01.

Definition of Agreement
When a person (promisor) offers something to someone else
(promisee), and the concerned person accepts the proposal with
equivalent consideration, this commitment is known as the
agreement. When two or more than two persons agree upon the
same thing in the same sense (i.e. Consensus ad idem), this
identity of minds is agreement. The following are the types of
agreement are as under:

 Wagering Agreement
 Void Agreement
 Voidable Agreement
 Implied Agreement
 Express Agreement
 Conditional Agreement
 Illegal Agreement.

It can also be defined as the contract which lacks enforceability by law is

known as the agreement.

Definition of Contract
To be precise, a legally enforceable agreement for doing or not
doing an act is known as a contract. A contract must contain
these elements: Offer and Acceptance, Adequate and
Unconditional Consideration, Free Consent, Capacity,
Lawful object, Certainty, Intention of creating legal
obligations, and the Agreement should not be declared void.
The contract may be oral or written. The major types of contract
are as under:

 Void Contract
 Voidable Contract
 Valid Contract
 Unilateral Contract
 Bilateral Contract
 Express Contract
 Tacit Contract
 Contingent Contract
 Implied Contract
 Executed Contract
 Executory Contract
 Quasi Contract etc.

1
Difference Between Agreement and
Contract
There is an old statement, “All contracts are an agreement,
but all agreements are not contracts” which implies that
agreement is different from a contract. Without knowing the
fact, we enter into hundreds of agreement daily, which may or
may not bound us legally. Those which bind us legally are known
as a contract, while the rest are agreement.

02. Definition and Essentials

of ‘Contract’
INTRODUCTION

The Contract Act (1872) provides the rules related to commercial

transactions. It determines the circumstances in which a is promise
made by the parties, to a contract, which is legally binding on them

According to Section 1 of the Contract Act (1872);

 It extends to the Whole of Pakistan

 It shall come in to force on the first day of September 1872
 Nothing herein contained shall effect the provisions of any
stature, act or regulation.

DEFINITION OF CONTRACT

According to Section 2 (h) of the Contract Act (1872);

An agreement enforceable by law is a contract.

Example;

If there is an agreement between A and B that A will construct a

house for B and B will pay 5 lakhs to A, the agreement is said to be
a contract,

ESSENTIALS FOR A VALID CONTRACT

Following are the essentials for a valid contract;

1. Proposal

2
According to Section 2 of the Contract Act (1872), when a person
signifies to another his willingness to do or to abstain (stop) from
doing anything, the view of obtaining the assent (approval) of that
other to such act or abstinence (stop), he is said to make a proposal.

There must be lawful proposal by one party to the other party for a
contract to be valid.

Acceptance

To constitute a contract, it is necessary that there should be

unconditional acceptance of the proposal by the competent person
or authority

3. Agreement

According to Section 2 (e) of the Contract Act (1872), every promise

and every set of promises forming the consideration for each other
is an agreement.

There should be an agreement between the two parties ie. Promisor

and promise

4. Written Form

It is necessary that agreement between the two parties should be in

written form and fully expressed

5. Lawful Agreement

Agreement between the parties must be lawful because unlawful

agreement cannot be enforceable by the law

According to Section 2 (g) of the Contract Act (1872), an agreement

not enforceable by the law is said to be void

6. Lawful Object

The object of the contract must not be; i

 Illegal or unlawful
 Immoral
 Opposed to public policy

7. Competency of the Parties

Parties performing the contract must be competent to enter into

contract

3
According to the Contract Act (1872), every person is
competent to contract who;

 has attained the age of majority

 Is of sound mind
 is not disqualified from contracting by the law to which he
is a subject to

8. Consideration

According to Section 2 (d) of the Contract Act (1872), when at the

desire of the promisor, the promise or any other person has done or
abstained (stopped) from doing or does or abstains from doing, or
promises to do or to abstain from doing something, such act or
abstinence of promise is called as consideration

Consideration is "something in return"

An agreement is invalid if it has been concluded without any

consideration of any unlawful consideration.

9. Free Consent

According to Section 14 of the Contract Act (1872), Consent is said

to be free when it is not caused by;

 Coercion
 Undue influence
 Fraud
 Misrepresentation
 Mistake

For a valid contract, it is necessary that the consent of the parties

must be free.

10. Certain and Definite

Contract must not be uncertain, and/'or indefinite where the

agreement is unreasonable or unclear and its meaning can't be
ascertained it shall be unenforceable.

11. Not declared void

According to Section 2 (5) of the Contract Act (1872), a

contract which ceases (end) to be enforceable by law becomes void
when it ceases to be enforceable.

Agreement must not have been declared void by any law enforced
in the country because a void agreement is not enforceable by law

4
CONCLUSION

To conclude, it can be said that an agreement become enforceable

by law when it fulfils some conditions.

