MULLA The Indian Contract Act SIR DINSHAW FARDUNJI MULLA [15 Fifteenth ed.] 9789351436362

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MULLA The Indian

Contract Act SIR DINSHAW FARDUNJI MULLA

15th Edition

Anirudh Wadhwa

LexisNexis

iVX

THE INDIANCONTRACTACT -1/934ed (Act 9 of 1872)

General Contents Preface to the Fifteenth Edition.

Preface to the Fourteenth Edition. X

Preface to the Thirteenth Edition.. Preface to the Twelfih Edition..

*************************"

*********

Preface to the Eleventh Edition.. *****************

Xi

*******

Preface to the Ninth Edition.

xii

**********

Preface to the Eight Edition...

xiv

Table of Cases.

*****************

xli

Introduction...

..********************

Preliminary

CV

****

*****

**********************

ChapterIOF

THE

COMMUNICATION,

ACCEPTANCE AND

REVOCATION OF

PROPOSALS ************************************************"*********************

23

************

Chapter II-51

OF CONTRACTS, VOIDABLECONTRACTSAND VOID AGREEMENTS..

ChapterIl

145

OF CONTINGENT CONTRACTS.*.**********

ChapterIV OF THEPERFORMANCEOF CONTRA*C **T**S*.*.*.******************************************

ChapterV-

OF CERTAIN RELATIONS RESEMBLINGTHOSECREATED BY CONTRACT..

ChapterVIOFTHC EONSEQUENCEOSFBREACHOF CONTRACT ..

ChapterVI SALE OF

*************************** ****

[xv]

*****

150

208

223 249

xvi

General Contents

Chapter VIII OF INDEMNITY AND GUARANTEE..

*****************************

250

ChapterXOF BAILMEN*T*.*.*.**************************************************************.....

...

281

******************************************************

311

OFPARTNERSHIP (Repealed).*.************************************************************

371

SCHEDULE- EnactmentsRepealed.. *******************.*****oo****...........

371

Chapter XAGENCY**.*.************************

ChapterXI-

SUBJECTINDEX..

****************************:1***********************************************

373

itiV

THE INDIAN CONTRACT ACT (Act 9 of 1872)

Contents Preamble...

Preliminary title..*.*.*.*****************************************************************************************

S. 1. Short

Extent. Commencement.

*****************************

*************

S6a**v*in **g**********************************************************************************************

Law anteriortoContractAct:IntroductionofEnglish Law into India..

1

Applicability o**f*t*h*e***A**c*t*.****************************************************************** Scope of t*h*e ******A*C **t*.*.*************************** *****************************************2** How far native Law ofContractsis still in force.. 2

Saving ofusageorcustomof trade,etc. ** ***** ************************** Not inconsistent with theprovisions of this Act. aa..aa............aa.. aa....... Evidence as to usage of trade*.*.***************************************************** Sections referring to usage or custom of trad*e*.*.********************************* Foreign COnurac... * e***************************************************************** Act not retrospective.. **** ********************************************

S. 2.

Interpretation

clause.

*****************

Scopeof section.

*************************************

************

Theory of Formation ofa*C*o **n*t*r*a*c**t.*.**************************************************** Ag*r*e*e**m **e*n**t.*.*********************************..*.****************************************************

6

Proposaland Promise*.*.*********************************************************** Promisor and Promisee. **** ****************************************************************** Privity of Contract(Impositionof liabilitiesuponthird party). ..... ... Promise and

Conside**r*a*t*io**n*.*.*.**********************************************************

Doctrine ofConsideration

0

*****************************************************************

.Definition of Consideration. "At thedesireofthepromisor". *********************************************************** ."Promisee

9 10 10 11

or any other per*s*o*n**"*.*"*********************************************

Privity of Contract (Acquisition of rights by a third party) .*.******

12

Past, Present, Prospective Consideration.*.*************************************

16

Pa**s*ct*o**n*s*i*d*e**r*a*t*io**n*.******.****************************************************1*6******* "Or doesorabstainsfrom doing" :Forbearanceas consideration. ."Or

promises to do or to abstain from doing something"

.

Mutual

promises..*****************************************************************************************

xvii

17 18

xvii

Contents "Such act or abstinence or promise is called a consideration

promise

for the

...

Further requirements...

*******

** * * ***********

19

Promissory Estoppel and Consideration I..*.*********

20

Sub-ss.(e) to G):Agreementand contract.. ***** VoiduacC**o*n**tr*a**c*t*..*************************************************

21 21

Distinction between void and voidable contracts

.

Voidable contract..

21 ********************

*************************************************

BecomesVoid ..

18

22

CHAPTER I

OF THE COMMUNICATION, AcCEPTANCE AND REVOCATION OF PROPOSALS S. 3.

23

Communication, acceptance and revocation of proposals.. What is communication..

Modesof Communication. Communication by Communication

in

23

***************************************

*** ****

***********************************

25

si*le**n*c*e**..**************************************** Electronic

Form . ***********

Communicatioonsfpeciaclonditions.

23

25

*

.

Shrinkwrap Lice*n*c**e*s*.*******************************************

S. 4.

Communication when complete..*** ***********************************************

27

Scope and object.**********************************************************"* ******* Communication of a pro*p*o **s*a**l.*.**********************************************

28

Agreemebnettweepnartiesatadistance..

.

.

28

Non-instantaneous communication through post, courier or telegram..

28

EnglisRhules.. on.snnssesnasnns************** Instantaneouscommunication on phone or on telex... ******** Communication through fax, email or other electronic means.

Mode ofacceptance.. *****.******************* Revocationof Acceptance.. ********************************

28

30 ******* *****

30 31 31

31

**

Time and Place of Contrac*t*..*.**********"**** *********

Statutoryconsents. S. 5

33

*******************

Revocation of Proposals and acceptances. Scope.

33

***************************************************************************************************

Revocationofoffersgenerally. * ******************"

.....

Revocationof 'conditionalI'clS.*************************** Revocationof 'firm' offers... Standingoffers..

Sale by Auction,Tenderetc.

34 34 35

36

*****************************

38

Revocationof Acceptan*c**e*.**"***************** *7 Indian Oaths Act. ************************************

S.6Revocation howmade .. Scopeand object...

38

*****************************************

8

*********************************************"****

38

Noticeof rev*o*c**a*t*io **n*.*.*.*****************************.** Lapse of time for Acceptance..

38

*************************************************************

Condition precedent to Acceptance.

33

**************************

Death or insanity of proposer .Revocation distinct from 'rejection' or"refusal

****** *****

***************************************|

39

40

40 41

Contents

S.7

xix Acceptance must be absolu*t*e*.***********************

12

TOO

CertainA toycfceptance.. Acceptancesubject to

42

form*a **li*t*ie**s*.*.***********************************************

Modes or ACceptance.. Acceptance in a prescribed

44 14

iss***************** *s*s******** manner.*.*********************************s************

45

Usual and reasonabie man*n**e*r*****************************************************s***********

6

Acknowledgment of Electronic Records*.*.*************************************

S.8 Acceptance by performing conditions or receiving consideration.

46

Scopeand******o*b*j*e*c**t.*.*.**************************************************************4*6***

Acceptanceby performance.*******

**************

6

***

Acceptance in lgnorance of ****o*f*f*e*r*.*..************************************************ Acceptance by receiving consideuroal*tim ons.s.d****************************************

48 18

.When isacceptancecompletues.m . erannane*******************************************C*I*.** 49

S.9 Promises, express and implied.

49

Express and tacit

49

promise**s*.*.************************ es**eee..ss*ss...............

Place o*f***C**o*n*t*r*a*c**t.*.***********************************************************************5*0* Conflict**o**f*L**a*w ********************************************************************************5* 0

CHAPTERII

OF CONTRACTS, VOIDABLE CONTRACTS AND VOID AGREEMENTS S. 10

What agreements are contra*c*t*s*.*************************************************

S1

Enforceable C*o*n*t*r*a*c**t.******************************************************************* 51 51

Freedomof Contract.. Requirementof formalities..

****************************************************************

52

Oral C*o*n**tr*a**c*t*s*.********************************************************************************53

Written contracts.

S. 11

53

***************************1****"

Contracts required to be in writ*in**g*.*.*************************"********************* Variance between print and writing. ********************************************************

53

As to the law relating to

54

Registra*t*io**n*.*.*************************************************

Who are competent to contract.. Competency to

"To

************

********************************

Co*n*t*r*a*c*t*.*.*.*****************************************************************

54

55 55

*C**o*n**tr*a**c*t*.******************************"*********************************************

Infancy..

********************************************************************"***************************

55 S5

Age of majority... "Law to which he 1S Subjeet

56

Minor's

56

*********1 ********* *** ************ agree**m **e*n**t.*****************************************************************************

Agreement onbehalf of Fraudulent

m **i*n*o**r.*.**********************************************

Representatio*n*.*.***********************************************************

Estoppel..*************************

*m **i*n*o**rs**.*****************************************************************************

Gifts tominors.. .................*.***************************************

57 58

********************

EXecutea Conuacts. ******************************************** Mortgages and sales in favour of min*o*r*s*.********************************************** Lease to

57

..

59

59 51

61

Minor-Partner*s*h**ip**..************************************************************************** 61 Minor-Insu*ra **n*c**e*.*.****************************************************************************

61

Contents

XX

Minor-Suretybond.

61

..... .... ........ .. .......s....n ..........sa..sssasss.......aan.a....... ..

Minor-Joint docume*n **t*s*.*..*******************************************************************

Ratification..

62

****************

52 Payment of debt incurred during minority. ************** 2 SpecificPerformance..************************************************************************* . Nec*e*s*s**a*r*ie **s*.*.*.*****************"***********************************************6*3*

"Ofsoundmind"

Persons otherwise "disqualified from

S. 12

53

******** ************************. contra*c*t*in **g*.*.*****************************

What is a sound mind for the purposes of contracting.

64

Test ofSoundnes*s*o*f***m**in**d*.*.*.*********************************************************4 *

Burden*o*f*p **r*o*o**f**.*.*.******************"******************************************6*6***** Contract in lucid interval.

S. 13

Consent"

defined..

Apparent

and real

Ambiguity..

56

. ++e***..*a*nsssn*************************

56

*********************************************************************** consent .

*********************************************************************************s***

Fundamentalerror...

******"

*************************************************.

67

As to thenatureof thetransaction(nonestfactum).

Consenatnedstoppel.

************************************************************************

8

Error as to the person of the other p**a*r*t*y***.*..*****************************************

As tothesubject-matterof theagreement. S. 14 "Free consent" defined.

********

*************

70

*************************************************************

70

Free consent.... S. 15 Coercion"

defined..

*****************

*************************************

70

.Extent of"coercion'"underthe Act.. Act

forbidden by the Penal C **o**d*e*.*.**************************************************

Unlawfuldetaining*o*f*p*r*o**p*e**rt*y**.************************************************2*** f a*n**y*p**e*r*s*o**n*.*.*************************************************1*2* To theprejudiceSoO Causing any person to enter into an

agreeme*n**t.*.*********************************

Dure*s**s*.*.***************************.*.*. ***************************************************************** 12

S. 16

"Undue

74

Influence" defined..

.The doctrine of undue influence in England and Ind **ia **.*.************************* Sub-s. 1: Undue influence

gene*r*a**ll*y*.*.*************************************************

Sub-s. 2: Different forms of influence

.Mentaldistress.

***

**************************************************

****************************************************************

Proof of undue in*fl*u*e**n*c*e **.*..********************************************************* Transaction with parda-nishin women. ********************************************* Who is a

15

75 76 18 19

19

parda-n*is**h*i*n*.*.******************************************************************

Sub-s. 3: Rule of *e*v**id**e*n**c*e*.************************************************************* "Unconscionable bargains" ************************"*********************************************** Lapse of time and lim*i*ta**ti*o*n **.*..***********************************************************

S. 17

"Fraud" defined Ingredientsof fraud.

32

32

.

********************************.*.****** *****************************************

33

Fraud in *g*e*n **e*r*a**l.*.**********************************************************************. 3 84 Sub-ss. 3, 4, 5. ******************************************************************************************** 84 Acts and omissions specially declared to be fraudulent . ************ Mere non-dis**c*lo **s*u**re **.*.***************************************************************8*5*

XXI

Contents S. 18

"Misrepresentation"

defined..

***

Misrepresentation. *****ssanusne**************************************************************

35

86 Principles of English law as to misrepresentation.. ********** ***S **u*b **-*s*.**I.*.*.*****************.*******************************************************************6 ****

Sub-s.2.

***********************************************************************************.**************

B6

*******S **u**b*-*s*.**3**.*****************************************************************************7 ******* Misrepresentation of tact or law... osssosssssnn*************************** 88 Fraud andmisrepresentation distinguished.. Fraud, Misrepresentation and non est factum

S. 19

distinguish*e**d*.*.*.*****************

88

88

Voidability of agreements without free consent*.*.********

Scope of th*e**s*e **c*t*io **n*.*.*********************************************************************8**9

9

Otherremedies.

Burdenofproof .****

** ****************************************************89

Exception : Means of discovering

Iuul.************************************************

.Loss of right torescind.

91

consenf".*.*.**************************************************

Explanation: as to "causing

Rescission of voidable

92

*c**o*n*t*r*a*c**ts**..**************************************************92

SpepceifirciOrmance.. . S. 19A

89

eossnesnens*************** *****

Power to set aside contract induced by undue influence ..

Contractinducedbyundueinfluence..

*****

*************************************************

92

92 93

Who can raise th*e*****p*l*e*a*.*.*.************************************************************* 94

Heirs andlegalrepresentativesofdeceasedcontractingparty .. S. 20

Agreement

void

where both

parties are under

mistake as to

matter o*f****fa **c*t*.*.*******************************************************************9**4** .M ***is*t*a**k*e***o*f***f*a*c**t.*****************************************************************9*4******* Common and mutualm **is**ta **k*e***.*..******************************************************** 94

Mistakeof fact..

95

5

Mistake essential to agreement.. Specific

********************************* **** Perf*o*r*m **a**n*c*e**.*********************************************************************** 97

Rectification..

7

**********************

Compensatio **n*.*.********************************************************************************

S. 21

Effect of mistakes as to law..*******************************************************************

97

97

Effect of mistake o*f***l*a*w **.*..*********************************************************** 91

8

S. 22

Mistake o*f*fo **r*e*i*g*n****l*a*w **.*..************************************************************** 98 Contract caused by mistake of one party as to matter of fact.

S. 23 What considerations and objects are lawful and what Unlawful

not...

C..***annennnes********************************************senen**********

98

9

(Ist Clause)

:

100

"Forbidden by Law .

(2nd Clause) "Defeat theprovisionsofany law"....

itibe1. Legislativeenactment.

.

102

2. Rules of Hindu and Mahomedan la**w*.**********************************

105

3. Other rules of law in force in India .

106

XXii

Contents

ievi?sterva7tq9tail/

(3nd Clause)

**"*F**r*a*u*d **u*l*e*n**t"**.*.****************************************************************1*0*6******* (4th Clause) Injury to theperson or property of ano*th**e*r*"*.*.*********************************** 106 (Sth Clause)

Imnmoral...

106

wssssanss

Opposed to public **p*o*l*i*c*y*"*.*.******************************************************107 1.

Trading with enemy.

108

...

2. Stifling prosecution.. **************i******************************************* Champerty and Maintenance"*.*.*********** 4.Interference with course of justice.. ************************

109

5.

Marriage procurement con*tr*a**c*t*s*.*.**********************************************

112

6.

Agreement

112

**""

tending to create interest against duty .

**************

7. Sale of public offices. *********************************************************************** 8. Agreements tending to create monopolie*s**************************************

Agreemenntotto bid... 10.

.

110 111

113 113 113

Suicide*..******************************************************************************

11. Unconscionable agreements...

113

114

**

Waiver of illegality..

114

Void Agreements

S.24. Agreementsvoid, ifconsiderationsandobjects unlawful in part.. S. 25.

Entireordivisible agreements... Agreement without consideration void, unless..

it is in writing andregistered.

115 115

issnseanea

*****

116

****"

116

**************************************

or is a promise to compensate for something

don*e**.********************"

116

...

or is a promise to pay a debt barred by limitation

116

law. *************

Consi*d*e*r*a**ti*o*n **.*..******************************************************************************117 117 Forbearance and compromise as consideratio*n*.*.*.*.****************************

Promisetoperform existingduty **.*********

********************************

15 118 119

Transfer of immovable property.. Negotiable instruments. **************a* +****a

119

***************

Consideration dispensed *w **i*th **.*.******************************************************* (a) Registered writing ***************** ******************************** **.*.************************************* (b) Compensation for voluntary serv*ic*e

) Promisetopayatime-barreddebt...

**********************"

119 120 121

********D*e **b*t*.*.************ ***************************************************************************1*2*2**

Explanation2..

*************************************************************************************

S. 26 Agreement in restraint of marriage void. S. 27 Agreement in restraint of trade void.

*****************************

**

******

122

123 123

Savings of agreement not to carry on business of which goodwill

is sold. Agreement in restraint oftrade.

123 124

Contents

XXii Restraint during term of service. ********************************************** Restraintoperatingbeyondterm of service.. ****************************************

125

Public policy...

***************

126

***************************

126

*******************************************************************

126

*

Agreement not in restraintof trade.

Tradceombination.s

*************ssa**

To thaetxtent"

125

127

****E**x*c*e**p*t*io **n**I*.*.*.****************************************s*******.**** Reasonableness of limits*******************************

127 127

C

S. 28 Agreements in restraint of legal proceedings void..

128

************* 2

Saving of contract to refer to arise

arbitration

dispute that may *******

E 128

Saving of contract to refer questions that have already arisen... Saving

of a

guarantee

agreement

of a bank

or a

29

financial

institution.

129

Agreement in restraint of legal procBe*e*d**in**g*s*.*.*.********************************** Agreements to refer to referee or arbitrator.. **************************************

130 130

Agreementson jurisdic**ti*o*n **.*..*******************************************************1*3| 1 132 "Rights under or in respect of any contract. . Limitation of time to enforce rightsunder a contrac*t*.ssemeee****************| 132 ************************************************************************** Exception 1 & 2.. **********************************************ssseenenne**************** ****sen

134 134

***E **x*c**e*p**ti*o*n ****3*.*.*********************************************************************1**3*4******

S. 29

Agreements void for uncertainty. Construction of

135

c*o*n **t*ra **c*t*.*.**************************************************************** 135

Ambiguous contracts. S. 30

****************************************************

**************************************************|

Agreements by way of wager void.

135

136

Exception in favour of certain prizes for horseracing. Section 294-A of the Indian Penal Code not affected...

Wageringcontracts...

.

****************

137

*********************************************************

137

What *i*s*a**w **a*g **e*r**.*********************************************************************1*3*7**

Reforms in English Law(Gambling Act, 2005)...

***********************

38

Contracts "By way of****w**a*g*e **r*"*..******************************************************1**38 138 Court to ascertain real nature and mutual intention.. *** ****************

.Teji Mandtri ansaction. *****************************nenneea**msnnsnen*ssansannene* Agreements between Pukka Adatia and his constituenlttsd.**** ****************

Agreemecnotlslateratwolagerincgontracts..

.

139 140

Insurance pollcies**oonasanns*ssssnannnan**sssesennnnn************************.

140 143

Promissory note for debt due on a wagering contract.*.*************************

143

Award on debt on wagering contract...

143

*******************************

Suit to recover dep **o*S **i*t.*.**********************************************************************

Lottery.

*n******************************************************************************************

143 144

xxiv

Contents CHAPTERIII

OF CONTINGENT CONTRACTS S. 31

"Contingent contract"

defined..

145

*****

**********************7

Of thesection**in**g **e*n**e*r*a*l*.*********************************************************1**4*5** .Event collateral to *c**o*n**tr*a**c*t*..***********************************************************1*4*5

Contingdeenpceyndeonacotpfarty..

.

.

146

147

S. 32

Enforcement of contracts contingent on an event happening..

S. 33

Enforcement of contracts contingent on an event not happening...

S. 34

When

13/

event on

which

contract

is

contingent

impossible, if it is the future conduct of a living S. 35

deemed

person...

.

148

When contracts become void which are contingent on specified

eventnohtappening withinfixedtime . When

contracts

may be enforced which

are

specified event not happening within fixed time. S. 36

to be

148

contingent

148

on 148

**************************

149

Agreements contingent on impossible events void .. CHAPTERIV

OF THE PERFORMANCE OF

CONTRACTS,

Contracts which must be Performed S. 37

Obligation

of parties to contracts .

****

*****1***

e

Performance and discha*r*g*e**..*.****************** TIm1J Succession to benefit of contra**c*t*..*.*************************************************

150 151

152

Assignmenotf contracts...

Anyotherlaw. S. 38

150

153

Effect of refusal to accept offer of performance..

i..

Essentialsof validperformance.. Offer to perform or Tender... *********************************************

154 154 154

Offer must not be of part o **n*l*y************************************************************* Offer must be unconditional.

155

Offer at proper time and *p*l*a*c*e **.*..**********************************************************

155

Ableand willing..

*************************************************************************

Reasonable opport1 uyn*it*y*************************************************** ***********

155 155 156

Tend*e**r*o**f**m **o*n**e*y*.*.*********s*n******************************************************1**5*6**** Offer to one of several jolnt promises .. oessnnnnssee************************ Validity of discharge by one of several joint promises. ********

S. 39 Effect of refusal of party to perform promise wholly. Refusal to perform

157

157

57

contr*a*c**t.*.*.***************************i************************** 158

Scope of section. ***s*sennnsunn****************************************************160 Reason for refusal to perfo**r*m**..*.************************************************"**** 160 Disabled himself from per*f*o*r*m **i*n*g**".*.**********************************************160 "Promisee may put an end to the

contra**c*t*"*..*.************************************

160

XXV

Contents

Anticipatory**b **r*e*a**c*h*.************************************************************************* 161 162 Contractof service... *****

************************************************************************

Waiver of right to rescind...

s**

********

162

Measure of d **a*m **a **g*e**..*************************************************************************** 162

By whom Contracts must be Performed S. 40

Person by whom promise is to be Personal

perform **e**d*.*.*******************************

co **n*t*r*a*c**ts**.************************************************************************* 163

Vicarious performian il*c*e*.n*seossenness***ossswneeon**************.

S. 41

162

Effect of accepting performance from third person*.**********************

S. 42 Devolution of joint liabilities...

163

*****

Liability of joint promisors*.*.********************************************************** 164

S. 43 Any one of joint promisors may be compelled to

perform.. *******

165 165

Each promisor may compel contribution....

Sharing of loss by default on contribu*ti*o*n**..*.********************************** 165

Joint promisors....

************.

********************************

Effect of decree against some only of joint promiIsoo*r*s**..************************

165 166

.Suit against one of several pa*r*tn **e*r*s*.*.*.***********************************************166 Co-heirs.

**************************************************************************************************

167 167

Contribution between joint promisors

When liability to contribaulltded.a**ri*s*e**s*.*************************************************** 167 . Contribution between mortg*a **g*o**r*s*.****************************************************** 168 168 Contribution between tort-feasor1sd. ..****** ****************************** Contribution between partne**r*s*.*********************************************************** 168 S. 44 S. 45

Effect ofreleaseof one joint promisor.

Devolutionof joint rights....

* ************************

168

****************** ***

169

********

Rights of joint p*r*o*m **i*s*e**s*.*.**************************************************************1*6* 9 169 Right to performance of promisees during joint livw es**..******* Suit by a surviving *p **a*r*t*n*e**r.*.************************************************************170

Deceasedpartner's estate..

******************

*****

***

170 170

Time and Place for Performance S. 46

Time for

performance

of promise where no application is

made and no time is specified..

to be 170

*******

Time forPerformance.

*******

170

*******

Reasonabletime **.********

171

E ICnIgnat.g..e**m**e*n**t.***********************************************************************************171

S. 47

Time

and

place

for

performance

of promise

specified and no application to be made.********* S. 48

Application

where

time is

*******""*****************

171

for performance on certain day to be at proper time 171

xxvi

Contents

S. 49 Place for performance of promise where no application to be made and no place fixed for performance... i Place for Performance.

171

Placeof delivery.. S. 50

172

*

Performance in manner or at time

promisee.

171

prescribed or sanctioned by 173

'****************

**********************1***********

Manner of perfor*m **a **n*c**e*.*.**************************************************************** 173

FS. 51

Promisor not bound to perform unless reciprocal promisee ready

and willing to perform..

Simultaneous performance... Consequences of partial default in performance...

Waiver ofperformance..**********************************

************************"************

Order of performance of reciprocal promises. Order ofPerformance..

S. 53

Liability

of party preventing

take effect..

. .

*****************************.

Readiness and willingness.

S. 52

176

* *****************************

176

176

*************"********************************

Voidableatoption ..

**

promise which should be

med in contract consisting of reciprocal Promisses. Default of promisor in first performance.. S. 55

175 175

******************************

*******************************************************************************************

Effect of default as to that

174

event on which the contract is to

Impossibility created by act of party.

S. 54

174

**********************************************************

Effect of failure to perform at fixed

first perfor*****************

**************************************

time, in

177 177

178 178

contract in which

time is ess*e*n**ti*a*l*.****************************************************************************178

Effect of such failure when time is not essential.

*****************

Effect of acceptance of performance at time other than

that2

agreed **u*p**o*n**..*.***************************************************************************1*79 Time as essence of con*t*r*a*c*t*.*.***************************************************************" 179 179 Failure to performintime..

TimeWhen

not ofessenceof contract.

Time when ofessenceof contract..

i********* *******

.Performance inreasonable time. S. 56

Agreement to do impossible

act.

*******************************************************

Contract to do act afterwards becoming impossible or unlawful. .

179 182 182

183 183

Compensation for loss through non-performance of act known to be impossible or

unlaw*f*u*l*.*..******************************************************

Impossibility in general*..******** Impossible in itself.

Subsequenitmpossibility or unlawfulnes..

Stoppageofworkby strike.. Frustration by total or partial prohibition. "Becomes impossible".. ****** * ********************

183 183 184 184 185 185 186

xxvii

Contents

.

impo*s*s**ib**il*it*y*.*.*************************************************************1*87 187 S. .... 2 "Becomesunlawful"... Frustration of contracts.*.*.******************** *************s***************************** 188 Commercial

Nofrustration ofcontracts.. Effectsof frustration...

******************e**********************************************

co.188 188

R **e**fu **n*d**..*****************************************************************************************1*88 189 Innocent Promisee entitled to Compensati*o*n ******************************************

S. 57

Reciprocal

promise

illegal. .

to do things legal, and also other

************

Scopeof the section.. S. 58

things

**********************************************************

189 189

189

Alternative promise, one branch being illegal..

Appropriation ofPayments S. 59

Application of payment where debt to be discharged is indicated... Appropriation of paym**e*n*t*s*.*.************************************************ Debt ..... **s****n*n*e **n*n**n*s************************************************************************************

Several distinct debts..

S. 60

Application

******************************************************************************

190 190 190 190

of payment where debt to be discharged is not indi-

ac.************************************************************************************************

Creditor'srighttoappropriate ..

191 191

Contract of g*u*a **r*a*n**te**e*.*.**************************************************************1*9*1 Principal and interes**t*******************************************************************"

Debtbarredbythelawof limitation.. S.61

***

***

Application of payment where neither party appropriates.

191

192

192

Scope of the *s*e*c**ti*o*n **..***********************************************************************1*92 Mortgage of joint Hindu family prop **e*r*t*y*.*.****************************************** 192

Contracts which need not be performed

S. 62

Effect of novation rescission and alteration of contract.

193

Assent of *a*l*l***p*a*r*t*i*e*s*.*.*.***************************************************************1*9*3** Discharge of existing c*o*n**tr*a**c*t*.**********************************************************193 Ovauol.********************************************************************************************

193

Assignment and novation distinguishe*d*.*.*******************************************

194

Newenforceable contract..

194

*************************************************

Effect ofunauthorisedalterationof documents.. Novationbeforebreach.*************************************************************************** KescSSIOn... S. 63

sss***sss****s*sss***ssass*ssasasasssnssnsasnsn

Promisee maydispense with or remit performance of

promise..

194

196 196

196

197 Rule of the Common Law. ********************************************************************* Scope of the****s*eecste ioens.*..******ese*******************************ssanasas***sseea1n9a7***

Remission of perform **a **n*c**e*.************************************************************** 197 Agreement to exten**d***t*im **e **.*..*************************************************************1*98

Acceptanysatisfaction*.*.*****************************s*nenunen***** *ma S. 64

Consequencesofrescissionofvoidable contract...

***

198

199

Scope of the s*e*c**ti*o*n**..**************************************************************1*99

Kxvii

Contents

Minor'scontract. Election to rescind..

***************unounese*******.**i*******************.

199

*************************************************************** *******

199

Benefit received "thereu **n*d**e*r*"*************************************************************200

S. 65

Obligation

of person who has received advantage under void

200

agreement or contract thatbecomesvoid.

Scope of t*h*e****s**e*c*t*i*o*n*.*.*.**************************************************************2**0*1** Where anagreementisdiscoveredto be**v**o*i*d*.**********.*.*************************202 When a contractbecom**e*s*****v*o*i*d*"*.*.*********************************************2**0*3 Contracts with corp*o*r*a**ti*o*n**s*.*.***********************************************************204 "A*n*y****p **e*r*s*o **n*"*.*.*.**********************************************************************2**0*5**** *********A*g **e*n**t.*.******************************************************************************************2 **0*5 206 206

"Received any advantage". ************************************************************************* Value ofadvantage,Burden of proof... ...

S. 66

Mode of communication or revoking rescission of voidable con*******************************

e 206

S. 67 Effect of neglect of promisee to afford promisor reasonable facilities for

e

perfor*m **a**n*c*e **.*******************************************************************2*0* 6

Refusal or neglect of pr*o*m **i*s*e**.***********************************************************207

CHAPTERV

OF CERTAIN RELATIONS RESEMBLING THOSE CREATED BY CONTRACT Quasi-Contracts or Implied

S. 68

Contra*c*t*s*.*..*****************************

208

Claim for necessaries supplied to person incapable of contracting,

or on his account...

.

.

208

Person incapable of entering into contr*a*c**t.*****************************************

.

Any one whom he is legally bound to suppo**r*t***************************************

209 209 209

Remedy,Nature of.*.*************************************************************2*0*9* S. 69

Reimbursement of person paying money due by another, in payment of which he is

intere*s*t*e*d**..********************************************* 209

"Person.. interested in thepayment of money".

*****************************

210

Bound *b*y*****L **a*w **"*.*.************************************************************************2 **1*1

S.70 Obligation of person enjoying benefit of non-gratuitous act.. Non-gratuitous act done for anot*h*e **r*.**************************************************

Essential conditions of this sectio**n**.**********************************************************

212 213 214

Person liable to c*o*n **t*ri*b*u **t*e***.*..*************************.*.*.*..*.*.*.*.*..*.*.*.*.*..*.*.*.*.*.*..*.*.*.********2**1*4* 215 Quantum of Compens**a*t*io**n*.*.**************************************************** ***"*L*a*w **f*u*l*l*y************.**************************************************************2*1*6****** Personsincompetent to contract.. 216 Contracts required to be in writi*n*g**..*.*************************************************** 216

S.71 Responsibility of finder of goods...

217

. ....

Lia*b*i*li*ty**o*f*fi*n*d**e*r*.********************************************************2*1*7***** Agency

******

***********************************i****************************

xxix

Contents

S. 72

Liability of person to whom money is paid, or thing delivered, by

mistakeor under

coercion...

*** ********************

218

Payment under mistake of fact or mistake of law.

221

DeIences. ********************************T ayment not under a mistake.

218

**********************************************************

Coerci*o*n **.*.************************************************************************************

221

222

CHAPTER VI

OF THE CONSEQUENCES OF BREACH OF CONTRACT S. 73

Compensation

Compensation

for loss or damage caused by breach of

223

contract..

for failure to discharge obligation resembling

thosecreatedby contract..

******

Breach of Contract and Remedies .*.*************************************************************

223 225

Remedy provided by this section not the only remedy for breach of

Rule in Hadley v. Baxendale. **** Market rate: limits of rule..**********************************************************************.

If noreadymarket ...

.... ....

........ ...............................

Notice of contract ofresale*.******************************************************************

226 226 228 228 231

Chain or COnuractS. .............. oonomanassssenssen***************************************** 232

234 234 Duty tomitigate loss. ****************************************************************************_ ***se*nssaaaa"......... Contracts relating to immovable property. 235 Interest by way of *d*a**m**a*g**e*.*.******************************************************** 235 Damages Recoverable under Revenue Recovery Ac*t*.*.*************************** 236 Explanation to Section 73: "means which existed

S. 74

elc.

n

Compensation for breach of Contract where penalty stipulated

******1**o*r**********.**************************************************************2**3*6****** Scope o*f*th **is ****S **e*c **ti*o*n **.*..********************************************************2*3**7**** Penalty and liquidated dam**a*g*e **s*.********************************************************** 238

Stipulations for interes**t.*.******************************************************** 240 I. Stipulations forenhancedrate of interest. ************************************ 240 II. Stipulations for compound intere**s*t*.*****esnneeses********************** 241

III. Stipulations for payment of interest if principal not paid on due 241

IV.

Stipulations for payment of interest at a lower rate, if interest

242

paidregularlyonduedates .. V.

Stipulations for payment of interest from date of bond, the rate of

242

Withdrawcoa oflncessiopnaaylments..

243 ************

243

*******************************

244

Deposit onagreement for purchaseof immovable property.

Deposiotstheth r aenanem stoney.

244 Consent decree . ****************************************************************** "Reasonable compensation"...**************************************************** 245 Onus of proof to prove actual extent of da*m ***a*g*e **.*.******************************** 245 247

Exception mentioned in S. S. 75

74-Scope..

Partyrightfully rescinding contract entitled to compensation.

247

247

Contents CHAPTERVII

SALE OF GOODS CHAPTERVIII

OF INDEMNITY AND GUARANTEE S. 124

Contract" of indemnity defin**e*d*.********************************************* 250 Indemniy.

..

.mooo

aooo

****-

Commencementand Extent of Indemnifier's liability.

S. 125

Rights of indemnity holder when

Rights ofindemnityholders.

*****************************

sue*d*.*.*********************************** 251 ******************

***************

Sub-SectioIn .*.***************************************************************************************** Sub-Section2..

*************************************

lim Oitua*t*io **n*.*.******************************************

Rights of promisor. **********************************************************************************

S. 126

Contract

of guarantee," "surety,"

ereditor."..

"Principal

252 252 253

253

debtor," and 253

"Discharge Liability"...

255

S. 127 Consideration for guarantee..

255

Consideration for a contract of guarante.

S. 128

251

252

Sub-Section3 .. Cause of action and period of

250 250

***********************************

256

Surety's **l*ia**b*i*li*t*y*.*********************************************************************2*5**7 257 Proof ofsurety'sliability ************************************************************************** MadrasAgriculturists'Relief Act.. ** ***************************| 257 257 Liability for whole orpart ofdebt ... **************************************************

Co-extensi*v*e****l*ia **b*i*li*t*y*.*..*************************************************************2*5*8** Surety's liability where original contract is void or voidable . 259 ********************| 260 Limitation.********************************************************************************.*..

S.129 "Continuing guarantee".

260 260

Continuingguarantee. ************* S. 130

Revocationof continuingguarantee.************

*******

Revocation of continuingguarantee*. ******** * *** *****

Future transactions.. .........

261 262 262

........ss..sn.au...sa...aa..a..aa..

Contrac*t*in**g***o*u**t.*.***************************************************************************2*62 S. 131

Revocation of continuing guarantee by surety's death... "Contract to the contrary".

S. 132

Liability of two persons, primarily

263

*********************

263

liable, not affected by arran-

gements between them that one shall be surety on other's default...

263

Joint debtorsand internally oneof them a surety for the other.

263

S. 133 Discharge of surety by variance in terms of contract. *****

264

Variation of contract between creditor and principal .*.********************* ***

Contractingout or waiver of rights by Surety ..

*****

264 266

Contents S. 134

XXXI

Discharge of surety byrelease ordischarge of principal Creditor'sdischargeofprincipaldebtor..

debtor..

**********************************************

"Act oormissioo nfthcereditor. Creditor's omission to sue principal within limitation period.

S. 135 Discharge of surety when creditor compounds with, gives time to,

oragrees not tosue, principal

debtor..

s************************

267 267 268 268

269

269 Sure*ty**'s*a*s**s*e*n **t*..***********s*n************************************************2*7*0***** Contract to give time to principal de **b*t*o*rs.ss******************************************

S. 136 Surety not discharged when agreement

made with third person to

gve me to primcipalueDtor S. 137

eessnnnn

********************

Creditors forbearance to sue does not discharge surety..

***********

270 270

**r*a*n**c*e*.*.****************************************************************1*2**2**7*1** Mere fo**r*b*e*a

S. 138 Release of one co-surety does not discharge others..

***************

Releaseof one ofseveral surew tie.*s*.***************************

***********

271 271

S. 139 Discharge of surety by creditor's act or omission impairing sure 271

ty's eventualremedy. Act or omissionof creditortendingto impairsurety's remed**y*..**********T Act or omission impairing surety's eventual remedy..

************************

271 272

S. 140 Rights of surety, on payment or performan*c*e**..*.***************************

272

S. 141

273

Surety's right to benefit of creditor's securities.

**********************

**************** "To the extent of the value of the secu*r*i*ty**"*.*****************************************

274 275

When surety becomes entitled to benefit of creditor's securities.

275

Surety'sright tobenefitofsecurities..

*********

S. 142

Guarantee obtained by misrepresentation

S. 143

Guarantee obtained by concealment invalid..

************

inval*id **.************************** **************

Guarantee obtained by misrepresentation or concealmen**t*************"*********

.Misrepresentation orsilence by creditor..

S. 144

ssssssssen*********************

276 276 277

Guarantee on contract that creditor shall not act on it until co

Surety joins...

***********************************************************************

S. 145 Implied promise to indemnify Surety's right to indemnity...

277

************************************************************

277 278 278

*************************************************

Guaranteewithoutconcurrenceof principal debtor..

S. 146 Co-sureties liable to contribute Contribution by co-sureties ***

277

***********************************.

surety..

"Whatever sum he has rightfully paid".

S. 147

276

equally..

****************s**********C * 279

*************************************************************

Liability of co-sureties bound in different sums..

279

Contents

xXxii CHAPTER IX

OF BAILMENT Bailment S. 148

"Bailment,"

"bailor," and "bailee"

defined.

281

*****

Natureof the transaction..

**************************

No bailmentwherewholepropertytransferred. S. 149

281

283

Delivery to bailee, how m**a*d**e*.*..*******************************************************284 Putting bailee in poss*e*s**s*i*o*n*.*.*.****************************************i***********h*** 284

S. 150

Bailor's duty to disclose faults in goods bailed.

*********************************

...

Bailor'sduty todisclosematerial faults.. S. 151

Care to be taken by bailee. ***

T28S

**********************************************

PrudentMan's Care.*.*.***********"******** Commoncarriers. ****

284

***************************

285 285 286

.

anh+#nnsosn*s***********

Carriers by **r*a**il*w**a*y*s**..******************************************************************2*8* 6 287 Innkeeper.. Carriagea*b*y**************************************************************************************** 287 Se*a*****C**a*r*m **e**r.*.*.***********************************************************************2*8**7*** Burden or proor.. e*onn.ennannn**************************************************2*8**7

Contract by baileeexempting himself from liability for negligence.. Bailee's liability fornegligenceof servants. ****************************|

S. 152 Bailee when not liable for loss, etc., of thing bailed.

No liabilityforlossifcaretakenby baile... S. 153

288 288

************************************

Termination of bailment by bailee's act inconsistent with condi-

Terminationof bailment.. S. 154

*******************

Liability of bailee makingg unauthorised

********

288

******

289

use of goods bailed.**********

289

Bailee's liability for unauthorised**u**s*e*.*.************************************************ 289

Bailor's remedy.. S. 155 Effect of mixture, with bailor's consent of his goods with bailee's. S. 156

Effect «

289

289

mixture, without bailor's consent, when the goods can 290

be separat*e*d **.*..***************************************** S. 157

Effect of

mixture,

cannot be

without

bailor's

consent, when the goods

separ*a**te**d*.*.*.*************************************************************** 290

**

Mixture of goods by *b*a*i*l*e*e*.***************************************************a**

S. 158

290

*

290

************.

***********

290

*******************

*************

291

Repayment by bailor of necessary expenses. ***************** Bailor to pay expenses to gratuitous bailee

S. 159 Restoration of goods lent gratuitously. S. 160

of time or accomplishment

ofpurpose.

******************************"**************

Duty to return***************************************************

*****************.

291 291

XXxii

Contents S. 161

Bailee's responsibility when goods are not duly

Bailee'sliability forloss,ifgoodsnotreturned. S. 162

291

returned.

291

***************

292

.

Termination of gratuitous bailment by death.

Terminationog f ratuitoubsailment.

292

292

S. 163 Bailor entitled to increase or profit from goods bailed.. Bailor entitled toincreaseor profit.

*********"****************

292

S. 164

Bailr's

responsibility to bailee. **********************************

S. 165

Bailment by several joint *o*w **n**e*r*s*.*.*.******************************************r**2**93 Bailment by joDin**t*o**w*n **e*r*s*.*.**********************************************************2*9*3

S. 166

293

Bailee not responsible on re-delivery to bailor without title.. ********

Return of goods to or to-the order of the ba*i*l*o*r**..*********************************** 293

.Estoppelof bailee.

293

*********************************************************************************

293

S. 167 Right of third person claiming goods baile*d*.*.**********

.Third pa*r*t*y*'s****ri*g*h **t*..*.*.****************************************************************2**9*3**

S. 168 Right of finder of goods, may sue for specific reward offered.

Finderogfoodsri,ghtstosueandto retain.. S. 169

294

8

When finder of thing commonly on sale may sell it .

294

Finder's r*i*g*h*t**t*o**s*e**ll*.******************************************************************2**9*4**

S. 170

Bailee's particular

294

lien*.*.*****"***

Principle of baile*e **'s***l*ie **n*.*****************************************************************2*9 *5 Parti*c*u**la**r***li*e*n**.****************************************************************2*9**5**

No transfeorflien..

*****************************************************************

295

296 Particu*la**r***li*e*n**s*.*..*.*********************************************************************2*9 **6** Contract to the con*t*r*a*r*y*.********************************************************************

S. 171

General

lien of bankers,

factors,

wharfingers,

attorneys and

296

policy-brokers..

General as distinct from particular lien. ................. *************************** 296 Effect on right of lien underspecial statute. ***************************************** 8 296 Lien of b**a*n**k*e*r*s*.*.******************************************************************************2 **96

Factor.

.Wharfingers. Attorneys.

***********************************************************************************************

297 298

*******************************************************************************************

298

r. S. 172

"Pledge"

"pawnor" and "pawnee" defin*e*d*.*.********************************** 299

299 Subject-matter of a***p **le **d*g**e*.*.***********************************e*****************3**0*0 300 Pledge and hypothecation distinguished..

Ingredientsof apledge.

********************************************************************

300 Lien andpledgedistinguished... ***********n*nsss*n**enm****************************** Pledgeandm **o **r*tg **a*g**e*.******.*********************************************3*0*0*******

Rights and liabilities of**p*l*e*d**g*e**.******************************************************3 **0|0

Contents

XXXIV

S. 173 Pawnee's right of retainer.

* ******************301

Right of *re **t*e*n*t*i*o*n**..****************************************************************

301

S. 174 Pawnee not to retain for debt or promise other than that for which goods pledged. Presumption in case of subsequent

advances..

*************************************"********

*mmanaaeenn****

Retention not for any other *d **e*b**t.*.*.*******************************************************

S. 175 Pawnee's right as to extraordinary expenses incurred..

***************

**..** *********************.************* S. 176 Pawnee's right where pawnor makes defau*l*t*..*************************** "Entitled to receive

301 301

302 302

302

Pawnee's****r*i*g*h**ts**..**************************************************************************3**02 302 "May sellthethingpledged", 303 Cannotsellto himself.. *********************************** ***************************** 303 *ss*nassennn**sesnsss****************************************** 303

Reasonable notice of sale, requirem*e**n*t**o*f******************************************** NOIce to surety..

S. 177 Defaulting pawnor's right to redeem... Pawnors right to redeem.. Limitation...

***

*********** *********

303

********* **********

*********

**** ****

**********************************

S. 178 Pledge by mercantile agent...

304 *******1 *******.*.*..*.*.*

Pledge by mercantile agent..*..*********

Antecedentdebt..

*******************************************************************

Possessionwith Owner's consent.*.*.*****

304 304

304 305

Acting in the ordinary course of business.***********************************************

305 306 307

Notice.. *sssnassanse****.* Seller or buyer in possession after **s*a**le**..*******************************************

307 307

Pledge by seller remaining in possesio**n*.*.******************************************

307

Goodfaith..

***

****

Pledge by buyer obtaining poSse**s*s*i*o*n**..********************************************** 307 307 Competition betweeen prior mortgagee and subsequent pledge... 307 Documentsof title to goods... *************************************************

Revocationof authority ofmercantileagent.

308

S. 178A Pledge by person in possession under void-able contract*.*.******* **. Pledge by person in possession under voidable contract..**************** Pledge by co-owner in possession. ********************.

Good faith..

ss**eseensess.....s...

308 308 309

309 *********N*o **t*ic*e **.*.*******************************************************************************3*0**9****

S. 179

***************************************************************************.**

Pledge where pawnor has only a limited

intere*s*t*.***************************

309

Suits by Bailees or Bailors against Wrong-doers

S. 180 Suit by bailor or bailee against wrong-doer.

309

S. 181

310

Apportionment of relief or compensation obtained by such suits...

Contents

XXXV

AGENCY

Appointmenatnd Authorityof Agentsei wirls S. 182

Agent" and principal defined.

*****************

Principal and Agent.. ***************************************s**** Nature ofagency ingeneral.

812

******sss

******

*******************************************************************************

Law ofPrincipalandAgent...... S. 183

Who may employ agent ********************

313

QualificationsoP f rincipaalndAgent .. Consideration

312 312 312

313

*****

S. 184 Who may be an agent...

S. 185

311

*******************"***********************************************

Co-agents.

Co-principals..

311

*****

not necessa*r*y*.*******************

*****

Consideration not ne*c**e*s*s**a*r*y*.*******************************************************

S. 186

Agent's

authority may be expressed or implied.

S. 187

Definitions of ex- press and implied

313

313 313

313

autho*r*it*y*.*..****************************** 313

Agency, how cons*ti*t*u*t*e*d**..**************************************************************** 313

316 ************************************* Authority not **i*m **p*l*ie **d*.****************************************************************3*1**6 Husband a*n**d**w **if*e**..********************************************************************3 * 17

Authorityimplied.

S. 188 Extent of agent's authority..

Incidentalauthority.

St

S. 189

*************"***********

318 Extent of incidental authority..ms*enenenen****************************************** 318 319 Authority to do every lawful thing necessary for the purpose. ************** Authority of counsel, attorney, and plead*e**r.*.************************************* 319 **f**f*a*c*t*o*r*.*.********************************************************************3* 20 Authority o 320 Authority of broker. ******************************************************************************* 320 Authority of auctione.e*r*.*****************************.**.***.*.*+*s**n**s*s*.*...ss...ss...sss.. 320 Authority of shipm*a**s*t*e*r*.*.***********************************************s*** ********************************************************************************

Agent's authority in an emergen**c*y*.********************************** Protecting principal in an emergenc*y*******************************

321

**********

Sub-agents

S. 190 When Agent cannot delegate... S. 191

*****************"***

322

Delegatus non protest de*l*e*g**a*r*e*.*.******************************************************322 "Sub-agent" de*fi*n*e**d*.*.****************************************************************323

Sub-*a*g**e*n*t*.*.*******************************************************************3*2*3*

S. 192 Representation of principal by sub-agent properly appointed... Agent's responsibility for sub-agent.. euseonenneu*ssenerenn******************

323

23

Sub-agent's responsib*il*i*ty*.****************************************************************|323

Principal, Agent, Sub-agent,third party

***********************************************

Agent's responsibility for subag*e*n*t*.**********************************************

23 324

Contents

XXXV1

S. 193 Agent's responsibility for sub-agent appointed without

authority...

Unauthorizedsub-agent...

*****

324 324

S. 194 Relation between principal and person duly appointed by agent

to act inbusinessof agency.. ***** Substitute Agent..

324

************************************

********************************************************************************

S. 195 Agent's duty in naming such perso*n**.*****************************************"

325

325

******D **i*s*c*r*e**ti*o*n **.*********************************************************************3*2*6******** Ratification S. 196

Right of person as to acts done for him

Effect of ratifīcation.

without his

authority.

********************************************

******

Conditionof Ratification. Essence of ratification.. *************************************************************************

326 326 326

Legal effect of Ratific*a**ti*o*n **.***************************************************************** 327

Timeto ratity..

..**...*-*ss*****

"Acts done without knowledge or authority".*.*************************************|

t

327 327

327 327 What act cannot be ratified **.******************************************************************* Agents of Gov*e*r*n*m **e **n*t*.*.*************************************************************** 328

Retrospectiveeffect.

S. 197

***************************************************************************

Ratification may be expressed or

impli*e*d**..************************************ 328

. Expresrastific*a*t*i*o*n*.******.***************************** Implied

ratification by

328 *c*o **n*d**u*c*t*.*.*.***************************************************3* 28

****

S. 198 Knowledge requisite for valid ratification.

***************************************

328

Knowledge offacts to precede ratification.

**********************************

328

S. 199

Effect of ratifying

unauthorized act forming part of a transac-

S. 200

Ratification of unauthorised act cannot injure third person ...

**

Revocationnot toprejudicea third party ***..*********************************o

329 329

Revocationof and renunciation Authority

S.201 Terminationoa f gency ..

********************

Termination of Agency**..*.*****************

ns***s*********************************

.Termination ofagency. *************************************************************************** Revocation by principal.

Renunciationby agent.

********************************************************************.

Completion ofbusiness of agency.

Deathof principal. Where the agency is for a fixed term..

S. 202

Termination

329 330 330 330 330 330

.................. ..................

*****

*************************************************

331 331

of agency where agent has an interest in subject-

**m **a*t*t*e*r*.*..*******.************************************************************************3*3*1****

XXXVÍi

Contents

S. 203 When principal may revoke agent's What amounts "to exercise of

S. 204

authori*t*y*.*. ***************************

authority*"*..**************************************** 332

Revocation where authority has been partly exercised..

333

************

Authority partly exe*rc**is**e*d*.*.****************************************************************

S. 205

332

333

Compensation for revocation by principals or renunciation by ****a*g**e*n*t*.*.***********************************************************************************3*3*3 Compensation for revAo*c*a**ti*o*n**..********************************************************* 333 Sufficien*t****C*a **u*s**e*.*..*******************************************************************3 **3*4*

334

S. 206 Notice of revocation or renunciation*.*.******************************** Noticebefore revocation.. S. 207

************************************************

Revocation and renunciation may be expressed or implied.

334

****

334

**

Form roefvocation/renunciation**.****************************sseenn******seeann**********

334

S. 208 When termination of agent's authority takes effect as to agent, and as to third p*e*r*s*o **n*s**..*.*********************************************************334 Time from which revocation ope*r*a*t*e**s*.**********************************************

S. 209

335

Agent's duty on termination of agency by principal's. death or

insanity

335

********

335

Agent to protect the interest of the legal representatives of the principal..

S. 210 Termination of sub-agent's authority..

335

****************

Agent's Duy to Principal

S. 211 Agent's duty in conducting principal's

335

business...

*****

Acts otherwise or departure from instruct*i*o*n**..*.************************************

"If anyloss besustained"-measure of.

336 336 336

***************t****************** Customs o**f***tr*a**d*e**..*.***********************************************************************3 **3*7 Del credere a **g*e**n*t******************************************************************************* 337 337 UsageoftheBombaymarketknownasthepakkiadatsystem. .. Usage of the Bombay market known as the kachhi adat system in cottounicSbSu.s.*in **e*snsn.e.nss***************************************************************************** 338

339

S. 212 Skill and diligence required from agent..

Us**e**o*f***s*k**il*l.*******************************************************************************3**3*9** 339 Reasonablediligence. ************** ********************* **** 340 Paymentof Compensation. ********************************************************************

S. 213

Agent's

a*c**c*o*u **n*t*s*.*.************************************"******************************3**4*0

Agent's duty to account. .. .. .. ... ... .. ... .. principa. Suit by agent against ****************************************************************

E

340 341

Legal representatives of**a**g*e**n*t************************************************************* 341

Liability to account bribe or Secret Commission received by agent.

341

Right of Agent to sue his principal for accounts..

341

S. 214 Agent's duty to communicate with

principal...

342

Duty to com*m**u*n**ic*a **t*e**.***************************************************************3*4**2*

XXXViii

Contenis

S. 215

Right of principal when agent deals, on his own account ness of agency without principal's consent.

in busi***.

Rightsof Principal.. *****************************************************************************

342 343

Principal's right to benefit gained by agent dealing on his own account in his business of agency. ********************************************************

343

Agent not to deal on his own account.

S. 216

342

343 Forfeiture of comm*is*s**io**n*.*.*.*****************************************************************344

Principal'srightsto profits.. ********************************************************************. Disclosure to

prin **c*i*p*a**l.*.*************************************************************o *****"344 344 Agent selling his pre-agency property to principal. ******

S. 217

Agent's

right of retainer out of sums received on

principal's

account. ************************************************************************************************* Agent to retain his dues out of Principal's moneys.

***********************************

S. 218 Agent's duty to pay sums received for principal..

************************.

345 345

345

***************************************************************

345

Mode of payment... ********** ****************************************************** Payments in respect of illegal transaction. -*uee*..4a--*ss.......

345 345

Agents duty to pay to Principal.

S. 219 When Agent's remuneration becomes due .*.*************************************"*

346

"Special *c*o **n*t*r*a*c**t"*.************************************************************************3 **4*6 346 Completion of such ac **t********************n**a*s*s**a********************************************************* 346 Agent prevented from earning remuneration.*..**************************************. 347 Quantummeruit remuneration..sssasaason**.

S. 220 Agent not entitled to remuneration for business misconduct.

Noremuneration ifagentguiltyom f isconduct.

347

.....

*M **i*s*cnoanedsuscste..*nossnesesns*.e*essunen**snasseenn********* S. 221 Agent's lien on principal's property. ******************* **************** Possessoryand Particular lien.

*********************************

s*a*********

348 348

348 348

Agent's lien.. ********************************

349

How far lien effective against third persons.

349

Lienofsub-agents.**************************************************"

349 349

Lien

how lost or extinguished*.*.****************

Principal's Duty to Agent

S. 222 Agent to be indemnified againstconsequencesof lawful acts..

******

350

Limits ofagent's in**d*e**m**n*i*ty*.*.*.*******************************************************3**5*0

."Lawful"... ..... S. 223

Agent to be indemnified

351

against consequences of acts done in

good *f*a*i*th******************************************************************************************351

UnlawfulActs.. Bailiff.

S. 224

*********************************************************************************.

*******************************************************************************************************

Non-liability of employer of agent to do a criminal act.

S. 225 Compensation to agent for injury caused by principal's

351

352

********

352

neglect...

352

Contents

XXXIX

Compensation to agent for injury by neglect or want of skill of **p*r*i*n*c*i*p*a **l.*.*.***********************************************************************************3*5 *2

Effect ofagencyoncontracts with thirdpersons Inl non9 S. 226

Enforcement and consequences of agent's contracts.

353

*********

Contracts and acts done through agent, enforceable by or against

E 353

S. 227

Principal how far bound when agentexceeds authority. ...

S. 228

Principal

S. 229

arable....

not bound

when excess of agent's authority is not sep-

354

Consequences of notice given to

NoticetoAgent.

353

agent..*.****************

***"******

******************************************************************************

In course of business*.********************************************************************************

.

S. 230

355 355 355

Duty to communicate and material to busine*s*s*.**********************************|

Fraud on principal.

354

************************************************************************

355 355

Agent cannot personally enforce, nor be bound by contracts, on behalf of p*r*i*n*c*i*p*a**l.******************************************************************3*5*6

Presumption of contract to contrary..

*****

Enforceability of contracts by an agent.. Contract to the contrary.. usasn. **** Principle of the rule and exceptions..

****

********************.

******************************************

Presumed exceptions:.. *** .

.....................

356 356 356 357 357

) Foreignprin **c*i*p*a**l.*.*******************************************************3*5*7*** Principal undis*c*l*o*s*e **d*.*.**********************************************************3**58 359 (i) Principal not liable to be sued. ************************************************** Sovereign States as prianlcdi*p*a*l*s************************************************************ 359 (i)

**

S. 231

Rights of parties to a contract made by agent notdisclosed. Undisclosed principal's

************.

rights *to ***s**u*e*.*************************************************

"Discloses himself. S. 232

S. 233

Performance of contract with agent supposed to be

principal..

360 360 360

360

Rights of a third party if undisclosed principal su*e*s**..***************************

360

Equitiesbetweenagentand third party.*********.*.*******************************

361

Right of person dealing with agent personally liab*l*e*.********************* 362 In caseswhere theagentis personally**li*a*b **le **.*..********************************** 362 Creditor's *e*l*e*c**ti*o*n**.*************************************************************************3*62

S. 234 Consequence of inducing agent or principal to act on belief that

principal or agent will be held exclusively liable. Estoppealgainstthird party.. ****************** .Inducing beliefin agent/principal.. S. 235

Liability of pretended agent .

Liability ofpretendedagentto third person..*****

**********

363 363 363

363 363

x

Contents

."Untruly representinghimself". Measureof damages.

364 364

*******

****************

******

*******

365

S. 236 Person falsely contracting as agent not entitled to performance. Agent acting on his own account not entitled to require performance..

S. 237

Liability of principal acts were

365

inducing belief that agent's unauthorised

authoris*e*d**..*.*.***********************************************************365

Ostensibleauthority.. Notice ofexcess of authority.

"On behalfofhisprincipal".. S. 238

a

365 ****************************ss***

******************

* ***********

Effect, on agreement, of misrepresentation

or fraud by agent*..********

Liability of principal foragent'sfraud or misrepresentation.

Incourse of business..

*************************

In courseoef mployment..

****"*

Briberyof agent.

"***********

Right of principal to follow property into hands of third personIS s......... Personal liability of agent, to repay money received to principal's use.*..***

367 367

367 367 367 367

369 369 369

Money received by agent from a third person by fraud.

CHAPTERXI

OF PARTNERSHIPr (Repealed)

SCHEDULE..

*************

********

*****************************

Enactments Repealed*.*.*****************************************************************"********

371 371

SUBJECT **I*N **D**E*X **.*.****************************************************************************3**7*3**

INTRODUCTION The first six chapters of the Act contain the general principles of the law of contract. The remaining chapters refer to particular contracts arising out of the ordinary transactions of merchants and traders. The preliminary section 2 professes to be merely terminology but in eftfect it declares substantive law and embodies some of the principles of the English common law. Thus a promise arises out of the acceptance of an offer or proposal, and an agreement is a promise or a set of reciprocal promises. Consideration, is an act or abstinence of the promisee to do or not to do something the promisee wants done or not done. The section then classifies agreements as (1) void or not enforceable by law, (2) voidable contracts enforceable by one party only, and (3) contracts enforceable

by both parties.

Formation ofContracts

Chapter

refers to the formation of contracts. It sets out rules for the offer and

acceptance and revocation of proposals. A proposal or acceptance may be express or implied, expressed in words spoken or written or implied from conduct. A proposal remains open until it has been accepted, or if the parties are at a distance, until the acceptor has posted his acceptance-until then it can be revoked. If the parties are at a distance the acceptor may revoke his acceptance before his letter of acceptance has reached the proposer. The acceptance must be absolute and unqualified, otherwise, there is no agreement. An offer or proposal may lapse, if it is not accepted within a reasonable time.

Voidable Contracts and Void Agreements

Chapter II set out theessentials of a legally enforceable agreement or contract. It states the circumstances when it is voidable or enforceable by one party only, and when the agreement is void, i.e. not legally enforceable and not a contract. These matters have

been summarized in the chart or analytical statement given in the Sec. 30

commentary under

Contingent Contracts Chapter III refers to contingent contracts, i.e. contracts which are conditional on some future event happening or not happening-Sec. 31. Contracts of insurance or of indemnity are contracts of this cass. Such contracts are enforceable when the future event or loss occurs, e.g. insurance money on a policy of fire insurance is payable when the fire takes place. The contract may be contingent (1) on the happening, or (2) on the not happening of a future event.

(1) If it is contingent on the happening of a future event, event happens-Sec. 32. If the event becomes impossible, the 32. A agrees to pay a sum of money to B when he marries contract becomes void. If a time is fixed for the happening

it is enforceable when the contract becomes void-Sec. C. C dies unmarried. The of the event, the contract

becomes void if the event does not happen at the expiry of that time or if before the expiry of that time the event becomes impossible-Sec. 35. A agrees to pay B a sum of

cv]

cvi

Introduction

money if his ship returns within a year. The contract becomes void when the ship sinks within the year. (2) If it is contingent on a future event not happening, it can be enforced when that event becomes impossible-Sec. 33. A agrees to pay Ba sum of money if his ship does not return. The contract is enforceable when the ship is wrecked. If a time is fixed within which the event should not happen, it may be enforced if the event does not happen at the

expiry of the time or if before the expiry of that time it becomescertain that the event will not happen-Sec. 35. A agrees to pay B a sum of money if his ship does not return within a year. The contract is enforceable if the ship does not return within a year, or if it is

wrecked before the end of the year. If the future event is impossible at the time the contract is made, the contract is void whether the impossibility was known to the parties or not-Sec. 36. A promises to pay B a

sum of money if he marries C. Cis dead at the time of the contract. The contract is void. If the future event is the act of a living person,any conduct of that person which prevents the event happening within a definite time renders the event impossible-Sec. 34. A promises to pay B a sum of money when he marries C. C marries D. The event on which the contract is contingent is considered impossible although D may die and B may then marry C.

Performance ofContracts Chapter IV deals with the performance of contracts. A contract has for its subject the creation of an obligation between the parties. This chapter explains (1) who must perform his obligation, (2) the mode of performance, and (3) the consequences of nonperformance. (1) Who must perform-The promisor or his representative must perfom-Sec. 37, unless the nature of the contract shows that it must be performed by a third personSec. 40; but the promisee may accept performance by a third person-Sec. 41. If there are joint promisors all must perform, and after the death of any of them the survivors and the representatives of thedeceasedmust perform-Sec. 42. But the liability of joint promisors is joint and several, so that the promisee may require any one of them to perform the whole promise-Sec. 43, in which case there is a right of contribution even against a pro-

misor who has beenreleasedfromperformance-Secs.43 and 44. f thepromiseesare joint the right to claimperformance is joint and not joint and several. All must claim performance and, if some are dead, performance must be claimed by the survivors and the representatives of the deceased promisees-Sec. 45.

(2) Mode of performance.-The promisor must offer to perform and his offer must be (1) unconditional, (2) made at the proper time and place so as to give the promiseea reasonable opportunity of ascertaining that the promisor is able and willing to perform the whole of his promise, and (3) if the promise is to deliver anything, to allow the promisee a reasonable opportunity of inspection-Sec. 38. Performance may also be in the manner and at the time prescribed by the promisee-Sec. 50. If the promise is to be performed on a certain day on application by the promisee, it is the duty of the promisee to appoint a proper place within the usual business hours-what is a proper place is a question of fact-Sec. 48. If the promise is to be performed without application by the promisee, the promisor must perform within a reasonable time-Sec. 46; and if a day is fixed he must perform within the usual business hours on that day and at a proper placeSec. 47, and if no place is fixed, it is the duty of the promisor to apply to the promisee to

appoint a reasonable place-Sec. 49. If the promises are reciprocal they must be performed simultaneously.

If the contract is by A to deliver goods to B to be paid for on

delivery, A need not deliver unless B is ready and willing to pay for them-Sec. 51. If the

Introduction

cvii

order of performance of reciprocal promises is fixed by the contract, they must be performed in that order. If A contracts to build a house for B for a fixed price, A must build the house before B pays for it-Sec. 52.

Tf the performance consists of payment of money and there arc several debts to be paid, the debtor may indicate, or the circumstances may indicate, in respect of which debt the payment is made and the payment must be appropriated

accordingly. Such a circum-

stance is the payment of the precise amount of one debt-Sec. 59. If there is no express or implied instruction to appropriate given by the debtor, the creditor may appropriate to any debt lawfully due-Sec. 60. If there is no appropriation by either party, the payment must be appropriated in the order of time, whether the debts are time-barred or not, and if the debts are of equal "standing to all rateably-Sec. 61.

The mode of performance may be varied by agreement, for the promisee may dispense with or remit performance, wholly or in part, or may make a composition accepting a different

satisfaction-Secs. 62, 63.

(3) Consequences of non-performance.-If an offer of performance is not accepted, the promisor is not responsible for non-performance and does not lose his rights under the contract-Sec. 38, so also if the promisee fails to afford reasonable facilities-Sec. 67. He may sue for specific performance or he may avoid the contract and claim compensation-Secs. 39 and 53. If one party has disabled himself from performing his promise in its entirety, this anticipatory breach entitles the other party to avoid the contracts-Sec. 39.

So also if one party prevents the other from performing his promise-Sec. 53. If reciprocal promises arc to be performed simultaneously or in a certain order, one party need not perform unless the other party is ready and willing to perform-Sec. 51. There is also a

right to avoid the contract for failure to perform at the time fixed by the contract if time is of the essence of the contract, but if time is not of the essence of the contract the breach gives only a right to compensation-Sec. 55. A voidable contract is avoided by rescission. Rescission is communicated and revoked in the same way as a promise-Sec. 66. The effect of rescission is to dispense with further performance and to render the party rescinding liable to restore any benefit he may have received from the other party

Sec.64. Parties may agree to cancel the contract or to alter it or to substitute a new contract

for it. In such cases of rescission or novation there is no question of performing the original contract-Sec. 62. There is also no question of performance when an agreement becomes void or is discovered to be void, but a party who has received a benefit under such a contract is bound to restore it or to make compensation-Sec. 65. If the agreement is to do an act which is impossible or which becomes impossible or unlawful it is void,

but if the promisor knew and the promisee did not know that it was impossible orunlaW ful, the promisor must make compensation. Thus if A promises to marry B who does not know that A is married and that his marriage to her would þe bigamous and must make compensation to B-Sec. 56.

unlawtul, A

Quasi Contracts of Implied Contracts Chapter V refers to cases in which an obligation is created without a contract. Such

obligations are treated in English law as arising out of the fiction of a contract implied by law. In this chapter, however, the legal relations are defined and the obligations they give rise to arę expressly enacted. If a person incapable of entering into a contract, or the dependents of such a person, arc supplied with necessaries suitable to his condition in

life, the person supplying is entitled to be reimbursed out of the property of the incapable person-Sec. 68. There is thus a right of reimbursement for necessaries supplied to an infant or a lunatic. A person who is interested in the payment of money which another is

cvii

Introduction

bound by law to pay, and who therefore pays it is entitled to be reimbursed by the otherSec. 69. A tenant who pays arrears of rent, which the zamindar is bound by law to pay, and who pays it to avoid the forfeiture of his holding, is entitled to recover it from the zamindar. A person who enjoys the benefit of a non-gratuitous act is bound to make compensation-Sec. 70. If a tradesman leaves goods that have not been ordered at the house of a customer, the customer if he takes the goods is bound to pay for them. A responsibility of a bailee-Sec. person who finds lost property may retain it subject to the 71.If money is paid or goods delivered under coercion, the payee or recipient must repay or make restoration-Sec. 72.

Breach of Contracts andRemedies Chapter VI refers to breach of contract. It has been enacted in Chapter IV that in case of non-performance by one party the other party need not perform his part of the contract and is entitled to compensation for the loss occasioned to him. This chapter explains the mode in which compensation for breach of contract is estimated and follows the rules laid down in the leading English case of Hadley v. Baxendale. Damages for breach of contract must be such loss or damage as naturally arose, in the usual course of things from such breach or which may reasonably have been supposed to have been in the contemplation, of the parties when they made the contract as the probable result of the breach. Damages which do not fall within this description are said to be remote or indirect and cannot be claimed. The party who suffers by the breach must take all reasonable steps to mitigate the damages and the means he had for doing so must be taken into account in estimating damages. These rules are enacted in sec. 73, and are

explained by numerous illustrations.

The same rules apply to breach of the non-

contractual obligations referred to in the last chapter-Sec. 73, and also when estimating the compensation when a party rightfully rescinds a contract-Sec. 75. In case the parties have in the contract fixed a sum to be paid in case of breach it is enacted that the party

who suffers is entitled to receive only reasonable compensation not exceeding the fixed sum-Sec. 74. This does away with the distinction made in English law between a penalty and liquidated damages. The same rule applies to ordinary contracts with Government, but in the case of bail bonds or recognizances given to Government for a public purpose the whole sum fixed is recoverable.

Sale of Goods Chapter VII is repealed and re-enacted in the Indian Sale of Goods Act, 1930 (3 of

1930).s

9s

Indemnity and Guarantee.

Chapter

VIII

refers to contracts

of indemnity and guarantee. A contract of

indemnity is a contingent contract and belongs to the class of contracts which are the subject of Chapter III. It is a contract between two persons by which A promises to save B from loss occasioned by the conduct of A or of some third person-Sec. 124. Thus a contract by A to indemnify B from damages which may be decreed against him in a suit filed by C is a contract of indemnity. B is entitled to recover from A the damages decreed against him in C's suit, and if he has acted as a prudent man unindemnified would have acted, he is also entitled to recover the costs of C's suit and all sums paid under a

compromise of C's suit-Sec. 125. In a contract of guarantee, however, there are three parties, A the creditor, B the principal debtor and C'the surety who guarantees the default of the principal debtor-Sec. 126. The debtor is called the principal debtor because the surety is also a debtor. The creditor has therefore two persons he can proceed against, for the liability of the surety is coextensive with that of the debtor-Sec. 128. The consideration for the contract of guarantee is something done by the creditor for the

Introduction

Cix

principal debtor. Thus A supplies goods to B because C guarantees payment by B. The supply of goods to B is the consideration for C's guarantee-Sec. 127. A guarantee may be a series of transactions and, if so, it is called a continuing guarantee-Sec. 129. As to future transactions such a guarantee is an offer which does not become a promise or agreement until the transaction takes place. A continuing guarantee may therefore as to the creditor-Sec. 130; and is revoked as to future transactions be revoked by notice to

future transactions by the death of the surety-Sec. 131. A guarantee by a surety may be conditional on another person joining as co-surety-Sec. 144. A contract of guarantee is obtained by misrepresentation is invalid-Secs. 142 and 143. Co-sureties are liable equally, subject to any contract to the contrary between themselves-Sec. 146. Co-sureties are joint promisors, so on the principle of sec. 44 if one is released by the creditor, he is still responsible to the other sureties-Sec. 138. If co-sureties have bound themselves in different sums they are still equally liable upto those amounts-Sec. 147. Thus three cosureties A, B and C are liable upto Rs. 10,000, Rs. 20,000 and Rs. 40,000 respectively for a debt of Rs. 40,000. A is liable to pay Rs. 10,000 and B and C Rs. 15,000 each. Co-

sureties may contract with each other that one shall be liable only in default of the other. But if the creditor is not a party to the contract, his rights are not affected-Sec. 132. A surety has a right to be indemnified by the principal debtor for any sums he has rightfully paid in performance of his obligation-Sec. 145. He is also subrogated to the rights of the creditor and is invested with all the rights and securities which the creditor had against the

principal

debtor-Secs.

140 and 141. If the debt is secured by a mortgage and the

surety pays the debt he is entitled to enforce the mortgage. The surety guarantees the performance of the contract of the principal debtor. Therefore any variance of that contract without the consent of the surety discharges the surety for transactions subsequent to such variance-Sec. 133. For the same reason the surety is discharged if the creditor without his consent makes a composition with the principal debtor or gives him timeSec. 135. The surety is also discharged if the creditor does any act which impairs the rights of the surety or his remedy against the principal debtor-Sec. 139. So if the creditor parts with a security for the debt the surety is discharged to the extent of the value of the security-Sec. 141, and he is wholly discharged, if he without the assent of the surety releases or gives time to or promises not to sue the principal debtor-Secs. 134 and 35. But an agreement between the creditor and a third person not to sue the principal debtor is not enforceable by the principal debtor and has no elect on the liability of the surety-Sec. 136. Mere passive inactivity on the part of the creditor, such as forbearance to sue, does not discharge the surety-Sec. 137.

Bailment Chapter IX refers to bailment. Bailment is defined as a delivery of goods by one person to another for some purpose upon a contract that when the purpose is accomplished the goods are to be returned or disposed of according to the directions of the bailorSec. 148. The chapter makes no classification of bailments, but bailments of loan and hiring and for work to be done are expressly referred to, while bailments of pledge are separately dealt with. Delivery to the bailee is effected by doing anything which has the effect of putting the goods in possession of the bailee or of some one on his behalfSec. 149. It is the duty of the bailor to disclose to the bailee defects of which he is aware and if he does not he is liable for damage caused to the bailee-Sec. 150. If A lends B a gun which he knows is likely to burst, he must warn B of the defect in the gun, for the object of bailment is to confer a benefit, and not to do a mischief. If the bailment is for hire the bailor is responsible for a defect in the thing bailed whether he was aware of its existence or not-Sec. 150. It is the duty of the bailee to take as much care of the goods bailed as a man of ordinary prudence would take of his own goods-Sec. 151; and if he takes such care he is not responsible for their loss-Sec. 152. So that if the goods are

Introduction

CX

stolen from the bailee without any fault of his, the bailee is not liable. But the bailee must observe the conditions of the bailment and if he makes an unauthorized use of the goods bailed the bailor may avoid the contract and is entitled to compensation for damage due to such use-Secs. 153 and 154. A hires his horse to B for riding. B drives the horse in a carriage. The horse falls and is injured. A may take back the horse and claim damages. The bailee must return the goods bailed to the bailor when the time for which they were

bailed has expired-Sec. 160. If the goods do not belong to the bailor, he must make compensation to the bailee for any loss he may sustain by reason of the bailor's want of titleSec. 164; but the bailee acting in good faith is not responsible itf he returns the goods to the

bailor-Sec.

delivery-Sec.

166. But in such a case the real owner may apply to the Court to stop

167. If the goods are not returned at the proper time, the bailee is

responsible for any loss or deterioration in the goods-Sec. 161. As it is the duty of the bailee to return the identical goods he must not mix the goods bailed with his own goods without the consent of the bailor. If the bailor consents, they both have an interest in the mixture in proportion to their shares-Sec. 155. If the bailor does not consent and the goods arc separable the bailee must bear the expenses of their separation-Sec. 156. If the goods cannot be separated, the bailee must compensate the bailor-Sec. 157.

If the bailment is gratuitous the bailee is entitled to be repaid any expenses incurred for the purpose of the bailment-Sec. 158. Again, if the bailment is gratuitous the bailor may take back the thing bailed at any time, but if the net result of the transaction is loss to the bailee, he is entitled to be compensated by the bailor-Sec. 159. If the bailment is for skilled work to be done, the bailee is entitled to the stipulated remuneration or reasonable remuneration for his services, and to a lien, i.e. a right to retain the goods until he is paidSec. 170. IfA leaves his watch with B to be repaired, B is entitled to be paid and to retain the watch until he is paid. This is a particular lien, for B holds the watch as security for the payment due to him for repair of the watch. But certain specified bailees, viz. bankers, factors, attorneys and policy brokers are entitled to a general lien, i.e. a right to retain goods bailed to secure other debts as well, such as a general balance of account Sec. 171.

If goods arc lost, the finder is under no obligation to take charge of them, but if he does, he is a gratuitous bailee. He is entitled to compensation for trouble and expense in keeping the goods and discovering the owner or to the reward, if the owner has offered a reward. He may also retain the goods until he is paid such compensation or reward-Sec.

168. If the goods are saleable and the owner cannot be found or refuses to pay or compensate, the finder may sell the goods if they arc perishable or if his charges amount to two-thirds of their value-Sec. 169. Pledge-A bailment of goods as security for a debt or promise is called a pledge. The bailor is called the pawnor and the bailee is called the pawnee Sec. 172. The pawnee retains the goods as security for the debt and interest and necessary expenses incurred for the custody and preservation of the goods-Sec. 173, but unless there is an agreement to that effect he is not entitled to retain the goods for any debt or promise other than the debt or promise for which they were pledged, except subsequent advances-Sec. 174. For extraordinary expenses, i.e. expenses other than necessary expenses, the pawnee has only a personal remedy against the pawnor-Sec. 175. The pawnor may redeem the goods at

the stipulated time by payment of the debt, and after that time by payment of the debt and of additional expenses incurred by his default-Sec. 177. On the other hand, in default of payment by the pawnor, the pawnee may sue for his debt, or may after reasonable notice to the pawnor

sell the goods. The pawnor is liable for any deficit on such sale and is

entitled to the surplus sale proceeds if any-Sec. 176. If the pawnor has only a limited interest in the goods the pledge is valid to the extent of that interest-Sec. 179. If the pawnor has ostensible

authority to pledge, the pledge is valid unless the pawnee has

cxi

Introduction

notice of the want of real authority. Thus a pledge by a mercantile agent who has by custom authority to dispose of goods which are in his possession or of which he holds documents of title is valid unless the pawnee has notice of want of authority-Sec. 178. A

pledge of documents of title is equivalent to a pledge of the goods. Similarly, a pledge by a person in possession under a contract voidable for fraud or misrepresentation or undue influence is valid unless the pawnee had notice of the pawnor's defect of title-Sec. 178A.

Right of suit.-If the bailee is deprived of the goodsbailed by the wrongful act of a third person, both the bailee and the bailor have a right to bring a suit-Sec. 180. The compensation awarded in such suit must be apportioned between them in the proportion

of theirinterests-Sec.181. Agency Chapter X refers to agency. Agency is created when a man employs another to do an act for him or to represent him in dealings with third persons. A contract between B and C does not bind A. But if B has been employed by A to make the contract, A is really the contracting party. A is called the principal and B who acts on his behalf is called the agent-Sec. 182. The principal must have contractual capacity, i.e. he must be of the age of majority and of sound mind; but this is notnecessary in the case of the agent, for he is not the contracting party, but only the mouthpiece of the principal-Secs. 183 and 184. The employment of an agent may be gratuitous-Sec. 185. The authority of an agent may be expressed, e.g. in a power of attorney or it may be implied from the circumstances of the case or the relationship of the parties, e.g. husband and wife, solicitor and client, owner and manager of a shop-Secs. 186 and 187. An agent employed for a particular act has authority to do everything necessary and incidental to that act, e.g. an agent to carry on the business of a ship-builder may purchase timber and hire workmen-Sec. 188. An

agent has also authority of necessity to act in case of emergency to save his principal from loss provided he acts as a man of ordinary prudence would act-Sec. 189. Thus a warehouseman may incur expenses to save the goods in case of fire. As a general rule ar agent has no authority to appoint a sub-agent. This is the rule expressed in the maxim

delegatus non potest delegare. There are, however, exceptions arising out of custom of trade or the nature of the agency-Secs. 190 and 191. Thus an architect has authority to appoint a qualified

sub-agent to take measurements and to make calculations. An agent

must exercise the discretion of a man of ordinary prudence in selecting a sub-agent and if he does not, he is responsible for the sub-agent's negligence-Sec. 195. If the sub-agent is properly appointed he is just as much as agent of the principal as the original agent. The principal is as to third parties bound by, and responsible for, the acts of the sub-agent; but the sub-agent is responsible to the agent, and the agent is responsible to the principal Sec. 192. When an agent has authority to name another person to act for the principal and does so, the latter is not a sub-agent of the agent, but a substituted agent of the principal. He stands in the shoes of the agent and is directly responsible to the principal. So if a principal instructs a solicitor to find an auctioneer for the sale of an estate, the auctioneer sells the estate as agent of the principal-Sec. 194. If the agent has exceeded his authority in the appointment of a sub-agent the principal is in no0 way bound, for there is no privity of contract between him and the sub-agent. Moreover the agent is in such a case responsible to the principal and to third persons for the acts and defaults of the sub-

agent-Sec. 193. Agency by ratification-A person may be constituted an agent by ratification as and when A adopts a contract made on his behalf but without his authority by B. Such an adoption of the contract is equivalent to a previous authority and makes B the agent of A-

Sec. 196. But the act must have been done by B on behalf of 4. If B forges A's name ona promissory note, A cannot ratify the act and adopt the promissory note as his own, forB

Introduction

CXi

was acting on his own account. Ratification may be express or implied by conduct-Sec. 197. Thus if B buys goods for A without authority and A accepts them, that is an implied ratification of B's purchase. But there can be no valid ratification unless the ratifier has

full knowledge of all the advantages and disadvantages so as to justify the inference that he ratifies the acts whatever they are-Sec. 198. But the ratifier must ratify all or none. He cannot ratify a part of the transaction which is advantageous to him and disown the restSec. 199. So when the master of a ship exceeded his

authority

by entering

into a

charterparty to alter the ship into a troopship and carry troops, the owner could not claim the freight and yet refuse to bear the expenses of the alteration. Again, the principal cannot ratify an act so as to prejudice a third person. If the agent not being authorized gives notice to quit to a tenant the principal cannot ratity the act so as to determine the tenancySec. 200.

Termination of agency-An agency is terminated by the act of parties or by operation of law. By act of parties (a) when the principal revokes his authority, or (b) when the agent renounces the agency. By operation of law (a) when the business of the agency is completed, or (b) by the death or lunacy of the principal or agent, or (c) by the insolvency of the principal-Sec. 201. The principal may revoke his authority at any time before it has been completely exercised; but if it has been partly exercised, the principal cannot revoke his authority as to acts already done-Secs. 203 and 204. Again, if the agreement is that the agency shall continue for a fixed time, revocation by the principal before the expiry of that time is a breach of contract for which the principal must make compensation and conversely if the agent renounces before the expiry of the fixed time be must make compensation-Sec. 205. Another restriction on the principal's power to revoke his authority occurs when the agent has an interest in the subject-matter of agency. In such a case the authority is regarded as security for that interest and cannot be revoked to the prejudice of that interest-Sec. 202. A consigns goods to B and authorizes B to sell the goods at a fixed price and to pay himself out of the sale proceeds a debt which A owes to B. A cannot revoke the authority until the debt is paid. Revocation and

renunciation may be express or implied but if the principal revokes or the agent renounces before the business of the agency is completed, the other party may be put to loss. Therefore, reasonable notice must be given or compensation

paid-Secs. 206 and

207. Although the agency is terminated by the death or unsoundness of mind of the principal, the agent must take on behalf of the representatives of the late principal reasonable steps for the protection of their interests-Sec. 209. A sub-agent's authority terminates with that of the agent-Sec. 210. Even after the termination of the agency the principal may be liable to third persons by the rule of estoppel. A has held out B to be his agent and had induced persons to deal with B as his agent. It would be unfair to such third persons to affect them with knowledge of the revocation unless they had been

informed of it-Sec. 208. Rights of principal and agent inter

se.t

is the duty of the agent to act in

accordance with the instructions or with usage affecting the particular business. The agent has no discretion to disregard instructions and if he does so he is responsible for the loss, and if he thereby makes a profit he must make good the profit-Sec. 211. In cases of difficulty he must communicate with the principal and seek his instructions-Sec. 214. As he has been selected by the principal for the conduct of his business he must conduct the business with such skill and diligence as hepossesses and he is responsible for such skill as is usual and requisite-Sec. 212. It is his duty to render an account of all moneys hehas received on account of the principal-Sec. 213. But he is entitled to deduct moneys due to himself for advances made or expenses incurred in the business of the agency and for his remuneration-Sec. 217 and 218. The relationship of principal and agent is a fiduciary

relationship entailing on the agent the duty of fullest disclosure if he has apersonal interest in the business of the agency. He must not deal in that business on his own account

Introduction

CXi11

without the consent of the principal. If he does the principal may repudiate the transaction-Sec. 215; or claim for himself any profit that the agent has made-Sec. 216. The agent's remuneration is not due until the completion of the business of the agency and may be forfeited for misconduct-Secs. 219 and 220. In regard to his remuneration and his disbursements the agent has a right of retainer of moneys or goods received for his principal-Secs. 217 and 221. The agenthas also a right to be indemnified by the principal for all liabilities incurred by him for lawful acts done by him in the performance of the agency-Sec. 222 and even for acts done by him in good faith in the performance of his duties which make him liable in damages to a third person-Sec. 223. But he is not entitled to an indemnity if the act is not done in good faith or if the act is criminal-Secs 223 and 224. The agent has a right to be compensated by the principal for any injury

caused to himself by the principal's neglect or want of skill-Sec. 225. Dealings with third parties-If a person contracts as agent for a principal he is only the mouthpiece of the principal. The acts and knowledge of the agent are the acts and knowledge of the principal-Sec. 229. The agent cannot sue or be sued on contract-Secs. 226 and 230. But the agent may make himself liable as a contracting party (1) when the contract is for the sale or purchase of goods for a foreign merchant, (2) when the agent does not disclose the name of the principal, and (3) when the principal cannot be suedSec. 230. If the agent is personally liable the third person dealing with him may hold either the agent or the principal or both liable-Sec. 233. But if he has obtained a judgment against the agent he cannot proceed against the principal and conversely if he has obtained a judgment against the principal he cannot hold the agent liable-Sec. 234. If the agent is personally liable either the agent or the principal may sue on the contract, but if the principal who sues has permitted the agent to hold himself out as principal the defendant has the same right of set off and other defence as he would have had against the agent-Sec. 232. A person who falsely represents himself to be an agent is not entitled to shift his position. He cannot adopt the contract as his own and sue as principal-Sec. 236. Moreover the person with whom he contracts is entitled to damages for breach of the implied warranty of authority-Sec. 235. If the agent has no authority or has acted in excess of his authority the principal is not bound. But in such a case the principal may be bound by the rule of estoppel. This is when the principal has held out the agent as having

the requisite authority-Sec. 237. If the agent while acting in the business of the agency has been guilty of fraud or misrepresentation the agent's contract is voidable against the principal-Sec. 238. Partnership Chapter XI which dealt with partnership, is repealed and re-enacted in the Indian Partnership Act, 1932 (TX of 1932.)

INTRODUCTION The first six chapters of the Act contain the general principles of the law of contract. The remaining chapters refer to particular contracts arising out of the ordinary transactions of merchants and traders. The preliminary section 2 professes to be merely terminology but in effect it declares substantive law and embodies some of the principles of the English common law. Thus a promise arises out of the acceptance of an offer or proposal, and an agreement is a promise or a set of reciprocal promises. Consideration, is an act or abstinence of the promisee to do or not to do something the promisee wants

done or not done. The section then classifies agreements as (1) void or not enforceable by law, (2) voidable contracts enforceable by one party only, and (3) contracts enforceable by both parties.

Formation ofContracts Chapter I refers to the formation of contracts. It sets out rules for the offer and acceptance and revocation of proposals. A proposal or acceptance may be express or implied, expressed in words spoken or written or implied from conduct. A proposal remains open until it has been accepted, or if the parties are at a distance, until the acceptor has posted his acceptance-until then it can be revoked. If the parties are at a distance the acceptor may revoke his acceptance before his letter of acceptance has reached the proposer. The acceptance must be absolute and unqualified, otherwise, there is no agreement. An offer or proposal may lapse, if it is not accepted within a reasonable time.

Voidable Contracts and VoidAgreements

-o Chapter II set out the essentials of a legallyenforceableagreement or contract. It states the circumstances when it is voidable or enforceable by one party only, and when the agreement is void, i.e. not legally enforceable and not a contract. These matters have been summarized in the chart or analytical statement given in the commentary under

Sec.30 Contingent Contracts Chapter III refers to contingent contracts, i.e. contracts which are conditional on some future event happening or not happening-Sec. 31. Contracts of insurance or of indemnity are contracts of this class. Such contracts are enforceable when the future event or loss occurs, e.g. insurance money on a policy of fire insurance is payable when the fire takes place. The contract may be contingent (1) on the happening, or (2) on the not happening of a future event. (1) If it is contingent on the happening of a future event, it is enforceable when the event happens-Sec. 32. If the event becomes impossible, the contract becomes void-Sec. 32. A agrees to pay a sum of money to B when he marries C. C dies unmarried. The contract becomes void. If a time is fixed for the happening of the event, the contract becomes void if the event does not happen at the expiry of that time or if before the expiry of that time the event becomes impOssible-Sec. 35. A agrees to pay B a sum of

cv]

Introduction

cVi

money if his ship returns within a year. The contract becomes void when the ship sinks within the year. (2) If it is contingent on a future event not happening, it can be enforced when that event becomes impossible-Sec. 33. A agrees to pay B a sum of money if his ship does not

return. The contract is enforceable when the ship is wrecked. If a time is fixed within which the event should not happen, it may be enforced if the event does not happen at the expiry of the time or if before the expiry of that time it becomes certain that the event will not happen-Sec. 35. A agrees to pay B a sum of money if his ship does not returm within a year. The contract is enforceable if the ship does not return within a year, or if it is wrecked before the end of the year. If the future event is impossible at the time the contract is made, the contract is void whether the impossibility was known to the parties or not-Sec. 36. A promises to pay B a sum of money if he marries C. C is dead at the time of the contract. The contract is void.

If the future event is the act of a living person, any conduct of that person which prevents the event happening within a definite time renders the event impossible-Sec. 34. A promises to pay B a sum of money when he marries C. C' marries D. The event on which althoughD may die and B may then the contract is contingent is considered impossible marry C.

Performance ofContracts Chapter IV deals with the performance of contracts. A contract has for its subject

thecreation of an obligation between the parties. This chapter explains (1) who must perform his obligation, (2) the mode of performance, and (3) the consequences of nonperformance.

(1) Who must perform.-The promisor or his representative must perform-Sec. 37, unless the nature of the contract shows that it must be performed by a third personSec. 40; but the promisee may accept performance by a third person-Sec. 41. If there are joint promisors all must perform, and after the death of any of them the survivors and the representativesof thedeceasedmust perform-Sec. 42. But the liability of joint promisors is joint and several, so that the promisee may require any one of them to perform the whole promise-Sec. 43, in which case there is a right of contribution even against a pro-

misorwho has beenreleased from performance-Secs. 43 and 44. If the promisees are Joint the ight to claim performance is joint and not joint and several. All must claim performanceand, ifsome are dead, performance must be claimed by the survivors and the representatives of the deceased promisees-Sec. 45.

(2) Mode of performance.-The promisor must offer to perform and his offer must be (1) unconditional, (2) made at the proper time and place so as to give the promisee a reasonable opportunity of ascertaining that the promisor is able and willing to perform

the whole of hispromise, and (3) if the promise is to deliver anything, to allow the promisee a reasonable opportunity of inspection-Sec. 38. Performance may also be in the manner and at the time prescribed by the promisee-Sec. 50. If the promise is to be per-

formed on a certain day on application by the promisee, it is the duty of the promisee to appoint a proper place within the usual business

hours-what

is a proper place is a ques-

tion of fact-Sec. 48. If the promise is to be performed without application by the promisee, the promisor must perform within a reasonable time-Sec. 46; and if a day is fixed he must perform within the usual business hours on that day and at a proper place Sec.47, and if no place is fixed, it is the duty of the promisor to apply to the promisee to

appoint a reasonableplace-Sec. 49. If the promises are reciprocal they must be performedsimultaneously. If he contract is by A to deliver goods to B to be paid for on delivery, A need not deliver unless B is ready and willing to pay for them-Sec. 51. If the

Introduction

cvi

order of performance of reciprocal promises is fixed by the contract, they must be per formed in that order. If A contracts to build a house for B for a fixed price, A must build the house before B pays for it-Sec. 52.

If the performance consists of payment of money and there arc several debts to be paid, the debtor may indicate, or the circumstances may indicate, in respect of which debt the payment is made and the payment must be appropriated accordingly. Such a circum-

stanceis the payment of the precise amount of one debt-Sec. 59. If there is no express or implied instruction to appropriate given by the debtor, the creditor may appropriate to any debt lawfully due-Sec. 60. If there is no appropriation by either party, the payment must be appropriated in the order of time, whether the debts are time-barred or not, and if the debts are of equal 'standing to all rateably-Sec. 61

The mode of performance may be varied by agreement, for the promisee may dispense with or remit performance, wholly or in part, or may make a compoSition accepting a different

satisfaction-Secs.

62, 63.

3) Consequences of non-performance.-If an offer ofperformance is notaccepted, the promisor is not responsible for non-performance and does not lose his rights under the contract-Sec. 38, so also if the promisee fails to afford reasonable facilities-Sec. 67. He may sue for specific performance or he may avoid the contract and claim compen- sationSecs. 39 and 53. If one party has disabled himself from performing his promise in its entirety, this anticipatory breach entitles the other party to avoid the contracts-Sec. 39

Soalso if one party prevents the other from performing his promise-Sec. 53. If reciprocal promises arc to be performed

simultaneously or in a certain order, one party need not

perform unless the other party is ready and willing to perform-Sec. 51. There is also a right to avoid the contract for failure to perform at the time fixed by the contract if time is of theessence of the contract, but if time is not of the essence of the contract the breach gives only a right to compensation-Sec. 55. A voidable contract is avoided by rescission. Rescission is

communicated

and revoked

in the same way as a

promise-Sec.

66. The

effect of rescission is to dispense with further performance and to render the party rescinding liable to restore any benefit he may have received from the other partySec. 64.

Parties may agree to cancel the contract or to

alter it or to substitute a new contract

for it. In such cases of rescission or novation there is no question of performing the original contract-Sec. 62. There is also no question of performance when an agreement becomes void or is discovered to be void, but a party who has received a benefit under such a contract is bound to restore it or to make compensation-Sec. 65. If the agreement is to do an act which is impossible or which becomes impossible or unlawful it is void, but if the promisor knew and the promisee did not know that it was impossible or unlawful, the promisor must make compensation. Thus if A promises to marry B who does not know that A is married and that his marriage to her would þe bigamous and unlawful, A must make compensation to B-Sec. 56.

Quasi Contracts of Implied Contracts Chapter V refers to cases in which an obligation is ereated without a contract. Such

obligationsare treated in English law as arising out of the fiction of a contract implied by law. In this chapter, however, the legal relations are defined and the obligations they give rise to arę expressly enacted. If a person incapable of entering into a contract, or the dependents of such a person, arc supplied with necessaries suitable to his condition in life, the person supplying is entitled to be reimbursed out of the property of the incapable person-Sec. 68. There is thus a right of reimbursement for necessaries supplied to an infant or a lunatic. A person who is interested in the payment of money which another is

Tntroduction

cvii

bound by law to pay, and who therefore pays it is entitled to be reimbursed by the other Sec. 69. A tenant who pays arrears of rent, which the zamindar is bound by law to pay, and who pays it to avoid the forfeiture of his holding. is entitled to recover it from the zamindar. A person who enjoys the benefit of a non-gratuitous act is bound to make compensation-Sec. 70. If a tradesman leaves goods that have not been ordered at the customer if he takes the goods is bound to pay for them. A house of a customer, the person who finds lost property may retain it subject to the responsibility of a bailee-Sec. 71. If money is paid or goods delivered under coercion, the payee or recipient must repay or make restoration-Sec. 72.

Breach of Contracts andRemedies Chapter VI refers to breach of contract. It has been enacted in Chapter IV that in case of non-pertormance by one party the other party need not perform his part of the contract and is entitled to compensation for the loss occasioned to him. This chapter explains the mode in which compensation for breach of contract is estimated and follows Hadleyv. Baxendale. Damages for the rnuleslaid down in the leading English case of breach of contract must be such loss or damage as naturally arose, in the usual course of things from such breach or which may reasonably have been supposed to have been in the contemplation, of the parties when they made the contract as the probable result of thebreach. Damages which do not fall within this description are said to be remote or indirect and cannot be claimed. The party who suffers by the breach must take all reasonable steps to mitigate the damages and the means he had for doing so must be taken into account in estimating damages. These rules are enacted in sec. 73, and are

explained by numerous illustrations. The same rules apply to breach of the noncontractual obligations referred to in the last chapter-Sec. 73, and also when estimating the compensation when a party rightfully rescinds a contract-Sec. 75. In case the parties have in the contract

fixed a sunm to be paid in case of breach it is enacted that the party

who suffers is entitled to receive only reasonablecompensation not exceeding the fixed sum-Sec. 74. This does away with the distinction made in English law between a penalty and liquidated damages. The same rule applies to ordinary contracts with Government, but in the case of bail bonds or recognizances given to Government for a public purpose the whole sum fixed is recoverable.

Sale of Goods Chapter 1930).

VIl is repealed and re-enacted in the Indian Sale of Goods Act, 1930 (3 of

Indemnity and Guarantee

Chapter

VIII refers to contracts of indemnity and guarantee. A contract of

indemnity is a contingent contract and belongs to the class of contracts which are the

subject of Chapter II. It is a contract between two persons by which A promises tosave B from loss occasioned by the conduct of A or of some third person-Sec. 124. Thus a contract by A to indemnify B from damages which may be decreed against him in a suit

filed by C is a contract of indemnity. B is entitled to recover from 4 thedamagesdecreed against him in C's suit, and if he has acted as a prudent man unindemnified would have acted, he is also entitled to recover the costs of C's suit and all sums paid under a

compromise of C's suit-Sec. 125. In a contract of guarantee, however, there arethree parties, A the creditor, B the principal debtor and C the surety who guarantees the default of the principal debtor-Sec. 126. The debtor is called the principal debtor because the surety is also a debtor. The creditor has therefore two persons he can proceed against, for the liability of the surety is coextensive with that of the debtor-Sec. 128. The consideration

for the contract of guarantee is something done by the creditor for the

Introduction principal debtor. Thus A supplies goods to B because C guarantees payment by B. The supply of goods to B is the consideration for C's guarantee-Sec. 127. A guarantee may be a series of transactions and, if so, it is called a continuing guarantee-Sec. 129. As to future transactions such a guarantee is an offer which does not become a promise or agreement until the transaction takes place. A continuing guarantee may therefore as to future transactions be revoked by notice to the creditor-Sec. 130; and is revoked as to

future transactions by the death of the surety-Sec. 131. A guarantee by a surety may be conditional on another person joining as co-surety-Sec. 144. A contract of guarantee is obtained

by

misrepresentation

is

invalid-Secs.

142 and

143.

Co-sureties

are

liable

equally, subject to any contract to the contrary between themselves-Sec. 146. Co-sureties

are joint promisors, so on the principle of sec. 44 if one is released by the creditor, he is still responsible to the other sureties Sec. 138. If c0-sureties have bound themselves in different sums they are still equally liable upto those amounts-Sec. 147. Thus three cosureties A, B and C are liable upto Rs. 10,000, Rs. 20,000 and Rs. 40,000 respectively for a debt of Rs. 40,000. A is liable to pay Rs. 10,000 and B and C Rs. 15,000 each. Cosureties may contract with each other that one shall be liable only in default of the other. But if the creditor is not a party to the contract, his rights are not affected-Sec. 132. A surety has a right to be indemnified by the principal debtor for any sums he has rightfully paid in performance of his obligation-Sec. 145. He is also subrogated to the rights of the creditor and is invested with all the rights and securities which the creditor had against the principal debtor-Secs. 140 and 141. If the debt is secured by a mortgage and the surety pays the debt he is entitled to enforce the mortgage. The surety guarantees the performance of the contract of the principal debtor. Therefore any variance of that

contract without the consent of the surety discharges the surety for transactions subsequent to such variance-Sec. 133. For the same reason the surety is discharged if the creditor without his consent makes a composition with the principal debtor or gives him time-Sec. 135. The surety is also discharged if the creditor does any act which impairs the rights of the surety or his remedy against the principal debtor-Sec. 139. So if the creditor parts

with a security for the debt the surety is discharged to the extent of the

value of the security-Sec. 141, and he is wholly discharged, if he without the assent of the surety releases or gives time to or promises not to sue the principal debtor-Secs. 134 and 35. But an agreement between the creditor and a third person not to sue the principal debtor is not enforceable by the principal debtor and has no elect on the liability of the

surety-Sec. 136. Mere passive inactivity on the part of the creditor, such as forbearance to sue, does not discharge the surety-Sec. 137.

Bailment Chapter IX refers to bailment. Bailment is defined as a delivery person to another

of goods by one

for some purpose upon a contract that when the purpose is

accom-

of the plished the goods are to be returned or disposed of according to the directions bailor-Sec. 148. The chapter makes no classifícation of bailments, but bailments of loan and hiring and for work to be done are expressly referred to, while bailments of pledge are separately dealt with. Delivery to the bailee is effected by doing anything which has the effect of putting the goods in possession of the bailee or of some one on his behalfSec. 149. It is the duty of the bailor to disclose to the bailee defects of which he is aware and if he does not he is liable for damage caused to the bailee-Sec. 150. If A lends B a gun which he knows is likely to burst, he must warn B of the defect in the gun, for the

object of bailment is to confer a benefit, and not to do a mischief. If the bailment is for existence or not-Sec. 150. It is the duty of the bailee to take as much care of the goods bailed as a man of ordinary prudence would take of his own goods-Sec. 151; and if he takes such care he is not responsible for their loss-Sec. 152. So that if the goods are

Introduction

CX

stolen from the bailee without any fault of his, the bailee is not liable. But the bailee must observe the conditions of the bailment and if he makes an unauthorized use of the goods bailed the bailor may avoid the contract and is entitled to compensation for damage due to such use Secs. 153 and 154. A hires his horse to B for riding. B drives the horse in a carriage. The horse falls and is injured. A may take back the horse and claim damages. The bailee must return the goods bailed to the bailor when the time for which they were bailed has expired-Sec. 160. If the goods do not belong to the bailor, he must make com pensation to the bailee for any loss he may sustain by reason of the bailor's want of titleSec. 164; but the bailee acting in good faith is not responsible if he returns the goods to the bailor Sec. 166. But in such a case the real owner may apply to the Court to stop delivery-Sec. 167. If the goods are not returned at the proper time, the bailee is responsible for any loss or deterioration in the goods-Sec. 16l. As it is the duty of the bailee to return the identical goods he must not mix the goods bailed with his own goods without the consent of the bailor. If the bailor consents, they both have an interest in the mixture in proportion to their shares-Sec. 155. If the bailor does not consent and the goods arc separable the bailee must bear the expenses of their separation-Sec. 156. If the goods cannot be separated, the bailee must compensate the bailor-Sec. 157.

If the bailment is gratuitous the bailee is entitled to be repaid any expenses incurred for thepurpose of the bailment-Sec. 158. Again, if the bailment is gratuitous the bailor may take back the thing bailed at any time, but if the net result of the transaction is loss to the bailee, he is entitled to be compensated by the bailor-Sec. 159. If the bailment is for skilled work to be done, the bailee is entitled to the stipulated remuneration or reasonable

remuneration for his services,andto a lien, i.e. aright to retain thegoods until he ispaidSec. 170. If A leaves his watch with B to be repaired, B is entitled to be paid and to retain

the watch until he is paid. This is a particular lien, for B holds the watch as security for

the payment due to him for repair of the watch. But certain specified bailees, viz. bankers, factors, attorneys and policy brokers are entitled to a general lien, i.e. a right to retain goods bailed to secure other debts as well, such as a general balance of accountSec. 171.

If goods arc lost, the finder is under no obligation to take charge of them, but if he does, he is a gratuitous bailee. He is entitled to compensation for trouble and expense in keeping the goods and discovering the owner or to the reward, if the owner has offered a

reward. He may also retain the goods until he is paid such compensation or reward-Sec. 168. If the goods are saleable and the owner cannot be found or refuses to pay or

compensate, the finder may sell the goods if they arc perishable or if his chargesamount

to two-thirds of their value-Sec. 169. Pledge.-A bailment of goods as security for a debt or promise is called a pledge. The bailor is called the pawnor and the bailee is called the pawnee-Sec. 172. The pawnee retains the goods as security for the debt and interest and necessary expenses incurred for the custody and preservation of the goods-Sec. 173, but unless there is an agreement to that effect he is not entitled to retain the goods for any debt or promise other than the debt or promise for which they were pledged, except subsequent advances-Sec. 174. For extraordinary expenses, i.e. expenses other than necessary expenses, the pawnee has only a personal remedy against the pawnor-Sec. 175. The pawnor may redeem the goods at

the stipulated time by payment of the debt, and after that time by payment of the debt and of additional expenses incurred by his default-Sec. 177. On the other hand, in default of payment by the pawnor, the pawnee may sue for his debt, or may after reasonable notice to the pawnor

sell the goods. The pawnor is liable for any deficit on such sale and is

entitled to the surplus sale proceeds if any-Sec. 176. If the pawnor has only a limited interest in the goods the pledge is valid to the extent of that interest-Sec. 179. If the pawnor has ostensible

authority to pledge, the pledge is valid unless the pawnee has

Introduction

CX1

notice of the want of real authority. Thus a pledge by a mercantile agent who has by custom authority to dispose of goods which are in his possession or of which he holds

documents of title is valid unless the pawnee has notice of want of authority-Sec. 178. A pledge of documents of title is equivalent to a pledge of the goods. Similarly, a pledge by a person in possession under a contract voidable for fraud or misrepresentation or undue

influence is valid unless the pawnee had notice of the pawnor's defect of title-Sec. 178A.

Right of suit.-If the bailee is deprived of the goods bailed by the wrongful act of a third person, both the bailee and the bailor have a right to bring a suit-Sec. 180. The compensation awarded in such suit must be apportioned between them in the proportion

of theirinterests-Sec.181. Agency Chapter X refers to agency. Agency is created when a man employs another

to do

an act for him or to represent him in dealings with third persons. A contract between B

and C does not bind A. But if B hasbeenemployedby A to makethecontract, A is really the contracting party. A is called the principal and B who acts on his behalf is called the agent-Sec. 182. The principal must have contractual capacity, i.e. he must be of the age of majority and of sound mind; but this is notnecessary in the case of the agent, for he is not the contracting party, but only the mouthpiece of the principal-Secs. 183 and 184. The employment of an agent may be gratuitous-Sec. 185. The authority of an agent may be expressed, e.g. in a power of attorney or it may be implied from the circumstances of the case or the relationship of the parties, e.g._husband and wife, solicitor and client, owner and manager of a shop-Secs. 186 and 187. An agent employed for a particular act has authority to do everything necessary and incidental to that act, e.g. an agent to carry

on thebusiness of a ship-builder maypurchase timber and hire workmen-Sec. 188. An agent has also authority of necessity to act in case of emergency to save his principal from

loss provided he acts as a man of ordinary prudence would act-Sec. 189. Thus a

warehouseman may incur expensesto save the goods in case of fire. As a general rule an agent has no authority to appoint a sub-agent. This is the rule expressed in the maxim delegatus non potest delegare. There are,however, exceptions arising out of custom of trade or the nature of the agency-Secs. 190 and 191. Thus an architect has authority to appoint a qualified sub-agent to take measurements and to make calculations. An agent

must exercise the discretion of a man of ordinaryprudence in selecting asub-agent and if he does not, he is responsible for the sub-agent's negligence-Sec. 195. If the sub-agent is properly appointed he is just as much asagent of the principal as the original agent. The principal 1s as to third parties bound by, and responsible for, the acts of the sub-agent; but the sub-agent is responsible to the agent, and the agent is responsible to the

principal-

Sec. 192. When an agent has authority to name another person to act for the principal and Ldoes so, the latter is not a sub-agent of the agent, but a substituted agent of the principal. He stands in the shoes of the agent and is directly responsible to the principal. So if a principal instructs a solicitor to find an auctioneer for the sale of an estate, the auctioneer sells the estate agent of the principa Se 194. If the agent has exce ed authorit in the appointment of a sub-agent the principal is in no way bound, for there is no privity of contract between him and the sub-agent. Moreover the agent is in such a case acts and defaults of the subresponsible to the principal and to third persons for the agent-Sec. 193. Agency by

ratification.A

person may be constituted an agent by ratification as and

when A adopts a contract made on his behalf but without his authority by B. Such an adoption of the contract is equivalent to a previous authority and makes B the agent of ASec. 196. But the act must have been done by B on behalf of A. If B forges A's name on a ratity the act and adopt the promissory note as his own, for B promissory note, A cannot

Introduction

cxii

was acting on his own account. Ratification may be express or implied by conduct-Sec. 197. Thus if B buys goods for A without authority and A accepts them, that is an implied ratification of B's purchase. But there can be no valid ratification unless the ratifier has full knowledge of all the advantages and disadvantages so as to justify the inference that

he ratifies the acts whatever they are-Sec. 198. But the ratifier must ratify all or none. He cannot ratify a part of the transaction which is advantageous to him and disown the restSec. 199. So when the master of a ship exceeded his authority by entering into a charterparty to alter the ship into a troopship and carry troops, the owner could not claim the freight and yet refuse to bear the expenses of the alteration. Again, the principal

cannotratifyan actso as toprejudicea thirdperson. If theagentnotbeingauthorized gives notice to quit to a tenant the principal cannot ratify the act so as to determine

the

tenancy-Sec. 200. Termination of agency-An agency is terminated by the act of parties or by operation of law. By act of parties (a) when the principal revokes his authority, or (6) when the agent renounces the agency. By operation of law (a) when the business of the agency is completed, or (b) by the death or lunacy of the principal or agent, or (c) by the insolvency of the principal-Sec. 201. The principal may revoke his authority at any time before it has been completely exercised; but if it has been partly exercised, the principal cannot revoke his authority as to acts already done-Secs. 203 and 204. Again, if the agreement is that the agency shall continue for a fixed time, revocation by the principal before the expiry of that time is a breach of contract for which the principal must make

compensation and conversely if the agent renounces before the expiry of the fixed time hebe must make compensation-Sec. 205. Another restriction on the principal's power to

revoke his authority occurswhen the agenthas an interest in thesubject-matter of agency. In such a case the authority is regarded as security for that interest and cannot be.

revoked to the prejudice of thatinterest-Sec. 202. A consigns goods to B and authorizes B to sell the goods at a fixed price and to pay himself out of the sale proceeds a debt which A owes to B. A cannot revoke the authority until the debt is paid. Revocation and

renunciation may be express or_implied, but if the principal revokes or the agent renounces before the business of the agency is completed, the other party may be put to

loss. Therefore, reasonable notice must be given or compensation paid-Secs. 206 and 207. Although the agency is terminated by the death or unsoundness of mind of the principal, the agent must take on behalf of the representatives of the late principal reasonable steps for the protection of their interests-Sec. 209. A sub-agent's authority terminates with that of the agent-Sec. 210. Even after the termination of the agency the principal may be liable to third persons by the rule of estoppel. A has held out B to be his agent and had induced persons to deal with B as his agent. It would be unfair to such

third persons to affect them with knowledge of the revocation unless they had been informed of it-Sec. 208.

Rights of principal and agent inter

se.-It

is the duty of the agent to act in

accordance with the instructions or with usage affecting the particular business. The agent has no discretion to disregard instructions and if he does so he is responsible for the loss, and if he thereby makes a profit he must make good the profit-Sec. 211. In cases of difficulty he must communicate with the principal and seek his instructions-Sec. 214. As he has been selected by the principal for the conduct of his business he must conduct the business with such skill and diligence as he possesses and he is responsible for such skill as is usual and requisite-Sec. 212, It is his duty to render an account of all moneys he has received on account of the principal-Sec. 213. But he is entitled to deduct moneys due to himself for advances made or expenses incurred in the business of the agency and for his

remuneration-Sec. 217 and 218. The relationship of principal and agent is a fiduciary relationship entailing on the agent the duty of fullest disclosure if he has a personal inter est in the business of the agency. He must not deal in that business on his own account

Introduction

CXi11

without the consent of the principal. If he does the principal may repudiate the transaction-Sec. 215; or claim for himself any profit that the agent has made-Sec. 216. The agent's remuneration is not due until the completion of the business of the agency and may be forfeited for misconduct-Secs. 219 and 220. In regard to his remuneration

and his disbursements the agent has a right of retainer of moneys or goods received for his principal-Secs. 217 and 221. The agenthas also a right to be indemnified by the principal for all liabilities incurred by him for lawful acts done by him in the performance of the agency-Sec. 222 and even for acts done by him in good faith in the performance of his duties which make him liable in damages to a third

person-Sec. 223. But he is not

entitled to an indemnity,if the act is not done in good faith or if the act is criminal-Secs 223 and 224. The agent has a right to be compensated by the principal for any injury caused to himself by the principal's neglect or want of skill-Sec. 225. Dealings with third parties.-If a person contracts as agent for a principal he is only the mouthpiece of thee principal. The acts and knowledge of the agent are the acts and knowledge of the principal-Sec. 229. The agent cannot sue or be sued on contract-Secs 226 and 230. But the agent may make himself liable as a contracting party (1) when the

contract is for the sale or purchase of goods for a foreign merchant, (2) when the agent does not disclose the name of the principal, and (3) when the principal cannot be suedSec. 230. If the agent is personally liable the third person dealing with him may hold either the agent or the principal or both liable-Sec. 233. But if he has obtained a judgif he has ment against the agent he cannot proceed against the principal and conversely obtained a judgment against the principal he cannot hold the agent liable-Sec. 234. If the agent is personally liable either the agent or the principal may sue on the contract, but if

the principal who sues has permitted the agent to hold himself out as principal the defendant has the same right of set off and other defence as he would have had against the agent-Sec. 232. A person who falsely represents himself to be an agent is not entitled to shift his position.

He cannot adopt the contract as his own

and sue as principal-Sec.

236. Moreover the person with whom he contracts is entitled to damages for breach of the implied warranty of authority-Sec. 235. If the agent has no authority or has acted in excess of his authority the principal is not bound. But in such a case the principal may be boundby the rule of estoppel. This is when the principal has held out the agent as having

therequisiteauthority-Sec. 237. f the agent while acting in the business of the agency

hasbeen guilty of fraud or misrepresentation the agent's contract is voidable against the principal-Sec. 238.

Partnership Chapter XI which dealt with partnership, is repealed and re-enacted in the Indian Partnership Act, 1932 (1X of 1932.)

THE INDIAN CONTRACT ACT (ACT IX OF 1872) Preamble

mend

to define

WHEREAS it is expedien

certain parts of the law relating to contracts;

It is hereby enacted as follows:

Preliminary Short title.

Extent. Commencement.

Saving "[***].

S. 1.

This

Act

may

be

called

The

Indian

Contract Act, 1872. It extends to the whole of India "[except the State of Jammu and Kashmir]; and it shall come into force on the first day of September, 1872. Nothing

herein

contained

shall

affect

the

provisions of any Statute, Act or Regulation not hereby expressly repealed, nor any usage or custom of trade, nor any incident of any contract,' not inconsistent with the provisions of this Act. Law anterior to Contract Act: Introduction of English Law into Charter of 1661 and 1726 the

English

India.-By the

Law had a deep impact on the Indian

Legal

System. However, the English Law applied whenever the Indian Law was deficient or wanting. In 1774 the Mayor's Court at Calcutta was replaced by the Supreme Court. The Regulating Act of 1773 and the Charter of 1774 were silent as to the Supreme Court was to apply to Indians. Consequently, S. 17 of the Act

law which the of Settlement,

1781 directed that questions of inheritance and succession, and all matters of contract and dealing between the parties should be determined, in the case of Mahomedans and Hindus by their respective laws, and where only one of the parties should be a Mahomedan or Hindu by the laws and usages of the defendant. Similar provisions were introduced in course of time in Madras and Bombay when these town came to have first the Recorder's Courts and then the Supreme Courts. This system continued upto the

enactmentof the Indian Contract Act, 1872.

*Substituted by Act 3 of 1951, S. 3 and Sch. for "except Part B states". The words "The enactments mentioned in the Schedule hereto are repealed to the extent specified in the third column thereof, but" repealed by Act 10 of 1914, Section 3 and Sch. II.

