Business Law I (English Version)-munotes

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MODULEI1THE INDIAN CONTRACT ACT 1872:INTRODUCTION TO LAW OF CONTRACTAgreements & ContractsUnit Structure1.0Objectives1.1Introduction1.2Meaning of Agreements1.3Meaning of Contracts1.4Essential Elements of Valid Contract1.5Summary1.6Questions1.0 OBJECTIVESAfter studying the unit, the students will be able to:•Understand the meaning of Law.•Know the meaning of Agreement and kinds of Agreement.•Explain the meaning Contract and essentials of valid contract.1.1 INTRODUCTION‘Lawin simple term means ‘rulesor the system of rules which a particularcountry or community recognizes as regulating the actions of its membersand which it may enforce by the imposition of penalties. It is a very wideterm and includes different sets of rules regulating external human actionsand conduct of individuals in their dealing with other individuals and withthe Government.Definitions of Law:Salmonddefined law as “the body of principles recognized andapplied by the State in the administration of justice”Hollanddefined law as “rule of external human action enforced bySovereign Political Authority”.munotes.in

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Austinhas defined law as “A law is a rule of conduct imposed andenforced by the Sovereign”.The Indian Contract Act was passed and implemented tocontrol variouskinds of commercial and business activities. It deals with generalprincipals of the Law of Contract and Special Contract.The Contract Act came into force on 1stSeptember 1872. The act isapplicable to the whole of India except for theState of Jammu andKashmir. The preamble of the Contract Act states where it is expedient todefine and amend certain parts of the law relating to contracts. Therefore,this act is not a complete code of contracts.The Law of Contract is the most importantbranch Business Law. It playsan important role in our day to day life and more in case of Trade,Commerce and Industry. The partnership Act, The sale of Goods Act, TheMaharashtra Co-Operative Societies Act, The Negotiable Instruments Act,The Companies Act, Corporate Laws, The Consumer Protection actbelongs to the law of contract but for technical reason are covered byseparate Act•Meaning of Business Law:Business law may be defined as that branch of legal system that regulatesbusiness activates andprovides for an orderly conduct of business affairsand also for settlement of genuine disputes in a systematic manner.In commercial and ordinary life, promises are made. Promise arises out ofthe acceptance of an offer or proposal. Sometimes, promises areperformed, sometimes breach is committed. The Law of Contract dealswith such promises which create legal obligations. This excludes thosepromises made in common life which may be morally binding but createno legal obligation. These promises are madewithout a view to obtain theassent of the other. No value is given to such promises made. Suchpromises are not covered by the Indian Contract Act except for thoseprovides under section 24 of the Act. Certain promise do not create legalobligation. Promises which do not give rise to legal obligations are notcontracts.For example,A promise B to attend the dinner and fails toattend. This promise certainly does not create a legal obligation on the partof A to enable B to sue A for the price of non-consumed food. Law ofContract thus deals with agreements which create obligation. The Law ofContract createsjus in personam and not jus in rem.Right in personammeans a right against a particular person or persons. Right in Rem on theother hand, is available against the whole world.Examples:1. Amit Sells his Vehicle to Balram for Rs. 2 lakh. Amit has right torecover the price of the car from Balram only. The right of Amit is a‘‘right in personam’’ i.e.against a particular person Balram. This isjusinpersonam.munotes.in

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2. Savitri buys a Car and becomes the owner of the car. She has right tohave a quiet possession of the car and enjoy against the whole world.Nobody in the world can disturb her right. The right of Savitri isjus inrem,i.e.right againstthe whole world.1.2MEANING OF AGREEMENTS1.2.1 Meaning:Section 2 (e) of the Indian Contract Act defines an agreement as under:“Every promise and set of promises, forming the consideration for eachother is an agreement”.The term ‘agreement’ for acommon man means “to agree”. Here, oneperson offers or proposes to another, and the later agrees to the offer orproposal made. This results in an agreement.Example: Poffers to takeQfor Movie andQagrees to withPthis resultsin an agreement. in the above example.Pmay be called an ‘Offeror’ or‘Proposer’ or ‘Promisor’ WhileQmay be called an ‘Offeree’ or Acceptoror ‘Promise’.It should be noted that a mere promise by two parties would not constitutean agreement. Offer and acceptance together constitute an agreement.Agreement is a promise or a set of reciprocal promises.Hence:Agreement = Offer + Acceptance.Agreement can also be a set of Promises,like‘ P’offers to take ‘Q’formovie and ‘Q’agrees to take‘P’to a restaurant after theshow. Bothagree.The scope of an agreement is infinite, as one can enter into any kind of anagreement be it legal, illegal, impossible to perform etc. Though one canenter into any kind of agreement, all agreements may not be enforceable inthe court oflaw if any party does not fulfill his obligation. In the aboveexample if‘Q’fails to turn up at the thereafter agreeing to come. ‘P’cannot go to the court. On the other hand, contract is an agreement whichis enforceable. So Contract is an offer whichwhen accepted is enforceablein the court of law, if any of the party backs out of his obligation.Hence:Contract=Offer+ Acceptance+ Enforceability What isEnforceability?It means an agreement which create some legal obligation; if thisagreement is not followed by any party to contract, he can be sued.munotes.in

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1.1.2Kinds of Agreements:1. Valid Agreement:A valid agreement is one which is enforceable by law.2. Void Agreement:An agreement not enforceable by law is said to be void [U/s 2(g)]. It hasnotlegal existence at all and is without any legal effect. It does not giverise to any rights and obligations. Unlawful agreements are examples ofvoid agreements. A Void agreement is not enforceable by law as they areopposed to the public policy like agreements in restraints of trade or inrestraint of marriage or in restraint of legal proceedings.3. Enforceable Agreement:An agreement enforceable by law is a contract [Sec. 2(h)]4. Voidable Agreement:A voidable agreement is one which is enforceable bylaw at the option ofone or more of the parties thereto but not at the option of the other orothers. A Voidable agreement is valid so long as it is not avoided by theparty entitled to do so.5. Unenforceable Agreement:An unenforceable agreement isvalid in law but is incapable of proofbecause of some technical defect, for example, Promissory note which isnot at all stamped or is insufficiently stamped. Law recognizes the validityof the promissory note but cannot enforce the same due to it being not atall stamped or insufficiently stamped.6. Illegal Agreement:An illegal agreement is something against the law and public policy. It isvoid ab-inito.Illegal agreement often involves a commission of crime.They are opposed to the public morals andas such, parties to suchagreements are punishable under Indian Penal Code (IPC).1.3MEANING OF CONTRACT1.3.1Meaning:Law of Contract is that branch of law which deals with making of legallyvalid agreements and also for interpreting these agreements. The law ofContract is the basis of business law because majority of the transactionsin business, trade occupation, commerce and ever in profession and ourday-to-day life are based on contracts.In the words of Pollock‘every agreement and promises enforceable bylaw is contract’Section 2(h) of the Indian Contract Act, 1872 states that“an agreement enforceable by law is contract”.This definition givesus two ingredients are as under:munotes.in

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•An agreement•Enforceable by law.It means:Contract=an agreement + enforceable by law.An agreement which is enforceable by a court or law is called aContract.An agreement which is not enforceable by a court of law cannot be calledcontract.For example:An agreement between A & B to stab C and sharethe belongings of C acquired through such crime.An agreement becomes a Contract when:-1.Agreement isnotdeclared void by law.2.Agreement is madefor a lawful object.3.It is made byfree consent of parties.4.Parties arecompetent to contract.5.Agreement is made forlawful consideration.All of us enter into contracts everyday knowingly orunknowingly.For examplea.Purchasing goods from a shopb.Going to watch a Cinemac.Boarding a traind.Boarding a buse.Buying milk or newspaper in the morning. Etc.1.4ESSENTIALELEMENTSOFVALIDCONTRACTS-SECTION 10An agreement, to beenforceable by law, must possess the essentialelements of a valid contract as contained in section 10 of the IndianContract Act. According to Section 10, “All agreements are contract ifthey are made by the free consent of the parties, competent to contract, fora lawful consideration and with a lawful object and are not expresslydeclared to be void.”Essentials valid contracts:1.Offer and Acceptance.In order to create a valid contract, there must be a ‘lawful offer’ by oneparty and ‘lawfulacceptance’ of the same by the other party.2.Intention to Create Legal Relationship.In case, there is no such intention on the part of parties, there is nocontract. Agreements of social or domestic nature do not contemplatelegal relations.munotes.in

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For Example:•P invites Q to have a dinner and Q accepts it. If P fails to serve thedinner, Q cannot sue ‘P’ for non-performance. The invitation for dinneris a social agreement.•An agreement to have a cup of tea at a friend’s house is a socialagreement. A friendlyagreement cannot be called Contract.•‘A’ gives a promise to his son to give him a pocket allowance ofRupees one hundredevery month. In case A fails or refuses to give hisson the promised amount,his sonhas no remedy against A.Case:-[Balfour vs.Balfour(1919)2 K.B.571].Facts of the Case:A husband agreed to pay £30 to his wife every monthwhile he was abroad. As he failed to pay the promised amount, his wifesued him for the recovery of the amount.Held: She could not recover as it was a social agreement and the partiesdid not intend to create any legal relations3.Lawful Consideration:In other words of Pollock, “Consideration is the price for which thepromise of the another is brought. “consideration is known as quid pro-quo or something in return. Consideration must be real and lawful. Anagreement to do something for others without getting anything in return isnot enforceable.Example:P promises to pay Rs.1,00,000/-on a certain date to Qwithoutany promise in exchange. This is not a valid contract.Example:A agrees to sell his pen to B for Rs.300/-. Here for A, theconsideration for the watch is the money he gets from B and for B, theconsideration for the money he gives, is the watch.•Consideration may be …•In cash or kind•A promise to do or not to do something•Past, Present, Future.4.Capacity of parties:The parties to an agreement must be competent t contract. If either of theparties does not have the capacity to contract, thecontract is not valid.According the following persons are incompetent to contract.(a)Minors(b)Persons of unsound mind, and(c)Persons disqualified by law to which they are subject.munotes.in

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5.Free Consent:‘Consent’ means the parties must have agreedupon the same thing in thesame sense. A contract is made when one person makes an offer andanother person accepts the offer. This acceptance of the offer should bemade without any force or threat or coercion. According to Section 14,Consent is said tobe free when it is not caused by-(a) Coercion (b) Undueinfluence (c) Fraud(d)Mis-representation, (e) Mistake.An agreement should be made by the free consent of the parties.6.Lawful Object:The object of an agreement must be valid. Object hasnothing to do withconsideration. It means the purpose or design of the contract. Thus, whenone hires a house for use as a gambling house, the object of the contract isto run a gambling house.For Example:A promised to pay Rs.2,00,000/-to B to kill Q.The killingof a person is punishable under the IPC. Therefore, the promise isunlawful and void.The Object is said to be unlawful if-(a)It is forbidden by law;(b)It is of such nature that if permitted it would defeat the provision ofany law;(c)It is fraudulent;(d)It involves an injury to the person or property of any other;(e)The court regards it as immoral or opposed to public policy.7.Legal Formalities:An oral Contract is a perfectly valid contract, expect in those cases wherewriting,registration etc. is required by some statute. In India writing isrequired in cases of sale, mortgage, lease and gift of immovable property,negotiable instruments; memorandum and articles of association of acompany, etc. Registration is required in cases of documents comingwithin the scope of section 17 of the Registration Act.8.Certainty of Meaning:According to Section 29,”Agreement the meaning of which is not certainor capable of being made certain are void.” An agreement contains termsas decided by the parties. The terms of agreement must be certain andunambiguous. If the terms of an agreement are uncertain, it is not a validcontract.For Example:A agreed to pay Rs.3 lakh to B for an ultra-moderndecoration of his drawn room. The agreementis void because the meaningof the term ‘ultra-modern’ is not certain.munotes.in

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However, an agreement to agree is not a concluded contract [PunitBeriwala v. Suva Sanyal AIR 1998 Cal. 44]9.Possibility of Performance:If the act is impossible in itself,physically or legally, if cannot be enforcedat law.For Example:Mr. A agrees with B to discover treasure by magic. SuchAgreements are not enforceable.10.Not Declared to be void or Illegal:The agreement though satisfying all the conditions for a valid contractmust not have been expressly declared void by any law in force in thecountry. Agreements mentioned in Section 24 to 30 of the Act have beenexpressly declared to be void for example agreements in restraint of trade,marriage, legal proceedingsetc.All the elements mentioned above must be present, in order to make avalid contract. If any one of them is absent the agreement does not becomea contract.1.5SUMMARY•Law of Contract is that branch of law which deals with making of legallyvalidagreements and also for interpreting these agreements.•Every promise and set of promises, forming the consideration for each other isan agreement.•Contract = Offer + Acceptance+ Enforceability•Essential Elements of Contract:Offer and Acceptance. Intention to CreateLegal Relationship. Lawful Consideration, Capacity of parties, Free Consent,Lawful Object, Legal Formalities, Certainty of Meaning, Possibility ofPerformance, Not Declared to be void or Illegal,1.6QUESTION1. What isan agreement?2.Distinguish between Agreement and Contract.3.Distinguish between Void Contract and Voidable Contract.4.Enumerate the essentials of Valid Contract.5.Explain the following terms:a. Businessb. Lawc. Agreementd.Contracte. Voidable agreementf.Void agreementg. Illegal Agreementh.Unenforceable Agreement*****munotes.in

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2KINDS OF CONTRACT: CLASSIFICATIONOF CONTRACTSUnit Structure2.0Objectives2.1ClassificationofContractAccordingtoValidityorEnforceability2.2Classification of Contracts According to Modes of Formation2.3Classification According to Performance2.4Difference Between Agreement and Contract.2.5Difference Between Void and Voidable Contract.2.6Summary2.7Questions2.0OBJECTIVESAfter studying the unit, the students will be able to:•Classify the contracts on various basis.•Understand the validity of each type of contract.2.1CLASSIFICATION OF CONTRACT ACCORDINGTO VALIDITY OR ENFORCEABILITYFollowing are the kindsof contract according to Validity ofEnforceability:1.Valid Contract:A valid contract is one which has all essential elements and is enforceableby law.For Example:A’ contracts with B’ for sell of his furniture for Rs.2,00,000/-A delivered hisphone to B in exchange B transfers Rs.2,00,000/-As both parties have fulfilled their contractual obligations andwith lawful consideration contract is valid.2.Voidable Contract:An agreement which is enforceable by law at the option of one or more ofthe parties thereto, but not at the option of the other or others, is a voidablecontract. A contract is voidable when one of the parties to the contract hasnot exercised his free consent. One of the essential elements of amunotes.in

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formation of a contract for example, free consent, is absent. All voidablecontracts are thosewhich are induced bycoercion fraud ormisrepresentation. The person whose consent is not freely given mayavoid a contract. It therefore continues to be valid till the party whoseconsent iscaused by coercion, undue influence, fraud or misrepresentationchooses to avoid the contract within a reasonable time. Contract then isnot binding on the other party.3.Void Contract:A contract which ceases to be enforceable by law becomes void, whenitceases to be enforceable. A void contract is a nullity from its inception. Norights accrue there under. A contract may also be originally valid whenentered into but subsequently due to change in the events orcircumstances, it may become void. It should be noted that there cannot bea void contract because when the contract is void, it is no contract at all.Avoid contract is not enforceable by the court of law.For Example. A says to B will you buy my mobile phone in exchange ofa consideration of AK47. As the consideration is void the contract is notenforceable. Hence it is Void.4.Unenforceable Contract:A contract which satisfies all the requirements of the contract but hastechnical defects is called unenforceable contract. A contract is saidtohave a technical defect when it does not fulfill the legal formalitiesrequired by some other act. When such legal formalities are complied withlater on, the act becomes enforceable.2.2CLASSIFICATION OF CONTRACTS ACCORDINGTO MODES OF FORMATION2.2.1Following are kinds of Contracts according to its mode offormation:1.Express Contract:When the terms of a contract are reduced in writing or are agreed upon byspoken words at the time of its formation, the contract is express.For Example:Asays to B Will you purchase my SONY Television forRs.50000/-by the words spoken or written.2.Implied Contract:The terms of a contract are inferred from the conduct or dealing betweenthe parties. When the proposal or acceptance ofany promise is madeotherwise than in words, the promise is said to be implied. Such animplied promise leads to an implied contract.For Example:‘A’ boards a bus. It is implied from his conduct that A hasentered onto an implied promise to purchase a ticket.munotes.in

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2.3CLASSIFICATIONACCORDINGTOPERFORMANCEFollowing is the classification of contract on the basic of performance:1.Executed Contract:Where both the parties have performed their obligation, it is an executedcontract. Even when one party to the contracthas performed his share ofthe obligation, the contract is executed through to the other party is stillunder an outstanding obligation to perform his part of the promise.For Example:A sells his car to B for Rs.2.00 lakh. A delivered the carand B paidthe Price. This is an executed contract.2.Executory Contract:Here neither party to the contract has performed his share of theobligation, for example, both the parties have yet to perform theirpromises, the contract is executory. In an executed contract one party hasalready performed his part of the agreement while the other party has toperform his par. In an executory contract both the parties have to performtheir mutual promises and the fact that they have to perform their parts ofthe contractdoes not affect the validity of the contract.For Example:A sells his car to B for Rs.2 lakh. If A is still to deliver thecar and B is yet to pay the price, it is executor contract.3.Partly Executed and Partly Executory Contract:In a partly executedand partly executor contract, one party has alreadyperformed his promise and the other party has yet to execute his promise.For Example: ‘A’ sells his Vehicle to ‘B’. ‘A’ has delivered his Vehicle;‘B’ has yet to pay the price. For ‘A’ it is an executed contract whereas it isan executor contract on the part of ‘B’ since the price has yet to be paid.4.Unilateral Contract:A unilateral contract is also known as a one-sided contract. It is contractwhere only one party has to perform his promise. Insuch a contract, thepromise on one side is exchanged for an act on the other side. After theformation of a unilateral contract, only one party remains liable to performhis obligation because the other party has already performed hisobligation.For Example: Arunapromises to pay Rs 2000/-to anyone who finds hislost Golden Ring.Varunfinds it and returns it toArun. From the timeVarunfound the Golden Ring, the contract came into an existence. NowArunhas to perform his promise, that is thepayment of Rs.2000/-munotes.in

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5.Bilateral Contract:In a bilateral contract both the parties have to perform their respectivepromises. It is also known as a two-sided contract. Here, the obligation isoutstanding on the part of both the parties.For Example: ‘A’promises to sell his car to ‘B’ for Rs. 2.00 lakh andagrees to deliver the car on the receipt of the payment by the end of theweek. The contract is bilateral as both the parties have exchanged apromise to be performed within a stipulated time.2.4DIFFERENCEBETWEENAGREEMENTANDCONTRACTDIFFERENCESAGREEMENTCONTRACTDefinitionSection 2(e) of theIndian Contract ActDefines agreement as–“Every promise andevery set of promises,forming theconsideration for eachother is an agreement”Section 2(h) of theIndian Contract Act1872 defines Contractas–“An agreementenforceable by law is aContract”Validity based onMutual acceptancebyboth (or all) partiesinvolved.Mutual acceptance byboth (or all) partiesinvolved.Does it need to be inwriting?No.No, except for somespecific kinds ofcontracts, such as thoseinvolving land orwhich cannotbecompleted within oneyear.ConsiderationrequiredNo considerationrequired.Yes consideration is anessential factor.Legal effectAn agreement thatlacks any of therequired elements of acontract has no legaleffect.A contract is legallybinding and its termsmay be enforceable inacourt of law.One anotherAll agreements are notcontract.All contracts areagreement.munotes.in

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2.5 DIFFERENCE BETWEEN VOID AND VOIDABLECONTRACTDifferencesVOID CONTRACTVOIDABLE CONTRACTDefinitionWhen a contract ceasesto be enforceable atlaw,it becomes voidcontractVoidable contract is a contractwhich is enforceable by law atthe option of one or moreparties thereof, but not at theoption of others.StatusA void contract cannotcreate any legal rights.It is a total nullity.A voidablecontract takes itsfull and proper legal effectunless it is disputed and setaside by the person entitled todo so.NatureA void contract is validwhen it is made. Butsubsequentlyitbecomes void due toone reason or the other.A contract may be voidablesince very beginning, or maysubsequently become voidable.RightsA void contract is validwhen it is made. Butsubsequentlyitbecomes void due toone reason or the other.A voidable contract gives rightsto the aggrieved party to rescindthe contract, and claim thedamages, etc. in certain cases.2.6SUMMARYKinds of Contract:Valid Contract,Voidable Contract, Void Contract ,Unenforceable Contract , Express Contract, Implied Contract, ExecutedContract, Executory Contract, Partly Executed Partly Executory Contract,Unilateral Contract, Bilateral Contract2.7QUESTIONS1.Enumerate various types of contracts.2.Distinguishbetween Agreements & Contracts.3.What is void and voidable contract?4.DistinguishbetweenContingentContractandWagering Agreement.5.Define the following terms:a.Valid Contractb.Void Contract.c.Unilateral contractd.Executorycontract.*****munotes.in

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3OFFER/PROPOSALU/s 2(a) & ACCEPTANCE U/S 2(b)Unit Structure3.1Objectives3.2Introduction3.3Meaningof Offer3.4Essentialsof Valid Offer3.5Clasification/Typesof Offer3.6Acceptanceof An Offer3.7Summary3.8Questions3.1 OBJECTIVESAfter studying the unit, the students will be able to:•Know the meaning of and elements of offer.•Discuss about the essentials of valid offer.•Explain the types of offers.3.2 INTRODUCTIONThe words ‘offer’ and ‘proposal’ aresynonymous and they mean one andthe same thing. Offer is the first step in the formation of contract. When avalid offer is made and accepted, contract comes into existence, providedthe other essential elements are present.3.3 MEANING OF OFFER3.3.1Meaning:Section 2 (a) of the Contract Actdefines Offer as–‘when one personsignifies to another his willingness to do or to abstain from doinganything, with a view to obtaining the assent of that other to such act orabstinence, he is said to make anoffer’.3.3.2 Elements of Offer:The analysis of the definition would show that the following elements arepresent in an offer:munotes.in

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a.There is an expression of willingness to do or abstain from doingsomething;b.The expression is from one person toanother;c.The expression is for seeking the assent of that other person.d.The person making the offer is called the ‘offeror’ and the person towhom the offer is made is called the ‘offeree’.e.An Offer is the first step in the formation of contract.Offer or Proposalis a medium through which person **signifies to another hiswillingness to do not to do anything with a view to obtaining *assentof that other to such act or abstinence.(*Assent:Means acceptance has been signified either in writing orbywords of mouth or by performance of some act.).(** Signify Means:a sign, symbol)Section 2(a) of the Indian Contract Act, 1872 defines the term“Proposal”as when one person signifies to another his willingness to door to abstain from doingsomething with a view to obtaining the assent ofthe other to such an act or abstinence, he is said to make a proposal.”•The person making the ‘proposal’ or ‘offer’ is called the ‘promisor’or‘offeror’,•The person to whom the offer is made is called the‘offeree’ orPromise. orAcceptorExample:Ram asked to Shyam “Will you buy this Furniture for Rs.2,00,000/-?.Here Ram is making an offer to Shyam, because he signifies to Shyam hiswillingnessto sell his furniture for Rs.2,00,000/-with a view toobtainingShyam’s assent to purchase furniture.3.3.3Modes of Giving an Offer:An offer can be made by an act in the following ways:a.By Spoken or by written (Express offer):The written offer can be made by letters, telegrams, telex messages,advertisements, etc. The oral offer can be made either in person or overtelephone.Examples:•A proposes, by letter, to sell a house to B at a certain price. This is anoffer by an act by written words (i.e., letter). This is also an expressoffer.•Aproposes, over telephone, to sell a house to B at a certain price. Thisis an offer by act (by oral words). This is an express offermunotes.in

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b.By conduct(Implied):The offer may be made by positive acts or signs so that the person actingor making signs meansto say or convey.However, silence of a party can in no case amount to offer by conduct. Anoffer can also be made by a party by omission (to do something). Thisincludes such conduct or forbearance on one’s part that the other persontakes it as his willingness or assent. An offer implied from the conduct ofthe parties or from the circumstances of the case is known as impliedoffer.•BEST runs a bus on a particular route. It is animplied offerby thetransport company to carry apassengerfor a certain fare.•A owns a motor boat for taking people fromMumbai to Alibag. Theboat is in the waters at the Gateway of India. This is an offer byconduct to take passengers fromMumbai to Alibag. He need notspeak or call the passengers. The very fact that his motor boat is in thewaters near Gateway of India signifies his willingness to do an actwith a view to obtaining the assent of the other. This is an example ofan implied offer.3.3.4To whom offer can be made?a.To definite person-SpecificOffer:Example: ZahirProposes to sell his horse toMihirfor Rs. 80,000/-Thisoffer is made to adefinite personi,e toMihir.Xoffers to buy car fromYfor Rs 1.0 lakh. This offer is a specific offerwhich has been made to a definite personYNo person other thanYcanaccept this offerb.To definite Class of Person:Example:School put up a notice to offer a reward of Rs.500/-to anystudents who returns the lost cell phone of a teacher. This is an offer to adefinite class of persons i,ethe Students of School.c.To the world at large.-General Offer:A general offer is one which is not made to a definite person, but to theworld at large or public in general. A general offer can be accepted by anyperson by fulfilling the terms of theoffer. In case of general offer, thecontract is made with person who having the knowledge of the offercomes forward and acts according to the conditions of the offer.Example:X advertiser! the newspaper that he would pay Rs. 5,000 toanyone who traceshis missing boy. Y who knew about the reward tracedthat boy and sent a telegram to X that he had found his boy; It was heldthat X was entitled to receive the amount of reward. [Harbhajan Lal v.Harcharan Lal (AIR All 539)]munotes.in

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Case Laws: Carlill v. CarbolicSmoke Ball Co. [1893 1Q.B.256]Facts of the Case:The Carbolic Smoke Ball Company, advertised in the severalnewspapers,that a reward of 100 pounds would be given to any person who sufferedfrom influenza after using smoke ball of the company accordingto itsprinted directions. The company’s advertisements also stated that 1000pounds had been deposited at a London bank as a sign of the company’sgood faith in offering such a reward.Mrs. Louisa Carlill purchased one of the Carbolic Smoke Balls and,following the instructions as per the direction of given by theCo.(i.e.howto use the product), used it three times daily for a period of two months.She subsequently contracted influenzaat the end of this period.Represented by her husband, a qualified solicitor, she attempted to claimthe 100-pound reward from the company.It was held, she could recoverthe amount as, by using smoke balls, she had accepted the offer.
Source:https://www.google.com/search?q=carlill+v/s+carbolic+smoke+ball&rlz=3.4ESSENTIALS OF VALID OFFER3.4.1Valid Rules As To Offer.An offer to be valid mustsatisfythe following conditions.They are the essentials of a valid offer.1.Offer may be express or implied:An offer may be made either by words or by conduct. When an offer ismade by words, written or spoken, it is called an express offer. When theintention to make an offer is gathered from the conduct of the person, it iscalled an implied offer.
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2.The terms of the offer must be certain:If the terms of the offer are not certain or definite, it is not a valid offer. Itis rightly observed that unlessall the material terms of the contract areagreed, there is no binding obligation. Therefore, the terms of the offermust not be loose or vague. They should not be capable of different orvarious interpretations and it must be possible to correctly ascertain theintention of the parties.3.Offer must be distinguished from invitation to make offer:An offer is different from ‘invitation to offer’. In the case of invitation tooffer, the person sending his invitation is merely calling upon the others toplace their offers. Price Tags on a product is the good example of aninvitation to make the offer. Similarly, an advertisement for sale of goodsby auction, quotations, catalogues of prices are examples of invitations tooffer.For Example:Job or Tender advertisement inviting applications for a jobor inviting tenders is an invitation to an offer.4.Offer may be general or specific:An offer is said to be general when it is made to the public at large andanyone may accept the same. A specific offer is made to a definite personor persons and hence can be accepted only by the person to whom it ismade.For Example: Aoffers toBto sell his Car for Rs.90, 000/-, it is a case ofspecific offer.WhereasAoffers a reward of Rs. 5000/-to whosoever findshis lost scooteris a general offer.5.Offer must be communicated:Offer must be communicated to the offeree; otherwise, it is not effective inthe eyes of law. There cannot be any acceptance without the knowledge ofoffer. Thus, whereAfinds an article lying on a street and restores it to theowner without any knowledge about the reward offered by theowner, hecannot claimthe reward from the owner because there was nocommunication of offer to him.A person cannot accept an offer as longas he isunaware of its existence.Unless an offer is properlycommunicated there cannot be an acceptance of it. An acceptance of anoffer, in ignorance of the offer is no acceptance at all and does not createany legal rights or obligations.Case Law: Lalman Shukla vs Gauri Dutt.(1913) All LJ 489]Facts of the Case:Lalman Shukla is an employee with Pt. Gauri Dutt.When the nephew of Pt. Gauri Dutt was found missing, Lalman Shuklawas sent for the search. It was announced later that who so ever findsthemissing nephew will be rewarded with Rs.501/-. Unaware of theannouncement of the reward, Lalman Shukla located the missing nephewand brought back.munotes.in

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It was held that Lalman Shukla has no right in the reward because he hasno knowledge of theproposal. Hence, an action without the knowledge ofthe proposal is no acceptance at all.6.Offer must not thrust the burden of acceptance:Offer should not contain the term the non–compliance of which may beassumed to amount to acceptance.Example:‘X’ writes to ‘Y’, I will sell you my motor car for Rs.50000/-If you do not reply I shall assume you have accepted the same.7.A statement of price is not an offer:A mere statement of price is not an offer to sell.Case Laws: Harvey V/s FaceyThe case involved negotiations over a property inJamaica. Thedefendant, Mr.Facey, had been carrying on negotiations with the Mayorand Council of Kingston to sell a piece of property to Kingston City.On 7 October 1891,Faceywas traveling on a train between Kingston andPours and theappellant, Harvey, who wanted the property to be sold tohim rather than to the City, sent Facey a telegram.It said….Q 1.”Will you sell us Bumper Hall Pen?Q 2. “Telegraph lowest cash price-answer paid”.Facey replied on the same day:“Lowest price for Bumper Hall Pen£900.”Harveythen replied in the following words. “We agree to buy BumperHall Pen for the sum of nine hundred pounds asked by you. Please send usyour title deed in order that we may get early possession.”Held:No contract betweenHarvey & FaceybecauseFacey replied onlyQ no 2.He supplied merely the information and no offer has been madeby him to sell.3.4.2 Difference between Offer and Invitation to an Offer:OfferInvitationto an offerMeaningWhen one person signifieshis willingness to do orabstain from doinganything with a view toobtaining an assent ofanother person is calledoffer.It is not an offer in realsense, but an indication ofthe person’s willingness toenter into a contract.munotes.in

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SectionsSection 2 (a) of IndianContract Act 1872.Not defined in IndianContract Act 1872.ModesCan be express of ImpliedCannot be impliedAcceptanceOffer becomes anagreementwhen accepted.An invitation to offerbecomes anoffer.ExampleA’ offering to sell his carto his friend B for INR4,00,000/-Book Seller sendingcatalogue of booksindicating prices ofvarious books.3.5CLASIFICATION/TYPES OF OFFER1.Express Offer:The offer made by using words spoken orwritten is known as an expressoffer.Example.Viral says to Kiran-”Will you purchase by Computer forRs.10,000/-?2.Implied Offer:The offer which could be understood by a conduct of parties orcircumstances of the cases is implied offer.Example-Withdrawing money by the card holder from the ATM it createsan implied contract between the Card holder and Bank3.General Offer:If the offer made to the world at large, it is known as the general or publicoffer. The general offer is one which is notmade to a specific person. TheGeneral Offer can be accepted by anyone.For Example: An advertisement in a newspaper ‘Anyone who will findmy lost Envelop will be rewarded with Rs.5,000/-.4.Specific Offer:The offer made to a specific person or aparticular person or two or morethan two specific persons. The offer is made to an ascertained person.Example: ‘A’ offers to sell his house to ‘B’for Rs. 40,00,000/-price. Theoffer has been made to a definite person, i.e., ‘B’. It is only ‘B’ who canaccept it [Boulton v. Jones (1857) 2H.and N. 64].5.Cross Offer:If two parties made offer to one another in ignorance of the offer made byother party, and terms-conditions in both the offer are same. Two crossoffer do not conclude a contract.munotes.in

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Example:“A” by a letter offered to sell his car to “B” for Rs 2lacs.Without knowing about “A”s offer “B” also by a letter offered to buy“A”s same car for Rs 2lakhs. Both the offers cross each other.6.Continuous Offer: (standing offer)An offer of acontinuous nature is known as ‘standing offer’. A standingoffer is in the nature of a tender.Example:X Ltd. requires a large quantity of certain goods during the 12months period and gives an advertisement inviting tender in the leadingnewspaper Z submitted the tender to supply those goods at a specific rate.Z’s tender is accepted or approved. Now, Z’s tender becomes a standingoffer. Each order given by X Ltd. will be an acceptance of the offer.7.Counter Offer:Counter offer is the rejection of the original offer by the offeree and givingnew offer.Example:A offers to sell his car to B For Rs. 80,000/-, but B is ready tobuy it for Rs.50,000/-. This new offer by B of Rs.50000/-to A is called acounter-offer. Now, it is for A to accept this new offer or reject it. If Aaccepts this offer, it will become a binding contract.3.6ACCEPTANCE OF AN OFFER3.6.1Rules of Valid Acceptance:A contract comes into existence when a valid offer is validly accepted.Section 2 (b) of the Contract Act states that, ‘when the person to whom theoffer is madesignifies his assentthereto, the offer is said to be accepted.(An offer when accepted becomes promise) A valid acceptance must be inconformity with the following rules:1.Acceptance must be given by the person to whom the offer is made:An offer can be accepted only by the person or persons to whom the offeris made; no one else can accept theoffer. For Example if A intends tocontract with B and therefore makes an offer to B, C cannot intervene andaccept the offer made to B, without the consent of A.2.Acceptance must be by certain person:An offer may be made to an unascertained number orto the world at largebut no contract can arise until it has been acceptedby a certain person whofirst gives information either by words or by conduct. Such an offer isknown asGeneral Offer. The general offer is closed as soon as it isaccepted by adefinite person.Example: Agives an advertisement in the newspaper offering Rs.25,000/-to one who gives information of his lost daughter. B gives the information.Bis entitled to have reward of Rs.25000/-Similarly, an offer to class ofmunotes.in

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persons, can be accepted by any member of that class or group only andnot by any other person not belonging to that group.3.AcceptancemustbeAbsoluteandUnconditionalor Unqualified:An acceptance must be unconditional. A conditional or qualifiedacceptance is noacceptance in the eyes of law. Even a slight deviationfrom the terms of the offer would make the acceptance invalid. In fact, aconditional acceptance by itself is a counter-offer and not an acceptance.Example: If A offers an article to B for Rs. 100/-, the acceptance by B tobuy the article for Rs. 90/-is no acceptance in the eyes of law.Xinquires withY “Will you purchase my dog for Rs.100”/-B replies, Ishall purchase your dog for Rs.100/-, provided you should purchase mycat for Rs. 90/-In this example, there will be no contract because the acceptance isconditional.4.Acceptance must be Communicated:Mere mental acceptance is not acceptance. But there is no requirement ofcommunication of acceptance of the general offer. The general offercanbe accepted by the performance of a condition.Example: MariatellsPeterthat she intends to marryStiven,but does nottell anything toStiven. There is no contract even ifStivenis willing tomarry Maria.Case Laws:BrogdenV/s Metropolitan Railway Company.Facts of the Case:The Manager of Railway Company received a draftagreement relating to the supply of Coal. The manager marked the draftwith the words“ Approved”,and put the same in the drawer of his tableand forgotall about it.Held:There was no contract between the parties as the acceptance was notcommunicated. It may, however, be pointed out that the Court construed aconduct of parties, as railway company was accepting the supplies of coalfrom time to time.5.Mental Acceptance is not sufficient in Law:Silence cannot amount to acceptance. Mere un communicated or mentalacceptance is not enough. Acceptance to be complete must becommunicated by words or conduct by an offeree to the proposer. MentalAcceptance is no acceptance at all. The proposer cannot prescribe that theofferee’s silence shall be deemed to an acceptance.Example:X tells Y that he intends to buy Z’s house, but does not tellanything to Z of his intention. This is no contract.munotes.in

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CaseLaw:Felthouse v Bindley[1862] EWHC CP J35:A nephew discussed buying a horse from his uncle. He offered to purchasethe horse and said if I don’t hear from you by the week end, I will considerhim mine. The horse was then sold by mistake at auction. Theauctioneerhad been asked not to sell the horse but had forgotten. The unclecommenced proceedings against the auctioneer for conversion. The actiondepended upon whether a valid contract existed between the nephew andthe uncle.Held:There was nocontract. You cannot have silence as acceptance.6.Acceptancemustbeexpressedinsomereasonable manner:If the terms of the offer stipulate certain period within which the offer hasto be accepted, the acceptance must be effectedwithin the time sostipulated. Acceptance may be made either by words or by conduct; It mayalso be expressed by post or telegram. If the proposer prescribes themanner in which the proposal is to be accepted and the acceptance is notmade in such manner, the proposer may, within a reasonable time after theacceptance is communicated tohim insist that his proposal shall beaccepted in a prescribed manner, and not otherwise; but if he fails to doso; he accepts the acceptance. Therefore, if the proposer prescribes amethod of delivery of goods at a particular place, he is not bound to acceptdelivery at any other place.Usual and reasonable manner would mean the parties intended to performthe contract in the ordinary course of trade or business. The proposer is atliberty to prescribe the mode in which his offer or proposal shall beaccepted. The proposer has the rightto prescribe the manner in which theproposal can be accepted but not the manner in which it may be refused.7.Acceptance must be given within a reasonabletime:Moffered to take share in a company on 9th June and received aacceptance on 24th November.Mrefused to take the shares. As thereasonable period of acceptance had elapsed, he was entitled to refuses totake the shares.3.7SUMMARY•Section 2 (a) of the Contract Actdefines Offer as–‘when one personsignifies to another his willingness to do or to abstain from doinganything, with a view to obtaining the assent of that other to such act orabstinence, he is said to make an offer’.•Modes of Giving an Offer:By Spoken or by written (Express offer)By conduct. (Implied):•To whom offer can be made?: To definite person-Specific Offer, Todefinite Class of Person, To the world at large.-General Offer:,munotes.in

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•Essential Elements of ValidOffer:Offer may be express or implied,The terms of the offer must be certain, Offer must be distinguishedfrom invitation to make offer, Offer may be general or specific, Offermust be communicated, Offer must not thrust the burden of acceptance.•Types of Offer:Express Offer, Implied Offer, General Offer, SpecificOffer, Cross Offer: Continuous Offer: (standing offer), Counter Offer:3.8QUESTIONS1.What is offer? Enumerate essentials of a valid Offer?2.What are the various types of Offers?3.State briefly the Ingredients of Offer.4.What is acceptance of an offer?5.Explain the difference between Offer and an Invitation to offer.6.What are the essential elements of acceptance of an offer?7.Define the following terms:a.Offerb.Valid offerc.Cross offerd.Specific offere.Implied offer*****munotes.in

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4COMMUNICATION OF OFFER ANDACCEPTACEUnit Structure4.0Objectives4.1Introduction4.2Meaning of Communication of offer Complete4.3Communication of Acceptance4.4Revocation ofProposal Section: 54.5Summary4.6Questions4.0 OBJECTIVESAfter studying the unit, the students will be able to:•Understand when the communication of offer is complete.•Understand the communication of offer and acceptance of offer.•Discuss about themeaning and modes of Revocation of proposal.4.1 INTRODUCTIONTheoffermust be communicated to the other party so that itsacceptancemay constitute a contract.An offer must be communicated to the person to whom the offer is made(theofferee) if the offer is to be effective. If an offer is sent in the post, itwill have no effect until it reaches the offeree, that is to say when it iscommunicated not when the offer letter is posted.4.2 MEANING OF COMMUNICATION OF OFFERCOMPLETEThe communication of offer is completewhen it comes to theknowledge of the person to whom it is made. In case an offer is made bypost, its communication will complete when the letter containing the offerreaches the offeree.Example:Xof Chennai sends a letterby post toYof Madurai offering tosell his car far Rs 1,00,000. The letter is posted on 1st January and thismunotes.in

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letter reaches on 7th January. The communication of the offer is completeon 7th January.Note:An offer accepted without its complete communication does notbind theofferor.Example: In case ofLalman V/s Gauri Dutt, G sent his servant L totrace his lost nephew. When the servant had left, G announced a reward toanyone who traces the boy. L foundthe boy and brought him home. WhenL came to know of the reward, he claimed the reward. It was held that Lwas not entitled to the reward because he did not know about the offerwhen he found the missing boy.A proposal is an expression of willingness todo contract on certain terms,made with the intention that it shall become binding as soon as it isaccepted by the other person to whom it is addressed.4.3 COMMUNICATION OF ACCEPTANCELet’s try to understand the communication of offer and acceptancewiththe help of following example:-Xof Agra sends a letter by post toYof Delhi offering to sell his car forRs. 1,00,000. This letter is posted on 1st January and reaches Yon 7thJanuary Y sends his acceptance by post on 10th January but X receivesthis letter of acceptance on 15th January. Answer each of the followingquestions.(a)When is the communication of offer complete:-7th January(b)When is the communication of acceptance complete as against theofferor:-10th January(c)When is the communication of acceptance complete as against theacceptor:15th Jan(d)If X sends a telegram on 8th January revoking his offer and thistelegram reaches Y before the letter of the acceptance is posted. Isrevocation of offer is valid?Yes it is valid(e)If Y sends a telegram on 14th January revoking his acceptance and thistelegram reaches X before the letter of acceptance is received by X. Isrevocation of acceptance is valid? Yes it is validAs against the proposer:The communication of acceptance is complete, when it is put a course oftransmission to him, so as to be out of the power of theacceptor. In thecase of acceptance through post, the contract is complete on the date whenthe letter of acceptance is posted. Whether or not the letter is received bythe offeror is absolutely immaterial. The offeror, however, becomes boundonly when a properly addressed and adequately stamped letter ofmunotes.in

