantile Bank v Union o f India AIR 1965
SC 1954. A pledge or pawn as defined in sec. 172 lies in between a loan
and mortgage — Padam Singh v Ramkrishan AIR 1954 MB 6.
Rights of pledges— Pledges cannot maintain an action for recovery
of debt and as well as retain the goods pledged. The pledgee can sue
on the debt or promise but that does not however, extinguish the right to
sell the pawn— C.A. Cherian v A. Menon AIR 1963 SC 132. G overn­
ment as creditor of pledgor has no superior right against the pawnee
whose dues must be satisfied before the dues of other creditors are
paid— Bank o f Bihar v State o f Bihar AIR 1971 SC 1210. The legal title
in goods pledged would not vest in the pawnee. So the pawnee could
not be treated as the holder of the shares pledged in its favour by the
company— Balkrishan Gupta vSw adeshiP olytex Ltd. AIR 1985 SC 520:
(1985)2 SCC 167.
A pledgee has the same remedies as the owner of the goods has
against a third person for deprivation or injury of goods— M orvi M ercan­
tile Bank v Union o f India AIR 1965 SC 1954: (1965)3 SCR 254: (1966)2
SCJ 6.
Goods reached its destination by railway on being properly booked
but the goods were neither delivered to the consignor’s agent in whose
favour Railway Receipt was endorsed nor kept in railway godown. The
goods were kept at the jetty where same were destroyed by fire. The
Supreme Court held that the Railway authorities were responsible to
compensate for the damages— Union o f India v H afiz B ashir Ahm ed
1987 (Supp) SCC 174.
S. 173. Pawnee’s right of retainer.— The pawnee m ay retain the
goods pledged, not only for payment of the debt or the perform ance of
the promise, but for the interests of the debt, and all necessary expenses
incurred by him in respect of the possession or for the preservation of
the goods pledged.
s. 178A] Indian Contract Act, 1872 93

S. 174. Pawnee not to retain for debt or promise other than that
for which goods pledged. Presumption in case of subsequent ad­
vances.— The pawnee shall not, in the absence of a contract to that
effect, retain the goods pledged for any debt or promise other than the
debt or prom ise for which they are pledged; but such contract, in the
absence of anything to the contrary, shall be presumed in regard to
subsequent advances made by the pawnee.
S. 175. Pawnee’s right as to extraordinary expenses incurred.—
The pawnee is entitled to receive from the pawnor extraordinary ex­
penses incurred by him for the preservation of the goods pledged.
S. 176. Pawnee’s right where pawnor makes default.— If the paw­
nor makes default in paym ent of the debt, or performance, at the stipu­
lated tim e or the prom ise, in respect of which the goods were pledged,
the pawnee m ay bring a suit against the pawnor upon the debt or prom­
ise, and retain the goods pledged as a collateral security; or he may sell
the thing pledged, on giving the pawnor reasonable notice of the sale.
If the proceeds of such sale are less than the am ount due in respect
of the debt or promise, the pawnor is still liable to pay the balance. If the
proceeds of the sale are greater than the am ount so due, the pawnee
shall pay over the surplus to the pawnor.
S. 177. Defaulting pawnor’s right to redeem.— If a tim e is stipu­
lated fo r the paym ent of the debt, or perform ance of the promise, for
which the pledge is m ade, and the pawnor makes default in payment of
the debt or perform ance of the prom ise at the stipulated time, he may
redeem the goods pledged at any subsequent tim e before the actual
sale of them ; but he must, in that case, pay, in addition, any expenses
which have arisen from his default.
S. 178. Pledge by mercantile agent.— W here a mercantile agent is,
with the consent of the owner, in possession of goods or the document
of title to goods, any pledge made by him, when acting in the ordinary
course of business of a m ercantile agent, shall be as valid as if he were
expressly authorised by the ow ner of the goods to make the same; pro­
vided that the paw nee acts in good faith, and has not at the time of the
pledge notice th a t the paw nor has not authority to pledge.
Explanation .— In this section, the expressions “mercantile agent"
and “docum ents of title” shall have the meanings assigned to them in
the Indian Sale of G oods Act, 1930 (3 of 1930).
S. 178A. Pledge by person In possession under voidable con­
tract.— W hen the paw nor has obtained possession of the goods pledged
by him under a contract voidable under section 19 or section 19A, but
the contract has not been rescinded at the time of the pledge, the pawnee
acquires a good title to the goods, provided he acts in good faith and
without notice of the paw nor’s defect of title.
94 Indian Contract Act, 1872 [S. 179

S. 179. Pledge where pawnor has only a limited interest.— Where

a person pledges goods in which he has only a limited interest, the pledge
is valid to the extent of that interest.

NOTES
Pawn or a pledge.— Under the common law a pawn or a pledge is a
bailment of personal property as a security for some debt or engage­
ment. A pawner is one who being liable to an engagement gives to the
person to whom he is liable a thing to be held as security for payment of
his debt or the fulfilment of his liability. The two ingredients of a pawn or
a pledge are: (1) that it is essential to the contract of pawn that the
property pledged should be actually or constructively delivered to the
pawnee; and (2) a pawnee has only a special property in the pledge but
the general property therein remains in the pawner and wholly reverts
to him on discharge of the debt. A pawn therefore is a security, where,
by contract a deposit of goods is made as security for a debt. The right
to property vests in the pledgee only so far as is necessary to secure
the debt. In that sense a pawn or pledge is an intermediate between a
simple lien and a mortgage which wholly passes the property in the
thing conveyed — Maharashtra State Co-operative Bank vAsst. Provi­
dent Fund Commissioner (2009)10 SCC 123.
Suits by bailees or bailors against wrong-doers
S. 180. Suit by bailor or bailee against wrong-doer.— If a third
person wrongfully deprives the bailee of the use of possession of the
goods bailed, or does them any injury, the bailee is entitled to use such
remedies as the owner might have used in the like case if no bailment
had been made; and either the bailor or the bailee may bring a suit against
a third person for such deprivation or injury.
S. 181. Apportionment of relief or compensation obtained by
such suits.— Whatever is obtained by way of relief or compensation in
any such suit shall, as between the bailor and the bailee, be dealt with
according to their respective interests.
CHAPTER X
Agency
Appointment and authority o f agents
S. 182. “Agent” and “principal” defined.— An "agent” is a person
employed to do any act for another, or to represent another in dealings
with third persons. The person for whom such act is done, or who is so
represented, is called the “principal”.