04. Offer and Acceptance

Introduction The meaning of offer and acceptance is the basis of a
contract. To form a contract, there must be an offer made by one
party which is, in turn, accepted by another party, and then, in most
cases goods and/or services must be exchanged between the two.

Elements to an Offer
In contract law, the party making the offer is called the “offeror.”
Put simply, this is the person or company that has ownership in
some form of the goods and/or services being offered.
The other party to the agreement is called the “offeree.” This is the
person or company willing to pay the other party some form of
compensation in order to use or acquire ownership of the goods
and/or services. The result of this agreement is a legally binding
contract, which is usually, but not always, finalized through the
signatures of both parties.
There are two parts to any offer:

 The Expression: This is where the parties articulate in some

form an inclination to enter into a contract and to make that
contract legally binding upon the acceptance by both parties.
The expression may take a wide variety of forms, from a
personal discussion to a letter that lays out the basics of the
terms.
 The Intention: This is a slightly vaguer concept, and it is
often left up to the courts to determine whether or not
intention was breached by a party. Essentially, intention
involves a presumption by both parties that the agreement
will be legally binding and comes down to the belief that
neither party would begin discussions without the intent to
live up to their side of the bargain.

Elements to Acceptance
Acceptance is the final agreement of both parties to consent to the
terms of the offer. While it is common for the terms of the offer to
be negotiated before acceptance, if it can be shown that through
conduct and communications that the parties did in fact intend to

5
agree to the final terms of the contract, then formal acceptance of
an offer is not required for it to be legally binding.
A promise or act on the part of an offeree indicating a willingness to
be bound by the terms and conditions contained in an offer. Also,
the acknowledgment of the drawee that binds the drawee to the
terms of a draft.
Unilateral contract
A unilateral contract is created when someone offers to do something "in
return for" the performance of the act stipulated in the offer. In this
regard, acceptance does not have to be communicated and can be
accepted through conduct by performing the act. Nonetheless, the person
performing the act must do it in reliance on the offer.

05. Lawful Object and Consideration

Introduction
For a contract to be a valid contract two things are absolutely essential
– lawful object and lawful consideration. So the Indian Contract
Act gives us the parameters that make up such lawful consideration
and objects of a contract. Let us take a look at the legality of object
and consideration of a contract.

Lawful Consideration and Lawful Object

Section 23 of the Indian Contract Act clearly states that

the consideration and/or object of a contract are considered lawful
consideration and/or object unless they are

 specifically forbidden by law

 of such a nature that they would defeat the purpose of the law

 are fraudulent

 involve injury to any other person or property

 the courts regard them as immoral

 Are opposed to public policy.

So lawful consideration and/or lawful object cannot contain any of the
above. Let us take a more in detail look at each of them.

6
1] Forbidden by Law
When the object of a contract or the consideration of a contract is
prohibited by law, then they are not lawful consideration or object
anymore. They then become unlawful in nature. And so such a
contract cannot be valid anymore.

2] Consideration or Object Defeats the Provision of the Law

This means if the contract is trying to defeat the intention of the law.
If the courts find that the real intention of the parties to the
agreement is to defeat the provisions of the law, it will put aside the
said contract.

Say for example A and B enter into an agreement, where A is the

debtor, that B will not plead limitation. This, however, is done to defeat
the intention of the Limitation Act, and so the courts can rule the
contract as void due to unlawful object.

3] Fraudulent Consideration or Object

Lawful consideration or object can never be fraudulent. Agreements
entered into containing unlawful fraudulent consideration or object
are void by nature. Say for example A decides to sell goods to B and
smuggle them outside the country. This is a fraudulent transaction as
so it is void. Now B cannot recover the money under the law if A does
not deliver on his promise.

4] Defeats any Rules in Effect

If the consideration or the object is against any rules in effect in the
country for the time being, then they will not be lawful consideration
or objects. And so the contract thus formed will not be valid.

5] When they involve Injury to another Person or Property

In legal terms, an injury means to a criminal and harmful wrong done
to another person. So if the object or the consideration of the contract
does harm to another person or property, this will amount to unlawful
consideration. Say for example a contract to publish a book that is a
violation of another person’s copyright would be void. This is because
the consideration here is unlawful and injures another person’s
property, i.e. his copyright.

6] When Consideration is Immoral

If the object or the consideration are regarded by the court as
immoral, then such object and consideration are immoral. Say for

7
example A lent money to B to obtain a divorce from her husband C. It
was agreed once B obtains the divorce A would marry her. But the
court passed the judgement that A cannot recover money from B
since the contract is void on account of unlawful consideration.

7] Consideration is opposed to Public Policy

For the good of the community, we restrict certain contracts in the
name of public policy. But we do not use public policy in a wide sense
in this matter. If that was the case it would curtail individual freedom
of people to enter into contracts. So for the purpose of lawful
consideration and object public policy is used in a limited scope. We
only focus on public policy under the law.