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acceptance is posted. The contract is complete when acceptance of offer isput in the course of transmission tothe offeror.As against the acceptor:When it comes to the knowledge of the proposer (Section 4)Example: ‘B’accepts‘A’sproposal by a letter sent by post. Thecommunication of the acceptance is complete as against A, when the letteris posted, as against B, when the letter is received by A.If communication of the acceptance is made by telephone, teleprinter,telex and fax machines, it completes when the acceptance is received bythe offeror. The contract is concluded as soon as the offeror receivesorhears the acceptance.4.4REVOCATION OF PROPOSAL SECTION: 54.4.1Meaning:Revocation means‘taking back’or‘cancellation’.When can theproposal be revoked?A proposal may be revoked at any time before the communication of itsacceptance iscomplete as against the proposer, but not afterwards. Anacceptance may be revoked at any time before the communication of theacceptance is complete as against the acceptor, but not afterwards.Example:A proposal is sent byYameentoYasirand is accepted byyasirby letter. The proposal might have been revoked any time before theletter of acceptance was posted but it cannot be revoked after the letter isposted.Example: Aproposes, by a letter sent by port, to sell his house toB.Baccepts the proposal by a letter sent by post.Amay revoke his proposal atany time before or at the moment whenBposts his letter of acceptance,but not afterwardsmay revoke his acceptance to any time before or at themoment whenBposts his letter ofacceptance, but not afterwards.4.4.2 Modes of Revocation of Proposal (Section 6):1.By notice of revocation:Offer may be revoked by a communication of a notice of revocation by theofferee to the other party before acceptance is complete against the offerorhimself. An offer made in writing may be revoked by words of mouth.The notice of revocation may not always be express. A notice ofrevocation to be effective must be communicated to the offeree.2.By lapse of time:A proposal will come to an end by the lapse of time prescribed in suchproposal for its acceptance or, if no time is so prescribed by the lapse ofmunotes.in

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time of reasonable time is a question of fact depending upon thecircumstances of each case. Where the subject matter of the contract is anarticle, like gold, the parties of which fluctuate daily in the market, veryshort period will be regarded as reasonable made late in November.3.By non-fulfillment of condition precedent:A proposal is revoked when the acceptor fails to fulfill a conditionprecedent to the acceptance of the proposal which was conditional offer.Thus, X may offer to sell certain goods to Y on a condition that Y pays acertain amount before a certain date.4.By death or insanity:A proposalis revoked by the death or insanity of the proposer if the fact ofhis death or insanity comes to the knowledge of the acceptor beforeacceptance.5.By counter offer:An offer comes to end when the offeree makes a counter offer or rejectsthe offer.Where an offer is accepted with some modification in the termsof the offer or with some other condition not forming part of the offer,such qualified acceptance amount to a counter offer.6.By the non-acceptance of the offer according to the prescribedorusual mode:The offer will also stand revoked if it has not been accepted according tothe prescribed.7.By subsequent illegality:An offer lapses if it becomes illegal after it is made and before it isaccepted. Thus, where an offer is made to sell10 bags of wheat for Rs.2500 and before it is accepted, a law prohibiting the sale of wheat byprivate individual is entered, the offer comes to end.4.4.3Revocation of Acceptance:An acceptance may be revoked at any time before communication of theacceptance is complete as against the acceptor, but not afterwards.Example: ShahidProposes by a letter sent by post to sell his Shop toBilal. Bilalaccepts the proposal by a letter sent by post.Shahidmayrevoke his proposal at any time before or at the moment whenBilalposthis letter of acceptance, but not afterwards.Bilalmay revoke his acceptance at any time before or at the moment whenthe letter communicating it reachesShahidbut not afterwards.Time for revocation of Proposal andAcceptance:A Proposal may revoke at any time before the communication of theacceptance is complete as against the proposer and not afterwards.munotes.in

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For Example:‘A’ proposes by a letter sent by post to sell his house to‘B’. The letter is posted on 1st July,2011. ‘B’ accepts the proposal by aletter sent by post on 4th July, 2014. The letter reaches ‘A’ on 6th July,2014.•‘A’may revoke his offer at any timebefore ‘B’posts his letter ofacceptance i,e 4th July,2011 and not afterwards.•‘B’may revoke his acceptance at any timebeforethe letter ofacceptance reached‘A’i,e before 6th July,2011 and not afterwards.Communication of Revocation of an offer:As far as the revocation of the offer is concerned, the offeror is bound byrevocation of the offer as soon as he duly posts the letter of revocation ofthe offer. He cannot cancel the revocation made by him. But revocation ofthe offer is binding on the offeree only if the letter of revocation of theoffer is received by the offeree before the letter of acceptance is dulyposted by the offeree.4.5 SUMMARY•An offer must be communicated to the person to whom the offer ismade (theofferee) if the offer is to be effective.•The communication of offer is completewhen it comes to theknowledge of the person to whom it is made.•A proposal may be revoked at any time before the communication ofits acceptance is complete as against the proposer, but not afterwards.Modes of Revocation of Proposal:By notice of revocation, Bylapse of time, By non-fulfillment of condition precedent, By death orinsanity, By the non-acceptance of the offer according to theprescribed or usual mode, By subsequent illegality.4.6QUESTIONS1.What is Communication of Offer? Illustrate with suitable case laws.2.Why Communication of offer isessential?3.Short Note:a)Revocation of Acceptance.b)Modes of Revocation of Proposal.*****munotes.in

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5CAPACITY OF PARTIES U/S 10-12Unit Structure5.0Objectives5.1Introduction5.2Meaning of Minor and Effects of Minors Agreements5.3Agreements byPersons of Unsound Mind5.4Capacity to Contract: Persons Disqualified to Enter into A Contract5.5Questions5.0OBJECTIVESAfter studying the unit, the students will be able to:•Discuss about the meaning of Minor and effects of Minor agreement.•Meaningof Sound mind and the effects of the agreement done by theunsound mind person.•Know the capacity of contract.5.1INTRODUCTIONFor construction of valid contract, the parties to a contract must havecapacity i.e.,competencyto enter into a contract.Every person isassumed to have capacity to contract but there are certain persons whoseage, condition or status makes them incapable of binding themselves by acontract.Section 11 of the Contract Act deals with the competency of parties andprovidesthat “every person is competent to contract who is of the age ofmajority according to the law to which he is subject, and who is of soundmind and is not disqualified from disqualified from contracting by any lawto which he is subject.”Hence: Section 10 says, all agreements are contracts, if they are made bythe parties competent to contract.Section. 10require that the parties shall be competent to contract.Section .11Who is competent to contract.?–Every person is competent to contract who is of ….•The age of majority according to the law to which he is subject, and;•Who is of sound mind, and;munotes.in

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 •Is not disqualified from contracting by any law to which he is subject.Hence:Following persons are not competent to contract.(a)Minor(b)Person ofunsound mind, and(c)Person disqualified by any law to which they are subject. Contractentered into by the persons mentioned above are void.Every person is competent to contract who is:(a)Of the age ofmajority.(b)Ofsound mind.(c)Not disqualifiedfrom making a contract.Therefore, the following persons are not competent to contract(a)A person who is aminor.(b)A person ofunsound mind.(c)A person who isdisqualifiedfrom making a contract.Although the above-mentioned categories ofpersons are not competent tocontract, yet they may sometimes be making some bargains, taking someloans, or be supplied with some goods by third parties, or be conferredwith some benefits etc., the position of such person in such like situationsis beingdiscussed below.5.2MEANING OF MINOR AND EFFECTS OFMINORS AGREEMENTS5.2.1Meaning of Minor:A person who has not attained the age of majority is a minor. Section 3 ofthe Indian Majority Act, 1875 provides about the age of majority. “Everyperson domiciled in India shall attain the age of majority on hiscompleting the age of eighteen years and not before.” It states that aperson is deemed to have attained the age of majority when he completesthe age of 18 years, except in case of a person of whose person or propertya guardian has beenappointed by the Court in which case the age ofmajority is 21 years.5.2.2Effects of Minors Agreements:A minor’s agreement being void is wholly devoid of all effects. Whenthere is no contract there should be no contractual obligation on eitherside.munotes.in

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1.An agreement with or by minor is void:Section 10 of the Indian Contract Act requires that the parties to a contractmust be competent and Section 11 says that a minor is not a competent.But either section makes it clear whether the contract entered into by aminor is void or voidable. Till 1903, court in India we were not unanimouson this point the privy council made it perfectly clear that a minor is notcompetent to a contract and that a contract by minor is voidab initio.The leading case is:MOHRI BIBI V. DHARMO DAS GHOSE (1903):“A minor borrowed Rs. 20,000/-from B and as a security for the sameexecuted a mortgage in his favor. He became a major a few months laterand filled a suit for the declaration that the mortgage executed by himduring his majority was void and should be cancelled. It was held that amortgage by a minor was void and B was not entitled to replacement ofmoney.2.No ratification:An agreement with the minor is completely void. A minor cannot ratifythe agreement even on attaining majority, because a void agreementcannot be ratified. A person who is not competent authorize an act cannotgive it validity by ratifying.But if on becoming major, minor makes a new a new promise for freshconsideration, then this new promise will be binding.3.Minor can be apromise or beneficiary:If a contract is beneficiary to a minor it can be enforced by him. There isno restriction on a minor from bring a beneficiary, for example, being apayee or a promisee in a contract. Thus a minor is capable of purchasingimmovableproperty and he may sue to recover the possession of theproperty upon tender of the purchasemoney. Similarly, a minor in whosefavor a promissory note has been executed can enforce it.4.No estoppel:Where a minor by misrepresenting his age has inducedthe other partyenter into a contract with him, he cannot be made liable on the contract.There can be no estoppel against a minor. It means he is not estoppel frompleading his infancy in order to avoid a contract.5.Liability for Torts:A trot is acivil wrong. A minor is liable in tort unless the tort in reality isa breach of contract. Thus, where a minor borrowed a horse for ridingonly, he was held liable when the he lent the horse to one of his friendswho jumped and killed the horse. But a minor cannot be made liable for abreach of contract by framing the action on tort. you cannot convert acontract into a tort to enable you to sue an infant.munotes.in

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6.No insolvency:As he is incapable of contracting debts and dues are payable from thepersonal properties of minor and he is not personally liable. A minorcannot be declared insolvent7.Partnership:A minor being in competent to contract cannot be a partner in apartnership firm, but under Section 30 of the Indian Contract Act , he canbe admitted tothe benefits of partnership.8.Minor can be an agent:A minor can act as an agent. But he will not to be liable to his principal forhis acts. A minor can draw, deliver and endorse negotiable instrumentswithout himself being liable.5.3AGREEMENTS BY PERSONS OF UNSOUND MINDAs stated earlier, as per Section 11 of the Contract Act, for a validcontract, it is necessary that each party to it must have a ‘sound mind’.5.3.1Meaning of Sound Mind:Section 12 of the Indian Contract Actdefines the term ‘sound mind’ asfollows: “A person is said to be of sound mind for the purpose of making acontract, if, at the time when he makes it, he iscapable of understanding itand of forming a rational judgment as to its effects upon his interests.”Therefore, the person entering into the contract•Must be a person who understands the terms of Contract.•What he is doing and is able to form a rational judgment.(i)A person who isusually of unsound mind, butoccasionally of soundmind, may makea contract when he is of sound mind.” Thus, a patient ina lunatic asylum, who is at intervals of sound mind, may contract duringthose intervals.(ii)A person who isusually of sound mind, butoccasionally of unsoundmind, may not make a contract whenhe is of unsound mind.” Thus, asame man, who is delirious from fever, or who is so drunk that he cannotunderstand the terms of a contract, or form a rational judgment as to itseffect on his interest, cannot contract whilst such delirium or drunkennesslasts.In Halsbury’s Laws of England, it is stated: “The general theory of the lawin regard to acts done, contracts of unsound mind are generally deemed tobe invalid; or in other words, (subject to exceptions), there cannot be acontract by a person of unsound mind.”munotes.in

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5.3.2Unsoundness of mind may arise from:•Idiocy:It is permanent and congenital (by birth), and therefore he cannever understand the contract and make rational judgments. Themental powers of an idiot are completely absent because of lack ofdevelopment of the brain.•Lunacy or Insanity:It is a disease of the brain. A lunatic loses the useof his reason due to some mental strain or disease, of course, he mayhave lucid intervals of sanity.•Drunkenness:Drunken state of mind is a hurdle to enter into acontract. When a person is so drunkthat he cannot form a rationaljudgment about the terms and conditions of the contract then suchcontract is a void contract. But if he can still understand the terms andconditions of the contract even though he has consumed alcohol thenthat contract isvalid as he could understand the terms and conditionsof the contract, that is why it is said that mere drinking is not a hurdleto contract.•Hypnotism: It also produces temporary incapacity, till the person isunder the impact of artificially induced sleep;5.3.3Effects of agreements made by persons of unsound mind:An agreement entered into by a person of unsound mind is treated on thesame as that of minor’s and therefore an agreement by a person ofunsound mind is absolutely void and inoperative asagainst him but he canderive benefit under it.The property of a person of unsound mind is, however, always liable fornecessaries supplied to him or to any one whom he is legally bound tosupport, under Section 68 of the Act.5.4CAPACITY TO CONTRACT:PERSONSDISQUALIFIED TO ENTER INTO A CONTRACTThe third type of incompetent persons, as per section 11, are those who are“disqualified from contracting by any law to which they are subject.”Who are disqualified Persons?1.Alien Enemies:An alienthat is citizen of a foreign country living in India can enter intocontracts with citizens of India during peace time, by observing therestrictions imposed by the government in that respect. On the declarationof a war between his country and India, he will become an alien enemyand cannot enter into contractsmunotes.in

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 2.Convicts:A convict is a person, who is sentenced by any competent court to theimprisonment. A convict cannot enter into a valid contract while he wasundergoing sentence, His incompetency isover, when the period of hissentence is over or his punishment is suspended..3.Foreign sovereigns and ambassadors:While entering into contracts with foreign sovereigns and ambassadors,one must be cautious because whereas they can sue others toenforce thecontracts entered upon with them, they cannot be sued without obtainingthe prior sanction of the central Government as they are in a privilegedposition and are ordinarily considered incompetent to contract.5.5 SUMMARY•For construction of valid contract, the parties to a contract must havecapacity i.e.,competencyto enter into a contract.•A person who has not attained the age of majority is a minor. Section 3of the Indian Majority Act, 1875 provides about the age ofmajority.•Effects of Minors Agreements:An agreement with or by minor isvoid,No ratification, Minor can be a promise or beneficiary, Noestoppel, Liability for Torts, No insolvency, Minor can be an agent.•Persons are not competent to contract-Minor,Person of unsoundmind, and Person disqualified by any law to which they are subject.5.6QUESTIONS1.Discuss briefly the capacities of parties to enter into a contract.2.Short Note: Agreements by persons of Unsound Mind.munotes.in

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6CONSIDERATION(SEC 2and25)Unit Structure6.0Objectives6.1Introduction6.2Meaning and Definitions &Importance of consideration6.3Legal Rules of Consideration.6.4No Consideration No Contract Exceptions.6.5Types of Consideration.6.6Stranger to Contract&Stranger to Consideration.6.7Unlawful Consideration.6.8Summary6.9Questions6.0OBJECTIVESAfter studyingthe unit,the students will be able to:•Understand the meaning and definition of Consideration•Know the essentials of valid consideration.•Discuss the cases where an agreement though made withoutconsideration will be valid.•Explain the types of consideration.•Know the meaning of Stranger to Contract and strange toconsideration.6.1INTRODUCTIONConsideration is the foundation stone of every contract. The law enforcesonly those promises which are made for valid consideration. Where oneparty promises to do something, it must get something in return. This‘something in return’is called consideration. Consideration is thelife-bloodof every contract.If a promise is to be enforced as creating legal obligations, the law insistson the existence of consideration. A promise without consideration is nulland void. It is called a naked promise or “Nudum Pactum.”Thus, if Apromise to pay B Rs. 1000 without anything in return, thisconstitutesabare promise and gives no right of action.munotes.in

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For a contract to be binding there must be valid consideration.Consideration is the promise given by both partiesas the “price” ofentering into the agreement. Without consideration there will be nocontract.For example, ifAnilentered into an agreement withBhanufor purchaseof a Motor Car in exchange of nothing. Here there is no contract as theconsideration value isnil.In other case Anju entered into an agreement with Manu for Purchase ofMotor car for Rs. 80,000/-, here the motor car isconsiderationfor Manjuand Rs.80,000/-is consideration for Anju. Hence here is a valid contract.Consideration is inLatintermquid pro quomeans something in return, itmeans Price for the Promise.6.2MEANING AND DEFINITIONS CONSIDERATION6.2.1Meaning and Definition:•Section2(d)of the Indian Contract Act defines consideration as under:‘When, at the desire of the promisor, thepromiseor any other person (i)has done, or abstained from dong or (ii) does or abstains from doing, or(iii) promises to do or to abstain from doing something, such act orabstinence or promise is called a consideration for the promise’.Section 23 provides that agreement without consideration is void.Definition:Consideration has been defined in many ways. According topollock”Consideration is the price for which the promise of some otheris brought and the promise thus given for value is enforceable.”According toSection 2 (d)of the Indian Contract Act definesconsideration as(a)when at the desire of the promisor,(b)thepromise or any other person,(c)has done or abstained from doing, or does or abstain from doing, orpromises to do or abstain from doing,(d)something, such act or abstinence or promise is called a considerationfor the promise.Example:A agrees todell his horse to B for Rs. 1000. Here A’s promiseto sell his horse is for B’s consideration to pay Rs. 1000 is A’sconsideration to sell his horse to B.6.3LEGAL RULES OF CONSIDERATIONPresence of consideration is one of the requisites of Valid Contract.Consideration must be of two directionalnatures. That means both partiesmunotes.in

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should get benefited mutually. Then only the Contract becomes capable ofcreating legal relations. Considerationmay be in the form of cash, goods,act or Abstinence.1.Consideration must move at the desire of the promisor.Theconsideration must move at the desire of the promisor. It is not necessarythat it must be for the benefit of the promisor. It can be forthe benefit ofthe third person also.Example:Prof. Vinayak is employed by an Institution to teachMercantileLaw, but he teaches “Economics”. Prof. Vinayak has donenothingat the desire of the appointing authority i,ePromisor.2.Consideration maybe Past, Present or Future:Consideration are of three types namely Past, Present and Futureconsideration.•The consideration which is sent before formation of contract is calledpast consideration.•The consideration which gets passed at the time of formation ofcontract is called Present Consideration.•The Consideration which is to be passed in future i.e. after the contractis called Future Consideration. As per Indian Law three types ofconsiderations are Valid. But as per England law Past Considerationisnot valid.3.Consideration need not be adequate:Consideration need not be required to be adequate it can be inadequate. Itmeans if a person sell a Mobile Phone worth Rs.10,000/-in Rs. 5,000/-, itis a valid contract, provided mutually agreed uponby both the parties.Example:There is a Contract between A and B according to the terms ofwhich A has to provide his house to B at a rent of one rupee. Courtdecides that it is a Valid Contract because Consideration need not beadequate.4.Consideration must be Lawful:Consideration must be lawful. Presence of unlawful consideration makesthe contract illegal and hence Void.Example:There is a Contract between X and Z according to which Z hasto murder Y for a Consideration of Rs. 10000from X. Here Considerationfrom Z to X is unlawful and it is illegal contract.5.Consideration must be real and not illusory:Consideration must be real and of some value in the eyes of law.Consideration is not real when it is uncertain illusory or when it isphysically or legally impossible to perform. Hence consideration shouldmunotes.in

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be possible to perform. An act does not recognizeimpossible performance.It may be physically impossible or can be legal impossible.Example: Ajaypromises to discover treasure by magic ifAtulpays himRs.5000/-Consideration from Ajay is void because it is impossible toperform the promise.6.4NOCONSIDERATIONNOCONTRACTEXCEPTIONSEvery agreement to be enforceable at law must be supported by validconsideration. An agreement made without consideration is void and isunenforceable except in certain cases. Section 25 specifies the cases wherean agreement though made without consideration will be valid.They are as follow:1.Natural love and affection [Sec. 25(1)]:An agreement though made without consideration will be valid if it is inwriting and registered and is made on account of naturallove and affectionbetween parties standing in a near relation to each other. An agreementwithout consideration will be valid provided-•It is expressed in writing;•It is registered under the law for the time being in force;•It is made on account of natural love and affection;•It is between parties standing in a near relation to each other.•All these essentials must be present to enforce an agreement madewithout consideration.2.Compensation for services rendered [Sec. 25(2)]:An agreement made withoutconsideration will be valid if it is a promiseto compensate wholly or in a part a person who has already voluntarilydone something for the promisor or somethingwhich the promisor waslegally compellable to do.To apply this rule, the followingessentials must exist:(a)The act must have been done voluntarily;(b)For the promisor or it must be something which was the legalobligation of the promiser;(c)The promisor must be in existence at the time when the act was done;(d)The promisor must agree now to compensate the promisee.3.Time-barred debt [Sec. 25(3)]:A promise to pay a time-barred debt is also enforceable. But the promisemust be in writing and be signed by the promisor or his agent authorizedmunotes.in

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in that behalf. Thepromise may be to pay the whole or part of the debt. Anoral promise to pay a time-barred debt is unenforceable.4.Promise to Charities:A mere promise to contribute to charity is not enforceable by law becauseit is without consideration.If a person promises to contribute to charity and on this faith, the promiseundertakes a liability to that extent not exceeding the promisedsubscription, the contract shall be valid and enforceable by law.For Example:Anurag promises to pay Rs.12,000/-to the ManagementCommittee of the school by way of donation. The Management on thebasis of Anurag’s Promise, gets a Water Purifier system installed in theschool at the cost of Rs. 8,000/-on credit. Now Anurag refuses to pay thedonation.In the above case Anurag will have to pay Rs. 8,000/-to the school onaccount of donation as the management had incurred a liability on the faithof Anurag. Here is valid contract even though the consideration is absent.6.5TYPES OF CONSIDERATIONThere are three different types of consideration are asunder:-1.Past Consideration:When something is done before the date of the agreement, at the desire ofthe promisor, it is called ‘past consideration.Let us discuss an example of this.Ateaches the son ofBatB’s request in the month of January, and inFebruaryBpromises to payAa sum of Rs 200 for his services. Theservices ofAwill be past consideration.2.Present consideration.Consideration which moves simultaneously with thepromise, is called‘present consideration’ or ‘executed consideration’.Example:Asells and delivers a book toB,uponB’s promise to pay for itat a future date. The consideration waiting fromAis present or executedconsideration sinceAhas done hisact of delivering the booksimultaneously with the promise ofB.3.Future Consideration:When the consideration on both sides is to move at a future date, it iscalled ‘future consideration’ or ‘executory consideration’. It consists of anexchange ofpromises and each promise is a consideration for the” other.munotes.in

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 Example: Xagrees to sell a Sofa-cum-Bed for Rs. 20,000/-on first of thenext month andYagrees to pay the price 15 days after the date ofdelivery.In this contract, consideration for boththe parties is future isfuture or executor.6.6STRANGERTOCONTRACT&STRANGERTOCONSIDERATION6.6.1Strangerto Contract:Stranger to Contract means the person who is not party to contract. Thestranger to contract is also known as third party. Thestranger to contract iscannot bring suit except in recognized cases.It is general law of contract that a person who is not a party to the contractcannot sue upon it.Dunlop Pneumatic Tyre Co. v/s V. Selfridge & Co. (1915)A large quantity of tyressold by X to Y at a certain price on entering intoa agreement that he should not sell the tyres below the price mentioned inprice list supplied by X.Y sold the tyres to Z a retail dealer under acontract stipulating the same covenant as between X and Y. Z sold thetyres at less than the list price. X suedZ for breach of contract. It was heldthat X could not sue Z as X was not a party to contract between Y and Z.6.6.2Stranger to Consideration:Under the Indian Contract Act 1872 consideration for a contract maymove from the promisee or any other person i.e. a stranger to theconsideration can also enforce the contract. But under the English Law theconsideration for the contract must move from the promisee and promiseeonly, therefore a stranger to consideration cannot enforce it.So, in India the consideration may move from stranger. This law wasestablished in the case ofCHINAYYA Vs. RAMAYYA.Facts of the Case:An old ladyLaxmi Ranigifted her property to her own daughterRamayya, with the instructions to pay a certain sum of money annually tochinayya, her maternal uncle. On the same day Ramayya refused tohonour the agreement on the ground that there is no consideration.Chinayya sued for the recovery of the annuity. It was heldthat there wassufficientconsideration i.e. the property given to her by the sister ofChinayya.6.7UNLAWFUL CONSIDERATIONLegality of Object and Consideration.munotes.in

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Two things are categorically prerequisite to form a valid contract. That is,lawfulobject and lawful consideration. Indian Contract Act provides usthe criterion that accordingly we could make up such lawful object andlawful consideration.Let us discuss the legality of object andconsideration of a contract.Lawful Consideration andLawful Object:Indian Contract Act Section 23provides that consideration and / o objectof a contractisconsidered unlawful unless they are…•Forbidden by law•That they would defeat the purpose of the law•Are fraudulent•When itinvolvesinjury to any other person or property•The courts regard them as immoral•Are opposed to public policy.Object or Consideration of a contract are not lawful when it is prohibitedbylaw,they become unlawful in nature and such contract cannot be validforever.Forbidden by Law.Unlawful consideration of object includes acts that are categoricallypunishable by the law. This also includes those that the appropriateauthorities restricted through various rules and regulations.Example:A received a license from the Excise Department ForestDepartment to sell a liquor in acertain area. The authorities at thedepartment told him he cannot pass on such interest to another person. Butthe Excise Act has no such statute.So,A sold his interest to B and thecontract was held as valid.Consideration / Object Defeats the Provisions of the LawWhen the contract is defeats the intention of the law and the court findsthe actual intention of the parties to agreement is to defeat the provisionsof the law the said contract will keep aside as it is not effective and non-enforceable as it is againstthepublic policy.Forexample:•Amit agreesto sell his house toBalram for3,00,000 rupees. Here,Balram’s promise to pay the sum of 3, 00,000 rupees is theconsideration for Amit’s promise to sell the house and Amit’spromises to sell the house is the consideration for Balram’s promise topay the 3,00,000 rupees. These are lawful considerations.•Amar, Akbar and Anthony enter into an agreement for the divisionamong them of gains acquired or to be collected, by them by fraud.The agreement is void for being object is unlawful.munotes.in

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•Hamid promises to obtain forVeena anemployment inthe publicservice and Veena promises to pay 1,00,000 rupees to Hamid. Theconsideration for the same is unlawful and hence the agreement isvoid.Consideration / Object is Fraudulent:Agreement involving unlawful and fraudulent consideration or objects arevoid by nature.Forexample:Amar decides to sell new born baby to Bankim which hehad stolen from the nearby maternity home and smuggle the outside thecountry. This is a fraudulent transaction as so it is void. Now Bankimcannot recover the money under the law if Amar does not deliver on hispromise.If Consideration is Immoral:If the court has regarded that the object or consideration isimmoral,thensuch object and consideration are treated as immoral.For example:Arvindlent money to Mala to obtain a divorce from her husband Kumar.It was agreed once Mala obtains the divorce Arvind would marry her. Butthe court passed the judgement that Arvind cannot recover money fromMala since the contract is void on account of unlawful consideration.Consideration is Opposed to Public PolicyWe prohibit certain contracts in the name of publicpolicy forthebetterment of the community.Examples:An Agreement to Traffic in Public OfficesAgreements to create MonopoliesAnagreement to brokerage marriage for rewardsInterfering with the Courts: An agreement whose object is to induce ajudicial or state officials to act corruptly and interfere with legalproceedings.6.8 SUMMARY•Consideration is the foundation stone of every contract. Where oneparty promises to do something, it must get something in return. This‘something in return’is called consideration. Consideration is thelife-bloodof every contract.•Legal Rules as to consideration: Consideration must move at thedesire of the promisor, Consideration may be Past, Present or Future,munotes.in

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Consideration need not be adequate, . Consideration must be Lawful,Consideration must be real and not illusory,•Unlawful Consideration:Forbidden by law, That they would defeatthe purpose of the law, Are fraudulent, When it involve injury to anyother person or property, The courts regard them as immoral, Areopposed to public policy.6.9QUESTIONS1.What is consideration and stateits essential elements of consideration?2.“No consideration No contract”Discuss.3.Short Notes:a.Types of Consideration.b. Strangers to Contract.c. Unlawful Consideration*****munotes.in

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 MULTIPLE CHOICE QUESTIONS WITH ANSWERS(MODULE I)1.When predefined rules are enforced or bind on people it is called asa)Actb) Lawc) Sectiond) all of the aboveAnswer. b) Law2.Contract Act deals under which branch of Lawa) Commercialb) Internationalc) Cyberd) None of the aboveAnswer. a) Commercial3.Which of the following is not a branch of Lawa) Commercialb) Internationalc) Mercantiled) LegalAns. d) Legal4.A contract is a/an _________________ made between two or moreparties whichthe Law will enforce.a ) Offerb) Transactionc) Agreementd) none of the aboveAnswer. c) Agreement5.All Contract is a/an ______________a ) Offerb) Agreementc) Acceptanced) TransactionAns. b) Agreementmunotes.in

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6.A/an _______________ is every Promise and every set ofpromises, forming consideration for each othera) Offerb) Agreementc) Acceptanced) TransactionAns. b) Agreement7.Every agreement and promise enforceable by law is______________a)Offerb) Contractc) Acceptanced) ConsiderationAnswer. b) Contract8.___________________ contract is made by spoken wordsa)impliedb) Expressc) voidd) special(Ans: b)9.Where acontract is been understood by from the conduct of partiesit is __________________ contracta)impliedb) Expressc) voidd) special(Ans: a)10.The person who makes an offer is called ________________a)sellerb)offererc) offereed) Promisee(Ans: b)11.Contract = _____________________ +_____________________a) Agreement+ Offerb) Agreement + considerationc) Agreement + enforceable by lawd) None of the above(Ans: c)munotes.in

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12.Agreement=___________________+ _______________________a ) Consideration + Offerb) Acceptance + considerationc) Offer + Acceptanced) None of the above(Ans: c)13.The party who initiates the offer is called asa)Offerorb)offereec) Acceptord) First Party(Ans: a)14.The requirement that the parties to an to agreement must becompetent to contract, is laid down inA. Sec 10B. Sec 11C. Sec 24D. Sec 2515.Thecapacity to contract (i.e.. Competence of the parties) isdefined inA.Sec 10B. Sec 11C. Sec 24D. Sec 2516.The capacity to contract meansA.Willingness of the parties to enter into a contractB.Intention of the parties to enter into acontractC.Competence of the parties to enter into a valid contract.D.Certificate to enter into a valid contract17.The Capacity to contract isA. A legal rule of validityB. An essential element of a valid contractC. An essential element ofcompetencyD. None of these18.An agreement by or with a party not competent to contract isA.MinorsB.VoidableC.ForbiddenD.Voidmunotes.in

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19.Which ofthe following persons are not competent to contract ?A. MinorsB. Persons of un sound mindC. Personsdisqualified by lawD. All of these.20.Every person iscompetent tocontract who is of theA. Age of majorityB. Age of minorityC. Sound reputationD. Sound financial21.Every person Is competent to contract who isA. Of sound mindB. Notdisqualified from contractingC. Both (a) and (b)D. None of these22.For the purposes of entering into contract, a minor is a personwho has not completed the age ofA. 15 yrsB. 18 yrsC. 21 yrsD. 25 yrs23.Under English Law, for all purposes, aminor is a person who isunder the age ofA. 15 yrsB.18 yrsC. 21 yrsD. 25 yrs24.A minor is defined as a person who has not completed eighteenyears of age in section 3 of theA. Guardians and Wards Act, 1890B. Indian Contract Act, 1872C. Indian Majority Act, 1875D. Court of Wards Act25.For the purposes of validity of contract, a person entering Intocontract should be of sound mindA. Only at the time when he makes the contractB. Only at the time when he enforces the contractmunotes.in

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C. Both at thetime of making as well as enforcement of contractD. Throughout his life26.The soundness of mind for the purposes of entering into a validcontract is defined InA. Sec lOB. Sec llC. Sec l2D. Judicial decisions27.A drunken or intoxicated personIs not competent to contract ashe falls in the categoryofA.Persons disqualified by lawB.Persons of unsound mindC.Persons discarded by societyD.Enemies of society28.Which of the following are the persons of unsoundmind?A. IdiotB. IunaticC. DrunkenD. All of these29.An Idiot can enter Into a valid contract at a time when he Is ofsound mindA. Alien enemiesB. InsolventsC. ConvictsD. AII of these30.Which of the following persons are not competent to contractbeingthe personsdisqualified by law?A. Alien enemiesB. InsolventsC. ConvictsD. All of these31.Which of the following persons are not competent to contractbeingthe persons disqualified by law?A. IdiotsB. LunaticsC. AlienD. Drunken personsmunotes.in

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32.Flaw in capacity to contract may arise formA. Uncertainty of objectB. Unsoundness of mindC. Want of considerationD. Illegality of object33.Incompetency to enter into a contract, IncludesA. MinorityB. DisqualificationC. Unsoundness ofmindD. AII of these*****munotes.in

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MULTIPULE CHOICE QUESTIONS FOR PRCTICEMODULE 11.An agreement consists of reciprocal promises between at least(a)four parties.(b)six parties.(c)three parties.(d)two parties.2.Every promise and every set of promise forming the considerationfor each other is a/an(a)contract.(b)agreement.(c)offer.(d)acceptance.3.In agreements of a purely domestic nature, the intention of theparties to create legal relationship is(a)to be proved to the satisfaction of the court.(b)presumed to exist.(c)required to the extent of consideration.(d)not relevant at all.4.A makes a contract with B to beat his business competitor. This isan example of(a)valid contract.(b)illegal agreement.(c)voidable contract.(d)unenforceable contract5.Agreement the meaning of which is uncertain is(a)Void(b)Valid(c)Voidable(d)Illegal6.As per section 2(e) of the Indian Contract Act, “Every Promiseand every setof promise forming the consideration for each otheris a/an(a)Contract(b)Agreement(c)Offer(d)Acceptancemunotes.in

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7.A promises to deliver his watch to B and, in return, B Promise topay a sum of ‘ 2,000. There is said to be a/ an(a)Agreement(b)Proposal(c)Acceptance(d)Offer8.For an acceptance to be valid, it must be(a)Partial & qualified(b)Absolute & unqualified(c)Partial & unqualified(d)Absolute & qualified9. overa cup of coffee in a restaurant, X Invites Y to dinner at hishouse on a Sunday. Y hires a taxi and reachesX’s house at theappointed time, but x fails to perform his promise. Can Y recoverany damages from X?(a)Yes, as y has suffered(b)No, as theintention was not to create legal relation.(c)Either (a) or (b)(d)None of these.10.Which one of the following has the correctsequence?(a)Offer, acceptance, consideration, offer.(b)Offer, acceptance, consideration, contract(c)Contract,acceptance, consideration, offer.(d)Offer, consideration, acceptance, contract.11.Every agreement and promise enforceable by law is …………….(a)Offer(b)Contract(c)Acceptance(d)Consideration12.Offer implied from conduct of parties or fromcircumstances ofthe case is called ………..(a)Implied offer(b)Express offer(c)General offer(d)Specific offermunotes.in

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13.Consideration in a contract:(a)May be past, present or future(b)May be present or future only(c)Must be present only(d)Must be future only.14.Amit helped Ankit to reach the office on time where he had animportant meeting to attend. Two days later, Ankit promised topay Rs. 10000 to Amit in gratitude. This contract isa)Void because there is no considerationb)Valid as Amit’s action of helping amount to past considerationc)Validd)Voidable15.Astha promised to give Aarush Rs. 10000. In return, Aarushpromised to kidnap Chetan’s daughter. This contract isa)Validb)Voidc)Voidabled)None of these16.Which of the following is not an exception to the consideration asan essential condition?a)Natural love and affectionb)Promise to pay a time-barred debtc)Both (a) and (b)d)None of these17.Whichof the following is false? An offer to be Valid must(a)Contain a term the non-compliance of which would amount toacceptance.(b)Intend to create legal relations.(c)Have certain and unambiguous terms.(d)Be communicated to the person to whom itis made.18.Offer implied from conduct of parties or from circumstances ofthe case is called ………..(a)Implied offer(b)Express offer(c)General offer(d)Specific offermunotes.in

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19.An acceptance on telephone should be(a)Heard by the offeror(b)Audible to the offeror(c)Understood by the offeror(d)All of the above.20.“Consensus–ad–idem” means ………(a)General Consensus(b)Meeting of minds upon the same thing in the same sense(c)Reaching an agreement(d)Reaching ofcontract*****munotes.in

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MODULEII7INDIAN CONTRACT ACT1872 PART IIFREE CONSENT & CONTRACTSections. 13-22Unit Structure7.0Objectives7.1Introduction:Consent7.2Free Consent.7.3Coercion (Section 15)7.4Undue Influence (Section 16)7.5Fraud(Section 17)7.6Misrepresentation (Section 18)7.7Mistake (Section 20)7.8Summary7.9Questions7.0OBJECTIVESAfter studying the unit the students will be able to:•Know the meaning of consent•Explain the meaning and effects of Coercion•Know theMeaning and effects of Undue influence.•Understand the meaning and effects of Misrepresentation.•Know the Meaning and effects of Mistake.•Explain the meaning and effects of fraud.7.1INTRODUCTION:CONSENTSection 13of Indian Contract Act“Consent” has definedas-Two ormore persons are said to consent when they agree upon the same thing inthe same sense (i, eConsensus ad idem)The word Consent means agreeing that something should be happen. Anagreement is valid only when it is the result of the free consent of all theparties to it.munotes.in

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7.2 FREE CONSENTSection.14 defines “Free consent” as,Consent is said to be free when it is not caused by-•Coercion, as defined in section 15, or•Undue influence, as defined in section 16, or (3) fraud,as defined insection 17, or (4)•Misrepresentation, as defined in section 18, or•Mistake, subject to the provisions of sections 20, 21 and 22. Consent issaid to be so caused when it would not have been given but for theexistence of such coercion, undueinfluence, fraud, misrepresentationor mistake.Free consent is one of the most important essential elements of a validcontract. The term free consent refers to meeting of free and fresh mindsof two parties of an agreement when two parties take andunderstand,purpose, subject matter and terms and conditions of the agreement in thesame sense it is free consent. Both of them must take things in the sameway. They must not understand it in different way.Two persons are said to consent, when they agree upon the same thing inthe same sense. It is also known as consensus-ad-idem, which meansidentity of mind.7.3COERCION (SECTION 15)7.3.1 Meaning:“Coercion”is the committing, or threatening to commit, any act forbiddenby the Indian Penal Codeunder (45of1860), or the unlawful detaining, orthreatening to detain, any property, to the prejudice of any personwhatever, with the intention of causing any person to enter into anagreement.Example,“A” threatens to shoot “B” if she doesn’t marry with him“B”marries “A” under threat. Since the marriage has been brought about bycoercion, such marriage is not valid.In simple words, coercion is the threat used by one party against anotherfor compelling him to enter an agreement against his or herwill. Section15 of the Indian Contract Act defines coercion as the committing orthreatening to commit any act forbidden by Indian Penal Code or anunlawful detaining or threatening to detain, any property of any personwith the intention of inducing any person to enter into an agreement. It isimmaterial whether the Indian Penal Code is or not in force in the placewhere the coercion is employed.munotes.in

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When aperson was forced to enter into a contractby use or under thethreat of use of physical forceby the other person committing orthreatening to commit any act forbidden by IndianPenalCode,Coercionissaidtohavebeenemployed.Effectof CoerciononaContract:•The contact becomesvoidableat the option of the aggrievedperson/party, theaggrieved party has two options may compel theother party for performance.•If the aggrieved party decides to set aside the contract, he mustcompensate any benefits received by him under such contract.
Committing or threatening to commit an act.Coercion means forcing someoneto enter into a contract against their will.When threats are used under pressure to achieve the party’s consent, i.e. itis not free consent.Coercion may involve the actual infliction of physical and psychologicalharm in order to enhance the credibility of a threat. Then the threat offurther harm can lead to the threatened person’s cooperation or obedience.Contract entered into by coercion is voidable. It implies that at the optionof the party whose consent was not free, the contract is voidable. Theaggravated party will, therefore, determine whether to enforce the contractor to cancel the contract.Example:‘Amar Kaka’went out for an evening walk,‘Mr. Chalu Kishan’approaches ‘Amar Kaka’ with a stranger, taken out his gun and asks



 


  

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‘Amar Kaka’to give all his belonging to him immediately, otherwise hewill shoot Amar kaka. The consent of ‘Amar Kaka’ was obtained bycoercion here.1.The act must be forbidden by Indian Penal Code:The word act prohibited by the Indian penal code makes it necessary in acivil action for the court to decide whether the alleged act of coercion isamount to an offence. A threat of bringing a false charm with the object ofmaking another do a thing amount to blackmail or coercion.In the case of Ranganayakamma vAlwar Setti, where the widow wasprohibited from removing the corpse of her husband until she consentedfor the adoption. The court said that her consent was not free and it wascoerced. It is clear that coercion is committing or threatening to commitanyact which is contrary to law.The act is forbidden by Indian Penal Code:Coercion can be exercised by contracting party or third party:It does not always requiresthat only contracting party should exercise thecoercion. Any third party on behalf of him can also exercise the same,For Example: Mr. Amar employs Mr. Tapori to bit Mr. Sojwal to makeMr. Sojwal part with Rs. 1,00,000/-Intention of causing the other party to enter into a contract:It is required, that the coercion must be committed with the intention tomake the person to enter into the contract by inducing the partywrongfully for obtaining assent or consent.7.4UNDUE INFLUENCE (SECTION 16)7.4.1Meaning:It is a wrong pressure put on someone which prevents that person fromacting independently.(Section 16(2))States that “A person is deemed to be in a position todominate the will of another.For Example-Spiritual adviser inducing his/herdevotee to gift overtheproperty for securing “moksha”.Undue influence means and includes:Under undue influence a party is compelled to enter into an agreementagainst his own will as a result of unfair persuasion byother party. Itincludes mental, moral and physical domination that deprives or makesunable the person to take his own judgement.munotes.in