NOTES

Agency, have created.— Definition of agent given in sec. 182 is wider

S. 188] Indian Contract Act, 1872 95

than in English law. It is formed on contract expressed or implied by

which one of the parties codifies to the other the management of some
business to be transacted in his name or on his account and by which
the other agrees to do the business and render on account of it— Motilal
v Golden Tobacco Co. AIR 1957 MP 223; Sukumari Gupta v Dhirendra
Nath Roy Chowdhury AIR 1941 Cal 643. A servant works directly under
the control of the master whereas the principal can only direct the agent
what work and in which mode work is to be done— Shankar Sitaram v
Balkrishna Sitaram AIR 1956 SC 149; Chandi Prasad v State o f U.P.
AIR 1954 SC 354. The post office is ordinarily an agent of the sender—
I.T. Commr. v Patney & Co. AIR 1959 SC 1070. Retailers of food under
the Director of Rationing under an agreement of agency are not agents
of the Government. The title in the goods possess to them— Ghasiram v
State AIR 1967 Cal 568 (FB). A stockist under the control and supervi­
sion of the Government is not an agent of the Government— Ghasiram
v State AIR 1967 Cal 568; S.N. Barick v State o f West Bengal AIR 1963
Cal 79.
S. 183. Who may employ agent.— Any person who is of the age of
majority according to the law to which he is subject, and who is of sound
mind, may employ an agent.
S. 184. Who may be an agent.— As between the principal and third
persons, any person may become an agent, but no person who is not
of the age of majority and of sound mind can become an agent, so as to
be responsible to his principal according to the provisions in that behalf
herein contained.
S. 185. Consideration not necessary.— No consideration is nec­
essary to create an agency.
S. 186. Agent’s authority may be expressed or implied.— The
authority of an agent may be expressed or implied.
S. 187. Definitions of express and implied authority.—An author­
ity is said to be express when it is given by words spoken or written. An
authority is said to be implied when it is to be inferred from the circum­
stances of the case; and things spoken or written, or the ordinary course
of dealing, may be accounted circumstances of the case.
Illustration
A owns a shop in Serampur, living himself in Calcutta, and visiting
the shop occasionally. The shop is managed by B, and he is in the habit
of ordering goods from C in the name of A for the purpose of the shop,
and of paying for them out of A’s funds with A's knowledge. B has an
implied authority from A to order goods from C in the name of A for the
purposes of the shop.
S. 188. Extent of agent’s authority.— An agent, having an authority
to do an act has authority to do every lawful thing which is necessary in
order to do such act.
96 Indian Contract Act, 1872 [S. 189

An agent having an authority to carry on a business, has authority to

do every lawful thing necessary for the purpose, or usually done in the
course, of conducting such business.
Illustrations
(a) A is employed by B, residing in London, to recover at Bombay
a debt due to B. A may adopt any legal process necessary for
the purpose of recovering the debt, and m ay give a valid dis­
charge for the same.
(b) A constitutes B his agent to carry on his business of a ship­
builder. B may purchase tim ber and other materials, and hire
workmen, for the purpose of carrying on the business.

NOTES
Extent of authority of agent.— Every agent who has authority to
carry on the business has the implied authority to do w hatever is inci­
dental to the ordinary conduct of such business. He has implied author­
ity to purchase goods on credit— Valapad Co.op. Stores v Srinivasa
Iyer AIR 1964 Ker 176. The ordinary authority given in one part of the
power of attorney will not be cut down because there are ambiguous
and uncertain expressions elsewhere. The docum ent will have to read
as a whole for the interpretation of particular words used — Syed Abdul
Khader v Rani Reddy AIR 1979 SC 553. The statem ent of an agent in
course of business under a power-of-attorney is binding on the principal
in a criminal case against the principal— R.K. Dalmia v Delhi Adminis­
tration AIR 1962 SC 1821.
S. 189. Agent’s authority in an emergency.— An agent has au­
thority, in an emergency, to do all such acts for the purpose of protect­
ing his principal from loss as would be done by a person of ordinary
prudence, in his own case, under sim ilar circumstances.
Illustrations
(a) An agent for sale may have goods repaired if it be necessary.
(b) A consigns provisions to B at Calcutta, with directions to send
them immediately to C, at Cuttack. B may sell the provisions at
Calcutta, if they will not bear the journey to Cuttack without
spoiling.
Sub-agents
S. 190. When agent cannot delegate.— An agent cannot lawfully
employ another to perform acts which he has expressly or impliedly
undertaken to perform personally, unless by the ordinary custom of trade
a sub-agent may, or, from the nature of the agency, a sub-agent must,
be employed.
S. 191. “Sub-agent” defined.—A “sub-agent" is a person employed
by, and acting under the control of, the original agent in the business of
the agency.
s. 191] Indian Contract Act, 1872 97