1. The words "not inconsistent with the provisions of this Act" are not to be connected with the clause

"nor anyusage or custom of trade". In the sectionas cited by theJudicial Committee there is no comma after "contract" : Irrawaddy Flotilla Co. v. Bugwandas, (1891) LR 18 IA 121, 127: 18 Cal 620, 627. 2. See Prof. M.P. JAIN, OUTLINES OF INDIAN LEGAL AND CONSTITUTIONAL HISTORY, (6th edn., 2006) at pp. 473-477.

2

S.1

Preliminan

Applicability general terms that

of the Act-The second clause of S. I of the Act says in the most the Act is to extend to the whole of India except the State of Jammu

and Kashmir. These words are wide enough to include all Courts and persons of all denominations.

The third clause of S. I provides that nothing contained in the act shall

affect the provisions

of any statute not thereby expressly repealed. The schedule of the

Act enumerates the enactments repealed by the Act, but this enumeration does not include the provision in the statutes of 1781l and 1797 directing Hindu law to be applied to Hindus and Mahomedan law to Mahomedans. In Madhub Chunder v. Rajcoonmar Doss3 this circumstance gave rise to a question as to the applicability of the Contract Act to Hindus. The parties were Hindus and the case came before the High Court of Calcutta in the exercise of its Original Civil Jurisdiction. On behalf of the plaintiff it was contended that S. 27 of the Indian Contract Act did not apply and the case was govemed by

S. 17 of the Statute of 1781. The effect of the contention as to the applicability of S. 17 of the Statute of 1781 was that the agreement was not rendered void under section 27 of the Contract Act since the Hindu law of contract did not render the agreement in restraint of trade void. However, it was held that the Act applied to Hindus in view of general words used in cl. 2 of S. 1. Regarding non-repeal of the Statute of 1781, it was said that it was not necessary to repeal it, as the Supreme Court to which it applied had been abolished and there was nothing left to which it could apply. Scope of the Act.-The Contract Act does not profess to be a complete code dealing with the law relating to contracts. As appears from the preanmble, the Act purports to do

no more than 'define and amend certain parts' of that law. The third clause of S. I saves the provisions of other statutes, regulations, customs of trade, and incidents of any contract, which are not inconsistent with the provisions of this Act. This also indicates that this Act does not profess to be a complete code. The Act deals with particular contracts in separate chapters, but the Legislature has not dealt exhaustively with any parTo the extent that this Act ticular chapter or sub-division of the law relating to contracts. deals with a particular subject, it is exhaustive and it is not permissible to import the

principles of English law independent of the statutory provisions contained in this Act. How far native Law of Contracts is still in force.-As the Contract Act is not exhaustive, cases may occur which are not covered either by the Contract Act or by any special enactment relating to contracts. In such cases the High Courts in the exercise of their original jurisdiction are bound to apply the Hindu law of contract to Hindus and the Mahomedan law of contract to Mahomedans. An instance of such a case is the Hindu rule of damdupat according to which interest in excess of principal cannot be recovered at any one time. This ule is in force in the Bombay State and in the presidency-town of Calcutta,' but it is not recognised outside that towns nor in the Madras State Such cases are however very rare and for all practical purposes the native law of contract has been superseded by the Contract Act and special enactments relating to particular contracts.

3.

Madhub Chunder v. Rajcoomar Doss, (1874) 14 BLR 76.

4.

Irrawaddy Flotilla Co. v. Bugwandas, (1891) LR 18 IA 121: 18 Cal 620, 628, 629 cited LR 56 LA at p. 178. "The Act, so far as it goes, is exhaustive and

imperative";

(1929)

Mohori Bibee v.

BurmodasGhose,(1903) LR 30 LA 114, (1903) ILR 30 Cal 539, 548. See also Ramdas Vithaldass 5.

v. Amerchand & Co., (1916) LR 43 IA 164: 40 Bom 630, 636. Satyabrata Ghose v. Mugneeram Bangur & Co., AIR 1954 SC 44 (47): 1954 SCR 310.

6. Dhondu v. Narayan 7. 8.

9

(1863) 1 BHC 47; Harilal v. Nagar, (1896) 21 Bom 48; Saundanappa v.

Shivbasava, (1907) 31 Bom 354. Nobin Chunder v. Romesh Chunder. (1887) 14 Cal 781. Het Narain v. Ram Deni, (1883) 12 CLR 590.

Annaji Rou v. Ragubai, (1883) 6 Mad HC 400; Subramania Aijar v. Subramania Aiyar, (1908) 18 Mad LI 245.

Short title

S. 1

3

Saving of usage or custom of trade, etc-The true and appropriate office of a usage or custom of trade is to interpret the otherwise indeterminate intentions of the parties and to ascertain the nature and extent of their contracts, arising not from the express mere implications and presumptions and acts of a doubtful or stipulations, but from The term "usage of trade" is to be understood as referring to a equivocal character. particular usage to be established by evidence, and perfectly distinct from that general custom of merchants which is part of the law of the realm and is to be collected from decisions, legal principles, and analogies and, according to the opinion now received, can still be increased by proof of Iiving general (not merely local) usage. A particular usage remains unaffected by the provisions of the Act even though it may be inconsistent with

those provisions. The words "not inconsistent with the provisions of the Act" apply only to the immediately preceding words "any incident of any contract" and are not connected with the words "usage or custom of trade".Z But a general or universal usage pervading all trades has no binding force if it is inconsistent with the provisions of the Act. Such general usage is

equivalent

to a general

law and no such

general

law or usage in

contravention of the general law laid down by the Contract Act can be consistent with the

validity of the Act itself

Not inconsistent with the provisions of this Act.-A stipulation in a contract of

guarantee that the surety shall not have the benefit of S. 133 has been held to be inconsistent with the Act.14

Evidence as to usage of trade.-Section 92(5) of the Indian Evidence Act, 1872, enacts that though the terms of a contract have been reduced to writing, oral evidence may be given of any usage or custom by which incidents not expressly mentioned in the contract are usually annexed to contracts of that description. A mercantile usage is pro vable by a number of particular instances showing a given course of business and a general established understanding respecting it. It may also be proved by showing it to be part of an accepted codification of prevailing customs and practices.6 It does not need the antiquity, uniformity or notoriety; it may still be in its growth; but it should be so well known and acquiesced in that it may be reasonably presumed to have been an ingredient tacitly imported by the parties into their contract. Certainty and reasonableness are the

othercharacteristics ofsuch a usage.

That section, however, requires that such incident

shall not be inconsistent with the express terms of the contract. This section of the Contract Act also requires that it shall not be inconsistent with the general provisions of the Contract Act.

10.

The Schooner Reeside, (1837) 2 Sumn. 567.

11. See Bechuanaland Exploration Co. v. London Trading Bank. (1898) 2 QB 658; Edelstein v. Schuler & Co., (1902) 2 KB 144.

12. Irrawaddy Flotilla Co. v. Bugwandas, (1891) 18 IA 121, 127

18

Cal 620, 627; In re

McCorkindale, (1881) 6 Cal wN I. 13. Moothora Kant Shaw v. The India General Steam Navigation Co., (1883) 10 Cal 166, 185. 4. Chitguppi & Co. v. Vinayak Kasinath, (1921)45 Bom 157: 22 Bom LR 659. 5. Mackenzie v. Dunlop, 3 Macq. HL cas 22. 16. Federal Bank Lid. v. VM Jog Engineering Lid, (2001) 1 SCC 663, 679: AIR 2000 SC 3166 (UCP code

formulated

by the

ICC

to be

taken

into

account

as part

of

mercantile

usage

unless

contradicted).

7.Jago M Ghosh v. Manikchand, 7, Moor IA 263: 4 WR 8 PC; Manek Lal v. Suryapur Mills, AIR 1928 Bom 487.

18. Manek Lal v. Suryapur Mills, AIR 1928 Bom 487. 19. See Ruttonsi Rowji v. Bombay United Spinning and Weaving Co., (1917) 41 Bom 518, at pp. 538, 540.

S.1

Preliminary

Sections referring to usage or custom of trade.-Section 190 enacts that an agent cannot delegate his authority to another unless allowed by the "ordinary custom of trade". Similarly, an agent is bound, in the absence of directions from the principal, to conduct business according to "the custom which prevails in doing business" of the same kind at the place where the agent conducts such business (S. 211). It may here be observed that the expression "usage or custom of trade" used in S. 1, as well as the sections referred to above, relates to a particular usage as distinguished from a general or universal usage. A general usage pervading all trades has no binding force if it is inconsistent with the provisions of the Act. A general usage is equivalent to a general law, and no general law

or usage in contravention of the general law laid down by consistent with the validity of the Act itself,20

the Contract Act can be

The Transfer of Property Act. IV of 1882, S. 4, provides that the chapters and sections of that Act which relate to contracts shall be taken as part of the Contract Act.

Foreign Contract.-A contract in which two or more countries are concerned in respect of its performance, questions arise as to the law of which country would govem such a contract. This system of law which governs the contract is called the "proper law'". In NTPC v. Singer,' the Supreme Court has indicated that determination of the proper law of a contract involves the need to examine three possible situations. In the first instance, the law which would govern such a contract would be the law expressed by the parties themselves in the contract.2 In the absence of an expressed intention, the rule to apply is to infer an intention from the terms and nature of the contract and the general circumstances of the case.5 Such circumstances may be (1) the country where either the

court or an arbitration tribunal would have jurisdiction over claims made under the contract, (1i) the country in which the contract was entered into,, (iin) the country where paymentwas to be made iv) the nature and location of the subject-matter of the contracts (v) the residence- and occasionally the nationality of the parties. In the absence of an express or interred intention, the court must look to identify the legal system with which the "transaction has its closest and most real connection."3' Under this test, the court would regard all facts and circumstances of the contract. Although the weight attached to each fact or circumstance would differ from case to case,4 the place of performance assumes great importance, because the transaction is most closely connected with such a law than any other.3 In such a contract, in the absence of an

20. 21. 22.

Moothora Kant Shaw v. The India General Steam Navigation Co., (1883) 10 Cal 166, 185. NTPCv. Singer, (1992) 3 SCC 551, S60-562: AIR 1993 SC 998.

Dhanrujmal Gobindram v. Shamji Kalidas & Co., AIR 1961 SC 1285: (1961) 3 SCR 1020 : 64 Bom LR 169. (Contract provided application of Indian Arbitration Act and jurisdiction to Bombay High Court.)

23. Dhanrajmal Gobindram v. Shamji Kalidas & Co., AIR (1961) SC 1285 64 Bom LR 169. (Contract provided application of Indian Arbitration Act and jurisdiction to Bombay High Court.) 24. 25.

The Komninos S, [1991] 1 Lloyd's Rep. 370.

Steel Authority of India Lid. v. Hind Metals Inc., [1984] 1 Lloyd's Rep 405. 26. State Aided Bank of Travancore Lid. v. Dhrit Ram, AlR (1942) PC 7, Se Se Oil v. Gorakhram, 64 Bom LR 113 (118). 27. State Aided Bank of Travancore Lid. v. Dhrit Ram, AIR (1942) PC 7; Se Se Oil v. Gorakhram, 64 Bom LR 113 (118). 28. British South Africa Co v. De Beers Consolidated Mines Lid, [1910] 1 Ch 354, 383. 29. Jacobs v. Credit Lyonnais, (1884) 12 QBD 589; Keiner v. Keiner, [1952] 1 Al ER 643. 30. Re Missouri Steamship Co., (1889) 42 Ch D 321, 328-329. 31. NTPCv. Singer, (1992) 3 SCC 551, 562: AIR 1993 SC 998. 32. Rabindra N. Maitra v. LIC, AIR 1964 Cal 141. 33. PoLLOCK & MULLA, INDIAN CONTRACT AND SPECIFIC RELIEF ACTS, (13th edn, 2006) at p. 25.

Interpretation clause express provision,

S. 2

5

if a payment is to be made, it should be of the tender governing the

country in which payments is to be made.3*

Act not retrospective.-The before the Act came into force.3

provisions of this Act do not apply to contracts made

S. 2. In this Act the following words and expressions are used in the following senses, unless a contrary intention Interpretation clause.

appears from the context:

(a) When one person signifies to another his willingness to do or to abstain from doing anything, with a view to obtaining the assent of that other to such act or abstinence, he is said to make a proposal; (b) When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. A proposal, when accepted, becomes a promise;

(c) The person making the proposal is called the "promisor", and the person accepting the proposal is called the "promisee"; (d) When, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing something, such act or abstinence or promise is called a consideration for the promise; (e) Every promise and every set of promises, consideration for each other, is an agreement;

forming

the

() Promises which form the consideration or part of the consideration for each other, are called reciprocal promises;

(gAn agreement not enforceable by law is said to be void; (h) An agreement enforceable by law is a contract;

(i) An agreement which is enforceable by law at the option of one or more of the parties thereto, but not at the option of the other or others, is a voidable contract; G) A contract which ceases to be enforceable by law becomes void when it ceases to be enforceable. Scope of section-Although this section professes to be an interpretation clause, it declares a considerable part of the substantive law. Its propositions are not confined to principles of universal jurisprudence, but embody several concepts peculiar to the common law, or those which are of particular importance to it.

34.

City of Auckland v. Alliance Assurance Co., (1937) APC 54 (59).

35.

Omda Khamum v. Brojendro, (1874) 12 BLR 451, 458; ib. p. 472, on appeal.

6

S. 2

Preliminary

tTheory of Formation of Contract.-Implicit in this section is the idea that a contract must, in its ultimate analysis, resolve itself into a proposal and its absolute and unqualified acceptance.0 This analysis of the process may not always be appropriate in a number of situations since it may be difficult to say who has made the offer, and who has accepted it. This is true particularly in complex commercial transactions where contracts

are often concluded after prolonged negotiations in which the sequence of offer and acceptance cannot be identified. Such analysis has been viewed as out of dates and the courts will normally hold that there is a contract, even though it is difficult or impossible to analyse the transaction in terms of offer and acceptance.38 The analysis of the formation into offer and acceptance is however a "working method'" which enables us, in doubtful cases, to ascertain whether a contract has been concluded and as such is a useful

tool in the common law.39 Agreement. -The effect of clauses (a) to (f) is that an agreement is a promise or set of reciprocal promises; that a promise is formed by the acceptance of a proposal; and that there must be a promisor who makes the proposal and a promisee who accepts it. In the case of reciprocal promises each party is a promisor as to the promise he makes and a promisee as to that which he receives; he is both proposer and acceptor, promising to become liable and accepting the other's liability. The mutual proposals of the two parties become promises by mutual acceptance; whatever may have happened before the promises are exchanged is merely preliminary negotiation, and does not enter into the

legal analysis of the transaction. There

must be an offer

or a proposal

which

the person

accepting

has had an

opportunity of considering, and which, when he accepts he knows, will form a binding contract. In other words, the proposer and the acceptor must agree upon the same thing and in the same sense. Unless that is done, where each of them is, so to speak, makıing an offer or a cross-offer, it is not a contract. So in Tinn v. Hotfiman and Company" on 28th

November, 1871, thedefendants wrote to the plaintiff offering to sell acertain quantity of iron at a certain price. That very day the plaintiff wrote to the defendants offering to buy the same quantity of iron at the same price. The letters crossed in the post. The plaintiff contended that there was a concluded contract But the Court held that the defendants were not liable by the simultaneous offers, each being made in ignorance of the other. BLACKBURN, J. said:*" "when a contract is made between two parties, there is a promise by one in consideration of the promise made by the other, there are two assenting minds, the parties agreeing in opinion and one having promises in consideration of the promise made by the other-there is an exchange of promise. But I do not think exchanging offers would, upon principle, be at all the same thing." The necessity of the communication of the offer or proposal and its consequent acceptance seem to be the reason why identical cross-offers do not make a contract. Similarly the promise or offer being made on each side in ignorance of the promise or offer made on the other side, neither of them can be construed as an acceptance of the other. The aforesaid rule is essential in order not to cause inconvenience in mercantile business and to leave no doubt in the minds of either party on the matter. The subsequent sections provide for methods of communication, acceptance and revocation. It will be noticed that upon reading clauses (e) to G), that an

36.

37. 38. 39. 40. 41.

Badri Prasad v. State of Madhya Pradesh, AIR 1970 SC 706; Suraj Besan and Rice Mills v. Food Corpn of India, AIR 1988 Del 224:(1969) 2 SCR 380; Deep Chandra v. Rukruddaula Shamsher, AIR 1951 All 93. John Adams, "The Battle of the Forms", (1979) 95 Law Quarterly Review 481. Clarke v. Earl of Dunraven (The Satanita), [1897) AC 59. ANSON'S LAW OF CONTRACT, (29th edn, 2010) at p. 30.

Tinn v. Hoffman and Company, (1873) 29 LT 271. Tinn v. Hoffiman and Company, (1873) 29 LT 271 at 279.

Interpretation clause

S. 2

7

agreement is a wider concept or a genus of which a contract is a species. Every contract is an agreement but every agreement is not a contract.

Proposal and Promise.

The word "proposal" is synonymous in English use with

"offer". But the language of these definitions appears to confine "proposal" to an offer to be bound by a promise. To have made a proposal, the offeror must manifest or make

known his intention of doing or not doing something, and he must do so with the purpose of getting the offeree to assent to it. Statements which do not propose an undertaking, i.e. where they are not made with the purpose of getting the offeree to assent, do not constitute a proposal. Sometimes courts also express this in terms of a requirement of an intention to create legal relations.42 On this basis unilateral declarations,45 social

engagements," purely domestic or family arrangements*) and mere puffsso statements"'

have been held not to amount to a proposal.

In

Kleinwort

and joking Beson

v.

MMCB,43 KB & Co when asked by MMCB to guarantee the debts of subsidiary company stated-"it is our policy to ensure that the business of [the subsidiary company] was not a is at all times in a position to meet its liabilities to you", It was held that this proposal and the words "it is our policy" merely expressed an intention to do something

but they were not made with the purpose of getting the offeree to assent to them. Therefore when the subsidiary was allowed to become insolvent by KB & Co., MMCB could not claim for a breach of a contractual undertaking.

A proposal (or offer) must also be distinguished from an "invitation to offer". Before parties enter into a contract, usually preliminary negotiations take place between them. A person may ask for some information or supply some information and invite the other to make an offer or make a definite offer. In order to ascertain whether a particular intention statement amounts to an offer or an invitation to offer, the test would be the with which such statement is made. Does the person who makes the statement intend to be bound by it as soon as it is accepted by the other or he intends to do some further act, before he becomes bound by it? In the former case, it amounts to a proposal or offer and in the latter case, it amounts to an invitation to offer. An invitation to traders to make tenders,4 an invitation by a company to the public to subscribe for its shares, an invitationfor allotting flats under a public scheme, aquotation of prices to a

customer,32 display of goods for sale in shop

windows3

and advertising

auction

42. See however-CWTv. Abdul Hassain, (1988)3 SCC 562, 569: AIR 1988 SC 1417 (requirement of

43. 44.

45. 46.

"intention to create legal relations questioned on the ground that it was developed in civil law systems which lack the test of consideration to determine the boundaries of contract). Hulas Kunwar v. Allahabad Bank Lid, AlR 1958 Cal 644 (unilateral circular by bank to debtors intimating them of enhanced interest rates). Coward v. Motor Insurers' Bureau, [1963] 1 QB 259 (ofer to share the cost of petrol used on a Journey). Balfour v. Balfour, [1919]2 KB 571, 578 (offer to providea monthly allowance to wife). Banwari Lal v. Sukhdarshan Dayal, (1973) 1 SCC 294 : AIR 1973 SC 814 (offer to reserve land for Dharamshala (public inn) over loudspeaker during auction of plots of land).

47. Weeks v. Tybold, (1605) Noy 1l (offer to give £100 to person who would marry daughter with consent). See also-GH TREITEL, THE LAW OF CONTRACT (1 lth edn, 2003), at p. 162.

48. 49. 50.

51. S2.

Kleinwort Benson v. Malaysia Mining Corporation Berhad, [1989] 1 WLR 379. Spencer v. Harding, (1870) 5 CP S61. Hebb's Case, (1867) LR 4 Eq. 9; Harris's Case, (1872) LR 7 Ch App 587; Wall's Case, (1872) 42 LJ Ch 372.

Ghaziabad Development Authority v. Union of India, (2000) 6 SCC 113, 117: AIR 2000 SC 2003. Mylappa Chettiar v. Aga Mirza Mohammed Shirazee, (1919) 37 Mad L.T. 712; Pharmaceutical

Society of Great Britain v. Boots CashChemists(Southern) Ltd., (1953) 1 QB 401; cp Secretary of

State v. Madho Ram, (1928) Lah. 493, 502. Pharmaceutical Society of Great Britain v. Boots Cash Chemists, (1953)1 QB 401: [1953] 1 All 53. ER 482 (CA).

8

S.2

Preliminary

sales are instances of invitation to the other to offer to buy or sell, as the case may be. In such cases, the invitor retains to himself the right to do some other act (such as to accept or reject tender,35 to allot or not to allot shares, to refuse to sell or to withdraw or postpone auction sale) before he is bound by its acceptance. Similarly, a voluntary retirement scheme by a corporation is not an offer but an invitation to its employees to offer to take up early retirement under the terms of the scheme.3° In case of a proposal or

offer, the person making it intends to be bound by it (without doing any further act on his part) as soon as it is accepted by the other and on such acceptance it becomes a promise which is the foundation of an agreement under clause (c). He does not reserve to himself any such right as is done in the case of an invitation to offer.

The "intention" of the proposer is vital to determine whether his statements amount to a proposal. The test to determine intention is an objective one, that is, as it would be reasonably construed by a person in the position of the offeree. A person can be said to have made an offer though he did not subjectively have the intention to make one8 or even if it has been made under a mistake, if A's conduct is such as to induce B to

reasonably believe that A had that intention.0 The practice of executing deeds in the English form and the legal doctrines exclusively applicable to such instruments have never been introduced in India. It is difficult at first sight to say, without doing some violence to language, that in the common affairs of life a promise is always an accepted proposal. Take the case of a man offering to sell and deliver goods on credit then and there, to another who at first does not want the goods, but is finally persuaded to take them at a price named by the seller. Here the seller delivers the goods and receives in exchange the buyer's promise to pay for them. Now the buyer's

promise has never been a proposal; the seller offered

to sell, and the buyer

accepted the offer by taking the goods and pledging his credit. It may be said, however, that the buyer must be deemed to adopt the seller's terms at the last

moment

before

delivery of the goods. For the seller will not deliver them unless he knows that he will get the buyer's promise to pay for them; and the only way in which he can be sure of this is the existence of a proposal from the buyer to become liable for the price, which proposal will become a promise on the goods being delivered. These reasons appear to be sound and sufficient on principle to justify the language of the Act.

Promisor and

Promisee.-S.

2(c) contemplates two parties to an agreement-a

promisor and a promisee. On this basis, it has been held that an agreement can only be bilateral

54.

and the same party cannot be a party on both sides.01 For the same reason, a

See notes under S. 5 "Sales by Auction, Tender etc."

55. See for instance- Ular Pradesh Avas Evam Vikas Parishad v. Om Prakash Sharma, (2013) 5 SCC 182 (even whene highest bidder deposited earnest money as per terms of auction, "so long as an order regarding final acceptance of the bid has not been passed by the competent authority, the highest bidder acquires no vested right to have the auction concluded in his favour"). 56.

Bank of India v. O.P. Swarnakar, (2003) 2 SCC 721, 753: AIR 2003 SC 858, differencebetween offer and invitation to offer comprehensively explained; State Bank of Patiala v. Romesh Chander Kanoji, (2004) 2 SCC 651, 656; Board of Trustees, Visakhapatnam Port Trust v. T.S.N. Raju, (2006) 7 SCC 664, 679.

57.

58.

JP Vorster, "A comment on the meaning of objectivity in contract" 104 Law Quarterly Review 274 (1987); Anne De Moor, "Intention in the law of contract: elusive or illusory?"106 Law Quarterly Review 632 (1990). Upton-on-Severn RDC v. Powell, [1942] 1 All ER 220.

59. OT Africa Line Ltd. v. Vickers Pic, [1996]1 Lloyd's Rep 700. 60. Paal Wilson & Co v. Partenreederei (The Hannah Blumenthal), [1983) 1 AC 854; Allied Marine 61.

Transport v. Vale de Rio Doce Navegacao SA (The Leonidas D), [1985] 2 All ER 796 (CA). Nabendra Nath Basak v. Shasabindoo Nath Basak, AIR 1941 Cal 595.

Interpretation clause

S.2

9

person cannot form a partnership while acting in different capacities.52 Similarly, it is not possible for a contract to be formed where one party is not in existence.3

Privity of Contract (Imposition of liabilities upon third party).-The general rule in common law is that no one but the parties to a contract can be entitled under it, or bound

by it. This also seems to be the import of Ss. 2(a), (b), (c) and (e) which contemplates This principle that only the parties to a contract only the two parties to an agreement.° known as the "privity of contract". It lies at the are entitled to sue or be sued upon it is heart of the difference between rights under contract which are in personam and proprietary rights which are in renm.

There are two different aspects to the principle of privity of contract which must be considered (a) acquisition of rights by a third party, and (b) imposition of liabilities upon a third party. The first aspect of this

principle is discussed later.0

Let us consider the

secondaspect of this principle. As a general rule, two persons entering into a contract between themselves cannot impose contractual liabilities on a third party. Thus, in Gujarat Bottling v. Coca Cola,o G and C agreed that G would not assign, even indirectly, the rights to the contract without the consent of C. The shareholders of G transferred their shares in G-which had the same effect as an assignment-without permission from C. It was held that the shareholders of G were not party to the contract between G and C and hence not bound by it

One exception to the above principle appears well

ning property (either real property,03

intellectual

established./ A contract concer-

property

and to a more limited

extent personal property'") may impose liabilities on third parties who subsequently acquire such property with notice of the contract.

Promise and Consideration.-The technical use of the word "promise" in the Act is far narrower than the popular use. Express words of promise may be and often are, in law, no more than a proposal. In common life many promises are made, and regarded as normally binding between one person and another, without any "view to obtaining the

62. Meenakshi Achi v. PSM Subramanian Chetiar, AIR 1957 Mad 8. 63. AP Tourism Development Corpn Lid. v. Pampa Hotels Ltd., (2001) 5 SCC 425, 430 (company that was party to the agreement not incorporated). The position is however different in the case of preincorporation contracts entered into by promoters of the company. See S. 19(e), Specific Relief Act, 1963.

64. Kepong Prospecting Ltd. v. Schmidt, (1968) AC 810. 65. See notes under S. 2 below "Privity of Contract (Acquisition of rights by a third party)". 66. Gujarat Bottling Co Ltd. v. Coca Cola Ltd., AIR 1995 SC 2372 : (1995) 5 SCC 545. 67. See ANSON'S LAW OF CONTRACT (29th edn, 2010) at p. 652; CHESHIRE, FIFOOT & FURMSTON'S LAWOF CONTRACT (1Sth edn, 2007) at pp. 593-600. 68. Tulk v. Moxhay, (1848) 2 Ph 774 (restrictive covenant concerning land). See also S. 40 of the

Transfer of Property Act, 1882. 69. Columbia Gramophone Ltd. v. Murray, (1922) 39 RPC 239; Dunlop Rubber Co Ltd v. Long Life [1958] 1 WLR 1033 (patents); Prince Albert v. Strange, (1849) 1 Mac & G 25 Battery De (confidential information). 70. This exception is perhaps available only in case of chattel of exceptional value and importance (like a ship under charterparty) and not with personal property generally. See Greenhalgh v. Mallard, [1943] 2 AlI ER 234, 239; Port Line Lid. v. Ben Line Steamers Ltd., [1958] 2 QB 146. 71. Lord Strathcona SS Co. v. Dominion Coal Co., [1926] AC 108 (sale of ship having long-term time charterparty). 72. Thus a letter requesting a loan of money, and promising repayment with interest on a certain day, is not a promissory note but a mere proposal for a loan: Dhondbhat v. Atmaram, (1889) 13 Bom 669; Narayanasami v. Lokanibalammal, (1897) 7 Mad LJ 200.

10

S.2

Preliminary

assent of that other" to the contents of the promise. In common speech no one thinks of acceptance by the promisee as being an essential condition which must be satisfied before

a declaration of intention amounts to a promise. Apart from the peculiar case of a promise made by deed, English law will not enforce a promise unless it was given for value, that is, not necessarily for an adequate value, but for something which the law can deem of some value, and the parties treat as such by making it a subject of bargain. The value so received in exchange for the promise may consist in present performance, for example,

the delivery of goods, or it may itself be the promise of a performance to come. These elements are embodied in the definition of consideration by cl. (d) of our section.

Doctrine of Consideration.-The doctrine of consideration limits the freedom of individuals to make binding promises-only those promises which are supported by consideration are legally binding; others are not, even if the promisor intends to bind himself to the promise. This requirement is unique to the common law (it is not a requirement in the civil law systems) and its utility has been called into question by scholars. It is however so firmly entrenched in the common law that despite sporadic attacks, it does not appear that its position as the "most fundamental limitation on the enforcement of promises"'o is likely to be disturbed. Definition of Consideration.-The terms of the Indian definition must now be examined. The conception of "consideration' in English Law is some 'detriment' to the promisee (in that he may suffer something or give something of value) or some "benefit' to the promisor (in that he receives something of value). 'Detriment' to the one person and benefit' to the other are the same thing looked at from two different angles. Usually each party enters into a contract in order to obtain consideration promised by the other

(seller wanting to realize the price of his goods and the buyer desiring to get goods of

value) but that may not always be the case. Here detriment to the promisee suffices even

if the promisor does not benefit.'" There is nothing in the definition of "consideration' in cl. (d) that the benefit of any act or abstinence must go to the promisor. Adopting the said conception, the framers of this Act have made some departures which will be noticed hereafter.

"At the desire of the

promisor"The

act or omission to do or promise to do con-

stituting the consideration must have been done at the desire or request of the promisor as when a person contracts a marriage in consideration of a promise of a settlement. An act done at the desire of a third party is not a consideration. Thus a promise by the defendants to pay to the plaintiff a commission on articles sold through their agency in a market constructed by the plaintiff, not at the desire of the defendants, but of the collector of the place, is void under S. 25, being without consideration. Nor can it be supported under cl. 2 of that section, which enacts that an agreement without consideration is void, unless it is a promise to compensate a person who has already voluntarily done something for the promisor. The expression "*voluntarily" appears to be used in that

73. 74.

ATIYAH'S INTRODUCTION TO THE LAW OF CONTRACT (6th edn, 2006) at p. 106-109. Combe v. Combe, [1951] 1 All ER 767; Gould v. Gould, [1969] 3 All ER 728.

75.

Pillans v. Van Mierop, (1765) 3 Burr 1664, per MANSFIELD C.J; Williams v. Roffey Brothers & Nicholls (Contractors) Lid., [1990] 1 All ER 512 (CA): (1991) 1 QB 1 (recognition of 'practical

76.

benefit as adequate consideration), see notes under S. 25 *"Promise to perform existing duty". FARNSwORTH ON CONTRACTS (3rd edn, 1999) at p. 45.

17. Sudhanshu Mohan Koley v. Mathura Mohan Adak, (1975) ILR 1 Cal 182; Pearl Carriers Inc v. Japan Lines Ltd. (The Chemical Venture), [1993] I Lloyd's Rep 509 (promise for benefit of third party). 78. Nanjunda Swami Chetti v. Kanagaraju, (1919) 42 Mad 154, 159, See Vishveshwar v. Sadashiv, (1925) 27 Bom LR 14S6. 79. Durga Prasad v. Baldev, (1880) ILR 3 All 221.

Interpretation clause

S. 2

11

section in contradistinction to the words "at the desire of the promisor" 80 In respect of a claim upon a pro-note it was held that as the moneys were advanced not at the request of the promisor but in fulfilment of an undertaking given by the father of the promisee to the father of the promisor, there was no consideration within the meaning of the said expression "at the desire of the promisor"o In another case where a drawer's bank credited the amount of a dishonoured cheque to the payee's bank and debited the amount to the drawer and the payee's bank paid the amount to the payee, upon the drawer's bank demanding payment from the drawer, it was held that the payment by the drawer's bank when there was no balance in account, was not done at the instance or request of the drawer and hence there was no consideration for such payment by the drawer's bank to the payee's bank.8 A voluntary payment, even if repeated, is not in itself evidence of a promise to continue it.83 In Combe v. Combeš4 wife started proceedings for divorce and got a decree nisi against her husband. The husband then promised to give her £100 p.a. as permanent

maintenance. The wife did not in fact apply to the Divorce Court for maintenance, but this forbearance was not at the husband's request. The decree was made absolute. The annual payments were not made and the wife sued the husband for his promised sum on the ground that she had given consideration for the husband's promise by forbearing to apply to court for maintenance order in her favour. But it was held by the Court of Appeal that the husband had not requested her to forbear and her action could not be said to have been in return for his promise to pay.

Questions may arise whether the thing done by the plaintiff claiming under a promise was in fact done at the desire of the promisor so as to amount to consideration. In Kedar Nath v.

Gorie Mahomed

the defendant had agreed to subscribe Rs. 100 towards the

construction of a town hall at Howrah. It was in evidence that the plaintiff

promisee-the

secretary of the municipality-had entered into contract with the contractor for the

purpose of building the town hall and thus had undertaken liability pay him. The plaintiff sued the defendant as he failed to pay the subscription. The Calcutta High Court held that though the promise was to subscribe to a charitable

institution and there was no

benefit to the defendant-promisor, still it was supported by consideration as the plaintiff had suffered a detriment in having undertaken a liability to the contractor on the faith of the promise of the defendant. But where the promisee has done nothing, there is no consideration.86

"Promisee or any other

person"-In

modern English law it is well

settled that

consideration must move from the promisee. In Tweddle v. Atkinson an agreement was entered into between the respective fathers of the husband and wife that each should pay a sum of money to the husband and that the husband should have power to sue for such sums. After the death of both the fathers, the husband sued the executors of the wife's

80. Sindha Shri Ganapatsingji v. Abraham, (1895) 20 Bom 755, 758, Raja of Venkatagiri v. Krishnayya, (1948) APC 150: 50 Bom LR 517. 81. Sindha Shri Ganapatsingji v. Abraham, (1895) 20 Bom 755, 758; Raja of Venkatagiri v. Krishnayya, (1948) APC 150: 50 Bom LR 517. 82. Hyderabad State Bank v. Ranganath, AIR (1958) AP 605. 83. Jiban Krishna Mullick v. Nirupama Gupta, (1926) 53 Cal 922: AIR 1926 Cal 1009. 84. 85.

Combe v. Combe, (1951) 2 KB 215 [1951] 1 All ER 767. Kedar Nath v. Gorie Mahomed, (1887) ILR 14 Cal 64.

86. Abdul Aziz v. Mazum Ali, (1914) 36 All 268 AIR 1914 All 22 (promise of Rs. 500 to a fund for rebuilding a mosque, but no stepstaken to rebuild)., See Doraswamy v. Arunachala, AlR 1936 Mad 87.

135 (promise to pay in order to meet a liability already incurred). Tweddle v. Atkinson. (1861) 1 B & S 393 123 ER 762 overruling 210.

Dutton v. Poole,

(1678) 2 Lev

12

Preliminary

S. 2

father for the money promised to him. It was held that action would not lie as no consideration had moved from the husband, the promisee and so the promise was, as far

as he was concerned, a gratuitous one. Under the Act, however, consideration may pro ceed from the promisee or any other person. This is a departure from the English law,85 cUonndtrearctt.h8e9 Indian law of contract, consideration need not always flow from a party to a

Privity of Contract (Acquisition of rights by a third

party).-Under

the Act, the

consideration for an agreement may proceed from a third party, but does it follow that the third party can sue on the agreement? This is the second aspect of the doctrine of privity of contract discussed earlier.0 There was earlier some divergence of opinion on this point.i This is now settled in the negative, and the best statement of the law is that of RANKIN, C.J. in Krishna Lal Sadhu v. Pramila Bala Dasi.2 His Lordship said: "Clause (d), section 2, Contract Act, widens the definition of *consideration' so as to enable a party to a contract to enforce the same in lndia in certain cases in which the English law would regard that party as the recipient of a purely voluntary promise and would refuse to him a right of action on the ground of nudum pactum. Not only, however, is there nothing in section 2 to encourage the idea that contracts can be enforced by a person who is not a party to the contract but this notion is rigidly excluded by the definition of

promisor and 'promisee'." The English law is the same and LORD HALDANE said that it was a fundamental principle of English law that only a person who is a party to a contract can sue on it and that the law knows nothing of a right gained by a third party arising out of a contract.3 In Dunlop Pneumatic Tyre Ltd. v. Selfridge d& Co Lid the appellants were manufacturers of motor car tyres. They sold to a firm of Factors, Messrs Dew Co, a number of tyres on the understanding that the tyres should not be sold under a certain price. The respondents bought the tyre from Dew & Co. and in their contract of sale bound themselves to observe the above condition as to minimum price; they also promised that they would pay £5 by way of damages to the appellants for every tyre sold in breach of this under standing. However, the respondents sold some tyres below the stipulated price to some customers. Appellants sued respondents for breach of their agreement with Dew & Co. The House of Lords held that the respondent's promise was not binding to them as nothing moved from the appellants and hence the appellants were strangers to the respondents' promise. Secondly, the respondents had entered into the agreement only with Dew & Co., and not with the appellants and so the appellants were strangers to a contract between the respondents and Dew and Company. In Beswick v. Beswick5 the rule that a person who is a stranger to contract cannot sue was again applied by the House of Lords.

88.

Chinnayya v. Ramayya, (1876-1882) ILR 14 Mad 930 (gift by mother to daughter on her promise to pay annuity to uncle, claim by uncle to enforce daughter's promise). 89. Nihal Singh v. State of Punjab, (2013) 14 SCC 65 (master-servant relationship between Punjab State and SPOS, despite wages of SPOs paid by third party banks to whom they provided security). 90. See notes under S. 2 above, "Privity of contract (Imposition of liabilities upon third party)".

91. See for adiscussion of various judgments Subbu Chetti v. Arunachalam, AlR 1930 Mad 382 (FB): 92.

(1930) 53 Mad 270: 124 IC 55. Krishna Lal Sadhu v. Pramila Bala Dasi, (1928) 55 Cal 1315 : (1928) Cal 518.

93. Dunlop Pneumatic Tyre Co. v. Selfridge & Co., (1915) AC 847: [1914-15] All ER333 (HL) cited in Vandepitte v. The Preferred Accident 1933 PC 11.

Insurance Co., (1933) 64 Mad LJ 133 : 143 IC 79:

AIR

94. Dunlop Pneumatic Tyre Co. v. Selfridge & Co., (1915) AC 847: [1914-15] All ER 333 (HL) cited 95.

in Vandepitte v. The Preferred Accident Insurance Co., (1933) 64 Mad LJ 133 : 143 IC 79: AIR 1933 PC 11. Beswick v. Beswick, (1968) AC 58 (HL): (1967) 2 All ER 1197.

Interpretation clause

S. 2

13

In a case from Malaya where the provisions of the Indian Contract Act prevail, the Privy Council, after considering various Calcutta, Madras, Bombay and Punjab decisions, approved the decision of the Bombay High Court.2 The Privy Council held that although the provisions of S. 2d) enabled consideration to move from a person other than the promisee, that did not affect the law as to the enforcement of contracts by third parties. Paras (a), (6), (c) and (e) of S. 2 support the English conception

of a contract as an

agreement on which only the parties to it can sue.* In a recent case, the House of Lords in England held that the principle of consideration moving from a promisee is quite distinct and different from the rule that party to a contract can alone sue. In Jamina Das v. Ram Autar the Privy Council held upon the provisions of S. 90 of the Transfer of Property Act that a purchaser's contract to pay off the mortgage debt could not be enforced by a mortgagee who was not a party to the contract. In Jamna Das v. Ram Autar', A, owner of property borrowed Rs. 40,000 by executing a mortgage in favour of mortgagee, B. Subsequently, A sold the property to C for Rs. 44,000 and allowed C, the purchaser, to

retain Rs. 40,000 of the price in order to redeem the mortgage if C thought fit. B sued C for the recovery of the mortgage money but the Privy Council disallowed his claim as B was not a party to an agreement between A and C. n Mangal Sen v. Muhammed Hussain a sub-lessee who agreed to pay the lessor's dues to Zamindar was held not

liable in a suit by Zamindar for the payment of amount due. The following are the exceptions to the rule that a stranger to a contract cannot

sue:

1. Trust or Charge.-The possibility of a trust as an exception to the privity of contract was indicated as early as 1753-where A makes a promise to B for the benefit of C, the promise can be enforced by C against A, if B constituted himself trustee of A's

promise for C." A trust will not be inferred simply because A and B make a contract with the intention of benefiting C; there have to be much stronger indicia. Charge of specific property to enforce the promise would be an important consideration in determining existence of the trust.0 In an old case of Gregory and Parker v. Williams, Parker owed money both to Gregory and Williams. He agreed with Williams to assign to him the whole of his

property if Williams would pay the debt due to Gregory.1The property was duly assigned but Williams failed to perform his promise. He was held liable to pay to Gregory in terms of his promise with Parker on the ground that Parker was a trustee for Gregory and Gregory derived an equitable right through the mediation of Parker's agreement'. This equitable exception was applied in India by the Privy Council in Khwaja Muhammad Khan v. Hussaini Begum.4 The appellant executed an agreement with the 1. Kepong Praspecting Ltd. v. Schmidt, (1968) AC 810 (PC). 2. National Petroleum Co. LId. v. Popatlal, (1936) 38 Bom LR 610: AIR 1936 Bom 344. 3. Kepong Prospecting Ltd. v. Schmidt, (1968) AC 810 (PC).

4. KepongProspectingLid. v.Schmidt,(1968) AC 810(PC).

o 1o1211ET

5. Scruttons Lid. v. Midland Silicones Ltd, (1962) AC 446: (1962)1 All ER 1:(1962) 2 WLR 186. 6. Jamina Das v. Ram Auta, (1912) ILR 34 All 63: 39 IA 7; Suraj Prasad Oja v. Ram Lal Singh, (1947) 25 Pat 269: AIR 1947 Pat 131: 230 1C 224. 14 Jamna Das v. Ram Autar, (1912) 34 All 63 :39 IA 7; Suraj Prasad v. Ram Lal, (1947) 25 Pat 269: 7. AIR 1947 Pat 131 230 IC 224.

Mangal Sen v. Muhammed Hussain, (1915) ILR 37 All 115. Tomlinson v. Gill, (1756) Amb 330. See ARTHUR L CORBIN, "CONTRACTS FOR THE BENEFIT OF 9.

THIRD PERSONS", 46 Law Quarterly Review 12 (1930); GLANVILLE WILLIAMS, "CONTRACTS FOR THE BENEFIT OF THIRD PARTIES" 7 Modern Law Review 123 (1943). 10. Inuganti Kasturamma v. Chelikani Venkatasurayya Garu, AIR 1916 Mad 65. 11. Gregory and Parker v. Williams, (1817) 3 Mer 582:36 ER 224.

12. Khwaja Muhammad Khan v. Hussaini Begum, (1910) ILR 32 All 410:37 IA 152: 12 Bom LR 638.

14

S.2

Preliminary

respondent's father that in consideration of the respondent's marriage with his son, both being minors at the time, he (appellant) would pay to the respondent Rs. 500 p.m., in perpetuity towards the betel-leaf expenses called Kharchi-i-pandan. The appellant charged certain properties for the payment and empowered the respondent to enforce it. The husband and wife separated and suit was brought by the plaintiff-respondent for the recovery of the arrears of the expenses payable by the father-in-law, appellant-defendant. It was held that the respondent, although no party to the agreement, was entitled to claim the allowance as the agreement charged specially immovable property for her allowance. Another instance of a trust in favour of a third party is found in the facts of another Privy Council decision of Rama Uma Nath v. Jang Bahadur.5 Here U was given the entire estate by his father and he agreed with his father to pay a certain sum of money and a village

to J, an

illegitimate

son of his father. It was held that this created a trust in

favour of J, an illegal son.

In MC. Chacko v. State Bank of Travancorel

the Supreme Court did not find an

intention to create a change or trust in favour of the respondent Bank. The father of the

appellant executed letters of guarantee holding himself liable for the overdraft account which the appellant as the Managing Director of H. Bank had with the respondent bank.

Subsequently, the father of the appellant executed a deed of partition giving away his properties to the appellant and referred to his letters of guarantee with the respondent bank stating that if any amount had to be paid under letters of guarantee, the appellant (i.e. Managing Director of H. Bank) and properties allotted to him were to be answerable for that amount. It was held that the deed of partition did not show an intent to create a charge in favour of the respondent bank. The deed of partition merely set out an arrangement between the father and other members of his family regarding his liability under letters of guarantee, The letters of guarantee created merely a personal obligation and intention to create a personal debt into a secured debt in favour of the bank could not be inferred from a deed. No charge or trust was created.

respondent

The exception of trust as a promise has been applied to promises to pay money and

transfer property, but has been largely confined within narrow limits and its application refused to other forms of contractual obligations. Since such a trust is by its nature irrevocable, the concern of the courts in expanding on this exception has been that a finding of existence of a trust would be incompatible with the contractual liberty of the

parties.6

2. Marriage settlement, partition or other family arrangement.-The Specific Relief Act, 1963 enables specific performance of a contract being a settlement on marri: age, and family arrangements at a suit of any person beneficially entitled thereunder, and creates an exception to the rule that a party to a contract cannot sue. Even before its enactment, a party

could sue to enforce a benefit

where it was due to him under a

marriage settlement, partition or other family settlement, even though he was a stranger to such settlement. So in Shappu Amal v. Subramanyans two brothers, on a partition of the family properties, agreed to pay Rs. 300 in equal shares to their mother for maintenance. It was held that the mother, though a stranger, could enforce the promise. 13. Rama Uma Nath v. Jang Bahadur, AIR 1938 PC 245 14. MC. Chacko v. State Bank of Travancore, (1970) 1 SCR 658:AIR

1970 SC 504.

15. Green v. Russell, [1959] 2 OB 226; ReSchebsman, [1944) Ch 83; Vandepitte v. Preferred Accident Insurance Corp., [1993] AC 70. 16.

Re Schebsman, [1943] 2 All ER 768.

17. See S. 15(c) of the Specific Relief Act, 1963. 18.

Shappu Amal v. Subramanyan, (1910) 33 Mad 238; See also Veeramma v. Appayya, AIR 1957 AP 965.

Interpretation clause

S. 2

Similarly, in Sundararaja v. Lakshmi Ammal

5

a sister was allowed to sue for her

marriage expenses provided by a partition deed (between her brothers) to which she was no party.

3. Acknowledgement or Estoppel.-Where the promisor has by his conduct, whether by acknowledgment or part payment or estoppel, created a privity between himself and the stranger he cannot be permitted to plead that action will not lie at the instance of a stranger. So A having received money from B for payment over to C, admits to C receipt of the money. A is deemed to constitute himself as agent of C and C is entitled to recover the amount from A.20

4. Covenant running with the land.-Person who purchases land with notice that the owner of land is bound by certain duties affecting land, is bound by those duties although he was not a party to an agreement. So a person may be able to enforce a covenant affecting land made by his predecessor in title and a person who acquires land with notice that it is burdened by a restrictive covenant may be bound.4 5. Assignnment.-Assignment is a process whereby right to enforce a contract is vested in someone (other than original creditor) without the consent of original debtor.25 By its very nature, where an assignment is validly made, the assignee may bring an action to enforce his rights under the contract, even though he was not originally a party to it. 6. Statutory exceptions.-Sometimes the statutes cast a duty for the benefit of a third party to the contract. He can get the advantage though he is a stranger to the contract e.g. the insurance company has to bear the third party risk in accidents involving a motor

vehicle. Statutory exceptions to the privity rule have been similarly carved out for third parties in the context of: a holder of a promissory note, bill of exchange or cheque a consignee of goods under a bill of lading or a subsequentendorsee and an undisclosed

principle-. In the UK, apart from

similar statutory exceptions, the Contra

of Third

(Rig

Parties) Act 1999 has been recently enacted which enables a third party to enforce a term

of the contract if this is either (a) expressly provided; or (b) confers a benefit on him and there is an intention to confer enforceable rights. Though this has substantially diluted the first aspect of the privity rule-it only creates a statutory exception and has not abolished

it. The Act also does not alter the second aspect of the privity principle i.e. the rule against imposition of liabilities against a third party.5 Similar legislations have also been introduced in other common law countries like New Zealand and Australia.30

19. Sundararaja v. Lakshmi Ammal, (1915) 38 Mad 788 : 24 IC 943. See Tulkv. Moxhay, (1843-60) All ER Rep 9, Smith and Snipes Hall Farm Lid. v. River Douglas Catchment Board, (1949) 2 All ER 179. 20. Deb Narain Dut v. Ram Sadhan Mandal, AIR 1914 Cal 129; Dwarika Nath Ash v. Priya Nath Malki, AlR 1918 Cal 941. 21. See S. 40 of the Transfer of Property Act, 1882. 22. 23. 24.

MULLA'S TRANSFER OF PROPERTY ACT (10th edn, 2006) at p. 259. See notes under S. 37 "Assignment of Contract". See S. 149 Motor Vehicles Act, 1988. See also New India Assurance Co Ltd. v. Rula,

(2000) 3 SCC

195, 199: AIR 2000 SC 1082 (third party entitled to amount under insurance policy though this may be later cancelled on the ground of non-payment of premium). 25. S. 8 Negotiable Instruments Act, 1881. 26. S. 1 Indian Bills of Lading Act, 1856. 27. S. 231 Indian Contract Act, 1872.

28. See notes under S. 2 above, "Privity of contract (Imposition of liabilities upon third party)". 29. New Zealand Contracts (Privity) Act, 1982. 30. See S.11 Western Australian Property Law Act 1969; S. 55 Queensland Property Act, 1974.

16

Preliminary

S.2

Even in India, the Law Commission of India has recognized that a rigid adherence to the rule of privity of contract causes hardship; and much before the corresponding legislative changes in the UK. recommended incorporation of a separate section into the

Act to address this issue." Past, Present, Prospective Consideration.-The words "has done or abstained from doing" refer to something already done. This is known as past consideration. 1he words "does or abstains from doing" refer to something done or omitted in presenti. This is known as present consideration. The words "promises to do or to abstain from doing refer to something to be done in future. This is known as prospective consideration.

A consideration which consists in performance, past or present, is called "executed consideration', and in so far as it consists in promise in future, it is said to be "executory consideration'. Executed consideration consists of an act or actual forbearance against a In "executed future promise. Executory consideration is in fact a promise for a promise. consideration', the liability is outstanding on one side only as the one party has already performed his part. In 'executory consideration', the liability is outstanding on both sides. In other words, it must involve legal obligations which can be compelled to be performed or enforced in a court of law.55 An actual forbearance to exercise a right may be a good executed consideration. provided it be at the promisor's request.* A promise to forbear from exercising a right may be a g0od executory

consideration.

Past consideration.-Past consideration must be distinguished from executed consideration. If the act or forbearance alleged to constitute the consideration has been done prior to and independently of the giving of the promise, it amounts to past consideration. On the other hand, in the case of executed consideration, both the promise and the act or forbearance which constitutes the consideration are integral and co-related parts of the same transaction.3° Under English law, past consideration is no consideration at all. The general principle is that the consideration is given and accepted in exchange for the promise. As the consideration and the promise are simultaneous, the consideration must always be present. A consideration if past may be the motive but cannot be the real consideration of a subsequent promise. English law has however long recognised that a past consideration will support a subsequent promise, if the consideration was given at the request of the promisor.5 This is known as the exception of Lampleigh v.

Brathwait,39

31.

Law Commission of India, 13th Report (1958) at para

16 recommended adding a new S. 37A to the

Act as folows: 37A. Benefits conferred on third

32. 33.

parties.() Where a contract expressly confers a benefit directly on a third party, then, unless the contract otherwise provides, it shall be enforceable by the third party in his own name, subject to any defences that would have been valid between the contracting parties. (2) Where a contract expressly conferring a benefit directly upon a third party has been adopted, expressly or impliedly, by a third party, the parties to the contract cannot substitute a new contract for it or rescind or alter it so as to effect the rights of the third party. Union of India v. Mis. Chaman Lal Loona, AlR 1957 SC 652 : (1957) 1 SCR 1039. Taluk Board, Koilpati v. Senthatikali Pandia Chinnathambiar, AlR 1936 Mad 709: (1937) I MLJ

34.

S0. See notes later under S. 2 "Forbearance as Consideration'".

35. Westminster City Council v. Duke of Westminster, [1991]4 All ER 136. 36. Roscorla v. Thomas, (1842) 3 QB 234 (warranty given subsequent to sale of horse); Re MeArdle. |1951)TAl ER 905 (subsequent promise to compensate for improvements in property). 37. 38.

39.

Re Casey's Patents, (1892) I Ch 104, 115 per BoWEN L.J.; Pau On v. Lau Yu Long. 1980 AC 614.

Lampleigh v. Braihwait, (1615) Hob 105 (subsequent promise to pay for requested attempt to oblain pardon held enforceable). Lampleigh v. Brathwait, (1615) Hob 105; Smith L.C. 11th Ed. 141.

Interpretaiion clause

S. 2

17

Under the Act, the use of the perfect tense in the clause "has done or abstained from doing... embodies the Lampleigh v. Brathwait exception that a past consideration to

support a promise must be moved by a previousrequest. Thus if services have been rendered in the past at the request or desire of the promisor the subsequent promise is regarded as an admission that the past consideration was not gratuitous and which is

evidence of the amount of the reasonable remuneration on the faith of which the services were rendered." So in Sindha v. Abraham*i the plaintiff rendered services to the defendant at his desire during his minority and continued those services at his request after his majority. This was held to be a good consideration for a subsequent express promise by

the defendant to pay an annuity to the plaintiff, but it was admitted that if the services had not been rendered at the desire of the defendant the case would have fallen within S. 25

of the Act. In Thomas v. Thomas*- it was pointed out that the conditions on which the executors allowed the plaintiff to reside in the testator's house during her life were that the plaintiff agreed to pay the ground rent and to carry out repairs to the house; those conditions constituted the real consideration. Pious respect for the wishes of the testator did not move from the plaintiff and hence that was not the consideration although that had been the motive also on the part of the executors.

The English law exception in Lampleigh v. Brathwait will not extend to promises where the past consideration was not given at the request of the promisor. Thus if A saves B from drowning and B later promises A a reward, A's action cannot be relied on as consideration for B's promise for it is past in point of time."" Under the Act however, such promises would be covered by the rule in S. 25(2).44

"Or does or abstains from

doing" : Forbearance as

consideration.The

essence

of consideration is that the promisee takes on himself some kind of burden, or detriment", as the English authorities call it. Where the consideration is a present performance and not a promise, the detriment may consist either in actually parting with something of value, or in undertaking a legal responsibility or in foregoing the exercise of a legal right. Thus the performance which constitutes a consideration may be negative as well as positive, provided that the promisee's abstinence from exercising a right was plaintiff undertaken at the request of the promisor. If at the defendant's request the promise to. abstain from exercising a right the contract is formed by reciprocal promises

undersub-section (1). But if the plaintiff makes no promise but merely abstains from exercising his right such abstention is good consideration," and is an acceptance of defendant's proposal-sec. 8. In Alliance Bank v. Broom*o the defendant owed to the

plaintiffs, who pressed him to give security. The defendant promised to do so, but he did not expressly ask for forbearance nor did the plaintiffs promise it. It was held that the defendant was bound by his promise to give security as the plaintiffs did in effect give and the defendant received, the benefit of some degree of forbearance. Lord MCNAGHTEN later explained such cases on the ground that the debtor impliedly requests And where the defendant has made an offer to pay in consideration of forbearance. 40.

Re Casey's

Patents, (1892) 1 Ch 104, 115, per BoWEN, LJ.

41. SindhavA . braham(,1895)20Bom,755;cf.(1918)20BomLR441. " 42. 43. 44.

:

Thomas v. Thomas, (1842) 114 ER 330 [1842] 7 QB 851. ANSON'S LAW OF CONTRACT (29th edn, 2010) at p. 95-96. See notes under S. 25 "Compensation for voluntary service".

45. See Alliance Bank v. Broom, (1864) 2 Dr. & S 289 as a good example

of this class. See also

Fanindra arain Raj v. Kacheman Bibi, (1918) 45 Cal 774:AIR 1918 Cal 816. 46. See Aliance Bank v. Broom, (1864) 2 Dr. & S 289 as a good example of this class. See also Fanindra Narain Raj v. Kacheman Bibi, (1918) 45 Cal 774: AIR 1918 Cal 816. 47.

Alliance Bank v. Broom, (1864) 2 Dr. & S 289 at p. 292.

48. Fullerton v. Provincial Bank of Ireland, (1903) AC 309, 313.

18

S. 2

Preliminary

forbearance,

with some other alternative offer, the plaintiff's

forbearing to sue in fact is a

sufficient acceptance of the first alternative.49 If it is asked at what moment the proposal conveyed

by such a request becomes a promise the answer is that it does so whenever the

other party has in fact forborne his rights for a time which enough to amount to a reasonable compliance with the request.

the Court considers long It will be found that many

cases in which forbearance to sue is said to be consideration for a promise are really cases of reciprocal promises. In such cases the consideration is not the forbearance but an

express promise not to sue or a promise implied from such forbearance50 The most usual and important kind of forbearance occurring in practice is that which

is exercised or undertaken by way of compromise ofa doubtful claim. It is aquestionof some importance within what limits the abandonment or compromise of a disputed claim is a good consideration. This topic is dealt under S. 25 of the Act.

"Or promises to do or to abstain from doing something"

Mutual promises.

These words, supplemented by sub-ss. (e) and (f), convey in a somewhat indirect and inconspicuous manner the extremely important proposition that a contract may be formed by the exchange of mutual promises, each promise being the consideration for the other. In this case neither promise is of any value by itself but each of them derives its value from the exchange which makes them both binding. It is obvious that the consideration cannot be wholly executed on both sides. For where performances, and performances only, are exchanged, of which a sale of goods over the counter for ready money is a familiar example, nothing remains to be done by either party, and there is no promise at all and nothing for the law to enforce. The possible existence of a collateral promise, e.g. a warranty on sale, does not affect the

general truth of this statement. The proposal to give a promise for a promise is accepted by giving the promise asked for, and thereupon, if there be no special ground of invalidity, the two parties are both bound, each being both promisor and promisee. But for the counter-promise or "reciprocal promise" as the Act has it, neither party's signification of willingness" could become a promise within the definition of the Act.

Such act or abstinence or promise is called a consideration for the promise" Further requirements.-It will be observed that, according to the terms of the definition, it is only required that the request of the promisor It is a fundamental

"something"

should have been done, forborne, or promised at

rule in the Common Law that though consideration need not be

adequate,3l it must be 'something which is of some value in the eyes of law$2 One would expect the Act to say somewhere that, in order to have legal effect, a consideration must not only be something which the promisor asked for and got, but must be "good" or "valuable", that is to say, something which not only the parties regard, but the law can regard, as having some value. In S. 23 it is declared that certain kinds of considerations are not lawful. In S. 25 agreements made without consideration are declared to be void. It is not anywhere stated in terms that consideration is not lawful, or otherwise not

49.

Wilby v. Elgee, (1875) LR 10 CP 497.

50. For example, Amin Chand v. Guni, (1929) 119 IC 766: AIR 1929 Lah466. 51. De la Bere v. Pearson, [1908] 1 KB 280 (possible benefit to newspaper in publishing letter held to be consideration for offer to give financial advice); Haigh v. Brooks, (1839) 10 A&E 309 (promise 52.

to surrender a document thought to be a guarantee which turned out to be of doubtfül validity held good consideration). White v. Bluet, (1853) 23 LJ Ex 36 (promise by son 'not to bore' father, not good consideration).

Interpretation clause

S. 2

sufficient if it is not "good" law.

9

or "valuable" in the sense, which those terms bear in English

would Had the Act abrogated the settled principle of English law, the consequer have been extensive; but it seem to be beyond doubt that such was not the intention and that the silence of the Act cannot be taken as altering the English law as it stood settled in India. 3 The principle may be broadly expressed thus: The law will not enforce a promise given for nothing and if it is apparent to the Court on the face of the transaction that an alleged consideration amounts to nothing (and not merely to very little), then there is no foundation for the promise, and we say either that there is not any consideration or that there is an "unreal consideration."

Promissory Estoppel and Consideration.-The principle of promissoryestoppel provides that if a promise is made in the expectation that it would be acted upon, and it

was in fact acted upon by the promisee who alters his position in reliance of the promise, the promisor will not be allowed to back out of it when it would be inequitable to do so. The court will do what is necessary, but not more, to prevent a person who has relied upon such promise from suffering detriment.2

Promissory estoppel rests uneasily with traditional contract theory since it protects reliance, not bargains. The doctrinal vehicle for reconciling promissory estoppel and the requirement for consideration has been the rule that promissory estoppel does not create new causes of action where none existed previously; it is a "shield and not a sword"o It has been said that to extend the doctrine of promissory estoppel beyond this would amount to abolishing the doctrine of consideration ina "back-hand way"

The doctrine has developed differently in India. In Motilal Padampat Sugar Mills case the Supreme Court expressly recognized that this principle "*can furnish a cause of action A convincing explanation justifying the departure from English law, is found in a decision of the High Court of Australia which has a similar rule as India. It was held that promissory estoppel and consideration protect different interests-an estoppel remedy only seeks to effect the minimum equity needed to avoid the detriment from reliance and unconscionable conduct, whereas, where a promise is supported by consideration, the

expectations of the promisee are protected even if the promise is entirely executory and there has been no reliance on it. Although the application of promissory estoppel in India has so far been limited to promises made by public bodies (and has therefore been developed largely in the field of administrative law), there seems no reason in principle why this cannot be applied between private individuals,o nor has the Supreme Court limited the application of the

doctrinewhile formulating ito 53. See Kulasekaraperumal v. Pathakutty, AIR 1961 Mad 405; Chidambara lyer v. Ranga hyer, AIR 1966 SC

193:(1966)

1 SCR 168. See also notes under S. 25 "Explanation 2".

54. Central London Property Trust Lid. v. High Trees House Lid., [1947] KB 130; Motilal Padampat Sugar Mills Co Ltd. v. State of Uttar Pradesh, AIR 1979 SC 621: (1979) 2 SCC 409. 55. Crabb v. Arun DC, [1976] Ch 179, 198. S6. Combe v. Combe, [1951] 2 KB 215, 224; ANSON'S LAW OF CONTRACT (29th edn, 2010) at p. 123. S7. Brikom Investment Lid. v. Seaford, [1981]2 All ER 783, per RoSKILL LJ. S8. Motilal Padampat Sugar Mils Co Lid. v. State of Utar Pradesh, AIR 1979 SC 621:(1979) 2 SCC 409 affrmed in Union of India v. Godfrey Phillips India Ltd, AlR 1986 SC 806: (1985) 4 SCC 369.

$9. Walions Stores (lnterstate) Lid. v. Maher, (1988) 164 CLR 387, 406 (Australia). 60. Nrimal Kumar Moulik v. Champabala Roy, AIR 1971 Cal 407 (plaintiff estopped from claiming land earlier shown as park in plans given to prospective purchasers). 61. Century Spinning and Mfg Co Ltd. v. Ulhasnagar Municipal Council, AlR 1971 SC 1021, per Shah Jpublic bodies areas much bound [by the principle of promissory estoppel] as private individuals" (promise of exemption from payment of octroi duty).

20

S. 2

Preliminary

The Law Commission of India in its 13th report in 1958 sought to undo the injustice done when a promise is made knowing that it would be acted upon, and which is then

acted upon, and then it is held that the promise is unenforceable on the ground of want of consideration. It recommended adding an exception to s 25.2 After considering the later developments, particularly the law laid down in the Motilal Padampat Sugar Mills', it gave its 108th Report on promissory estoppel, where it recommended not only an express provision to make such promises enforceable, but also gave the circumstances in which such promise would or would not be enforceable.03 Sub-ss. (e) to Gi): Agreement and contract.-The question in each case is: Is this an enforceable agreement? Or a concluded and binding contract? If there is an essential term which has yet to be agreed and there is no provision, either express or implied, for its solution, that is the parties have to meet each time and decide the same, there is no

binding contract. Where an agreement leaves the terms of price, date and quantity of delivery of the goods to be agreed in future, there is no binding contract. In such cases there is a distinction between an agreement or contract where the agreement is wholly executory on both sides and the one which has been executed on one side or the other. By

sub-sec. (e) an agreement is either a promise or a group of promises and, therefore, it would seem that an executed consideration is not reckoned as part of the agreement. This is not according to the current use of language, which treats an agreement as an act of both parties, whether a legal obligation is incurred by one or both of them. A unilateral contract is not the less a transaction between two parties to which both must contribute something. Sub-s. (1) agrees with common usage.

62.

The Law Commission of India, 13th Report (1958) recommended adding in this Act: 25(4). It is a promise, express or implied, which the promisor knew or should reasonably have known would be relied upon by the promisee, where the promisee has altered his position to his detriment in reliance on the promise.

63.

Law Commission of India, 108th Report (1984) recommended adding in this Act: 25A. (1) Where-fa) a person has, by his words or conduct made to another person, an unequivocal promise which is intended to create legal relations or to affect a legal relationship to arise in the future; and (b) such person knows or intends that the promise would be acted upon by the person to whom

it is made; and (c) the promise is, in fact, so acted upon by the other person, by altering his position, then, notwithstanding that the promise is without consideration, 1t shall be binding on the person making it, if, having regard to the dealings which have taken place between the parties, it would be unjust not to hold him to be so bound. (2) The provisions of this Section apply whether or not there is a pre-existing relationship between the parties.

(3) The provisions of this Section shall not apply(a) Where the events that have subsequently happened show that it would be unjust to hold the promisor to be bound by the promise; or (6) Where the promisor is the government and the public interest would suffer if the government is held to be bound by the promise; or

64. 65.

(c) Where the promisor is the government, and enforcing the promise would be inconsistent with an obligation or liability imposed on the govemment by law. Explanation (1). Where a question arises whether public interest could suffer within the meaning of cl (b), the court shall have regard to the amount of harm likely to be caused to the promise if the promise is not enforced and the extent of injury to be caused to the public interest it the promise is enforced, and shall decide the matter ofa balance of the two considerations. Explanation (2). In this Section, "Government' includes all public bodies. See Abaji Sitaram v. Trimbak Municipality, (1904) 28 Bom 66, at p. 72. The fact that consideration is not a necessary element for making an agreement is also seen from the language of Ss. 10 and 25, though it is necessary for making itenforceable."qa D93 to g.ti

S.2

Interpretation clause

21

The distinction between "agreement" and contract made by sub-s. (h) is apparently original. The conditions required for an agreement being enforceable by law are contained in Chapter II of the Act, ss. 10 et seq. where it will also be seen that the absence of any such condition makes an agreement void, and certain defects will make a contract voidable. The duties of parties to a contract are set forth in Chapter IV of the Act. In one case A agreed to sell B his land on the bargain paper being made through a

Vakil two days after the date of the agreement and on execution of the bargain paper further steps were to be taken, no bargain paper was executed and the court held that there was no enforceable contract.00 This case emphasises the distinction between an agreement and a contract. The test is enforceability. Void Contract.-It is a practice to use the term 'void contract, but this is truly a contradiction in terms. An 'agreement' not enforceable by law is itself void, and therefore, cannot be a "contract' at al1.67

In an old case8 the Privy Council observed that sub-s. (G) did not declare every unenforceable contract void but only those unenforceable by law, and by those words meant not unenforceable by reason of some procedure or regulation, e.g. Limitation Act, but unenforceable by substantive law. "For example", observed their Lordships, "a contract which was from its inception illegal, such as a contract with an alien enemy, would be avoided by S. 2(g), and one which became illegal in the course of its performance, such as a contract with one who had been an alien friend but later became an alien enemy, would be avoided by S. 20). A mere failure to sue within the time specified by the stature of limitations or an inability to sue by reason of the provisions of one of the Orders under the Civil Procedure Code would not cause a contract, to become void. The words "unenforceable by law" would mean unenforceable by substantive law. The said expression does not refer to procedural law like Civil Procedural law like Civil Procedure Code or Limitation Act.0 Instances of void contracts are provided for in sections 20, 23, 24, 25, 26, 27, 28, 29 and 30.

Distinction between void and voidable

contracts.-A

voidable contract takes its

full and proper legal effect until it is set aside, while a void contract is a nullity and no

right would accrue thereunder from its commencement. Voidable Contract.-Voidable contracts under this Act can be divided into two groups, namely, contracts voidable in their inception under S. 19 on the ground of undue influence, by the person coercion, fraud, misrepresentation and under S. 19A whose consent was obtained by one of the aforesaid factors; and contracts becoming voidable by subsequent default of one party under S. 39 (refusal of party to perform promise wholly), S. 53 (impossibility created by act of party), and S. 55 (failure to

perform at time fixed, time being of essence). If the party entitled to avoid the contract does not affirm it, fails to avoid it, within a reasonable time, he will be estopped from avoiding it if the other party has altered his position to his prejudice or a third party has acquired bona fide some rights. A contract which is avoided by one party is not binding on the other party as there would then arise lack of mutuality.

66. Govind Laxman v. Harichand, 25 Bom LR 531 (PC). 67. Fawcett v. Star Car Sales Ltd., (1960) NZLR 406. 68. Mahanth Singh v. U Ba Yi, (1939) 66 lA 198: 41 Bom LR 742: 181 IC1: AIR 1939 PC 110; Vishwanath Narayan v. Deokabai, (1948) Nag 50: AIR 1948 Nag 382. Mahanth Singh v. U Ba Yi, (1939) 66 LA 198, 41 Bom LR 742, 181 IC 1, (1939) APC 110; 69. Vishwanath Narayan v. Deokabai, (1948) Nag 50: AIR 1948 Nag 382.

Municipal Corporation of Bombay v. S. of S. for India, 36 Bom LR 568 : 58 Bom 660: AIR 1934 70. Bom277.

22

S.2

Preliminary

Becomes Void.-A contract which becomes void is a valid contract at its inception, but is rendered void (i.e., unenforceable) by some later event. Under the Act, a contract becomes void under S. 32, when the event on which its enforcement is contingent, becomes impossible; S. 35, when the specified event on which the enforcement of contract is contingent, does not happen before the time fixed, or becomes impossible within that time; S. S6, when the act promised becomes impossible or unlawful by reason

of some event which the promisor could not prevent. It has also been held that a contract becomes void' when it is rescinded by the party at whose option it is voidable.

71.

Satguru Prasad v. Har Narain Das, AIR

1932 PC 89.

CHAPTER I

OF THE COMMUNICATION, ACCEPTANCE AND REVOCATION OF PROPOSALS Communication, acceptance and

revocation ofproposals.

S. 3. The communication of proposals, acceptance of proposals, and the revocation proposals and acceptances, respectively, deemed to be made by any act or omission of accepting or revoking, by which he intends

the of are the to

party proposing, communicate such proposal, acceptance or revocation, or which has

the effect of communicating it. What is communication.-In S. 2 (a) and (b) we have seen that a promisor has to signify his willingness and a promisee has to signify his assent. It is therefore necessary to define what is meant by such signification and the mode of such signification. This is described as communication.

The words "signifies to another" clearly imply that the willingness or the assent, as the case may be, must be brought to the notice of the other, in other words "is communicated to the other." This section is also remised on this principle that both the offer and its acceptance ought to be notified to the other party, in order that the two minds may come together and agree upon the same thing in the same sense (as stated in S. 13). If there be no "meeting of minds" no contract may result. The section states that communication may be made by an act or omission, by which the person intends to communicate, or which has the effect of communicating. It was

Suggested in earlier editions of Pollock & Mulla that the word "or" must be replaced with "and", because otherwise the section suggests that even an inchoate communication intended to communicate, but which in fact does not have that effect, would have legal

effect

The Law Commission of India considered this opinion, but recommended no

change because the existing language has not caused any difficulty The use of the word "or in the section has been rationalized by later editors on the basis that it indicates that an act or omission with intention to communicate would amount to a communication,

provided it is complete under S. 4. The later part of the clause suggests that if the act or omission has the "effect of communicating", it is equally a communication, irrespective

ofintention. Modes of

Communication.-This

section provides two general modes of commu-

nication viz. (1) any act or (ii) omission intending thereby to communicate to the other or 1. 2.

Bhagwandas Goverdhandas Kedia v. Girdharlal Parshottamadas & Co., AlR 1966 SC 543 and 547, Para 6:(1966) 1 SCR 656. See POLLOCK & MULLA, INDIAN CONTRACT AND SPECIFIC RELIEF ACTS, (9th edn, 1972) at p. 57.

3. See Law Commission of India, 13th Report (1958) at para 27. 4. See PoLLOCK & MULLA, INDIAN CONTRACT AND SPECIFIC RELIEF ACTS, (13th edn, 2006) at p. T50.

[231

24

S. 3

Chapter-0f theCommunication,Acceptance& Revocationof Proposals

which has the effect of communicating it to the other. The first mode "any act" would include any conduct and words, written or oral. Written words would include emails, letters, telegrams, telex messages, advertisements etc. Oral words would include telephone messages. Any conduct would include positive acts or signs so that the other

person understands what the person acting or making signs means to say, or convey. Omission would not mean silence° but would include such conduct' or forbearance on one's part that the other person takes it as his willingness or assent.

It is a matter of the

commonest experience that the communication of intentions may be effectually made in many other ways besides written, spoken, or signaled words. For example, delivery of goods by their owner to a man who understood by everyone as acceptance to the contrary. No words are needed, into a ferry-boat or a tramcar, or a

has offered to buy them for a certain price will be by act or conduct, unless there be some indication again, to explain the intent with which a man steps public vehicle or drops a coin into an automatic

machine. These are instances of communicating by conduct. It is also possible for parties to hold communication by means of pre-arranged signs not being any form of cipher or secret wTiting, and not having in themselves any commonly understood meaning. This does not often occur in matters of business. Means of communication

which a man has

prescribed or authorized are generally taken as against him to be sufficient. E-mails, post, telegram, telephone, telex and radio are the modern means of communications and hence these means can be used for the purpose of communicating the offer, acceptance or revocation. But acceptance of an offer cannot be by serVing copy of a plaint in the suit

through court because it is not usual to accept an offer by filing of a plaint.0 The offer as well asacceptance should precede the institution of suit

The words "which has the effect of communicating it" clearly refer to an act or omission or conduct, which may be indirect but which results in communicating it to the other. The said words would include communication to an agent.12 A mere mental but unilateral act of assent in one's own mind will not amount to a communication as it cannot have the effect of communicating it to the other.5 A resolution passed by abank to sell land to A remained uncommunicated to A and it was held that there was no communication and no contract.4 Notification of acceptance is required for the benefit of the person who makes the offer. The words "which has the effect of communicating it" have been further elaborated in sections 4, 7, 8, 9. The person making the offer may, however, either dispense with the notice of acceptance or may provide particular mode of acceptance as sufficient to make the bargain binding. S. 7 provides for that

contingency. S. 8 provides for a con-

tingency of acceptance by the mode of performance of the condition contained in the proposal.

5.

Bishan Pado Haldarv. Chandi Prasad & Co., 42 All 187.

6. Haji Mahomed Haji Jiva v. E Spinner, (1900) ILR 24 Bom 510 (524); Bank of India v.Rustom 7.

FakirC ji owasjee5,7BomLR850(866) AIR1955BOm 41i97i

8. SeenotesunderS.3below "Communicationbysilence" 9. 10. 11. 12.

o) to

Bishan Pado Haldar v. Chandi Prasad & Co., 42 All 187. Harvey v. Johnston, (1848) Visweswaradas v. Narayan Visweswaradas v. Narayan Henthorn v. Fraser, (1892)

u

tg 5 Y

t1}

6 CB 295 (305). Singh, AIR 1969 SC 1157:(1969) 1 SCC 547. Singh, AIR 1969 SC 1157, 1159 at para 7:(1969) 1 SCC 547. 2 Ch 27 (33): [1891-94] All ER Rep 908 (CA).

13. Brogden v. Metrop R Co., (1877) 2 App Cat at pp. 691, 692, per LORDBLACKBURN;Bhagwandas 14.

v. Girdharlal & Company, AlR 1966 SC 543 at 547, Para 6: (1966) 1 SCR 656. Central Bank, Yeotmal v. Vyankatesh, AIR 1949 Nag 286.

ES

Communication, acceptance and revocation ofproposals

S. 3

25

Communication by silence-Communication should be through some external manifestation which the law regards as sufificient. As a general rule, neither mere silence nor inaction is an effective expression of intention.6 In Felthouse v. Bindley7, F offered to buy his nephew's horse for £30. 15s adding "If I hear no more about him I shall consider the horse mine at £30. 15s°. The nephew did not communicate his acceptance to F but told B, an auctioneer, to remove the horse out of the auction sale as he B sold the horse by mistake. It was held that the intended to reserve it for his uncle.

nephew's acceptance was not communicated to F, the nephew had no obligation to reply, and his silence did not constitute acceptance. Hence, F's action for conversion failed. Communication however can be inferred from silence in exceptional circumstances. If silence is reinforced by conduct, or other relevant facts, it may be taken as sufficient communication. Similarly, substantial delay, ie. silence and inactivity, by the claimant in pursuing the reference to arbitration after it has been instituted has been held to amount to a proposal to abandon it. Communication in Electronic Form.-The words of S. 3 of the Act are wide enough to cover communications by data messages in electronic form (called "electronic record" in the Information Technology Act 2000).21 This has been recognized by the newly inserted S. 10A of the Information Technology Act, 2000 which provides that a contract shall not be denied enforceability on the sole ground that electronic records are

used in its formation.

To take a very common example, there would be valid

communication of both the offer and acceptance where a user indicates his assent to the displayed terms by clicking the "I agree" button on a website.5 Similarly, communication taking place through e-mail has been held to give rise to a valid contract.24

Communication of special conditions.-There has been a series of cases in which the first question is whether the proposal of special terms has been effectually communicated. This arises where a contract for the conveyance of a passenger, or for the carriage or custody of goods, for reward, is made by the delivery to the passenger or owner of a ticket containing or reterring to special conditions limiting the undertaker's liability, and nothing more is done to call attention to those conditions. English authorities have established that it is a question of fact whether the person taking the ticket had (or with ordinary intelligence would have) notice of the conditions, or at any rate that the other

15.

Bhagwandas Govardhandas Kedia v. Girdharilal Parshottamdas & Co., AIR 1966 SC 543.

16.

HulasKumwar v. AllahabadBank Ltd, AlR 1958 Cal 644: KaranSingh v. Collector,Chhatarpur,

AIR 1980 MP 89; Urmila & Co. v. JM Bari & Co., AIR 1986 Del 336. 17. Felthouse v. Bindley. (1862) 11 CBNS 869: (1863) 7 L.T. 835.

vacating); Alliance Bank v. Broom, (1864) 2 Drew & Sm 289 (debtor's proposal for additional security accepted by creditor's forbearance to sue); Bharat Petroleum Corpn. LId. v. Great Eastern Shipping Co. Ltd, (2008) 1 SCC 503, S1l: AIR 2008 SC 357 (arbitration clause in proposed charterparty accepted by continued hire of vessel beyond tem of original charterparty). 19. Rust v. Abbey Life Insurance Co., [1979] 2 Lloyd's Rep. 355 (offer solicited by offeree); Cole Mcintyre-Norfleet Co v. Holloway, 141 Tenn. 649, 214 SW 87 (1919) (previous course of dealing between parties suggested that silence may amount to acceptance). 20. Andre et CompagnieS.A. v. MarineTransocean Ltd, [1981) 2 Lloyd's Rep. 29,31; Paal Wilson & Co Als v Partenreederei

Hanna Blumenthal, |1983| 1 All ER 34 (HL).

21.

POLLOCK & MULLA, Indian Contract and Specific Relief Acts (13th edn, 2006) at p. 152.

22.

For contracts which may not be made in electronic fom, see S. I(4) of the Information Technology Act, 2000. See also notes under S. 10"Contracts required to be in writing".

23. 24.

ProCD Inc v. Mathew Zeidenberg, 86 F 3d 1447 (7th Ci, 1996). Trimex International FZE Ld. v. Vedanta Aluminium Lid, (2010) 3 SCC 1, 32 (2000) 1 JT 474

(contract through exchange of e-mails)

26

S. 3

Chapter of the CommunicatioA nc,ceptance&RevocationofProposals

party was minded to contract only on special conditions to be ascertained from the ticket. In either of these cases his acceptance of the document without protest amounts to a tacit acceptance of the conditions, assuming them to relate to the matter of the contract, and to be of a more or less usual kind. But he is not

liable

if the

ticket

is so

printed

or

delivered to him in such a state, as not to give reasonable notice on the face of it that it does embody some special conditions.26 A party cannot unilaterally after the conclusion of the contract impose upon the other special conditions which are onerous to the other

without his consent.Also the special conditions must be on a contractual document. If a document is one which a person receiving it would scarcely expect to contain any con-

dition e.g. merely a receipt for payment of money, it cannot be said that the notice given was reasonably sufficient and so the defendant cannot rely upon it to meet the plaintiff's case 28

A passenger purchased of the defendant company a ticket by steamer, which was in the French language. Towards the top of the ticket were the words to the effect that "this ticket

in

order

to be

available,

must be signed

by the

passenger

to

whom

it is

delivered."2 At the foot of the ticket there was an intimation in red letters that the ticket was issued subject to the conditions printed on the back. One of those conditions was that the company incurred no liability for any damage which the luggage might sustain. The vessel was wrecked by the fault of the company's servants, and the plaintiff's baggage was lost. The plaintiff sued the defendant company for damages. The ticket was not signed by him, and he stated that he did not understand the French language, and that the

conditions of the ticket had not been explained to him. It was held that the plaintiff had reasonable notice of the conditions and that it was his own fault if he did not make himself acquainted with them. As to the absence of the plaintiff's signature, it was held that the clause requiring the passenger's signature was inserted for the benefit of the company and that they might waive it if they thought fit. The decision seems also to imply that a French company is entitled to assume that persons taking first-class passage either know French enough to read their tickets or, if they do not ask for a translation at the time, are willing to accept the contents without inquiry. This seems reasonable enough in the particular case. In respect of an airlines travel ticket, special conditions of carriage were printed in small letters on the ticket and were displayed in big types in the airlines office, it was held that the terms were duly communicated to, and were impliedly accepted by, the passenger.30 Similarly, where the e-ticket of an airline referred to conditions of carriage available on the web-site and as wellas at airport counters for inspection, the conditions were held binding on the passenger. The mere fact that a passenger may not read or may not demand a copy does not mean that he will not be bound by such terms of contract of carriage.31

25. 26.

See Gibaud v. G.E.R. Co., (1920) 3 KB 689.

In Henderson v. Stevenson, (1875) LR 2 Se & D 470, where an endorsement on a steamboat ticket was not referred to on its face, and Richardson v. Rowntree, (1894) AC 217, where the ticket was folded up so that no writing was visible without opening it, a finding of fact that the passengerknew 3tnothing of any conditions was supported. See Madras Railway Co. v. Govinda Rau, (1898) 21 Mad 172, 174, and for a general summary of the law Hood v. Anchor Line, (1918) AC 837, where both the contract and a notice on the envelope enclosing 1t pointedly called attention to the conditions. Inability to read is no excuse: Thompson v. L.M. & S.R. Co., (1930) 1 KB 41, CA. 27. Olley v. Marlborough Court Ltd., (1949) 1 KB 532; Chapelton v. Barry U.D.C., (1940) 1 KB 532. 28.Chapelton v. Barry UDC.,(1940) 1 K.B. 532; Jaswant Raj Soni v. Prakash Mal, (2005) 8 SCC 38, 39 (condition at the back of the rent receipt given by landlord). 29. Mackillican v. Compagnie des Messageries Maritimes de France, (1880) 6 CWN 227:6 Cal 227. 30. Mukul Dutta v. Indian Airlines, AlR 1962 Cal 311.

31. AnterGlobeAviation v. NSatchidanand (2011) 7 SCC 463, 479.ynat

.va ihyisait hui

Communication when complete

S.4

27

A launderer had given to his customer a receipt for goods received for washing; special conditions for this were printed on the reverse of the receipt. It was therefore held that the special conditions were duly communicated to the customer who had impliedly accepted the same.2 Where a carrier after accepting the goods for transport without any conditions issued subsequently a circular to owners of goods limiting his liability for goods, it was held that the special conditions were not communicated prior to the date of contract for transport and were hence not binding on owners of goods.5

Shrinkwrap Licences.-The 'shrinkwrap licence gets its name from packages (usually of retail software) covered in plastic 'shrinkwrap', having written terms, mostly unsigned, which state that acceptance on the part of the user to the licence is indicated by opening the shrinkwrap packaging. The customer would know about the licence and be able to read its terms only after the package is opened. These terms which are accessible only upon opening the shrinkwrap packaging are not binding as they are not communicated prior to the formation of the agreement.* However where there is an approve-or

return policy in the licence, the customer would be deemed to accept its terms if he continues to use the goods and does not return them within the stipulated time. Communication when complete.

S. 4. The

communication

of a proposal is comp-

lete when it comes to the knowledge of the person to whom it is made.

The communication of an acceptance is complete, as

against

the

proposer,

when

it

is

put

in

a

course

of

transmission to him, so as to be out of the power of the acceptor;

as against the acceptor, when it comes to the knowledge of the

proposer. The communication of a revocation is

complete,-

as against the person who makes it, when it is put into a course of transmission

to the person to whom it is made, so as to be

out of the power of the person who makes it; as against the person to whom it is made, when it comes to his

knowledge. lustrations (a) A proposes, by letter, to sell a house to B at a certain price. The communication of the proposal is complete when B receives the letter. (b) B accepts A's proposal by a letter sent by post. The communication of the acceptance is

complete,as against A, when the letter is posted; as against B, when the letter is received by A.

32.

Lily White v. R. Muthuswami, AlR 1966 Mad 13:(1965) 1 MLJ7

33. 34.

Raipur Transport Co. v. Ghanshyam, AIR 1956 Nag 145. Step-Saver Data Systems inc v. WYSE Technology, 939 F 2d 91 (3rd Cir, 1991).

35.

ProCD Inc v. Mathew Zeidenberg, 86 F 3d 1447 (7th Cir, 1996); Hüll v. Gateway 2000 Inc., 105 F 3d 1147 (7th Cir, 1997).

28

S. 4

Chapter 0f the CommunicatioA n,cceptance&RevocationofProposals

(c) A revokes his proposal by telegram. The revocation is complete as telegram is despatched. It is complete as against B when B receives it.

against A when the

B revokes his acceptance by telegram. B's revocation is complete as telegram is despatched, and as against A when it reaches him.

against B when the

Scope and object.-This section is very important. It deals with the completion of communication of proposals, acceptances and revocations and helps one in deciding whether the contract is concluded or not. The provisions of this section are applied with Ss. 2 and 3 to determine the time when the contract is concluded;

where the contract is made, which assumes relevance the court.

and also the place

while deciding the jurisdiction

of

Communication of a proposal.-This section provides two stages for a valid communication of a proposal. The communication of the proposal is the first stage. Receipt of the communication by the acceptor is the second stage. In Powellv. Lee,30 the managers of a school resolved to appoint a person as the headmaster. One of the managers communicated this to the candidate in his personal capacity. No other communication was received, and subsequently, the managers reversed their decision. It was held that there was no contract as there had been no authorised communication on the part of the managers "Non-authorisation of communication was held to imply that the managers reserved power to reconsider the matter. The candidate coming to know indirectly of the selection was held to be not material.38 Whether a proposal has or has not come to the knowledge of the person to whom it was made is purely a question of fact.

Agreement between parties at a distanceWhen the parties are in the presence of each other, the proposer and the acceptor know whether the acceptance has been communicated. If they are at a distance, they depend upon other modes of communication. The present modes of communication may be grouped into three categories. First, non-

instantaneous modes like the post, courier or telegram. Second, instantaneousmodes like the telephone, telex etc. There lies between these two an intermediate mode of communication which comprises of fax, email and other electronic methods. Each of these categories require to be looked at separately.

Non-instantaneous communication through post, courier or telegram.--The second and third paragraphs of the section are intended, as shown by the illustrations, to meet the questions raised by the formation of agreements between parties at a distance by

correspondence through post and other similar modes of non-instantaneous communication. It has done this, as regards acceptance, by enacting (in combination with S. 5) that for a certain time-namely, while the acceptance is on its way-"the receiver' of the acceptance (i.e. proposer) shall be bound and the sender (i.e. Acceptor) not. This can be

regarded only as a deliberate and rather large departure, for reasons of convenience, from the common law rule which requires the promise and the consideration to be simultaneous. In India though proposer (i.e. promisor) is bound when letter of acceptance is posted by acceptor (i.e. promisee), the acceptor is not bound by mere posting of the letter of acceptance. Acceptor is bound only when the letter of acceptance comes to the knowledge of the proposer (see section 4). The gap of time between the posting and

delivery of acceptance to proposer can be utilised by acceptor if he wants to revoke his earlier acceptance by a speedier means of communication which reaches faster or earlier than the letter of

acceptance."

36. Powell v. Lee, (1908) 99 37. Powell v. Le, (1908) 99 38. Powell v. Lee, (l1908) 99 39. See Kamisetti Subbiah v.

The acceptor is able to do this against the promisor

LT 284 (KB). LT 284 (KB). LT 284 (KB). Katha Venkatswami, (1903) 27 Mad 355 at 359.

Communication when complete

S. 4

29

because under section 4 of the Act, the contract is not complete, as against the acceptor, when the letter of acceptance is posted. The words "put in a course of transmission" imply that an acceptance may be communicated by post or by a telegram. That would be on the basis that the post England is that such service

office would be a carrier common to both.2 The rule should be expressly or impliedly authorised.45 This rule

in

would further imply that a communication should be posted at the correct address4* or the last known address and should be duly posted* or wired" as the case may be. In the second para, 'communication' is divided into two parts but until the offeror or proposer comes to know of "acceptance, the contract is not complete. The case of an acceptance being "put in a course of transmission to" the proposer, but failing to reach him, is not expressly dealt with. It seems to result from the language of the second paragraph that the proposer must be deemed to have received the acceptance at the moment when it was despatched so as to be "out of the power of the acceptor," and that accordingly it becomes a promise on which the acceptor can sue, unless some further reason can be

found why it should not. In respect of a contract formed by correspondence through the post, the posting of a letter-accepting an offer constitutes a binding contract, the reason being that the post office is the common agent of both parties.48 The post office being the common agent, as soon as the letter of acceptance is delivered to the post office the contract is as complete and binding as if the acceptor had put his letter into the hands of a

messenger sent by the offeror himself as his agent to deliver the offer and receive the acceptance. The acceptor in posting the letterhas put it out of his control and power and done an extraneous act which shows that he is bound thereby. A casualty in the post, whether

resulting in the delay, which is often

as bad as no delivery,

or in

non-delivery,

cannot unbind the parties." Upon balance of conveniences and inconveniences the contract would be complete as soon as the acceptance is posted. It is impossible in transactions

which pass between parties at a distance and have to be carried on through

the medium of correspondence to adjust conflicting rights between innocent parties so as to make the consequences of mistake on the part of the post office, a mutual agent, fall equally upon the shoulders of both. A letter not correctly addressed by an acceptor cannot be said to have been put in the course of transmission.2 If the wrong address is not due to the fault of the acceptor, the letter could be said to be in the course of transmission,5 even though there might be some delay in the letter reaching the addressee.4 Where the agreement is to consist in mutual promises, a binding contract appears to be formed by a letter of acceptance despatched in the usual

way, even if it does not arrive at al, unless the proposal was expressly made conditional

40.

Kamiseti Subbiah v. Katha Venkatswami,. (1903) 27 Mad 355 at 359.

41.

Bruner v. Moore, (1904) 1 Ch 305 (316).

42. 43.

Henthorn v. Fraser. (1892) 2 Ch 27; Powell v. Lee, (1908) 99 LT 284 (KB). Henthorn v. Fraser, (1892) 2 Ch 27; Powell v. Lee, (1908) 99 LT 284 (KB).

44. 45.

Tricumdas Mills v. Haji Saboo Siddick, 4 Bom LR 215 (220). Henthorn v. Fraser, (1892) 2 Ch 27; Powell v. Lee, (1908) 99 LT 284 (KB).

46.

Re London and Northern Bank, (1900) 1 Ch 220.

47. 48.

Bruner v. Moore, (1904) 1 Ch 305 (316). Dunlopv.

Higgins, 1 HLC 381; Re National Savings Bank Association: Hebb's Case, (1867) LR 4

12

49. Household Fire Insurance Co. v. Grant, (1879) 4 Ex D 216. S0. Household Fire Insurance Co. v, Grant, (1879) 4 Ex D 216. 51. Household Fire Insurance Co. v. Grant, (1879) 4 Ex D 216. 52. Ram Das v. The Official Liquidator, (1887)9 All 366 (384). 53. Townsend's Case, (1871) LR 13 Eq 148; Tricumdas Mils v. Haji Suboo Siddick, 4 Bom LR 215 (220). 54.

Dunlop v. Higgins, 1 HLC 381; Bruner v. Moore, (1904) I Ch 305.

30

S. 4

Chapter 1of theCommunication,Acceptance& Revocation ofProposals

on the actual receipt of an acceptance within a prescribed time, or in due course, or unless for by the latter part of the section and the acceptor sends a revocation as provided qualification is probably35 a departure from the explained by illustration (c). This last English law. When the proposal and acceptance are made by letters, the contract is made at the time when and the place where the letter of acceptance is posted.36 In Haridwar Singh v. Bagum Sumbruis7 Appellant's highest bid but less than the reserved price for the settlement of bamboo coup was accepted by the Divisional Forest

Officer subject to the confirmation by the Government. Later on, while the Government was considering the matter of confirmation of this bid, Appellant by his communication expressed his desire for the settlement of crop even at the reserved price. The minister directed that the crop may be settled with the Appellant at the reserved price and a telegram was sent to the conservator of Forests, confirming the auction sale to appellant at Forest offthe reserved price. However, as no intimation was received by the Divisional icer regarding the minister's telegraphic approval of the Appellant's bid, he did not communicate the minister's acceptance of Appellant's bid at the reserved price to him. It

was held that the minister's telegram to the Conservator of Forest accepting the Appellant's bid at the reserved price can not be considered as the communication

of the

acceptance of that offer to the Appellant, as the acceptance of the offer was not even put "in a course of transmission" to the Appellant. English Rules. -The rules as now settled in England are as

follows:

"A person who has made an offer must be considered as continuously making it

until he hasbrought to the knowledge of the person to whom it was made that it is withdrawn. In other words, the revocation of a proposal is effectual only if actually communicated before the despatch of an acceptance; and the time when the revocation was despatched is immaterial. But where an acceptance, without notice of the offer being revoked, is despatched in due course by means of communication, such as the post, in general use and presumably

within the

contemplation

of the

parties, the acceptance is complete from the date of despatch, notwithstanding any delay or miscarriage in its arrival from causes not within the acceptor's control. A letter of acceptance misdirected by the acceptor's fault cannot be deemed to have been effectually put in the course of transmission to the proposer"o

Instantaneous communication on phone or on telex.

A communication by

means of telephone or telex is an instantaneous mode of communication.i This sort of communication has not been dealt with by the statute.2 The communications on phone or telex machines are direct between the parties and hence instantaneous. In respect of the communication by post or telegram, a third party is involved. Communications by phone or telex would fall under the first para i.e. as if the parties make oral offer and acceptance. Communications by post or telegram would fall under the latter paras of the section. If an acceptance on phone is drowned by noise of a flying aircraft or is spoken 55.

See notes under S. 5 below "Revocation of acceptance".

S6.

Kamisetti Subbiah v. Katha Venkataswamy, (1903) 27 Mad 355. English authority, so far as it goes, is to the same effect. Haridwar Singh v. Bagum Sumbrui, (1973) 3 SCC 889: AIR 1972 SC 1242. LORD HERSCHELL in Henthorn v. Fraser, (1892) 2 Ch 27, 31.

$7. 58.

59. Henthom v. Fraser, (1892) 2 Ch. 27, 31; Protap Chandra v. Kali Charan, (1952) AC 32. 60.

Townsend's Case, (1871) LR 13 Eq 148.

61. Entores Ltd. v. Miles Far EastCorporation,(1955) 2 QB 327; Firm Kanhaiyalalv.Dineshchandra, AIR 1959 MP 234; Bhagwandas V.

Girdharlal

& Company,

AlR 1966 SC 543 : (1966) 1 SCR 656.

62. Firm Kanhaiyalal v. Dineshchandra, AlR 1959 MP 234; Bhagwandas v. Girdharlal &Company

Communication when complete

S. 4

31

into a telephone after the line has gone dead or is so indistinct that the proposer does not hear it, or the telex machine has gone out of order, there is no contract.0 The acceptor should ensure that the acceptance should be audible, heard and understood by the

offeror the reason being that the acceptance should be absolute and unconditional which in its turn requires that it should not be based on any mistake or misrepresentation.

Communication through fax, email or other electronic means.-When communication is sent through post or by any other non-instantaneous method like a telegram, there is a risk that the letter or telegram might get lost or delayed or garbled, and the sender may not know about it. On the other hand, where the communication is made by an

instantaneous

mode,

namely,

by telephone

or telex, the sender is able to know

immediately whether his communication has reached, and has an opportunity of making a proper communication. This difference perhaps underlies the reason why English and Indian law have different rules for these two categories of communication.

Fax messages fall into an intermediate position; the messageis transmitted imme diately, and the sender would, usually, be able to know at once if his message has not been received at all. If this is the case, then this resembles an instantaneous communication, and the attempted fax should not amount to an effective acceptance. But if the message is received in such a form that it is wholly or partly illegible, the sender is unlikely to know this at once, and it is suggested that the acceptance will be eftective in Such circumstances on the same principle as postal communications.° Similarly, an acceptance by e-mail or during the course of website trading may be wholly or partly garbled or may not reach the addressee at all (and unlike the case of fax, the sender

would usually be unable to know about this at once). The despatch in such cases resembles that by post in that once the message is sent, it goes into a course of transmission so as to be out of the control of the sender, and therefore a similar rule should be applicable. It may be that these principles would need to be re-assessed in their application to newer modes of communication or further developments of existing ones. As a general rule however, it is submitted that the rules of postal communication must apply to communication by electronic means, except where the sender has an opportunity of immediately verifying the proper communication of the message.

Mode of acceptance.-See S. 8.

Revocation of

Acceptance.-Unlike

English law, under the Act, a revocation

of

acceptance is possible by the express terms of Ss. 4 and 5 of the Act.6 The same rules mentioned above about actual knowledge of the revocation of proposal would apply to

revocation of acceptance.

Time and Place of

Contract.-A

proposal (regardless of the mode of commu-

nication) is made not at the place where it emanates but where it is received This is because a proposal is not complete unless and until it comes to the knowledge of the

63.

Entores Ltd. v. Miles Far East Corporation, (1955) 2 QB 327; Firm Kanhaiyalal v. Dineshchandra, AIR 1959 MP 234; Bhagwandas v. Girdharlal & Company, AIR 1966 SC 543:(1966) 1 SCR 656.

64. Firm Kanhaiyalal v. Dineshchandra, AIR 1959 MP 234; Bhagwandas v. Girdharlal & Company AIR 1966 SC 543 at 50, Para 14: (1966) I SCR 656.

65. 66.

CHITTY ON CONTRACTS (29th edn, 2004) at para 2-049. See notes under S. 5 below "Revocation of acceptance

67. Premchand Roychand v. Moti Lal, 52 Bom LR 643 Dhanraj Mills Ltd. v. Narsingh Prasad Bodona, AlR 1949 Pat 270; Ratan Lal Gattani v. Harcharan Lal, AIR 1947 All 337.

32

S.4

Chapter0f theCommunication,Acceptance & Revocationof Proposals

person to whom it is made6 A similar rule is also applicable to determine the time and place of contract in the event an instantaneous method of communication is used. A contract is then said to take place at the time when and the place where the acceptance is received.69 When an agreement is entered into by correspondence, the contract is made at the time when and the place where the letter of acceptance is posted. A proposal was made at Midnapore but was received and accepted at P, it was held that the contract took place

at P.

By logical extension, this rule should apply to all forms of non-instantaneous

communication and also, as discussed earlier, to communication through fax, email and other electronic means. In so far as communication takes place through an "electronic record", S. 13 of the Information Technology Act, 2000 is relevant as it has introduced certain legal fictions in

respect of the time and place of despatch and receipt of "electronic records".2 68. 69.

70. 71. 12.

Firm Kanhaiya Lal v. Dinesh Chandra, AIR 1959 MP 234; Baroda Oil Cakes Traders v. Parshotam Narayandas Bagulia, AIR 1954 Bom 491. v. Miles Far East Corp., Firm Kanhaiyalal v. Dineshchandra, AIR 1959 MP 234; Entores Ltd. [1955] 2 QB 327, 332; Bhagwandas v. Girdharlal & Co., AIR 1966 SC 543 (1966) 1 SCR 656 words of acceptance spoken at K over the telephone and received at A, held receipt at A determines time and place of contract). Kamisetti Subbiah v. Katha Venkataswamy, (1903) 27 Mad. 355. English authority, so far as it goes, is to the same effect. Sitaram Marwari v. Thomson, (1905) 32 Cal 884. This section provides as followS:

S. 13. Time and place of desptach and receipt of electronic

record.1)

Save asotherwise

agreed to between the originator and the addressee, the despatch of an electronic record occurs when it enters a computer resource outside the control of the originator.

(2) Save as otherwise agreed between the originator and the addressee, the time of receipt of an electronic record shall be determined as follows, namely: (a) if the addressee has designated a computer resource for the purpose of receiving

electronic records,

t.

V

) receipotccursatthetimewhenth electronircecordentersthdeesignatecd omputer resource; or (11) if the electronic record is sent to a computer resource of the addressee that is not the designated computer resource, receipt occurs at the time when the electronic record IS retrieved by the addressee;

(6)

if the addressee has not designated a computer resource along with specified timings, if any, receipt occurs when the electronic record enters the computer resource of the addressee.

(3) Save as otherwise agreed to between the originator and the addressee, an electronic record is deemed to be despatched at the place where the originator has his place of business, and is deemed to be received at the place where the addressee has his place of business.

(4) The provisions ofsub-section (2) shall apply notwithstanding that the place where the computer resource is located may be difterent from the place where the electronic record isdeemed to have been received under sub-section (3). (5) For the purposes of this section,(a) if the originator or the addressee has more than one place of business, the principal place of business, shall be the place of business; (b) if the originator or the addressee does not have a place of business, his usual place of residence shall be deemed to be the place of business; (C) "usual place of residence", in relation to a body corporate, means the place where it is registered.] To understand its efifect take a contract concluded through correspondence over email (which would quality as an "electronic record under the Information this contract would be Technology, Act, 2000). It appears from this provision, that deemed to be made-at the principal place of business (or, as the case may be, the residence or registered office) of the party accepting the offer; and, at the time when the email enters a computer resource outside the control of the party accepting the offer.

Revocation of Proposals andacceptances

S. 5

33

Statutory consents. The validity ofconsentsrequired by special statutory provisions and revocations thereof, is governed by the terms of the statutes, and not by this or

the following section.5

S. 5. A proposal may be revoked at any time before the communication of its acceptance is complete as against the proposer, but not after-

Revocationof Pro posalsana dcceptances.

wards. An acceptance may be revoked at any time before the communication of the acceptance is complete as against the acceptor, but not

afterwards. llustrations A proposes, by a letter sent by post, to sell his house to B. B accepts the proposals by a letter sent by post.

A may revoke his proposal at any time before or at the moment when B posts his letter of acceptance, but not afterwards. B may revoke his acceptance at any time before or at the moment when the letter communicating it reaches A, but not afterwards.

STATE AMENDMENT Uttar Pradesh.-In its application to the State of Uttar Pradesh, at the end of the first paragraph, insert the following, Explanation namely: "Explanation.-Where an invitation to a proposal contains a condition that any proposal made in response to such invitation shall be kept open for a specified time and a proposal is thereupon

made accepting such condition, such proposal may not be revoked within such of 1976, S. 25 (w.e.f. 1-1-1977).

time.-U.P.

Act 57

Scope-While S. 4 provides the time at which communication of acceptance and of revocation of proposal and acceptance is complete, this section first provides that both proposal and acceptance can be revoked, and secondly, gives the time before which the right of revocation can be exercised. This section must be read along with S. 4.

Revocation of offers generally.-The general rule in common law is that (i) an offer may be revoked at any time before its acceptance, " and, (1i) an offer is made irrevocable by acceptance.

This is also the import of S. 5.

These two propositions are best illustrated by contrasting the facts of two cases. In Re London and Northern Bank'0, an offer to purchase shares was withdrawn by a letter posted on 26th October and it reached the acceptor (addressee) on the next day at 8:30

a.m. The acceptor actually posted the letter of acceptance of the offer after 8:30 a.m. The offer was held validly revoked. On the other hand, in Sandhoo Lal Motilal"" the telegram revoking the proposal reached the offeree after the offeree had posted the letter of acceptance. It was held that the contract was complete as soon the letter of acceptance was posted and the revocation was therefore ineffective.

73. Lingo Raoji Kulkarni v. Secretary of State, (1928) 30 Bom LR 570: AIR 1928 Bom 201. 74. Offord v. Davies (1862) 12 CBNS 748; Scammell v. Dicker, [2001]1 WLR 631. 75.

Northern Railway Co. v. Witham, (1873) LR 9 CP 16.

76.

Re London and Northern Bank, (1900) 1 Ch 220.

77. Sandhoo Lal Motilal v. State of MadhyaPradesh, AIR 1972 All 137.

5a

34

S. 5

Chapter -of theCommunicationA , cceptance&Revocation ofProposals

Revocation of "conditional' offers.-In the event that an offer envisages the doing of something (say, payment of money) on the performance of certain conditions, the satisfied." It acceptance of such an offer is complete only when such conditions are offer. This is follows therefore that up to this time, the offeror is at liberty to revoke the performance is a discrete act for which little or no acceptable in cases in which preparation is required, such as "putting a coin into a machine", but it leads to inequitable

results if "performance involves a protracted act or requires significant preparation Thus, "if one man offers another £100 if he will go to York, he can revoke when the other is half-way there."80

It has been argued by Sir FREDERICKPOLLOCK that in such instances a distinction should be drawn between the acceptance of the offer for the purposes of revocation, and satisfaction of the conditions that have to be performed before the offeree can enforce the promise contained in the offer. Acceptance is complete once the offeree has commenced performance and thus the offeror cannot revoke the offer after this time; but the offeree is not entitled to be paid £100 (as per the example above), until the act has been completely performed.31 This view has some judicial support and has also been endorsed by the Law Commission of India which

has recommended an amendment to the language in S. 8

to clarify this issue.35 Another the faith of a that a certain promise, and

solution has been to hold that "when the work is done and expense incurred on conditional promise [i.e. a unilateral promise to do something on the condition act is performed], the promisor comes under an obligation not to revoke his if he does so he may be sued for damages or on a quantum meruit."84

Revocation of

contractcannot

firm'

offers.-It

is implied in this section that the proposer of a

bind himself (unless by a distinct contract made for a distinct

consideration) to keep his offer open for any definite time and that any words of promise to that effect can operate only for the benefit of the proposer and as a warning that an acceptance after the specified time will be too late (S. 6, sub-s. 2). Such is undoubtedly the rule of the Common Law. The reason is that an undertaking to keep the offer open for a certain time is a promise

without

consideration,

and such a promise is unenforceable. A

gives an undertaking to B to guarantee, for 12 months,

the payment of Ms hills, which

may be discounted by B at A's request. This is not a binding promise, but a standing as and when B discounts bills on proposal which becomes a promise or series of promises the faith of it. A may revoke it at any time subject to his obligations as to any bills already

discounted. "The promise"-or rather offer-"to repay for twelve monthscreates no additional liability on the guarantor, but, on the contrary, fixes a limit in time beyond which his liability cannot extend"39 Z offers to take A's house on certain terms, an answer to be given within six weeks. A within that time writes Z a letter purporting to accept, but in fact containing a material variation of the terms (see S. 7, sub-s. 1, below); Z then withdraws his offer, A writes again, still within the six weeks, correcting the error

78. 79. 80. 81.

82.

See notes under S. 8 "Scope and object" and "Acceptance by performance". ATIYAH'S INTRODUCTION TO THE LAW OF CONTRACT (6th edn, 2006) at p. 59. Rogers v. Snow, (1573) Dalison 94; G.N. Ry. v. Witham, (1873) LR 9 CP 16, 19. See ANSON'SLAW OF CONTRACT (29th edn, 2010), at p. 54 FREDERICK POLLOCK, PRINCIPLES OF CONTRACT, (13th edn, 1950) at p. 19. Errington v. Errington, [1952] 1 KB 290, per DENNING LW "[offer] could not be revoked by offeror once the offerees entered on performance of the act, but it would cease to bind [the

offerror if [theofferees left it incomplete andunperformed." 83. 84. 85.

Law Commission of India, 13th Report (1958) at para 32. Morrison Steamship Co Ltd v. The Crown (1924) 20 Lloyd's LR 283, 287 per VIscOUNT CAVE LC. See also Daulia LId. v. Four Millbank Nominees Lid., [1978] Ch 231, 239. Oford v. Davies, (1862) 12 CBNS 748. See Stevenson v. McLean, (1880) 5 QBD 346, 351.

Revocation of Proposals andacceptances

S. 5

35

in his first letter and accepting the terms originally proposed by Z. No contract is formed between Z and A, since A's first acceptance was insufficient, and the proposal was no longer open at the date of the second.50 In order for a promise to keep the offer open for a certain period of time to be binding, it must be supported by consideration. This is known as "purchasing an option'; that is, the offeror makes a separate and distinct contract. often for a nominal consideration,/ to not revoke the offer during the stated period.3 A 'firm' offer may also be

irrevocable under the doctrine of promissoryestoppel. The Supreme Court has illustrated these principles in OP Swarnakar.0 In this case,

public banks invited offers from their employees to take up early retirement, in return for a special compensation package. The invitation document contained clauses which barred employees from taking back their applications once these were submitted. These clauses were held void since there was no consideration to the employee for keeping open the offer to take up early retirement.° However, some banks had laid down guidelines to be followed in assessing the applications and created "enforceable rights" of the employees upon submission of the application. In such cases the banks could be said to have purchased" the irrevocable offer, and clauses which restricted the employees offer from

being revoked were held valid.2 The general rules regarding revocation of firm' offers do not apply to the State of Utar Pradesh given the specific legislative amendment to S. 5,3 The general rules regarding revocation of firm offers are also inapplicable where the agreement between the parties is statutory

in

character.*

Thus, a statutory

power to make rules

for the

conduct of departmental business will justify a local Government in prescribing among the conditions of tenders for public works, that a tender shall not be withdrawn before acceptance or refusal.> If, however, there is no statutory power to make such rules, the ordinary law applies and the bidder can withdraw his offer before it is accepted.6 However earnest money (or security deposit) may be liable for forfeiture according to the

terms and conditions of the tender or bid, if the offer is prematurely withdrawn. Standing offers.-A prices and up to a stated

period of twelve quantity,

writing whereby A agrees to supply coal to B at certain quantity, or in any quantity which may be required for a

months, is not a contract unless B binds himself to take some certain

but a mere

continuing

offer

which

may be accepted

by B,

from

time

86.

Routledge v. Grant, (1828) 4 Bing 653, 29 RR 672.

87. 88.

Mountford v. Scott, [1975] Ch 258. Bruner v. Moore, [1904] 1 Ch 305 followed in Goldsbrough Mort & Co LId. v. Quinn, [l1910) 10 CLR 674; Commissioner of Taxes (Queensland)v. Campin,|1937J 57CLR 127.

89.

See notes under S. 2 "Promissory

90.

Bank of India v. OP Swarnakar, (2003) 2 SCC 721: AIR 2003 SC 858. The effect of the decision in OP Swarnakar has been helpfully summarised in New India Assurance Co Lid. v. Raghuvir Singh Narang, (2010) 5 SCC 335, 342. Bank of India v. OP Swarnakar, (2003) 2 SCC 721, 754: AIR 2003 SC 858. Bank of India v. OP Swarnakar, (2003) 2 SCC 721, 759: AIR 2003 SC 858; State Bank of Patiala v. Romesh Chander Kanoji, (2004) 2 SCC 651: AIR 2004 SC 2016. See text of the amendment given under S. 5 above. New India Assurance Co. Ltd. v. Raghuvir Singh Narang. (2010) 5 SCC 335, 343. Secretary of State v. Bhaskar Krishnaji, (1925) 49 Bom 759: AIR 1925 SC 485. Somasundaram Pillai v. Provincial Government of Madras, (1947) Mad 837: AIR 1947 Mad 366. NHA! v. Ganga Enterprises, (2003) 7 SCC 410: AIR 2003 SC 3823; State of Haryana v. Malik Traders, (2011) 13 SCC 200; NTPC v. Ashok Kumar Singh, (2015) 4 SCC 252, 258, In such cases, Since forteiture takes place betore there is any agreement reached between the parties, the principles

91. 92. 93. 94.

95. 96. 97.

Estoppel and Consideration".

under S. 74 will not be applicable as held in Kailash Nath Associates v. DDA, (2015) 4 SCC 136, 162.

S.5

Revocation ofProposals andacceptances

35

in his first letter and accepting the terms originally proposed by Z. No contract is formed between Z and A, since A's first acceptance was insufficient, and the proposal was no

longer open at the date of thesecond.86 In order for a promise to keep the offer open for a certain period of time to be binding, it must be supported by consideration. This is known as 'purchasing an option'; that is, the offeror makes a separate and distinct contract, often for a nominal consideration,3 to not revoke the offer during the stated period.5 A 'firm' offer may also be

irrevocable under the doctrine of promissory estoppel. The Supreme Court has illustrated these principles in OP Swarnakar.0 In this case,

public banks invited offers from their employees to take up early retirement, in return for a special compensation package. The invitation document contained clauses which barred employees from taking back their applications once these were submitted. These clauses were held void since there was no consideration to the employee for keeping open the offer to take up early retirement. However, some banks had laid down guidelines to be followed in assessing the applications and created "enforceable rights" of the employees upon submission of the application. In such cases the banks could be said to have

purchased" the irrevocable offer, and clauses which restricted the employees offer from being revoked were held valid.2 The general rules regarding revocation of firm' offers do not apply to the State of Uttar Pradesh given the specific legislative amendment to S. 5.3 The general rules regarding revocation of firm offers are also inapplicable where the agreement between the parties is statutory

in

character.*

Thus, a statutory power to make rules

for the

conduct of departmental business will justify a local Government in prescribing

among

the conditions of tenders for public works, that a tender shall not be withdrawn before acceptance or refusal. If, however, there is no statutory power to make such rules, the ordinary law applies and the bidder can withdraw his offer before it is accepted.0

However earnest money (or security deposit) may be liable for forfeiture according to the terms and conditions of the tender or bid, if the offer is prematurely withdrawn." Standing offers.-A writing whereby A agrees to supply coal to B at certain prices and up to a stated quantity, or in any quantity which may be required for a period of twelve months, is not a contract unless B binds himself to take some certain quantity, but a mere continuing offer which may be accepted by B, from time

86.

Routledge v. Grant, (1828) 4 Bing 653, 29 RR 672.

87.

Mountford v. Scott, [1975] Ch 258.

88.

Bruner v. Moore, [1904] 1 Ch 305 followed in Goldsbrough Mort & Co LId v. Quinn, [1910] 10 CLR 674; Commissioner of Taxes (Queensland) v. Campin, [1937] S7 CLR 127.

89.

See notes under S. 2 "Promissory Estoppel and Consideration.

