CLAT-PG Course

Contract Law

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Contract law is fascinating as most people have knowingly or unknowingly formed a legally
binding contract at some point in their life. Therefore, the learners have to give importance
to this subject, for CLAT PG and otherwise.

Contract Law is a practical subject. The contents of this module is made in such a way that
each and every illustration is significant and can’t be skipped. All the concepts, theories and
principles should be given equal importance, along with the case laws and examples. We
have also given pro tips at different segments.

How to study

● The learner should first just go through the content once to get an overview of the
topics provided in the content and get familiarized with all.

● In the second reading, the learner should try to understand the concepts.

● Special efforts have been made to help the learners understand the concepts through
illustrations.

● It is a general practice of the CLAT PG to ask practical questions on various theories

of contract law.

● After the third reading, the learner will be expected to be well versed with all the
contents, and should then focus on multiple revisions.

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 Table of Content

Table of contents......................................................................................................................... 3

What is a Contract?.....................................................................................................................3

According to Salmond-................................................................................................... 4

Communication when complete:...............................................................................................5

We will understand this with the help of the following illustration:...................................... 5

Essentials of a contract............................................................................................................... 6

g. Lawful Object................................................................................................................... 16

h. Contract not expressly declared void............................................................................. 17

Privity of Contract......................................................................................................................17

Contingent and Wagering Contract......................................................................................... 19

Discharge of Contract................................................................................................................ 21

Indemnity and Guarantee......................................................................................................... 31

Bailment and Pledge..................................................................................................................33

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 What is a Contract?

Contract is derived from a Latin word ‘Contractum’, which means ‘to bring together’.

According to Salmond-

“A contract is an agreement creating and defining obligation between two or more persons
by which rights are acquired by one or more to acts or forbearance on the part of others”

The Law of Contract is based on the principle laid down in the Latin phrase ‘Pacta Sunt
Servanda’ which means ‘Agreements must be kept’.

The Indian Contract Act, 1872 came into force on September 01, 1872. As per Section 2(h)
of the Indian Contract Act, 1872, ‘An agreement enforceable by law is a Contract.’

Let’s understand this, with the help of a pyramid and few equations:

Every Contract is an Agreement but every Agreement is not a Contract.

Hence, Agreement is a wider term than Contract.

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 Communication when complete

As per Section 3 of the Indian Contract Act, 1872, “the communication of proposals, the
acceptance, and the revocation of proposals and acceptances, respectively, are deemed to be
made by any act or omission of the party proposing, accepting or revoking, by which
he/she intends to communicate such proposal, acceptance or revocation, or which has the
effect of communicating it.” As per Section 4 of the Indian Contract Act, 1872, “The
communication of a proposal is complete when it comes to the knowledge of the person to
whom it is made”.

We will understand this with the help of the following illustration:

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 Essentials of a contract

As per Section 10 and other provisions of the Indian Contract Act, 1872, the following are
the essentials of a valid contract:

● Valid Offer

● Communication of Acceptance

● Intention to create a legal relationship

● Lawful Consideration

● Competency of parties

● Free consent

● Lawful Object

● Not expressly declared void

a. Valid Offer

Under Section 2(a) of the Indian Contract Act,1872 when a person expresses his
willingness to another person to do or to abstain from doing something in order to
obtain the consent of such expression, it is called an Offer.

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 Though an offer may be made to the whole world, a contract can arise only by
acceptance of the offer. Knowledge of the terms of the offer is essential for
acceptance.

There are also cases of general offers of a continuing nature.

In the case of Lalman Shukla v. Gauri Dutt1, a person had sent his servant in search of
his missing boy and subsequently offered a reward to anyone who would find a boy. The
servant on finding the boy, could not claim the reward, as his search for the boy could not
be regarded as a consideration for the promise of reward. Hence, the Allahabad High
Court confirmed that mere knowledge of an offer does not imply acceptance by the
offeree. The offer must be communicated to the offeree.