NOTES
Sub A g e n t.— Under sections 190 and 191 — the sub-agent is a
person em ployed by and acting under the control of the agent. The prin­
cipal has no control over the sub-agent. The fact that after such em­
ployment, the sub-agent and the principal directly correspond - does
not convert the sub-agency into a case of substituted agency. Nor does
mere knowledge of the principal regarding the sub-agency creates any
direct privity. The term s for which the sub-agent works, under the agent
are different from the term s for which the agent works under the princi­
pal. Notwithstanding the employment of the sub-agent, the relationship
between the principal and agent continues. The agent continues to be
liable for the acts and negligence of the sub-agent — State Bank of
Hyderabad v Devara Konda 1983(2) APLJ 188. Referred to in Meet
Road Lines v United India Insurance AIR 2005 AP 485, para 18.
NRI. — V opened an NRI account with Canara Bank and he gave to
Canara Bank a bank draft for realisation. Canara Bank discounted the
draft and thereupon Canara Bank became virtually the owner of the
value of instrum ent. If the draft is lost in transit, Carana Bank would be
liable — Canara Bank v V/yay AIR 2004 Del 304.
Letter of appointm ent of agent of L.I.C. as well as relevant regulation
expressly prohibiting agent to collect premium on behalf of L.I.C., the
agent had neither actual nor apparent authority to receive premium on
behalf of L.I.C ., where nothing to show that L.I.C. induced insured to
believe that the agent had been so authorised by L.I.C. — HarshadJ.
Sha v L.I.C. o f India (1997)5 SCC 64: AIR 1997 SC 2459.
Power of Attorney.— General power of attorney and special power
of attorney. Power of attorney relates to various cases pending in courts.
It is a general pow er of attorney — Amina Begum v Md. Ramzan AIR
2005 Raj 41.
A w ritten pow er of attorney cannot be cancelled orally — Amina
Begum v Md. Ramzan AIR 2005 Raj 41.
A by virtue of pow er of attorney authorises B to deal with a property
B by m eans of forgery, m anipulates and sells the property to C. C is a
bona fide purchaser. A is bound by the transaction — Clifford George v
M.R. Shenava AIR 2005 Kant 167.
Execution of pow er of attorney to look after construction work. The
terms of pow er of attorney did not specifically authorise the power of at­
torney holder to incur loan liabilities in his personal capacity for the pur­
pose of construction. In general terms, he has been authorised to raise
loans and to encum ber the property as a security. Such general authority
cannot constitute in law to authorise him to incur personal liability. The
power of attorney in order to be one coupled with interest under sec. 202

[12] ICA — 7
98 Indian Contract Act, 1872 [S. 191

the property should have been given as a security to the agency along
with possession; but, any liability incurred after creation of the agency
voluntarily by the agent does not make a power of attorney coupled with
interest — Ishwarappa vArun Kumar AIR 2004 Kant 416.
Principal and agent.— The relationship of principal and agent may
be constituted either by express appointment by the principal or by im­
plication of law or by subsequent ratification by the principal of acts lone
on his behalf. The agent within the ambit of his authority deputises for
his principal. Law does not require ordinarily a contract of the agency to
be created in writing except where the statute specifically requires the
authority in writing. The agent carrying out his undertaking within the
scope of his authority binds his principal as acts of agents are deemed
to be those of his principal — M/s. Laxmi Ginning and Oil Mills v M/s.
Amrit Banaspati Co. Ltd. AIR 1962 Punj 56.
An agent cannot be treated in joint possession with the principal,
even if he had been collecting rent from the tenant. Possession of the
tenant is the possession of the principal; and in view of the fiduciary
relationship, the agent cannot claim his own possession. Even if he had
collected rent after the death of the principal - the agent cannot claim
adverse possession — Chandrakantaben v VadilalA\R 1969 SC 1269,
1277 relying on David Lyell v John Lamson (1889)14 App Cas 437.
Express authority to agent to manage the property of the principal in
his absence. Agent inducted a licensee. Principal subsequently ratified
the act of the agent. Principal or his transferee can sue for possession
after revoking licence by means of mandatory injunction, while posses­
sion is asked for in essence suit for mandatory injunction is maintain­
able as held in Sant Lai v Avtar Singh AIR 1985 SC 857; Kamlesh v
Jasbir A\R 2004 Punj 216.
Agent collects rent from tenants. His possession is possession of
principal. He cannot be held to be in joint possession of the property
with the principal — Chandrakantaben v Vadilal Bapala AIR 1989 SC
1269.
An agent who received property or money from or for his principal
obtains no interest for himself in the property. He is bound to keep such
property separate from his own and that of others — Southern Road­
ways v S.M. Krishnan AIR 1990 SC 673 (para 7).
In view of fiduciary relationship the possession of agent is the pos­
session of the principal. So the agent cannot claim adverse possession
until he renounces his character as an agent — Southern Roadways v
S.M. Krishnan AIR 1990 SC 673 (para 13).
Commission agent hired a godown for business of the principal. Term
was that the godown will be occupied by the principal even if agent is
removed. Principal can occupy such godown even after removal of the
S. 195] Indian Contract Act, 1872 99