90. Bank of India v. OP Swarnakar, (2003) 2 SCC 721: AIR 2003 SC 858. The efect of the decision in OP Swarnakar has been helpfully summarised in New India Singh Narang, (2010) 5 SCC 335, 342.

Assurance Co Lid.

v.

Raghuvir

91. Bank of India v. OP Swarnakar, (2003) 2 SCC 721, 754: AIR 2003 SC 858. 92. Bank of India v. OP Swarnakar, (2003) 2 SCC 721, 759: AIR 2003 SC 858; State Bank of Patiala v. Romesh Chander Kanoji, (2004) 2 SCC 651: AlR 2004 SC 2016. 93.

See text of the amendment given under S. 5 above.

94.

New lndia Assuramce Co. Ltd. v. Raghuvir Singh Narang. (2010) 5 SCC 335, 343.

95. Secretaryof State v. Bhaskar Krishnaji. (1925) 49 Bom 759: AIR 1925 SC485. 96. Somasundaram Pillai v. Provincial Government of Madras, (1947) Mad 837: AIR 1947 Mad 36. 97.

NHAI v. Ganga Enterprises, (2003) 7 SCC 410 : AIR 2003 SC 3823; State of Haryana v. Malik Traders, (2011) 13 SCC 200;, N7PC V. Ashok Kumar Singh, (2015) 4 SCC 252, 258. In such cases, since forfeiture takes place before there is any agreement reached between the parties, the principles under S. 74 will not be applicable as held in Kailash Nath Associates v. DDA, (2015) 4 SCC 136, 162.

36

S. 5

Chapter Of theCommunicationA , cceptance&RevocationofProposals

to time by ordering goods upon the terms of the offer. In such a case, each order given by B is an acceptance of the offer; and A can withdraw the offer, or, to use the phraseology of the Act, revoke the proposal, at any time before its acceptance by an order from B. The same principle was affirmed by the Judicial Committee on an appeal from the Province of Quebec, where French-Canadian law is in force. A printer covenanted to execute for the Government of the Province, during a term of eight years, the printing and binding of certain public documents on certain terms expressed in a schedule. In the course of the same year the Lieutenant-Governor cancelled the agreement. The printer

sued the Crown by petition of right, and it was ultimately held, reversing the judgment below, that he had no ground of action.- The Supreme Court has laid down the same

principles.3 Advertisements of rewards and other so-called "general offers" have also raised questions whether particular acts were proposals capable of becoming promises by acceptance or merely the invitation of proposals. This will be more conveniently dealt with under S. 8.

Sale by Auction, Tender etc.

The liberty of revoking an offer beforeacceptanceis

well shown in the case of a sale by auction. Here, the owner of each lot put up for sale makes the auctioneer his agent to invite offers for it and "every bidding is nothing more than an offer on one side, which is not binding on either side till it is assented to.* Hence a bidder may withdraw his bid at any moment before the fall of the hammer." The English rule that a bid may be withdrawn at any time before the fall of the hammer is

followed in India.° Bidding through a tender process also invites the application of a Similar rule, i.e. the tender may be withdrawn at any time before it is accepted and such acceptance is communicated to the tenderer. Communication of such revocation need not necessarily be explicit, but can be deduced

from clear conduct.3

Even if a bid or tender is conditionally accepted, ie. it is subject to the approval of another person or authority, the bidder ortenderer will be bound only after suchapproval is given and this is communicated to him." It follows that the bid or tender can be revoked at any time before that, as there is no concluded contract. Similarly, a bid in

an auction sale held by a court of law in execution of a decree can be withdrawn before it is accepted by the court by an order confirming the sale2 In two Madras cases, it has been held that where a bid has, to the knowledge of the bidder, been conditionally accepted, the agreement is complete once the condition has .

The Bengal Coal Co. v. Homee Wadia & Co., (1899) 24 Bom 97;

Joravia Mell Champalal v.

Jeygopaldas Ghanshanmdas, (1922) 43 Mad LJ 132: 45 Mad 799. R. Demers, (1900) AC 103, 108. Followed in Secretary of State v. Madho Ram, (1928) 10 Lah 493. 2. 3. Union of India v. Maddala Thathiah, (1964) 3 SCR 774 (786) : AIR 1966 SC 1724. 4. Mackenzie v. Chamroo Singh, (1889) 16 Cal 702. S. Payne v. Cave, (1789) 3 TR 148: 100 ER 502. 6. Agra Bank v. Hamlin, (1890) 14 Mad 235. 7. Executive Engineer, Sundergarh v. Mohan Prasad Sahu, AIR 1990 Ori 26.

8.

9.

Villayati Ram Mittal v. UO1, (2010) 10 SCC 532 (revision of terms of bid after conditional acceptance held amounts to "revocation inviting forfeiture of earmest money as per the terms of the tende

Muthu Pillai v. Secretary of State, AIR 1923 Mad 582, Union of India v. Bhimsen WalaitiRam, AIR 1971 SC 2295 : (1969) 3 SCC 146.

Sri Durga Saw Mill v. State of Orissa, AIR 1978 Ori 41; G. Srinivasa Reddy v. Commr ofExcise, 10. Board of Revenue, AlR 1973 AP 173 (FB); T. Linga Gowder v. State of Madras, AIR 1971 Mad28. Haridwar Singh v. Bagun Sumbrui, AlR 1972 SC 1242: (1973) 3 SCC 889; Abdul Rahim Khan v. 11. Union of India, AIR 1968 Pat 433. Raja of Bobbili v. A. Suryanarayana Rao, (1919) 42 Mad 776. 12.

Revocation of Proposals andacceptances

S. 5

37

been fulfilled, and no communication to the offeror of the absolute acceptance is necessary. In Chittibobu Adenna v. Garimalla Jaggarayadu, D, a bidder for a piece of land, was notified of X's acceptance of his bid 'subject to the approval and orders of the special agent V. V did approve, and a document embodying his approval was drawn up, but was not communicated to D, and the land was sold by X to P. P sought to eject D, relying on S. 4, but the Court held for D, on the ground that the contract was complete on

the fulfilment of the condition subsequent. The decision was followed in Rajanagram Village Co-operative Society v. Veerasami." There, the property was knocked down to P, the highest bidder at an auction, 'subject to the approval of the C.D. bank'. The bank passed a resolution

accepting the bid, but rescinded it before it was communicated

to P.

The Court nevertheless gave specific performance in favour of P, on the ground that communication of acceptance twice was not needed, once when the conditional acceptance was given and again when the condition was fulfilled5 It is submitted that these two cases were wrongly decided. In the 1916 bench decision, the Court misunderstood the nature of a condition subsequent. A condition subsequent predicates a pre-existing obligation, which is to terminate upon the occurrence of some event. It is a resolutive condition, as distinct from a suspensive condition

or condition precedent, which prevents the existence of any obligation until the condition is satisfied. Yet the court clearly decided that there was no binding agreement at any rate until V, the special agent, approved. In other words, their Lordships held that the condition was a condition precedent, for had the condition been a condition subsequent, there would have been a binding contract the moment D's bid was accepted, liable to be

defeated by Vs failure to approve. Appropriate wording to impose a condition subsequent would have been to the etfect that the bid was accepted, but if V should not approve the contract was to be at an end.

It is submitted that in both the cases there was a condition precedent, and that the bidder could have retracted his offer before the final acceptance by Vand the C. D. bank

respectively, as in Somasundaram v. Provincial Government of Madras. S. RAO, J., in the Rajanagram Case seeks to escape from this conclusion by drawing a distinction, which he purports to find in the Somasundaram Case, between a provisional and a conditional acceptance. An acceptance, in his opinion, is provisional where the offeree has no authority to accept the bid: he is a mere conduit-pipe like the Sub-Collector in the Somasundaram Case. In the meantime, the offeror can withdraw his bid. But where the

offeree has full power to accept the offer, yet gives only a qualified acceptance, although the offeree is not finally bound, the offeror cannot withdraw. This reasoning is, with respect, erroneous. An acceptance is either absolute or conditional. There is no half-way house between the two. If an acceptance is conditional, the offeror can withdraw at any

moment until absolute acceptance has taken place. Authority, if it be needed, is supplied by the English case of Hussey v. Horne-Payne. There V offered land to P, and P accepted 'subject to the title being approved by my solicitors'. V later refused to go on, Chittibobu Adennav. Garimalla Jaggarayadu, AIR 1916 Mad 75. Rajanagram Village Co-operative Society v. Veerasami, AlR 1951 Mad 322: (1950) 2 MLJ 486. 15. AIR 1951 Mad 322: (1950) 2 MLJ 486. 16. Somasundaram v. Provincial Government of Madras, (1947) Mad 837: AIR 1947 Mad 366. See also Union of India v. Narain Singh, AIR 1953 Punj. 274. 13. 14.

17.

Hussey v. Horne-Payne, (1878) 8 Ch D 670. This case is discussed at length (infra), and the law as

to the effect of an agreement subject to the approval of the purchaser's solicitor is considered. There are two lines of decisions, one based on the Court of Appeal in this case, holding that such words import a condition, the other, based on the view of LORD CAIRNS n the same case in the House of Lords, that the words do not import a condition at all. In this edition, the Court of Appeal view is preferred, but even if LorD CAIRNS is right, this does not destroy the value of the Court of Appeal decision as an authority contrary to the view of S. RAO, J., in (1947) Mad 837.

38

S.6

Chapterof theCommunication,Acceptance & Revocationof Proposals

and the Court of Appeal held that the acceptance was conditional and there was no P's solicitors had approved the title. binding contract: V could withdraw at any time until be a case of conditional rather than According to the reasoning of S. RA0, J., this would provisional acceptance, as clearly P was no *conduit-pipe', but the prospective owner of the property, with full power to accept V's offer if he chose, S. RAO, J., would hold that V

cannot withdraw, contrary to the decision of the Court of Appeals.8 Revocation of Acceptance.-One point remains unsettled in England. It has never been decided whether a letter of acceptance dispatched by say, post, can be revoked by a later

communication

(such as a telegram, telex or email message) arriving before such

letter. There is no English authority yet which expressly lays down that revocation of posted acceptance will be ineffective, though this view does appear to find some support. In a Scottish case, it was held that a simultaneous arrival of letter of acceptance and letter revoking such acceptance cancels one another, and there would be

no binding contract; indicating that revocation of acceptance is possible.40 In India, however, there is no such doubt and such a revocation is made valid by the

express terms of Ss. 4 and 5 of the Act. If the telegram revoking the acceptance reaches the proposer before the letter of acceptance, no contract is concluded.1 Indian Oaths Act.-If A offers to be bound by a accepts the offer, A cannot resile from the agreement. provisions of the Indian Oaths Act, B may be allowed

special oath taken by B, and B Having regard, however, to the by the Court to resile from the

agreement.5 Revocation how made.

S. 6. A proposal is revoked

(1) by the communication of notice of revocation by the proposer to the other party; (2) by the lapse of the time prescribed in such proposal for its acceptance, or, if no time is so prescribed, by the lapse of a

reasonable time, without communication of the acceptance; (3) by the failure of the acceptor to fulfil a condition precedent to acceptance; or

(4) by the death or insanity of the proposer, if the fact of his death or insanity comes to the knowledge of the acceptor before acceptance. Scope and object.-This section provides the revoked or shall stand revoked.

mode in which a proposal can be

Notice of revocation.Here sub-s. (1) appears to make it a condition of revocation being effectual that it shall be communicated by the proposer or by his authority. Hussey v. Home-Payne, (1878)8 Ch D 670. 19. Morrison v. Thoelke, 155 So. 2d 889 (1963); A to Z Bazaars (Pty) Lid. v. Minister of Agriculture (1974) (4) S.A. 392 (c). See CHITTY ON CONTRACTS (29th edn, 2004) at para 2-058. 20. Countess of Dunmore v. Alexander, (1830) 9 S. 190. 21. Dhanraj Mills Ltd. Liability Co. v. Narsingh Prasad Boobna, AlR 1949 Pat 270. 22. Saheb Ram v. Ram Newaz, AIR 1952 All 882. 23. Mahadeo Prasad v. Srjug Prasad, (52) A Pat 208. 18.

S.6

Revocation how made The notice may be given however, a revocation coming since S. 6(1) requires that the express or may be implied, e.g.

39

by the offeror, or by his agent.24 Unlike English law25 from a source other than the offeror would not be valid, notice be given by the "proposer"26 Revocation may be by the offeror varying the terms of the offer.2

Where the offer is general and made to the whole world, it is sufficient revocation if the offeror has taken suitable steps to bring the offer to the notice of the persons to whom it is made. Actual receipt of notice by each and every offeree would not be required.23 It is possible to revoke an offer by performance of an act inconsistent with the offer by which the offeror "intends to communicate" such revocation or which has the "effect

of communicating" it. However, the act of selling to one man, property already offered to another, cannot by itself have the etfect of communicating notice to the other of the revocation.0 In such cases, the original offeree and the subsequent purchaser, both cannot acquire the property, "but they can both acquire a right to it as against the seller,

together with the alternative right to damages" Lapse of time for Acceptance.t is implied in this sub-section that a proposer is not bound to keep his proposal open indefinitely. This rule is based on the principle that an undertaking to keep open an offer indefinitely would be a promise without a consideration and hence such a promise would be unenforceable (vide S. 25).

The power to accept the offer ends at the time specified in the offer. If the offer stipulates a period of time, namely, 15 days, time would run from the date of receipt of offer, unless the offer stipulates that time shall run from the date of the offer, or its transmission. If such offer stipulates reply by return post, it may be accepted by a letter posted on that date.5 But where a specific time is prescribed for the receipt of an acceptance, it must reach the addressee before that time.4 The reason behind the rule that an offer is taken as withdrawn after the lapse ofa reasonable period of time is that it is an implied term of all offers (where the offeror has not waived revocation) that if the offer is not accepted, it will be treated as withdrawn; or, that if the offeree does not accept it within reasonable time, he must be treated as having

24. 25. 26. 27.

Henthorn v. Fraser, (1892) 2 Ch 27 (CA). Dickinson v. Dodds, (1876) 2 Ch D 463. POLLOCK & MULLA, INDIAN CONTRACT AND SPECIFIC RELIEF ACTS (13th edn, 2006) at p. 196. Haryana Industrial Development Corporation v. Inderjeet Sawhney, (1996) 7 SCC 339: AIR 1996 SC2244. Shuey v. US, (1875) 92 U.S. 73. See Ss. 3, 4 of the Indian Contract Act, 1872.

28. 29. 30. POLLOCK & MULLA, INDIAN CONTRACTANDSPECIFICRELIEFACTS (13th edn, 2006) atp. 194-195 distinguishing Dickinson v. Dodds, (1876) 2 Ch D 463. See also Adams v. Lindsell, (1818) 1B. & Ald. 681; Stevenson, Jacques & Co v. Maclean, (1880) 5 QBD 346. LANGDELL, SUMMARY OF THE LAW OFCONTRACTS (lst edn, 1880) at S. 181. 31.

v. Clark, [1951] SCR177: (1950) 4 DLR 529 (Supreme Court of Canada) (time ran from 32. Barrick the receipt of the offer at the offeree's address, although he was away). 33.

Dunlop v. Higgins, (1848) 1 HL Cas 381; Kalyanji (1996) 10 SCC 762.

Vithaldas & Sons v. State of Madhya Pradesh,

34. R Maheswari v. Secretary Selection Committee, AIR 1995 Mad 168 (case relating to receipt of application for admission to an entrance examination). Ed: It is arguable based on the language of S. 4 that

communication

of the acceptance would be complete as against the proposer when the

acceptance is put in the course of transmission, actual receipt of acceptance IS not envisaged under that section. It is submitted that if the offer prescribes for receipt of acceptance before a particular time, and this is not done, the situation may perhaps be better considered as a case of nonfulfillment of a "condition precedent" under S. 6(3) rather than "lapse of time" under S. 6(2).

40

S. 6

Chapter 1-of theCommunication,Acceptance & Revocation ofProposals

refused it.35, The offer lapses even if the acceptor is prevented from accepting due to causes beyond his control.50 What is reasonable time is a question of fact and would depend on the purpose of the offer, its subject-matter, the method by which the offer is

communicated, thesubsequentconduct of the parties, renewals of the offer. An offer to sell perishable articles, or goods subject to violent price fluctuations, or an offer sent by telegram or telex, would terminate after a short period of time. Thus, where it was held that a person who applied for shares in a company in June was not bound by an allotment made in November.37 This case was followed by the Bombay35 and Nagpur" High Courts.

Condition precedent to Acceptance.-The meaning of the term 'condition precedent to acceptance' is not entirely clear. The words were borrowed from the draft Civil Code of the State of New York, which was never adopted. This sub-section suggests that if a condition is to be complied with by the acceptor before acceptance, its non-fulfilment will prevent the formation of a contract. A conditional proposal lapses when the offeree does not accept the condition. A condition precedent is thus a condition which prevents any obligation to come into existence until the condition is satisfied. Conditions such as payment of deposit" or earmest money or filling in a certain form or executing a certain document or time limit within which to communicate acceptance are often laid down by offerors and failure to satisfy any such conditions may make a proposal lapse. It may also happen that the other party may do something obviously inconsistent with performing some or one of the things requested. This amounts to a tacit refusal, and accordingly the proposal is at an end, and the parti can m a contract only by starting

afresh. If the fact amounts to a refusal, there is no manifestreason for calling it a failure to fulfil a condition precedent, since everything required on the acceptor's part to complete an acceptance would rather seem to be part of the acceptance itself.

This term is also not used in this connection in English books. Under English law, an offer made expressly or impliedly subject to a condition upon which it would terminate, cannot be accepted upon the occurrence of the condition.43

Death or insanity of

proposer.The provision made by sub-s. (4) is quite clear. In

a Madras case of an auction sale held by the court, the bid was subject to its sanction or acceptance by the Court but before the court could accept it, the bidder died and it was

held that on the death of the bidder his bid stood revoked.44 The position in the English law regarding the death and insanity of the party is different.* Under English law, death

35.

Manchester Diocesan Council for Education v. Commercial and General Investments Ltd., [1969] 3 All ER 1593. 36. Shyam Biri Works Pvt. Ltd. v. Uttar Pradesh Forest Corpn., AlR 1990 All 205. 37.

Ramsgate Victoria Hotel Co. v. Montefiore,

38.

Indian Co-operative Navigation and Trading Co. Lid. v. Padamsey Premji, (1934) 36 Bom LR 32: 1S0 IC 645: AIR 1934 Bom 97.

39.

Ramlal Sao v. Malak, (1939) 183 IC 748 : AIR 1930 Nag 225.

40. 41.

42.

43.

44. 45.

(1866) LR 1 Ex 109.

Pipraich Sugar Mills Ltd v. Pipraich Sugar Mazadoor Union, AIR 1957 SC 95: [1956] SCR 872. Hansa Gandhi v. Deep Shankar Roy, (2013) 12 SCC 776 (no binding contract between parties where conditions regarding payment set out in the letter of intent not satisfied by the acceptor/promisee). Kerala Financial Corpn. v. Vincent Paul, (2011) 4 SCC 171 (even where bid is selected through tender and earnest money deposited, failure to communicate acceptance of other pre-conditions of tender within one week (as stipulated in the tender) implied no contract concluded). Financings Ltd. v. Stimson, [1962] 1 WLR 1184 (offer to buy subject to implied condition that goods will be in substantially same state as when offer was made); Canning v. Farquhar, (1885) 16 QBD 727 (offer to insure life of person, cannot be accepted after he has suffered serious injuries). Raja of Bobbili v. A. Suryanarayana Rao, (1919) 42 Mad 776. See ANSON'S, LAW OF CONTRACT (29th edn., 2010) at pp. 60, 246; CHESHIRE & FiFoOT AND FURMSTON's LAW OF CONTRACT (15th cdn., 2006) at pp. 80, 570.

Revocation how made

S. 6

41

of the offeror will terminate the offer "only if the offer on its true construction so provides"40 The law on insanity of a party is discussed later."

This sub-section does not envisage the situation of the death of the offeree; which is very different from the case of one who accepts a proposal subsequent to the death of the oferor (which is allowed in India if the fact of the offeror's death is not known to the acceptor before acceptance, and also in England if the offer on its "true construction" so

provides). Some English authorities support the view that an offer is incapable of being made to a dead person and therefore such an offer ceases to be an offer capable of acceptance upon the death of the offeree.* The editors of Chitty however take the view that where an offer "on its true construction" can be held to have been made to the offeree or to his executors, such an offer can be accepted after the death of the original offeree.> The Indian law in the event of the death of the offeree is unclear given the absence of any statutory guidance, though it appears that Indian courts might be persuaded to take the

"true construction'" approach.

Revocation distinet from 'rejection' or 'refusal'-An unambiguousintimation,

express or implied, by the offeree to the offeror that he rejects the offer; terminates the

offer. The rejection of a propOsal by the person to whom it s made is wholly distinct from revocation, and is not within this section. An offer can be rejected only by a definite indication of an intention to reject. There is no rejection if the offeree merely makes further enquiries about the offer, or accepts the offer but offèrs to enter into further contract. A counter-offer proposing different terms has the same effect as a merely negative refusal; it is no less a rejection of the original offer, and a party who, having made it, changes his mind, cannot treat the first offer as still open.I Secking clarifications about the proposal is neither acceptance nor a counter-proposal, nor is the proposal rejected if the offeree expresses that a condition modified by the proposer is not acceptable.52

The rules governing communication of 'refusals' or 'rejections' are not provided for under the Act. In English law, there is support for the rule that the rejection would

operate only upon being actually received by the offeror.4 If the offeree changes his mind and accepts the offer, having rejected it first, and the acceptance reaches the offeror before the rejection, a contract is concluded.° If however, the offeree accepts the offer having rejected it first, and the acceptance reaches the offeror ajter the rejection, a contract would not be concluded. It has been suggestedo that to apply the "postal rule" of acceptance in such a situation merely because at the time of posting the acceptance, the rejection had not reached the offeror, could cause serious inconvenience to the offeror who may rely on the rejection and contract elsewhere.

46.

CHITTY ON CONTRACTS (29th edn, 2004) at para 2-098.

47. See notes under S. I12 "Of sound mind". 48. Reynolds v. Atherton, (1921) 125 LT 690 (CA) affirmed (1922) 127 LT 189 (HL) 49.

CHITTY ON CONTRACTS (29th edn, 2004) at para 2-099.

50. Stevenson, Jacques & Co v. Maclean, [1880] 5 QBD 346 (an inquiry whether the offeror would take delivery over a period); Gibson v. Manchester City Council, [1978] 2 All ER 583 (an inquiry whether the offeror-vendor would reduce the price). S1. Hyde v. Wrench, (1840) 3 Beav 334; not otherwise in India. Nihal Chand v. Amar Nath, (1926) 8 Lah LJ 434. 52. Untar Pradesh State Electricity Board v. Goel Electric Stores, AIR 1977 All 494. 53. Ss. 3, 4 and 5 deal with communication of "proposals, acceptances and 'revocations' (of proposals and acceptances) and do not appear to deal with refusal' or 'rejection' of the offer. 54.

ANsON's LAW OF CONTRACT (29th edn, 2010) at p. 58-59.

55.

PERCYH

WINFIELD, "SOME ASPECTS OF OFFER AND ACCEPTANCE", 55 Law

Quarterly

499, 513 (1939). 56.

CHITTY ON CONTRACTS (29th edn, 2004) at para 2-092.

57.

See notes under S. 5 "Non-instantaneous communication through post, courier or telegram".

Review

42

S.7

Chapter of theCommunicationA,cceptance&RevocationoP f roposals

Acceptance absolute.

must

be

S. 7. In

order

to

convert

a

proposal

into a

promise, theacceptance must-

(1) be absolute and unqualified; (2) be expressed in some usual and reasonable manner, unless the

proposal preseribes the manner in which it is to be accepted. If the proposal prescribes a manner in which it is to be accepted, and the acceptance is not made in such manner, the

proposer may, within a reasonable time after the acceptance is

communicated

to him, insist

that his

proposal

shall be

accepted in the prescribed manner, and not otherwise; but, if he fails to do so, he accepts the acceptance.58 Certainty of Acceptance.-The

rule in the first sub-section is based on the

principle that unless the parties have consensus ad idem i.e. are of one mind, there cannot be an agreement between them.39 This is sometimes called the 'mirror rule', i.e., the acceptance must match with the terms of the offer. The rule is in itself obviously necessary, for words of acceptance which do not correspond to the proposal actually made are not really an acceptance of anything and therefore, can amount to nothing more than a new proposal, or, as it is frequently called, a counter offer. Where an offer to purchase a house with a condition that possession shall be given on a particular day was accepted varying the date for possession° or an offer to sell g0od' barley was accepted with the hope that "fine barley would be deliveredo4 or an offer to buy a property was accepted upon a condition that the buyer signed an agreement which contained special terms as to payment of deposit, making out title, completion date, the agreement having been returned unsigned by the buyers or an offer to sell rice was accepted with an endorsement on the sold and bought note that yellow or wet grain will not be accepted it has been held that the acceptance was not absolute and unqualified and that the variations were counter proposals. Where an acceptance of a proposal for insurance was accepted in all its terms subject to the condition that there shall be no assurance till the first premium was paid the said condition was held to be in the nature of a counter proposal.

A composite offer, each part whereof is dependantupon the other, if accepted in part only, the acceptance would not be absolute and unqualified.6 Where a lessee who was offered a renewed lease on condition of paying the upset price and annual rent within a specified time, did not pay the amounts and approached the

58.

These sections (7,8 and 9) must be read without reference to the English law on the subject. ASHWORTHJ., Gaddar Mal v. Tata Industrial Bank, (1927) 49 All 674, 677.

59. DeepChandra v. Sajad Ali Khan, (1951) A All 93 (108). 60. Haji Mahomed v. E. Spinner, (1900) 24 Bom 510. 61. Routledge v. Grant, (1028) 130 ER 920:4 Bing 653. 62. 63.

Huchinson v. Bowker, (1839) 151 ER 227. Jones v. Daniel, (1894) 2 Ch 332.

64. Ah Shain v. Moothia Chetty, 2 Bom LR 556 (PC) : 27 IA 30. 65. Sir Mohamed Yusuf v. S. of S. for India, (1920) 22 Bom LR 872:45 Bom 8: AIR 1921 Bom 200.

66. GeneralAssuranceSociety v. LLC. India, (1964) 5 SCR 125: AIR 1964 SC 892; Food Corpn of India v. Ram Kesh Yadav, (2007) 9 SCC 531, 536: AIR 2007 SC 1421.

Acceptancemust beabsolute w

af

S. 7

higher authorities, there is no absolute acceptance.

43

A provisional acceptance ofa bid at

an auction sale would not be an absolute acceptance

Sometimes additional words that seem at first sight to make the acceptance conditional are no more than the expression of what the law implies, as where in England an offer to sell land is accepted "subject to the title being approved by our solicitors." The reasonable meaning of this appears to be not to make a certain or uncertain solicitor's

opinion final, but only to claim the purchaser's common right of investigating the title with professional assistance and refusing to complete if the title proves bad. Again, the offer of a new contract, may be annexed to an absolute acceptance so that there is a concluded contract whether the new offer is accepted or not." But an acceptance on

condition, coupled with an admission that the condition has been satisfied, may be in immaterial additions or phrases in the acceptance letter may be ignored if they do not impair reasonableness of contract as a whole. Such immaterial or minor differences or variances between the offer and acceptance will not

effectunconditional." Howe

prevent the formation of the contract.5 Anacceptance will have legal effect if the new terms are trivial, or the acceptance is accompanied with a protest or a 'grumble, or it

requests the offeror for betterterms.74 Annexing collateral terms along with an absolute acceptance may be said to convert an absolute acceptance into a conditional or qualified one.' A seller, who accepted a Works order from the purchaser and who consigned part of the goods and who sent a

letter to purchaser stating that if prices increased, the purchaser shall be liable to pay the increased price, demanded increased price in respect of the two consignments already supplied, it was held that the acceptance of the works order was absolute, the said letter did not make the absolute acceptance into a conditional one.0 There is a distinction between a clause which is meaningless and a clause which is yet to be agreed upon. The

former does not affect certainty but the latter would affect certainty ofa contract.' Until there is absolute acceptance of a proposal, the parties are still in the ge of negotiations and no legal obligations attach to them. The issue whether negotiations between the parties is still open to bargaining, or has resulted in the formation of a 67.

70. 71.

Badrilal v. Indore Municipality. (1973) 2 SCC 388 AIR 1973 SC 508. Raghunandhan v. Stateof Hyderabad, AIR 1963 AP 110, Raja of Bobbili v. A. Suryanarayana Rao, 42 Mad 776; Haridwar Singh v. BegumSumbai,(1972) 3 SCR 629: (1973) 3 SCC 889 AIR 1972 SC 1242; State of Orissa v. Harinarayan Jaiswal, AIR 1972 SC 1816: (1972) 2 SCC 36. Hussey v. Horne Payne, (1879) 4 App Ca 311, 322, per LORDCAIRNS followed, Treacher & Co. v. Mahomedally, (1911) 35 Bom 110. Sir Mahomed Yusyfv. Secretary of State, (1920) 45 Bom 8. Roberts v. Security Co., (1897) 1 QB 111 CA see The Equitable Fire and Accident Ofice v. The

72.

Ching Wo Hong. (1907) AC 96 101. Nicolene Ltd v. Simmonds, (1953) 2 WLR 717: (1953) 1 QB S43 : (1953) 1 All ER 822; Clive v.

73.

Clive v. Baumont, (1847) 1 De G. & Sm. 397; Simpson v. Hughes, (1897) 66 LI Ch 334; Butler

68.

69.

Beaumont,

1 De G & S 39.

Machine Tool Co Ltd. v. Ex-Cell-O Corp. (England) Ltd., [1979] 1 WLR 401.

Harris's Case, (1872) L.R. 7 Ch. App. 587; Global Tankers Ine v. Amercoat Europa N.V., [1975] 1 Lloyd's Rep. 666, 671; Kanhaiya Lal Agrawal v. Union of India, AR 2002 SC 2766: (2002) 6 SCC 315. 75. Jainarain v. Surajmall, (1949) FCR 379: AIR 1949 FC 211; Namayya v. Union of India, AIR 1958 AP 533. 74.

76.

R.N. Ganekar v. Ms. Hindustan Wires Ltd, (1974) 1 SCC 309: AIR 1974SC 303.

77.

Nicolene Ltd. v. Simmonds, (1953) 2 WLR

717:(1953) 1 QB S43 (1953) 1 All ER 822; Clive v.

Beaumont, 1 De G & S 39.

78. Haji Mohamed Haji Jiva v. E Spinner, (1900) ILR 24 Bom 510; Satya Prakash Goel v. Ram Krishan Mission, AlR 1991 All 343 (no contract concluded by acceptance referring to future negotiations for finalisation of more terms).

44

S. 7

Chapter-of theCommunication,Acceptance & Revocation ofProposals

contract, what the are still terms.

will depend on the facts and circumstances of each case. The court will review parties write and how they act,80 and from that material infer whether parties negotiating or whether they have reached an agreement, and if so on what Where a contract was concluded but subsequently fresh negotiations were started with regard to stamp duty on the transfer deed and the said negotiations did not fructify, it was held that the concluded contract was not affected.&2

Acceptance subject to formalities.-Although there can be no contract without a complete acceptance of the proposal, it is not universally true that complete acceptance of the proposal makes a binding contract; for one may agree to all the terms of a proposal, and yet decline to be bound until a formal agreement is signed,33 or some other act is done. There may be an express reservation in such words as these: "This agreement is made subject to the preparation and execution of a formal contract."4 Where there is no

precise clause of reservation, but the acceptance is not obviously unqualified, it becomes a question of construction whether the parties intended that the terms agreed on should merely be put into form,3 or whether they should be subject to a new agreement, the terms of which are not expressed in detail, and this must be determined by examination of the whole of the continuous correspondence or negotiation. It will not do to pick out this

or that portion which, if it stood alone, might be sufficient evidence of a contract.36 Where, however, there is no such stipulation express or implied, the mere circumstance that the parties intended to put the agreement into writing or in a formal instrument will not prevent the agreement from being enforced, assuming, of course, that an agreement otherwise complete and enforceable is proved./ Where, however, the formalities are not of the parties selection, so that nothing turns upon the intention of the parties, no nference against a concluded agreement can be drawn from the non-completion of these formalities.s The offeror cannot prescribe that the offeree's silence shall be taken as acceptance.9

Modes of Acceptance.-This sub-section in the first instance throws the burden upon the offeror, or promisor to prescribe a mode of acceptance. If he does not prescribe 79.

Rickmers Verwaltung GmBH v. Indian Oil Corpn., (1999) 1 SCC 1,9: AIR 1999 SC 504 (review of correspondence between parties showed that they were still negotiating).

80.

Gujarat State Fertilizers Co Ld. v. HJ Baker and Bros, AIR 1999 Guj 209 (court is more likely to hold that the negotiations have resulted in a contract if a party has acted on the basis of existence of an agreement, on facts Jorce majeure clause was invoked). 81. Koyalsh Chunder v. Tariney Churn, (1884) ILR 10 Cal 588. 82. Jainarain v. Surajimull, AIR 1949 FC 211:(1949) FCR 379. 83. Jawaharlal v. Union of India, AIR 1962 SC 378 : (1962) 3 SCR 769. 84. Hatzfeldt-Wildenburg v. Alexander, (1912) 1 Ch 284; Rossdale v. Denny, (1921) 1 Ch 57 CA; Namayya V. Union of India, AlR (1958) AP S33; Financings Lid. v. Stimson, (1962) I WLR 1184. 85. Harichand Mancharam v. Govind Laxman Gokhale, (1922) 50 IA 25: AIR 1923 PC 47;

Curimbh0y & Co. Ltd. v. L.A. Creet, (1930) 60 IA 297 60 Cal 980: AIR 1933 PC 29; Subimalchandrav. Radhanalh, (933) 60 Cal 1357: 149 IC 999: (34) AC 235; Shankarlal v. New Mofussil Co. Ltd., (1946)73 IA 91: 48 Bom LR 456: 224 IC 598: AIR 1946 PC 97; Jawaharlal v. Union of India, AIR 1962 SC 378:(1962) 3 SCR 769. 86. Hussey v. Horne-Payne, (1879) 4 App Cas 311; Aryodaya S. & W. Co. v. Javalprasad, (1903) 5 Bom LR 909.

87. Whymperv. Buckle,. (1879) 3 Al 469 citing Brogden v. MetropolitamRailway Co. (1887) 2 App Ca 666. See also Ge0-Group Communications Inc v. 1OL Broadband Lid., (2010) I SCC 562, 571

(agreement indicated to be a draft but substantially acted upon by parties and no subsequent document signed, "draft' held binding); Trimex International FZE LId. v. Vedanta Aluminium Lid 88. 89.

(2010) 3 SCC 1, 29 (contract concluded through exchange of email, mere fact that a formal document has not yet been drawn up is immaterial). Thota Venkatachellasami v. Krishnaswamy, (1874) 8 MHC 1. Felthouse v. Bindley, (1862) 11 CBNS 869. See notes under S. 3 "Communication by silence".

S.7

Acceptance must be absolute

45

any specific method, the acceptor has to follow usual and reasonable mode. The offeror cannot impose upon the acceptor the penalty that in the event of his silence, he would be deemed to have accepted the proposal. Acceptance in a prescribed manner.-Under the common law, acceptance by mode other that one prescribed by the offeror would amount to a counter-offer, and would result into a contract when this is in return accepted." However, in applying the rule of acceptance in a prescribed manner, the court may decide what object the offeror had in view. An expression "reply by letter sent by return of post" may have been used with a view to get a quick reply and hence acceptance by telegram may do. If, however, the offeror expressly dislikes telegrams, an acceptance by telegram may not suffice. The question would be whether the prescribed mode is mandatory, or directory.5 Therefore, if the proposer chooses to require that goods shall be delivered at a particular place, he is not bound to accept delivery tendered at any other place.* It is not for the acceptor to say that some other mode of acceptance which is not according to the terms of the proposal will do as well.

The Indian law differs from the common law position. Under S. 7(2) of the Act, if the acceptor does not send the acceptance in the manner prescribed by the offeror, the

acceptance is nevertheless valid unless the offeror intimates to the acceptor that he does not 'accept the acceptance. The present sub-section, throws on the proposer the burden of notifying to the acceptor that an acceptance not in the prescribed manner and form is insufficient, and he remains bound if he fails to insist on an acceptance such as he required. Usual and reasonable manner.-This expression includes what must have been within the contemplation of the parties according to the ordinary practice followed in a particular trade or business or place. This may cover a case of acceptance "by beginning to perform" or by opening a letter of credit or by actual forbearance or by payment of earnest money or deposit, as the case may be. A personal message through the acceptor's agent was deemed to be under this expression, the promisor having not prescribed any mode.

In LI.C. of India v. Rajavasireddy?" the Supreme Court of India observed as fol-

lows "Contract of insurance will be concluded only when a party to whom an offer has been made accepts it

and communicates his acceptance to the silence t person making the offer. Though in certain human relationship propo sal might convey acceptance but in the case of insurance proposal, silence does not denote consent and contract arises when the person to whom offer is made says or does something to signify his acceptance. Mere delay in giving an answer cannot be construed as acceptance as prima facie, acceptance must be communicated to the

90. 91. 92. 93. 94.

95. 96. 97.

unconditionally

Haji Mahomed v. E. Spinner, (1900) ILR 24 Bom 510; Felthouse v. Bindley. (1862) 11 CBNS 869. Wettern Electricity Lid. v. Welsh Development Agency, [1983]2 All ER 629. TRETEL, THE LAW OF CONTRACT (12th edn., 2007) at p. 33.

Yates Building Co. Lid. v. Pulleyn & Sons Ltd, The Times, February 27, 1975. Eliason v. Henshaw, (1819) Sup Ct. U.S. 4 Wheaton, 225. A communication by post of any demand or offer generally authorises the post as a proper mode of conveying the answer, but a general authority to pay a sum due by remittance through the post will not authorise the unusual practice of enclosing considerable sums of coin or negotiable notes in a post letter; Mitchell Henry v. Norwich Union Insurance Society, (1918) 2 KB 67 CA. FREDERICK POLLOCK, PRINCIPLES OF CONTRACT, (13th edn., 1950) at p. 19.

Surendra Nath v. Kedar Nath, AIR 1936 Cal 97. LLC. of India v. Rajavasireddy, AIR 1984 SC 1014 :(1984) 2 SCC 719.

46

S.8

Chapter 0f theCommunicationA,cceptance&RevocationoP f roposaks

offeror. Similarly, the mere receipt and retention of premium until after the death of the applicant or the mere preparation of the policy document is not acceptance."

Acknowledgment of Electronic Records-The provisions of the Information Technology Act, 2000 lay down special rules for acknowledgment of electronic records. A_ person sending a message by electronic record may require the addressee to acknowledge its receipt in a particular form or by a particular method. If he has not so

stipulated, the acknowledgment may be given by any form of communication or by conduct. Such sender (originator) of the electronic record can exclude liability for the message by stipulating that this record will not be binding on him unless acknowledgment is received. Then, if acknowledgment is not received, the 'electronic record shall be deemed to have never been sent by the originator'3 If the originator stipulates for an acknowledgment, but has not stipulated that the electronic record shall be binding only on receipt of acknowledgment, and acknowledgment has not been received within time specified or agreed, or within reasonable time (if no time is specified), and the addressee has not sent any acknowledgment, the originator must give notice to the addressee

specifying a time for receipt of acknowledgment, and if it is still not received, 'treat the electronic record as though it has never been sent.4 Therefore, where the sender (originator) of electronic record has stipulated for an acknowledgment, failure to give acknowledgment by the addressee may absolve the sender (originator) of liability for the electronic record sent.

Whether or not sending an acknowledgment amounts to accepting the offer is not dealt with by the Information Technology Act, 2000, but by the substantive law of contract; and matters of establishing despatch, receipt and acknowledgments by the law

ofevidence.

S. 8. Performance of the conditions of a proposal, or the Acceptancebyperfor- acceptance of any consideration for a reciprocal ming conditions,

or

promise

which

may be offered

with a proposal, is

receivincgonsideration. an acceptance of the proposal. Scope and

object.-The

object of this section is complimentary to the preceding

section. If a proposer has not prescribed a mode, an acceptor has to adopt some usual and reasonable mode. This section prescribes one of such methods in the form of an implied

acceptance. This section recognises a distinction between acceptance of an offer which asks for a promise and an offer which asks for an act on condition of the offer becoming a promise. This is implicit in the division of the subject-matter of the section into two branches performance of the conditions of a proposal" and 'acceptance of any consideration for a reciprocal promise which may be offered with the proposal", which coresponds with the division of proposals into those which offer a promise in exchange for an act or acts and those which offer a promise in exchange fora promise.5 Acceptance by performance. The terms of this section are very wide. In the absence of illustrations, their intended scope is not very clear. "Performance of thecon ditions of a proposal" seems to be nothing else than doing the act requested by the pro-

1. 2. 3. 4.

5. 6.

under S. 3 "Communication in Electronic Form'". Information Technology Act, 2000. Information Technology Act, 2000. Information Technology Act, 2000. and Pharmaceutical Works Ltd, AIR 1954 Pat 14 (16): State of Bihar v. Bengal Chemical Hindusthan Co-operafive Insuramce Society V. Shyam Sunder, AlR 1952 Cal 691. This has been recognised in BSNL v. BPL Mobile Cellular Lud, (2008) 13 SCC 597, 620.

See also Section Section Section

notes 12(1) 12(2) 12(3)

Acceptance by performing conditions or receiving consideration poser as the

consideration

for the promise

S.8

47

offered by him, as when a tradesman sends

goods on receiving an order from a customer. The only previous definition of acceptance in the Act is that a proposal is said to be accepted when the person to whom it is made

"signifies his assent thereto" [s. 2(6)). This has to be read with the provisions as to communication in Ss. 4 and 7. The present section appears, in its first branch, to recognise the fact that in the cases in which the offeror invites acceptance by the doing of an act, "it is sometimes impossible for the offeree_to express his acceptance otherwise than by performance of his part of the contract."' Where a promisor stated that he had purchased

a particular immovable property for the promisee and although it was kept in his name for the present', it would be transferred to the name of the promisee after the death of the promisor, and the promisee accordingly went to reside with the promisor in the said property, it was held that the promisee had accepted the offer by going to, and residing in, the property with the promisor i.e., by compliance with the promisor's stipulations and

terms.The most obvious example is where a reward is publicly offered to any person, or to the first person, who will recover a lost object, procure certain evidence, or the like. Here, the party claiming the reward has not to prove anything more than that he per formed the conditions on which the reward was offered, which conditions may or may not include communication by him to the proposer. In the simple case of a reward proposed for something in which the proposer has an obvious interest, there is not likely to be any other question than what the terms were, and whether they have been satistied by the claimant. There is some authority for construing the terms liberally in favour of a finder. In England an open letter of credit authorizing the addressee to draw on the issuer to a special extent and requesting "parties negotiating bills under it to endorse particulars" has been held to amount to a general invitation or request to advance money on the faith of such bills being accepted, and to constitute a contract with anyone so advancing money while the credit remained open. The acceptance of an offer by conduct would be effective only when such act is done with the "intention (actual or apparent) of accepting the offer". The nature of acceptance required in such cases was considered by the English Court of Appeal in

Carlill v. Carbolic Smoke Ball Co. The defendant company, being the proprietor of the carbolic smoke ball.,a device for treating the nostrils and airpassages with a kind of carbolic acid snuft, issued an advertisement offering £l00 reward to any person who should contract influenza (or similar ailments as mentioned) after having used the ball as directed. It was also stated that £1,000 was deposited with a named bank, "showing our sincerity in the matter." The plaintiff bought one of the smoke balls by retail, did use it as directed, and caught considered judgment

influenza while she was still using it. HAWKINS, J."3 held in a that she was entitled to recover £100 as on a contract by the

company. The Court of Appeal confirmed that judgment. It was objected in this case that the plaintiff had not communicated her acceptance of the offer to the defendant company. But Bowen, L.J., said that notification of acceptance 7.

ANsON's LAW OF CONTRACT, (28th edn., 2002) at p. 42.

8. Venkatayyammav. AppaRao, 43 IA 138.See Errington v. Errington, (1952) I KB 290. 9.

10.

Offer of reward to any one tracing a lost boy and bringing him home held to be earned by finding and prompt notification (facts insutficiently stated): Har Bhajan Lal v. Har Charan Lal, (1925) 23 All LJ 655. Re Agra and Masterman's Bank Exparte Asiatic Banking Corporation, (1867) LR 2 Ch 391.

11.

Bhagwati Prasad PawanKumar v. Union of India, (2006) 5 SCC 311, 318: AIR 2006SC 2331 (offer of payment of lesser sum for discharge of debt of larger amount). This case is perhaps better

seen as authority for the principles of accord and satisfaction, covered under S. 63. Carlillv. Carbolic Smoke Ball Co., (1893) 1 QB 256. 13. The facts were not disputed. See the report in the Court below, Carlill v. Carbolic Smoke Ball Co., (1892) 2 QB 484. 12.

48

S.8

Chapter -0f theCommunicationA , cceptance&RevocationofProposals

is required for the benefit of the person who makes the offer, and that he may dispense with notice to himself. When the proposal is made in consideration of some act to be done, dispensation of notice may be inferred from the nature and circumstances of the

proposal.4 Acceptance in Ignorance of

Does an act done by a person in ignorance of of the condition of the proposal" within the meanthe proposal amount to "performance ing of this section? According to the High Court of Allahabad it does not. The plaintiff in that case was in the defendant's service as a munib. The defendant's nephew absconded, and the plaintiff volunteered his services to search for the missing boy. In his absence the defendant issued handbills offering a reward of Rs. 501 to anyone who might find out the boy. The plaintiff traced him and claimed the reward. The plaintiff did not know of the plaintiff was not entitled to the handbills when he found out the boy. Held that the

reward.

A similar rule is also accepted in the common law.0 If, however, the acceptor

knows of the offer, but is inspired to performance by a motive other than that of claiming the reward, such a motive is immaterial. This was accepted in Williams v. Cowardine,5 where a reward was offered for supply of information relating to a case of murder. The plaintiff had knowledge of the reward but supplied the information only to "ease her conscience". This was held immaterial and she was entitled to claim the reward. On the other hand, in an Australian case one Clarke who knew of the offer of a reward gave the

information to clear himself of the suspicion of the charge against himself and without any thought of claiming the reward. The claim for reward made by Clarke failed because he did not give the information in exchange of the offer. Acceptance by receiving consideration.The second branch of the section as to "acceptance of any consideration," etc. is rather obscure. It is generally sound principle, no doubt, that what is offered on conditions must be taken as it is offered. The use of the word "reciprocal is curious, for it hardly fits the most obvious class of cases, as where goods are sent on approval, and the receiver keeps them with the intention of buying them. Here the seller need not and commonly does not offer any promise, and there is therefore no question of a reciprocal promise as defined in the Act [s. 2(1)]. Further, a thing which is offered in one right and for one purpose may be taken under a different claim of right and with a different intent, and in that case, the legal result will not be a contract between the parties unless the party receiving the thing so conducts himself as to lead the proposer reasonably to conclude that there is an acceptance according to the offer, and then the proposer can hold him liable on the universal principle that a man's

reasonably apparent intent is taken in law to be his real intent. It cannot be supposedthat

the present section is intended to preclude all inquiries of this kind by making every receipt in fact of a thing offered by way of consideration a conclusive aceptance of the

proposal.

(communication necessary) with Ranga Ram Thakar Das v. Raghbir Singh, (1928) 113 IC 780: AlR 1928 Lah 938 (communication not necessary). 15. Lalman Shukla v. Gauri Dut, (1913) 11 All LJ 489. 16. AH Hudson, "Gibbons v. Proctor revisited" 84 Law Quarterly Review, 503 (1968). See also Fitch v. Snedaker, (1 868) 38 NY 248 (New York); Bloom v. American Swiss Watch Co., 1915 AD 100

(South Africa); R v. Clarke, (1927) 40 CLR 227 (Australia) c.f. Gibbons v. Proctor, (1891) 64 LT 594: (1891) 55 JP 6l6 (plaintiff gave information in ignorance of offer of reward but knewabout it by the time the information reached the concerned officer, held entitled to reward) 17. 18.

ANSON'S LAW OF CONTRACT (29th edn., 2010) at p. 51. Williams v. Cowardine, (1833) 4 B. & Ad. 621:(1833) 5 C&P 566.

19.

Rv.Clarke, 40 CLR 227 (241).

S. 9

Promises, express and implied

49

The section has been applied to the case of a bank's customer receiving notice, which he did not answer, of an increase in the rate of interest on overdrafts, and afterwards obtaining a further advance. It was held that he accepted a consideration offered by the bank within the terms of this sectionand as a consideration for that 'reciprocal promise' the bank offered to desist from discontinuing the overdraft or from immediate

recall of its debt." Similarly, an offer to supply goods sent to the offeree may be accepted by using the goods.A new lease may be accepted by staying on the premises.

When is acceptance complete.-Where

acceptance takes place by performance of

an act, the latter being the condition of the proposal, when does the acceptance "become complete as to bind the offeror? Does the word "performance' in this section mean

complete or partial performance? Insisting on completion of performance for formation of contract would cause injustice, for it may be possible for the offeror to revoke the proposal even after the offeree has commenced the performance of the act.* The section as it is presently drafted does not provide any guidance on this issue. The Law Commission of India has recognised this ambiguity and recommended adding a clarification in

the section to the

effect"[}n

the case of a promise made in consideration of the

promisee's performing an act, the promisee's entering upon performance of the act is an acceptance of the proposal, unless the promise contains an express or implied term that it can be revoked before the act has been completed."

S. 9. In so far as the proposal or acceptance of any promise is made in words, the promise is said to be express. Promises,expressand In so far as such proposal or acceptance is made

implied.

otherwise than in words, the promise is said to be

implied. Express and tacit promises.-This section assumes that both proposals and acceptances may take place by words or without express words. The words may be spoken or WTitten between the parties. An implied promise, in the sense of the Act, Is a real promise, though not conveyed in words. An implied promise is therefore to be inferred from certain facts such as a course of dealings between the parties. In other words where there is an express contract in existence, there is no question of an implied contract. An implied promise must be distinguished from the promises frequently said in English books to be implied by law, which were fictions required by the old system of pleading to bring cases of "relations resembling those created by contract or quasi-contracts (Ss. 6872, below) within the recognized forms of action and sometimes to give the plaintiff the choice of a better form of action. Similarly, a term which, in the opinion of the court, results from the true construction of the language used by the parties may be said to be implicit in that language, but in the sense of the present section it is not implied; for it is

20. 21. 22.

23. 24.

25. 26.

Gaddar Mal v. Tata Industrial Bank. (1927) 49 All 674: AIR 1927 Al 407 followed in Behari Lal v. Radhye Shyam, AIR 1953 All 745. Hulas Kumwar v. Allahabad Bank Ltd., AIR 1958 Cal 644. Weatherby v. Banham Lloyd's Rep 134.

(1832) 5 Cc&P 228; Minories Finance Ltd. v. Afribank Nigeria Ltnd, [1995) 1

Roberts v. Hayward, (1828) 3 C&P 432. See notes under S. 4 "Revocation of "conditional' offers" Law Commission of India, 13th Report (1958) at para 32. See notes under S. 3 "Communication by silence".

27. See for instance Security Printing and Minting Corpn. of India Lid. v. Gandhi Industrial Corpn., (2007) 13 SCC 236, 245 (terms of contract clear between parties and variation proposed by one party not assented to by the other, held sub silentio principle, i.e. implied acceptance by silence, not

applicable).

50

S. 9

Chapter I-of theCommunication,Acceptance& Revocation ofProposals

contained in the words of the agreement,28 though not apparent on the face of them. The court normally imports such terms into a contract for giving effect to the "presumed intention" of the parties.30 Implied contracts and express ones are both equally binding upon the parties. The difference between them is confined to the manner of proving them. A tacit promise may be implied from a continuing course of conduct as well as from particular acts. Thus an agreement between partners to vary the terms of the partnership contract may "either be expressed or be implied from a uniform course of dealing, Again, when a customer of a bank has not objected to a charge of compound interest in accordance with the usual course of business, there is an implied promise." Where parties have acted on the terms of an informal document which has passed between them, but has never been executed as a written agreement or expressly assented to by both, it 1S a question of fact whether their conduct establishes an implied agreement to be bound by those terms. Questions may arise whether all the terms of another document are incor porated in a contract, when the contract refers to that document. The terms of a document can be incorporated by reference, when they are not inconsistent with the express terms of the incorporating document, and are not repugnant to the transaction which that document represents.3

Where a contract is partly oral and partly in writing, it is necessary to consider the

whole of the negotiations for the purpose of determining whether the parties have truly agreed on all the material points.34 Extrinsic evidence is admissible if there remains a doubt about the effect and true meaning of a document.55 This is more appropriately studied as a branch of the law ofevidence.36 Place of Contract.-Having regard to the provisions of S. 4, a question arises as to where a contract can be said to take place. Determination of this question in its turn helps in deciding jurisdiction of courts. This issue is discussed earlier.5/

Conflict

of

Law.-Incidents

where the contract is made.55 This applies to conflict of laws of different States.

28.

of the State

of a contract are governed by the law

provinces or

This topic is discussed in more detail elsewhere.40

It often depends on the true construction of an agreement whether it is a contract or not; and for this purpose there is no difference between express and implied terms; see Meherulla v. Sariatulla, AlR 1930 Cal 596.

29.

Courts will enforce not only the terms expressly agreed between the parties, but also those which are logically implied from those express terms, see Tappenden v. Artus, [1963] 3 All ER 213 (CA); Gardiner v. Moore, [1966] 1 All ER 365. 30. The Moorcock, (1889) 14 PD 64, 68, per BoWEN LJ. 31. Haridas Ranchordas v. Mercantile Bank of India, (1920) LR 47 IA 17 ILR 44 Bom 474: AIR 1920 PC 61 (compound interest with monthly rests); Hulas Kunwar v. Allahabad Bank, AIR 1958 Cal 644 (where the customer operated upon an overdraft account after the rate of interest had been increased); Hiralal v. Lachmi Prasad, 31 Bom LR 905 (PC) (with annual rests). 32. Brogden v. Metropolitan Railway Co., (1877) 2 App Ca 666. 33. Dwarkadas & Co. v. Daluram, AIR 1951 Cal 10, 19; M.R. Engineers v. Som Datt Builders, (2009) 7 SCC 696, 704 (incorporation of arbitration clause by reference). 34. 35. 36.

Scamell v. Ouston, (1941) AC 251. Godhra Electricity Co Ltd. v. State of Guyjarat, AIR 1975 SC 32:(1975) 1 SCC 199.

38. 39.

Shankar v. Maneklal, 42 Bom LR 873. Shankar v. Maneklal, 42 Bom LR 873.

40.

See notes under S. 1 "Foreign

Sections 91-100 Indian Evidence Act, 1872. See SARKARON LAW OF EVIDENCE (17th edn, 2010) at PP. 1675-1849; Ratanlal & Dhirajlal on Evidence (23rd edn, 2010) at pp. 1079-1169. 37. See notes under S. 4 "Time and place of contract".

Contract".

CHAPTER II

OF CONTRACTS, vOIDABLE CONTRACTS AND VOID AGREEMENTS S. 10. All agreements are contracts if they are made by the free Whatagreementsare consent or parties competent to contract, for a lawful consideration and with a lawful object, and contracts. are not hereby expressly declared to be void.

Nothing herein contained shall affect any law in force in [India], and not hereby expressly repealed, by which any contract is required to be made in writing or in the presence of witnesses, or any law

relating to the registration of documents. Enforceable

Contracet.-We have seen in section 2(h) that this Act makes a distinc-

tion between an agreement and a contract. The test is 'enforceable by law'.

This section adds further

qualifications about the contracts. The said

qualifications

are as under: (1) Free consent of the contracting parties (vide sections 13 to 22); (2) Competency to contract (vide section 11); (3)

For a lawful

(4)

Not declared void (vide sections 20, 26, 27, 28, 29, 30 and 56);

consideration (vide section 23, 2(d) and 25);

(5) In writing if so required by law [eg Art. 299 (1) of Constitution of India; S. 17 of Indian Registration Act; Municipal Acts, Companies Act).

Qualifications

(1) to (4) above relate to the 'essential'

validity

of an agreement,

while Qualification (5) deals with 'formal' validity. Contract.-A contract is a consensual act and the parties are free to Freedom of settle any terms as they please. This freedom lies in choosing the party with whom to

contract,2 in the freedom to fix the terms of the contract, in excluding or limiting the liability for damages or limiting the remedies available for the breach etc. However, this

freedom is subject to many exceptions. Statutes may prohibit refusing to enter into certain contracts some on the grounds of caste," race, or sex of a person. ne government may Substituted for "Part A States and Part C States" by

Act 3 of 1951 S. 3 and Sch. which had been

substituted by the A.O. 1950, for "the Provinces". 1. See Her Highness Maharani Shantidevi P Gaikwad v. Savjibhai Haribhai Patel, (2001) 5 SCC 101, 130: AIR 2001 SC 1462 (unilateral right of termination upheld). 2. Patel Engg. Lid. v. Union of India, (2012) 11 SCC 257. 3. 4. 5.

See Ss. 5, 6 Protection of Civil Rights Act, 1955. In the UK, Race Relations Act, 1976. In the UK, Sex Discrimination Act, 1975.

[51

52

S. 10

Chapter I1-Of Contracts, Voidable Contracts and VoidAgreements

control sale of certain commodities by regulating their supply, distribution, price as well as production.° A statute may restrict the terms in which a person may contract;' impose or imply terms; or may even compel a person to enter into a contract. The Act itself limits this freedom in a number of situations. It is safe to say that there is no absolute' which are laid freedom of contract, but an agreement made under such compulsions down by law, is no less a contract because of this reason alone.

Requirement of

formalities.-The

Act does not itself lay down any formality

requirement for a contract, but gives legal sanction to requirements of form which may be prescribed by other laws. Even if the agreement is in a form that contemplates fulfillment of certain formalities, these formalities are dispensible if they are not required by law. The formalities required by different laws vary. The most common formality require ments include the requirement of having an agreement in writingi or in a prescribed form, attestation, registration and payment of stamp duty. Similarly, a contract made in the exercise of the executive power of the Union or a State must comply with the Constitutional formalities.18 The effect of not observing the required formalities also differ. It may make the agreement unenforceable." lt may preclude the agreement from being used as evidence of the transaction," or allow its use only for collateral purposes. Failure to comply with or be a criminal offence.25 the formal requirements may also involve a penalty 6.

See S. 3, Essential

7.

In the UK, the Unfair Contract Terms Act, 1977 restricts the operation and legality of contract terms which are perceived as unfair. See S. 3A, Employers Liability Act, 1938; S. 25 Minimum Wages Act, 1948,; S. 23 Payment of Wages Act, 1936; S. 17 Workmen's Compensation Act, 1923.

8.

9. 10.

Commodities

Act, 195S.

This may be seen in statutes requiring compulsory insurance, see Ss. 146, 196 Motor Vehicles Act, 1988; S. 54(¢) Inland Vessels Act, 1917. See Ss. 23-30, Indian Contract Act, 1872.

11.

Vishnu Agencies v. Commercial Tax Officer, AIR 1978 SC 449: (1978) I SCC 520 over-ruling the majority Judgment and approving the dissenting judgment of Hidayatullah Jin New India Sugar Mills Ltd. v. Commissioner of Sales Tax, AIR 1963 SC 1207: 1963 Supp (2) SCR 459.

12.

Aloka Bose v. Parmatma Devi, (2009) 2 SCC 582, 587: AIR 2009 SC 1527 (sale agreement contemplated "subscription by hands and seals" by both parties but was Signed by only one party,

held valid). 13.

See notes under S. 10 later

"Contracts required to be in writing".

14.

See for instance, forms prescribed by bye-laws framed under S. 15 (3A) of the ForwardContracts (Regulation) Act, 1952 discussed in Jaikishan Dass Mull v. Luchhiminarian Kanoria & Co., AIR 1974 SC 1579 : (1974) 2 SCC 521 (document must contain all terms and conditions in the form, but literal compliance not necessary); Banarsi Dass v. Cane Commissioner, AlR 1956 All 725. 15. See Ss. 59 (mortgage, except one by deposit of title deeds) and 22 (gift of immovable property) of the Transfer of Property Act, 1882. 16. See S. 17, Registration Act, 1908; Ss. 54 (sale of immovable property). 123 (gift of immovable property) Transfer of Property Act, 1882; S. 68 (assignment and license of patents) Patents Act, 1970; S. 3 (employment agreements) Cine Workers and Cinema Theater Workers (Regulation of Employment) Act, 1981; S. 4 (agreement under the Act) Apprentices Act, 1961; Ss. 269AB and 2690C (transactions relating to immovable property) Income 1 ax Act, 196l, 17. See Indian Stamp Act, 1899 and other analogous State legislations. 18. See Art. 299 of the Constitution of India, 1950. 19.

20. 21. 22.

Gyanchand v. Sushila Bai, (2007) I MPLJ 207 (arbitration agreement not in writing as required by S. 7(3) of Arbitration and Conciliation Act, 1996, heldunenforceable).See also J Belli Gowder v. Joghi Gowder, AlR 1951 Mad 683; Gouri Singh v. Ram Lochan Singh, AIR 1948 Pat 430. S. 35, Indian Stamp Act, 1899, and similar provisions in State Stamp laws. Ss. 17, 49, Registration Act, 1908. S. 62, Indian Stamp Act, 1899.

23. S. 21, Forward Contracts Regulation Act, 1952; S. 23 Securities Contracts Regulation Act, 1956. See also State of Gujarat v. Manilal Joitaram, AIR 1968 SC 653 (1968) 2 SCR 177.

S. 10

WhatAgreements are Contractsldsl

53

The requirements of formalities in the second paragraph must be read with the first paragraph of the section which prescribes conditions of enforceability. It is therefore

submitted, that unless the statute prescribing the formalities

specifically provides a

specific effect for non-compliance, an agreement should not be enforceable unless the formality is complied with. The court may go behind the document and look at the substance of the transaction to determine the nature or type of contract for ascertaining the formalities required. The title, description or form are not decisive of its nature" Oral Contracts.-An oral contract by which the parties intend to be bound is valid and enforceable," unless required by any other law to be in writing; but, oral contracts require clear and satisfactory evidence about formation and contents.20

Written

contracts.-Where

the contract has been reduced to writing the deed must

be construed and given effect to as it stands, even if the result be that the document is

found to embody a bargain intended by neither of the parties to it

There is no principle

of construction which permits a document contrary to its actual wording to be read as though it followed a proposed precedent unless between the parties it has been rectified or at least is such as would be rectified by the Court.2 But if a party to an agreement embodied in a document is told that any stipulation in the agreement would not be enforced, he cannot be held to have assented to it. The document does not amount to real agreement between the parties and the other party cannot sue on it.

Contracts in writing:

required to be in

writing-The

following Acts require contracts to be

) TheApprenticesAct1961,S. 4; i)

The Arbitration and Conciliation Act 1996,S. 7: arbitrationagreements;

(1i) The Cine-Workers and Cinema Theatres Workers (Regulation of Employment) Act 1981, S. 3;

(iv)

The Indian Contract Act 1872, S. 25(1): agreement without consideration between near

relations; S. 25(3):

promise to pay a time-barred

debt; S. 28,

Exception 2: agreement to refer to arbitration; (v)

(vi)

The Companies Act 1956, S. 15: memorandum of association; S. 30: articles of association; S. 46: form of contracts by companies, S. 108: transfer of shares and debentures of a company;

The Copyright Act 1957, S. 19: assignment of copyright, S.

30A: license of

copyright; (vii) The Income Tax Act 1961, S. 269UC: any transaction for transfer of immovable property having such value of more than rupees 5 lakhs as may be prescribed shall be by an agreement reduced in writing;

(vii)

The Limitation Act 1963, S. 18: acknowledgment to pay a debt (not strictly a

contract); 24. Sundaram Finance Ltd. v. State of Kerala, AIR 1966 SC 1178 : (1966) 2 SCR 828; DV Corpn v. State of Bihar, AIR 1961 SC 440: (1961) 2 SCR 522. 25.

SN Mundade v. New Mofussil Co Ltd., AIR 1946 PC 97.

26. See Smith v. Highes, (1871) LR 6 QB 597 (wholly oral contract, dispute on whether subject-matter of sale described as 'good oats or 'good old oats'). 27. Sunitabala Debi v. Manindra Chandra, (1930) 52 Cal LJ 435. 28. Adaikappa v. Thomas Cook & Son, Lid, (1933) 64 MLJ 184 142 IC 660: AIR 1933 PC 78. 29. Tyagaraja v. Vedathanni, (1936) 63 IA 126:59 Mad 446: AIR 1936 PC 70.

54

S. 10

(ix)

()

Chapter I1-of Contracts, Voidable Contracts amd VoidAgreements

The Patents Act 1970, S. 68: assignment, mortgage, licence, etc, of patent;

The Trade Marks Act, 1999, S. 18: assignment of trade-mark; S. 49: licence of trade-mark called permission to use a trade-mark;

(xi)

The Transfer of Property Act 1882, S. 54: sale of immovable property; S. 59: mortgage; S. 107: lease; S. 123: gift; S. 130: assignment of actionable claim;

(xii)

The Indian Trusts Act 1882, S. 5: trust of immovable property (these are not

strictly contracts). Documents

in

electronic

form

(called

'electronic

records')

are treated as the

equivalent ofwriting.30 However, there are some exceptions, and "electronic records' shall not be deemed to

be in 'writing' where these include3 (a)

a

negotiable

instrument

(other than a cheque) as defined

in S. 13 of the

Negotiable Instruments Act, 1881;

apower-of-attorneyasdefined in S. 1A of thePowers-of-AttorneyAct,1882;

i(b) orf

(c)

a trust as defined in S. 3 of the Indian Trusts Act, 1882;

(d) a will as defined in S. (2)(h) of the Indian Succession Act, 1925, including any testamentary disposition by whatever name called;

du

(e) any contract for the sale or conveyance of immovable property or anyinterest in such property."

Variance between print and writing.-Print and other mechanical equivalents of handwriting are generally in the same position with regard to rules of evidence and construction. But where a contract is partly printed in a common form and partly written, the words added in writing are entitled, as Lord Ellenborough said in a judgment repeatedly approved,52 if there should be any reasonable doubt upon the sense and meaning of the whole, to have a greater effect attributed to them than to the printed words; inasmuch as the written words are the immediate language and words selected by the parties them-

selves for the expression of their meaning, and the printed words are general formula adapted equally to their case and that of all other contracting parties upon similar occasions. But the print is not to be discarded altogether, and the Court should discover the real contract of the parties from the printed as well as from the written words.35

As to the law relating to Registration.-Section 17 ofthe IndianRegistrationAct XVI of 1908 specifies documents which are required to be registered; and S. 49 of the

same Act provides that no document required by S. 17 to be registered shall effect any immovable property, unless it has been registered in accordance with the provisions of that Act. Such document shall also not be received 'as

evidence of the transaction.

30. See S. 4 Information Technology Act, 2000 which provides that "Where any law provides that intormation or any other matter shall be in writing or in the typewritten or printed form, then, notwithstanding anything contained in such law, such requirement shall be deemed to have been

satisfied ifsuchinformationormatter is 31.

(a) rendered or made available in an electronic form, and (b) accessible so as to be usable for a subsequent reference." See S. 14) and First Schedule Information Technology Act, 2000.

32. Roberison v. French, (1803) 4 East 130; approved in H.L. Glynn v. Margetson, (1893) AC 351 357 (CA) Noorbhai v. Alabur, (1917), 19 Bom LR 845; MK Abraham and Co v. State ofKerala, (2009) 7 SCC 636, 643: AIR 2010 SC 1265. 33.

Paul Beier v. Chotalal Javerdas, (1906) ILR 30 Bom 1.

Who are competent to contract

S. 1

55

However, under S. 49, it can be admitted 'in' evidence for certain other purposes.54 Registration of a document may also be required under other statutes.5)

S. 11. Every person is competent to contr: Who arecompetentto

contract.

who is of the age of

majority according to the law to which he is subject, and who is of sound mind, and is not

disqualiffed from contracting by any law to which he is subject.

Competency to Contract.-This section deals with personal capacity in three distinct branches: (a) disqualification by infancy; (b) disqualification by insanity: (c) other special disqualifications prescribed by law.

To

Contract."-That is, to bind himself bypromise.

Infancy.-As

to infancy, the terms of the Act as compared with the Common Law,

were long a source of grave

difficulty.

Under the Common Law, an infant's contract is

generally not void but voidable at his option; if it appears to the Court to be for his benefit, it may be binding, and especially if the contract is for necessaries. The literal construction of the present section requires being of the age of majority according to one's personal

law as a necessary

element

of contractual

capacity. Since the Act as a

whole purports to consolidate the English law of contracts, with only such alteration as local circumstances require, the Indian High Courts endeavoured to avoid a construction involving so wide a departure from the law to which they had been accustomed; but the

Judicial Committee in 1903 declared that the literal construction is correct, and suggested that it was intended to give effect to the rule of Hindu law on the subject.5° In this connection, the Privy Council in the leading case of Mohori Bibee v. Dharamdas Ghosh observed as under:

"The construction which they have put upon the Indian Contract Act seems to be in accordance with the old Hindu laws as declared in laws of Manu and Colebrok's Digest Book II, Chapter 4, Section 2 Article 3, verses 53, 57 although there are no

doubt decisions of some weight that before the Indian Contract Act, infant's contract was voidable only in accordance with English law as it then stood." Age of majority.-This is now regulated by the Indian Majority Act IX of 1875: Section 3 of the Act declares that every person domiciled in India shall be deemed to have attained his majority when he shall have completed his age of eighteen years, and not before. In the case, however, of a minor of whose person or property or both a guardian has been appointed by a Court, or of whose property the superintendence is assumed

bya Court of Wards, before the minor has attained the age of eighteen years, the Act provides that the age of majority shall be deemed to have been attained on the minor com-

pleting his age of twenty-one years.

34.

Nand Singh v. Sewa Singh, AIR 1959 Punj 609 (unregistered document required to be registered can be used to show factum of the transaction, but not the content.).

35. See Ss. 54 (sale of immovable property), 123 (gift of immovable property) Transfer of Property Act, 1882; S. 68 (assignment and license of patents) Patents Act,

Cine Workers and Cinema Theater Workers (agreement under the Act) Apprentices

1970 S. 3 (employment agreements)

(Regulation of Employment) Act, 1981; S.

Act, 1961; Ss. 269AB and 269UC (transactions relating to

immovable property) Income Tax Act, 1961. 36. Mohori Bibee v. Dhurmodas Ghose, (1903) 30 Cal 539:30 IA 114; followed in Mir Sarwarjan v. 37.

Fakharuddin Mahomed, (1912) 39 Cal 232; Ma Hnit v. Hashim, (1920) 22 Bom LR 531 (PC). (1930) 30 Cal at 549-550.

56

Chapter I1of Contracts, VoidableContracts and VoidAgreements

S. 11

Law to which he is subject."-The age of majority as well as the disqualification from contracting is to be determined by the law to which the contracting party is subject. The general principle is that the capacity of a person to enter into a contract is decided by the law of his domicile, and not the law governing the substance of the contract, but the later trend of authority is not to recognise the law of domicile as having an exclusive prerogative in all cases. There is a body of English opinion favouring the lex loci con tractus, the place where the contract is made, in the case of ordinary mercantile contracts, while in the case of contracts relating to land the lex situs, the place where the land is situated.38 Thus in Kashiba v. Shripats a Hindu widow above the age of sixteen and under the age eighteen years, whose husband had his domicile in British India, executeda bond in Kolhapur (outside British India), where she was then residing. The question arose whether her liability on the bond was to be governed by the law of Kolhapur (lex loci contractus), or by the law of British India (law of her domicile). According to the law of Kolhapur, she would have been liable on the bond, as the age of majority according to that law is sixteen years, and the bond was executed by her after she completed her sixteenth year. According to the law in British India, namely, the Contract Act, she was not liable, as the contract was made when she was under the age of eighteen years, and was not ratified by her after she attained her majority. It was held that her capacity to contract was regulated by the Contract Act, being the law of her domicile, and has been held by the Madras High that under the Act she was not liable on the bond. It Court that in ordinary mercantile contracts the age of majority is to be determined by the lex loci contractus. Thus where a person aged 18 domiciled in British India endorsed certain negotiable instruments in Ceylon, by the laws of which he was a minor, he was held not to be liable as endorsee. Minor's agreement.-If the first branch of the rule laid down in the section be converted into a negative proposition, it reads thus: No person is competent to contract who is not of the age of majority according to the law to which he is subject; in other words, a minor is not competent to contract. This proposition is capable of two constructions: either that a minor is absolutely incompetent to contract, in which case his agreement is void, or that he is incompetent to contract only in the sense that he is not liable on the contract though the other party is, in which case there is a voidable contract. If the agreement is void, the minor can neither sue nor be sued upon it, and the contract is not

capable of ratification in any manner;*" if it is voidable, he can sue upon it, though he cannot be sued by the other party, and the contract can be ratified by the minor on his attaining majority. The former current of Indian decisions was that, as under the English law, a

minor's

contract

is

only

voidable

at his

option.

But in

1903, the Judicial

Committee ruled that "the Act makes it essential that all contracting parties should be competent to contract," and especially provides that a person who by reason of infancy is incompetent to contract cannot make a contract within the meaning of the Act. It was accordingly

held that a mortgage made by a minor is void, and a moneylender who has

advanced money to a minor on the security of the mortgage is not entitled to repayment of the money under Ss. 64 and 65 on a decree being made declaring the mortgage invalid.2 This decision leaves no doubt that a mortgage by a minor being void, no decree 38. See DICEY & MOORIS: THE CONFLICTOF LAWS, (12th edn., 1993) at pp. 1271-1277; Cooperv. Cooper, (883) 13 APp Cas at l05, 108; Bank of Africa v. Cohen, (1909) 2 Ch 129; Republic of Gautemala v. Nunez, (1927) 1 KB 669; In re Auziani, (1930) 1 Ch 407. Regarding mercantile 39.

contracts see Male v. Roberts, (1790) 3 Esq. 163. Kashiba v. Shripat, (1894) 19 Bom 697. See also Rohilkhand and Kumaun Bank Ltd. v. Row

(1885) 7 All 490. 40. T.N.S. Firm v. Muhammad Hussain, (1933) 65 MLJ 458: 146 IC 608: AIR 1933 Mad 756. 41. Suraj Narain v. Sukhu Ahir, (1928) 51 All 164; cf. Bindeshri Bakhsh Singh v. Chandika Prasad (1926) 49 All 137. 42.

Mohori Bibee v. Dhurmodas Ghose, (1903) 30 Cal 539 : 30 IA 114.

Who are competent to

contractfuby

S. 11

57

can be passed on the mortgage either against the mortgagor personally or against the

mortgaged property. Agreement on behalf of

minor.-Contracts of betrothal of minors by their parent

and guardians have been upheld on the ground of the custom of the community.45 But until marriage takes place, the agreement remains nudum pactum.*

Contracts on behalf of minors in respect of their property have been upheld provided it is competent for the guardian or the manager of the estate to do so and the transaction is for a legal necessityA> or for his benefit. In the aforesaid two cases it was held that there being no necessity or benefit, the guardian was not competent to contract." A family settlement entered into by an elder brother acting as a de facto guardian of the minor, although continued for a long time, was held void qua the minor and the parties

sui juris as well even though it was for the benefit of the minor, the parties were governed by Mohamedan law.* In Raj Rani v. Prem Adib," a film producer entered into an agreement with a minor girl to act in a film, and the same agreement was entered into

by the father of the minor on her behalf with the producer. On a breach of the agreement, the minor sued the

producer through her father as next friend. DESAI, J., held that the

agreement with the father was void, seeing that the consideration moving from the father was the minor's promise to act, and as the minor could not in law promise, there was no consideration.

On the other hand, had the consideration

moved from the father in the

shape of an undertaking by him that his daughter should act, the father could have sued, but could recover only the damages he had suffered.

Fraudulent case that a minor's

Representation.-The

Privy Council while holding in Mohori Bibee's

contract is void referred to the Court's

discretion under Ss. 38 and 41

of the Specific Relief Act, 1 of 18770 to award compensation. Their Lordships held that the Calcutta High Court had correctly exercised their discretion in refusing compensation as the money had been advanced with full knowledge of the infancy of the borrower. It was further held that the equitable principle to restore will not apply in case of contracts which are void ab initio, This pronouncement has later been held to justity the award of compensation when the cancellation of an instrument has been adjudged at the instance of a minor.If a mortgage or a sale* of his property by a minor is set aside the Court may award compensation if satisfied that the minor had made a fraudulent representation as to his age. His liability to restore is based purely and simply on his fraud.

43. Rose Fernandes v. Joseph Gonsalves, 26 Bom LR 1035: 48 Bom 673; Khimji Kuverji v. Lalji Karamsi, 43 Bom LR 35: (1941) Bom 211: AIR 1941 Bom 129; Navakoti Daniel v. Ingilala

Mariamma, AIR 1951 Mad 466 : (1951) I MLJ1. 44.

Janak Prasad v. Gopi Krishna, AIR 1947 Pat 132.

45. Gopalkrishna v. Tukaram, (1956) A Bom 566; Gujoba v. Nilkanth, (1957) 59 Bom LR 1123:

AIR

1958 Bom 202; Suryaprakasam v. Gangaraju, AIR (1956) AP 33; C.I.T. v. Shah Mohandas, AlIR (1966) SC 15: (1965) 2 SCJ 314.

46. Guyjoba v. Nilkanth, (1957) 59 Bom LR 1123; Lachuram v. Madharam Nath, (1962) A Ass 41; Great American Insurance Co. v. Madanlal, 37 Bom LR 461. Gopalkrishna v. Tukaram, (1956) A Bom 566; Lachuramv. Madhuram, (1962) A Ass 41. Mohd. Amin v. Vakil Ahmad. (1952) SCR 113 : AIR (1952) SC 358.

47. 48. 49. Raj Rani v. Prem Adib, (1949) 51 Bom LR 256: AIR 1949 Bom 215. 50. Corresponding to Ss. 30 and 33 of the Specific Relief Act, XLVII of 1963. S1. Mohori Bibee v. Dhurmodas, 30 IA 114 (126) : 30 Cal 539, 549. 52. See Dattaram v. Vinayak, (1903) 28 Bom 181, at p. 190. $3. Kamta Prasad v. Sheo Gopal Lal, (1904) 26 All 342; Vaikuntarama v. Authimoolam, (1915) 38 Mad 1071. 54.

Muhammad Said v. Bishambhar Nath. (1923) 45 All 644.

58

S. 11

Chapter I1-of Contracts, Voidable Contracts and VoidAgreements

It is well established in English law that an infant cannot be made liable for what was in truth a breach of contract by framing the action ex delicto. "You cannot convert

a contract

into a tort to enable

you to sue an

infant">

In R.

Leslie, Lid. v.

Sheilpo the Court of Appeal held that where an infant obtains a loan by falsely representing his age, he cannot be made to pay the amount of the loan as damages for fraud, nor can he be compelled in equity to repay the money if it is not distinctly traceable. "Restitution stopped where repayment began."> The principle of that decision was applied by the Judicial Committee to a case from the Straits Settlements where the loan was secured by a mortgage of the minor's property. The Lahore High Court has, however, held that as the contract is wiped out the status quo ante should be restored and that the Court has jurisdiction to adjust the equities between the parties and to order a fraudulent minor to restore the benefit he has received or to make compensation for it.o In some casesoi the Courts have taken the view that in such a case the fraudulent minor cannot be ordered to make compensation. It is submitted, however, that the latter view is incorrect. In India the Court derives its power from a statutory enactment which is expressed in the widest terms, and the

word used is "compensation", not "restitution" 2 Estoppel--There were many conflicting decisions as to whether a minor was estopped by a false representation as to his age. The question is now settled by the case of Sadiq Ali Khan v. Jai Kishore03 where the Privy Council observed that a deed executed

by a minor is a nullity and incapable of founding a plea of estoppel. The principle underlying the decision is that there can be no estoppel against a statute. The Bombay High Court has followed the Privy Council ruling and reversed its former course of decisions. In a Calcutta case> the Court said: "It is unnecessary to consider whether a minor can be estopped in any case, but we think that the law of estoppel must be read subject to other laws, such as the Indian Contract Act, and that a minor cannot be made

liable upon a contract by means of an estoppel under Section 115 of the Indian Evidence Act, when some other law (the Contract Act) expressly provides that he cannot be made liable in respect of the contract." A minor who procures a loan by falsely representing that he is of full age is not estopped from pleading his minority in a suit upon a promissory note passed by him.°6

55. 56. 57.

Jennings v. Rundall, (1799) 8 TR 335. R. Leslie, Lid. v. Sheill, (1914) 3 KB 607. R. Leslie, Lid. v. Sheill, (1914) 3 KB 607 at 618 per LORD SUMNER.

58.

Mahomed Syedol Ariffin v. Yesh Ooi Gark, (1916) 43 IA 256, pp. 263-64 21 CWN 257. See Radha Shiam v. Behari Lal, (1918) 40 All S58, 559-560. Mohori Bibee v. Dhurmodas Ghose, 30 IA 114: 30 Cal 539; Khan Gul v. Lakha Singh, 9 Lah 701; Limbaji v. Rahi, 27 Bom LR 621 :49 Bom 576; Manmatha Kumar v. Exchange Loan Co. Lid, AIR 1936 Cal 567. Khan Gul v. Lakha Singh, (1928) 9 Lah 701 (721-22); Mo Maung Uv. Ma Bla On, (1939) 185 IC 733: AIR 1939 Ran 399; Harimohan v. Dulu Miya, (1935) 61 Cal 1075: 15S IC 1017: AIR 1935 Cal 198. Ajudhiya Prasad v. Chandan Lal, (1937) All 860, 170 IC 934 (37) AA 610 (FB); Tikki Lal v.

59.

60.

61.

Komalchand,

(1940) Nag 632 : AlR 1940 Nag 327.

62. 63.

See S. 33 Specific Relief Act, 1963; S. 41 Specific Relief Act, 1877. Sadiq Ali Khan v..Jai Kishore, (1928) 30 Bom LR 1346: 109 IC 387: AIR 1928 PC 152; Khan Gul v.Lakha Singh, (1928) 9 Lah 701. 64. Gadigeppa v. Balangowda, (1931) 55 Bom 741: 33 Bom LR 1313. 65. Golam Abdin v. Hem Chandra, (1916) 20 CWN 418. 66. Kanhaya Lal v. Girdhari Lal, (1912) 9 All LJ 103; Vaikuntarama v. Authimoolam, (1915) 38 Mad 1071; Manmatha Kumar v. Exchange Loan Co. Lid, AIR 1936 Cal 567.

vi

S. 11

Who are competent to contract

Executed

Contracts-Contracts

59

which are completely executedon the minor's side

so that there are no further liabilities on his part, can be enforced by the minor for the reason that nothing further remains to be done by him. The decision of the Court in such minor and as cases only operates to enforce the rights of and not liaiblities against the such only protects the interests of the minor. Thus it has been held by the Bombay High Court that a minor can sue under a bond in his own favour. These cases of executed contracts may be distinguished from a case where the contract is merely executory and thus imposes obligations upon the minor, for instance where there is a lease in favour of the minor8 or where the minor is a mortgagor.

In practice, the distinction between executory and executed contracts could be tough to draw. In certain situations, it is difficult to conclude that there might be no further liabilities on or obligations to be performed by the minor. For instance, in Abdul Ghaffar, the executed contracts exception was applied by the Lahore High Court to a case where the minor Plaintiff who had supplied goods to the Defendant, had sued the Defendant for the price. This case did not consider that there exist various covenants and warranties that might operate to impose liability upon the minor Plaintiff in the event such goods were defective or did not meet the required criterion.

The policy reasoning behind the exception though is apparent enough. If the exception were to be discarded, it would follow that the law relating to the contracts of minors meant for their protection, would in numerous cases have an exactly opposite effect and result in manifest injustice. To take a simple instance, if a minor sent a money order to a shopkeeper in payment of certain selected goods to be forwarded, the

shopkeeper having knowledge of the status of the minor, could keep the money and refuse to deliver the goods. In this case, the shopkeeper might be within his right in refusing to complete the contract entered into with a minor, but Justice demands that the

shopkeeper who has accepted the money having knowledge of the status of the minor cannotnow refuse to perform obligations voluntarily undertaken by him. The demands of justice would be no different if the shopkeeper who did not initially have such knowledge but having acquired it later, attempts to use that to get out of the bargain.

Mortgages and sales in favour of minors. - The executed contracts exception (as above) to the rule in Mohori Bibee (that contracts with minors are void ab initio) was held by various High Courts to apply to cases where morgages and sales were executed in favour of minors, and where the minor had already advanced the consideration amount to the other party. It was reasoned that the rationale for holding a minor's agreement void was that the agreement by a minor involved a promise on his part or his promise was a

necessary part of the agreement (for instance in Mohori Bibee itself the minor was the mortgagor and the consideration for the mortgage was the promise of the minor to repay). In such cases, the contract is void because a minor is incapable of giving a promise imposing a legal obligation upon himself. However, where a minor mortagee had paid consideration of the mortgage at the time of the mortgage deed, he was held entitled to sue on his mortgage as the consideration

promise but had actually done something.""

furnished by the minor was not a Similarly, where a minor is a transferee in

67. Hanmant Lakhshman v. Jayarao Narsinha, (1888) ILR 13 Bom 50.

68. Pramala Basi Das v. Jogeshar Mandal, (1918) 3 Pat LJ 518 : 46 IC 670 (lease in favour of minor held void as it imposes obligations upon him to pay rent and to perform covenants). Mohori Bibee v. Dharmodas Ghose (1903) Cal 539: 30 TA 114. 69. Abdul Ghaffar v. Piare Lal (1935) 16 ILR Lah 1. 70.

71. Raghava Chariar v. Srinivasa, AlIR 1917 Mad 630 (FB); Madhab Koeri v. Baikuntha Karmaker, (1919) ILR Pat 561; Satyadeva Narayana v. Tirbeni Prasad, AIR 1936 Pat 153.

60

Chapter IIOf Contracts, VoidableContracts and VoidAgreements

S. 11

the case ofa sale transaction and the consideration amount is already paid, no promise of the minor is sought to be enforced.2 Thus, it may be said that a person incompetent to contract may yet accept a benefit and be a transferee and so although a sale or mortgage of his property by a minor is void, a duly executed transfer by way of sale"s or mortgage4 in favour of a minor who has paid the consideration money is not void, and it is enforceable by him or any other person on his behalf. A minor, therefore, in whose favour a deed of sale is executed is competent to sue for possession of the property conveyed thereby. And it has been held by a Full Bench of the Madras High Court that a mortgage executed in favour of a minor who has advanced the mortgage money is enforceable by him or by any other person on

his behalf.76

The decision of the Supreme Court in Mathai Mathai however alters the above position. In this case, one of the descendents of the original mortgagee of certain land filed a claim under a particular statute in the State of Kerala (under which he would be, if successful,

entitled to purchase the land at a certain concessional rate) on the basis of

inter alia the possession given to his ancestor pursuant to such mortgage. It was a matter of undisputed fact that the original mortgagee of the land was a minor at the time that the mortgage deed was executed. In this context, the Supreme Court having noted this fact

held"Many

courts

have

held

that a

minor

can be a

mortgagee

as it

is transfer of

property in the interest of the minor. We feel that this is an erroneous application of the law keeping in mind the decision of the Privy Council in Mohori Bibee's case. As per the Indian Contract Act, 872 it is clearly stated that for an agreement to become wherein age of majority is a a contract. the parties must be competent to contract, and we cannot hold that a condition jor competency. A deed of mortgage iS a contract mortgage in the name of a minor is valid, simply because it is in the interests of the minor unless she is represented by her natural guardian or guardian appointed by the

court. The law cannot be read differently fora who s a morigagee as there are rights and property would flow out of such a contract on to hold that the mortgage deed... is void ab claim any rights under it."

minor who is a mortgagor and a minor liabilities in respect of the immovable both of them. Therefore, this Court has initio in law and the Appellant cannot

For a judgment of such significant importance, the decision in Mathai Mathai is surprisingly bereft of reasoning or authority. The Supreme Court could easily have avoided getting into this issue given that none of the parties had ever raised this argument in any of the forums below, nor does it appear that this point was argued by any party even

before the Supreme

Court.

But

having chosen to decide on the basis of this

argument, at least the prior decisions of the various High Courts on this subject should have been considered, and either distinguished or expressly over-ruled. There is an inherent logic to the executed contracts exception to Mohori Bibee - and a reading of Mohori Bibee in Mathai Mathai that appears to render all contracts with minors as being

76.

Munni Koer v. Madan Gopal, (1916) 38 All 62. Munni Koer v. Madan Gopal, (1916) 38 All 62; Munia v. Perumal. (1914) 37 Mad 390; Bholanath v. Balbhadra, AIR 1964 All 527. Raghava Chariar v. Srinivasa, (1917) 40 Mad 308 (FB); Madhab Koeri v. Baikuntha Karmaker. (1919)4 Pat LJ 682; Zafar Ahsan v. Zubaida Khatun, (1929) 27 All LJ 1l14. Munni Koer v. Madan Gopal, (1916) 38 All 62; Munia v. Perumal, (1914) 37 Mad 390. Raghava Chariar v. Srinivasa, (1917) 40 Mad 308; Hari Mohan v. Mohini Mohan, (1918) 22 CWN

77.

Mathai Mathai v. Joseph Mary, (2015) 5 SCC 622.

72.

73. 74. 75.

130.

Who are competent to contract

61

S. 11

void ab initio is over-broad, and with respect, requires re-consideration by the Supreme Court. Till such time however, it is submitted that the decision in Mathai Mathai must seen in context. Mathai Mathai can, at best, be said to be an authority in respect of those types of executed contract cases, where minors are transferees of immovable property and liabilities in respect of the transaction are imposed upon the minor consequent to an executed document (and in this respect Mathai Mathai, it is submitted, should be read as

laying down a proposition no different from the law already laid down in Mohori Bibee as interpreted by the various High Courts in the executed contracts cases above). Mathai Mathai does not at all deal with those cases of executed contracts (for instance bonds

executed in favour of the minor) where there is no transfer of property involved or where minors are mortgagees and consideration amount having already been paid, no further liability exists upon the minor or can be the subject matter of enforcement.

Lease to minors-A lease to a minor is void, as a lease imports a covenant requiring the minor to pay rent and also imposes other reciprocal obligations.7 The amendment to S. 107 of the Transfer of Property Act, 1882 also makes it clear that a lease both by and to a minor must be void since the lease must now (subsequent to the amendment) be

executed both by the lessor and the lessee."9

Gifts to

minors-A

minor donee is competent to accept a gift. An express accep

tance in Such cases is not normally insisted upon, an implied acceptance is deemed sufficient.0 Acceptance of an onerous gift, i.e. a gift burdened with an obligation, cannot bind the minor unless upon becoming competent to contract and being aware of such obligation, he retains the gift.3 Minor-Partnership.-A partner would be invalid.3

partnership agreement admitting a minor as a full-fledged However, a minor may be admitted to the benefits of a

partnership by his guardian provided it is supported by necessity or benefit.35

Minor-Insurance.-A contract of insurance by a de facto guardian of a minor in respect of the minor's goods being for the benefit of the minor would be valid and the minor would be entitled to sue thereon.34

Minor-Surety bond.-A bond passed by a minor and surety will be void vis-a-vis the minor but it can be enforced against the surety.3

Minor-Joint documents.-Documents jointly executed by a minor and an adult major person would be void vis-a-vis the minor but they could be enforced against the major person who has jointly by such a major person.

executed the same provided there is a joint promise to pay

78.

Pramila Bali Das v. Jogeshar, (1918) 3 Pat LJ 518: 46 IC 670; Jaykant v.

79.

MULLA's TRANSFER OF PROPERTY ACT (10th edn, 2006) at p. 121.

Durgashankar,

(1969)

Gu LR T78:AIR1970Gu l06 80. Sunder Bai v. Anandi Lal, AIR 1983 All

23: (1982) 8 All LR S86; Ponnuchami Servai v.

Balasubramanian, AlR 1982 Mad 281 :(1981) 2 MLJ 455. 81. Sections 122-127 Transfer of Property Act, 1882. See also K Balakrishnan v. K Kamalam, (2004) I SCC 581, 588 AIR 2004 SC 1257. 82. CLT Bombay v. Dwarkadas Khetan & Co., AIR 1961 SC 680: (1961) 2 SCR 821. 83.

CIT. v. Shah Mohandas Sadhuram, AIR (1966) SC 15: (1965) 2 SCJ 314.

84. Great American Insurance Co. v. Madanmlal,59 Bom 656: 37 Bom LR 46l; Vijaykumar v. New Zealand Insurance Co., 56 Bom LR 341 : AIR 1954 Bom 347.

85. Kashiba v. Shripat, (1894) 19 Bom 697. 86. Jamna Bai v. Vasanta Rao, (1916) 39 Mad 409 (PC) : 43 IA 99; Sain Das v. Ram Chand, (1923) 4 Lah 334: AIR 1924 Lah 146: 85 IC 701.

62

S. 11

Chapter I1-0f Contracts, Voidable Contracts and VoidAgreements

Ratification.-As a minor's agreement is void there can be no question of its being ratified,7 nor can it (nor any act done pursuant to it) constitute a valid consideration for a

subsequent

contract.38

In a Madras

case"

a person

gave a

promissory

note in

satisfaction of one executed by him when a minor for money then borrowed. The Court held that the obligee could not enforce it as it was void for want of consideration. Where a minor entered into a partnership and carried on the partnership business for

nine years after he obtained majority, it was held that he had ratified the partnership.0 It is submitted that the question of

ratification

was beside the point as the suit was in

respect of dealingsbetweenpersonssui juris. Payment of debt incurred during minority.-It is permissible at law for a person after attaining majority to elect to pay the debt incurred by him during his minority Hence where a vendor after attaining majority had paid the amount due on the basis of the mortgage entered into during his minority he cannot subsequently bring a suit for the refund of that amount because a contract entered into by a minor is void and not unlaw-

ful.

Specific

Performance.-A

minor's agreement being void cannot be specifically

enforced. But a contract may be entered into on behalf of a minor by his guardian or by a manager of his estate. In that case if the contract is within the competence of the guardian or manager and for the benefit of the minor it may be specifically enforced by

or against the minor. But if either of these two conditions is wanting the contract cannot be

specifically

enforced at all.75 Thus it has been held that a contract entered into by a

certificated guardian of a minor with the sanction of the Court for the sale of property belonging to the minor, the contract being for the minor's benefit, may be enforced by either party to the contract. But a guardian of a minor has no power to bind the minor by a contract for the purchase of immovable property, and the minor therefore, is not entitled to specific performance of the contract: so held by the Judicial Committee in Mir Sarwarjan v. Fakharuddin Mohamed. Nor can the guardian of a minor enter into a

valid contract of service on her behalf.6 Where, however, a sale deed was executed in favour of A and his minor brother (A acting as guardian of the minor brother) and they had also agreed to reconvey the prop-

erty on the happening of certain events, it was held decreeing specific performance of the agreement to reconvey that the minor could not be heard to say that he would take benefit under the sale deed and repudiate the contract of reconveyance on ground of want of mutuality.97

87. 88. 89. 90.

Indian Cotton Co. v. Raghunath, 33 Bom LR 111. Bhola Ram v. Bhagat Ram, AIR 1927 Lah 24. Arumugan v. Duraisinga, (1914) 37 Mad 38. Maganlal v. Ramanlal, 45 Bom LR 761.

Anant Rai v. Bhagwan Rai, (1939) ALJ 935: 187 IC 4: AIR 1940 All 12. Bholanath v. Balbhadra Prasad, AIR 1964 All 527. Subramanyam v. Subba Rao, (1948) 75 IA 115: (1949) Mad 141 AlR 1948 PC 95; Etwaria v. Chandra Nath, (1906) 10 CWN 763, Babu Ram v. Said-un-Nissa, (1913) 35 All 499; Gopalkrishna v.Tukaram, AIR 1956 Bom 566. 94. Babu Ram v. Said-un-Nissa, (1913) 35 All 499; Jnnatunnessa v. Janaki Nath, (1918) 22 CWN 477. 95. Mir Sarwarjan v. Fakharuddin Mohamed, (1912) 39 Cal 232: 39 1A 1; Gopalkrishna v. Tukaram, AIR 1956 Bom 566. 96. Raj Rani v. Prem Adib, (1949) 51 Bom LR 256: AIR 1949: AIR 1949 Bom 215. 97. Sitarama Rao v. Venkatarama, AIR 1956 Mad 261.

91. 92. 93.

S. 11

Who are competent to contract

63

Necessaries.-Section 68 provides for liability in respect of necessaries supplied to person incapable of entering into a contract. A minor is a person incapable of contracting within the meaning of that section, and, therefore, the provisions of that section apply to his case. It will be observed that the minor's property is liable for necessaries, and no sonal liability in such a case. Under English law the liability is not on the express promise, if any there be; the obligation is quasi ex contractu to pay a reasonable price for necessary goods supplied. Necessaries must be things which the minor actually needs; whether any article amounts to a necessary or not as contemplated by this section is a mixed question of law and fact. Necessaries include articles required to maintain a particular person in the state, degree and station in life in which he is."It must be determined with reference to the fortune and circumstances of a particular infant." Therefore it is not enough that they be of a kind which a person of his condition may reasonably want for ordinary use; they will not be necessaries if he is already sufficiently supplied with things of that kind, and it is immaterial whether the other party knows this or not.° Wedding presents for a minor bride' and a house for a minor to reside and continue his studiess have been held to be necessaries. Objects of mere luxury cannot be necessaries nor can objects which, though of real use, are excessively costly. The fact that buttons are a

normal part of many usual kinds of clothing, for example, will not make pearl or diamond buttons necessaries." See notes to S. 68, below.

Of sound mind."-See S. 12 for the definition ofsoundness of mind. Under English law a lunatic's contract is not void, but voidable at his option, and this only if the other party had notice of his insanity at the time of making the contract.° But, after the decision that this section makes a minor's agreement wholly void, it is clear that a person of unsound mind must in India be held absolutely incompetent to contract. And it has in fact been so held." A mortgage in favour of a lunatic has been held to be valid.2

Persons otherwise "disqualified from

contracting."-The

capacity of a woman to

contract is not affected by her marriage either under the Hindu or Mahomedan law. A Hindu female is not, on account of her sex, absolutely disqualified from entering into a

contract, and marriage, whatever other effect it may have, does not take away or destroy any capacity possessed by her in that respect. It is not necessary to the validity of the contract that her husband should have consented to it. When she enters into a contract with the consent or authority of her husband, she acts as his agent, and binds him by her act,

1.

Watkins v. Dhunnoo Baboo, (1881) 7 Cal 140, 143.

2. Mohori Bibee v. Dhurmodas Ghose, 30 IA 114 (124): 30 Cal 539. 3. Johnstone v. Marks, (1887) 19 QBD 509, followed in Jagon Ram v. Mahadeo Prasad, (1909) 36 Cal 768 (778, 779). 4. Johnstone v. Marks, (1887) 19 QBD 509, followed in Jagon Ram v. Mahadeo Prasad, (1909) 36 Cal 768 (778, 779). 5. Johnstone v. Marks, (1887) 19 QBD 509, followed in Jagon Ram v. Mahadeo Prasad, (1909) 36 Cal 768 (778, 779). Johnstone v. Marks, (1887) 19 QBD 509, followed in Jagon Ram v. Mahadeo Prasad. (1909) 36 6. Cal 768 (778, 779). 7. Johnstone v. Marks, (1887) 19 QBD 509, followed in Jagon Ram v. Mahadeo Prasad (1909) 36 Cal 768 (778, 779). 8. Kunwarlal v. Surajmal, AIR (1963) MP 58. 9. The classical English authority is Ryder v. Wombwel, (1868) LR 4 Ex. 32. 0. Imperial Loan Co. v. Stone, (1892) 1 QB 599, CA, confiming previous authorities. 11. Machairan v. Usman Beari. (1907) 17 Mad LU 78; Amina Bibi v. Sayidi Yusuf, 44 AIl 748 (Lease

void). 12.

Sheoratan v. Kali Charan, 79 IC 955 (Oudh).

64

S. 11

Chapter I1-0f Contracts, Voidable Contracts and VoidAgreements

and she may bind him by her contract, in certain circumstances, even without his authority, the law empowering her on the ground of necessity to pledge herhusband's credit. Otherwise a married woman cannot bind her husband without his authority, but she is then liable on the contract to the extent of her stridhanam (separate property). In the same way a married Mahomedan woman is not by reason of her marriage disqualified from entering into a contract.

Turning next to persons of other denominations, there are two Indian enactments that create the separate property of married women, and impliedly confer upon them, as an incident of such property, the capacity to contract in respect thereof. The first is the Indian Succession Act, 1925, S. 20 and the other, the Married Women's Property Act, 1874. Neither of them applies to any marriage one or both of the parties to which professed, at the time of the marriage, the Hindu, Mahomedan, Buddhist, Sikh, or Jain religion. Section 20 of the Succession Act provides that no person shall by marriage acquire any interest in the property of the person whom he or she marries, nor become incapable of doing any act in respect of his or her own property which he or she could have done if unmarried. The effect of this was that all married women to whose marriages the Act applied became absolute owners of all property vested in, or acquired by, them, and their husbands did not by their marriage acquire any interest in such property.o The Married Women's Property Act enacted that the wages and earnings of any married woman acquired or gained by her in any employment, occupation, or trade camied on by her, and all money or other property acquired by her through the exercise of any literary, artistic, or scientific skill, should be deemed to be her separate property (S. 4). The Act also provides that a married woman may sue and may be sued in her own name in respect of her separate property (S. 7), and that a person entering into a contract with her with reference to such property may sue her, and to the extent of her separate property recover against her, as if she were unmarried (S. 8). By the usage and etiqu of his profession a barrister is debarred from suing for his fees. But a barrister enrolled as an advocate of the Allahabad High Court who can both plead and act and combines the function of a barrister and solicitor can make a valid contract for his fees which he can enforce by suit.

A contract entered into by a statutory corporation is required to be within the objects

of the company; if it is outside its objects, it would be ulitra vires and void.8 A company incorporated to make clothes could not manufacture veneers. Such ultra vires contracts being void cannot be enforced by, any more than against, the company.0 These principles are looked upon with disfavour, see European Community Act, 1972, and Corporate Bodies Contract Act, 1960.

Contracts with Government are required to comply with certain formalities, if such formalities are not complied with, such contracts would be void21 The same principle applies to contracts with municipalities.22 ot

13.

Eg pressing necessity: Pusi v. Mahadeo Prasad (1880) 3 All 122, at p. 124.

14. 15.

Per CUR in Nathubhai v. Javher, (1876) 1 Bom 121. See Married Women's Property Act, 1874, S. 2 and Indian Succession Act, 1925, S. 20.

16. See the Preamble to Married Women's Property Act, 1874.

17. Nihal Chand v. Dilawar, (1933) 55 All 570: 143 1C 727: AIR 1933 All 417; Gauba v. J. Vasica, $7 Bom LR 941

AIR 1956 Bom 34.

18. Ashbury Rly. Carriage & Iron Co. v. Riche, (1875) LR 5 HL 653. 19. In re. Jon Beauforte Lid., (1953) Ch 131.

20.

Bell Houses Lid v. City Wall Properties Lid, (1965) 3 WLR 1065.

21. Art. 299 (1)Constitution of India; Bhikhraj v. Union of India, (1962) 2 SCR 880: AIR 1962SC 113; Karamshi v. State of Bombay, AIR 1964 SC 1714:(1964) 6 SCR 984.

22. Ramaswamy v. Municipal Council of Tanjore, (1906) 29 Mad 360.

S. 12

What is a sound mind for the purposes of contracting The disability of alien enemies to sue in our Courts

65

without licence is a matter of

general public policy not coming under this head.

S. 12. A person is said to be of sound mind for

What is a sound mind

for the purposes of

the

purpose

of

making

a

contract

if, at the

time

contracting.

when he makes it, he is capable of understanding it and of forming a rational judgment as to its effect upon his interests.23 A person who is usually of unsound mind, but occasionally of sound mind, may make a contract when he is of sound mind.4 A person who is usually of sound mind, but occasionally of unsound mind, may not make a contract when he is of unsound mind. lhustrations (a)

A patient in a lunatic asylum, who is, at intervals, of sound mind, may contract during those intervals.

(6)

A sane man, who is delirious from fever, or who is so drunk that he cannot understand the terms of a contract, or form a rational judgment as to its effect on his interests, cannot contract whilst such delirium or drunkenness lasts.

Test of Soundness of mind. A person of unsound mind need not necessarily be a lunatic or suffer from total deprivation of reason. It is sufficient if the person suffers from an inability, "from defect of perception, memory, and judgment, to do the act in question or to understand its nature and consequences." Mere weakness of mind is not unsoundness of mind.o Nor does mere loss of memory make a person unfit for manage ment of his own affairs in his lifetime. The understanding of the party to a contract required to uphold the validity of transaction would depend on the nature of the transac tion.4 There cannot be a fixed standard of sanity for all transactions. A person may be normal by appearance, but if he is incapable of forming a judgment as to what is in his own interest, the law would protect him.30 The soundness of mind of a person may be established by medical evidence. It may also be proved by showing uncharacteristic conduct which cannot be explained on any reasonable basis. In Sona Bala Bora v. Jyotirindra Bhatacharjee,3I B suffered from fits of insanity during which he threatened to sell his properties, dispossess his family and initiate criminal proceedings against them. B secretly sold the residential house to a third party, instituted criminal proceedings against his family and tried to forcibly dispossess them. In the absence of any evidence of ill feeling and discord between B and his family, this irrational conduct was held indicative of an unsound mind. Even though there was no conclusive medical evidence, it was held B was incompetent to sell the house.

23. As to evidence of unsound mind see Ram Sunder Saha v. Raj Kumar Sen, (1928) 55 Cal 285. 24. See illustration in Jai Narain v. Mahabir Prasad, (1926) 2 Luck 226.

25. Sona Bala Bora v. Jyotirindra Bhatacharjee, (2005) 4 SCC 501, 509 : (2005) 4 JT 418 relying on BLACK'S LAW DICTIONARY (6th edn, 1990) at p. 795. See also Kanhaiyalal v. Harsing Larman Wanjari, AIR 1944 Nag 232; Indar Singh v. Parmeshwardhari Singh, AIR 1957 Pat 491. 26. Kanhaiyalal v. Harsing Laxman Wanjari, AIR 1944 Nag 232. 27.

Rajkumar Sen Chowdhury v. Ram Sundar Shaha, AIR 1932 PC 69.

28. Manches v. TrimBom 115 LJKB 305; Gibbons v. Wright, (1954) 91 CLR 423; Re Roberts, [1978]2

29. 30. 31.

All ER 225 (capacity to marry); Re Beaney, [1978] 2 All ER 595; Bennett v. Benne, [1969) 1 All ER 539. Gibbons v. Wright, (1954) 91 CLR 423

ndar Singh v. Parmeshwardhari Singh, AIR 1957 Pat 491 Sona Bala Bora v. Jyotirindra Bhatacharjee, (2005) 4 SCC 501, 509 (2005) 4 JT 418.

66

Chapter II-0f Contracts, VoidableContracts and VoidAgreements

S. 13

The recently enacted Mental Capacity Act, 2005 in the UK has established a new

framework in English law within which the Court or other designated persons can take decisions on behalf of a person who lacks capacity, and for the supervision of such a person. Under this Act, the lack of capacity is no longer defined as a general disability but as the

inability

to make a decision in relation to a particular

matter, at a particular

time, because of permanent or temporary impairment of, or disturbance in the functioning of, the mind or brain.33

Burden of

proof.-The presence or absence of the capacity mentioned in this sec-

tion at the time of making the contract is in all cases a question of fact. Where a person is

usually of sound mind the burden of proving that he was of unsound mind at the time of execution of a document lies on him who challenges the validity of thecontract.3 Where a person is usually of unsound mind, the burden of proving that at the time he was of sound mind lies on the person who affirms it. In cases, however, of drunkenness or delirium from fever or other causes, the onus lies on the party who sets up that disability to prove that it existed at the time of the contract.

Subsequent to the Mental Capacity Act, 2005 in the UK, a person must be assumed to have capacity unless it is established that he or she lacks capacity.0 Contract in lucid intervalThe second paragraph of the section provides that a person who is usually of unsound mind, but occasionally of sound mind, may make a contract when he is of sound mind. Thus, even during lucid intervals (see illustration (a)].

"Consent" defined.

a patient in a lunatic asylum

may contract

S. 13. Two or more persons are said to consent when they agree upon the same thing in the same sense.

Apparent and real

consent.-If the section is to cover all kinds of contracts, the

word "thing" must obviously be taken

as widely as possible. We must understand by "*the

same thing" the whole contents of the agreement, whether it consists, wholly. or in part, of delivery of material objects, or payment, or other executed acts or promises.7 Generally parties who have concurred in purporting to express a common intention by certain words cannot be heard to deny that what they did intend was the reasonable effect of those words; and that effect must be determined, if necessary, by the Court according to the settled rules of interpretation.

Whoever becomes a party to a written

contract "agrees to be bound, in case of dispute, by the interpretation which a Court of law may put upon the language of the instrument," whatever meaning he may attach to it in his own mind.55 Exceptions to this rule are admitted only for special and carefully limited reasons. Although, there may be apparent consent to the terms between the parties, real consent may not be found, and hence the agreement negatived in the following situations-

(i) (ii)

32. 33. 34. 35. 36. 37. 38.

ambiguity; and fundamental error, as to-the nature of transaction, the person dealt with, or the subject-matter of the agreement.

ANSON'S LAW OF CONTRACT (29th edn., 2010) at p. 246. S. 2(1), Mental Capacity Act, 2005. Tilok Chand v. Mahandu, AlR 1933 Lah 458.

Sona Bala Bora v. Jyotirindra Bhatacharje, (2005) 4 SCC 501, 511: (2005) 4 JT 418. S. 1(2), Mental Capacity Act, 2005. Central National Bank v. United Industrial Bank, (1954) SCR 391 AIR 1954 SC 181. Per LORD WATSON, Stewart v. Kennedy, (1890) 15 App Ca 108, 123; Sunitabala Debi v. Manindra Chandra, (1930) 52 Cal LJ 435 PC.

S. 13

"Consent" defined

67

These are considered in turn below. Ambiguity.-An apparent agreement can be avoided by showing that some term (such as a name applying equally to two different ships) is ambiguous, and there has been a misunderstanding without fault on either side. Such cases, however, are extremely rare. It usually turns out that there is no real ambiguity, for either (1) the terms have an ascertained sense by which the parties are bound whatever they may profess to have thought, or (2) the proposal was never accepted according to its terms, as when a broker employed to sell goods delivered to the intending purchaser and the intending seller sold notes describing goods of different qualities. "The contract," said the Court, "must be on the one side to sell, and on the other side to accept, one and the same thing." No such contract being shown on the face of the transaction, there was no need to say, and the Court did not say, anything about mistake. Similarly, if the addressee of a cipher or code message conveying a proposal misreads the proposal not unreasonably, and accepts it according to his own understanding, he cannot be held bound to the contract which the proposer intended. If the terms are really ambiguous, there is nothing in such a case which either party can enforce.40

Fundamental error.-In certain classes of cases there may be all the usual external evidence of consent, but the apparent consent may have been given under a mistake, which the party is not precluded from showing, and which is so complete as to prevent the formation of any real agreement "upon the same thing. Such fundamental error may relate to the nature of the transaction, to the person dealt with, or to the subject-matter of the agreement.

As to the nature of the transaction (non est factum). -A man who has put his name to an instrument of one kind understanding it to be an instrument of a wholly different kind may be entitled, not only to set it aside against the other party on the ground of any fraud or

misrepresentation

which caused his error, but to treat it as an absolute

nullity, under which no right can be acquired against him by anyone. This is known as the doctrine of non est factum. The transaction is invalid not on the ground of any fraud or misrepresentation which caused the error, but because the "mind of the signor did not never did sign the accompany the signature" and therefore, in contemplation of law, he document that he intended to sign.42 Authorities draw a distinction between a fundamental error as to the character of the document and an error as to its contents. It is only

doctrine of non est in the case of the former that the agreement is void ab initio under the Jactum, in the case of the latter, it is only voidable." The distinction between the two may be difficult to draw in practice because the character of a document may be said, in one sense, to depend on its contents. A preferable test is to look to the disparity between the document actually signed and the document as it was believed to be (rather than the nature of the mistake), and if there is a "fundamental" or "radical" difference between what a person signed and what he thought he was signing, the agreement would be held

void ab initio.*

39.

Thornton v. Kempster, (1814) 5 Taunt, 785.

40. Falck v. Williams, (1900) AC 176. 41.

Bismillah v. Janeshwar

Prasad,

(1990) 1 SCC 207, 211 : AIR

1990 SC 540;

Dularia

Devi v.

Janarsan Singh, (1990) Supp SCC 216, 220: AIR 1990 SC 1173; Prem Singh v. Birbal, (2006) 5 SCC 353, 359: AIR 2006 SC 3608. 42. Bismillah v. Janeshwar Prasad, (1990) 1 SCC 207, 211: AIR 1990 SC 540. 43. Ningawwa v. Byrappa, AIR 1968 SC 956: (1968) 2 SCR 797; Bismillah v. Janeshwar Prasad, (1990) 1 SCC 207, 211 : AIR 1990 SC 540; Dularia Devi v. Janarsan Singh, (1990) Supp SCC

216, 220: AIR 1990 SC1173; Prem Singh v. Birbal, (2006) 5 SCC 353, 359: AIR 2006 SC 3608. 4. Saunders v. Anglia Building Society, (1971) AC 1004:(1970) 3 All ER 961.

68

Chapter I1-0f Contracts, Voidable Contracts and VoidAgreemets

S. 13

The plea of non est factum will not be available lightly.45 It would not be available to a person who has signed

without

taking the trouble

to find out at least the general effect

of the document, nor would it be available to a person whose mistake was really a mistake as to the legal effect of the document.40 In one case the defendant had purported to endorse a bill of exchange which, he was told, was signing as a guarantee. The plaintiff was a subsequent holder for value, and therefore the fact that the defendant's signature was obtained by fraud would not have protected him in this action. But the Court held that his signature, not being intended as an endorsement of a bill of exchange, or as a signature to any negotiable instrument at all, was wholly inoperative, as much so as if the signature had been written on a blank piece of paper first, and a bill or note written on the other side afterwards."7

If an executing party is told that the document will not be enforced, the locument does not represent the real agreement and hence the parties did not agree to the same thing. Where a person is illiterate or blind or ignorant of the language of the document, such a document would not bind the signatory by reason of his signature thereto unless he was negligent. Where such a document was read over but it is different from the one pretended to be read over, the signature

would be of no force as there is an error as to the

nature of thetransaction. Consent and

estoppel.-The

ing that, in normal which he has in fact person entrusts to signed and scaled

Indian Courts have followed English authority in hold-

circumstances, a man is not allowed to deny that he consented to that done, or enabled to be done with his apparent authority. Thus when a his own man of business a blank paper duly stamped as a bond and by himself in order that the instrument may be drawn up and money

raised upon it for his benefit, if the instrument is afterwards duly drawn up and money obtained upon it from persons who have no reason to doubt the good faith of the transaction, it is presumed that the bond was drawn in accordance with the obligor's wishes

and instructions, Error as to the person of the other party.-There can be no real formation of an agreement by proposal and acceptance unless a proposal is accepted by the person, or one of a class or number of persons, to whom it is made. Similarly, the acceptance must be directed to the proposer, or at least the acceptor must have so acted as to entitle the pro-

poser to treat the acceptance as meant for him. The acceptance of an offer not directed to the acceptor may

occur by

accident, as where a man's

successor in business receives an

order addressed to his predecessor by a customer who does not know of the change, and executes it without explaining the facts. Here no contract is formed. But the buyer

45.