One of the landmark judgments is Carlill v. Carbolic Smoke Ball Co.2 where Carbolic
Smoke Ball Co. promised in an advertisement to pay 100 pounds to any person who
contracts the flu after using a smoke ball. Mrs. Carlill saw the advertisement and
purchased one of the smoke balls. She used it as per the instructions given by the
Company but ended up contracting the flu. The question that arose was whether there
was a binding contract between the smoke ball company and Mrs. Carlill and whether she
was entitled to claim the reward of 100 pounds from the Company.In this case, it was held

1
(1913) 11 AQLJ 489
2
(1892) 2 QB 484

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that the offer made by the Company was a unilateral offer “offers to anybody who performs
the conditions named in the advertisement, and anybody who does perform the condition
accepts the offer” and was binding on the Company, even though it was not made to
anyone in particular. It was further held that for a continuing offer, the notification of
acceptance did not have to precede the act of performance.

However, the exposure of goods by a shopkeeper does not amount to an offer to sell. On
picking the goods, it is an offer by the customer to buy and sale is not affected until the
buyer’s offer price is accepted by the shopkeeper. [Pharmaceutical Society of Great
Britain v. Boots Cash Chemists (Southern) Ltd., (1952) 2 QB 795]

b. Communication of Acceptance

Under Section 2(b) of the Indian Contract Act, 1872 when the person to whom a
valid offer is made signifies his assent to the proposal, it becomes an acceptance.
An accepted offer is a Promise.

There must be an absolute, unconditional and unqualified acceptance. When the

acceptor adds in a new condition while accepting, the agreement already signed by
the proposer is not complete until the proposer accepts the condition.3 An
acceptance with a variation is no acceptance, it is simply a counter offer which
must be accepted by the original promisor before a contract is created.4

The acceptance of a promise can be in express terms or in implied terms. In the

case of Rakesh Kumar Dinesh Kumar v. U.G. Hotels and Resorts Ltd.5, M/s.
Rakesh Kumar Dinesh Kumar claiming itself to be a Hindu Family Trading Firm
filed the present suit for recovery of Rs. 12,23,250/- on account of principal and
interest from the defendants. The suit was filed through Rakesh Kumar who is

3
Haridwar Singh v. Begum Sumbrui [AIR (1972) SC 1942]
4
Haji Jiva v. E. Spinner, (1900) 24 Bom 510
5
AIR 2006 HP 135

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 stated to be Karta of HUF. The defendant which was running the hotel in Shilon
Bag on the Kufri Chail road was purchasing goods on credit from the plaintiffs and
accounts on his behalf were being maintained. According to the plaintiffs the
defendant failed to pay the amounts due on account of supply of goods made to it
and defaulted in making the payments. Thereafter the accounts between the
parties were settled and the defendant after settling the accounts agreed to pay a
sum to the plaintiffs in respect of the goods supplied by the plaintiffs to the
defendant. The conduct of the parties showed that the plaintiff had implicitly
accepted the offer and received part of the amount.

Communication of acceptance also plays a very important role. In case of general

offers, communication of acceptance in express terms is not required. The
communication of acceptance should be made by the acceptor himself to the
offeror only. Communication of acceptance made or received by an unauthorized
person is considered ineffective.

c. Intention to create a legal relationship

Black’s Law Dictionary defines an Agreement as:

“a concord of understanding and intention between two parties with respect

to their relative rights and duties.”

There must be a clear intention among the parties that the agreement creates a
binding legal obligation. A contract is an agreement made with the intention to
make it legally binding. If the agreement is social or domestic in nature, it does not

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 give rise to a legal obligation. An example of domestic agreement- If a father
promises his son to give a bicycle in case he gets 90% marks in his exams and later
he doesn’t keep up his promise, it cannot be said that the father breached the
contract.

In the case of Balfour v. Balfour6, a husband promised to pay his wife a £30 per
month allowance and the wife sued her husband to enforce the promise. The Court
observed that arrangements between husband and wife usually do not result in
contracts even though there may be consideration involved. The Court held that
domestic agreements of this nature did not create any binding legal obligations
and, therefore, cannot be enforced.

