Law of Contracts Notes and Study Material

When studying for exams or delving deeper into the subject of the Indian Contract Act (ICA), having comprehensive and well-organized notes and study materials can make a significant difference. The Indian Contract Act of 1872, with its foundational principles and detailed provisions, governs the formation, execution, and enforcement of contracts in India. Understanding these facets is crucial for students, legal practitioners, and business professionals alike.

The Indian Contract Act, 1872, based on English Common Law principles, came into force on September 1, 1872. It applies to the whole of India and provides a legal framework for contractual relationships. The Act outlines essential elements of a contract such as offer and acceptance, intention to create legal relations, lawful consideration, capacity of parties, free consent, and lawful object. It also covers various classifications of contracts, including valid, void, voidable, and unenforceable contracts, as well as express and implied contracts.

In this blog post, we aim to provide you with essential notes and study materials that cover key areas of the Indian Contract Act. These resources are designed to help you grasp the fundamental concepts, navigate through legal texts, and prepare effectively for your exams. From the basic definitions and elements of a valid contract to detailed discussions on specific provisions like offer and acceptance, free consent, performance of contracts, and remedies for breach, we offer a structured overview that caters to both beginners and advanced learners.

Join us as we explore the intricate world of the Indian Contract Act, offering insights and clarity to support your academic and professional journey.

Indian Contract Act, 1872

1. Introduction:

Origin: Based on English Common Law principles.
Enactment Date: Came into force on September 1, 1872.
Applicability: Applicable to the whole of India.

2. Definition of a Contract:

Contract: An agreement enforceable by law involving a promise or set of promises that the law will enforce if breached.

3. Essential Elements of a Contract:

For a contract to be valid, it must have:

Offer and Acceptance
Intention to Create Legal Relations
Lawful Consideration
Capacity of Parties
Free Consent
Lawful Object
Certainty and Possibility of Performance
Not Expressly Declared Void or Illegal
(In some cases) Writing and Registration

4. Classification of Contracts:

Valid Contracts: Meet all essential elements.
Void Contracts: Lack one or more essential elements.
Voidable Contracts: One party has the option to void the contract.
Unenforceable Contracts: Legally valid but not enforceable in court.
Express and Implied Contracts: Explicitly stated or implied by the conduct of the parties.
Executed and Executory Contracts: Already performed or to be performed in the future.
Unilateral and Bilateral Contracts: Involving one promise (unilateral) or mutual promises (bilateral).

Key Definitions Under the Indian Contract Act, 1872:

1. Contract (Section 2(h)):

A legally enforceable agreement involving two or more parties who make promises to each other.

2. Agreement (Section 2(e)):

The first step in forming a contract, where one person makes a proposal (offer) to another person, and the second person accepts it.

3. Promise (Section 2(b)):

A commitment made by one party to do something or refrain from doing something in the future.

4. Offer or Proposal (Section 2(a)):

A communication by one person to another expressing the willingness to enter into an agreement, outlining the terms and conditions of the proposed contract.

5. Acceptance (Section 2(b)):

The expression of agreement or assent by the person to whom the offer has been made, signifying acceptance of the terms and conditions proposed by the offeror.

6. Promisor and Promisee (Section 2(c) and (f)):

Promisor: The person who makes the promise in a contract.
Promisee: The person to whom the promise is made.

Offer in Contract Law

1. Definition of Offer:

Offer (Proposal): The first essential element of a contract. It’s a clear and unequivocal communication by one party (the offeror) to another party (the offeree), expressing the willingness to enter into a contract on specific terms and conditions.

2. Characteristics of an Offer:

Intention to Create Legal Relations: Must indicate an intention to form a legally binding agreement. Offers in social or domestic contexts may lack this intention.
Specificity: Must be clear and specific. Vague or ambiguous offers are generally invalid.
Communication: Must be communicated to the offeree, who cannot accept an offer they are unaware of.
Revocability: Generally revocable until accepted, meaning the offeror can withdraw the offer before acceptance.

3. Invitation to Treat vs. Offer:

Invitation to Treat: An invitation for others to make an offer. Not a binding offer itself (e.g., advertisements, price tags, displays of goods in a store).
Example: A customer selecting an item and taking it to the cashier is making an offer to buy. The cashier’s acceptance forms the contract.