agent who cannot oppose — Southern Roadways v S.M. Krishnan AIR

1990 SC 673.
Com pany engaged in transport business. It engaged a commission
agent and placed a godown at his disposal. On term ination of agency
the agent cannot interfere with the possession of the godown by the
com pany — Southern Roadways v S.M. Krishnan AIR 1990 SC 673.
S. 192. Representation of principal by sub-agent properly ap­
pointed.— W here a sub-agent is properly appointed, the principal is, so
far as regards third persons, represented by the sub-agent, and is bound
by and responsible for his acts, as if he were an agent originally ap­
pointed by the principal.
Agent's responsibility for sub-agent.— The agent is responsible to
the principal fo r the acts of the sub-agent.
Sub-agent’s responsibility.— The sub-agent is responsible for his acts
to the agent, but not to the principal, except in cases of fraud or wilful
wrong.
S. 193. Agent’s responsibility for sub-agent appointed without
authority.— W here an agent, without having authority to do so, has ap­
pointed a person to act as a sub-agent, the agent stands towards such
person in the relation of a principal to an agent, and is responsible for
his acts both to the principal and to third persons; the principal is not
represented by or responsible for the acts of the person so employed,
nor is that person responsible to the principal.
S. 194. Relation between principal and person duly appointed
by agent to act in business of agency.— W here an agent, holding an
express or im plied authority to name another person to act for the prin­
cipal in the business of the agency, has named another person accord­
ingly, such person is not a sub-agent, but an agent of the principal for
such part of the business of the agency as is entrusted to him.
Illustrations
(a) A directs S, his solicitor, to sell his estate by auction, and to
em ploy an auctioneer for the purpose. B names C, an auction­
eer, to conduct sale. C is not a sub-agent, but is A's agent for
the conduct of the sale.
(b) A authorizes B, a merchant in Calcutta, to recover the moneys
due to A from C & Co. B instructs D, a solicitor, to take legal
proceedings against C & Co. for the recovery of the money. D
is not a sub-agent but is solicitor for A.
S. 195. Agent’s duty in naming such person.— In selecting such
agent for his principal, an agent is bound to exercise the same amount
of discretion as a man of ordinary prudence would exercise in his own
case; and, if he does this, he is not responsible to the principal for the
acts or negligence of the agent so selected.
100 Indian Contract Act, 1872 [S. 196

Illustrations
(a) A instructs B, a merchant, to buy a ship for him. B employs a
ship-surveyor of good reputation to choose a ship for A. The
surveyor makes the choice negligently and the ship turns out
to be unseaworthy and is lost. B is not, but the surveyor, is
responsible to A.
(b) A consigns goods to B, a merchant, for sale. B, in due course,
employs an auctioneer in good credit to sell the goods of A,
and allows the auctioneer to receive the proceeds of the sale.
The auctioneer afterwards becomes insolvent without having
accounted for the proceeds. B is not responsible to A for the
proceeds.
Ratification
S. 196. Right of person as to acts done for him without his au­
thority. Effect of ratification.—Where acts are done by one person on
behalf of another but without his knowledge or authority, he may elect to
ratify or to disown such acts. If he ratifies them, the same effects will
follow as if they had been performed by his authority.
S. 197. Ratification may be expressed or implied.— Ratification
may be expressed or may be implied in the conduct of the person on
whose behalf the acts are done.
Illustrations
(a) A, without authority, buys goods for B. Afterwards B sells them
to C on his own account; B’s conduct implies a ratification of
the purchase made for him by A.
(b) A, without B ’s authority, lends B ’s money to C. Afterwards B
accepts interest on the money from C. B’s conduct implies a
ratification of the loan.
S. 198. Knowledge requisite for valid ratification.— No valid ratifi­
cation can be made by a person whose knowledge of the facts of the
case is materially defective.
S. 199. Effect of ratifying unauthorized act forming part of a
transaction.—A person ratifying any unauthorized act done on his be­
half ratifies the whole of the transaction of which such act formed a part.
S. 200. Ratification of unauthorized act cannot injure third per­
son.— An act done by one person on behalf of another, without such
other person’s authority, which, if done with authority would have the
effect of subjecting a third person to damages, or of terminating any
right or interest of a third person, cannot, by ratification, be made to
have such effect.

Illustrations
(a) A, not being authorized thereto by B, demands, on behalf of B,
the delivery of a chattel, the property of B, from C who is in
S. 202] Indian Contract Act, 1872 101

possess of it. This demand cannot be ratified by B, so as to

make C liable for damages for his refusal to deliver.
(b) A holds a lease from B, terminable on three month’s notice. C,
an unauthorized person, gives notice of termination to A. The
notice cannot be ratified by B, so as to be binding on A.
Revocation of authority
S. 201. Termination of agency—An agency is terminated by the
principal revoking his authority; or by the agent renouncing the busi­
ness of the agency; or by the business of the agency being completed;
or by either the principal or agent dying or becoming of unsound mind;
or by the principal being adjudicated an insolvent under the provisions
of any Act for the time being in force for the relief of insolvent debtors.

NOTES
Termination of agency.— Section 201 is not exhaustive. It does not
mention all the circumstances in which an agency can be terminated.
The section is illustrative. The question whether in particular circum­
stances agency has been terminated is to be decided upon the general
principle of law — Development of Industries v I.T. Commr. AIR 1968
Cal 492. Agency unless it is for a fixed period can be terminated at
principal’s pleasure — Premji Damodar v Firm L V. Govindji & Co. AIR
1943 Sind 197. When the period of agency is not fixed reasonable no­
tice is necessary to terminate the agency. Three months notice is held
reasonable — J. K. Sayani v Bright Bros. AIR 1980 Mad 162. Agency of
bank collecting moneys and sending drafts terminating on the termina­
tion of business, that is, on dispatching drafts— In re, Noakhali Union
Bank Ltd. 54 CWN 747.
Effect of revocation of agency.—The possession of the agent of a
suit premises is on behalf of the company and not on his own right. It is,
therefore, unnecessary for the company to file a suit for recovery of
possession. The agent has no right to remain in possession of the suit
premises after termination of his agency. He has also no right to inter­
fere with the company’s business. The principal has right to carry on
business as usual after the removal of his agent —Southern Roadways
Ltd. vS.M. Krishnan AIR 1990 SC 673.
S. 202. Termination of agency, where agent has an interest in
subject-matter.—Where the agent has himself an interest in the prop­
erty which forms the subject-matter of the agency, the agency cannot,
in the absence of an express contract, be terminated to the prejudice of
such interest.
Illustrations
(a) A gives authority to B to sell A's land, and to pay himself, out of
the proceeds, the debts due to him from A. A cannot revoke
this authority, nor can it be terminated by his insanity or death.
102 Indian Contract Act, 1872 [S. 20 3