Naba Kishore Lal Singh Deo v. Panchanan Mahto, AIR 1930 Pat 601 (party pleading that he did not read the document); Rameswar Nathany v. Nurul Haq Choudhury, AlIR 1949 FC 78 (document not in a language known to executant, does not necessarily lead to conclusion that he did not understand it); Grasim Industries Ltd. v. Agarwal Steel, (2010) 1 SCC 83, 84: (2009) 13 JT 413

(presumption signatures are affixed 46. 47.

48. 49. S0.

51. S2.

to a document only after properly understandingits

consequences); Usha Kumari Ranawat v. LIC, (2011) 13 SCC 196 (presumption that person signing does so with full knowledge of terms and conditions). Saunders v. Anglia Building Society, 1971 AC 1004 :(1970)3 All ER 961. Fosterv. Mackinnon, (1869) LR 4 CP 704; Oriental Bank Corporation v. John Fleming. 3 Bom 242 (267); Patal Bala Debi v. Santimoy, AIR 1956 Cal 575. Tyagaraja Mudaliar v. Vedathanni, 63 IA 126: AIR 1936 PC 70. Dagdu v. Bhana, 28 Bom 420; Chimanram v. Diwanchand, 56 Bom 181 (189-90); Banku Behari v. Krishto Gobindo, 30 Cal 433 (438). Dagdu v. Bhana, 28 Bom 420; Chimanram v. Diwanchand, 56 Bom 181 (189-90); Banku Behari v. Krishto Gobindo, 30 Cal 433 (438). Wahidunnessa v. Surgadass, (1879) 5 Cal 39. Boulton v. Jones, (1857) 2 H&N 564.

S. 13

"Consent" defined

69

would be bound, as on a new contract if after notice he treated the sale as subsisting.33

Acceptance intended for a person other than the person actually making the offer might possibly happen by accident, but in the reported cases it has been the result of fraudulent personation. The proposer has obtained credit, in effect, by pretending to be some person of credit and substance known to the acceptor, or the agent of such a person. In Cundy v. Lindsay, one Blenkarn closely imitated the address of a known respectable firm of Blenkiron & Co., and wrote his signature so as to look like theirs. A dealer to whom he wrote ordering goods thought, as Blenkarn intended, that the order came from Blenkiron & Co., and sent the goods to the address given. However the goods were obtained by Blenkan as he had the business in the same street as that of Blenkiron & Co., but only a different door number. Blenkarn sold the goods to the defendant who took the goods in good faith. The Plaintiff Respondent sued the defendant-appellant for conversion. The question arose whether a contract between plaintiff (Lindsay & Co) and Blenkarn was void as being vitiated by mistake as contemplated by plaintiff, in that case the ownership in the goods would not pass to Blenkarn and much less to defendant, (Cundy & Co.) But if the contract be voidable, as being vitiated by fraud, it will be good until it is set aside

and the ownership would pass from plaintiff to Blenkarn and from him to defendant. It was held by the Court of Appeal and the House of Lords that, as the senders thought they were dealing with Blenkiron & Co., and knew nothing of Blenkarn, and had no intention of dealing with him, there was no contract, and Blenkarn acquired no property in the goods.

Similarly,

in a Punjab case, where A entered into a contract

with B, a brother

of C,

on the representation of B that he was C himself, the Chief Court of the Punjab held that the case came within the section, and that there was no contract between A and B. But if the mistake is not as to the identity of the other party but as to his attributes e.g. solvency or social position, the mistake is insufficient as a defence.36 In Phillips v. Brooks, Ltd., a man called North entered the plaintiff's shop and selected pearls and a

ring. He then produced a cheque-book, claiming himself to be Sir George Bullough, a wealthy man known to the plaintifi, and gave Sir George Bullough's address. The plaintiff had only heard of Bullough and upon consulting a directory found that he lived at the address given. The plaintiff then said: "Would you like to take the article with you?" North replied: "You had better have the cheque cleared first, but I should like to take the ring, as it is my wife's birthday tomorrow." The plaintiff let him do so. North pledged the ring to defendant who had no notice of the fraud. The plaintiff sued and claimed that there was no contract between him and North and so latter had no title to the ring which he could pass to the defendant. But the Court held that the plaintiff had contracted to sell and deliver the ring to the person who came into his shop by means of false pretence that he was Sir George Bullough. The Plaintiff's intention was to sell to the person present and identified by sight and hearing. Thus the plaintiff failed.

As to the subject-matter of the agreement.-It is quite possible for the parties to a contract to be under a common mistake of this kind. If the mistake is not common, it may happen, in very exceptional cases, that by reason of an ambiguous name, or the like, each party is mistaken as to the other's

intention, and neither

is estopped from showing

53. See Mitchell v. Lapage. (1816) Holt, NP 253. S4. Cundy v. Lindsay, (1878) 3 App Ca 459.

55. Jaggannath v. Secretary of State, (1886) Punj Rec no. 21. 56.

57.

Phillips v. Brooks, Lid., (1919) 2 KB 243; See also Lewis v. Averay, (1972) 1 QB 198. Tarsem Singh v. Sukhminder Singh, (1998) 3 SCC 471, 477: AIR 1998 SC 1400 (agreement for

Sale of land where one party thought of area in bighas, and the other in kanals, held void under S. 20). The court held that the parties were not ad idem; therefore it is submitted that this case should be seen as an instance of negativing

of consent by a 'mutual

mistake' under S. 13, rather

than an instance of nullification of consent through 'common mistake of tact under S. 20. For a difference between the two, see notes under S. 20 "Common and mutual mistake".

70

Chapter II0f Contracts, VoidableContractsamd VoidAgreements

S. 14

his own intention.38 Otherwise a contract (assuming the other conditions for the formation of a contract to be satisfied) can be affected by such a mistake, not common to both

parties, only where it is induced by fraud or misrepresentation. We shall find (see below on S. 18) that wilful acquiescence in the other party's mistake is equivalent to misrepre sentation under certain circumstances. If the mistake is common, it can seldom, if ever, be said that there was no consent. Thus if both parties agree to sell and to buy a horse not knowing that the horse is dead, the agreement fails not for want of consent but because the nature of the agreement implied that it referred to a living horse. Similarly, where parties entered into a contract on the understanding that a particular procession will pass through a particular road while the route of the said procession was already cancelled,59 or on the basis that the land in question was capable of producing a particular quantity of product per month while the and was not capable of so producing.o0 Free consent" defin-

S. 14. Consent is said to be free when it is not

caused by

ed.

(1)

coercion, as defined in seetion 15, or

(2) undue influence, as defined in section 16, or (3) (4)

fraud, as defined in section 17, or misrepresentation, as defined in section 18, or

(5) mistake, subject to the provisions of sections 20, 21 and 22. consent is said to be so caused when it would not have been given but for

the existence of such coercion, undue influence, fraud, misrepresentation

or mistake. Free consent. Not only consent but free consent is declared by S. 10 to be necessary to the complete validity of a contract. Where there is no consent or no real and certain object of consent there can be no contract at all. Where there is consent, but not

free consent, there is generally a contract voidable at the option of the party whose consent was not free. This section declares in general the causes which may exclude freedom of consent, leaving them to be more fully explained by the later sections referred to in the text. A father consenting to a settlement in respect of a bank's claim against his son who forged his father's signatures on the pronotes and thereby defrauded the bank although no threat of prosecution was held out, was held to be not a free agent to consent to the

settlement° "Coercion" defined.

S. 15. "Coercion" is the committing, or threatening to commit, any act forbidden by the Indian

Penal Code (45 of 1860), or the unlawful detaining, or threatening to detain, any property, to the prejudice of any person whatever, with the intention of causing any person to enter into an agreement. 58.

Falck v. Williams, (1900) AC 176; Jamuna Das v. Ram Kumar, (1937) 169 IC 396: AIR 1937 Pat 358.

59. 60. 61.

Grifith v. Brymer, (1903) 19 TLR 434. Sheikh Bros. Lid. v. Ochsner, (1957) AC 136. Kessowji Tulsidas v. Harjivan Mulji, (1887) ILR 11 Bom 56.

"Coercion" definednm

S. 15

71

Explanation-It is immaterial whether the Indian Penal Code (45

of 1860) is or is not in

force in the place

where

the

coercion

is

employed. Illustrations A, on board an English ship on the high seas, causes B to enter into an agreement by an act amounting to criminal intimidation under the Indian Penal Code (45 of 1860). A afterwards sues B for breach of contract at Calcutta. A has employed coercion, although his act is not an offence by the law of England, and although section 506 of the Indian Penal Code (45 of 1860) was not in force at the time when or place where the act was done.

Extent of "coercion" under the Act. -The words of this section are far wider than anything which then existed in the English authorities; it must be assumed that this was intended. As the definition stands the coercion invalidating a contract need not proceed from a party to the contract0 or be immediately directed against a person whom it is intended to cause to enter into the contract or any member of his household, or affect his property, or be specifically to his prejudice. This was not so under the earlier English law on duress". The concept of "duress" has however been rapidly evolving and these differences no longer seem to hold. In fact, duress under English law is now perhaps broader than coercion as defined under the Act, and has been discussed later3

Act forbidden by the Penal Code.-The words "act forbidden by the Indian Penal Code" make it necessary for the Court to, decide in a civil action, if that branch of the section is relied on, whether the alleged act of coercion is such as to amount to an offence. The mere fact that an agreement to refer matters in dispute to arbitration was entered into during the pendency, and in fear, of criminal proceedings is not sufficient to avoid the agreement on the ground of "coercion," though the agreement may be void as opposed to public policy within the meaning of S. 23.04 It must further be shown that the complainant or some otherperson on his behalf took advantage of the state of mind of the accused to apply pressure upon him to procure his consent.0 To threaten a criminal prosecution is not by itself an act which is forbidden by the Indian Penal Code.

Such an

act could only be forbidden if it amounts to a threat to file a false charge.6 So if a false charge of criminal trespass is brought against a person and he is coerced into agreeing to give half of his house to the complainant the agreement will not be enforced.7 This was also the position in common law.o% The rule in equity was however the opposite and a threat by one party to prosecute the other for a criminal offence could constitute a ground for setting aside the contract.0 It has been suggested that the rule of equity represents the prevailing position of English law.70 In a Madras case the question arose whether if a person held out a threat of committing suicide to his wife and son if they refused to execute a release in his favour, and the wife and son in consequence of that threat executed the release, the release could be

62.

Chuni Lal v. Maula Bakhsh, 161 IC 347

63.

See later notes under S. 15 "Duress".

AIR 1936 Lah 6.

64. Gobardhan Das v. Jai Kishen Das, (1900) 22 All 224; Masjidi v. Mussammat Ayisha, (1882) Punj Rec. no. 135.

65. 22 All p. 227, citing Jones v. Merionethshire Building Society. (1893) 1 Ch 173. 66. Askari Mirza v. Bibi Jai Kishori, (1912) 16 IC 334. 67. Sanaullah v. Kalimullah, (1932) AL 446. 68.

Williams v. Bayley, (1886) LR 1 HL 200.

69. Mutual Finance Co. Ltd, v. John Wetton & Sons Lid, [1937]2 KB 389.

70. ANSON'SLAWOC F ONTRACT (29thedn,2010)at p. 352.ut b) Tte t

r

12

S. 15

Chapter I1-0f Contracts. Voidable Contracts and VoidAgreements

said to have been obtained by coercion within the meaning of this section. Wallis, C.J., and Seshagiri Aiyar, J., answered the question in the affirmative, holding in effect that though a threat to commit suicide was not punishable under the Indian Penal Code, it must be deemed to be forbidden, as an attempt to commit suicide was punishable under

the Code (S. 309). Oldfield, J., answered the question in the negative on the ground that the present section should be construed strictly, and that an act that was not punishable under the Penal Code could not be said to be forbidden by that Code. That view seems to be correct. A penal code forbids only what it declares punishable.

A demand by workers under the Industrial Dispute Act backed by a threat of strike being not illegal, the threat of strike would not amount to coercion. Under the language of the section as it stands, a threat to commit an offence under any law other than The

Indian Penal Code 1860, may not amount to coercion. Recognising this, the Law Commission of India had recommended a wider expression to include penal laws other than the Indian Penal Code, 1860.73

Unlawful detaining of property.-A refusal on the part of a mortgagee to convey the equity of redemption except on certain termsis not an unlawful detaining or threatening to detain any property within the meaning of this section.4 However, refusal by the outgoing agent, whose term expired, to hand over the account books to the new incoming agent until, the principal gave him a complete release

would amount to coercion'.

To the prejudice of any person.-The sectiondoes notcontemplatemeresentimental prejudice. Some legal injury must flow in order that a person may be said to have been prejudiced. Where the threat by a husband to commit suicide caused the wife to release the property, it was held that the wife was prejudiced. The possibility of the

husband leaving the wife and the child uncared for was sufficient in the eye of law to furnish a ground of prejudice.'o Causing any person to enter into an

agreement.-In

Kanhaya Lal v. National

Bank of India the Privy Council has laid down that the word 'coercion' in S. 72 is not controlled by the definition given in S. 15 and it is used there in a general sense and it is not necessary that coercion should have been used for bringing about a contract between the parties.

Duress.-Under the English law, actual or threatened violence to the victim's person has long been recognised to amount to duress,s but duress may consist of actual or threatened imprisonment, and now also includes wrongful threats to

71

Amiraju v. Seshama, (1917) 41 Mad 33.

72. Workmen of Appin Tea Estate v. Presiding Oficer, Industrial Oficer, Assam, AIR 1966 Gau 115 (1967) II LLJ 371. 73.

74. 75. 76.

77. 78.

Law Commission of India, 13th Report (1958) at para 32, recommending amending the section by substituting the words "act is punishable by any law for the time being in force" in place of "any act forbidden by the Indian Penal Code". Bengal Stone Co. Ltd. v. Joseph Hyam, (1918) 27 Cal LJ 78, 80-82. Muthiah Chettiar v. Karupan Chetti, (1927) 50 Mad 786. Ammiraju v. Seshamma, AIR 1918 Mad 414. Kanhaya Lal v. National Bank of India, 40 IA 56: 40 Cal 598 (611): 15 Bom LR 472. Kesarmal v. Valliappa Chettiar, [1954] 1 WLR 380 (PC); Barton v. Armstrong, [1975] 2 All ER 465 (PC).

79. Cumming v. Ince. [1847] 11 QB 112 (woman forcibly taken to lunatic asylum); but see Bifin v. Bignell, (1862) 7 H & N 877 (distinction between a threat and a mere warning).

"Coercion" defined

S. 15

73

property or threats to seize goods, and wrongful or illegitimate threats to economic interests,3 where the victim has no practical alternative but to submit.82 The effect of duress is not to make the acts of the victim non-voluntary, nor does it deprive him of free choice (for there is definitely a choice, though coerced), it just leaves him with a "choice between evils"5 The classic case of duress is, not the lack of will to submit but "the victim's intentional submission arising from the realization that there is no practical choice open to him".84 There has developed tremendous jurisprudence around the concept of duress, especially "economic duress". Devising a test for this concept involves a delicate

balancing act for, in a sense, all contracts are made under pressure each party "threatens" the other that unless his terms are accepted, the other party will not get the reciprocal benefíts under the contract. The test in English law has been to distinguish between legitimate and illegitimate pressures, and only the latter is said to amount to duress.Threats to commit an otherwise lawful act are ordinarily not duress.30 Thus, a threat to breach the contract in order to reach an agreement as to its variation has been generally regarded as a legitimate commercial pressure, especially where this is the result of an unanticipated difficulty or based on a bona fide and reasonable belief that

unless the demand is met, the party would be unable to perform.* If however the threat is "immoral or unconscionable", this might be held to constitute duress. Thus, an unlawful threat by a trade union to continue the "boycott" of a ship: a threat to break an existing contract coupled with unreasonable and overwhelming commercial pressure: refusal to rescue a vessel in distress or those on board save on extortionate terms, have all been held to be cases involving duress.

The doctrine of economic duress has also been accepted by the Bombay High Court to authority

be part of Indian law. However to the extent this decision is seen as an importing the doctrine of duress in Indian law, its correctness is not free

from doubt.93

80. Lloyd's Bank v. Bundy. [1975] QB 326; North Ocean Shipping Co Ltd. v. Hyundai Construction Co 81.

Ltd., [1978] 3 All ER 1170; Pao On v. Lau Yiu, [1979] 3 All ER 65. Universe Tankships of Monrovia v. International Transport Workers Federation, [l1983] 1 AC 366 [1982] 2 All ER 67 (HL).

82.

Pao On v. Lau Yiu, [1979) 3 All ER 65; UniverseTankships of Monrovia v. InternationalTransport

Workers Federation, [1983] I AC 366 [1982) 2 All ER 67 (HL). See also Roger Halson, "Opportunism, Economic Duress and Contractual Modifications", I07 Law Quarterly Review 649 (1991). 83. Lymch v. DPP, Northern Ireland, [1975] AC 653, 690. 84. Universe Tankships of Monrovia v. ITWF. [1983] 1 AC 366, 400: [1982]2 All ER 67 (HL). 85.

CHrTY ON CONTRACTS (29th edn, 2004) at para 7-007.

86. CTN Cash & Carry Ltd v. Gallagher Lid., [1994] 4 All ER 714; Leyland Daf Ltd v. Automotive 87.

Products plc, [1994] 1 BCLR 244. Pao On v. Lau Yiu, [1979] 3 All ER; Occidental Investment Corpn v. Skibs A/S Avanti, [1976] 1

Lloyd's 88.

293.

Gaebel v. Linn, (1882) 11 NW 284; Linz v. Schuck, (1907) 67 A 286.

89. Universe Tankships of Monrovia v. ITWF, [1983] 1 AC 366, 400: [1982)]2 All ER 67 (HL). 90. Atlas Express Lid v. Kafco (Importers and Distributors) Lid., [1989) QB 833. 91. Port Caledonia, [1903] P. 184; The Rialto, [1891) P. 175. 92. Dai-ichi Karkaria Pu. Lud. v. ONGC, AIR 1992 Bom 309 (buyer threatened non-performance to make seller agree to renegotiated terms). 93. See PoLLOCK & MULLA, INDIAN CONTRACT AND SPECIFIC RELIEF ACTS (13th edn, 2006) at p. 437.

74

Chapter I1-Of Contracts, Voidable Contracts and VoidAgreements

S. 16

IS. 16. (1) A contract is said to be induced by "undue influence" where the relations subsisting between the parties

"Undue defined.

Infl

are such that one of the parties is in a position to dominate

the

will

of the

other'

and uses that

position to obtain an unfair advantage over the other.

(2) In particular and without foregoing

prejudice to the generality of the

principle, a person is deemed to be in a position

to dominate

the will of another(a) where he holds a real or apparent authority over the other, or where he stands in a fiduciary relation to the other; or (b)

where

he

makes a

contract

with

a

person

whose

mental

capacity is temporarily or permanently affected by reasoa of age, illness, or mental or bodily distress.

(3) Where a person who is in a position to dominate the will of another, enters into a contract with him, and the transaction appears, on the face of it or on the evidence adduced, to be unconscionable,? the burden of proving that such contract was not induced by undue influence shall be upon the person in a position to dominate the will of

the other.

Nothing in this sub-section shall affect the provisions of section 111 of the Indian Evidence Act, 1872 (1 of 1872). Ilhustrations (a) A, having advanced money to his son B, during his minority, upon B's coming of age obtains, by misuse of parental influence, a bond from B for a greater amount than the sum due in respect of the advance. A employs undue influence. (b) A, a man enfeebled by disease or age, is induced, by B's influence over him as his medical attendant, to agree to pay B an unreasonable sum for his professional services. B employes undue

influence. village, contracts a fresh loan on terms (c) A, being in debt to B, the money-lender of his which appear to be unconscionable. It lies on B to prove that the contract was not induced by undue influence. (d) A applies to a banker for a loan at a time when there is stringency in the money market. The banker declines to make the loan except at an unusually high rate of interest. A accepts the loan on these terms. This is a transaction in the ordinary course of business, and the contract is not induced by undue influence]. llustrations (a) and (b) of the present section are elementary law. Illustrations (c) and (d) are evidently intended to explain the application and the limits of part 3.

Substitutedby Act6 of1899, . 2 I.

This is an essential condition for the application of the section; no further question arises until it is satisfied. Raghunath Prasad v. Sarju Prasad, (1923) LR S1 1A 101:3 Pat 279; Sanwal Das v. Kure Mal, (1927) 9 Lah 470.

This condition is essential for throwing the burden of proof on the person who was in dominating position. Otherwise the actual use of that position must be proved as a tact: Poosathurat v. Kannappa Chettiar, (1919) LR 47 IA I :43 Mad 546; Mahmudun-Nissa v. Barketullal, (1926) 48

All 667.

"Undue Infuence

S. 16

defined

75

The doctrine of undue influence in England and India.The equitable doctrine of undue influence has grown out of and been developed by the necessity of grappling with insidious forms of spiritual tyranny and with the infinite varieties of fraud." It applies alike to acts of pure bounty by way of gift and to transactions in the forms of contract which are clearly more advantageous to one party than to the other.

The English authorities are numerous, and many of them are complicated by ques tions on the one hand of actual fraud or on the other hand of breach of some special duty, such as that of an agent, which is independent of the state of mind of the parties. It will be sufficient for the present purpose to refer to a few of the leading authorities on the var ious points dealt with by the text of the Act.

The first paragraph of the section lays down the principle in general terms; the second and third define the presumptions by which the Court is enabled to apply the prinCiple. It is obvious that the same power which can "dominate the willl of a weaker party is often also in a position to suppress the evidence which would be required to prove moreconstraint in a specific instance. Modification of the ordinary rules of evidence is accordingly necessary to prevent a failure of justice in such cases. Where the special presumptions do not apply, proof of undue intluence or the particular occasion remains admissible, though strong evidence is required to show that, in the absence of any of the relations which are generally accompanied by more or less control on one side and submission on the other, the consent of a contracting party was not free. The essential ingredients under this section are as under: (1) One of the contracting parties dominates the will and mind of another; or One of the contracting parties hay a real or apparent authority over the other,

or One of the contracting parties stands in fiduciary position to the other, e.g. minor and guardian, trustee and beneficiary; husband and wife; or One of the contracting parties is strong enough and upon whom the other has to depend because of some infirmity mental or physical. (2) The dominating party has taken an unfair advantage over the weaker party or the transaction is unconscionable.

Sub-s. 1: Undue influence generally.-The first paragraph gives the elements of undue influence: a dominant position and the use of it to obtain an unfair advantage. The words "unfair advantage" must be taken with the context. They do not limit the jurisdiction to cases where the transaction

would be obviously

unfair as between persons

dealing on an equal footing. "The principle applies to every case where influence is acquired and abused, where confidence in reposed and betrayed,"" or, as Sir Samuel Romilly expressed it in his celebrated argument in Huguenin v. Baseley, which has been

made authoritative by repeated judicial approval,3 "to all the variety of relations in which dominion may be exercised by one person over another." *As no Court has ever attempted to define fraud, so no Court has ever attempted to define undue influence, which

includes one of its many varieties." 3.

LINDLEY, L.J., in Allcard v. Skinner, (1887) 36 Ch Div. 145, 183.

4. LORDKINGSDOWN in Smith v. Kay, (1859) 7 HLC 750, at p. 779. This was a case of general control obtained by an older man over a younger one during his minority without any spiritual influence or other defined fiduciary relation. S.

Huguenin v. Baseley, (1807) 14 Ves. 285; per WRIGHT, J. (1893) 1 Ch 752.

6. LINDLEY, L.J., in Allcard v. Skinner, (1877) 36 Ch Div. at p. 183.

76

Chapter II-0f Contracts, VoidableContracts and VoidAgreements

S. 16

Some form of pressure which the law would regard as improper would be undue influence. An unconscientious use of pressure exercised under certain circumstances and conditions whereby the defendant was victimised by the plaintifis, unfair and improper conduct,' the nature of benefit gained by the plaintiff, or the age or cap ity or healthand the surrounding cireumstances of the defendant are to be taken into account.3 The doctrine of undue influence does not protect persons who deliberately and voluntarily agree to the terms out of folly, imprudence or lack of foresight. Contracts containing unconscionable, unfair and unreasonable terms "are rarely induced by undue influence even if at times they arc between parties, one of whom holds is a real or apparent authority over the other." The court felt that "such contracts are entered into by the weaker party under pressure of circumstances, generally economic,

which results in inequality if bargaining power. Such contracts will not fall withi... undue influence." Such contracts incorporating a set of rules entered into by a party having superior bargaining power with a large number of persons who have far less bargaining power, are injurious to public interest and be adjudged void (asopPposedto public policy) and thus would avoid multiplicity of litigation if such contracts were declared as voidable (induced by undue influence).!

Sub-s.2:

Different forms of influence. -The second paragraph of the present

section makes a division of the subject-matter on a different

principle

according to the

origin of the relation ofdependence, continuing or transitory which makes undue influence possible. Such a relation may arise (a) from a special authority or confidence committed to the donee, or (b) from the feebleness in body or mind of the donor. Practically the most important thing to bear in mind is that persons in authority, or holding confidential employments such as that of a spiritual, medical or legal adviser, are called on to act with good faith and more than good faith in the matter of accepting any benefit (beyond ordinary professional remuneration for professional work done) from those who

are under their authority or guidance. Relationships of guardian and ward, father and son/daughter, trustee and cestui que trust, patient and medical adviser and solicitor and client are the recognised relationship for the purposes of this section. Relationships of husband and wifel3 and paramour and mistress 4 also fall in the same category. In fact, their honourable and prudent course is to insist on the other party taking independent advice. Following these principles, the High Court of Allahabad set aside a gift of the whole of his property by a Hindu well advanced in years to his guru, or spiritual adviser, the only reason for the gift as disclosed by the deed being the donor's desire to secure

7. Ganesh Narayan v. Vishnu, (1907) 9 Bom LR 1164: 32 Bom 37. 8. Ganesh Narayan v. Vishnu, (1907) 9 Bom LR 1164:32 Bom 37.

9. GaneshNarayanv.Vishnu,(1907)9BomLR 1164:32Bom 37.e 10.Central

Inland Water Transport Corp. Lid. v. Brojo Nath, AlR 1986 SC 1571 at 1611, para 92

(1986) 3 SCC 156.

See Central Inland Water Tramsport Corp. Ltd. v. Brojo Nath, AlIR 1986 SC 1571 at 1611, para 92: (1986) 3 SCC 156. 12. Ganesh Narayan v. Vishnu, (1907) 9 Bom LR 1164: 32 Bom 37; Dent v. Bennet, 41 ER 105:4

11

My&

Cr. 269(surgeon andpatient); Sandersonsand Morgan v. Mohanlal, AIR 1955 Cal 310

solicitor and client), Joseph John Peter Sandy v. Veronica Thomas Rajkumar, (2013) 3 SCC 801 13. 14. 15.

(unmarried daughter, and, her brother and father). Tungabai v. Yeshwant, (1945) 47 Bom LR 242: (1945) PC 8.

Shivgangawa v. Basangowda, (1938) 40 Bom LR 132: AIR 1938 Bom 304. In the case of a gift from client to solicitor it is an essential condition to the validity of the gift that the client should have competent independent advice : Liles v. Terry. (1895) 2 QB 679 CA. The

principle of Liles v. Ten was followed in Rajah PapammaRaw v.Sitaramayya, (1895) 5 Mad LJ 234; Babu Nisar Ahmed Khan v. Babu Raja Mohan Manucha, (1941) 73 Cal LJ 121: (1941) All

LJ316:(19414)3BomLR465:AIR1940PC204. i) votuAZ 1

.l 1.

"Undue Influence" defined

S. 16

77

had no benefits to his soul in the next world. Similarly, where a cestui que trust independent advice, it was held that a gift by him to the trustee of certain shares forming part of the trust funds was void, though in the same case a gift of shares which did not

form part of the trust fund was upheld.

The case of Wajid Khan v. Ewaz Ali,

in which

the Judicial Committee set aside a deed of gift executed by an old illiterate Mahomedan lady in favour of her confidential managing agent, comes under this head, Himachal Pradesh High Court set aside a gift deed obtained by the son from their aged, old illiterate

and ailing mother.The same principles apply to agreements for remuneration between an attorney and a client-"

and between a managing clerk in an attorney's

office and a

client and between an eldest sister's husband who was the manager of the estate and two younger sisters.A parent stands in fiduciary relation towards his child, and any transaction between them by which any benefit is procured by t parent to himself or to a third party at the expense of the child will be viewed with jealousy by courts of equity, and the burden will be on the parent or third party claiming the benefit of showing that the child in entering into the transaction had independent advice, that he thoroughly understood the nature of the transaction, and that he was removed from all undue influence when the gift was made.25 Upon these principles the High Court of Madras refused to enforce against an adopted son a deed of trust of joint family property executed by him and his adoptive father whereby annuities were created in favour of certain relations of the father. The su was brought by the relations after the father's death, but although th deed had been executed by the son after he had attained majority, it was dismissed as there was no evidence to show that the son had independent advice, or that he understood

the nature of the transaction, or that his father's influence had ceased when the document was executed.

This

equally

applies to persons in loco Parentis.

Where an elder

brother obtained from his younger brother, who was of feeble mind, a transfer of his half share in family properties for a small maintenance allowance, the Chief Court of Oudh set aside the transaction as being obtained by undue influence.2 But the presumption of undue influence does not ap

to a gift by a mother to her daughter. If such a gift is

sought to be set aside on the ground of undue influence, the burden lies upon those who seek to avoid it to establish domination on the part of the daughter and the subjection of the mother27 Age and capacity are important elements in determining whether consent was free in the absence of any confidential relation, but as against the presumption

arising from the existence of such a relation they count for very little.28 Clause (b) of this paragraph seems to include the principle, established by a series of English decisions, that "where a purchase is made from a poor and ignorant man at a considerable undervalue, the lvice, a court of equity will set aside the transacndorhaving no iep

tion29 Infirmity of body or mind on the vendor's part will make it still more difficult to uphold any such contract.

When the people who are nursing an elderly

invalid get a

16. Mannu Singh v. Umadat Pande, (1890) 12 All 523. 17. Raghunath v. Varjivandas, (1906) 30 Bom 578. 18. Wajid Khan v. Ewaz Ali, (1891) 18 Cal 545: LR 18 IA 144.

19. Kartari v. Kewal Krishan, AlR 1972 HP 117. 20. Shamaldhone Dubt v. Lakshimani Debi, (1908) 36 Cal 493. 21. Harivalabhdas v. Bhai Jivanji, (1902) 26 Bom 689. 22. Palanivelu v. Neelavathi, (1937) 39 Bom LR 720: 167 IC 5 : AIR 1937 PC 50. 23. Mariam Bibi v. Cassim Ebrahim, (1939) 184 IC 171: AIR 1939 Rang 278. 24. 25. 26. 27.

Lakshmi Doss v. Roop Loll, (1907) 30 Mad 169, on app. From 29 Mad 1. Karnal Distillery Co. v. Ladli Prasad, AIR 1958 Punj 190. Tribhuvan v. Someshwar, (31) AO 34. smail Mussajee v. Hafiz Boo, (1906) 33 Cal 733: LR 33 IA 86.

28. Rhodes v. Bate, LR 1 Ch at p. 257; Ladli Parshad Jaiswal v. Karnal Distillery Co. Lid.. AIR 1963 29.

SC 1279: (1964) 1 SCR 270. Per KAY, J., Fry v. Lane, (1888)4 Ch D 312, 322.

78

S. 16

Chapter I1-0f Contracts, Voidable Contracts and VoidAgreements

transfer of practically the whole of his property in their favour without theknowledge and to the complete exclusion of his heir, it is for them to prove the bona fides of the transfer. There is no absolute nule as to the necessity or sufficiency of independent advice. It is not the only possible proof of a donor's competence and understanding on the other hand, advice relied on to support the transaction must not only be independent, but "must be given with knowledge of all relevant circumstances, and must be suchasa competent and honest adviser would give if acting solely in the interests of the donor.2 The fact that the contents of the document were read over and explained to the donor does not mean that he received independent advice.35 Again, the independent advice must have been given betore the transaction, for the question is as to the will of the party at the time of entering into the disputed transaction.4 The acts of undue influence must range under one or the other of the heads "coer

Cion or "fraud",59 Mental distress. "A state of fear by itself does not constitute undueinfluence Assuming a state of fear amounting to mental distress which enfeebles the mind, there must further be action of some kind, the employment of pressure or influence by or on behalf of the other party to the agreement." The mere fact, therefore, that a submission during the pendency and under fear of a criminal prose was executed by the defendant cution instituted against him by the plaintiff will not avoid the transaction on the ground of "undue influence."50 The pendency of the criminal proceedings did not put the plaintiff in a position to dominate the will of the defendant; but even if it did, there was no evidence that the plaintiff used that position to obtain an unfair advantage, "The law says that (1) not only the defendant must have a dominant position, but (2) he must use it."37 Both these elements were present in the case where the High Court of Madras refused to enforce an agreement entered into by a Hindu widow to adopt a boy to her husband, it appearing on evidence that the relatives of the boy obstructed the removal of her husband's corpse from the house unless she consented to the adoption. A deed of set tlement executed in favour of Respondent, one of the grandsons of an executant (Appellant) who was of weak intellect due to old age and had ailments including diabetes, was set aside as induced by undue influence by the Supreme Court in Lakshmi Amma v. T

Narayana,7 in the following circumstances: (1)

ot

Respondent took executant, Appellant, from his residence along with his wife to a Nursing Home. Some unidentified person made an application to joint sub Registrar for registration of the deed at the Nursing Home. In the Court neither slusTithe name of the applicant was disclosed nor an application was producedto know the reasons for registration to be done at the Nursing Home. (2)

Evidence of the wife of executant how

30. 31. 32. 33. 34.

35. 36. 37. 38. 39.

executant

having

an

infirm

was believed by the court which showed mind

was

pressurised

to execute the

Maung Aung Bwinv. Maung Than Gyaung, AIR 1933 Rang 90, Abdur Rauff v. Aymona Bibi, AlIR 1937 Cal 492. Kali Baksh Singh v. Ram Gopal, 41 IA 23: 36 All 81; Sajjid Husain v, Wazir Ali Khan, 39 LA 156. Inche Noriah v. Shaik Allie Bin Omar, (1929) AC 127, 135. See also Ram Sumran Prasad v. Gobind Das, (1926) 5 Pat 646, 661. Bhola Ram v. Peari Devi, AIR 1962 Pat 168.

Jean Mackenzie v .Royal Bank of Canada AIR1934PC210."I Someshwar Dut v. Tribhovan Dutt, AIR 1934 PC 130. Gobardhan Das v. Jai Kishen Das, (1900) 22 All 224. Amjadennessa Bibi v. Rahim Buksh, (1915) 42 Cal 286. See also Bara Estate, Ltd. v. Anup Chand, (1917)2 Pat LJ 663, at p. 670. Ranganayakamma v. Alwar Setti, (1889) 13 Mad 214. Lakshmi Amma v. T. Narayana, AIR 1970 SC 1367: (1970) 3 SCC 159.

"Undue Influence " defined

S. 16

79

document. In fact executant looked scared and Respondent shouted at him and told him to sign it. Executant was not in a fit condition to realize what he was

doing or disposing ot. (3)

Respondent himself got the draft prepared at his own initiative and without the approval or instruction of the executant. Scribe who prepared the deed stated in court that he met executant only on the date of registration and not on the date when he wrote out the deed of settlement. He stated that he prepared deed not on the instruction of an executant but another person.

(4)

Doctors had not given satisfactory explanation as to why they did not examine the mental condition of executant at the time he executed the document. They had done the attestation on the deed of settlement but had never cared to ascer tain whether the signature had been subscribed by executant while he was of a sound disposing mind.

(5) The trial Judge found executant blank and he did not answer, when asked, what his name was. Regarding his age the old man stated in the court that he was 25 t0 30 years of age.

(6) The entire property was settled by deed in favour of Respondent to the excluSion of the issues of executant himself and other grand children. Negligible provision was made for his Wife and there was no provisions for her right to reside. Executant debarred himself from dealing with his property during his life. These circumstances raised a grave suspicion regarding the genuineness of the document. The Court found the deed of settlement an unnatural and unconscionable document.

Proof of undue influence. -In dealing with cases of undue influence there are four important questions which the Court should consider, namely, (1) whether the transaction is a righteous transaction, that is, whether it is a thing which a right-minded person might be expected to do; (2) whether it was improvident, that is to say, whether it shows so much improvidence as to suggest the idea that the donor was not master of himself and not in a state of mind to weigh

what he was doing; (3) whether it was a matter

requiring a

legal adviser; and (4) whether the intention of making the gift originated with the

donor.

All these are questions of fact.

Transaction

with parda-nishin women. -The principles to be applied to transac

tions with parda-nishin women are not merely deductions from the law as to undue influence but have been said by the Privy Council to be founded upon the wider basis of equity and good conscience. The test laid down by the Privy Council is that the disposition must be substantially understood and must really be the mental act, as its execution is the physical act of the person who makes it.45 In the earliest decision of the Privy Council on the subject a Mahomedan lady sued her husband to recover the value of company's paper alleging that the paper was her property and that she had endorsed and handed it over to him for collection of interest. The husband's defence was that he had

40.

Per LORD MACNAGHTEN in Mahomed Buksh v. Hosseini Bibi, (1888) 15 Cal 684, at pp. 698-700: LR 1S IA 81, at pp. 92-93, see vencatrama Ayar v. Arishnammal, (1927) 52 Mad LJ 20. 41. There is really no law in such a case as Narayana Doss Balakrishna v. Buchraj Chorida Sowcar, (1927) 53 Mad LJ 842; though the facts may call for a careful judgment; another such is Prabhu v. Puttu, (1926) 1 Luck 144; See also Bellachi v. Pakeeran, (2009) 12 SCC 95, 99: AIR 2009 SC 3293 (undue influence as finding of fact). 42. Tara Kumari v. Chandra Mauleshwar, (1931) 58 IA 450 :11 Pat 227.

45.

Faridunnissa v. Mukhtar Ahmad, (1925) 52 TA 342 : 47 All 703; Tara Kumari v. Chandra Mauleshwar, (1931) 58 IA AIR 1931 PC 100.

450:

11 Pat 227;

Ramanamma

v.

Viranna,

(1931) 33 Bom

LR 960 :

S. 16

80

Chapter II-0f Contracts, Voidable Contracts and VoidAgreements

purchased the paper from his wife. Their Lordships held, upon a review of the evidence, that although the wife had failed to prove affirmatively the precise case set up by her, nevertheless, as the wife was parda-nishin, the husband was bound to prove something more than mere endorsement and delivery and that he had failed to discharge the onus probandi, which was on him, that the sale had been bona fide and that he had given value for the paper.44 A few years later the Privy Council said with reference to deeds executed by parda-nishin women that it was necessary to see "that the party executing them has

been a free agent, and duly informed of what she was about."45 "If a feature of the transaction affecting in a high degree the expediency of her entering into it is not understood by the lady, the bargain cannot be divided into parts or otherwise reformed by the Courts so as to uphold certain portions of it while rejecting others. Her answer to a suit upon the deed is not that she has an equitable defence to the enforcement ofa certain stipulation but that it is not her deed."46 Although it is desirable that there should be

independent legal advice, independent legal advice is not in itself essential. The sole question is whether there is sufficient the terms contained in the deed.

evidence to show that she understood and agreed to

The law as to the burden of proof is summarized in a decision of the Judicial Com-

mittee:-5 "In the first place, the lady was a parda-nishin lady, and the law throws around her a special cloak of protection. It demands that the burden of proof shall in such a case rest, not with those who attack, but with those who found upon the deed, and the proof must go so far as to show affirmatively and conclusively that the deed was not only executed by, but was explained to, and was really understood by the grantor. In such cases it must also, of course, be established that the deed was not signed under duress, but arose from the free and independent will of the grantor,. The law as just stated is too well settled to be doubted or upset." In another case the Privy Council said: "It is only

when they have established the grantor's (i.e. the parda-nishin lady's) intelligent understanding of the deed that the question of undue influence having affected such intelligent understanding can arise. In this case the Appellant has failed in the first step, and the second step does not arise. Who is a parda-nishin.-The expression "parda-nishin'" connotes complete seclusion. It is not enough to entitle a woman to the special care with which the Courts regard the disposition of a parda-nishin woman that she lives in some degree of seclusion." Thus a woman who goes to Court and gives evidence, who fixes rents with tenants and collects rents, who communicates, when necessary, in matters of business, with men other than members of her own family, could not be regarded as a parda-nishin woman. Her training, habit of mind and surrounding circumstances are the elements to be

considered.

fSub-s.

3: Rule ofevidence The third paragraph of the presentsectiondoesnot

lay down any rule of law but throws the burden of proving freedom of consent on a party 44. 45.

Moonshee Buzloor Ruheem v. Shumsoonissa Begum, (1867) 11 MIA 551. Geresh Chunder v. Bhuggobuty, (1870) 13 MIA 419, 43 1; Annoda Mohun Rai v. Bhuban Mohini Debi, (1901) 28 IA 71, 28 Cal 546; Lachmeshwar v. Moti Rani, (1939) 41 Bom LR 1068 : 43 CWN 129 :0 181 IC 359: AIR 1939 PC 1S7. 46. Hem Chandra Roy Chaudhury v. Surajhani Debya, AIR 1940 PC 134. 47. Ramanamma v. Viranna, (1931) 35 CWN 633, 33 Bom LR 960: 131 IC 401: AIR 1931 PC 100. 48. Kali Baksh v. Ram Gopal, (1914) LR 41 IA 23, 28-29:36 All 81, 89. 49. Bank of Khulne, Lid. v. Jyoti Prokash Mitra, (1941) 45 CWN 253: AIR 1940 PC 147. 50. Shaik Ismail v. Amirbibi, (1902) 4 Bom LR 146, 148. 51.

Ismail Musajee v. Hafiz Boo, (1906) 33 Cal 773, 783 : LR 33 IA 86; Shaik Ismail v. Amirbibi

0n(1902) 4 Bom LR 146. 52. Kali Baksh Singh v. Ram Gopal, 41 LA 23: 36 All 81.

"UndueInfhuence

S. 16

defined

81

who, being in a dominant position, makes a bargain so much to his own advantage that,

in the language of some of the English authorities, it "shocks the conscience." But until it has been established that one party was "in a position to dominate the will of the other," no assistance on the issue of undue influence is available to the person attempting to avoid the contract. The issue, in other words, remains with the burden of

proof on him.53 Unconscionable bargains."-Ilustration (c) contemplates the case of a person already indebted to a money-lender contracting a fresh loan with him on terms on the face of them unconscionable. In such a case a presumption is raised that the borrower's consent was not free. The presumption is rebuttable, but the burden of proof is on the party who has sought to make an exorbitant profit of the other's distress. The question is

not fraud, but of the unconscionable use of superior power. Inadequacy of consideration, though it will not of itself avoid a contract (S. 25, expl. 2 below), has great weight in this class of cases as evidence that the contract was not freely made. Relief in cases of uncon-

scionable bargains is an old head of English equity. The general principles of equity in dealing with what are called "catching bargains" remain and the third clause of the section now before us is apparently intended to embody them. In fact, Indian High Courts have acted on there principles, both before and since the passing of the Contract Act,

without any express authority of written law. Thus, where the interest was exorbitant, relief was granted by reducing the rate of interest in cases where the loan was made to an illiterate peasant,* and to a Hindu sixteen years old. Acting upon the same principles, the High Court of Bombay held that a covenant in a mortgage executed by an illiterate peasant in favour of a money lender to sell the mortgaged property to the mortgagee at a gross undervalue in default of payment of interest was inequitable and oppressive and the mortgage was set aside to that extent.36 The High Court of Allahabad disallowed compound interest payable at 2 per cent per mensem with monthly rests in the case of a bond executed by a spendthrift and a drunkard eighteen years old,° and in another case reduced 25 per cent compound interest to 12 per cent simple where the debtor was old

and illiterate and involved in litigation.5 Where a poor Hindu widow borrowed Rs. 1,500 from a money-lender at 100 per cent per annum for the purpose of

enabling

her to

establish her right to maintenance, the High Court of Madras allowed the lender interest at 24 per cent. The relief, however, has not been contined to money-lending transactions, and so far back as the year 1874 the Judicial Committee set aside a bond obtained

by a powerful and wealthy banker from a young zamindar who had just attained his majority and had no independent advice, by threats of prolonging litigation commenced against him by other persons with the funds and assistance of the banker. The question whether a transaction should be set aside as being inequitable depends upon the circumstances existing at the time of the transaction, and not on subsequent events.

53.

Gafur Mohomed v. Mahomed Sharif, (1932) 34 Bom LR 1194: AIR 1932 PC 202.

54.

Lalli v. Ram Prasad, (1886) 9 Al 74. See also the observations of the Judicial Committee in

55. 56.

Kamini v. Kaliprossunno Ghose, (1885) 12 Cal 225, 238, 239: made to a parda nishin lady. Mothoormohan Ray v. Soorendra Narain Deb, (1875) 1 Cal 108. Kedari Bin Ranu v. Atmarambhat, (1866) 3 BHCAC 11. Kripa Ram v. Sami-ud-din, (1903) 25 All 284. Rukmisa v. Mohib Ali Khan, AIR 1934 All 938.

LR 12 1A 215, where the loan was

57. S8. 59. Rannee Annapurni v. Swaminatha, (1910) 34 Mad 7 See, further; as to the test of what is excessive:

Din Muhammad v. Badri Nath, (1929) 120 IC 417: AIR 1930 Lah 65. Exact definition is not possible: Ramkishun Ram v. Bansi Singh. (1929) 110 IC 43 AIR 1929 Pat 340. 60. Chedambara Chetty v. Renja Krishna Muthu, (1874) 13 BLR 509: LR 1 IA 241. 61. Ganga Baksh v. Jagat Bahadur Singh, (1895) 23 Cal 15: LR 22 IA 153.

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Chapter I1-0f Contracts, Voidable Contracts and VoidAgreements

As between parties on an equal footing high interest, and even the holding of securities for a greater sum than has been actually advanced, will not suffice to make the Court hold a bargain unconscionable.52 Similarly, though the agreement by a mortgagor for sale of his equity of redemption to the mortagee may be upon onerous terms, the Court will not therefor refuse specific performance if the bargain is not unconscionable and there is no evidence to show that the mortgagee took an improper advantage of his position or of

the mortagor's difficulties.3

On examining the cases relating to money-lending transactions cited in the preceding

paragraph, it will be observed that in each of them the lender was "in a positionto dominate the will" of the borrower, and the bargain was "unconscionable within the meaning of cl. (3) of the present section. It is only the concurrence of these twoelements that can justify the Courts in raising the presumption under sub-s. (3),° or in granting relief to the borrower. The mere fact that the rate of interest is exorbitant Is no ground for

relief under this

section,0

unless it be shown that the lender was in a position to

dominate the will of the borrower. And it has been held by the highest tribunal that urgent need of money on the part of the borrower does not of itself place the lender in a

position to dominate his will within the meaning of this section.5 The law on this subject, however, has been considerably Loans Act, 1918.

altered since the enactment of the Usurious

Lapse of time and limitation.-Delay and acquiescence do not bar a party's right to equitable relief on the ground of undue influence, unless he knew that he had the right, or, being a free agent at the time, deliberately determined not to inquire what his rights were or to act upon them8 Lapse of time is not a bar in itself to such a relief. Theremust be conduct amounting to confirmation or ratification of the transaction. In a Privy Council

case a Hindu

widow

having a

widow's

estate entered

into a lease which was

neither prudent nor benefīcial to the estate, but with full knowledge of the lease the widow, and after her, her reversioners, accepted rent under the lease. Their Lordships held that such conduct amounted to a confirmation of the transaction by conduct both by the widow and her reversioners. If there be no such conduct, it is open to the party, though he may not sue to set aside the transaction within the period of limitation, to plead undue influence as a defence in a suit brought against him to enforce the transaction.

S. 17.

"Fraud"

Fraud" defined

another party

contract:62. 63. 64. 65. 66. 67.

68. 69. 70.

Hari Lahu Patil

means and committed

includes

by a

party

any of the to a

following acts

contract,

or with his

connivance, or by his agent, with intent to deceive thereto or his agent, or to induce him to enter into the

v. Ramji Valad Pandu, (1904) 28 Bom 371. As to the

rate of interest, cp. Lala

Balla Mal v. Ahad Shah, (1919) 21 Bom LR 558, where the Privy Council held 2 per cent per mensem not to be unusual, also that compound interest was not necessarily unconscionable. Davis v. Maung Shwe Go, (1911) 38 Cal 805: LR 38 IA 155. Ladli Parshad v. Karnal Distillery, AIR 1963 SC 1279 (1290) :(1964) 1 SCR 270. Poosathurai v. Kannappa Chettiar, (1919) 43 Mad 456: LR 47 IA 1. As to relief where a stipulation for the payment of interest amounts to a penalty, see S. 74 below and the notes thereon.

Sunder Koer v. Rai ShamKrishen, (1907) 34 Cal 150: LR 34 IA 9; Chatring v. Whitchurch.(1970) 32 Bom 208; Debi Sahai v. Ganga Sahai. (1910) 32 All 589; Ramalingam Chettiar v.Subramania Chettiar, (1927) 50 Mad 614; Sitaram v. Ramrao, AIR 1931 Nag 91. Lakshmi Doss v. Roop Loll, (1907) 30 Mad 169. Allcard v. Skinner, (1887) 36 Ch Div. 145. at pp. 181, 182, 186; Kurja Lal v. Havalal, AIR 1943 Cal 162. Juggal Kishore v. Charoo Chandra, (1929) 42 Bom LR 1055: 181 1C 341: AIR 1939 PC 159.

"Fraud"defined

S.17

33

(1) the suggestion, as a fact, of that which is not true, by one who

does not believe it to be true; (2) the active concealment of a fact by one having knowledge or

belief of the fact; 3) a promise made without any intention of performing it;

(4) any other act fitted to deceive; (5) any such act or omission as the law specially declares to be

fraudulent. Explanation.-Mere ness of a

silence as to facts likely to affect the willing-

person to enter

into a

contract

is not

fraud,

unless the

circumstances of the case are such that, regard being had to them, it is

the duty of the person keeping silence to speak, or unless his silence, is, in itself, equivalent to speech. Ilhustrations (a) A sells, by auction, to B, a horse which A knows to be unsound. A says nothing to B about the horse's unsoundness. This is not fraud in A.

(b) B is A's daughter and has just come of age. Here, the relation between the parties would make it A's duty to tell B if the horse is unsound. ()B says toA"If you do not deny it, I shall assume that the horse is sound." A says nothing. Here, A's silence is equivalent to speech. (d) A and B, being traders, enter upon a contract. A has private information of a change in prices which would affect B's willingness to proceed with the contract. A is not bound to inform B.

Ingredients of

fraud.-1)

The words_"with intent to deceive" in the principal part

of the section and the words "any other act fitted to deceive" in clause (4) indicate that an intention to deceive is an essential ingredient; (2) the act may be done by a party to a contract or with his connivance by some one or by his agent;

(3) a suggestio falsi, (4) an active concealment of a fact which it is his duty to disclose (suppressio veri), (5) a false promise; (6) any act or omission which the law may declare as fraudulent;

(7) pursuant to any of the above elements, the party defrauded or his agent must have entered into a contract or must have done some act. Fraud in general.-Fraud is committed wherever one man causes another to act on a false belief by a representation which he does not himself believe to be true. Under the Contract Act we are concerned with the effects of fraud only so far as consent to a contract isprocured by it. We have already pointed outl that the result of fraudulent practice may sometimes be a complete misunderstanding on the part of the person deceived as to

71. See notes under S. 13"As to the nature of the transaction (non est factum)", Foster v. Mackinnon and other cases cited.

84

S. 17

Chapter I1Of Contracts, Voidable Contracts and VoidAgreements

the nature of the transaction undertaken, or the person of the other party. Such casesare exceptional. Where they occur, there is not a contract violable on the ground of fraud, but the apparent agreement is wholly void for want of consent, and the party misled may treat it as a nullity even as against innocent third persons. Thus when A sold land to B who covenanted to accept title as it was, the fact that A had previously sold the land to C was held to be active concealment amounting to fraud.'Z But there was in fact no consent for the covenant implied that A had some title.3

Sub-ss. 3, 4, 5.-Fraud, as a cause for the rescission of contracts, is generally reducible to fraudulent misrepresentation. Accordingly we say that misrepresentation is either fraudulent or not fraudulent. If fraudulent, it is always a cause for rescinding a contract induced by it; if not, it is a cause of rescission only under certain conditions, which the definitions of S. 18 are intended to express. There are, however, forms of fraud which do not at first sight appear to include any misrepresentation of fact, and sub-ss. 3,4 and 5 are intended to cover these. With regard to a promise made without any intention of performing it (sub-s. 3), it may fairly be said that promise, though it is not merely a representation of the promisor's intention to perform it, includes a representation to that effect. It is fraud to obtain property, or the use of it, under a contract by professing an intention to use it for some lawful purpose when the real intention is to use it for an unlawful purpose. 4 **There must be a misstatement of an cisting fact, but the state of a man's mind is as much a fact as the state of his digestion. It is true that it is very difficult to prove what the state of a man's mind at particular time is, but if it can be ascertained it is as much a fact as anything else."

Accordingly

it is fraud to obtain a loan of money by

misrepresenting the purpose for which the money is wanted, even if there is nothing unlawful in the object for which the money is actually wanted and used. In particular, it is well settled in England that buying goods with the intention of not paying the price is a fraud which entitles the seller to rescind the contract. In India, borrowing money with no intention of repaying it is cheating and punishable under the Indian Penal Code 1860;7" but mere delay in payment of money due on a building contract or withholding of money is not fraud;'8 nor is every breach of

contract a fraud.

Acts and omissions specially declared to be fraudulent.-Sub-s. 5 applies tocases in which the disclosure of certain kinds of facts is expressly required by law, and noncompliance with the law is expressly declared to be fraud. Thus by S. 55 of the Transfer

of Property Act (IV of 1882) the seller of immovable property is required to discloseto the buyer "any material defect in the property of which the seller is and the buyer is not, aware, and which the buyer could not with ordinary care discover," and the buyer to disclose to the seller "any fact as to the nature or extent of the seller's interest in the property of which the buyer is aware but of which he has reason to believe that the seller is not aware, and which materially increases the value of such interest," and "omission to

make such disclosures.. is fraudulent, and this, it seems, even if the omission bedue

12.

Akhtar Jahan Begum v. Hazari Lal, (1927) 25 All LI 708.

73. 74. 75.

Motivahoo v. Vinayak, (1888) 12 Bom 1. See Feret v. Hill, (1854) 15 CB 207. Edgington v. Fitzmaurice, (1885) 29 Ch Div 459, 480, 483, per BoWEN, L.J.

76.

PC. v. L. & N. W.R. Co., (1871) LR 7 Ex 21, in Ex. Ch; Ex parte Whittaker, (1875) LR 10 Chat

77. Section 415 Ilustration () Indian Penal Code, 1860. 78. Kapila Textiles Mills Ltd v. Madhava & Co., AIR 1963 Mys 39. 79. Jethmal Ganeshmal Firm v. Raridas Roy, AIR 1949 Assam 6; Reliance Salt Lid. v. Cosmos Enterprises, (2006) 3 SCC S99, fraud must have nexus wih act of parties prior to enteringtne contract, subsequent breach would not vitiate the contract itself.

S. 18

"Misrepresentation" defined

85

merely to oversight.80 Similarly, under S. 55(1)(c) the seller is bound to answer truthfully

any requisition with regard to the income or rental of the property and if he gives information which is false to his

Mere

knowledge, he commits fraud.31

non-disclosure.-There

are special duties of disclosure (of which

we have

just seen an instance) in particular classes of contracts, but there is no general duty to disclose facts which are or might be equally within the knowledge of both parties. Silence as to such facts, as the Explanation to the present section lays down, is not

fraudulent.

There are at least two practical qualifications of this rule. First, the suppression of part of the known facts may make the statement of the rest, though literally true so far as mis leading as an actual falsehood. In such a case the statement is really false in substance, and the wilful suppression which makes it so is fraudulent,33 Secondly, a duty to disclose particular defects in goods sold, or the like, may be imposed by trade usage. In such a case omission to mention a defect of that kind is equivalent to express assertion that it

does not exist.o" Again, non-disclosure may be coupled with a representation that is fraudulent. A, knowing that an insolvent's decree is fully secured, suppresses the fact of the security and induces the Ofificial Assignee to assign it to him at 20 per cent of its face value by representing that the decree is practically unrealizable. A was under no duty to disclose the security. Nevertheless, his statement that the decree was practically unrealizable was false and made with intent to deceive and therefore a fraud3 "Misrepresentation"

S. 18.

defined.

(1) the positive

"Misrepresentation"

assertion, in a manner not

means and

warranted

include

by the

information of the person making it, of that which is not true, though he believes it to be true; (2) any breach of duty which, without an intent to deceive, gains an advantage to the person committing it, or any one claiming under him, by misleading another to his prejudice, or to the prejudice of any one claiming under him; (3) causing however innocently, a party to an a mistake as to the substance of the thing

agreement, to make which is the subject

of the agreement. Misrepresentation.-The words "means and includes" suggest that the definition is exhaustive. The misrepresentation, as defined, is of three kinds as follows: (a) an unwarranted positive assertion of what is not true, even though he might believe it to be true; or

6)

committing a breach of duty which misleads another to his prejudice or to the prejudice of any one claiming under him; or

80. Note that an agreement between vendor and purchaser that the vendor is not to be liable for

defective title will not excuse active concealment: Akhtar Jahan Begum v. Hazari Lal, (1927) 25 All LJ 708.

81. Premchand v. Ram Sahai, AIR 1932 Nag 148.

82. e.g Contract of fire insurance: Imperial Peessing Co. v. British Crown Assurance Corporation, 913)41 Cal 581. See also S. 143 below. 83. Peek v. Gurney, (1873) LR 6 HL 392 403. 84. Jones v. Bowden, (1813) 4 Taunt 847. 85. Subramanian v. Oficial Assignee, AIR 1931 Mad 603.

86

Chapter lI-of Contracts,VoidableContractsand VoidAgreements

S. 18

g(c)

causing a party to the contract to make a mistake as to the subject-matter of the agreement.

Principles of English law as to

misrepresentation.-The

Common Law recognizes

a general duty not to make statements which are in fact untrue, with the intent that a person to whom they are made shall act upon them to the damage of the person so acting,

and without any belief that they are true. The breach of this duty is the civil wrong known as fraud or deceit. But, if belief is there, it is not required by any general rule of law to be founded on any reasonable ground, though want of any reasonable ground may be evidence of want of belief.so With regard to contracts, the general principle is that if one

party has induced the other to enter into a contract by misrepresenting, though inno cently, any material fact specially within his own knowledge, the party misled can avoid the contract. In certain classes of contracts, where the facts are specially within one party's knowledge, a positive duty of disclosure is added, and the contract is made voidable by mere passive failure to communicate a material fact. But there is no positive duty of disclosure between contracting parties where the facts are not by their nature more accessible to one than to the other, though one party may have acquired information which he knows that the other has not.3 Sub-s. 1-What is meant by "the positive assertion, in a manner not warranted by the information of the person making it, of that which is not true"? This clause seems to mean that innocent misrepresentation does not give cause for avoiding a contract unless the representation is made "without any reasonable ground." The High Court of Calcutta has held that an assertion cannot be said to be "warranted" for the present purpose where it is based upon mere hearsay.35

.91 We may refer to a Punjab case to illustrate the meaning of the expression "positive assertion."A

sells a mare to B. Before the sale A writes to B as follows, in answer to

inquiries from B: "I think your queries would be satisfactorily answered by a friend if you have one in the

station and I shall feel more satisfied. All I can say is that the mare is

thoroughly sound." The letter is "positive assertion" of soundness coupled with a recommendation to B to satisfy himself before purchasing; but it does not amount to a

warranty.89 d

Sub-s.

2-This

sub-section

was

considered

in a

Bombay case

by Sergeant, J.:

The second clause of S. 18 is probably intended to meet all those cases which are called in the Court of Equity, perhaps unfortunately so, cases of "constructive fraud, in which there is no

intention

to deceive, but where the

circumstances

are such as to make the

party who derives a benefit from the transaction equally answerable

in effect as if he had

IThis sub-section presupposes that (i) a representor owes a duty to the representee in respect of the statement, (ii) the representor makes a statement, negligent or fraudulent or innocent, (11i) the representee is misled to his prejudice, and (iv) the representor gains an 11 advantage.

The basis of "duty of care" implies some kind of relationships between the parties e.g., buyer and seller, landlord and tenant, owner and hirer, banker and client, professional and client, lender and borrower. The requirement that the representee should be

86.

Derry v. Peek, (1889) 14 App Ca 337. Such is the law settled for England by the House of Lords.

87. Laidlawv.Organ,2Wheat9,8.SeealsoTurnerv.Green(,1895)2Ch205. 88. MohanLallv.SrG i ungaC ji ottonMillsCo.(,1899)4CWN369. l 89.

Currie v. Rennick, (1886) Punj Rec. No. 41.

90. OrientaB l ankCorporationv.Flemming(,1879)3Bom242,267.

:

"Misrepresetation" defined

S. 18

87

misled to his prejudice implies that the misrepresentation should be material. In Hedley

Byrne & Co. Lid. v. Heller & Partners Ltd

where a party gave credit to a limited

company after obtaining a reference from a bank as the latter gave a good reference sub-

ject to the condition "*without responsibility and the party suffered a loss, the House of Lords, while declining to accept a narrow view of the duty of care and the scope of liability for negligent statements, observed in that case that the bank would have owed some duty had the reference not contained the words "without responsibility". The expression "breach of duty' carries within it contracts involving a duty on the part of the contracting party to disclose all material facts. Such contracts are contracts of insurance, family arrangement, allotment of shares by a limited company, sale of immov able property, sale of other things wherein the purchaser depends upon the implied warranties on the part of the seller. Contracts of insurance are examples of contracts uberrimae fidei. In a family

arrangement, the party owes a duty to the other to make a

complete disclosure of every material fact of which he is aware. In cases of allotment of shares of a limited company, the latter or its promoters are under a duty to make a full true and fair disclosure of the position of the company and of every material fact which throws light on the business to be undertaken by the company. In contracts for sale of immovable property, vendor owes a duty to the purchaser to disclose defects in title latent defects in the property, encumbrances, easements etc.

Sub-s. 3.This

sub-section was applied in The Oceanic Steam Navigation Co. v.

Soonderdas Dhurumsey.2 In that case the defendants in Bombay chartered a ship wholly unknown to them from the plaintiffs, which was described in the charter-party, and was represented to them, as being not more than 2,800 tonnage registered. It turned out that the registered tonnage was 3,045 tons. The defendants refused to accept the ship in fulfilment of the charter-party. It was in evidence that defendants had entered this charter-party as they were assured that the vessel was not more than 2,800 tonnage registered. It was held that they: were entitled to avoid the charter-party by reason of the erroneous statement as to tonnage. As further illustratıng the rule laid down in the present subsection we might cite an earlier case, where it was held by the Allahabad Court that an agreement by the defendant to sell and deliver a boiler to the plaintiff at Rajghat was voidable

at the option of the defendant, the plaintiff having represented (though innocently) to the defendant that there was a practicable road all the way, while, as a matter of fact, there was at one point a Suspension bridge on a part of the way not capable of

bearingthe weight of the boiler.3 Misrepresentation of fact or law.-It used to be said in English books that misrepresentation which renders a contract voidable must be of fact; but there does not seem to be really any dogmatic rule as to representations of law. The question would seem on principle to be whether the assertion in question was a mere statement of opinion or a

positiveassurance

especially

if it came from a person better qualified to

know-that

the

law is so and so. It seems probable in England, and there is no doubt here that at any rate

deliberate misrepresentation in matter of law is a cause for avoiding a contract. Where a clause of re-entry contained in a Kabuliyat (counterpart of a lease) was represented by a zamindar's agent as a mere penalty clause, the Judicial Committee held that the mis representation was such as vitiated the contract, and the zamindar's suit was dismissed.* An innocent misstatement about the law however does not amount to misrepresen-

91. HedleyByrne & Co. Lid v. Heller & Partners Lid., (1964) AC 465: [1963] 2 AlI ER 575. 92. The Oceanic Steam Navigation Co. v. Soonderdas Dhurumsey, (1890) 14 Bom 241. 93. Johnson v. Crowe, (1874) 6 NWP 350.

94. Fertab Chunder v. Mohendranath Purkhait, (1889) 17 Cal 291: LR 16 1A 23.

88

S. 19

Chapter II-0f Contracts, VoidableContracts and VoidAgreements

tation.5 However this distinction between statements of law and statements of fact is too neat, and is likely to mislead.o Even an innocent statement of law may be misrepre sentation where it carries an implication of fact which itself is untrue. Where an executing

party to a deed signed the deed upon a representation that the

deed will not be enforced, there is a mistake as to the substance of the agreement, apart from the question that there was no consensus of mind%

Fraud and misrepresentation distinguished.

The principal difference between

fraud' and misrepresentation' is that in the one case the person making the suggestion does not believe it to be true and in the other he believes it to be true, though in both

cases, it is amisstatementof fact whichmisleadsthe promisor.9 Intention todeceive'is essential in fraud, while that is not necessary in 'misrepresentation'. Although in both the cases, the contract can be avoided, in case of misrepresentation or a fraudulent silence, the contract cannot be avoided if the party whose consent was so caused had the means of

discovering the truth with ordinary diligence. Fraud, Misrepresentation and non est factum distinguished.-See S. 13 "As to the nature of the transaction (mon est factun)".

notes under

S. 19. When consent to an agreement is caused by coercion, "[***] Voidability

of

fraud

or

misrepresentation,

the

agreement

agreements without free contract voidable at the option of the party whose consent was so caused.

is a

consent.

party to contract, whose

consent was caused by fraud or

misrepresentation, may, if he thinks fit, insist that the contract shall be performed,

and that he shall be put in the

position in which he

would have been if the representations made had been true. Exception-If such consent was caused by misrepresentation or by silence, fraudulent within the meaning of section 17, the contract, nevertheless, is not voidable, if the party whose consent was so caused

had the means of discovering the truth with ordinary diligence. Explanation.-A

fraud or

misrepresentation which did not cause

the consent to a contract of the party on whom such fraud was practised, or to whom such misrepresentation was made, does not render a contract voidable. llustrations (a) A, intending to deceive B, falsely represents that 500 maunds of indigo are made annually at A's factory, and thereby induces B to buy the factory. The contract is voidable at the option of B. b) A, by a misrepresentation, leads B erroneously to believe that 500 maunds of indigo are made annually at A's factory. B examines the accounts of the factory, which show that only 400 maunds of indigo have been made. After this B buys the factory. The contract is not voidable on

account of A's misrepresentation. 95. Ganga Retreat & Towers Ltd. v. State of Rajasthan, (2003) 12 SCC 91, 108. 96. Brikom Investments Lid v. Seaford, [1981] 2 All ER 783,Solle v. Butcher, [1950] 1 KB 671. 97. CHITTY ONCONTRACTS (29th edn, 2004) at para 6-011. 98. Tyagaraja v. Vedathanni, (1936) 59 Mad 446:63 IA 126: AIR 1936 PC 70. 99. Naiz Ahmed v. Parshottam, (1931) 53 All 374 : AIR 1931 All 154. The words "undue influence" repealed by Act, 6 of 1899, S. 3.

Voidability ofagreements without free consent

S. 19

89

(c)A fraudulently informs B that A's estate is free from encumbrance. B thereupon buys the estate. The estate is subject to a mortgage. B may either avoid the contract, or may insist on its being carried out and the mortgage-debt redeemed.

(d) B, having discovered a vein of ore on the estate of A, adopts means to conceal and does conceal the existence of the ore from A. Through A's ignorance B is enabled to buy the estate at an

under-value. The contract is voidable at the option of A.

)

A is entitled to succeed to an estate at the death of B; B dies; C, having received

intelligence of B's death, prevents the intelligence reaching A, and thus induces A to sell him his interest in the estate. The sale is voidable at the option of A.

Scope of the section.The section states the legal effect of coercion, fraud, and misrepresentation,in rendering contracts procured by them voidable, the foregoing sections have only laid down their respective definitions. Section 19 of the Act does r now refer to undue influence. It was deleted from S. 19, of the Act by Act VI of 1899. The said amendment inserted in the Indian Contract Act Section 19A giving power to the Court to set aside a contract induced by undue influence. Perhaps the most important parts of the section, certainly those which need the most careful attention, are the exception and the explanation. These mark the limits within which the rule is applied. The party entitled to set aside a voidable contract may affirm it if he thinks fit. That is involved in the conception of a contract being voidable. And if he affirms it, he may require the performance of the whole and every part of it (subject to the perfornmance in

due order of whatever may have to be performed on his own part) or, in default thereof, damages for non-performance. If, as may well be the case, the default is wholly or partly due to the non -existence of facts which the defaulting party represented as existing, this party can obviously not set up the untruth of his own statement by way of defence or mitigation; and, if the case is a proper one for specific performance, and if it is in his power to perform the contract fully, though with much greater cost and trouble than if his statement had been originally true, he will have to perform it accordingly3

Other remedies. -Apart from the remedies provided in this section the aggrieved party may have the agreement rescinded under S. 27 of Specific Relief Act, 1963; or he may refuse to carry out the agreement and defend a suit brought against him for specific performance and/or for compensation.

Burden of proof. -A heavy burden lies upon the party who seeks to avoid a contract on the ground of misrepresentation, fraud or coercion to prove any such allegation. Exception : Means of discovering truth.-In English law the principle is that if a man makes a positive statement to another, intending it to be relied on, he must not complain that the other need not have relied upon it. "The Purchaser is induced to make a less

accurate examination by the representation which he hada right to believe"° But when a purchaser chooses to rely upon his own judgment or of his agent, he cannot afterwards say that he relied upon a previous representation made by the vendor. Again the possession of obvious means of knowledge may lead, in some cases, to a fair inference that those means were used and relied on. But still the real point to be considered is whether the party misled did put his trust in the representation made to him of which he Fraud in theperformance of acontractis no ground for rescission:Jamsetji v, Hirjibhai. (1913) 17 Bom LR 158, 169, Fazal v. Mangaldas, (192Í) 46 Bom 489, 508. 2. See the Specific Relief Act, 1963, S. 21. 3. 4.

See the Specific Relief Act, 1963, S. 20. Rangnath v. Govind, (1940) 28 Bom 639.

5. Alva Aluminium Ltd v Gabriel India Ltd,(2011)1SCC 167.:/ . DyeHvr.argra(v1e8,051)V0e5s055,10.

7.Redgravev.Hurd(,18812)0ChDiv

90

Chapter I-of Contracts, VoidableContractsand VoidAgreements

19

complains, or in other information of his own. In the latter case the misrepresentation did not really cause his consent.

The exception to Section 19, though ambiguously worded, is 'not intended to depart from the well established rule of English Law.5 The exception lays down that the contract is not voidable but is binding on a party whose consent was caused by misrepresentation (as defined in S. 18 of the Act) or by silence fraudulent (i.e. silence amounting to fraud) within the meaning of S. 17 of the Act if the party whose consent was so caused had the means of discovering the truth with ordinary diligence.? The reasoning for this conclusion, according to these High Courts, is that the word

fraudulent"

(within the meaning of S. 17 of the Act) appearing in Section 19 applies to

the preceding word "silence" exclusively, and not to the word "misrepresentation". Also, the Legislature has used the preposition "by" twice i.e. both before "misrepresentation"

and also before "silence". If the expression "fraudulent within the meaning of S. 17 were to qualify the word "misrepresentation", the result would be startling as due diligence would be required where misrepresentation became fraudulent but not when the misrepresentation fell within S. 18 of the Act and it was not fraud. Thus to sum up, the plaintiff is required to exercise due diligence to find out the truth when his consent was caused by active misrepresentation as defined in S. 18 of the Act or by silence amounting to fraud as defined in S. 17 of the Act. The ordinary diligence of which the Exception speaks may be taken to be such diligence as a prudent man would consider appropriate to the matter having regard to the importance of the transaction in itself and of the representation in question as affecting its

out of proportion to the value of the whole subject-matter would not, it is conceived, be "means of discovering the truth with ordinary diligence." The standard of diligence required is not that of a person learned in the law who might be able to discover it after careful examination of legal authorities.Where a purchaser was misled by certain statements of the accredited agents of the Court made at the auction sale held under orders of the Court, it was held that the purchaser hand no means of discovering the truth while the sale was going on. Where a vendor leased a plot of land to a third party and thereafter sold the same land to a purchaser, without disclosing the fact of the prior lease,

it was held that the vendor could not plead that the purchaser could have discovered it with diligence.2 Where a purchaser of rice stored up at a place to which he had an easy access refused to take delivery on the ground that the rice was of an inferior quality to

that contracted for, it was held that he could not rescind the contract, for he could have discovered the inferiority of the quality by using "ordinary diligence" s On the other hand, as the learned authors, Sir FrEDERICK POLLOCK and Sir DiNSHAH MULLA in their work on the Contract Act say 4

Y1"the

exception does not apply to cases of active fraud as distinguished from mis-

representation which is not fraudulent".

8.

Niaz Ahmed Khan v. Parshottam Chandra, AIR 1931 All 154, 157.

9. Niaz Ahmed Khan v. Parshottam Chandra, AIR 1931 All 154; J.M. Apcar v. LC. Malchus, AIR 1939 Cal 473, Venkataratnam v. Sivaramudtu, AlR 1940 Mad 560; Niranjan v. Tirilochan, AIR 1956 Ori 81. 10.

In Re: Nursey Spg. & Wvg. Co. Ltd, 5 Bom 92 (98).

11. Kala Mea v. Harperink, 36 Cal 323 (PC). 12. Venkataratmam v. Sivaramuhu, AIR 1940 Mad 560; John Minas Apcar v. Louis Caird. (1939) 1 Cal 389. 13. Shoshi Mohun Pal v. Nobo Kristo, (1878) 4 Cal 801. 14. POLLOCK AND MULLA, INDIAN CONTRACT AND SPECIFIC RELIEF ACTS, (13th edn., 2006) at p. 590.

S:19

Voidability ofagreements without free consent

91

Cases of deliberate active fraud and of misrepresentation which is fraudulent are not within the exception to S. 19 of the Act. Here plaintiff's failure to exercise due diligence to discover the truth will not be a good defence to the defendant. The aforesaid principle was applied in the following cases. In John Minas Apcar v. Louis Caird Malchus,s

defendant who wanted to sell his property caused letters to be written to him in which fictitious offers for the property at high prices were made with the sole purpose of showing it to an intending purchaser. According to the Calcutta High Court this was fraud under S. 17 of the Act an exception to S. 19 was not applicable.

In Venkataratnam v. Sivaramudy, a vendor not only failed to disclose that he has leased away the land which was being sold, but stated that immediate possession would be given. The Madras High Court did not allow the vendor to take the defence that the vendee had failed to exercise due diligence and vendee was allowed to treat

the contract as voidable. In Niranjan Samalv.

Tirilochan,'

plaintiff filed a suit to set

aside compromise decree on the ground that he agreed to compromise the suit with the defendant on the assurance that the other civil and criminal cases would be

withdrawn but this was an empty assurance with the intention of not fulfilling it. It was held that the plaintiff could set aside the compromise decree as it was a case of fraud and the defendant's defence that the plaintiff failed to exercise ordinary diligence was not accepted. In Ganpat v. Mangilal, contract was vitiated by fraud on account of a false statement that property to be sold was free from mortgage. The court held the contract voidable and exception to S. 19 was not applicable on account

of the fraud of the vendor. Further exceptions:

Loss of right to rescind.-In some cases defaults or acts or delay on the part of the aggrieved party would disable him from rescinding the contract e.g. where restitution is

impossible or a third party has bona fide and for value acquired possessory title of where it is inequitable to do so. Where a purchaser of a lorry knowingly accepted the serious defects existing in it, but went on the journey in it. When it broke down completely, it was held that it was too late for the purchaser to

rescind and secondly restitution was not possible. " Where a buyer of land alleged misrepresentation by the seller as to the nature of the land and permitted FAR (floor adequacy ratio), it was held that no rescission was possible after he had initiated construction on the land without any protest. Where a purchaser of a picture wanted to rescind the contract after waiting for five years, it was held that it was too late for him to rescind and it would be very unreasonable to do so. A shareholder wishing to repudiate the contract of sale of shares by declining to pay call money was disentitled to do so after the company went into liquidation and the creditors of the company under liquidation had acquired certain rights.22 In case of one University, a student filled in the form for

examination, the form was

passed by the head of department and university authorities and the student was allowed to appear. Subsequently finding that the form was filled in by the student making certain Wrong statement, the University authorities cancelled the candidature of the student, it 15. John Minas Apcar v. Louis Caird Malchus, AIR 1939 Cal 473. 16. Venkataratnam v. Sivaramudy, AIR 1940 Mad 560. 17.

Niranjan Samal v. Tirilochan, AIR 1956 Ori 81.

18. Ganpat v. Mangilal, AIR 1962 MP 144. 19. Long v. Lloyd, (1958) I WLR 753. 20. Ganga Retreat & Towers Ltd. v. State of Rajasthan, (2003) 12 SCC 91, 108.

2.

Leafv.International Galleries, (1950) 2 KB 86.

22. Oakes v. Turquand, (1867) LR 2 HL 325.

92

S. 19-A

Chapter I1-Of Contracts, Voidable Contracts and VoidAgreements

was held that the University authorities could have easily discovered the infimities in the admission form but they and the head of department overlooked the infirmities and allowed the student to appear and hence they could not complain of fraud and could not

withdraw the candidature of the student.5 Explanation: as to "causing consent"-A false representation, whether fraudulent or innocent, is merely irrelevant if it has not induced the party to whom it was made to act upon it by entering into a contract or otherwise. He cannot complain of having been misled by a statement which did not lead him at all. Hence an attempt to deceive which has not in fact deceived the party can have no legal effect on the contract, not because it is not wrong in the eye of the law, but because there is no damage. This rule is applicable where a seller of specific goods purposely conceals a

fault by some contrivance, in order that the buyer may not discover it if he inspect the goods, but the buyer does not in fact make any inspection." The representation must form a "material inducement" to the party to enter into the contract. "If it is proved plaintiff to enter into a contract, made a that the defendants with a view to induce the would be likely to induce a person to statement to the plaintiff of such a nature as enter into a contract, and it is proved that the plaintiff did enter into the contract, it is a fair inference of fact that he was induced to do so by the statement. .. Its weight as

evidence must greatly depend upon the degree to which the action of the plaintiff was ikely, and on the absence of all other grounds on which the plaintiff might act."0 There is no rule of law that any particular kind of statement is necessarily material in some cases and immaterial in others. In general one man's money is as good as another's, and in a contract of loans the lender's personality is indifferent to the bor rower, but where a money-lender who has acquired an evil repute for hard dealing in his own name advertises and lends money in assumed names, it is a permissible inference of fact that the concealment of his identity was a fraud inducing the

borrower to contract with him.2 Rescission of voidable

contracts.-As

to the consequences of the rescission of

voidable contracts, see S. 64.

Specific performance.-As to the effect of fraud and misrepresentation on the rights of a party to claim or resist specific performance, see Specific Relief Act, XLVIl of 1963, Ss. 18(a), 26 and 27(1)(a).

[S.

19-A. When consent to an

Power to set aside contract induced by undue influence.

agreement is caused by undue

niuence, the agreement is a contract voidable at the option of the party whose consent was so

caused.

Any such contract may be set aside either absolutely, or, if the party who was entitled to avoid it has received any benefit thereunder, upon such terms and conditions as to the Court2" may seem just.

23. Shri Krishan v. Kurukshetra University, (1976) 1 SCC 311: AIR 1976 SC 376. 24.

25. 26. 27.

Horsfall v. Thomas, (1862) 1 H&C 90.

ANSON'S LAW OF CONTRACT (29th edn., 2010) at p. 305.

Smithv. Chadwick, (1884) 9 App Ca 187, 196 (LORD BLACKBURN). Gordon v. Street, (1899) 2 QB 641 (CA). *Inserted by Act 6 of 1899, S. 3. 28. The refusal of terms suggested by the Court leaves this discretion free: Sunder Rai v. Suraj Bali Rai.

(1925) 47 All 932.

S. 19-A

Power to set aside contract induced by undue influence

93

Jllustrations (a) A's son has forged B's name to a promissory note. B, under threat of prosecuting A's son, obtains a bond from A, for the amount of the forged note. If B sues on this bond, the Court may set the bond aside. (6) A, a money-lender, advances Rs. 100 to B, an agriculturist, and by undue influence, induces B to execute a bond for Rs. 200 with interest at 6 per cent per month. The Court may set the bond aside, ordering B to repay Rs. 100 with such interest as may seem just.

STATE AMENDMENT Madhya

Pradesh.-Ss.

19-B and 19-C inserted by Madhya Pradesh Act (XV of 938) are as

follows: "19-B. Definitions of maintainer and champertous agreement.-(a)

"Maintainer' means a

person who gives assistance or encouragement to one of the parties to a suit or proceeding and who has neither an interest in such suit or proceeding nor any other motive recognized by law as

justifying his interference. (6) "Champertous agreement means an agreementwhereby the nominal plaintiff agrees with the maintainer to share with or give to him a part of whatever is gained as the result of the suit maintained.

19-C. Power to set aside champertous agreement.-A champertous agreement may be set aside upon such terms and conditions as the Court may deem fit to impose."

Note. The Madhya Pradesh Act, 1938 (XV of 1938), as in force in the Mahakoshal region immediately

before

1lst January,

1959, has been

force, in all the other regions of the (23 of 1958).

extended

to, and

shall as

from

that

date, be in

State-See S. 3, Madhya Pradesh Extension of Laws Act, 198

These sections were repealed in their application to the Vidarbha area of the State of Maharashtra by the Maharashtra Repealing and Amending Act, 1963 (26 of 1963).

Contract induced by undue influence.-This section appears to be intended to give express sanction to the constant practice of Indian as well as English Courts in cases of unconscionable money-lending, namely to relieve the borrower against the oppressive terms of his contract, but subject to the repayment to the lender of the money actually advanced with reasonable interest. (See the illustrations.) The rate of interest allowed by the High Courts as reasonable has varied, according to circumstances, percent in Bengal to 24 percent in Bombay, Madras and Uttar Pradesh.9

from 6 and 12

The second paragraph of the section is virtually a reproduction of Ss. 35 and 38 of the Specific Relief Act. The combined effect of those two sections is that a contract in writing may be rescinded at the suit of a party when (amongst other causes) it is voidable, but that the Court may require the party rescinding to make any compensation to the other which justice may require. It may be noted that under the present section the contract need not be in writing. See also S. 64 below, which leaves no discretion to the

Court in the matter of restitution. and only gives the Contract procured by undue influence is only a voidable one person under undue influence a right of choice or election. Such a right once exercised is

exhausted. So, if by notice expressly given or implied by conduct, the Promisor elects to affirm, he cannot afterwards claim to avoid; Similarly, if he has once elected to avoid, he cannot afterwards be allowed to affirm in his own interest.

29. Raja Mohkam Singh v. Raja Rup Singh. (1893) 15 All 352: LR 20 IA 127 (where 20 per cent was

allowed); Maneshar BakhshSingh v. Shadi Lal, (1909) 31 All 386: LR 36 IA 96 (where 18 percent

30.

was allowed); Poma Dongra v. William Gillespie, (1907) 31 Bom 348 (where 24 per cent was allowed); Rannee Annapurni v. Swaminatha, (l1910) 34 Mad 7 (where 24 per cent was allowed). Kunja Lal v. Hara Lal, AlR 1943 Cal 162.

94

S. 20

Chapter I1-of Contracts, Voidable Contracts and VoidAgreements

Who can raise the plea.

A plea of undue influence can only be raised by apartyto

the contract and not by a third party3 A registered gift deed cannot be challenged by a third party, it can be challenged by the donor.2

Heirs and legal representatives of deceased contracting

party.-Benefit and

burden of promises devolve on legal representative of a deceased contracting party (vide Ss. 37, 42, 45) and hence that principle would apply to sections 19 and 19A.* Heirs of a deceased

vendor

could

therefore

file a suit to set aside the sale deed executed by the

deceased vendor on the ground of undue influence.34 Agreement void where both parties are under

S. 20. Where both the parties to an agreement are under a mistake as to a matter of fact essential

fact.

to the agreement, the agreement is void.

mistakeas to matter of

Explanation-An erroneous opinion as to the value of the thing which forms the subject-matter of the agreement is not to be deemed a mistake as to a matter of fact. 35 Ilustrations (a) A agrees to sell to B a specific cargo of goods supposed to be on its way from England to Bombay. lt tuns out that, before the day of the bargain, the ship conveying the cargo hạd beencast away and the goods lost. Neither party was aware of these facts. The agreement is void. (b) A agrees to buy from B a certain horse. It turns out that the horse was dead at the time of the bargain, though neither party was aware of the fact. The agreement is void.. (c) A, being entitled to an estate for the life of B, agrees to sell it to C. B was dead at the time of the agreement, but both parties were ignorant of the fact. The agreement is voido.

Mistake of fact.-In order to render a contract void on the ground of mistake,there should exist three things as under:(1)

Both parties to the contract must be under a mistake;

(2)

Mistake should be one of fact and not of law;

(3)

Mistake should be essential to the agreement.

Common and mutual making a contract is to be

rendered void."

mistake.-A

mistake known to the other party at the time of

established.9

If mistake is unilateral,40

agreement is not

This section is concerned with the situation when the parties are ad idem

but both are mistaken about the same vital fact. Such mistake mullifies consent and is 31. Kotumal v. Dur Mahomed, AlR 1931 Sind 78 (DB). 32. Trimbak v. Shanker Shamrav, 36 Bom 37; Venkatasubbiah v. Subbamma, AlR 1956 AP 195. (1927) S1 Bom 133 (140); Mahboobkhan v. Hakim Abdul, AIR 33. Shravan Goba v. Kashiram Deyji, 1964 Raj 250. 34. Shravan Goba v. Kashiram Devji, (1927) 51 Bom 133 (140); Mahboobkhan v. Hakim Abdul, AIR 1964 Raj 250. 35. See Harilal Dalsukhram Sahiba v. Mulchand. (1928) 52 Bom 883. See also Soorath Nath Banarjee V. Bharasankar Goswami, (1928) 33 CWN 626. 36. Couturier v. Hastie, (1856) 5 HLC 673. 37. Potier, Contract de Vents, cited 5 HLC 673. 38. 39.

40.

Strickland v. Turner, (1852) 7 Ex. 208; Cochrane v. Willis, (1865) LR 1 Ch 58.

Dagdu v. Bhana, 28 Bom 420; Lakshmana Prasada v. Achutan Nair, AIR 1952 Mad 779.

China & Southeren Bank v. Te ThveSeng. (1925) 3 Rang 477; Bell v. Lever Bros. Lid, (1932) AC 161:[1937] All ERRep 1. 41. A case of unilateral mistake might amount to misrepresentation under S. 18(3) and if so, the agreement is voidable, see Ganga Retreat & Towers Ltd. v. State of Rajasthan, (2003) 12 SCC 91, 110. See also S. 22 infra.

Agreement void where both parties are under mistake

S. 20

95

known as a "common mistake". Mistake may however also negative consent, where for and the other about another. The instance, one party intends to contract about one thing, parties are not ad idem at all and this is known as "mutual mistake". A common is "made mistake is thus "made or shared alike by both parties", while a mutual mistake regard to each other".* But it is or entertained by each of the persons towards or with common to use the term 'mutual' mistake for even this type of mistake,4* and has been so used below. See S. 22 infra.

Mistake of fact

Where moneys were paid under an unilateral mistake of law, it

was held that the mistake did not come under this section.*

Where there was a mistake

with regard to the law of registration of a document upon validity of assignment deed and where a prior lease was treated as forfeited upon the assignment of the term on the ground of breach of the lease and upon such assumption a new lease was granted to a new party and it turned

out that the lessor had no right to forfeit

the prior lease, as

assumed, it was held that there was no mistake of fact but there was a mistake of law.0 lgnorance of a private right was on par with a mistake of fact."' So in Cooper v. Phibbs Xagreed to take a lease of a fishery from Y, although, unknown to both the parties, it already belonged to X. It was held that the lease must be set aside as both the parties contracted under a mutual mistake and misapprehension as to their relative and respective rights. Mistake essential to

agreement.-It

is not that a mistake has any special operation

because it is a mistake, but that the true intention of the parties was to make their agree ment conditional on the existence of some state of facts which turns out not to have existed at the date of the agreement. Where the contract was for the sale of an object not existing, or which has ceased to exist according to the description by which it was con-

tracted for, the result is still more easily apprehended if we say that there was nothing to buy and sell.

This section is based on a mistake at the time of the formation of contract but not on a mistake coming into existence subsequently.** Where a specific article is otfered for

sale without any express warranty or without specitying the purpose for which the pur chaser required the aticle and the buyer had full opportunity to inspect the sample of the article and he agreed to purchase it relying upon his own judgment, the rule of caveat

emptorapplied.*" If a contracting party tells the other party *"I am well known to the.. Bank in your city" and upon such statement the other party enters into a contract, it was held that there was no mistake of fact, the said statement was a statement of his own

opinion of his creditworthiness. The mistake must be "as to a matter of fact essential to the agreement." lt is not enough that there was an error "as to some point, even though a material point, an error

as to which does not affect the substance of the whole consideration." 42.

See notes under S. 13 "Fundamental

The difference

error".

43. 1TC Lid. v. Gorge Joseph Fernandes, (1989) 2 SCC1, 23: AIR 1989 SC 839; UP Government v. Nanhoo Mal, AIR 1960 All 420. 44. ANSON'S LAW OF CONTRACT (29th edn., 2010) at p. 251; S. 26 Specific Relief Act, 1963 also uses the term 'mutual' mistake. 45. Raja Rajeswara v. Secretary of State for India, AIR 1929 Mad 179: 56 Mad LJ 269. 46. Kalyanpur Lime Works v. State of Bihar, 1954 SCR 958 : AIR 1954SC 165. 47. Cooper v. Phibbs, (1867) 2 HL 149. -

48. Babshettiv.Venkataramana,3 Bom 154;Bell v. LeverBros.Ltd., (1932) AC 161 (19) :[1931] All ER Rep 1; Dagdu v. Bhana, 28 Bom 420 (426) : 6 Bom LR 126. 49. Smith v. Hughes, (1871) 6 QB 597. S0. Hope Prudhomme v. Earnest Max, (1915) 29 IC 575. S1. Per BLACKBURN, J., in Kennedy v. Panama Mail Co., (1867) LR 2 QB S580, 588.

96

S. 20

Chapter I1-of Contracts, Voidable Contracts and VoidAgreements

between what has been contracted and what has been offered must be such that "if the contract were enforced in the actual circumstances which have unexpectedly emerged, this would involve an obligation fundamentally different from that which the parties believed they were undertaking."52 Where a property agreed to be sold had been notified for acquisition under the Caleutta Improvement Act, and neither the vendor nor the purchaser was aware of the notification at the date of their agreement, the notification was held to constitute a matter of fact essential to the agreement within the meaning of this section and the agreement was declared void.3 Upon the same principles a compromise of a suit will be set aside if it was brought about under a mistake as to the subject-matter of the agreement.34 Not only a compromise,35 but an order of the Court made by consent.0 may be set aside if the arrangement was entered into under aone sided mistake of counsel to which the other party, however innocently, contributed, or even otherwise if the mistake was such as to prevent any real agreement from being

formed. A fortiori it is so in the case of the mistake being common to both parties.A mistake as to an existing fact renders the contract void ab initio, but if the mistake is as to some future event, it is a binding contract, which may be avoided at some füture date if the expected event does or does not occur. Where a mistake is related not to the

subject-matter

of the service contract but to

quality of service contract, it is not a mistake essential to the agreement.

Where a

contract is entered into upon the basis that a certain price is the controlled price while it turns out that the controlled price was actually lower, it was held that the mistake was essential to the agreement.o If there is a mis-description of the property, the question is whether it affects the subject-matter of the contract and whether but for such mis-

description,

"the purchaser would

not have agreed to

purchase, in such a case the

misdescription would be essential to the agreement. In Sheikh Brothers Lid. v. Ochsner an appeal from Kenya, the Privy Council construed S.20 of the Indian Contract Act in the following facts. Appellants contracted with Respondent to grant him a licence to cut, process and manufacture all Sisal grown on the particular estate of which they were the lessees. In return, Respondent deposited some amount and undertook to deliver to Appellants 50 tons of Sisal fibre, manufactured by him, each month. The estate was, in fact, not capable of producing such a quantity of Sisal as would meet this

requirement. It was held that the Contract was void. Specific Performance-As to the right of a party to resist specific performance of a contract on the ground of mistake, see Specific Relief Act, XLVII of 1963, S. 18(a). Rectification.-The

courts will not rectify an instrument on the ground of mistake

unless it is shown that there was an actual concluded contract antecedent to the instrument sought to be rectified, and that the contract is inaccurately represented in the instrument. What is rectified is not the agreement but the mistaken expression of it.0

52. 53.

ITC Lid. v. Gorge Joseph Fernandes, (1989) 2 SCC 1, 26: Nursing Dass v. Chuttoo Lall, (1923) 50 Cal 615.

54. BibeeSolomon v. AbdoolAzeez, (1881) 6 Cal 687, 706. 55. 56. 57.

AIR 1989 SC 839.

raef/

H

Hickman v. Berens, (1895) 2 Ch 638. Wilding v. Sanderson, (1897) 2 Ch 534. Huddersfield Banking Co. v. H. Lister & Son, (1895) 2 Ch 273.

58. Chandanmull v. Clive Mills Co. Lid, (1948) 52 CWN 521: AIR 1948 Cal 257. 59. Bell v. Lever Bros. Ltd., (1932) AC 161 (191). 60. Lakshmana Prasada v. Achutan Nair, AIR 1952 Mad 779. 61. Krishnaji Gopinath v. Ramchandra, AlR 1932 Bom 51. 62. Sheikh Brothers Lid v. Ochsner, (1957) AC 136. 63. Dagdu v. Bhana, (1904) ILR 28 Bom 420: 6 Bom LR 126.

Effect of mistakes as to law

S. 21

97

Ordinarily this mistaken expression would be in the form of a document, but the exisimplied.* The rectitence of a real oral agreement prior to the document is necessarily

fication consists in bringing the document into conformity with this prior agreement, where the expression in the document is contrary to the concurrent intention of all the parties.Thus in a Bombay caseo the plantiffs chartered a steamer from the defendants to sail from Jedda on "the 10th August 1892 (fifteen days after the Haj)," in order to

convey pilgrims returning to Bombay. The plaintiffs believed that "the 10th August 1892" corresponded with the fifteenth day after the Haj but the defendants had no belief on the subject, and contracted only with respect to the English date. The 19th July 1982, and not the 10th August 1892, in fact corresponded with the fifteenth day after the Haj. plaintiffs sued the defendants for rectification of the On finding out the mistake the charter-party. It was held that the agreement was one for the 10th August, 1892; that the mistake was not mutual, but on the plaintiff's part only; and, therefore, that there could be no rectification. The court observed that plaintiff seeking rectification must show that there was an actual concluded contract earlier to the instrument sought to be rectified and such a contract is inaccurately represented in the instrument. This was not so in the facts of the case. The Court further expressed its opinion that even if both the parties were under the mistake the Court would not rectify, but only cancel the instrument, as the agreement was one for the 10th

August

1892, and

that date was a matter

materially

cia nsdeu.c6in 7g the agreement. See also Specitic Relief Act, Ch. II, and the undermentioned Compensation.-Note, in connection with the present section, the provision of S. 65 that when an agreement is discovered to be void any person who has received any advantage under the agreement is bound to restore it, or to make compensation for it, to

the person from whom he received it. A deficiency in quantity of land (or anything) sold

which can be adequately dealt with by compensation does not come within this section at all.o8

S. 21. A contract is not voidable because it was caused by a mistake Effect ofmistakesas as to any law in force in "Tndia; but a mistake as to a law not in force in *[Indiaj has the same effect as to law. a mistake of fact.

"***] lustration A and B make a contract grounded on the erroneous belief that a particular debt is barred by the Indian law of limitation; the contract is not voidable.

***]

Effect of mistake of law.-It is a citizen's businessto know, by taking professional

advice or otherwise, so much law as concerns him for the matters he is transacting. No 64. Dagdu v. Bhana, (1904) ILR 28 Bom 420:6 Bom LR 126. 65. Dagduv. Bhana, (1904) ILR 28 Bom 420:6 Bom LR 126. 66. Haji Abdul Rahman Alarakhia v. The Bombay and Persia Steam Navigation Co., (1892) ILR 16 Bom 561. 67. Mdhayji v. Ramnath, (1906) 30 Bom 457. 68. U Pan v. Maung Pa Tu, (1927) 100 IC 327: AIR 1927 Rang 90. The original words "British India" have successively been amended by the A.0. 1948 and the A.O. 1950 to read as above. Inserted by A.O. 1937, omitted by A.O. 1950. The 2nd illustration repealed by Act 24 of 1917, S. 3 and Sch. 1.

*

Chapter IIOf Contracts,VoidableContractsand VoidAgreements

S. 22

98

other general rule is possible, as has often been observed, without enormous temptations to fraud. But it is to be observed that the existence of particular private rights is a matter

of fact, though depending on rules of law, and for most civil purpose ignorance of civil rights-a man's ignorance that he is heir to such and such property, for instance-is ignorance of fact. A man's promise to buy that which, unknown to him, already belongs to him is not to be made binding by calling his error as to the ownership a mistake of

law.

It is a mistake of fact as to title and the agreement is void.

The section does not say that misrepresentation, at any rate, wilful misrepresentation, of matter of law, may not be ground for avoiding a contract under S. 17 or S. 18.0 The cases in which the present section has actually been applied have been fairly

simple. An erroneous belief that the judgment-debtor is bound by law, to pay interest on the decretal amount, though no interest has been awarded by the decree, is a mistake of law, and a contract grounded on such belief is not voidable. Such a belief is not a belief

as to a matter of fact essential to the agreenment within the meaning of S. 20: the Judicial Committee so held in Seth Gokul Dass v. Murli." If a mortgagee advances moneys under the erroneous belief that a prior unregistered mortgage deed would not take prec edence even if registered subsequently, he cannot avoid the mortgage transaction. The erroneous belief that the tribunal under a Debt Conciliation Act had jurisdiction over a non-agriculturist is a mistake of law.5

Mistake of foreign

law.-As to the second clause of

dence has adopted the rule of the Common must be proved or admitted as such, though relaxed by the Evidence Act.74

S. 22. A mistakeof oneparty as because it was Contract

caused

by

to matter of fact.

nAs

e section, Indian jurispruLaw that foreign law is a matter of fact, and the strictness of the rule has been somewhat

contract is not voidable merely caused by one of the parties to it

being under a mistake as to a matter of fact.s

an illustration of the rule, see Haji Abdul Rahman Allarakhiav. TheBombayand

Persia Steam Navigation Co. Similarly the court did not allow the contract to be avoided when petitioner alone was under a bona fide mistake that auction was held on the basis that the rental for the auction of the fishery right was for three years and not for one year. The respondent who was the other party to the contract did not share this mistake. The court reiterated that under S. 22 of the Act a contract is not voidable when one party alone was mistaken as to a fact.,'0 What

considerations

and objects are lawful and what not.

S.

23.

agreement

The

consideration

is lawful,

or

object

of an

unless-

it is forbidden by law;

or is of such a nature that, if permitted, it would defeat the provisions of any law; or is fraudulent; or 69. 70. 71. 72. 13. 74.

See Cooper v. Phibbs, LR 2 HL 149: [1861-73] All ER Rep 2109. See notes under S. 18 "Misrepresentation of fact or law". Seth Gokul Dass v. Murli, (1878) 3 Cal 602: LR 5 IA 78. Jowand Singh v. Sawan Singh, AIR 1933 Lah 836. Ghanshyam v. Girijashanker, (1944) Nag 244: AIR 1944 Nag 247. Indian Evidence Act, S. 38.

See commentsunderS. 20. 75.

Haji Abdul Rahman Allarakhia v. The Bombay and Persia Steam Navigation Co., (1892) 16 Bom S61. See notes under S. 20

"Rectification".

76. A. Singh v. Union of India, AlR 1970 Manipur 16 at 21.

Whactonsiderationsandobjectsarelmefulandwhatnot t es

involves or implies,

injury to the person or

S. 23

99

property of

another; or the Court regards it as immoral, or opposed to

public policy. In each of these cases, the consideration or object of an agreement is said to be unlawful. Every agreement of which the object or consideration is unlawful is void. lustrations (a) A agrees to sell his house to B for 10,000 rupees. Here B's promise to pay the sum of 10,000 rupees is the consideration for A's promise to sell the house, and A promise to sell the house is the consideration for B's promise to pay the 10,000 rupees. These are lawful considerations. (6) A promises to pay B 1,000 rupees at the end of sixX months, if C, who owes that sum to B, fails to pay it. B promises to grant time to C accordingly. Here the promise of each party is the consideration for the promise of the other party, and they are lawful considerations.

(c) A promises, for a certain sum paid to him by B, to make good to B the value of his ship if it is wrecked on a certain voyage. Here A's promise is the consideration for B's payment and B's payment is the consideration for A's promise and these are lawtul considerations. the (d) A promises to maintain B's child, and B promises to pay A 1,000 rupees yearly for purpose. Here, the promise of each party is the consideration for the promise of the other paty. They are lawful considerations.

(e) A, B and C enter into an agreement for the division among them of gains acquired, or to be acquired, by them by fraud. The agreement is void, as its object is unlawful.

() A promises to obtain for B an employment in the public service, and B promises to pay 1,000 rupees to A. The agreement is void, as the consideration for it is unlawful.

(g) 4, being agent for a landed proprietor, agrees for money, without the knowledge of his principal, to obtain for B a lease of land belonging to his principal. The agreement between A and B is void, as it implies a fraud by concealment by 4, on his principal. (h) A promises B to drop a prosecution which he has instituted against B for robbery, and B promises to restore the value of the things taken. The agreement is void, as its object is unlawful.

i) A's estate is sold for arrears of revenue under the provisions of an Act of the Legislature, by which the defaulter is prohibited from purchasing the estate. B, upon an understanding with A, becomes the purchaser, and agrees to convey the estate to A upon receiving from him the price which B has paid. The agreement is void, as it renders the transaction, in effect, a purchase by the

defaulter, and would so defeat the object of the law. G) 4, Who is B's mukhtar, promises to exercise his influence, as such with B in favour of C, and C promises to pay 1,000 rupees to A. The agreement is void, because it is immoral.

k) A agrees to let her daughter to hire to B for concubinage. The agreement is void, because it is immoral, though the letting may not be punishable under the Indian Penal Code (45 of 1860).

Unlawful objects.-By S. 10 an agreement is a contract (i.e. enforceable) only if it is made for a lawful consideration and with a lawful object. The present section declares what kinds of consideration and object are not lawful. The word "object" in this section is not used in the same sense as "consideration",

but it is used as distinguished from "design".78

77. 78.

"consideration", and it means "purpose

or

See Mohan Lal v. Udai Narayan, (1910) 14 CWN 1031, which is a parallel case. Jaffer Meher Ali v. Budge Budge Jute Mills Co., (1906) 33 Cal 702, 710; see on appeal (1907) 34 Cal 289; Sreenivasa Rao v. Rama Mohana, AIR 1952 Mad 579.

100

S. 23

Chapter I1-of Contracts, Voidable Contracts and VoidAgreements

With regard to a consideration

being

forbidden by law, it is to be observed that,

where the consideration is a promise, it may be forbidden in one of two distinct senses: (1) the promise may be something which it is unlawful to perform or (2) though the per formance is not unlawful, the law for reasons of public policy will not enforce it. Thus agreements of wager, or in restraint of trade (apart from the limited sanction given to them) are not unlawful but no legal, obligation attaches to them as the law will not enforce them. An agreement may be rendered unlawful by its connection with a past as well as with a future unlawful transaction. Thus the giving of security for money purporting to be

payable under an agreement whose purpose was unlawful is itself an unlawful object, even though it was not stipulated for by the original agreement. With regard to the tendency of an agreement to "defeat the provision of any law", these words must be taken as limited to defeating the intention which the Legislature has

expressed, or which is necessarily implied from the express terms of an act. It is unlawful to contract to do that which it is unlawful to do; but an agreement will not be void merely because it tends to defeat some purpose ascribed to the Legislature by conjecture, or even appearing, as a matter of history, from extraneous evidence, such as legislative debates or preliminary memoranda not forming part of the enactment. There is no department

of the law in

which the Courts have exercised larger powers

of restraining individual freedom on grounds of general utility and it is impossible to provide in terms for this discretion without laying down that all objects are unlawful which the Court regards as immortal or opposed to public policy. The epithet "immoral" points, in legal usage, to conduct or purposes which the State, though disapproving them, is unable, or not advised, to visit with direct punishment. "Public policy" points to political, economical or social grounds of objection, outside the common topics otf morality, either to an act being done or to a promise to do it being enforced.

Agreements

or other acts

may be contrary to the policy of the law without being morally any obvious moral censure.

disgraceful or exposed to

English authorities on the subject of agreements being held unenforceable asrunning counter to positive legal prohibitions, to morality, or to public policy, are inapplicable to thecircunmstances of India; because under the conditions of Indian manners and society such facts as are dealt with by certain classes of English decision do not occur. (1st Clause)

"Forbidden by Law"-An act or undertaking is equally forbidden by lawwhether it violates a prohibitory enactment of the Legislature or a principle of unwritten law. But in India, where the criminal law is codified, acts forbidden by law seem practically to

consist of acts punishable under the Penal Code and of acts prohibited by speciallegisla tion, or by regulations or orders made under authority derived from the Legislature. Parties are not, as a rule, so

foolish as to commit themselves to agreements to do anything

obviously illegal, or at any rate to bring them into Court; so the kind of question which arises in practice under this head is whether an act, or some part of a series of acts,agreed upon between parties does or does not contravene some legislative enactment or regulation made by lawful authority. Broadly speaking, that which has been forbidden in the public interest cannot be made lawful by paying the penalty for it; but an act which is in itself harmless does not become unlawful merely because some collateral requirement imposed for reasons of administrative convenience has been omitted.

79.

Fisherv. Bridges. (1854) 3 E&B 342; Geere v. Mare, (1863) 2 H&C 399.

What considerations and objects are lawful and what not

S. 23

101

Cases under this head have arisen principally in connection with Excise Acts, and they have almost all been decided with reference to English law. The principles may be stated thus: "When conditions are prescribed by statute for the conduct of any particular business or profession, and such conditions are not observed, agreements made in the

course of such business or profession are void if it appears by the context that the object of the Legislature in imposing the condition was the maintenance of public order or safety or the protection of the persons dealing with those on whom the condition is imposed, but they are valid if no specific penalty is attached to the specific transaction,

and if it appears that the condition was imposed for merely administrative purposes, e.g. the convenient collection of the revenue".80 The High Court of Bombay acted on these principles* where the question arose whether an agreement by a lessee of tolls from Government under the Bombay Tolls Act, 1875, to sub-let the tolls was valid and binding between the lessee and sub-lessee. Section 10 of the Act empowered the Government to lease the levy of tolls on such terms and conditions as the Government deemed desirable. One of the conditions of the lease was that the lessee should not sub-let the tolls without the permission of the Collector previously obtained, and another condition empowered the Collector to impose a fine of Rs. 200 for a breach of the condition. The lessee sub-let the tolls to the defendant without

the permission of the Collector, and then sued him to recover the amount which he had promised to pay for the sub-lease. It was contended on behalf of the defendant that the sublease was unlawful, as it was made without the permission of the Collector, and that the lessee was not therefore entitled to recover the amount claimed by him. But the con- tention was overruled as the Act did not forbid the transaction but merely imposed a condition for administrative purposes. Similarly, where a licence to cut grass was given by the Forest Department under the Forest Act, 1878, and one of the terms of the licence was that the licensee should not assign his interest in the licence without the permission of the Forest Officer, and a fine was prescribed for a breach of this condition, it was held that there being nothing in the Forest Act to make it obligatory upon the parties to

observe the conditions of the licence, the assignment would be binding upon the parties, though it was competent to the Forest Officer to revoke the licence if he thought fit to do so.82 The above Acts, which are intended solely for the protection of revenue, must be distinguished from Abkari and Opium Acts, which have for their object the protection of the public as well as the revenue. Thus an agreement to sub-let a licence to sell arrack issued under the Madras Abkari Act, 1886,85 or a licence to manufacture and sell country N.-W.P. Excise Act, 1887, or a licence to sell opium issued liquor granted under the under the Opium Act, 1878,85 or a licence to manufacture salt under the Bombay Salt

Act, 1890,36 without the permission each case without such permission

of the Collector, is illegal and void, the sublease in being prohibited by statute, and no suit will lie to

recover any money due or any sum

deposited under such an agreement. A breach of a

condition of a licence granted under the Bombay Abkari Act, 1877, is penal under that Act. Therefore if the licensee enters into a partnership in breach of the terms of his

80.

See FREDERICK POLLOCK, PRINCIPLES OF CONTRACT, (11th edn., 1942) at p. 275;

Fakirchand v.

Bansilal, AIR 1955 Hyd 28 (FB). See also BOI Finance Lid. v. Custodian, (1997) I0 SCC 48, S06 (non-compliance of directions issued by RBI). 81. Bhikanbhai v. Hiralal, (1900) 24 Bom 622; followed, Abdullah v. Allah Dijya, (1927) 8 Lah 310; Bhagwant Genuji v. Gangabisan, (1940) 42 Bom LR 750: 1911C 806: AIR 1940 Bom 369, 82. 83.

84. 85.

86.

Nazaralli v. Baba Miya, (1916) 40 Bom 64. Thithi Pakurudasu v. Bheemudu, (1902) 26 Mad 430. Debi Prasad v. Rup Ram, (1888) 10 All 577. As to what amounts toa sublease, see Radhey Shivam v. Mewa Lal, (1929) 51 All 506. Raghunath v. Nathu Hirji, (1894) 19 Bom 626.

smaljiv. Raghunath. (1909) 33 Bom 636; Rabiabibi v. Gangadhar, (1922) 24 Bom LR 111.

102

S. 23

Chapter I1-0f Contracts, Voidable Contracts and VoidAgreements

licence the agreement is void as forbidden by law.87 Nor does it make any difference if the partnership was entered into before the licence was obtained.5 A contract which is illegal at its inception, because it forbidden by a Government regulation, does not become valid after the expiry of the regulation.39 In such cases parties cannot recover any moneys paid under agreements, which are void as being forbidden by law.

In the case of contracts with public departments the breach of a condition issome times the subject of a pecuniary penalty. It does not follow that an agreement in breach of such a condition is immoral or opposed to public policy and therefore void. If the condition is imposed for administrative

purposes such an agreement is valid and the conse

quences are limited to the specific penalty.9 Agreement between partners providing that one of them shall enter into a wagering transaction on behalf of the firm with an outsider and profit and loss resulting from the transaction would be borne by them in equal shares is void and unenforceable, but it is not forbidden by law under the first clause of S. 23 of the Act and so it is not unlawful

under S. 23 of the Act.2 The word void cannot be equated with the expression "forbidden by

law'.3

Even a partnership

formed

to carry on a

wagering

transaction

is not

unlawful.* (2nd Clause)

"Defeat the provisions of any law."-

w" in this expression would seem term to include any enactment or rule of law for the time being in force in India; however it does

not mean "law"

the sense that the same is used in Article 13 of the Constitution.

This

branch of the subject may thus be considered under three heads according to the object or consideration of an agreement which is such as would defeat, (1) the provisions of any legislative enactment, or (2) the rules of Hindu and Mahomedan law, or (3) other rules of law for the time being in force in India. 1. Legislative enactment.-An agreement to pay a cess which the law has declared to be illegal is void. So when the manager of a temple at Broach sued to establish a right

to levy duty on cotton exported from Broach, the Court held that, even if the defendant had impliedly assented to pay, the agreement was unlawful as defeating the provisions of the Bombay Town Duties Act XIX of 1844, which 'had abolished all cesses not forming part of the land revenue.70 Again, if a suspect who is ordered to furnish security for good behaviour under the Code of Criminal Procedure deposits the amount of the security bond with the surety, he will not be able to recover it by a suit. This is because the effect of the agreement of deposit is to defeat the provisions of the Code by rendering the 87.

88. 89. 90. 91. 92. 93. 94.

95.

96.

Hormasji v. Pestonji, (1887) 12 Bom 422; Vishwanathan v. Namakchand, AIR 1955 Mad 536: Maniam Hiria v. Naga Maistry, AIR 1957 Mad 620. Velu Padayachi v. Sivasooriam, (1950) Mad 987: AIR 1950 Mad 444 (FB). Krishan Lal v. Bhanwar Lal, AIR 1952 Raj 81. Venkata v. Atar Sheik, (49) AM 252. Bhikanbhai v. Hiralal, (1900) 24 Bom 622 approving Gangadhar v. Damodar, (1896) 21 Bom 522. Gherulal Parakh v. Mahadeodas, AIR 1959 SC 781, 785, Para 8 and 792, Para 20: 1959 Supp (2) SCR 406. Gherulal Parakh v. Mahadeodas, AIR 1959 SC 781, 785, Para 8 and 792, Para 20: 1959 Supp (2) SCR 406. Gherulal Parakh v. Mahadeodas, AIR 1959 SC 781, 785, Para 8 and 792, Para 20: 1959 Supp (2) SCR 406.

Union of India v. Col. LSN Murthy, (2012) 1 SCC 718, contract cannot be held to violate S. 23 on the ground that it was in contravention of a mere "executive instruction prescribing reasonabie rates. Goswami Purushotamji Maharaj v. B. Robb, (1884) ILR 8 Bom 398.

S.23

What considerations and objects are lawful and what not

103

surety, a surety only in name.' Similarly, if a bail-bond is forfeited owing to the failure of the accused to appear, the surety cannot recover the amount from a person who agreed to indemnify him. But when an agreement is merely "void" as distinguished from "illegal," e.g. an agreement to give time to a judgment-debtor without the sanction of the Court under the old Civil Procedure Code-either party on performing his part of the contract can enforce it as against the other party. Under S. 11(2) of the Indian Companies Act, 1956, a trading partnership of more than 20 persons is illegal unless registered as a company.It has been held that suit will not lie for the dissolution of such a partnership as

it would defeattheprovisions of theCompaniesAct." But the illegality of thepartnership affords no reason why it should not be sued by an innocent person who is not aware of

the illegality which affects the firm The policy of the Insolvent Debtors Act to make the relief of the insolvent conditional on all his property being available for rateable distribution among all his creditors.

Therefore

an

agreement

made by an

insolvent

to pay one

creditor in full in

consideration of his not opposing his discharge is void as inconsistent with the policy of the Act An agreement by a debtor not to plead limitation is not a restraint of legal proceedings under S. 28 but it is void under S. 23, as it would defeat the provisions of the

Limitation Act. Where a discharged insolvent agrees to pay his old debt in consideration of the creditor entering into a fresh transaction, the transaction is valid.° In a partition suit a decree was passed against one of the parties for Rs. 1,000 for the marriage expenses of another

party. In order to evade the Child Marriage Restraint Act (XIX of 1929) the marriage of the party in whose favour the decree was passed was there was no prohibition against such a marriage. It

performed in a Native State, where was held that the decree could be

executed for the marriage expenses.