So let us look at some agreements that are opposed to public policy,

1. Trading with the Enemy: Entering into an agreement with a

person from a country with whom India is at war, void be a void
agreement. For example, a trader entering into a contract with a
Pakistani national during the Kargil war.

2. Stifling Prosecution: This is a pervasion of the natural course of

law, and such contracts are void. For example, A agrees to sell
land to B if he does not participate in the criminal proceedings
against him.

3. Maintenance and Champers: Maintenance agreement is when a

person promises to maintain a suit in which he has no real
interest. And champers is when a person agrees to assist another
party in litigation for a portion of the damages or proceeds.

4. An Agreement to Traffic in Public Offices

5. Agreements to create Monopolies

6. An agreement to brokerage marriage for rewards

7. Interfering with the Courts: An agreement whose object is to

induce a judicial or state officials to act corruptly and interfere
with legal proceedings

06. Capacity to enter into Contract

INTRODUCTION

The word capacity in common law means the *ability", , so the

capacity of the contract means the ability of the parties to enter into
the contract that forms legally binding relations with each other. If
any party fails or is incapable to perform the conditions agreed by

8
the parties to contract, then the contract becomes invalid. So, the
capacity of the parties is an essential element of a valid contract.

Example

A minor who is unable to understand the terms and conditions of the

contract, such person is in capable to enter into the contract. This is
a capacity of a party.

WHO IS COMPETENT TO CONTRACT?

According to the Contract Act of 1872

"Every person is competent to contract who is the age of majority,

according to the law he is subject to, and who is of the sound mind,
and is not disqualified by the law from contracting by the law which
he is subject to.

(i) THE Age Of Majority

According to Sec 3 of the Pakistan Majority Act, "Every person

who is living in Pakistan attained the age of majority on his
completing the age of 18 years."

 For entering into the contract, if a person who is a day less

than attaining the age of majority, he is said to be an
incompetent person to contract,
 A minor is incapable of understanding the terms and
conditions of a contract. Hence, any agreement made with the
minor is null and void.

Example

Ahmed is a minor, he gave his property to moneylender for attaining

the loan of Rs.50, 000/- Now Ahmed's mother sent a letter to the
moneylender declaring that is son is a minor. So, the contract
between them is null and void.

Effects of Minor agreements

(a) Agreement with minor is void

(b)Minor can be beneficiary of contract

A minor is not competent to contract but for any contract which is

made in the favor of the minor is not invalid.

(c) Minor as major

9
Suppose a minor made a contract with another person pretending
that he is a major person and competent to enter into a contract
then the contract is void and minor is not liable to this.

(d) Payment of void agreement

A minor cannot be compelled to repay, or pay back the money

received by him under an agreement which is void,

(ii)SOUND MIND

According to the Contract Act of 1872, "A person is said to be of

sound mind who can understand the terms and conditions and who
is capable of making a rational decision with the effects of
conditions mentioned in a contract."

(I The sound mind person enters in to a contract that is of

occasionally a sound mind person. This means the person who is of
sound mind for some time and later is of unsound mind, for some
period.

The person of unsound mind includes; Lunatics, Idiots, Intoxicated or

Drunkards

(iii) PERSON DISOUALIFIED BY THE LAW

A person is disqualified or barred from entering into a contract by

the law of the land. Contract made by or with the person who is
disqualified by the law is void. Following are the examples of
disqualified persons:

(i) Alien enemy

There can be no contract with the person who belongs to the foreign
country, and war has been declared in that country.

Example

If there is a war between Pakistan and India, the person from India
wants to contract with the person from Pakistan.

(ii) Prisoners

A person who is in the prison cannot enter into a contract unless or

until completion of his sentence.

(iii) Corporation

10
A corporation cannot make contract personally because it is an
artificial personality.

(iv) Insolvent

An insolvent person is the person who is financially incapable to pay

bills or obligations. He is a bankrupt. So, there cannot be a contract
with an insolvent person.

(v) Government

The contract with the government must complete with certain

formalities, if such formalities are not fulfilled then the contract
would be void.

08. Free Consent and its Scope

INTRODUCTION When parties enter into a contract must give an
offer and acceptance at their own will without any external pressure
of forces.

CONSENT

According to Contract Act,

"Two or more person are said to have consented when they agree
upon something,

FREE CONSENT

According to Contract Act,

The consent is said to be free when it is not caused by;

 Coercion

 Undue influence

 Misrepresentation

 Fraud

11
  Mistake

1. COERCION

The coercion is committing or threatens to commit or any act which is

forbidden by Pakistan Penal Code, or unlawful detaining
(confinement) or threat to detain any property of any person to force
him to enter into an agreement.