(b) A consigns 1,000 bales of cotton to B, who has made advances

to him on such cotton, and desires B to sell the cotton, and to
repay himself, out of the price the am ount of his own advances
A cannot revoke this authority, nor is it term inated by his insan­
ity or death.
S. 203. When principal may revoke agent’s authority.— The prin­
cipal may, save as is otherwise provided by the last preceding section,
revoke the authority given to his agent at any tim e before the authority
has been exercised so as to bind the principal.
S. 204. Revocation where authority has been partly exercised.—
T he principal cannot revoke the authority given to his agent after the
authority has been partly exercised, so far as regards such acts and
obligations as arise from acts already done in the agency.
Illustrations
(a) A authorizes B to buy 1,000 bales of cotton on account of A
and to pay for it out of /Vs moneys remaining in B's hands. B
buys 1,000 bales of cotton in his own name, so as to make
him self personally liable for the price. A cannot revoke B ’s au­
thority so far as regards paym ent for the cotton.
(b) A authorizes B to buy 1.000 bales of cotton on account of A,
and to pay for it out of /Vs moneys remaining in B ’s hands. B
buys 1,000 bales of cotton in /Vs name, and so as not to render
him self personally liable for the price. A can revoke B ’s au­
thority to pay for the cotton.
S. 205. Compensation for revocation by principal, or renuncia­
tion by agent.— W here there is an express or implied contract that the
agency should be continued for any period of time, the principal must
m ake com pensation to the agent, or the agent to the principal, as the
case m ay be, for any previous revocation or renunciation of the agency
w ithout sufficient cause.
S. 206. Notice of revocation or renunciation.— Reasonable no­
tice m ust be given of such revocation or renunciation, otherwise the
dam age thereby resulting to the principal or the agent, as the case may
be, m ust be made good to the one by the other.
S. 207. Revocation and renunciation may be expressed or im­
plied.— Revocation and renunciation may be expressed or may be im­
plied in the conduct of the principal or agent respectively.
Illustration
A em powers B to let /Vs house. Afterwards A lets it himself. This is
an im plied revocation of B 's authority.
S. 208. When termination of agent’s authority takes effect as to
agent, and as to third persons.— The termination of the authority of an
S. 211] Indian Contract Act, 1872 103

agent does not, so far as regards the agent, take effect before it be­
com es known to him, or, so far as regards third persons, before it be­
com es known to them.
Illustrations
(a) A directs B to sell goods for him, and agrees to give B five per
cent comm ission on the price fetched by the goods. A after­
wards by letter, revokes B 's authority. B, after the letter is sent,
but before he receives it, sells the goods for 100 rupees. The
sale is binding on A, and B is entitled to five rupees as his
commission.
( b) A, at Madras, by letter directs B to sell for him som e cotton
lying in a warehouse in Bombay, and afterwards, by letter, re­
vokes his authority to sell, and directs B to send the cotton to
Madras. B, after receiving the second letter, enters into a con­
tract with C, who knows of the first letter, but not of the second,
for the sale to him of the cotton. C pays B the money, with
which B absconds. C ’s payment is good as against A.
(c) A directs B, his agent, to pay certain money to C. A dies, and D
takes out probate to his will. B, after A ’s death, but before hear­
ing of it, pays the money to C. The payment is good as against
D, the executor.
S. 209. Agent’s duty on termination of agency by principal’s
death or insanity.— When an agency is terminated by the principal dying
or becom ing of unsound mind, the agent is bound to take, on behalf of
the representatives of his late principal, all reasonable steps for the pro­
tection and preservation of the interests entrusted to him.
S. 210. Termination of sub-agent’s authority.— The termination of
the authority of an agent causes the termination (subject to the rules
herein contained regarding the termination of an agent’s authority) of
the authority of all sub-agents appointed by him.
Agent’s duty to principal
S. 211. Agent’s duty in conducting principal’s business.— An
agent is bound to conduct the business of his principal according to the
directions given by the principal, or in the absence of any such direc­
tions according to the custom which prevails in doing business of the
same kind at the place where the agent conducts such business. When
the agent acts otherwise, if any loss be sustained, he must make it good
to his principal, and if any profit accrues, he must account for it.
Illustrations
(a) A, an agent engaged in carrying on for B a business, in which
it is the custom to invest from time to time, at interest, the mon­
eys w hich m ay be in hand, on its to make such investments. A
104 Indian Contract Act, 1872 [S. 212

must make good to B the interest usually obtained by such

investments.
(b) B, a broker in whose business it is not the custom to sell on
credit, sells goods of A on credit to C, whose credit at the time
was very high. C, before payment, becom es insolvent. B must
make good the loss to A.