Contracts forbidden by regulations under the Defence of India Act are illegal. Agreements in contravention of the Jute Control Order and the Oil Seeds Order are void, and so are any references to arbitration contained in such agreements. The principal could not recover moneys received by the agent by means of sale of quota rights contrary

to Imports and Exports Act. 2 Agreements in contravention of Agra Tenancy Act,3 Bengal Tenancy Act,4 Rajasthan Tenancy Act, West Bengal Premises Rent Control Act.° Karnataka Land

1. Fateh Singh v. Sanwal Singh. (1875-80) ILR 1-2 All 751. 2. Bhupati Ch. Nandy v. Golam Ehibor Choudhury, (1919) 24 CWN 368 : AIR 11920 Cal 498. 3. Bank of Bengal v. Vyabhoy, (1891-92) 15-16 Bom 618. 4. Mewa Ram v. Ram Gopal, (1926) 48 All 735: AIR 1926 All 591 5. Appa Dada Patil v. Ramkrishna Vasudeo Joshi, (1929) 53 Bom 652: AIR 1930 Bom 5. 6. Naoroji v. Kazi Sidick Mirza, (1896) ILR 20 Bom 636. 7. Ballapraguda v. Thummana, (1917) 40 Mad 701; Jawahar Lal v. Mathura Prasad, AIR 1934 All 661 (FB).

8. Hashim Ismail v. Chotalal, (1938) 174 IC 863: AIR 1938 Rang11 9.

Anandaramayya v. Subbayya, (1940) 2 MLJ 353 : AIR 1940 Mad 901.

10.

Abdulla Saheb v. Guruvappa, AIR 1944 Mad 387.

11.

Birla Jute Manufacturing Co v. Dulichand, AlR 1953 Cal 450; Hussain Kasam Dada v. yayanagaram Commercial Associalion, AIR 1954 Mad 528. Ms. Nathumal Bhairon Bux & Co. v. Kashi Ram, AlR 1973 Raj 271. Motichand v. Ikram-Ullah, (1917) 39 All 173 (PC). Kristodhone v. Brojo Gobindo, (1897) ILR 24 Cal 895. Ram Karan v. State of Rajasthan, (2014) 8 SCC 282.

12. 13. 14. 15.

16. Saleh v. Manekji, (1923) 50 Cal 491. t L)

104

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Chapter IIOf Contracts,VoidableContractsand VoidAgreements

Refoms Act would not be enforced. Agreement entered into by the State Road Transport Corporation with another to run his bus as a nominee of the Corporation on the route in respect of which permit was issued in favour of the Corporation for 5 years was contrary to sections 42 and 59 of the Motor Vehicles Act 1939. Corporation cannot allow its nominee to run the vehicles against payment of some amount to Corporation. There is no statutory provision authorising the Corporation to grant such permit as it

would be exercising power of the Regional Transport Authority and Corporation cannot indirectly clutch at jurisdiction of the Regional Transport Authority, The principle of ex turpi causa non oritur actio ("from a dishonorable cause an action does not arise") provides that no person can pursue a cause of action arising in connection with his own illegal act.20 However it is important to distinguish the

enforcement of executory provisions arising under an illegal agreement and the enforcement of rights already acquired under the completed provisions of such an

general rule here is in pari delicto potior est conditio posidentis agreement. The (where the circumstances are such that the court will refuse to assist either party, the consequence must, in fact follow that the party in possession should not be

disturbed")

Thus, an executed transfer of property made in pursuance of an unlawful

agreement is valid and the court will assist the transferee in the protection of his interest provided that he does not require to base this on the unlawful agreement, The in pari delicto doctrine was considered by the Supreme Court in two appeals from the same statute called Bihar Buildings, (Lease, Rent and Eviction) Control Act 1947. In

Budhwanti v. Gulab Chand,5 Supreme Court found that there was no compulsion or exploitation and parties had contravened the provisions of the said Act for their mutual advantage. If that be the evidence, the excess rent paid voluntarily and without any protest under a mutual agreement in violation of the said Act cannot be recovered back by a tenant nor can he ask for adjustment of such amount towards the rent. In Mohd.

Salimuddin v. Mistrilal tenant in order to secure tenancy advanced certain amount to his landlord in violation of the prohibition of the aforesaid Act. An agreementbetween them contained a stipulation that the loan amount was to be adjusted against the rent which accrued. The amount so advanced was sufficient to cover a landlord's claim for arrears of rent. However a landlord filed a suit for eviction against a tenant. It was held

that tenant was entitled to claim adjustment of the loan amount against the rent. In this case, tenant cannot be said to be in arrears of rent after such adjustment of loan amount towards the rent. Here the exception of the doctrine was applicable as the position of the parties to an agreement was unequal and the statute was enacted for the benefit of the tenant. Also, the tenant was acting not voluntarily but under compulsion of circumstances and was obliged to succumb to the will of the landlord who was in a dominating position and made the tenant to advance money to him perforce to secure a lease. On the other hand, Supreme Court in Lachoo Mal v. Radhey Shyam2 found agreement between landlord and tenant neither illegal nor unlawful nor defeating the provision of any law within S. 23 of the Indian Contract Act in the following facts. A 17.

Jayamma v. Maria Bai, (2004) 7 SCC 459, 465 AIR

18. 19.

Brij Mohan v. M.P. Road Transport, AIR 1987 SC 29 :(1987) 1 ScCC 13. Brij Mohan v. M.P. Road Transport, AIR 1987 SC 29: (1987) 1 SCC 13.

20. 21.

PRAMANATHA AIYAR'S ADVANCED LAW LEXICON (4th edn., 2010) at p. 2452.

22. 23. 24. 25.

2004 SC 3957.

STROUD'S JUDICIAL DICTIONARY (4th edn, 1973) at p. 1317. See also notes under S. 65 "Where an agreement is discovered to be void".

Tinsley v. Milligan, (1993) 3 All ER 65 (HL). Budhwanti v. Gulab Chand, AIR 1987 SC 1484: (1987) 2 SCC 153. Mohd. Salimuddin v. Mistrilal, AIR 1986 SC 1019:(1986) 2 SCC 378, see for similar PC decision Kiriri Cotton Company Lid. v. Ranchhoddas Dewani, (1960) AC 192. Lachoo Mal v. Radhey Shyam, AIR 1971 SC 2213 (1971) 1 SCC 619.

S. 23

What considerations and objects are lawful and what not

105

tenant had surrendered possession of his shop to landlord for reconstruction of rooms on the upper storey of shop for his own residence under a written agreement. It also provided that tenant would be redelivered possession of his shop on the same rental basis and a landlord shall not be entitled to derive benefits from the U.P. Rent Control and Eviction Act 1947. Upon completion of construction landlord redelivered possession but claimed higher rent from tenant inspite of written agreement. The question for the Supreme Court was whether this agreement was unlawful as tending to defeat the provision of the said Act or it operated to waive the advantage of law, without infringing any public right or public policy. The Court found the latter interpretation to be the correct one as the U.P. tenant who required to be protected. A landlord

Rent Act was for the protection of could waive the benefit intended by

the Act. A private advantage, not involving public considerations, may be released or waived by a landlord.

In BOI Finance Lid. v. Custodian26 parties entered into a "buy-back agreement', i.e. securities were sold by one party to the other, and there was a corresponding obligation

on the parties to

re-transfer these at a fixed

price at a later date. The

securities were sold to the other party but before they could be re-transferred, the agreement was challenged as being illegal on the ground that buy-back agreements were prohibited by the RBI. Relying on the in pari delicto principle, 1t was observed that the illegality of the agreement could not invalidate the transfer which had already taken place, and the securities were allowed to lie where they fell'-with the original

buyer. It has been recognized that, as a general rule, a party may contract out of a statute and waive any benefits conferred upon him by such statute, even if such waiver is not expressly contemplated by such statute.27 Of course, if this waiver raises any additional

issue of public policy or infringes upon a public right, then Courts are unlikely to recognize or enforce such a waiver and will press into action the present provision to

strike that down.

2. Rules of Hindu and Mahomedan law.-An agreement that would defeat the provisions of Hindu law is unlawful within the meaning of the present clause. A contract to give a son in adoption in consideration of an annual allowance to the natural parents is an instance of this class, and a suit will not lie to recover any allowance on such a contract, though the adoption may have been made.3

A contract entered into by Hindus living in Assam, by which it is agreed that, in the event of the husband leaving the village in which the wife and her friends resided the marriage shall become null and void, is contrary to the policy of Hindu law.29 An agreement entered into before marriage between a Mohammedan wife and husband that the wife shall be at liberty to live with her parents after marriage, is void, and Upon the same does not afford an answer to a suit for restitution of conjugal rights. principle an agreement between a Mohammedan husband and wife for a future separation is void, and the wife cannot on separation recover the maintenance allowance provided

26. 27.

BOIFinance Lid. v. Custodian, (1997) 10 SCC 488, 513: AIR 1997 SC 1952. HR Basavaraj v. Canara Bank, (2010) 12 SCC 458, 467 (waiver by surety of rights under S 130 recognised).

28. Sitaram v. Harihur. (1910) 35 Bom 169, at pp. 179, 180; Raghubar Das Mahamt v. Raja Natabar Singh, (1919)4 Pat LJ 42; Narayan v. Gopalrao, (1922) 24 Bom LR 414:46 Bom 908.

29. Sitaram v. Mussamut Aheeree Heerahnee, (1873) 11 BLR 129, 134, 135. 30. Abdul v. Hussenbi, (1904) 6 Bom LR 728.

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by the agreement.3 But an agreement contemporaneous with the marriage that in case of strained relations between the busband and his wife, the wife would be entitled to claim the customary maintenance allowance is not void.32

3. Other rules of law in force in India. -It is a well established rule of law that, unless a will is proved in some form, no grant of probate can be made merely on the consent of parties. Hence an agreement or compromise as regards the genuineness and due

execution of a will, if its effect is to exclude evidence in proof of the will, is not lawful so as to be enforceable under the provisions of S. 375 of the Civil Procedure Code [now O. 23, R. 3]55 Similarly, a receiver being an officer of the Court, the Court alone is to

determine his remuneration, and the parties cannot by any act of theirs add to, or derogate from, the functions of the Court without its authority.34 A promise, therefore, to pay the salary of a receiver without leave from the Court, even if unconditional, being in contravention of the law, is not binding on the promisor.39

(3rd Clause) "Fraudulent"-Where the object of an agreement between A and B was to obtain a contract from the Commissariat Department for the benefit of both, which could not be obtained for both of them without practising fraud on the Department, it was held that the object of the agreement was fraudulent, and that the agreement was therefore void.36 But an agreement between A and B to purchase property at an auction sale jointly, and not to bid against each other, is perfectly lawful.37

(4th Clause)

Injury to the person or property of another"-The generalterm "injury" means criminal or wrongful harm. Evidently there is nothing unlawful in agreeing to carry on business lawful in itself, though the property of rivals in that business may, in a wide sense, be injured by the consequent competition. A bond which compels the executant to daily attendance, and manual labour until a certain sum is repaid in a certain month and penalizes default with overwhelming interest is unlawful and void. "Such a condition," the Court said, "is indistinguishable from slavery and such a contract is, in our opinion,

opposed to public policy and not enforceable.35 An agreement between two companies that they would not without the written consent of the other "at any time employ any person who

during the then past five years shall have been a servant of yours" is

unlawful.39

(5th Clause) "Immoral."-A landlord cannot recover the rent of lodgings knowingly let to a prostitute who carries on her vocation there. Similarly, money lent to a prostitute

31. Fatma v. Ali Mahomed, (1912) 37 Bom 280; contra Muhammad Muni-ud-din v. Jamal Fatima, (1921) 43 All 650; followed Muhammad Ali Akbar v. Fatima Begum, (1929) 1l Lah 85. 32. 33. 34.

Jamila v. Abdul, (1939) 184 IC 105: AIR 1939 Lah 165. Monmohini Guha v. Banga Chandra Das, (1903) 31 Cal 357. See Civil Procedure Code, O. 40, R. 1.

35. 36. 37. 38.

Prokash Chandra v. Adam, (1903) 30 Cal 696. Sahib Ram v. Nagar Mal, (1884) Punj Rec. no. 63. Nanda Singh v. Sunder Singh, (1901) Punj. Rec. no. 37. Ram Sarup v. Bansi Mandar, (1915) 42 Cal 742; Satish Chandra v. Kashi Sahu, (1918) 3 Pat LJ 412.

39. 40.

Kores Mamyfacturing Co. v. Kolok Manyfacturing Co., (1957) 3 Al ER 158. Gaurinath Mookerji v. Madhumani Peshaker, (1872) 9 BLR App 37; Bani Mancharam v. Regina Stanger, (1907) 32 Bom 581, at p. 586 et seq; Choga Lal v. Piyari, (1908) 31 All 58.

S. 23

Whatconsiderations and objects are lauful and what not

107

her trade cannot be recovered.4 On like grounds, expressly to enable her to carry on ornaments lent by a brothel-keeper to a prostitute for attracting men and encouraging prostitution cannot be recovered back."4 An assignment of a mortgage to a woman for future cohabitation is void, and it can be set aside at the instance of the assignor though partial eftect may have been given to the illegal consideration.3 Similarly, where the plaintiff advanced moneys to the defendant, a married woman, to enable her to obtain a divorce from her husband, and the defendant agreed to marry him as soon as she could obtain a divorce, it was held that the plaintiff was not entitled to recover back the amount, as the agreement had for its object the divorce of the defendant from her husband, and the promise of marriage given under such circumstances, was contra bonos mores.** An agreement to pay money upon the consideration that the plaintiff would give evidence in a civil suit on behalf of the defendant cannot be enforced. Such an agreement may be for giving true evidence, and then there is no consideration, for "the performance of a legal duty is no consideration for a promise; or it may be for giving favourable evidence either true or false, and then the consideration in vicious.*" An agreement to sell a share in the managing agency of a company to a person who is appointed to enquire into a dispute between the vendor and another in respect of the managing agency is void.-6

A consideration which is immoral at the time, and, therefore, would not support an immediate promise to pay for it, does not become innocent by being past, and so in Husseinali v. Dinbai, and again, in Kisondas v. DhonduA it was held that past cohabitation 1S not a good consiIderation for a transtfer of property. Bonds and covenants given in consideration of future co-habitation are void in law. The English view of such cases is that the alleged consideration is bad simply as being a past consideration. In a Patna case a person had agreed to pay a maintenance allowance to his discarded mistress.

That was considered a contract to compensate the woman for the social position that she had lost as the result of being a man's mistress, and contract was considered valid.

Opposed to public policy"-The general head of public policy covers a wide range of topics. Agreements may offend public policy by tending to prejudice the State in time of war (trading with enemies, etc.), by tending to the perversion or abuse of municipal justice (stifling prosecutions, champerty and maintenance) or, in private lite, by attempting to impose inconvenient and unreasonable restrictions on the free choice of individuals in marriage, or their liberty to exercise any lawful

tradeor

expression "public policy" is however incapable of a precise definition3

calling. The

It varies from

time to time. Transactions which were once considered against public policy are now being upheld, and vice-versa. Public policy, however, is not the policy of a particular

41. 42. 43.

Bholi Baksh v. Gulia, (1876) Punj Rec. no. 64 Alla Baksh v. Chunia, (1877) Punj Rec. no. 26. Kandaswami v. Narayanaswami, (1923) 45 Mad

LJ 551. See also Alice Mary Hill v. William Clark,

(1905) 27 All 266. 44. Bai Vijli v. Nansa Nagar, (1885-86) ILR 9-10 Bom 487. 45.

Sashannah Cheti v. Ramasamy Chetty, (1868) 4 MHC 7.

46. Gulabchand v. Kudilal, AIR 1959 MP 151. 47. 48.

49. 50.

Husseinali v. Dinbai, (1923) 25 Bom LR 252. Kisondas v. Dhondu, (1920) 44 Bom 542; Sabava v. Yamanappa, (1933) 35 Bom LR 345: AlR 1933 Bom 209. Istak Kamu v. Ranchhod Zipru, AlR (1947) Bom 198. Godfrey Mt. Parbati, (1938) 17 Pat. 308: 178 IC 574 : AIR 1938 Pat 502. The distinction between past cohabitation as being a consideration and loss of social status as being a consideration is fine.

S1. State of Rajasthan v. Basant Nahata, (2005) 12 SCC 77, 97-101 AIR 2005 SC 3401 (legislation delegating power exercisable on the basis of

imprecise" and "uncertain").

public

policy, concept analysed m detal and held

108

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government.2 In a suit between private parties, the Court will not enforce, on the ground of public policy, a contract which involves the doing in a foreign and friendly country of an act which is illegal by, and violates, the law of that country.35 However, courts are generally slower to invoke public policy in cases involving a foreign element on the ground that "transactions containing a foreign element may constitute a less serious threat to municipal institutions than would purely local transactions." The doctrine of public policy is not to be extended beyond the classes of cases already covered by it. No Court can invent a new head of public policy:35 it has even been said in the House of Lords that "public policy is always an unsafe and treacherous ground for legal decision."6 This does not affect the application of the doctrine of public policy to new cases within its recognised bounds. Where there has been a well recognised head of public policy, Courts will extend it to new transactions and changed circumstances. It may invent a new head of public policy in consonance with public conscience and public good and certainly the preamble to the Constitution, fundamental rights and the directive principles of state

policy.57 In Gherulal Parakh v. Mahadeodas Maiya the Supreme Court observed that the doctrine of public policy is a branch of common law and like any other branch of common law, it is governed by precedents. Its principles have been crystallized under different heads and though it is permissible for courts to expound and apply them to different sit uations, it should be invoked in clear and incontestable cases of harm to the public.9 Even if it is permissible for courts to evolve a new head of public policy, it should be done under extraordinary circumstances giving rise to incontestable harm to the society.00 The underlying rationale may be traced to the "paramount public policy" of upholding

the freedom of contract. 1. Trading with enemy.-It is long settled law that all trade with public enemies without licence of the Crown is unlawful. "The King's subjects cannot trade with an alien enemy, ie. a person owing allegiance to a Government at war with the King, without the King's licence."04 This includes shipping a cargo from an enemy's port even in a neutral

52.

Central Inland Water Transport Corp. Ltd. v. Brojo Nath Ganguly, AIR 1986 SC 1571, 1612,para 93 (1986) 3 SCC 156. See also ONGC v. Saw Pipes Lid, (2003) 5 SCC 705, 720: AIR 2003 SC 2629 (concept of public policy' discussed in the context of setting aside an arbitration award under S. 34 of the Arbitration and Conciliation Act, 1996).

53.

Regazzoni v. K.C. Sethna Lud, (1957) 3 All ER 286.

54. RemusagarPower Co Lid v. General Electric Co Ltd, (1994) Supp (1) SCC 644, 678: AIR 1994 55.

S6. 57.

S8. 59.

SC 860 (case involving enforcement of a foreign arbitration award). LORD HALSBURY, Janson v. Driefontein Consolidated Mines, (1902) AC 484, 491. See also Shrinivasdas Lakshmi Narayan v. Ramchandra Ramrattandas, (1920) 44 Bom 6; Abdul Rahim v. Raghunath Sukul, AIR 1931 Pat 22. LORD DAVEY (1902) AC at p. 500. Central Inland Water Transport Corp. Lud. v. Brojo Nath Ganguly, AlR 1986 SC 1571, 1612, para 93:(1986) 3 SCC 156. Gherulal Parakh v. Mahadeodas Maiya, (1959) 2 SCR (Supp.) 406: AlR (1959) SC 781. Gherulal Parakh v. Mahadeodas Maiya, (1959) 2 SCR (Supp.) 406: AIR (1959) SC 781.

60. Gherulal Parakh v. Mahadeodas Maiya, (1959) 2 SCR (Supp.) 406: AIR (1959) SC 781.

61.

Printing and Numerical Registering Co v. Sampson, (1875) LR 19 Eq 462 : 32 LT 354; Zoroastrian Coop Housing Society Lid. v. District Registrar, (2005) 5 SCC 632, 657-662: AIR 2005, SC 2360 (bye-laws of a Pasi housing society prohibited sale of house to non-Parsis, membership under-taken voluntarily, held provision was enforceable since public policy itself lies in the freedom of contract). 62. LORDMACNAGHTEN Janson v. Driefontein Consolidated Mines, (1902) AC 484 at p. 499: [190003] All ER Rep 426 (HL).

Whatconsiderationsandobjects are lawful andwhat nott

S. 23

109

vessel3 Ifthe performance of a contractmade in time ofpeaceisrendered unlawful by the outbreak of war, the obligation of the contract is suspended or dissolved according as the intention of the parties can or cannot be substantially carried out by postponing the performance till the end of hostilities. The recent development of cases of this class is dealt with under S. 56 below. The rules under this head become applicable only when an actual state of war exists. A contract of insurance made before war cannot be vitiated, as regards a loss by seizure before any act of public hostility, by the fact that war did break out shortly afterwards.05

2. Stifling prosecution.-Agreements for stifling prosecutions are a well known class of those which the Courts refuse to enforce on this ground. The principle is "that you shall not make a trade of a felony"so In England the compromise of any public off ence is illegal. If the accus person is innocent, the law [is] abused for the purpose of extortion, if guilty, the law [is] eluded by a corrupt compromisescreening the criminal for a bribe."67 A compromise of proceedings which are criminal only in form, and involve only private rights, may be lawful.os This perhaps is of no importance in Indian practice, where we have a statutory list of compoundable offences.0y "The criminal law of this country makes a difference between various classes of offences. With regard to some, it allows the parties to come to an agreement and either not to take proceedings or to drop the proceedings after institution in a few instances even without the leave of the Court, and, in other instances, with the leave of the Court. But there are other cases which cannot be compounded or arranged between the parties... If the offence [is] compoundable and can] be settled in or out of the Court without the leave of the Court, there seems no reason why [a compromise] should be regarded as forbidden by law or as against public policy, the policy of the criminal procedure being to allow such a compromise in such cases." Thus, where A agreed to execute a Kabala of certain lands in favour of B in consideration of B abstaining from taking criminal proceedings against A with respect to an offence of simple assault which is compoundable, it was held that the contract was not against public policy and could be enforced.7 The same principle was applied where the offence was compoundable with the permission of the Court and was so compounded." But where the offence is non-compoundable as where the charge is one of criminal breach of trust and the offence is compounded by the accused passing a bond to the

complainant, the latter cannot recover the amount of the bond.'" An arbitration agreement

63. 64.

Esposito v. Bowden, (1857) 7 E&B 763. Esposito v. Bowden, (1857) 7 E&B 763.

65. Janson v. Driefontein Consolidated Mines, (1902) AC 484 [1900-03]All ER Rep 426(HL), followed in Wolf & Sons v. Dadyba Khimji & Co., (1920) ILR 44 Bom 631 : AIR 1920 Bom 192. 66.

LORD WESTBURY, Williams v. Bayley, (1866) LR 1 HL 200, 220; Mohanlal v. Kashiram, Nag 105 :AIR 1950 Nag 71.

(1950)

67. 68.

Windhill Local Board v. Vint, (1890) 45 Ch Div. 357 Fisher & Co. v. Apollinaris Co, (1875) LR 10 Ch 297, as qualified by Windhill Local Board v.

Vint, (1890) 45 Ch Div. 351. See also Tek Chand v. Harja Rai Arjau Das, (1929) 117 IC 74: AIR 1929 Lah S64. 69.

See S. 320, Criminal

Procedure Code, 1973, see also Penal Code, ss. 213, 214.

in Ahmed Hassan v. Hassan 70. Per CUR. Amir Khan v. Amir Jan, (1898) 3 CWN 5, followed Mahomed, (1928) 52 Bom 693; Harbans Singh v. Bawa Singh, AiR I952 Cal 73. 71. Per CUR. Amir Khan v. Amir Jan, (1898) 3 CWN 5, followed in Ahmed Hassan v. Hassan Mahomed, (1928) 52 Bom 693; Harbans Singh v. Bawa Singh, AiR 1952 Cal 73. 12. Ouseph Poulo v. Catholic Union Bank, AlR 1965 SC 166:(1964) SCR 745. 13. Majibar v. Syed Muktashed, (1912) 40 Cal 113; Mottai v. Thanappa, (1914) 17 Mad 385; Ahmed

Hassan v. Hassan Mahomed (1928) 52 Bom 693, Habidad Khan v. AbdulRahman, (1931) 53 All 130: AIR 1931 Cal 128; Mishrimal v. Sohanraj, ILR (1959) Raj 934.

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Chapter I10f Contracts, VoidableContracts and VoidAgreements

to stifle a non-compoundable offence cannot be enforced.74 In the Supreme Court case a partner R filed a complaint against his co-partners including an Appellant in the

Magistrate's Court alleging that the accounts of the partnership were fraudulently altered. Later on, an agreement was executed by all the partners referring their dispute to an arbitrator and R agreed to withdraw the aforesaid complaint pending before the Mag-

istrate Court. When the question of enforcement of an arbitrator's award arose, Appellant alleged for setting aside the award of an arbitrator on the ground that the arbitration agreement was invalid under S. 23 of the Act insofar as arbitration was the result of an

agreement to stifle prosecution. The Supreme Court accepted the Appellant's contention. As the offence charged by R against the Appellant was non-compoundable offence, the withdrawal of such proceeding was a consideration for the arbitration agreementto which S. 23 would be attracted. Once the machinery of the criminal law is set for non compoundable offence, it is for the criminal courts alone to deal with the allegation and that decision cannot be taken out of the hands of the criminal court and dealt with by private individuals. " A bond in discharge of a pre-existing liability is valid although on execution of the bond a prosecution of the executant for a non-compoundable offence is withdrawn. This is because the withdrawal of the prosecution may be the motive but is not the consideration or object of the bond.76 As a suit will not lie on anagreement to stifle a prosecution so an agreement of this class will not avail as defence to a suit. Thus, where in a suit for damages for wrongful arrest and confinement the defendant pleaded an agreement under which the plaintiff was to give up all claims against the defendant for his arrest and confinement in consideration of the defendant withdrawing charges of criminal trespass and being a member of an unlawful assembly preferred against the plaintifi, it was held that, the latter oftfence being non-compoundable, the agreement could not be set up as an answer to the suit. 3. "Champerty and Maintenance-The practices forbidden under these names by English law may be summarily described as the promotion of litigation in which one has no interest of one's own. Maintenance is the more general term, champerty, which in fact is the subject of almost all the modern cases, is in its essence a bargain whereby the one party is to assist the other in recovering property, and is to share in the proceeds of the action."8 Agreements of this kind are equally illegal and void whether theassistance to be furnished consists of money, or, itseenms,of professional assistance, or both. They are in practice often found to be also disputable on the ground of fraud or undue influence as between the parties.30 The specific rules of English law against maintenance and champerty have not been adopted in India,31 but the principle, so far as it rests on general grounds of policy, is regarded as part of the law of "justice, equity, and good conscience" to which the decisions of the Court should conform. The leading judgment to this effect is in G.F. Fischer

74.

V. Narasinha Raju v. V. Gurumurthi Raju, (1963) 3 SCR 687: AIR 1963 SC 107.

75.

V. Narasinha Raju v. V. Gurumurthi Raju, (1963) 3 SCR 687: AIR 1963 SC 107.

76. Shaikh Gafoor v. ML. Hemamta, (31) AC 416; Deb Kumar v. Anath Bandhu, (1931) 35 CWN 28: AIR 1931 Cal 421; Ouseph Poulo v. Catholic Bank, AlR 1965 SC 166: (1964)7 SCR 745. 77. Dalsukhram v. Charles de Bretton, (1904) 28 Bom 326; V. Narasimharaju v. Gurumurthy, AlR 1963 SC 107:(1963) 3 SCR 687. 78.

Hutley v. Hulley, (1873) LR 8 QB Churchill, (1888) 40 Ch D at p. 488.

112, per BLACKBURN, J.: and see per CHITTY J., Guy v.

79. Stanley v. Jones, (831) 7 Bing 369, may be considered the leading modem case; Re Attorneys and Solicitors Act, (1875) 1 Ch D 573.

80. Rees. v. De Bernardy, (1896) 2 Ch 437; U. Pe Gyi v. Maung Thein Shiv, (1923) 1 Rang 565. 81. Ram Coomer Coondoo v. Chunder Contu Mookerjee, (1876) LR 4 IA 23 :2Cal 233; Banarsi Das v. Sital Singh, (1920) 121 1C 295 :AIR 1930 Lah 392.

uslak., SIfeDIif AlA:0

What considerations and objects are lawful and what not

S. 23

111

v. Kamala Naicker,32 an appeal from the Sudder, Dewanny Adawlut, Madras. In Bhagwat Dayal Singh v. Debi Dayal Sahu,35 the Judicial Committee clearly laid it down that an agreement champertous according to English law was not necessarily void in India; it must be against public policy to render it void here. A present transfer of property for consideration by a person who claims it as against another in possession thereof, but who has not yet established his title thereto, is not for that reason opposed to

public policy.* Similarly, agreements to share the subject of litigation, if recovered in, consideration of supplying funds to carry it on are not in themselves opposed to public policy.3 But agreements of this kind ought to be carefully watched and when found to be extortionate and unconscionable so as to be inequitable against the party, or to be made, not with the bona fide object of assisting a claim believed to be just and of obtaining a reasonable recompense therefore, but for improper objects, as for the purpose

of gambling in litigation or of injuring or oppressing others by abetting and encouraging unrighteous suits so as to be contrary to public policy, effect ought not to be given to them.o But it is essential to have regard not merely to the value of the property claimed but to the commercial value of the claim. "The uncertainties of litigation are proverbial; and if the financier must risk losing his money he may well be allowed some chance of exceptional advantage."> Where a claim was of a simple nature and in fact no suit was necessary to settle the claim, an agreement to pay Rs. 30,000 to the plaintiff for assisting in recovering the claim was held to be extortionate and inequitable.35 A contract to assist

a litigant so as to delay the execution of a decree against him is opposed to public policy and cannot be enforced. Agreements between legal practitioners-subject to the Legal Practitioners Act, 1879,

(corresponding now to the Advocates Act, 1961) and their clients, making the remune ration of the legal practitioner dependent to any extent whatever on the result of the case in which he is retained, are illegal as being opposed to public policy.0

4. Interference with course of justice.-Any agreement for the purpose, or to the effect, of using improper influence of any kind with judges or officers of justice is void." An

agreement to pay a fee to a holy man for prayers for the success of a suit is not an

interference with the course of justice.2

82. G.F. Fischer v. Kamala Naicker. (1860) 8 MIA 170 (PC). 83. Bhagwat Dayal Singh v. Debi Dayal Sahu, (1908) 35 Cal 420: LR 35 IA 48. 84. Achal Ram v. Kazim Hussain Khan, (1905) 27 All 271: LR 32 IA 113, as explained in Bhagwant Dayal Singh v. Debi Dayal Sahu, (1908) 35 Cal 420: LR 35 IA 48. 85.

Kumwar Ram Lal v. Nil Kanth, (1893) LR 20 IA 112; Inder Singh v. Munshi, (1920) 1 Lah 124; Raja Venkata v. Shri Venkatapathi Raju, (I1924) 48 Mad 230 (250). 86. Ram Coomar Coondoo v. Chunder Canto Mookerjee, (1876) LR 4 IA 23 :2 Cal 233: Baldeo Sahai

v. Harbans, (1911) 33, All 626; Marina Viranna v. ValliuriRamanamma,(1927) 1091C 87: AiR 1928 Mad 437; Ramanamma v. Viranna, (1931) 33 Bom LR 960: AlR 1931 PC 100; Amrita v. Pratap, (1931) 52 CLJ 492: AIR 1931 Cal 144; Lucy Moss v. Mah Nyein, AIR 1933 Rang 418. 87. Lala Ram Sarup v. Court of Wards, (1940) 67 IA S0: (1940) Lahl: 185 IC 590: AIR 1940 PC 19.

88.

Harilal Nathalal v. Bhailal Pranlal, (1940) 42 Bom LR 165: 188 IC 217: AIR 1940 Bom 143; Venkataswamy v. Nagi Reddy, AIR 1962 AP 457. 89. Nand Kishore v. Kunj Behari, (1933) All LJ 85: AIR 1933 All 303. 90. Ganga Ram v. Devi Das, (1907) Punj Rec. no. 61; In the matter of Mr. 'GAdvocate, AIR (1954) SC 557 (1955) 1 SCR 490 56 Bom LR 838; R.B. Basu v. P.K. Mukerji, AIR (1957) Cal 449 (Chartered Accountant). 91. Ratlan Chand Hira Chand v. Askar Nawaz Jung, (1991) 3 SCC 67, 78; MD, Army Welfare Housing Organisation v. Sumangal Services (P) Lid., (2004) 9 SCC 619, 66l: AIR 2004 SC 1344. 92.

BalsundraMudaliar v.MahomedOosman,(1930)54 Mad 29: 57 Mad I 154.

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Chapter I1Of Contracts, Voidable Contracts and VoidAgreements

S. 23

Similarly, an agreement which is in contravention of a statute or opposed to its gen-

eral policy will not be enforced by a court of law. A compromise decree enabling the decree holder to attach moneys in contravention of the provisions of S. 60 of the Civil Procedure Code has been held to be unlawful and not enforceable.2

5. Marriage procurement are undoubtedly

contracts.-Agreements to procure marriages for reward

void by the Common

Law, on the ground that marriage

ought to

proceed, if not from mutual affection, at least from the free and deliberate decision of the parties with an unbiased view to their welfare. In England, however, this topic is all but obsolete. Such questions have come before Indian Courts in several moderm cases, with not quite uniform results. In all those cases, it will be observed, the parties to the suit have been Hindus, a community in which the consent of the marrying parties has rarely anything to do with the marriage contract, which is generally arranged by the parents or friends of the parties before they themselves are of an age to give a free and intelligent consent. But it has been held by the High Courts in India that an agreement to pay money to the parent or guardian of a minor in considerations of his consenting to give the minor in marriage, is void as being opposed to public policy." So also an agreement to pay a penalty in case a minor daughter is not given in marriage to a particular person is void Again, there IS no doubt that an agreement by a person to pay money to a stranger hired to procure a wife is opposed to public policy and will not be enforced by any of the

Indian Courts.°

6. Agreement tending to create interest against duty. One of the reasonssuggested for not enforcing agreements to reward parents for giving their children in marriage is that such agreements tend to a conflict of interest with duty. The same principle is

applied by the Common Law to dealings of agents and other persons in similar fiduciary positions with third persons. An agent must not deal in the matter of the agency on his own account without his principal's knowledge. In the present Act the rules on this head are embodied in the chapter on Agency,' and will accordingly be considered in that place. If a person enters into an agreement with a public servant which to his knowledge might cast upon the public servant obligations inconsistent with the public duty, the agreement is void.3

In respect of acquisition of property by a government servant, a distinction has been made between a transaction contrary to statutory prohibition and a transaction in contravention of government servant's conduct rules, In the former, a transaction would be void and in the latter, it would not be void. If the carrying out of an agreement involved

1.

Motichand v. Ikram Ullah, (1917) 39 All 173 (PC) contrary to the provision of Agra Tenancy Act;

Kristodhone v. Brojo Gobindo, ((897) ILR 24 Cal 895, contrary to Bengal Tenancy Act and Agra 2. 3. 4.

Tenancy Act; Saleh v. Manekji, 50 Cal 491, contrary to the Bengal Rent Act. M& S.M. Rly. v. Rupchand Jitaji & Co., 51 Bom LR 1024. Purshotamdas Tribhovandas v. Purushotamdas Mangaldas, (1897) 21 Bom 23. Dholidas v. Fulchand, (1897) 22 Bom 658; Baldeo Das v. Mohamaya, (1911) 15 CWN 447; Kalvangunta Venkatay, Kalvangunta Lakshmi, (1908) 32 Mad 185; Abbas Khan v. Nur Khan, (1920) 1 Lah 574.

5. Devarayan v. Muthuraman, (1914) 37 Mad 393 18 IC 515; Fazal Rahim v. Nur Mohammad, AlR 1933 Pesh 121,

6.

Vaithyanathan v. Gungarazu, (1893) 17 Mad 9; Pitamber v. Jagjiwan, (1884) 13 Bom 131; Bhan Singh v. Kaka Singh, AIR 1933 Lah 849.

7.

Ss. 215, 216. Sitarampur Coal Co., Ltd. v. Colley. (1908) 13 CWN 59. Dharwar Bank v. Mahomed, AlR 1931 Bom 269.

9.

What considerations and objects are lawful and what not

S. 23

113

violation of public policy (offering a bribe for a favourable report in the inquiry proceedings), such an agreement cannot be enforced0

7. Sale of public offices. -Traffic by way of sale in publie offices andappointments obviously tends to the prejudice of the public service by interfering with the selection of the best qualified persons, and such sales are forbidden in England by various statutes said to be in affirmance of the Common Law,The cases in India on this branch of the subject have arisen principally in connection with religious offices. The sale of the office of a sebait has been held invalid by the High Court of Madras.2 Similarly, the office of mutwali ofa wakf is not transferable,S nor the land which is the emolument of a religious office.14 An agreement to pay money to a public servant to induce him to retire and thus make way for the appointment of the promisor is virtually a trafficking with reference to an

office, and is void under this section.l Similarly, an agreement by co-sharer in a mahal to pay an annuity to another co-sharer in consideration of the latter withdrawing his

candidature for lambardarship is opposed to public policy and void.l6 IfA pays money to B who promises to use his influence and to secure A's son an appointment in the public service, A cannot recover the money if his son does not secure the appointment.

8. Agreements tending to ereate monopolies.-Agreements having for their object the creation of monopolies are void as opposed to public policy.

9 Agreement not to bid.

-An agreement between persons not to bid against one

another at an auction sale is not necessarily unlawful. Such an agreement is not unlawful if the object is merely to make a good bargain.20 But it is unlawful, if the object is to defraud a rival decree-holder.21

10. Suicide.-In England suicide by a sane person is felode se, and it has accor dingly been held that the heirs or assignees of an assured, who has committed suicide, cannot enforce the insurance policy, even though on its true construction the insurers had This was on the ground that suicide was a crime, and it agreed to pay in such an event. would be against publie policy to enforce such a contract of insurance. In India, however, suicide is not a crime, nor is it against public policy to enforce a contract of insurance where the assured has committed suicide.3 10.

Ratanlal v. Firm Mangilal, AIR 1963 MP 323.

11.

See FREDERICK POLLOCK, PRINCIPLES OF CONTRACT, (11th edn., 1942) at pp. 305-306.

12. Kuppa Gurukal v. Dora Sami, (1822) 6 Mad 76. See also Gnanasambanda Pandara Sannadhi v. Velu Pandaram, (1900) 23 Mad 271: LR 27 IA 69. 13. Wahid Ali v. Ashruff Hossain, (1882) 8 Cal 732. 14. Anjaneyalu v. Sri Venugopala Rice Mill, Lid., (1922) 45 Mad 620. 15. See Venkataramanayya v. J.M. Lobo, AlR 1955 Mad 506. 16. Puttulal v. Raj Narain, (1931) 53 All 609: AIR 1931 All 428. 17. Ledu v. Hiralal, (1916) 43 Cal 115.

18. Somu Pillai v. 1The Municipal Council, Mayavaram, (1905) 28 Mad 520; Devi Dayal v. Narain, (1927) 100 IC 859 : AIR 1928 Lah 33; District Board, Jhelum v. Hari Chand, AlR 1934 Lah 474; Kameshwar Singh v. Mahomed Yasin Khan, (1938) 17 Pat 225: 179 IC 431 : AlR 1938 Pat 473.

19. 20.

Hari v. Naro, (1894) 18 Bom 342; Doorga Singh v. Sheo Pershad, (1889) 16 Cal 194, 199; Gurmukh Singh v. Amar Singh, (1991) 3 SCC 79, 83. Mohomed Meera v. Savvasi Vijaya, (1900) 23 Mad 227: 27 IA 17; Maung Sein Hrin v. Che Pan Ngaw, (1925) 3 Rang 275. Ram Lal v. Rajendra Nath, (1933) 8 Luck 233 AIR 1933 Oudh 124.

21. 22. Beresford v. Royal Insurance Co. Ltd., (1938) AC 586:[1938] 2 All ER 602. (But now the position is altered in England by Suicide Act 1961). 23. Scottish Union & National Insurance Co. v. Roushan Jahan, (1945) 20 Luck 194 AIR 1945 Oudh 152.

114

S. 23

Chapter I1-of Contracts, Voidable Contracts and VoidAgreements

11. Unconscionable agreements.-Terms falling short of undue influence or coercion but nevertheless unfair or unconscionable,2 or caused by economic duress, have been struck down by the courts on the ground of public policy. The test to be applied is whether the terms of the contract "are so unfair and unreasonable that they shock the conscience of the court."20 Thus, in Central Inland Water Transport Corporation Lid. v. Brojo Nath Ganguly,a company entered into a scheme of arrangement with CIWTC Ltd, a government corporation. Under the scheme, officers of the company could either continue in the corporation, or leave and receive a small compensation. Some officers of the company decided to continue in the corporation, but their services were terminated by giving three months notice, which was provided by the rules of the corporation. This rule was challenged as unconscionable. Since the rule was a part of the contract of employment, its validity fell to be tested under the general law of contracts. The court held that even though no case of coercion, fraud, misrepresentation or undue influence was made out, the clause was unconscionable which *shocked the conscience

of the court" and was hence against public policy. It wasobserved "[The] principle is that the courts will not enforce and will, when called upon to do so, strike down an unfair and unreasonable contract, or an unfair and unreasonable clause in a contract, entered into between parties who are not equal in bargaining power. It is difficult to give an exhaustive list of all bargains of this type... One can only attempt to give some illustrations. For instance, the above principle will apply where the inequality of bargaining power is the result of the great disparity in the economic strength of the contracting parties. It will apply where the inequality is the result of circumstances, whether of the creation of the parties or not. It will apply to situations in which the weaker party is in a position in which he can obtain goods or services or means of livelihood only upon the terms imposed by the stronger party or go without them. It will also apply where a man has no choice, or rather no meaningfül choice, but to give his assent to a contract or to sign on the dotted line in a prescribed or standard form or to accept a set of rules as part of the contract, however unfair, unreasonable and unconscionable a clause in that contract or form or rules may be... there can be myriad situa-

tions which result in unfair and unreasonable bargains between parties possessing wholly disproportionate and unequal bargaining power. These cases can neither be enumerated nor fully illustrated. The court must judge each case on its own facts and circumstances.

The application of this principle is however excluded in cases where-i) the bargaining power of the contracting parties is equal or almost equal; (i1) both parties are businessmen and the contract is a commercial transaction.

Waiver of illegalityAgreements which seek to waive an illegality are void on grounds of public policy.30 Whenever an illegality appears, whether from the evidence 24. Central Inland Water Transport Corporation Ltd. v. Brojo Nath Ganguly. (1986) 3 SCC 156: AIR 1986 SC 1571; Lily White v. R Mumuswami, AlR 1966 Mad 13 (condition in laundry receipt that only half price will be paid in case of loss of gaments given for washing); RS Deboo v. MV 25. 26. 27. 28.

29.

30.

Hindelkar, AIR 1995 Bom 68 (clause in insurance policy requiring insured to be defended by solicitor appointed by insurer). Dai-ichi Karkaria Pvt. Ltd. v. ONGC, AIR 1992 Bom 309. See also notes under S. 15 "Duress". Central Inland Water Transport Corporation Lid. v. Brojo Nath Ganguly, (1986) 3 SCC 156, 219: AIR 1986 SC 1571. Central Inland Water Transport Corporation Lid. v. Brojo Nath Ganguly, (1986) 3 SCC 156: AIR 1986 SC 1571. Central Inland Water Transport Corporation Ltd. v. Brojo Nath Ganguly, (1986) 3 SCC 156, 216 AIR 1986 SC 1571.

Central Inland Water

Transport Corporation Lid. v. Brojo Nath Gamguly, (1986) 3 SCC 156, 216: AIR 1986 SC 1571; Indian Bank v. Blue Jaggers Estate Lid, (2010) 8 SCC 129, 136 AIR 2010 SC 2980, Phulchand Exports Lid. v. 0.0.0. Patriot, (2011) 10 SCC 300 at 315. Dhamukdhari v. Nathia, (1907) 1l CWN 848; La Banque v. La Banque, (1887) 13 App Ca 111.

Agreementsvoid. ifconsiderationsandobjectsunlawful in part

S.24

115

given by one side or the other, the disclosure is fatal to the case. A stipulation of the

strongest form to waive the objection would be tainted with the vice of the original contract and void for the same reasons. Wherever the contamination reaches, it destroys. It is therefore open to a Court itself to take objection when it appears that the contract is tainted with illegality or immorality.3

Void Agreements

S. 24. If any part of a single consideration for and one or more objects, or any one or any part of any considerations objects unlawfül in part. one of several considerations for a single object, is unlawful, the agreement is void. Agreements void, if

lustration A promises to superintend, on behalf of B, a legal manufacturer of indigo, and an illegal traffic in other articles. B promises to pay A a salary of 10,000 rupees a year. The agreement is void, the object of A's promise, and the consideration for B's promise, being in part unlawful.

Entire or divisible agreements.-This section is an obvious consequence of the general principle of S. 23. A promise made for an unlawful consideration cannot be enforced, and there is not any promise for a lawful consideration if there is anything illegal in a consideration

which must be taken as a whole. On the other hand,

it is well

settled that if several distinct promises are made for one and the same lawful consideration, and one or more of them be such as the law will not enforce, that will not of itself prevent the rest from being enforceable. The test is whether a distinct consideration which is wholly lawful can be found for the promise called in question. "The general rule is that, where you cannot sever the illegal from the legal part of a covenant, the contract is altogether void; but where you can sever them, whether the illegality be created by statute or by the common law, you may reject the bad part and

retain the good.

An agreement consisting of two independentparts, only one of which is illegal, can be severed and the legal part can be given effect to while the illegal part can be ignored.33 On the other hand, an agreement with a pleader to pay a fee of Rs. 500 if he

wins the suit and also to transfer to him part of the property in dispute, is not severable and is

wholly

void.34

Where a part of a

consideration

for an agreement was the

withdrawal of a pending criminal charge of trespass and theft, it was held that the whole agreement was void.35 Where A promised to pay Rs. 50 per month to a married woman B, in consideration of B living in adultery with A and acting as his house-keeper, it was held that the whole agreement was void, and B could not recover anything even for services rendered to A as

31. 32.

33.

Narayana Rao v. Ramachandra Rao, AIR 1959 AP 370. WILES J., in Pikering v. llfracomb Ry. Co., (1868) LR 3 CP 235 at p. 250.

BOI Finance Ltd. v. Custodian, (1997) 10 SCC 488, S09: AlR 1997 SC 1952 (case concerning a

buy-back or "ready-forward" arrangement,where the ready leg was legal while the "torward leg was illegal). This case was decided under S. 57, which might perhaps be misplaced since this

was not a case concerning reciprocal promises (as defined under S. 2(1). It is submitted that this case should rather be treated as authority for the principle of severability under S. 24. See alsoCanbank Financial Services Ltd. v. Custodia, (2004) 8 SCC 355, 381 AIR 2004 SC 5123. 34. Kathu Jairam Gujar v. Vishwanath Ganesh Javadekar, (1925) 49 Bom 619.

35. Srirangachariar v. Ramasami Ayanga, (1894) 18 Mad 189; Bindeshari Prasadv. Lekhraj Sahu, (1916)1 Pat L 48, 60; Bani Ramachandra v. Jayawanti, (1918) 42 Bom 339.

116

Chapter I1of Contracts, VoidableContracis and VoidAgreemenis

S. 25

house-keeper.36 Similarly, a suit will not lie to recover money advanced as capital for the purposes of a partnership which is partly illegal.37 Agreement consideration unless,

without void,

S. 25. An

agreement made without considera-

tion is void unless-

(1) it is expressed in writing and registered under registerin edwriting and the law for the time being in force for the registration of "[documents] and is made on account of natural love and affection between parties standing in a near relation to each other; or unless or is a promise

to

(2) it is a promise to compensate,

compensate something done,

a person who has already

wholly or in part,

voluntarily done some

thing for the promisor, or something which the promisor was legally compellable to do; or unless

or isapromiseto pay a debt barred limitation law.

3) it isS a promīse,

made in

by the person to be charged

writing

and signed by

therewith, or by his agent

generally or specially authorised in that behalf, to pay wholly or in part a debt of which the creditor might have enforced payment but for the law for the limitation of suits.

In any of these cases, such an agreement is a contract.

Explanation 1-Nothing in this section shall affect the validity, as between the donor and donee, of any gift actually made.

Explanation

2.-An agreement to which the consent of the pro-

misor is freely given is not void merely because the consideration is inadequate; but the inadequacy of the consideration may be taken into account by the Court in determining the question whether the

consent of the promisor was freely given lhustrations (a) A promises, for no consideration, to give to B Rs. 1,000. This is a void agreement. (b) 4, for natural love and affection, promises to give his son, B, Rs. 1,000. A puts his promise

to B into writing and registers it. This is a contract. (c) A finds B's purse and gives it to him. B promises to give A Rs. 50. This is a contract.

(d) A supports B's infant son. B promises to pay A's expenses in so doing. This is acontract

(e) A owes B Rs. 1,000 but the debt is barred by the Limitation Act. A signs a written promise to pay B Rs. 500 on account of the debt. This is a contract.

)A agrees to sell a horse worth Rs. 1,000 for Rs. 10. A's consent to the agreementwas freely given. The agreement is a contract notwithstanding the inadequacy of the consideration. () A agrees to sell a horse worth Rs. 1,000 for Rs. 10. A denies that his consent to the agreement was freely given.

36.

Alice Mary Hill v. William Clarke, (1905) 27 All 266.

37.

Gopalrav v. Kallappa, (1901) 3 Bom LR 164. Substituted by Act 12 of 1891, S. 2 and Sch. II for "assurances".

Agreemenw t ithouctonsiderationvoid,unless"no

1)t9

S. 25

117

The inadequacy of the consideration is a fact which the Court should take into account in considering whether or not A's consent was freely given.

Consideration. This section declares, long after consideration has been defined Is. 2, sub-s. (d)], that (subject to strictly limited exceptions) it is a necessary element of a binding

contract.

The present section goes on to state the exceptional cases in which

consideration may be dispensed with. The most obvious example of an agreement without consideration is a purely gratuitous promise given and accepted. This section embodies the principle that an agreement without valuable consideration is void or what is known as Nudum pactum and it cannot be enforced but the Explanation states that if there is consideration, however inadequate, the agreement will not be void. The inconvenience suffered by the plaintiff in using the ball38 or in using special comb for a certain period5 were held to be sufficient. It is not enough that something, whether act or promise, appears on the face of the transaction, to be given in exchange for the promise. That which is given need not be of any particular value; it need not be in appearance or in fact of approximately equal value with the promise for which it is exchanged (see commentary on explanation 2, below); but it must be something which the law can regard as having some value, so that the giving of it effects a real though it may be a very small

change in the promisee's poition, and this is what English writers mean when they speak of consideration as good, sufficient, or valuable. An apparent consideration which has no legal value is no consideration at all.A performance or promise of this kind is sometimes called an "unreal" consideration. If consideration lies in a promise and this is not performed, it does not render the agreement void for lack of consideration-for the consideration exists in the promise to perform

and not the subsequent

performance

itself. What must be considered is the

absence of consideration in law, the absence of consideration in fact does not trigger this

section Forbearance and compromise as consideration.-Compromise is a very common transaction, and so is agreement to forbear prosecuting a claim, or actual forbearance at

the other party's request, for a definite or for a reasonable time. The giving up, or for bearing to exercise, an actually existing and enforceable right is certainly a good consideration2 but what if the claim is not well founded? Can a cause of action to which there is a complete defence be of any value in the eye of the law? If a man bargains for reward in consideration of his abandonment of such a cause of action, does he not really get something for nothing even if he believes he has a good case? The answer is that abstaining or promising a abstain from doing anything which one would otherwise be lawfully free to do or not to do is a good consideration, and every man who honestly

38.

39. 40.

Carlill v. Carbolic Smoke Bal Co. (1893), 1 QB 256

Wood v. Letrisk, the Times January 13, 1932, John Tinson and Co Pvt. Ltd. v. Surjeet Malham, (1997) 9 SCC 651: AIR 1997 SC 1411 (consideration of Rs. 1 for transfer of preference shares). This decision has been criticised on the

ground that consideration of Rs. I though inadequate is not unreal,POLLOCK& MULLA, Indian 41.

Contract and Specific Relief Acis (13th edn, 2006) at p. 100. Pankaj Bhargava v. Mohinder Nath, (1991) 1 SCC 556: AIR 1991 SC 1233 (cheque given for rent

of premisesbounced); Claude-Lila Parulekar v. SakalPapers (P) Lid., (2005) II SCC 73, 96:AIR 2005 SC 4074 (argument that contract not concluded till price in fact paid, held unsustainable; decided in the context of whetheragreement void underS. 29 where exact consideration not initialy

quantified) cf National Insurance Co Ltd. v. Seema Malhotra, (2001) 3 SCC 151, 157: AIR 2001

SC197,

which ignores this distinction. In National Insurance an insurance contract was held void

under S. 25 when the cheque given by the insured towards the first premium was dishonoured. This

case is however better explained as an instance of a total failure of consideration which is covered under S. 54 of the Act. See notes under S. 54 "Default of promisor in first performance". 42.

Jagadindra Nath v. Chandra Nath, (1903) 31 Cal 242; Balarama v. Vasudeva, AIR 1948 PC7.

118

S. 25

Chapter I1-of Contracts, Voidable Contracts and VoidAgreements

thinks he has a claim deserving to be examined is free to bring it before the proper Court, and have the judgment of the Court on its merits, without which judgment it cannot be certainly known whether the claim is well founded or not, for the maxim that every man is presumed to know the law, not a very safe one at best, is clearly inapplicable here. That which is abandoned or suspended in a compromise is not the ultimate right or claim of the party, but his right of having the assistance of the Court to determine and, if admitted or held good, to enforce it. "If an intending litigant bona fide forbears a right to litigate a question of law or fact which it is not vexatious or frivolous to litigate, he does give up something of value. It is a mistake to suppose that it is not an advantage, which a suitor is

capable of appreciating., to be able to litigate his claim, even if he turns out to be wrong"3 The principle thus stated is followed by the Indian Courts.44 An agreement in the nature of compromise of a bona fide dispute as to the right of succession to a priestly office is not without consideration;#" nor is a mutual agreement to avoid further litigation

invalid on this ground:*0 nor a family arrangement providing for the marriage expenses of female members of a joint Hindu family on a partition of the joint family property: nor an agreement entered into by a Hindu husband with his wife in settlement of a doubtful claim for maintenance.48 Promise to perform existing duty.-It is well settled in England*9 that the performance of what one is already bound to do, either by general law or by a specific obli gation to the other party, is not a good consideration for a promise, for such performance is no legal burden to the promisee, but, on the contrary, relieves him of a duty. Neither is the promise of such performance a consideration, since it adds nothing to the obligation already existing. Moreover, in the case of the duty being imposed by the general law, an

agreement to take private reward for doing it would be against public policy. A person served with a subpoena is legally bound to attend and give evidence in a court of law, and a promise to compensate him for loss of time or other inconvenience is void for want of consideration. Similarly, an agreement by a client to pay to his vakil after the latter had accepted the vakalatnama a certain sum in addition to his fee if the suit was success-

ful is without consideration. But if a man, being already under a legal duty to do something, undertakes to do something more than is contained therein, or to perform the duty in some one of several admissible ways-in other words, to forego the choice which the law allows him-this is a

good consideration for a promise of special reward.4 IfA is already bound to do a certain thing, not by the general law, but under a contract with Z, it seems plain that neither the performance of it nor a fresh promise thereof without any addition or variation will support a promise by Z, who is already entitled to

43. 44. 45.

BoWEN, LJ. in Miles v. New Zealand Alford Estate Co., (1886) 32 Ch Div. 266, 291 Olati Pulliah Cheti v. Varadarajulu, (1908) 31 Mad 474, at p. 476, 477; Krishna Chandra v. Hemaja Sankar, (1917) 22 CWN 463 (where the claim was not bona fide). Rameshwar Prosad v. Lachmi Prosad, (1904)31 Cal 111, 131-132; Bhiwa Mahadshet v. Shivaram Mahadshet,

(1899) 1 Bom LR 495, 497.

46. 47.

Bhima v. Ningappa, (1868) 5 BHC ACJ 75. Anantanarayana v. Savithri, (1913) 36 Mad 151.

48. 49.

ndira Bibi v. Makarand, AIR 1931 Nag 197. Collins v. Godefroy, (1831) 1 B & Ad 950. Sashannah Chetti v. Ramasamy Chetti, (1868) 4 MHC 7; Collins v, Godefroy. 950.

50.

S1.

(1831) 1 B & Ad

Ramchandra Chinmaman v. Kalu Raju, (1877) 2 Bom 362.

52. England v. Lavidson, (1840) 1l A&E 856 (reward to constable for servicesbeyond duty; Glasbrook Brolhers Ld. v. Glamorgan County Council, (1925) AC 270.

S. 25

Agreement without consideration void, unless

119

claim performance. For Z is none the better thereby in point of law, nor A any worse. The

question however arises-what if Z finds it more economical and of "practical' benefit to have the promise

performed by A

immediately

rather than be required to pursue the

action for damages which may not practically compensate fully the breach? Would this be good consideration? The Court of Appeal has answered this question in the affirmative in Williams v. Roffey Brothers.5 This case has been criticised on the ground that it enables the promisor to rely on its own breach as consideration, though it seems that fears of arm-twisting by promisors to claim enhanced consideration to perform existing duties is already covered under the doctrine of duress. The recognition of practical' benefit as good consideration significantly dilutes the requirement of consideration, and commentators have understood this to be a significant step towards an overt acknowledgment that all promises made (without duress) in a commercial context give rise to enforceable contractual obligations34

In case there is a promise to compensate the promisee who has already performed something

voluntarily, the same is covered under S. 25(2) and is dealt with later.35

Transfer

of immovable

property.-The

section has been referred to in some cases

of sale and mortgage of immovable property which have been said to be void for want of consideration; but this is incorrect. The Transfer of Property Act says that some of its sections shall be read as part of the Contract Act but does not say that any of the proVISions of the Contract Act shall be read into the Transfer of Property Act. In Tatia v. Babajipo Farran, CJ., explained the difference between a completed conveyance and an

executory contract.". Negotiable

instruments.-In

the case of negotiable instruments proof of conside-

ration is not necessary, for consideration is presumed to have been received. This presumption is enacted both in S. 118 of the Negotiable Instruments Act, 1881, and in illustration (c) to S. I 14 of the Indian Evidence Act, 1872.

form Consideration dispensed with.The English doctrine that a contract in t a deed, i.e. under seal is valid without consideration has never been accepted in India. But under the Contract Act consideration is dispensed with in the following cases: (a) Registered

writing.-The

fact that a contract is in writing and registered dis-

penses with consideration only if it is made for natural love and affection. A registered agreement between a Mahomedan

within the provisions of cl. on account of natural love debt due by B to C. In such and sue A, to recover the

53.

husband and his wife to pay his earning to her is

(1) of the section.59 So is a registered agreement whereby A and affection for his brother, B, undertakes to discharge a a case, if A does not discharge the debt, B may discharge it, amount. In addition to natural love and affection, the

Williams v. Roffey Brothers & Nicholls (Contractors) Lid., [1990] 1 All ER 512 (CA): (1991) 1 QB 1, per GLIDEWELL LS (contractor promised extra compensation to sub-contractor to complete the

work in order to avoid penalty under main contract); Anangel Atlas Comp Nav SA v. IshikawajimaHarima Heavy Industries Co Ltd. (No 2), [1990] 2 Lloyd's Rep 526, 554-555; Simon Container Machinery Lid. v. Emba Machinery AB, [1998] 2 Lloyd's Rep 429, 435. 54.

ANSON'S LAW OF CONTRACT (29th edn., 2010) at p. 110; ATIYAH'S INTRODUCTION TO THE LAW

OF CONTRACT (6th edn, 2006) at pp. 116-117. $5. See discussion under heading "Compensation for vołuntary service". S6. Tatia v. Babaji, (1896) 22 Bom 176. $7.

See MULLA'S TRANSFER OF PROPERTY ACT, Sth Ed., p. 47.

58. 59.

Kaliprasad Tewari v. Raja Sahib Prahlad Sen, (1869) 2 BLR PC 11, 122. Poonoo Bibee v. Fyez Buksh, (1874) 15 BLR App 5.

60. Venkatasamyv.Rangasamy,(1903)13 Mad LJ 428. ri

)

120

S. 25

agreement

Chapter II-of Contracts, Voidable Contracts and VoidAgreements

must also be made "between

parties in a near relation to each other"61

However, it is not to be supposed that the nearness of relationship necessarily imports natural

love and

affection.

Thus,

where a

Hindu

husband

executed a registered

document in favour of his wife, whereby, afler referring to quarrel and disagreement between the parties, the husband agreed to pay her for a separate residence and maintenance, and there was no consideration moving from the wife, it was held in a suit by the wife brought on the agreement that the agreement was void as being made without consideration. The recitals in the agreement showed that it was not made on account of natural love and affection.°2 So the agreement was not covered by the

exception ()) to S. 25 of the Act.63 But a different view is taken by the Bombay High Court in Bhiwa v. Shivaram,4 where though bad terms existed between the two brothers their agreement was considered to have been made for natural love and affection and S. 25(1) of the Act was applicable. The view of Allahabad High Court may be noted. In Smt. Mania v. Dy. Director, Consolidation a mother disposed of certain immovable property to one of her daughters. This caused quarrel and even beating between the two sisters. Later on, a compromise was made and sale deed was executed transferring some plots

reportedly for some amount in favour of the other sister. (Non-petitioner). A sister transferring the property (Petitioner) challenged her own sale deed. The trial court held that the deed was made due to compromise, there was consideration and it was valid in law. In the High Court, it was argued by the Petitioner Sister that since no cash consideration was paid to her for the sale-deed by non-petitioner sister, the sale Negativing the argument the deed was void as being without consideration. Allahabad High Court held that even if there may be no consideration the transaction fell within S. 25(1) of the Act as it was signed and registered document and thus a valid one. The other requirement of S. 25(1) that the transaction is made on account of natural love and affection between parties was probably not examined by the Court as it found support by its earlier decisions that a family arrangement entered for the

preservation of peace and honour of family or avoidance of litigation constitutes consideration. (b) Compensation for voluntary service.-If the services have beenrenderedat under S. 2(d)so. The services-here the request of the promisor they are considered referred to must have been rendered voluntarily and the clause appears to cover Services rendered for a services rendered without the knowledge of the promisor. person other than the promisor are not within the clause. Again, the promisor must have been in existence when the voluntary act was done, so that work done by a promoter of a company before its formation is not work done for the company. The Therefore a promise to act must have been done for a person competent to contract. repay money advanced during the minority of the promisor does not come within the

61.

Pratima Chowdhury v. Kalpana Mukherjee, (2014) 4 SCC 196 (aunt and mother-in-law ofniecenot in near relationship) 62. Rajhukhy Dabee v. Bhootnath. (1900) 4 CWN 488; see Gopal Saran v. Sita Devi, (1932) 36CWN 392, 34 Bom LR 470: AIR 1932 PC 34. 63. Rajlukhy Dabee v. Bhootnath, (1900) 4 CWN 488; see Gopal Saran v. Sita Devi, (1932) 36 CWN

392:34 Bom LR 470: AIR 1932 PC 34. 64.

Bhiwa v. Shivaram,

(1899) 1 Bom LR 495.

65. Smt. Mania v. Dy. Director, 66. 67.

Consolidation, AIR 1971 All 151.

See notes under S. 2 "Past Consideration'".

Sindha v. Abraham, (1895) 20 Bom 755, per FARRAN, C.J. 68. See Gajadhar v. Jagannath, (1924) 46 All 755.

69. AhmedabadJubileeS & WCo. v.Chhotalal,(1908)10Bom LR141, 143.r

ud

Agreementwithoutconsiderationvoid,

unlesse

S. 25

121

exception. It is unnecessary to refer to English cases as the exception does not follow the common law rules. In a Privy Council case B agreed to give his son in

adoption, if A agreed to advance moneys to defend any litigation challenging the adoption. There was litigation and A advanced moneys towards it. Thereafter A died and A's son advanced moneys to the adopted son. While the adoption suit was pending before the Privy Council, the adopted son passed a promissory note in favour of

A's son, who agreed that if the adopted son was unsuccessful before the Privy Council, the promissory note would not be enforced. The adopted son was successful,

and A's son filed a suit on the promissory note. It was held that S. 25(2) was not applicable because to invoke the aid of that provision it had to be proved that the payments had been made voluntarily. As the moneys were not advanced voluntarily

but because of the undertaking given by A, the section did not apply. (c) Promise to pay a time-barred debt. Sub-s. (3) reproduces modern English law. This exception applies only where the promisor is a person who would be liable for

the debt if not time-barred, and does not cover promises to pay time-barred debts of third persons. But the Madras view is different. It emphasised that the words "by the person to be charged therewith" of S. 25(3) are wide enough and it is not necessary that the promisor must be a person originally liable to pay the debt. A promise to pay a debt due by a third person is void for want of consideration; but

if a Hindu son promises to pay a time-barred debt due by his father he is liable under Hindu law to the extent of the ancestral property in his hands." The distinction between an acknowledgment under S. 19 of the Limitation Act and "promise" within the meaning of this section is of great importance. Both an acknowledgment and a promise are required to be in writing signed by the party or his agent authorised in that behalf, and both have the effect of creating a fresh starting point of limitation. But while S. 18 of the Limitation Act requires that an acknowledgment

should be made before the expiry of the period of limitation, a promise under this section may be made after the period of limitation has expired. The Privy Council in Maniram v. Seth Rupchand') has said that an unconditional acknowledgment implies a promise to pay. But this implied promise is not a promise under this section. A promise under this section to pay a time-barred debt must be express promise. Therefore if there is no express promise, a promise implied from an acknowledgment cannot be the basis of a

suit under S. 25 of this Act."6 To support a suit there must be a distinct

promise and not a mere acknowledgment." The Bombay High Court had held that khata balance or account stated was a mere acknowledgment which could not form the basis of a suit. But this case must be treated as no longer law, for the Privy Council has held that, even when the balance of indebtedness throughout the account is on one side, a statement of account is an agreement that the items on one side are discharged

70.

Indran Ramaswami v. Anthappa Chettiar, (1906) 16 Mad LJ 422; Suraj Narain v. Sukha Ahir, (1928) 51 All 164. 71. Raja of Venkatagiri v. Krishnayya, AIR 1948 PC 150: 50 Bom LR 517. 72. Pestonji v. Bai Meherbai,. (1928) 30 Bom LR 1407. 73. Paliyath Govinda Nair v. Parekalalhil Nair, AIR 1940 Mad 678. 74. Abani Bilas v. Kanti Chandra, (1934) 38 CWN 253: AIR 1934 Cal 178; See Champaklal v. Rayachand,

75.

(1932) 34 Bom LR 1005 : AIR 1932 Bom 522.

Maniram v. Seth Rupchand, (1906) 33 IA 165, 172 :33 Cal 1047, 1058.

76. Maganlal Harjibhai v. Amichand Gulabji, (1928) 52 Bom 521; Deoraj Tewari v. Indrasan1Tewari, (1929) 8 Pat 706; Girdhari Lal v. Firm Bishnu Chand, (1932) 54 All S06: AIR 1932 All 461. 77. Gobind Das v. Sarju Das, (1908) 30 All 268; Mithin Lal v. Marguerite Dairy Farm, AlR 1932 All

38;AllahBakshv. HamidKhan, AIR 1931 All 160. )18 78. Jethibai v. Putlibai, (1912) 14 Bom LR

1020.zog..

rlup

122

S. 25

Chapter l1of Contracts, Voidable Contractsamd VoidAgreements

by the items on the other side and that the balance only is payable. This arrangement limitation is under constitutes a new cause of action as on an account stated for which Art. 64 of the Limitation Act.80 On the other hand, where a tenant wrote to his landlord in respect of rent barred by limitation, "I shall send by the end of Veyshak month", it was held that the words constituted a promise under this section.3i The or the words "Nagad Rokda Polia words "balance due payable by two instalments"82 Lidha Te deva sahi" meaning thereby "the moneys received in cash are agreed to be

paid'"

import a promise to pay. Under sub-s. (3) it is not necessarythat person

charged with should know that the debt for which he was passing the writing was already time-barred. An agreement between a creditor and a debtor entered into before

the expiry of the period of limitation, whereby the date of payment is extended beyond the period of limitation, is valid though verbal, if there is a consideration for the agreement, e.g. payment of interest up to the extended date. Such an agreement is not an acknowledgment within the meaning of S. 1984 of the Limitation Act nor is it a promise to pay a barred debt; it may be enforced at any time within three years from

the date on which it was made.8

A promise to pay, may be absolute or conditional. If

it is absolute, if there is no "but' or "if,' it will support a suit without anythingelse:if it is conditional, the condition must be performed before a suit upon it can be decreed.86

Debt.

The expression "debt" here means anascertainedsum of money. A promise,

therefore, to pay the amount that may be found due by an arbitrator on taking accounts between the parties is not a promise to pay a "debt" within this section. The word debt

in this section has been defined as a sum payable in respect of a money demand recoverable by action®* and includes a Judgment debt.Therefore amount of a time barred decree is valid and enforceable.3

a promise to pay the

Explanation 2.-This explanation declares familiar principles of English law and equity. If there is some consideration which the law regards as valuable, the Court will not inquire into its adequacy but will leave the parties to make their own bargain. But inadequacy of consideration may be evidence that the promisor was the victim of some imposition. It may be evidence that the promisor's consent was not

free, but it is not in itself conclusive, and standing alone mere inadequacy of consideration

is not a bar even to a suit

aside a conveyance on the ground Committee observed: "The question then inadequacy of price as to be a sufficient

for specific

performance.

In a suit" to set

of inadequacy of consideration the Judicial reduces itself to whether there was such an ground of itself to set aside the deed. And

79. Corresponding to Art. 26 of the Limitation Act, 1963. 80. Bishun Chand v. Girdhari Lal, (1934) 61 IA 273 : S6 All 376: 33 Bom LR 723; Shivjiram v. D Gulabchand, (1941) Nag 114: AIR 1941 Nag 100; Balkrishna v. Jayshanker, (1938) 40 Bom LR 1010 178 IC 174: AIR 1938 Bom 460; Shanti Prakash v. Harnam Das, (1938) Lah 193, 174 IC 277: AIR 1938 Lah 234 (FB). 81 Appa Rao v. Suryaprakasa Rao, (1899) 23 Mad 94. See also Laxumibai v. GaneshRaghunath, (1900) 25 Bom 373. 82. Nagindas Dharamchand v. Tricumdas, (1877) PJ 239. 83. Kasturchand v. Manekchand, 45 Bom LR 837. 84. Corresponding to S. 18 of the Limitation Act, 1963. 85. Ibrahim Mallick v. Lalit Mohan Roy, (1923) 50 Cal 974. 86. Maniram v. Seth Rupchand, (1906) 33 IA 165, 172: 33 Cal 1047, 1058; Ballapragada v. Thammana, (1917) 40 Mad 701. 87. Doraisami v. Vaithilinga, (1917) 40 Mad 31 (FB). 88. Doraisami v. Vaithilinga, (1917) 40 Mad 31: 39IC 220 (FB); Bharat National Bank v. BishanLal. (1932) 13 Lah 448: AIR 1932 Lah 212. 89. Heera Lall v. Dhunput Singh, (1878) 4 Cal : Shripatrav v. Govind, (1890) 14 Bom 390. 90. The Administrator-General of Bengal v. Juggeswar Roy. (1877) 3 Cal 192, 196.

Agreement in restraint of trade void

S. 27

123

upon that subject it may be as well to read a passage from the case of Tennent v. Tennents (L.R. 2 Sc. & D. 6) in which Lord Westbury very shortly and clearly stated the law upon this subject. He says: "The transaction having been clearly a real one, it is impugned by the appellant on the ground that he parted with valuable property for a most inadequate consideration. My Lords, it is true that there is an equity which may be founded upon gross inadequacy of consideration. But it can only be where the inadequacy is such as to involve the conclusion that the party either did not

understand what he was about or was the victim of some imposition. Their Lordships are unable to come to the conclusion that the evidence of inadequacy of price is such as to lead them to the conclusion that the plaintiff did not know what he was about or was the victim of some imposition." Agreement in restraint of marriage, void.

S. 26. Every agreement in restraint of the marriage of any person, other than a minor, is

void.

An agreement by a Hindu at the time of his marriage with his first wife not to marry a second wife whilst the first was Iliving would be void according to the literal terms of this section.It may be doubted whether such a result was ever contemplated by the Legislature. A restraint on marriage which is absolute is different from a

restraint on remarriage.

A condition is a wakf that the widow of the co-sharer

would forfeit her right of maintenance contemporaneous to marriage executed by strained relations between him and his customary maintenance allowance is not therefore,

that a

provision

in a

if she remarried is valid. a husband providing that wife, the latter would be in restraint of marriage2

Kabinnamah

by

which

a

An agreement in the event of entitled to her It would seem

Mahomedan

husband

authorises his wife to divorce herself from him in the event of his marrying a second wife is not void, and if the wife divorces herself from the husband on his marrying a entitled to maintenance from him for the second wife, the divorce is valid, and she is period of iddat.95 Agreement in restraint oftrade, void.

S. 27.

Every

agreement

by which

anyone is a restrained from exercising lawful profession, trade or business of any kind, is to that extent void.

Exception 1-One who sells the goodwill of a yonbusiness Dusiness may agree with the buyer to refrain from

Savings of agreement not to

of which goodwill is sold.

carrying

on a

similar

business,

local limits, so long as the

within

specified

buyer, or any person

deriving title to the goodwill from him, carries on a like business therein:

Provided that such limits appear to the Court reasonable, regard being had to the nature of the business.

91. Latafatunnissa v. Shaharbanu, AIR (1932) Oudh 108 (112). 92. Jamila Khatoon v. Abdul Rashid, AIR 1939 Lah 165: 184 IC 105. 93. Badu v. Badarannessa, (1919) 29 CLJ 230. Exception (2) and (3) repealed by Partnership Act 9 of 1932, S. 73 and Sch. I.

124

S. 27

Chapter I1-0f Contracts, Voidable Contracts and VoidAgreemens

Agreement in restraint of trade.-Very broadly, agreements in restraint oftrade are those in which one or both parties limit their freedom to work or carry on their profession or business in some way. These invite the application of two opposing principles. That there should be freedom of contract and every man should be bound by his bond. On the other hand the State should not be deprived ofa man's skills and talent by any contract that he enters into. It is a matter of legal selection as to which of these policy choices is more appealing, or as Lord Shaw put it-"... (it involves a determination between) the right to bargain and the right to work"2 The application of the restraint of trade doctrine requires a balance to be found between these two policy concerns. In India, the doctrine of restraint of trade has been codified in the present section which is general in its terms, and declares all agreements in restraint of trade void" pro anto, except in the case specified in the exception. The object appears to have been to protect trade. It has been said that "trade in India is in its infancy; and the Legislature may have wished to make the smallest number of exceptions to the rule against contracts whereby trade may be restrained."* To escape the prohibition, it is not enough to show that the restraint created by an agreement is partial, and not general; it must be distinctly brought within one of the exceptions. "The words 'restraint from exercising a lawful profession, trade orbusiness do not mean an absolute restriction and are intended to apply to a partial restriction, a restriction limited to some particular place, otherwise the first exception would have been unnecessary." This view of the section was expressed by Couch, C.J. in Madhub Chunder v. Rajcoonmar Doss." The parties in that case carried on business as braziers in

the same quarter of Calcutta. The defendants suffered loss from the plaintiff's competition and agreed that if the plaintiff closed his business in that quarter they would pay him all the advances he had made to his workmen. The plaintiff complied but the defendants failed to pay. The plaintiff sued to recover the amount of the advances, but the restriction, though confined to a particular quarter, was held to be void. In other case the plaintiff agreed with the defendant not to carry on the business of dubash for three years and for the same period to act as stevedore of five ships assigned to him by the defendant and no others. It was held that the agreement was void, as the first branch imposed an absolute, and the second a partial, restraint on the plaintiff's business.° In recent cases a simple

(though

unattractive)

test has been

adopted. A restraint

operating during the period of contract will be generally valid, unless it is "unconscionable or excessively harsh or unreasonable or one-sided".' However, a restraint operating beyond the term of the contract will be ipso facto void.3 In Zaheer Khan' an agreement was entered into by a famous cricketer with a sports management agency for marketing and managing the cricketer's endorsements. The

1.

Petrofina (Great Britain) Ltd. v. Martin, [1966] 1 All ER 126; Esso Petroleum Co Lid. v. Harper's Garage (Stourpori) Lid.,

[1967] 1 All ER 699.

2. 3.

Mason v. Provident Clothing and Supply Co Lid., [1913] AC 724, 738 (HL). Certainly not "illegal": Haribhai Maneklal v. Sharafali Isabji, (1897) 22 Bom 861, 866.

4.

Per KINDERSLEY, J., in Oakes & Co. v. Jackson,

6.

Madhub Chunder v. Rajcoomar Doss, (1874) 14 BLR 76, 85, 86. Nur Ali Dubash v. Abdul Ali, (1892) 19 Cal 765.

7.

(1876) 1 Mad 134, 145.

Niranjan Shankar Golikari v. Century Spinning & Mfg Co Ltd., AlR 1967 SC 1098. This test appears to be based on the English doctrine of "reasonableness", see notes infra under S. 2

"Reasonablenessof Limits". 8. SuperintendenceCompany of India v. Krishan Murgai, AIR 1980 SC 1717:(1981) 2 SCC246; Percept D'Mark (India) P Lid v. Zaheer Khan, (2006) 4 SCC 227, 246 : AIR 2006 SC 3426.

9. Percept D'Mark (lndia) P Lid v. Zaheer Khan, (2006) 4 SCC 227: AIR 2006 SC 3426.

Agreementin restraint oftrade void

S. 27

125

contract provided that even after its termination, if the cricketer received an offer from a third party then he would have to first submit that offer to the Agency, which could then choose to match that offer. This was held to constitute a "restraint" since it imposed a restriction on the ability of the cricketer to contract with a third party (should the Agency choose to match that offer), and since it operated beyond the term of the agreement, was held void.

Restraint during term of service.-An agreement of service bywhich anemployee binds himself, during the term of his agreement, not to compete with his employer directly or indirectly is generally not in restraint of trade, unless it is unconscionable or excessively harsh or unreasonable or one-sided. Such an agreement may be enforced by injunction where it contains a negative clause, express or implied," providing that the

employee should not carry on business on his own account during the term of hisengage ment. Thus in Charlesworth v. MacDonald" the defendant agreed to serve the plaintiff, a physician and surgeon practising at Zanzibar, as an assistant for three years. The letter which stated the terms which the plaintiff offered and the defendant accepted/ contained the words, "The ordinary clause against practising must be drawn up." No formal agreement was drawn up and at the end of a year the defendant ceased to act as the plaintiff's assistant and began to practise in Zanzibar on his own account. It was held that the plaintiff was entitled to an injunction restraining the defendant from practising in

Zanzibar on his own account during the period of theagreement. " If however, there is a wrongful dismissal' of the employee by the employer, the restraint cannot then bind the employee for the remaining term of the contract.

Restraint operating beyond term of service-In SuperintendenceCompany of ndia v. Krishan Murgaio a clause in a contract with an employee provided that he was not to join a competitor or start a similar business at the place of his last posting, for two years after leaving the employer. It was held in a concurring judgment by AP Sen J (with Tulzapurkar J and Untwalia J refraining

from opining upon the issue) that since the res-

triction operated beyond the term of the contract it was "obviously in restraint of trade" and therefore void. Although, some initial doubts were raised on whether the judgment of AP Sen J constituted the ratio of this case," the Supreme Court adopted the same rule in Zaheer Khan.3 Thus, now, once the service of the employee is validly terminated no further

restraints can be imposed upon him on the basis of the earlier contract of

employment. Cases where an employee is proceeded against for divulging confidential information on the basis of either an express contract or an implied duty of fidelity in an emp10.

Niranjan Shankar Golikari v. Century Spinning & Mfg Co Ltd., AIR 1967 SC 1098:(1967) 2 SCR 378 (restraint restricted to the period of employment and similar type of work, held reasonable); Gopal Paper Mills v. Surendra K Malhotra, AIR 1962 Cal 61 (agreement containing restraint was for a 20 year period and had unconsciounable terms, held unreasonable). 11. See Specific Relief Act, 1963, S. 42, ill. (d); Subha Naidu v. Haji Badsha, (1902) 26 Mad 168,

172; Pragji v. Pranjiwan, (1903) 5 Bom LR 878. i 12. 13. 14.

General Billposting Co. v. Atkinson, (1909) AC 118. Charlesworth v. MacDonald, (1898) 23 Bom 103. See also The Brahmaputra Tea Co. Lid. v. Scarth, (1885) 11 Cal 545, 550. The Bombay Court based its decision on the authority of Lumley v. Wagner, (1852) 1 DMG 604. See Ehrman v.

Bartholomew,

(1898) 1 Ch 671.

15. General Billposting Co v. Atkinson, (1909) AC 118;SuperintendenceCompanyof India v. Krishan Murgai, AIR 1980 SC 1717:(1981)2 SCC 246. 16. Superintendence Company of India v. Krishan Murgai, AlR 1980 SC 1717. 17. Gujarat Botling Co Ltd. v. Coca Cola Co., (1995) 5 SCC 545, 566: AIR 1995 SC 2372; Pepsi Foods Lid. V. Bharat Coca Cola Holdings 81,(1999) DLT 122. 18. Percept D'Mark (India) P Lid. v. Zaheer Khan, (2006) 4 SCC 227, 246: AIR 2006 SC 3426.

126

S. 27

Chapter I1-of Contracts, Voidable Contracts and VoidAgreements

loyer-employee relationship, would not be taken as a restraint operating beyond the term of service. Liability based on the tort of misappropriation, may also be imposed on a third party who tries to use such information.20

Public

policy.-The present section is very strong; it invalidates many agreements

which are allowed by the Common Law, and it does not seem open to the Courts to hold

that any agreement in pari materia, not coming within the terms of the section, is void on some unspecified ground of public policy. "So far as restraint of trade is an infringement

of public policy, its limits are defined by section 27.21 Agreement not in restraint of trade.-This section aims at "contracts, by which a person precludes himself altogether either for a limited time or over a limited area from exercising his profession, trade, or business and not contracts by which in the exercise of his profession, trade, or business, he enters into ordinary agreements with persons dealing with him which are really necessary for the carrying on of his business." A reasonable construction must be put upon the section, and not one which would render void the most common form of mercantile contracts. Thus, a stipulation in an agreement whereby the plaintiffs agreed that they would not sell to others for a certain period any goods of the same description as they were selling to the defendant is not in restraint of trade. Similarly, an agreement to sell all the salt manufactured by the defendant during a certain period to the plaintiff at a certain price is not in restraint of trade. Similar restraints have also been upheld in the case of exclusive dealing agreements2

Trade combinations.-An agreementbetweenmanufacturers not to sell their goods below a stated price, to pay profits into a common fund and to divide the business and

profits in certain proportions, is not avoided by this section, and cannot be impeached as opposed to public policy under S. 23. In Fraser & Co. v. The Bombay lce Manufacturing Co. Sir Lawrence Jenkins, CJ., expressed a decided opinion that a stipulation restraining the parties to a combination agreement from selling ice manufactured by them at a rate lower than the rate fixed in the agreement was not void under this section. A stipulation not to gin cotton or to sell ice for less than a fixed rate does not restrain any party to the contract from ginning cotton or from selling ice; in other words, none of the parties is restrained from exercising his business of ginning cotton or selling ice. What it does provide for is that in the exercise of the busineşs certain terms shall be observed. In an Allahabad case it has been held that agreements such as the above were neither in

restraint of trade nor opposed to public policy. 19. Hivac Ltd v. Park Royal Scientific Instruments Lid, [1946] 1 All ER 350 cf. Polaris Sofware Ltd. v. Suren Khiwadkar, (2004) I LLJ 323 (Mad) where the Court by way of obiter dicta appears to have rejected this principle as being specific to English Law. 20. Smith v. Snap-On Tools Corp, 833F 2d 578 (5th Cir 1988); Trandes Corpn v. Guy F. Atkinson, 996 F 2d 655 (4th Cir 1993). 21. Per JENKINS, C.J., in Fraser & Co. v. The Bombay lce Mamufacturing Co., (1904) 29 Bom 107, at p. 22. 23.

120. Per HANDLEY J., in Mackenzie v. Striramiah, (1890) 13 Mad 472, 475.

n

Mackenzie v. Striramiah, (1890) 13 Mad 472 at p. 474.

24. CARLISLES, Nephews & Co. v. Ricknauth Bucktearmull, (1882) 8 Cal 809. 25. Sadagopa Ramanjiah v. Mackenize, (1891) 15 Mad 79.

26. Esso Petroleum Co Ltd. v. Harper's Garage (Stourport) Ltd., [1967] 1 All ER 699; Gyjarat

Bottling Co Lid. v. Coca Cola Co., (1995) 5 SCC 545, 566: AIR 1995 SC 2372; Suresh Dhanuka v. Sunita Mohapatra, (2012) 1 SCC 578 (exclusive dealing provision enforced at the interim stage against assignor of trademark to sell goods under such mark only through assignee). 27. Fraser & Co. v. Bombay lce Mamfacturing Co., (1904) 29 Bom 107; Bhola Nath v. Lakshmi

Narain, (1931) 53 All 316 : AIR 1931 All 83. 28. 29.

Fraser & Co. v. The Bombay lce Manufacturing Co., (1904) 29 Bom 107. Kuber Nath v. Mahali Ram, (1912) 34 All 587.

Agreementin restraint of trade void "To that

extent"-The

S. 27

127

meaning of these words is that if the agreement can be

broken up into parts, it will be valid in respect of those parts which are not vitiated as being in restraint of trade. Where the agreement is not so divisible, it is wholly void.50 In

common law, the test to determine the divisibility (or severability) of the agreement is the blue pencil" test. If the offending portion in the contract can be severed by running a "blue pencil" through it then the enforceable part is divisible. Thus, a covenant "not to carry on business in Birmingham or within 100 miles" may be severed so as to reduce the area to

Birmingham,

Birmingham

but a covenant

"not to carry on business within 100 miles of

will not be severed so as to read "will not carry on business in Birmin-

gham". This distinction may be artificial but appears to logically follow from this rule. Mere "textual divisibility" is however not enough, the court must also be satisfied as to "substantial severability", i.e. whether "the parties could have agreed on the valid terms of the agreement had they known that the other terms were invalid or unlawful". If the answer to this is in the affirmative, the valid terms of the agreement can be enforced,

gnoring the invalid terms. Exception 1.-This exception deals with a class of cases which had a leading part in causing the old rule against agreements in restraint of trade to be relaxed in England. The question in England is always whether the restraint objected to is reasonable reference to the particular case and not manifestly injurious to the public interest.5

with

The law of India, however, is tied down by the language of this section to the principle of a hard and fast rule qualified by strictly limited exception; and, however mischievous the economical consequences may be, the Courts here can only administer the Act as they find it. The kind of cases covered by this exception be illustrated by the following decision where it was held that a covenant by the defendants on the sale of the goodwill of their business of carriers to the plaintiff not to convey passengers to and fro on the road between Ootacamund and Mettupalaiyam was not in restraint of trade: SO partial a restraint is not really adverse to the interests of the public at large"s* In a later and similar case the business disposed of was that of a ferry and the restraint on the seller was limited to three years; but the Judicial Committee had no difficulty in holding that the transaction amounted to a real sale of goodwill and was enforceable.3)

Reasonableness of limits.-Reasonableness

of restraint imposed must be ascer-

tained in every case by a reference to the nature of the business in question, by the

character and nature of business or if its customers and the situation of the parties.5o The test of reasonableness is as between the parties and injury to public interest.3 Any attempt to suppress

competition

and monopolize the market would be injurious to

public interest.38 The word 'reasonable' would mean that it is in the interests of the parties i.e. the covenanted subjects himself to the restraint which is no wider than is required to give

30.

31. 32. 33. 34. 35. 36. 37. 38.

Parasullah v. Chandra Kant, (1917) 21 CWN 979, 983.

Attwood v. Lamont, (1920) 2 KB 146; Goldsoll v. Goldman, [1914-15] All ER Rep 257 (CA). Shin Satellite Public Co Ltd v. Jain Studios, (2006) 2 SCC 628, 637: AlR 2006 SC 963 (decided in the context of severance of a clause offending S. 28). Nordenfelt v. Maxim-Nordenfelt Guns and Ammunition Co.. (1894) AC 535. Auchterlonie v. Charles Bill, (1868) 4 MHC 77. Chandra Kanta Das v. Parasullah Mullick, (1921) LR 48 IA 508: 48 Cal 1030: AIR 1922 PC 167. Shaikh Kalu v. Ram Saran, 13 CWN 388 (393-94): 9 CLJ216. Connors Bros Ltd. v. Bernard, AlR 1941 PC 75. Shaikh Kalu v. Ram Saran, 13 CWN 388 (393-94):9 CLJ 216.

128

Chapter II-of Contracts, VoidableContracts and VoidAgreements

S. 28

adequate protection to the interest of the covenanted." A restraint may be imposed more readily and more widely in cases of commercial contracts in the interests of the covenantee, than upon an employee in the interests of the employer It is a question of law for the decision of the Court whether the circumstances of the particular case do or do not justify the restraint. A restraint can only be justified if it is reasonable both in the interests

of the contracting parties and in the interests of the public. In Indian law, the test for "reasonableness of limits" will be relevant only where the restraint operates during the term of the contract (since restraints operating beyond the term of the contract are ipso facto void). This is however a commercially unattractive result. The present blanket rule strikes down restraints even when these protect legitimate interests of one of the parties and are otherwise reasonable. This is no doubt result of the strict and unyielding language of this section. It is suggested that amendment to this section, on the lines of the Law Commission recommendation,

the a an be

adopted to permit reasonable restraints regardless of whether they operate during beyond the term of the contract.3 Agreements

in

or

IS. 28. Every agreement,

res-

traint of legal procee

(a) by which any party thereto is restricted

dingsvoid..

absolutely from enforcing his rights under or in respect of any contract, by the usual legal proceedings in the ordinary tribunals, or which limits the time within which he may thus enforce his rights; or

(b) which extinguishes the rights of any party thereto, or dis-

charges any party thereto, from any liability, under or in respect of any contract on the expiry of a specified period so as to restrict any party from enforcing his rights, is void to that extent.] Exception

1-This section shall not render illegal a contract, by which two or more persons agree that any dispute

Saving ofcontract to

which may arise between them in respect of any

to arbitration subject or class of subjects shall be referred to in arbitration and that only the amount awarded such arbitration shall be recoverable in respect of the dispute so

refer

dispute that may arise.

referred.

39. 40. 41. 42.

Forster & Sons v. Suggett, (1918) 35 TLR 87; M& SDrapers v. Reynolds, [1957] 1 WLR 9. Esso Petroleum Co Lid. v. Harper's Garage (Stourport) Ltd., [1968] AC 269. North Western Salt Co Ltd. v. Electrolytic Alkali Co Ltd, [1914] AC 461 (470). See notes supra under S. 27 "Agreements in restraint of trade".

43.

Law Commission of India, 13th Report (1958) at para 55, recommended the addition of

the

following in the main section-"... except in so far asthee restraint is reasonable having regard to the interests of the parties and of the public.". Substituted by Act 1 of 1997 S. 2, for the portion beginning with the words "Every agreement" and ending with the words "is void to that extent" (w.e.f. 8-1-1997). Prior to the substitution, this portion read as follows: "Every agreement by which any party thereto is restricted absolutely from enforcing his rights under or in respect of any contract, by the usual legal proceedings in the ordinary tribunals, or which limits the time within which he may thus enforce his rights, is void to

that extent."

Agreements in restraint of legalproceedings void

S. 28

129

2.-Nor shall this section render illegal any contract in

Exception

writing, by which two or more persons agree to Saving ofcontract to rerer to arbitration any question between them refeqruestionsthathave which has already arisen, or affect any provision already arisen. of any law in force for time being as to references

to arbitration. 44|Exception 3.-This section shall not render illegal a contract in Savingof aguarantee writing by which any bank or financial institution agreement of a bank or a financial institution

stipulate

making

a term in a

guarantee

or any

agreement

for guarantee for provision extinguishment of the rights or discharge of any party thereto from a

any liability under or in respect of such guarantee or agreement on the expiry of a specified period which is not less than one year from the date of occurring or non-occuring of a specified event for extinguishment or discharge of such party from the said liability.

Explanation. ) InException3,theexpression"bank" means (a) a "banking

company" as defined in clause (c) of section 5

of the Banking Regulation Act, 1949 (10 of 1949).

6) a corresponding new bank" as defined in clause (da) of section 5 of the Banking Regulation Act, 1949 (10 of 1949);

(c) "State Bank of India" constituted under section 3 of the State Bank of India Act, 1955 (23 of 1955);

(d) a subsidiary bank" as defined in clause (k) of section 2 of the State Bank of India (Subsidiary Banks) Act, 1959 (38

of 1959); (e)"a Regional Rural Bank" established under section 3 of the Regional Rural Banks Act, 1976 (21 of 1976);

(a Co-operativeBank" asdefined inclause(cci) ofsection 5of the Banking Regulation Act, 1949 (10 of 1949); The second clause of Exception 1 to S. 28 repealed by Act I of 1877, S. 2 and Sch. This part of

Exception I was repealed by the Specific Relief Act, 1887, but was in force in certain Scheduled Districts to which the Specific Relief Act, 1887, did not apply. The Act of 1887 is now repealed by the Specific Relief Act of 1963 which applies to the whole of India except the State of Jammu and Kashmir. It provided: Suits barred by such contracts.-When such a contract has been made. a suit may be brought for its specific performance and if a suit, other than for such specific performance, or for the recovery of the amount so awarded, is brought by one party to such contract against any other such party in respect of any subject which they have so agreed to refer the existence of such contract shall be a bar to the suit.

44.

Ins. by the Banking Laws (Amendment) Act, 2012 (4 of 2013), sec. 17 and Sch. (w.e.f. 18-1-2013, vide S.O. 192(E), dated 17-1-2013).

130

Chapter I1-0f Contracts, Voidable Contracts and VoidAgreements

S. 28

g)a

multi-State co-operative bank" as defined in clause

(cciia) of section 5 of the Banking Regulation Act, 1949 (10 of 1949); and

(in In Exception 3, the expression "a financial institution" means any Public financial institution within the meaning of Section 4A of the Companies Act, 1956 (1 of 1956).] Agreement

in

restraint

of legal

proceedings.-This

section

applies to

agreements which wholly or partially prohibit the parties from having recourse to a court of law "If, for instance, a contract were to contain a stipulation that no action should be brought upon it, that stipulation would, under the first part of section 28, be

void, because it would restrict both parties from enforcing their rights under the contract in the ordinary legal tribunals. The section before us affirms the Common Law. Its provisions 'appear to embody a general rule recognised in the English Courts which prohibits all agreements purporting to oust the jurisdiction of the

Court.' It does not affect the validity of compromises of doubtful rights, and this view is supported by the provisions of the Civil Procedure Code, which enable parties to a suit to go before the Court and obtain a decree in terms of a compromises. If a contract were to contain a double stipulation that any dispute between the parties

should be settled by arbitration, and neither party should'

enforce his rights under it

in a court of law, that would be a valid stipulation so far as regards its first branch, viz. that all disputes between the parties should be referred to arbitration, because that

of itself would not have the effect of ousting the jurisdiction of the Courts, but the latter branch of the stipulation would be void because by that the jurisdiction of the Court would be necessarily excluded. 46

Agreements to refer to referee or arbitrator.-A contract whereby it is provided that all disputes arising between the parties should be referred to two competent London brokers, and that their decision should be final, does not come within the purview of this sections. If parties freely agree to hold the arbitration in a foreign country it does not fall within this section, despite one of them having to bear some hardship.*5 Nor does a contract whereby it is provided that all disputes arising between the parties "should be

referred to the arbitration of the Bengal Chamber of Commerce, whose decision shall be accepted as final and binding on both parties to the contract,* still less is it wrong for the parties to a pending suit to give the Court itself, if they choose so to agree, full power to decide the whole matter

without

further appeal.

reference shall not object at all to the validity before any court of law, does restrict a party

But a stipulation

that parties to a

of the award on any ground whatsoever absolutely from enforcing his rights in

ordinary tribunals, and as such, is void. The Courts have power, in spite of such a stipulation, to set aside an award on the ground of misconduct on the part of the

45.

Anant Das v. Ashburner & Co., (1875-77) ILR 1 All 267 (FB).

46.

Per GARTH C.J. in Coringa Oil Co., Ltd. v. Koegler, (1876) 1 Cal 466, 468, 469; Mulji Tejsing v. Ransi Devraj, (1909) 34 Bom 13. 47. Coringa Oil Co. Lid v. Koegler, (1876) 1 Cal 466; William Jacks & Co. v. Harrowing Steamship Co. Lta., (32) AS I11. 48. Atlas Export Industries v. Kotak & Co., (1999) 7 SCC 61, 65: AIR 1999 SC 3286 (arbitration in London); SVG Molasses Co BV v. Mysore Mercantile Co Ltd, 2006 (Suppl) Arb LR 1, 6 (SC) 2007 (9) Scale 89 (arbitration in Netherlands). 49. Champsey v. Gill & Co., (1905) 7 Bom LR 805; Chaitram v. Bridhichand. (1915) 42 Cal 1140.

50. Bashir Ahmad v. Sadiq Ali, (1930) 5 Luck 391: 120 IC 826: AlR 1929 Oudh 451; Bhirgunalh Prasad v. Annapurna, AlR 1934 Pat 644.

Agreements in restraint of legalproceedings void

S. 28

131

arbitrator. It was so held by the Madras High Court in a casel in which the agreement to submit to arbitration contained a restrictive stipulation of the above character. It now

appears settled that an agreement providing finality to the decision of the arbitrator and prohibiting, any appeal by a party, will be held void,4 unless the offending portion is

Agreements on jurisdiction.-Where there are two Courts, both of which would normally have jurisdiction to try a suit, an agreement between the parties that the suit should be filed in one of those Courts alone and not in the other does not contravene the provisions of this section. The intention of the parties as to choice of a particular jurisdiction must be clear and unambiguous; however the use of words like "alone", "only", "exclusive" etc. is not required. In such cases, the latin maxim expressio unius est exclusio alterius comes into play, meaning that expression of one is the exclusion of another. The Supreme Court in Swastik Gases upon an analysis of previous judgments has held that where the contract expresses a choice as to jurisdiction of courts at a particular place, and, courts at such place do otherwise have jurisdiction to deal with the matter, an inference may be drawn that parties intended to exclude jurisdiction of all other courts. Thus, in that case, by making a provision that the agreement was "subject to the jurisdiction of the courts at Kolkata", the parties were held to have impliedly excluded the jurisdiction of courts at all other places. Parties to a contract however cannot agree to oust the jurisdiction

of all the Courts

which would otherwise have jurisdiction to decide the cause of action, for that would amount to a total ouster of jurisdiction which would not be permissible under this section; it is for this reason that parties cannot agree to confer exclusive

jurisdiction

upon a court

that otherwise does not possess it.0

In InterGlobe a complaint was instituted by apassenger against an airlines, at the Permanent Lok Adalat at Hyderabad. This was challenged by the airlines as being without juri: ction since the standard terms which governed the contract between the parties provided, "all disputes shall be subject to the jurisdiction of the courts of Delhi only." On facts, the ticket related to travel from Delhi to Hyderabad and the complaint was in regard to delay at Delhi. It was contended by the airlines that as the Courts at Delhi had jurisdiction (as part of cause of action arose at Delhi) and since the contract provides for exclusive jurisdiction for the courts at Delhi, the jurisdiction of other courts was ousted and therefore the Permanent Lok Adalat at Hyderabad had no jurisdiction to hear the complaint. This argument of the airlines was rejected by the Supreme Court and it was held that "as the clause provides that irrespective of the

51. 52.

Burla Ranga Reddi v. Kalapalli Sithaya, (1883) 6 Mad 368. Abdul Latif v. Bahawal Saheb, AIR 1950 Lah 120; Naraindas v. Kewalram, AIR 1917 Sind 38;

Hurdwar Mull v. AhmedMusafi Selaji, (1909) 13CWN 63; RamJawaya Mal v. Devi Ditla Mal, (1916) 34 IC 192; Rangiah Chetty v. Govindasami Chetty ILR 45 Mad 466: AIR 1922 Mad 179.

53. Davistone Estates v. O'Del, (1969) 2 WLR 1287 (1969) 2

All ER 849. See

further

BACHAWAT'S LAW OF ARBITRATION AND CONCILIATION (5th edn, 20I0) at pp. 91-94.

54.

Milton & Co. v. Ojha Automobile Co., (1930) 57 Cal 1280: AIR 1931 Cal 279; Lakshmivillas Mils Co. v. Vinayak, (1935) 37 Bom LR 157: AIR 1935 Bom 198; Musaji v. Durga Das, (1948) Lah

281,223 IC 284: AIR 1946 All 57 (FB); Libra Mining Works v. Baldota Bros., AIR 1962 AP 452; Hakam Singh v. Gammon (India) Lid, 1971 3 SCR 314 AIR 1971 SC 740; ABC Laminart Pvt. Lid. v. A.P. Agencies, Salem, (1989) 2 SCC 163: AIR 1989 SC 1239; AVM Sales Corpn. v.

AnuradhaChemicals,(2012) 2 SCC 315. 55. Swastik Gases v. Indian Oil Corporation, (2013) 9 SCC 32. S6. ABC Laminart v. A.P. Agencies, 1989 (2) SCC 163. $7. InterGhobe Aviation v. N Satchidanand, (2011) 7 SCC 463.

iautita*** 132

Chapter II-Of Contracts, Voidable Contracts and VoidAgreements

S. 28

place of cause of action, only courts at Delhi would have jurisdiction, the said clause is invalid in law." This conclusion, with the greatest respect, is incorrect. InterGlobe was a case where a part of cause of action clearly arose in Delhi, and as such, Courts in Delhi had jurisdiction. Just because a forum selection clause in favour of a particular location, could, in some situations (where Courts in the selected forum do not otherwise have any jurisdiction) be violative of S. 28, does not mean that such a clause is invalid even in those cases where the selected forum does have jurisdiction. The other line of reasoning given in InterGlobe to support the decision is equally suspect. On the basis that a forum selection clause would necessarily have to be providng for construed strictly, it was held by the Supreme Court that the clause

jurisdiction of "courts" in Delhi,

excluded jurisdiction of only the "courts" at the

other places. Since the complaint was instituted by the passenger at the "Permanent Lok Adalat" at Hyderabad, which is not a "court", the restriction in the clause would not apply.8 With respect, even this appears incorrect. As per its express terms, the

clause was an exclusive jurisdiction clause in favour of the "Courts of Delhi only" By implication, and having regard to the natural language as well as ordinary intention of parties executing such contracts, this would necessarily exclude jurisdiction of all other fora at all other places. For the Court to expect that parties would further specifiy in an exclusive

jurisdiction clause that in addition to parties

agreeing to jurisdiction of courts at a particular place, they exclude jurisdiction other quasi

judicial

fora at all other places, is to place a strained

and

of all

unnatural

construction to ordinary language. One way to explain the judgment in InterGlobe would be to see it in the context of its facts, where the Court was (and it is submitted, rightfully so) distrustful of enforcing a clause set out in a standard form, non negotiable, contract between an airline and its passengers. However, the same result could very well have been reached if the Court had examined the choice of jurisdiction clause in light of S. 23 of the Contract Act (unconscionability and public policy) as opposed to the present section (restraint of legal proceedings).

"Rights under or in respect of any

contract."-Note that this section applies only

to cases where a party is restricted from enforcing his rights under or in respect of any contract. It does not apply to cases of wrongs or torts. Nor does it apply to decrees. The expression "contract" does not include rights under a decree.

Limitation of time to enforce rights under a

contract.-Under the provisions of

this section, an agreement which provides that a suit should be brought for the breach of

any terms of the agreement within a time shorter than the period of limitation prescribed by law is void to that extent. The effect of such an agreement is absolutely to restrict the parties from enforcing their rights after the expiration of the stipulated period, though it may be within the period of limitation. Agreements of this kind were earlier distinguished from those which did not limit the time within which a party could enforce his rights, but which provided for a release or forfeiture of rights if no suit was brought within the period stipulated in the agreement. The latter class of agreements were outside the scope of the section (prior to the 1997 amendment), and they were binding between the parties. Thus, a clause in a policy of fire insurance which provided that "If the claim is made and rejected, and an action or suit be not commenced within three months after such rejection all benefits under this policy shall be forfeited" was valid, as such a clause operated as a

release or forfeiture of the rights of the assured if the condition was not complied with, and a suit could not be maintained on such a policy after the expiration of three months from the date of rejection of the plaintiff's claim. It was so held by the High Court of

58. InterGlobe Aviationv. N Satchidanand, (2011) 7 SCC 463 at 477. 59. Ramghulam v. Janki Rai, (1884) 7 All 124, 131.

Agreementsinrestraintoflegaplroceedings voidm

ilm-

S. 28

133

Bombay in the Baroda Spg & Wvg. Co.'s case.0 This distinction was also later endorsed by the Supreme Court.1 The 1997 amendment to this section however does away with the earlier distinction, and now, both, clauses limiting time for enforcement of the right, and, clauses extinguishing rights, are equally void under Indian law.o Even clauses which prescribe a

condition precedent (like assertion of rights or making of a claim, within a particular time) would. it appears, be covered under this section if their non-compliancehas the effect of so limiting the time or extinguishing the rights of aparty In a few occasions, courts have either missed or misconstruedo the applicability of this amendment; with respect, it appears that these cases have not properly appreciated the import of the amendment, and must therefore be read with caution. No provision is made in the section for agreements extending the period of limitation for enforcing rights arising under it. In a case before the Judicial Committeeb6 their Lordships expressed their opinion that, an agreement that in consideration of an enquiry into the merits of a disputed claim, advantage should not be taken of the Statute of Limitation in respect of the time employed in the inquiry is no bar to the plea of Limitation, though an action might be brought for breach of such an agreement. There is hardly any doubt that an agreement which provides for a longer period of limitation than the law allows does not lie within the scope of this section. Such an agreement certainly does not fall within the first branch of the section. There is no restriction imposed upon the right to

60.

Baroda Spg. &HWvg.Co., Ltd. v.Sanyanarayan Marine & Fire Insurance Co., Ltd., (1914) 38 Bom 344, Foll. in Girdharilal v. Eagle Star & British Dominions Insurance Co., Ltd., (1923) 27 CWN 955

AIR 1924 Cal 186; G. Rainey v. Burma Fire & Marine Insurance Co., (1925) 3 Ran 383; Haji

Shakoor v. H.E. Hinde & Co., (1932) 34 Bom LR 634: AIR 1932 Bom 330; Westerm India Prospecting Syndicate Lid. v. Bombay Steam Navigation Co. Lid., AIR 1951 Saur 83; The Unique Motor Insurance v. Rayma, AIR Khandelwal, AIR 1974 Bom 228. 61.

62.

63.

1950 Kutch 32; New India

Assurance Co. Lid.

v. R.M.

Food Corpn of India v. New India AssuranceCo Ltd, (1994) 3 SCC 324, 335: AIR 1994 SC 1889 National Insurance Co LId. v. Sujir Ganesh Nayak & Co. (1997) 4 SCC 366, 375: AIR 1997 SC 2049 (period of 12 months to claim insurance from date of damage otherwise liability extinguished). Pandit Construction Company v. Delhi Development Authority, 2007 (3) Arb LR 205, 211-212 (2007) 143 DLT 270 (Del); Hindustan Construction Corpn v. DDA, (1999) 77 DLT 165 :(1999) 1 Arb LR 272; J.K. Anand v. Delhi DevelopmentAuthority, 2001 (2) Arb LR 663 (Del); Union of India v. Simpler Concrete Piles India Pvt. Ltd., 2003 (3) Arb LR 536 (Del); D.C. Kapoor v. Delhi Development Authority, 2007 (1) Arb LR 486 : (2006) 130 DLT 94 (Del); Avinash Sharma v. Municipal Corporation of Delhi, 2007 (4) Arb LR 147, 153 (Del); Prem Power Construction Ltd. v. National Hydro Power Corporation Lid., (2009) 160 DLT 610. See however-POLLOCK & MULLA, INDIAN CONTRACT ANDSPECIFICRELIEF ACTS (13th edn, 2006) at p. 881, where the learned editor opines that clauses providing for a conditions precedent would

not fall within the purview of the amended section. To Justify this conclusion, the learned editor has conceived a further category of cases where the contract extinguishes the right or limits the time to,

"assert the right" or "make a claim, as distinct from where it extinguishes or limits the time for "enforcement of the right" itself. With great respect, the distinction appears to be artificial, and it adopted is likely to perpetuate the pre-amendment confusion, and will defeat the intention behind the 1997 amendment.

64. P. Manohar Reddy & Bros v. Maharashtra Krishna Valley Developmen Corpn., (2009) 2 SCC 494, 504: AIR 2009 SC 1776; Mahesh Chand v. Union of India, 2005 ()) Arb LR 153 (Raj). 65. HP State Forest Co Ltd. v. United India Insurance Co Ltd, (2009) 2 SCC 252, 257: AIR 2009 SC 1407. The Supreme

Court

opined

that the 1997

amendment

to S. 28 had been repealed and reached

this conclusion on an admission by the counsel for a party. This seems to be incorrect. It is likely that counsel based his admission on the Repealing and Amending Act, 2001 which repealed many amending statutes, including the 1997 amendment to the Contract Act. While this is indeed true, the

Repealing and Amending Act, 2001 (like its earlier predessors) while repealing the amending legislation, does not affect the amended legislation. 66.

East India Co. v. Odichur Paul, (1849) 5 MIA 43, 70.

134

S. 28

Chapter I1-Of Contracts, Voidable Contracts and VoidAgreements

sue; on the contrary, it seeks to keep the right to sue subsisting even after the period of

limitation. Nor is this an agreement limiting the time to enforce legal rights. It would, however, be void under Section 23 as tending to defeat the provisions of the Limitation Act, 1908.01,08 A restriction in a grant of maintenance which debarred the grantee from suing for maintenance more than one year in arrear was held to be void under this section.

"To that

extent"-These

words are a recognition of the doctrine of severability,

which has been discussed elsewhere.70

Exception 1 & 2.-This exception "applies only to a class of contracts, where, as in Scott v. Avery,'" the parties have agreed that no action shall be brought until some question of amount has first been decided by a reference, as for instance, the amount of damage which the assured has sustained in a marine or fire policy. Such an agreement does not exclude the jurisdiction of the Courts; it only stays the plaintiff's hand till some particular amount of money has been first ascertained by reference. The point is very similar to those which so frequently occur in England where an engineer or architect is constituted the arbitrator between a contractor and the person who employs him as to what should be allowed in case of dispute for extras or penalties. It

must not be supposed that the use of such terms as "sole judge" necessarily imposes any duty of proceeding in a quasi-judicial manner. This class of cases must be distinguished from those where the obligation of a promisor, such as the duty of paying for work to be done or goods to be supplied is made, by the terms of the contract, to depend on the consent or approval of some person, as in a builder's contract, the certificate of the architect, that the work has been properly done. Here there is no question of referring to arbitration, or anything like arbitration, a dispute subsequent to the contract, but the contract itself is conditional, or, in the language of the Act, contingent (Ss. 31-36, below). It is usual for agreements providing for arbitration to contain clauses where determination of a party on certain contentious issues is termed as "final" and "not susceptible to challenge". These might validly be relied upon to oust the jurisdiction of the arbitral tribunal for disputes arising out of such clauses. These however cannot restrict the rights of the party to pursue its remedies under law (for to do so would amount to a restraint on legal proceedings) and it will be open to a party to raise this dispute before an

appropriate judicial forum.74 Exception

3.-This

exception applies only to contracts by a bank or a financial

institution which stipulate that rights under a guarantee or any agreement making a time period, not being less provision for guarantee can only be claimed within a specifie than one year. At the end of the specified time period, the rights under the guarantee or agreement shall be extinguished.

67.

Repealed and re-enacted as the Limitation Act, 1963.

68. Ballepragada v. Thammana, (1917) 40 Mad 701. 69. Saroj Bandhu v. Jnanda Sundari, (1932) 36 CWN 555: AIR 1932 Cal 720. 70. See notes underS. 27 "To that extent' 71. Scott v. Avery, (1885) 5 HL 811; Cipriani v. Barret, (1933) 64 MLJ 284: AIR 1933 PC 91. 72. Per GARTH, C.J, in Coringa Oil Co., Ltd. v. Keegler, (1876) 1 Cal 466, 469; Cooverji v. Bhimji. (1882) 6 Bom 528, 536.

73. VishwanathSood v. Union of India, (1989) 1 SCC 657: AIR 1989 SC 952; DelhiDevelopment Authority v. SudhirBrothers, (1995) 2 Arb LR 306 (Del-DB) : (1995) 57 DLT 474 (DB).

14.

Oil and Natural Gas Corporation Lid. v. Mitra Guha Builder (lIndia) Co., 2009 (2) Arb LR 40, 48 (DelDB); Bharat Sanchar Nigam Ld. v. Motorola India Pvt. Lid, (2009) 2 SCC 337, 347: AIR 2009 SC 337: Sterlite Optical Technologies Lid v. Bharat Sanchar Nigam Lid., 2009 (1) Arb LR 139, 143 (Del).

Agreementvsoidfor uncertainty lpbi Agreements void for uncertainty.

aot

)1O

e

S. 29

135

S. 29. Agreements, the meaning of which is not certain, or capable of being made certain, are

void. lhustrations (a) A agrees to sell to B "a hundred tons of oil." There is nothing whatever to show what of oil was intended. The agreement is void for uncertainty.

kind

(6) A agrees to sell to B one hundred tons of oil of a specified description, known as an article of commerce. There is no uncertainty here to make the agreement void. (c) 4, who is a dealer in coconut-oil only, agrees to sell to B "one hundred tons of oil." The nature of A's trade affords an indication of the meaning of the words, and A has entered into a contract for the sale of one hundred tons of coconut-oil. (d) A agrees to sell to B "all the grain in my granary at Ramnagar." There is no here to make the agreement void.

uncertainty

(e) A agrees to sell to B "one thousand maunds of rice at a price lo be fixed by C." As the price is capable of being made certain, there is no uncertainty here to make the agreement

Void. (

A agrees to sell to B "my white horse for rupees five hundred or rupees one thousand."

There is nothing to show

Construction of

which of the two prices was to be given. The agreement is void.

contract.The Court must give effect to the plain meaning of the

words in the instruments however it may dislike the result. When the bargain is in writ-

ing, the intention of the parties is to be looked for in the words used. A right to terminate at will cannot be restricted to a right to terminate for a reasonable cause. In construing business contracts it is no doubt important to appreciate the methods and the point of

view of businessmen but this is merely a prudent way of qualifying the mind to construe their words and so to determine their meaning but this is rather different from postulating that reasonable men would or would not have agreed.'o If the meaning is doubtful, the Court may have regard to the surrounding circumstances. Ambiguous contracts.-Section 93 of the Evidence Act provides that when the language of a document is ambiguous or defective no evidence can be given to explain or amend the document. See also Sections 94-97 of the same Act. Neither will the Court

undertake to supply defects or remove ambiguities according to its own notions of what is reasonable; for this would be not to enforce a contract made by the parties, but to make a new contract for them. The only apparent exception to this principle is that when goods are sold without naming a price, the bargain is understood to be for a reasonable

price.8 Where the defendant passed a document to the Agra Savings Bank whereby he promised to pay to the manager of the bank the sum of Rs.10 on or before a certain date "and a similar sum monthly every succeeding month," it was held that the instrument could not be regarded as a promissory note, as it was impossible from i language to say for what period it was to subsist and what amount was to be paid under it. But if the agreement

75. Central Bank of India v. Hartfort Fire Insurance Co., AIR 1965 SC 1288:(1965) 35 Com Cas 378. 76. Hurnandrai v. Pragdas, 50 IA 9:25 Bom LR 537: AIR 1923 PC 54; China Coton Exporters v. Beharilal Colton Mills, (1961)3 SCR 845 :(1961) ASC 1295. 17. Vatsavaya Venkatav. Venkatapathi Raju, AIR 1924 PC 162:48 Mad 230. 78. See Section 9(1) of the Indian Sale of Goods Act, 1930. 79. Carter v. The Agra Saving Bank, (1883) 5 All 562.