Example

A person forces his father that if he will not sign the property papers
then he will kill his father. Thus the above example is amounting to
coercion and the contract which is signed under coercion is voidable
contract

2. UNDUE INFLUENCE

A contract is said to be influenced by undue influence when the

relations between the parties are such that one party is dominating
on the will of another and uses that position to obtain an unfair
advantage,

Example

A doctor is in the dominant position with the relation to his patient

and here the doctor influences the patient to sign papers for the
operation. The doctors influence the patient to sing paper and the
patient is under undue influence

3. FRAUD

The fraud includes any of the following acts committed by a party or

his agent to deceive another party or his agent;

 The suggestion which is not true

 Active concealment of the fact

 A promise made without any intention of performing it

12
  Act or omission fitted to deceive

 Any such act or omission which is declare fraud by law

Example

*A' sells a horse to *B° but the horse is unsound and *A" said nothing
to *B' that the horse is not a sound mind. Here, *A" makes a fraud,

4. MISREPRESENTAION

This means one party presenting false representation of facts without

any wrong intention or to deceive the other party. The party who
presented the false fact is innocent because they believed facts to be
true.

Example

*A' sold his radio to "B' in good condition as "A' was not using it for a
long time. After sometime, the radio stopped working as "A' believed
the radio to be in good condition. So, *A' did not deceive B

5 MISTAKE

When one of the parties in the contract has given his consent to the
contract under some kind of mistake, misunderstanding or
misrepresentation then the consent is said to be given in mistake.

Example

*A' wanted to do contract with B' but mistakenly signed a contract

with *C' as he believes C' as’ B

Kinds of Mistake

(i) Mistake of Law

When the party has any misunderstanding with views to the law

Example

13
A person comes from USA deals with some drugs in Pakistan but he
did not know about the laws of Pakistan on drugs.

(ii) Mistake of Fact

It is when the party has any misunderstanding regarding the facts,

terms and conditions of contract and subject matter of the contract.

09. Discharge of Contract

INTRODUCTION

Discharge of the contract means the end of the contract. It is defined

as the termination of the contract or agreement by contracting parties
due to failure in the performance of the contractual obligations
agreed during the formation of the contract. There are various modes
of discharge of contract.

MODES OF DISCHARGE OF CONTRACTS

1. BY PERFORMANCE

 It means when the contracting parties perform (complete) their

contractual obligations within the stipulated (fixed) time.

 When the contracting parties refuse to perform their obligation,

then the contract is discharged

The discharge of the contract by performance has two categories

(1) Actual Performance

When the contracting parties refuse to perform their contractual

obligations then the contract comes to an end. This is an actual
performance

14
(ii) Attempted Performance

When the contracting parties complete their contractual obligation

then the contract automatically comes to an end and is discharged by
performance

2. BY MUTUAL AGREEMENT

When the contracting parties mutually agrees to cancel, alter or

modify the contract then the contract is discharged by mutual
agreement between the parties. If both the contracting parties are not
willing to perform the terms and obligations of the contract then the
contract is mutually discharged

Example *A' promises to sell his house to 'B' for a certain amount.
Both mutually agreed and then cancel the agreement

Types

(i) Novation

Novation of contract means cancellation of original contract and

replacing the original contract with a new contract between same
contracting parties

(ii) Rescission (Cancellation)

The parties are agreed to cancel the contract with mutual

understanding

(iii) Alteration

The contracting parties can alter the terms and conditions of the
contract cither wholly or partly with mutual consensus

(iv) Waiver

It means surrendering the rights. When one party to the agreement

postpones his rights, the agreement is released

3. BY IMPOSSIBILTY OF PERFORMANCE

15
When there is impossibility for the contracting parties to perform the
obligations agreed in the contract, then the contract is discharged,
The impossibility to perform the contractual obligation may arise due
to;

 Destruction of subject matter

 Change of Law

 Non-existence of essential thing

 Incompetent person

 Declaration of War

4. BY OPERATION OF LAW

A contract may be discharged by operation of law that includes the

following circumstances

 Death of the person selected due to personal talent and skill

 Insolvency

 Alteration without consent of other party

5. BY LAPSE OF TIME

When the contract is to be performed within stipulated time as agreed

by the contracting parties and if one of the parties could not perform
the contractual obligations within the prescribed time, then the
contract is discharged due to lapse of time

6. BY BREAH OF CONTRACT

16
Discharge of contract by breach of contract means termination of the
original contract or the contracts comes to an end because of the
failure of the performance of contractual obligation

10. Breach of Contract and remedies

INTRODUCTION

The parties to the contract are legally expected to perform their

obligations which they promised in the contract, when any party
breaks the promise or agreement then it is known as breach of
contract. Party who is breaching is called as Defaulting Party and the
other party is called as Aggrieved Party. Remedy means the right to
take action against the party who breaches the contract. The
provisions relating to the remedies for breach of contract are given
under Section 73-75 of the Contract Act, 1872.