However, in the case of Mcgregor v. Mcgregor7, a husband and his wife withdrew
their complaints on the condition of an agreement between them, by which the
husband promised to pay her allowance and the wife refrained from pledging his
credit. The Court held that this was a binding contract since the intention of the
parties was to create a legal relationship.

d. Lawful Consideration

The term ‘Consideration’ has been defined under Section 2(d) of the Indian
Contract Act, 1872. Consideration is an act done or promised to be done and such
an action (or abstinence to do an act) is done at the desire of the promisor and can
be done by the promisee or any other person.

Consideration is the cause of the promise and its absence would make the promise
a gratuitous or bare promise (Nudum Pactum).

6
(1919) 2 KB 571
7
(1888) QBD

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 Some important points related to consideration are:

● Consideration should be given at the desire of the promisor

● Consideration must have some value and not an illusion

● Consideration need not be adequate

● Under English Law, there is a concept of Privity of Consideration i.e.,

only the parties of the contract can give consideration. But in Indian Law,
consideration can also be given by a third party, apart from the parties to
the contract.

● Consideration can be present, past or future

● Discharging pre- existing obligations is no consideration

● Forbearance to sue is considered a good consideration

As per Section 25 of the Indian Contract Act, 1872 an agreement made without
consideration is void except when:

● the contract is made on account of natural love and affection between the
parties and is expressed in writing and registered under the law in force;

● the promise has been made to compensate wholly or in part a person who
has already done something voluntarily for the promisor; and

● the promise is to pay a time-barred debt.

In the case of Kedarnath v. Gorie Mohd.8, (popularly known as town hall

construction case), the Court observed persons were asked to subscribe for
construction of town hall, knowing the purpose for which money was to be
applied. They knew that on the faith of their subscription, an obligation was to be
incurred to pay the contractor for the work. Thus, the plaintiff’s act of entering into

8
1886, ILR 14 Cal 64

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 contract with contractor was done at the desire of the promisor, so as to constitute
consideration within Section 2(d).

In the case of Venkata Chinmaya Rau v. Venkata Ramaya Garu9, an old lady
granted her estate to her daughter with a direction to pay annuity to the old lady’s
sister. The daughter promised to pay the annuity but failed. The Court held that
the agreement between the daughter and old lady’s sister is a valid contract, even
though consideration does not have to move solely from the promisee. The court
ruled that the doctrine of privity of consideration does not apply in India.
According to the Indian Contract Act, 1872, consideration may move not from the
promisee, but even from a third person who is not a party to the contract.

e. Competency of parties

Section 11 of the Indian Contract Act, 1872 sets out the criteria to determine which
person can qualify as a competent person to contract. The requirements are as
follows:

● The person should be a major

● The person should be of sound mind

● The person should not be disqualified by law from contracting

Section 12 of the Indian Contract Act, 1872 a person is said to be of unsound mind
if, at the time of making the contract, such a person is incapable of understanding
and forming a rational judgment as to its effect on his interests.

9
(1881) Mad H.C.

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 Illustration: Mr. X who is in a lunatic asylum but at intervals he is of sound
mind, can enter into valid contracts during those intervals when he is of sound
mind. Mr. Y who is a sane man but he is badly drunk and cannot make rational
judgment about the terms of contract, cannot enter into a contract during such
drunkenness.

In a landmark judgment of the Privy Council in Mohoribibee v. Dharmodas

Ghose10, where a mortgage was made by a minor and the money lender who had
advanced money to the minor on the security of the mortgagee sued the minor on
the basis of the contract. The court held that an agreement with a minor is void
ab initio. However, if the contract entered into by a minor is effectuated by
his/her guardian, then it creates a binding legal obligation on the minor. The
minor has the right to ratify the contract at a later date by ratification, once the
minor attains majority.

A contract of marriage entered into by a father for the benefit of his minor child is
not void for want of consideration. Unlike, a contract of service by a minor, entered
into by the father on behalf of the minor, not enforceable as it is void for want of
consideration.11

f. Free consent

Under the Indian Contract Act, 1872, two or more persons are said to consent when
they agree upon the same thing in the same sense. The concept of ‘Consensus ad
idem’ plays an important role here. It means “meeting of minds”.