136

S. 30

Chapter I1Of Contracts, Voidable Contracts and VoidAgreements

is capable of being made certain the section does not apply.30 In a contract of sale, price was to be fixed by a named person, the plea of uncertainty of conditions wasnegatived. An agreement to grant a lease when no date of commencement is expressly or impliedly fixed cannot be enforced. But when the commencement of a lease is dependent upon a contingency, which has occurred, the agreement can be enforced. An agreement that provides for sale of a particular portion of a larger piece of land, without

clearly identifying or demarcating such portion, is uncertain and hence void.* An agreement to pay a certain amount, after deduction as would be agreed upon between the parties is void for uncertainty.3 It has also been held that an agreement to refer an arbitration to a person, who has been described in uncertain terms is void86 But where the proprietor of an indigo factory mortgaged to B all the indigo cakes that might be man-

ufactured by the factory from crops to be grown on lands of the factory from the date of the mortgage upto the date of payment of the mortgage debt, it was held that the terms of the mortgage were not vague, and that the mortgage was not void in law.5 A term in an agreement that a dispute arising out of the contract be settled by arbitration according to a specified Association is not vague or uncertain.35 A contract containing the words "subject to usual force majeure clause" is not vague or uncertain. Similarly, an agreement between a landlord and a tenant to adjust the cost of repairs of the new construction to be made by the tenant against the rent payable by the tenant to the landlord would not be void for uncertainty as the cost of repairs could beascertained after the repairs are carried out."0

A contract to negotiate', supported by consideration, is too uncertain and not enforceable."

Court held there was no contract as there was no agreement between the

parties upon a fundamental matter as to price in a building contract nor regarding the method by which price was to be calculated.

S. 30. Agreements by way of wager are void; and no suit shall be

tbrought

Agreements by way of wager, void.

for recovering anything alleged to bewon

on any wager, or entrusted to any person to abide the result of any game or other uncertain event on

which any wager is made. 80. 81.

Gadula Rami Naidu v. Seethan Naidu. (1935) 154 IC 821: AIR 1935 Mad 276. Sobhat Devi v. Devi Phal, AIR 1971 SC 2192 :(1972) 3 SCC 495; M. Sham Singh v. State of Mysore, AIR 1972 SC 2440 : (1973) 2 SCC 303 (Salary to be fixed by Govt.); Sudbrook Trading

Estate Lid. v. Eggleton, (1982) 3 All ER 1 :(1983) 1 AC 444 (HL) (price to be fixed byvaluers); Claude-Lila Parulekar v. Sakal Papers (P) Ltd., (2005) 11 SCC 73, 96: AIR 2005 SC 4074 (price to be determined by auditors). If however the valuation is not in fact made, the contract can be

82.

83. 84.

avoided, see S. 10(1) of the Sale of Goods Act, 1930. Giribala Dasi v. Kalidas Bhanja, (1920) 22 Bom LR 1332 : 57 IC 626: AIR 1921 PC 71; Central Bank Yeotmal Ltd. v. Vyankatesh, (1949) Nag 106 : AIR (1881) 18 Ch D 233 CA. Sitlani v. Viroosing, (1947) 225 IC 264: AIR 1947 Sind 6.

1949 Nag

Marshall

v. Berridge.

Pawan Kumar Dut v. Shakuntala Devi, (2010) 15 SCC 601.

85. Kalpana Devara v. Krishna Mitter, (1945) Mad 521:2191C 231 86. 87. 88. 89.

286;

AIR 1945 Mad 10 distinguished

in East Asiatic Co. v. Rugnath, AIR 1953 Sau 122. Governor-General in Council v. Simla Banking & Industrial Co. Ltd, AlR 1947 Lah 215: 266 1C444.

Baldeo Parshad v. Miller. (1904)31 Cal 667, 676-678. M Golodetz v. Serajuddi, 63 CWN 128. Dhanrajimal Gobindram v. Shamji Kalidas & Co., (1961) 3 SCR 1020:64 Bom LR 169: AIR 1961 SC 1285.

90.

91.

Chandra Sheikhar v. Gopi Nath, AIR 1963 All 248. Courtney and Fairbairn Lid. v. Tolaini Bros. (Hostels) Lid, (1975) 1 WLR 297: (1975) 1 All ER 716; Walford v. Miles, [1992] 2 AC 128, 138 (HL).

S. 30

Agreemenis by way of wager void

This section shall not be deemed to render

137

unlawful a subscription

or contribution, or agreement to subscribe or contribute, made or Exceptioninfavourof entered into 1or or towards any plate, prize or sum certainprizes forhorse- of money, of the value or amount of five hundred racing. rupees or upwards, to be awarded to the winner or

winners of any horse-race. Nothing in this

section shall be deemed to legalize any transaction the Section 294-A of the connected with horse-racing, to which provisions

Indian Penal Code not affected.

of section

294-A

of the

Indian

Penal

Code (45 of 1860) apply.

Wagering contracts.-This section represents the law of wagering contracts now in force in India, supplemented in the Maharashtra State by Act III of 1865. It superseded

Act 21 of 1848 (an Act for avoiding wagers). There is no technical

objection

to the

validity

of a wagering

contract.2

It is an

agreement by mutual promises, each of them conditional on the happening or not happening of an unknown event. So far as that goes, promises of this form will support each other as well as any other reciprocal promises. What is a

wager.-A

wager has been defined as a contract by A to pay money to B

on the happening of a given event, in consideration of B paying to him money on the event not happening.7 But Sir William Anson's definition, "a promise to give money or money's worth upon the determination or ascertainment of an uncertain event," is neater and more accurate. To constitute a wager "the parties must contemplate the determination of the uncertain event as the sole condition of their contract. One may thus distinguish a

genuine wager from a conditional promise or a guarantee"* But if one of the parties has the event in his own hands, the transaction lacks an essential ingredient of a wager.5 It is of the essence of a wager that each side should stand to win or lose according to the uncertain or unascertained event, in reference to which the chance or risk is taken.o A wager may be even with respect to an event which has already happened in the past and so it may not be a future event. eg. result of an election which is Over but the parties may not be aware of its result. Lastly, to amount to a wagering transaction it is necessary that the stake money for the contemplated event should come out of the pockets of the parties entering into the wagering transaction. If it is subscribed by outsiders, the agreement between parties is not a wager. So where two wrestlers agreed to play a wrestling

match and apart from pro-

viding that the winner of them was to get a certain sum, they also provided that a party failing to appear on the fixed day was to forfeit Rs. 500 to the opposite party out of the gate money. The defendant failed to appear in the ring and plaintiff sued him for Rs. 500 only. It was held as the prize for success was not subscribed for by competitors themselves but by outsiders, viz., the gate money provided by the public, it was not a wager Moreover, neither side stood to lose according to the result of the wrestling match. Thus, the plaintiff could recover Rs. 500/- from the defendant.

92. 93.

Gherulal Parakh v. Mahadeodas Maiya, (1959) 2 SCR (supp) 406: AIR 1959 SC 781. Hampden v. Walsh, (1876) 1 QBD 189, 192. See also per LORD BRAMPTON in Carlill v. Carbolic

Smoke Ball Co, (1892) 2QB 484, 490:[1891-94] All ER Rep 127. 94.

ANSON'S PRINCIPLES OF THE ENGLISH LAW OF CONTRACT, (22nd edn., 1964) at pp. 301-302.

95.

Per BIRDWOOD J., in Dayabhai Tribhovandas v. Lakhmichand Panachand (1885) 9 Bom 358, 363.

96.

Per JENKINS, C.J., in Sassoon v. Tokersey, (1904) 28 Bom 616, p. 621.

138

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In Alamai v. Positive GovernmentSecuriny Life Assurance Co.a case of life insurance, FULTON, J., said: "What is the meaning of the phrase"agreements by way of wager' in Section 30 of the Contract Act?*" In Thacker v. Hardy,2 COTTON, L.J. said that the essence of gaming and wagering was that one party was to win and the other was to lose upon a future event, which at the time of the contract was of an uncertain nature; but he also pointed out that there were some transaction in which the parties might lose and gain according to the happening of a future event which did not fall within the phrase.

Such transactions, of course, are common enough including the majority of forward pur chases and sales. If an agreement does not involve loss to either party, it is not a wager. A certain class of agreement such as bets, by common consent, come within the

expression *agreements' by way of wagers. Others, such as legitimate forms of life insurance, do not, though looked at from one

point of view they appear to come within the definition of wagers. The distinction is doubtless rather subtle, and probably lies more in the intention of the parties than in the form of the contract. In such doubtful cases it seems that the only safe course for the Courts in India is to follow the English decisions, and that when a certain class of agreement has indisputably been treated as a wagering agreement in England it ought to receive the same treatment in India.3

Reforms in English Law (Gambling Act, 2005).-Changing notions of public morality, the rise of the gambling industry and the growth of sophisticated commercial risk management instruments had necessitated, in England, a change in the approach to gaming and wagering agreements. In 2000, provision was made that an agreement would

not be void if at least one of the parties entered into it for legitimate businesspurposes." In 2005, the Gambling Act was enacted which repealed s. 18 of the Gaming Act, 1845 so that a gaming contract is now no longer in itself illegal in the UK. Subsequent to the enactment of this Act, the standard textbooks on English law now do not deal with gaming and wagering contracts-though the old commentaries and the decided cases

would stil remain relevant to understand the scope of India Law. Contracts "By way of

wager"-There

is no distinction between the expression

"gaming and wagering," used in S. 18 of the (English) Gaming Act, 1845 and the repealed Indian Act XXI of 1848, and the expression "by way of wager," used in this section.

Court to ascertain real nature and mutual

intention.-Wagering contracts may

assume a variety of forms, and a type with which the Courts have constantly dealt is that

which provides for the payment of difference, in stock exchange transactions, with or without colourable provisions for the completion of purchases. Such provisions, if inserted, will not prevent the Court from examining the real nature of the agreement as a whole. "In order to constitute a wagering contract neither party should intend to perform

2. 3.

5. 6. 7. 8. 9.

Alamai v. Positive Government Security Life Assurance Co., (1898) 23 Bom 191. Thacker v. Hardy, (1878) 4 QBD 685, 695. See Trimble v. Hill, (1879) 5 App Ca 342; and also Kathama Natchiar v. Dorasingu, (1875) LR 2 IA 169, 186. Section 412, Financial Services and Markets Act, 2000. Section 335, Gambling Act, 2005. See ANSON'S LAW OF CONTRACT (29th edn., 2010) at p. vi (preface). Kong Yee Lone & Co. v. Lowjee Nanjee, (1901) 29 Cal 461, LR 28 IA 239. Doshi Talakshi v. Shah Ujamsi Velsi, (1899) 24 Bom 227, 229: 1 Bom LR 796. Re Gieve, (1899) QB 794 CA; Doshi Talakshi v. Shah Ujamsi Velsi, (1899) 24 Bom 227, 232:1 Bom LR T96.

S. 30

Agreements by way of wager void

139

the contract itself, but only to pay the differences."l0 It is not sufficient if the intention to gamble exists on the part of only one of the contracting parties. "Contracts are not wagering contracts unless it be the intention of both contracting parties at the time of entering into the contracts that under no circumstances to call for or give delivery from or to each other." It is not necessary that such intention should be expressed. "If the circumstances are such as to warrant the legal inference that they never intended any actual transfer of goods at all, but only to pay or receive money between one another, according as the market price of the goods should vary from the contract price at the given time, that is not a commercial transaction but a wager on the rise or fall of the Judicial Committee in Kong Yee Lone & Co. v. market. This was laid down by the In Doshi Talakshi v. Shah Ujamshi Lowjee Nanjeel and in Sukdevdoss V. Govindoss. Velsi'" certain contracts were entered into in Dholera for sale and purchase of Broach cotton, a commodity which, it was admitted, never found its way either by production or delivery, to Dholera. The contracts were made on terms contained in a printed form

which incorporated the rules framed by the cotton merchants of Dholera. Those rules expressly provided for the delivery of cotton in every case, and forbade all gambling in differences. The course of dealings was, however, such that none of the contracts was ever completed except by payment of differences between the contract price and the market price in Bombay on the vaida (settlement) day. It was held upon these facts that the contracts were by way of wager within the meaning of this section. On the other hand, the modus operandi may be such as to raise a presumption against the existence of a common intention to wager. This frequently happens when agreements of a speculatıve character are entered into through the medium of brokers, and when, according to the practice of the market, the principals are not brought into contact with each other, and do not know the name of the person with whom they are contracting until after the bought and sold notes are executed. Under circumstances such as these, when a party launches his contract orders he does not know with whom the contracts would be made. And this presumption is considerably strengthened when the broker is authorised by the principal

to contract with third persons in his (the broker's) own name; for the third person may in such case remain undisclosed even after the contract is made.° But the presumption may be rebutted by evidence of a common intention to wager, though the contract has been brought about by a broker."

Teji Mandi

transaction.-A

teji mandi transaction involves a sale or apurchase, at

the ruling rate of the date of the transaction, of a double option for a future date (Vaida day) in respect of certain goods or stock or commodity, such as cotton, gold, silver, hessian, groundnut etc. A purchaser of a double option pays a premium in respect of a unit of a commodity. He pays a premium of, say, Rs. 20/- per unit. On or before the settlingdate (Vaida day) the buyer has the option to declare himself a buyer or a seller. If the

market rate goes down on the settling date the buyer will declare himself as the seller. If the market rate goes up, he will declare himself as a buyer. Assuming the market rate on

10.

Perosha v. Manekji, (1898) 22 Bom 899, 903; The Universal Stock Exchange v. Strachan, (1896) AC 166; Eshoor Doss v. Venkatasubba Rau, (1895) 18 Mad 306; Ganesh Das v. Har Bhagwan, (1932) 138 IC 542 : AIR 1932 Lah 273.

I1. Ajudhia Prasad v. Lalman, (1902) 25 All 38;Sassoonv. Tokersey, (1904) 28Bom 616, Meghji v. Jadhowjee, (1910) 12 Bom LR 1072; Sitaram v. Chamanlal, AIR 1952 Hyd 95; Perosha v. Manekji. (1898) 22 Bom 899. 12. Kong Yee Lone & Co. v. Lowjee Nanjee, (1901) 29 Cal 461 467: LR 28 1A 239. 13. Sukdevdoss v. Govindoss, (1918) 51 Mad 96 (PC). 14. Doshi Talakshi v. Shah Ujamsi Velsi, (1899) 24 Bom 227, 229 : 1 Bom LR 796. I5. JH. Tod v. Lakhmidas, (1892) 16 Bom 441, 446. 16. Perosha v. Manekji. (1898) 22 Bom 899, Sassoon v. Tokersey, (1904) 28 Bom 626. 17. Eshoor Doss v. Venkatasubba Rau, (1895) 1LR 18 Mad 306.

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Chapter I1-0f Contracts, Voidable Contracts and VoidAgreements

S. 30

the date of the purchase of the double option to be Rs. 100/- per unit, if on the settling date (Vaida day) the market rate falls to Rs. 90/- or less than that, the buyer of the double option will declare himself as the seller and if the market rate rises above Rs. 100/-, he will declare himself as the purchaser. The decisions bearing on this point were considered in a case where it was held that the mere fact that a transaction was teji mandi did not make it a wagering transaction; to constitute it a wager it must be proved that there was a

common intention to pay differences only. And this, it is submitted, is the correct rule.s Teji mandi contracts are also known as nazarana contracts, Agreements between Pukka Adatia and his in some Bombay cases that a pukka adatia was that therefore no transaction between them wandas v. Kanji0 however, it was held, on constituent the pukka adatia was a principal

constituents.-It

was at one time held

merely the agent of his constituent, and could be a wagering transaction. In Bhagthe evidence of custom, that as regards his and not a disinterested middleman bringing

two principals together. Since that decision the High Court of Bombay held in two cases that a transaction between a pukka adatia and his constituent may be by way of wager like any other transaction between two contracting parties, and that the existence of the pukka adatia relationship does not of itself negative the possibility of a contract being a wagering contract as between them." One of those cases was taken to the Privy Council, which affirmed the principle laid down by the Bombay High Court.2 Agreements collateral to wagering

contracts.-Thus

far our observations are con-

fined to suits between the principal parties to such a contract. Different considerations apply where the suit is brought by a broker or an agent against his principal to recover his brokerage or commission in respect of such a transaction entered into by him as such, or

for indemnity for losses incurred by him in such transactions, on behalf of his principal. Apart from a Bombay

enactment to be presently noticed there is no statute which

declares agreements collateral to wagering contracts to be void. Nor is there anything in the present section to render such agreements void. A subsequent promise to pay which is supported by consideration to pay money which was due originally under a wagering transaction would be enforceable.-3 It has accordingly been held that a broker or an agent may successfully maintain a suit against his principal to recover his brokerage, commiSSIon, or the losses sustained by him, even though the contracts in respect of which the claim is made are contracts by way of wager.* Conversely, an agent who has received

18.

Manilal

Dharamsi v.

Allibhai

Chagla, (1923) 47 Bom 263 : 24 Bom LR 812 : 68 IC 481 : AIR

1922 Bom 408; approved SobhagmalGianmal v.Mukundchand Balia, (1926) LR 53 TA 241:5

Bom : 28Bom LR 1376: 981C 338: AIR 1926PC119,RamPrasad v.Ranji Lal, (19275 ) 0 Al 115 103 IC 218: AIR 1927 Al 795; Narandas v. Ghanshyamdas, (1933) 35 Bom LR 640: 1471C 412: AIR 1933 Bom 348; Baldeosahai v. Radhakrishan, (1939) 41 Bom LR 308: 183 IC 22: AIR

1939 Bom 225. 19. 20. 21.

Pirthi Singh v. Matu Ram, (1932) 13 Lan 766: 138 IC 241: (32) AL 356. Bhagwandas v. Kanji, (1905) 30 Bom 205. Burjorji v. Bhagwandas, (1914) 38 Bom 204; Chogmal v. Jainarayan, (1915) 39 Bom 1.

22. Bhagwandas v. Burjorji, (1918) LR 45 IA 29: 42 Bom 373. See also Manilal Raghunath v. Radha Kisson Ramjiwan, (1921) 45 Bom 386; Harcharan Das v. Jai Jai Ram, (1940) All 136: 188 IC 29:

AIR 1940 Al 182. 23. 24.

Leicester & Co. v. S.P. Mullick, (1922) 27 CWN 442. Daya Ram v. Murli Dhar, (1927) 49 All 926: 102 IC 605: AIR 1927 All 823; Chekka v. Gajjila. I904) 14 Mad LJ 326; much more can the principal recover from the agent money deposited with him as security Hardeo Das v. Ram Prasad, (1926) 49 All 438: 100 IC 774 : AIR 1927 All 238. See Mutsaddi Lal-Sewa Ram v. Bhagirath, (1929) 10 Lah LJ 522: 115 IC 424: AIR 1929 Lah 375; Ram Dev v. Seth Kaku, AIR 1950 EP 92:52 Pun LR 31 (FB).

Agreementsby way ofwager voido

S. 30

141

money on account of a wagering contract is bound to restore the same to his principal.25 Such transactions are neither against the provisions of the present section nor of Section 23,26 The law is, however, different in the State of Maharashtra. In that State, contracts collateral to or in respect of wagering transactions are prevented from suppoting a suit by the special provisions of Bombay Act Ill of 1865. Sections I and 2 of the Act run as

follows: Section I: "All contracts, whether by speaking, writing, or otherwise knowingly made, to further or assist the entering into, effecting or carrying out agreements by way of gaming or wagering, and all contracts by way of security or guarantee for the performance of such agreements or contracts, shall be null and void; and no suit shall be allowed

in any Court of justice for recovering any sum of money paid or payable in respect of any Such contract or contracts or any such agreement or agreements as aforesaid.

Section 2: "No suit shall be allowed in any Court of justice for recovering any commission, brokerage free, or reward in respect of the knowingly effecting or carrying out or of the knowingly aiding in effecting or in carrying out or otherwise claimed or claimable in respect of any such agreements by way of gaming or wagering or any such contracts as aforesaid, whether the plaintiff in such suit or be not a party to such last mentioned agreement or contract, or for recovering any sum of money knowingly paid or payable on account of any persons by way of commission, brokerage fee or reward in contract as aforesaid. respect of any such agreement by way of gaming or wagering

But in order to make the sections of the Bombay Act applicable it must be shown that the transaction in respect of which the brokerage, commission, or losses are claimed must amount to a wagering agreement, and it is no answer to a suit by a broker in respect of such a claim against his principal that, so far as the defendant was concerned, he entered into the contracts as wagering transactions with the intention of paying the differences only, and that the plaintiff must have known of the inability of the defendant to

complete the contracts by payments and delivery, having regard to his position and means. It must, further, be shown that the contracts which the plaintiff entered into with third persons on behalf of the defendant were wagering contracts as between the plaintiff and those third persons. Tt has also been held that a deposit paid on a wagering contract cannot be recovered in a case subject to the provisions of Section 1 of the Bombay Act, whether the person suing is a winner or a loser in the transaction.3 An agreement to settle differences arising out of a nominal agreement for sale which was really a gamble is no less void than the original wagering transaction.

The result therefore is that, though an agreement by way of wager is void, a contract collateral to it or in respect of a wagering agreement is not void, except in the Maharashtra State and possibly in the state of Gujarat in view of Section 87 of the Bombay

Reorganization Act (XI of 1960).

25.

Bhola Nath v. Mul Chand, (1903) 25 All 639; Hardeo Das v. Ram Prasad, (1927) 49 All 438, 100

IC 774: AIR 1927 Al 238; Muthuswami v. Veeraswami, (1936) 70 MLJ 433 : 163 IC 251: AIR 1936 Mad 486.

26.

Banj Madho Das v. Kaunsal Kishor Dhusar, (1900) 22 All 452; Gherulal Parakh v. Mahadeodas, AIR 1959 SC 781 :(1959) 2 SCR (Supp) 406. 27. Perosha v. Manekji, (1898) 22 Bom 889, 907; Sassoon v. Tokersey. (1904) 28 Bom 616. 28. Ramchandra v. Gangabison, (1910) 12 Bom LR 590. 29. Jivanchand Ghambirmal v. Laxminarayan, (1925) 49 Bom 689: 27 Bom LR 941 : 89 IC 885: AIR 1925 Bom 511.

30. Leicester & Co. v. S.P. Mullick, (1922) 27 CWN 442; followed in W. Banvard v. M.M. Moolla, (1928) 7 Rang 263: 119 IC 215: AIR 1929 Rang 241.

Invalidating Causes

N

person

(b)

Lawful considerationSs. 2(d) & 23 (d) Not decl,u-ed to be void Ss. 25-30

(c)

(b) (c) (d)

Without consideration-$. 25 unless (i) by writing registered, between near relations out of natural love and affection (ii) to compensate a person for something voluntarily done for the promisor or which the promisor was bound to do (iii) in writing to pay a time-barred debt

(c) in restraint of the marriage of a person not a minor- S. 26 (d) in restraint of trade-S. 27 (saving the sale of a goodwill) (e) in restrain of legal proceedings-S. 28 (saving references to atbitration) (f) by way ofwager-S. 30 (g) of uncertain meaning-S. 29 (h) to do an act which is impossible or becomes impossible-Ss. 35, 36 & 56. mistake of both parties as to essential matter of (i) fact-S. 20 (j) mistake of both parties to foreign law - S. 21

I

Voidable by subsequent default (a) where offer of performance is not accepted- S. 38 (b) when one party prevents performance of reciprocal promise-S. 53 (c) when a party fails to perform at the time fixed if time is the essence of the contract-S. 55

i.., i

z

g

§

F

I

i

I

(a)

as

Voidable in inception consent caused by fraud-Ss. 14, 17 & 19 consent caused by coercionSs. 14, 15 & 19 consent caused by misrepresentation-Ss. 14, 18 & 19 consent caused by undu·e influences- Ss. 14, 16 & 19A

Cl)

•

Chapter I1-of Contracts, Voidable Contracts and VoidAgreements

(a) Consideration or object unlawful--S. 1.3 being (i) forbidden by law (ii) defeating the provisions of any law (iii) fraudulent (iv) Injurious to person or property of another (v) itntnoral ot opposed to public policy

-

{b) Free consent- S. 14

...

Enforceable by one party only Voidable contract-S. 2(i)

. 2(g)

S. 30

Not enforceable Void agreement-

Requisites Competent Ss, 11 & 12

.,::. N

AGREEMENT

Enforceable Contract-$. 2(h) (a)

-

142

CHART A -AGltttM}:NT

-

0-

g

a :s

§ C

Agreementsbywayofwager voidliot

an

)100-sitoi)

S. 30

143

So in Rangoon Case, K owed money to N. On a betting transaction K refused to pay the said amount. N threatened to post K as defaulter before the Turf Club. So K gave a post dated cheque to and requested N not to do so and moreover K promised to make payment on a certain day but he defaulted. It was held that plaintiff could recover on the

cheque because the consideration for the passing of a cheque was the plaintiff's act in refraining from posting defendant before the Turf Club (as plaintiff could have done so) and the defendant's promise on such consideration is binding on defendant. It may be hoped that in any future revision of the Contract Act the provisions of the Bombay Act will be incorporated in the present section so as to render the law uniform on

this subject in the whole of India. Insurance policies.-The cases of life insurance and marine insurance afford illustration of another variety of wageringcontracts. In Alarnmai v. Positive Government Security Life lnsurance Co.3 the High Court of Bombay held that in India an insurance for a term of years on the life of a person in whom the insurer had no interest was void under this section. In that case the defendant company issued a policy for a term of 10 years for Rs. 25,000 on the life of Mehbub Bi, the wife of a clerk in the employ of the plaintiff's husband. About a week after, Mehbub Bi assigned the policy to the plaintiff. Mehbub Bi died a month later, recover Rs. 25,000 from the defendants. It and the plaintiff asassignee of the policysued

was held on the evidence that the policy was not effected by Mehbub Bi for her own use and benefit, and that it was void as a wagering transaction, the insurer having no interest in the life of Mehbub Bi.

A third party liability insurance effected by the registered owner of a motor vehicle under the Motor Vehicles Act is not void as a wagering contract, even though the registered owner was a benamidar for the real owner.32 The registered owner even if he was a benamidar, had sufficient insurable interest to effect the insurance required under the Motor Vehicles Act.33

Promissory note for debt due

on a wagering contract.-Agreements by way of

wager being void, no suit will lie on a promissory note for a debt due on a wagering contract. Such a note must be regarded "as made without consideration": for "a contract which is itself null and void cannot be treated as any consideration for a promissory

note.4 Award on debt on agering contract.-An arbitration clause in a wagering contract is not to be treated as a covenant distinct from the contract of wager and is therefore void. An award resulting from a reference in such a contract is void and a suit will lie to

set it aside.» Suit to recover deposit.-The prohibition contained in this section as regards the recovery of money deposited pending the event of a bet applies only to the case of winners. The winner of a wager or a bet cannot sue to recover the amount deposited by the loser with the stake-holder, but it is quite competent to the loser to recover back his

31.

Alarnmai v. Positive Government Security Life Insurance Co., (1898) 23 Bom 191.

32. Northerm India General Insurance Co. Lid. v. Kanwarjit Singh Sobti, AIR 1973 All 357. 33. Northern India General Insurance Co. Ltd. v. Kanwarjit Singh Sobti, AIR 1973 All 357. 34. Trikam Damodar v. Lala Amirchand, (1871) 8 BHC AC 131. See also Doshi Talakshi v. Shah Ujamsi Velsi, (1899) 24 Bom 227; Kong Yee Lone & Co. v. Lowjee Nanjee, (1901) 29 Cal 461 : LR 28 TA 239. 35. Karunakumar v. Lankaran, (1933) 60 Cal 856:149 IC 61: AIR 1933 Cal 759.

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S. 30

Chapter I1-Of Contracts, Voidable Contracts and VoidAgreements

deposit before the stake-holder has paid it over to the winner.36 In a case, however, governed by the provisions of Bombay Act IIll of 1865, even a loser cannot recover back the deposit.3 Lottery.-A cross-word puzzle wherein prizes are awarded to a person whose solution corresponds closely to the set solution of the editor is a lottery because the prize did not depend upon the best solution of a competitor but upon the chance of his solution corresponding closely to a set solution.38 But ifa prize is awarded to the best solution and is not dependent upon a predetermined solution, it would not be a lottery because success depended upon an exercise of a substantial degree of skill.3 A Kuri chit fund has been held to be a lottery.40 A sweepstake has been held to be a lottery. A contract to purchase a lottery authorized by the Government is null and void as it is a contract by way of a wager.

to

36.

Ofcourse not after payment: Maung Po Hmein v. Maung Aumg Mya, (1925) 3 Ran 543:93 IC 105: AIR 1926 Rang 48. Ramchandra v. Gankgabison, (1910) 12 Bom LR 590.

37. 38. Coles v. Odhams Press, (1936) 1 KB 416. 39. Witty v. World Services Ltd, (1936) Ch 303. 40. Sesha Aiyar v. Krishna Aiyar, AIR 1936 Mad 225: 70 MLJ 36. 41. Kshiteendra v. Madaneshwar, (1937) 63 Cal 1234. 42. Sir Dorabji J. Tata v. Edward Lance, 42 Bom 676.

CHAPTERIII

OF CONTINGENT CONTRACTS S. 31. A

"Contingent contract" defined.

"contingent

contract" is a contract to

do or not to do something, if some event, collateral to such contract, does or does not happen. llustration

A contracts to pay to B Rs. 10,000 if B's house isburnmt. This is a contingent contract.

Of the section in general. -We do not know why the word "contingent," familiar to English lawyers only in the law of real property, was preferred to "conditional." A promise is said to be absolute or unconditional when the promisor binds himself to performance in any event, conditional when performance is due only on the happening of Some uncertain event in the future or if some state of facts not within the promise's knowledge now exists.

A contract may be subject to a condition precedent or a condition subsequent or a condition concurrent. This chapter deals with condition precedent. If a contract provides that it is not to be binding until a specified occurs, it is subject to a condition precedent. If a contract provides for its determination on the occurrence of a specified event in future, it is subject to a condition subsequent. For example, where a contract provides that after

the purchaser opens a confirmed letter of credit in favour of the seller, the latter will ship the goods, the opening of the letter of credit is a condition precedent

Event collateral to

contract-In

the text of the Act the words "some event col-

lateral to such contract" seem to mean that the event is neither a performance directly promised as part of the contract, nor the whole of the consideration for a promise. Thus, ifI offer a reward for the recovery of lost goods, there is not a contingent contract; there is no contract at all unless and until someone, acting on the offer, finds the goods and brings them to me, Again, a contract to pay a man for a piece of work is very çommonly made on the terms that he is to have no pay till the work is all done; but the completion of the work, being the very thing contracted for, is not collateral to the contract, and the

contract is not properly said to be contingent, though the performance of the work may be, and often is, a condition precedent to the payment of the wages. Where a contract

provides

that the goods would be delivered as and when they

arive, or when received from the mill where they are under manufactures or as soon as they are received from the mill. or that the goods will be shipped as soon as they are

.Trans Trust v. Danubian Trading Co. Lad, (1952) 2 QB 297:(1952) 1 All ER 970. Ranchhoddas v. Nathumal, 5I Bom LR 491. 3.

Hurnandrai v. Pragdas, 25 Bom LR 537: AIR 1923 PC

4.

Ganga Saran v. Ram Charan, 1952 SCR S6.

145]

54:50 1A 9. Aas

146

Chapter II-Of ContingenC t ontracts

S. 31

delivered by the vendor's

sheller," it is not a contingent contract but it merely provides a

particular mode of performance. The illustration to the section is the ordinary one of a contract of fire insurance. All contracts of insurance and indemnity are obviously contingent. A wager is a contingent agreement, but Section 30 prevents it from being a contract.

Contingency dependent on act of party.-Words of promise amount to nopromise at all if their operation is expressed to be dependent on the mere will and pleasure of the service he will pay whatever he promisor, for example if a man says that for a certain himself thinks right or reasonable.' But the operation of a promise may well be dependent on a voluntary act other than the mere declaration of the promisor's will to be bound. The act may be that of a third person: thus a promise to pay what A shall determine is perfectly good. The act may also be that of the promisor himself so long as it

is not an act of mere arbitrary choice whether he will be bound or not, as in the common case of goods being sold an approval, where the sale is not completed until the buyer has either approved the goods or kept them beyond the time allowed for trial. So, in the case of goods to be manufactured to order it may be a term of the contract that the work shall "bona fide be done to the customer's approval and then the customer's judgment, acting a contract and not capriciously," is decisive. On the same principle if a clause in provides that a party's disability to perform his promise shall be a cause for annulling the contract but shall give no remedy in damages, this does not apply to a disability brought about by the promisor's own conduct. A builder's right to recover for his work is often fact been done and made conditional on the architect certifying that the work has in

properly done, and such a condition is good." Payment of a policy of insurance may be conditional on proof of the claim satisfactory to the directors of the insurance company being furnished; this means such proof as they may reasonably require Sale of boat "subject to satisfactory survey",13 sale of land "subject to the grant of the planning permission to use the land as a transport depot"l4, sale of good "subject to export (import) licence and sale of devised property "subject to ratification by the beneficiaries"lo are further examples of contingent or conditional contracts. Government of H.E.H. the Nizam with the consent of the plaintif decided to purchase plaintiff's book of Unani medicinal prescriptions and to float a public limited company to. run the medicinal factory after taking over a concern run by plaintiff. Accor dingly, H.E.H. the Nizam appointed a committee for determining the amount of compensation to be paid to plaintiff for his formulas and stocks and assets of plaintifř's Dawakhana and factory. On the basis of the report of committee Firman was issued to

5. 6. 7. 8. 9.

Navnitlal & Co. v. Kishen Chand, AlR 1956 Bom 151. Commissioner of Excess Profits Tax v. Ruby Gen. Insurance Comp. Ltd., 1957 SCR 1002, 1011. Roberts v. Smith, (1859) 4 H&N315. Eliphick v. Barnes, (1880) 5 CPD 321 See Section 24 of the Indian Sale of Goods Act. Andrews v. Belfield, (1857) 2 CBNS 779. 10. New Zealand Shipping Co. v. Societe des Ateliers et Chantiers de France, (1919) AC1:[1918-19 All ER Rep 552; Chunilal Dayabhai & Co. V. Ahmedabad Fine Spinning etc. Co., (1921) ILR 46 Bom 806 : AIR

11. 12. 13. 14.

1922 Bom 44.

Clarke v. Watson, (1865) 18 CBNS 278. Braunstein v. Accidental Death Insurance Co., (1861) 1 B&S 782. Astra Trust v. Adams and Williams, (1969) 1 LI. Rep. 81. Hargreaves Transport Ltd. v. Lynch, (1969) I WLR 215; Richard West & Partners (Inverness) Lid v. Dick, (1969) 2 Ch. 424. Charles H. Winds Chueql Lid. v. Alexander Pickering Co. Ltd, (1950) 84 LI L Rep. 89 (92-93).

15. 16. MV Shankar Bhat v. Claude Pinto, (2003)) 4 SCC 86, 98 AIR 2004 SC 636.

Enforcement of contracts contingent on an event happening

S. 32

147

pay to plaintiff Rs. 2,00,000 (Rs. 50,000 for book to be paid in cash and for the rest Rs. 1,50,000 to be paid in the shape of shares in the proposed company). Accordingly, Rs. 50,000 was paid to plaintiff who sent the book. However, the proposal regarding the floating of Company did not materialise. Defendant, returned the

book to plaintiff who refused to take it back, asaccording to plaintiff, inpursuance of the agreement he had sold the book to defendant for Rs. 50,000 and he claimed the balance sum of Rs. 1,50,000 which had remained outstanding. The defendant-the state of A.P. counterclaimed to recover Rs. 50, 000 and defended the suit on the ground that the proposal to form a company did not materialise due to default of the plaintiff who had taken responsibility for floating the company. The Supreme Court went through the circumstances and the various firmans and found it was not a part of the agreement that to float the Company. In pursuance of the scheme the government plainti h had

appointed a Managing Director plaintiffř's book. Though the book make the contract contingent. The and purchased the b0ok. But if the his right to enforce the contract.7 Enforcement of con-

tractscontingent on an event happening.

of the proposed company and had purchased the was bought for the company to be floated, it did not government chose to carry out the contract piecemeal company could not be floated the plaintiff did not lose

S. 32. Contingent anything

II an

contracts to do or not to do

uncertain

cannot be enforced

future

event

happens

by law unless and

until

that event has happened. If the eventbecomes

impossible, such contracts become void. lhustrations

(a) A make, a contract with B to buy B°s horse if A survives C. This contract cannot be enforced by law unless and until C dies in A's lifetime.

ii

(6) A makes a contract with B to sell a horse to B at a specified price, if C, to whom the

horse has been offered, refuses to buy him. The contract cannot be enforced by law unless and until C refuses to buy the horse.

(c) A contracts to pay Ba sum of money when B marries C. C dies without being married to B. The contract becomes void.

There are some cases which may be dealt with either under this section or Section S6, for it may be equally true to say that performance of a material part of the contract has become impossible, and that the contract was made on the contingency of an event which has become impossible. This section applies when the contract is dissolved by its own force i.e., by the event contemplated in the contract itself;8 Section 56 comes into play when the contract crumbles down due to an impact of a violent nature with some outside force such as imposition of government restriction or some commercial impossibility. See notes on Section 56, below, and Krell v. Henry20 where a contract to hire the use of a room in London to view the intended coronation procession of June 1902, was held, in effect, to be conditional on the procession taking place. Whether a contract is of the kind specified

17.

Bashir Ahmed v. A.P. Govt., AIR 1970 SC 1089: 1970 JU 217; See also Rajasara Ramjibhai v. Jani Narottamdas, AlR 1986 SC 1912: (1986) 3 SCC 300.

18. SmtD . urgaDevB i hagatv.J.B.Advani&Co.L1a,76CWNS28. h hanin? y o 19. Smt. Durga Devi Bhagat v. J.B. Advani & Co. Lid, 76 CWN 528,

20. Krell v. Henry, (1903) 2 KB 740 :[1900-03] Al ER Rep 20.

T

D

33nent tul 9ć 820

E C

148

r Chapter II1-O Cfontinge Cnotntracts

S. 33

in this section may be a question of fact2 or construction.22 When parties enter into an agreement on the clear understanding that some other person should be a party to it, there

is no contract, if the other person does not join the agreement.45

S. 33.

of

Enforcement

contractscontingenton an event not happening.

Contingent

contracts to do or not to do

anything if an uncertain future event does not happen, can be enforced when the happening of the event becomes impossible, and not before. lustration

A agrees to pay B a sum of money if a certain ship does not return. The ship is sunk. The contract can be enforced when the ship sinks.

S. 34. If the future event on which a contract is

When event on which

contractiscontingento contingent is the way in which a person will act at be deemed impossible, ifit isthefutureconduct an unspecified time, the event shall be considered to become impossible when such person does anything of a living person. which renders it impossible that he should so act within any definite time, or otherwise than under further contingencies Illustration A agrees to pay B a sum of money ifB marries C. Cmarries D. The marriage of B to Cmust now be considered impossible, although it is possible that D may die and that C may afterwards marry B.

Sections 32 and 33 cannot be made plainer by any

commentary.

Section 34 is in

accordance with very old English authority. A man who has contracted to sell and convey a piece of land to A on a certain date breaks his contract by conveying it to Z before that date, though he might possibly get the land back in the meantime. The application of the present section, or any section in this group, must obviously depend on the special facts and the construction of the contract.24 When

contracts

S. 35.

be-

Contingent

contracts to do or not to do

come void, which are anything, If a specified uncertain event happens contingenotn happeningwithin a fixed time, become void if, at the expiofspecifiedeventwithin ration of the time fixed, such event has not fixed time. happened, or if, before the time fixed, such event

becomes impossible. When contracts

roilose

Contingent contracts to do or not to do anything

may

beenforced,which are

o2eih

if a

specified

uncertain

event does

not happen

contingeno t nspecified within a fixed time, may be enforced by law when event not happening the time fixed has expired, and such event has not within fixedtime.i

21.

J.P. Builders v. A. Ramadas Rao, (2011) 1 SCC 429, 449 (agreement to sell held not contingent upon vendor getting NOCs and title deed from bank, these were independent and incidental

obligations of vendor). 22.

Ranchoddas v. Nathmal, (1949) 51 Bom LR 491 : AIR 1949 Bom 356; Bisseswarlal v. Jaidayal, (1945) 1 Cal 391 AIR 1949 Cal 407.

23. Jainarain v. Surajmul, (1949) FCR 379: AIR1949 FC 211. 24.

See for instance Jaunpur Sugar Factory. In re, (1925) 23 All LI 608: 89 IC 438 : AIR 1925 Al 658.

S. 36

Agreements contingent on impossible events void

149

happened, or before the time fixed has expired, if it becomes certain that such event will not happen. llustrations 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 the year, and becomes void if the ship is burnt within the year. (b) A promises to pay B a sum of money if a certain ship does not return within a year. The contract may be enforced if the ship does not return within the year, or is burnt within the year.

continAgreements gent on impossible events void.

S. 36. Contingent agreements to do or not to do

anything, if an impossible event happens, are void, whether the impossibility of the event is known or not to the parties to the agreement

at the time

when it is made.io Illustrations (a) A agrees to pay B 1,000 rupees

if two

straight

lines should

enclose a space. The

agreement is void. (b) A agrees to pay B 1,000 rupees if B will time of the agreement. The agreement is void.

marry A's daughter

Thetwolasftoregoinsgectionesxplatihnemselvesi.

0211

C. C was dead at the

rii.1927anogpdti i Ioiqo eiiborit

dt 2oigf 1 haa

CHAPTER IV

OF THE PERFORMANCE OF CONTRACTS

Contracts which must be Performed S. 37.

The

parties

Obligation ofparties perform, or offer to promises, unless such

to contracts.

to a

contract

must

either

perform, their respective performance is dispensed

with or excused under the provisions of this Act, or of any other law. Promises bind the representatives of the promisors in case of the death of such promisors before performance, unless a contrary intention appears from the contract. llustrations (a) A promises to deliver goods to B on a certain day on payment of Rs. 1,000. A dies before that day. A's representatives are bound to deliver the goods to B, andB is bound to pay the Rs.

1,000 to A's representatives. 6) A promises to paint a picture for B by a certain day, at a certain price. A dies before the day. The contract cannot be enforced either by A's representatives or by B.

Performance and discharge A contractbeing anagreemene t nforceableby law comprises of reciprocal promises. This chapter therefore deals with the different aspects

of performance of suchpromises. In order that a party could enforce the promises made to him, he should perform his promise or offer to perform his promise and it is after he has so performed, or offered to perform, his promise that he could ask the other party to carry out his promise. It is this principle which is embodied in this section. Either performance or readiness and willingness to perform the contract is the basic requirement. This section is to be read with the other sections in this chapter. The order in which the reciprocal promises are to be performed is given in Sections 51 and 52. Section 50 provides for the manner of performance, Sections 46 to 49 provide for time and place for performance. Sections 40 to 45

show the extent of liability of the contracting parties in performing their promises. A contract being an agreement enforceable by law (S. 2, above creates a legal obligation, which subsists until discharged)performance of the promise or promises remaining to be performed is the principal and most usual mode of discharge. As to performance by an agent, see Section 40, below. The rule of the Common Law which is here affirmed in the second paragraph was stated in England in 1869, by WILLES, J., a judge of very great learning and authority. "Generally speaking, contracts

bind the executor or administrator though not named. Where, however, personal considerations are of the foundation of the contract, as in cases of principal and agent, and master and servant, the death of either party puts an end to the relation; and, in

[150]

Obligation ofparties to contracts

S. 37

respect of service after the death the contract is dissolved, unless there be a

151

stipulation

express or implied to the contrary. Such personal considerations as are here mentioned extend, as shown by illustration (b) to the present section to contracts involving special personal confidence or the exer-

cise of special skill (cp. S. 40, below). They do not extend to mere exercise of ordinary discretion. The executors of a man who has ordered goods deliverable by instalments under a continuing

contract

may be bound to accept the remaining

instalments,

for the

duty or discretion of seeing that the goods supplied are according to contract does not require any personal qualifications.2 The words "dispensed with or excused" used in respect of performance of a contract have been deliberately used. The legal consequence of performance is a discharge from the obligations created by mutual promises. Non-performance would amount to a breach of contract. If the performance is dispensed with or excused, its legal consequence is a discharge from the obligations. Such modes of discharge are as follows: (a) By proper performance (Ss. 37-38). (b)

When performance becomes impossible or unlawful (S. 56).

(c) By death of the contracting party if the contract is personal in its character (S. 37).

(d) Byrescission(S.62).

1t,

() By novation(S. 62).

) Byremission(S.63). (8)

By accord and satisfaction (S. 63).

(h) By operation of other laws such as Presidency Towns Insolvency Act, Provincial Insolvency Act, Agricultural Debtors Relief Act, Rent Restriction Act, C.P. and Berar Reduction of Interest Act, etc. Succession to benefit of contract. -Generally the representatives of a deceased promisee may enforce subsisting contracts with him for the benefit of his estate. It is no real exception to this rule that in some cases the nature of the contract is in itself, or may be made by the intention of the parties, such that the obligation is determined by the death of the promisee. The contract to marry is the most obvious example in the Common

Law. Another more seeming than real exception is where performance by the other party is conditional on some performance by the deceased which was not completed in his lifetime and is of such a persónal character that performance by his representatives cannot be equivalent. An architect's executor, for example, cannot insist on completing an unfinished design, even if he is a skilled architect himself; and accordingly he cannot fulfil the conditions on which payment, or further paynment, as the case may be, would have become due. But a builder's executors may be entitled and bound to perform his

contracts for ordinary building work, for they have only to procure workmen of ordinary competenceand similarly-in other cases. All rules of thi kind are in aid of the presumed intention of the parties and if the parties have expressed a special intention it must prevail.

1.

Farrowv.

Wilson, LR 4 CP 744, 746.

2. Wentworthv. Cock,(1859) 10 A&E 42.

152

S. 37

The rights of insolvent

Chapter IV-0f thePerformanceoC f ontracts debtor's assignee to sue on his contracts depend, of

course, on statute; but in the absence of more specific provisions they are governed by the same principles as an executor's. Assignment of contracts.-Broadly speaking, the benefit of a contract can be assigned subject to the exception of personal contracts; but not the burden." This is because every person has the right to choose with whom he will contract, and no one is obliged to accept the liability of a person other than the one with whom the contract is made. The principles were thus stated by the Court of Appeal in England: *"Neither at law nor in equity could the burden of a contract be shifted off the shoulders of a contractor on those of another without the consent of the contractee. A debtor cannot relieve himself of his liability to his creditor by assigning the burden of the obligation to someoneelse this can only be brought about by the consent of all three, and involves the release of the original debtor... On the other hand, it is equally clear that the benefit of a contract can be assigned and wherever the consideration has been executed, and nothing more remains but to enforce the obligation against the party who has received the consideration, the right to enforce it can be assigned and can be put in suit by the assignee in his own name

after notice.. There is, however, another class of contracts where there are mutual obligations still to be enforced and where it is impossible to say that the whole consideration has been executed. Contracts of this class cannot be assigned at all in the sense of discharging the original contractee and creating privity or quasi-privity with a

substituted person.... To suits on these contracts, therefore, the original contractee must be a party whatever his rights as

between him and his assignee. He cannot enforce the

contract without showing ability on his part to perform the conditions performable by him under the contract. This is the reason why contracts involving special personal qualifications in the contractor are said, perhaps somewhat loosely not to be assignable."" Thus, in Pan Ocean,P chartered the Trident Beauty from T and agreed to pay hire twice monthly. T assigned the hire to C, to whom P paid an instalment in advance. The ship was out of action during all this period. P repudiated the contract and sougth refund of the instalment. It was held that an assignee, who was never intended to be under any obligation to supply the consideration, could not be liable to repay. The remedy of P lay

against T under the terms of the charter party, and C's right to receivables remained unaffected by T's obligations to P. The Contract Act has no section dealing generally with assignability of contracts. This is a topic that belongs to the law of property. A contract which, under Section 40, is such that the promisor must perform it in person has been held not to be assignable. "When considerations connected with the person with whom a contract is made form a material element of the contract, it may well be that such a contract on that ground alone is one which cannot be assigned without the promisor's consent so as to entitle the assignee to sue him on it."/ Debts are assets of the creditor, and as such rights attached to

the same are capable of being assigned." In view of the principle that the burden of a contract cannot be shifted on to the shoulders of a third party without the consent of the contractee and the third party, ît has been stated that a stranger to a contract cannot sue on the contract. Where A agrees to pay

3. Khardah & Co Lud v. Raymon & Co, AIR 1962 SC 1810. 4. See - Section 40 for vicarious performance, Section 41 for acceptance of performance from third person, and Section 62 for novation. 5. Tolhurst v. Associated Cement Manufacturers, (1902) 2 KB 660, 669 per COLLINs, MR. 6. Pan Ocean Shipping Lid v. Creditcorp Lid (The Trident Beauty), [1994] 1 Al ER 470 (HL). 7. Toomey v. Rama Sahi, (1890) 17 Cal 115, at p. 121.

8. ICICIBankv.APSStaIrndustries(2 , 010)10SCC1,27.

Obligation of parties to contracts

S. 37

153

off the debt of B to C,C cannot enforce such a contract against A because C is not a party to the contract and cannot insist upon its performance. Similarly, in Indu Kakkar, H (a corporation) agreed to allot a plot of land to Y (the original allotee). The allotment agreement contained a clause for resumption of the plot by H for breach of its terms by Y. Subsequently, Y assigned the agreement to I (a third party) without the consent of H. It was held that I, being a third party, did not have the locus standi to question H's order of resumption of the plot for breach ofterms by Y0 However, where a contract is intended to secure a benefit to a third party as a beneficiary under a family arrangement or partition, such a beneficiary may sue in his own

right to enforce it. Where A, a salt manufacturer, agreed with B, to manufacture for him for a period of seven years such quantity of salt as B required in consideration of B paying him at a fixed rate, four months credit after each delivery being allowed to B and of his paying Government taxes and dues, and executing all but petty repairs in A's factory, it was held that the contract was based upon personal consideration, and that it was not therefore competent to B to assign the contract without A 's consent. The court said: There is not only credit given to B in the matter of payment, but other liabilities are thrown upon him, the discharge of which depended upon his solvency, and there is also a certain discretion vested in him in regard to the quantity of salt to be demanded".!3 But where A agreed to sell certain gunny bags to B, which were to be delivered in monthly instalments for a period of six months, and the contract contained certain buyer's option as to quality and packing, it was held that the clause as to buyer's option did not preclude B from assigning the contract. R agreed with M the proprietor of an indigo concern, to sow indigo, taking the seed from M's concern, on four bighas of land out of his holding selected by M or his Amlah, and, when the indigo was fit for weeding and reaping, to

weed and reap it according to the instructions of the Amlah of the concern, and if any portion of the said land was in the judgment of Amlah found bad, in lieu thereof to get

some other land in his holding selected and measured by the Amlah. Held, contract was entered into with reference to the personal position, circumstances and qualifications of M and his Amlah and M could not assign the contract without the consent of R, [See Specific Relief Act. Section 21(b) (corresponding to Section 14(1)(6) of the Act of 1963) and illustrations.]

Any other

law.-The most important statutory discharge of contracts, outside the

present Act, is that which follows on insolvency. See the Presidency Towns Insolvency Act, 1909, and the Provincial Insolvency Act 1920.6 See also Section 62 to 67. The rule of damdupat in Hindu law is also within the meaning of "other law".

9

Nathu Khan v. Thakur Burtonath, 26 Cal WN 514 (PC); Jamnadas v. Ram Autar, 34 All 63 (PC): 39 IA 7; Duraiswami v. U.LL. Assurance Co., AIR 1956 Mad 316; National Petroleum Co. Ltd. v. Popatlal, 60 Bom 954: 38 Bom LR 601 AIR 1936 Bom 344. 10. Indu Kakkar v. Haryana State IDC Ltd, (1999) 2 SCC 37, 44: AIR 1999 SC296. 11. Din Kuer v. Sarala Devi, AlR 1947 PC 8; Khwaja Muhammad Khan v. Hussaini Begam, 37 LA 152

:32 All 410. 12. 13. 14. 15. 16.

17.

Namasivaya Gurukkal v. Kadir Ammal, (1894) 17 Mad 168. Namasivaya Gurukkal v. Kadir Ammal, (1894) 17 Mad 168 at p. 174.Iuu

brngme Jaffer Meher Ali v. Budge Budge Jute Mills Co, (1906) 33 Cal 702, affirmed on appeal 34 Cal 289. Toomey v. Rama Sahi, (1890) 17 Cal 115 See Janefalkar v. Deshpande, (1946) Nag 334 : AIR 1946 Nag 336 in which The Central Provinces &Berar Reduction of Interest (Amendment) Act of 1938 was held to be a law which under Section 37 of the Contract Act partially dispensed with theperformmanceof the contract.

Bapurao v. Anant, (1946) Nag 407: AIR 1946 Nag 210.

154

S.38

Effect

of

Chapter 1V-0fthe Performance ofContracts

refusal

to

accept offer of performance.

non-performance,

S. 38. Where a promisor has made an offer of performance to the promisee, and the offer has not

been accepted, the promisor is not responsible for nor does he thereby lose his rights under the

contract. Every such offer must fulfil the following conditions: (1) it must be unconditional; (2) it must be made at a proper time and place, and under such circumstances that the person to whom it is made may have a reasonable opportunity of ascertaining that the person by the whom it is made is able and willing there and then to do whole of what he is bound by his promise to do;

(3) if the offer is an offer to deliver anything to the promisee, the promisee must have reasonable opportunity of seeing that the thing offered is the thing which the promisor is bound by his

promise to deliver. An offer to one of several joint promisees has the same legal consequences as an offer to all of them. Illustrations A contracts to deliver to B at his warehouse, on the Ist March 1873, 100 bales of cotton of a particular quality. In order to make an offer of performance with the effect stated in this section, A must bring the cotton to B°s warehouse on the appointed day, under such circumstances that B may nave a reasonable opportunity of satistying himself that the thing offered is cotton of the quality contracted for, and that there are 100 bales.

Essentials of valid performance: ()

It should be unconditional (Section 38);

Gi)

It should be performance by promisor or by his representative (Section 40);

(ii)

It should be performed at proper time specified in the agreement or within a reasonable time (Sections 46-47)

(iv)

It should be performed at the place specified in the agreement or at the place to be appointed by the promisee (Section 49);

(v)

The promise must have reasonable opportunity to ascertain (a) the thing offered and (b) whether the performance is of the whole or of a part [S. 38(1)3)1

Offer to perform or 1Tender-The subject-matter of the present section is to be found under the head of "Tender' in English b0oks. The first sub-section is chiefly, though not exclusively, appropriate to an offer of payment the second and third concern offers of other kinds of performance, such as

delivery ofgoods.

S. 38

Efect of refusal to accept ofer ofperformance

155

The principles were laid down in England in 1843 in Startup v. Macdonald:18 "The law considers a party who has entered into a contract to deliver goods or pay money to

anotheras having substantially performed it, if hehas tendered the goods or money to the party to whom the delivery or payment was to be made, provided only that the tender has been made under such circumstances that the party to whom it has been made has had a reasonable opportunity of examining the goods or the money tendered, in order to ascertain that the thing tendered really was that it purported to be" : As to what are proper time and place, see Sections 46-49 below. Read Section 67 which lays down a duty for

the promisee to afford reasonable facilities for performance.

offer must not be of part only.-With regard to the validity of an offer performance, it must be not only unconditional, but entire, that is, it must be an offer of the whole payment or a performance that is due.

It has been held by the High Court of Calcutta that a creditor is not bound to accept a sum smaller than he is entitled to and therefore the tender of such a sum does not stop

interest running on it.0 A so-called tender of less than the

debtor admits to be due is not a tender at all, but

an offer of payment on account, which the creditor may accept or not, and risks nothing, in point of law, by not accepting, though it is often, in point of fact, unwise not to take what one can get. He may take the debtor's offered payment without prejudice to his claim, such as it may be, to a further balance or any other right. The debtor is entitled to a receipt for what he pays, but not to a release. A tender will be vitiated by the addition of any terms which amount to requiring the creditor to accept the sum offered in full satisfaction, or to admit in any other way that no more is due. Offer must be unconditional"The person making a tender has a right to exclude presumptions against himself by saying: "I pay this as the whole that is due': but if he requires the other party to accept it as all that is due, that is imposing a condition; and when the offer is so made, the creditor may refuse to consider it as a tender"2 If a tender is accompanied by a condition which prevents it being a perfect and complete tender, the other party is entitled to reject it. A cheque being subject to being honoured by the bank, it is a conditional tender.

Offer at proper time and place.-A tender of debtbefore the duedate is nota valid tender and will not prevent interest from running on the loan* Able and such

willing-Sub-Section

circumstances

that

the

person

(2) provides that the tender must be made under to

whom

it

is

made

may

have

a

reasonable

opportunity of ascertaining that the person by whom it is made is able and willing there and then to do the whole of what he is bound by his promise to do. A tender of money in

payment must be made with an actual production of the money.A plea of tender before

18. 19.

Startup v. Macdonald, (1843) 6 Man & G 593, 610; judgment of Rolfe, B. Dixon v. Clark, (1848) 5 CB 365.

20.

Watson & Co. v. Dhonendra

Chunder Mookerjee, (1877) 3 Cal 6, 16.

21. See for instance Rattan Lal v. SN Bhalla, (2012) 8 SCC 659 (buyeraccepted refund of earnest money from seller "without prejudice" to right to enforce the agreement to sell, held valid).

22. Bowen v. Owen, (1847) 11 QB 130, 136 per ERLE, J; Sati Prasad v. Monmotha Nath, (1913) 18 CWN 84; Bank of Mysore v. B.D. Naidu, A 1954 Mys 168. Narain Das v. Abinash, 21 All LJ 201:37 Cal LJ 4S7: AIR 1922 PC 347. 23. 24. Eshahuq Molla v. Abdul Bari Haldar, (1904) 31 Cal 183. 25. A mere offer by post to pay the amount due is not a valid tender: Veerayya v. Sivayya, (1914) 27 Mad LJ 482; Kamaya v. Devapa, 22 Bom 440.

156

S.38

Chapter 1V-0f thePerformance ofContracts

action must beaccompanied by a payment into Court after action, otherwise the tender is ineffectual.26 The Calcutta High Court2 did not accept the view of the Madras High Court in Veerayya v. Sivayya2" as the correct view of S. 38 of the Contract Act. Accor ding to the High Court of Calcutta an offer made by Promisor, through his Solicitor, to pay a debt with interest due thereon at the date of offer, does not of itself afford a reasonable opportunity to the promisee of ascertaining that the promisor is able and willing then and there to perform his promise. The Calcutta High Court further observed that an ofer of performance must fulfil certain conditions mentioned in S. 38 itself. On a contract for the sale and purchase of Government paper providing for its delivery on a certain date, it is not necessary for the seller to prove that he took the paper to the purchaser's place of business and made an actual tender then and there. It is sufficient that the seller was ready and willing to deliver on that date and did his best to inform the purchaser by going to his place of business on that date. Where a contract is made for the future delivery of shares, and the purchaser, before the delivery day, gives notice to the vendor that he will not accept the shares, the vendor is

thereby exonerated from giving proof of his readiness and willingness to deliver the shares, and the issue as to readiness and Such a case falls under Section 39.

willingness

Reasonable opportunity.-A tender of whom the goods are offered has a reasonable goods of the quality contracted for. A tender day that the buyer has no time to inspect them

is in such a case

immaterial.0

goods must be so made that the person to time to ascertain that the goods offered are made at such a later hour of the appointed is not good.

Reasonable opportunity of inspection is all that the Act requires: it is the receiving

party's business to verify, not the delivering party's to supply further proof that the goods are according to contract. The goods need not be in the delivering party's actual possession; control is enough.4 Tender of money.Legal tender must be in the current coin of the country.33 A creditor is not bound to accept a cheque because it is a conditional payment; but ifa cheque is tendered and received, and the creditor or his agent objects only to the amount, or makes no immediate objection at all, he cannot afterwards object to the nature of the

tender.3 Downright refusal by the creditor to accept payment at all precludes any subsequent objection to the form of thetender.3

26. Haji AbdulRahman v. Haji Noor Mahomed, (1891) 16 Bom 141, at pp. 149-150;Sabapathy v.

Vanmahalinga, (1915) 38 Mad 959 at p. 970; Rakhal Chandra v. Baikuntha Nath, (1928) 32 CWN

1082: AIR 1928 Cal 874. 27.

Ismail Bhai Rahim v. Adem Osman, (1938) 2 Cal 337 181 IC 539: AIR 1939 Cal 131.

28. A mere offer by post to pay the amount due is not a valid tender, Mulpuri Veerayya v.

29.

Sanagavarapu Sivayya, (1914) 27 Mad LJ 482 : AIR 440. Juggernath Sew Bux v. Ram Dyal, (1883) 9 Cal 791.

T915 Mad s46;

Kamaya

v, Devapa, 22 Bom

30. Dayabhai Dipchand v. Maniklal Vrijbhukan, (1871) 8 BHC AC 123. 31. Startup v. Macdonald, (1843)6 Man & G 593. 32. Arunachalam Chetiar v. Krishna Aiyar, (1925) 49 Mad S30. 33. Jagat Tarini v. Naba Gopal, (1907) 34 Cal 305. 34. Jagat Tarini v. Naba Gopal, (1907) 34 Cal 305. 35. Venkatrama Ayyarv. Gopalakrishna Pillai, (1928) 52 Mad 322: 90 IC 481 AIR 1925 Mad 1168: 16 1C 844: (29) AM 230; Krishnaswamy v. Mohanlal, (1949) Mad 657: AlR 1925 Mad 535; Narain Das v. Rikhabai, AIR 1952 Raj 72.

S.39

Efect ofrefusal of party to performpromise wholly

157

As regards the payment by cheque, in recent cases the tendency is to treat payment by cheque as an act of a prudent and reasonable man and a good tender of rent by a tenant.s0 Similarly tender rent by money order has been held to be a proper mode.37

Offer to one of several joint

promisees.-A tender of rent by a lessee to one of

several joint lessors and of a mortgage debt by a mortgagor to one of several mortgagees would be a valid tender under this section.

Validity of discharge by one of several joint promisees.-In Barber Miran v. Ramana, it was held by the High Court of Madras that this section does not make it incumbent on the debtor to satisfy all the joint promisees before obtaining a complete discharge. and therefore a release of a mortgagor by one of two mortgagees on payment to him of the mortgage debt discharges the mortgagor as against the other mortgagee. This decision was based upon the English case of Wallace v. Kelsall, The correctness of this decision has been doubted

in a number of cases.2 The correct view seems to be that a

mere tender of a money debt to one of the joint creditors does not discharge the debt; the material section of the Contract Act, as regards the right to give a discharge in the name of joint debtors, is not Section 38 but Section 45. It must not be overlooked that in English law the rule that payment to one of joint creditors is a good discharge is still the general rule. The principle of the decision in Barber Miran v. Ramana Goundan applies only where there are two or more joint promisees. It does not apply to the case of co-heirs who are not joint promisees, but the heirs of a single promisee, and a release therefor of the debtor by one of the heirs of the deceased creditor on payment to him of the amount due on the bond is not a valid discharge to the debtor44 In any case a payment

to one of several joint

creditors does not operate as a

payment to them all where the payment is fraudulently made to him and not for the

benefit of them all.4 Effect of refusal of

to perform party promise wholly.

S. 39. When a party to a contract has refused

to perform, or disabled himself from performing, his promise in its entirety, the promisee may put

an end to the contract, unless he has signified, conduct, his acquiescence in its continuance.46

by words or

llustrations (a) 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

36.

Marutirao Bhaurao v. Akbarali, 76 Bom LR 35; Parasram v. Damadilal, (1971) RCJ 117 (MP).

37. Ajitkumar Bhattacharya v. Rukmani Devi, (1973) RCJ 70 (All); Bhikha Lal v. Munna Lal, (1974) RCJ (AlI); Rajaram v. Ganpatlal, AIR 1973 MP 268. 38. Krishnarav v. Manaji, (1874) 11 BHC 106. But payment to a partner in fraud of his c0-partners is not a valid discharge. Chinnaramanuja Ayyangar v. Padmanabha Pillaiyan, (1896) 19 Mad 471. 39. See Barber Miran v. Ramana-Goundan, (1897) 20 Mad 461. 40. Barber Miran v. Ramana, (1897) 20 Mad 461. See Shrinivasdas v. Meherbai, (1917) 41 Bom 300 : LR 44 IA 36. 41. (1840) 7 M & W 264.

42. Sheik Ibrahim v. Rama Aiyar, (1911) 35 Mad 685, 687; Sitaram v. Shridhar, (1903) 27 Bom 292, 294; Hossainara v. Rahimannessa, (1910) 38 Cal 342, at pp. 349-350; Mahadeosing v. Balmukund, (1947) Nag 553 AIR 1948 Nag 279. 43. Powell v. Broadhurst, (1901) 2 Ch at p. 164.

44. Alluri China Bapann v. Jaggiah, (1939) 2 MLJ 214: AIR 1939 Mad 818. 45. Sheikh Ibrahim v. Rama Aiyar, (1911) 35 Mad 5. 46. See Boulton Bros. & Co. v. New Victoria Mills Co., (1928) 26 All LJ 1119: 119 IC 837: AIR 1929 All 87.

158

S. 39

Chapter 1V-0f thePerformance ofContracts

night's performance. On the sixth night / wilfully absents herself from the theatre. B is at liberty to put an end to the contract. (b) 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 next two months, and B engages to pay her at the rate of 100 rupees for each night. On the sixth night A wilfully absents herself. With the assent of B, A sings on the seventh night. B has signified his acquiescence in the continuance of the contract, and cannot now put an end to it, but is entitled to compensation for the damage sustained by him through A's failure to sing on the sixth night.

Refusal to perform

contract.-As

correctly laid down by the High Court of Cal

cutta, "this section only means to enact what was the law in England and the law here before the Act was passed, viz. that where a party to a contract refuses altogether to perform or is disabled from performing his part of it the other side has a right to rescind in the notes to Cutter v. Powell in SMITH'S LEADit"47 English authorities are collected ING CASES.48

The words used by GARTH, CJ., *where a party to a contract refuses altogether to perform... his part of it," clear up a slight verbal ambiguity in the Act, where the words "his promise in its entirety" mean the substance of the promise taken as a whole. In one sense, refusal to perform any part of a contract, however small, is a refusal to perform the contract "in its entirety"; but the kind of refusal contemplated by this enactment is one

which affects a vital part of the contract, and prevents the promisee from getting in substance what he bargained for. "It is slightly misleading to speak of entire and several contract. Contract of carriage of goods, contract to serve upon the ship from its commencement of voyage to its destination, contract with respect to the quantity work and labour to be done (e.g. erecting building, interior decoration etc.) are illustrations of the entirety of obligation under a contract. It must be shown that the refusal is absolute

and that the party to the contract had made quite plain his intention not to perform the contract. The refusal to perform the contract must be communicated to the other party to the contract.31

The leading case on this subjecet is Withers v. Reynolds.2 The action was for not delivering straw to the plaintiff under an agreement whereby the defendant was to supply the plaintiff with straw from October 1829 to Midsummer 1830 in specified quantities, and the plaintiff was to pay a named sum per load "for each load of straw so delivered," which the Court read as meaning that he was to pay for each load on delivery. In January 1830, the straw having been regularly sent in, and the plaintiff being in arrears with his payment, the "defendant called upon him for the amount, and he thereupon tendered to the defendant £l1.11s., being the price of all the straw delivered except the last load, saying that he should always keep one load in hand." The defendant took this payment under protest, and refused to deliver any more straw unless it was paid for on delivery. The Court held that this gave the plaintiff no right of action, in other words that the defendant was entitled to put an end to

the

contract.

As

PaRKE, J. (as he was

then,

afterwards better known as BARON PARKE), said, *"the substance of the agreement was that the straw should be paid for on delivery.. When, therefore, the plaintiff said that he would not pay on delivery (as he did, in substance, when he insisted on keeping one load in hand), the defendant was not obliged to go on supplying him."

47. Per GARTH, C.J. in Sooltan Chund v. Schiller, (1878) 4 Cal 252, 255. 48. Vol. Il at p. 10, 12th edn. (1795) 6 TR 320. 49. G.H. TREITEL'S LAW OF CONTRACT, (4th edn., 1975) at p. 535. 50. E.E. Master v. Garret and Taylor Ltd., (1936) 131 IC 220 AIR 1931 Rang 126. 51. Dhanraj Mills Ltd. v. Narsingh, (1949) 27 Pat 723: AR 1949 Pat 2070. 52. Withers v. Reynolds, (1831) 2 B & Ad 882.

Efect of refusal ofparty toperformpromise wholly

S. 39

159

As to failure in performing other particular terms of a contract, no positive general rule can be laid down as to its effect. The question is in every case whether the conduct of the party in default is such as to amount to an abandonment of the contract or a refusal to perform it, or, having regard to the circumstances and the nature of the transaction, to "evince an intention not to be bound by the contract." Parties can undoubtedly make any

term essential or non-essential; they can provide that failure to perform it shall discharge the other party from any further duty of performance on his part, or shall not so discharge him, but shall only entitle him to compensation in damages for the particular breach.

In Sooltan Chund v. Schiller54the defendantsagreed to deliver to the plaintiffs 200 tons of linseed at a certain price in April and May, the terms as to payment being cash on delivery. Certain deliveries were made by the defendants between the lst and 8th of May, and a sum of Rs. 1,000 was paid on account by the plaintiffs, which left a large balance due to the defendants in respect of linseed already delivered. This balance was not paid, and the defendants thereupon wrote to the plaintiffs cancelling the contract and refusing

to make further deliveries under it. The plaintiffs answeredexpressing their willingness to pay on adjustment of a sum which they claimed for excess refraction (i.e. excess of impurities and an allowance for some empty bags. The defendants stated that they would make no further delivery, and the plaintiffs thereupon bought in other linseed and sued the defendants for damages for non-delivery of the remaining linseed. Upon these facts it was held, that there was no refusal on the part of the plaintiffs to pay for the linseed delivered to them as they were willing to pay the sum due as soon as their cross-claims were adjusted. It may be further observed, with regard to the illustrations, that it would be rash to extend them. In England it has been held that a singer engaged to perform in concerts as well as in operas who has agreed, amongst other things, to be in London six days

before the beginning of his engagement, for the purpose of rehearsal, does not, merely by failing to be in London at the time so named, entitle the manager to put an end to the contract.3 Wrongful dismissal of an employee has, on the other hand, been held to determine not only the contract of service, but a term restraining the employee from carrying on the same business after its termination.56

The principles set forth above were applied by the High Court of Calcutta in a case where the plaintiff had agreed to purchase from the defendant 300 tons of sugar, "the

shipment to be made during Septemberand October next in lots of about 75 tons in a shipment," the terms as to payment being cash before delivery. Notice of the arrival of the September shipment was given to the plaintiff, and he was called upon to pay before delivery. The plaintift, was unable to pay, and asked for time, but the defendant deeclined and ultimately wrote to the plaintiff stating that he had cancelled the contract. On the arrival of the October shipment the plaintiff tendered payment for the same, but the defendant refused to accept the

money, saying that the contract had been cancelled.

The

plaintiff thereupon sued the defendant for damages for refusing to deliver the October shipment. It was held, in accordance with the English authorities that mere failure on the part of the plaintiff to pay for and take delivery of the September shipment did not amount to "a refusal to perform the contract within the meaning of this section so as to entitle the defendant to rescind the contract, and that it did not exonerate him from deliv-

53.

Freethv. Burr, (1874) LR 9 CP 213, 214:[1874-80] All ER Rep 751: 29 LT 773.

54.

(1878) 4 Cal 252; Burn & Co. v. Thakur Saheb Sree Lukdirjee, (1923) 28 CWN 104, a case on rather similar lines; Volkart Bros. V. Rutna Velu Chetti, (l894) 18 Mad 63.

S5.

Bettini v. Gye, (1876) 1 QBD 183.

56. General Bill Posting Co. v. Atkinson. (1909) AC 118;SuperintendenceCompany of India v. Krishan Murgai, AlR 1980 SC 1717: (1981) 2 SCC 246.

160

S. 39

Chapter 1V-ofthe Performance ofContracts

ering the October shipment.37 Here the plaintiff's failure to pay before delivery cannot be construed as his refusal to perform the contract "in its entirety". It would not be correct to hold that any departure whatever, from the terms of the contract will entitle the other party to set aside the contract. Repudiation of a contract is a *serious matter, not to be lightly found or inferred."5 Expression of an erroneous, but bona fide, view on the construction of an agreement does not amount to repudiation. Similarly, merely questioning the mode of performance of an agreement cannot be taken as a refusal to perform the contract in its entiretyo0

Scope of Section.-The section is not confined to anticipatory breaches. It includes breaches before as well as after the time when the contract is to be performed. If the promisee takes no action on a repudiation before date of performance it is open to the promisor to change his mind and perform. See note "Anticipatory Breach" below.

Reason for refusal to perform.-A buyer who has refused to receive goods on the ground that they were not tendered within the agreed time cannot afterwards change his ground and raise the objection that in fact the goods were not according to contract; the election to rescind, once made, is conclusive.0

for

"Disabled himself from performing"-Disability due to the party's own fault must be distinguished from inability to perform a contract. It is very old law that if a promisor disables himself from performance, even before the time for performance has arrived, it is equivalent to a breach. But a person cannot by an unilateral act put an end to the contract. If the promisor commits a breach of the contract, the promisee can terminate the contract.65

"Promisee may put an end to the contract"-The common law rights of a promisee on refusal by the promisor to perform his promise were thus stated by ScOTLAND, C.J., in a Madras case of 1863, and the statement remains applicable under the Act:

"If a vendor contracts to deliver goods within a reasonable time, payment to be made on delivery, and before the lapse of that time, before the contract becomes absolute,

he says to the purchaser, I will not deliver the goods,' the latter is not thereby immediately bound to treat the contract as broken, and bring his action. The contract is not necessarily broken by the notice. That notice is, as respects the right to enforce

the contract, a perfect nullity, a mere expression of intention to break the contract, capable of being retracted until the expiration of the time for delivering the goods. It cannot be regarded as giving an immediate right of action unless, of course, the purchaser thereupon exercise his option to treat the contract as rescinded, when he may 57. Rash Behary Shaha v. Nrittya Gopal Nund)y. (1906) Cal 477. 58. 59.

60. 61. 62.

Ross Smyth & Co Ltd. v. Bailey Sun & Co., (1940) 3 All ER 60, 71 per LORD WRIGHT. Sweet & Maxwell Lid. v. Universal News Services Ltd, (1964) 2 QB 699: (1964) 3 WLR 356 (CA).

Claude-Lila Parulekar v. Sakal Papers (P) Ltd, (2005) 11 SCC 73, 98: AIR 2005 SC 4074. Phul Chand Fateh Chand v. Jugal Kishore Gulab Singh, (1927) 8 Lah 501: 106 IC 10: AIR 1927 Lah 693. Nannier v. Rayalhu lyer, (1925) 49 Mad 781 : 93 1C 673: AlR 1926 Mad 778. But as to a case where the vendor was not ready and willing to perform at all, see British and Beningtons v. N. W. Cacher Teaq Co., (1923) AC 48, per LORD SUMMER, at p. 70.

63. SeeNarasimha Mudali v. Narayanaswami Chetty, (1925) 49 Mad LJ 720 : 92 IC 333: AIR 1926 64.

65. 66.

Mad 178, cp. Jawahar Singh v. Secy. of State, (1926) 8 Lah LJ 114: 94 IC 635: AIR 1926 Mad 292. FREDERICK POLLOCK, PRINCIPLES OF CONTRACT (1 lth edn., 1942) at p. 222. Haji M Ahamed v. Murugesa, AIR 1958 Ker 195: 198 Ker LJ 708 (DB). Mansuk Das v. Rangayya Cheti, 1 MHC 162. See also the observations of MULLA, J., in Steel Brothers & Co. Lid. v. Dayal Khatao & Co., (1923) 47 Bom 924, a case of a contract on c.if. terms.

Efect of refusal ofparty to perform promise wholly

S. 39

161

go into the market and supply himself with similar goods, and sue upon the contract at once for any damage then sustained." The said words comprehend a number of courses of action viz.

)

Thepromiseemayrefuseto performhis part of thepromise.

(11) The promisee may reject the incomplete work done by promisor and refuse to pay for the same or may refuse further deliveries.

(1)

The promisee may return the defective goods.07

Although the right to rescind arises upon the promisor's refusal to perform, or his disability to perform the unexecuted part of the contract, the right to rescind refers to the executory as well as executed part of the contract as is indicated from the above three instances. Besides the said right to rescind, the promisee may treat the refusal to perform as breach and sue for damages (for which read the provisions of Sections 73 and 74). Anticipatory breach.The case of Hochster v. De la Tour8 is now generally treated as the leading one on "anticipatory breach of contract:" The rule shortly indicated by this phrase is that on the promisor's repudiation of the contract, even before the time for orman has arrived, the promisee may at his option treat the repudiation as an immediate breach, putting an end to the contract for the future and giving the promisee a right of action for damages. It must be remembered that the option is entirely with the promisee. The law on the subject of "anticipatory breach" may be summed up as fołlows69

The promisee, if he pleases, may treat the notice of intention as inoperative, and await the time when the contract is to be executed, and then hold the other party responsible for all the consequence of non-performance: but in that case he keeps the contract alive for the benefit of the other party as well as his own; he remains subject to all his own obligations and liabilities under it, and enables the other party not only to complete the contract, if so advised, notwithstanding his previous repudiation of it, but also to take advantage of any supervening circumstance which would justify him in declining to compete it.

On the other hand, the promisee may, if hethinks proper, treat the repudiation of the other party as a wrongful putting an end to the contract and may at once bring his action as on a breach of it: and in such action he will be entitled to such damages as would have arisen from the non-performance of the contract at the appointed time, subject, however, to abatement in respect of any circumstances which may have afforded him the means of mitigating his loss." See notes to illustration (h) to Section 73. When the promisee has so determined his choice, then, whether he sues for damages or not, it is not open to the promisor to go back on his refusal and treat the contract as subsisting

3d If the promiseedoes not treat the repudiationas an immediatebreachand elects to keep the contract alive, the repudiation is a brutum fulmen i.e, the parties are left with

their rights and liabilities as before, and if performance by the promisor is subject to a condition precedent, the promisee has no right of action till that condition is fulfilled.

67. 68.

LAw OF CONTRACT BY G. TRETEL, 2nd edition, p. 597. Hochster v. De la Tour, 2 E & B 678.

69. Frost v. Knight, (1872) LR 7 Ex. 111:41 LJ Ex 78, Ratanlal v. Brijmohan, (1931) 33 Bom LR 703 70.

71.

:133 IC 861 : AIR 1931 Bom 386. Jhandoo Mal Jagan Nath v. Phul Chand Fateh Chand (1924) 5 Lah 497 : 85 IC 118: AIR 1925

Lah 217. Florrie Edridge v. R.D. Sethna, (1933) 60 IS 368: 58 Bom 101: 36 Bom LR 127: 146 1C 739 AIR 1933 PC 233.

162

Chapter IV-of thePerformance ofContracts

S. 40

Contract of service.-The illustration to the section are both examples of contracts of service. In Hochester v. De la Tour the defendant engaged the plaintiff ashis courier on a Continental tour from June 1 for three months certain at £10 a month. Before that day came the defendant changed his mind and wrote to the plaintiff that he did not want

him. The plaintiff, without waiting further and before June 1, sued the defendant for breach of contract. For the defendant it was argued that the plaintiff should have waited till June 1 before bringing his action, on the ground that the contract

could

not be con-

sidered to be broken till then. It was held, however, that the contract had been broken by express renunciation, and the plaintiff was not bound to wait until the day of performance. engaged by the month leaves his employer's serWhere a servant or a clerk who vice wrongfully in the course of the then current month, he is not entitled to any salary

for the broken portion of the month in the course of which he left the service.3

Waiver of right to rescind. The words "unless he has signified, by words or conduct, his acquiescence in its continuance" indicate the circumstances under which the right of rescission referred to in the preceding words may be waived. The said words indicate clearly an affirmative assertion or act. For example, a landlord may waive his right to forfeit the lease by demanding rent despite the breach brought to his knowledge; a shipowner may waive his right to forfeit the charterparty by accepting payments due thereunder.3

Since the right to rescind the contract is preceded by the words "when a party to a contract has refused to perform..in its entirety" clearly imply existence of those facts to the knowledge of the promisee who could put an end to the contract under the two prec eding circumstances or conditions.

The words "refused to

perform..

his promise" and "disabled

himself from

performing his promise" refer to unexecuted or executory part of the contract. Right to rescind is, however, not limited to executory part of the contract.

Measure of damage.-The measure of damages for "anticipatory breach" is not necessarily the same as it would be for a failure or refusal occurring at the time when the performance was due. The plaintiff is entitled to measure his damages as they stand at

the date of repudiation.

By whom Contracts must be Performed Person

promise

by

is

whom

to

be

S. 40. If it appears from the nature of thecase that

it was the

intention

of the

parties

to any

performed.

contract that any promise contained in it should be performed by the promisor himself, such promise must be performed by the promisor. In other cases, the promisor or his representatives may employ a competent person to perform it. 72. 73. 14. 75. 76. 77.

Hochester v. De la Tour, (1853) 2 E & B 678. Ramji v. Little, (1873) 10 Bom HC 57; Dhumee v. Sevenoaks, (1886) 13 Cal 80; Rali Bros. v. Ambika Prasad, (1913) 35 All 132. David Blackstone Ltd. v. Burnetts, (1973) 3 All ER 782. The Brimnes, (1974) 3 All ER 86. Millet v. Van Heek & Co., (1921) 2 KB 369 CA. Ramgopal v. Dhanji Jadhayji Bhatia, (1928) 55 IA 299.

S. 41

Bfect ofacceptingperformancefrom thirdperson

163

llustrations (a) A promises to pay B a sum of money. A may perform this promise, either by personally paying the money toB or by causing it to be paid to B by another; and, if A dies before the time appointed for payment, his representatives must perform the promise, or employ some proper person to do so.

(b) A promises to paint a picture for B. A must perform this promise personaly.

Personal contracts. Contracts involving the exercise of personal skill and taste, or otherwise founded on special personal confidence between the parties, cannot be performed by deputy. But it is not always easy to say whether a particular contract is, in this sense, personal or not, or what is an adequate performance of a personal contract. A contract for personal agency or other service entered into with partners is generally determined by the death of a partner. On the other hand, a contract with a firm which has nothing really personal about it so far as regards the partners, for example, a contract to pertorm at a musiC-hall belonging to the firm, 1s not generally determined by the death of

one member of the firm, especially if the individual members of the firm were not named in the contract and not known to the other party. its own circumstances.

Every case must really be judged on

A shipowner must perform a charterparty personally and cannot require the charterer to accept performance from the assignee of the ship.'" If an owner of goods relies upon the skill and integrity of the warehouseman, the latter must perform the warehousing of the goods personally.Where a garment cleaner accepted the uniform for cleaning, it was held that the contract of cleaning the uniform was to be performed personally,S1

Vicarious performance-Ordinary contractsfor delivery of goods,payment for them and the like, may, of course, be performed by deputy.32 "There is clearly no personal element in the payment of the price35

S. 41. When a promisee accepts performance of performancefrom third the promise from a third person, he cannot afterEffect

of accepting

person.

wards enforce it against the promisor.

Acceptance of performance from a third person involves waiver of right of performance by the promisor.

Under Section 41 of the Act when a promisee has accepted performance of the promise from a third person, the promisee cannot enforce it against the promisor even if the promisor has neither authorised nor ratified the act of third party.84 S. 41 of the Act applies when contract was performed by a stranger.3 It is essential that the performance under the contract should be in full

and not in part.0° So when a plaintiff (promisee) received Rs. 5500 out of the total price of Rs. 7600 from defendant 2 (a third person)

78.PhillipsvA.lhambrPaalaceCo(.1901)1KB59:70LJKB26. 79FratSeoli.rrentinvBo.uerg(e1r,9153)KB367.1 80.

Edwards v. Newland,

(1950) 2

KB 534.

81. Davies v. Collins, (1945) All ER 247. 82. J.H. Tod v. Lakhmidas, (1892) ILR 16 Bom 441, 451; followed in Bom 862:27 Bom LR 1261 :91IC 360: AIR 1926 Bom 97 (DB).

83. 84. 85.

Yaman v. Changi,. (1925) 49

Tolhurst v. Associated Portland Cement Manyfacturers, (1902) 2 KB 660, 672 : [1900-03] All ER Rep 386 (HL). Chegamull v. Govindaswami, AIR 1928 Mad 972,974. Harchandi Lal v. Sheoraj Singh. AIR 1926 PC 68, 70; Citibank NA v. Standard Chartered Bank, (2004) I SCC 12,36:AIR 2003 SC 4630; Citibank NA v. Standard Chartered Bank, (2004) 6 SCC 1,21.

86. ChandrasekharHebbar v. VittaiaBhandari, AIR 1966Mys 84:(1965)2 Mys L 338.

164

Chapter IVOf thePerformance ofContracts

S. 42

towards the price of timber, it being not a full payment or performance, S. 41 was not held not applicable and for the balance sum plaintiff was, therefore, allowed to sue

Defendant I who was aperson with whom plaintiff had earlier agreed to supply timber at Rs. 7600.3/ However, if a promisee accepts from a third person a lesser sum in full satistaction of a claim against the debtor (promisor), a promisee cannot recover the balance from his debtor after receiving payment in full satisfaction5 According to the Calcutta High Court" a consignee after receiving compensation for the loss from an insurer cannot again sue the carrier who was actually liable for causing the loss of goods in transit. The Calcutta High Court considers S. 41 as a clear bar to such a suit because the plaintiff has accepted performance of the promise to pay compensation from insurer and so plaintiff cannot enforce the same claim against the carrier. The Madras High

Court has taken a contrary view of S. 41 in Sarada Mills Ltd v. Union of India"0 According to the Madras view S. 41 has no application because the insurer's payment is not

in discharge of the liability of carrier to take due care and caution The Madras High Court relied on some observations of the Bombay High Court in Parsram v. Air India Lid?l for reaching this view. Of course under this view the plaintiff would prosecute the suit against defendant and pay to insurer whatever he would recover from defendant.

Devolution liabilities.

of joint

S. 42. When two or more persons have made a

joint promise, then, unless a contrary intention appears by the contract all such persons, during

their joint lives, and after the death of any of them, his representative jointly with the survivor or survivors, and, after the death of the last survivor, the representatives of all jointly, must fulfil the promise. Liability of joint

promisors-This is a deliberate variation of the Common Law

rule in England "upon the death of one of several joint contractors the legal liability under the contract devolves on the survivors; and the representatives of the deceased cannot be sued at law either alone or jointly with the survivors. Consequently, the whole legal liability ultimately devolves upon the last surviving contractor, and after his death upon his representatives,"7 Parties can, of course, make their contracts what they please; but the presumption established for India by the present section appears to be more in accordance with modern mercantile usage.5 This section lays down the rule in respect of the liabilities of joint promisors to fulfil their joint promise while Section 45 lays down the rule in respect of the rights of the joint promisees to claim performance.

Parties who should perform the promise.oz(1) (2)

The promisor personally in the case of a personal contract. In case of non-personal contracts,

) by the promisors jointly, or (ii)

87.

by the promisor's man, or

Chandrasekhar Hebbar v. Vittaia Bhandari, AIR 1966 Mys 84: (1965) 2 Mys LJ 338.

88. Lala Kapurchand Godha v. Mir Nawab Himayatalikhan, AIR 1963 SC 250 : (1963) 2 SCR 168; See also Hirachand Punam Chand v. Temple, (1911) 2 KB 330. 89. 90.

Textiles and Yarn (P) Ltd. v. Indian National Steamship Company Lid., AIR 1964 Cal 362. Sarada Mills Ltd. v. Union of India, AIR 1966 Mad 381: (1966) 2 MLJ 16.

91. Parsram v. Air India Ltd, (1954) S6 Bom LR 944, 954. 92.

MARTIN LEAKE, PRINCIPLES OF THE LAW OF CONTRACTS (8th edn., 1931) at p. 313.

93.

Motilal v. Ghelabhai, (1893) 17 Bom 91.

S. 43

Any one ofjoint promisors may be compelled to perform

Any

165

ii)

by a third personon behalf of thepromisors

(iv)

in the event of the death of the promisor, by the legal representatives of the deceased promisor or promisors.

one

of

promisors may

jOint

be

S. 43. When two or more persons make a joint promise,

the

promisee

may,

in

the

absence

of

compelled to perform.

express agreement to the contrary, compel any lone or more] of such joint promisors to perform the whole of the promise. Each promisor may compel contribution.

Each of two or more joint

compel every other joint

promisors

promisor to

contribute

equally with himself to the performance promise, unless a contrary intention appears from the contract. Sharing of loss by default in contribution.

If any one of two or more

may of the

joint promisors

makes default in such contribution, the remaining joint promisors must bear the loss arising from such default in equal shares.

Explanation.-Nothing in this section shall prevent a surety from recovering, from his principal, payments made by the surety on behalf of the principal, or entitle the principal to recover anything from the surety on account of payment made by the principal. lhustrations a) 4, B and Cjointly promise to pay D 3,000 rupees. D may compel either A or B or C to pay him 3,000 rupees. (b) A, B and C jointly promise to pay D the sum of 3,000 rupees. C is compelled to pay the whole. A is insolvent, but his assets are sufticient to pay one-half of his debts. C is entitled to receive 500 rupees from A's estate, and 1,250 rupees from B.

A,

B and C are undera joint promise to pay D 3,000rupees. C is unable to pay anything.

and A is compelled to pay the whole. A is entitled to receive 1,500 rupees from B.

(d) A, B and C are under a joint promise to pay D 3,000 rupees, A and B being only sureties for C. C fails to pay. A and B are compelled to pay the whole sum. They are entitled to recover it from C.

Joint promisors.-The series of section now before us materially varies the rules of the Common Law as to the devolution of the benefit of and liability on joint contracts.>4 As far as the liability under a contract is concerned, it appears to make all joint contracts joint and several. It allows a promisee to sue such one or more of several joint promisors as he chooses, and excludes the right of a joint promisor to plead that all the

promisors must have been made parties.o The minority of one of the joint promisors

94.

Substituted by Act 12 of 1891, S. 2 and Sch. II, for "one". Lukmidas Khimji v. Purshotam Haridass, (1882) 6 Bom 700, 701.

95. Motilal Bechardass v. Ghellabhai Hariram, (1892) 17Bom 6, 11; Raghunath Das v. Baleshwar Prasad, (1928) 7 Pat 353 105 IC 424: AIR 1927Pat 426: 9 PLT 137. 96. Hemendro Coomar Mullick v. Rajendrolal Moonshee, (1878) 3 Cal 353, 360; Muhammad Askari v.

Radhe Ram Singh, (1900) 22 Al 307 315; Dick v. Dhunji Jaitha, (1901) 25 Bom 378, 386; Jainarain v. Surajmul, (1949) FCR 379: AIR 1949 FC 211.

166

S. 43

Chapter IV-0f thePerformance ofContracts

does not affect the liability of the others. There is considerable difference of opinion amongst the Indian High Courts as to its consequential operation where a judgment has been obtained against some or one of joint promisors. These decisions are examined in the next topic.

Effect of decree against some only of joint promisors. -In Hemendro Coomar Mullick v. Rajendro Lal Moonshee the High Court of Calcutta held, following the rule laid down in King v. Hoare," that a decree obtained against one of several joint makers of a promissory note is a bar to a subsequent suit against others. This was followed by the High Court of Madras in a similar case in Gurusami Chetti v. Samurti Chinna."

STRACHEY, C.J., dissented from these decisions in Muhammad Askari v. Radhe Ram Singh In that case the question was whether a judgment obtained against some of several mortgagors and remaining unsatisfied against them was a bar to a second suit against other joint mortgagors, and the Court held that it did not constitute any bar and that a second suit was maintainable, as the doctrine of King v. Hoare® was not applicable in India, at all events in the Mufassal, since the passing of the Indian Contract Act. The applicability to India of the rule in King v. Hoare was considered by the Bombay High Court in a case in which it was held that the present section merely took

away the right of a joint promisor to have his co-promisor joined with him in the action, and did not enable the promisee to file separate actions against both. "It could not have

been intended to deprive the second co-contractor of his right to plead the previous Judgment or to split up one case of action into as many causes of action as there are joint contractors.' The Bombay High Court has adopted a contrary view in a later case.3 The provisions of sections 43 and 44 of this Act make English law and declare that the liability of 'joint promisors' seems to be the reason why a decree obtained against one remaining unsatisfied would not deprive the promisee of his

a clear departure from the is joint and several". That of the joint promisors and right to proceed against the

other joint promisors to the extent of the unsatisfied claim of thepromisee. We think it the better opinion that the enactment should be carried to its natural and logical consequences, and that, notwithstanding the English authorities founded on a different substantive rule, such a judgment, remaining unsatisfied, ought not, in India, to be held a bar to a subsequent action against the other joint promisor or promisors. The various judgments on either side are found in Nil Ratan Mukhopadhyaya v. Cooch Behar

Loan Office Lid.10

Suit against one of several partners. -In Lukmidas Khimji v. Purshotam Haridas it was held in a suit brought upon a contractmade by apartnership firm that a plaintiff may select as defendants those partners of the firm against whom he wishes to proceed. This decision was cited with approval by FARRAN, C.J., in Motilal Bechardass 1, Jamna Bai v. Vasanta Rao, (1916) 43 IA 99:39 Mad 409; Sain Das v. Ram Chand (1923) 4 Lah

334:85 IC 701: AIR 1924Lah 146;Keka v. Sirajuddin, AIR 1951 All 618. 2. 3. 4. 5.

Hemendro Coomar Mullick v. Rajendro Lal Moonshee, (1878) 3 Cal 353. King v. Hoare, (1844) 13 M & W 494. Gurusami Chetti v. Samurti Chinna, (1881) 5 Mad 37; For contrary view see Ramanjulu Naidu v. Aravamudu, (1910) 33 Mad 317. Muhammad Askari v. Radhe Ram Singh, (1900) 22 All 307. See also Abdul Aziz v. Basdeo Singh, (1912) 34 All 604, 606.

6. King v. Hoare, (1844) 13 M & W 494. 7. 8.

LR 370. In re Vallibhai, 35 Bom LR 881.

9 T. Radhakrishna v. Muthukrishnan, AlR 1970 Mad 337. 10. Nil Ratan Mukhopadhyaya v. Cooch Behar Loan Office Lid., AIR 1941 Cal 64. 11. Lukmidas Khimji v. Purshotam Haridas, (1882) 6 Bom 700.

Any one ofjoint promisors may be compelled to perform

v. Ghellabhai Hariram

S. 43

167

andwas followed by the High Court of Madras in Narayana

Chetti v. Lakshmana Chetti, where it was held in a similar case that according to the law declared in Section 43 of the Contract Act, it is not incumbent on a person dealing with partners to make them all defendants, and that he is at liberty to sue any one partner as he may choose. The same view of the section has been taken by the High Court of Lahore.14 Co-heirs.-This section speaks of two or more persons making a joint promise, and it has no application where parties become jointly interested by operation of law in a contract made by a single person. Hence the section does not apply to the case of several heirs of the original debtor, and they all must be joined as parties to the suit.

Contribution between joint promisors-Paras 2 and 3 represent the doctrine of English equity as distinct from that of the Common Law Courts Equity adopted the rule that the amount of contribution was the amount of the debt divided by, the number of co-debtors who were solvent at the time the right to contribution arose.o For example, if the joint debt is of Rs. 1,000/- and the joint debtors are five; and one of them pays the debt, he would be entitled to recover Rs. 800/- from the

remaining solvent joint debtors. If all the remaining four are not solvent but only three are solvent he would recover Rs. 750/- from the three solvent joint debtors. The right to contribution contained in this section is subject to a contrary intention appearing in the contract between the parties. Joint tenants are joint promisors; therefore the liability is only to contribute to the performance of the promise. Hence if one of several persons jointly liable for a debt is sued and is compelled to satisfy the debt and the costs of the suit, he can only call on the others to contribute in respect of the debt, but not in respect of the costs.

A decree holder (promisee) is entitled to execute his money decree from any joint judgment debtors (promisors). The judgment-debtor who is thus compelled to entitled to demand contribution from the remaining judgment debtors,8 or the judgment debtors were discharged from their liability by virtue of the provisions of the

of the pay is other Relief

of Indebtedness Act.

19

When liability to contribute arises. In a case decided before the enactment of the Contract Act, it was held that the mere existence of a decree against one of several joint

debtors does not afford a ground for a suit for contribution against the other debtors. "Until he has discharged that which he says ought to be treated as a common burden, or at any rate done something towards the discharge of it, he cannot say that there is anything of which he has relieved his co-debtors, and which he can call upon them to share

12. 13.

Motilal Bechardass v. Ghellabhai Hariram, (1892) 17 Bom 6, 11. Narayana Cheti v. Lakshmana Cheti, (1897) 21 Mad 256. See also Appa Dada Patil v. Ramkrishna Vasudku, (1930) 53 Bom 652:31 Bom LR 1187: 121 IC 581: AIR 1930 Bom 5 (DB).

14. Muhammad Ismail Khan v. Said-ud-din Khan, (1927) 9 Lah 217 104 IC 700: AIR 1927 Lah 819 (DB); Liquidator, Union Bank of India v. Gobind Singh, (1923) 4 Lah 239: 77 IC 338: (24) AL 148 (partners). 15.

Shaikh Sahad v. Krishna Mohan, (1916) 24 Cal LJ 371; Devi Dayal v. Bhupinder Kumar, (1970)

AIR Del 790. 16. 17.

18. 19.

Hitchman v. Stewart, (1855) 3 Drew 271:61 ER 907; Lowe v. Dixon, (1885) 16 QBD 455 (458). Punjab v. Petum Singh, (1874) 6 NWP 192; Suryanarayana v. Bajalingam, (1933) 144 IC 726: AIR 1933 Mad 382. Shanker Lal v. Moti Lal, AIR 1957 Raj 267; Moolchand v. Alwar Chetty, (1916) 39 Mad 548. Jankibai v. Rama Manaji, AlR 1948 Nag 292; Haridas V. Ramguljarilal, AlR 1947 Nag 61.

168

Chapte1 r V-OfthP e erformancefContracts

S. 44

with him.20 And the law under the Contract Act would appear to be the same see the illustrations to the section.

The words "may compel other joint promisor to contribute equally with himself to the performance of the promise' read in the sequence of the first para show that in the first instance after one of the joint promisors is compelled to perform the promise that the right of the promisor, who was compelled to perform the promise, to the contribution from the other joint promisors arises. The liability of the remaining joint promisors to contribute should subsist when one of the joint promisor's liability subsisted at the time he was called upon to perform or was sued. Contribution between mortgagors.-Unless there is a contract to the contrary, the question of contribution by co-mortgagors, where one mortgagor has redeemed, is governed by Sections 28 and 92 of the Transfer of Property Act, and not by Section 43 of the Contract Act.25

Contribution between tort-feasors.-The rule of contribution contained in Section 43 applied to joint promisors provided there is a joint promise by them and that is also subject to the contract to the contrary amongst them as it appears from para two. Once a decree has been passed against two or more tort feasors, which imposes a joint and several liability upon each one of the judgment-debtors, if one of them is made to pay the decretal debt he should be entitled to contribution from the remaining cojudgment-debtors." To what extent and in what proportion may depend upon the circumstances of eachcase.

Contribution between partners.-The principle of contribution does not apply to partners inter se. A partner, who has been compelled to pay, cannot file a suit for contribution but he has to file a suit for partnership accounts. 0

Effect of release or

one joint promisor.

S. 44. Where two or more persons have made promise, a release of one of such Joint joint promisors by the promisee does not discharge the

other joint promisor or joint promisors; neither does it free the joint promisor so released from responsibility to the other joint

promisor

or joint promisors. We have here another variation of English law.27 In England the releasing creditor must expressly reserve his rights against the co-debtors if he wishes to preserve them. The words "neither does it free the joint promisor or joint promisors" apply to the right of

contribution amongst the joint promisors. This section applies equally to a release given before

suit-

or after breach. Thus where in a

for damages against several partners the plaintiff compromised the suit with one of

20.

Ram Pershad Singh v. Neerbhoy Singh. (1872) 11 BLR 76.

21. 22. 23. 24.

See Abraham v. Raphial, (1916) 39 Mad 288, 291. Kunju Naina v. E. Chacko, AIR (1954) TC 499. Kedar Lal v. Hari Lal, AlR 1952 SC 47 (1952) SCR 170. Dharmi Dhar v. Chandra Shekhar, AlR 1951 All 774 (784); Nani Lal De v. Tirathalal De, AlR 1953 Cal 513. Nani Lal De v. Tirathalal De, AIR 1953 Cal 513. Mayyappa v. Palaniappa, AlR 1949 Mad 109. See Krishna Charan v. Sanat Kumar, (1917)44 Cal 162, 174. Kirtee Chunder v. Struthers, (1879) 4 Cal 336:3 CLR 546.

25. 26. 27. 28.

S. 45

Devolutionof joint rights

169

them, and undertook to withdraw the suit as against him it was held that the release did not discharge the other partners and the suit might proceed as against them.

The principle of this section has also been applied to judgment debts. It has thus been held that release by decree-holder of some of the joint judgment-debtors from liability under the decreel does not operate as a release of the other judgment-debtors.2" Similarly, where the debt of one judgment-debtor was scaled down under the C.P. & Berar

Relief of Indebtedness Act, the Judgment-creditor was held entitled to proceed against the remaining judgment-debtors for the remaining amount of the decree.50 Devolution

rights.

of

joint

S. 45. When a person has made a promise to two

or more persons jointly, then, unless a contrary intention appears from the contract, the right to claim performance rests, as between him and them, with them during their joint lives, and, after the death of any of them, with the representative of such deceased

person jointly with the survivor or survivors, and, after the death of the last survivor, with the representatives of all jointly. lustration A, in consideration of 5,000 rupees lent to him by B and C, promises B and Cjointly to repay them that sum with interest on a day specified. B dies. The right to claim performance rests with B's representatives jointly with C during C's life and after the death of C, with the representatives

of B and C jointly.

Rights of joint promisees.-This sectionappliesto all jointpromiseeswhether they be partners, co-sharers, mortgagees, 5 joint lessors,5 or members of a joint Hindu family carrying on business in partnership. In a case where the owner of a single right dies, and several persons become entitled to it, it has been held that all of them must join in a suit to enforce the right, and if any of them refuses to join as plaintiff, he must be added as a defendant.30 Obviously joint promisees cannot divide the debt among themselves and sue severally for the portions.

As a Karta of a joint Hindu family can enforce a contract made with the joint family, this section would not apply to such acase. This section would not govern the right of co-trustees to sue.5

Right to performance ofpromisees during joint lives.As the right to claim per-

formance of a promise in the case of joint promisees rests with them all during their joint 29.

Mool Chand v. Awar Chetty, (1916) 39 Mad 548; Daulat v. P.N. Bank, (1933) 144 IC 981: AIR 1933 Lah 505.

30. 31.

Haridas v. Ramguljarilal, 1947 Nag 229 IC 360: AIR 1947 Nag 61. Motilal v. Ghellabhai, (1892) 17 Bom 613; Aga Golam Husain v. A.D. Sassoon, (1897) 21 Bom 412, 421. 32. Ramkrishna v. Ramabai, (1892) 17 Bom 29. 33. Rameshwar Bux v. Ganga Bux, AIR 1950 All 598 (FB). 34. Moolchand v. Smt. Renuka Devi, 1973 AIR Raj 13. 35. Kalidas v. Nathu Bhagvan, (1883) 7 Bom 217; Ram Narain v. Ram Chunder, (1890) 18 Cal 86; Alagappa Chetti v. Vellian Chetti, (1894) 18 Mad 33. 36. Ahinsa Bibi v. Abdul Kader, (1902) 25 Mad 26, 35; Mahamed Ishaq v. Sheikh Akramul Hug. (1908) 12 CWN 84, 86, 93. 37. Siluvaimuthu Mudaliar v. Muhammad Sahul, (1926) 51 Mad U 648 98 IC 549: AIR 1927 Mad 84. 38.

39.

KishanParshadv. HarNarain,(1911)33 All 272(PC). Manikya Rao v. Adenna, AIR 1949 Mad 654.

otge

170

S..46

Chopter IV-of thePerformance ofContracts

lives, it follows that all the joint promisees should sue upon the promise.40 Therefore if a suit is brought by some of them only, and the other promisees are subsequently added as plaintiffs on objection taken either by the defendant* or by the Court of its own motion, the whole suit will be dismissed if it is barred by limitation as regards the other promisees who were added subsequently at the time of their joinder. Suit by a surviving partner.-The general rule of English law is (contrary to the present section) that joint contracts are enforceable by the survivors or survivor alone. There is an equitable exception, founded on mercantile custom, as to debts due to part ners; but even in this case "although the right of the deceased partner; devolves on his

executor .. the remedy survives to his co-partner, who alone must enforce the right by action, and will be liable on recovery to account to the executor or administrator for the share of the deceased."** The present section extends the mercantile rule of substantive right to all cases of joint contracts. It seems to be the better opinion that the representatives of a deceased partner are not necessary parties to a suit for the recovery of a debt which accrues due to the partnership in the lifetime of the deceased.** The dissolved partnership firm may sue for the debt.

Deceased partner's estate. -The High Court of Bombay has decided, after full examination of the rule and the present section of the Act in the light of both Indian and English authorities, that where a partner has died before the commencement of a suit against the firm, the rule does not enable the Act to make the deceased partner's separate estate liable without adding his legal representatives as "parties."*)

Suit by representative of deceased

partner.-The representative of the estate if

deceased partner may maintain a suit for the recovery of a partnership debt, and may join the surviving partners as defendants in the suit where they refuse to join as plaintiffs.*0

Time and Place for Performance Time for performance

of promise,where no

S. 46. Where, by the contract, a promisor is to perform his promise without application by the

Specifiaendd. no time 1s fied, the

engagement

must be

performed

within

a

reasonable time. Explanation.-The question "what is a reasonable time" is, in each particular case, a question of fact. Time for Performance-This section proceeds upon the assumption that a contract not specifying the time of performance would not be bad for uncertainty. This section would not apply to a case where the promisee upon the promisor to perform the promise.

has to apply to or call

40. Dular Chand v. Balram Das, (1877) 1 Al 453; Vyankatesh Oil Mill

v. Velmahomed,(1927) 30

Bom LR 117: 109 IC 99 AIR 1928 Bom 191.

41. 42. 43. 44.

1

(1897) 21 Bom 580. Ramsebuk v. Ramlall Koondoo, (1881) 6 Cal 815; Fatmabai v. Pirbhai, Imam-ud-Din v. Liladhar, (1892) 14 All 524; Ram Kinkar v. Akhil Chandra, (1908) 35 Cal 519. Williams on Executors, 11th ed. 638. Motilal v. Ghellabhai, (1892) 17 Bom 6; Vaidyanatha Ayyar v. Chinnasami Naik, (1893) 17 Mad 18, Ugar Sen v. Lakshmichand, (1910) 32 All 638; Mool Chand v. Mul Chand, (1923) 4 Lah 142

71 LC 951: AIR 1923 Lah 197. 45.

Mathuradas v. Ebrahim Fazalbhoy, (1927) 51 Bom 986 : 29 Bom LR 1296 105 IC 305: AIR 1927 Bom 581.

46. AgaGulamHusain v. A.D.Sassoon,(1897)21 Bom412, 421.| AiA

aeAl.

whi.a

S. 49

Place for performance of promise where no application to be made

171

Reasonable time.-Where the defendants agreed to supply coal to the plaintiffs from time to time, as required by the plaintiffs on reasonable notice given to them, a notice given by the plaintiffs on the 22nd July 1898 for the supply of 2,648 tons of coal on or before 31st August 1898 was held not to be reasonable.47 Where the defendant agreed to discharge a debt due by the plaintiff to a third party and in default to pay to the plaintiff such damagesas he might sustain, and no time was fixed for the performance of the obligation, it was held that the failure of the defendant to perform it for a period of three years amounted to a breach of the contract, as that was a sufficient and reasonable time for performance.**

Engagement, -This word appears to be synonymous with "promise". Time and place for

S. 47. When a promise is to be

performed

on a

performanceop f romise, certain day, and the promisor has undertaken to wheretime isspecified perform it without application by the promisee, m anadneo.applicationtobe the promisor may perform it at any time during the usual hours of business on such day and at the place at which the promise ought to be performed. lhustration A promises to deliver goods at B's warehouse on the Ist January. On that day A brings the goods to B's warehouse, but after the usual hour for closing it, and they are not received. A has not performed his promise.

Application for perfor-

manceoncertainday to

beat propertime and place.

S. 48. When a promise is to be performed on a certain

day, and

perform it without

promisor

has not

undertaken

to

application by the promise, it is

the duty of the promisee to apply for performance at a proper place and within the usual hours of business.

Explanation.-The question "what is a proper time and place" is in each particular case, a question of fact. To ascertain whether time is of the essence of the contract or not, read Section 55,

infra. Place for the perfor-

mance ofpromise,

S. 49.

When

a

promise

is to be

performed

Without application by the promisee, and no place

wherenoapplicationto is fixed for the performance of it, it is the duty of be made and no place the promisor to apply to the promisee to appoint a fixed for performance.

reasonable place

for the performance

of the

promise and to perform it at such a place. llustration A undertakes to deliver a thousand maunds of jute to B on a fixed day. A must apply to B to appoint a reasonable place for the purpose of receiving it, and must deliver it to him at such place.

Place for Performance. -The legislaturehas usedthree different expression viz: "at the place at which the promise ought to be performed" (S. 47), "at a proper place" (S. 48) and "at a reasonable place," (S. 49). The said expressions imply that the place to be fixed should be reasonable.

47.

The Bengal Coal Co., Lid. v. Homee Wadia & Co, (1899) 24 Bom 97, 140; Bank of India v. Chinoy, (l950) 77 1A 76:(1950) Bom 606: AIR 1950PC90.

48. Subramanianv.Muthia,(1912)35Mad639.

foali ,ite tphniushMw , ainal one

3

Chapter 1Vof thePerformanceofContracts

S. 49

172

The rule in this section is the one which, it was intended, should apply both to delivery of goods as well as to payment of money. The common law rule requiring a debtor to find the

creditor

in the realm was not

applied.

In that case there was a specific

agreement to pay at Hyderabad.u In case of Pakki Adat dealings, the place of payment is the place where the constituent resides unless the contract provides to the contrary. In

case of negotiable instruments, the rule of finding out the creditor would not apply. If the obligation is to deliver heavy or bulky goods he must procure the creditor to appoint a place to receive them. The words "no place is fixed" and promisor to apply to the promisee to appoint a reasonable place do not exclude any inference the Court may draw

as to the intention of the parties from the nature and circumstances of the contract, especially where the obligation is to pay money.5 A debtor cannot be held liable to pay wherever the creditor may choose to shift his business. The application of Common Law rule would be engrafting something on S. 20 of the Civil Procedure Code and in a vast

country like India it will not only be inconvenient but oppressive.3 Place of delivery Where by an agreement for the sale of goods it was stipulated that the goods were "to be delivered at any place in Bengal in March and April 1891," and it was added, "the place of delivery to be mentioned hereafter," the Judicial Committee held that the buyer had the right to fix the place, subject only to the express contract that it must be in Bengal and to the implied one that it must be reasonable.30

PERFORMANCE (TIME and PLACE for)

Withoutapplicationofpromisee

On application ofpromisee

In any other contract

Ss4 . 64,7,49)

(S. 50

T no time

Ifto be perfomedDuring usual

specied

on a day specified

At proper

business hours

AL the ume and

48)3

n the day

2

maner prescribed

Oypromisee

named by

(S. 50)

promisee

TIfno place

(S. 4

specihed time (S. 46)

Tomisolro Duringusual business hours request pro-

: 2 2 miseteofix(S4.7) reasonable

i

At he place where it should be performed

.S. 47)

S.49)

49. SoniramJeethmulv. RD Tata & Co., 54 IA 265: 29Bom LR 1027: AIR 1927PC 156. 50. Bansilal v. Grulam, 53 IA 58:53 Cal 88: AlR 1925 PC 290. S1. Kedarmal v. Govindram, 9 Bom LR 903.

52. Jivatlal y.Lalbhai,44BomLR495 (FB):(1942)Bom 620: AIR 1942Bom251.

0

53. Raman Chettiyar v. Gopalachari, (1908) 31 Mad 223, at p. 228; Soniram v. Tata & Co. Lid, (1927)

DO7i5 Rang 451: 54 IA 265; Nathubhai Ranchod v. ChhabildasDharamchand, (1935) 59 Bom 365 37 Bom LR 357: 157 IC248: AIR 1935Bom 283, Tuljaram v. Wadhumal,(1933) 142 IC 844: AIR 1933Sind 62, Bhagauti v. Chandrika Prasad, (1933) 1501C 289: AIR 1933 All 147. 54. 55.

Madan Lal v. Chawle Bank Ltd., AIR 1959 All 612. Piyara Singh v. Bhagwandas, AlR 1951 Punj 33; Narayan Singh v. Jagjit Singh, AIR 1955 Punj 128.

56.

Grenonv. LachmiNarainAngurwala,(1896)24 Cal 8:23 IA

119.aitatd

vnwinumaroh?

Performance in manner or at time prescribed or sanctioned by promisee

Performance

S.50

173

in

S. 50. The performance of any promise may be cribed orsanctionedby made in any manner, or at any time which the promisee promisee preseribes or sanctions. manner or at time

pres-

lhustrations (a) B owes A 2,000 rupees. A desires B to pay the amount to A's account with C, a banker. B, who also banks with C, orders the amount to be transferred from his account to A's credit, and this 1S done by C.

Afterwards,

and before A knows of the transfer, C fails. There has been a good

payment by B. 6) A and B are mutually indebted. A and B settle an account by setting off one item against another, and B pays A the balance found to be due from him upon such settlement. This amounts to a payment by A and B respectively, of the sums which they owed to each other. (c) A owes B 2,000 rupees. B accepts some of A's goods in reduction of the debt. The delivery of the goods operates as a part payment. (d) A desires B, who owes him Rs. 100, to send him a note for Rs. 100 by post. The debt is discharged as soon as B puts into the post a letter containing the note duly addressed to A.

Payment to an agent, who to the debtor's knowledge had no authority to receive the payment, does not discharge the debtor.