4. Cross Offers:

Definition: When two parties simultaneously make identical offers to each other. No contract is formed until one party accepts the other’s offer.

5. Lapse of Offer:

Conditions for Lapse: Offers can become invalid due to the expiration of a specified time period, the occurrence of a specific event, or revocation by the offeror.

6. Termination of Offer:

Conditions for Termination:
- Death or insanity of the offeror or offeree.
- Rejection or counteroffer by the offeree.
- Subsequent illegality making the offer impossible to fulfill.

7. Communication of Acceptance:

Requirement: Acceptance must be communicated to the offeror in the manner specified in the offer, if any. A contract is formed when acceptance is effectively communicated.

8. Counteroffers:

Definition: A rejection of the original offer and presentation of a new offer with modified terms. It terminates the original offer, making the offeree the new offeror.

9. Unilateral vs. Bilateral Contracts:

Unilateral Contract: Acceptance is through performance (e.g., a reward for finding a lost item).
Bilateral Contract: Acceptance is through a promise (e.g., buying and selling goods).

Acceptance in Contract Law

1. Definition of Acceptance:

Acceptance: The second essential element of a contract. It is the assent or agreement by the offeree (the person to whom the offer is made) to the terms and conditions of the offer, thereby forming a contract.

2. Characteristics of Acceptance:

Unconditional Acceptance: Acceptance must be absolute and unconditional. Any attempt to change or modify the terms of the offer constitutes a counteroffer, not acceptance.
Communication: Acceptance must be communicated to the offeror. Silence generally does not constitute acceptance.
Mirror Image Rule: The acceptance must mirror the terms of the offer. Any deviation from the offer’s terms may be considered a counteroffer.

3. Modes of Acceptance:

Various Modes: Acceptance can be made through oral communication, written communication, or conduct, depending on what the offer allows.
Specified Mode: If the offer specifies that acceptance must be in writing, then oral acceptance is not valid.

4. Acceptance by Conduct:

Implied Acceptance: In some cases, acceptance can be implied by the offeree’s conduct. For instance, if you order goods online and receive them without any objections, your conduct is considered acceptance.

5. Postal Rule:

Postal Rule (Mailbox Rule): States that acceptance is generally effective when sent, not when received. This rule is particularly relevant for acceptance by post or email.
Example: If an offer is accepted by mail, the acceptance is typically effective when the letter is posted, even if the offeror has not yet received it.

6. Silence as Acceptance:

General Rule: Silence does not amount to acceptance. The offeree is not obligated to respond to an offer, and silence does not create a contract.
Exceptions: There are exceptions, such as when there is a course of dealing or a prior agreement between the parties that suggests acceptance by silence.

7. Case Law: Carlill v. Carbolic Smoke Ball Co. (1893):

Principle of Acceptance by Conduct: The Carbolic Smoke Ball Company advertised that their product could prevent influenza, offering a reward to anyone who used it as directed and still got the flu. Mrs. Carlill used the smoke ball as directed and then contracted influenza. The company argued that there was no contract, but the court held that Mrs. Carlill had accepted the offer by her conduct (using the product as directed), and the company was bound to pay the reward.

8. Counteroffer:

Counteroffer: If the offeree attempts to change the terms of the offer in any way, it is not considered acceptance but a counteroffer. A counteroffer terminates the original offer.

Essentials of a Valid Contract under Indian Contract Law

A valid contract under Indian contract law, as well as in many other legal systems, typically requires several essential elements. These elements ensure that the contract is legally enforceable. Here are the essentials of a valid contract:

1. Offer and Acceptance (Consensus ad Idem):

Clear and Definite Offer: There must be a clear and definite offer made by one party (the offeror) to another party (the offeree).
Precise Acceptance: The offeree must accept the offer precisely and without any material changes, creating a meeting of minds known as consensus ad idem, meaning “agreement to the same thing.”

2. Intention to Create Legal Relations:

Intention to be Bound: The parties must intend for their agreement to create legal relations, meaning they intend to be bound by the contract’s terms. Contracts in social or domestic settings are often presumed not to have this intention.

3. Lawful Consideration:

Exchange of Value: Consideration is something of value exchanged between the parties, such as money, goods, services, or a promise to do or refrain from doing something.
Legality: Consideration must be lawful, meaning it cannot involve illegal activities or be against public policy.