10
1903 ILR 30 Cal 539
11
Raj Rani v. Prem Adib, AIR (1949) Bom 215

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 If the consent to an agreement is obtained through coercion (Section 15), undue
influence (Section 16), fraud (Section 17), or misrepresentation (Section 18), the
agreement is voidable - it is only enforceable at the option of the party whose
consent was not obtained freely.

If the consent is due to a mistake, the agreement is void ab initio.

For example, if A advances money to his minor son B, during his minority and
upon B coming of age, by misuse of his parental influence, A makes a contract with
B for a greater amount than the sum due. In this case, the contract is voidable at
the option of B due to the undue influence inflicted on him by his father, A.

Undue influence is said to be a subtle species of fraud, whereby mastery is

obtained over the mind of the victim by insidious approaches and seductive
artifacts.12

Mere silence as to facts likely to affect the willingness of a person to enter into a
contract is not fraud, unless the circumstances of the case are such that-

● It is the duty of the person keeping silence to speak

● His silence is, in itself, equivalent to speech.

Illustrations

1. A sells by auction to B, a cat which A knows to be unsound. A says

nothing to be about her unsoundness, this is not considered as fraud.

But if B was A’s daughter and has just come of age, here the
relationship between the parties would make it A’s duty to tell B
about cat’s unsoundness.

12
Mahboob Khan v. Hakim Abdul Rahim, AIR 1964 Raj 250

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 2. If B says to A- “If you do not deny, I shall assume that the cat is sound”
and A still says nothing. Here, A’s silence is equivalent to speech.

g. Lawful Object

Under Section 23 of the Indian Contract Act, 1872 the following are not lawful
objects or considerations of a contract:

● A contract which is forbidden by law

● A fraudulent contract

● Contract damaging a person or his/her property

● Contract, which in the opinion of the court, is immoral or against the public
policy

Every agreement of which the object or consideration is unlawful is void.

h. Contract not expressly declared void

One of the most fundamental requirements for a valid contract is that it should
not otherwise be expressly declared void. Contracts entered under the following
circumstances are expressly void:

● Agreements with parties who do not have the capacity to contract

● Agreement under a mutual mistake of fact

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 ● Agreement with an unlawful consideration or object

● Agreement without any consideration

● Agreements in restraint of trade, marriage, legal proceedings

● Agreements which have uncertain meanings

● Agreements by wager or agreements to do an impossible act

Privity of Contract

The concept of the Doctrine of Privity of Contract is that only contracting parties can be
sued or have the right to sue the other parties of the contract, in case of any conflict. This
doctrine states that contracting parties have this right as they share a pre-existing
relationship, which is not there with any third party.

Under English law

In the English case of Tweddle v. Atkinson13, a couple was about to get married, the
father of the groom and father of the bride entered into an agreement that they would
both pay sums of money to the couple. Unfortunately, the father of the bride failed to pay
the sum, so the groom sued him for the payment that was previously agreed between the
fathers. The groom’s claim was rejected by the court. It was held that the groom was not a
part of the agreement between the fathers and he did not provide any consideration for
the promise made by the father of the bride. Although the agreement was made for his
benefit, he was still a stranger to the contract. A third party beneficiary cannot enforce an
agreement between two parties.

13
(1861) 1 B&S 393

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In the case of Dunlop Pneumatic tyre Co. Ltd. v. Selfridge & Co. Ltd.14Dunlop was a tire
manufacturer who agreed with his dealer to not sell the tires below a recommended retail
price(RRP). As part of the agreement, Dunlop also required their dealers to gain the same
agreement with their retailers, who in this instance was Selfridge. The agreement held
that if tires were sold below the RRP, they would be required to pay some money per tire
in damages to Dunlop. This was agreed between the dealer and Selfridges, which
effectively made Dunlop a third-party to that agreement. Sometime after this, Selfridge
sold the tires below the agreed price and Dunlop sued for damages and an injunction to
prevent them from continuing this activity. The court held that only a party to a contract
can claim upon it. Since, Dunlop had not given any consideration to Selfridge and there
could be no binding contract between him and the retailer. Dunlop was not listed as an
agent within the contract and therefore could not be included as a valid third-party who
could have claimed on the contract.

Under Indian law

The position is the same as English law.