Manner of performance. It is hardly needful to add that where the request is to send not the legal currency, but a cheque or other negotiable instrument, this does not imply any variation of the rule that payment by a negotiable instrument is conditional on its being honoured on presentation within due time. Under S. 50, the payment of a debt may be made in cash or in such other manner as the creditor may prescribe. A subscriber to Railway Provident Fund desired payment of his deposit in the Provident Fund in sterling and declared that remittance be made to him by a bank draft in a named bank in England. Under the law the only legal method of such remittance was to send the amount to Reserve Bank of India for payment to bank in England. Under S. 50 it justified the conclusion that by sending the cheques for the amount to Reserve Bank of India, in performance of the manner of payment prescribed by subscriber, the debt was discharged and money must be deemed to have been paid out to subscriber.0 To support a plea of payment passing of cash need not be shown. Payment made by means of transfer entries

is sufficient.61 If there is either an express or implied request to send cheques by post, the debtor performs his obligation by posting the cheque.2 This is however not so where there is no such request to send the cheques by post. Thus, in UTI v. Ravinder Kumar Shukla5, a

57.

S8. 59. 60. 61. 62.

Mackenzie v. Shib Chunder Seal, (1874) 12 BLR 360.

Kedarmal v. Surajmal, (1907) 9 Bom LR 903. Hairoon Bibi v. The United India Life Insurance Company Ltd, AIR 1947 Mad 122. Union of India v. Kashi Prosad, AIR 1962 Cal 169. Narayandas v. Sangli Bank, AIR 1966 SC 170: (1965) 3 SCR 777. CIT v. Ogale Glass Works Ltd., AlR 1954 SC 429 (1955) 1 SCR 185 (post office as agent of addressee); Prima Realty v. Union of India, (1996) 11 SCC 65, 70 (1996) 10 JT 383 (cheque of large amount payable by government sent by post, held to be in ordinary course of business usage). If there is an express or implied request to send cheques by post, the post office is taken to be the agent of the addressee; and if there is no such request, it is taken as the agent of the sender. This may be compared with the rule in common law on communication of acceptances where the post office is taken as the "common agent" of the parties (though the operation of the rule in practice has led to the same result), see notes under S. 4

63.

"Non-instantaneous

communication

courier ortelegram UTIv. Ravinder Kumar Shukla, (2005)7 SCC 428, 430: AIR 2005 SC 3s28.

through post,

174

Chapter 1V-of thePerformanceofContracts

S. 51

mutual fund (UTI) had sent cheques to their fund-holders through post. These cheques never reached the fund-holders as they were intercepted and fraudulently encashed. The issue arose whether mere posting of the cheques was sufficient to discharge the debt owed by UTI. The Supreme Court held that there was no contract with or request of the payees to send the amount by post, nor was sending of cheques through post in such cases established commercial practice. Thus, the risk of non-delivery was on UTI, and the debt was not discharged by posting the cheques. UTI had to bear the loss and make fresh payments to the affected fund-holders.

Performance of ReciprocalPromises (1) If to be performed simultaneously or concurrently, promisor to perform his promise when promisee is re

dy andwillin

to perform his promise (S. 51).

(2)

Ifthe order is fixed by contract, it should be performed in that order (S. 52).

(3)

If contract is silent, performance be made in the order in which the nature of transaction requires. (S. 52).

(4)

If promises are dependent, the one which should be done first should be performed first (S. 54).

S. 51. When a contract consists of reciprocal perform,unlessrecipro promises to be simultaneously performed, no procaplromiseeready and misor need perform his promise unlesS the pr0willing to perform. misee is ready and willing to perform his reciprocal promise. Promisor not bound to

fi

llustrations (a) A and B contra t that A shall deliver goods to B to be paid for by B o

ieliv

A need not deliver the goods, unless B is ready and willing to pay for the goods on delivery. B need not pay for the goods, unless A is ready and willing to deliver them on payment.4 (b) A and B contract that A shall deliver goods to B at a price to be paid by instalments, the first instalment to be paid on delivery. A need not deliver, unless B is ready and willing to pay the first instalment on

delivery.

B need not pay the first instalment, unless A is ready and willing to deliver the goods on

payment of the first instalment.

Simultaneous performance

This sectionexpressesthe settled rule of the Common

Law. To understand the principle rightly, we must remember that in a contract by mutual promises the promises on either side are the consideration, and the only consideration, for

one another. But the terms of a promise may express or imply conditions of many kinds; and the other party's performance of the reciprocal promise, or at least readiness and willingness to perform it, may be a condition. And if it appears on the whole from the terms or the nature of the contract that performance on both sides was to be simultaneous, the law will attach such a condition to each promise, with the operation laid down in the present section. Performance of one party's promise may have to be complete or tendered before he can sue on the other's reciprocal promise. In that case it is said to be a condition precedent to the right of action on the reciprocal promise

64. Chengravelu Chety v. Akarapu Venkana & Sons, (1925) 49 Mad LU 300 : 86 IC 299 AlR 1925 Bom 971.

65. Nathulal v. Phool Chand, AlR 1970 SC 546 : (1970) 2 SCR 854 (1969) 3 SCC 120; G.K. Chengravellchetty v. Akarapu Venkanna, 86 1C 299: AIR 1925 Mad 971 :49 MLJ 300 (DB).

o

Promisor not bound to perform unless reciprocal promisee ready

S. 51

175

Where the performances are intended to be simultaneous, as supposed in this section (goods to be delivered in exchange for cash or bills, and the like), they are said to be concurrent conditions, and the promises to be dependent.

Promises which can be enforced without showing performance of the plaintiff's own promise, or readiness or willingness or perform it, are said to be independent. In order to apply the rule of this section we must know whether the promises are or are not "to be simultaneously performed." This is a question of construction, depending on the intention of the parties collected from the agreement as a whole.°o Ina case of sale of shares

of a limited company, transfer of shares and payment of price were held to be simultaneous.

Consequences of partial default in performance.-There is a distinct question from that of "condition precedent" namely, whether failure to perform some parts of a contract deprives the party in fault of any right to remuneration for that which he has performed,

and

entitles

the other to put an end to the contract,

or is only a partial

breach which leaves the contract as a whole still capable of performance. In dealing with cases of this kind it may be very difficult to ascertain the true intention of the parties. We have to "see whether the particular stipulation goes to the root of the

matter, so that a failure to perform it would render the performance of the rest of the contract by the plaintiff a thing different in substance from what the defendant has

stipulated for or whether it merely partially affects it and maybe compensated for in damages.8 B entered into a contract with G, director of the Royal Italian Opera in London. Under this, B had to render exclusively his services as a singer in operas and concerts for a period of over three months. B also undertook that he would be in

London six days at least before the commencement of this engagement, for rehearsals. B arrived two days before the commencement of the engagement. G thereupon refused to go with the contract. B sued G for breach. It was held that as the engagement was for over three months the term regarding previous attendance at rehearsals was not a fundamental term going to the root of the matter. Consequently Gwas not entitled to refūse to receive B into his service. All that G could do was to

sue B for damages for breach of warranty. On the other hand, if B's engagement had been only to sing in Operas, or if it had been only for a few performances, it might very well be that previous attendance at rehearsals with actors in company with whom he was to perform was essential.

Waiver of

performance-This section does not, of course, refer to any special

remedy to a party who has chosen to perform his part without insisting on the reciprocal performance which was intended to be simultaneous with his own, as where a seller of goods "for cash on delivery" chooses to deliver the goods without receiving the price Readiness and willingness.-If a party bound to do an act upon request is ready to do it when it is required, he will fully perform his part of the contract, although he might happen not to have been ready had he been called upon at some anterior period. For a

party to prove himself ready and willing to perform his obligation under a contract to purchase shares, he has not necessarily to produce the money or vouch a concluded scheme for financing the transaction. But where the purchaser before the day fixed for

66. 67.

Kaikhushroo v. C.P. Syndicate Lid, (1949) FCR 501:52 Bom LR 189: AIR 1950 FC 8.

Imperial Banking Co. v. Atmaram, 2 Bom HCR 246 (258).

68.

Per CUR., Bettini v. Gye, (1876) 1 QBD 183; Compare Poussard v. Spiers and Pond. (1876) 1 QBD

410. 69. Sooltan Chund v. Schiller. (1878) 4 Cal 252. 70. 71.

Jivraj Megji v. Poultan, (1865)2 BHC 253,256. Bank of India v. Chinoy, (1950) 77 IA 76:(1950) Bom 606: AIR 1950PC 90.

176

Chapter IV-0f thePerformance ofContracts

S. 52

delivery gives notice to the vendor that he will not accept the shares, the vendor is

exonerated from giving proof of his readiness and willingness to deliver the shares.2 Similarly as to goods, it is a still more elementary proposition that a vendor may be ready and willing to deliver without having the goods in his actual custody or possession, it is enough if he has such control of them that he can cause them to be delivered.s

Where goods are sold for "cash on delivery", and the vendor delivers a portion of the goods, and the purchaser offèrs to pay the price thereof if certain cross-claims set up by him are adjusted, it cannot be said that he is not ready and willing to perform his promise, so as to entitle the vendor to refuse delivery of the remaining goods.

S. 52. Where the order in which reciprocal Orderofpertomance promises are to be performed is expressly fixed by of reciprocal promises. the contract, they shall be performed in that order; and, where the order is not expressly fixed by the contract, they shall be performed in that order which the nature of the

transaction requires. llustrations (a) A and B contract that A shall build a house for B at a fixed price. A's promise to build the

house must be performed before B's promise to pay for it. (6) A and B contract that A shall make over his stock-in-trade to B at a fíxed price, and B promises to give security for the payment of the money. A's promise need not be performed until the security is given, for the nature of the transaction requires that A should have security before he delivers up his stock.

Order of

Performance-If

a contract expressly states the order of performance,

that would govern the matter; if a contract is silent, one has to look to the nature of the transaction in order to decide the order of performance. In the latter event, the Court may look to the usual practice in the market also.

Subsequent conduct of the parties may not throw any light on the order in which the

promises are to be

performed.The Supreme Court has clarified that parties cannot

merely rely on the order in which clauses are placed in a contract, in order to ascertain which condition serves as a precondition for the performance of other parts of the contract; this has to be expressly fixed for it to fall within the first part of the section.

S. 53. When a contract contains reciprocal preventing event0n promises, and one party to the contract prevents which the contract 1S to the other from performing his promise, the take effect. contract becomes voidable at the option of the party so prevented; and he is entitled to compensation from the other party for any loss which he may sustain in consequence of the nonLiability

of

party

performance of the contract. 72.

Dayabhai Dipchand v. Maniklal

Vrijbhukan, (1871) 8 BHCR AC 123; Zippel v. Kapur & Co.,

(1932) 139 IC114: AIR1932Sind 9. 73.

Kamvar Bhan Sukha Nand v. Gampat Rai Ram Jivan, (1926) 7 Lah 442:94 IC 304: AIR 1926 Lah 318. 74. Sooltam Chund v. Schiller, (1878) 4 Cal 255. 75. Edridge v. R.D. Sethna, (1933) 60 IA 368: 58 Bom 101:36 Bom LR 127: 146 1C 739 : AIR 1933 PC 233. 76. Saradamani Kandappan v. S. Rajalakshmi, (2011) 12 SCC 18.

Liability of party preventing event on which the contract is to take effect

S. 53

177

llustration A and B contract that B shall execute certain work for A for a thousand rupees. B is ready and willing to execute the work accordingly, but A prevents him from doing so. The contract is voidable at the option of B; and, if he elects to rescind it he is entitled to recover from A compensation for any loss which he has incurred by its non-performance

Impossibility created by act of party.-This is in substancethe rule not only of the Common Law, but of all civilised law. No mancan complain of another's failure to do something which he has himself prevented the other from doing or performing. The principle is not confined to acts of direct or forcible prevention, which are neither frequent nor probable, but extends to default or neglect in doing or providing anything which a party ought under the contract to do or provide, and without which the other party cannot perform his part. Where under the contract with the government, the government merely agreed to assist the contractor in obtaining the controlled articles necessary for execution. But the contractor demanded that the government should supply free of cost crane and iron materials. Hence S. 53 of the Act could not be of any assistance to the contractor when government refused to supply to him crane and iron materials free of

cost.

Prevention by a third party may not help the other party in repudiating

the contract. A man agrees to sell standing wood; the seller is to cut and cord buyer to take it away and pay for it. The seller cords a very small part of the neglects to cord the rest the buyer may determine the contract and recover money he has paid on account.

his part of it, and the wood, and back

"This was an entire contract; and as by the defendant's default the plaintiffs could not perform what they had undertaken to do, they had a right to put an end to the whole

contract and recover back the money that they had paid under it; they were not bound to take a part of the wood only".78

If the contract is between A and B. and B makes a default which prevents A from fulfilling a particular term or condition of the contract, A may treat that term or condition as fulfilled and require B to perform his part of the contract. On the other hand A's non-fulfilment gives B no right to rescind or to take advantage of any agreed penalty

by the contract. A Privy Council decision illustrates the circumstances in which

a claim to compen-

sation may be sustainable under this section. In Kleinert v. Abosso Gold Mining Co.,79 P

contracted with D to remove waste rock lying at a dump at D's mine within two years, provided that there were not more than fifty thousand tons, D agreeing to supply a crusher. The crusher supplied by D was so inadequate, crushing only three tons per hour, that the work had to be stopped. P recovered damages for the expense to which he had been put in preparing for the work, and for the loss of profit he would otherwise have made by supplying crushed stone to a third party.

Voidable at

option.-These words suggest that the other party so prevented has

the option to avoid the contract, Such a party may or may not, avoid the contract. In the

event of such party not avoiding the contract, the parties are left with their rights and liabilities as before.50

77. 78. 79.

Namayya v. Union of India, AIR 58 AP 533. Giles v. Edwards, (1797) 7 TR 181. Kleinert v. Abosso Gold Mining Co., (1913) 58 Sol Jo 45, on appeal from the SC of the Gold Coast. The

80.

decision was based on common law principles as laid down in Mackayv. Dick, (1881) 6 App Cas 251. Edridge v. R.D. Sethna, AlR 1933 PC 233 : 60 IS 368.

178

Chapter 1V-Of the Performance ofContracts

S. 54

S. 54. When a contract consists of reciprocal Effect ofdefaultasto promises, such that one of them cannot be perpromise which that be firstperform- formed, or that its performance cannot be claimed

the proting ofreciprocalpro misor of the promise last mentioned fails to permisses. form it, such promisor cannot claim the performance of the reciprocal promise, and must make compensation to the other party to the contract for any loss which such other party may Sustain by the non-performance of the contract. ed, in contract consis-

till

the other has been

performed,

an

Illustrations a) A hires B's ship to take in and convey, from Calcutta to the Mauritius, a cargo to be provided by A, B receiving a certain freight for its conveyance. A does not provide any cargo for

the ship. A cannot claim the performance of B's promise, and must make compensation to B for the loss which B sustains by the non-performance of the contract.

b) A contracts with B to execute certain builder's work for a fixed price, B supplying the scaffolding and timber necessary for the work. B refuses to furnish any scaftfolding or timber, and the work cannot be executed. A need not execute the work, and B is bound to make compensation to A for any loss caused to him by the non-performance of the contract.

c) A contracts with B to deliver to him, at a specific price, certain merchandise on b0ard a ship which cannot arrive for a month, andB engages to pay for the merchandise within a week from the date of the contract. B does not pay within the week. A's promise to deliver need not be performed and B must make compensation. (d) A promises B to sell him one hundred bales of merchandise, to be delivered next day, and B promises A to pay for them within a month. A does not deliver according to his promise. B's promise to pay need not be performed, and A must make compensation.

Default of promisor in first

performance.This sectioncompletes the declaration

of the principles explained under Section 51. The words "cannot be performed," "cannot be claimed" and "till the other has been performed" clearly indicate that the performance of the other promise must be a condition precedent. Unless it is a condition precedent, the other promisor cannot refuse to perform his promise. In practice the difficulty is to know whether the promises in a case in hand are or are not "such that one of them cannot be performed," etc. One way in which the test is expressed in English authorities, is that if a

plaintiff has himself broken some duty under the contract and his breach is such that it goes to the whole

of the consideration

for the promise sued upon, it is a bar to his suit;

but if it amounts only to a partial failure of that consideration, it is a matter for compensation by a cross-claim for damages.31 Thus, when the insured failed to pay any premium to the insurer under the insurance contract

this was a total

failure

of consideration

and the insurer was not bound to

compensate in the event of an accident.82 Effect

of failure to

perform at a fixed time,

S. 55. When a party to a contract promises to do a certain

thing at or

before a specified

time, or

intimecontractn which certain things at or before specified times, and fails is essential. to do any such thing at or before the specified time, the contract, or so much of it as has not been performed,

81. 82.

See the observations of the Judicial Committee in Oxford v. Provand, (1868) LR 2 PC 135, 156. National Insurance Co Lid. v. Seema Malhotra, (2001)3 SCC 151, 157: AIR 2001 SC 1197.

Effectof failure to perform at fixed time, in contract

S.5

179

becomes voidable at the option of the promisee, if the intention of the parties was that time should be of the essence of the contract. If it was not the intention of the parties that

Effect of such failure

when time

is

not

time

should be of the essence of the

contract,

the

essential.

contract does not become voidable by the failure to do such thing at or before the specified time; but the promisee is entitled to compensation from the promisor for any loss occasioned to

him by such failure. Effect of acceptance

If, in case of a contract voidable on account

of

ofperformanceat time the promisor's failure to perform his promise at other than that agreed the time agreed, the promisee accepts performance upon. of such promisee at any time other than that

agreed, the promisee cannot claim compensation for any loss occasioned by the non-performance of the promise at the time agreed, unless, at the time of such acceptance, he gives notice to the promisor of his intention to doso.83 Time as essence of contract.- It may be seen that the question whether time is the essence of the contract may arise for consideration either with reference to the contract as a whole or with reference to a particular term or condition of the contract which is breached.84

Failure to perform in

9f1 e ud10j191 time-Where time is of theessenceof a contract, failure to

perform at or before the specified time, entitles the promisee to avoid the contract; if the contract is not avoided, the promisee may accept performance subsequently but in the latter event, the promisee cannot claim compensation unless he has reserved his. right by giving notice at the time of accepting late performance. Where time is not of the essence of the contract, the contract is not voidable although

time of performance has expired, but promisee is entitled to claim compensation from promisor for the loss caused by failure or late performance.

Time-When not ofessenceof contract

At commonlaw in Englandstipulations

as to time were normally regarded as "of the essence" of contracts for sale of land, unless the contract, on its true construction, provided otherwise.36 In England accidental delays in the completion of contracts for the sale of land within the time named are frequent by reason of unexpected difficulties in verifying the seller's title under the very peculiar system of English real property law. Sharp practice would be unduly favoured by strict

enforcement of clauses limiting the time of completion, and accordingly Courts of Equity if not wholly, applied in cases between vendors have introduced a presumption, chiefly, and purchasers of land, that time is not of the essence of the contract. But this presumption will give way to proof of a contrary intention by express words or by the This clearly means that the promisee cannot claim damages for non-performance at the original agreed time, not that he cannot claim damages for non-performance at the extended time"; Muhammad Habib Ullah v. Bird & Co., (1921) LR 48 IA 175, 179. 84. Saradamani Kandappan v. S. Rajalakshmi, (2011) 12 SCC 18 (contract defined specific time for payment of sale price of immovable property but not regarding execution of sale deed, held time of the essence only with reference to former). 85. See General Manager, Northern Raiłway v. Sarvesh Chopra, (2002) 4 SCC 45, 55 : AIR 2002 SC 1272. 86. RightsidePropertiesLid. v. Gray,(1974)2 All ER1169 (1184).e fibeboen ubty owfo

83.

180

55

Chapter 1V-Of thePerformance ofContracts

nature of the transaction. TREITEL states that since land has become an article of commerce and business (to develop quickly for business and industrial purposes) the distinction between "commercial" contracts and contracts for sale of land begins to look

somewhat unrealistic.87 In Jamshed v. Burjoji the Judicial Committee has observed5 that this section does not lay down any principle, as regards contracts to sell land in India, different from those which obtain under the law of England. Specific performance of a contract of that nature will be granted, although there has been a failure to keep the dates assigned by it, if justice can be done between the parties and if nothing in (a) the express stipulations of the parties, (b) the nature of the property, or (c) the surrounding circumstances make it inequitable to grant the relief. In the Privy Council case, the Respondent agreed to sell to Appellant his interest in certain land which he held on lease from the Secretary of State

for India for Rs. 85,000, of which Rs. 4,000 was paid as deposit or earnest money on execution of agreement. It was agreed that title was to be made marketable and Rs. 80,000 should be paid on the execution of the deed of sale which was to be prepared

within two months from the date of agreement of sale. Requisitions on title were made by Appellant (purchaser) but were not complied with by the Respondent (seller) who subsequently claimed, under the terms of the agreement, to put claiming time to be the essence of contract as the purchaser investigation and also to pay the amount of purchase money

an end to the contract failed to complete the within two stipulated months. The purchaser (Appellant) brought a suit for specific performance of agreement. Reversing the appellate judgment of the High Court of Bombay, the Privy Council held that notwithstanding that a specific date is mentioned for the completion of the contract law will look not at the letter but at the substance of the agreement to ascertain the real intention of the parties. Accordingly, the contract did not make time of the essence of the contract and purchaser was entitled to specific performance of the contract, as the parties really intended that their contract should be performed within the reasonable time.

In the Supreme Court case a contract for sale of immovable property in which one of the terms was that the seller would apply for and obtain necessary permission of government to sell within two months. This contract could be specifically enforced even when application was made and withdrawn by the seller as the buyer was ready and willing to perform the contract and court found time not of the essence of the said contract. An intention to make time of the essence of the contract must be expressed in unmistakable language: it may be inferred from the circumstances existing at the time of execution of the contract, or what passed between the parties before, but not after, the

87

THE LAW OF CONTRACT by G.H. TREITEL, 4th edition, p. 569.

88. Jamshed v. Burjorji, (1916) LR 43 IA 26; Mahadeo v. Narain, (1919-20) 24 CWN 330; Sadig Hussain v. Anup Singh, (1923) 4 Lah 327 76 IC 91 : AIR 1924 Lah 151: 761C 91 (DB); Raghbir Das v. Sunder Lal, (1930) 11 Lah 699: 131 1C 371:(31) Al 205. 89. Chandnee Widya v. Dr. C.L. Katyal, AIR 1964 SC 978:(1964) 2 SCR 495. 90. Kishen Prasad v. Kunj Behari Lal, (1925) 24 All LJ 210:91 IC 790: AIR 1926 All 278; Burn &

Co, Ltd v. ThakurSahib of Morvi State,(1925) 30 CWN 145:90 IC 52 AIR 1925PC.188: Shambhulal v. Secretary of State, (1940) 189 IC 785: AIR 1940 Sind 1; Chand Rani v. Kamal Rani, (1993) 1 SCC 519, 528: AIR 1993 SC 1742. (contract requirement payment "within a period of ten days only', time held of the essence); AK Lakshmipathy v. Rai Saheb Pannalal, (2010) 1 SCC 287, 295:AIR 2010 SC 577 (contract expressly stating time to be of essence and requiring payment on or before particular date); Citadel Fine Pharmaceuticals v. Ramaniyam Real Estates, (2011)9 SCC 147, 158 (contract expressly providing time of essence and also for termination and return of

22earnest money upondelay). 91.

Coromandel Indag Products v. Garuda Chit & Trading Co., (2011) 8 SCC 601, 606 (agreement showed vendor needed money and sale was for immediate need).

Efect of failure to perform at fixed time, in contract

S. 55

181

contract is made.' If the contract provides for extension of time or payment of a fine or penalty in the event of delay, time is generally- not of essence of the contract,° and this is so even if the contract expressly states time to be of the essence. The rule established sinceJanmshedv. Burjoji that time is presumed not to be of the essence in contracts involving sale of immovable property, has been subsequently criticised by the Supreme Court in KS Vidyanadam. It was noted that this rule causes injustice especially in contracts relating to urban immovable properties where the sharp rise in prices cannot be adequately reflected

in (and hence compensated by) contractual damages. These observations mark the first indication that Indian law is moving

towards treating contracts for sale of immovable property on the same basis as other commercial contracts. For the present though the presumption still continues,° however, its operation is tempered to the extent that even if time is not of the essence, the contract must still be performed within a reasonable period of time,' otherwise it may be treated as abandoned.3

An option to repurchase (being an exceptional or concessional provision Seller's benefit) must be exercised strictly within the time limit.° Renewal of

for the a lease

is a privilege and must be claimed within the time limited for that purpose. When goods are to be delivered 'as soon as possible" time in the sense of a definite date line

was not the essence of contract. When by the terms shipment due to force majeure or due to causes beyond purchaser agreed to accept a late shipment or late objection, purchaser cannot subsequently by unilateral

of contract if there were late the control of the supplier, the supply of the goods without action make time the essence

of contract.

1.

3.

Claude-Lila Parulekar v. Sakal Papers (P) LId, (2005) 11 SCC 73, 97: AIR 2005 SC 4074 (where time not fixed in contract, subsequent unilateral notice cannot make time as essence). Subsequent conduct otf the parties can however make time of theessence if there is an "unmistakable" intention to do so. See notes later under S. 35 "Time-when of essence of contract" Narinder Kumar Malik v. Surinder Kumar Malik, (2009) 8 SCC 743, 748 (time as essence even where this was extendable by ten days with the consent of both parties). McDermott Intermational Inc v. Burn Standard Co Ltd, (2006) 11 SCC 181, 217; Rathnavathi v. Kavita Ganashamdas, (2015) 5 SCC 223, 240.

4. Arosan Enterprises Lid. v. Union of India, (1999)9 SCC 449, 462: AIR 1999 SC 3804; Swarnam Ramachandran v. Aravacode Chakungal Jayapalan, (2004) 8 SCC 689, 695; Balasaheb Dayandeo Naik v. Appasaheb Dattatraya Pawar, (2008) 4 SCC 464, 470: AIR 2008 SC 1205. 5.

KS Vidyanadam v. Vairavan, (1997) 3 SCC 1,9: AIR 1997 SC 1751 followed and re-iterated in

Saradamani Kandappan v. S. Rajalakshmi, (2011) 12 SCC 18; Citadel Fine Pharmaceuticals v. Ramaniyam Real Estates, (2011)9 SCC 147, 160. 6. See Swarnam Ramachandran v. Aravacode Chakungal Jayapalan, (2004) 8 SCC 689, 695; Balasaheb Dayandeo Naik v. Appasaheb Dattatraya Pawar, (2008) 4 SCC 464, 470 : AIR 2008 SC 1205 (distinguishing KS Vidyanadam as being specific_to urban immovable property); A.K. Lakshmipathy v. Rai Saheb Pannalal H. Lahoti Charitable Trust, (2010) 1 SCC 287, 294 (time held to be of essence as a matter of fact despite no such presumption in case of contracts for sale of

immovable properties). 7.

Chand Rani v. Kamal Rani, (1993) 1 SCC 519, 528: AIR 1993 SC 1742.

8.

Arosan Enterprises Ltd. v. Union of India, (1999) 9 SCC 449, 462: AIR 1999 SC 3804. Samarapuri Chhetiar v. Sudarsana Chariar, (1919) 42 Mad 802; Maung Wala v. Maung Sluve Gon, (1923) 1 Rang 472 82 IC 610 : AlR 1924 Rang 57 (DB); Protap Chandra v. Kali Charan, AIR 1952 Cal 32: 55 CWN 557; Krishna v. Ramgulam, AIR 198 MP 298 : 1958 MPLJ 121 (DB);

9.

Hasan Nurani Malik v. MohanSingh, (1974) Mh LJ 120: AIR 1974 Bom 136(reconveyance); Bismillah

Begum v.

Rahmatullah

Khan, (1998) 2 SCC 226, 228 : AIR 1998 SC 970 (reconveyance);

Raj Kishore v. Prem Singh, (2011)1 SCC 657, 665 (reconveyance). 10. Caltex (Andia) Ltd v. Bhagwandevi, AIR 1969 SC 405, 407:(1969) 2 SCR 238. 11. V.R. Mohankrishnan v. Chimanlal & Co., AlR 1960 Mad 452, 454.

182

S. 55

Chapter 1V-0f thePerformance ofContracts

In a contract for sale of goods, stipulations as to time for payment of price are not deemed to be of essence of such a contract unless a different intention appears from the

terms of such a contract.2 Time-when of essence of contract. There is no place, however, in mercantile contracts (including mercantile contracts for sale of immovable property)" for the presumption that time is not of the essence of the contract.

This is especially so as to

shipping contracts. In a contract for sale of goods, time for delivery is of essence of such contract or a contract. Whether any other stipulation as to time is of the essence of the not depends on the terms of the contract. Generally it is to be observed that in modern business documents men of business are taken to mean exactly what they say. "Merchants are not in the habit of placing upon their contracts stipulations to which they do not attach some value and importance."Io Defendant agreed to deliver his elephant to plaintiff for Kheda operations (to capture wild elephants) on Ist October and he subsequently obtained an extension of the time till 6th October but did not deliver the elephant, till 11th October. It was held that the very circumstance that the defendant asked for extension of the time showed that time was intended to be of the essence of the contract and plaintiff was justified in refusing to accept the elephant on 11 October and was entitled to damages for the breach of contract. Parties to mercantile contracts, therefore, cannot rely upon the present section to save them from the consequences of

unpunctuality. If time is fixed by the contract, but is not originally of the essence, a party can subsequently make time of the essence by displaying an "unmistakable" intention to do so.8 Thus, where subsequent to an initial contract which envisaged extension of time, a supplementary contract was entered into by the parties which granted a "final extension and categorically excluded any further extension, it was held that time became of the essence upon grant of the final extension. of market price, the time On a sale of goods notoriously subject to rapid fluctuations of delivery is of the essence. So in an agreement to exhibit a cinema picture time is of the essence.

Performance in reasonable time.-Either party's general right to have the contract performed within a reasonable time according to the circumstances is, of course, unaffected by the fact of time not being of the essence; and in case of unnecessary delay by one party the other may give him notice fixing a reasonable time after the expiration of which he will treat the contract as at an end. In determining the reasonableness of time 12. 13.

See Section 11 of Indian Sale of Goods Act. Citadel Fine Pharmaceuticals v. Ramaniyam Real Estates, (2011)9 SCC 147, 159.

14.

Reuter v. Sala, (1879) 4 CP Div. 239, 249, per COTTON, L.J.; Mercantile transactions are transactions in the course of business. Lucknow Automobiles v. Replacement Parts Co., (1940) 190 IC 554 : AIR 1940 Oudh 443; Mahabir Rungta v. Durga Datta, AlR 1961 SC 990: (1961) 1 SCJ S69. Reuterv, Sala, 4 CPD 239; Hurnandrai v. Pragdas, 50 IA 9. LORD CAIRNS in Bowes v. Shand, (1877) 2 App Ca at p. 463.

15. 16.

17. Bhudar Chandra v. Betts, (1915) 22 Cal L 566; See also Colles Cranes of India Ltd. v.Speedeo Spares Corp, AIR 1970 Cal 321. 18.

National Coop Sugar Mils Lid. v. Albert & Co, AIR 1981 Mad 172 (DB).

19. RB Jodhamal v. State, 2005 (1) Arb LR 534, 553 (J&K);, Bharat Sanchar Nigam Ltd. v. BWL LId, 2009 (2) Arb LR 638, 643-648 (Del). 20. 21. 22.

Balaram, Paramsukdass, Firm v. Govinda Chetty. (1925) 49 Mad LJ 200: 91 IC 257: AIR 1925 Mad 1232. Sreedhara v. Thanumalayan, AIR 1953 TC 90, 94. Stickney v. Kaeble, (1915) AC 386; Steedman v. Drinkle, (1916) AC 275 (JC); Muhammad Habid Ulah v. Bird & Co., (1921) 48 TA 175:43 All 257.

S. 56

Agreement to do impossible act

183

so limited (in the notice), the court will consider not merely what remains to be done at the date of the notice but all the circumstances of the case, including the delay of the vendor, attitude of the purchaser and necessity of early completion and where there has been inordinate delay on both sides, it may be inferred that the contract has been abandoned, although no such notice has been given.25 Agreement

to

do

impossible act.

S. 56. An agreement to do an act

impossible in

itself is void.

after the conA contract to do an act which, C o n t ra c t afterwards to do act tract is made, becomes impossible, or, by reason or impossibleorunlawful. Some event which the promisor could not prevent, unlawful, becomes void when the act becomes

impossible or unlawful. Where one person has

promised to do some

Compensatiotnoross thing, which he knew, or with reasonable diligence, tmharonucgehof act known to

might

beimpossibleor unlaw.

not know, to be impossible or unlawful, such promisor must make compensation t such pror e

ful

have

known,

and which

the

promisee

did

for any loss which such promisee sustains through the non-performance of the promise.24 llustrations (a) A agrees with B to discover treasure by magic. The agreement is void. (6) A and B contract to marry each other. Before the time fixed for the marriage, A goes mad. The contract becomes void.

(c) A contracts to marry B, being already married to C, and being forbidden by the law to which he is subject to practise polygamy. A must make compensation to B for the loss caused to her by the non-performance of his promise. (d) A contracts to take in cargo for B at a foreign port. A's Govenment afterwards declares war against the country in which the port is situated. The contract becomes void when war is declared. (e) A contracts to act at a theatre for six months in consideration of a sum paid in advance by B. On several occasions A is to0 ill to act. The contract to act on those occasions becomes void.

Impossibility in general.-This section varies the Common Law to a large extent, and moreover the Act lays down positive rules of law on questions which English Courts have of late more and more tended to regard as matters of construction depending on the true intention of the parties. English authorities, therefore, can be of very little use as guides to the literal application of this section. In India, the law dealing with frustration must primarily be looked at as contained in Sections 32 and 56 of the Contract Act.26 The rule in Section 56 exhaustively deals with the doctrine of frustration of contracts and it cannot be extended by analogies borrowed from the English Common law.2 The court 23. 24.

Pearl Mill Co. v. Ivy Tannerty Co., (1919) 1 KB 78.

25. 26.

The section does not, of course, enable a party to take advantage of impossibility caused by his own default: Benarasi Prasad v. Mohiuddin Ahmad, (1924) 3 Pat 581: 78 IC 723 : AIR 1924 Pat 586. Satyabrata v. Mugneeram, AIR 1954 SC 44: 1954 SCR 310. Ganga Saran v. F. Ram Charan Ram Gopal, (1952) SCR 36 at 42: AIR 1952 SC 9 at 11; Naihati

27.

Jute Mills Ltd. v. Khyaliram, AIR 1968 SC 522 at 526: (1968) 1 SCR 821. Raja Dhruv Dev Chand v. Raja Harmohinder Singh, AIR 1968 SC 1024

(1968) 3 SCR 339; contra Parshotam Das Shankar Das v. Mumicipal Committee, Batala, (1949) A EP 301, overruled on this point.

184

S. 56

can give relief purpose or the expected event the date of the

Chapter 1IV-0f thePerformance ofContracts on the ground of subsequent impossibility when it finds that the whole basis of the contract was frustrated by the intrusion or occurrence of an or change of circumstances which was not contemplated by the parties at contract.25 When such an event or change of circumstances which is so

fundamental as to be regarded by law as striking at the root of the contract as a whole occurs, it is the court which can pronounce the contract to be frustrated and at an end. This is really a positive rule enacted in Section 56 of the Act.29

Impossible in

itself.-With regard to the first paragraph, we may say that parties

who purport to agree to the doing of something obviously impossible must be deemed not to be serious or not to understand what they are doing, also that the law cannot regard a promise to do something obviously impossible as of any value, and such a promise is therefore no consideration. "Impossible in itself seems to mean impossible in the nature of things. The case of performance being at the date of the agreement, impossible by reason of the non-existence of the subject-matter of the contract has been dealt with under the head of Mistake (S. 20). Subsequent impossibility or unlawfulness.-The second paragraph has the effect of turning limited exceptions into a general rule. By the Common Law a man who promises without qualifications is bound by the terms of his promise if he is bound at all. If the parties do not mean their agreement to be unconditional, it is for them to qualify it by such conditions as they think fit. But a condition need not always be expressed in words; there are conditions which may be implied from the nature of the transaction; and in certain cases where an event making performance impossible "is of such a character that it cannot reasonably be supposed to have been in the contemplation of the contracting parties when the contract was made">0performance or further performance of the promise, as the case may be, is excused. On this principle a promise is discharged if without the promisor's fault, (1) performance is rendered impossible by law;31 (2) a specific subject-matter assumed by the parties to exist or continue in existence is accidentally destroyed or fails to be produced, or an event or state of things assunmed as the foun-

dation of the contract does not happen or fails to exist, although performance of the contract according to its terms may be literally possible; (3) the promise was to perform something in person, and the promisor dies or is disabled by sickness or misadventure.4

This clause contemplates a supervening impossibility or illegality.35 This clause contemplates a frustration of a contract by intrusion or occurrence of an unexpected event or a change of circumstances beyond the contemplation of parties. Such event or change 28.

Naihati Jute Mills Ltd v. Khyaliram AIR 1968 SC s22 at 527:(1968) 1 SCR 821; Satyabrata

29.

Ghose v. Mugneeram, AIR 1954 SC 44 at 48: 1954 SCR 310. Naihati Jute Mills Ltd. v. Khyaliram, AIR 1968 522 at 527: (1968) 1 SCR 821.

30.

Baily v. De Crespigny, (1869) LR 4 QB at p. 185: (a case of compulsory acquisition); Taylor v. Caldwell (destruction of Surrey Music Hall due to fire). MD, Army Welfare Housing Organisation v. Sumangal Services (P) Lid, (2004) 9 SCC 619, 63 : AlR 2004 SC 1344 (statutory stop-work

notice). Baily v. De Crespigy, (1869) LR 4 QB at p. 185; (a case of compulsory acquisition); Taylor v. Caldwell (destruction of Surrey Music Hall due to fire). 32. Taylor v. Caldwell, (1863) 3 B&S 826; Howell v. Coupland, (1876) 1 QB Div. 258; Kimjilal Monohardas v. Durgaprasad Debiprasad, (1919-20) 24 CWN 703; Gurdit Singh v. Secretary of

31.

33.

State, (1931) 130 IC 772: AIR 1931 Lah 347. Krell v. Henry, (1903) 2 KB 740 CA; Blackburn Bobin Co. v. T.W. Allen & Sons, (1918) 2 KB 467

CA. 34. 35. hst

Robinson v. Davison, (1871) LR 6 Ex. 269. Satyabrata Ghose v. Mugneeram Bangur, 1954 SCR 310 : AIR 1954 SC 44; Suramma v. Sitaramaswamy, AIR (1957) AP 71; Sushila Devi v. Harisingh, AIR 1971 SC 1756: (1971) 2 SCC 288 (India/Pakistan Partition).

Agreement to do impossible act must be so fundamental as to be

185

S. 56

regarded by law as striking at the root of contract as a

whole,30 or must mean that the basis of the contract no longer exists. The court will not easily recognise an impossibility of performance" and, in order to do so, may rely upon the belief, knowledge and intention of the parties as pieces of evidence only. Having regard to the unqualified language of the Act, it seems useless to enter at more length on the distinctions observed in English law. The illustrations do not indeed, appear to go beyond English authority, but this cannot detract from the generality of the enacting words. H agreed to hire the use of K's rooms in London on the days of 26th and 27th June 1902, for the purpose of seeing the intended coronation processions. By reason of the King's illness no procession took place on either of those days. It was held that K could not recover the balance of the agreed rent, as the taking place of the processions "was regarded by both contracting parties as the foundation of the contract."9 In India such a case would, perhaps, fall more appropriately under Section 32. In a House of Lords case it has been held that in such a case if payment is made in advance the person making the payment would be entitled to a refund.4

Stoppage of work by strike.

A strike oftheworkmenemployedin executing

work under a contract does not of itself make performance impossible for the purpose of this section.41 Frustration by total or partial prohibition.-In astate of war many contracts are affected by performance or further performance becoming wholly or in part unlawful. This may be under the general rules against intercourse with the enemy, or may be the result of express executive orders issued under powers of emergency legislation. In principle the question is the same that we have noted above, whether the new state of things is such as the parties provided for or contemplated, and whether further performance, so far as the prohibition is not total, or when it is removed, would really be performance of the same contract. Where time is not of the essence of the contract and the suspension owing to military requirements is temporary, the contract is not frustrated. Compulsory suspension of an engineering contract on a large scale, in order to direct the labour to producing munitions of war, was held to discharge the contracts.** So, too, a contract to deliver goods may be frustrated by emergency regulations restricting transport** or export. But a continuing contract is not discharged by a prohibitive regulation which may be determined or varied during the war and leaves a

substantial part of the contractcapable ofexecution.o

36.

Satyabrata Ghose v. Mugneeram Bangur, 1954 SCR 310 : AIR 1954 SC 44; Suramma v.

Sitaramaswamy, AIR 1957 AP 71; Sushila Devi v. Harisingh, AIR 1971 SC 1756 (1971) 2 SCC 288 (India/Pakistan Partition). 37. British Movietonews Ltd. v. London and District Cinemas Ltd., (1962) AC 166. 38. Industrial Finance Corpn of India Ltd. v. Cannanore Spinning & Weaving Mils Ltd., (2002) 5 SCC 54, 78 : AIR 2002 SC 1841 (contract of guarantee between surety and creditor not frustrated where

assets of principal debtor nationalised). 39. Krellv. Henry. (1903) 2 KB 740. 40. Fibrosa Sholka Akeyjna v. Fairbairn Lawson, (1943) AC 32, overruling Chandler v. Webster, (1904) 1 KB 493.

41. 42. 43. 44. 45. 46.

Hari Laxman v. Secretary of State, (1927) 52 Bom 142:30 Bom LR 49: 108 IC 19: AIR 1928 Bom 61; Rampratap Mahadeo v. Sasansa Sugar Works Lid., AlR 1964 Pat 250. Mugneeram & Co. v. Gurbachan Singh, AIR 1965 SC 1523:(1965) 2 SCR 630. Metropolitan Water Board v. Dick Kerr & Co., (1918) AC 119.

Sannidhi Gundayya v. Subbayya, (1926) 51 Mad LJ 663 :99 1C 459: AIR 1927 Mad 89;Ramayya v. Firm of M.S. Shaik Saib, AIR 1958 AP 576: 1958 Andh LT 163. Durga Devi Bhagat Smt. v. J.B. Advani & Co. Ltd., 76 CWN 528.

Leiston Gas Co. v. Leiston-cum-SizewellUrban Council, (1916)2 KB 428

AC.5poi)

ozls

186

S. 56

Chapter IV-0f thePerformanceofContracts

Frustration does not apply to:

(1)

a lease because it is completed conveyance or transfer of interest in the land.47 By express terms ofS. 56 of the Act, frustration cannot apply to cases in which there is a completed

transfer.48 Lease is not a mere contract. Where the

property leased is not destroyed or rendered substantially and permanently unfit49 the lessee cannot avoid the lease because he does not or is unable to use the land for purposes for which it is let to him. Rights of parties do not, after the lease is granted, rest in contract. Section 4 of the Transfer of Property Act does not enact that the provisions of the contract Act are to be read into the Transfer of Property Act.50 It may be that para two of this section may apply to performance of a covenant in a lease. A covenant under a lease to do an act, which after the contract is made, becomes impossible or unlawful. But on that account the transfer of property resulting from the lease is not declared void;51 (2)

titug9 (3)

an arbitration clause in a contract is not affected by the frustration of the con-

tract;°4 If the impossibility is brought about by an act of a party to the contract or it is

self induced.33

"Becomes impossible"-The Indian decisions merely illustrate what amounts to supervening impossibility or illegality within the meaning of the second paragraph.

nIn a suit fordamages for breach of a contractagainst a Hindu father to give his minor daughter in marriage to the plaintiff, it was held that the performance of the contract had not become impossible simply because the girl had declared her unwillingness to marry the plaintiff, and the defendant had declared that he could not compel her to change her mind.* Ifa man chooses to answer for the voluntary act of a third person, and does not in terms limit his obligation to using his best endeavors, or the like, there is no reason in law or justice why he should not be held to warrant his ability to procure

that act. An agreement to sell a specified quantity of dhotis to be manufactured at a particular mill "to be taken delivery of as and when the same may be received from mills," cannot be read as meaning "If and when," especially when a time is named for the completion of delivery; and the failure of the mills to produce the goods is no excuse. The doctrine of frustration does not extend to the case of a third person on whose work the defendant relied preferring to work for someone else during the material time. An agreement to sell Penang tin is not frustrated because Penang has been occupied 47.

48. 49. 50.

Raja Dhruv Dev v. Raja Harmohinder Singh, AIR 1968 SC 1024 Retreat & Towers Lid. v. State of Rajasthan, (2003) 12 SCC 91, 106. Raja Dhruv Dev v. Raja Harmohinder Singh, AIR 1968 SC 1024 Retreat & Towers Ltd. v. State of Rajasthan, (2003) 12 SCC 91, 106. See S. 108, Transfer of Property Act, 1882.

(1968) 3 SCR 339; Ganga

(1968) 3 SCR 339; Ganga

Raja Dhruv Dev v. Raja Harmohinder Singh, AIR 1968 SC 1024 (1968) 3 SCR 339; Ganga Retreat & Towers Ltd. v. State of Rajasthan, (2003) 12 SCC 91, 106. 51. Raja Dhruv Dev v. Raja Harmohinder Singh, AIR 1968 SC 1024 (1968) 3 SCR 339; Ganga Retreat & Towers Lid. v. State of Rajasthan, (2003) 12 SCC 91, 106. 52. Union Bank of India v. Kishorilal, (1960) 1 SCR 493 (514): AIR 1959 SC 1362 (1371). (1969) 1 SCR 65; MD, Army 53. Bootalinga Agencies v. Poriaswami Nadar, AIR 1969 SC 110: Welfare Housing Organisation v. SumangalServices (P) Lid, (2004) 9 SCC 619, 664: AIR 2004 SC 1344 (onus of proving that frustration was self-induced rests upon the party raising this allegation). 54. Purshotamdas Tribhovandas v. Purshotamdas Mangaldas, (1896) 21 Bom 23. 55. Hurnandrai Fulchand v. Pragdas Budhsen, (1922) 50 IA 9, 47 Bom: 344 AIR 1923 PC 54; see also Ganga Saran v. Ram Charan, Ram Gopal, AIR 1952 SC 9 : 1952 SCR 36.

Agreement to do impossible act

S. 56

187

by enemy action, unless it is an express or implied term of the contract that the goods were to be consigned from Penang. The impossibility of performance must be in

respect of a term of the contract.o

Imposition by the Government of restrictions on

export to Great Britain and

hence refusal to issue export licence, were treated as a commercial Calcutta High Court.57

impossibility by the

If one of the modes ofperformance hasbecome impossible or unlawful, and the contract can be performed in other ways, the contract is not frustrated.8

Commercial impossibility.-The impossibility referred to in the second clause of this section does not include what is called commercial impossibility. A contract, therefore, to supply freight cannot be said to become impossible within the meaning of the clause merely because the freight could not be procured except at an exorbitant price;

or by mere economic unprofitableness, building cost becoming costlier.2

or the performance more

onerous,l

e.g.

"Becomes unlawful"By a contract madewith the plaintiff the defendants agreed to carry from Bombay to Jedda in their steamer 500 pilgrims who were about to arrive in Bombay to Singapore in the plaintiffs' ship. The pilgrims arrived in Bombay, but the defendants refused to receive them on board their steamer on the ground that during the voyage of the plaintiffs' ship to Bombay there had been an outbreak of smallpox on

board and that the pilgrims had been in close contact with those who had been suffering from the disease, and that the performance of the contract had under the cir-

cumstances become unlawful, Indian Penal Code, 1860. That ligently does any act which likely to spread the infection

having regard to the provisions of Section 269 of the section provides that whoever unlawfully and negis, or which he knows or has reason to believe to be, of any disease dangerous to life, shall be punished with

imprisonment. It was held that the carrying of the pilgrims in thedefendants steamer would not have been in contravention of any law or regulation having the force of law, and that if special precautions were necessary to prevent infection it was the duty of the defendants to take those precautions and to perform the contract.s

Certain statutory enactments define the effect of the present section. The Transfer of Property Act, 1882, Section 108, provides as to property let on lease, that if by fire, tempest, or flood, or violence of an army or ofa mob, or other irresistible force, any material part of the property be wholly destroyed or rendered substantially and permanently unfit for the purposes for which it was let, the lease shall, at the option of the lessee, be void. The doctrine of frustration does apply to mere agreement of lease, where no interest in the property leased passes. In Satyabrata v. Mugneeram, it was decided that the doctrine of frustration applies to a contract to sell land, as in mere contract to sell land does not create any estate in the buyer.

S6. Pragdas v. Jeewanlal, (1949) S1 Bom LR 178: AIR 1948 PC 217.

$7. PragdasvJ.eewanla(l,1949)51BomLR178:AR1948PC217. 58.

India unlike England a

o

Lolt

t,

19in

T.W.1. Co. v. Uganda Sugar Factory, AlR 1945 PC 144.

59. Karl Ettlinger v. Chagandas, (1916) 40 Bom 301, 310, 311. 60. Sri Amuruvi Perumal v. K.R.P. Pillai, (1962) Mad 252: AIR 1962 Mad 132. 1960 AIR SC 589; Travane ore 61. Alopi Parshad v. Union of India, (1960) 2 SCR 793 (807) Devaswom Board v. Thanath International, (2004) 13 SCC 44, 48 (escalation of price of raw material on account of Gulf War and Ram Janmabhoomi agitation). Davis Contractors v. Fareham U.D.C., (1956) 1 QB 302:(1956) 2 All ER 145. 62. Bombay and Persia Steam Navigation Co. Lid. v. Rubattino Co. Ltd., (1889) 14 Bom 147. 63. 64. Satyabrata v. Mugneeram, AlR (1954) SC 44, 49.

188

Chapter IV-of thePerformance ofContracts

S. 56

Frustration of contracts Re: Personalcontracts By death of the party or by permanent incapacity of the party e.g. madness.

Re: Other contracts(1)

Impossible in itself.

(2) Supervening impossibility or illegality, involving actions contrary to law or

public policy. (3) Outbreak of war, war restrictions, illegal to trade with enemy ete.

4)

Destruction of subject-matter by fire, explosion, spoilage of dates by water and sewage due to sinking of ship.

(5) Happening of event which rendered the contract impossible of performance but would not include hard and difficult cases of abnormal rise or fall or price,

depreciation of currency, closure of Suez Canal involving longer route and journey involving more freight and delay. (6) Unavailability due to lawful seizure, requisition, detention of chartered ship running aground. (7)

Imposition of Government restrictions or orders.

No frustration of contracts (1)

if events are, could be foreseen or provided for or might have been anticipated or guarded against. This is subject to supervenial illegality.

(2)

Failure to unload goods due to strike.

(3)

Self induced frustration i.e. frustration due to his own conduct or to the conduct of those for whom he is responsible or by party's deliberate or negligent act or election.

(4)

Abnormal rise, or fall, in price or depreciation of currency, performance becoming more onerous or costly.

Effects of

frustration.-As stated on the first twoparas of the section, the contract

becomes void, that is to say it determines and is not enforceable with regard to the rights not yet accrued. With regard to the rights already accrued, see the provisions of Section 65 and the two paras hereunder. Refund.Where

a contract, after it is made, becomes impossible, the party who has

received any advantage under it is bound to restore it to the other party under Section 65 below. A buys a freight from B for Rs. 2,500 bales of cotton on a ship belonging to B to be carried from Bombay to Genoa. The freight is paid in advance and the goods are put on board the ship. While the ship is still lying in the harbour, the export of cotton to Genoa is prohibited by orders of the Government, and the voyage is abandoned. A is Similarly, entitled under Section 65 to recover from B the freight paid in advance.0 where a contract becomes unlawful owing to the outbreak of war, either party is from the other any deposit made by him as a entitled under Section 65 to recover

security for the due performance of the contract.00 And where tonga stands were leased by the Municipality to A, and the tongawallas refused to use those stands, the contract of

65.

Boggiano & Co. v. The Arab Steamers Co. Ltd., (1916) 40 Bom 526; followed in Gandha Korliah v. Janoo Hassan, (1925) 49 Mad 200:91 1C 780: AIR 1926 Mad l175. 66. Textile Manfg. Co. Ltd. v. Solomon Brothers, (1916) 40 Bom 570.

S. 58

Alternative promise, one branch being illegal

189

lease was frustrated and A was held entitled to the refund of moneys paid to the Municipality.° Appellant had taken on lease an area of land in mountgomery district. Due to partition of India, he had to migrate from West Punjab. He claimed a refund of rent on the ground that consideration for the lease has failed. It was held that S. 56 of the

Contract Act is not applicable to lease. Inability of appellant to cultivate the land or to collect the crops because of widespread riot cannot clothe him with the right to claim refund of the rent paid.68 The contract for sale of coal by the railways being not in the prescribed manner under Section 175 of the Government of India Act, the purchaser was entitled to refund of the amount paid as deposit.69

Innocent Promisee entitled to Compensation.-The third para of this section IS an exception

to the doctrine of frustration.

Although a promisor had known that his

promise was impossible or unlawful, but the promisee did not know it to be impossible or unlawful, the promisee is entitled to claim compensation. Reciprocal promise to

S. 57. Where persons

dothingslega,andalso firstly to do other things illegal.

reciprocally

promise,

certain things which are legal, and,

secondly, under specified circumstances, to do certain other things which are illegal, the first set of

promises is a contract, but the second is a void agreement. llustration A and B agree that A shall sell B a house for 10,000 rupees, but that if B uses it as a gambling house, he shall pay A 50,000 rupees for it. The first set of reciprocal promises, namely to sell the house and to pay 10,000 rupees for it, is a contract. The second set is for an unlawful house, and is a void agreement.

object, namely, that B may use the house as a gambling

Scope of the section.-This section applies to cases where the two sets of promises are severable and distinct. When the void part of an agreement can be properly separated from the rest, the latter does not become invalid, but when the parties themselves treat transactions, void as well as valid, as an integral whole, the Court also will

regard them as inseparable, and wholly void.0 Alternative

promise,

one branch being illegal.

S. 58. In the case of an alternative promise, ne Branch or which is legal and the other illegal, the legal branch alone can be enforced. lllustration

A and B agree that A shall pay B 1,000 rupees, for which B shall afterwards deliver to A either

rice or smuggled opium. This is a valid contract to deliver rice, and a void agreement as to the opium.

67.

Parshotam Das v. Batala Municipality, AIR 1949 EP 301:(1949) 51 Pun LR 44 DB.

68. Raja Dhruv Dev Chand v. Raja Harmohinder Singh, AlR 1968 SC 1024: (1968) 3 SCR 339. 69. Har Prasad Cheubey v. Union of India, AIR 1973 SC 2380 : (1973) 2 SCC 746. 70. Davlatsing v. Pandu, (1884) 9 Bom 176; see also Poonoo Bibee v. Fyez Buksh, (1874) 15 BLR

APp

.

190

Chapter 1V-0f thePerformance ofContracts

S. 59

Appropriation ofPayments Application of payment where debt to be discharged is indicated.

S. 59. Where a debtor, debts

to

one

person,

owing several

makes

a

payment

distinct to

him,

either with express intimation, or under circumstances implying that the payment is to be applied

to the discharge of some particular debt, the payment, if accepted, must be applied accordingly. lhustrations (a) A owes B, among other debts, 1,000 rupees upon a promissory

note, which

falls due on the

Ist June. He owes B no other debt of that amount. On the first June, A pays to B 1,000 rupees. The payment is to be applied to the discharge of the promissory note. (b) A owes to B, among other debts, the sum of 567 rupees. B writes to A and demands payment of this sum. A sends to B 567 rupees. This payment is to be applied to the discharge of the

debt of which B had demandedpayment

Appropriation of payments.-In England "it has been considered a general rule that when a debtor makes a payment he may appropriate it to any since Clayton 's case debt he pleases, and the creditor must apply it accordingly.2 Debt.-Where money is paid by a debtor to his creditor with express intimation that the payment is to be applied to the discharge of some particular debt, and it is received and appropriated on that account, it is not in the power of the creditor, without the assent

of the debtor, to vary the effect of the transaction by altering the appropriation in which both the debtor and the creditor originally concurred. The same rule applies to payment of Government revenue.4 The express intimation must be at the time of payment, and not subsequently. If debtor has not intimated at the time of payment, creditor is entitled to appropriate it to the debt first in time." Several distinct

debts.-This section deals only with the case of several distinct

debts, and does not apply where there is only one debt, though payable by instalments. Interest is not a debt distinct from the principal." Thus, where the amount of a decree was by consent made payable by five annual instalments, it was held that the decreeholder was not bound to appropriate the payments to the specific instalments named by the judgment-debtor.78 This section (and also Ss. 60 and 61) are not applicable where the debt has merged in a decree, since the applicable rule then would be what is provided in the decree itself or the general rule for execution of money decrees. 79

71. 72.

Clayton's case, (1816) 1 Mer at p 608. Per BLACKBURN J., City Discount Co. v. Mclean, (1874) LR 9 CP 692, 700.

73. Foster v. Chety, (1924) 2 Rang 204: 82 IC 660: AIR 1925 Rang 4. 74. Mahomed Jan v. Ganga Bishun Singh, (1910) 38 Cal 537 38 IA 80. 75. Chhangur Sahu v. Ratan Sugar Mills Ltd., (1958) All LJ 311. 76. Relu Mal v. Ahmad, AIR 1926 Lah 183, vide Section 60.

77.

Bansi Lal v. Sant Ram, AIR 1965 Punj 375; Cory Bros. & Co. v. The Mecca, (1897) AC 286 (294); Industrial Credit & Development Syndicate v. Smithaben H Patel, (1999) 3 SCC 80, 86: AIR 1999 SC 1036; Gurpreet Singh v. Union of India, (2006) 8 SCC 457, 467. 78. Fazal Husain v. Jiwan Ali, (1906) All WN 135; followed in Harikisondas v. Nariman, (1927) 29 Bom LR 950: 104 IC 673 : AIR 1927 Bom 479.

79.

Industrial Credit & Development Syndicate v. Smithaben H Patel, (1999) 3 SCC 80, 87: AIR 1999 SC 1036; Gurpreet Singh v. Union of India, (2006) 8 SCC 457, 471.

Application ofpayment where debt to be discharged is not indicated

Application of

pay-

mentwhere debt to be

dischargedis not indie cated.

.60

191

S. 60. Where the debtor has omitted to intimate, and there are no other circumstances

indicating

to which

debt the

payment is to be

applied, the creditor may apply it at his discretion to any lawful debt actually due and payable to him from the debtor, whether its recovery is or is not barred by the law in force for the time being as to the limitation of suits. Creditor's right to

appropriate.-If

the debtordoes not make any appropriation

at the time when he makes the payment, the right of application devolves on the creditor," and he may exercise that right until the very last moment, and need not declare his intention in express terms;30 he may, indeed, exercise that right even when he is being examined at the trial of the case.s There were conflicting decisions in India on the question as to the time when the creditor may elect to appropriate. The point has now been concluded by a decision of the Privy Council, in which after referring to provisions of rule as that laid down in English law Section 60 their Lordships said: "This is the same by the House of Lords in Cory & Bros. & Co. v. The Mecca3s and under it the creditor has a right to appropriate a payment by the debtor to the principal or to the interest of the same debt. There is no obligation upon the creditor to make the appropriation at once though when once he has made an appropriation and communicated it to the debtor he

would have no right to appropriate it otherwise. Lord MACNAGHTEN'slanguage in that case is equally applicable under Sections 60 and 6l of the Contract Act. Where the election is with the creditor, it is always his intention express or implied or presumed and not any rigid rule of law that governs the application of the money." But the creditor may do nothing at all, in which case a rule is necessary for the guidance of the Courts, and Section 61 provides such a rule. The rule laid down in Section 61 is in conformity with the English law.

Contract of

guarantee.-A surety is bound by the creditor's appropriation.34

Principal and interest.-Where there is a debt carrying interest, money paid and received without any definite appropriation is to be first applied in payment of interest.

f the debtorappropriates a payment to principal, the creditor need not acceptpayment on those terms, but ifhe does not he must return the money; if he doesaccept he is bound by the appropriation.a0 However, acceptance of such a payment by the creditor *without prejudice and "under protest" shall still be appropriated towards interest, despite the fact that the debtor expressly appropriated the same towards the principal.8 To the extent that the debt is merged in a decree, the decree-holder (creditor) is not bound to intimate the judgment-debtor (debtor) that payments made have not been appropriated in the manner specified.35 The rule of appropriation in such cases (where 80.

LORD MACNAGHTEN in Cory Bros. & Co. v. Owners of the "Mecca", (1897) AC 286, 293; followed in Manisty v. Jameson, (1925) 5 Pat 326:94 IC 273 AIR 1926 Pat 330. Seymour v. Picket, (1905) 1 KB 715.

81. 82. Ram Shah v. Lal Chand, (1940) 67 IA 160: (1940) Lah 470: 187 IC 233: AIR 1940 PC 63. 83. Cory& Bros. & Co. v. The Mecca, (1897) AC 286,294. 84. Messrs. Kukreja Lid. v. Said Alam, (1941) Lah 323 IC 206: AIR 1941 Lah 16. 85. Venkatadri Appa Row v. Parthasarathi Appa Row. (1921) LR 48 IA 150, 153: 44 Mad 570, 573; Munno Bibi v. Income-tax Commissioner, AIR 1952 All 514 (DB); Shanmugam v. Annalakshmi, (1949) FCR 537 AIR 1950 FC 38. 86. Nemi Chand v. Radha Kishen, (1921) ILR 48 Cal 839, 841. 87.

88.

Leela Hotels Ltd. v. Housing & Urban Development Corpn. Lid., (2012) 1 SCC 302 at paras 42-43.

Industrial Credit & Development Syndicate v. Smithaben H Pate!, (1999) 3 SCC 80, 86: AIR 1999 SC 1036.

192

Chapter IV-0f thePerformance ofContracis

S. 61

debt is merged in a decree) is that in the absence of an agreement to the contrary, the payments must be appropriated strictly according to the directions of the decree, and in the absence of such direction, firstly, towards the interest and costs, and thereafter in payment of the principal amount. For this purpose, an arbitral award that has attained finality in terms of S. 36 of the Arbitration and Conciliation Act, l996 is also treated as a decree.90

Debt barred by the law of limitation.-Where no appropriation is made by the debtor, the creditor may apply the payment to any lawful debt, though barred by the law of limitation. This frequently happens where there is a running account extending over several years. The creditor may in such a case appropriate the payments to the earliest items barred by limitation and may sue for such of the balance as is not so barred. Application

of

pay-

ment where neither party appropriates.

S. 61. Where neither party makes any appropriation,

the

payment

shall

be

applied

in

discharge of the debts in order of time, whether they are or are not barred by the law in force for the time being as to the limitation of suits. If the debts are of equal standing, the payments shall be applied in discharge of each propor-

tionably. Scope of the section.-The section must be read continuously with Section 60. It must be carefully observed that it does not lay down a strict rule of law, but only a rule to be applied in the absence of anything to show the intention of the parties. In order to ascertain the intention of the parties, not only any express agreement, but the mode of dealing of the parties, must be looked to. On the other hand, the circumstances may show that accounts which it was at a party's option to treat as separate were, in fact, treated as continuous, and then payments will be appropriated to the earliest unpaid item of the combined account.2

Mortgage of joint Hindu family property.-In a Full Benchcase of the Allahabad High Court,

the question before the Court was "whether it is open to a mortgagee on a

joint family property, under a mortgage deed executed by the manager of the joint family, when a portion of the mortgage debt was not raised for legal necessity, to appropriate during the pendency of the suit payments made by the mortgagor, towards the discharge of such portion of the debt as was not raised for legal necessity when no appropriation was made either by the mortgagor or the mortgagee till the date of the suit." The cout decided that as long as the two portions of the debt had not been definitely ascertained it was not open to the creditor to appropriate a payment towards an unknown and unspecified portion of the debt. But after the two portions were definitely ascertained in such a way as to make them constitute two distinct debts he was entitled to appropriate the payment. As, however, the creditor had not appropriated the debt in the trial Court, it was held that the payment should be rateably distributed between the two portions of the debt.

89.

Industrial Credit & Development Syndicate v. Smithaben H Patel, (1999) 3 SCC 80, 86: AIR 1999 SC 1036; Gurpreet Singh v. Union of India, (2006) 8 SCC 457, 471.

90.

91.

Leela Hotels Lid. v. Housing & Urban Development Corpn. Ltd., (2012) 1 SCC 302 at paras 45. Bishun Perkash v. Siddique, (1916) 1 Pat LT 474; Ramavel v. Pandyan Automobiles Ltd, (1973)

92.

Hooper v. Kecy. (1876) 1 QB Div. 178.

93.

Gajram Singh v. Kalyan Mal, (1935) All 791: 1661C 423: AIR 1937 All 1: 1936 ALJ 1224 (FB).

AIR Mad 359.

Efect of novationrescissionandalterationofcontract

S. 62

193

Contracts which need not be performed

S. 62. If the parties to a contract agree to of novation rescissiona . ndalteration substitute a new contract for it, or to rescind or ofcontract. alter it, the original contract need not be performed. Effect

lhustrations (a) A owes money to B under a contract. It is agreed between A, B and C that B shall thenceforth accept C as his debtor instead of A. The old debt of A to B is at an end, and a new debt

from C to B has been contracted. 6) A owes B 10,000 rupees. A enters into an agreement with B, and gives B a mortgage of his (A's) estate for 5,000 rupees in place of the debt of 10,000 rupees. This is a new contract and

extinguishes the old. (c) A owes B 1,000 rupees under a contract. B owes C 1,000 rupees. B orders A to creditC with 1,000 rupees in his books, but C does not assent to the agreement. B still owes C 1,000 rupees, and no new contract has been entered into.

Assent of all parties.Whether or not there is a novation of a contract it is in each case a question of fact. This section requires assent of both the parties in respect of novation, alteration or rescission. Unilateral novation, alteration or rescission can

however take place if this was either envisaged in the original contract,' or, if the novation, alteration

or rescission is accepted sub silentio i.e. there is implied acceptance

through silence. Discharge of existing contract.-The words "The Original Contract need not be performed" clearly indicate that by virtue of the three circumstances specified in this section, the old original contract is discharged completely and it is not to be performed. You have then to look at the new contract or the altered contract, as the case may be.

Novation.-The

meaning of "novation," the term used in the marginal note to this

section, and now the accepted catchword for its subject-matter, has been thus defined in the House of Lords: "that, there being a contract in existence, some new contract is substituted for it either between the same parties (for that might be) or between different parties, the consideration mutually being the discharge of the old contract. A common instance of it in partnership cases is where upon the dissolution ofa partnership the persons who are going to continue in business agree and undertake as between themselves and the retiring partner, that they will assume and discharge the whole liabilities of the business, usually taking over the assets; and if, in that case, they give notice of that arrangement to a creditor, and ask for his accession to it, there becomes a contract between the creditor who accedes and the new firm to the effect that he will accept their liability instead of the old liability, and on the other hand, that they promise to pay him for that consideration."5 Substitution of one debtor for another or extinction of an existing debt by creation of new one is treated 1.

LORD SELBORNE in Scarfv. Jardine, (1882) 7 App Ca 345, 351.

2.

DDA v. Joint Action Committee, Allottee of SFS Flats, (2008) 2 SCC 672, 698: AIR 2008 SC 1343 (unilateral imposition of charges for flats); BSNL v. BPL Mobile Cellular Ltd., (2008) 13 SCC 597, 619 (unilateral variation of rates by BSNL based on internal circulars having no statutory force), HR Basavaraj v. Canara Bank, (2010) 12 SCC 458, 467 (no novation where the changed situation

resulted on account of decree of Court and not consent of the party). 3. Her Highness Maharani Shantidevi P Gaikwad v. Savjibhai Haribhai Patel, (2001) 5 SCC 101, I30: AIR 2001 SC 1462 (unilateral right of termination upheld) over-ruling National Fertilizers v. Puran Chand Nangia, (2000) 8 SCC 343: AIR 2001 SC 53 (unilateral right to modify contractual terms held unenforceable). 4.

BSNL V. BPL Mobile Cellular Ltd, (2008) 13 SCC 597, 623.

S. Roushan Bibee v. Hurray Kristo Nath, (1882) 8 Cal 926; Kshetranath Sikdar v. Harasukdas Bal Kissendas, (1926) 31 CWN 803: 102 IC 871 : AIR 1927 Cal

538..

194

Chapter IV-0f thePerformanceofContracts

S. 62

as novation. There is no novation when the creditor does not accept the new debtor for the original one. So where A owes B Rs. 300, A transfers the whole of his property by a registered instrument to C. The consideration for the transfer is Rs. 2000 out of which C agrees to pay Rs. 300 to B. Here there is no novation, for there is no contract between A, B and C thatB shall accept C as his debtor instead of A. Thus B is entitled to recover the debt

from A.° Assignment and novation

distinguished.-The

assignment of a debt operates as an

effective transfer of a debt without the consent of the debtor. A novation is effective if the debtor is a consenting party. In assignment there is a transfer of property and in a novation there is annulment of one debt and then the creation of a substituted debt in its place.

New enforceable contract.-An attempted novation which fails to produce a new enforceable contract may put an end to the original contract if it was the intention of the parties to rescind it in any event. Such intention must be clearly proved. A fresh contract which required to be compulsorily registered was not registered and hence it was held not to operate as a novation.

It has to be considered in every case not only whether a new debtor has consented to assume liability, but whether the creditor has agreed to accept his liability in substitution original debtor's. In some circumstances the creditor may be entitled to sue th retiring or the incoming partner in a firm at his option; mere continuing to deal with the firm as reconstituted will not preclude him from suing his original debtor. Novation is f

notconsistent with the original debtorremaining liable in any form.

It requires as an

essential element that the right against the original contractor shall be relinquished, and

the liability of the new contracting party accepted in his place.2 Therefore, if a new contracting party has been accepted, the onus of proving that the original party remains liable lies heavily on the person asserting it.5 Election to accept the sole liability by new or surviving partners in a firm does not need very strong proof, but merely ambiguous acts will not do. A advanced Rs. 50,000 to a fim consisting of three partners. The sum of Rs. 50,000 was made up partly of secur ities handed over by A to the firm and partly of cash. The firm passed a note to A promising to return the securities and repay the cash with interest at 6 per cent per annum payable every six months. Thereafter one of the partners died, and A accepted from the surviving partners a promissory note in the firm's name for Rs. 50,000 to be paid in cash with interest at the same rate, but not payable with six monthly rests. This was a new con-

tract with the surviving partnersalone.

Effect of unauthorised alteration ofdocuments. What if thedocumentrecording an agreement is altered without the consent of both parties? No answer to this question is given by the Contract Act, or anywhere in the Anglo-Indian Codes, but Indian practice 6. 7. 8.

Debnarayan Dutt v. Chunilal Ghose, (1914) 41 Cal 137. In re United Railways of the Havana & Regla Warehouses Ltd., (1960) Ch 52 at 84. Morris v. Baron, (1918) AC 1; British and Beningtons v. N. W. Cachar Tea Co., AIR 1923 Cal 48,

68, Mahabir Prasad v. Satyanarain, AIR 1963 Pat 131. 9. Abdul Kayum v. Bahadur, (1912) 14 Bom LR 26; Angan Lal v. Saran Behari, (1929) 51 Al 799: 121 IC 211:AIR 1929 All 503. 10. Scarf Jardine, (1882) 7 App Ca 345, 351. l1. See Commercial Bank of Tasmania v. Jones, (1893) AC 313. 12. Nadimulla v. Channappa, (1903) 5 Bom LR 617. Accordingly a formal instrument is not annulled by a mere agreement to substitute something else for it at a future date; Angan Lal v. Saran Behari Lal, (1929) 51 All 799 121 IC 221: AIR 1929 All 503.

13. Liladhar Nemchand v. Rawji Jugjiwan, (1935) 68 MLJ 530: 154 IC 1090: AIR 1935 PC 93. 14.

Markandrai v. Virendrarai, (1917) 19 Bom LR 837, 843, 844.

Efect ofnovationrescission and alteration of contract

S. 62

195

follows the authorities of the Common Law. The rule is that any material alteration is an instrument (upon which claim can be founded) made by a party, or by anyone while it is in the party's custody or in that of his agent, disables him from relying on it either as plaintiff or as defendant, though he may sue for restitution under Section 65.l6 Any alteration is material which affects either the substance of a contract expressed in the document or the identification of the document itself, at all events where identification

may be important in the ordinary course of business.' Alterations are immaterial if they merely express what was already implied in the document, or add particulars consistent with the document as it stands, though superfluous, or are innocent attempts to correct clerical errors. There may be cases of wilful fraud practised by a stranger where the rule will not be held to operate against the person who had the custody of the document.

The Indian decisions on the subject may be divided into two classes. The first class comprises cases in which the suits were for bond debts brought upon the basis of altered documents. The second class relates to suits on documents which by the very execution thereof effect a transfer of interest in specific immovable property. As to the former class of cases, the Indian Courts have followed the principles of English law set out above, the point for decision in each case being whether the alteration was or was not material. Thus where a bond was passed to the plaintiff by one of three brothers, and the plaintiff forged the signature of the other two to the bond, and brought a suit upon it in its altered form against all the three brothers, it was held that the alteration avoided the bond. In such a

case the plaintiff is not entitled to adecree even against the real executant. Similarly, where the date of a bond was altered from 11th September to 25th September, it was held that the alteration was material, as it extended the time within which the plaintiff was

entitled to sue; it did not matter that the period of limitation, though reckoned from 11th September, had not expired at the date of the suit2 But the fact that the signature of an attesting witness had been affixed after execution to a bond that does not require to be attested is not a material alteration, and does not make the bond void.2 Besides the alteration being material, it must have been made in a document which is the foundation of the plaintiffs claim. A material alteration, therefore, in a written acknowledgement of debt does not render it inoperative, as the acknowledgement is merely evidence of a pre-

existing liability25 We shall next consider the cases where the effect of the execution of the altered document is to create an interest in the property comprised in the document. The rule to be derived from these cases may be stated as follows: A material alteration, though fraudulent, made in a mortgage or hypothecation bond does not render it void for all purposes, and the altered document may be received in evidence on behalf of the person in whose favour it is executed for the purposes of proving the right, title or interest created by, or resulting from the execution of the document, provided that the suit is based on such right, and not on the altered document. This rule is founded by Indian Courts on English

15.

Suffellv. Bank of England, (1882) 9 QB Div 555:51 LJQB 401, where authorities are collected.

16. Anantha Rao v. Surayya, (1920)43 Mad 703. 17. Sufell v. Bank of England, (1882) 9 QB Div 555 : 51 LJQB 401. A Bank of England note with the 18. 19. 20. 21. 22.

number altered is not substantially the same note. Howgate and Osborn's Contract (1902) 1 Ch 451. Lowe v. Fox, (1887) 12 App Ca 206 at p 217, per LORDHERSCHELL. Gour Chandra Das v. Prasanna Kumar Chandra, (1906) 33 Cal 812.

Govindasami v. Kuppusami, (1889) 12 Mad 239; Mt. Gomti v. Merghraj Singh, (1933) All LJ 907 145 IC 147: AIR 1933 All 443. Venkatesh v. Baba, (1890) 15 Bom 44; Ramayyar v. Shanmugam, (1891) 15 Mad 70.

23. Aimaram v. Umedram, (1901) 25 Bom 616; Harendra Lal Roy v. Uma Charan Ghosh, (1905) 9 CWN 695.

196

S. 63

Chapter 1V-of thePerformance ofContracts

decisions.24 The reason is that the right, title or interest created by, or resulting from, the very fact of the execution of the document does not rest on a contract or a covenant, but arises by operation of law, and a subsequent alteration, therefore, does not divest the vested right. A plaintiff sued to recover the principal and interest due on a mortgage bond by fraudulently doubling the rate of interest and inserting a condition making the

whole sum payable upon default of payment of any one instalment. The suit was brought on the altered bond made by the plaintiff himself. The Full Bench confirmed the decision of the court below dismissing the plaintiffs entire claim. Similarly a hypothecation bond was fraudulently altered by the plaintiff so as to, comprise a larger area of land than was actually hypothecated. The suit was brought on the altered bond and the High Court of Allahabad held that the suit was rightly dismissed by the lower court. On the other hand where a mortgage bond was altered in a material respect but the suit was not based on the altered bond, the court allowed the bond to be used as proof of the mortgagee's

right to sell the property.23 Similarly, a puisne mortgagee brought a suit for sale against his

mortgagors

and

impleaded

therein as a defendant a prior

mortgagee,

offering

to

redeem the prior mortgage. The prior mortgage, when tendered in evidence by the prior mortgagee, was found to have been tampered with materially by somebody. It was held that such alteration did not render the instrument void so as to justify the court in ignoring its existence and passing a decree in favour of the plaintiff for sale of the property comprised in it without payment of the amount due under it to the prior mortgagee.29 In this last mentioned case it may be observed that the suit was not brought by the prior mortgagee nor was the suit based on the altered document. In the case of negotiable instruments the English rule has been adopted to its full extent, as will be seen from Sections 87-89 of the Negotiable Instruments Act XXVI 1881.

of

Novation before breach. -The very basis of this section is that the performance of the original contract should be affected and hence novation must be prior to the breach of the contract. Calcutta High Court has held that the novation should be previous breach of the contract,30 while Madras High Court has held to the contrary.31 Rescission-The

basis for rescission under this section is mutual assent of the par-

ties while the basis off rescission in Section 64 is one-sided.32

Rescission may be express or may be inferred from the circumstances and conduct of the parties to the contract.

S. 63. Every promisee may dispense with or pense with or remit remit, wholly or in part, the performance of the for performanceopfromise. promise made to him, or may extend the time Promisee

may

dis-

such performance, or may accept instead of it any satisfaction which he thinks fit. 24. 25. 26. 27. 28. 29. 30. 31. 32.

Agricultural Cattle Insurance Co. v. Fitzgerald, (1851) 17 QB 432. See the cases in Mangal Sen v. Shankar, (1903) 25 All 580. Christachartu v. Karibasayya, (1885) 9 Mad 399, 412. Christacharlu v. Karibasayya, (1885) 9 Mad 399, 412. Ganga Ram v. Chandan Singh, (1881) 4 All 62. Subrahmania v. Krishna, (1899) 23 Mad 137. Mangal Sen v. Shankar, (1903) 25 All 580. Manohar v. Thakur Das, (1885) 15 Cal 319; Jitendra Chandra v. Banerjee, AIR 1943 Cal 181. K.M.P.R.N.M. Firm v. Theperumal, (1921) 45 Mad 180. Jitendra Chandra v. Banerjee, AlR 1943 Cal 181.

S. 63

Promisee may dispense with or remit performance of promise

197

llustrations (a) A promises to paint a picture for B. B afterward forbids him to do so. A is no longer bound to perform the promise.

(6) A owes B 5,000 nupees, A pays to B, and B accepts, in satisfaction of the whole debt, 2,000 rupees paid at the time

and place at

which

5,000

rupees were

payable.

The

whole debt is

discharged.

(c) A owes B 5,000 rupees. C pays to B 1,000 rupees, and B accepts them, in satisfaction of his claim on A. This payment is a discharge of the whole claim." (d) A owes B, under a contract, a sum of money, the amount of which has not been ascertained. A without ascertaining the amount gives to B, and B, in satisfaction thereof, accepts, the sum of 2,000 rupees. This is a discharge of the whole debt, whatever may be its amount.

(e)A owes B 2,000 rupees, and is also indebted to another creditors. A makes an arrangement with his creditors, including B, to pay them a composition| of eight annas in the rupee upon their respective demands. Payment to B of 1,000 rupees is a discharge of B's demand.

Rule of the Common

Law.-This

section makes a wide departure from the

Common Law. In England, to quote an authoritative exposition, "it is competent for both parties to an executory contract by mutual agreement, without any satisfaction, to discharge the obligation of that contract", in other words, as reciprocal promises are a sufficient consideration for each other, so are reciprocal discharges. "But an executed contract cannot be discharged except by release under seal, or by performance of the obligation, as by payment where the obligation is to be performed by payment"; but, by

the law merchant, the obligation of a negotiable instrument may be discharged by mere waiver The intention of the present section to alter the rule of the Common Law is clear, and has been recognised in several Indian cases.34 Scope of the section.-The present section and Section 62 must be construed so as not to overlap each other. This would be done by holding that agreements referred to in Section 62 are agreements which more or less affect the rights of both parties under the contract discharged by such agreements; whilst those referred to in Section 63 are such as affect the right of only one of the parties. The former case necessarily implies consideration, which may be either the mutual renunciation of right, or, in addition to this, the mutual undertaking of fresh obligations, or the renunciation of some right on the one side and the undertaking of some obligation on the other. It is only when the agreement to discharge affects the right of only one party that consideration might be found wanting, and there alone the Indian law departs from the English law by making provision for every such possible case in Section 63.3 No consideration is required for remission under this section.36

Remission of performance.-The words, of the section, construed according to their natural meaning, imply that a promisee can discharge the promisor not only without consideration but without a new agreement. *See S.41, supra. **Substituted by Amending Act 12 of 1891, S. 2 and Sch. II for "Compensation". 33.

"atni

Foster v. Dawber, (1851) 6 Ex. 839.

34. Monohur Koyal v. Thakur Das Naskar, (1888) 15 Cal 319, 326; Davis v. Cundasami Mudali, 35. 36.

(1896) 19 Mad 398, 402; Naoroji v. Kazi Sidik, (1896) 20 Bom 636, 644. PerCuURin Davis v. Cundasami Mudali, (1896) 19 Mad 398.

M/s. Hari Chand Madan Gopal & Co. v. State of Punjab, AR 1973 SC 381. 37. Chunna Mal, Fim v. Mool Chand, Firm, (1928) 55 IA 154; Phoenix Mills Lid v. M.H. Dinshaw &

Co, (1946) 48 Bom LR 313: 226 IC 503: AIR 1946 Bom 469 (1946) 48 Bom LR 313; Sabaldas v. Sobhokhan, (1947) Kar 182: AIR 1948 Sind 91 (DB); Citibank NA v. Standard Chartered Bank, (2004) 1 SCC 12, 36: AIR 2003 SC 4630; Citibank NA v. Standard Chartered Bank, (2004) 6 SCC 1,21.

198

S.63

Chapter 1V-Of thePerformance ofContracts

Where a promisee remits a part of the debt, and gives a discharge for the whole debt on receiving the reduced amount, such discharge is valid. The section, is intended not only to enable a promisee to release a debt at the instance of a third enable the promisor, whose debt has been released at the instance of a advantage of that release.35 Thus where a lessor, to whom rent is due lease, accepts a smaller amount of rent from the lessee in pursuance of

party, but also to third party, to take under a registered a subsequent oral

agreement to reduce the rent, and passes a receipt in full discharge of the rent due, the

discharge will take effect independently of the prior oral agreement.

So also where

money is accepted in full satisfaction of the claim, it is a discharge of the whole debt. A dispensation or remission under this section may well be contingent on the happening ofa future event, just as an original promise may. The holder of a promissory note

from the officers ofa masonic lodge agreed in writing to make no claim "if the.. lodge

building which has been burnt down is resuscitated." He cannot sue on his note after the lodge is rebuilt.4

Discharge from liability on negotiable instrument is tiable Instruments Act, 1881, Sections 82, 90.

specially dealt with in the Nego-

Agreement to extend time.-An agreement simply extending the time for performance of a contract is exempted by this section from any requirement of consideration to support it. No consideration is necessary to support such an agreement, exactly as none is required for the total or partial remission of performance. This section does not entitle a promisee to extend the time for performance of his own accord for his own purposes. Thus, where a date is fixed for delivery of goods under a contract and the seller fails to deliver the goods, the buyer may not of his own accord give further time to the seller for giving delivery, so as to claim damages on the footing of the rate on the later date fixed by him, he is entitled to damages on the basis only of the rate prevailing on the date fixed for performance in the contract.43

Accept any satisfaction. -The last part of this section relates to what is known as the principle of "Accord and Satisfaction in English Law. Instead of insisting upon performance, a promisee may accept any other form of satisfaction. Illustrations (d) and (e) to the section illustrate this principle. The essential element of 'satisfaction' is that the promisee must accept it unequivocally. If a promisor tenders something in füll satisfac tion but the promisee does not accept it or accepts in part performance, such a satisfaction will fall outside this part.44 Where the defendant company sent the bill for work done by the plaintiff in full and final settlement of all his claims under the contract but the plaintiff signed the bill and advance receipt with the words "under protest" and the defendant company sent the cheque nine months thereafter, it was held that there was 'no accord and satisfaction' in

the sense of bilateral consensus of intentions." If however, the creditor voluntarily and unequivocally accepts the offer to accept a lesser sum in satisfaction of the claim, then the creditor cannot subsequently insist on the balance. Whether the offer is accepted 38. In re industrial Bank of Western India, (1930) 32 Bom LR 1656: 129 IC 890: AIR 1931 Bom 123 (DB). 39.

Karampalli v. Thekku Vitil, (1902) 26 Mad 195. See Basdeo Ram Sarup v. Dilsukh Rai Sevak Ram,

(1922) 44 All 718. 40. Ishaq v. Madanlal, AIR 1965 Al 34 41. Abraham v. The Lodge "Good Will", (1910) 34 Mad 156. 42. Davis v. Cundasami Mudali, (1896) 19 Mad 398, 402; Jugal Kisore v. Chari & Co., (1927) 49 All 43. 44, 45.

599. Muthaya v. Lekha, (1914) 37 Mad 412, 413, 417. Shyamnagar Tin Factory v. Snowwhite Food Product, AlR 1965 Cal S41. Amar Nath v. M/s. Heavy Electricals Ltd., AlR 1972 All 176.

Consequencesofrescission of voidable contract

S. 64

199

voluntarily and unequivocally is essentially a question of fact. Usually, the court will be hesitant to find that there was no satisfaction where the protest is made after the payment of a lesser sum is accepted", though this is not an iron clad rule. The court will take note of practical realities, especially in government projects, where contractors are routinely arm-twisted to accept satisfaction of a lesser sum as a pre-condition for release of even admitted dues.47

S. 64. When a person at whose option a conof rescission of voidable tract is voidable rescinds it, the other party thereto Consequences

contract.

need not perform any promise therein contained in

which he is the

promisor. The party

rescinding a voidable

contract

shall, if he has received any benefit therunder from another party to such

contract,

restore such benefit, so far as may be, to the person

from whom it was received. Scope of the section.-Contracts declared voidable [S. 2, clause )] under this Act may be divided into two groups, namely contracts voidable in their inception under Sections 19 and 19-A on the ground of fraud or the like, and contracts becoming voidable by subsequent default of one party, as mentioned in Sections 39, 53 and 55.

The direct application of this section, according to recognised canons of interpretation, is only to contracts declared voidable by the Act at the option of one of the parties; but the principle which it affirms is one of general jurisprudence and equity, and applicable in various other cases. The Privy Council held5 that the Section applies to cases of rescission under Section 39.

Minor's

contract.-In

Mohori Bibee case49 the Privy Council observed that the

term 'person' in S. 64 or S. 65 of the Act does not comprise a minor but means such a liability upon a person as is competent to contract under S. 11 of the Act. There is no

minor under both of these sections to make compensation to the other side. It does not follow, however, that a minor is entitled both to repudiate his agreement and to retain specific property which he has acquired under it, or to recover money after receiving for it value which cannot be restored. General principles of equity seem incompatible with such a result, and it would certainly becontrary to English authority Election to rescind.-The broad principle on which this and the following section rests, and which, as we have seen, is not confined to cases expressly included in either of them, was thus stated in England in one of the weightiest judgments: "No man can at once treat the contract as avoided by him, so as to resume the property which he parted with under it, and at the same time keep the money or other advan-

tages which he has obtained under it."2 46. Bhagwati Prasad Pawan Kumar v. Union of India, (2006) 5 SCC 311, 318, CauveryCoffeeTraders 47.

V. Hornor Kesources (International) Co. Lid., (2011) 10 SCC 420, 431. National Insurance Co Ltd. v. Boghara Polyfab Pvt. Ltd, (2009) 1 SCC 267, 294: AIR 2009 SC 170, per RAVEENDRAN J.

48. 49. 50. 51.

Muralidhar Chatterjee v.InternmationalFilm Co. Ltd., AlR 1943 PC 34. Mohori Bibee case, (1903) 30 Cal 539: LR 30 IA 114.

Seealso Motilal Mansukhram v. Maneklal Dayabrai, (1921) 45 Bom 225. See 2alentani v. Canali, (1889) 24 QB Div 166; Steinberg v. Scala (Leeds), [1923] 2 Ch 452, CA. See Chinaswami v. Krishnaswami, (1918) 35 Mad LJ 652. This does not mean that money lent to a borrower whom the law declares absolutely incapable of contracting a loan can be recoveredunder cover of equitable compensation or under the present section; Limbaji Ravji v. Rahi, (1925) 49 Bom

576 27 Bom LR 621 88 IC 643 : AIR 1925 Bom 499 See, however, S. 33 of the Specific Relief 52.

Act as to the discretion of the Court under that section, exercised in the case now cited. Clough v. L. & N.W.R., (1871) LR 7 Ex. 26.

200

S. 65

Chapter IV-Of thePerformance ofContracts

For the same reason, a

man cannot rescind a contract in part only. When he decides

to repudiate it, he must repudiate it altogether. Whenever a party to a contract has an option to rescind it, the contract is voidable and when such a party makes use of that option, the agreement becomes void, the other party is freed from its obligation to perform artand rescinding party is liable to restore the benefit received under such a contract. If such a rescinding party has put it out of his power to restore the former state of thing, either by acts of ownership or by adopting and accepting dealings with the subject-matter of the contract which alter its character, as the conversion of shares in a company, or if he has allowed a third person to acquire rights under the contract for value, it is too late to rescind, and the remedy, if any, must be of some other kind.

Benefit received "thereunder"-The words "benefit' and 'advantage' do not include any profit' or "clear profit', nor does it matter what the party receiving the money may have done with it. The Act requires that a party must give back whatever he received under the contract. The benefit to be restored under this section must be benefit received under the contract. A agrees to sell land to B for Rs. 40,000. B pays to A

Rs. 4,000 as a deposit at the time of the contract, the amount to be forfeited to A if B does not complete the sale within the specified period. B fails to compete the sale within the specified period, nor is he ready and willing to complete the sale within a reasonable time after the expiry of that period. A is entitled to rescind the contract and to retain the deposit. The deposit is not a benefit received under the concillary to the contract for the sale of the land.o However, if a person has elected to put an end to the contract under

Section 39, he is bound to return any benefit (part payment of price in advance) that he has received under the contract but he in his turn is entitled to damages for the defaulting party's breach.57

Obligation of person

S. 65. When an agreement is discovered to be

whohasreceivedadvan- Void, or when a contract becomes void, any person tage undervoidagree-

who

has

received

any

advantage

under

such

that agreement or contract is bound to restore it, or to make compensation for it, to the person from whom he received it.

becomes void.

lustrations (a) A pays B 1,000 rupees in consideration of B's promising to marry C, A's daughter. C is dead at the time of the promise. The agreement is void, but B must repay A the 1,000 rupees. (b) A contracts with B to deliver to him 250 maunds of rice before the Ist of May. A delivers 130 maunds only before that day, and none after. B retains the 130 maunds after the lst of May. He is bound to pay A for them. (c) A, a singer, contracts with B, the manager of a theatre, to sing at his theatre for two nights in every week during the next two months, and B engages to pay her a hundred rupees for each night's performance. On the sixth night, A wilfully absents herself from the theatre, and B, in consequence, rescinds the contract. B must pay for the five nights on which she had sung.

53. 54.

$5. S6. 57.

Clarke v. Dickson, (1858) EB & E 148. Muralidhar Chatterjee v. International Film Co. Ltd, (1943) 70 LA 35, 49 (1943) 2 MLJ 369: AIR 1943 PC 34. Muralidhar Chatterjee v. International Film Co. Ltd, (1943) 70 IA 35, 49 (1943) 2 MLJ 369: AIR 1943 PC 34. Natesa Aiyar v. Appavu, (1915) 38 Mad 178. Muralidhar Chatterjee v. International Film Co. Ltd, (1943) 70 IA 35, 49 AIR 1943 PC 34.

(1943) 2 MLJ 369

Obligation ofperson who has received advantage under void

S. 65

201

(d) A contracts to sing for B at a concert for 1,000 rupees, which are paid in advance. A is too ill to sing. A is not bound to make compensation to B for the loss of the profits which B would have made if A had been able to sing, but must refund to B the 1,000 rupees paid in advance.

The illustrations to this section are rather miscellaneous in (a) we have a simple case of money paid under a mistake (¢f. S. 72.) In (b) it does not seem that the contract has

become void at all, but, on the contrary,

that B has elected to affirm it in part and

dispense with the residue. There is no new contract under which he is bound to pay for the 130 maunds of rice, as is shown by this, that what he does accept he is undoubtedly bound to pay for at the contract price. In (c) it is not clear whether the contract is to be treated as divisible, so that A is entitled for Rs. 100 for each night on which she did sing, or the Court is to estimate what, on the whole, the partial performance was worth. Illu-

stration (d) is simple; English lawyers would refer it to the head of money paid on a

consideration which fails.

Scope of thesection. This sectionapplies to)

where an agreement, which the parties intended to enforce, is found subsequently to be void. e.g. where parties discover their mistake as to a matter of fact essential to the agreement (S. 20).

e.g. where a Court of law holds it to be void under any of the Sections 23, 24, 25, 26, 27, 28, 29, 30. In the first instance the word 'agreement' is used and in the second instance, the word 'contract' is used. But by the word 'agreement' is meant 'an enforce able agreement.

(1i) A contract which subsequently becomes void by reason of supervening illegal

ty, impossibilityetc. A contract or agreement which the parties know at the time of entering into it as void would not fall under either of the categories mentioned above. It does not apply to cases where there is a stipulation that, by reason of a breach of warranty by one of the parties to the contract, the other party shall be discharged from the performance of his part of the contract, An insurance company is not, therefore, bound under the provisions of this section to refund to the heirs of the assured the premiums paid on the policy of life assurance where the assured had committed a breach of the warranty by making an untrue statement as to his age. This section does not apply to a case where

one of the

parties-such as a minor

known at the time so as to

be-being

wholly incompetent to contract, there not only never was but there never could have been any contract. K had been granted mining lease by J. Company and K paid Rs. 80,000 to J. Company. Under Rule 45 of the Mineral Concession Rules, 1949, it was necessary that lessee should have certificate of approval from the provincial government. Rule 49 provided against payment of salami or premium except certain charges, or fees or rent specified in licence or lease. K had no such certificate. K did not get possession of the

leased property. K filed a suit for recovery of possession of leased property or the refund of Rs. 80,000. The Supreme Court refused to invoke S. 65 of the Contract Act in favour of K as K either knew or should have known of illegality because K was already in the

58. Orienmal Government Security Life Assurance Co. Lid v. Narasimha Chari, (1901) 25 Mad 183, 214.

59. Mohori Bibee v. Dhurmodas Ghose. (1903) 30Cal 539: LR 30 IA 114; Punjabhai v. Bhagwandas, 1928) 53 Bom 309:31 Bom LR 88: 117 IC 518 : AIR 1929 Bom 89;Gopalaswami v. Vaithilinga, (1940) I MLJ 547: AlR 1940 Mad 719.

202

S.65

mining business and could have

Chapter IV-0f thePerformanceofContracts consulted his legal adviser and hence there was no

Occasion for him to be under any kind of ignorance of law. According to the Supreme Court K's payment of money was not made lawfully which he was claiming by way of refund. As K knew from the beginning the illegality of his agreement, it cannot be said that he entered into an agreement under the belief that it was a legal agreement. To invoke S. 65 of the Act, the invalidity of agreement should be discovered subsequent to the making of it.60 As this section refers to a restoration of any advantage, the contract or agreement may be executory or executed. Where an agreement is discovered to be void.-The expression "discovered to be void presents some difficulty as regards agreements which are void for unlawful conSideration (Ss. 23 and 24). It seems that the present section does not apply to agreements which are void under Section 24 by reason of an unlawful consideration or object4 and there being no other section in the Act under which money paid for an unlawfül purpose may be recovered back, the analogy of English law will be the best guide. According to that law money paid in consideration of an executory contract or purpose which is illegal may be recovered back upon repudiation of the transaction, as upon a failure of consideration. But if the illegal purpose or any material part of it has been carried out, the money paid cannot be recovered back, for the parties are then equally in fault, and in pari delicto melior est conditio possidentis.0 This principle applies to cases where a person transfers his property benami to another in order to defraud his creditor. In such cases, where the fraudulent purpose is not carried into execution, the transferee will be deemed to hold the property for the benefit of the transferor, as provided by Section 84 of the Trusts Act. Where, however, the fraudulent object is accomplished, the transferee will not be disturbed in his possession.0 The same principles have been held to apply to payments made under agreements which are void under Section 30 as being by way of wager. This section applies to a contract which is void ab initio.9 The words 'discovered to be void' mean nothing more or less than when the plaintiff comes to know, or fînds out, that the agreement is void.6 The word 'discovered' would imply the pre-existence of something which is subsequently found out. If knowledge is an essential requisite even an agreement ab initio void can be discovered to be void subsequently.0 Where moneys have passed from one party to another under a marriage brokage agreemento® or where an alienation is declared void under Bhagdari Act, 1862,7 the con60. Kuju Collieries Ltd v. Jharkhand Mines Lid, AIR 1974 SC 1892: (1972) SCC 533; LIC of India v, Madhava Rao, AIR 1972 Mad 112. 61.

62. 63.

64.

65.

Mohanlal v. Yakubkhan, (1965) 6 Guj LR 817 :(1965) ILR Guj 961.

Rudragawda v. Gangowda, 39 Bom LR 1124. Taylor v. Bowers, (1876) 1 QBD 291; Kearley v. Thomson, (1890) 742,; Petherpermal v. Muniandi Servai, (1908) 35 IA 98, at p. 103, Kedarnath v. Prahlad Rai, AIR 1960 SC 213: 1962 SCJ 1072; Sita Ram v. Radha Bai, AIR 1968 SC 534: (1968) 2 SCJ 231. Petherpermal v. Muniandi Servai, (1908) 35 IA 98; Jadu Nath Poddar v. Rup Lal Poddar, (1906) 33 Cal 976; Girdharlal v. Manikamma, (1914) 38 Bom 10; Kalipada v. Kali Charan, AIR 1949 Cal 204. Shaikh Umar v. Shivdansingh_AIR (1958) MP 88; Gulabchand v. Fulbai, 11 Bom LR 649; Amolkachand Seth v. Prahlad Singh, (1972) MPLJ 473; L.IC. v. Madhava Rao, AIR 1972 Mad 112.

66. Ramaya Prasad v. Murli Prasad, AIR 1974 SC 1320: (1974) 2 SCC 266. 67. Ramaya Prasad v. Murli Prasad, AIR 1974 SC 1320: (1974) 2 SCC 266; Tarsem Singh v. Sukhminder Singh, (1998) 3 SCC 471, 480 :AIR 1998 SC 1400 (agreement void ab initio under S. 20, though "discovered" to be so only subsequently). 68. Gulabchand v. Fulbai, 11 Bom LR 649. 69. Jijibhai Laldas v. Nagji, 11 Bom LR 693.

Obligation ofperson who has received advantage under void

S. 65

203

tracts would fall under this clause. A deed of mortgage was effected in the course of execution proceedings before a Collector but it was later discovered that the permission of

the Collector under para II of Schedule II of C.P. Code, 1908 was not obtained and hence the mortgage is discovered to be void.70

A transferee of property which from its very nature is inalienable is entitled to recover back his purchase money from the transferor, if the transfer is declared illegal and

void.

So also the purchaser of an expectancy.2

In the absence of special circumstances?5 the time at which an agreement is discovered to be void is the date of the agreement.74

"When a contract becomes void"-The expression "becomes void" includes cases of the kind contemplated by the second clause of Section 56, and is sufficient to cover the case of a voidable contract which has been avoided. On a suit to enforce a registered mortgage, the mortgage was found to be void because permission under para II of the third schedule to the Code of Civil Procedure had not been obtained. The claim on the personal covenant appeared to be time-barred and was formally abandoned by the mortgagee. The Privy Council held that the mortgagee had the right to refuse to be bound

by the contract of loan when the basis of the contract had gone. "The lender who has agreed to make a loan upon security and has paid the money is not obliged to continue the loan as an unsecured advance. The bottom has fallen out of the contract and

he may avoid it." The mortgagee was given relief under the section. ' It was deemed applicable by the High Court of Bombay" to the case of a lease which was terminated by the lessee under the provisions of the Transfer of Property Act on the destruction of the property by fire. In that case the plaintiff hired a godown from the defendant for a period of twelve months and paid the whole rent to him in advance. After about seven months the godown was destroyed by fire, and the plaintiff claimed

a refund from the defendant of a proportionate amount of the rent, and subsequently brought a suit for the same. The Court held that the plaintiff was entitled under this section to recover the rent of the unexpired part of the term. A contract also "becomes

void" when a party disables himself from suing upon it by making an unauthorised alteration.

Where the defendant has sold stolen goods to the

plaintifi,

and the goods

are recovered by the police, the contract is discovered to be void and the plaintiff is entitled to recover from the defendant the moneys paid to him.?

Nisar Ahmad Khan v. Manucha, 67 IA 431:43 Bom LR 465 (PC); Raja Mohan v. Manzoor Ahmad Khan, 46 Bom LR 170:70 IA 1: AIR 1943PC 29. 71. Haribhai v. Nathubhai, (1914) 38 Bom 249,.Javerbhai v. Gordhan. (1915) 39 Bom 358; Bai Diwali 70.

v. Umedbhai, (1916) 40 Bom 614; Dyviah v. Shivamma AIR 1959 Mys 186. 72. Harnath Kuar v. Indar Bahadur Singh, (1923) S0 LA 69: 45 All 179. See also Annada Mohan Roy V. Gour Mohan Mullick, (1923) S0 1A 239: 50 Cal 929. 73. Harnath Kuar v. Indar Bahadur Singh, (1923) 50 LA 69:45 All 179. 74. Hansraj Gupta v. Official Liquidators, Dehra Dun-Mussoorie Electric Tramway Co, (1923) 60 IA

13:54 All 1067:35 BomLR 319:142 IC 7: AIR1933PC63.

75. Satgur Prasad v. Har Narain, (1932) 59 IA 147: 7 Luck 64: 34 Bom LR 771 AIR

1932 PC 89

136 IC 108. 76. Raja Mohan Manucha v. Manzoor Ahmad Khan, (1943) 70 IA 1:(1943) 1 MLJ 508: AIR 1943 PC 29. The mortgagee, however must not omit to repudiate within a reasonable time, otherwise his conduct may be treated as an election to affirm the contract based on the personal convenant (Ibid). 17. Dhuramsey v. Ahmedbhai, (1898) 23 Bom 15, followed in Muhammad Hashim v. Misri, (1922) 44

All 229. 78. 79.

Anantha Rao v. Surayya, (1920) 43 Mad 703. Chiramji Lal v. Hans Raj, AIR 1961 P&H 437.

204

S. 65

Contracts with

Chapter 1V-0f thePerformance ofContracts corporations.-At Common Law the contracts of corporations must

in general be under seal. To this, however, there are some exceptions. One of them is where the whole consideration has been executed and the corporation has accepted the executed consideration, in which case the corporation is liable on an implied contract to pay for the

work done, provided that the work was necessary for carrying out the purposes for which the corporation exists. The exception is based on the injustice of allowing a corporation to take the benefit of work without paying for it. This exception, however, is in certain cases excluded by statute. Contracts with a corporation are often required by the Act creating it to be executed in a particular fom, as for instance, under seal. The question in such cases is whether the Act is imperative and not subject to any implied exception when the

consideration has been executed in favour of the corporation. If the Act is imperative and the contract is not under seal, the fact that the consideration has been executed on either side does not entitle the party, who has performed his part, to sue the other on an implied contract for compensation. This may work hardship but the provision of the Act being imperative, and not merely directory, it must be complied with. The present section, accordingly, does not apply to cases where a person agrees to supply goods to, or do some work for, a municipal corporation, and goods are supPplied or the work is done in pursuance

of the contract, but the contract is required by the Act under which the corporation is constituted to be executed in a particular form, and it is not so executed. In such cases the corporation cannot be charged at law upon the contract, though the consideration has been

executed for the benefit of the corporation. "The Legislature has made provisions for the protection of ratepayers, shareholders and others who must act through the agency of a representative body by requiring the observance of certain solemnities and formalities which involve deliberation and reflection. That is the importance of the seal. It is idle to say there is no magic in a wafer.. The decision may be hard in this case on the plaintiffs, who may not have known the law. They and others must be taught it, which can only be done by its enforcement.83 This view has been confirmed by the Supreme Court4 Just as a corporation, cannot be sued upon a contract which is required to be, but which is not under seal, though the consideration has been executed for its benefit, so it

cannot sue upon the contract, though it has performed its own part of the contract so that the other party has had the benefit of it.3 In Mohamed Ebrahim Molla v. Commission-

ers for the Port of Chittagongšo the commissioners for the Port of Chittagong sued the defendant for the recovery of money due as hire of a tug lent to the defendant under a contract with him. The contract was not under seal as required by Section 29 of the Chittagong Port Act, 1914. It was held that the Act was imperative in its terms and that the plaintiffs could not sue on the contract. It was held at the same time that the plaintiffs were entitled to payment upon a quantum meruit. The Calcutta High Court87 held that a contract with a Municipality not in accordance with the form prescribed by Statute-not in

80. 81. 82.

Lawford v. Billericay Rural District Council, (1903) 1 KB 772. Clarke v. Cuckfield Union, (1852) 21 LJQB 349, 351. Young & Co. v. Corporation of Royal Leamington Spa, (1883) 8 App Ca 517.

83. Young & Co. v. Corporation of Royal Leamington Spa, (1883) 8 App Ca 517, per LORD BRAMWELL, at p. 528. The "wafer" is the common modern substitute for a waxen seal.

84

Rikhy. H.S (Dr) v. New Delhi MunicipalCommittee, (1962)3 SCR 604: AIR (1962) SC 54 (1962) 1 SCJ 612.

85. Raman Chedi v. Municipal Council ofKumbakonam, (1907) 30 Mad 290; Mohamad Ebrahim Molla v. Commissioners for the Port of Chittagong, (1927) S4 Cal 189, 210 et seq. 103 IC 2: AlIR 1927 Cal 465:31 CWN 985 (DB). 86. Mohamad Ebrahim Molla v.Commissionersfor the Port of Chittagong. (1927) 54 Cal 189: AIR 1927 Cal 465:31 CWN 985 (DB). 87.

Ranendra Nath v. Dhuliyah Municipality, AIR 1956 Cal 203 following Ram Nagina Singh v. Governor-General in Council, AlR 1952 Cal 306.

Obligation of person who has received advantage under void

S. 65

205

writing, signed andsealed-is invalid but if the other party has performed his part of the contract, he is entitled to restitution under S. 65 of the Contract Act by way of compensation. The full bench of Allahabad High Court viewed the problem differently in Gonda Municipality v. Bachchu, 88 By resolution of the municipal board of Gonda it was agreed to grant a contract to defendant for the realisation of the municipal dues leviable in mandi. A formal contract required under Section 97 of U.P. Municipalities Act 1916 was never made but defendent began his realisation and paid part of the dues. In a suit by the municipal board to recover thebalance sum, defendent pleadedabsence of execution of written contract as required by S. 97 of the UP Municipalities Act 1916. The main question before the full bench was whether S. 65 of the Contract Act hasany application to the case of a contract which fails for non-compliance with the provisions of S. 97 of UP Municipalities Act. The full bench was of the view that S. 65 of the Contract Act applies to a case in which agreement entered into by a statutory body is invalid by reason of non-observance of statutory provisions with regard to the execution of contracts, but does not apply when those provisions refer to the capacity of the statutory body to enter into an agreement. So where a statute creates a corporation and lays down that corporation has not got the capacity to enter into an agreement, unless it complies with a certain form or makes its will known in a par

ticular manner, S. 65 of the Contract Act will not apply even if the Corporation might have received an advantage under an assumed agreement. wever, where the form prescribed by the statute merely makes the agreement unenforceable by law against the Cor poration, the statutory provision will not debar the applicability of S. 65 of the Contract Actbecause that section applies even though an agreement is void ab initio. Acording to the full bench S. 97, UP Municipalities Act, 1916, does not refer to the capacity of Municipal Corporation to enter into an agreement and so non-compliance with it does not loaned to a render S. 65 of the Contract Act inapplicable. Where money has been Municipality without a formal contract, the contract is void and the plaintiff is entitled to

recover it.0 At all events, where a contract which fails to comply with the statutory only executory, neither party can enforce performance against the other

"Any

person"-The

formalities is

obligation under this section to restore the advantage received

under an agreement is not confined to parties to the agreement, but extends to any person that may have received the advantage. A sajadanashin leased the property of a khankah and received nazarana for the same. Thereafter a Receiver was appointed

who avoided the lease. The lessee was held entitled to recover the nazarana from the Receiver on the ground that the khankah had benefited from the nazarana and the person in charge of the khankah estate was bound to restore the advantage received.3 Agent.-Where on the instruction of a principal an agent entered into a transaction with a third party and paid money to the third party, it was held that the agent did not become liable to restore the money to the principal on the agreement being discovered to be void, Since it could not be said that the agent had received any advantage.*

88. 89. 90.

Gonda Municipality v. Bachchu, AIR 1951 All 736. Gonda Municipality v. Bachchu, AIR 1951 All 736 at p. 741. Kishengarh Municipality v. Maharaja Kishengarh Mills Ltd, AIR 1961 Raj 6: 1960 Raj LW 345

91. 92. 93. 94.

Ahmedabad Municipality v. Sulemanji, (1903) 28 Bom 618. Giraj Baksh v. Kazi Hamid Ali, (1886) 9 All 340, 347. Devi Prasad v. Mehdi Hasan, (1940) 18 Pat 654: 186 IC 674: AIR 1940 Pat 8 (DB). Harijivanlal v. Radhakison, (1938) ALJ 77 : 172 IC 330: AIR 1938 PC 4.

(DB).

206

S. 66

"Received any

Chapter 1V-of thePerformance ofContracts advantage"-The framers of this Act wisely and rightly laid down

the rule in this section. In England a contrary rule which prevailed for many years has been since overruled by the House of Lords in Fibrosa Spolka Akajna v. Fairbairn Lawson,". ViscOUNT SIMON L.C. observed in that case "I can see no valid reason why the right to recover the prepaid money should not equally arise on frustration arising from supervening circumstances as it arises on frustration from the destruction of the subject matter." The general rule of this section applies to such cases and that each party is bound to return any payment received prior to the contract becoming void or being discovered to be void.o Where a contract is partially

performed and is found to be void at a later stage, the

Court may allow a proportionate part of the advantage received.

Value of advantage, Burden of

proof.-A party claiming the restoration of any

advantage received after a contract has become void must prove the value of advantage received. In Govindram v. Edward Radbone5 the defendant had contracted to purchase machinery from Germany and the German firm had agreed to send a technician to India to set up the machinery. Part of the machinery arrived in India and thereafter, on war being declared, the contract was frustrated. The Custodian of Enemy Property filed a suit against the purchaser for the value of the machinery received, but failed to prove the advantage received by the defendant. Their Lordships said: "In estimating that value, a Court would have to take into account the fact that the balance of the machinery contracted to be supplied could not be supplied from Germany, and the fact that the appel lants (purchasers) could no longer have the services of a qualified erector sent from Germany and of the sellers' Chief Chemist. Further, the Court would have to consider the question

whether or not the appellants were able to procure from other sources the

balance of the machinery contracted to be sent from Germany, and, if so, at what price and within what period of time, and what quantity and quality of products could be produced by the plant so assembled." Mode

of communi-

S. 66. The rescission of a voidable

contract may

cation orrevokingresci- be communicated or revoked in the same manner, ssion of voidable con- and subject to the same rules, as apply to the tract.

communication or revocation of a proposal.

S. 67. If any promisee neglects or refuses to Effect of neglect of misoreasonablefacilipromisee to afford pro-

ties for performance.

afford the promisor reasonable facilities for the performance of his promise, the promisor is excused by such neglect or refusal as to any non-perfor

P Ilhustration A contracts with B to repair B's house. B neglects or refuses to point out to A the places in which his house requires repair.

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

95. Fibrosa Spolka Akajna v. Fairbaim Lawson, (1943) AC 32:(1942) 2 All ER 122. 96. Wolf & Sons v. Dadyba Khimji, (1920) 44 Bom 631. 97. Dhuramsey v. Ahmedbhai, (1898) 23 Bom 15 (21); Muhammad Hashimv. Misri, (1922) 44 All 229 [Contra: Lakshmanan v. Kamarajendra, AIR (1955) Mad 606]. 98. Govindram v. Edward Radbone (1947) 74 IA 295 : (1947) Bom 860: 50 Bom LR 561 AIR 1948 PC 56.

Efect ofneglect ofpromiseeto affordpromisorreasonablefacilities

S. 67

207

Refusal or neglect of promisee. A case exactly in point is that of anapprentice, whom a master workman has undertaken to teach his

teach him. "t is evident that the mastercannot be liable the apprentice will not be taught."99

99:

Raymond v. Minton, (1866) LR 1 Ex 244.

trade, refusing to let the master

for not teaching the apprentice if

CHAPTERV

OF CERTAIN RELATIONS RESEMBLING THOSE CREATED BY CONTRACT Quasi-Contracts or Implied Contracts.-Chapter V does not deal with the rights or liabilities accruing from the Contract but those accruing from relations resembling those created by Contract. These relations resembling contract are known as contract implied in law or a quasi-contract.

It is not a real contract or as it is called, a consensual

contract based on agreement of the parties. These obligations come into existence by a fiction of law. It may become necessary to hold one person to be accountable to another, even without any agreement between them, on the ground that otherwise he would be retaining money or some other benefit which has come into his hands to which the law regards the other person as better entitled, or on the ground that without such accountability the other would unjustly suffer loss. The law of quasi-contract exists to provide remedies in such circumstances. In quasi-contracts, liability exists, according to some Writers," to prevent unjust enrichment and for this the courts do not take notice of the intention of the parties or their agreement. However, the other view is that it rests upon a hypothetical contract which is implied by law According to this restricted view quasicontractual liability can, only arise where a contract can be implied by law. Claim for necessaries supplied to person incapable of contracting,

S. 68. If a person, incapable of entering into a contract, or anyone whom he is legally bound to

support, is supplied by another person with necessaries suited to his condition in life, the person who has furnished such supplies is entitled to be reimbursed from the property of such incapable person. or on his account.

lustrations (a) A supplied B, a lunatic, with necessaries suitable to his conditions in life. A is entitled

to be

reimbursed from B's property.

6) A supplied the wife and children of B, a lunatic, with necessaries suitable to conditions in life. A is entitled to be reimbursed from B's property.

their

.

State ofW. Bengal v. B.K. Mondal AIR, 1962 SC 779: 1962 Supp (1) SCR 876. 2. Quoted in Dhrangadhra Municipality v. Dhrangadhra Chemical Works, (1988) GLR 388 at 400 from ANSON'S CONTRACT, 25th edn. ANSON'S LAW OF CONTRACT (23rd ed) 589 4.

Moses v. Macferlan, (1760) 2 Burr 1005, 1008 per LORD MANSFIELD; Fibrosa Case 1943 AC 32,

5.

63 per LoRD WRIGHT: United Australia Ltd. v. Barclays Bank Ltd, (1941) AC1, 28, per LORD ATKIN, Kiriri Cotton Company Ltd. v. Dewani, (1960) AC 192, 204, Per LORDDENNING. Sinclair v. Brougham, (1914) AC 398, 415, 452 Per ViscoUNT HALDANE and LORD SUMMER, respectively;

Holt v. Markham, (1923) 1 KB 504, 513, Per SCRUTTON L.J.; Re: Diplock (1948) Ch

465, 480.

6. (1914) AC 398, 452; LORDSUMMER:cf.Supreme Court of India's Approach, State of W. Bengal v. B.K. Mondal, AlR 1962 SC 779: 1962 Supp () SCR 876.