4. Capacity of Parties:

Legal Capacity: Both parties entering into the contract must have the legal capacity to do so, meaning they must be of sound mind, not minors, and not disqualified by law from contracting.

5. Free Consent:

Voluntary Agreement: The consent of the parties must be freely given and not obtained through coercion, undue influence, misrepresentation, or fraud.
Voidable Contracts: If consent is not free, the contract may be voidable at the option of the aggrieved party.

6. Lawful Object:

Legality of Purpose: The object or purpose of the contract must be lawful. Contracts with illegal or immoral objectives are void.
Possibility and Certainty: The object must not be impossible or uncertain. It must be possible to perform.

7. Certainty and Possibility of Performance:

Clarity: The terms of the contract must be clear and certain so that the parties can understand their rights and obligations.
Feasibility: The contract’s performance must be possible and not dependent on uncertain events.

8. Not Expressly Declared Void or Illegal:

Legal Validity: The contract should not fall under any category explicitly declared void or illegal by law. For example, contracts for illegal gambling activities are void.

9. Writing and Registration (if required by law):

Compliance with Legal Requirements: Some contracts must be in writing and, in certain cases, registered to be enforceable, as per local laws. Examples include real estate transactions.

Free Consent in Contract Law

Definition: Free consent is a fundamental element of a valid contract. It means that the consent of the parties entering into the contract must be given willingly, without any coercion, undue influence, fraud, misrepresentation, or mistake.

Elements of Free Consent:

1. Coercion (Section 15):

Definition: Coercion involves the use of force or threats to make a person enter into a contract against their will.
Voidability: Contracts made under coercion are voidable, meaning they are valid unless the aggrieved party chooses to void them.
Case Law: Raghava Chariar v. K.N. Srinivasa Iyengar (1924): The threat of committing suicide by the promisor if the promisee didn’t agree to sell his land was held as coercion.

2. Undue Influence (Section 16):

Definition: Undue influence occurs when one party, due to a position of power or trust, unduly influences the other party to enter into a contract.
Voidability: Contracts made under undue influence are voidable.
Case Law: Mohori Bibee v. Dharmodas Ghose (1903): The contract was held voidable because the minor was unduly influenced by his guardian.

3. Fraud (Section 17):

Definition: Fraud involves deliberate deception or concealment of material facts to induce someone to enter into a contract.
Voidability: Contracts obtained by fraud are voidable.
Case Law: Derry v. Peek (1889): The House of Lords held that for an act to be fraudulent, there must be knowledge of the statement’s falsity or reckless disregard for its truth.

4. Misrepresentation (Section 18):

Definition: Misrepresentation occurs when false statements, whether intentional or not, are made that induce someone to enter into a contract.
Voidability: Contracts made based on misrepresentation may be voidable.
Case Law: Dooley v. Reynolds (1834): The court held that if a misrepresentation is innocent (not fraudulent), the contract may be voidable if it is a material term.

5. Mistake (Section 20):

Definition: A contract may be void if both parties were mistaken about a fundamental fact related to the contract’s subject matter.
Types: There can be mutual mistakes or unilateral mistakes.
Case Law: Bell v. Lever Brothers Ltd. (1932): A mutual mistake about the subject matter (existence of a particular ship) rendered the contract void.

Burden of Proof:

In cases of coercion, undue influence, fraud, or misrepresentation, the burden of proof is generally on the party alleging these vitiating factors to prove their existence.

Consequences of Lack of Free Consent:

If free consent is lacking, the affected party may have the option to void the contract or seek remedies, such as damages or rescission, to be restored to their original position.

Understanding the concept of free consent is fundamental in contract law, as it ensures that contracts are entered into willingly and without any unfair influence or deception. Contracts tainted by a lack of free consent are generally not enforceable or can be voided by the affected party.

Appropriation of Payments

Definition: Appropriation of payments is a legal principle that determines how payments made by a debtor are applied to various debts or obligations owed to a creditor when there are multiple debts outstanding.

General Principles:

Creditor’s Right to Appropriate: In the absence of specific instructions from the debtor or terms of the contract, the creditor has the right to appropriate the payment.