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In dealings between parent and child, husband and wife, attorney andclient, or doctor and patient, undue influence is generally presumed tohave beenexercised unless proven otherwise.Following situation or circumstances, a person is deemed to be in aposition to dominate the will of others.•Where he holdsa real or apparent authority over the other. Forexample, an employer may be deemed to be having authority over hisemployee.•Master and Servant•Parent and child•Where he stands in afiduciary relationshipto other,•The relationship of Solicitor with his client,•Spiritual advisor and devotee.•Doctor and Patient•Guardian and Child.•Where he makes a contract with a person whosemental capacity istemporarily or permanently affected by the reason of age, illnessor mental or bodily distress”7.4.2 EffectsofUndue Influence:When consent to an agreement is caused by undue influence,the contractis voidable at the option of the party whose consent was so caused. Anysuch contract may be set aside either absolutely, or if the party who wasentitled to avoid it has received any benefit there under. Only a party tothe contract can avoidor rescind the contract. This right does not lie in thehands of a third party.Illustrations:1)A’sson has forgedB’s name on a promissory note.B,under threat ofprosecutingA’sson, obtains a bond fromA, for the amount of theforged note. IfBsues on this bond, the Court may set it aside.2)A, a money lender advances Rs 100 toB, an agriculturist and by undueinfluence, induces B to execute a bond for Rs 200with interest at 6 percent per month. The Court may set the bond aside ordering B to repayRs 100 with such interest as may seem just.BasisCoercionUndue InfluenceMeaningIt refers to physical threat orforce used by one partyagainst the other for makinghim to enter into a contract.It is said to exist when oneof the parties tothe contractobtains, throughdominance, consent ofanother party to enter into acontract.munotes.in

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NatureConsent is obtained under thethreat of an offenceConsent is obtained by thedominant will of another.MediumConsent is obtained by force.Consent is given in goodbelief but under moralinfluence.LiabilityUnder the Indian Penal Code.Coercion is punishableThereis no criminalliability.ForceIncludes Physical forceIncludes Mental force.7.5FRAUD (SECTION 17)7.5.1Meaning:“Fraud” means and includes any act oran active concealment ofmaterial factsor misrepresentation made knowingly by a party to acontract, or with his connivance, or by his agent, with intent to deceiveanother party thereto of his agent orto induce himto enter into thecontract.“A false representation of fact made with the knowledge of its falsehoodwithout belief in truth with intention that it should be acted upon by theparty and actually inducing him to act upon it.”Section 17 of the Contract Act states,“Fraud means and any of the acts stated committed by a party to a contractor with his connivance, or by his agent, with intent to deceive anotherparty thereto or his agent, or to induce him to enter into a contract.”It must have been committed by a party to the contract or by his agent inorder to deceive the other party.Example1:Mr. Shah purchases the land from Mr. Khan, who hasalready sold his land to Mr. Rahul. In this example, Mr. Khan hadcommitted fraud because he did not tell to Mr. Shah that i have alreadysold this land to Mr. Rahul.Example2:Mr. Amur tells Miss. Jolly knowing it to be falsethat his cowis pregnant. On this suggestion Miss. Jolly agrees to buy cow Rs. 45,000.It is a fraud.Example3:Miss. Tina borrow Rs. 10,000 from Mr. Nash and promises toreturn it after one month without any intention of performing it. In thisexample Miss. Tina has no intention to return the money when shepromises to pay. It is also a fraud.The term ‘fraud’ includes all acts committed by a person with an intentionto deceive another person. Deception means to make the person to enterinto a contractby defrauding him.munotes.in

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 Fraud is thewillful, deliberate representationmade by a party to acontract with the intent to deceive the other party or to induce such partyto enter into a contract. It means made knowingly or without belief in itstruth or recklessly without caring whether is it true or false.According to Section 17, fraud means and includes any of thefollowing acts done with intent to deceive or to induce a person toenter into a contract.7.5.2 Elementsof Fraud:1.A False representationmust be there:A False statement maderecklessly without inquiring whether it is true or false would amountto fraud. But if a statement which turns out to be false is made in thehonest belief that it is true there is no fraud.2.The Active concealmentof material fact:If a person conceals orhides a fact which is material or important to the contract and it isduty to disclose it, it will be a case of fraud. Mere non-disclosure isnot a fraud, where there is no duty to disclose.3.A promise made without any intention ofperforming it:Where aperson orders and obtains possession of goods with the intention ofnot paying for them, he commits fraud.The initial intention not toperform the promise that is being made is a necessary element toprovefraud.4.Any such act or omission as the law specially declares to befraudulent:It is fraudulent to conceive of any act that attempts todeceive law. Thus, where a contract is based against the policy ofinsolvency law, or a secret agreement is formedbetween the insolventand the party, it is nothing short of a fraud on insolvency law.5.Suffering Loss:The other party must have subsequently sufferedsome loss. There is no fraud without damage or damage without frauddoes not give rise to an action.*80:,43*,(12,384-(8,60(1-(*87(17,6,56,7,38(8043$$ % %$!#&*89(11<,*,0:,+$9--,6,+477munotes.in

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For Example: Mr.XYZ Manufacturerof hair Shampoo. Claimed thatwhoever applies it, the hair will turn into Shiny and Smooth. Miss Riyabelieving in the statement bought the shampoo, applies on her hair,immediately her hair started falling. It is stated the7.5.3Whether mere Silence could lead toFraud?Mere silence is not fraud. Unless it was the duty of the person to speak orto provide any information as per act. A contracting party is not obliged todisclose each and everything to the other party. There are two exceptionswhere even mere silence may be fraud, one is where there is a duty tospeak, and then keeping silence is fraud. Or when silence is in itselfequivalent to speech, such silence is fraud.A silence to the contract is under no obligation to disclose the whole truthto the other party. ‘CAVEAT EMPTOR’i.e., let the buyer beware is therule applicable to contracts. There is no duty to speak is such cases andsilence does not amount to fraud. Similarly, there is no duty to disclosefacts which are within the knowledge of both parties.Example:H sold to W some pings which to his knowledge sufferingfrom fever. The pings were sold ‘with all faults’ and H did not disclosethe facts of fever to W.Held there was no fraud. [Word v. Hobhs.)(1878) 4 AC 13]Section17makes it clear that mere silence as to the facts likely to affectthe willingness of a person to enter into a contract is not fraud unless thecircumstances of the case are such thatregard being had to them it is theduty of person keeping silence to speak, or unless silence is equivalent tospeech.1.Mere silence is not fraud:A person is not bound to disclose the defect of his articles.Example: Asells by auction toB,a horse whichAknows to be unsound.Asays nothing toBabout the horse’s unsoundness. It is not fraud.2.Silence is fraud if silence is equivalent to speech:Again, where silence is equivalent to speech, silence amounts to fraud. Forexample, B says toA “If you do not deny it, I shall assume that the horseis sound.” A says nothing. Here A’s silence is equivalent to speech and assuch, it is fraud.7.5.4Duty or obligation to speak:In certain contracts, the law requires the parties to make full disclosure ofmaterial facts. Failure to disclose such facts would make the contract voidor voidable. Such contracts are calledUberrimae fidei, i.e., contractsrequiring utmost good faith. In such contracts, party having anyinformation regarding the subject-matter which is likely to affect themunotes.in

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willingness of the other party to enter into transactions, is bound todisclose the information.Following contracts are included in this category:1.Contracts of insurance:In contracts of insurance, the insured is required to disclose all materialfacts concerning the insurance which are likely to affect the risk and thusthe willingness of theinsurer. Failure to do so will result in avoidance ofthe policy. The policy can be avoided even if the mistake is innocent.2.Contract of immovable property:Under Sec. 55(i) (a) of the Transfer of Property Act, 1882, the seller isunder an obligation to disclose to the buyer any material defect in theproperty or in the seller’s title of which the seller is aware and the buyer isnot aware, nor he (Buyer) could know with ordinary care.Example: Aknows that there is a crack in the Furniture. He sells thisFurniture toBbut does not disclose this defect toB. It is fraud .Bcanavoid the sale when he comes to know of the defect.3.Allotment of shares in companies:Companies Act requires the directors to make fullest possible disclosure inthe prospectus to protect public interest, If the directors do not disclose thespecified facts, the agreementto take shares can be avoided.4.Contract of marriage:Each partyto an agreement for marriage is duty bound to disclose everymaterial fact, otherwise the party is justified in breaking off theengagement.7.5.5Effects and Consequences of Fraud:When consent to an agreement is caused by fraud, the agreement is acontract voidable at the option of the party whose consent was so caused.A party whose consent to an agreement was caused by fraud has tworemedies, namely:•He may rescind the contract, or•He may insist that the contract shall be performed and that he shall beput in the position in which have been, if the representation made hadbeen true.Example: Afraudulently informsBthatA’sestate is free fromencumbrance.Bthereupon buys the estates. The estate is subject to amortgage.Bmay avoid the contract or may insist on its carried out and themortgage debt repaid byA.Apart from the above,theperson defrauded may obtain rescission,restitution for damages.The aforesaid remedies are subject to anmunotes.in

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exception.Acontract cannot beavoided on the ground ofmisrepresentation or silence amounting to fraud. If a party to whom anuntrue or misleading statement was made had the means of discoveringthe truth with reasonable diligence. The party whose consent was obtainedby fraud has thefollowing rights:1.Aggrieved party can avoid the contract.2.He may also claim damages.3.He, instead of avoiding the agreement, may insist that the contractshall be performed and may claim the difference or loss due to fraud.In case of fraud the contract is voidable at the option of defrauded party. Aparty has the following three options:1.Contract May be Avoided:Defrauded party may avoid itself from the contract where his consent wasobtained by fraud. In case of fraudulent silence, he cannotavoid if he hadthe means to discover the truth.2.Act upon the Contract:Second option for the defrauded party is that it may act upon the contractand may ask the other party to fulfill the terms and conditions of thecontract.3.Claims for Damages:Third option for the defrauded party is that may claim for damages. Suitfor damage can be filled.7.6MISREPRESENTATION (SECTION 18)7.6.1Meaning:Introduction:The Word ‘Misrepresentation’ means a statement orpositive assertionmade by one party tothe other, before or at the time of the contractrelating to it.Therefore, Misrepresentation is a false statement which the person makingithonestly, believesto be true or which he does not know to be false.Example: Aintends to sell his horse toBand says, “My horse is perfectlysound”.Agenuinely believes the horse to be sound, although he does notknow that the horse has fallen ill yesterday.Bthere upon buys the horse.There is misrepresentation on the part ofA.Thus, misrepresentation meansfalse representation made innocently withan honest belief as to its truth by a party without any intention to deceive.The leading case on this point is:munotes.in

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 DERRY V. PEEK (1889)Facts of the Case:A representation in the prospectus of the Companythat thecompany has been authorized by a special Act of Parliament toruns trams by steam or mechanical power. The authority to use steam was,in fact, subject to the approval of the board of Trade, but no mention wasmade of this. The Boardrefused consent and consequently the companywas wound up. The plaintiff having bought some shares, sued the directorsfor fraud. But they were held not liable.There is no fraud and they were not guilty of fraud as they honestlybelieved that once the parliament has authorized the use of steam, theconsent of the board was practically concluded.7.6.2Essential Requirements of Misrepresentation:•There should be a representation or positive assertion;•Such representation must relate to a matter of fact which has becomeuntrue; and•It was made before the finalization of transaction with a view to inducethe other party to enter into contract.•It must actually have been acted upon by the party.•It must have been either by the party himself or by his duly authorizedagent.7.6.3Distinguish between Fraud And Misrepresentation.FRAUDMISREPRESENTATIONDefined Under Section 2 (17) ofthe Indian Contract Act, 1872Defined Under Section 2 (18) of theIndian Contract Act, 1872An intentional, deliberate falsestatementmade by the person todeceive the party.In misrepresentation the personmaking the false statement honestlybelieves it to be true.The purpose of the fraud is todeceive the other parties to thecontract.There is no intention to deceive theotherparty when there ismisrepresentation of fact.The contract is voidableMisrepresentation renders thecontract voidable at the option ofthe party whose consent wasobtained by misrepresentation.Fraud, In certain cases is apunishable offence under Indianpenal code.Misrepresentation is not an offenceunder Indian penal code and hencenot punishable.munotes.in

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7.7MISTAKE (SECTION 20)7.7.1Meaning:Mistake may be defined underSection 20of Indian Contract Act, 1872, as“an erroneous belief about something”. If the agreement is carriedunder an erroneous belief, it cannot be said that the parties enjoyed freeconsent i.e. both the parties shall understand the same thing in the samesense.7.7.2Mistake may be of two types:1.Mistake of law:Mistake of lawdoes not mean mistake in provisions of law but it meansthere is mistake in understanding or interpreting the provisions of any lawby the party to contract.Hence mistake of law is where you are mistakenor ignorant about the law2.Mistake of fact:Amistake of fact is just that: a mistake pertaining to some fact. Forexample, if you are 35 years old but I think you are 34, I have made amistake of fact.A mistake of fact can act as a defense. Mistake of fact can be furtherdivided asbilateralandunilateralmistake.A.Bilateral Mistake:As per Section 20 of the Act, where both the parties to an agreement areunder a mistake as to a matter of fact essential to the agreement, theagreement shall be void”.Example:Aagrees to purchaseB’sCar forRs. 90,000/-as aconsideration. The day before execution of Contract the said car wasdestroyed by fire along with the garage. Both the party was unaware of thefact and still want to make a contract. This is a bilateral mistake from boththe side and contract is not valid but void as the subject matter isdestroyed.B.Unilateral Mistake:If the mistake is on the part of one person ( One of the parties to thecontract) the contract is valid.Example: Amitabrought Pickle from the shop keeper a sample of whichhad been shown toAmita.ErroneouslyAmitathought the pickle was old.The pickle was however new.Hence bilateral mistake would avoid the contract whereas, unilateralmistake cannot.munotes.in

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Therefore, one party to the contract is under a mistake of fact, the contractis not voidable. Unilateral mistakes do not affect the validity of thecontract unless they concern some fundamental fact and the other party isaware of the mistake.A unilateral mistake maybe:-Mistake as to the nature of the transaction:A contract shall be void if a party to the contract without any fault of hisown makes a mistake about the changing nature of the contract. It may bebecause of blindness, illiteracy, or of the personentered the contract ordue to the tactics or deliberate misrepresentation as to the nature of thedocument.Case Study:‘Atul’Agree to sell his horse to‘Bunty’.But unknown toboth the parties, the horse had already died at the time of making of theContract. Is it a valid contract? Why7.7.3Effects of Mistakes:A contract isnot voidablebecause it was caused by a mistake as to anylaw in force in India: but a mistake as to law not in force in India has thesame effect as a mistake of fact.Illustration:AandBmake a contract grounded on the erroneous belief that a particulardebt is barred by the Indian Law of Limitation the contract is not voidable.It is expected that everyone is supposed to know the law of the land.Ignorance of law isno excuse. If a person wants to avoid the contract forthe reason that there was a mistake, the relief will not be granted to him.•Agreement void where both parties are under mistake as to matterof fact.Examples:•‘A’ agrees to buy from‘B’ a certainhorse. The horse was dead at thetime of the contract, though both the party was aware of the fact. Theagreement is void.•‘A’being entitled to an estate for the property of‘B’, agrees to sell itto‘C’. ‘B‘was dead at the time of the agreement, but both the partieswere ignorant of the fact. The agreement is void.When the type of mistake contemplated is section 20 is present in anagreement, the agreement is void. Section 20 requires that:•Both the parties to the contract should be under a mistake.•Mistake should as regard a matter of fact.•The fact relating to which the mistake is made should be requisiteto the agreement.munotes.in

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7.7.4Distinguish Between Unilateral Mistake and Bilateral Mistake.UNILATERAL MISTAKEBILATERAL MISTAKEOne party is atmistake.Both parties to contract is at mistake.Contract is notVoidorvoidable.Both parties to an agreement are undermistake of facts, agreement is void.Provisionsareapplicableunder section 22.Provisions areapplicable under section20.7.8SUMMARYSection 13 of Indian Contract Act “Consent” has definedas-Two ormore persons are said to consent when they agree upon the same thing inthe same sense (i, eConsensus ad idem)•Consent must be free from Coercion, Misrepresentation, Fraud, UndueInfluence, and Mistake.•“Coercion”is the committing, or threatening to commit, any actforbidden by the Indian Penal Code under (45 of 1860),•Undue Influence-“A person is deemed to be in a position to dominatethe will of another.•“Fraud” means and includes any act oran active concealment ofmaterial factsor misrepresentation made knowingly by a party to acontract•Therefore, Misrepresentation is a false statement which the personmaking ithonestly, believesto be true or which he does not know to befalse.•Mistake may be defined underSection 20of Indian Contract Act, 1872,as“an erroneous belief about something”.7.9QUESTIONS1.Define consent. When consent said to be free?2.What is undue influence? State the effects of undue influence onthecontract.3.What is Coercion? Differentiate Coercion withUndue Influence.4.What is Fraud? What are its essential elements?5.Enumerate the effects of Mistakes.6.Define the following terms:a.Consentb.Unilateral Mistakec.Fraudd.Misrepresentatione.Undue influencef.Coercionmunotes.in

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8VOID AGREEMENTS: (SECTION.24-30)Unit Structure8.0Objectives8.1What Is Void Agreement?8.2Types of Void Agreements8.3Differencebetween Wagering Agreement and Contingent Contract8.4Summary8.5Questions8.0OBJECTIVESAfter studying the unit, the students will be able to:•Understand the meaning of void agreements.•Explain the considerations those are lawful and those are not lawful.•Know the meaning and essentials of wagering agreement.•Explain the difference between wagering agreement and Contingentagreement.8.1WHAT IS VOID AGREEMENT?8.1.1Meaning:“An agreement not enforceable by law is said to be void”[Sec.2(g)].Thus,a void agreement does not give effects to any legalconsequences and isvoid ab-initio. In the eye of law such an agreement is no agreement at allfrom its beginning.One of the essentials of a valid contract is that the consideration and theobject should be lawful. Every agreement of which the object orconsideration is unlawful is void. Section 23 mentions the circumstanceswhen the consideration or object of an agreement is not lawful.“All agreements are contract if they are made by the free consent of theparties competent to contract, for a lawfulconsideration with lawfulobject, and not hereby expressly declared to be void.”1.If it is prohibited by Law:The agreement is unlawful if it involves doing of an act which is forbiddenby any law. An act forbidden by law is punishable by the Criminallaw orby a special act. The agreement to give bribe if some work will beperformed is unlawful and hence unenforceable.munotes.in

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2.Agreement in restraint of marriage.(S.26):Every agreement in restraint of the marriage of any person, other than aminor’smarriage is void.It is interesting to note that a promise to marry a particular person does notimply any restraint of marriage, and is, therefore, a valid contract.Examples:(a)‘A’ Agrees withBfor good consideration that he will not marryC.Itisa void agreement.(b)‘A’agrees withBthat she will marry him only. It is a valid contract ofmarriage.3.Agreement in restraint of trade.(S.27):Every agreement, by which one is restrained from exercising a lawfulprofession, trade or business ofany kind, is to that extent void.4.Agreement in restraint of legal proceedings. (S.28):Every agreement by which any party thereto is restricted from enforcinghis rights under or in respect of any contract, by the usual legalproceedings in the ordinary courts is void to that extent.Section 28, as amended by the Indian Contract (Amendment) Act, 1996,declares the following three kinds of agreements void:Example:An employee agreed with his employernotto sue for hiswrongful dismissal. Held thatthe agreement was in restraint of legalproceeding and is void.Restriction on Legal proceedings. As stated above Section 28 rendersevery agreement in restraint of legal proceedings are void.5.Agreements for uncertainty. (S.29):Agreements themeaning of which is not certain, ambiguous are void.Example:Aagrees to sell to sellBa hundred ton of oil. There is nothingto show what kind of oil was intended. This agreement is void foruncertainty.6.Agreements Opposed to Public Policy:Certaintypes of agreements are harmful to Society. Such agreements arecalled agreements opposed to public policy. Such agreements are declaredas Void by Status.The following are the agreements opposed to public policy.•Agreements in Restraint of Trade•Agreements in Restraint of Marriagemunotes.in

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 •Agreements in Restraint of Personal Freedom•Agreements in Restraint of Parental Rights•Agreements with regard to Compromise of offence•Agreements with regard to sale of Public Offices and Titles•Agreements with Alien Enemy•Agreements based on Bribes•Agreement to Commit a Crime•Agreements to defraud Creditors•Agreements to defraud Government•Champerty Agreementa.Agreements in Restraint of Trade:The agreements which restrict trade business or Profession are calledagreements in restraint of trade. One citizen cannot restrict lawful businessof the other.Example:A case on this point is Madhav V/s Raj kumar. A and B entersinto a contract according to which B has to close down his business forwhich he would be paid amount by A. B closes his business but, A fails topay B the agreed amount. B sues A for recovery and court decides that it isan agreement in restraint of trade and hence void.b.Agreements in Restraint of Marriage:The agreements which createrestriction on marriage are called agreementsin restraint of marriage. One person cannot restrict the other from gettingmarried.Example:A case on this point is Lowe V/s Peerless. In this case anagreement gets formed between A and B according to whichA shouldmarry B only and B should marry A only. If only one of them reaches theagreement a compensation of $ 2000/-is to be paid. Court decides that thelanguage used in the agreement is creating restriction on marriage andhence void.c.Agreements in Restraint of Parental Rights:The agreements which restrict rights of Parents on their Children arecalled agreements in restraint of Parental Rights. By Virtue of anagreement, Parents cannot waive up their rights. Such agreements areharmful toChildren.d.Agreements in Restraint of Personal Freedom:The agreements which restrict Personal Freedom are opposed to publicpolicy. For example: An agreement to do slavery falls under this group.Example:Related case isRamasastry V/s Ambela.In this case acontract of loan gets formed between A and B and their Contract Specifiesmunotes.in

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that B has to join as slave at A’s house till Settlement of debt. Courtdecides that the contract is void.e.Agreements with regard to sale of Public Offices and Titles:Titles and positions in Government will be given basing on personaltalent. That person who has obtained them cannot transfer them to someother person by means of an agreement.Example:In the case of S V/s Muthu Swamy. a Contract gets formedbetween A and B according to which A has to transfer his position ingovernment. to B for certain consideration. It is opposed to Public Policyand hence held to be Void.f.Agreements with Alien Enemy:Agreements with aliens are Valid so long as there are good relationsbetween two Countries. When War breaks out between the Countries thatContract becomes opposed to public policy and hence void.g.Agreements based on Bribes:Whenever there is involvement of Crime or Corruption, Such agreement issaid to beopposed to public policy.Example:There is an agreement between A and B according to which Bhas to pay Rs.15000 to A and for that A has to arrange for admission ofA‘s Son to a Medical College. The agreement is opposed to Public Policyand hence thesame is void.h.Agreement to Commit a Crime:In case where objective of the agreement is to conduct a Crime likemurder etc., it becomes opposed to public policy.i.Agreements to Defraud Creditors:If debtors form an agreement to defraud theirCreditors, such agreement isopposed to public policy.j.Agreements to Defraud Government:Agreements to evade taxes etc. create loss to government they are opposedto public policy.k.Champerty Agreement:It is the agreement where one party agrees toassist the other in receivingproperty with an object of sharing the profit out of litigation. This is a sortof gambling on litigation, and treated as against public policy, thechamperty agreement is void.7.Agreement by way of Wager: (S.30)Under wagering agreements two persons holding opposite views normallytouching the issue of uncertain events and the events must be future.munotes.in

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Examples:•AandBmutually agree that if it rains todayAwill payB Rs100 itdoes not rainBwill payARs 100.•CandDenter into agreement that on tossing up a coin, if it falls headupwardsCwill payDand if it falls tail upwardsDwillpay CRs 50;there is, a wagering agreement.It is essential to a wagering contract that……a.each party may under it eitherwin or lose,b.whether he will win or lose being dependent on the issue of the event,and,c.therefore, remaining ‘uncertain until that issue is known,d.If either’ of the parties may win but cannot lose, or may lose butcannot win, it is not a wageringcontract.Wager is a game of chance in which the contingency of either gain or lossis wholly dependent on an‘uncertain event.’ An event may be uncertain,not only because it is a future event, but because it is not yet known to theparties. Thus, a wager may be made upon the result of the cricket matchwhich is to take place”, next month in Calcutta, or upon the result of anelection which is over, if the parties do not know the result.Secondly, the parties to a wager must have no interest in theevent’s‘happening or non-happening. There is sole intention to gamble and tomake the money.Essential features of a Wagering Agreement:The essentials of a wagering agreement may thus be summarized asfollows:a.There must be a promise topay money ormoney’s worth,b.Thegainof one party must be thelossof the other,c.The promisemust be conditional on an event’s happening or nothappening,d.The event must be an uncertain one. If one of the parties has the eventin his own hands, the transaction is not a wager.e.Each party must stand to win or lose under the terms of agreement. Anagreement is not a wager if one party-may only win and cannot lose,or if he may lose but cannot win, or if he can neither win nor lose.f.No party should havea proprietary interest in the event. The stakemust be the only interest which the parties have in the agreement.g.The promise must be made with the sole intension to gamblei.e.,neither party should have any interest in the happening or non-happening of the event other than the sum or stake he will win or lose.munotes.in

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Section 30 lays down that “agreements by way of wager are void; and nosuit shall be brought or recovering anything alleged to be won on anywager.The Section makes anexceptionin favourof certain prizes for horseracing.Special Cases.1.Lotteries:A lottery is a game of chance. Therefore, the business of lottery is awagering transaction. Such a transactions has no legal force, becausesection 294-A of the Indian Penal Code states‘conducting of lottery apunishable offence’. If a lottery is authorized by the Government of thatState, the only effect of such permission is that the persons conducting thelottery will notbe guilty of a criminal offence.2.Games of Skill / Intelligenceor Crossword puzzles:Where prizes depend upon a chance, it is ‘a lottery and therefore awagering transaction. Thus, a crossword puzzle, wherein prizes aredepending upon correspondence of the competitor’s solution with apreviously prepared solution, isa wager.But if prizes depend uponskilland intelligence, it is a valid transaction. Thus, prize competitions whichare games of skill e.g., picture puzzles, literary competitions and athleticcompetitions are not wagers as there is efforts are made to select the bestcompetitor.3.Insurance Contracts:Insurance contracts are valid contracts even though they provide forpayment of money by the insurer, on the happening of a future uncertainevent. Such contracts differ from wagering agreements mainly inthreerespects:a.The contracts of Insurance are entered into to protect an interest. In awagering agreement there is no interest to protect and the parties betexclusively because they can thereby make some easy moneyb.Contracts of Insurance are basedon scientific and actual calculationswhereas, wagering agreements are a gamble without any scientificcalculation of risks.c.Contracts of Insurance are regarded as beneficial to the public,whereas wagering agreements do not serve any useful purpose.8.3DIFFERENCEBETWEENWAGERINGAGREEMENT AND CONTINGENT CONTRACTBasisContingent ContractWageringAgreementReciprocalpromisesIt consists reciprocalpromises.Itdoesnotcontainreciprocalpromises.munotes.in

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 NatureItis essentiallycontingent nature.ItmaynotbeofwageringnatureVoidor notIt isvoid.Itis valid.Interestsubjectmatter.Parties have no otherinterest in happening ornon-happening of futureuncertain events.The parties have otherinterest also in the subjectmatter.8.4SUMMARY•“An agreement not enforceable by law is said to be void”[Sec.2(g)].Avoid agreement does not give effects to any legal consequences and isvoid ab-initio.•Void Agreements:If it is prohibited by Law,Agreement in restraint ofmarriage. Agreement in restraint of trade. Agreement in restraint oflegal proceedings.•Agreements for uncertainty, Agreements Opposed to Public Policy.•Agreement by way of Wager: Two persons holding opposite viewsnormally touching the issue of uncertain events and the events must befuture.8.5QUESTIONS1.Enumeratetheagreementswhichhavebeenexpressly declared void bythe Indian Contract Act.2.WhatisWageringAgreement?Describeitsessential elements.3.When anagreement in restraint of trade is valid?4.Short Note:a.Agreements opposed to the public policy.b.Differencebetween Wagering Agreement and ContingentContract.*****munotes.in

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9CONTINGENT CONTRACTS (S.31) QUASICONTRACTS (S.68-72)E-CONTRACTS (S.37)Unit Structure9.1Objectives9.2Introduction9.3Meaning and Elements of Contingent Contracts9.4Meaning and Elements of Quasi Contracts9.5Meaning and Elements of E-Contracts.9.6Summary9.7Questions9.1OBJECTIVESAfter studying the unit, thestudents will be able to:•Understand the meaning of Contingent Contract, Quasi Contract andE-Contract.•Know the Effects of the above contract and their validity.CONTINGENT CONTRACT9.2INTRODUCTION9.2.1Meaning:Section 31of the Indian ContractAct defines contingent contract as “Acontract to do or not to do something if some event, collateral to suchcontract, does or does not happen”So, in simple words, it may be defined as aconditional contract.A Contract may be absolute or contingent. The contract is said to beabsolute when the promisor binds himself to the performance in any event.While contingent contract is the contract to do or not to do something,if some event collateral to such contractdoes or does not happen.In case where there is condition, then such contract is called ContingentContract. Therefore, Contingent Contract means Conditional Contract.When imposed and condition is fulfilled, the Contingent Contract becomesmunotes.in

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valid and then parties have to perform their obligations. If imposed andCondition is not fulfilled, the Contingent Contract become Void and thenit need not be performed. So Contingent Contract is to be performed undersome circumstances only.Example:A Contract exist betweenBhavnaandVibhaaccording towhichBhavnahas to sell her goods which are in voyage, toVibhaif theship reaches the harbor safely. Here condition can be seen and it isContingent Contract. All indemnity contracts, guarantee contracts andinsurance contracts are Contingent Contracts. According to Sec. 31 ofIndian Contracts Act, a Contract performance of which depends uponhappening or non-happening of an un-certain event is called ContingentContract.9.3MEANING AND ELEMENTS OF CONTINGENTCONTRACTS9.3.1Essential Elements of Contingent Contract:•There must be avalid contract.•The performance of the contractmust be conditional.•The event must befuture & uncertain.•The event must becollateral to the contract.Example:Amir agrees todeliver Sofa-cum-Bed and Salman agrees to paythe price only after the delivery. These are reciprocal promises it is not acontingent contract because the event on which Salman’s promise dependsis a part of the promise or consideration of the contract, and not acollateral event.Rules regarding the enforcement of the ContingentContract:•It depends on the happening of the specified uncertain event within thefixed time. So, the contract will be enforced only if that uncertainevent happens within thefixed time. (Section 35)•It depends on the non-happening of the specified uncertain eventwithin the fixed time. So, the Contract will be enforced only if thehappening of that uncertain event becomes impossible within the fixedtime as that event cannot happen. (Section 35)•Contingent Contract dependent on the impossible event is void andcannot be enforced by law as the impossible event will never happen.This will be void whether the impossibility of the event is known ornot to the parties at the time of making the contract.munotes.in

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9.3.2Types of Contingent Contracts:1.Depending Upon Happening of an Uncertain Event:Sometimes Contingent Contract depends upon happening of uncertainevent. Then if such uncertain event takes place, the Contingent Contractbecomes valid and if that uncertain event does not take place, theContingent Contract is Void.Example:According to Contract formed between A and B, A has to sellgoods to B, if ship comes there safely, their Contract is valid and if theship getsdrowned, their Contract is void.2.Depending upon non-happening of an uncertain event:At times the Contingent Contract may depend upon non-happening ofuncertain event. Then if that event does not happen, the Contract is Validand if that event takes place, the contract is void.Example:There is a contract between A and B according to which A hasto sell goods to B, if the ship does not come back. Here, if the ship comesback, the Contract is void and if the ship gets drowned away, then it isvalid.3.Depending upon happening of an Uncertain event in a fixed period:At times Contingent Contract may depend upon happening of uncertainevent in a fixed period. If such event happens within fixed period, thecontract is Valid. If such event does not takeplace within fixed period, thecontract is void.Example:As per the contract formed between A and B, A has to sellgoods to B, if the ship comes back within 10 days. If it comes on 8th day(or) 9th day, the contract is valid and if it comes back on 12thday (or)13th day, the contract is void.4.Depending upon non-happening of an uncertain event in a fixedperiod:At times the Contingent Contract may depend upon non-happening ofuncertain event in a fixed period then if such event place within thatfixedperiod, the contract is void and if that event does not take place withinagreed period, then it is valid.Example:A has to sell goods to B if the ship does not come back within10 days. If it comes on 8th day (or) 9th day, the contract is void andif itcomes back on 12th day (or) 13th Day, the contract is valid.5.Depending upon an Impossible Event:Sometimes the Contingent Contract may depend upon impossible event.Such a type of Contingent Contract is void ab initio (Void since inception)munotes.in

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Example:There is a contract between A and B where A will payRs.100000/-to B if B marries C. Assume that C was dead 5 years ago,now element of impossibility can be seen and their contract is void ABinitio.9.4 MEANING AND ELEMENTS OF QUASICONTRACTSThe term ‘Quasi Contract’ laws have been derived from the Latinstatement ‘Nemo debet locupletari ex aliena jactura’which states that nohuman being should gain an unjust benefit from another’s loss. It was oneof the main principles of Roman law.Theterm ‘quasi’ means having some to but not all. Similarly, QuasiContract meaning laws which are like regular contract law but not quiteso. A regular contract should have some essential components to beconsidered valid. It includes offers, acceptance, consideration, two ormore parties who are legally and mentally capable etc.Certain obligations which are, specified in the Indian Contract Act, thatare not actually contracts as there is absence of one or the other elementsof a contract, but are still enforceable in a court of law. Such obligationsare called Quasi-contractual obligations. Each of them has been discussedseparately in Sections 68 to 72 Chapter V) of the Indian Contract Act,1872.Quasi contracts rise out of obligation enjoyed by one person from thevoluntary acts of the other which are not intended to be performedgratuitously. An obligation that the law creates in the absence of anagreement between the parties. It is invoked by the courts where UnjustEnrichment, which occurs when appears on retains money or benefits thatin all fairness belong to another, would exist without judicial relief.A quasi contract is a contract that exists by order of a court, not byagreement of the parties. Courts create quasi contracts to avoid the unjustenrichment of a party in a dispute over payment for a goods or services. Insome cases, a party who has suffered a loss in a business relationship maynot be able to recover for the loss without evidence of a contract or somelegally recognized agreement.It is not a contract at all. It is deemed to be a contract, because, to form avalid contract, proper offer and acceptance is pre-requisite here in quasicontract offer and acceptance is absent. Certain relations resemble thosecreated by a contract. Certain obligations which are not contracts in factbut are so in the contemplation of law and hence the said contract is validin the eyes of law. General Contracts created by the parties whereas QuasiContracts are created by law.munotes.in

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For Example: ‘A’ supplies necessities to ‘B’ who is not capable ofcontracting and reimbursing to ‘A’. ‘A’ is entitled to be reimbursed fromB’s property.a.Supply of Necessaries to incapable persons:This is supply of necessaries to a minor or a person of unsound mind. Herethe minor on the person on unsound mind is personally liable. Theproperty of the incapable person is liable. And were the in capable personis not own any property nothing shall be payable.(a) Arjun supplies Balu, a lunatic, with necessaries suitable tohiscondition in life. A is entitled to be reimbursed from Balu’s property.(b) Anurag supplies the wife and children of Romio, a lunatic, withnecessaries suitable to their condition in life. Anurag is entitled to bereimbursed from Romio’s property.a.Obligation of a person enjoying benefit of Non-Gratuitous Act.A non-gratuitous act means the act which isnot done free. The personwho does some non-gratuitous act another is entitled to recover thecompensation for such act. The Obligation of a personenjoying the benefit of the non-gratuitous act arises in respect of thelawful act only.For example:A pizza boy delivers a pizza at your doorstep by mistake instead of yourneighbor who ordered it. You eat it having knowledge that it was order byyour neighbor. You are required to pay for the same. You enjoyedsomething which was a non-gratuitous act.b.Finder of goods:A finder of goods means aperson who finds the goods belonging toanotherand takes them into his custody is subject to the sameresponsibility as a bailee.A finder of goods has the duty to find the real owner and returned thesame. He can get the reimbursement of the expenses, which he hasincurred in preserving and maintaining the goods from the real owner.c.Payment byInterested person:A person who is interested in the payment of money which another isbound by law, and who therefore pay it is entitled to be reimbursed by theother.Forexample:Asupplies toB, a lunatic, the necessaries for maintaininghis life. Here,Ais entitled to recover the amount fromB’sproperty.munotes.in

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 d.Money paid under mistake or delivery of goods under mistake:If certain amount of money is paid or goods delivered to a person under amistake, the person receiving the money or goods must repay it.For Example: A and B jointlyown Rs 100 toC.Apays amount toCandnot knowing this fact,Balso pays Rs 100/-toC.HereCis bound to repayRs 100 to B.9.4.1Difference between QuasiContract and Contract.Quasi contractContractIt is not intentionally formed butlaw imposed upon the parties.It is intentionally formed by theparties.Quasi contract does not posses allthe requirement of valid contract.Contract possess all therequirementof valid contract.Obligations are implied upon bythe law.Obligations are mutually created bythe parties.It is full-fledged contract and thesame is bindingIt is not a full-fledged contractthough enforceable.There is an agreement.There is no agreement.9.5MEANING AND ELEMENTS OF E-CONTRACTS9.5.1Meaning:An E-Contract is a contract that is formed electronically.New laws areneeded to govern these contracts however; today most courts have adaptedtraditional contract law principles and the provisions of the UniformCommercial Code to cases involving e-contract disputes.9.5.2Essentials for the fulfillment ofan E-contract:There are certain essential elements like any other contract that has to befulfilled to have a valid e-contract. They are-1.Valid OfferFor a contract to come into an existence it is required to have a valid offer.It is important tonote that the items displayed in any e-shopping app areonly an invitation to offer and not an offer in itself. There is an offer whenthe person selects a particular item into the cart or gives an order.2.An offer needs to be acknowledged with legal considerationIt is important to note that the offer has to be accepted. Any method ofacceptance is valid but the acceptance should reach the offeror by anymethod like, Mail, Message etc. The offer is revocable until theacceptance is made.considerationgiven from the party should be legal tohave a valid e-contract.For example, selling of narcotic drugs orpornography is strictly prohibited and cannot be considered as validconsideration.munotes.in

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3.Objectmust be Lawful:Online contract also requires stickto object being lawful. For Example Anonline Website agreeing to sell Magic Cure of all types of Blindness is notlawful./ I jii4.Parties must be able to enter a contract with each other:As there is no real time connection, it is essential to thatthere should beaffirmation that both the parties are humans as the electronic system that iscomputers are unable to recognize offline and computers are not able toenter into a contract. This is a very crucial part of an e-contract and oneshould be careful as cases of cyberbullying and online fraud are increasingday by day.5.Free consent:Consent should always be free. Consent is said to be free when it is notcaused by coercion, misrepresentation, undue influence, or fraud. When itis certain thatthese above-mentioned elements are present, only then an e-contract is confirmed. Along with these elements, a contract is onlypossible when there are a lawful object and possibility of performance’.9.5.3Forming Contracts Online:Online transactions can be identified in three ways:•Business-to-Consumer transactions conducted via the Internet. (B2C)•Business-to-Business transactions conducted via the Internet. (B2B)•Consumer-to-Consumer transactions conducted via the Internet.( C2C)E-Signatures:Ane-signature is an electronic sound, symbol, or process attached to orlogically associated with a record and executed or adopted by a personwith the intent to sign the record. E-signatures can be created and verifiedon e-contracts. Digital signatures are transmitted electronically.9.6SUMMARYCONTINGENT CONTRACT: Section 31 of the Indian Contract Actdefines contingent contract as “A contract to do or not to dosomething if some event, collateral to such contract, does or does nothappen.QUASI-CONTRACT:It is not a contract at all. It is deemed to be acontract, because, to form a valid contract, proper offer and acceptance ispre-requisite here in quasi contract offer and acceptance is absent. Certainrelations resemble those created by acontract. Certain obligations whichare not contracts in fact but are so in the contemplation of law and hencethe said contract is valid in the eyes of law.munotes.in

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•E-CONTRACT:An E-Contract is a contract that07
-462,+,1,*86430*(11<9.7QUESTIONS1.DefineContingent Contract. What are the essentials?2.Discuss the laws relating to the validity of contingent contract withsuitable examples.3.What are the various types of quasi contract?4.Explain the rights and duties of finder of goods.5.Explain theessential elements for formation of E-Contracts6.How E-Contracts satisfies the essentials of a contract under the IndianContract Act 1872.munotes.in

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10PERFORMANCE OF CONTRACT, MODESOF DISCHARGE AND REMEDIES FORBREACH OFCONTRACT (S.73-75)Unit Structure10.1Objectives10.2Introduction10.3Performance of Contract.10.4Meaning Discharge of Contract10.5Modes of Discharge of Contract10.6Remedies for Breach of Contract10.7Summary10.8Questions10.1OBJECTIVESAfter studyingthe unit, the students will be able to:•Understand the ways of performance of contract•Know the modes of discharge of contract and remedies of breach ofcontract.10.2INTRODUCTIONAn agreement enforceable by law is called contract. Each and allpartiesin the contract are required to full fill their respective obligations tofinalize the contract.Example:Amit asks Reena ‘will you buy my mobile phone for Rs.15,000/-‘Reena was ready to buy for the same.Amit delivered mobile toReena andReena transferred Rs. 15,000 online, here both parties havefulfilled their respective obligations by performance.10.3 PERFORMANCE OF CONTRACT.Section 37-67 deals obligation of the parties to contract.Section 37-67 Provides that“The parties to acontract must eitherperform or offer to perform their respective promises, unless suchperformance is dispensed with or excused under the provisions of this Act,or any other law.”munotes.in