NOTES
Agent’s duties.— An agent to collect rent and remit money is liable
until he pays the money collected by him — In re, Calcutta National
Bank AIR 1955 Cal 91. He is entitled to be identified by the principal for
the loss suffered by him in carrying out the direction of the principal —
State o f West Bengal v Subodh Gopal Bose AIR 1954 SC 100. The
prin cip a l is e ntitled to recover from the agent only the actual loss
sustained by him if the agent neglects or commits breach of duty —
Gambhirmull v Indian Bank Ltd. AIR 1963 Cal 163. W hen the agent
failed to insure goods on being directed by the principal and the goods
are dam aged by fire the agent is liable— Firm Pannalal Jankidas v
Mohanlal AIR 1951 SC 144. W hen the agent enters into contract on
behalf of an inclosed principal the agent is alone liable — J. Thomas &
Co. v Bengal Jute Bailing Co. AIR 1979 Cal 20.
S. 212. Skill and diligence required from agent.— An agent is bound
to conduct the business of the agency with as much skill as is generally
possessed by persons engaged in sim ilar business, unless the princi­
pal has notice of his w ant of skill. The agent is always bound to act with
reasonable diligence, and to use such skill as he possesses; and to
m ake com pensation to his principal in respect of the direct conse­
quences of his own neglect, want of skill, or misconduct, but not in re­
spect of loss or damage which are indirectly or remotely caused by
such neglect, want of skill, or misconduct.
Illustrations
(a) A, merchant in Calcutta, has an agent, B, in London, to whom
a sum of money is paid on A's account, with orders to remit. B
retains the money for a considerable time. A, in consequence
of not receiving the money, becom es insolvent. B is liable for
the money and interest, from the day on which it ought to have
been paid, according to the usual rate, and for any further di­
rect loss— as, e.g., by variation of rate of exchange— but not
further.
(b) A, an agent for the sale of goods, having authority to sell on
credit, sells to S o n credit, without making the proper and usual
enquiries as to the solvency of B. B, at the time of such sale, is
insolvent. A must make com pensation to his principal in re­
spect of any loss thereby sustained.
S. 215] Indian Contract Act, 1872 105

( c) A, an insurance-broker employed by B, to effect an insurance

on a ship, omits to see that the usual clauses are inserted in
the policy. The ship is afterwards lost. In consequence of the
omission of the clauses nothing can be recovered from the un­
derwriters. A is bound to make good the loss to 6.
(d) A, a merchant in England, directs B, his agent at Bombay, who
accepts the agency, to send him 100 bales of cotton by a cer­
tain ship. B, having it in his power to send the cotton, om its to
do so. The ship arrives safely in England. Soon after her ar­
rival, the price of cotton rises. B is bound to make good to A
profit which he might have made by the 100 bales of cotton at
the tim e the ship arrived, but not any profit he might have made
by the subsequent rise.
S. 213. Agent’s accounts.— An agent is bound to render proper
accounts to his principal on demand.

NOTES
Agent’s duty to account.— An agent cannot ordinarily sue the prin­
cipal for accounts. An agent can sue his principal on equitable ground,
when all papers are in possession of principal, to determine the com ­
mission— Narandas MorandasvS.P.A.M. Papammal AIR 1967 SC 333.
But his right to sue for accounts may arise only in exceptional cases
nam ely when he cannot sue for specified am ount without proper ac­
counts — Narandas Morandas v S.P.A.M. Papammal AIR 1967 SC
333.
S. 214. Agent’s duty to communicate with principal.— It is the
duty of an agent, in cases of difficulty, to use all reasonable diligence in
com m unicating with his principal, and in seeking to obtain his instruc­
tions.
S. 215. Right of principal when agent deals, on his own account,
in business of agency without principal’s consent.— If an agent deals
on his own account in the business of the agency, without first obtaining
the consent of his principal and acquainting him with all material circum­
stances w hich have com e to his own knowledge on the subject, the
principal m ay repudiate the transaction, if the case shows, either that
any material fact has been dishonestly concealed from him by the agent,
or that the dealings of the agent have been disadvantageous to him.
Illustrations
(a) A directs B to sell A's estate. B buys the estate for himself in
the nam e of C. A, on discovering that B has bought the estate
fo r him self, m ay repudiate the sale, if he can show that B has
dishone stly concealed any material fact, or that the sale has
been disadvantageous to him.
106 Indian Contract Act, 1872 [S. 216

(b) A directs B to sell A s estate. B, on looking over the estate

before selling it, finds a mine on the estate which is unknown to
A. B inform s A that he wishes to buy the estate for himself, but
conceals the discovery of the mine. A allows 6 to buy, in igno­
rance of the existence of mine. A, on discovering that B knew
of the mine at the tim e he bought the estate, may either repudi­
ate or adopt the sale at his option.
S. 216. Principal’s right to benefit gained by agent dealing on
his own account on business of agency.— If an agent, w ithout the
knowledge of his principal, deals in the business of the agency on his
own account instead of on account of his principal, the principal is en­
titled to claim from the agent any benefit which may have resulted to him
from the transaction.
Illustration
A directs B, his agent, to buy a certain house for him. B tells A it
cannot be bought, and buys the house for himself. A may, on discover­
ing that 6 has bought the house, compel him to sell it to A at the price he
gave for it.
S. 217. A gent’s right of retainer out of sums received on
principal’s account.— An agent may retain, out of any sums received
on account of the principal in the business of the agency, all moneys
due to him self in respect of advances made or expenses properly in­
curred by him in conducting such business, and also such remunera­
tion as may be payable to him for acting as agent.
S. 218. Agent’s duty to pay sums received for principal.— Sub­
ject to such deductions, the agent is bound to pay to his principal all
sums received on his account.
S. 219. When agent’s remuneration becomes due.— In the ab­
sence of any special contract, payment for the perform ance of any act
is not due to the agent until the completion of such act; but an agent may
detain moneys received by him on account of goods sold, although the
whole of the goods consigned to him for sale may not have been sold,
or although the sale may not be actually complete.
S. 220. Agent not entitled to remuneration for business miscon­
ducted.— An agent who is guilty of misconduct in the business of the
agency, is not entitled to any remuneration in respect of that part of the
business which he has misconducted.
Illustrations
(a) A employs B to recover 1,00,000 rupees from C, and to lay it
out on good security. 6 recovers the 1,00,000 rupees, and lays
out 90,000 rupees on good security, but lays out 10,000 ru­
pees on security which he ought to have known to be bad,
S. 223] Indian Contract Act, 1872 107