Jamna Das v. Ram Autar Pande15, was a Privy Council case by which the Doctrine of
Privity to Contract was introduced in India. In this case, it was held that a person who is
not a party to the agreement cannot recover the amount due from a party to the
agreement.

Exceptions to the Doctrine of Privity to Contract

1. Trust or charge

2. Marriage settlement, Partition or other family settlement

3. Acknowledgement or estoppel

4. Covenants running with land

14
(1915) AC 847
15
(1916) ILR 38 All 209

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 5. Assignee in insurance policy

Contingent and Wagering Contract

As per Section 31 of the Indian Contract Act, 1872, a contingent contract is a contract to
do or not to do something, if some event, collateral to such contract, does or does not
happen. Thus, such kinds of contract are dependent or conditional upon happening or
non- happening of a future event or contingency.

In a contingent contract there should be some event collateral or incidental to the

contract. It is one which does not form part of consideration of a contract and is not
independent of it.

A distinction has to be drawn between a contract under which present obligation is

created but performance is postponed to a future date and a contract under which there is
no present obligation at all but the obligation is to arise by reason of some condition
being complied with or some contingency arising in future.

Illustration

A contracts to pay B Rs. 5,000, if B’s dog runs away. This is a contingent contract. In this,
‘A contracts to pay B Rs. 5,000’ is the main event and ‘if B’s dog runs away’ is collateral to
the main event.

Enforcement of Contingent contract

1. On the happening of an event (Section 32)

2. On the not happening of an event (Section 33)

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 3. On the future conduct of a living person (Section 34)

4. On the happening of a specified event within fixed time (Section 35)

5. On an impossible event (Section 36)

Illustration

C promised to pay D Rs. 6000 if the sun rises in the west. This is contingent on an
impossible event. This contingent agreement is void.

A wagering agreement is also a contingent agreement but as per Section 30 of the Indian
Contract Act, 1872, it has been declared void. Some important points about wagering
agreement:

● The subject matter is uncertain

● Mutual chances of gain or loss are there but one loses and on wins

● Parties have no other personal interest

● There is no control over the uncertain event

● No legal enforcement, neither against other party nor third party

Illustration

X promises to pay Y Rs. 10,000, if Y wins a lottery. This is a wagering agreement.

Exception to wagering agreement is- price for horse racing and chit-fund.

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 Discharge of Contract

When the agreement which was binding on the parties to it, ceases to bind them, the
contract is said to be discharged. When the rights and obligations arising out of a contract
are extinguished, the contract is said to be discharged.

Contract may be discharged in following way:

● By performance of contract

● By breach of contract

● By impossibility

● By novation, rescission and alteration of contract (Refer to Section 62)

● By operation of law

Performance of Contract

Every contract consists of a reciprocal and actionable promises. Each party to the
contract is bound to perform the promise made by him i.e., his part of obligation
otherwise an action would lie against him. After the parties have made due
performance of the contract, the liability under contract comes to an end. In such a
case, the contract is said to be discharged by performance.

Effect of refusal to accept offer of performance:

In cases where the promisor makes an offer of performance but the offer is not
accepted, the promisor is not responsible for non-performance.

The offer of performance must fulfill the following conditions-

1. It must be unconditional

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 2. It must be made at a proper time and place

3. Promisee must have a reasonable opportunity of inspection

Illustration

A contracts to deliver to B at his house, on the 1st March, 2022, 200 cotton candies of a
particular quality. In order to make an offer of a performance with the effect stated in
this section, A must bring the cotton candies to B’s house, on the appointed day, under
such circumstances that B may have a reasonable opportunity of satisfying himself that
the thing offered is cotton candies are of the quality contracted for, and that there are
200 of them. In case A refuses to accept them, B is not responsible for non-performance.

Breach/ Repudiation of Contract

When a party having a duty to perform fails to do so or does an act whereby the
performance of the contract becomes impossible or he refuses to perform the
contract, there is said to be a breach of contract on his part. Breach of contract
occurs when a party totally or partially fails to perform his part.

On the breach of contract by one party, the other party is discharged from his
obligation to perform his part of the obligation and also gets a right to sue the
guilty party for damages.