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 Illustrations:(a) Anup promise to deliver goods to Balu on a certain dayof payment ofRs.1,00,000. Anup dies before that day. Anup’s representatives are boundto deliver the goods to B, and B is bound to pay the Rs.1,00,000 to Anup’srepresentatives.(b) Sangita promise to paint picture for Heena by a certain day, at acertain price. Sangita dies before the day. The contract cannot be enforcedeither by Sangita’s representatives or by Heena, as it involves expertise.Section 39.Effect of refusal of party to perform promise wholly.“When a party to a contract has refusedto perform, or disabled himselffrom performing, his promise in its entirety, the promisee may put an endto the contract, unless he has signified, by words or conduct, hisacquiescence in its continuance.”Illustrations:(a) Balaji, a singer, enters intocontract with Laxminand Pyare , themanager of a theatre, to sing at his theatre three nights in every weekduring next three months, and Laxminand Pyare agrees to pay him INR5000 for the performance of each nights. On the fifth night Balajiwilfully absents himself from the theatre. Laxminand Pyare is free to putan end to the contract.(b)Balaji, a singer, enters into contract with Laxmi Nand Pyare, themanager of a theatre, to sing at his theatre three nights in every weekduring next three months, and Laxmi Nand Pyare agrees to pay him at therate INR 5000 for each night. On the fifth night Balaji wilfully absentshimself. With thepermissionofLaxmi Nand Pyare, Balaji sings on thefifth night. Laxmi Nand Pyare has signified his acceptance in thecontinuance of the contract, and cannot now put an end to it, but is entitledto compensation for the damage sustained by him through Balaji’s failureto sing on the fifth night.Person by whom Promises/Contract is to be performed.Contract should be performed by the promisor himself; such promise mustbe performed by the promisor in other words we can say that contract hasto be performed by therespective parties or their representativesdepending upon the circumstances of the cases.Illustrations:(a)Mr.Abhijeet promises to pay Mr. Kawal Singh a sum ofINR5,00,000/-. In this case Mr. Milan mayperform this promise, either byhimself paying the money to Mr. Kunal Singh, or by causing it to be paidto Kawal Singh by another; and if Mr. Abhijeetdies before the timeappointed for payment, his representatives must perform the obligationpromised.munotes.in

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(b) AkhtarAli promise to paint a portrait of Shilpa. Akhtar Ali mustperform this promise personally.Time for performance of promise, where no time is specified.Where, by the contract,a promisor is to perform his promise withinstipulated time andwhen no time for performance is specified, theperformance must be carried out within a reasonable time.Illustration:Shakib promises to deliver goods at Bina’s warehouse on first March. Onthat day Shakib brings the goods to Bina ’s warehouse, but after the usualhour of closing it, and they are not received. In this case Shakib has notperformed his promise as he has not observed the reasonableness of time.Order of performance of reciprocal promises.When contract includes reciprocal promises, it is required that thepromisor and promisee must has an intention to perform the same. It notno performance is possible. Hence the reciprocal promises need to beperformed.Illustrations:(a)Amitabh andJaya entered in to contract that; Amitabh shall build ahouse for Jaya at a fixed price. Amitabh’s promise to build the house mustbe performed against Jaya’ s promise to pay for it.(b)Shrikant a builder, entered into a contract with Ms Gayatrithat he willconstruct a house for her in consideration INR 10,00,000/-. Further it hasdecided that Mr. Shrikant will give the possession first then Ms. Gayatriwill make the payment. Accordingly, Mr. Shrikant has to performed first.10.4 MEANINGDISCHARGE OF CONTRACTIntroduction:The Contractual relation comes to an end, the parties to the contractperformed their respective obligation and hence their rights and duties areput to an end.In other words, the termination of the contractual relationsis called discharge of contract.Following are the modes of discharge of contract.I.Discharge of Contract by Performance:This is the best way of bringing the contract to an end. Everyperson whois a party to a contract is bound to fulfil his/her obligation at the time whenhe/she has promised to perform it. The moment the parties execute theirpromises the contract the contract comes to an end. This mode ofdischarge is called discharge by performance.munotes.in

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The performance can be of two types.1. Actual Performance2. Attempted PerformanceActual Performance:In actual performance the parties to a contract have actually performedtheir respective contractual obligations or promises.Theycarried out what they had promised to each other under a contract.They have fulfilled all their obligations under the contract. As a result, thecontract put to an end.Illustration:On Sunday Chintamani offered to sell her car for rupees thirty thousandtoMadhura and Madhura agreed to buy the car and pay in cash by Fridayevening. On Friday evening Madhura paid INR 3,00,000 in cash toChintamani and Chintamani gave the car to Madhura. Thus, the contractcame to an end by actual performance.AttemptedPerformance:In this type performance one party offers to perform what he/she hadpromised butthe other party does not want him/ her to perform. The partywhich is ready to accomplish its obligation is excused from performingand the contract is discharged. However, it can sue the other party forbreach of contract.On Sunday, Chintamani offered to sell her car for INR 3,00,000/-toMadhura and Madhura agreed to buy the car and pay in cash by Fridayevening. On Friday Madhura refused to buy the car. Hencethis was anattempted performance. The promisor Chintamani offered to execute herpromise but Madhura denied to buy the car. Thus, Chintamani can sueMadhura for breach of contract.II.Discharge of Contract by Mutual Agreement or Consent:Partieswilling to terminate or to put a contract at end can discharge thecontract without performance. They can do so by mutually agreeing toreplace the old contract with a new one. The new contract extinguishes therights and obligations of the parties under the old contract.Discharge by Agreement:Section 62 states that….“If the parties to a contract agree to substitute a new contract for it, or torescind or alter it, the original contract need not be performed.”Section 63 states that …“Every promise may dispense with or remit, Wholly or in part, theperformance of the promise made to him or may extend the time of suchperformance, or may accept instead of it, any satisfaction which maythinks fit”.munotes.in

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1.NOVATION: (NEW)In this theparties to a contract agree to substitute the existing contractwith a new contract. The new contract is bringing about by eitherchanging the contract between the same parties or by changing the partiesin the same contract.Illustration:Sanjanaoffered to keep Vinita as her servant for rupees Five thousand ona monthly basis. Vinita accepted the offer and promised to start work fromthe first day of the next month. However, she met with an accident andinjured her leg. She approached Sanjana andshowed her reluctance tojoin. It was felt that it would take about two months’ time for the leg toheal unwillingness and after a little seduction from Sanjana, Vinita madeher mind to join as servant after one month. In this case the old contractwas substituted with a new one and the parties to the contract are thesame.2.Alteration:In this the parties agree to make some changes in one or more terms of thecontract. By doing so the old contract is discharged and the parties arebound by the changedcontract.Illustration:Steffinaoffered to keep Jolly as her secretary on fixed salary of INR20,000/-on a monthly basis. Jolly accepted the offer and promised to startwork from the first day of the next month. Afterwards Jolly felt that thissalary was not as per her expertise she possessed and that she denied to4386(*8
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work. She informed to Steffina. After some bargaining with Jolly Steffinadecided to increase the salary by rupees ten thousand. Jolly agreed to workfor the additional rupees ten thousand offered by Steffina. In this case theparties to the contract agreed to make some changes in the terms of thecontract. By doing so the old contract was discharged and the parties werebound by the changed contract.3.Rescission:In this the parties decides to put the contract end beforethe contract isPerformed. Rescission can take place by mutual consent or agreement.Here both the parties mutually agree to terminate the contract.Illustration:Vandana offered to keep Kashi bai as her maid on salary of Rs. 5000/-permonth.Kashi bai accepted the offer and promised to resume anassignment from the first day of the next month. However, Kashi bai metwith an accident and injured her head.She contacted Vandana anddescribed her unwillingness to join. It was mutually decidedto terminatethe contract. Kashi bai was not bound to join as a maid from the nextmonth.4.Remission:Remission means acceptance by the promisee of a lesser fulfilment of thepromise made by the promisor.If the promisor has performed less than what he/she had promised and thepromisee accepts it without having any say then this is called discharge ofcontract by remission.Illustration:Kunal (Promisee) approached Milan (Promissor) for a loan of Rs.1,00,000/-and promised that he will square off the same within a coupleof months. After the couple of months Kunal showed his inability toreturn Rs. 1,00,000/-instead he had Rs. 90,000/-to Milan. Milan agreesfor such lessor fulfilment and was ready to discharge the contract byremission.5.Waiver:Discharge of contract by Waiver is takes place when the party deserts hisright for enforcement of contractual performance.Illustration:Yogitaoffered to keep Sunita as her maid for rupees two thousand on amonthly basis. Sunita accepted the offer and promised to start work fromthe first day of next month. The very next day Yogita forbade Sunita fromworking as a maid. Thus, Sunita is no longerunder any obligation toperform her promise.munotes.in

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III.Discharge by Lapse of Time:It is expected that a contractual obligation must be performed within areasonable period. If the contract is not performed within that period, thenthe contract comes to an end and no legal action can be taken by thepromiseat later stage. In the case of contracts, the period of limitation isthree years. If none of the parties files a suit within this time, the contractbecomes time barred. Once the contract becomes time barred, it becomesunenforceable. It cannot be enforceable in a court of law.Illustration:Omkar took a loan of rupees ten thousand from Shila on first January2016. She was to repay the loan with interest on first January 2017. Shilawent to the Japan in October 2016 and Omkar did not repay the loanmoney on first January 2017 to Shila. Three years elapsed and Shila didnot take any legal action against Omkar for non-payment of the loan.Thus, the debt became time barred.IV.Discharge by Operation of Law:Sometimes the law discharges the contract, i.e. the law treated thecontract as terminated in the following circumstances.1.Death:In the contract as per the contractual term the performance isrequired to be done by promissor itself and his /her skilland knowledge isrequired for fulfilling the obligation and if the promissor dies beforeperformance the contract comes to an end automatically.The lawdischarges the contract.Illustration:Pannalal promised Ms. Champa to make a painting of aPortrait on herbirthday. Before Champa’s birthday Pannalal met with an accident anddied. Hence the contract terminated and Pannalal was discharged of allhis liabilities.2.Insolvency:When a person has been declared insolvent by competentCourt of law he / she is discharged from all liabilities.Illustration:Jeevan entered into an agreement with Prema to buy a seven thousandsreems of cloths manufactured by Prema in the first week of April. In themonth of March Jeevan was declared insolvent. As a result the contractbetween him and Prema is dissolved and Jeevan was discharged from hisliability to buy shoes from Radhika.Merger:In this case the contract giving inferior rightsto a person merges into asuperior right. The contract giving the inferior right is discharged and isreplaced by the one giving superior right.munotes.in

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 Illustration:Ragini mortgaged her gold bangles and took rupees two lakh fromShambhu. She promised to pay Shambhu rupees two lakh with interestwithin two years. Two years expired and Ragini was unable to pay themoney. Hence Shambhu, who was a bailee under the contract became theowner of the gold bangles. The contract originally entered into betweenShambhu and Ragini gave the right of a bailee to Shambhu, but after theexpiry of two years the contract gave Shambhu the right of an owner,which was a superior right.4.Unauthorized Material Alteration:Any alteration made in a contract by one party without proper knowledgeto the other party or without the consent of the other party will make thecontract void and nonoperative. The contract will no longer be enforceablein a Court of law.Illustration:Laxman offered to sell his Flat to Bharat for INR 15,00,000 and Bharatagreed to buy it. The agreement between them was a written agreement.Later without informing or knowledge of Bharat, Laxman enhanced orraised the amount from INR 15,00,000/-to 16,00,000/-Hence the contractbecome void and not enforceable.V.Discharge by Impossibility of Performance.Discharge of contract by impossibility of performance occurs when thecontractual obligation cannot be performed because of death, illness, or areason caused by the other party.Impossibility of Performance is of two types.•Pre-contractual Impossibility•Post–Contractual ImpossibilityI Pre-Contractual Impossibility:It is also termed as initial impossibility.At the time of entering into a contract the agreement was such as theparties are not able to perform or as it was impossible for them.a.Impossibility of Performance known to both the parties:A contractis void when both the parties are aware that the performance is impossibleExample:A enters into a contract with B agreeing that A will discover thetressure through magic in consideration of Rs. 2,00,000/-. Here bothparties to the contract were aware that the performance is not possible andcontract is voidb.Impossibility unknown to both parties in a Contract:In this caseboth the parties to the contract are ignorant about theimpossibility,contract is void.munotes.in

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Example:Mr. Jaswant enters into a contract with Ms. Reena for purchaseof Flat of Ms. Reena situated at Pune. They were discussing about thecontractual terms and conditions, but at the same time Flat of Ms. Reemawas destroyed by fire, both the parties are unaware at that time, contract isvoid and not enforceable.Causes of Subsequent Impossibility or frustrationDestruction of subject-matter of contract:If the subject matter of a contract is destroyed after the formation of thecontract without any fault ofthe parties, the contract is discharged and noparty is liable.Example.A agrees to sell his car to B for Rs. 2,00,000/-which is kept inGulbarga. The said car was destroyed by fire along with garage which thefact is unknown to A. There will be nocontract as the subject matter isdestroyed.Death or personal incapacity of the party:When the performance of a contract is based on the personal skill, abilityor qualification of a party, then such contract becomes discharged on thedeath, incapacityor illness of that party.Such contract can not beperformed by the agent or any representative of the promisor.Example:Mr Jafer agrees draw a portrait of Ms. Heeron the occasion ofher birthday. All of a sudden Mr. Jafer falls sick and mentally unstableresulting in unable to perform the promise. Contract get discharged bypersonal incapacity as the relative or any family members did not havethat expertise of painting.Government, Administrative or Legislative intervention:Sometimes, a contract is lawful and enforceable at the time of its making.However, it may become unlawful due to a subsequent change in law orgovernment policy.Contract is discharged by impossibility ofperformance.Example:Mr. Alber enters into an agreement with Principal of onecollege on 1.07.2021 for selling of Smart Phones to the Students of thesaid Institution at a concessional rate.On 03.07.201 State Government hascome up with anew law that using Mobile Phone by the college studentsare prohibited.As the law bans such use contract gets discharged.Intervention of War:If a war is declared after the formation of a contract; all pending contractswith the residents of enemy country is either suspended or declared asvoid.Example:Mr. Sun-Chang of China enters in to an agreement with Mr.Abhishek of India for supply of electronic items. Before the actualperformance war declared between two countries. Parties to the contractmunotes.in

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has to suspend the contractual relations amongst them if the governmentof the respective countries does not grant the consent.Cases in which there is no Supervening Impossibility•The mere fact that performance is more difficult or expensive than theparties expected does not frustrates the contract.•Commercial impossibility cannot be a ground for exclusion ofperformance. A contract, therefore, is not discharged for frustrationmerely because expectation of higher profit is not realized; or thenecessary raw material is available at very high price.•Strikes, lockouts and civil disturbance like riots do not terminatecontracts unless there is clause in the contract providing for orperformance in such cases.VI.Discharge by Breach of ContractIf theparties to the contract denies to perform their promised obligation/sis known as contract is discharged by breach.Branch of contacts may be of two types:1. Actual breach of contact.2. Anticipatory breach of contact.1.Actual breach:Actual breach means promisor fails to perform thecontractual obligation on due date of performance. When a promisor failsor refuses to perform the promise upon the due date for performance thenit is called actual breach of contract.Example:Dinkar Seth promise to supply 500 litter Oil to Ms Ranjana onthe day of marriage of her daughter falls on 06.06.2021. If he fails tosupply on that day it lead to actual breach of contract.2.Anticipatory breach of contact:It occurs when a party toexecutorycontract declares his intension of not performing the contract before theperformance is due.Example:A” agrees to sell crops to B” by 30th June 2021, howeverbefore the due date that is on 28thJune 2021, he wrote a letter to “B”stating hisinability to deliver the crops as promised.10.4.1Remedies for Breach of Contract:When a promise is breached by any of the parties, means it is a breach ofcontract. So, when either of the parties does not keep their end of theagreement or does not fulfil their obligation as per the terms of thecontract, it is a breach of contract. There are a remedies for breach ofcontract available to the wronged party.munotes.in

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•Recession of ContractWhen one of the parties to a contract does not perform his obligations,then the other party can cancel/ rescind the contract and deny theperformance of hisobligations.Provisions under section 65 of the Indian Contract Act, the party thatrescinds the contract must restore any benefits he got under the saidagreement. And section 75 states that the party that rescinds or cancelsthe contract is entitledto have damages and/or compensation for such acancellation.•Sue for DamagesSection 73 provides that the party who had suffered, since the other partyhas not kept the promises, can claim compensation for loss or damagesresulted to them in the normal course of business.Such damages will not be payable if the loss is abnormal in nature, i.e. notin the ordinary course of business. There are two types of damagesaccording to the Act,•Sue for Specific PerformanceThe party in breach will actually haveto carry out his duties according tothe contract. In certain cases, the courts may insist that the party carry outthe agreement or perform in accordance with agreed terms of contract.If, any of the parties fails to perform the contract, the court may orderthem to act according to the court orders. This is a decree of specificperformance and is granted instead of damages.•InjunctionAn injunction is an order or the court, like a decree for specificperformance. It simply means to prevent the person from doing something.An injunction is a court order restraining a person from doing a particularact.So, a court may grant an injunction to stop a party of a contract from doingsomething he promised not to do. In a prohibitory injunction, the courtstopsthe commission of an act and in a binding injunction, it will stop thecontinuance of an act that is unlawful.•Quantum MeruitQuantum meruit is a Latin phrase meaning “what one has earned”. In thecontext of contract law, it means something along the lines of “reasonablevalue of services”At times when one party of the contract is prevented or interrupted fromcompleting his performance of the contract by the other party, he canclaim quantum meruit.munotes.in

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 In this circumstances party must be paid a reasonableremuneration for thepart of the contract he has already performed. This could be theremuneration of the services he has provided or the value of the work hehas already done.10.7SUMMARY•Discharge of Contract & Modes of Discharge:•The Contractualrelation comes to an end, the parties to the contractperformed their respective obligation and hence their rights and dutiesare put to an end.•Discharge of Contract by Performance:•Discharge of Contract by Mutual Agreement or Consent:•Discharge by Lapseof Time•Discharge by Operation of Law•Discharge by Impossibility of Performance.10.8QUESTIONS1.What is discharge of contract?2.What is anticipatory breach of contract?3.Explain the following concepts with examples:-a)Novationb)Rescissionc)Alteration4.What are the effects of material alteration?5.What is QuantumMeruit.6.Discuss the modes of discharge of contract.7.What are the various remedies available for breach of contract?munotes.in

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MULTIPLE CHOICE QUESTIONS WITH ANSWERS(MODULE II)1.The contract in which consent is caused by the way of fraud isa)Voidb)Voidablec)Either (a) or (b)d)ValidAns: (b)2.As per the Indian Contract law, which of the following is not avitiating factor for free consent?a)Mistake oflawb)Mistake of factc)Fraudd)CoercionAns: (a)3.Shruti sold a bottle to Ankit and told him that it is a steel flask.Ankit consented for the contract believing the bottle to be a steel flask.If the bottle was not a steel flask, it is a case ofa)Fraud if Shruti knew it was not a steel flask.b)Misrepresentation if Shruti believed it to be a steel flaskc)Either (a) or (b)d)None of theseAns: (c)4.Which section of the Indian Contract Act defines free Consent?a)Section 10b)Section 13c)Section 14d)Section 25Ans: (c)5.The Indian Contract Act of 1872 defines consent asa)Agreeing on all the conditions of the agreement.b)Agreeing on the same thing.c)Agreeing on the same thing in the same sensed)None of the aboveAns: (c)munotes.in

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6.Apromised to sell the car in the garage to B. There were two cars inthe Garage–Maruti and Hyundai. A gave Maruti to B but B said thathe agreed for the Hyundai car.a)This is a valid contract as they both agreed for the car.b)There is no consent asthey did not agree upon the same thing in thesame sense.c)There is no free consentd)None of the aboveAns: (b)7.Aarti threatened Archana that she will kill Archana’s brother ifArchana did not give the tender to Ashu. Archana gave the tender toAshu under this fear. This contract isa)Voidb)Voidable under section 16 of the Indian Contract Actc)Voidable under section 15 of the Indian Contract Actd)ValidAns: (c)8.Rohan agreed to sell his vintage car to his boss for just Rs. 10000 ashisboss promised to give him a due promotion. It is a case ofa)Free Consentb)Undue Influencec)Misrepresentationd)FraudAns: (b)9.Which of the following is not an essential element for a validcontract?a)Adequate Considerationb)LawfulConsiderationc)Lawful objectd)Free ConsentAns: (a)10.In which of the following vitiating factors, the intention need notbe proved?a)Fraudb)Misrepresentationc)Mistaked)Both (b) and (c)Ans: (d)munotes.in

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11.A contract based on happening ornon-happening of some eventwhich is collateral to contract is called_______________a) Wagering contractb) Contingent contractc) Uncertain contractd) Illegal contractAns-Contingent contract12.A contingent contract may be ____________a) Void frombeginningb) Void subsequently when event becomes impossible to happenc) Voidabled) UnlawfulAns-Void subsequently when event becomes impossible to happen13.When a party to a contract transfers his contractual rights toanother, it is :a)rescission of contractb)discharge of contractc)waiver of contractd)assignment of contractAns-Void subsequently when event becomes impossible to happen14.When a valid tender of goods is not accepted, it is calleda)actual performanceb)attempted performancec)no performanced)discharge of contractAns-attempted performance15.Quantum meruit means:a)A non-graduations promiseb)As much as is earnedc)An implied promised)As much as is paidAns: As much as is earned16.Acontract is discharged:a)When all the parties perform their promises.b)When performance of contract becomes impossiblec)When one party makes a breach of contractd)In all the above casesAns: In all the above casesmunotes.in

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17.A contract is discharged byremission:a)When a party waives all his rights under a contractb)When a party cancels an existing contractc)When a party accepts lesser performance in discharge of a wholeobligationd)When a party makes novation of a contract.Ans: When a partyaccepts lesser performance in discharge of a wholeobligation18.Anticipatory breach of a contract takes place:a)During the performance of the contractb)At the time when the performance is duec)Before the performance is dued)At the time when thecontract is entered into.Ans: Before the performance is due19.The damages which can be claimed only when the specialcircumstances are communicated tothe promisor is called:a)Ordinary damagesb)Exemplary damagesc)Special damagesd)NominalAns: Special damages20.Which of the following act does not amounts to fraud?a)Knowingly making false statementb)Promise made without intending to fulfilc)Active concealment of material factd)A positive assertion.ANS: A positive assertion21.Mistake can be of______________a)Indian lawb)Foreign lawc)Factsd)IntentionalANS: B and C22.Whether silence is amounts to fraud?a)Yes alwaysb)Noc)Sometimed)Yes, but only equivalent to speak.ANS: Yes, but only equivalent to speak.munotes.in

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23.Wagering agreements are commonly called as_____________.a)Agreement in respect of wagesb)Agreement in respect of employeesc)Bettingd)Beating.ANS: Betting24.The webpage is _____________.a)offerb)invitation to offerc)acceptanced)advertisementANS: invitation to offer25.Substitution of the new term only while a parties in a contracts aresame will be treated as ____________a)Novation.b)Suspensionc)Terminationd)AlliterationANS : Novation.26.Specific performance isgranted by the court only if ____________compensation is found to be not adequate.a)Monetaryb)Anticipatoryc)Remitoryd)ExemplaryANS: A)Monetary.27.Rescission of contract means ________________of a contract.a)Cancellationb)Verificationc)Novationd)SpecializationANS: A) Cancellation.28.Discharge by waiver means where the party ______his rights.a)Fulfillsb)Abandonsc)Remittedd)Accepted .ANS: B-) Abandonsmunotes.in

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 29.When an innocent party is calming for monetary damages, itmaybe:a)liquidated damagesb)ordinary damagesc)vindicative damagesd)all of the above.(Ans : d all of the above)30.If a party to a contract does not perform, action can be taken onlywithin a time specified by the Act. Failing which thecontract is____________________.a)performed by giving and extra time period.b)terminated by lapse of time.c)treated as valid by lapse of timed)treated as voidable by lapse of time(Ans : b terminated by lapse of time)munotes.in

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MULTIPLE CHOICE QUESTIONS . MODULE IIFOR PRACTICE1.…………….. is a one-sided contract in which only one party has toperform his promise or obligation.(a)Void contract(b)Illegal agreement(c)Unilateral contract(d)Bilateral contract2. Whichof the following is not Competent to Contract?(a)A minor(b)A person of unsound mind(c)A person who has been disqualified from contracting by some Law(d)All of these3. “ Consensus–ad–idem” means ………(a)General Consensus(b)Meeting ofminds upon the same thing in the same sense(c)Reaching an agreement(d)Reaching of contract4.A Contract which is formed without the free consent of parties, is……….(a)Valid(b)Illegal(c)Voidable(d)Void ab-initio5. The phrase“Quantum Meruit” literally means–(a)As much as is earned(b)The fact in itself(c)A Contract for the sale(d)As much as is gained.6. The two types of breach are____________.(a)Actual breach and Deemed breach(b)Actual breach andConditional breach(c)Actual breach and Anticipatory breach(d)Actual breach and Remedial breachmunotes.in

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7. Consent is free under section 14 if not caused bya)Coercion and undue influenceb)Fraud and misrepresentationc)Mistake subject to theprovisions of section 20, 21 and 22d)All the above8. Ram has age of 17 years 11 months and 29 days. He will beconsidered as__________a)Majorb)Minorc)Cannot be decided.d)None of the above9. Contract made with minor’s, willbe treated as __________-a)Voidb)Validc)Void-ab-initiod)Voidable at the option of minor.10. Mohan(age of 17) made a contract with Shaym ( age25 years) toprovide a loan of Rs. 100000/-It was decided that Shaym will payentire amount with interest after 1 years. After the period 1 yearShyam denied to make the payment of entire amount with interestclaiming that Mohan had no capacity to contract, hence contract wasvoid from the beginning.Here remedy available to Mohan is_________________.a)Mohan can ratify the contractb)Mohan can force the Shyam to make the repayment as per contractc)Mohan can file a suit for recovery.d)None of theabove.11. Aarti threatened Archana that she will kill Archana’s brother ifArchana did not give the tender to Ashu. Archana gave the tender toAshu under this fear. This contract isa)Voidb)Voidable under section 16 of the Indian Contract Actc)Voidable under section 15 of the Indian Contract Actd)Valid12. In which of the following vitiating factors, the intention need notbe proved?a)Fraudb)Misrepresentationc)Mistaked)Both (b) and (c)munotes.in

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13. B’ is blind ‘A’agrees to restore B’ vision by magic. Thisagreement is ________a)Voidb)Voidablec)Void-ab-initiod)Legal.14. Agreement in restraint of trade is ____________a)Voidableb)Validc)Voidd)Wagering type.15. A’ murders B’ ,to which C’ was a witness. A’ promises to pay C’,a sum of Rs. 1,00,000/-for not exposing him? The agreement is__________a)Valid for public interestb)Voidablec)Void due as it opposes to public policyd)None of the above.16. An agreement ofmarriage brokerage is an agreement _________a)Against the courtb)Against public policyc)In favour of the bride and bridegroom.d)Against the public authority17. Doctors in government hospitals are restrained from carrying onprivatepracticeor consultancy is ____________a)voidb)validc)voidabled)exceptions to the rule.18.Where the promisor absolutely refuses to perform the contractprior to the due date of performance, it is known asa) abandonment of contract.b) remission of contract.c) actual breach of contract.d) anticipatory breach of contract19. Discharge by mutual agreement may involvea)Novationb)Recissionmunotes.in

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 c)Alterationd)All of the above20.Where the Contracting parties change, then it is a case of__________a)Remissionb)Recissionc)Novationd)Alterationmunotes.in

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MODULE III11SPECIAL CONTRACTSCONTRACT OF INDEMNITYUnit Structure11.1Objectives11.2Introduction11.3Essentials of Contract of Indemnity.11.4Rights of the Indemnity Holder11.5Rightsof Indemnifier11.6Summary11.7Questions11.1OBJECTIVESAfter studying the unit, the students will be able to:•Understand the meaning and kinds of Contracts of Indemnity.•Know the essentials of Contracts of Indemnity.•Discuss about the Rights ofindemnity-holder.•Discuss about the Rights of indemnifier.11.2INTRODUCTIONDefinition & Meaning:TheContracts of Indemnityhas been defined as: “A Contract whereinone party promises to save the other from loss caused to him by the act ofthe promisor himself or by the act of any other person is called acontractof indemnity.” In short Indemnity means and includes making goodtheloss or compensating a person for any loss.Indemnity, in simple words,is protection against future loss.The person who promises to save the other is called theIndemnifierandthe person who is compensated is theIndemnified. An indemnity can be defined as a sum paid by A to B byway of compensation for a particular loss suffered by B. A, the indemnitormay or may not be responsible for the loss suffered by the B, theindemnitee. Forms of indemnity include cash payments, repairs,replacement, and reinstatement. Contract of indemnities should all satisfythe conditions of a valid contract.munotes.in

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Example:MandNtwo friends goes to a shop.Msays to the shopkeeper. “LetNhave the goods; I shall see that you will be paid.” Here is a contract ofindemnity.11.3 ESSENTIALS OF CONTRACT INDEMNITYA contract of indemnity can be classified into two categories on the basisof expression of the parties at time of its formulation as express andimplied.1. Express contract of Indemnity:When theparties to contract expressly agreed into a contract of indemnity.A party expressly promises to indemnify the other person from losses.Example: Apromise to compensateBifB’s goods are damaged due tothe conduct ofC.2. Implied contract of Indemnity:When the contract of indemnity deemed to have concluded by the acts ofthe parties or from the circumstances of the case, it is known as impliedcontract of indemnity.Example: Abhijithires a motorcycle from theAbdul’s shop to use forone day. The motorcycle gets damaged due to the accident. Here,Abhijithas to compensate for damage toAbdul,although he has not agreedexpressly to do so.11.3.1 Essentials or features of a Contract of IndemnityA valid contract of indemnity should fulfill the following conditions:1.Anticipated loss:A contract of indemnity is a security for ananticipated loss.2. Requirements of valid contract:Contract of indemnity being a speciesof contract must have all essentials of a valid contract likefree consent,competence of the parties, consideration, etc.3. To save other party:There must be a promise to save the other partyfrom some loss.4.Covers only the actual loss:It covers only the actual loss may be dueto the promisor himself or any other person and it covers only the losscaused by an event mentioned in the contract. The event mentioned in thecontract must happen.5. Definition isnot exhaustive:As in the definition it is clearly stated thatContract of Indemnity covers only one kind of loss that is loss on accountmunotes.in

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of human agency. While in fact losses could be by events beyond thecontrol of human agency like on account of Tsunami, Earthquake etc.11.4RIGHTS OF THE INDEMNITY HOLDER11.4.1Rights of indemnity-holder when sued: Sec. 1251. Right to Recover Damages:All compensations which he may be compelled to pay in any suit inrespect of any matter to which the promise toindemnify applicable.2. Right to Recover Costs:All costs which he may be compelled to pay in any suit if, in bringing ordefending it, he did not act against the orders of the promisor and acted asit would have been prudent for him to act in the absence of any contract ofindemnity, or if the promisor authorized him to bring or defend the suit.3. Right to Recover Amount paid in Compromise:A contract of indemnity is a kind of the general contract and as such, itmust satisfy all the essentials of avalid contract like capacity of parties,free consent, lawful objects, etc. Thus if the object of a contract ofindemnity is unlawful, it will be void.Example: Bakul asksAlexzanderto beatPauras, promising toindemnifyAlexzanderagainst its consequences.AlexzanderbeatsPaurasand in consequence is fined Rs. 50000/-.Alexzandercannotrecover the amount from Bakul, as the object of this agreement isunlawful.11.5RIGHTS OF INDEMNIFIER11.5.1Rights of Indemnifier“It is a well knownprinciple of law that where one person has agreed toindemnify another, he will on making good the loss, be entitled to all theways and means by which the person indemnified might have protectedhimself against or reimbursed himself for the loss”.11.6SUMMARYContracts of Indemnity: Indemnity means and includes making good theloss or compensating a person for any loss.KINDS OF CONTRACT OF INDEMNITY:•Express contract of Indemnity.•Implied contract of Indemnity:munotes.in

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Essentials or features of aContract of Indemnity•Anticipated loss:•Requirements of valid contract•To save other party•Covers only the actual loss:•Definition is not exhaustive:11.7QUESTIONS1.Explain the provisions under contract of Indemnity.2.Discuss theessentials of contract of Indemnity3.What are the rights of Indemnity Holder and Indemnifier?munotes.in

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12CONTRACT OF GUARANTEEUnit Structure12.0Objectives12.1Introduction-Meaningand Definition12.2Essentialsof Contractof Guarantee.12.3Characteristicsor Essentialsof Contractof Guarantee12.4Featuresof A Contractof Guarantee12.5Kindsof Guarantee12.6Revocationof Continuing Guarantee12.7Modesof Dischargeof Surty12.8Extentof Surety’s Liability12.9Differencebetween Contactof Indemnity And ContractofGuarantee12.10Summary12.11Questions12.0OBJECTIVESAfter studying the unit, the students will be able to:•Understand the meaning and kinds of Contracts of Guarantee.•Familiar with Kinds of Guarantee•Discuss the modesof discharge of surety.•Discuss about the Rights of Surety.12.1INTRODUCTIONMEANING AND DEFINITIONMeaning and definition:A guarantee means a contract of a promise to be responsible forsomething, to perform the promise or to discharge theliability of a thirdperson, in case of his default. Such a contract involves three parties. Theyare:Creditor: the person to whom the guarantee is given;Surety: the person who gives the guarantee.Principal debtor: the person, in respect of whose default, the guarantee isgiven.munotes.in

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&# %!#"# "#%!#12.2ESSENTIALS OF CONTRACT OF GUARANTEECONTRACT OF GUARANTEE
Section 126 of Indian Contract Act, A contract of guarantee is a contractto perform the promise to dischargethe liability of a third person in caseof his default.A clear definition was made regarding a guarantee by English Court in thecase ofBricknyrsV/S.Darmell (1704),‘A contract of guarantee is acontract by one person to discharge the debt, fault or miscarriage ofanother.’A contract of guarantee is entered into with the object of enabling a personto get a loan or goods on credit or an employment.Example:If ‘A’advances a loan of Rs. 5000/-to ‘B’ and ‘C’ promisesto ‘A’ that if ‘B’ does not repay the loan, ‘C’ will do so. Here, this is acontract of guarantee.Here•A Creditor•Cis Surety•Bis Principal Debtor.It will be noticed that in a contract of guarantee there are three separatecontracts, i.e.-•between the principal debtor and creditor,•between the creditor and surety, and•between the surety and principal debtor,munotes.in

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Wherein the principal debtor requests the surety to act as surety andimpliedly toindemnify the surety in case the surety incurs liability. Thus,the contract of guarantee is of tripartite nature.The primary liability is of the principal debtor. The secondary liability isof the surety which arises only when the principal debtor defaults.PN.Bandak V/S Sri.Vikram Cotton Mills. (1970)The surety must have to know all the facts regarding the contract.Ifany alteration regarding the terms of the contract is made without theconsent of the surety, it terminates automatically.12.3CHARACTERISTICS OR ESSENTIALS OFCONTRACT OF GUARANTEEFollowing are the characteristics or essentials of contract of guarantee:1.Tripartite agreement:In a contract of guarantee, there are three parties namely: principalcreditor, creditor and surety.Under this contract, three separate contractsare made among them and consent of all the three parties is necessary. Thecontracts connecting each-other as contract between:a.the principal debtor and creditor,b.the creditor and surety, andc.the surety and principal debtor,2.Liability:Under such contract the primary liability is of the principal debtor andonly secondary liability is of the surety. As a conditional contract, liabilityof the surety arises only when the principal debtor (primarilyliable)defaults.3.Essentials of valid contract:It is also as same as other general contract in respect of essentials. All therequirements for valid contract, i.e. free consent,consideration, lawfulobject, competency of the parties etc. arenecessary to form this kind ofcontract. But, in respect of consideration, no direct consideration in thecontract between the surety and creditor. Consideration of principal debtoris considered to be adequate for the surety.4.Written form:A contractrelating to guarantee must be concluded in writing in Nepal andEngland. But, the Indian legal framework does not compel to form suchcontract in written form. Both written and oral is valid in India.munotes.in

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12.4 FEATURES OF A CONTRACT OF GUARANTEEA contractof guarantee is a type of general contract and as such all theessentials of a valid contract must be present. However, it has thefollowing special features:1.Surety’s Liability on principal-debtor’s default:There must be a conditional promise to payon the default of the principaldebtor. If the promise is not conditional on default, it will not be a contractof guarantee but of indemnity.Examples:a)‘A’ asks ‘B’ to sell certain goods on credit to‘C’promising “I will paythe amount in case ‘C’fails to pay.” It is a contact of guarantee as thepromise is contingent on the default of ‘C’.b)‘A’asks a shopkeeper to sell certain goods to ‘C’promising, “Iwill seethat you are paid.”This isnota contract of guarantee as the promise ofthe guarantee is not conditional on default of the buyer. It is a contract ofindemnity.2.Principal debtor need not be competent to contract:Although the creditor and the surety must be capable of entering intocontract, yet, the principal-debtor need not be competent to contract. Insuch a case, the principal-debtor is not liable but the surety is liable as theprincipal-debtor.[Kashiba v/s Shripat],3.Surety’s Distinct Promise to be answerable:In order to constitute aguarantee,there must be a distinct promise on thepart of surety to be answerable for the debt.Example:A goes with B to Titan Watch Company says to the proprietor “let B have this watch , and if he does not pay I will pay you”. This is aContract of Guarantee.12.5KINDS OF GUARANTEEContracts of guarantee may be1.Specific guarantee:Specific guarantee means a guarantee given for one particular transaction.In this case the liability of the surely extends only to a particulartransaction and not other thanthat.Example:Aguarantee payment toBof the price of 5 sacks of flour to bedelivered byBtoCand to be paid in a month.Bdelivers sacks toC. Cmunotes.in

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pays for them. AfterwardsBdelivers four sacks toC,whichCdoes notpay. The guarantee given byAwasonly a specific guarantee andaccordingly he is not liable for the price of the four sacks.2.Continuing Guarantee (Sec. 129):A continuing guarantee is that which extends to a series of transactions.When the guarantee is a continuing one surety canfix up a limit on thisliability as to time or amount of guarantee,Example:(i) A, in consideration that B will employ C in collecting therents of B,s zamindari, promises B to be responsible, to the amount of5,000 rupees, for the due collection anypayment by C of those rents. Thisis continuing guarantee.3.Retrospective guarantee:Retrospective guarantee is given for an existing debt. It is a guaranteeissued when the debt is already outstanding.4.Prospective guarantee:Prospective guaranteeis given for a future debt, i.e., a debt to be taken infuture.12.6REVOCATION OF CONTINUING GUARANTEEA continuing guarantee is revoked by any of the following ways.1.By notice (Sec. 130).By giving an appropriate notice to the creditor acontinuingguarantee may at any time be revoked or terminated by thesurety as to future transactions.2.By Death (Sec. 131):Death of the surety will operate as a revocation ortermination of the continuing guarantee with regard to the futuretransactions. No notice of death need be given to the creditor. Heirs of thesurety will not be liable for any fresh transactions entered into by thecreditor with the principal debtor after the death of the surety withoutknowledge of such death.Natureof Surety’s Liability:Whatever amount of money a creditor can legally realize from theprincipal debtor including interest, cost of litigation, damages etc., thesame amount he can recover from the surety.Example: Anuragguarantees toBhamathe payment of a bill ofexchange byChatur,the acceptor. The bill is dishonoured byChatur.Anuragwill be liablenot only for the amount of the bill also for anyinterest and charges which have become due onmunotes.in

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RIGHTS OF SURETY:Rights of Surety can beclassified into three groups, as follows;I.Rights against Principal debtor.II.Rights against Creditor.III.Rights against Co-Sureties.I. Rights against Principal Debtor:a) Right to give Notice:Whenever creditorapproaches tosurety,forseekingpayment, surety can give a notice to principal debtor to settle thedebt.b) Rights of Sub-rogation:Sub-rogation is a procedure where rights willget transferred from one person to the other. If surety makes payment tocreditor, surety gets all rightsof creditor by sub-rogation and from thenonwards surety can act as creditor.c) Right of Indemnity:Principal of indemnity operates between principaldebtor and surety where principal debtor becomes implied indemnifier andsurety becomes implied indemnity holder. Therefore, surety can makeprincipal debtor liable for all damages or losses.d) Right to get Securities:In case where surety makes payment tocreditor, surety has right to get the securities given by principal debtor tocreditor.e) Right toask for Relief:With effect from the date of guarantee, apartcreditor, surety also can also bring pressure on principal debtor in relationwith settlement of unpaid debts.II. 12.6.1 Rights against Creditora) Right to get Securities:when Surety makes payment to creditor, suretycan get all securities into his possession from creditor.b) Rights of Sub-rogation:Whenever surety makes payment to creditor,creditor foregoes or loses all of his rights in his capacity as creditor andthose rights will be attained by surety.III. 12.6.2 Rights against Co-Suretiesa) Right to ask for Contribution:Surety can ask his co-sureties tocontribute the amount in default of principal debtor. If they have givenguarantee for equal amounts, they have to contribute equally.b) Right to claim Share in Securities:When Co-Sureties make paymentto creditor, they get securities from creditors procession. Then everysurety can claim their share in those securities.munotes.in

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12.7 MODES OF DISCHARGE OF SURTY1. Revocation of surety by giving a notice (sec-130):Surety cannotrevoke specificguarantee if the liability has already accrued. Whereascontinuing guarantee may at any time, be revoked by the surety, for futuretransactions, by giving notice to the creditor. But the surety remains liablefor transactions already entered into.2. Revocation by Death (sec-131):The death of the surety in operation,in the absence of any contract to the contrary, as a revocation of acontinuing guarantee, so far as regards future transactions. The effect ofthe death of the surety is that it results in automatic revocation of theguarantee as to future transactions. But such revocation does not affect thetransactions which were executed prior to the death of the surety.Example:In a contract of guarantee, on the death of the surety, hisproperty or his respective legal representatives will be responsible for suchliability, in such acase;the guarantee is not revoked even if the suretydies.3. Variation or alteration in the terms and conditionsof the contractbetween the principal debtor and the creditor without surety’s acquiesceleads to discharge the surety.Example:Amar employed the services of Akbar where Anthony was theguarantor of Akber’s performance. Amar has changed the term of servicesof Akber without knowledge of Anthony. Anthony is discharged from hisliability.4. By release of Principal Debtor:If the creditor releases the principaldebtor, the surety also automatically discharges.Examples: BabitaappointedJethalalto paint his house in considerationof Rs.5,00,000/-within a particular time period.Mr. Popatlalwas theguarantor for the said performance. HereMs. Babitawas to supply rawmaterial. If she fails to supply the same.Popatlalis released from theliability and discharged.5. Arrangementfor Compensation:If the creditor makes anarrangement for composition or promises to give time or not sue theprincipal debtor without surety’s acquiesce, the surety will be discharged.6. Act of Creditor’s:Any act or omission to do particular act by thecreditor which in turnsin abusingthe rights of the surety, and alsoprejudice the eventual remedy of the surety himself against the principaldebtor, discharges the surety.7. Loss of Security:Where the creditor loses with any security which hereceives from the principal debtor without the consent / permission of themunotes.in