w hereby A losses 2,000 rupees. 8 is entitled to remuneration

for recovering the 1.00,000 rupees and for investing the 90,000
rupees. He is not entitled to any remuneration for investing the
10,000 rupees, and he must make good the 2,000 rupees to B.
(b) A em ploys 8 to recover 1,000 rupees from C. Through 8 s mis­
conduct the m oney is not recovered. 8 is entitled to no remu­
neration fo r his services, and must make good the loss.
S. 221. Agent’s lien on principal’s property.— In the absence of
any contract to the contrary, an agent is entitled to retain goods, papers,
and other property, w hether movable or immovable, of the principal re­
ceived by him, until the am ount due to himself for commission, disburse­
m ents and services in respect of the same has been paid or accounted
for to him.
Principal’s duty to agent
S. 222. Agent to be indemnified against consequences of lawful
acts.— T he e m ployer of an agent is bound to indemnify him against the
consequence of all lawful acts done by such agent in exercise of the
authority conferred upon him.
Illustrations
(a) B, at Singapur, under instructions from A of Calcutta, contracts
w ith C to deliver certain goods to him. A does not send the
goods to 8, and C sues 8 for breach of contract. 8 informs A of
th e suit, and A authorises him to defend the suit. 8 defends the
suit, and is com pelled to pay dam ages and costs, and incurs
expenses. A is liable to 8 for such damages, costs and ex­
penses.
(b) 8, a broker at Calcutta, by the orders of A, a merchant there,
contracts with C fo r the purchase of 10 casks of oil for A. After­
w ards A refuses to receive the oil, and C sues 8. 8 informs A,
w ho repudiates the contract altogether. 8 defends, but unsuc­
cessfully, and as to pay dam ages and costs and incurs ex­
penses. A is liable to 8 for such damages, costs and expenses.
S. 223. Agent to be indemnified against consequences of acts
done in good faith.— W here one person employs another to do an act,
and the age n t does the act in good faith, the employer is liable to indem­
nify the age n t against the consequences of that act, though it cause an
injury to the rights of third persons.
Illustrations
(a) A, a decree-holder and entitled to execution of B's goods, re­
quires the officer of the Court to seize certain goods, repre­
senting them to be the goods of 8. The officer seizes the goods,
and is sued by C, the true owner of the goods. A is liable to
108 Indian Contract Act, 1872 [S. 224

indem nify the officer for the sum which he is com pelled to pay
to C, in consequence of obeying A s directions.
(b) B, at the request of A, sells goods in the possession of A, but
which A had no right to dispose of. B does not know this, and
hands over the proceeds of the sale to A. Afterwards C, the
true ow ner of the goods, sues B and recovers the value of the
goods and costs. A is liable to indem nify B for what he has
been com pelled to pay to C, and for B ’s own expenses.
S. 224. Non-liability of employer of agent to do a criminal act.—
W here one person employs another to do an act which is criminal, the
em ployer is not liable to the agent, either upon an express or an implied
prom ise to indem nify him against the consequences of that act.
Illustrations
(a) A em ploys 6 to beat C, and agrees to indem nify him against all
consequences of the act. 6 thereupon beats C, and has to pay
dam ages to C for so doing. A is not liable to indem nify B for
those damages.
(b) B, the proprietor of a newspaper, publishes, at A's request a
libel upon C in the paper, and A agrees to indemnify B against
the consequences of the publication, and all costs and dam ­
ages of any action in respect thereof. B is sued by C and has to
pay damages, and also incurs expenses. A is not liable to B
upon the indemnity.
S. 225. Compensation to agent for injury caused by principal’s
neglect.— The principal must make compensation to his agent in re­
spect of injury caused to such agent by the principal’s neglect or want of
skill.
Illustration
A em ploys B as a bricklayer in building a house, and puts up the
scaffolding himself. The scaffolding is unskilfully put up, and B is in con­
sequence hurt. A must make compensation to B.
Effect of agency on contracts with third persons
S. 226. Enforcement and consequences of agent’s contracts.—
Contracts entered into through an agent, and obligations arising from
acts done by an agent, may be enforced in the same manner, and will
have the same legal consequences as if the contracts had been en­
tered into the acts done by the principal in person.
Illustrations
(a) A buys goods from B, knowing that he is an agent for their
sale, but not knowing who is the principal. B ’s principal is the
person entitled to claim from A the price of the goods, and A
cannot, in a suit by the principal set-off against that claim a
debt due to himself from B.
S. 230] Indian Contract Act, 1872 109