This is different from what is called a rescission of a contract. Rescission is

unwinding the contract. It is an equitable remedy to bring the parties, as far as
possible, back to the position in which they were before they entered into a
contract

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 ANTICIPATORY BREACH (Section 39)

When a party to a contract has refused to perform or disabled himself from

performing, his promise in its entirety, before the due date of performance has
come, it is known as an anticipatory breach. In such a case, the promisee may put
an end to the contract, unless that party who has refused to perform has signified,
by words or conduct, his acquiescence in its continuance.

In an anticipatory breach, there are two options to sue the promisor:

1. On the date on which the promisor has refused to perform, or

2. On the actual due date of the contract

Illustration

A, a singer, enters into a contract with B, the manager of a theatre, to sing at his theatre
two nights in every week during the next two months, and B engages to pay her 100
rupees for each night’s performance. On the sixth night, A wilfully absents herself from
the theater. This is an anticipatory part on the part of A. B is at liberty to put an end to
the contract and sue A either on the sixth night or at the end of two months.

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ACTUAL/ PRESENT BREACH

When a party to a contract has refused to perform, or disabled himself from

performing, his promise in its entirety, exactly on the due date of performance, it is
known as actual breach of contract.

Illustration

A contracts with B to deliver 100 tons of castor oil to B’s warehouse on 3rd March, 2022 at
3 P.M. He failed to do so.

REMEDIES FOR BREACH OF CONTRACT

1. Damages

‘Damages’ means compensation in terms of money for the loss suffered by the
injured party. In every case of assessment of damages, there are two problems:

a. Remoteness of damages

The consequence of a breach may be endless but there must be an end to

liability. The defendant cannot be held liable for all that follows from his
breach. In other words, the compensation is not to be given for any remote
or indirect loss or damage sustained by reason of the breach.

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 As per Section 75 of the Indian Contract Act, 1872, the party who suffers by
such breach is entitled to receive compensation from the party who has
broken the contract, for any loss or damage which:

● Naturally arose in the usual course of things, or

● the parties knew when they made the contract

In the landmark case of Hadley v. Baxendale16, the claimant, Hadley,

owned a mill featuring a broken crankshaft. The claimant engaged
Baxendale, the defendant, to transport the crankshaft to the location at
which it would be repaired and then subsequently transport it back. The
defendant then made an error causing the crankshaft to be returned to the
claimant a week later than agreed, during which time the claimant’s mill
was out of operation. The claimant contended that the defendant had
displayed professional negligence and attempted to claim for the loss of
profit resultant from the unexpected week-long closure. The Court observed
that a party could only successfully claim for losses incurred from breach of
contract where the loss is reasonably viewed to have resulted naturally from
the breach, or where such losses would result from breach which are in
‘contemplation of parties’, when the contract was formed. The Court held
that loss of profits is a special loss which cannot be claimed as
compensation.

In the case of Victoria Laundary Ltd. v. Newman Industries Ltd.17,

‘contemplation of parties’ was replaced by ‘reasonable man’s foresight’.

There are two types of damages-

● General Damages

16
(1854) 9 Exc 341
17
[1949] 2 KB 528

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 These are damages which arise naturally in the usual course of things and
which can be foreseen by a reasonable man’s foresight. It is objective in
nature and compensation can be claimed and is recoverable.

● Special Damages

These damages are of special nature. Compensation for such kind of

damages cannot be recovered. It is subjective in nature. It can be claimed
only under special circumstances i.e., when it is brought to the knowledge
of the party so that the possibility of special loss was in contemplation of
the parties.

b. Measure of damage

In estimating the loss or damage arising from a breach of contract, the

means that existed to remedy the inconvenience caused by the
non-performance of the contract must be taken into account. This is
popularly known as Market Rate Theory.

In the case of Karsandas H. Thacker v. Saran Engineering Co.18, the

Court held that the measure of compensation will be the difference between
the market rate and contractual rate.

Illustrations

18
AIR (1965) SC

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● A contracts to sell and deliver 50 maunds of saltpetre to B, at a certain price to be
paid on delivery. A breaks his promise. B is entitled to receive from A, by way of
compensation, the sum, if any, by which the contract price falls short of the price
for which B might have obtained 50 maunds of saltpetre of like quality at the time
when the saltpetre ought to have been delivered.