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surety, this discharges the surety to the extent of the value of suchsecurity.12.8 EXTENT OF SURETY’S LIABILITY“Section 128 provides that, theliability of a surety is alike withthat of theprincipal debtor unless the contract provides to the contrary. As soon asthe Principal Debtor makes any delinquencyin the payment of the debt,the surety becomes liable. Thus, a creditor is not bound to proceed againstthe principal debtor first. He can directly sue the surety without suing theprincipal debtor. However, until the principal debtor makes any default,the creditor cannot ask the surety to pay the debt. Hence, the surety’sliability is secondary and the liability of the principaldebtor beingprimary.”12.9.DIFFERENCEBETWEENCONTACTOFINDEMNITY AND CONTRACT OF GUARANTEEPOINTSCONTACTOFINDEMNITYCONTRACTOFGUARANTEEMeaningIn the contract of indemnityone person promises to savethe other from any loss.Under Contract ofGuarantee performance ofthe contract is guaranteed.Numberof PartyThere are two partiesThere are three parties.LiabilityUnder indemnity contractthe basic liability falls onthe indemnifies.Incaseof guaranteecontract surety has thesecondary liability.NumberofContractsUnder the indemnitycontract there is onecontract betweenIndemnifiedandIndemnifier.Under the contract ofguarantee there are threecontracts between Suretyand Principal debtor,Principal Debtor andCreditor & CreditorandSurety.Performance ofContractContract of indemnitydepends upon the possibilityof risk or loss.In case of guarantee there isan existing debt or dutyperformance about whichguarantee is given.12.10 SUMMARYA contract of guarantee is acontract to perform the promise to dischargethe liability of a third person in case of his default.munotes.in

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CHARACTERISTICS OR ESSENTIALS OF CONTRACT OFGUARANTEE•Tripartite agreement:a.the principal debtor and creditor,b.the creditor and surety, andc.thesurety and principal debtor,•Liability:•Essentials of valid contract:•Written form.Rights against Principal DebtorRights against Creditora)Right to give Noticeb)Rights of Sub-rogation:c)Right of Indemnity:d)Right to get Securities:e)Right to ask for Relief:a)Right to get Securitiesb)Rights of Sub-rogation:12.11QUESTIONS1.Define Contract of Guarantee and enumerates essentials.2.What are the rights of surety against the principal debtor?3.What are the various kinds ofGuarantees?4.Distinguish between Contract of Indemnity and Guarantee5.Explain the modes of discharge of surety.6.Short Notes:a. Rights of Suretyb. Extent of Surety’s Liability.munotes.in

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13CONTRACT OF BAILMENTUnit Structure13.0Objectives13.1Meaningand Definition Bailment13.2Characteristic Featuresorthe Requisitesof Bailment13.3Different Kindsof Bailment/ Classificationof Bailment13.4Rights & Dutiesof The Bailee13.5Dutiesof The Bailor13.6Terminationof Bailment13.7Rightsand Dutiesof Finderof Goods13.8Law Relatingto Lien13.9Summary13.10Questions13.0OBJECTIVESAfter studying the unit, the students will be able to:•Understand the meaning of Bailment.•Explain the Features of Bailment.•Know the different types of Bailments.•Discuss about the rights and duties of the Bailee.•Explain the Duties of Bailor.•Explain the rights of the finder of the goods.13.1MEANING AND DEFINITION BAILMENTDefinition of Bailment:The term ‘bailment’ isderived from the French word ‘bailor’ which meansto deliver a thing under a contract. The delivery of movable goods by oneperson to another person for a specific purpose with a condition to returnthe goods when the purpose is over or otherwise disposedoff according tothe direction of the person.The person who delivers the goods is known as the ‘Bailor’and theperson who receives the goods is known as the‘Bailee’and thetransaction is known as the ‘Bailment’.munotes.in

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Definition:Bailment is “the delivery of goods by one person to anotherfor some purpose, upon a contract that they shall, when the purpose isaccomplished, be returned or otherwise disposed of according to thedirection of the person delivering them. The person delivering the goods iscalled the ‘bailor’. The person to whom they are delivered is called the‘bailee’.Examples:(i)‘A’ lends his motor cycle to ‘B’ for his use.(ii)‘A’ gives a piece of cloth to a tailor to make it into a coat.(iii)‘A’ gives his radioset to a mechanic for repairs.A bailment is the delivery of goods by one person to another for somepurpose, upon a contract that they shall, when the purpose is accomplishedbe returned or otherwise disposed’, of according to the directions of thepersons delivering them-Sec. 14.The person delivering the goods it called the Bailor. The person to whomthey are delivered is called theBailee.The transaction is calledBailment.Examples:‘P’ lends his book to ‘Q’.‘P’ delivers a pen to ‘Q’ forrepair.‘P’ gives ‘Q’ his watch as security for a loan.‘P’ gives a cloth to his tailor for stitching. It is bailment of the cloth. Assoon as the cloth is stitched, it will be returned to ‘P’.In all these cases ‘P’ is the bailor and ‘Q’ is the bailee.13.2CHARACTERISTIC FEATURES OR THEREQUISITES OF BAILMENT1.Delivery:It is delivery of goods by one person to another.2.Purpose:The goods are delivered for some purpose.3.Return:It is agreed, that when the purpose is accomplished, the goodsare to be returned or otherwise disposed of according to the direction ofthe bailor.4.Contract:Bailment arises from express or implied t contract. (n caseof finder of goods bailment arises by implication tit’ law.5.Ownership:In bailment the bailor continues to be the owner of thegoods. Therefore, bailment does not cause any change of ownership.6.Movable goods:Bailment is concerned with only movable goods.Money is not included in the category in movable goods. A deposit ofmoney is notbailment.munotes.in

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Deposit of money in a bank does not.constitute bailment relationshipbetween depositor and the bank is that of borrower and the lender.7.Possession:A person already in possession of the goods may become abailee by a subsequent agreement,express. or implied.Example:‘X’is a seller of motor car, having several cars in his possession. ‘Y’buysa car and leaves the car in the possession of‘X’.Afterthe sale iscomplete,‘X’becomes a bailee, although originally, he was the owner.13.3DIFFERENT KINDS OF BAILMENT/CLASSIFICATION OF BAILMENT1. Bailment on the basis of Reward or Charge:a. Gratuitous Bailment:A gratuitous bailment is the bailment without any charge or reward.Neither the bailor, nor the bailee is entitled to anyremuneration.Examples:Mohan lends his car to Sohan without any charges to go to his nativeplace. (No consideration)b. Non-Gratuitous Bailment:It is the bailment for some charges or reward. The bailee is required to paysome charges to the bailorExample:‘A’ has given his taxi to the ‘B’ for two days at the rate ofhundred rupees per day. Now, in this ‘A’ is charging hundred rupees perday this is known as the non-gratuitous bailment.2. Bailment on the basis of Benefit:a. Bailment for theexclusive benefit of the bailor:It is the bailment in which the goods are delivered by the bailor to thebailee only for the exclusive benefit of the bailor himself.Example:Giving goods to a neighbor for safe custody.b. Bailment for the exclusive benefit of the bailee:It is the bailment in which the goods are delivered by the bailor to thebailee only for the exclusive benefit of the bailee.Example:Lending a Scooter to a friend.c. Bailment for mutual benefit of bailor and bailee.It is thebailment in which the goods are delivered by the bailor to thebailee for the benefit of both the parties.munotes.in

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Example:Giving Television for repair, Giving watch for repair.3.According to Purpose:a.Bailment by safe Custody:In such types of bailments,goods are bailed by one person to anotherperson for safe custody.For example:Having safe deposit locker in a bank.b.Bailment by hire: Having a Car/ Vehicle on rent.13.4RIGHTS & DUTIES OF THE BAILEE13.4.1 RIGHTS OF THE BAILEEFollowing are therights of the Bailee:1.Bailment by several joint owners:“If several joint owners of goodsbail them, the bailee may deliver them back to, or according to thedirections of, one joint owner without the consent of all, in the absence ofany agreement tothe contrary.”-Sec. 165.2. Bailee not responsible on re-delivery to bailor without title: “If thebailor has no title to the goods, and the bailee, in good faith, delivers themback to, or according to directions of the bailor, the bailee is notresponsible to the owner in respect of such delivery.”Sec. 166.3. Bailee’s Particular Lien:Lien means the rights to retain property until debt or claim is squared up.The right of lien is given by law in certain cases. Lien may be of twotypes:General Lienand Particular Lien.General lienmeans the right to retainall the goodsof the other partyuntil all the claims of the holder are paid.Particular lienmeans the right to retainparticular goodsuntil claims onaccount of those goods are paid.Example :‘A‘delivers a rough diamond to‘B’,a jeweler, to be cut andpolished, which is accordingly done. ‘B’I s entitled to retain the stone tillheispaid for the services which he has given.13.4.2DUTIES OF THE BAILEE:1. Duty of reasonable care:The bailee is bound to take care of the goods bailed to him. The degree ofcare to be taken by a bailee is that of a man of ordinary prudence. If hemunotes.in

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takes that amount of care, he will not be held responsible for loss,destruction or deterioration of the goods bailed. (Sec. 152). The degree ofcare required from the bailee is the same whether the bailment is forreward or is Gratuitous.He is also not liable for the destruction or the loss ofgoods due to an actof GodExample:If ‘A’ bails his ornaments to ‘’B and ‘B’ keeps these ornamentsin his own locker at his house along with his own ornaments and if all theornaments are lost/ stolen in a riot, B will not be responsible for the loss toA.2. Bailee’s liability for negligence of servants:For damagescaused by negligence of the servants about the use or custodyof the things bailed a bailee is liable, when acting in course of theiremployment. The bailee is also not liable for unauthorized acts of hisservants outside the scope of their employment. Case:Sanderson v/sCollins.3. Unauthorized use of goods:If the baileemakes unauthorized use of goods bailed, i.e., uses them in away not authorized by the terms of the bailment, he is responsible for alldamages to the goods and must pay compensation to the bailor. Thisliability arises even if the bailee is not guilty ofany negligence, and evenif the damage is the result of accident.-Sec. 154.Examples:‘A’lends a horse to ‘B’ for his own riding only.‘B’ allows ‘C’a memberofhis family, to ride the horse. ‘C’ rides with care, but the horseaccidentally falls arid isinjured. ‘B’ is liable to make compensation to‘A’for the injury done to the horse.4. Mixture of Bailor’s goods with the Bailee’s:If the bailee mixes up his own goods with those of the bailor, thefollowing rules apply:(a) “If the bailee, withconsent of the bailor, mixes the goods of the bailorwith his own goods, the bailor and the bailee shall have an interest, inproportion to their respective shares, in the mixture thus produced.”-Sec.155.(b) If the bailee, without the consent of the bailor mixes goods of thebailor with his own goods, and the goods can be isolated or divided, theproperty in the goods remains in the parties respectively; but the bailee isbound to bear the expense of isolation or division,and any losses arisingfrom the mixture.-Sec. 156.Example:Hamid bails100 bales of cotton marked with a particular marktoSalim.SalimwithoutHamid’sconsent mixes the l00 bales with othermunotes.in

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bales of his own, bearing a different mark.Hamidis entitled to have hisl00 bales returned, andSalimis bound to bear all the expenses incurred inthe separation of the bails, and any other incidental damage.Without the consent of the bailor, If the bailee mixes goods of the bailorwith his own goods, in such a way that it is impossible to segregate thegoods bailed from the other that good, and returned them back, the bailoris entitled to be compensated by the bailee for the loss of the goods.-Sec.157.Example:Dbails superior flour worth Rs. 45toB.B,withoutD’sconsent. mixes the flour with inferior flour of his own,–worth only Rs. 25Bmust compensateDfor the loss of his flour.5. Duty of returning goods:It is the duty of the bailee to return or deliver according the bailor’sdirections, the goods bailed, without demand, as soon as the time forwhich they were bailed has expired, or the purpose for which they werebailed has been accomplished.—sec160.If, by the default of the bailee, the goods are not delivered or tenderedatthe proper time, he is responsible to the bailor, for any loss, destruction ordeterioration of the goods from that time.-Sec. 161.Example: Gagreed to carry certain goods ofBin an efficient manner.The driver of the van which was carrying the goodsleft the vanunattended for one hour for lunch. During that time the goods were stolen,Bfiled a suit for damages againstG. Held, the carrier has a duty via todeliver the goods or return them. The carrier could not do so. The vandriver’s departure constitutes a fundamental breach of the contract to carrythe goods forthwith to the destination. compensation, were awarded.6. Accretion to the goods bailed:Sec. 163.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 bailedExample : Cleaves a cow in the custody ofBto be taken care of. Thecow has a calf.Bis bound to deliver the calf as well as the cow toC.13.5DUTIES OF THE BAILORFollowing are the dutiesof the Bailor1. Bailor’s duty to disclose faults in goods bailed:The bailoris bound to disclose to the bailee faults in the goods bailed, ofwhich the bailor is aware, and which materially interfere with the use ofthem, or expose the bailee to extra ordinary risk, and, if he does not makesuch disclosure, he is responsible fordamage arising to the bailee directlyfrom such faults.munotes.in

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Examples:(i)A lends a horse which he knows to be vicious to B. He does notdisclose the fact that the horse is vicious. The horse runs away, B isthrown and injured. .A is responsible to B for damage sustained.(ii)A hires a carriage of B. The carriage is unsafe, though B is not awareof it, and A is injured. Bis responsible to A for the injury.2. Payment of expenses in Gratuitous Bailment:Where by the conditions of the bailment, the bailee isto receive noremuneration, the bailor shall repay to the bailee the necessary expensesincurred by him for the purpose of the bailment.-Sec. 158.13.6TERMINATION OF BAILMENTA contract of bailment comes to an end under the followingcircumstances:1. Efflux of Time:If the contract of bailment is for a particular period, the bailmentterminates as soon as the same period is expiring.2. Destruction of the subject matter:A bailment is terminated when the subject matter of bailment is destroyed.Example: Suppose3. Fulfillment of Purpose:If the bailment is for a specific purpose, the bailment terminates as soon asthe purpose is fulfilled.4. Act Inconsistent with the terms :(Sec. 153.)If the bailee does any act, with regard to the goods bailed, which isinconsistent with the terms of the bailment, the bailment terminates.5. Goods Lent Gratuitously:(Sec. 159).A gratuitous bailment can be terminated any time but if prematuretermination causes any loss to. the bailee, the bailor mustindemnify thebailee.6. Death:(Sec. 162.)A gratuitous bailment is terminated by the death either of the bailoror thebailee.13.7RIGHTS AND DUTIES OF FINDER OF GOODS13.7.1 Meaning:Finder of goods means a person who finds a goodsbelongs to others andtakes the custody of the same.munotes.in

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Following are the rights and duties of the finder of goods:13.7.2Rights:A finder of goods is in the position of a bailee if he takes charge of thegoods. The rights of the finder of goods can be summarized as follows.-Sections 168and169:1.Possession: Hecan retain possession of the goods against everybodyexcept the true owner.2. Compensation and Lien:He is entitled to get the compensation for thetrouble and expense incurred by him for preservation of the goods and tofind out the owner. He has a lien upon the goods for the payment of thesesums i.e., he can refuse to return the goods until they are paid.3.Reward:He can sue for any reward which the owner might haveoffered for the return of the goods lost.4. Sale:If the goods found are commonlythe subject-matter of sale and ifthe owner cannot with reasonable diligence be found or if he refuses topay the lawful charges of the finder, the goods can be sold provided thefollowing further conditions are fulfilled(a)When the thing is in dangerof perishing or of losing the greater part ofits value.(b)When the lawful charges of the finder amount to two thirds of itsvalue.13.7.3Duties and Obligations:The finder of goods is a bailee. Therefore, he has the following duties andobligations:He must try to find out the true owner of the goodsHe should takereasonable careof the goods (Sec. 151).He should not mix the finder’s goods with his own goods(Sec.I55-157).The goods must be returned to the real owner(Sec.160 & 161).If there isa growth or increase to the goods bailed, it must be given to thereal owner (Sec.163).He must not use the goods for his personal purpose.munotes.in

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13.8LAW RELATING TO LIEN13.8.1Meaning:A lien is a right of any one person to retain that, which is in hispossession,belonging to another, until certain demands of a person in possession arefulfilled. In other words, a lien means the right to ‘retain’ the possession ofthe goods or property until the claim is paid or squared off. Possession isessential to create a right of lien.Hence, Lien is a right of person to retain that which is in his possessionand which belongs to another, until the demands of the person inpossession are satisfied.13.8.2Kinds of Lien:There are two kinds of liens:(a)Particular lien,(b)General lien.1. Particular Lien or Specific lien (Section 170):It is a right to retain custody or possession over those particular goods inconnection with which the debt is in question. It is restricted to thosegoods which are subject matter of the contract and are liable for certaindemands of the person in possession of those goods.According to Section 170 where the bailee has, in accordance with thepurpose of the contract of bailment, provides any services including anexercise of labour and skill in respect of the goods bailed, he has, in theabsence of a contract to contrary, a right to retain such goods in hiscustody until he gets applicable or due remuneration in respect of them.Besides the bailee, other persons whoare entitled to exercise particularlien are unpaid seller of goods, finder of goods,Pawnee, agents, etc.2. General Lien. (Section 171): [Holding goods until a debt has beenpaid]General lien is a kind of a special privilege which the law has grantedonlyto few persons (i) bankers, (ii) factors (iii) wharfingers,(iv) attorney of theHigh Courts, (v) policy brokers, and (vi) others by agreement. Theseparties, can exercise general lien against any goods under their possessionand for any sum legally due on a general balance of account.It entitles a person in custody or possession of the goods to retain themuntilall claimsof the person in possession against the owner of the goodsare satisfied or paid off. It is not necessary that the demands should ariseonly out of the articles detained under possession. But where the goods aremunotes.in

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deposited for somespecial purposes, e.g., safe custody, they will notcome under the spell of general lien.Example:Parasbhaideposited certain jewels with the Gujrat Bank to secure certaindebt, after payment of this debt he demanded the return of these jewelsfrom the bank. He was still indebted to the bank for certain other debts. Onthe bank’s refusal to return, it was held that he was not entitled to recoverunless he proved that the bank had agreed to give up its general lien.(Kunhan V. Bank of Madras, 1895).A solicitor has a general lien on all the papers of the client in hispossession in his professional capacity as solicitor. He can claim a lien forall costs due to him from the client but not for money loans13.8.3Differencebetween Pledgeand Lien:PLEDGELIENCreation ofright:In a pledge, goods arebailed as a security forpayment of debt or forperformance ofapromise.here is no bailment ofgoods as security. It is onlya creation of a right topossession in the hands ofthe bailee. It is a mere rightof retainer.Right to sell:It gives a right to sell.It gives no right to sellPossession:It creates aright ofsecurity i.e. pledge ofgoods is not lost byreturn of goods to theowner or by loss ofpossession.Lien is host by loss ofpossessionOriginPledge is created bycontract between theparties.Lien is created by law orby express or impliedcontract.13.9SUMMARY•Bailmentis “the delivery of goods by one person to another for somepurpose, upon a contract that they shall, when the purpose isaccomplished, be returned or otherwise disposed of according to thedirection of the person deliveringthem.•FEATURES OR THE REQUISITES OF BAILMENTDelivery, Purpose. Return, Contract, Ownership, Movable goods:Bailment is concerned with only movable goods.1.Bailment on the basis of Reward or Charge:a.Gratuitous Bailment:b.Non-GratuitousBailment:munotes.in

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2. Bailment on the basis of Benefit:a.Bailment for the exclusive benefit of the bailor:b.Bailment for the exclusive benefit of the bailee:c.Bailment for mutual benefit of bailor and bailee.3. According to Purpose:a.Bailment by safe CustodyTERMINATION OF BAILMENT:Efflux of Time:Destruction of the subject matter:Fulfillment of Purpose:Act Inconsistent with the terms :(Sec. 153.)Goods Lent Gratuitously: (Sec. 159).Death:(Sec. 162.)There are two kinds of liens:(a)Particular lien, (b) General lien.13.10QUESTIONS1.What is bailment? What are the essential elements of valid bailment?2.Explain various types of bailments3.Distinguish between Pledge and Lien4.Short Notes:a.Rights and duties of bailor andbailee.b.Rights and duties of Finder of Goods.c.Right of Lien.5.Define the following terms:a.Lienb. Bailmentc. Gratuitous bailmentd. Specific liene. General lien*****munotes.in

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14CONTRACT OF PLEDGE(SECTION 172 TO 179)Unit Structure14.1Objectives14.2Meaning and Features of Valid Pledge14.3PledgebyNon-Owner. (Section: 178 & 179)14.4RightsandDuties of The Pawnor and Pawnee14.5Difference Between Bailment and Pledge14.6Questions14.1 OBJECTIVESAfter studying the unit, thestudents will be able to:•Understand the meaning and features of valid pledge.•Explain the concept Pledge by Non-owner.•Know the concepts Pawnee and Pawnor and their rights and duties.•Difference between Bailment and Pledge.14.2 MEANING AND FEATURES OFVALID PLEDGEMeaning:APledgeis a bailment that conveys possessory title to property owned bya debtor (the Pledgor) to a creditor (the Pledgee) to secure repayment forsome debt or obligation and to the mutual benefit of both parties. The termis alsoused to denote the property which constitutes the security. A pledgeis type of security interest.In short Pledge is the bailment of goods as security for payment of a debtor performance of promise. Bailor in this case is called the‘Pawnor’andthe bailee is called the‘Pawnee’(Sec. 172).14.2.1 Essential FeaturesofValid Pledge.1. Bailment of Movable Property only:Only movable property like Valuables Jewellery or documents can bepledged. Immovable property like land and building cannot be pledged,that can be treated separately under Transfer of Property Act.2. Delivery of possession:It is an essential and important element of a valid pledge that thePossession of the goods must be delivered by the Pawnor to the Pawnee. Itmunotes.in

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 may be noted that only the possession of the goods transfers from oneperson to the other and not the ownership. The ownership remains with thePawnor. If the possession is not delivered then there cannot be a validpledge.3. Actual delivery OrConstructive delivery:Actual delivery means the delivery of physical possession. Andconstructive delivery means when there is no change of physicalpossession. The delivery of keys of a godown where the goods are storedis the constructive delivery.4.Delivery should be for the purpose of security:The goods should be delivered by one person to another by way of asecurity. The pawnor should deliver the goods to the Pawnee as a securityfor the payment of a loan or for the satisfaction of an obligation.5.Delivery should be upon a condition to return:It is also an important element of a valid pledge. The goods should bedelivered to the Pawnee as a security for some loan or for the fulfillmentof the promise. When such loan is repaid or promise is fulfilled, thesecurity should be returned to the pawner.14.3PLEDGE BY NON-OWNER. (Section: 178 & 179)Pledge can be made only by the owner of the goods. But there are certainexceptions to this rule. Hence the following persons can also make a validpledge:1.Mercantile agent:According to the Sale of Goods Act, 1930, “Mercantile agent means amercantile agent having in the customary course of business as such agentauthority either to sell goods.A mercantile agent, who is in possession of thegoods or documents oftitle of goods with the consent of the owner, canmake a valid pledge ofthe goods while acting as a mercantile agent in the ordinary course of thebusiness.2.Pledge by persons in possession of goods under a voidable contract:A person who is in custody of goods under a voidable contract can make avalid pledge of the goods, if at the time of pledge the contract was notcancelled. The Pawnee will get a good title to the goods provided he actsin good faith and without notice of thepawnor’s defect of title (Sec.178A).Example:‘A’, by fraud, induced ‘B’ to sell goods.Apledged these goodswith‘C’who acted in good faith and has no knowledge of the fraud. Thepledge is valid.munotes.in

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3.Pledgebyapersonhavingonlyalimitedinterest:(Section 179)Where a person pledges goods in which he has a limited interest, thepledge is valid to the extent of that interest only. In such cases it is notimportant that the Pawnee had no notice of the limited interest of thePawnor in the property.Example:‘A’ findsB’stransistor on the road. In spite of makingreasonable search,Acould not find the true owner.Aspent Rs. 20/-on itsrepair and pledged it for Rs. 100/-withC.Bcan get the transistor only onpaying Rs. 20/-14.4RIGHTS ANDDUTIES OF THE PAWNOR ANDPAWNEE14.4.1Rights and Duties of the Pawnor:Right to receive goods till sold [(Right to redeem) (Sec. 177)].If a time is assigned for the payment of the debt or performance of thepromise, for which the pledge is made, and the Pawnor makes default inthe payment of the dues or the performance of the promise at the assignedtime he may redeem the goods pledged atany subsequent time, beforetheir actual sale of them, but he must in that case pay, in addition, anyexpenses which might have arisen from his default.14.4.2Rights and duties of the Pawnee:1.Right of retainer (Section 173-174):As persection 173,the Pawnee may retain the goods pledged, not only fora payment of a debt or the performance of thepromise, but also for the interest of the debt, and all necessary expensesincurred by him in respect of the possession or for the preservation of thegoods pledged.2.Right to receive extraordinary expenses (Sec. 175):Pawnee is also entitled to receive from the Pawnor any extraordinaryexpenses which he has incurred for the preservation of the goods pledged.3.Right of sale (Section 176):The Pawnee may bring a suit against the pawnor upon the debt or thepromise and retain the goods pledged as a collateral security; or he maysell the thing pledged, on giving the pawnor reasonable notice of the sale.If the pawnormakes default in payment of the debt or performance at thestipulated time, of the promise, in respect ofwhich the goods werepledged,4.Right of Particular lien (Sec. 174):Pawnee has no right to retain his possession over the goods pledged forany debt or promise other than the debt or promise for which they werepledged unless otherwise provided for, by a contract.munotes.in

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5.Pawnee’s right where Pawnor makes default (Sec. 176):In the case of default by the Pawnor in the payment of debt or theperformance of promise at the stipulated time or on demand or withinreasonable time, the Pawnee can exercise the following rights:He has a right to bring a suit on the debt or promise and can retain thegoods pledged as a collateral security.He has also a right to sell the goods pledged after giving reasonable noticeof sale to the Pawnor.6.Pawnee must not use the goods pledged:He must not use goods pledge unless they are such as will not deteriorateby wear.14.5DIFFERENCEBETWEENBAILMENTANDPLEDGEBailmentPledgeBailment can be for many typesfrom the reward to gratuitous.pledge is bailment done for a specifictype of purpose, which is to secure aloan or performance of a promiseThe baileedoes not get a right tosell the goodsA Pawnee has a right to sell the goodsin case of default.A Pawnee gets a right of retainerand a special interest in thegoods, which is more than justthe lien.The Pawnee has no right to use thegoods.BailmentistheTransfer of movable property tothe baileeHere transfer of object, documents tosomeone as a security for loan.14.6SUMMARYMeaning:APledgeis a bailment that conveys possessory title to propertyowned by a debtor (the Pledgor) toa creditor (the Pledgee) to securerepayment for some debt or obligation and to the mutual benefit of bothparties.Essential Features of a Valid Pledge.Bailment of Movable Propertyonly: Delivery of possession: Actual delivery Or Constructive delivery:Delivery should be for the purpose of security: Delivery should be upon acondition to return:PLEDGE BY NON-OWNER:Mercantile agent: Pledge by persons inpossession of goods under a voidable contract: Pledge by apersonhavingonly a limitedinterest: (Section 179).munotes.in

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RIGHTS AND DUTIES OF THE PAWNOR AND PAWNEE:Rights and Duties of the Pawnor:Right to receive goods till sold [(Right to redeem) (Sec. 177)].•Rights and duties of the Pawnee•Right of retainer (Section 173-174):•Right to receiveextraordinary expenses (Sec. 175).:•Right of sale (Section 176):•Right of Particular lien (Sec. 174):•Pawnee’s right where Pawnor makes default (Sec. 176):•Pawnee must not use the goods pledged:14.6 QUESTIONS1.What are the rights and duties of thePawneeand Pawnee underContract of Pledge?2.When the Non-owner can create the Pledge?3.Distinguish between Bailment and Pledge4.Short Notes:-a.Rights and duties of bailor and bailee.b.Rights and duties of Finder of Goods. Right of Lien.5.Define the following terms:a.Pawneeb.Pawnorc.Pledgemunotes.in

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 MODULE IV15LAW OF AGENCYUnit Structure15.1Objectives15.2Meaning and Essentials of Law of Agency15.3Modes of Creating an Agency15.4Classification/ Kinds of Agents15.5Dutiesand Rights of an Agent15.6Duties and Rights of Principal15.7Termination of Agency15.8Irrevocable Agency15.9Summary15.10Questions15.1OBJECTIVESAfter studying the unit, the students will be able to:•Understand the meaning of the term Agencyand essentials for ValidAgency.•Discuss about the modes of creating Agency.•Know the Classification of Agents.•Discuss about the rights and duties of the agent.•Understand the Important conditions that should be fulfilled for a validratification.•Know the meaning of Irrevocable agency.15.2.MEANINGANDESSENTIALSOFLAWOFAGENCY15.2.1Definition & Meaning:Section 182 of the Indian Contract Act defines an agent, as personemployed to do any act for another or to represent another in dealings withthird persons. The person for whom such act is done, or who is sorepresented is called the “principal”.When a person employs another person to do any act for himself or torepresent him in dealing with third persons, it is called a‘Contract ofmunotes.in

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Agency’.The person who is so represented is called the ‘principal’ andthe representative so employed is called the ‘agent (Sec. 182). The duty ofthe agent is to enter into legal relations on behalf of the principal withthird parties. Principal shall be responsible for all the acts of his agentprovided they are not outside the scope of his authority.15.2.2EssentialsforValid Agency.The legal definition of the term ‘agency’, discussed earlier, reveals theessential element of agency, and a valid agency mustsatisfy theseessential requirements. The essential features of agency relationship arediscussed below.1.There should be an agreement between the principal and the agent:It is an essential element of a agency. According to this element, theagency must be created by an agreement between the principal and theagent. The agreement may be express (i.e., by words of mouth or of thecase.)2.The agent must act in the representative capacity:The agent must act as representative of principal, i.e., he must representhis relationship of his principal with the third persons. Thus the true natureof the relationship should be seen if the agent acts in representativecapacity and had the power to bind his principal with the third persons, therelationship is that of ‘agency’.3.The principal must be competent to contract:The principal must be competent to enter into a valid contract, i.e., hemust be of sound mind, and have attained the age of majority (i.e., heshould have completed 18 years of age).4.The agent need not be competent to contract:Anyperson may become an agent and he need not be competent tocontract [Section 184]. Even a minor can be appointed as agent, and theprincipal shall be bound by the acts of such an agent. It may, however, benoted that such an incompetent agent shall not be liable to the principal.Thus, the principal cannot recover any compensation from an incompetentagent for losses caused by misconduct or unauthorized acts of such agent.5.The consideration is notnecessary:No consideration is essential for the establishment of a valid agencyrelationship [Section 185]. An agency is valid even without consideration.Mostly, an agent is remunerated by way of commission for the servicesprovided by him.15.3MODESOF CREATING AN AGENCYIn ordinary contracts, the parties to the contract act entirely by themselves.When instead another person is engaged to do the acts under the contract,munotes.in

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it is called agency. Agency is a special type of contract. Section 182 of theContract Act defines the terms Agent and Principal as follows:1.Agentis a person employed to do any act for another or to representanother in relation with third persons.2.The person for whom such act is done, is calledPrincipal.3.The contract which creates the relationship of ‘Principal’ and ‘Agent’is called anagency.Creation of agency:A contract of agency comes into existence in any of the following ways.1.Agency by Express Agreement: Section 186 & 187:Agency is createdby a contract in writing. An Agency may be created byoral contract between principal and agent. The common form of anagreement in writing is “power of Attorney” whereby, authority is given tothe power of attorney holder, either generally or specifically, to act onbehalf of the principal. A general power of attorney authorizes the Agentto do all things on behalf of the Principal.2.Agency by Implied Agreement: Section 187:Implied agency may arise by conduct of the parties of the circumstances ofthecase. When agency come in to an existence by the conduct of theparties it is called implied agency.Example:A of Calcutta has a shop in Delhi. B, the manager of the shop,has been ordering and purchasing goods from C for the purpose of theshop. The goods purchased were being regularly paid for out of the fundsprovided by A. B shall be considered to be an agent of A by his conduct.•Partners,•Servants and•Wives areregarded as agents by implications because of theirrelationship.•Wife as an impliedagent to her husbanda.When the husband and wife are living together the wife shall have animplied authority to pledge the credit of her husband for necessaries. Theimplied authority can be challenged by the husband only in the followingsituations(1)The husband has expressly prohibited the wife from borrowingmoney or buying goods on credit.(2)The things brought did not constitute necessities of her life.(3)Husband had given requisite funds to the wife for purchasing thearticles.(4)The creditor had been instructed not to give credit to the wife.munotes.in

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b.When the wife lives separate from husband without her fault, she shallhave an implied authority to bind the husband for necessaries, if he fails toprovide her maintenance.Such an agency may takeany of the following forms:i.Agency by Estoppel:Such an agency is based on the principle of estoppel. The rule of estoppelcan be stated thus: Where a person, by his words or conduct, has willfullyled another to believe that certain set ofcircumstances or facts exist, andthat other person has acted on that belief, he is estopped from denying thetruth of such statements. In other words, estoppel arises when one isprecluded from denying the truth of anything which he has represented asa fact, although it is not a fact.ii.Agency by Holding out:Such agency is based on the principle of holding out which is a part of theprinciple of estoppel. The only distinction is that in this case someaffirmative conduct by the principal is necessary.For example, a dealer iniron usually sent his employee to buy on credit and paid for it afterwards.On one occasion, he sent the employee with cash, who bought the iron oncredit and pocketed the money. It was held that the iron merchant wasliable to pay for the iron, as the previous dealings justified the seller inassuming that the Agent had authority to buy on credit. The employer’sconduct in ‘holding out’ his employee to be his agent estops him fromdenying the existence of authority of the employee. However, if the Agentis held out as having only a limited authority to do acts, the principal is notbound by an act outside the authority.iii.Agency by Necessity:In certain circumstances, the law authorizes a person to act as agent foranother without any regard to the consent of the principal.Example:A wife deserted by her husband and forced to live separatefrom him, can pledge her husband’s credit to buy all the necessaries of lifeaccording to the position of the husband even against the wish of thehusband and the husband can be held liable for the same.In other cases where in order to save the property of another, one has toact before the instructions of the owner can be received, he is, bynecessity,authorizedto act as Agent and the consent of the owner asPrincipal is assumed in law. Agency by Ratification: Sections 196 and 197Ratification means thesubsequent adoption and acceptance of an actoriginally done without instructions or authority.Thus, where anAgent exceeds his authority (except under emergency), theacts of theAgent are not binding on the Principal. The Principal, however, mayafterwards confirm and adopt the contract so made and this is known asratification. Section 196 of the Contract Act provides for ratification andstates that ‘where acts are done by one person on behalf of another, butmunotes.in

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without his knowledge or authority, he may elect to ratify or to disownsuch acts. If he ratifies them, the same effects will follow as if they hadbeen performed by his authority.15.4CLASSIFICATION / KINDS OF AGENTSAgents can beclassified in various ways:1.Special Agents:Agent appointed to carry out a particular task only. The agency in suchcases for a specific period of for a particular type of work. When theassigned work is got over the agency gets terminated. Forexample… Anagent has appointed by B to sell Block number 420 in a particular area.2.Universal Agents:Universal agent is practically a general agent with very extensive rights.We can say that an universal agent is a substitute of principal for all thosetransactions where in principal cannot participate. Universal agent canlook after all the work of agents inhis absent. For example: when a personleaves his country for a long time, he may appoint his son/daughter as hisagent to act on his behalf inhis absence.3.General Agents:The agent has a general authority in such a case. A general agent is onewho has authority to do all the acts (generally related to business) in theinterest of his principal.4.Co-Agents:When two or more persons havebeen appointed by the principal. It isgenerally treated as their authority is joint. But when their authority isseveral, any other of the co-agents can act without the concurrence of theother.5.Sub-Agents:A sub-agent would be a person employed and acting under the control ofthe original agent of the agency In simple words, sub-agent is an agent ofthe original agent. Agent is responsible to the principal for the acts of sub-agent.6.Factor:A Factor is one type of a mercantile agent who sells goods on behalf of hisprincipal. He has wide authority powers to sell goods upon such terms andconditions as he thinks proper. If a factor does any act which is beyond hisauthority, but which is within the scope of his apparent authority, then hisprincipal is bound by such act.7.Commission Agents:For selling or buying goods on behalf of his principal a commission agentis appointed. Such types of agents belong to a indefinite class of agents.munotes.in

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He/She takes care to secure buyer for a seller of a goods and sellers for abuyer of goods and receives a commission in return for his work on theactual sales price.8.Broker:A broker is a special type of commercial agent who acts as a middlemanbetween the buyer and the seller. We can say that he is employed to bringabout contractual relationship between the principal and the third party.He usually gets commission for the work performed. His function endswhen he brings the two partiestogether. Heis never in possession of thesubject, therefore cannot exercise the right of lien.9.Auctioneer:Auction is usually a public sale of goods made in the highest of severalbidders. An auctioneer is a mercantile agent who is appointed to sell goodson behalf of principal, compensated in terms of commission.10.Del Credere Agents:A Del Credere agent is a mercantile agent who is employed to sell goodson behalf of his principal. He undertakes to guarantee the payment of duesin consideration for an extracommission. We can say that besides being amercantile agent a del credere agent finds himself into the shoes of aguarantor as well.15.5DUTIES AND RIGHTS OF AN AGENT15.5.1Duties of An Agent:1.Duty not to delegate-Section 190:The agent cannotdelegate his authority to perform his act in express orimplied manner unless the custom of trade or the nature of the agency sorequires.2.Duty of Obedience [Duty to follow the instructions of Principal-Section 211]:Express instructions are paramountand any agent disobeying these will beautomatically liable for any loss which is caused to the principal. Thisduty takes precedence over the duty to exercise all reasonable care andskill. If the agent fails to act according to the direction or custom then he isliable to the principal for the loss suffered by the principal due to such anact of the agent.Two important issues stem from this point of law. Firstly, it is wise to askfor all significant instructions to be given in writing, both at the initialundertaking and throughout the management of a property. Verbalinstructions are more prone to ambiguity and can be forgotten. Secondly,the firm’s management agreement should define the professional servicesprovided and what actions will be taken incertain situations. In this way,munotes.in

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 the definition of ‘reasonable care and skill’ will be less open tointerpretation by any aggrieved client.3.Duty to Account:An agent is obliged to pay over or otherwise account for all monies in hispossession wheresuch monies have been received from the principal; thatwhich he receives from a third party to hand over to the principal, and thatwhich he is deemed to receive on behalf of the principal (e.g. a secretprofit). In connection with the agent’s duty to account, it has been heldthat it is his duty to keep accurate accounts of all his dealings on behalf ofthe principal. If he does not, everything which is consistent with theproved facts is presumed against him. In accounting for such moniesreceived, the agent may deduct whatever is due to him by way ofcommission and expenses.4.Duty of Care and Skill. Section 211:An agent is under a duty to exercise reasonable care and skill which willbe examined in the light of all the particular circumstances of thecase.From a professional liability point of view, this duty is one of the mostimportant to consider. It holds the highest penalty since professionalnegligence claims can be costly in time and any awards for damages madeif a matter was to go to court.5.Duty of Loyalty [Duty not to make secret profit-Section 216]:This arises automatically out of the fiduciary nature of the relationshipbetween agent and principal. It is the duty of an agent not to make secretprofit. If the agent makes secret profit,the principal can claim such abenefit from the agent.Furthermore, the agent should not take secret profits (which are deemed toinclude bribes and commissions) without the prior knowledge andauthorization of the principal. The implication of this dutyis that agentsshould declare any commissions that may be earned within their agencyagreement or terms and conditions.6.Performancewith Honesty:It is the duty of an agent that he should deal the business honestly. If heconducts the business dishonestly then he is not entitled to receive thereward of his services.7.Communicationwith Principal:It is the duty of the agent that he should give all the information’s aboutthe business to the principal. He should seek instructions from hisprincipal. He should not keep anything secrets from his principal.8.Separate Account:An agent should not mix his account with the principal. It is the duty thathe should keep the accounts of a principal separate.munotes.in

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15.5.2Rights of Agent:Following are the important rights of an agent :1.Right of Remuneration: Section 219 and 220:It is basic right of an agent that he should receive the remuneration of hisservices. He has also a right to claim remuneration as may be payable tohim foracting as an agent. In the absence of any contract to the contrary,this right to claim remuneration will arise only when he has carried out theobject of the agency in full without being guilty of misconduct (Sec. 219).An agent who is guilty of misconduct in the business of the agency is notentitled to any remuneration in respect of the part of that business whichhad been misconducted (Sec. 220)2.Right of Compensation: Section 225:In case of injury caused to agent by the negligence of the principalmay becompensated by the principal.3.Right to claim reimbursement for expenses: (Right to retainer)Section 217:Agent has the right to retain, out of the money received on behalf of theprincipal, money advanced or expenses properly incurred in conductingthe agency business. The agent may have paid the money at the request ofthe principal, or on account of the understanding implied by the terms ofthe agency or through mercantile usage. In conducting the business if anagent advances or spends some money for the betterment of a business. Hehas also right to retain that amount from the total sum received by him onaccount of the principal.4.Right of Lien: Section 221:An agent has also a right to retain the goods or property of a principal tillthepayment in due is received by him.5.Right to indemnification againstconsequences of all lawfulacts:(Sec. 222):An agent has a right to be indemnified by the principal against theconsequences of all lawful acts done in exercise of his authority.Example:Salim, a broker at Patna , by the orders of Ahmad, merchantthere, contracts with Chaman bhai for the purchase of 10 casks of oil forAhmed. Afterwards Ahmed refuses to receive the oil and Chaman bhaisues Salim. Salim informs Ahmad, who repudiates the contract altogether.Salim defends, but unsuccessfully, and has to pay damages and incursexpenses. Ahmad is liable to Salim for such damages, costs and expenses.6.Right of particular lien: 221:An agent is entitled to retain under the possession both movable andimmovable of the property of the principal received by him until theamount due to him for commission, disbursements and services has beenmunotes.in