The general rule is that the creditor should apply the payment in a manner that is most beneficial to them.
The debtor may challenge the creditor’s appropriation if it is unfair or prejudicial to the debtor.

Case Law:

Clayton’s Case (1816): The court held that when a debtor makes a payment without specifying how it should be applied, the creditor has the right to appropriate the payment as they see fit. In this case, the creditor applied the payment to the unsecured debt, leaving the secured debts intact.

Creditor’s Right to Appropriation:

If the debtor does not specify how the payment should be applied, the creditor can generally choose how to appropriate the payment.
The creditor can allocate the payment to the debt that is easiest to recover or the one with the highest interest rate, as long as it is not unfair or prejudicial to the debtor.

Debtor’s Right to Challenge:

The debtor can challenge the creditor’s appropriation if it is unfair or prejudicial. For example, if the debtor has a specific debt they want to pay off, but the creditor allocates the payment to a different debt, the debtor can contest this allocation.

Importance of Clear Instructions:

To avoid disputes, debtors can specify how they want their payments to be applied when making a payment. Clear instructions can prevent misunderstandings and ensure that payments are allocated as desired.

Application in Practice:

Appropriation of payments is commonly seen in various financial transactions, including loans, credit card payments, and mortgage repayments.

Time and Place of Performance of Contracts

Time of Performance:

The time for performance of a contract may be specified in the contract itself or determined by the circumstances and nature of the contract.
If the contract specifies a time frame, it must be adhered to. Failure to perform within the stipulated time may result in a breach of contract.

Case Law: Hochster v. De La Tour (1853):

Facts: The defendant, De La Tour, had agreed to employ the plaintiff, Hochster, as a courier for three months, starting on June 1. However, before the commencement date, De La Tour wrongfully discharged Hochster.
Held: The court held that Hochster could bring an action for breach of contract even before the start date of the contract because De La Tour’s repudiation of the contract made it impossible for Hochster to perform his duties.

Delay in Performance:

If a party fails to perform within the specified time or within a reasonable time, the innocent party may have the right to terminate the contract and seek damages.

Time as the Essence of the Contract:

In some contracts, time is considered of the essence, meaning that strict adherence to the specified time frame is crucial. Failure to meet the deadline constitutes a material breach.

Place of Performance:

The place of performance can be specified in the contract. If not specified, it is generally the location where the offeror was at the time of the offer.

Case Law: Robinson v. Davidson (1871):

Facts: The defendant offered to sell goods to the plaintiff at the defendant’s residence. The plaintiff accepted the offer and went to the defendant’s residence to collect the goods.
Held: The defendant refused to deliver the goods, arguing that the place of performance was his residence. The court held that the place of performance was where the plaintiff was when he accepted the offer, and the defendant was obligated to deliver the goods there.

Implied Terms:

In some contracts, the place of performance may be implied based on the nature of the contract or the parties’ intentions.
For example, in a contract for the sale of goods, the place of delivery is often the seller’s place of business or a mutually agreed-upon location.

Consequences of Non-Performance:

If a party fails to perform at the specified time and place, the innocent party may have various remedies, including seeking damages, specific performance, or termination of the contract.

Contingent Contracts in Contract Law

Definition:

A contingent contract is a contract where the performance of the contractual obligations depends on the occurrence or non-occurrence of a specific future event. The contract’s fulfillment is conditional upon this uncertain event.

Key Features of Contingent Contracts:

1. Contingency:

The central characteristic is the presence of a contingency or uncertainty. The contract specifies that something will happen (or not happen) in the future, and the parties’ obligations are tied to this event.

2. Future Event:

The event in question must be future and uncertain at the time of contract formation.

3. Conditional Obligations:

The obligations of the parties are conditional upon the occurrence or non-occurrence of the specified event.

Case Law: Bishambhar Dayal v. Badri Narain (1924):

Facts: The parties entered into a contract where the defendant agreed to pay the plaintiff a certain amount if a particular cargo of goods was not delivered by a specified date. If the cargo was delivered on time, no payment would be made. The cargo was delivered on time.
Held: The court held that the contract was a contingent contract because the defendant’s liability to pay was contingent on the non-occurrence of the event (i.e., late delivery of the cargo). Since the event (timely delivery) did occur, the defendant was not liable to pay.