● A contracts to supply B with a certain quantity of iron at a fixed price, being a

higher price than that for which A could procure and deliver the iron. B wrongfully
refuses to receive the iron. B must pay to A, by way of compensation, the difference
between the contract price of the iron and the sum for which A could have
obtained and delivered it.

2. Specific performance

Specific performance can also be claimed as a remedy for a breach. This is

equitable relief. When a party seeks a specific performance of a contract, the
court will direct the other party to do what was agreed in the contract to be
done or abstain from doing a deed. Please note that specific performance is a
discretionary remedy of the court. The Specific Relief Act, 1963 deals with the
grounds where specific performance of a contract can be directed

3. Quantum Meruit

It refers to a reasonable sum of money that is to be paid for services rendered or

work done when the amount due is not stipulated in a legally enforceable
contract.

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 Agreement to do an impossible act

Under English law, there is a concept of Doctrine of Frustration:

● Theory of implied terms

● Theory of qualifying power of the court

The doctrine of frustration is really an aspect or part of the law of discharge of

contract by reason of supervening impossibility or illegality of the act to be agreed
to be done.

As per Section 56 of the Indian Contract Act, 1872, there are three types of
impossibility:

1. Initial impossibility

2. Subsequent or supervening impossibility

3. Where one party knew about the impossibility of the performance of the
contract but the other didn’t.

In the case of Satyabrata Ghose v. Mugneeram Bangur19, the Court observed

that the concept of supervening impossibility is similar to the doctrine of
frustration under English law. But the Court held that any intervention of
temporary nature does not mean supervening impossibility and doesn’t lead to
frustration of contract.

Illustrations

19
AIR 1954 SC 44

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A contracts to take in cargo for B at a foreign port. A’s Government afterwards declares
war against country C, in which the port is situated. The contract becomes void when
war is declared due to subsequent or supervening impossibility.

Operation of law

Under English Law, the concept of Quasi Contract or Constructive Contract is

recognized. Under the Indian Contract Act, 1872, Chapter V deals with such kinds
of contracts under the heading “Of certain relations resembling those created by
contract”.

A Quasi Contract is one which does not arise out of an agreement between parties.
The legal obligation in such a contract is imposed by law without offer and
acceptance.

A Quasi Contract is not a contract in fact but a contract in law.

The Quasi contractual obligations are based on the principle that the law should
try to prevent “Unjust Enrichment” i.e., enrichment of one person at the cost of the
other and justice should be served.

In an action for unjust enrichment the following essentials have to be proved:

1. The defendant has been enriched by the receipt of the benefit.

2. This enrichment is at the expense of the plaintiff.

3. The retention of the enrichment is unjust.

Five Obligations which are considered as a contract by the operation of law-

1. Liability for necessaries supplied to an incapable person (Section 68)

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 Illustration: A supplies B, a minor, with necessaries suitable to his condition in
life. A is entitled to be reimbursed from B’s property.

2. Liability on payment made by an interested person, where money is due by another

(Section 69)

Illustration: Landlord A was liable to pay some maintenance charges but due to
his availability, it was paid by his tenant B. Later on, B is entitled to be
reimbursed by A for the amount paid by B on the behalf of A.

3. Liability to pay for enjoying the benefit of non-gratuitous acts (Section 70)

Illustration: A, a tradesman, leaves goods at B’s house by mistake. B treats the

goods as his own. He is bound to pay A for them.

4. Obligations of the finder of goods.

5. Liability of person to whom payment is made by mistake or under coercion.

Illustration: A was under obligation to pay B. But by mistake, he transferred the

money to C’s account. Now, C is under obligation to repay the money to A.

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 Indemnity and Guarantee

Chapter VIII of the Indian Contract Act, 1872 deals with indemnity and guarantee covered
under Sections 124 to 147.