(b) A, being B ’s agent, with authority to receive money on his be­

half receives from C a sum of money due to B. C is discharged
of his obligation to pay the sum in question to B.
S. 227. Principal how far bound, when agent exceeds authority.—
When an agent does more than he is authorized to do, and when the part
of what he does, which is within his authority, can be separated from the
part which is beyond his authority, so much only of what he does as is
within his authority, is binding as between him and his principal.
Illustration
A, being ow ner of a ship and cargo, authorizes S to procure an insur­
ance for 4,000 rupees on the ship. B procures a policy for 4,000 rupees
on the ship, and another for the like sum on the cargo. A is bound to pay
the prem ium fo r the policy on the ship, but not the premium for the policy
on the cargo.
S. 228. Principal not bound when excess of agent’s authority is
not separable.— W here an agent does more than he is authorized to
do, and w hat he does beyond the scope of his authority cannot be sepa­
rated from w hat is w ithin it, the principal is not bound to recognize the
transaction.
Illustration
A authorizes S to buy 500 sheep for him. 6 buys 500 sheep and 200
lam bs fo r one sum of 6,000 rupees. A may repudiate the whole transac­
tion.
S. 229. Consequences of notice given to agent.— Any notice given
to, or inform ation obtained by the agent, provided it be given or obtained
in the course of the business transacted by him for the principal, shall,
as betw een the principal and third parties, have the same legal conse­
quences as if it had been given to or obtained by the principal.
Illustrations
(a) A is em ployed by B to buy from C certain goods, of which C is
the apparent owner, and buys them accordingly. In the course
of the treaty for the sale, A learns that the goods really be­
longed to D, but B is ignorant of that fact. B is not entitled to set­
off a debt ow ing to him from C against the price of the goods.
(b) A is employed by B to buy from C goods of which C is the appar­
ent owner. A was, before he was so employed, a servant of C,
and then learnt that the goods really belonged to D, but B is igno­
rant of that fact. In spite of the knowledge of his agent, B may set­
off against the price of the goods a debt owing to him from C.
S. 230. Agent cannot personally enforce, nor be bound by, con­
tracts on behalf of principal.— In the absence of any contract to that
effect, an agent cannot personally enforce contracts entered into by
him on behalf of his “principal” , nor is he personally bound by them.
110 Indian Contract Act, 1872 [S. 231

Presumption of contract to contrary.—S uch a contract shall be pre­

sumed to exist in the following cases:—
(1) where the contract is made by an agent for the sale or pur­
chase of goods for a merchant resident abroad;
(2) where the agent does not disclose the name of his principal;
(3) where the principal, though disclosed, cannot be sued.
S. 231. Rights of parties to a contract made by agent not dis­
closed.— If an agent makes a contract with a person who neither knows,
nor has reason to suspect, that he is an agent, his principal may require
the performance of the contract, but the other contracting party has, as
against the principal, the same rights as he would have had as against
the agent, if the agent had been principal.
If the principal discloses himself before the contract is completed,
the other contracting party may refuse to fulfil the contract, if he can
show that, if he had known who was the principal in the contract, or if he
had known that the agent was not a principal, he would not have en­
tered into the contract.
S. 232. Performance of contract with agent supposed to be prin­
cipal.— Where one man makes a contract with another, neither know­
ing, nor having reasonable ground to suspect that the other is an agent,
the principal, if he requires the performance of the contract, can only
obtain such performance subject to the rights and obligations subsisting
between the agent and the other party to the contract.
Illustration
A, who owes 500 rupees to B, sells 1,000 rupees worth of rice to B.
A is acting as agent for C in the transaction, but B has no knowledge nor
reasonable ground of suspicion that such is the case. C cannot compel
B to take the rice without allowing him to set-off A s debt.
S. 233. Right of person dealing with agent personally liable.— In
cases where the agent is personally liable, a person dealing with him
may hold either him or his principal, or both of them liable.
Illustration
A enters into a contract with B to sell him 100 bales of cotton, and
afterwards discovers that B was acting as agent for C. A may sue ei­
ther B or C or both, for the price of the cotton.
S. 234. Consequence of inducing agent or principal to act on
behalf that principal or agent will be held exclusively liable— When
a person who has made a contract with an agent induces the agent to
act upon the belief that the principal only will be held liable, or induces
the principal to act upon the belief that the agent only will be held liable,
he cannot afterwards hold liable the agent or principal respectively.
S. 235. Liability of pretended agent. — A person untruly repre­
senting himself to be the authorized agent of another, and thereby in­
ducing a third person to deal with him as such agent, is liable, if his
S. 238] Indian Contract Act, 1872 ill

alleged employer does not ratify his acts, to make compensation to the
other in respect of any loss or damage which he has incurred by so
dealing.
S. 236. Person falsely contracting as agent, not entitled to per­
formance— A person with whom a contract has been entered into, in
the character of agent, is not entitled to require the performance of it, if
he was in reality acting, not as agent, but on his own account.
S. 237. Liability of principal inducing belief that agent's unau­
thorized acts were authorized.— When an agent has, without author­
ity, done acts or incurred obligations to third persons on behalf of his
principal, the principal is bound by such acts or obligations, if he has by
his words or conduct induced such third persons to believe that such
acts and obligations were within the scope of the agent’s authority.
Illustrations
(a) A consigns goods to B for sale, and gives him instructions not
to sell under a fixed price. C, being ignorant of B ’s instructions,
enters into a contract with S to buy the goods at a price lower
than the reserved price. A is bound by the contract.
(b) A entrusts B with negotiable instruments endorsed in blank. B
sells them to C in violation of private orders from A. The sale is
good.
S. 238. Effect, on agreement, of misrepresention or fraud by
agent.— Misrepresentations made, or frauds committed, by agents act­
ing in the course of their business for their principals, have the same
effect on agreements made by such agents as if such misrepresenta­
tions or frauds had been made or committed by the principals; but mis­
representations made, or frauds committed by agents, in matters which
do not fall within their authority, do not affect their principals.
Illustrations
(a) A, being B ’s agent for the sale of goods induces C to but them
by a misrepresentation, which he was not authorized by B to
make. The contract is voidable, as between B and C, at the
option of C.
(b) A, the captain of B 's ship, signs bills of lading without having
received on board the goods mentioned therein. The bills of
lading are void as between B and the pretended consignor.

CHAPTER XI
Of Partnership
[Rep. by the Indian Partnership Act, 1932 (9 of 1932), s. 73 andSch.
Il\.
SCHEDULE.— [Enactments repealed.] Rep. by the Repealing and
Amending Act, 1914 (10 of 1914), s. 3 and Sch. II.