Contingent Contracts vs. Wagering Contracts:

Contingent Contracts: In these contracts, the parties have a genuine interest in the event, and the contract’s purpose is not purely speculative or based on chance.
Wagering Contracts: In a wagering contract, the parties bet on the outcome of an event without any legitimate interest in the event itself. Such contracts are void.

Enforcement of Contingent Contracts:

Contingent contracts are enforceable as long as they meet the essential elements of a valid contract, including offer, acceptance, consideration, and free consent.
If the contingent event occurs, and the contract specifies the consequences, the parties must fulfill their obligations accordingly.

Performance upon Contingency:

If the contingent event does not occur, the contract may become void. If it does occur, the parties must perform as specified in the contract.

Common Examples:

1. Insurance Contracts:

Payment of insurance proceeds is contingent upon the occurrence of insured events (e.g., accidents, natural disasters).

2. Sale Contracts with Conditions Precedent:

A contract to purchase land contingent upon obtaining planning permission.

Quasi Contracts in Contract Law

Definition:

A quasi contract is not a true contract but is a legal obligation created by the law to prevent unjust enrichment. It arises when one party receives a benefit at the expense of another party, and it would be unfair to allow the benefiting party to retain that benefit without compensating the other party.

Elements of a Quasi Contract:

1. Benefit Conferred:

One party must have conferred a benefit on the other party.

2. Unjust Enrichment:

The party receiving the benefit must be unjustly enriched if they are allowed to keep it.

3. Absence of a Valid Contract:

There should be no existing valid contract between the parties governing the benefit.

4. Involuntary Payment:

The benefit must have been conferred involuntarily or under circumstances where it is reasonable to assume that the benefiting party knew payment was expected.

Case Law: Moses v. Macferlan (1760):

Facts: Moses, without any obligation, paid the debt of Mr. Macferlan to protect his reputation. Mr. Moses then sued Mr. Macferlan to recover the amount he had paid.
Held: The court held that Mr. Moses was entitled to recover the amount because he had conferred a benefit upon Mr. Macferlan, and it would be unjust for Mr. Macferlan to retain the money without compensating Mr. Moses.

Types of Quasi Contracts:

1. Supply of Necessaries:

When someone supplies necessaries (essential goods or services) to a person incapable of entering into a contract, the supplier can recover the reasonable value of the goods or services.

2. Payment by an Interested Person:

If a person pays money to protect their own interests, which another person is legally bound to pay, they can recover that amount from the person legally liable.

3. Finder of Lost Goods:

If someone finds lost goods and takes them into their custody, they can recover the expenses incurred for preserving the goods from the owner.

Quantum Meruit and Quantum Valebant:

In quasi contract cases, the court may award damages based on the principle of quantum meruit (as much as he has earned) or quantum valebant (as much as it was worth). These principles aim to provide fair compensation for the benefit conferred.

Difference Between Quasi Contracts and Contracts:

1. Voluntary Agreement:

Quasi contracts are not voluntary agreements between parties, unlike true contracts. They are imposed by law to prevent unjust enrichment.

2. Intention and Meeting of Minds:

In a true contract, there is an intention to create legal relations and a meeting of minds between the parties, whereas quasi contracts lack this element.

Contracts That Need Not Be Performed

1. Novation:

Definition: Novation is the substitution of a new contract between the same parties, which discharges the obligations of the existing contract. It replaces the original contract with a new one, and all parties involved must agree to the change.
Elements of Novation:
- Agreement of all parties to the existing contract.
- Intention to discharge the existing contract.
- Creation of a new contract with new terms.
Case Law: Shankarlal Agrawal vs. State of Maharashtra (1984):
- The Bombay High Court held that novation requires the mutual consent of all parties involved and cannot be imposed unilaterally.

2. Rescission:

Definition: Rescission is the act of canceling or annulling a contract, returning the parties to their pre-contract position.
Grounds for Rescission:
- Misrepresentation or fraud.
- Lack of free consent.
- Impossibility of performance.
- Illegality or against public policy.
Case Law: Satyabrata Ghose vs. Mugneeram Bangur & Co. (1954):
- The Supreme Court of India held that rescission is a remedy available for fundamental breaches of contract or repudiation of the contract.