TYPES OF REMEDIES FOR BREACH OF CONTRACT

There are 05 types of remedies for the breach of contract

1. Recession of Contract

The recession of the contract means when one of the contracting

parties fails to perform their contractual obligations then the other
party can also refuse to perform the contractual obligation in the
contract

The party who rescind (refuses) the contract and gain profit from the
agreement, must restore such benefit whereas if any loss is caused to
the other party due to refusal of the contract then the compensation
must be given

Example 1

*A' contract with *B' to provide/deliver him 250kg of rice before the
first day of May, but he only delivers 130kg of rice before that day
and none after B' retains the 130kg of rice after the first day of May.
Now, B is bound to pay *A1 for 130kg of rice.

Example 2

17
*A' contracts with B' that if 'A' practices with a surgeon in Peshawar
then he will pay 50,000rs to 1B* now *A' practices with the surgeon
but the surgeon has to move to California before completion of a year.
Now, B' is entitled to take a compensation of 50,000rs from *A

2. Suit for Damages

If one contracting party suffered any damages or loss due to non-

performance of the other party to the contract then the aggrieved
party can claim the compensation for loss or damages he/she caused.
The other party has the right to claim for compensation by suit for
damages against the other party.

Example

A' promises to deliver 1000 cycle tires to 'B' at Rs 50 each to 'B' on 01

May 2020 but Does not perform his promise on that date. In such
circumstances, if the price of the cycle tire on 01* May is Rs 55 then
"B' is entitled to claim damages at Rs 05 per tire from A and can sue
for such damage

3. Suit for Specific Performance

When the contracting party failed to perform their promise then the
other party can file a suit for specific performance of contract. It is the
duty of the contracting party to perform their obligations agreed upon
during the formation of the contract. In this situation, the court may
observe that if due to non-performance of contract the other party
suffers huge loss and if that cannot be compensated

Example

*A' is looking for a house in the locality for his residence and finds
one. He contracts with the owner B' to buy the house and later "B'
refuses to sell the house to A'. In this case the damages from *B' is
not an adequate remedy for *A' because damages will not able to
have the type of house he wants in the locality

4. Injunction

The term injunction means restraining the person from performing a

certain act. Injunction is always passed by the court. The court may

18
grant an order of injunction to stop the contracting party from
performing something that he promised not to do

Example

A film actress agreed to act exclusively for a specific producer for a

year and not act for any other producer. During the year, she
contracted to do an act for another producer. It was held that she
could be restrained by injunction from doing so

5. Quantum Meruit

It means as much as earned. At time, when one party of the contract

is prevented from finishing his contractual duties by other party he
can claim Quantum Merit. It means the other party must pay a
reasonable payment of services that are already performed

Example

"A' promises to construct a house for "B' for 500,000rs. After 'A' has started construction,
but before its completion 'B' abrogates the contracts and stops 'A' from work. In such
situation, 'A' can sue for an adequate compensation for the work that he has already done
and can also sue for damages.

11. CONTRACT OF GUARANTEE

Introduction

According to Section 126 of the Contract Act 1872, contract of

guarantee is a contract to perform the promise, or discharge the
liability, of a third person in case of his default.

Example

A requests B to give Rs. 50,000 to C, and guarantees that C will repay

the amount within a year. If C does not, a he will pay the amount to B.
This contract would be a contract of guarantee,

Parties to Contract of Guarantee

• There are three parties to the contract of Guarantee i.e. Surety,

Principal debtor and Creditor.

19
• The person who gives the guarantee is called the surety.

• The person in respect of whose default, the guarantee is given is

called the principal debtor •

The person to whom the guarantee is given is called the creditor.

Purpose of Contract of Guarantee

• The purpose of a contract of guarantee can be one of the following:

For the security of a loan given to a party,

For the assurance of good conduct and honesty of an employee in

service contracts,

For the indemnity of a third party from loss resulting from the non-
payment of a debt.

Discharge of liability of surety in contract of guarantee;

1. Notice of Revocation:

The continuing guarantee may be revoked at any time by the surety

as to future transactions by notice to the creditors.

• Specific guarantee cannot be revoked as it is for specific

transaction/debt.

Example: If A took guarantee of B for one year, for six months he pay
to creditor on the behalf of principal debtor and then he can revoke
his continuing guarantee for next six months.

2. Death of Surety:

The death of the surety operates, in the absence of any contract to

the contrary, as a revocation of a continuing guarantee, so far as
regards future transactions The estate of deceased surety is,
however, liable for those transactions which had already taken place
during the lifetime of the deceased.

20
3. by variance in terms of contract

Where there is any variance (changes) in the terms of contract

between the Principal debtor and creditor without surety's consent, it
would discharge the surety in respect of all transactions taking place
subsequent to such variance.

Example: A becomes surety to C for B that B will pay his debt before
20th March 2023. If he fails to pay then A will pay the debt to C. Later
on B and C decided that the time limitation increase to 20th May 2023
without the consent of A now A is discharged from the surety to C for
B.