Indemnity

Section 124 of the Indian Contract Act, 1872, defines Indemnity as a contract to
compensate another person for the losses suffered due to his act or act of a third party.
The person agreeing to compensate in case of loss is the ‘indemnifier’ and the person
receiving the amount is the ‘indemnity holder’. Insurance transactions are the best
example to understand the contract of indemnity where the insurance company agrees to
indemnify for the loss caused to the policyholder because of an accident.

In the case of a contract of indemnity, the indemnifier is entitled to receive the amount
indemnified from the indemnity holder once the payment is made to a third party.
Section 125 deals with the rights of the indemnity holder when sued and includes the
right to recover from the indemnifier

1. Damages he is compelled to pay in any suit to which promise of indemnity

applies.

2. Cost of defending suit accrued to him as a prudent person as if there was no

contract of indemnity.

3. Amount paid under the terms of any compromise of any such suit.

It is important to note that the Law Commission of India in its 13th Report, 1958 suggested
including another Section 125A for providing remedies available to indemnity holders
when not sued.

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In the case of Adamson v. Jarvis, where an auctioneer sold a certain chattel believing it
to be the defendant’s. When the latter found it didn’t, was allowed to be indemnified by
the defendant as he acted on the request of the defendant.

In the case of Gajanan Moreshwar v. Moreshwar Madan, the Court decided on when
the liability of indemnifier to indemnify commenced? Is it after the loss is caused to the
indemnity holder? Bombay High Court held that indemnity holder can compel to
indemnifier to pay even before he has actually suffered any loss based on English maxim
“you must be damnified before you can claim for indemnified”

Guarantee

A contract of guarantee is a special contract and is defined under Section 126 of the Act
as a contract to perform part or discharge liability of a third person in case of his default.
Here in the promise to perform is ‘guarantee’, the person who is promising to perform is
‘surety’, the person in respect of whose default the promise is made is ‘principal debtor’,
and the person to whom the guarantee is given is ‘creditor’.

Following are the important concepts related to the contract of guarantee:

1. Any act done or promised made is considered to be sufficient consideration to the

surety. (Section 127)

2. Unless otherwise provided in the contract liability of the principal debtor and
surety co-exists. (Section 128)

3. A guarantee extending to a series of transactions is a ‘continuing guarantee’ and

can be revoked by the surety by giving an advance note to the creditor regarding
future transactions. (Section 129 and Section 130)

4. As per section 132, if two persons agreed to take the liability of an act of the third
person and the latter enters into a separate contract to be surety for another,
doesn’t affect the initial contract and is a liability to the third person according to

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 the initial contract even if the third person was aware of the existence of the such
contract.

Illustration: If A and B agree to be surety for C with regards to an amount of

10,000 equally and later on if A enters into a contract with B to be liable to pay
the entire amount in case of default. In respect of the latter contract A& B’s
liability will remain unchanged towards C.

Bailment and Pledge

Chapter IX of the Indian Contract Act, 1872 deals with indemnity and guarantee covered
under Sections 148 to 181.

Bailment

Section 124 of the Indian Contract Act, 1872, defines “Bailment” as the delivery of goods
by one person to another for some purpose, upon a contract that they shall, when the
purpose is accomplished, be returned or otherwise disposed of according to the directions
of the person delivering them. The person delivering the goods is called the “bailor”. The
person to whom they are delivered is called, the “bailee”.

If a person already in possession of the goods of another, contracts to hold them as a

bailee, he thereby becomes the bailee, and the owner becomes the bailor of such goods,
although they may not have been delivered by way of bailment.

Essentials of bailment:

1. Specific movable property

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 2. Delivery of goods for change of possession

3. Delivery for some purpose, usually upon a contract

4. Obligation to return the goods or dispose of them according to directions

Pledge

Section 172 of the Indian Contract Act, 1872, defines the bailment of goods as security for
payment of a debt or performance of a promise as “pledge”. The bailor is in this case called
the “pawnor”. The bailee is called the “pawnee”.

Essentials of a pledge:

1. Bailment

2. Bailment of goods as security

3. Purpose of security

4. Special Property

5. Goods

Pledge by non- owners:

1. Pledge by mercantile agent (Section 178)

2. Pledge by a person in possession under voidable contract (Section 178 A)

3. Pledge by a person having limited interest (Section 179)

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