3. Alteration:

Definition: Alteration refers to any change or modification made to the terms of a contract after its formation, which can impact the rights and obligations of the parties.
Rules Regarding Alteration:
- Alterations must have the consent of all parties to the contract.
- Alterations without consent are generally void and do not affect the original terms.
Case Law: Bank of India vs. Vijaya Bank (1985):
- The Supreme Court held that material alterations in a contract without the consent of all parties would discharge the contract.

Compensation in Contract Law

Definition: Compensation in contract law refers to the remedy sought by an injured party when the other party breaches a contract. It aims to restore the injured party to the position they would have been in if the contract had been performed as agreed.

Types of Compensation:

General Damages: These are losses that naturally flow from the breach and are foreseeable. They are the direct and immediate consequences of the breach.
Special Damages: These arise from specific circumstances known to both parties at the time of contract formation. They must be specifically communicated and proven by the injured party.

Principles of Compensation:

Principle of Causation: Damages must be directly caused by the breach and should not be too remote or speculative.
Mitigation of Loss: The injured party has a duty to minimize their losses and cannot claim damages for losses that could have been reasonably avoided.
Principle of Certainty: Damages must be quantifiable, provable, and not speculative.
Principle of Foreseeability: Damages must be reasonably foreseeable at the time of contracting.

Case Law: Hadley v. Baxendale (1854): In this case, the court ruled that damages could only be awarded for losses that were reasonably foreseeable at the time of contracting.

Measure of Damages: The measure of damages is typically the difference between the contract price and the market price or the cost of rectifying the breach. In some cases, loss of profit or specific performance may be considered.

Exclusion Clauses: Parties may include exclusion or limitation clauses in contracts to limit their liability for damages in case of a breach. However, these clauses must be clear, reasonable, and brought to the attention of the parties to be enforceable.

Liquidated Damages: Parties may agree in advance on a specific amount of damages to be paid in case of breach, known as liquidated damages. These are enforceable if they represent a genuine pre-estimate of loss.

Bailment in Contract Law

Definition of Bailment (Section 148, Indian Contract Act, 1872): Bailment is a legal relationship where one party (the bailor) transfers personal property to another party (the bailee) for a specific purpose, with an agreement that the property will be returned or dealt with as per the terms of the agreement.

Essential Elements of Bailment:

Delivery of Possession (Section 149): The bailor must physically deliver the property to the bailee.
Personal Property: Bailment applies only to personal property, not real estate.
Purpose (Section 150): There must be a specific purpose for the bailment, such as safekeeping or repair.
Agreement (Section 151): An agreement between the bailor and bailee regarding terms and conditions.

Types of Bailments:

Gratuitous Bailment (Section 172): Bailee receives the property for free.
Bailment for Hire (Section 164): Bailee receives compensation for the bailment.
Bailment for Mutual Benefit (Section 168): Both parties benefit from the bailment.

Duties and Responsibilities:

Bailee’s Duty (Section 151): Take reasonable care of the property and use it as agreed.
Bailor’s Right (Section 152): Can reclaim the property after the purpose is fulfilled.

Termination of Bailment: Bailment ends when the purpose is fulfilled (Section 160), time expires, or there’s a breach of contract.

Liabilities of the Parties:

Bailee’s Liability (Section 151): Responsible for loss, damage, or theft unless no fault is proven.
Bailor’s Responsibility (Section 153): Disclose any hidden defects in the property.

Rights of Third Parties (Section 180): Third parties usually can’t claim rights to bailed property unless they have a legal interest.

Return of Bailed Property (Section 160): Once the purpose is met, bailee must return the property or dispose of it as per bailor’s instructions.

Case Laws:

State of Maharashtra v. Patel (2000): The Supreme Court discussed bailment as a delivery of goods on a contract for a specific purpose.
Safeway Aviation v. Lila Charitable Trust (2009): The Delhi High Court discussed the duty of care owed by the bailee in a bailment scenario.

Contract of Indemnity (Section 124)

Definition: A contract of indemnity is where one party promises to save the other from loss caused by the promisor’s conduct or that of any other person.

Parties Involved:

Indemnifier (Promisor): Promises to indemnify against loss.
Indemnity-holder (Promisee): Receives the promise of indemnity.