4. By release/ discharge of principal debtor:

The surety is discharged by any contract between the creditor and

the Principal debtor when the Principal debtor is released from the
contract, or by any act or omission of the creditor, the legal
consequence of which is the discharge of the Principal debtor.

5. Creditor's act/omission impairing surety's eventual remedy

It is the duty of the creditor not to do any act which is inconsistent

with the contract which would result in the impairment of the remedy
of the surety to recover the amount from the principal debtor after
repayment.

Circumstances in which surety cannot be discharged:

1) If the creditor enters into an agreement to give time to principal

debtor with any other third party who is not the party of the contract,
it does not discharge the surety from his liability because the contract
is still between creditor and principal debtor and the liability of surety
is still present.

Example: A is creditor B is principal debtor and C is surety and there

is contract between these parties. B fails to pay the money and A
contracted with third party D that he will give the time to B to pay his
money. Now the surety cannot be discharged.

2) The patience of creditor to sue the principal debtor will not

discharge the liability.

21
Example: A is creditor B is principal debtor and C is surety and B has
to pay some money to A and A is not suing B in the court then the
surety's liability not discharge in this case.

3) Where there are co-sureties and all divided there liabilities and if the
creditor release one of the surety. This release does not discharge the others
from the liabilities they will perform their part for the contract

12. Contract of indemnity

Introduction

According to Section 124 of the Contract Act 1872, "A contract by

which one party promises to save the other from loss caused to him
by the conduct of the promisor (ie. the indemnifier) himself, or by the
conduct of any other person, is called a contract of indemnity.

Example

Amit contracts with Rajesh that he will indemnify Rajesh against the
consequences of proceedings which Rahul may take against Rajesh. If
Rajesh has to pay 20,000 as a consequence of such proceedings, Amit
will have to pay that amount because he has promised to indemnity
Rajesh.

Parties to Contract of Indemnity

There are two parties to the contract of indemnity i.e. Indemnifier and
Indemnity holder

• The person who promises to protect another from a loss is called the
indemnifier,

• The person who is so protected is called the indemnity holder.

Contract of indemnity versus other contracts:

A contract of indemnity is like any other contract and must fulfill all
the essentials of a valid contract, e.g., consideration, free consent,
competency of parties, lawful object etc.

22
Example: X asks Y to burn the house of z promising to compensate Y
against the consequences. Y sets the house of Z on fire and is fined
Rs. 10,000. Y cannot recover the amount from X as the object of the
contract is not law full. Contract of indemnity, express or implied:

• A contract of indemnity may be express or implied. An express

contract can be by word of mouth or written. On the other hand, an
implied contract is apparent from the circumstances of the case.

Example, an act done by A on the behalf of B. For example, an agent

is indemnified by the principal for all lawful acts done on his
(principal's) behalf.

Rights of Indemnity holder

Section 125 enumerates the rights of an indemnity holder in a

contract of indemnity. An indemnity holder can recover from the
indemnifier.

1. All damages which he may be compelled to pay under the contract

in any suit.

2. All costs he may be compelled to pay in any such suit.

3. All Sums which he may have paid under the terms of any
compromise of any such suit, (All compensation which is set outside
the court between parties).

An indemnity holder shall be entitled to all these rights provided he

acts within the scope of his authority.

Rights of Indemnifier:

The Contract Act 1872 is silent on the rights of the indemnifier but, as
per the provisions of Section 141 and various court verdicts, the rights
of the indemnifier are similar to the rights of a surety, which are as
under

1. An indemnifier, after he has paid the damages under an indemnity,

recovers the rights he had delegated to the indemnified. But he gets
these rights only after he has paid the damages and not before.

23
2. If the indemnifier has indemnified the indemnity holder, he gets the
right to sue third parties on behalf of the indemnified.

3. If the indemnified suffered any damages which are not covered by

the contract of indemnity, the indemnifier is not bound by law to pay
such damages.

4. The indemnifier is entitled to sue third parties only to the extent of

the damages he has paid to the indemnified.

13. CONTINGENT CONTRACT

Definition

A contingent contact is a contract to do or not to do something, if any

event, collateral to such contract does or does not happen'

Example: A contracts to sell his car to B, if B's car got accident.

•It depends on happening or not happening of future uncertain event.

• Contingent contract is a sort of conditional contract that depends on

stipulated uncertain event.

Essentials of Contingent Contract:

 Uncertain future event.

 Future event must be collateral to the contract.

 Stipulated condition must be fulfilled for creation of contract's

obligations.

 Condition to be precedent.

Rules of Enforcement of Contingent Contract

1. Enforcement of Contracts contingent on happening of an event. If

the event becomes impossible, the contract becomes void

24
Examples: A contracts sell his property to B, if B got married with A's
daughter. Here contract can only be enforced if B marries A's
daughter otherwise it cannot. And if A's daughter dies before
marriage so it becomes impossible hence void contract.