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paid or accounted for him, provided the contractdoes not provideotherwise15.6RIGHTS AND DUTIES OF PRINCIPAL15.6.1 Duties of Principal:1.To indemnify the agent:To indemnify the agent against consequences of lawful act (sec 222): theemployer is bound to indemnify his great against theconsequences of alllawful acts done by such agent in exercise of the authority assigned tohim. The principal is liable only for such damages as are direct andimmediate and naturally follow the execution of the agency2.Compensate the agent for injurycaused (Sec 225):The principal must take compensation to his agent in respect of injurycaused to the agent by the principal’s neglect.3.Misrepresentations or fraud by agent (sec 238):Misrepresentations carried out, or frauds committed, by an agentacting inthe courses of business for his principal, has the same effect on agreementmade by such agent as if such misrepresentations or fraud had been madeor committed by the principal. In order that a principal shall be madeliable for the misrepresentations and frauds committed by the agent, suchmisrepresentations or frauds must be committed by the agent—1)In the course of the business of his principal; and2)The act must be within the scope of agent’s authority.15.6.2 Rights of Principal:1.To repudiate/cancel the contract (Sec 215):If an agent deals on hisown account in the business of the agency, without taking the consent ofhis principal and accustom him with all material facts which have come tohis own knowledge on the subject, the principal may cancel thetransaction, if the case shows either that any material fact has beendishonestly hided from him by the agent or that the dealings of the agenthave been harmful to him.2.To claim benefit (Sec 216):if an agent without the knowledge of theprincipal, deals in the business of the agency on his own account insteadof on account of his principal, the principal is to claim from the agent anyadvantage which may have resulted to him from the dealing.3.To ratify ( give retrospectiveeffect ) to agent’s acts (Sec 196):whereacts are done by one person on behalf of another but without hisknowledge or authority, he may elect to ratify or to give retrospectiveeffect to such acts.munotes.in

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4.To revoke/ to take back agent’s authority (Sec203):the principalmay revoke or take back the authority given to his agent by giving areasonable/ appropriate notice of revocation at any time before theauthority has been exercised.5.To demand accounts (Sec 213):Principal is entitled to demandappropriate accounts from the agent.6.To refuse remuneration when agent is guilty of misconduct (Sec220):The principal has a right to refuse remuneration to the agent who isguilty of misconduct in the business of the agency.15.7TERMINATION OF AGENCYAn agency may be terminated either by–1)Act of the parties, or2)Operation of law.A.By act of the parties:1.By agreement:An agency, like any other contract, can be terminated at any time by amutual agreement between the Principal and theAgent.2.Revocation by the Principal:The principal is empowered to revoke the authority of the Agent at anytime. The agency stands terminated from the time such revocation isaffected. Revocation can be express or implied.17.In the case of acontinuous agency, it can be terminated by revocationonly for the future. It cannot be revoked in relation to the acts alreadydone by the Agent. In other words, revocation cannot be with retrospectiveeffect. Reasonable notice should be given to the Agent and also the thirdparties before revocation.18.An agency, which is created for a fixed period, can be terminated byrevocation even before the expiry of that period. However, the Principal isbound to pay compensation to the Agent, even if the authority is revokedafter giving notice.3.Renunciation by the Agent:It is the termination of the agency at the instance of the Agent, when he nolonger wishes to continue working as Agent. The Agent has to give areasonable notice to the principal of hisintention to renounce the agency;otherwise, he is liable to compensate the principal for any loss due torenunciation without notice. Further, if the agency is for a fixed period andthe Agent renounces it without sufficient cause before the expiry of theperiod, he shall have to compensate the principal for the resulting loss, ifany.munotes.in

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 B. By operation of law:An agency comes to end automatically by operation of law in thefollowing conditions:1. Completion of business of agency:If the purpose for whichthe agency is created is served and achieved, theagency stands terminated, e.g. where an advocate is appointed to appear ina suit, his authority comes to end when the adjudication is complete andthe judgment is delivered.2. Expiry of time:When theagency is created for a specified period of time, the agencycomes to end with that period, even though the business or reason forwhich the agency was created continues.3. Death of the Principal or the Agent:An agency is terminated automatically on thedeath of the Principal or theAgent. In the event of the death of the Principal, the Agent must take allreasonable care to protect the interests of the deceased Principal, whichwere entrusted to him.4. Insanity of the Principal or the Agent:If thePrincipal or the Agent becomes of unsound mind, the agency isterminated automatically. Here also, in the case of insanity of theprincipal, the duty of the Agent is the same as in the event of death of theprincipal.5. Insolvency of the Principal:Whenthe Principal becomes insolvent, the agency is terminated.However, the termination of agency on the insolvency of the Agent is atthe discretion of the principal.6. Destruction of the subject matter:Where the agency is created with reference to a particular property orsubject matter, it stands terminated automatically with the destruction ofthat property.For example: Agent is appointed for the sale of a house, the agency isterminated whenthe house is destroyed by fire.7. Dissolution of aCompany:It is like the death of the principal or the agent. When Principal or theAgent is an artificial person created only in the eyes of law (such asincorporated companies), the agency is terminated with the dissolution ofthat company.munotes.in

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8. Becoming an alien enemy:If the Principal or the Agent is a citizen of another country and the warbreaks between India and that country, the contract of agency isautomatically terminated, as the continuance of the same is unlawful.15.8 IRREVOCABLE AGENCYIrrevocable agency means an agency which cannot be terminated. Anagency is irrevocable in the following cases:1. Where agency is coupled with interest:Where the agent has himself an interest in the property which forms thesubject-matter of agency, theagency cannot, in the absence of an expresscontract, be terminated to the prejudice of such interest (Sec. 202).Example:A gives authority to B to sell A’s land, and to pay himself, outof the proceeds, the debt due to him from A. A cannot revoke theauthority, nor can it be terminated by his insanity or death.It is essential that the interest of the agency should be existing at the timeof creation of agency. Therefore, if the interest was created subsequently,the agency can be revoked.There isno absolute restriction on the termination of the agency evenwhen it is coupled with interest but the agent should be compensated forthe loss arising from such termination.2. Where the authority has been party exercised?The principal cannot revoke theauthority given to his agent after theauthority has been partly exercised, so far as regards such acts andobligations as arisen from acts already done in the agency (Sec. 204).3. Where the agent has incurred personal liability?When the agent haspurchased the goods on his personal liability, or wherehe made the payment of the good, the agency cannot be terminated.Example: AbhimanyuauthorizedBhimto buy 100 bales of cotton onbehalf of Abhimanyu and to pay for it out of Abhimanyu’s money inBhim’s hand. Bhim buys 100 bales of cotton in his own name so as tomake himself personally liable for the price. Abhimanyu cannot revokeBhim’s authority so far asregards payment for the cotton.15.9SUMMARYMeaning:When a person employs another person to do any act forhimself or to represent him in dealing with third persons, it is called a‘Contract of Agency’.The person who is so represented is called the‘principal’ and the representative so employed is calledthe ‘agent.munotes.in

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Essentials For Valid Agency.•There should be an agreement between the principal and the agent:•The agent must act in the representative capacity:•The principal must be competent to contract:•The agent need not be competent to contract:•Theconsideration is not necessary:Modes of Creationof Agency:Classification ofAgents.Modes of Terminationof Agency•Agency byExpressAgreement:Section 186 &187:•2.Agency byImpliedAgreement:Section 187•Agency byEstoppel:•Agency byHolding out:•Agency byNecessity:•Special Agents:•UniversalAgents:•General Agents:•Co-Agents:•Sub-Agents:•Factor:•CommissionAgents:•Broker:•Auctioneer:•Del CredereAgents:A.By agreement:•Revocation by thePrincipal:•Renunciation by theAgent:•B. By operation oflaw:•Completion ofbusiness of agency:•Expiry of time:•Death of thePrincipal or theAgent:•Insanity of thePrincipal or theAgent:•Insolvency of thePrincipal:•Destruction of thesubject matter:•Dissolution of aCompany:Becoming an alienenemy:15.9QUESTIONS1.What are the essentials of valid contract of Agency?2.Explain the various modes of creation of Agency?3.What are the different types of Agents?4.Explain the rights and duties of Principal.5.Short Notes:a. Agency by Ratification.b. Rights and duties of Agent.c. Termination of Agencymunotes.in

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6.Define the following terms:a. Agencyb. Irrevocable agencyc. Agentd. Principale. DelCreder Agentf. Universal Agentg. Factorh. Sub-agent.*****munotes.in

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MULTIPLE CHOICE QUESTIONS WITHANSWERS(MODULE III)1. Section——————of Indian Contract Act defines a contract ofIndemnity.A) Section 127B)Section 124C)Section 125D)Section 130ANS: C)Section 1252. A contract by which one party promises the other party to savefrom losswhich may be caused either by the conduct of thepromisoror by the conduct of any other person is called as————A) Contract of BailmentB) Contract of GuaranteeC)Contract of PledgeD)Contract of IndemnityANS:D) Contract of Indemnity3. In acontract of Indemnity there are————A)3 parties and one contractB) 2 parties and 2 contractsC) 3 parties and 3 contractsD)2 parties and one contractANS:D)2 parties and one contract4. A Contract of Indemnity is———A)Void AgreementB)QuasiContractC)Contingent ContractD)Wagering ContractANS:C)Contingent Contract5. A———————is a contract to perform the promise ordischarge theliability of a third person in case of his default.A)Contract of GuaranteeB)Contract of BailmentC)Contract of IndemnityD)Contract of PledgeANS:A)Contract of Guaranteemunotes.in

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6. A Contract of Guarantee is a———————agreement.A)Bipartite agreementB)Tripartite agreementC)Either (A) or (B)D)None of theseANS:B)Tripartite agreement7. Surety isa person who——————A)Who gives the guaranteeB)To whom the guarantee is givenC)In respect of whose default the guarantee is givenD)None of the aboveANS:A)Who gives the guarantee8.A continuing guarantee applies to———A)Reasonable number oftransactionsB)Any number of transactionsC)A series of transactionsD)A specific transactionANS: C)A series of transactions9. A surety can be discharged from his liability by——A)By NoticeB)By NovationC)By his DeathD)All the aboveANS:D)All the above10. Right of Subrogation means—————A)The surety will step into the shoes of the anotherB)He is entitled to the benefit of every security which thecreditor hasC)The surety can claim indemnity from the principal debtorD)All theaboveANSD)All the above11. Bailment means————A)The goods delivered to be returned by way of an equivalentin othercommoditiesB)The goods delivered to be returned by way of an equivalentin moneyC)The goods is delivered by one person toanother for somepurpose tobe specifically returned or otherwise disposed ofas per the order ofthe bailorD)All of thesemunotes.in

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ANS: D)All the above12. Bailment is defined under Section———of Indian Contract Act,1872.A)144B) 146C)148D)149ANS:C)14813. In all cases of bailment, the bailee is bound to take as much careofthe goods bailed to him as a man of ordinary prudence wouldundersimilar circumstances. The statement is—————A) TrueB) FalseC) Partly correctD) None of the aboveANS:A) True14. If the goods are lent free to the bailee for his use it is known as—————A)AccommodationB)Gratuitous BailmentC)Non-Gratuitous BailmentD)DepositionANS:B)Gratuitous Bailment15. If the bailee mixes the goods of the bailor with hisown goods,without the consent of the bailorA)The bailee is liable to pay the expenses for separation ofgoods anddamagesB)The bailee is not liableC)Not liable for compensationD)None of these16. If the bailee mixes the goods of the bailor with his own goods,without the consent of the bailorA)The bailee is liable to pay the expenses for separation of goods anddamagesB)The bailee is not liableC)Not liablefor compensationD)Noneof theseANS: A)The bailee is liable to pay the expenses for separation ofgoods and damagesmunotes.in

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17. Lien means————A) A chargeB) A particular statusC)A guaranteeD)A legal claim to hold property as securityANS: D)Alegal claim to hold property as security18. Bailor in Pledge is known as————A)BaileeB)PawnorC)PawneeD)None of theseANS . B)Pawnor19. In a Pledge, the general property or ownership in goodsA)Transferred to the pawneeB)Cannot be transferred to the pawneeC)Continues in the pawnorD)None of the aboveANS :C)Continues in the pawnor20.According to Section 71 of the Contract Act, a person who findsgoods belonging to another and takes them into his custody, issubjectto the same responsibility as a—————A)BaileeB)BailorC)SuretyD)PawnorANS: A)Bailee21. As per Section 182 of the Contract Act, an agent is one—————A) Who is employed by anotherB) To do any act for anotherC) To represent another in dealingwith third personD) All of the aboveANS: D) All of the above22. A sub-agent is a person———A)Who works under the main agentB)Who carries out the order and direction of a person under whomheworks directlyC)Who works on behalf of the mainagentmunotes.in

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D)Employed by and acting under the control of the original agent in thebusiness of agencyANS: D)Employed by and acting under the control of the originalagent in the business of agency23. Substituted agent is—————A) Agent’s agentB)Principal’s agentC) None of the aboveD) Both (A) and (B)ANS: B) Principal’s agent24. Ratification of authority meansA) Delegation of powersB) SubrogationC) Termination of agencyD) Confirmation to make valid or sanction an act which is alreadydone.ANS:D) Confirmation to make valid or sanction an act which isalready done.25. An agency is terminated—————A) By the principal revoking the authorityB) By the agent renouncing the business of agencyC) By either the principal or agent dying orbecoming of unsound mindD) All the aboveANS: D) All the above26. The finder of goods is in the same position as that of ___________:a) Baileeb) Bailorc) Pledgerd) Creditor(Ans: aBailee)27. A hires a carriage of B. The carriage is unsafethough B is notaware of it and A is injured:a) B is responsible to A for the injuryb) B is not responsible to A for the injuryc) No one is responsible to each otherd) NocontractAns: a)B is responsible to A for the injurymunotes.in

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28. A person employedto do any act for another or to representanother in dealings with third person is called:a) Servantb) Labourc) Agentd) SoverignAns: c ) Agent29. An agent is bound to render proper account to ____ on demand:a. His principalb. Sub-agentc.Creditord. Share holders(Ans: a ) his principal)30. Factor is a ________________________ agent:a) del-credere agentb) mercantile agent.c) commission agentd) intending agent.Ans: b) mercantile agentmunotes.in

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MULTIPLE CHOICE QUESTIONS-FORPRACTICEMODULE III1. Guarantee is given for series oftransactions__________.a) implied guaranteeb) general and continuous guaranteec) continuous guaranteed) general guarantee2. The person to whom the guarantee is given is called ………..a) debtorb) creditorc) third partyd) surety3. A contract of indemnity may be called as:a. Quasi contractsb. Contingent contractsc. Good contractsd. None of the above.4. A contract to perform the promise, or discharge the liability of athird person incase of his default is called as:a. Contract of guaranteeb. Contract of agencyc. Contract of bailmentd. Contract of indemnity5. In a contract of indemnity there are:a. Two partiesb. Three partiesc. Four partiesd. None of the above6. The personin respect of whose default the guarantee is given iscalled:a. The creditorb. The suretyc. The principal debtord. None of the above7. On whose request the surety should give the guarantee:a. At the request of the principalb. At the request of thebankerc. At the request of the debtord. At the request of the creditormunotes.in

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8. The person who given the guarantee is called:a. Suretyb. Creditorc. Principal Debtord. None of the above9. The person whose loss is to be made good is called the:a. Suretyb. Indemnifierc. Creditord. Indemnified/Indemnity holder10. What is duty of Principal:a.Compensation to agent for injury caused by principal’s neglect.b.Agent to be indemnified against consequences of acts done in goodfaith.c.Agent to beindemnified against consequences of lawful acts.d.All of the above.11. How the agency can be created:a. By ratificationb. By express or implied agreementc. Be operation of lawd. All of the above.12. Ratification ofunauthorizedact of a person can be ratified by thePrincipal:a. In partb. In fullc. Substantial portiond. Only some portion13. An agent having an authority to do an act has authority to do:a. Everything which is at the discretion of the agent.b. Everythingwhich is profitable in his opinion.c. An agent having an authority to do an act has authority to do:d. Everything in which has its own interest.14. An agency may be terminated:a. By the business of the agency being completed.b. By the Agencyrenouncing the business of the agencyc. By the Principal revoking his authority.d. All of the above.munotes.in

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15.An agent who in consideration of an extra commission, guaranteeshis principal that the persons with whom he enters into contract onbehalf of the principal, shall perform their obligations:a. Del credere agentb. Brokerc. Mercantile agentd. Special agent16. The person who during the contract of bailment deliver goods iscalleda) Bailorb) Baileec) Both (a) and (b)d) None of above17. Theperson to whom goods are delivered according Bailment iscalleda. Bailorb. Baileec. Both (a) and (b)d. None18.The bailment of goods as security for payment of debt orperformance of a promise is called______________a.Pledgeb.Special bailmentc.Both (a) and (b)d.None of above19. In pledge bailor is called___________a. Pawnorb. Pawneec. Both (a) and (b)d. None of above20. A person employed to do any act for another or to representanother in dealings with third person iscalled_______a.Servantb.Labourc.Agentd.None of abovemunotes.in

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16SALE OF GOODS ACT 1930Unit Structure16.1Objectives16.2Introduction16.3Fundamental Concepts16.4Kindsof Delivery16.5Essentialsof Valid Sales/ Formationof AContract Of Sale16.6Distinguish Between A Sale And Anagreement To Sell16.7Difference Between Sale & Hire Purchase16.8Kindsof Goods16.9Effectsof Destructionof Goods-Already Contracted16.10Modesof Ascertainment Of Price16.11Summary16.12Questions16.1OBJECTIVESAfter studying the unit, the students will be able to:•Define the fundamental concepts in the Sale of Goods ACT.•Explain the essentials of Valid Sales.•Distinguish between Sale and Agreement to Sale•Distinguish betweenSale and Hire purchase16.2INTRODUCTIONThe sale of Goods Act 1930 deals with the law relating to sale of goods.The term Goods means every kind of movable property, other than Moneyand Actionable claims. The sale of Goods Act, 1930 is mainly based onthe English Sale of goods Act, 1893.Before the Sale of Goods Act,1930, the law relating to sale of goods wascovered under the Chapter VII of Indian contract act, 1872, the provisionof which were not suffice the purpose or not adequate. Therefore, new actcalled Sale of Goods Act, 1930 was passed. The presently act containing66 sections came into force from 1stJuly, 1930 which extends to whole ofIndia except the state of Jammu & Kashmir.munotes.in

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16.3FUNDAMENTAL CONCEPTS16.3.1Definition of Contract ofsale of goods:Section 2(1)of the Act defines a contract of sale of goods as: a contract bywhich the seller transfers or agrees to transfer the property in goods to thebuyer for a money consideration, called the price. Subsections (3) and (4)give different names to two transactions:(3) Where under a contract of salethe property in the goods is transferred from the seller to the buyer thecontract is called a sale.(4) Where under a contract of sale the transfer of the property in the goodsis to takeplace at a future time or subject to some condition later to befulfilled the contract is called an agreement to sell.16.3.2IMPORTANT CONCEPTS:1.Buyer [Section.2(1)]:Buyer means a person who buys or agrees to buy the goods.2.Seller:-[Section2(13)]:Seller means a person who sells or agrees to sell the goods.Example:-Mr. Kashif sells the shop to Mr. Zahir. Mr. Kashif is a sellerand Mr. Zahir is a buyer in this case.3.Goods:-[Section 2(7)]:Goods have been defined by Section 2,sub-section 7 of the Sale of GoodsAct 1930 as “every kind of movable property, other than actionable claimsand money; and includes stock and shares, growing crops, grass and thingsattached to or forming part of land which are agreed to be served beforesale or under a contract of sale.4.Delivery [Section 2(2)]:Delivery means voluntary transfer of the possession of goods from oneperson to another.16.4 KINDS OF DELIVERYa.Actual or Physical Delivery:When a seller delivers the goods physically tothe buyer or his agent, totake the possession. It is called an actual delivery. If the seller has receivedthe price but does not deliver the goods to the buyer. The buyer can suethe seller for price with reasonable interest.Example:An agreementbetweenMrs. Sapnaand Vasu for sale of car.Carhasdelivered toMr. Vasu.Thisiscalled actualdelivery.munotes.in

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b.Symbolic Delivery:If the key of any store is delivered to any person, it will be considered thegoods in the store are also delivered to thatperson. It is a symbolicdelivery.Example:Mr. Ram sells the car to Mr. Bharat which are kept in the“Show Room”. Mr. Ram gives the key of show room to Mr. Bharat . It is asymbolic delivery.c.ConstructiveDelivery:When there is a change in the legalcharacter without any visible change inactual and visible custody it is called constructive delivery.Example:Mr. Narad has bus, which he has rented out to Mr. Narayana. Itis in the custody of Mr. Narayana. Mr. Narad sells and transfers completetitleto Mr. Krishna. The bus remained in the custody of Mr. Narayana.There is no change in the custodian. Here only the title of the property haschanged. Now Mr. Narayana agrees to hold on behalf of the buyer. It iscalled constructive delivery.5.Price:Price must be the consideration in the contract of sale. If goods areexchanged with goods, it is barter and not a contract of sale.Example:“X” sells a book to “Y” for Rs. 300. It is a contract of sale.6.Transfer of Ownership:To constitute the sale,contract the seller must transfer or agree to transferthe property ownership to the buyers. So, possession and ownership bothwill be transferred to buyer.Example:“X” sells the car to “Y” for 6 lac.The possession andownership both will transfer to“Y”.7.Sale:When ownership and possession of the goods is immediately transferredfrom seller to buyer it is called contract of sale.Example:“X” buys a pen from the “Y” and pays the whole price on hishand. It is a sale.8.Agreement to Sell:Thecontract is called agreement to sell, when the transfer of ownership inthe goods is to take place at a future date.Example:Mr. X agrees to purchase Mr. Nitoo’s bus for Rs. 30 lac. Butthe transfer of bus will take place after one year. It isagreement to sell.Where under a contract of sale, the transfer of property in the goods is totake place at a future time or subject to some condition thereafter to bemunotes.in

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 fulfilled, the contract is called ‘an agreement to sell’ [Sec. 4(3)]. It is anexecutory contract and refers to a conditional sale.Illustrations:(a)On 1st January,Aagrees with B that he will sellBhis scooter on 15January for a sum of Rs. 3,000. It is an agreement to sell, since A agrees totransfer the ownership of the scooter toBat a future time.(b)Aagrees to purchaseB’s car for Rs. 50000, providedBstands suretyfor him withC. It is an agreement to sell forB. It becomes a sale when thecondition is fulfilled by B.16.5ESSENTIALS OF VALID SALES/ FORMATION OFA CONTRACTOF SALE.Section 4(1) of the Sale of Goods Act defines a contract of sale of goodsas-“a contract whereby the seller transfers or agrees to transfer theproperty in goods to the buyer for a price.”This definition reveals the following essentialcharacteristics of contract ofsale of goods:1.Two parties:The first essential is that there must be two definite parties to a contract ofsale, viz.., a buyer and a seller, as a person cannot buy his own goods.2.Parties:A minor or lunatic cannot be a transferor / vendor as he is not competentto contract under Section II of the Indian Contract Act, 1872. It has beenheld that a minor or a lunatic can be a transferee or purchaser in the caseof transfer by way of sale or mortgage, represented by hisGuardian.3.Transfer of property:‘Property’ here means ownership. Transfer of property in the goods isanother essential of a contract of sale of goods. A mere transfer ofpossession of the goods cannot be termed as sale.To form a contract ofsale theseller must either transfer or agree to transfer the property in thegoods to the buyer.4.Goods:The subject-matter of the contract of sale must be ‘goods’, According toSection 2(7), “goods means every kind of movable property other thanactionable claim and money; and•Includes stock and shares,•Growing crops, grass,•And things attached to or forming part of the land which are agreed tobe severed before sale or under the contract of sale.munotes.in

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Goodwill, trademarks, copyrights, patents right, water, gas,electricity,decree of a court of law, are all regarded as goods. Shares and stock arealso included in goods.5.Consideration:The consideration for a contract of sale must be money considerationcalled the price. If goods are sold or exchanged for other goods, thetransaction is barter, governed by the Transfer of Property Act and not asale of goods under this Act. If goods are sold partly for money and partlyfor goods, this is the contract of sale.6.Sale:Where under a contract of sale, the property in the goods is immediatelytransferred at the time of making the contract from the seller to the buyer,the contract is called a ‘sale’ [Sec. 4(3)]. It refers to an absolute sale.There is immediate transfer ofthe ownership and mostly of the subject-matter of the sale as well (delivery may also be given in future). It is anexecuted contract.7.Subject Matter:Subject matter is the transferable immovable property.16.6DISTINGUISHBETWEENASALEANDANAGREEMENT TO SELLBasis of distinctionSaleAgreement to sellTransferof ownershipTransferofownershipofgoodstakesplaceimmediately.Transfer of ownership of goods is to take place at a futuretimeExecuted contractor Executory contractIt isan executed contractbecausenothing remains to be done.Here something remains to be done. HenceIt is an executory contract.Conveyance of propertyBuyer gets a right to enjoy the goods against thewhole world includingseller. Therefore, a sale createsjus in rem (Rightagainstproperty).Buyer does not get such right to enjoy the goods. It onlycreates jus in personam (Right against the person).Rightsof seller againstthe buyer’s breachSellercansuethe buyer forthe priceEven though the goodsare in the possession of the buyer sellercan sue the buyer for damages. (Compensation)munotes.in

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16.7DIFFERENCEBETWEENSALE&HIREPURCHASESALEHIRE-PURCHASEProperty in the goods areTransferred tothe buyerimmediately atthe time of contract.Thepropertyinthe goodspassestothehireruponpayment of the last installment.The position of the buyer is that ofthe owner of the goodsThe position of the hirer is that ofa bailee till he pays the lastinstallment.Buyer is bound to pay the priceofthe goods hence cannot terminatethe contract.The hirer if he so likes, terminatethe contract by returning the goodsto its owner.The buyer can pass a good title to abonafide purchaser from himThe hirer cannot pass any titleeven to a bonafide purchaser.Sales tax is levied at thetime ofthecontractSales tax is not leviable until iteventually fit into a sale.16.8 KINDS OF GOODS1. Existing Goods:They are those goods which have actual existence at the time when thecontract of sale ismade.Existing goods are again of the following kinds:-a. Ascertained Goods:Unascertained goods become ascertained when the seller decides whichparticular goods he is going to sell. This word is used as synonymous withspecific goods but the difference between the two is that the ascertainedgoods may become identified only after a contract of sale has been made.b. Unascertained Goods:They are those goods which are not actually identified by the seller but aredescribed by description alonec. Specific Goods:They have been defined by Section 2, Sub-section 14 as those goodswhich are actually identified and agreed upon when the contract is comeinto existence.For Example:A Car, a radio, a watch, etc.2. Future Goods:A person may enter into anagreement to seal something to the otherwhich may have no actual existence but which he is tomunotes.in

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acquire, produce or manufacture in future. For example, a cultivator mayagree to sell the crop that he has sown.3. Contingent Goods:Are those the acquisition of which by the seller depends on a contingencywhich may or may not happen.Example:An importer in Mumbai agrees to sell the consignment of goodswhich is on its way from Germany. This consignment is an instance ofcontingent goods because the acquisition of goods by the importer inMumbai depends upon a contingency whether it arrives safe at itsdestination or not. Therefore, contingent goods are also a special class offuture goods.16.9 EFFECTS OF DESTRUCTION OF GOODS-ALREADY CONTRACTEDThere are various kinds of goods and the parties have various options toagree about the delivery of the goods. What shall be the fate of a contractif the goods are perished or destroyed?1. Destruction before making of contract:Where ina contract for sale of specific goods, at the time of making thecontract, the goods, without knowledge of the seller, have perished as nolonger to answer to their description in the contract, the contract shallbecome null and void. This is based on therule of impossibility ofperformance. Since the subject matter of the contract is destroyed which isone of its essential ingredients.2. Destruction After the Agreement to Sell but before Sale:Where in an agreement to sell a specific goods, ifsubsequently the goods,without any fault on the part of buyer, perish the agreement shall becomevoid, provided the goods are perished before the ownership and risk passesto the buyer. This rule is based on the ground of impossibility ofperformance.Example:A horse was delivered upon trial for 5 days. However, the horsedied within 5 days without the fault of the buyer or seller. The seller mustbear the loss as the contract was void.16.10MODES OF ASCERTAINMENT OF PRICE1.The price in a contractof sale may be fixed by and under the contract,or it be fixed in manner thereby agreed upon or it can be ascertainedby the course of dealing between the parties to the contract.2.Where the price is not fixed or ascertained in accordance with theabove provisions, the buyer shall pay the seller a reasonable price.munotes.in

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 Reasonable price will depend on the individual or circumstance of thecase.16.11SUMMARYMeaning:The sale of GoodsAct 1930 deals with the law relating to saleof goods. The term Goods means every kind of movable property, otherthan Money and Actionable claims.KINDS OF DELIVERY:Actual or Physical Delivery: SymbolicDelivery: Constructive Delivery:ESSENTIALS OFVALID SALES/ FORMATION OF ACONTRACT OF SALE.Two parties: Parties: Transfer ofproperty: Goods: Consideration: Sale: Subject Matter:KINDS OF GOODS:Existing Goods: Ascertained Goods:Unascertained Goods:Specific Goods: Future Goods: Contingent Goods:EFFECTS OF DESTRUCTION OF GOODS-ALREADYCONTRACTED:Destruction before making of contract, DestructionAfter the Agreement to Sell but before Sale:16.12QUESTIONS1.Distinguish between Sale and Agreement to Sale?2.Enumerate theessentials of Contract of Sale?3.Short Notes:-a.Types of Goods.b.Effects of Destructions of Goods.4.Define the following terms:a.Goodsb.Deliveryc.Symbolic deliveryd.Future goodse.Agreement to Salef.Hire purchaseg.Constructivedelivery.*****munotes.in

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17CONDITION AND WARRANTY(Section 11-17)Unit Structure17.1Objectives17.2Introduction17.3CONDITIONS-Implied Conditions17.4Implied Warranties17.5Circumstances When a Condition Can Be Treated as Warranty17.6Differencebetween Condition and Warranty17.7Doctrine of Caveat Emptor17.8Summary17.9Questions17.1OBJECTIVESAfter studying the unit, the students will be able to:•Define the terms Condition and Warranty•Discuss about the Implied Conditions•ExplainImplied Warranties.•Understand the circumstances when the conditions can be treated aswarranty.•Distinguish between Condition and Warranty.17.2INTRODUCTIONA condition is a stipulation essential to main purpose of the contract andhence it is theplinth or foundation of the contract. The effect of a breachof condition is that it gives the right to the distressed (an aggrieved) partyto treat the contract as void and also to claim damages (compensation), ifany.A warranty is a term which is collateral to the main purpose of the contractand hence is only a subsidiary. The breach of warranty does not give rightto the aggrieved party to treat the contract as void but entitles him to claimdamages (Compensation) only.munotes.in

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In the following cases, thebreach of a condition will be treated as breachof warranty only.When the buyer waives the condition orWhen the buyer treats the breach of condition as a breach warranty anddoes not treat the contract as void orWhere the contract of sale is inseparable and the buyer has accepted thegoods or part thereof orWhere the contract is for specific goods, the property in which has passedto the buyer.Condition and warranties may be express or implied, when they aredefinitely written in the contract, theyare called express conditions andwarranties. When they are not written, they are called implied conditionsand warranties, in the contract and applied to the contract either byoperation of law or by trade custom.17.3 CONDITIONS-IMPLIED CONDITIONSAcondition U/s 12 (2) Condition:“A stipulation essential to the main purpose of the contract, the breach ofwhich gives rise to a right threat the contract as repudiated”.The actual meaning of a condition is an obligation which requires beingfulfilledbefore another proposition takes place. A warranty is a suretygiven by the seller regarding the state of the product.Example:Sumit buys from General stores ‘ Ghee’ claimed to a pure cowghee.It was found that the Ghee was mixed with ‘Dalda’.Sumit canreturnthe ghee to the shop keeper ,repudiate the contract and claim refund ofprice.Implied Conditions in a contract that is not expressly stated or written. Itmaybe implied by fact and deed, viz. the parties’ acting; or it may beimplied by law, either case law or statute. Following are the impliedconditions.1.Conditions as to Title to Goods:[Section 14(a)]:There is an implied condition that the seller has a right to sell in case ofsale and that in the case of agreement to sell,he will have the right to sellthe goods at the time when the property is to pass.Rowland Vs Divall:Apurchased a car fromBfor a certain price and used it for some period.Subsequently, it was found that the car was stolen byBand therefore,Amunotes.in

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had returned back the car to the true owner. It was held thatAcouldrecover the full price paid toB.2.Sale byDescription :( Section15)The implied condition is that the goods delivered must correspond withthe description.Example:Where a machinewas described as almost new and used verylittle but when delivered, was found to be an old and repaired one, it washeld that the buyer was entitled to reject the machine.3.Sale by Sample: (Section 17)The implied condition is:•That the goods delivered shall correspond with the sample•That the buyer shall have a reasonable opportunity of comparing thebulk with the sample and•That the goods shall be free from any defect rendering them un-merchantable, which would not be apparent on reasonable examinationof the sample.4.Sale by sample as well as description:In the case of sale of goods by sample as well as description, the goodsdelivered must correspond with both sample as well as description.5.Conditions as to Quality or Fitness:The general rule is“Caveat Emptor”,i.e. let the buyer beware. So, theseller need not disclose the faults in the goods he sells nor need theguarantee that the goods are fit for the purposes of the buyer. So, the buyertakes them as they come. But in thefollowing cases, there is an impliedcondition as to quality or fitness of goods for any particular purpose.•Where the buyer makes known the purpose to the seller, who isordinarily dealing with sale of goods of that description and the buyer,relies on the judgments of the seller.•Where the seller does not disclose the faults in his goods and suchfaults cannot be detected on reasonable examination.•Where the seller makes a statement and the buyer relies upon it.Case Law:A purchased a motor car from Bfor using it as a tourist car.B,the seller knew the purpose. The car turned out to be unfit for the purpose.Held, A the buyer could repudiate the contract. But there is not impliedcondition as to fitness or quality of goods when they are sold under thepatent or trade name.munotes.in

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6.Conditionsasto Merchantability:(Section 16)In case of sale of good by description, there is an implied condition thatthe goods shall correspond with the description and also that they shall beof merchantable quality.BrantV/SAustralian Knitting Mills Ltd.:The buyer was supplied woolen underpants by the manufacturers. Thebuyer wore them for some time and contracted a skin disease. Held, thatthe buyer was entitled to damages.Exception:If the buyer has examined thegoods, there is not impliedcondition as to quality of goods as regards defects which such examinationmust have revealed.7.Conditionsas to wholesomeness:In the case of the implied condition is that the goods must be suitable forhuman consumptionand are fit for immediate use.For Example:A,purchased a bun fromBand injured his teeth by biting astone in the bun.Bwas held liable.17.4IMPLIED WARRANTIESA condition becomes a warranty when—1.The buyer waives the conditions or opts todeal the breach of thecondition as a breach of warranty; or2.The buyer accepts the goods or a part thereof, or is not in a position todismissed the goods for being faulty.1.Implied Warranty of Quiet Possession:(Section 14):In every contract ofsale, unless there is a contrary intention, there areimplied warranties that the buyers shall have and enjoy quiet possession ofthe goods. If the buyer’s right to possession and enjoyment of the goods isin any way disrupted as a result of the seller’s defective title, the buyermay sue the seller for damages for breach of this warranty.2.ImpliedWarrantyofFreedomfromEncumbrances:[Section. 14(c)]:The buyer is entitled to a further warranty that the goods shall be free fromany charges ornuisance, in favour of any third party or known to buyerbefore or inference at the time when the contract is made.Example: A, the owner of the watch, pledges it withB. After a week,Aobtains possession of the watch fromBfor some limited purpose andsellsit toC.BapproachesCand tells him about the pledge affair.Chas tomake payment of the pledge amount toB.munotes.in

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There is breach of this warranty andCis entitled to claim compensationfromA.3.Warranty of disclosing the dangerous nature of goodsto theignorant buyer:The third implied warranty on the part of the seller is that in case thegoods sold are of dangerous nature he will warn the ignorant buyer of theprobable danger.Example: Cpurchases a tin of disinfectant powder fromA.Aknows thatthe lid of the tin is defective and if it is opened without specialcare,it maybe dangerous, but tells nothing toC. Copens the tin in the normal waywhereupon the disinfectant powder flies into her eyes and causes injury.Ais liable in damages toCas he should have warnedCof the probabledanger.17.5CIRCUMSTANCES WHEN A CONDITION CANBE TREATED AS WARRANTYSection 13 of this act provides for the situations in which the condition canbe treated as a warranty. They are as follows.1.Where a contract of sale is subject to any condition to be fulfilled bythe seller, the buyer may relinquish the condition or may elect to treatthe breach of such condition as a breach of warranty and not as aground for treating the contract as terminated.2.Whether a stipulation in a contract of sale is a condition the breach ofwhich may give rise to a right to treat the contract as cancelled, or awarranty the breach of which may give rise to a claim for damages orcompensation but not to a right toreject the goods and treat thecontract as terminated, depends in each case on the construction of thecontract. A stipulation may be a condition though called a warranty inthe contract.17.6DIFFERENCEBETWEENCONDITIONANDWARRANTYMatterCONDITIONWARRANTYStipulationA condition is a stipulationessential to the mainpurpose of a contract.The warranty is collateralto the main purpose ofcontract.RightsBreach of condition givesright to the party to rejectthe contract.Breach of warrantygivesright to the party to claimthe damages only.Superiority ofConditionA breach of condition maybe treated as a breach ofwarranty.Breach of warranty maynot be treated as a breachof condition.munotes.in

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 LinkwithContractA condition has a directlinkwith the essential partof the contract.A warranty has no directlink with the essential partof the contract.17.7 DOCTRINE OF CAVEAT EMPTOR17.7.1Meaning:In business laws, the phrase ‘Caveat Emptor’ stands for ‘let the buyerbeware.’ It is atraditional attitude that the buyer takes the risk in respectof defects in the goods which he has brought. This implies that theresponsibility of identifying goods and finding defects with them lies withbuyer. It is the responsibility of the buyer thathe should find the defects inthe goods which he is going to buy. Seller will never specify the defects inhis own goods. Buyer should keep his eyes and mind open while carry outpurchasing. He should be finalizing the goods that he needs; it implies thatthe seller is not responsible to enquire what the buyer’s requirements areand not required to reveal faults in his products or services. If the buyerrelies on his own skill and judgement while making purchasing and foundthat the goods are faulty, he cannot blame the seller for the same.Therefore, buyer should take at most care while selecting the goods andshould see that the goods which he brought must suffice the purpose.Example:Ram bought 10 cows from a cattle broker. Out of those 10, 2cows had defects. However, Ram did not know this because he didn’tcheck all 10 cows though he paid for them. The 2 infected cows diedwithin three days of the purchase. Now, as there was no implied conditionthat the cows would be in great health at the time of thesale, Ram cannothold the cattle broker as responsible for having sold him those infectedcows. It was Ram’s basic duty to check the health of those cows and notexpect the cattle broker to state all the defects.In one interesting case, the buyer boughtcloth for making uniforms.Unfortunately, the seller was not aware of the purpose of buying the cloth.Later, the buyer found that the cloth is not fit making uniforms. It was,however, fit for other normal purposes. The seller was not found guilty astheprinciple of ‘Caveat Emptor’ applied in this case.17.7.2Exceptions:The doctrine of caveat emptor is subject to the following exceptions:Where the seller makes a mis-representationand the buyer relies on it,the doctrine of caveat emptor does not apply. Such a contract beingvoidable at the option of the innocent or faultless party, the buyer has aright to cancelled the contract.munotes.in

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Where the seller makes a false representationamounting tofraud andthe buyer relies on it, or where the selleractively conceals a defect in thegoods so that the same could not be discovered on a reasonableexamination, the doctrine of caveat emptor does not apply. Such a contractis also voidable at the option of the buyer and the buyer is entitled to avoidthe contract and also claim damages or compensation for fraud.Where the goods are purchased by descriptionfrom a seller who dealsin such class of goods and they are not of ‘merchantable quality’, thedoctrine of caveat emptor does not apply. But the doctrine applies, if thebuyer has examined the goods, as regards defects which such examinationought to have revealed[Sec. 16(2)].Where the goods are bought by sample, the doctrine of caveat emptordoes not apply if the bulk does not correspond with the sample, or if thebuyer is not provided an opportunity to compare the build with the sample,or if there is any hidden or latent defect in the goods(Sec. 17).Where the goods are bought by sample as well as by descriptionandthe bulk of the goods do not correspond both with the sample and with thedescription, the buyer is entitled to dismissed the goods(Sec. 15).17.8SUMMARYMeaning: A conditionis a stipulation essential to main purpose of thecontract and hence it is the plinth or foundation of the contract.Awarrantyis a term which is collateral to the main purpose of thecontract and hence is only a subsidiaryImplied Conditions:1.Conditions as to Title to Goods:[Section 14(a)]:2.Sale byDescription :( Section15)3.Sale by Sample: (Section 17)4.Sale by sample as well as description:5.Conditions as to Quality or Fitness:6.Conditions As to Merchantability :(Section16)7. Conditions As towholesomeness:Implied Warranties:1.Implied Warranty of QuietPossession :( Section14)2.Implied Warrantyof Freedom from Encumbrances: [Section. 14 (c)]3.Warranty of disclosing the dangerous nature of goods to theignorantbuyer:munotes.in

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17.9QUESTIONS1.What are the circumstances when conditions can be treated aswarranty?2.Distinguish between Condition & Warranty3.ShortNotes:-a.Implied Warranties.b.Doctrine of Caveat Emptor and its Exceptions.4.Definethe terms:a.Conditionb.Warranty*****munotes.in