Main Features:

Protection from Loss: The contract aims to protect against specific types of loss.
Human Agency: It covers losses caused by human actions.
Not Contingent: It doesn’t depend on the default of a third person.

Rights of Indemnity-holder (Section 125):

Right to recover damages and costs in a suit related to the promise of indemnity.
Right to recover sums paid under compromise, subject to conditions.

Liability Commencement: Liability to indemnify arises when the indemnity holder incurs a liability that is absolute and not contingent on actual payment.

Case Law: Gajanan Moreshwar v. Moreshwar Madan (1942) – Equitable principles of indemnity apply in India, allowing indemnity holders to seek indemnification before actual payment.

Contract of Guarantee (Section 126)

Definition: A contract of guarantee is a promise to perform or discharge the liability of a third person in case of default.

Parties Involved:

Surety: Gives the guarantee.
Principal Debtor: The person for whose default the guarantee is given.
Creditor: Receives the guarantee.

Main Features:

Tripartite Contract: Involves three parties – principal debtor, surety, and creditor.
Dependent on Default: Surety’s promise is triggered by the debtor’s default.
Consideration: Surety’s benefit or promise for the debtor’s benefit constitutes consideration.
Consent: Surety’s consent must be free from misrepresentation or concealment of material facts.

Validity Conditions (Sections 142, 143):

Guarantee obtained through misrepresentation or concealment is invalid.

Case Law: Richardson Re, Ex parte the Governors of St. Thomas’s Hospital (1911) – Principle established that indemnity doesn’t require actual payment but liability, followed in Indian context in Gajanan Moreshwar v. Moreshwar Madan (1942).

Introduction to Agency

Definition: Section 182 of the Indian Contract Act, 1872.
Parties Involved: Principal, Agent, Third Party.
Importance in Business Law: Nearly all business transactions are conducted through agency.

Who is an Agent?

Definition: Section 182 of the Indian Contract Act.
Capacity to Appoint: Section 183 (Persons capable of contracting).
Types of Agents: Special Agent (Section 189), General Agent (Section 189), Sub-Agent (Section 191), Co-Agent, Factor, Broker, Auctioneer, Commission Agent, Del Credere Agent.

Creation of Agency

Direct Appointment: Section 186 (Express agency creation).
Implication: Agency inferred from circumstances.
Necessity: Agency created out of necessity.
Estoppel: Agency created by estoppel.
Ratification: Agency created by ratification (Section 196).

Authority of an Agent

Express Authority: Section 187 (Express authority by spoken or written words).
Implied Authority: Section 187 (Authority inferred from facts and circumstances).
- Types of Implied Authority: Incidental, Usual, Customary, Circumstantial.

Case Law for Implied Authority

Chairman L.I.C v. Rajiv Kumar Bhaskar: Illustrates implied agency based on conduct and acceptance of responsibilities.

Agency between Husband and Wife

Generally no agency exists, except through contract, appointment, or ratification.
Agency of Necessity: Husband liable for wife’s necessaries if separated due to his fault (Section 68).

Sub-Agent and Delegation

Definition: Section 191 (Sub-agent employed by and under control of original agent).
Delegatus Non Potest Delegare: Principle that an agent cannot delegate his duties unless in certain circumstances.

Agency by Ratification

Definition and Types: Express and Implied Ratification.
Conditions for Ratification: Full knowledge of facts, act not injurious to Principal’s rights.

Termination of Agency

Ways of Termination: Revocation (Section 201), Renunciation, Completion of Business, Death or Incapacity, Insolvency.
Revocation of Authority: Conditions and effects (Section 202).

Duties, Rights, and Liabilities

Agent’s Duties: Conduct as per Principal’s instructions, skillful performance, communication, avoiding misrepresentation (Section 211).
Principal’s Duties: Indemnification (Section 222), good faith protection, non-liability for criminal acts.
Principal’s Liability for Agent’s Acts: Fraud or misrepresentation (Section 238).

Pharmaceutical Society of Great Britain v Boots Cash Chemists Ltd. 1952

Issue: Display of goods in a self-service shop.
Holding: Invitation to treat, not an offer (Section 182).

Carlill v Carbolic Smoke Ball Co. 1893

Issue: Offer in advertisement for influenza remedy.
Holding: General offer, intention to create legal obligation (Section 10).