2. Enforcement of Contracts contingent on non-happening of

an event.

It can only be enforced, if stipulated condition does not happen.

Example: A agrees to pay B a sum of money, if a certain ship does

not return. The ship is sunk.

The contract can be enforced.

3. Contracts dependent upon the contingency linked to the

human conduct.

Where a contract is contingent as linked to the human conduct and

such person does any such act which renders it impossible to come
upon the contingency.

Example: A agrees to pay B a sum of money if he marries C. C

marries D. The marriage of B and C now deemed to be impossible,
although it is possible that D dies and C may afterwards marry B.
many C marries D

4. Enforcement of Contracts contingent on Happening or non-

happening of an event within fixed time.

Where the contingent element of contract that requires happening or

non-happening of an event within specified time, and such thing do
not occur so within the time fixed or becomes impossible before or
after expiry of stipulated time. The contract is void.

Example: A promises to pay B a sum of money if a certain ship

returns within a year. The contract may be enforced if the ship returns
within year, and the contract is void if the ship is burnt within year.

Bailment

25
CONTRACT OF PLEDGE/PAWN (SECTION 172)

Definition

The bailment of goods as security for payment of a debt or

performance of a promise is called "pledge". Only possession is
transferred and not the Ownership.

The person transferring the possession of goods is case called "Pawn

or"/'Pledger"'

The Person obtaining the possession of goods is called "Pawnee"/

Pledgee

Essential elements of the Pledge

• There shall be a bailment for security against payment or

performance of the promise, • The subject matter of pledge is goods,

• Goods pledged for shall be in existence,

• There shall be the delivery of goods from pledger to pledge

There is no transfer of ownership in case of the pledge.

RIGHTS OF PAWNEE

1. Right of retain;

• The Pawnee has the right to retain the goods pledged with him until
he is paid

2. Right to extraordinary expenses:

The Pawnee has the right to recover extraordinary expenses incurred

by him for the preservation of the goods pledged. However, he has no
right to retain the goods in case of non-payment of extraordinary
expenses, he can only sue to recover them

PAWNEE'S RIGHT WHERE PAWNOR MAKES DEFAULT

26
Where the pawnor fails to retrieve his pledge, the Pawnee can
exercise the following rights: He may file a suit against the pawnor
upon the debt or promise and may retain the goods pledged as a
collateral security.

He may sell the goods pledged, after giving the pawnor a reasonable
notice of the sale. He can recover from the pawnor any deficiency
arising on the sale of the goods by him, But if there is any surplus, he
must pay it to the pawnor.

DUTIES OF PAWNEE

1. Take reasonable care:

The Pawnee must take care of goods pledged as a man of ordinary

nature would take care of his own goods.

2. Not to use the goods.

The Pawnee has no right to use the goods. However, he may use the
goods, if he has been so authorized by the pawnor.

3. Not to mix goods:

The pawnee must not mix his own goods with the goods pledged.

4. Return the goods:

The pawnee must return the goods, if the pawnor pays the debt or
performs his promise.

5. Return increase in goods:

The Pawnee must return to the pawnor any accretion to the goods
pledged with him

DUTIES OF PAWNOR

1. Duty to pay the loan

27
• It is the duty of the pawnor to pay the amount back to the Pawnee
so that he will get his goods back.

2. Duty to pay extraordinary expenses incurred by Pawnee.

• It is the duty of the pawnor to pay the extraordinary expenses to the

pawnee, which the Pawnee incurred in keeping the goods safe.

15. CONTRACT OF AGENCY

Definition of Agency; Such source which creates relationship

between principle and an agent is called agency

Parties to agency:

Following are the two parties in the contract of agency

1. Principal: Principal is a such person who is being represented

before the third party by the agent

2 Agent: A representative of an agency who acts on the behalf of

another person (Principal) in order to legally bind the third party in
particular business

According to Section 182 of the Contract Act, 1872 *An agent is a

person employed to do an act for another or represent another in
dealings with third persons." • The person for whom such act is done,
or who is represented, is called the 'principal'

Classification of Argents

1. Special / Particular Agent

2. General Agent,

28
3. Non-mercantile Agent

4. Mercantile Agent

5. Sub-agent

(1) Special / Particular Agent

Special Agent has only authority to do some particular act or

represent his principal in some particular transaction.

For Example, Special agent appointed to sell a property. A special

agent does not represent the principal, and is not liable to him, for
any deal other than for which he is appointed

(2) General Agent

General agent is appointed to do all acts concern to a business or

industry. A general agent for a textile business would be authorized to
do all acts concerning such business.