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18PASSING OF PROPERTY AND TITLE.(Section18-26)UnitStructure18.1Objectives18.2Introduction18.3TypestransferofProperty18.4Reservationof Rightof Disposal18.5Summary18.6Questions18.1 OBJECTIVESAfterstudyingtheunit,thestudentswillbeableto:•Knowthe meaning ofTransfer of Property.•UnderstandthedivisionofTransferofProperty.18.2 INTRODUCTIONThe important aspects the transfer of ownership is that itcan takeplaceonly in case of ascertained and specific goods.According to Sec. 18 “Notransfer of property in the goods can takeplacefromthesellertothebuyerunlessanduntiltheyareascertained”.18.3 TYPESTRANSFEROFPROPERTYTransferofpropertycanbedividedintwobroadcategories:18.3.1TransferofPropertyinSpecificandAscertainedGoods:According to Sec. 19 when there is a contract of sale ofspecific orascertained goods, the property in them shall pass fromthesellertothebuyerwherethepartieshaveintendedittopass.To find out the intention of parties in respect of transfer,consideration isto be given to the terms of the contract, conduct ofthepartiesand thecircumstancesofcase.But if the parties fail to yield their intentions regarding thetransfer ofproperty in the goods, certain rules have been laid downto find outtheintention of the parties as to the time at which theproperty in the goods ismunotes.in

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 to pass to the buyer, which are specifiedunderSections.20to24.Theprovisionsareasunder.1.Whengoodsareinadeliverablestate:AccordingtoSection20wherethereisanunconditionalcontract for thesale of specific goods in a deliverable state thepropertyinthegoodpassestothebuyerwhenthecontractofsaleismadeanditisimmaterialwhetherthetimeofpaymentoftheprice or thetime of delivery of the goods or both is delayed orpostponed.Example:Where there is a contract between A & B for the purchase ofa specificquantity of hemp stored on thepremises of the seller A;price to be paidon 4th February and the delivery to be given on 1stofMaywhilethecontractisbeingmadeon20thJanuarytheproperty in the specific lot ofhemp shall be transferred from A to Bon20th January itself.Asgoods under this rule are in such a state they can beimmediatelydeliveredtothebuyer,thereremainsnothingwhichcanprohibittotransferofownership.Butifthepartiesinsuchcases themselves decide that no transfer of property shall takeplacetilltheentirepriceispaid,ortillthedeliveryofgoodshasbeen given to the buyer, there would be no transfer ofproperty inthe goods even though the goods are specific and in adeliverablestate.2.Whengoods arenot ina deliverablestate:According to Section 21 whenthere is a contract for the saleof specificgoods the seller is bound put the goods in a deliverablestate, property inthem shall not be transferred until such thing isdonebythesellerandbuyer hasnoticethereof.Illustration:TherewasacontractforthewoodofOaktreesinacertainforest. The buyer purchased the wood from the seller selectingcertainportionoftreesandrejectingothers.Accordingtothecustomof trade the seller was to separate the selectedportionsfrom the rejectedportions. But the buyer threw upon himself thedutyofseparatingthetwoportions.Thecourtdecidedthatno transferofownershiphastakenplacessofaraswoodisconcerned.3.Whengoodsaretobemeasuredetc.:AccordingtoSection22,wherethereisacontractforthesale of specific goods in a deliverable state the seller in order todetermine the price, the seller is bound to measure, weight or countthegoodstillsuchactisdoneandthebuyerhasnoticethereof.munotes.in

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18.3.2 Transfer of propertyin unascertained goods:Accordingtosection18notransferofpropertycantakeplacefromthesellertothebuyerinunascertainedgoods.Therefore,someactshavegottobedoneinordertoconvertunascertained goodsintoascertained or specific goods. Such actsare collectively andtechnically called ‘appropriation’. According toSection 23 “Where thereis a contract for the sale of unascertainedor future goods by descriptionand goods of that description as wellasindeliverablestateareunconditionallyappropriatedtothecontract, either by the seller with theconsent of the buyer or by thebuyer with the consent of the seller, theproperty in the goods shallbetransferredfromthesellertothebuyer,assoonassuchappropriation is made, the consent of the buyer or the selleras thecasemaybeobtainedeitherbeforeorafterappropriation.1.Goods which are appropriatedmust be of thesamedescriptionunder which theyare sold:Forexample,whereanorderwasplacedforteasets,jarsandglassesmadeofChinaclayandwherethesellerwhilesupplying the goods also placed some other things in the parcel itwasheldthattherewasnoappropriationbecausethegoodsdidnotexactlyanswerthedescriptiongiveninthecontract.2.Thegoodsappropriatedtothecontractmustbeinadeliverable state:Becauseunlesstheyareinsuchastatenotransferofpropertycan takeplace.3.Thegoodsmustbeunconditionallyappropriatedtothecontract:According tosection 23 sub-section 2. “Goods are said to beunconditionally appropriated to the contract when the seller givesthem tothe buyer or a carrier or some other bailee (whether namedby the buyer ornot) for the purpose of transmission to the buyer.The most common formof appropriation is the delivery of goods toperson for the purpose oftransporting them to the buyer and assoon as this is done, generallyspeaking, the property shall betransferred to the buyer if the seller has notreserved the right ofdisposal asdefined by section 25.4.Basisofappropriation:Appropriation of goods is done on the basis of consent ofeither the buyeror the seller. Such a consent may be obtainedeitherbefore or afterappropriation.A.Bythebuyerwiththeconsentoftheseller:Where the buyer is holding the goods on behalf of the selleras an agent,the buyer can appropriate the goods for the purpose ofthecontract,informthesellerregardingthesame,obtainhisconsentonlythemthepropertyshallbetransferredtothebuyer.munotes.in

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B.By the seller with the consent of the buyerIllustration:A agrees to purchase 10 tons of petrol from B and alreadysends the steeltins to B for packing the petrol. As soon as B will fillthepetrolinthesteeltinssenttohimbythebuyer,thepropertyshallbetransferredfromBtoAbecausetheconsentofthebuyerto theappropriation made by the seller shall be taken to have beengivenbythebuyerhimselfsupplyingthesteeltins(consentofbuyer beforeappropriation).5.MethodofAppropriation:Appropriationofgoodsforthepurposeofthecontractmaybemade:(a)Bypackingthegoodsinsuitablecontainers.(b)Byseparatingthegoodsfromalargerquantity.(c)By the delivery of the goods to acommon carrier or bailee forthepurpose of transmission to the buyer without reserving theright ofdisposal which has been defined by Section 25 of theSaleof GoodsActas follows:1.Wherethereisacontractforthesaleofspecificgoodsorunascertained goods which are unconditionally appropriated tothecontract, the seller may under the terms of the contract orappropriation lay down certain conditions to be fulfilled by thebuyer.In such a case although goods may be delivered to thecommon carrieror other baileefor the purpose of transmissiontothebuyerthepropertyshallnotbetransferredtothebuyer.2.Where the seller sends the goods and takes a bill of lading orrailwayreceipt, deliverable to himself or his order it ispresumedthatthesellerhasreservedtherightofdisposaloverthegoods.18.3.3 Transferof propertyin transactionof sale or return:According to section 24 where the goods are sent to thebuyer “onapproval or on sale or return” or similar other terms thepropertyinthemshallpass tothe buyer:(a)Whenthebuyerexpresseshisapprovaloracceptancetothebuyerordoesanyotheractadoptingthetransaction:Example:AgivesadiamondtoBonsaleorreturn.BgivesthesametoConsimilartermsandCdeliversthesametoDonsaleorreturn. The diamond was lost from the custody of D. As B cannotreturnthe diamond to A, his act in giving the diamond to C shalltantamounttoadoptingthe transaction.Similarly,ifthebuyeronsale orreturn pledges the goods to a third party the act of pledgeshallbetakentobeanactadoptingthetransaction.munotes.in

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18.4 RESERVATION OF RIGHT OF DISPOSALUnderSection25,reservationoftherightofdisposalisdefined as anyaction made by the seller,where it is expressed thatan intention on his partnot to part with control over the goods untilcertain condition are fulfilled.Then, the property will be passedsubjecttofulfilmentof theseconditions.Example:‘A’ supplies 100 bags of Rice to ‘B’by a trunk, where noreservation of the right of disposal was there. In this case, the ricewillpass to B immediately after goods are handed over to thecarrier.TransferofTitle:In the performance of a contract of sale of goods by a sellertherearethreestages,namely,thetransferofpropertyinthegoods,thetransferofpossessionofthegoods,i.e.,deliveryofthe goods andthe passing of the risk. The main object of a contract ofsale of goods isthe transfer of property in goods from theseller tothe buyer. The term‘property in goods’ is different from the term‘possession of goods’:‘property in goods’ means the ownership ofthe goods whereas‘possession of goods’ means custody or controlof goods.18.5SUMMARYMeaning: Transfer of Property:When there is a contract of sale ofspecific or ascertained goods, the property in them shall pass fromthesellertothebuyerwherethepartieshaveintendedittopass.Rules ofTransferofPropertyinSpecificandAscertainedGoods:•Whengoodsareinadeliverablestate:•Whengoods arenot ina deliverablestate.Rules ofTransfer of propertyin unascertained goods:•Goods which are appropriated must be of thesamedescription underwhich theyare sold,•Thegoodsappropriatedtothecontractmustbeinadeliverable state:•Thegoodsmustbeunconditionallyappropriatedtothecontract:18.6QUESTIONS1.Whatare the consequences of Transfer of Property?2.HowProperty can betransferred in varioussituations?3.ShortNotes:a.TransferofPropertyinthetransactionofsaleorreturn.****munotes.in

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19UNPAID SELLERUnit Structure19.1Objectives19.2Meaning And Definition19.3Rights Of Unpaid Seller19.4Differencebetween Rightsof Lien & Rightto Stoppage In Transit19.5.Remediesfor The Breachof Contract Of Sale19.6Sale By Auction19.7Summary19.8Questions19.9References19.1OBJECTIVESAfter studying the unit, the students will be able to:•Understand the meaning of UnpaidSeller.•Explain the Rights of Unpaid Seller.19.2MEANING AND DEFINITIONDefinition:(1)The seller of goods is deemed to be anunpaid sellerwithin themeaning of this Part-(a)When the whole of the price has not been paid or tendered;(b)When a billof exchange or other negotiable instrument has beenreceived as conditional payment and the condition on which it wasreceived has not been fulfilled by reason of the dishonour of theinstrument or otherwise.19.2.1Meaning:According to (section 45) theterm seller includes ‘any person who is inthe position of a seller, as, for instance, an agent of the seller to whom thebill of lading (BOL is a document issued by a carrier which details ashipment of merchandise and gives title of that shipment to a specifiedparty.) had been endorsed, or a consignor or agent who has himself paid,or is directly responsible for, the price.•The seller of goods is deemed to be an ‘unpaid seller’•When the whole of the price has not been paid or tendered; ormunotes.in

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•Where a billof exchange or other negotiable instrument has beenreceived as a conditional payment, i.e., subject to the realizationthereof, and the same has been dishonoured.19.2.2Characteristics of an ‘Unpaid Seller’.According to above the following are the characteristics of an ‘unpaidseller’.1.He must sell goods on cash terms and not on credit, and he must beunpaid.2.He must be unpaid either fully or partly. Even if only a portion of theprice, however small, remains unpaid, he is deemed to be an unpaidseller.3.Where the price is paid through a bill of exchange or other negotiableinstrument, the same must be dishonoured.4.He must not refuse to accept payment when tendered. If the buyer hastendered the price but the seller wrongfully refuses to takethe same,he ceases to be an unpaid seller.19.3RIGHTS OF UNPAID SELLERAn unpaid seller has two-fold rights, viz.,;I.Rights of unpaid seller against the goods, andII.Rights of unpaid seller against the buyer personally. We shall nowexamine theserights in detail.A. Rights of Unpaid Seller against the Goods:An unpaid seller has the following rights against the goodsnotwithstanding the fact that the property in the goods has passed to thebuyer:1.Right of lien;2.Right of stoppage of goodsin transit;3.Right of resale [Sec. 46 (1)].1.Right of lien (Sec. 47)‘Lien’ is the right to retain possession of goods and refuse to deliver themto the buyer until the price due in respect of them is paid or tendered. Anunpaid seller in possessionof goods sold is entitled to exercise his lien onthe goods in the following cases:•Where the goods have been sold without any stipulation as to credit;•Where the goods have been sold on credit, but the term of credit hasexpired:•Where the buyer becomes insolvent, even though the period of creditmay not have yet expired.munotes.in

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 In other words, the seller can exercise his rights of lien on the followingtwo conditions:•He must be in possession of the goods.•He is an unpaid seller.2.Right of Stoppage ofGoods in Transit: Sections 50-52The right of stoppage in transit means the right of stopping the goodswhile they are in transit, to regain possession and to retain them till the fullprice is paid.The essential feature of stoppage in transit is thatthe goods should be inthe possession of a middleman or some other person intervening betweenthe vendor who has parted with and the purchaser who has not receivedthem.Conditions under which Right of Stoppage in Transit can beExercised [Section 50]:The unpaid seller can exercise the right of stoppage in transit only if thefollowing conditions are satisfied:a.The seller must have parted with the possession of goods, i.e., thegoods must not be in the possession of sellerb.The goods must be in thecourse of transit.c.The buyer must have become insolvent.3.Right of Resale:The right of resale is an important right given to an unpaid seller. In theabsenteeism of this right, the unpaid seller’s other rights against the goods,namely, ‘lien’ and ‘stoppage in transit,’would not have been of muchbenefited because these rights only entitle the unpaid seller to retain thegoods until paid by the buyer.If the buyercontinues to remain in default,then should the seller be expected to retain the goodsI for an indefiniteperiod, especially when the goods are perishable. Certain limited rightshave given to the unpaid seller under section 54, in the following cases:•Where the goods are of a perishable nature; or•Where such a right is expresslyreserved in the contract in case thebuyer makes a default in making payment.19.4DIFFERENCE BETWEEN RIGHTS OF LIEN &RIGHT TO STOPPAGE IN TRANSITRights of LienRight to stoppage in Transit.The basis of right of lien is toretain possession.Thebasis of right of stoppage intransit is right to regain possession.Seller should be in possession ofgoods under lienSeller should have parted with thepossessionmunotes.in

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It can be exercised even whenthe buyer is not insolvent.It cannot be exercised evenwhen thebuyer is not insolvent.Right of stoppage in transitbegins when the right of lienends.The end of the right of lien is thestarting point of stoppage in transit.19.5REMEDIES FOR THE BREACH OF CONTRACTOFSALEGeneral Principles of Indian Contract Act 1872 are applying to thecontract of sale also19.5.1Remedies available to Sellers against Buyers:The following are the remedies are available under Sale of Goods Act,1930 to the sellers in case of breach made by the buyer:Suit for the price:According to the section 55 Seller has right to sue the buyer price ofgoods. when under a contract the good has passed to him after which herefuses to pay for the goods.Recovery of losses in case of re-sale of goodwhile exercising the rightof lien/stoppage of good in transit:According to section 54 if the goods are of perishable nature or the unpaidseller has exercised his right of lien or stoppage in transit after givingnotice to the buyer of his intention to sell the good if the buyer doesn’t payhim within a reasonable time and after selling it to a third party in a lowerprice can sue the original buyer for the losses, he sustained due to originalbuyer’s breach.Damages for non-acceptance:According to section 56 when under a contract of sale buyer has sold agood to a seller and afterwards the buyer is wrongfully refusing to acceptand pay for the goods; seller can sue the buyer for non-acceptance.19.5.2 Remedies available to Buyers against Sellers.Thefollowing are the remedies under Sale of Goods Act, 1930 which areavailable to the buyersagainst the seller in case of breach.Damages (Compensation) for non-delivery:According to section 57 when a seller has sold a good and later wrongfullyrefuses to deliver the goods to the buyer; buyer can sue the seller fordamages for non-delivery of goods.It should be noted that a reasonable time must be given to the seller formaking theofthe good. Furthermore, if the buyer has not informed thetime period in which it is to be delivered by giving notice under section 55of the Indian Contracts Act, seller cannot sue for damages.munotes.in

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Damages for breach of warranty:According to section 59; in case where there is breach of warranty by theseller or the buyer has treated as breach of condition as breach of warrantyunder section 13, the buyer does not have the right to rescind the contract.In these cases, buyer has two options. First is to set up against the sellerthe breach of warranty in weakening of the price and the second optionavailable is to sue the seller for damages for breach of warranty.Specific Performances:The section 58 states that subject to the provision of Specific Relief Act1877, if the contract is breached, the Court may, on the request of thebuyer, giver the directions to the seller to perform the contract in aparticular and specified manner. This order is passed by the court may ormay not carry terms and conditions with respect of price, mode ofdelivery, etc.19.5.3 Remedies available to both Buyers & Sellers:Suite for Repudiation of contract before due date/anticipatory breach:Provisions under section 60, in case where either buyer or seller rescindsthe contractbefore the due date or in other words refuses before the duedate to perform the terms of the contract on the due date, the other partyhas two options. First, wait for the due date and after the non-performanceby the other party sue him for damages. Second, sue immediately withoutwaiting for the actual non-Performance of the terms of the contract.Interest by way of damages and Special Damages:Section61 relateswith the right to recover interest or special damageswhere interest or special damages may be recoverable or in the case whererecovery of the money paid where the consideration for the payment of ithas failed has to be made.The court may award or directs the interest at the rate which itdeems fittothe seller for the amount of price from the date of the delivery of the goodsor from the date on which the price was payable or to the buyer for therefund of price in case of breach of contract from thedate the paymentwas made.19.6 SALE BY AUCTIONSale of Goods Act 1930 covers the process which the bidding is done. Theprocess of sale by auction involves the selling of any goods or property ofvalue, in a public gathering where buyers make a bid for the purchase andthe sale is made to the highest bidder. In thisprocess anintending buyerscome together at a particular place and they offer the price at which theywish to buy the goods kept in auction, such priceisknown as bid.munotes.in

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Rules of an Auction Sale:Section 64 of the Sale of Goods Actstates the rules applicable in case ofan auction sale.Sale of Goods in Lots:When the auction includes the sale of goods in different lots, each lot ofgoods are covered under a separate contract of sale.Sale Completion:An auction sale is deemed tobe complete when the auctioneer saysaccordingly. The same can be done by the fall of hammer. The bidder canwithdraw the bid any time before the completion of the sale is declared.The Right to Bid Reserved for the Seller:The seller can reserve his right to bid at the auction but he mustexpressively reserve this right. He can appoint an agent to bid on hisbehalf.Notification of the Right to Bid by the Seller:If the seller has not expressively reserved his right to bid and has notinformed about thesame, he or his agent is not authorized to bid at theauction. The auctioneer is not entitled to accept any bids made by theseller or his agent if the buyer has not expressed his intent to do so. Anysale that is in contradiction to this rule will be deemed unlawful andfraudulent by the buyer.Reserve Price:The goods for sale at the auction may be subject to a reserve price or anupset price. The auctioneer cannot sell the goods below this price.No Credit Sale:The property in an auction cannot be sold on credit. A bill of exchange canbe accepted but only if it has been allowed by the seller.19.7SUMMARYMeaning:•When the whole of the price has not been paid or tendered;•When a bill of exchange or other negotiable instrument has beenreceivedas conditional payment and the condition on which it wasreceived has not been fulfilled by reason of the dishonour of theinstrument or otherwise.RIGHTS OF UNPAID SELLER:Rights of Unpaid Seller against the Goods:•Right of lien;•Right of stoppage ofgoods in transit;munotes.in

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 •Right of resale [Sec. 46 (1)].Remedies For The Breach Of Contractof Sale:Remedies available to Sellers against Buyers:•Suit for the price•Recovery of losses in case of re-sale of good while exercising the rightof lien/stoppage of good in transit•Damages for non-acceptanceRemedies available to Buyers against Sellers:•Damages (Compensation) for non-delivery:•Damages for breach ofwarranty:•Specific Performances:Remedies available to both Buyers & Sellers:•Suite for Repudiation of contract before due date/anticipatory breach:•Interest by way of damages and Special Damages:SALE BY AUCTION:Sale of Goods inLots,Sale Completion,TheRight to Bid Reserved for the Seller, Notification of the Right to Bid bythe Seller, Reserve Price, No Credit Sale19.8QUESTIONS1.What are the remedies available for breach of contract of sale?2.Who is unpaid seller? What are his rights?Short Notes:a.Auction Saleb.Right to stoppage in transitc.Rights of resale.19.9 REFERENCES•Associated Cinema of America, Inc v World Amusement Co(Minnesota Supreme Court 1973).•Hochster v De La Tour, E&B 678 (1853).•Suresh Kumar Rajendra Kumar v K Assan Koya & sons , AIR 1990Ker 20 (High Court of Kerela 1989).•Singh, A., 2017. Indian Contract & Specific Relief. Lucknow: EasternBook Company•Indian Contracts Act, 1872.munotes.in

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(MODULE IV)MULTIPLE CHOICE QUESTIONSWITH ANSWERS1.Goods to be manufactured or produced or acquired by the selleraftermaking of the contract of sale are——A) Contingent goodsB) Future goodsC) Unascertained goodsD) None of the aboveANS: B) Future goods2.The definition of goods in the sale of goods act include—A) Stock and sharesB) MoneyC) Actionable claimsD) All the aboveANS: A) Stock and shares3.Seller means a person——A) Who advertise the goods.B) Who agrees to purchaseC) Both of the aboveD) None of the aboveANS D) None of the above4.The money consideration for a sale of goods is called————A) Purchase moneyB) PriceC) ValueD) None of the aboveANS : B) Price5.The Sale of Goods Act, 1930 deals with————A) Immovable property onlyB) Movable property onlyC) Both (A) and (B)D) None of the aboveANS B) Movable property only6.A contract of sale may be __________.A. absolute only.B. condition only.munotes.in

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C. absolute and conditional.D. indemnity.ANSWER: C) absolute and conditional7.In the Contract of Sale, there is an implied warranty that:A.Seller has a right to sell the goodsB.The buyer has the right to have and enjoy the quiet possession ofgoods only.C.The goods shall be free from any charge or encumbranceD.The buyerhas the right to have and enjoy the quiet possession ofgoods and that the goods shall be free from any charge orencumbranceANS:D)The buyer has the right to have and enjoy the quietpossession of goods and that the goods shall be free from anychargeor encumbrance8.An agreement to sell is an executory contract. The statementis__________.A) FalseB) TrueC) Void Contract.D) None of the aboveANS: B) True9.Which of the following is a bailment plus agreement to sell?A) PledgeB) Hire purchaseC) MortgageD) None of the aboveANS : B) Hire purchase10.Which of the following sections of the Sale of Goods Act, 1930deals with implied conditions and warranties?A) Sections 14 to 17B) Sections 12 to 13C) Sections 19 to 20D) Sections 16 to 18ANS :A) Sections 14 to 1711.A stipulation essential to the main purpose of the contract is————.A) WarrantyB) SimplificationC) Conditionmunotes.in

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D) ExpectationANS : C) Condition12.Risk follows ownership ___________.A. onlywhen goods have been delivered.B. only when price has been paid.C. whether delivery has been made or not.D. even when the price has not been paid.ANSWER: C)whether delivery has been made or not.13.A stipulation collateral to the main purpose of the contract is——A) An expectationB) WarrantyC) ConditionD) Quasi ContractANS :B) Warranty14.Conditions and Warranties in a contract may be———A) ExpressB) ImpliedC) Express or ImpliedD) None of the aboveANS: C) Express or Implied15.Choose the most appropriate answer.Unless otherwise agreed, thegoods remain at seller’s risk until:A.The goods have been delivered to the buyerB.The goods have been utilised by the buyerC.The price to the goods has been received by sellerD.The property therein has been transferredto the buyerANS: D)The property therein has been transferred to the buyer.16.A contract of sale may be made:A.A in writing or by word of mouthB.partly in writing of partly by word of mouthC.by the implied conduct of partiesD.All of the aboveANS: All of the abovemunotes.in

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17.Out of the following persons which of the following does not comeunder the definition of the ‘’unpaid seller’’ as per Chapter V of Saleof Goods Act:A.A seller who has received a bill of exchange as conditional paymentandthe condition on which it was received has not been fulfilled byreason of the dishonour of the instrument or otherwise.B.A seller to whom more than half of the price has been paid ortenderedC.A seller to whom the whole of the price has not been paid or tenderedD.seller who has received a negotiable instrument as conditionalpayment and the condition on which it was received has not beenfulfilled by reason of the dishonour of the instrument or otherwiseANS: A) A seller who has received a bill ofexchange as conditionalpayment and the condition on which it was received has not beenfulfilled by reason of the dishonour of the instrument or otherwise.18.A seller delivers goods in excess of the quantity ordered for. Thebuyer may_________A. Accept the wholeB. Rejects the whole.C. Accept the goods ordered for and return the excess.D. Accept the part of goods.ANSWER: A ) Accept the whole19.Which right is available to the unpaid seller?A.Right of lienB.Stoppage in transitC.ResaleD.Allthe aboveANS:D) All the above20.Which of the following is not an implied condition in a contract ofsale _________.A. Condition as to title.B. Condition as to descriptionC. Condition as to freedom from the encumbrance.D. Condition as to a sampleANSWER: C) Condition as to freedom from the encumbrance.21.What can be the subject matter of the contract of sale as persection 6 of Sale of Goods Act:A.Only existing goods owned or possessed by the ownerB.Only Future goodsC.Existing goods whichare neither owned nor possessed by the ownermunotes.in

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D.Existing goods, owned or possessed by the owner or future goodsANS: Existing goods, owned or possessed by the owner or futuregoods22.In a contract for sale of specific goods, the goods, without theknowledge of seller perished at the time when the contract was made,the contract is:A.A voidable contract at the instance of sellerB.A voidable contract at the instance of buyerC.A voidable contract subject to approval of the civil courtD.A void contractANS: A void contract23. Implied conditions as to title means __________________A. the seller has title to sellB. the seller will get the title soonC. title of the seller is not applicable to himD. title to the sell has not conferred yet.ANS: A) the seller has title to sell24. Doctrine of caveat emptor places the burden on the ____________A. BuyerB. SellerC. ManufacturerD. GovernmentANS: A) Buyer25. Risk prima facie passes with property means:A. Risk is with publicB. Risk is with creditorsC. Risk is with ownerD. Ownership and risk generally go together.ANS: D) Ownership and risk generally go together.26. The right of lien excised by an unpaid seller is to ___________.A. retain possession.B. regainpossession.C. recovery price and other charges.D. Damages.ANSWER: A) retain possession.munotes.in

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 27. n unpaid seller can excises his rights of lien ___________.A. where the goods have been sold on credit and terms of credit has notexpiredB. where the buyer has not become insolvent.C. for the price of the goods.D. for the price of the goods and expenses.ANSWER: C) for the price of the goods.28. The lien of an unpaid seller depends on _____________.A. possession.B. title.C. ownership.D.possession and ownership.ANSWER: A) possession.29. An unpaid seller has not given notice of resale to the buyer. On theresale there is a loss____________.A. the unpaid seller can recover it from the buyer.B. the unpaid seller cannot recover it from the buyerC. the buyer can recover it from an unpaid seller.D. the buyer must compensate the unpaid seller.ANSWER: B) the unpaid seller cannot recover it from the buyer30. In a hire purchase agreement, the hirer ____________.A. has an option to buy thegoods.B. must but the goods.C. must return the goods.D. is not given the possession of the goodsANSWER: A) has an option to buy the goods.munotes.in

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MODULE IVMULTIPLE CHOICE QUESTIONS-FOR PRACTICE1. Condition is a stipulation which isA.Essential to the main purpose of contractB. Collateral to the main purpose of contractC. Not essential to the main purpose of contractD. Collateral to the main purpose of contract2.The sale of goods Act deals only with goods which are______________in natureA. ImmovableB. MovableC. SpecificD. All of the above3. Goods that are identified at the time of contract of sale is called________________ goodsA. Specific GoodsB. ascertained goodsC. clear GoodsD. both a & b4. _________________ is aStipulation which is Collateral to purposeof contractA. ConditionB. WarrantyC. GuarantyD. Collateral Contract5.__________________________ is the concept of “LET THE BUYERBEWARE”.A. Information CenterB. Unfair Trade PracticesC. Caveat EmptorD.Buyer Kingdom6.___________________ are the two parties involved in Contract ofsaleA. Seller & BuyerB. Agent & PrincipleC. Customer & Sales manD. Customer and suppliermunotes.in

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7.It is a standard rule that risk follows ____________________A. SellerB.buyerC. propertyD. Possession8.The sale of Goods Act enforces in the yearA. 1935B. 1930C. 1945D. 19559. The subject matter of the contract under Sale of goods Act mustbe_________A. MoneyB. GoodsC. Immovable GoodsD. All of the above10.Sale under Sale of goods Act is a/an ____________________contractA. ExecutoryB. ExecutableC. ExecutedD. None of the above11. In sale the transfer of property in goods from the seller to thebuyer takes placeA. At the end of contractB. ImmediatelyC. In a future DateD. Both a&b12. In Agreement to sell the transfer of property in goods from theseller to the buyer takes placeA. At the end of contractB. ImmediatelyC. In a future DateD. Both b&c13. Which of the following is not a subject matter in a Sale of goodsActA. Trade markB. Good willC. MoneyD. Watermunotes.in

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14. As per Sale of goods Act Movable goods does not includeA. GasB. Growing cropC. ElectricityD. Money15. The goods must be ________ goods for transferring the propertyin thegoodsA. AscertainedB. UnascertainedC. FutureD. All of the above16.The subject matter of the contract must necessarily be_____________A. SaleB. ProductC. ServiceD. Goods17. A consideration in contract of sale must be ______________ onlyA. GoodsB. movable onlyC. priceD. Purchase18. Transfer or agree to transfer the _____________ of the goods isthe purpose of sale of goods ActA. PropertyB. PossessionC. ValueD. Usage19. A sale is a ______________ contractA. ImpliedB. ExecutedC.AgreedD. Executory20. An agreement to sell is a ______________ contractA. ImpliedB. ExecutedC. AgreedD. Executorymunotes.in

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 21. A sale is said to be completed when ___________ is transferredfrom one party to the other partyA. MoneyB. GoodsC. InterestD.Ownership22. In contract of sale the payment of price is __________ to thetransfer of property in goodsA. concurrentB. importantC. mandatoryD. immaterial23. An agreement to sell will become a sale in _______________A. Future dateB. immediateeffectC. 30 daysD. None of the above24. An agreement to sell the transfer of ownership is ___________A. DefiniteB. MandatoryC. ConditionalD. immaterial25. A contract of sale of goods is a contract whereby the sellertransfers or agrees to transfer the property in goods to the buyer for___________A. priceB. interestC. creditD. value26. Right to stoppage in Transit ____________ be exercised evenwhen the buyer is not insolvent.A.Cannot beB.Can beC.May beD.Will bemunotes.in

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MODULEV20THENEGOTIABLE INSTRUMENTS(AMENDMENT ACT, 2015)Unit Structure20.1Objectives20.2Meaning20.3Classificationof Negotiable Instruments20.4Questions20.4Summary20.1 OBJECTIVESAfter studying the unit, the students will be able to:•Understandthe meaning of Negotiable Instruments.•Understand the various types of Negotiable Instruments and theirfunctions.20.2 MEANINGThe term“negotiable instrument”means a document transferable fromone person to another. However, the Act has not definedthe term. Itmerely says that“A. negotiable instrument” means a promissory note, billof exchange or cheque payable either to order or to bearer. [Section 13(1)]The objectives of the Negotiable Instruments Act, is to legalise the systemby which theinstrument pass from one hand to other through negotiation.As the commercial activities and trading increases at alarming rate thegrowing demand for money was not possible to meet with the currentsupply of coins in the time of British rule in India. Tocope up with thescarcity of the coins the instruments of credit took the function of money.Negotiable instruments are those documents which are generally use incommercial transaction and dealing of money.munotes.in

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20.2.1 EssentialFeatures of Negotiable Instruments:Essential Features of Negotiable Instruments are given below:1. Writing and Signature:Negotiable Instruments must be written and signed by the partiesaccording to the rules relating to Promissory Notes, Bills of Exchange andCheques. Demand Drafts are also construed as Negotiable Instruments inthe limiting case as they have the same property as Negotiable Instrument.2. Money:Negotiable instruments are payable by legal tender money of India. Theliabilities of the parties of Negotiable Instruments are fixed anddetermined in terms of legal tender money.3. Negotiability:Negotiable Instruments can be transferred from one person to another by asimple process. In the case of bearer instruments, delivery to the transfereeis sufficient. In the case of order instruments two things are required for avalid transfer: endorsement (i.e., signature of the holder) and delivery.Any instrument may be made non-transferable by using suitable words,e.g., “pay to X only.”4.Title:The transferee of a negotiable instrument, when he fulfils certainconditions, is called the holder in due course. The holder in due coursegets a good title to the instrument even in cases where the title of thetransferor is defective.5. Notice:It is not necessary to give notice of transfer of a negotiable instrument tothe party liable to pay. The transferee can sue in his own name.6. Presumptions:Certain presumptions apply to all negotiable instruments. Example: It ispresumed that there is consideration. It is not necessary to write in apromissory note the words “for value received” or similar expressionsbecause the payment of consideration is presumed. The words are usuallyincluded to create additional evidence of consideration.7.Popularity:Negotiable instruments are popular in commercial transactions because oftheir easy negotiability and quick remedies.8. Evidence:A document which fails to qualify as a negotiable instrument maynevertheless be used as evidence of the fact ofindebtedness.munotes.in

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20.2.2Presumptions as to Negotiable Instruments: (Sec-118 And119):There are number of presumptions which are applied to a negotiableinstrument unless the contrary is proved. As such these presumptionswould not arise if the contrary is proved. Sections 118 and 119 deal withthe following presumptions:1. Consideration:It is presumed that every negotiable instrument was made or drawn,accepted, endorsed, negotiated or transferred for consideration. As suchthe holder need not proveconsideration.However, this presumption would not arise if it is proved that theinstrument was obtained from its owner by any offence2. Date:Every negotiable instrument is presumed to have been made on the datewhich it bears.3. Time of acceptance:It is presumed that every accepted bill was accepted within a reasonabletime and before its maturity.4. Time of transfer:It is presumed that every transfer was made before maturity.5. Order of endorsements:The endorsements are presumed to have beenmade in the same order inwhich they appear.6. Stamp:In case an instrument is lost, it is presumed that it was duly stamped andthe stamp was duly cancelled.7. Every holder is a holder in due course:Every holder is presumed to be a holder in due course.8. Dishonour of instrument:In case a suit is filed for dishonour of an instruments the Court, on theproof of protest presumes that the instrument was dishonoured.20.3CLASSIFICATION OF NEGOTIABLE INSTRUMENTSThe negotiable instruments may bebroadly classifiedunder the followingsix heads:munotes.in

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1. Inland Instrument: Section 12The term ‘inland instrument’ is defined in Section 11 of the NegotiableInstrument Act, which reads as under:“A promissory note, bill of exchange or cheque drawn or made inPakistan, and made payable in, or drawn upon any person resident inPakistan, shall be deemed to be inland instrument”.The brief of this section provides that, in any of the following cases aninstrument is an inland instrument:An instrument whichis drawn in Pakistan and also payable in Pakistan.An instrument which is drawn in Pakistan on any person resident inPakistan whether payable in Pakistan or outside Pakistan.It will be interesting to know that the nature of an inland instrument is notchanged by the fact of its being circulation in a foreign country. Thus, aninland instrument remains inland even if it has been endorsed in Japan,they will remain inland bills.2. Foreign Instruments: Section 12The term ‘foreign instrument’ is definedin Section 12 of the NegotiableInstruments Act, which provides that a foreign instrument is one which isnot an Inland instrument.3. Bearer Instruments: Section 13The term ‘bearer’ instrument may be defined as negotiable instrument thepayment of which can be taken by a person who has the Instrument inpossession.Where the instrument is payable to bearer.Where the only endorsement or the last endorsement on the instrument isan endorsement in blank.4. Order Instruments: Section 13The term ‘orderinstrument’ may be defined as the Instrument the paymentof which can be taken by a specific person to whom it is made payable orif it is made payable or if it is made payable to the order of that specificperson“A promissory note, bill of exchange orcheque is payable to orderwhich is expressed to be so payable, or which is expressed to bepayable to a particular person, and does not contain wordsprohibiting transfer or indicating an intention that it shall not betransferable”.munotes.in

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The structure of this section provides that a negotiable instrument ispayable to order in any of the following circumstances.a)Where the instrument is to be payable to order.b)Where the instrument is to be payable to a particular person and whichdoes not contain any words restricting its further transfer.5. Instruments Payable on Demand: Sections19-21The ‘instrument payable on demand’ is defined in Section 19 of theNegotiable Instrument Act. In this connection first part of section 21 of theAct is also relevant.Both these sections respectively read as under:“In a promissory note or bill of exchange the expression ‘at sight’ and‘on presentment’ means on demand.”The analysis of thesesections reveals that, the following instruments arepayable on demand:a.Apromissory note or a bill of exchange in which no time for paymentis specified.b.A promissory or a bill of exchange which is expressed to be payable‘on demand’, or ‘at sight’, or ‘on presentment’.c.A cheque. As a matter of fact, the cheques are always payable ‘ondemand’.6. Time Instrument:The term ‘time instrument’ may be defined as the instrument payable infuture.Following are the examplesof timeinstruments:a.A promissory note or a bill of exchange which is payable after a fixedperiode.g. 60 days after sight.b.A promissory note or a bill of exchange which is payable on a specifiedday e.g. on 28thAugust,2015.c.A promissory note or a bill of exchange which is payable on thehappening of an event which is certaine.g. on the deathof a person.20.4SUMMARYMeaning:The term“negotiable instrument”means a document transferable fromone person to another. However, the Act has not defined the term. Itmerely says that “A. negotiable instrument” means a promissory note, billofexchange or cheque payable either to order or to bearer.munotes.in

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 Features of Negotiable Instruments:1.Writing and Signature:2. Money:3. Negotiability:4. Title5. Notice:6. Presumptions:7. Popularity:8.Evidence:Types of Negotiable Instruments:Inland Instrument, Foreign Instruments, Bearer Instruments, OrderInstruments, Instruments Payable on Demand, Time Instrument.20.5QUESTIONS1.Explain the features of Negotiable Instruments.2. What are the various types of Negotiable Instruments.munotes.in

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21PROMISSORY NOTES AND BILLS OFEXCHANGEUnit Structure21.1Objectives21.2Meaning21.3Essentials Characteristics Of A Promissory Note21.4Kinds Of Promissory Note21.5Bill Of Exchange–Section 5:-Meaning21.6Essentials OfA Bill Of Exchange21.7Kinds Of Bills Of Exchange21.8Section 7 Acceptor And Acceptance21.9Difference Between Bills Of Exchange And Promissory Note21.10Summary21.11Questions21.12Reference21.1OBJECTIVESAfter studying the unit, thestudents will be able to:•Understand the meanings of Promissory Notes and Bills ofExchange.•Understand the functions Promissory Notes and Bills of Exchange.•Understand the difference between Promissory Note and Bills ofExchange.21.2MEANING•Apromissory note has been defined by Sec. 4 of the Act as follows: A“promissory note” is an instrument.•in writing•containing an unconditional undertaking•signed by the maker•to pay a certain sum of money only to, or•to the order of, a certain person or•tothe bearer of the instrument.munotes.in

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•The person making the promise to pay is called the “maker”•The person to whom the payment is to be made is called the “payee”.In other words,itis an unconditional written promise by one person toanother in which the maker (Payer) promises to pay on demand on anyfuture date, a stated sum of money to the specified person or to the bearerof the instrument.A ‘promissory note’ is an instrument in writing containing anunconditional undertaking, signed by the maker, to pay a certain sum ofmoney only to, or to the order of, a certain person, or to the bearer of theinstrument.Illustrations:Y signs instruments in the following terms:1.“Ipromise to pay Z or order Rs. 1800.”2.“I acknowledge myself to be indebted to Z in Rs. 1800 to be paid ondemand, for value received,”3.“I promise to pay Z Rs, 1800, and all other sums which shall be due tohim.”4.“I promise to pay Y Rs. 1800 seven days after my marriage with C.”5.“I promise to pay Y Rs. 1800 on D’s death, provided D leaves meenough to pay that sum.”6.“I promise to pay Y Rs. 1800 and to deliver to him my black horse on1 st January next.”7.“Mr. B. I.O.U, Rs.1,800”.8.“Ipromise to pay Y Rs. 1800, first deducting there out any moneywhich he may owe me,’’SPECIMENS OR PROMISSORY NOTEI, Shri———————S/opromise to payShri———————S/oor order,the sum of Rs.———————(Rupeesonly)Place:Date:SignatureThe instrumentsrespectively marked (1) and (2) are promissory notes. Theinstruments respectively marked (3), (4), (5), (6). (7) and(8) are notpromissory notes.”munotes.in

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PROMISSORY NOTE UNDER SEC.4, NEGOTIABLEINSTRUMENTS ACT. I881MADE BY JOINT PROMISORSWe, Shri—————————————————-S/oandShri————————————————————S/o———————————————————acknowledge ourselves to be indebted to Sri,——————————————S/o.—————————————in Rs.————(Rupees———————-only) tobe paid on demand for value received.Place:(Signed)Date:(Signed)21.3ESSENTIALS CHARACTERISTICS OF APROMISSORY NOTE1.Writing:Promissory note must be in writing. Writing includes print andtypewriting. Oral promise a valid promissory note. Generally,consideration, Place and date of making is notessential requirement of thepromissory note.2.Promise to pay:•A Promissory note must contain an undertaking/Promise to pay.•Mere acknowledgment of debt is not sufficient.•Use of word “promise’’ is not mandatory, but the maker should bindhimself topay.Example:“I have received a sum of Rs. 5,000 from Sohan. This amountwill be repaid on demand’’.3.Unconditional Promise:The undertaking/ promise to pay should be unconditional and definite.Unconditional event means an event which is certain to happen but thetime of its occurrence is uncertain.Examples:-“I promise to pay B Rs. 500, seven days after my marriagewith C’’ cannot constitute a promissory note because a condition as tomarriage is attached.A write–“I promise to pay C Rs. 25,000, 7days after the death of B’’.This is a valid promissory note and is not conditional, since only the timeof death of B is uncertain, but is sure to happen.munotes.in