(3)Non-mercantile Agent

An agent operates on behalf of the principal in doing such acts which

are not concerned with business but are connected to the rights and
obligations of the principal

For Example, a law agent advises his principals on legal matters, or

an estate agent is concerned with matters or immovable property

(4) Mercantile Agent

An agent who represents the principal in commercial transactions is

called a mercantile agent

Following are types of mercantile agents;

Factor

29
• A factor is a mercantile agent to whom possession of goods is given
for sale. He usually sells the goods in his own name, and is
remunerated for his service in selling the goods

• He has the authority to issue receipts of payment for the goods in

his own name, and can initiate legal proceedings against defaulters in
payment. He has the right of general lien on the goods in his
possession for any consideration he might have to receive from the
principal. He cannot pledge the goods

Broker

• A broker is an agentywho is employed to make contracts for the

purchase and sale of goods for a commission called brokerage.

• A broker is an agent for both the buyer and the seller. He is not
given the possession of goods and, as such, does not have a lien.

• A broker cannot initiate any legal proceeding in his own name

• He makes contracts in the name of his principal and not in his own
name. Auctioneer

• An auctioneer is an agent appointed by a seller to sell his goods at

public auction for payment.

• An auctioneer is primarily the agent of the seller but after the sale
has been made, he also becomes the agent of the buyer. He is like a
factor except that he has only a particular lien on the goods for his
charges. An auctioneer has the right to sue in his own name for the
price of goods

sold

Commission Agent

- A commission agent is one who is employed to buy or sell goods for

his principal. For such activity, he receives his remuneration or reward
in the form of a commission

• He buys and sells goods in the market in his own name.

30
• A commission agent may or may not be in actual possession of the
goods.

Del Credere Agent

A del credere agent is one who, for an extra commission called del
credere commission guarantees the principal that, if the person
buying goods on credit defaults in his payment, he would make the
payment himself

• A del credere agent is appointed generally when the principal deals

with persons about whom he knows nothing.

Banker:

The relation between a banker and a customer is either that of debtor

and creditor or of an agent and principal.

• When the bankers advances money to his customer as a loan ,

banker is the creditor and customer is the debtor, Pago

• But the banker acts as an agent of his customer when he buys or

sells securities, collects cheques, dividend, bills, etc on behalf of his
customer

(5) Sub- Agent

An agent derives his authority directly from the principal. A Sub-agent

is a person who does his work under the control of the agent. He
derives his authority from the agent. He also gets remuneration from
him

RIGHTS OF AGENT

1- Right of Wage

Agent has the right to give lawful charges to him for providing
services against the contract of agency

2. Right of possession

31
Agent has right to keep the possession of the property of the principle
until that principle pays lawful charges to the agent

3. Right of commission

Agent has right of commission upon the thing which is under his
possession

4. Right of compensation

Agent has right to receive compensation from the principle for any
loss during the completion of the purpose

5. Right of security

Agent has right to receive the amount of security from principle for
any loss likely to be possible

6. Right of expenses

Agent has right to recover all the expenses which has been expensed
during the completion of the purpose

7. Right of stoppage

Agent has right to stop the process of delivery of goods

DUTIES OF AN AGENT

Following are the duties of an agent

1. Obey the instructions

It is the duty of an agent to obey the instructions of the principle

otherwise he will be held responsible for any loss

2. Use of skills and knowledge

It is the duty of an agent to use his skills and knowledge for

furtherance of the business of the principle

32
3. Should not make any secret profit

It is the duty of an agent that he should not make any secret profit
from the business of principle

4. Return of profit

It is the duty of an agent that if he earned the profit from the business
he should return it to principle

5. Payment of all sums

It is the duty of an agent to pay all amounts received on his amount

from the business of principle

6. Showing of accounts

It is the duty of an agent to show his account on the demand of the

principle

7. Separate accounts

It is the duty of an agent to maintain his accounts and keep them

separate from principle accounts and not to mix them

8. Duty in case of principle die or become insane

It is the duty of an agent in case of death or insanity of the principle

that he should protect the interests of his legal heirs

9. Delegation of authority

It is the duty of an agent that he should not delegate his authority to

any other person without the consent of the principle

10. Communicate with principle

It is the duty of an agent to communicate with principle and share all

the information with him related to matters of business

33
11. Performance with honesty

It is the duty of an agent that he should deal the business honestly. If

he deals the business dishonestly then he is not entitled to receive
the wage of his services

12. Conducting business

It is the duty of an agent to conduct the business of principle

TERMINATION OF AUTHORITY OF AGENT

Following are the ways by which authority of an agent gets

terminated

1) In case of death of principle

2) In case of death of agent

3) In case of insanity of principle

4) In case of insanity of agent

5) If agent gives up of the business

6) In principle becomes bankrupt

7) In case of destruction of the subject matter of the business

8) In case of expiry of the time

10) Preclude Remarks

An agent is authorized to create a contract between the third party

and principle and he plays his role as middle person in the contract of
agency. Agent act on the behalf of principle and his authority can be
terminated by principle at any stage or any time without any reason
because all powers are vested in principle. Actually agent has no
powers but there are a different kinds of agents according to their
authorities.

34
35