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 4.Signed by the maker:Promissory note should be signed by themaker himself. Where it iswritten and the name of the maker appears in the instrument, but is notsigned, it shall not treat a valid promissory note.5.Payee to be a certain person:Promissory note should specify the payee in clear terms i.e. by name,sonof, and resident of, etc. The payment can also be identified by description.6.Payment of Money only:There must be a promise to pay only money and notother consideration,e.g. “I promise to pay B a sum of Rs. 50,000 and deliver him my ScorpioCar’’ is not valid.7.Certain some of money:The amount to be paid must be certain; otherwise, the instrument will beinvalid.Example: Apromises to payBRs.800 and all other sums which becomedue. This is not a valid promissory note because the sum is not certain asno one knows what other sums will become due. However, a promise topay money with interest is valid. If the rate of interest is not given, it willnot be valid.For example, A’s promise to pay B Rs.5500 with interest accrued, is notvalid.8.Other formalities:Promissory note must be stamped according to the Indian Stamp Act,otherwise it will be inadmissible in evidence. However, other formalitieslike place of making the instrument, date or the words, “value received”are not necessary.9.Form of Promissory Note:The law has not given any specific from of a promissory note. As such itmay be in any form but it must satisfy all the essentialconditionsmentioned above. Sum payable must be certain.Examples:-“I promise to pay Ketan , Rs. 12,000, and all other sumswhich shall be due’’ is not valid since the sum is not certain.10.Duly stamped and dated:Stamps of requisite amount and description must be affixed on theinstrument and duly cancelled either before or at the time of its execution.If the promissory note is not dated, it is presumed to have been made onthe date of its delivery.munotes.in

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21.4 KINDS OF PROMISSORY NOTEa)PromissoryNote Payable on Demand:NoParticular time or stipulated time period for payment is made.b)After Sight (Payable after Date):Promissory Note is payable at a particular stipulated future date.c)Joint Promissory Note:This type of promissory note isprepared by two or more parties jointly.Here the liability of the persons who makes the promissory note is joint.In default of payment payee can take an action against all or any one ofthem or selective persons.d)Joint and Several Demand PromissoryNote:This type of Promissory Note is obtained when the loan is granted to theborrowers jointly or where it is considered expedient to make the officialsseverally liable. For Example, In the case of Limited Companies, it isessentials that the directorsor managing agents of the company should bemade personally liable to bring home to them their personal liability inorder to introduce a further element of security to the bank’s advance.21.5BILL OF EXCHANGE–SECTION 5:-MEANINGMEANING:Section 5defines a bill of exchange as…•an instrument in writing•containing an unconditional order,•signed by the maker,•directing a certain person to pay•a certain sum of money only to or•to order of, a certain person or•to the bearer of the instrument.There are three parties to a bill of exchange,Drawer : The maker of the billDrawee : The person who is ordered to payPayee :The person to whom or to whose order the money is directed to bepaid.21.6ESSENTIALS OF A BILL OF EXCHANGE1.It must be inwriting.The bill of exchange shall be in writing. Simplywords of order are invalid instrument and that doesn’tfulfilthe conditionsto be a bill of exchange.munotes.in

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2.It must contain an express order to pay.The bill of exchange is anunconditional order.Hence, the instrument shall have the instruction i.e.,an order to pay to certain person or to the order of.3.It must be signed by the drawer.The drawer of the bill of exchangeshall sign the instrument otherwise it would be invalid and notenforceable. He is the one who gives the order to pay. 4It must containan unconditional order to pay. The bill of exchange must not include an4.There must be three parties to the instrument.Bill of exchangealwayshasthree parties to it.Thedrawerwho makesthe bill of exchange.Thedraweewho shall accepts the bill of exchange and eventually whobecomes anacceptor. And finally, thepayeewho receives the sum ofmoney as specifies in the instrument.5.The parties must be certain. The names mentioned in there in the billof exchange shall be certain. The parties shall be identifiable and whenthat is not the case the bill of exchange is not valid.6.The order must be to pay a certain sum ofmoney:The sum ofmoney must be certain. In addition to the same of subtractions shall not beaccepted unless there is an interest clause and the same shall be mentionedin percent. Other conditions to the sum of money shall be treat as void.7.The instrument must contain an order to pay money and moneyonly:The instrument must not contain any thing apart from money.Itmust contain money and money only.8.It must be stamped:The stamp is affixed on every bill of exchange,except bill payable on demand.The value of stamp depends on the amountof the bill.Specimen of Bills of ExchangeShrikantMumbaiRs, 1,00,000/-April 01,2015Three months after date pay to me or my order, the sum of Rupee? OneLakhs, for value received.Accepted(signed) Shrikant(Signed)Gayatri 1.04.2015Powai Vihar65/569Mumbai-400 068.Swaroop.56/286Bhulabhai LaneMumbai72ToGayatri Devi.Mumbai 400068munotes.in

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21.7KINDS OF BILLS OF EXCHANGEDemand Bill:Demand bill is payable on demand or when it is presented at the site.There Is no specific time for payment is made.So, the debtor can makethe bill’s payment when it is presented.Inland Bills:The bill drawn between two parties residing in the same country andpayable also in that same country is known as inland bills.Foreign Bills:The bill drawn between two parties residing in two different countries isknown as foreign bills. For instance, a bill is drawn in the USA where theseller is situated, and the buyer lives in the UK. So, the bill will be payablein the UK, the drawee or buyer’s location.21.8SECTION 7 ACCEPTOR AND ACCEPTANCE“Acceptor”: After the drawee of a bill has signed his assent upon the bill,or, if there are more parts thereof than one, upon one of such parts, anddelivered the same, or given notice of such signing to the holder or tosome person on his behalf, he is called the “acceptor”.1.A drawee has no liability regarding any bill addressed to him foracceptance or payment until he accepts the bill.2. He needs to write the word ‘accepted’ on the bill and sign his namebelow inorder to complete the acceptance.3.By accepting the bill, the drawee gives is assent to the order of thedrawer.21.8.1 S.108. ACCEPTANCE FOR HONOUR:Acceptor forhonour”:When a bill of exchange has been noted orprotested for non-acceptance or for better security, and any personaccepts it supra protest forhonourof the drawer or of any one of theendorsers, such person is called an “acceptor forhonour”.1. An acceptorfor honourbinds himself to all parties subsequent to theparty for whose honour he accepts to pay the amount of the bill if thedraweedoesnot;2. When acceptor for honour may be charged. An acceptor for honourcannot be charged unless the bill has atits maturity been presented to thedrawee for payment, and has been dishonoured by him, and noted orprotested for such dishonour.munotes.in

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21.9DIFFERENCE BETWEEN BILLS OF EXCHANGEAND PROMISSORY NOTEBASIS OFCOMPARISIONBILL OFEXCHANGEPROMISSORY NOTEMeaningBOE is an instrument inwriting showing theindebtedness of a buyertowards the seller ofgoods.A promissory note is awritten promise made bythe debtor to pay a certainsum of money to thecreditor at a futurespecified date.Defined inSection5 of NegotiableInstrument Act, 1881.Section 4 of NegotiableInstrument Act, 1881.PartiesThere are Three parties,i.e. drawer, drawee andpayeeThere are Two parties, i.e.drawer and payeeDrawn byIt is drawn by CreditorIt is drawn by DebtorLiability ofMakerMaker’s liability isSecondary andconditionalMakers’ liability isSecondary andconditionalDishonourNotice ofDishonourisnecessary to be given toall the parties involved.Notice ofDishonourNotice is not necessary tobe given to the maker.21.10SUMMARYMeaning:It is an unconditional written promise by one person to anotherin which the maker (Payer) promises to pay on demand on any future date,a stated sum of money to the specifiedperson or to the bearer of theinstrument.Essential Features and Characteristics of Promissory Notes:Writing:Promise to pay:Unconditional Promise: Signed by the maker: Payee to bea certain person: Payment of Money only: Certain some of money: Otherformalities:Types of Promissory Notes:Promissory Note Payable on Demand: AfterSight Payable after Date, Joint Promissory Note: Joint and SeveralDemand Promissory Note:BILL OF EXCHANGE:•Meaning:an instrument in writing containing an unconditionalordersigned by the maker,directing a certain person to pay a certain sum ofmoney only to or to order of, a certain person or to the bearer of theinstrument.munotes.in

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Essential Elements of Bills of Exchange:It must be in writing; it mustcontain an express order to pay. It must be signed by the drawer. It mustcontain an unconditional order to pay. The parties must be certain, theorder must be to pay a certain sum of money,The instrument must contain an order to pay money and it must bestamped.21.11QUESTIONS1.What are the essential elements of promissory note?2.What is bills of exchange? What are its essential features?3.Distinguish between Promissory Note and Bills of Exchange.4.Write a Note on:a. Kinds of Bills of Exchangeb. Kinds ofPromissory Notesc. Rules of Acceptor and Acceptor for honour.21.12REFERENCE•1https://www.aaptaxlaw.com/negotiable-instruments-act/section-7-negotiable-instruments-ac•t-drawer-drawee-section-7-of-ni-act-1881.htmlmunotes.in

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22CHEQUESUnit Structure22.0Objectives22.2Characteristicsof Cheque22.3Crossingof Cheque: Section. 12322.4Distinguish Between Cheque And Bills Of Exchange.22.5Dishonourof Cheque: Sections 138-14222.6Basic Essentialsof Section 13822.7Draft And LetterofCredit22.8Summary22.9Questions22.0OBJECTIVESAfter studying the unit, the students will be able to:•Understand the meaning Of Cheque.•Understand the various types of Cheques.•Understand difference between the Cheque and Bills of Exchange•Understand the term “Dishonour of cheque” and its CriminalPenalties’CHEQUE-SECTION-6Section 6 of Negotiable Instrument Act defines Cheque as“abill ofexchange drawn on a specified banker and not expressed to payableotherwise than on demand and it includes the electronic image of atruncated cheque and a cheque in the electronic form”Payable on Demand:It should be payable whenever the holder choosesto present it to the drawee that is banker.Cheque in Electronic Form:Cheque drawn by using any computerresource and signed in a secure system with a digital signature andasymmetric crypto system; or electronic signature.Truncated Cheque:Means a chequewhich is truncated during the courseof clearing cycle, either by clearing house or by bank whether paying orreceiving payment immediately on generation of the electronic image fortransmission, substituting the further physical movement of the cheque inwriting.munotes.in

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(8,"(< (2,
4-Payee) 46+,6!#
,(6,6#95,,7$0.3(896,4-
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 4#7SEPCIMEN OF A CHEQUE
22.2 CHARACTERISTICS OF CHEQUE1.It must be in writing:A cheque must be in writing. An oral order topay does not constitute a cheque.2.An unconditional order:It is an unconditional order:A cheque cannotbe drawn so as to be payable on condition. The drawer’s order to thedraweebank must be unconditional. A conditional cheque shall be invalid.3. Drawn upon a Specified Banker:The drawer issues cheque directingto a particular bank having deposit in it to pay the amount of cheque.4. Signed by the maker:The cheque should be signed by the accountholder. A cheque does not carry any validity unless signed by the originaldrawer. It should be dated as well.5. Amount in words and figures:The amount of cheque should bementioned in words and figures.6.Payable on demand:Theamount of cheque must be paid by the bankas soon as it is presented at its counter.7.It mustcontain an express order to pay:Cheque should contain anexpress order to pay money and money only, request made in the chequeinvalidate the instrument.8.The sum contained in the order must be certain:The sum contain inthe cheque must be certain. Uncertainty leads to instrument invalid.munotes.in

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9. It does not require acceptance and stamp:Like a bill of exchange, acheque does not required acceptance from the drawee. There is, a customamong banks to mark cheques as ‘good’ for the purpose of clearance. Butthis marking is not an acceptance, further no revenue stamp is required tobe affixed on cheques.10. Validity:A cheque is generally valid for six months from the date itbears. Thereafter it is termed as stale cheque. A post-dated or antedatedcheque will not be invalid. In both cases, the validity of the cheque ispresumed to commence from the date mentioned onit.22.3 CROSSING OF CHEQUE: SECTION. 123CROSSING OF CHEQUES:Meaning:Crossing of cheques means an instruction to the drawee that is the payingbank that the payment is not to be made at the counter but through a bank.When a cheque bears acrossits face two parallel transverse lines, or of twoparallel transverse lines simply (either with or without the word, notnegotiable) that addition shall be deemed a crossing and the cheque shallbe deemed to be crossed generally.Thus, a cheque can eitherbe an open cheque, and the same can beencashed at the counter of the bank, or a crossed cheque that is a cheque witha special direction to at the paying banker to make payment only through aparticular banker and not to pay it at the counter. Crossing of a cheque ingeneral does not stop its negotiability but if words like ‘Not Negotiable’‘or A/c. Payee only’are used then it cannot be negotiated freely.Parties to a cheque1.Drawer:The person who draws the cheque.2.Drawee:The banker on whom the cheque has been drawn, the payee,holder,Endorser, andEndorseeare the same as in a bill.Types of Cheque1. Open Cheques / Bearer Cheques:An open or bearer is a cheque which is payable at the counter of thedrawee bank on presentation of the cheque. When the cheque is lost orstolen, it is not possible easily to trace the person who has received thepayment.2. Crossed Cheque:A crossed cheque is a cheque which is payable only through a specifiedbanker and not directly at thecounter of the bank. Crossing ensuressecurity to the holder of the cheque as only the particular banker creditsmunotes.in

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the funds to the account of the payee of the cheque. When two paralleltransverse lines, with or without any words, are drawn generally, on theleft hand top corner of the cheque.•A crossed cheque does not affect the negotiability of the instrument.•It can be negotiated the same way as any other negotiable instrument.Hence Crossed cheque is a cheque which is not paid on the counter of abank. The amount is credited by the bank to the account of payee. Thesignificance of different types of crossed cheques is different in style.22.3.1 Types of Crossing of the Cheque:Following are the types of crossing of the cheque:1. General Crossing:Section 123A cheque is said to be crossed generally when it bears across its face anyof the following:a.Two transverse parallel lines.b.Two transverse parallel lines with the word “And Company” or “AndCo”.c.Two transverse parallel lines with anyabbreviation of the word “&Company”.d.Two transverse parallel lines with the words “Not Negotiable”.e.Two transverse parallel lines with the words “Account Payee Only”.The cheque crossed generally does not ceases to be negotiable further. Thecollecting banker can collect the proceeds of the cheque in the account ofthat person mentioned on the cheque. A crossed cheque can be madebearer chequeby cancelling the crossing and writing that the crossing iscancelled and affixing the full signature of drawer.
Significance of General Crossing:a.The effect of general crossing is that it gives a direction to the payingbanker.
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b.The direction is that, the paying banker should not pay the cheque atthe counter.C. It must be presented to the payingbanker through any other bank andnot the payee himself at the counter.2. Special Crossing: Section 124:It is a cheque in which the name of the bank is appears between the twoparallel lines and hence it can be paid to that specific banker only.Insertion of the name of a banker is an essential in special crossing.Special Crossingcannotbe converted to General Crossing.
Essentials of special crossing:a.Two parallel transverse lines are not at all essential for a specialcrossing.b.Thename of banker must be necessary specified across the face of thecheque may suffice the purpose.c.It must appear on the left-hand side preferably on the corner. It shouldnot be destroying the printed number of the cheque.d.Thetwo parallel transverse linesand the wordsNot negotiablemaybe added to a special crossing.1. Restrictive crossing:Besides the above two types of statutory crossing in recent years thepractice of crossing cheques with the words Account payee only hassprung up. Such a crossing is termed as restrictive crossing.Essentials of restrictive crossing:a.The two transverse parallel lines across the face of the cheque.b.It must be presented in order to treat any cheque as a crossed cheque.
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c.The cheque will not be takenas a crossed cheque if this has not beendone.Significance of restrictive crossing:a.It is only a direction to the collecting banker that the proceeds are to beonly to the account of payee named in the cheque.b.If the collecting banker allows theproceeds to be credited to someother account, it may be held liable for wrongful conversion of funds.c.It is under no duty to ascertain that the cheque is in fact collected forthe account of the person named as payee.2.Double crossing:When acheque bears two separate special crossing, it is said to have beendoubly crossed. Thus, a paying bank shall pay a cheque doubly crossedonly when the second banker is acting only the agent of the first collectingbanker and this has been made clear on the instrument.3.Non-NegotiableCrossing:It is when the words ‘Not Negotiable’ are written between the two paralleltransverse lines.22.3.2 Section 125: Crossing of cheques after IssueFollowing are the guidelines under the said section.The holdermay cross the cheque generally or specially. If a cheque hasnot been crossed,If it’s crossed generally, holder may cross it specially.•Holder may add the words “not negotiable”. If it’s crossed generally orspecially,•If a cheque is crossed specially, banker to whom it’s crossed, mayagain cross it especially to another banker, his agent, for collection.Payment of cheque crossed generally or specially: Sections. 126 &127:•If cheque is crossed generally, the banker on whom it’s drawn shallnot payotherwise than to a banker.•If a cheque is crossed specially, it should be paid to the banker onwhom it’s crossed.•When a cheque is crossed especially to more than one banker exceptwhen it’s crossed to an agent for purpose of collection, the banker onwhom its drawn shall refuse payment thereof.munotes.in

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22.3.3 Payment in due course of crossed cheque: Section 128When a banker on whom a crossed cheque is drawn, pays it in due course,it’s to be presumed that he has made payment to the owner of the cheque,though in fact, amount may not reach the owner.In this way, banker making payment in due course is protected.22.3.4 Payment out of due course Sec. 129:Any banker paying the crossed cheque otherwise than in accordance withthe provisions of sec. 126 shall be liable to the true owner of the chequefor any loss he may have sustained.22.4 DISTINGUISH BETWEEN CHEQUE AND BILLSOF EXCHANGE.POINTS OFDIFFERENCESCHEQUEBILLS OFEXCHANGEMeaningAn Instrument used tomake easy payments ondemand and canbetransferred through handdelivery is known ascheque.An Instrumenta writtendocument that shows theindebtedness of thedebtor towards thecreditor.DraweeA cheque is alwaysdrawn on a bank or abanker.A bill of exchange canbe drawn on any personincluding a banker.CrossingA cheque may becrossed.There is no suchprovision in the case of abill of exchangeAcceptanceA cheque does notrequire acceptance.Bill of exchange needsto be accepted.StampingNo such requirement.Must bestamped.Noting orprotestingIf the cheque isdishonoured it cannot benoted or protestedIf a bill of exchange isdishonoured it can benoted or protested.ProtectionA banker is givenstatutory protection withregard to payment ofcheques in certaincircumstances.No such protection isavailable to the draweeor acceptor of a bill ofexchange.22.5 DISHONOUR OF CHEQUE:SECTIONS 138-14222.5.1 CONCEPT ANDMEANING:Prior to the introduction of this chapter, the drawer of a dishonouredcheque could be criminally prosecuted under S.420 of the Indian Penalmunotes.in

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Code. However, even today prosecution under the general for the offenceof ‘cheating’ is maintainable. The offence under S.138 of the Act andS.420 of the Indian Penal Code are different in nature, thereforeconviction of offence under one provision does not bar prosecution underthe other.There was no effective legal provision before the year 1888 to restrictpeople from issuing cheques without having sufficient amount in theiraccount or any harsh provision to punish them in the event of such chequenot being honoured by their bankers and returned unpaid. Dishonour ofcheques is a civil liability accrued.The processes to seek civil justice becomes a time consuming or a processof unusual length, and recovery by way of a civil matters takes a longtime. To ensure immediate remedy against defaulters and to ensurecredibility of the holders of the negotiable instrument a criminal remedy ofpenalty was introduced in Negotiable Instruments Act, 1881 in form of theBanking, Public Financial Institutions and Negotiable Instruments Laws(Amendment) Act, 1988 which were further modified by the NegotiableInstruments (Amendment and Miscellaneous Provisions) Act, 2002.Many issues arise under this section such as:-•what happens in case of default?•who will be liable to the holder of the cheque?•what are the procedures involved to make the case adept in the eyes ofthe magistrate? etc.The Negotiable Instruments Act, 1881 was amended in the year 1988 toadd–Chapter XVII which pertains to penal provisions in case ofdishonourof cheques for insufficiency of funds in the accounts.Section 138–reads: ‘Where any cheque drawn by a person on an accountmaintained by him with a banker for payment of any amount of money toanother person from out of that account for the discharge, in whole or inpart, of any debt or other liability, is returned by the bank unpaid, eitherbecauseof the amount of money standing to the credit of that account isinsufficient to honour the cheque or that it exceeds the amount arrangedto be paid from that account by an agreement made with that bank, suchperson shall be deemed to have committed an offence and shall withoutprejudice to any other provisions of this Act, be punished withimprisonment for [“a term which may extend to two year”], or with finewhich may extend to twice the amount of the cheque, or with both:’Provided that nothingcontained in this section shall apply unless-(a) Within a period of six months from the date on which it is drawn thecheque has been presented to the bank or within the period of itsvalidity, whichever is earlier.munotes.in

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(b)The payee of the cheque, or a person in whose custody the instrumentis as the case may be, makes a demand for the payment of the saidamount of money by giving a notice, in writing, to the drawer, of thecheque,within30 days of the receipt of information by him from thebank regarding the return of the cheques as unpaid, and(c)The payment of the said amount of money to the payee by the drawerhas not been made(d)Negotiable Instrument Amendment Act2015 providesas under“The Act specifies circumstances under which complaints forchequebouncing can be filed.However, the Act does not specify the territorialjurisdiction of the courts where such a complaint is to be filed.The Billamends the Act to state that cases of bouncing of cheques can be filed onlyin a court in whose jurisdiction the bank branch of the payee (person whoreceives the cheque) lies.”22.6 BASIC ESSENTIALS OF SECTION 1381.Cheque Drawn by the person who has a account in the Bank i.eexistence of Bank-Customer Relationship.2.Cheque Drawn in discharge–debt or liability.3.Discharge may be of full–part liability.4.Cheque returnedunpaid. (Returnedto Payee/Holder/Person entitledto receive money)5.Reasons for Return-•Insufficiency of Funds•Either the balance was insufficient–or it exceededthe amountarranged to be paid for overdraft.6.Cheque presented in bank within 6 months from date of cheque.7.Payee gave notice to drawer within 30 days of the refund of thecheque.8.Drawer must make payment within 15 days from receipt of notice.9.Cause of Action arises on 16thDay. (S.12(1) Limitation Act–excludes 16thDay)If the above conditions are fulfilled the offence u/s 138 is made out–theCognizance of which would then be taken by Metropolitan Magistrate/Judicial Magistrate 1stClass as per S.142.PUNISHMENT/S:Maximum 2 years (earlier it was 1 year–to make the act more stringentvide 2002 Amendments–to was extended to the present 2 years.Up to twice the amount of cheque as FINE.munotes.in

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22.7 DRAFT AND LETTER OF CREDITDRAFT:Draft is an order to pay money and involves three parties, It isand an unconditional written order to pay by which the party creating thedraft (the drawer) orders another party (the drawee), typically a bank, topay money to a third party (the payee). Adraftpayable on presentment. Itmay also be payable on acceptance-where you have thedraweeswrittenpromise to pay the draft when it comes due.Letter of Credit.Letter of Credit is issued by the bank to the buyer in order to secure thetimely payment by the buyer to the seller. It works in import of goods/equipment from abroad that is another country. It acts like a guarantee onbehalf of the buyer that he/she pays the full amount to the seller, as perdefined timeline or on time as it is sent along with bills of exchange. If incase the buyer is unable to repay the amount to the seller on time, then thebank will pay on buyer’s behalf to the seller.22.8SUMMARYMeaning:A bill of exchange drawn on a specified banker and not expressed topayable otherwise than on demand and it includes the electronic image ofa truncated cheque and a cheque in the electronic form.Essential Features and Characteristics of Cheque:Itmust be in writing: An unconditional order: Drawn upon a SpecifiedBanker: Signed by the maker: Amount in words and figures: Payable ondemand: It must contain an express order to pay, the sum contained in theorder must be certain. It does not require acceptance and stamp: ValidityCrossing of Cheque: Meaning:Crossing of cheques means an instruction to the drawee that is the payingbank that the payment is not to be made at the counter but through a bank.Types of Crossing of the Cheque:General Crossing: Section 123, Special Crossing: Section 124, Restrictivecrossing,Non-Negotiable Crossing,22.9QUESTIONS1.What is cheque? What are its characteristics?2.Distinguish between Bills of Exchange and Cheque3.What are the differenttypes of crossing of cheques?4.Explain the criminal penalties in respect of ‘Dishonour ofCheque’.munotes.in

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23MISCELLANEOUS PROVISIONUnit Structure23.1Holderof Negotiable Instrument Meaning23.2Holder In Due Course23.3Section 10. Payment InDue Course23.4Notingand Protesting–Section [99-104(A)]23.5Maturityof An Instrument23.6Summary23.7Questions23.1 HOLDER OF NEGOTIABLE INSTRUMENTMEANINGThe holder of a negotiable instrument means any person entitled to thepossession ofthe instrument in his/her own name and to receive or recoverthe amount due there on from the parties liable.CONDITIONS TO BE FULFILLED:Thus, in order to be called a ‘holder’ a person must satisfy the followingtwo conditions: (Sec. 8).1. He must beentitled to the possession of the instrument in his ownName.Actual possession of the instrument isnot requisites. What isrequired is aright to possessionunder valid title. He should be a ‘de jureholder’ and not necessarily ‘de facto holder’. It means that the person mustbe named in the instrument as the payee or the endorsee, or he must be thebearer of the same, if the instrument is bearer.2.If a person is in possession of a negotiable instrument without having aright to possess the same, he cannot be called the holder. Thus, a thief, or afinder on the road, or an endorsee under a forged endorsement, althoughmay be having the possession of the instrument, cannot be called its holderbecause he does not obtain legal title of the sameand henceis not entitledin his own to the possess the same.munotes.in

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23.2 HOLDER IN DUE COURSEMEANING:The basic principle relating to negotiable instruments is that a personobtaining a negotiable instrument in good faith and for value obtains avalid title thoughhe takes from one who had nothing. The property in anegotiable instrument is acquired by anyone who takes it bona-fide and forvalue, notwithstanding any defect of title in the person from whom he tookit. Now such a person who takes an instrument “in good faith and forvalue” becomes the true owner of the instrument and is known as a“holder in due course”.According to Section 9 “Holder in due course” means any person who forconsideration became the possessor of a promissory note, bill of exchangeorcheque if payable to bearer, or he become an owner of or the payee orendorsee thereof, if payable to order, before the amount mentioned in itbecame payable and without having sufficient reason to believe that anydefect appears in the title of the personfrom whom he obtained this title.23.2.1 Essential Qualifications of a “Holder in Due Course”:The essential qualifications of a “holder in due course” as follows:•He must be a holder for valuable consideration. All the essentials ofconsiderationshould be fulfilled so as to result in a valuableconsideration.•The person who takes a negotiable instrument after maturity does notbecome a holder in due course. Thus, the person became the holder ofthe instrument before its maturity.•That the instrument should be complete and regular on the fact of it.•The last requisites are that the holder should have obtained theinstrument in “good faith”.23.3 SECTION 10. PAYMENT IN DUE COURSE“Payment in due course S. 10 provides that, “payment in accordancewiththe apparent tenor of the instrument in good faith and without negligenceto any person in possession thereof under circumstances which do notafford a reasonable ground for believing that he is not entitled to receivepayment of the amount therein mentioned”.A paying banker does not get statutory protection under NegotiableInstrument Acts if he does not make the payment of negotiable instrumentin due course.munotes.in

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Payment must be in accordance with the apparent tenor of theinstrument.For example, abanker makes the payment through a postdated cheque. Inthis case, payment made by the banker is not in accordance with theapparent tenor of the instrument because this payment has made before thedate apparent on the instrument. Hence the payment made bythe banker isagainst the motive of the drawer of the cheque, therefore such paymentshall not be treated as payment in due course.Payment made must be to a legally entitled person in good faith andwithout negligenceThe banker must have made the payment on the belief that the person whoreceived the payment is eligible to receive payment of the amount thereinmentioned. Apart, the drawee (payer) should not be guilty of negligence inmaking such payment.Payment must be made only against presentationof the instrumentfor payment.If the payment made in the absence of presentation of the instrument forpayment, such payment will not be treated as payment in due course. Thedrawee shall receive and see the instrument (physical or electronic imageinclearing) presented to him for payment before making payment, lest itcannot be treated as payment in due course.23.4 NOTING AND PROTESTING–SECTION [99-104(A)]When a negotiable instrument is dishonoured, the holder may sue hisdrawer and the endorsers after he has given a notice of dishonour to them.The holder may needevidence of the factthat a negotiable instrument hasbeen dishonoured. When a cheque is dishonoured generally the bank whodenies payment returns back the cheque giving reasons inwriting for thedishonour of the cheque. Sections 99 and 100 provide an appropriatemethod of genuineness the fact of dishonour of a bill of exchange and apromissory note byway of ‘noting’ and ‘protest”.23.4.1 Noting:As soon as a bill of exchange or a promissory note is dishonoured, theholder can after giving the parties due notice of dishonour, sue the partiesliable thereon. Section 99 provides a mode of genuineness of the fact ofthe bill having been dishonoured. Such mode is by noting the instrument.Noting is a recorded of minute by a notary public on the dishonouredinstrument. When a bill is to be noted, the bill is taken to a notary publicwho represents it for acceptance.Noting should specify in the instrument,•The fact of dishonour,•The date of dishonour,munotes.in

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•The reasons for such dishonour,•The notary’s charges,•A reference to the notary’s register.Noting should be made by the notary within a reasonable time afterdishonour. Noting and protesting is notmandatory but foreign bills mustbe protested for dishonour.23.4.2 Protest:Protest is a certificate by the notary public attesting the dishonour of thebill by non-acceptance or by non-payment. After noting, the next step fornotary is to draw a certificate of protest, which is bonafide declaration onthe bill. An important advantage of protest is that the court on proofof the protest shall presume the facts of dishonour.Besides the protest for non-acceptance and for non-payment the holdermay protest the bill for better security. When the acceptor of a billbecomes insolvent, may protest the same in order to obtain better securityfor the amount due. For this purpose, the holder may employ a notarypublic to make the demand on the acceptorand if refused, protest may bemade. Notice of protest may be given to prior parties. When promissorynotes and bills of exchange are required to be protested, notice of protestmust be served instead of notice of dishonour. (Sec. 102)Inland bills may ormay not be protested. But foreign bills must beprotested for dishonour when such protest is required by the law of theplace where they are drawn (Sec. 104).23.5MATURITY OF AN INSTRUMENTThe maturity of a promissory note or bill of exchange means the date atwhich it falls due.Days of grace:Every promissory note and bill of exchange which is notexpressed to be payable on demand or at sight or on presentment is atmaturity on the thirdday, for example it is entitled to three days graceafter the day on which it is expressed to be payable. A cheque is alwayspayable on demand. It is not entitled to any days of grace. Similarlyinstruments payable on demand or at sight or on presentmentare alsoentitled to three days of grace. Thus, only following instruments areentitled to days of grace:1)Bills and notes payable on a specified day;2)Bills and notes payable at a certain period after date or after sight;3)Bills and notes payableat a certain period after the happening of acertain event.munotes.in

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23.6 SUMMARYHOLDER OF NEGOTIABLE INSTRUMENT MEANING: Meaning:The holder of a negotiable instrument means any person entitled to thepossession of the instrument in his/her own name and toreceive or recoverthe amount due there on from the parties liable.NOTING:Noting is a recorded of minute by a notary public on thedishonoured instrument. When a bill is to be noted, the bill is taken to anotary public who represents it foracceptance.PROTEST:Protest is a certificate by the notary public attesting thedishonour of the bill by non-acceptance or by non-payment.23.7QUESTIONS1.Explain the various features of Negotiable Instruments?2.What are the presumptionsapplicable to all the negotiable instrumentsunder Negotiable Instrument Act 1881?3.Define Promissory Note and explain is salient features.4.Define Bill of Exchange and explain its salient features.5.What is cheque? Explain its features and enumeratethe differenttypes of Crossing of Cheques.6.What are the penal provisions under Negotiable Instrument Act1881(Amendment Act 2012) in respect of dishonour of cheques?7.Distinguish between Holder and Holder in due course.8.What is the essential qualification of holder in due course?9.Write a short note on following:-a.Bill of Exchangeb.Time instrumentc.Bearer instrumentd.Inland instrumente.Negotiable Instrumentsf.Promissory Noteg.Crossed Chequeh.Bearer Chequei.DoubleCrossing of the Chequej.Notingk.Protestingmunotes.in

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(MODULE V)MULTIPLE CHOICE QUESTIONS WITH ANSWERS1. When did the Negotiable Instruments Act come into force?A) 1 April 1882B) 1 March 1936C) 01 May 1989D) 01 March 1882Answer–D) 01 March 18822.Which of the following section in the Negotiable Instruments Actdeals with the Bill of Exchange?A. Section 5B. Section 6C. Section 4D. Section 8Answer–D)Section 83. Which of the following is/are true about Bill of Exchange?(I)A bill of exchange requires in its inception two parties.(II)A bill of exchange or “draft” is a written order by the drawer to thedrawee to pay money to the payee.(III)Bills of exchange are used primarily in international trade, and arewritten orders by oneperson to his bank to pay the bearer a specificsum on a specific date.(IV)Definition of ‘ Bill of Exchange’ is mentioned in Section 6 of theNegotiable Instrument Act.A.(I) and (IV)B.(I), (II) and (IV)C.(II) and (III)D.(III) and (IV)ANS: C. (II) and (III)4. Which of the following is/are false about Dishonour of Cheque ?(I)Section 138 defines Dishonour of cheque for insufficiency, etc., offunds in the account.(II)Such cheque has been presented to the bank within a period oftwelve monthsfrom the date on which it is drawn or within theperiod of its validity, whichever is earlier(III)Imprisonment for such offence may be extended for period of fiveyear(IV) Section 138 apply unless–the drawer of such cheque fails to makethe payment ofthe said amount of money to the payee or, as the casemunotes.in

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may be, to the holder in due course of the cheque, within fifteen daysof the receipt of the said notice.A.(I) and (IV)B.(II) and (III)C.(II),(III) and (IV)D.Only (IV)ANS: (II) and (III)5._________ an instrument in writing containing an unconditionalundertaking signed by the maker to pay a certain sum of money onlyto, or to the order of, a certain person or to the bearer of theinstrument.A.Promissory NoteB.bill of exchangeC.ChequeD.none of the aboveANS: APromissory Note6. _____________ is an instrument in writing, containing anunconditional order, signed by the maker,directing a certain person,to a pay a certain sum of money only to, or to the order of a certainperson or to the bearer of the instrumentA. Promissory NoteB. bill of exchangeC. ChequeD. none of the aboveANS: B) Bill of exchange7. The parties of a bill of exchange areA. drawee acceptor and payeeB. banker drawee and payeeC. banker acceptor and payeeD. banker drawer and payeeANS: A) drawee acceptor and payee8. A Promissory Note or Bill of Exchange can be made payableA. On demandB. On a specific dateC. After a specified period–months or days.D. all of the aboveAns. D) All of the abovemunotes.in

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9.Whenthe is crossed with Two parallel lines or with word ‘&Co.’etc. this crossing is known as_____________A. general crossingB. special crossingC. restrictive crossingD. none of the aboveAns. A) general crossing10. When the is crossedwith Two parallel lines or with ‘A/c payeeonly.’ etc. this crossing is known as____________A. general crossingB. special crossingC. restrictive crossingD. none of the aboveAns. C.) restrictive crossing11. In the case of Bill of Exchange drawee is the ____________.A. makerB. acceptorC. payeeD. none of the aboveAns.B) acceptor12. Aholder in due course will get protected from earlier defect ofA. no considerationB. conditional deliveryC. unlawful meansD. all of the aboveAns. D) all of the above13. _____of aninstrument means a person legally entitled to possessand receive in his own nameA. ownerB. makerC. holderD. receiverAns.C) holder14. Holder of an instrument is a person who holds the instrumentA. for a longer periodB. before maturityC. after maturityD. on behalf of the ownerAns. B) before maturitymunotes.in

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15. Countermanding of a cheque is alsoknown asA. cancellationB.DishonourC. stop paymentD. payment through counterAns. C) stop payment16. ‘Something legally transferable from one person toanother for aconsideration’ is known asA. EndorsementB. bill of exchangeC. promissory noteD. negotiationAns. D ) negotiation.17. Incase ofDishonourof a bill of exchange ____________ iscompulsoryA. notingB. protestingC. both noting & protestingD. neither noting nor protestingAns. C ) both noting & protesting18. Maker of a bill ofexchange is called as ____________A. DrawerB. DraweeC. AcceptorD. PayeeAns A) Drawer19. Days of grace provided to the Instruments at maturity is_______________A.1 dayB.2 daysC.3 daysD.5 daysAns C) 3 daysmunotes.in

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20.Validity period for thepresentment of cheque in bank is_______________A.3 monthsB.6 monthsC.1 yearD.2 yearsAns A) 3 Months21.Which of the following is not applicable to negotiable instruments?A.It must be in writingB.It must be transferableC.It must beregisteredD.It must be signedAns C. It must beregistered.22.‘A’ signs the instrument in the following manner. State theinstrument which cannot be considered as promissory note.a)I promise to pay B or order INR 500.b)I acknowledge myself to beindebted to B for INR 1,000 to be paid ondemand for value received.c)I promise to pay B INR 10,000 after three months.d)I promise to pay B INR 500 seven days after my marriage with C.Ans D) Ipromise to pay B INR 500 seven days after my marriage withC.23.P obtains a cheque drawn by M by way of gift. Here P is a:A.Holder in due courseB.Holder for valueC.HolderD.None of the aboveAns C) Holder24.An instrument containing a promiseto __________ is validpromissory note.A.Pay Rs. 10 lakhsB.Deliver certain goodsC.Pay Rs. 10 lakh and deliver certain goodsD.Both (a) and (c)Ans A) Pay Rs. 10 Lakhsmunotes.in

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 25.In legal terms, person who takes the instruments bonafideforvalue before it is overdue, in good faith, is known as:A.Holder in due courseB.HolderC.Holder for valueD.None of the aboveAns A) Holder in due course.26.Maker of a bill of exchange is called as ____________a) Drawerb) Draweec) Acceptord) PayeeAns A) Drawer27.A draws a bill on B. B accepts the bill without any consideration.The bill is transferred to C without consideration. C transferred it toD for value. Decide as per provisions of Negotiable Instruments Act,1881-A.D can sueonly AB.D can sue A or B onlyC.D can sue any of the parties A, B or CD.D cannot sue any of the parties A, B or CAns C) D can sue any of the parties A,B,or C29.The essential characteristics of a negotiable instrument include:A.Payable to orderor bearerB.Easy transferabilityC.Transferee can sue in his own nameD.All the above.AnsD) All the above.30.Where the amount mentioned on the cheque differs in words andfigures, which amount should be considered:a.The amount stated in figures.b.The amount stated in wordsc.Both A and B the options are not correct and cheque is required to bereturned.d.It depends upon the discretion of the banker.Answer. B) The Amount stated in wordsmunotes.in

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MODULE VMULTIPLE CHOICE QUESTIONS-FORPRACTICE1.In a bill of exchange, drawee is the persona.who draws the billb.on whom the bill is drawnc.to whom the payment of the bill is to be maded.to whom the payment of the bill is not to be made2.How many parties are mainly involved inPromissory Note?a.Oneb.Fivec.Twod.Three3.In a bill of exchange, drawee is the persona.who draws the billb.on whom the bill is drawnc.to whom the payment of the bill is to be maded.to whom the payment of the bill is not to be made4.Anegotiable instrument drawn or make in India is called_______instrument.a.Inlandb.Foreignc.Timed.Clean5.Cheque is payable ona.Demandb.Usagec.Fixed future dated.After sight6.Which of the following is/are false about Dishonour ofCheque?A)Section 138 defines Dishonour of cheque for insufficiency, etc., offunds in the account.B)Such cheque has been presented to the bank within a period oftwelve months from the date onwhich it is drawn or within theperiod of its validity, whichever is earlierC)Imprisonment for such offence may be extended for period of fiveyearD)Section 138 apply unless–the drawer of such cheque fails to makethe payment of the saidamount of money to the payee or, as the casemunotes.in

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may be, to the holderin due course of the cheque,within fifteen daysof the receipt of the said notice.a.(A) and (D)b.(B) and (C)c.(B),(C) and (D)d.Only (D)7.Negotiable instrument means a promissory note, bill of exchangeor cheque, payable to ___________a.Bearerb.orderc.either to bearer or orderd.neither bearer nor order8.Which of the below given sentence is proper as to considered to bewritten in negotiable instrumentsa.I promise to pay B rs.500b.Mr. B said, I. owe you Rs.1000.c.I am liable to pay you Rs.1000.d.none of the above.9._________ an instrument in writing containing an unconditionalundertaking signed by the maker to pay a certain sum of moneyonly to, or to the order of, a certain person or to the bearer of theinstrument.a.Promissory Noteb.bill of exchangec.Chequed.none of the above10.The parties of a bill of exchange area)drawee acceptor and payeeb)banker drawee and payeec)banker acceptor and payeed)banker drawer and payee11.Acceptance is _________________ in case of bill of exchangea)compulsoryb)optionalc)not compulsoryd)adequatemunotes.in

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12.If theinstrument is not ‘on demand’ ___________ days of grace isgranted.a)7b)5c)3d)413.when the is crossedwith Two parallel lines or with word ‘& Co.’etc. this crossing is known asa.general crossingb.special crossingc.restrictive crossingd.none of the above14.In case ofDishonourof a bill of exchange_______________________ is compulsory.a.notingb.protestingc.both noting & protestingd.neither noting nor protesting15.A cheque drawn in favour of x is crossed “not negotiable”.X endorses the cheque in favour of Y for valuable consideration.Y becomesa.A holder in due courseb.only a holderc.an assignee for the amount of chequed.the cheque can not be endorsed.16.The dishonour of Cheque is punishablefor a maximum term upto_____ years.a.1 yearb.5 yearsc.2 yearsd.4 years17.The Negotiation of instrument to any person receiving it by payingconsideration, before maturity & in good faith is termedas_______.a.Holderb.Holder In due coursec.(a) & (b)d.None of themmunotes.in

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 18.If a minor draws, indorses, deliver or negotiates an instrument,such instrument bindsa.All parties to the instrument including the minorb.Only the minor and no other parties to the instrumentc.All parties to the instrument except the minord.None of the above.19.In a promissory note, the amount of money payablea.Must be certainb.May be certain or uncertainc.Is usually uncertaind.none of the above20.Offences committed under theNegotiable Instruments Act can bea.Compoundableb.Non-compoundablec.Non-compoundable and non-bailabled.Bailablemunotes.in