[208]

Reimbursementof person paying money due by another, in payment

Person incapable of entering into

209

S. 69

contract.-Since the decision of the Judicial

Committee in Mohori Bibi v. Dhurmodas Ghose" it is clear that this section applies to minors as well as to persons of unsound mind (see the illustrations) and other, if any disqualified from contracting by any law

to which they are subject, e.g. a ward under

U.P. Court of Wards Act.8 "Necessaries"Costs

incurred in successfully defending a suit on behalf of a

minor in which his property was in jeopardy are "necessaries" within the meaning of this section.

And so are costs incurred in defending him in a prosecution for dacoity.

also is a loan to a minor to save his property from sale in execution of adecree.

So

Money

advanced to a Hindu minor to meet his marriage expenses is supplied for "necessaries," and may be recovered out of his propertyl but without interest;3 so also moneys advanced for the purposes of the marriage of Muslim girl." But a distinction has been drawn, it would seem rightly, between the case of male and female minors on the ground

that the Hindu text enjoined the marriage of the latter but not the former.° It is submitted that the passing of the Child Marriage Restraint Act, 1929, has made the child marriage as an offence, and a court would scarcely regard expenditure on a purpose forbidden by law as expenditure on necessaries.

As to the definition of necessaries in general, see notes to Section 11, under the head "Necessaries". Any one whom he is legally bound to support.-This expression is well illustrated by ill. (b). This expression covers cases of husband and wife.

Remedy, Nature

of-A

supplier of necessaries has been given a

proceed against the estate of the person under a disability; he is not entitled personally against such a person. Reimbursement

rsPaynhoney by another,

due

of in

paymentof whichhe is interested.

remedy to to proceed

S. 69. A person who is interested in the pay-

ment of money which another is bound by law to pay, and

who

therefore

pays it, is entitled

to be

reimbursed by the other. lhustration

B holds land in Bengal, on a lease granted by A, the zamindar. The revenue payable by A to the Goverment being in arrear, his land is advertised for sale by the Government. Under the revenue law, the consequence of such sale will be the annulment of B's lease. B to prevent the sale and the consequent annulment of his own lease, pays to the Government the sum due from A. A is bound to make good to B the amount so paid.

7. Mohori Bibi v. Dhurmodas Ghose, (1903) 30 Cal 593: LR 30 IA 114. 8.

Vishwamath Khannav. Shiam Krishna, (1937) 166 IC 47.

9. Watkins v. Dhunnoo Baboo, (1881) 7 Cal 140; Phalram v. Ayub Khan, (1926) 49 All 52:98 IC 657 : AIR 1927 All 55.

10. Sham Charan Mal v. Chowdhry Debya Singh, (1894) 21 Cal 872.

.Kidar Nathv. Ajudhia, (1883)PunjRec no185. 12.

Pathak Kali Charan v. Ram Deni Ram, (1917) 2 Pat LJ 627; cp. Regd. Jessore Loan Co., Lid. v. Gopal Hari Ghose Choudhuri, (1928) 30 CWN 366 : 94 IC 159: AIR 1926 Cal 657; Meenakshi Ranga Ayyangar, AIR 1932 Mad 696: 139 IC 383, Shriniwasrao v. Baba Ram, AIR 1933 Nag 285 : 145 IC 350.

3. Ramchandra v. Hari, AIR 1936 Nag 12. 14. Rahima Bibi v. Sherfuddin, (1947) Mad 541 AIR 1947 Mad 155.

5.

Tiki Lal v. Komalchand. (1940) Nag 632: AIR 1940 Nag 327.

16.

Faiyazumnisa v. Bajrang Bahadur Singh. (1927) 1 Luck 275: 104 IC 358: AIR 1927 Oudh 609.

210

S. 69

Chap. V-OS Certain Relations Resembling those created by Contract

[As to the date from which time runs for the purpose of limitation in cases within this section, see Mulhuswami Kavundan v. Ponnayya Kavundan".]

Person.. interested in the payment of money"-This

section lays down a wider

rule than appears to be supported by any English authority. The words "interested in the payment of money which another is bound by law to pay" might include the appre hension of any kind of loss or inconvenience, or at any rate of any detriment capable of being assessed in money. This is not enough, in the Common Law, to found a claim to reimbursement by the person interested if he makes the payment himself. Authoritative statements in English books are much more guarded, for example: If A is compellable to pay B damages which C is also compellable to pay B, then A, having been compelled to pay B, can maintain an action against C for money so paid, for the circumstances raise an implied request by C to make such payment in his case. In other words, A can call upon C

to indemnify him."9 But the English authorities do not cover a case where the plaintiff has made a payment operating for the defendant's benefit, but was not under any direct legal duty to do so, nor where the defendant was not bound to pay, though the payment was to his advant-

age. The assignee of a term of years mortgaged the premises by sub-lease. The mortgagees took possession, but did not pay the rent due under the principal lease. The original lessees, who of course remained liable to the lessors, had to pay the rent, and sued the mortgagees to recover indemnity. It was held that the action did not lie,20 for there was no obligation common to the plaintitf and the defendant. It was to the mortgagees' inter est that the rent should be paid, but no one could call on them to pay it. This section only applies to payments made bona fide for the protection of one's own interest. A person may be interested in the payment, but if in making the payment he is not actuated by the motive of protecting his own interest, he cannot recover, under this section. Thus where A purchases property from B, and the sale is fictitious, A cannot recover from B money paid by him to save the property from being sold in execution of a

decree against B. It is, otherwise, however, if the sale is bona fide.3 Where A's goods are wrongfully attached in order to realise arrears of Government revenue due by B and 4 pays the amount to save the goods from sale, he is entitled to recover the amounts from B24 It is enough for a person claiming under the provisions of this section to show that he had an interest in paying the moneys at the time of payment. A mortgagee of a tenant's crop paid the amount due to Government in respect of a loan given to the tenant (mortgagor) and raised the attachment. The mortgagee being interested in payment was entitled to recover from the mortgagor (tenant) the amount so paid to the Government. Thus moneys paid by a person while in possession of an estate under a decree of a court to 17. 18.

Mulhuswami Kavundan v. Ponnayya Kavundan, (1928) 51 Mad 815. The view propounded in the text was adopted by STANLEY, C.J., in Tulsa Kunwar v. Jageshar

Prasad, (1906) 28 Al S63 by the Madras High Court in Subramania yer V. Rungappa, (1909)33

19. 20.

Mad 232 and by the Calcutta High Court in Pankhabati v. Nani Lal, (1914)) 18 CWN 778, 781; Siti Fakir v. Chand Bewa, (1928) 32 CWN 1087 : 108 IC 46: AIR 1928 Cal 389. Bonner v. Tottenham, etc., Building Society, (1898) 1 QB 161, 167, per A.L. SMITH, LJ. Bonner's Case, (1898) 1 QB 161, 167.

21. See Desai 22.

Himatsingji v. Bhavabhai, (1880) 4 Bom 643, 652. See also Secy. of State v.

Rangaswami & Co., (1927) 106 1C 657: AIR 1928 Mad 198. Janki Prasad Singh v. Baldeo Prasad, (1908) 30 All 167.

23. Subramania lyer v. Rungappa, (1909) 33 Mad 232. 24. Tulsa Kunwar v. Jageshar Prasad, (1906) 28 All 563; Abid Husain v. GangaSahai, (1928) 26 All U 435: 113 IC 441: AIR 1928 All 353, Exall v. Partridge, (1799) 8 Temm R 308 : (1775-1803) All ER Rep 341. 25. Sami Pillai v. R. Naidu, AIR 1972 Mad 4:(1971) 2 Mad LJ 206.

Reimbursement of person paying money due by another, in payment

S. 69

211

prevent the sale of the estate for arrears of Government revenue may be recovered by him under this section, even though the decree may be subsequently reversed and he may be deprived of possession.0 The section does not require that a person interested in a payment should at the same time have a legal proprietary interest in the property in respect of which the payment is made. The Appellant Company had contracted to buy the mills but they were imminently threatened by the municipality to pay unpaid taxes on the mills relating to a period before the date of sale and so payable by the Respondent (i.e. the Maharaja). The Respondent, when approached by the Appellant, showed no sign of paying the taxes to the municipality. So the Appellant company paid the sum to avoid the stoppage of the supply of water to the mills and a forced sale which would defeat its purchase. Such payment made by the Appellant Company cannot be called a voluntary payment. The Appellant Company paid this sum as it was "interested in the payment. "The Company was interested in the taxes being paid at the time when they were paid since2o 8nly through the payment could it realise the fruit of the contract that it had entered In Ram Tuhul Singh v. Biseswar Lal the Judicial Committee, in dealing with the rights of parties making payments,observed: "It is not in every case in which a man has benefited by the money of another that an obligation to repay that money arises. The quesing to the highest morality. To support such a suit there must be an obligation express or implied to repay. It is well settled that there is no such obligation in the case of a

voluntary payment by A of B's debt." "Bound by

Law"The

liability for which payment may be made under this sec-

tion need not be statutory.0 Contractual liability, on the other hand, is not a necessary element.3l An action to recover money is not maintainable under this section unless the person from whom it is sought to be recovered was bound by law to pay it. And where the income-tax authorities assessed the widow of a deceased, notwithstanding remonstrances on her part that the outstandings had not come to her, but had been bequeathed under the will of the deceased to the defendants, the widow paid the tax, it was held that she could not recover the amount from the defendants under this section, for the defendants, not being the parties assessed, were not "bound by law" to pay the tax.2 When there is no joint family property in his hands, a Hindu father is not "bound by law" to set his minor daughter married and therefore a mother incurring expense to get daughter married cannot recover from the father under this Section.33 A person purchasing property subject to a charge is alone liable to pay it off and so he cannot recover the amount paid by him from the person originally liable in respect thereof. So a mortgagee purchasing a property in execution of a mortgage decree cannot recover from the original tenant the amount which the mortgagee purchaser pays to satisfy the rent decree held by a landlord for rents due prior to his

purchase. A purchaser purchasing a property with the incumbrance of rent due from the original tenant with respect to property is deemed to have knowledge of the prior

26.

Dakhina Mohan Roy v. Saroda Mohan Roy. (1893) 21 Cal 142 LR 20 IA 160; Nagendra Nath Roy v. Jugal Kishore Roy. (1925) 29 CWN 1052: 90 1C 281 : AIR 1925 Cal 1097.

27.

Govindram v. State of Gondal, (1950) 77 IA 156:52 Bom LR 450: AIR 1950 PC 99.

28. Govindram v. State of Gondal, (1950) 77 IA 156:52 Bom LR 450: AIR 1950 PC 99 at p. 104. 29. (1875) 15 BLR 208: LR 2 IA 131; Panchkore v. Hari Das, (1916) 21 CWN 394, 399; Ruabon S.S. 30.

Co., V. London Assurance, (1900) AC 6, 15. Mothooranath v. Kristokumar, (1878) 4 Cal 369, 373.

31. Rasappa Pillai v. Doraisami Reddiar, (1925) 49 Mad LI 88:90 IC 545: AIR 1925 Mad 1041. 32. Raghaan v. Alamelu Ammal, (1907) 31 Mad 35. 33. Sundaramma v. Suryanarayana, AlR 1950 Mad 274.

212

Chap. V-of Certain Relations Resemblingthose created by Contract

S. 70

incumbrances and the existence

of an incumbrance

must have affected the price

which he offered at the time of sale. Such a purchaser simply discharges his own liability and not that of the original tenant and therefore the former is not entitled to recover the prior rent charges paid by him from the latter.3* Similarly a person buying immovable property subject to a charge for maintenance in favour of a widow cannot recover from the vendor maintenance money paid by him to the widow to save the property from sale at the instance of a widow.3 The Maharajah was bound to pay this money in the sense that he had made a legally enforceable contract with Mr. Seksaria

to pay it. "Unless the words "bound by law to pay,' where they occur in the section, exclude those obligations of law which arise inter partes, whether by contract or, by tort, and embrace no more than those public duties which are imposed by statute or general

law,

the

Maharajah

was a

person

from

whom

reimbursement

could be

claimed under the section. But their Lordships think that the words extend to any obligation which is an effective bond in law. Certainly the Common Law of England afforded a right of indemnity to one who had paid 'under compulsion of law' against the true obligor without limiting the circumstances in which the latter's liability had arisen. Certainly too, there is authority in the Courts of India for the proposition that bound by law' covers "obligations of contract or tort."50 Obligation of person

enjoying benefit of nongratuitous act.

person

enjoys

the

S. 70. Where a person

lawfully

does anything

for another person, or delivers anything to him, not intending to do so gratuitously, and such other benefit

compensation to the former done or delivered.

thereof,

the

latter

is

bound

to make

in respect of, or to restore, the thing so llustrations

(a) 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. (6) A saves B's property from fire. A is not entitled to compensation circumstances show that he intended to act gratuitously.

from B,

if the

Where a person lawfully does anything for another person. The word 'a person means a person who actually supplies goods or renders service." In the last case the plaintiff having admittedly not supplied the goods but the second defendant had done so, the suit was dismissed.38 The expression "another person' includes within its scope individuals as well as Government and Municipalities" as well successor to the title of the person who received the benefit such as the Government and Gondia Municipality who succeeded to dispensary Fund Committee.

Benefit:Acceptanceofbenefitneednot beavoluntaryact.

34. 35. 36. 37. 38. 39. 40. 41.

Ranglal Sahu v. Kali Shankar Sahai, AIR 1924 Pat 235. Mangalathammal v. Narayana Swami, (1907) 17 Mad LJ 250.

Govindram v. State of Gondal, (1950) 77 IA 156:52 Bom LR 450: AlR 1950 PC 99, 104, para 14. Hansraj Gupta & Co. v. Union of India, AlR 1973 SC 2724: (1973) 2 SCC 637. Hansraj Gupta & Co. v. Union of India, AIR 1973 SC 2724: (1973) 2 SCC 637. State of West Bengal v. B.K. Mondal & Sons, AIR 1962 SC 779:(1962) SCA 375. AIR 1970 SC 1201 73 Bom Piloo Sidhwa v. Poona Municipal Corporation, (1970) 3 SCR 415 LR.301. Pannalal v. Dy. Commissioner Bhandara, (1973) 1 SCC 639: AIR 1973 SC 1174; Khader Khan v. Doraiswami, AIR 1974 Mad 371.

Obligation of person enjoyingbenefit ofnon-gratuitousact

S.70

213

Benefit arising as a result of the Government issuing a blanket licence instead of a restricted licence cannot be attributed to the act of the plaintiff and he is not entitled to

the restoration of benefit arising due to issue of blanket licence.2 Non-gratuitous act done for another.-This section goes far beyond English law.s By the Common Law, if goods, work, or anything valuable be offered in the way of business and not as a gift, the acceptance of them is evidence of an agreement-a real, not a fictitious, agreement, though it need not be expressed in words-to pay what the consideration so given and taken is reasonably worth. A man is not bound to pay for that which he has not the option of refusing.44 Under this section it would seem that whoever finds and restores lost property, apart from any question of a reward having been offered, is entitled to compensation for his trouble if he did not intend to act gratuitously. This is certainly not the Common Law rule.

The terms of [this section) are unquestionably wide, but applied with discretion they enable the Courts to do substantial justice in cases where it would be difficult to impute to the persons concerned relations actually created by contract. It is, however, especially incumbent on final courts of fact to be guarded and circumspect in their conclusions and not to countenance acts or payments that are really officious. It is plain that the Section ought not to be read as to justify the officious interference of one man With the affairs or property of another or to impose oblıgations in respect of services which the person sought to be charged did not wish to have rendered.o In that case gov ernment repaired a tank from which were irrigated lands, some of which were Zamindari villages and others were raiyatwari villages held under government. The government effected the repairs as it was necessary for the purpose of preservation of the tank. It was found that government had carried out the repairs not gratuitously for the defendants who had enjoyed the benefit of it. In a suit by government to recover from defendants their share of the costs of repairs it was held that government was entitled under S. 70 of the Act to recover part of the costs incurred from the defendants on the basis of irrigable area of lands owned by plaintiff and defendants. Upon the same principle, where a mortgagee threatened to sell the land mortgaged to him and one of the co-sharers paid up the mortgage debt to prevent the mortgaged property from being sold, it was held that he was entitled to contribution from the other co-sharers.s Act was not gratuitous in the Calcutta Case. An entire tenure was sold in execution of rent decree obtained against some of the tenants. A plaintiff who was not a party to the rent suit deposited, with the

approval of the court and lawfully, the prescribed amount under S. 310A of C. P. Code (XIV of 1882) to have the sales set aside to protect his own interest in the holding. The sales were set aside with the result that the liabilities of the defendants in respect of rent were discharged. It was held that plaintiff was entitled to contribution from defendants as per their share in the decretal debts. The section does not apply where an act is done by one person at the express request of another. Thus if a client engages a pleader to act for him in a case, and if no fee is fixed, the pleader is entitled to reasonable remuneration not under this Section, but because the request

42. 43.

Srinivas & Co. v. Inden Biselers, AIR 1971 SC 2224 (1971) 3 SCC71. This was recognised in Jarao Kumari v. Basanta Kumar Roy. (1905) 32 Cal 374, 377.

44.

Sumpter v. Hedges, (1898) 1 QB 673, 676 per COLLINS L.J., see LSO Falcke v. Scottish Imperial Insurance Company, (1887) 34 ChD 234: 248 BOWEN LJ.

45.

Suchand v.

46. 47.

Damodara Mudaliar v. Secretary of State for India, (1895) 18 Mad 88, 93. Damodara Mudaliar v. Secretary of State for India. (1895) 18 Mad 88, 93.

Balaram,

(1910) 38 Cal 1 at 7.

48. Khairat Hussain v. Haidri Begam, (1888) Al WN 10. 49. Suchand v. Balaram, (1910) 38 Cal 1.

r

214

S. 70

Chap. V-0f Certain Relations Resemblingthose created by Contract

implies a promise

to pay such

remuneration.30 On the other hand, it can be seen that

the act was done gratuitously in the following cases and so there was no liability under S. 70 of the Contract Act. So where under the agreement the purchasers of the property sold undertook to pay on behalf of their vendors a portion of the purchase price to a mortgagee who held the mortgage over some other property of the vendors which was

not the subject of sale. Owing to delay in the registration of the sale deed which was caused by the action of the vendors, the purchasers did not immediately pay the stipulated sum to mortgagee. Subsequently when they tendered the sum to mortgagee, he refused to accept it without further payment of interest which had fallen due by this lapse of time. The purchasers paid the additional sum to the mortgagee but claimed it to recover from the vendors. It was held that there was no obligation upon the purchasers to

pay to mortgagee any amount towards the payment of interest. Their liability was restricted to the stipulated sum only and the payment of interest was gratuitously made. It may be that vendors were benefited by the payment of interest to their creditors but this by itself is not sufficient ground to fasten them with liability. So where out of three defendants A, B and C, in a previous suit, A had one-half interest in the disputed property of the litigation and in order to safeguard his interest A had to fight out the case in the best way he could; if incidentally and without any special effort on A's part, B and C derive any advantage, it cannot be said that A had done something for the

benefit of B and C2 Essential conditions of this section. -By this section three conditions are required to establish a right of action at the suit of a person who does anything for another: (1) the thing must be done lawfully; (2) it must be done by a person not intending to act gratuitously; and (3) the person for whom the act is done must enjoy the benefit of it."5 Person liable to contribute-In Governor-General in Council v. Madura Municipality* the Provincial Government wrongly purported to exercise their powers under the Railways Act and required the Railway Company to widen a culvert. The Railway Company while stating that Government had no power to require such widening

of the culvert agreed to do the work and charge either Government or the Municipality. After the work was completed the Railway Company filed a suit against the Municipality. Their Lordships held that although the Railway Company did not intend to do the work gratuitously, the work was not done for municipality and it did not enjoy the benefit of it except in an indirect sense and so municipality was not liable under S. 70 of the Act. The Division Bench of the High Court of Madras also took the same approach when the case was before it. Accordingly it stated:35

This is a very indirect benefit, and Section 70 can in our opinion only have application where there is direct benefit to the person for whom the work is done. The persons

who are enjoying the benefit of this work are the owners and occupiers of the buildings in the locality. It would be doing violence to the section to say that in these circumstances the work was done for the benefit of the municipality."

50.

Sibkisor Ghose v. Manik Chandra, (1915) 21 Cal LJ 618.

S1.

Suraj Bhan v. Hashmi Begam, (1918) 40 All 555, See also Nathu v. Bałwantrao, (1903) 27 Bom 390. Gulam Ali v. Inayat Ali, AIR 1933 Lah 95.

52.

53. Damodara Mudaliar v. SecretaryofState for India, (1894) 18 Mad88; Ranjani Kant v. RamaNath, (1914) 19 CWN 458, 460; Lakshmanan v. Arunachalam, AIR 1932 Mad 151: 135 IC 590; Union of India v. Goswami, AIR 1974 Cal 131; KS Satyanarayana v. VR Narayana Rao, (1996) 6 SCC 104, 109. 54. Govermor-General in Council v. Madura Municipality, (1949) 75 IA 213 (1949) Mad 529: S1

Bom LR 927:(49) APC39. 55.

AIR 1945 Mad 427, 430.

Obligation of personenjoying beneft ofnon-gratuitousact

70

215

But in the Supreme Court case6 the government was made liable under S. 70 of the

Act as it had full and direct benefit. A part of the steel supplied by the government of India was utilized for manufacturing gas plants by the plaintiff company and the rest of the unused steel was delivered under the government's direction viz. the Controller of Steel, Kanpur to another concem called G. Bros. which held the steel on behalf of the government of India. On a suit filed by the plaintiff company against the Union of India for steel delivered, the Union of India was defended in the Supreme Court that it was merely controlling the supply and distribution of iron and steel and that the liability to pay the price of goods dealt with by it in the exercise of its powers of control rested upon the party receiving the goods. However, the Supreme Court found that while directing the plaintiff company to deliver steel to another concern, the Controller of Steel, Kanpur, was dealing with the goods as if they belonged to the govemment of India and so it should be liable to pay for them when the plaintiff company was directed to deliver the goods to G. Bros. When G. Bros. held the supply of Steel made to them by the plaintiff company, they were holding the steel on behalf of the government of India who must have reaped

full benefit of the delivery to G. Bros. According to theSupreme Court the defendant "had enjoyed the full benefit of the delivery of goods to G. Brothers and not merely an

indirect benefit thereof."7 Where a contract is partly performed, the other party is not bound to pay unless it is

shown that he has taken benefit of the part performance under circumstances sufficient to raise an implied promise to pay for the part performance.

Quantum of Compensation.

Where a building contractor does 'extra work' over

and above the work mentioned in the contract, he would be entitled to be paid at the

market rate for such extra work.Y The question of whether something is "extra" will be determined by the court on an interpretation of the contract as a whole.ou Compensation

is usually at the market price of the goods supplied. In respect of a contract for construction of drainage syphons, after acceptance of the tender, specifications were altered by the Engineer and this resulted in additional item of work prolonging the duration of work and sharp rise in cost of material and labour2 The contractor claimed on the basis of increased rates of material and labour on the principle of quantum meruit.5 It was held that so long as the contract remained and was not frustrated, it was not open to the contractor to ignore the express terms of the contract and claim payments at the rates different from those stipulated on the plea of equity. Quantum meruit can be awarded only if the contract does not provide a fixed price or consideration for the work done.05 In another case, where a formal lease was not executed, lessee was held to be not entitled to damages for breaches of oral lease but it was held that he was entitled to the return of security deposit.00

56. Union of India v. Ms JK. Gas Plamt, (1980) 3 SCC 469: AIR 1980 SC 1330. 57. Union of India v, M/s J.K. Gas Plant, (1980) 3 SCC 469: AIR 1980 SC 1330 at p. 475. 58. Krishna Menon v. Cochin Dewaswom Board, AIR (1963) Ker 181. 59. V.R. Subramanyam v. B. Thayappa, (1961) 3 SCR 63: (1961)2 SCJ 191. 60. Food Corpn of India v. Vikas Majdoor Kamdar Sahkari Madli Lad, (2007) 13 SCC S44, 552. 61. Piloo Sidhwa v. Poona Municipal Corporation, AIR 1970 SC 1201 (1970) 3 SCR 415 : 73 Bom LR 301. 62. State of Rajasthan v. Motiram, AIR 1973 Raj 223.

63. StateofRajasthan v. Motiram, AIR 1973Raj223. I 64. State of Rajasthan v. Motiram, AIR 1973 Raj 223. 65. Puran Lal Sah v. State of U.P., AIR 1971 SC 712: (1971) 1 SCC 424. 66. State of Rajasthan v. Raghunath Singh. (1974) A Raj 4.

216

S. 70

Chap. V-Of Certain Relations Resembling those created by Contract

Lawfully"-By

the use of the word "lawfully" in this section the Legislature had

in contemplation cases in which a person held such a relation to another as either directly to create or reasonably to justify the interference that by some act done for another person the person doing the act was entitled to look for compensation to the person for whom it was done. Where a person managed the estate of his wife and his sisters-inlaw and was under the impression that he would receive remuneration for his services, he

was entitled to claim reasonable payment.05 The word "lawfully" in this section is not mere surplusage. It must be considered in each individual case whether the person who made the payment had any lawful interest in making it, if not, the payment cannot be said to have been made lawfully,07 A payment made by a person fraudulently and dishonestly with the intention of manufacturing evidence of title to land which belonged to the defendent, and to which he knew he had no claim, is not lawful within the meaning of this section.

So a tenant could not invoke S. 70 of the Act as his action was not

lawfl

when he had effected rapairs amounting to renovation of building without previous permission of Rent Controller as required under S. 22 of Madras Buildings (Lease and The word Rent Control) Act 1960 and also disregarded objections of landlord." "lawfully" indicates that after something is done or delivered to one person by another and the thing accepted and enjoyed, a lawful

relationship arises between

the two.

"There is no doubt that the thing delivered or done must not be delivered or done fraudulently or dishonestly nor must it be delivered or done gratuitously.

Section 70 is

not intended to entertain claims for compensation made by pesons who officially interfere with the affairs of another or who impose on others services not desired by them. Section 70 deals with cases where a person does a thing for another not intending to act gratuitously and the other enjoys it. It is thus clear that when a thing is delivered or done

by one person it must be open to the other person to reject it... under Section 70 there is no scope for claims for specific performance or for damages for breach of contract. In the very nature of things claims for compensation are based on the footing that there has been no contract and that the conduct of the parties in relation to what is delivered or done creates a relationship resembling that arising out of contract."s

Persons incompetent to contract.-This section does not apply to persons who are incompetent to contract. The section refers to circumstances in which the law implies a promise to pay, and where there could not have been a legally binding contract, a promise to pay cannot be implied.74

Contracts required to be in writing-Where there is a mandatory provision in an Act requiring contracts to be in writing, an oral contract is void. But it has been held by

67. Chedi Lal v. Bhagwan Das, (1888) 11 All 234, 243; see Gordhanlal v. Darbar Shri Surajmalji. (1902) 26 Bom 504, 518. Palanivelu v. Neelavathi, (1937) 39 Bom LR 720: 167 IC 5 : AIR 1937 PC 50. Panchkore v. Hari Das, (1916) 21 CWN 394, 399. A reversioner expectant on the death of a Hindu widow has no such interest; Gopeshwar Banerjee v. Brojo Sundari Devi, (1922) 49 Cal 470. 70. Desai Himatsinji v. Bhavabhai, (1880) 4 Bom 643, 653. See also Jinnat Ali v. Fatch Ali, (1911) 15 CWN 332, 334, 335. 71. Doraipandi Konar v. Sundara Pathar, AIR 1970 Mad 291. 72. Shabhaz Khan v. Bhangi Khan, (1931) 135 IC 177: AIR 1931 Lah 344; Nathibai v. Wailaja, (1937) Nag 111:169 IC 675: AIR 1937 Nag 330; Bankey Behari v. Mahendra Prasad (1940) 19 68. 69.

Pat 759:188 IC 772: AIR 1940 Pat 324 (FB). 73. State of West Bengal v. B.K. Mondal & Sons, AIR 1962 SC 77:(1962) 2 SCA 375. 74. Shabhaz Khan v. Bhangi Khan, (1931) 135 IC 177 : AlR 1931 Lah 344; Nathibai v. Wailaja,

(1937) Nag 111:169 IC 675: AIR 1937 Nag 330; Bankey Behari v. MahendraPrasad, (1940) 19 Pat 739: 188 IC 772: AIR 1940 Pat 324 (FB). 75. Chatturbhuj Vithaldas v. Moreshwar, AIR 1954 SC 236 : 1954 SCR 817.iraswi saad on

Responsibilityof finder ofgoods

217

S..71

the Supreme Court6 that where work has been done and accepted, Section 70 is

appli-

cable and payment should be made for the work done. So where the Respondent, a firm of Contractors, had at the request of certain Officer of the government of Bengal (as it then existed) done certain construction work for government and the latter had taken the benefit of that work. These officers were not authorised by the government to make the request on its behalf and the Respondent was aware of such lack of authority. The Supreme Court invoked S. 70 of the Act for the Respondent against the Appellant.' Similarly, a contract entered into by A with the government of India for the supply of coal to Railway

Administration

was void and un-enforceable as it contravened S. 175(3) of

government of India Act, 1935. But if under the said void contract, A had performed his part and government had received the benefit of the performance of the contract by A, government was bound to make compensation to A in the form of the value of the said Coal under S. 70 of the Contract Act.' The said principle of invalidity of contract has not been extended to pro-notes which are not admissible under Section 35 of the Stamp

Act and especially where the loan was simultaneous or where it was not given by way of collateral securty. The provisions of this section would not apply to such a case even on the basis of subsisting original contract. Responsibility finder ofgoods.

of

S. 71. A person who finds goods belonging to another, and takes them into his custody, is subject to the same

Liability

of

finder.-As

responsibility

as a bailee.

to who is a bailee and what are his responsibilities see Ch.

IX below. One H picked up a diamond on the floor of K's it till the owner appeared. H is therefore the finder liable (1) to try and find out the true owner, and (i) finder is entitled to the possession of such goods

shop and handed it over to K to keep of goods.0 Such a finder of goods is to take due care of the goods. Such a against all the world except the true

Such a finder is entitled to a lien, retain the goods even against the true owner owner. until he is paid by the owner, compensation for the custody, care and preservation, although he is not entitled to sue for such compensation. Where, however, the owner has offered a reward to the finder, the finder could sue for the reward on the basis of a contract (offer and acceptance). In English Law, once a finder accepts responsibility for

the goods his liability is that of a gratuitous bailee. In Newman v. Bourne & Hollingsworth, P, a customer in D's shop, put down a broach with the coat and forgot to pick it up. D's assistant found it and it was placed in a drawer over the week-end. On Monday it was missing. D was held liable to P as D had failed to exercise ordinary care which a prudent man would have taken85

Agency.-Respondent booked the goods at Quetta Railway Station for New Delhi just after partition of the country. The wagon containing the goods of the respondent seemed to arrive safe upto New Delhi, via Amritsar. The wagon was unloaded on 20-2-1948 and on 7-6-1948 he was told to take delivery of the goods. When he went to

76. State of West Bengal v. B.K. Mondal & Sons, AIR 1962 SC 779: (1962) 2 SCA 375. 77. State of West Bengal v. B.K. Mondal & Sons, AIR 1962 SC 779 : (1962) 2 SCA 375. 78. New Marine Coal Company Ltd. v. Union of India, AIR 1964 SC 152:(1964) 2 SCR 859. 79. Perumal Chettiar v. Kamakshiammal, AIR 1938 Mad 785 (FB); L. Sambasiva Rao v. T. Balakotiah, AIR 1973 AP 342 (FB). 80. Hollins v. Fowler, LR 7 HL 757. RAM 81. Hollins v. Fowler, LR 7 HL 757. 82. Har Bhajan v. Har Charan, (1925) All LJ 655. Ronilh.n 83. Newman v. Bourne & Hollings-worth, (1915) 31 TLR 209, 1A tAEeth

218

Chap. V-of Certain Relations Resemblingthose created by Contract

S. 72

collect the goods, the goods were not traceable. The owner sued the East-Punjab Railway which was handling the wagon from Indo-Pakistan Border into India. It was held that in the absence of any contract between the two governments or the railways, the respondent

delivered the goods to the Receiving Railway (N.W. Rly.) with authority to create the Forwarding Railway (East Punjab Rly.) as his immediate bailee from the point the wagon was put on its rails.3* The forwarding railway can be eguated with the finder of goods within the meaning of S. 71 of the Indian Contract Act.3) So the E.P. Rly. was liable for the loss as a bailee. Plaintiff's timber was lying on the land which was subsequently leased out to the defendant. The defendant gave notice to the owner of timber to remove it but it was not removed. The defendant then cleared the site and timber was "damaged' or "removed". The Plaintiff's claim under Section 71l of the Contract Act was dismissed as the defendant had not taken the goods into his custody.86

Liability of person to

S. 72. A person to whom money has been paid,

whommoneyispaid.or or anything delivered, by mistake or under coerth ,rycim cion, must repay or return it. taikn egd oreulinvde err ecd oeb on.

etlhustrations (a) A and B jointly owe 100 rupees to C. A alone pays the amount to C, and B, not knowing this fact, pays 100 rupees-over again to C. C is bound to repay the amount to B. (b) A railway company refuses to deliver up certain goods to the consignee except upon the payment of an illegal charge for carriage. The consignee pays the sum charged in order to obtain the goods. He is entitled to recover so much of the charge as was illegally excessive.

Payment under mistake of fact or mistake of law.-The rule of the Common Law is that "money paid under mistake or ignorance of fact may be recovered back when the supposed state of fact is such as to create a liability to pay the money, which in reality is not due" but "a payment made under the influence of a mistake which does not create a supposed legal obligation, and which therefore as regards the motive of the party is

voluntary, cannot be recovered back."8

Bramwell B, in Aiken v. Short8 stated "In order to entitle a person to recover back money paid under a mistake of fact, the mistake must be as to a fact which, if true, would make the person

paying liable to pay the money; not where, if true, it would merely make it desirable that he should pay the money."

This dictum of BRAMWELL B. has sometimes been approved and sometimes criticised but it seems probable that it no longer represents the law.3

Ashcrofa

In Morgan v.

bookmaker, through the error of his clerk, overpaid a client who was placing

bets with him. The

bookmaker sought to recover the excess payment as money paid

under a mistake of fact. He failed because even if the supposed fact had been true, liability to pay as the excess plaintiff bookmaker would have been under no legal payment was based on Gaming and Wagering contracts which are null and void by S. 18 of the Gaming Act, 1845. On these facts, the payment was a voluntary payment accord-

84.

Union of India v. Amar Singh, AIR 1960 SC 233, 237, Para ll :(1960) 2 SCR 75.

85.

Ibid p. 238, para 15.

86. Union of India v. MohammadKhan, AIR 1959 Ori 103: ILR 199 Cut 32 (DB). 87. 88.

MARTIN LEAKE, PRINCIPLES OF THE LAW OF CONTRACTS (8th edn., 1931) at pp. 68-69. Aiken v. Short, (1856) 1 H & N 210, 215.

89. 90.

Cheshire and Fifoot's Law of Contract (9th ed. 1976) p. 646. Morgan v. Ashcrofn, (1937) 3 All ER 92: (1938)1 KB 49.

S. 72

Liability of person to whom money is paid, or thing delivered

219

ing to the Court of Appeal and so Plaintiff could not recover the excess payment. Though the dictum of BRAMWELL B. applied to the facts of the above case, both Lord GREENE M.R. and ScOT L.J. did not consider that dictum as laying down an exhaustive statement of law. According to GREENE M.R. any mistake of fact which was sufficiently fundamental might allow a plaintiff to recover the money paid. He gave an instance. If A makes a voluntary payment (i.e. payment without any legal obligation to make the payment) of money to B under the mistaken belief that B is C, it may be that A can recover it. This

doubt expressed by the Court of Appeal in Morgan v. Ashcroft seems to have been confirmed partially by anotherdecision of the Court of Appeal in Larner v. London County Counci where the existence of a belief on the part of the payer that he was morally bound to pay was sufticient to allow the recovery as the payment was not considered as a voluntary

payment. In that case the defendants, the London

County

Council, resolved to pay all their employees who went on war service, the difference between their war service pay and their former civilian pay. The plaintitf, an employee of the defendants went on war service and got this difference. The plaintiff as per resolution undertook to notify all changes in his war service pay but this he did not notify and so the defendants over-paid him. The whole of the over-payments had not been recouped at the time of plaintiff's demobilisation. When he returned to the service of the Council, the Council began to deduct weekly amounts from his wages on account of the balance outstanding. The plaintiff brought an action claiming repayment of the amount deducted from his wages and the Council counter-claimed for the balance and the sum over-paid then outstanding. Regarding counter-claim of the council to recover the amount overpaid to plaintift, it was admitted by him that payments were made to him under a mistake of fact but he argued that they were voluntary

payments

which

were not made in

discharge

of legal liability and so it fell within the words ofBRAMWELLB., money which it was "merely desirable" that he should pay. The court held that the defendants were entitled to reclaim them as they were in honour bound' to keep their promise and payments should not be regarded as wholly gratuitous but made "as a matter of duty". It has been held that money paid under a mistake is recoverable under this section even where the person to whom it has been paid has not exercised any fraud or

misrepresentation.3 According to the Gujarat High Court in Dhrangadhra Municipality v. Dhrangadhra Chemical Works Ltd, it is further essential for a plaintiff seeking refund of illegal tax under S. 72 of the Contract Act to plead and prove that he would suffer legal injury or

prejudice if restitution is not granted. A plaintiff who has paid alleged illegal tax but has himself not suffered the incidence of tax and has passed it on the consumers who have borne the burden of tax cannot legitimately contend that refusal of his request for restitution would prejudice him. In such a case the real plaintiffs should be those who have actually suffered the burden of the tax. They would be innumerable unidentifiable consumers bearing the burden of the tax and not intermediaries like traders and manufactur-

ers who have merely passed on the burden of tax entirely to the consumers. If such pleading is not put forward, the requirements of S. 72 would remain uncomplied with and a plaint not disclosing the cause of action is liable to be rejected under O. 7, R. 11 of the

91. 92.

Morgon v. Asheroft, (1937) 3 All ER 92, 99:(1938) 1 KB 49, 66. Larner v. London County Council, (1949) 1 All ER 964: (1949) 2 KB 683; See also Lady Hood oj Avalon v. Mackinnon, (1909) 1 Ch 476.

93. State of Punjab v. Rafq Masih, (2014) 8 SCC 883. 94. Dhrangadhra Municipality v. Dhrangadhra Chemical Works Lid, (1988) 1 GLR 388.

220

S. 72

Chap. V-0f Certain Relations Resemblingthose created by Contract

C.P. Code. 1908 The Supreme Court also reached a similar conclusion in Mafatlal Industries and this case is discussed later.

This section does not make any distinction between money paid under mistake of fact and money paid under mistake of law. In Shiba Prasad v. Srish Chandras their Lordships drew a distinction between the provisions of Section 21 and this section and said: "If a mistake of law has led to the formation of a contract, S. 21 enacts that the contract is not for that reason voidable. If money is paid under the contract, it cannot be said that, that money was paid under mistake of law; it was paid because it was due under a valid contract, and if it had not been paid payment could have been enforced. Payment "by mistake in S. 72 must refer to a payment which was not legally due and

which could not have been enforced: the 'mistake' is in thinking that the money paid was due when in fact it was not due. There is nothing inconsistent in enacting on the one hand that if parties enter into a contract under mistake in law that contract must stand and is enforceable, but on the other hand that if one party acting under mistake of law pays to another party money which is not due by contract or otherwise, that money must be repaid. Moreover, if the argument based on inconsistency with S. 21 were valid, a similar argument based on inconsistency with S. 22 would be valid and would lead to the conclusion that S. 72 does not even apply to mistake of fact. The argument submitted to their Lordships was that S. 72 only applies if there is no subsisting contract between the person making the payment and the payee and that the Indian Contract Act does not deal with the case where there is a subsisting contract but the payment was not due under it. But there appears to their Lordships to be no good reason for so limiting the scope of the Act. Once it is established that the payment in question was not due, it appears to their Lordships to be irrelevant to consider whether or not there was a contract between the parties under which some other sum was due...

It may be well to add, that their Lordships' judgment does not inmply that every sum paid under mistake is recoverable no matter what the circumstances may be. There may in a particular case be circumstances which disentitle a plaintiff by estoppel or otherwise." In that case a lessee and his agents made over-payments in respect of rent and it was not clear why they made the over-payments. They may have acted on legal rights or inadequate information. They may have taken a wrong view or their they may have continued paying at the old rates without giving any thought to the matter. But it was clear that there was no intention to make a present to the lessor of money which was not due. The money was paid under the belief that it was legally due. As this belief was mistaken, that was considered by their Lordships sufficient to

bring the case within the provisions of the section. The Supreme Court held that sale tax amounts paid under a mistake of law were recoverable under this section. Other levies are also similarly recoverable. In Mafatlal Industries, the Supreme Court has exhaustively reviewed the law relating to claims for refund of taxes andhas over-ruled all earlier cases to the extent they are inconsistent with the judgment. The situations in which claims for refund of taxes can be tenable were classified by the court into three

categories-illegal ley; unconstitutional levy and (the confusingly titled) mistake of

1.

Dhrangadhra Para 14, 15.

Municipality v. Dhrangadhra

Chemical Works Lid., (1988) GLR 388 at p. 400-402,

2. Mafatlal Industries Lid. v. Union of India, (1997) 5 SCC 536. 3. Shiba Prasad v. Srish Chandra, (1949) 76 IA 244: 52 Bom LR 17: AlR 1949 PC 287. 4. Sales Tar Officer Banaras v. Kanhaiyalal, (1959) SCR 1350 AIR J959 SC 135; State of M.P. v. Bhailal Bhai, AIR (1964) SC 1006, (1010): (1964) 6 SLR 261. 5. Mahabir Kishore v. State of MP,(1989) 4 SCC 1,9: AIR 1990 SC 313 (cess tax and mahua charge paid after these had been struck down by the Court) 6. Mafatlal Industries Ltd. v. Union of India, (1997) 5 SCC 536.

Liability of person to whom money is paid, or thing delivered

72

221

law. An illegal levy is where tax is collected by the authorities under the statute on the basis of a misconstruction of the law or erroneous determination of facts. An unconstitutional levy is where the tax is levied under a provision of law that is struck down as unconstitutional. Mistake of law (in the context of this judgment) is where the claim for refund is based on a decision rendered in another case holding that the levy is either an illegal levy or an unconstitutional levy. To the extent the levy is an illegal levy, and refund for such collections is contemplated and provided for by the relevant law, the claim for refund cannot be taken up under S. 72 and must be pursued under the procedure provided by the relevant law.

This would cover all assessments by the authorities under the law, irrespective of whether this was within the jurisdiction of the authority or covered by the statute. A mistake of law (in the sense this is used in the judgment) based on a decision in another case also cannot, by itself, form the basis for recovering the tax paid under S. 72. An unconmistakenly paid is stitutional levy is the only category where a claim for refund of tax maintainable under 72 by way of a suit and also by way of a writ petition under the

Constitution. Further, a claim for refund can succeed only to the extent that the plaintiff (petitioner)

is able to

establish that he has not passed on the burden of the tax, since

where the burden of the tax has been passed on, the plaintiff (petitioner) has not suffered any real loss or prejudice.

Defences.-Every sum paid under mistake is not necessarily recoverable under all circumstances. There may be circumstances which disentitle a plaintiff from recovering

on the ground of estoppel or because no more blame attaches to the defendant than to the plaintiff and the defendant no longer retains the money. Common law recognizes various defences to an action for restitution based on unjust enrichment.3 The most important of these is the defence of "change of position", which has been described to be available to "a person whose position has so changed that it would be inequitable in all the circumstances to require him to make restitution, or alternatively to make restitution in full." Unlike the defence of estoppel, detrimental reliance is not a necessary ingredient for invoking the change of position defence; there must just be a sufficient This causal link between the defendant's unjust enrichment and its change of position. defence has also been recognized by the Supreme Court in Metro Exporters. The facts in this case are simple. Metro Exporters were due a certain sum of money on account of certain exports by them. On the instructions of and because of the mistake of SBI,

payments which were due to Metro Exporters from the Bank of America (bankers to the importer), were returned to the Bank of America, however the amounts were credited by SBI to the account of Metro Exporters. This mistake of SBI came to light after 2 years, where in order to recover its monies, SBI sought to exercise lien over the account of

Metro Exporters maintained with it. It was held that no doubt Metro Exporters had been unjustly enriched because of mistake of SBI, however, it had changed its position consequent to the enrichment, nor would it be equitable for the Court not now require Metro Exporters to recover the money from the importer. The claim under S. 72 thus was not maintaible.

Payment not under a mistake.-Where moneys are paid voluntarily with full knowledge of all the facts relating to the voidness of the contract, there does not arise a

. Nagoraov.Governor-Generalin Council, AlR 1951Nag372. 8.

See- Andrew Burrows, The Law of Restitution (3 edn, 2011, OUP) at pp 523-614.

9.

Lipkin Gorman v. Karpnale Ltd, [1991]2 AC 548, 580 (HL).

10. Scotish Equitable plc v, Derby, [2001) EWCA Civ 369: [2001]3 All ER 818. 11.

Metro Exporters v. SBI, (2014) 11 SCC 161.

222

S 72

Chap. V-0f Certain Relations Resemblingthose created by Contract

mistake of law or fact and such moneys cannot be recovered back.2 This would also apply to moneys paid under a compromise of doubtfül or disputed rights or claims.5 gnorance of law and a deliberate disregard of law would not amount to a mistake

oflaw.14 Where moneys are paid pursuant to orders of the Court, they would not fall under this clause. But if they are paid in execution of the Court's decree or order, the payment might be one under coercion. Coercion-The Judicial Committee had laid down that the word 'coercion' in this section is used in its general and ordinary sense and its meaning is not controlled by the definition of "coercion" in Section 15. Accordingly, where A who had obtained a decree against B, obtained an attachment against C's property, and took possession of it to obtain satistaction for the amount of the decree, and C on being ousted from his property paid the sum claimed under protest, C was held entitled to recover the sum as money paid under ""coercion within the meaning of this section.° In this case C sued for a declaration that the attachment was invalid and for a refund of the money paid. But if a defendant has had an opportunity of defending, of which he has not availed himself, he is not allowed to re-open the question in an action to get the money back. This is the foundation

of the rule that money paid underpressure of legal process cannot be recovered. Money paid under 0. 21, R. 89 of the Code of Civil Procedure, to set aside a sale is paid voluntarily and cannot be recovered as paid under coercion.8 Where a person who is charged with a non-compoundable offence is induced to pay money to the complainant to stifle the prosecution, he may recover the money so paid

under this section,

but not if no pressure or compulsion was exercised upon the

accused.0 As the right under this section is a statutory right it is not subject to equitable considerations.2

12. Anath Bandhu v. Dominion of India, AIR 1955 Cal 626. 13. Stapilton v. Stapilton, 26 ER 1 :1 Atk 3; Rameshar v. Babulal, AIR 1946 Pat 97. 14. Anath Bandhu v. Dominion of India, AIR 1955 Cal 626 (629). 15. Oficial Assignee v. Dayabhoy, AIR 1937 Rang 234; S. fS. v. Tatya Saheb, 34 Bom LR 791.

16. SethKanhaya Lal v. National Bank of India, (1913) 401A 56: 40 Cal 598; following in Ah Choon v. T.S. Firm, (1927) 5 Rang 653: 106 IC 468 : AIR 1928 Rang 55; Satyam v. Perraju, AIR 1931 Mad 753: 135 IC 24.

Marriot v. Hamton, (1797) 2 Smith LC 421; Secretary of State v. Tatyasaheb, (1932) 56 Bom 501 34 Bom LR 791: 140 IC 171 : AIR 1932 Bom 386; Bihar State v. Jhawarmal, AIR 1958 Pat 310. 18. Shankarrao v. Vadilal, (1933) 57 Bom 601:35 Bom LR 462: 148 IC 74 : AlR 1933 Bom 239. 17.

19. Muthuveerappa v. Ramaswami, (1917) 40 Mad 285. 20. Amjadennessa Bibi v. Rahim Buksh, (1915) 42 Cal 286.

21. Kanhaya Lal v. National Bank of India Ltd, (1923) 50 LA 162:4 Lah 284.

CHAPTERVI

OF THE CONSEQUENCES OF BREACH OF CONTRACT

Compensation for loss

or damagecaused by breach of contract

S. 73. When a contract has been broken,' the party wh0 suffers by such breach is entitled to

receive, from the party who has broken the contract, compensation for any loss or damage

caused to him thereby, which naturally arose in the usual course of things from such breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it. Such compensation is not to be given for any remote and indirect loss or damage sustained by reason of the breach. Compensation

for

failuretodischargeobli-

When an by

obligation

contract has been

resembling those ereated incurred

and has not been

8ationresembling th,ose discharged, any person injured by the failure to created by contract. discharge it is entitled to receive the same com-

pensation from the party in default, as if such person had contracted to discharge it and had broken his contract.2 Explanation.-In estimating the loss or damage arising from a breach of contract, the means which existed of remedying this inconvenience caused by the non-performance of the contract must be

taken into account. Illustrations (a) A contracts to sell and deliver 50 maunds of saltpetre to B, at a certain price to be paid on

delivery. A breaks his promise. B1s 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. b) A hires B's ship to go to Bombay, and there takes on board, on the first of January, a cargo, which A is to provide, and to bring it to Calcutta, the freight to be paid when earned. B's ship does not go to Bombay, but A has opportunities of procuring suitable conveyance for cargo upon terms as advantageous as those on which he had chartered the ship. A avails himself of those opportunities, but is put to trouble and expense in doing so. A is entitled to receive compensation from B in respect of such trouble and expense.

1. This section is declaratory of the Common Law as to damages. Jamal v. Moola Dawood Sons & Co., (1916) 43 LA 6, 11l:43 Cal 493, 503. 2. See Anrudh Kumar v. Lachhmi Chand, (1928) 50 All 818: AIR 1928 All 500.

[223

224

S. 73

Chapter VI-of theconsequencesof Breach ofContract

(c) A contracts to buy of B, at a stated price, 50 maunds of rice, no time being fixed for delivery. A afterwards informs B that he will not accept the rice if tendered to him. B is entitled to

receive from A, by way ofcompensation,the amount, if any, by which the contract priceexceeds that which B can obtain for the rice at the time when A informs B that he will not accept it.

(d) A contracts to buy B's ship for 60,000 rupees, but breaks his promise. A must pay to B, by way of compensation, the excess, if any, of the contract price over the price which B can obtain for the ship at the time of the breach of promise. (e) A, the owner of a boat, contracts with B to place, starting on a specified day. The boat, owing time appointed, whereby the arrival of the cargo would have arrived if the boat had sailed according

take a cargo of jute to Mirzapur, for sale at that to some unavoidable cause, does not start at the at Mirzapur is delayed beyond the time when it to the contract. After that date, and before the

arrival of the cargo, the price of jute falls. The measure of the compensation payable to B by A is the difference between the price which B could have obtained for the cargo at Mirzapur at the time when it would have arrived if forwarded in due course, and its market price at the time when it

actually arrived. )A contracts to repair B's house in a certain manner, and receives payment in advance. A repairs the house, but not according to contract. B is entitled to recover from A the cost of making the repairs conform to the contract. (g) A contracts to let his ship to B for a year, from the first of January, for a certain price.

Freights rise, and on the first of January, the hire obtainable for the ship is higher than the contract price. A breaks his promise. He must pay to B, by way of compensation, a sum equal to the difference between the contract price and the price for which B could hire a similar ship for a year on and from the first of January.

(h) 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.

) Adelivers to B, acommoncarrier, amachine,tobeconveyed,without delay, to A's mill, informing B that his mill is stopped for want of machine. B unreasonably delays the delivery of the machine, and A, in consequence, loses a profitable contract with the Government. A is entitled to receive from B, by way of compensation, the average amount of profit which would have been made by the working of the mill during the time that delivery of it was delayed, but not the loss sustained through the loss of the Government contract. )4, having contracted with B to supply B with 1,000 tons of iron at 100 rupees a ton, to be delivered at a stated time, contracts with C for the purchase of 1,000 tons of iron at 80 rupees a ton telling C that he does so for the purpose of performing his contract with B. C fails to perform his contract with A, who cannot procure other iron, and B, in consequence, rescinds the contract. C must pay to A 20,000 rupees, being the profit which A would have made by the performance of his contract with B.

(k) A contracts with B to make and deliver to B, by a fixed day, for a specified price, a certain piece of machinery. A does not deliver the piece of machinery at the time specified, and in consequence of this, B is obliged to procure another at a higher price than that which he was to have paid to A, and is prevented from performing a contract which B had made with a third person at the time of his contract with A (but which had not been communicated to A), and is compelled to

make compensation for breach of that contract. A must pay to B, by way of compensation, the difference between the contract price of the piece of machinery and the sum paid by B for another, but not the sum paid by B to the third person by way of compensation. () A, a builder, contracts to erect and finish a house by the first of January, in order that B may give possession of it at that time to C, to whom B has contracted to let it. A is informed of the contract between B and C. A builds the house so badly that, before the first of January, it falls down and has to be rebuilt by B, who, in consequence, loses the rent which he was to have received from C, and is obliged to make compensation to C for the breach of his contract. A

must

make

compensation to B for the cost of rebuilding the house, for the rent lost, and for the compensation made to C.

Compensation for loss or damagecausedby breach of contract

S. 73

225

(m) A sells certain merchandise to B, warranting it to be of a particular quality, and B, in reliance upon his warranty, sells it toC With a Similar warranty. The goods prove to be not according to the warranty, and B becomes liable to pay Ca sum of money by way of compensation. B is entitled to be reimbursed this sum by A. (n) A contracts to pay a sum of money to B on a day specified. A does not pay the money on that day. B, in consequence of not receiving the money on that day, is unable to pay his debts, and is totally ruined. A is not liable to make good to B anything except the principal sum he contracted

to pay, together with interest upto the day of payment. (o) A contracts to deliver 50 maunds of saltpetre to B on the first of January, at a certain price. B afterwards, before the first of January, contracts to sell the saltpetre to C at a price higher than the market price of the first of January. A breaks his promise. In estimating the compensation payable by A to B, the market price of the first of January, and not the profit which would have arisen to B from the sale to C, is to be taken into account.

p)A contracts to sell and deliver 500 bales of cotton to B on a fixed day. A knows nothing of B's mode of conducting his business. A breaks his promise, and B, having no cotton, is obliged to close his mill. A is not responsible to B for the loss caused to B by the closing of the mill. (g) A contracts to sell and deliver to B, on the first of January, certain cloth which B intends manufacture into caps of a particular

to kind, for which there is no demand, except at that season. The

cloth is not delivered till after the appointed time, and too late to be used that year in making caps. Bis entitled to receive from A by way of compensation, the difference between the contract price of the cloth and its market price at the time of delivery, but not the profits which he expected to obtain by making caps, nor the expenses which he has been put to in making preparation for the

manufacture. )A, a ship-owner, contracts with B to convey him from Calcutta to Sydney in A's Ship, sailing on the first of January, and B pays to A, by way of deposit, one-half of his passage-money. The ship does not sail on the first of January, and B, after being in consequence, detained in Calcutta for some time, and thereby put to some expense, proceeds to Sydney in another vessel, and, in consequence, arriving to0 late in Sydney, loses a sum of money. A 1s liable to repay. to B his deposit, with interest, and the expenses to which he is put by his detention in Calcutta, and the

excess, if any, of the passage-money paid for the second ship over that agreed upon for the first, but not the sum of money which B lost by arriving in Sydney too late.

Breach of Contract and Remedies. The illustrations to the section illustrate various kinds of breaches. There are three kinds of remedies upon a breach of contract viz. (1) specific performance, (2) injunetion, and (3) damages. This section deals with the last remedy. This section is triggered in the event of a breach of the contract and lays down the principle for ascertaining damages. The next section deals with what is known as liquidated damages i.e., the amount agreed upon between the parties to be paid in the event of a breach. The damages contemplated in the section are of pecuniary nature or of a loss of property. The remote or indirect damages such as for disappointment, vexation of mind, injured feelings are excluded by this section.

Damages:two standards: This section provides for loss or damage (1)

which naturally arose in the usual course of things from the breach; or

3. MD, Army Welfare Housing Organisation v. Sumangal Services (P) Ltd. v. Sumangal Services (P)

Lid, (2004)9 SCC 619, 666 : AIR 2004 SC 1344; Kailash Nath Associates v. DDA, (2015) 4 SCC 136, (section 74 applies only "when a contract has been broken")

4. Hamlin v. GreatNorthern Railway 1 H & N 408: 156 ER 1261; Addis v. GramophoneCo. Ltd, (1909) AC 488; Kemp v. Sobers, (1851) 1 Sim (NS) 517 (520); Withers v. General Theatre Corpo ration Ltd, (1933) 2 KB 536; Ghaziabad Development Authority v. Union of India, (2000) 6 SCC T13, 118 (compensation for mental agony)..

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(2) which the parties knew when they made the contract, to be likely to resut from the breach.

The first rule provides for usual losses and the second rule provides for additional loss as well. The words likely to result' have been deliberately used. It is not necessary to be proved upon a given state of knowledge, that the

defendant,

as a reasonable man,

could foresee that a breach must 'necessarily' result in the loss. It is enough if the defendant could foresee that it was "likely so to result". In the second rule a criterion is "not what was bound necessarily to result" but "what was likely or liable to result". This foreseen knowledge must be "at the time when the parties made the contract".

Remedy provided by this section not the only remedy for breach of contract. Where, under a contract

of sale, the property in the goods has passed to the buyer, and

the buyer wrongfully neglects or refuses to pay for the goods according to the terms of the contract, the seller may, at his option, either sue for the price of the goods or for damages for non-acceptance. The present section prescribes the method of assessing the damages, and it does not take away the right of a seller to maintain an action for the price where the property in the goods has passed to the buyer.

Rule in Hadley v. Baxendale. The illustrations to this section were obviously considered of special importance. We have thought that several of the English and recent Indian decisions would be most usefully dealt with by stating them in the form of additional illustrations and inserting them, distinguished by inclusion within square brackets and by the reference to the report of each case, in the places which seemed most appropriate.

The intention of the farmers of the Act was plainly to affirm the rule of the Common Law as laid down by the Court of Exchequer in the leading case of Hadley v. Baxendale, decided eighteen years before the passing of this Act. That rule, expressly and carefully framed to be the guide to judges in directing juries, was as follows: Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered either arising naturally, i.e.

according to the usual course of things, from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties at the time

they made the contract as the probable result of the breach of it. Now, if the special circumstances under which the contract was actually made were communicated by the plaintiffs to the defendants, and thus known to both parties, the damages resulting from the breach of such a contract, which they would reasonably contemplate, would be the amount of injury which would ordinarily follow from a breach of contract under these special circumstances so known and communicated. But, on the other hand, if these special circumstances were wholly unknown to the party breaking the contract, he at the most, could only be supposed to have had in his contemplation the amount of injury which would arise generally, and in the great multitude of cases not affected by any special circumstances, from such a breach of contract. For had the special circumstances been known, the parties might have specially provided for the breach of contract by special terms as to damages in that case; and of this advantage it would be very unjust to deprive them."6

5. 6.

P.R. & Co. v. Bhagwandas, (1909) 34 Bom 192; Finlay Muir and Co. v. Radha-Kissen, (1909) 36 Cal 736. Hadley v. Baxendale, (1854) 9 Ex 341, 354.

Compensationfor loss or damage caused by breach of contract

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227

So far as practicable, "a person with whom a contract has been broken has a right to fulfil that contract for himself as nearly as may be, but he must not do this unreasonably or oppressively as regards the other party, or extravagantly. It is even his duty to take all reasonable steps to mitigate the loss consequent on the breach; and then the effect in actual diminution of the loss he had suffered may be taken into account, and this apart

from the question whether it was his duty to act."The question must always be whether what was done was a reasonable thing to do, having regard to all the circumstances," and one test is "what a prudent person uninsured," i.e. not having a claim for compensation or indemnity or anyone, "would do under the same circumstances," It is not a reasonable thing, for example, to hire a special train to save an hour or so of time when there is no particular reason for being at one's destination at a certain hour; and expense so incurred cannot be recovered as damages. In English law, if a buyer disappointed of his goods can buy in the market as a sum equal to or less than the contracted price, he has suffered no loss and can recover only nominal damages. lhustrations (a) A contracts to sell and deliver 50 maunds of saltpetre to B, at a certain price, to be paid on

delivery. A breaks his promise. Bis entitled to receive from 4, by way ofcompensation, 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.

[Note-Market rate.-Under a contract for the sale of goods the measure of damages upon a breach by the buyer is the difference between the contract price and the market price at the date of the breach. If the seller retains the goods after the breach, he cannot recover from the buyer any further loss if the market falls, nor is he liable to have

thedamagesreducedif themarket rises."] Generally it is quite settled that on a contract to supply goods of a particular sort, which at the time of the breach can be obtained in the market, the measure of damages is the difference between the contract price and the market price at the time of the breach. But the subject-matter of the contract may not be marketable. In that case the value must be taken as fixed by the price which actually has to be paid for the best and nearest available substitute: Hinde v. Liddel, (1875) L.R. 10 QB 265, 269.

Again, if the buyer, after giving the seller time at his request, finally has to go into the market and buy at an advanced price, he may recover the whole difference between the contract price and the price he actually paid.s Accordingly, the decisive date for fixing the damages is the last date to which the contract was extended. The fact that the buyer sustains no actual loss from the seller's failure to deliver the goods is no ground for awarding merely nominal damages to the buyer. The buyer is entitled, as indicated by illustration (a) to the section, to receive from the seller by wvay of compensation the sum by which the contract price falls short of the price for which the buyer might have obtained goods of like quality at the time when they ought to have deliver:7. 8.

British Westinghouse, Etc, Co. v, Underground Electric Etc., Co., (1912) AC 673, see per LORD HALDANE at p 689. Le Blanche v. L. & N.W.R. Co., (1876) 1 CP Div 286, 309, 313; approved by the Judicial Committee in Erie County Natural Gas, Etc., Co. v. Carroll, (1911) AC 105.

Le Blanche v. L. & N.W.R. Co. (1876) 1 CP Div 286, 309, 313; approved Committee in Erie County Natural Gas, Etc., Co. v. Carrol, (1911) AC 105. 10. Erie County, Etc. Co. 's Case, (1911) AC 105. 1. Jamal v. Moola Dawood Sons & Co., (1916) 43 IA 6:43 Cal 493. 12. Including shares in a company, see Williams Bros. v. Ed.T. Agius, (1914) AC 510. 9.

by the Judicial :

SiA

13. Ogle v. Earl Vane Ex., Ch (1868) LR 3 QB 272. 14. Kidar Nath-Behari Lal v. Shimbhu Nath-Nandu Mal, (1926) 8 Lah 198:99 IC 812:(27) AL 176.

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ed15 But the Delhi High Court in Union of India v. Tribhuvan Patel6 declared its disagreement with this view. According to a single Judge of the Delhi High Court, under S. 73 the plaintiff must prove the actual loss suffered by him. The court found justification for its view as the law disallows even remote or indirect loss and so is obvious that plaintiff cannot be allowed to recover damages if he has actually suffered no loss. Section 73 would become nugatory if there be different interpretation. Illustration (a) to S. 73 has

to be construed in the light of this statutory provision so as to harmonise it with the principles laid down in S. 73 and not to enlarge the scope of the section. While laying

down the above interpretation the Delhi High Court found itself to be in line with the basic principles of damages for the breach of contract, that it should not be penal but compensatory. Market rate: limits of rule.-The market rate, however, is only a presumptive test: "it is the general intention of the law that, in giving damages for breach of contract, the party complaining should, so far as it can be done by money, be placed in the same position as he would have been in if the contract had been performed," and the rule as to market price "is intended to secure only an indemnity" to the purchaser. "The market value is taken because it is presumed to be the true value of the goods to the purchaser."

If he does not get his goods he "*should receive by way of damages enough to enable him to buy similar goods in the open market. Similarly, when delivery of goods purchased is delayed,

the goods

are presumed to have b

at the time

they

hould have be

delivered worth to the purchaser what he could then sell them for, or buy other like them for, in the open market, and when they are in fact delivered they are similarly presumed to be, for the same reason, worth to the purchaser what he could then sell for in that

market." There is an important exception "if in fact the purchaser, when he obtains possession of the goods, sells them at a price greatly in advance of the then market value." In such a case he must allow for the profit he actually makes and can recover only his actual loss; otherwise he would be placed in a better position than if the contract had been performed. So the law is explained by the Judicial Committee in Wertheim v. Chicoutimi Pulp Co.l17

If no ready market.-The defendant contracted to deliver to the plaintiff 1,000 tons of coal by instalments from February to June. The coal was not delivered and there was in those months no ready market for coal of the contract quality. In the absence of other material, the Court, in order to ascertain the measure of damages, admitted evidence of rates fixed in sub-contracts made by the plaintiff for the sale of the coal. (b) A hires B's ship to go to Bombay, and there takes on board, on the first of January, a cargo which A is to provide, and to bring it to Calcutta, the freight to be paid when eamed. B's ship does

not go to Bombay, but A has opportunities of procuring suitable conveyance for the cargo upon terms as advantageous as those on which he had chartered the ship. A avails himself of those opportunities, but is put to trouble and expense in doing so. A is entitled to receive compensation from B in respect of such trouble and expense.

[Note-Actual loss.-A contracts with B to sell and deliver goods which on the day appointed for delivery are worth Rs. 80 per ton. They are delivered later on a day when they are worth only Rs. 50 per ton, but meanwhile A has sold them for Rs. 70 per ton. A is entitled to damages only for his actual loss of Rs. 10 per ton. " 15.

16. 17. 18. 19.

Hajee Ismail & Sons v. Wilson & Co., (1918) 41 Mad 709; Errol Mackey v. Kameshwar, (1932) 59 TA 398: 11 Pat 600 :34 Bom LR 1596 : 138 1C 658 : AIR 1932 PC 196; Vishwanath v. Amarlal, AIR 1957 MB 190. Union of India v. Tribhuvan Patel, AlR 1971 Delhi 120. Wertheim v. Chicoutimi Pulp Co., (1911) AC 301, 307, 308. Jagmohandas v. Nusserwanji, (1902) 26 Bom 744. Wertheim v. Chicoutimi Pulp Co., (1911) AC 301 (see above).

Compensation for loss or damage causedby breach of contract

.73

229

(c) A contracts to buy of B, at a stated price, 50 maunds of rice, on time being fixed for delivery. A afterwards informs B that he will not accept the rice if tendered to him. B is entitled to

receive from 4, by way of compensation,the amount, it any, by which thecontract priceexceeds that which B can obtain for the rice at the time when A informs B that he will not accept it.

Note-Where

no time fixed for

delivery-If

in thecase put above A gives notice

to B that he will not take delivery after a certain date, and B does not deliver by that date, the measure of damages would be the difference between the contract price and the market price on that date.0] (d) A contracts to buy B's ship for 60,000 rupees, but breaks his promise. A must pay to B by way of compensation, the excess, if any, of the contract price over the price which B can obtain for the ship at the time of the breach of promise. (e) A, the owner of a boat, contracts with B to take a cargo of jute to Mirzapur, for sale at that place, starting on a specified day. The boat, owing to some avo1dable cause, does not start at the time appointed, whereby the arrival of the cargo at Mirzapur is delayed beyond the time when it would have arrived if the boat had sailed according to the contract, After that date, and before the

armival of the cargo, the price of jute falls. The measure of the compensation payable to B by A is the difference between the price which B could have obtained for the cargo at Mirzapur at the time when it would have arrived if forwarded in due course, and its market price at the time when it actually arrived.

INote-Late delivery, carriage by sea or land.-There is no general rule that t measure of damages in the case of late delivery when the carriage is by sea is governed by different principles to those that apply when the carriage is by land: *wherever the circumstances admit of calculations as to the time of arrival and the probable fluctuations of the market being made with the same degree of reasonable certainty in the case of a sea as of land transit, there can be no reason why damages for late delivery should not be calculated according to the same principles in both cases"] (f) A contracts to repair B's house in a certain manner, and receives payment in advance. A repairs the house, but not according to contract. B is entitled to recover from A the cost of making the repairs conform to the contract.

The above illustration refers to a case where work done does not conform to the contract. (g) A contracts to let his ship toB for a year, from the first of January, for a certain price. Freights rise, and, on the first of January, the hire obtainable for the ship is higher than the contract price. A breaks his promise. He must pay to B, by way of compensation, a sum equal to the difference between the contract price and the price for which B could hire a similar ship for a year on and from the first of January.

h) 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.

[Note-Delivery by instalments-Anticipatory breach.-If the iron was to be delivered by instalments at certain dates, e.g. at the end of the three months of September, October and November, the measure of damages is the sum of the differences between the contract and the market price of the several instalments of the respective final days for performance2; and the same rule is applied where the seller, before the expiration of the whole time for performance, has refused to complete the contract, and the buyer has treated the refusal as an immediate breach unless the seller can show that the buyer could

20. Gauri Datt v. Nanik Ram, (1916) 14 All LJ 597 21. Dunn v. Bucknall Bros., (1902) 2 KB 614, 623 CA. 22. Brown v. Muller, (1872) LR Ex 319.

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have obtained a new contract on better terms.25]. If a vendor has a specified time allowed to him to deliver goods (the option was to deliver in August or September), and before the expiry of that time he gives notice to the purchaser that he will be unable to perform the contract, and the purchaser does not rescind the contract (as he may do under S.39), the measure of damages is the difference between the contract price and the market price on the last day of the period limited (i.e., here last day of September).4 (i) A delivers to B, a common carrier, a machine, to be conveyed, without delay to A's mill

informing B that his mill is stopped for want of the machine. B unreasonably delays the delivery of the machine, and 4, in consequence, loses a profitable contract with the Government. A 1S entitled to receive from B, by way of compensation, the average amount of profit which would have been made by the working of the mill during the time that delivery of it was delayed, but not the loss sustained through the loss of the Government contract.

[Note.-Notice of special circumstances.-The facts in Hadley v. Baxendale,2 were somewhat similar to those in illustration (i), except that the defendants did not know that the plaintiff's mill was stopped for want of part of the machinery which they were to supply. They were held not liable for loss of profit. It may be collected from the judgment that with such knowledge they would have been liable. As to the general rule there laid down see the commentary below. The loss of profits on a contract of which the defendant had no notice is clearly too remote. But where the defendant failed to supply an essential part of a machine which the plaintiff, to the knowledge of the defendant, was under contract to supply to a third person, and the plaintiff, by the defendant's default,

lost the benefit of that contract, the defendant was held liable both for the loss of profit and for the plaintiff's charges in making other parts of the machine.20] B delivers to A several cases of machinery to be carried by sea from Bombay to Karachi for the purpose of building a mill. On arrival at Karachi one of the cases, containing indispensable parts of the machinery, was not found. A knew that the cases contained machinery, but did not know the specific contents of each case, A is liable to pay B by way of compensation the value of the lost case, freight and interest, but not the profits lost by the mill not having been set up at the time intended.

Defendant (Respondent) entered into Contract with Plaintiff Appellant In July 1952 for sale of certain quantity of scrap iron for which controlled price was fixed. The defendent did not know, nor was he told, that the scrap iron was required by plaintiff for sale to Export Corporation for export. The Plaintiff also had no knowledge that he would subsequently contract with Export Corporation to sell the scrap iron purchased from the defendant. Subsequently on 30-1-1953 Plaintiff contracted with the Export Corporation to sell them scrap iron. The defendant failed to supply the scrap iron, plaintiff sued him for damages for the breach. It was held that the loss which could have naturally arisen in the usual course of things from the breach of the contract by the defendant would be nil upon non-delivery of scrap iron as the plaintiff could have purchased the scrap iron from market at the same controlled price. Further, as the defendant was not informed

by the

plaintiff when they had entered into contract in July 1952 that the plaintiff was pur chasing the scrap iron for export, the defendant was not liable for the consequent loss suffered by the plaintiff.23

23. 24. 25.

Roper v. Johnson, (1873) LR 8 CP 167; Krishna Jute Mills Co. v. Innes, (1911) 21 Mad LJ 182. Mackertich v. Nobo Coomar Roy, (1903) 30 Cal 477. Hadley v. Baxendale, 9 Ex 341.

26. Hydraulic Engineering Co. v. McHaffie, (1878) 4 QB Div 670: 27 WR 221. 27. See British Columbia Saw Mill Co. Ltd. v. Nettleship, (1868) LR 3 CP 499. 28. Karsandas v. Saran Engineering Company Lid., AIR 1965 SC 1981.

a heiutéw

Compensation for loss or damage causedby breach of contract

S. 73

231

A sent by railway a set of books to himself as consignee. On arrival it was found that three volumes were missing, making the whole set useless. A sued the railway authority

for the price of the whole set. It was held that as the railway had no notice of the fact that loss of three volumes would make the whole set useless, invoice mentioning only a bundle of books, they were liable only for the price of the lost three volumes." In Victoria Laundry (Windsor) Ltd. v. Newman Industries Lid,30 the defendants, an engineering firm, contracted boiler for their works. This, delivered five months after the plaintiff's business and soon as possible.

to sell and deliver to the plaintiffs on a certain day a large however, was damaged in the course of removal and was the agreed date. The defendants were aware of the nature of they were informed that the boiler was required for use as

In consequence of this delay the plaintiffs lost the profits which they would have earned and, in particular, highly lucrative dyeing contracts which they could have to recover these losses. obtained with the Government. The plaintiffs sued the defendants It was held that the defendants knew at the time of the contract that the plaintiffs were laundrymen and dyers and required the boiler for immediate use in their business. From their own technical experience and the business relations existing between them, they must be presumed to have anticipated that some loss of profits would occur by this delay. But without special knowledge on their part, the defendants could not reasonably foresee the additional loss suffered by the plaintiffs because of their inability to accept the highly lucrative dyeing contract with the Government.TREITELS neatly distinguishes this case from Hadley v. Baxendale. Judging the defendants in both the cases from the facts known to them by the criterion of the reasonable man, the loss of profits was recovered in the Victoria Laundry case because the defendants knew that the boiler was required for immediate use, while in Hadley v. Baxendale defendants did not know that the delay in the delivery of the shaft would keep the mills idle. Secondly, in Hadley v. Baxendale the defendants who were the carriers were less able to foresee the effects of delay than the defendants in the Victoria Laundry Case who were qualified engineers and knew more than the uninstructed layman of the purposes to which such boilers were put. In Jaques v. Millar,32 it was held that where an intending lessor knew that the lessee wanted the premises for a certain trade, and refused to deliver possession for several weeks after the lessee was entitled to it, the lessee could recover for the estimated value to him of the possession during that time. G) A, having contracted with B, to supply B, with 1,000 tons of iron at 100 rupees a ton, to be delivered at a stated time, contracts with C for the purchase of l1,000tons of iron at 80 rupees a ton, telling C that he does So for the purpose of performing his contract with B. C fails to pertom his contract with A, who cannot procure other iron, and B, in conesquence rescinds the contract. C must

pay to A 20,000 rupees, being the profit which A would have made by the pertormance of his contract with B. Ifthe sub-sale was in contemplation, but the market price at the time fixed for delivery was only Rs. 90 a ton, it would depend upon the facts whether A was entitled to damages at the rate of Rs. 20 a ton, for example if he could honour his contract with B only by delivering the specitic iron to be supplied by C, or at the rate of Rs. 10a ton, for example, if he could honour his contract with Bby purchasing similar goods in the market."

Notice of contract of resale.-If C only knew generally that A wanted the iron for resale he would not be entitled to damages beyond the difference between the contract price

29. Dominion of India v. All India Reporter Ltd., AIR 1952 Nag 32:(1952) Nag 125. 30. Victoria Laundry (Windsor) Lid. v. Newman Industries Lid, (1949) 2 KB 528. 31. 32.

TREITEL, THE LAW OF CONTRACT (12th edn. 2007) at pp. 1045-1046). Jaques v. Millar, (1877) 6 Ch D 153.

33.

Kwei Tek Chao v. British Traders, (1954) 1 All ER 779, 797 per DEVLIN J.

2

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Chapter V-0f theconsequencesofBreach ofContract

and the market price at the date of the breach." If there is no market price the measure of damages is the difference between the resale price and the contract price.9 (k) A contracts with B to make and deliver to B, by a fixed day, for a specified price, a certain piece of machinery. A does not deliver the piece of machinery, at the time specified, and, in consequence of this, B is obliged t procure another at a higher price than that which he was to have paid to 4, and is prevented from performing a contract which B had made with a third person at the time of his contract with A (but which had not been communicated to A), and is compelled to make compensation for breach of that contract. A must pay to B, by way of compensation, the difference between the contract price of the piece of machinery and the sum paid by B for another, but not the sum paid by B to the third person by way of compensation. (1) 4, a builder, contracts to erect and finish a house by the first of January, in order that B may give possession of it at that time to C, to whom B has contracted to let it. A is informed of the contract between B and C. A builds the house so badly that, before the first of January it falls down and has to be rebuilt by B who, in consequence, loses the rent which he was to have received from C, and is obliged to make compensation to C for the breach of his contract. A must make compensation to B for the cost of rebuilding of the house, for the rent lost, and for the compensation made to C.

Chain of contracts.-The the headnote toš6;

following additional illustration is taken substantially from

B, a wholesale furrier, brought some dyed rabbit skins from A for the purpose, as A knew, of making fur collars. B, having made the fur collars, resold to C, C resold to D, and D to E, a draper.

E then sold a coat, with one of these fur collars attached, to F, a customer, for her

own wear. F developed "fur dermatitis," owing to antimony in the fur. F sued E for damages for breach of warranty on the sale of the coat. E gave notice of the action to D, D to

C, C to B, and B to A. F recoveredjudgment for damagesand costs. E claimed this sum, together with his own costs, from D, who paid the amount and recovered it from C, together with a further sum for his costs. C claimed from B, and B paid him and sued A for £699 damages for breach of the original warranty on sale of the skins. The Court, having found as a fact that E has acted reasonably in defending the original action by F, held that B was entitled to recover from A (1) the damages recovered in the original action by F (2) the costs of both sides in the action; and (3) a sum in respect of costs incurred by themselves and C and D respectively in connection with the claims against them. (m) A sells certain merchandise to B, warranting it to be of a particular quality, and B, in

reliance upon this warranty, sells it to C with a similar warranty. The goods prove to be not according to the warranty, and B becomes liable to pay Ca sum of money by way of compensation. B is entitled to be reimbursed this sum by A.

[Note.-Warranty.-4 sells a cow to B, whom he knows to be a farmer and likely to put the cow in a herd, with a warranty that she is free from foot and mouth disease. The cow in fact has the disease and communicates it to other cows with which she is placed, and several of them die. B can recover from A the whole loss, and not only the value of the cow sold, and it is immaterial whether A gave the warranty in good faith or not: Smith v. Green, (1875) 1 CPD 92.]

34. Thol v. Henderson, (1881) 8 QBD 457. 35. Emil Adolph Zippel v. Kapur & Co., AIR 1932 Sind 9: 139 IC 114. 36. Kasler & Cohen v. Slavonski, (1928)1 KB 78.

* ista**sata******i*d.Tiinn*mtats*

Compensation for loss or damage causedby breach of contract

S. 73

233

Damages suffered as a consequence of a breach of warranty must be calculated as of the date of such breach. Thus, where goods were supplied and found to be defective in 1982 or 1985, damages could not be awarded on the basis of rates prevailing in 1995. (n) A contracts to pay a sum of money to B on a day specified. A does not pay the money on that day. B in consequence of not receiving the money on that day, is unable to pay his debts, and is totally ruined. A is not liable to make good to B anything except the principal sum he contracted to pay, together with interest upto the day of payment.

INote. -Delay in payment of money.-"The law does not regard collateral or consequential damages arising from delay in the receipt of money": Per CUR., Graham v. Campbell, (1878) 7 Ch Div at p. 494.] A gives an ljara Patta of certain property to B. It is a condition of the Patta that B should pay to the superior landlord the rent. The superior landlord thereupon sues A for the rent, and, in execution of the decree obtained by him in the suit, the tenure is sold. B is not liable to A for the loss of the property, for A could have paid the rent on default by B, and saved the property from sale. (o) A contracts to deliver 50 maunds of saltpetre to B on the first of January, at a certain price, B afterwards, before the first of January, contracts to sell the saltpetre to C'at a price higher than the market price of the first of January. A breaks his promise. In estimating the compensation payable by A to B, the market price of the first of January, and not the profit which would have arisen to B from the sale to C, is to be taken into account.

Note-Failure

to deliver on agreed day

-Theil

ration assumes that there was a market price on the first of January. If there was no market price on that day the difference between the resale price and the contract price would be the measure of damages. See notes under illustration (j) and also the note "Market price" and the case of Jagmohandas v. Nusserwanji," cited there. In an English case" on a wilful default by a vendor of real estate to give possession, a contract to resell was accepted as evidence of

an advance of market value.] (p) A contracts to sell and deliver 500 bales of cotton to B on a fixed day. A knows nothing of B's mode of conducting his business. A breaks his promise, and B, having no cotton, is obliged to close his mill. A is not responsible to B for the loss caused to B by the closing of the mill.

(q) A contracts to sell and deliver to B, on the first of January, certain cloth which B intends to manufacture into caps of a particular kind, for which there is no demand, except at that season. The cloth is not delivered till after the appointed time, and too late to be used that year in making caps. B is entitled to receive from A, by way of compensation, the ditfference between the contract price of the cloth and its market price at the time of delivery, but not the profits which he expected to obtain by making caps, nor the expenses which he has been put to in making preparations for the manufacture.

[Note-Loss

of profits on breach of

contract.-The

market price is here the

price as diminished by the want of demand consequent on the season being past.

Note.-No

notice of special

circumstances.-A

tailor, expecting to make a large

profit on the occasion of a festival that is to be held at a certain place delivers a sewing machine and a cloth bundle to a railway company to be conveyed to that place, and

through the fault of the company's servants they are not delivered until after the conclusion of the festival. The company had no notice of the special purpose for which the goods were required. The tailor is not entitled to damages for the loss of profits nor for his expenses incidental to the journey to that place and back, as such damages could not

37. 38. 39. 40.

ONGC Ltd. v. Off-Shore Enterprises Inc., (2011) 14 SCC 147, 156. Girish Chandra v. Kunja Behari, (1908) 35 Cal 683. Jagmohandas v. Nusserwanji, (1902) 26 Bom 744. Engell v. Fitch, (1869) LR 4 QB 659 Ex Ch.

234

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Chapter V1-0f theconsequencesofBreach of Contract

have been in the contemplation of the parties when they made the contract, nor can they be said to have naturally arisen in the usual course of things from the breach.4 (r) A, a ship-owner, contracts with B to convey him from Calcutta to Sydney in A's ship,

sailing on the first of January,and B pays to A, by way of deposit, one-half of hispassagemoney. The ship does not sail on the first of January, and B, after being, in consequence, detained in ( for some time, and thereby put to some expense, proceeds to Sydney in another vessel, and, in consequence, arriving too late in Sydney, Ioses a sum of money. A 1s liable to repay to B his deposit, with interest and expense to which he is put by his detention in Calcutta, and the excess, if any, of the passage money paid for the second ship over that agreed upon for the first, but not the sum of money which B lost by arriving in Sydney too late."4

In this illustration it seems to be assumed that A does not know B°s particular reason for wanting to be at Sydney by a certain date. A contracts to sell by description to B sulphuric acid commercially free from arsenic. A does not know what B wants the acid for. B receives sulphuric acid from A under the contract, and uses it in producing a kind of sugar used by brewers. The acid is, in fact, not free from arsenic, the sugar manufactured with it is deleterious and useless, and B incurs liability to his customers, and the goodwill

of his business is diminished in value and othergoods of B's are spoilt by being mixed with this acid. B is entitled to the goods spoilt.4]

recover from A only the price of the acid and the value of

Explanation to Section 73: "means which existed"

etc-This explanationhas

caused considerable difficulty in practice; the words "means which existed of remedying the inconvenience" have seemed obscure.

Duty to

mitigate

loss.-In this connection may be noted the observations of the

Judicial Committee in Jamal v. Moolla Dawood Sons & Co.4* "It is undoubted law that a plaintiff who sues for damages owes the duty of taking all reasonable steps to mitigate the loss consequent upon the breach and cannot claim as damages any sum which is due to his own neglect. But the loss to be ascertained is the loss at the date of

the breach. If at that date the plaintiff could do something or did something which mitigated the damage, the defendant is entitled to the benefit of it. Staniforth v. Lyall45 is an illustration of this. But the fact that by reason of the loss of the contract which the defendant has failed to perform the plaintiff obtains the beneit of another contract which is of value to him does not entitle the defendant to the benefit of the latter contract." In the case of an anticipatory breach, the duty to mitigate damages does not require the party who suffers from the breach to go into the market in search of another contract. Z, a millowner, agreed to put his mill at the disposal of A, a cotton merchant, for six months and to gin cotton which A would buy and bring to the mill. Z repudiated the contract soon after it was made. The Privy Council held that A was not obliged to prove that he had purchased cotton and tendered it to other mills so that damages might be assessed at a difference of rates. Their Lordships said that as it was an anticipatory breach A was

entitled to damages assessed on an estimate of profit at the date of breach.4

41.

Madras Railway Co. v. Govinda Rau, (1898) 21 Mad 172; See also Fazal lahi v. East lndian Rly. Co., (1921) 43 All 623. 42. This illustration does not affect the rule as to measure of damages where the contract is for the sale

of goods;KandappaMudaliar v. MuthuswamiAyyar, (1926) S0 Mad 94:99 IC 609: AIR 1927 Mad 99.

43.

Bostock & Co. v. Nicholson & Sons, (1904) I KB 725.

44. Jamal v. Moolla Dawood Sons & Co., (1916) LR 43 IA 6, 10: 43 Cal 493, 592; Murlidhar Chiranjilal v. Harishchandra Dwarkadas, (1962) 1 SCR 653 AIR 1962 SC 366. Staniforth v. Lyal, (1830) 7 Bing 169.

45. 46. Ramgopal v. Dhanii Jadhavji Bhatia, (1928) 55 Cal 1048:55 IA 299 (PC) : 30 Bom LR 1389:111 IC 480: AIR 1928 PC 200.

Compensation for loss or damagecaused by breach of contract Contracts relating to immovable

property.-The

S. 73

235

rule as to damages as enunci-

ated in Hadley v. Baxendale*i does not apply in English law to contracts for the purchase

of immovable property. It was finally settled by the decision of the House of Lords in Bain v. ForthergilFs that a purchaser of real estate cannot recover damages for the loss of his bargain, but only his deposit and expenses; and that even if the vendor knew that he had no title nor any means of acquiring it, the purchaser may have a further remedy by an action for deceit, but not on the contract. The reason for this exceptional rule is that the purchaser of real estate in England must expect some degree of uncertainty as to whethera good title can be effectively made by the vendor, whereas the vendor of a chattel must know, or at all events is taken to know, what his right to the chattel is.

The rule in Bain v. Forthergill was at one timeassumed in the High Court of Bombay to be the law of India.- But Section 73 is general in its terms, and does not exclude the case of damages for breach of a contract to sell immovable property, and in fact the rule was not settled beyond question in England when the Act was passed. "The Legislature has not prescribed a different measure of damages in the case of contracts dealing with land firom that laid down in the case of contracts relating to commodities.

Therefore, when a purchaser of land claims damages for the loss of his bargain, the question to be decided is whether the damage alleged to have been caused to him

naturally arose in the usual course of things from such breach"; and in an ordinary case it would be difficult to hold otherwise. The view propounded above was approved by the High Court of Bombay in Ranch-

hod v. Manwohandas. In thatcase the Coutexpressedthe opinion that the rule in Bain v. Fothergil was not law in this country. "As Section 73 imposes no exception on the ordinary law as to damages, whatever the subject-matter of the contract, it seems to me

that in cases of breach of contract for sale of immovable property through inability on the vendor's part to make a good title the damages must be assessed in the usual way, unless

it can be shown that the parties to the contract expressly or impliedly contracted that this should not render the vendor liable to damages.3 A similar view has been expressed by the High Court of Calcutta,34 Lahore3 and Madras.6 A similar view has also been expressed by the Supreme Court. Where a vendor of land guarantees his title to the purchaser, and the latter is evicted from his holding, he is entitled to recover the value of

the land at the date of eviction, and not merely the purchase money paid for it.5

Interest by way of damage.-Act XXXII of 1839 provides for the payment of interest by way of damages in certain cases. Under that Act the Court may allow interest on debts or certain sums which are payable by an instrument in writing from the time when the

amount becomes payable where a time 1S fixed for payment, or,

47. Hadley v. Baxendale, (1854) 9 Ex 341:96 RR 742. 48. 49. 50. S1. $2.

Bain v. Forthergill, (1874) LR 7 HL 158. Pitamber v. Cassibai, (1886) 11l Bom 272. Per FARRAN, C.J., in Nagardas v. Ahmedkhan, (1895) 21 Bom 175, 185. Ranchhod v. Manwohandas, (1907) 32 Bom 165. Bain v. Fothergill, (1874) LR 7 HL 158.

53. Per MACLEOD, J., 32 Bom 165, 171 See Vallabhdas v. Nagardas, (1921) 23 Bom LR 1213. In

practice theassessmentof damages for a defective title may have to be rough;see Harilal 54. 55. S6. 57. 58.

Dalsukhram v. Mulchand, (1928) 52 Bom 883:30 Bom LR 1149: 113 1C 27 : AIR 1928 Bom 427. Nabinchandra v. Krishna, (1911) 38 Cal 458, at p. 465. Jai Kishen Das v. Arya Priti Nidhi Sabha, (1920) I Lah 380; Mangal Singh v. Dial Chand, (1940) 188 IC 383: AIR 1940 Lah 159. Adikesawan Naiduv. Gurunatha, (1918) 40 Mad 338. Jagdish Singh v. Natthu Singh, (1992) 1 SCC 647, 657 AIR 1992 SC 1604. Nagardas v. Ahmedkhan, (1895) 21 Bom 175..

236

S. 74

Chapter V-0f theconsequencesofBreach ofContract

where no time is fixed, from that date on which demand of payment is made in writing giving notice to the debtor that interest will be claimed.. The decisions in India were at one time divided on the question whether interest was recoverable by way of damages under the present section [lustration (n)]. It has now been decided by the Privy Council that the illustration does not confer upon a creditor a right to recover interest upon a debt which is due to him when he is not entitled to such interest under any provision of law. With reference to the words "interest shall be payable in all cases in which it is now payable by law" occurring in the proviso in the Interest Act, their Lordships observed that the proviso applied to cases in which the Courts of Equity exercised jurisdiction to allow interest. But in the case of breach of a contract of sale the Court may now award interest to a seller suing for the price and to a buyer suing for refund: Sale of Goods Act III of 1930,

Section 61.60 Although no interest by way of damages can be awarded under this section, where money is obtained by fraud and is retained by fraudl or where a debt is wrongfully detained, interest by way of damages has been awarded by Courts on equitable

principles. Damages Recoverable under Revenue Recovery

Act-In State of Karnataka v.

Shree Ranmeshwara Rice Mills03 the Supreme Court observed that when an agreement entered into between the Government and private party specifically provided for recovery

or damages for breach of any condition of contract asarrears of land revenue, even if the damages become payable on account of breach of conditions of the contract, the liability to pay damages does not fall outside the terms of the contract but within the terms of the contract. So it follows that though damages become payable on account of breach of conditions of agreement, they nevertheless constitute amounts payable under the contract and hence the damages can be recovered under the Revenue Recovery Act.

S. 74. TWhen a contract has been broken, if a Contract sum is named in the contract as the amount to be

Compensation

breach

of

for

where penaltsytipulated paid in case of such breach, or if the contract for. contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named or, as the case may be, the penalty

stipulated for. Explanation.-A

stipulation for increased interest from the

date of default may be a stipulation by way of penalty]

59. Bengal Nagpur Railway Co., Ltd., v. Rutanji Ramji, (1938) 65 LA 66: (1938) 2 Cal 72: 173 IC 15 AIR 1938 PC 67. 60. As to the former Indian law, see Kandappa Mudaliar v. Muthuswami Ayyar, (1927) 50 Mad 94:99 IC 609 AlR 1927 Mad 99. 61. Trojan & Co. v. Nagappa Chettiar, AlR 1953 SC 235: 1953 SCR 789. 62. 63.

Purshottam v. Amruth Ghee Co., AIR 1961 AP 143. AIR 1987 SC 1359:(1987) 2 SCC 160.

Substituted by Indian Contract (Amendment) Act, 1899 (6 of 1899), S. 4.

Compensationfor breach of Contract wherepenaltystipulated for

S. 74

237

Exception.-When any person enters into any bail-bond, recognizance

or

other

instrument

of the same nature

or, under the

provisions of any law, or under the orders of the [Central Government| or of any (State Government|, gives any bond for the performance of any public duty or act in which the public are interested, he shall be liable, upon breach of the condition of any such instrument, to pay the whole sum mentioned therein. Explanation.-A person who enters into a contract with Government does not necessarily thereby undertake any public duty, or promise to do an act in which the public are interested. lhustrations (a) A contracts with B to pay B Rs. 1,000 if he fails to pay B Rs. 500 on a given day. A compensation not fails to pay Rs. 500 on that day. B is entitled to recover from A such exceeding Rs. 1,000 as the Court considers reasonable. (b) A contracts with B that, if A practices as a surgeon within Calcutta, he will pay B Rs. 5,000. A practises as a surgeon in Calcutta. B is entitled to such compensation, not exceeding Rs. 5,000, as the Court considers reasonable.

(c) A gives a recognizance binding him in a penalty of Rs. 500 to appear in Court on a certain day. He forfeits his recognizance. He is liable to pay the whole penalty. [(d) A gives B a bond for the repayment of Rs. 1,000 with interest at 12 per cent at the end of six months, with a stipulation that in case of default, interest shall be payable at the rate of 75 per cent from the date of default. This is a stipulation by way of penalty, and B is only entitled to recover from A such compensation as the Court considers reasonable. (e) A, who owes money to B, a money-lender, undertakes to repay him by delivering to him 10 maunds of grain on a certain date, and stipulates that, in the event of his not delivering the

stipulated amount by the stipulated date, he shall be liable to deliver 20 maunds. This is a stipulation by way of penalty, and B is only entitled to reasonable compensation in case of breach. (f) A undertakes to repay B a loan of Rs. 1,000 by five equal monthly

instalments with a

stipulation that, in default of payment of any instalments, the whole shall become due. This stipulation is not by way of penalty, and the contract may be enforced according to its terms (g) A borrows Rs. 100 from B and gives him a bond for Rs. 200 payable by five yearly instalments of Rs. 40, with a stipulation that, in default of payment of any instalment, the whole shall become due. This is a stipulation by way of penalty.]

Scope of this Section.-Section 74 of the Indian Contract Act deals with the measure of damages in two classes of cases, viz (i) where the contract names a sum to be paid in case of breach and (ii) where the contract contains any other stipulation by way of penalty. The second category widens the amplitude of this section. The second category would comprise forfeiture of a right to money or other property already delivered, such as a forfeiture of earnest money, security deposit, instalments of hire etc.o

t Substitutedby A.O. 1937, for "Govenment of India". S 64. 65.

Substituted by Adaptation of Laws order, 1950, for "Provincial Government". Inserted by Act 6 of 1899, S. 4. See as to a similar clause in a "chit

ad" bond :Ramalinga Adaviar v.Meenakshişundaram,(1924)

47 Mad LJ 833 85 IC 261 AIR 1925 Mad 177. 66.

Fateh Chand v. Balkishan Dass, AIR 1963 SC 1405: (1964) 1 SCR 515; Union of India v. Shiam Sunder Lal, (1963) All LJ 251; Maung Bav. Motor House Co., (1929) 7 Rang 431.

238

S. 74

Chapter VI-Of theconsequencesofBreach of Contract

Under Section 73, the actual loss or damage which naturally arose in the course of things has to be proved.5/ But under this section the proof of actual loss or damage is not the sine qua non of awarding reasonable compensation. The words "Whether or not actual damage or loss is proved to have been caused thereby" contemplate cases where it may not be possible to assess the actual damages or loss, as stated in Section 73. This section does not actually do away with the proof of actual loss or damage, if this is

proved, the Court may take it into account in awarding 'reasonable compensation' 5 Also, while actual loss or damage need not be proved, the fact that some loss or damage has occurred must be shown since otherwise a party will get damages even where no injury is suffered. But where this has been shown, and it is not possible to prove actual loss or damage, and if the contract is one which falls under this section, the Court is entitled to award 'reasonable compensation'.

The provisions of Section 73 lay down the principle of compensation in case of a breach of a contract. This section also deals with compensation in respect of a breach of a contract but the contracts dealt with by this section are those containing a penalty or a named sum to be paid in the event of a breach of contract. The provisions of Section 73, therefore, would extend to contracts wherein no named sum or a penalty is stated. It is also possible that in the same contract there is provision for liquidated damages for some types of breach and these would therefore fall within S. 74, while the other types of breach which are not provided for would be covered under S. 73.0

Penalty and liquidated damages.-This section contemplates cases where the par ties to a contract anticipate possibility of a breach and prefer to name a particular amount to be paid to the injured party. The sum so fixed by the contract itself may be either (i) a genuine estimate of the actual loss likely to be suffered by the aggrieved

party; or (i)

it may be less than the genuine estimate of loss, parties contemplating that the liability should not exceed, or

(ii)

it may be greater than the genuineestimate of loss which the injured party may suffer, the sum was named so high as it was intended keep the potential defaulter to his bargain.

to operate as a threat to

The amount so fixed or named in the contract is called (1) in the first case and the second case, "liquidated damages or "reasonable compensation' and is awardable to the penalty' which may be injured party under this section and (i) in the third case a relieved against under this section. This section has provided a satisfactory solution to the vexed questions which arise in English law.

67.

The Supreme Court has held that such actual loss or damage under S. 73 may also be proved by use of an accepted intermational formula. Such formulae are quite popular in construction arbitrations where the actual loss or damage is very difficult to aceurately quantuty or prove. Examples of such formulae include the Emden formula, Hudson formula etc., see McDermott International Inc v. Burn Standard Co Ltd, (2006) 11 SCC 181, 226. 68. Maula Bux v. Union of India, (1970) 1 SCR 928: AIR 1970 SC 1955; Union of India v. Rampur Distillery & Chemical Co. Ltd, AIR 1973 SC 1098 : (1973) 1 SCC 649. 69. Fateh Chand v. Balkishan Dass, AIR 1963 SC 1405; Ennore Port v. Hindustan Construction

Company Lia., 2005 (Suppl) Arb LR 129,137 (Mad); Indian Oil Corpn v. Lloyds Steel Industries Lid., 2007 (4) Arb LR 84, 109 (Del). See also notes later under S. 74 "Onus of proof to prove actual

extent of damage". 70.

SAL v. Gupta Brother Steel Tubes Lud, (2009) 10 sCC 63, 80.

S. 74

Compensationfor breach of Contractwherepenaltystipulated for

239

If the subject-matter of a contract is of a definite or indefinite value and a fixed sum is payable on breach of the contract, the questions would be: (i) is this sum reasonable? or (i1) 1s this sum extravagant or unconscionable in amount in comparison with the maximum

loss that could conceivably be proved as a result of the breach? or is it in excess of the value of the subject matter of the contract? or is the sum payable irres-

pective of the impotance and significance of the breach of contract? If the sum named falls in the first category, it would be a liquidated damage and if it falls in the second category, it would be a penalty. Penalty is a sum payable in terrorem, while liquidated damages is a genuine covenanted pre-estimate of damages.

Although the text of the Indian statute tries to simplify English law and do away with all the difficult questions by laying down the general rule of awarding a reasonable amed; compensation in all cases, not exceeding the sum so amed or the penalt decisions drawing such a distinction (viz. between a clause being either by way of penalty, or, merely providing a genuine pre-estimate of loss) abound. Such an argument, it may be noted, is made in light of the law laid down by the Supreme Court to the effect that where a clause is held to be a genuine pre-estimate of damages (as opposed to being by way of a penalty), the court may take that into consideration as being the measure of reasonable compensation and not require such party to prove the loss suffered. '2 Whether a sum is a penalty or liquidated damages is to be judged as at the time of making of the contract and not as at the time of the breach,'" and is a question of construction to be

decided upon the terms and inherent circumstances of each particular contract. In BSNLv Reliance Communication'" the Supreme Court has laid down three tests relevant to determining whether the clause is one prescribing penalty or liquidated damages. (i) the fact that damage is

difficult

to assess strengthens the presumption that the clause is a

genuine pre-estimate of damages (and consequently an attempt to overcome the difficulty to prove the same at trial), (1) the assessment as to the nature of the clause is a matter of construction of its clauses and surrounding circumstances at the time of entering into the same, and (1ii) the description of the clause as being a "penalty" or "liquidated damages is relevant, but not decisive as to categorisation.

Except to the limited extent set out above, the section does away with the distinction between payment of a specified sum or a stipulation by way of a penalty. For this reason,

a clause providing for payment ofa specified sum or any other stipulation in the event of a breach, cannot be challenged as being illegal

or

unconscionable

under

S. 23, even

though the same may be penal in nature. This is only logical, for the award of "reasonable compensation" by the Court will, in all cases, mitigate the hardship of any unconscionable stipulations. Stipulations for forfeiture of earnest money, security deposit, withdrawal of concesSion are dealt with separately.

71.

Dunlop Pneumatic Tyre Co. Lid. v. New Garage & Motor Co. Ltd., (1915) AC 79.

72. See commentary under S. 73 infra under the headings "Reasonable compensation'" and "Onus of proof to prove actual extent of damage". Dunlop Pneumatic Tyre Co Ltd. v. New Garage & Motor Co. Ltd., (1915) AC 79. 74.

BSNL v. Reliance

Communication,

(2011) 1 SCC 394, 427.

75. See - Phulchand Exports Ltd. v. 0.0.0. Patriot, (2011) 10 SCC 300 at 315 (the reference by the Supreme Court to "liquidated damages in para 32 must be read as a reference to the general concept of liquidated damages, including "stipulations" by way of penalty and not just to reasonable compensation" alone), on facts of the case, the clause for re-imbursement of payment for non-delivery was held to not be a penal clause.

240

Chapter V--of theconsequencesofBreach ofContract

S. 74

Stipulations for interest.-By far the largest number of cases decided under this section are related to stipulations providing for interest. Those stipulations may be divided into the following five classes: I.

Stipulations for payment of interest at a higher rate on default on the part of the debtor to pay the principal or part thereof or interest on the due date, and these may again be sub-divided into:

(a) Stipulations for payment of enhanced interest from the date of the bond, and (6) Those for payment of such interest from the date ofdefanult. I.

II.

Stipulations for payment on default of compound interest, which may be divided into: (a)

Stipulations for payment of compound interest at the same rate as simple interest, and

(b)

Those for payment of compound interest at a rate higher than simple interest, or for paynment of an increased-rate of interest and compound interest at that rate.

Stipulations for payment of interest at a specified rate if the principal or a part thereof is not paid on the due date.

IV.

Stipulations for payment of interest at a lower rate, if interest paid on due dates.

V.

Stipulations for payment of interest from the date of the bond, but at an exorbitant rate. The stipulations

I.

comprised in the above classes are considered below:

Stipulations for enhanced rate of interest.-Such a stipulation occurring in a contract may be of a twofold character: (1) it may either provide for payment of interest at an increased rate from the date of the contract on failure of the debtor to pay on the due date the interest or principal or an instalment of principal, or (2) it may provide for payment at a higher rate from the date of default only. Thus if A borrows Rs. 1,000 from B on 1st June 1902, A may give a bond to B for repayment of the loan on Ist June 1903, with interest at 12 per cent per annum, with a stipulation either that in case of default interest shall be payable at the rate of 25 per cent from the date of the bond, namely,

Ist June 1902, or from the date of defaul, namely, Ist June 1903. In the former case it has been held that stipulation always amounts to a penalty, and the provisions of Section 74 apply, so that the Court may relieve the debtor, and award only such compensation to the creditor as it considers reasonable.' In the latter case, where the increased rate of interest is stipulated to have operation only from the date of default, the provision has not generally

76.

The leading case on the subject is Mackintosh v. Crow, (1883) 9 Cal 689. The result of the cases will be found summarised in Umarkhan v. Salekhan, (1892) 17 Bom 106, 113, 114, and in Abdul Gani v. Nandlal, (1902) 30 Cal 15,17.

77. Rameshwar Prosad Singh v. Rai Sham Kishen, (1901) 29 Cal 43, 50; Trimback v. Bhagchand. (1902) 27 Bom 21. See also Sunder Koer v. Rai Sham Krishen, (1907) 34 Cal 150, 157: LR 34 IA 9.

Compensationfor breach of Contract wherepenalty stipulatedfor been

regarded as a

penalty.'*

But such a

stipulation

S. 74

241

may in some cases be

penal. Whether it is a penalty or not is a question of construction. "It is for the Court to decide on the facts of the particular case whether the stipulation is or

is not a stipulation by way of penalty. "

It will be held to be penal if the

enhanced rate is unconscionable or if it is such as to lead to the conclusion that

it could not have been intended to be part of the primary contract between the parties,80 The law as to such stipulations may be stated as

(a)

follows:

A stipulation for increased interest from the date of the bond is always in

the nature of a penalty, and relief will be granted against it (b)

IL

A stipulation for increased interest from the date of default may be a stipulation by way of penalty, and whenever it is so, relief will be granted under this section. Whether such a stipulation is penal is a question of construction dependent upon the consideration set out above.

Stipulations for compound interest-A stipulation in a bond forpayment of compound interest on failure to pay simple interest at the same rate as was payable upon the principal is not a penalty within the meaning of this section. But a stipulation for the payment of compound interest at a rate

higher than that of simple interest is a penalty within the meaning of this section, and would be relieved against. As observed by the Judicial Committee, in Sunder Koer v. Rai Sham Krishen,35 "compound interest is in itself perfectly legal, but compound interest at a rate exceeding the rate of interest on the principal moneys, being in excess of and outside the ordinary and usual stipulation, may well be regarded as in the nature of a penalty."

. Stipulationsforpaymentofinterestifprincipalnotpaidon duedate. These are cases where the bond does not provide for payment of two rates of interest, one lower and the other higher, but for the payment of interest at one specified rate if the principal money or part thereof is not paid within a stipulated period. To such cases S. 2 of Act 28 of 185 would seem to apply. That Act abolished all usury laws and S. 2 of the Act provides that "in any suit in which interest is recoverable the amount shall be adjudged or decreed by the Court at the rate (if any) agreed upon by the parties, and if no rate shall have been agreed upon, at such rate as the Court shall deem reasonable." The section refers to a single rate of interest and therefore cases under stipulation 1, where there are two rates of interest, the original rate and the enhanced rate, are outside its scope. But stipulation III like S. 2 of the Act of 1855 refers to a

78.

Abdul Gani v. Nandlal, (1902) 30 Cal 15; Umarkhan v. Salekhan, (1892) 17 Bom 106; Periasami Thallavar v. Subramanian Ansari, (1904) 14 Mad LJ 136; Chuni Lal v. Munna Lal, (1930) 11 Lah 635: 131 1C 368 : AIR 1931 Lah 120; Rama Krishnayya v. Venkata, AIR 1934 Mad 31: 148 IC 467; Jyoti Cold Stores v. Punjab Financial Corporation, AIR 1973 P&H 38.

79. Abbakke Heggadthi v. Kinhiamma Shetty. (1906) 29 Mad 491, 496; P.C. Pl. v. K.A. L.R. Firm, 80. 81.

(1923) 1 Rang 460; Jyoti Cold Stores v. Punjab Financial Corporation, AlR 1973 P&H 38. Umarkhan v. Salekhan, (1892) 17 Bom 106, 113. The Courts do not lean towards compound interest, they do not award it in the absence of

stipulation; but where there is a clear agreement for its payment it is, in the absence of disentitling Circumstances, allowed"; Hari Lahu Patil v. Ramji Valad Pandu, (1904) 28 Bom 371, 377. 82. Ganga Dayal v. Bachhu Lal, (1902) 25 All 26; Surya Narain v. Jagendra Narain, (1892) 20 Cal 360; Malli Chettiar v. Veeranna Tevan, (1921) 41 Mad LJ 470. 83. SumderKoer v. Rai Sham Krishen, (1906) 34 Cal 150, at p. 158: LR 34IA 9; Mangat Rai v. Babu

Singh. (1927)8 Lah 721: 103 IC 437: AIR 1927Lah 415.

242

S. 74

Chapter V-Of theconsequencesofBreach of Contract

single rate of interest and the difficulty is to reconcile Section 2 of the Act of 1855 with S. 74 in its application to cases under stipulation IlI. Is the effect of the section to deprive the Court of jurisdiction to give relief in cases where

there is a stipulation for an exorbitant rate of interest in default of payment of principal? On this point there were many generally agreed that the words of S. 74 stipulation by way of penalty" introduced Contract (Amendment) Act, 1899, are wide

conflicting decisions, but it is now *if the contract contains any other in the Contract Act by the Indian enough to cover cases under this

stipulation.

IV.

Stipulations for payment of interest at a lower rate, if interest paid regularly on due dates.-Where a bond provides for payment of interest at 24 per cent per annum with a proviso that, if the debtor pays interest punctually at the end of every year, the creditor would accept interest at the rate of 18 per cent per annum, the creditor is entitled on failure of payment of interest on the due date to interest at the higher rate of 24 per cent per annum. Such a clause is not in the nature of a penalty.34

V. Stipulations for payment of interest from date of bond, the rate of interest being exorbitant.-The question to be considered under this head is, whether a stipulation for payment of interest can be deemed a "stipulation by way of

penalty within the meaning of this section, if the bond provides for payment of interest at one rate from the date of the bond, and that rate is high and exorbitant. This may be put in the form of an illustration thus:-A borrows Rs. 500 from B on 15th October 1930, and gives him a bond for that amount promising to pay the principal with interest thereon at the rate of 75 per cent per annum on 15th January 1931. A does not repay the loan on 15th January 1931. B sues A to recover the anmount of the loan with interest at 75 per cent

per annum. Is B entitled to interest at the rate of 75 per cent per annum, or has the Court power under this section to reduce the rate of interest? It has been

held by the High Court of Calcutta that whether the stipulation to pay interest at the rate of 75 per cent per annum is a stipulation

11

by way of penalty is a

question of fact depending on the circumstances ofeach case,and if the Court finds that the rate of interest is of a penal character, the Court has power under this section to grant relief On the other hand, it has been held by the High Court of Madras that the present section does not apply to cases like the above, the reason given being that there cannot be a stipulation by way of penalty unless there is another antecedent promise.30 The Madras decisions, it is submitted, are correct. The Patna High Court has taken much the same view as the Madras High Court.5 Cases of the kind now under consideration arising since the enactment of the Usurious Loans Act, 1918, will be dealt with under that Act, Section 3 of which empowers the Court to relieve against exorbitant interest where (1) the interest is excessive, and (2) the transaction was

substantially unfair.

84. Kutub-Ud-Din v. Bashir-Ud-Din, (1910) 32 All 448; FitzHolmes v. Bank of Upper India, Ltd, (1923) 4 Lah 258; Administrator-General of Burma v. Moola, (1927) 5 Rang 573: 105 IC 592: AIR 1928 Rang 19; Wallingford v. Mutual Society, (1880) 5 App Cas 685, 702.

85. Krishna Charan v. Sanat Kumar Das, (1917) 44 Cal 162 [rate reduced from 75 per cent to 15 per cent]; Abdul Majeed v. Khirode Chandra Pal, (1914) 42 Cal 690 [rate reduced from 60 per cent compound interest to 30 per cent simple interest).

86. Kesavulu v. Arithulai, (1913) 36 Mad 533; Najaf Ali Khan v. Muhammad Fazal Ali Khan, (1927) 26 All LJ 210: 107 IC 249: AIR 1928 All 225 Trate reduced from 37 to 12 per cent). Nathuni Sahu v. Baijnath Prasad, (1917)2 Pat LJ 212, pp. 216, 218. 87.

Compensationfor breach of Contract wherepenalitystipulated for

S. 74

243

Withdrawal of concessional payments-An agreement may allow a debtor to discharge his larger debt by payment of a lesser sum by instalments or within a specified time with a stipulation that in default the full amount of the debt shall be payable. Such a stipulation is not in the nature of a penalty and is in the nature of a withdrawal of a Concession.88

Deposit on agreement for purchase of immovable

property.-Maula Bux v.

Union of ndia supports an important distinction between earnest money and security deposit. When the contract is not regarding purchase of property but a deposit is given for guaranteeing due performance of the contract to deliver goods, such deposit is not an earnest money but security deposit. Earnest money is that which is paid by a purchaser as a stake and when the contract is completed it is treated as part payment of the price. It is forfeited when the transaction falls through by reason of the default or failure of the

purchaser.

Forfeiture of earnest money under a contract for sale of property-movable or

immovable-if the amount is reasonable, does not fall within S. 74.3 Forfeiture of a reasonable amount paid as earnest money is not a penalty.* But if forfeiture is of the nature of penalty, S. 74 applies whether the party in breach has undertaken to pay or he has already paid a sum of money to the party complaining of the breach of the contract. It is not correct to say that S. 74 has no application to cases of deposit for due performance of a contract which is stipulated to be forfeited for breach.6 In Fatch Chand V. Balkishan Das, the plaintiff (Respondent) agreed to sell to Defendant (Appellant) his rights in the land and building at Rs. 1,12,500. At the time of the execution of agreement,

purchaser (defendant) paid Rs. 1,000 to seller (plaintift) and Plaintiff was also paid Rs. 24,000 by the defendant out of the sale price at the time when the purchaser was given actual possession of the property. Under the agreement this entire sum of Rs. 25,000 was subject to forfeiture under the forfeiture clause along with resumption of possession provision if the defendant failed to get the sale deed registered by a specific date. There was also a clause by which further liability was fastened on the purchaser to pay an additional sum of Rs. 25,000 as damages if there was no registration of the sale deed by the specific date. The defendant defaulted, plaintiff claimed to forfeit the entire sum of Rs. 25,000 under the terms of the agreement as earnest money. The defendant did not object to the plaintiff's rights to forfeit Rs. 1,000 paid as earnest money under the 88.

89. 90.

Burjorji v. Madhavlal, (1934) 58 Bom 610: 36 Bom LR 798: 152 IC 575: AIR 1934 Bom 379, Waman v. Yeshwant, (1948) Bom 654 50 Bom LR 688 AIR 1949 Bom 97; Popular Bank of India v. Cheranji Lal. (1947) All 201 : AIR 1947 All 136: 231 IC 275, Ko (1935) Rang 341. Maula Bux v. Union of india, AIR 1970 SC 1955: (1969) 2 SCC 554.

Kyam Swe v. U. Ba,

Maula Bux v. Union of India, AIR 1970 SC 1955 at p. 1958, para 4:(1969) 2 SCC 554;see also Union of India v. Rampur Distillery & Chemical Co. Ltd, (1973) 1 SCC 649 AIR 1973 SC 1098: 1973 UJ 560.

91. Panna Singh v. Arjan Singh, (PC) (1929) 31 Bom LR 909: 117 IC 485 AIR 1929 PC 179; AlR 1947 Nag 192; Vijaya Foundry v. Gordon Bhalchandra v. Mahadeo, (1947) Nag 60 Woodroffe, (1963) 2 MLJ 153; Chiranjit Singh v, Harswarup, AIR 1926 PC I v. Union of India, AlR 1970 SC 1955, 1958: (1969) 2 SCC 554.

92.

93.

quoted in Maula Bux

Chiranjit Singh v. Harswaryp. AlR 1926 PC 1 quoted in Maula Bux, AIR 1970 SC 1955 at 1958 (1969) 2 SCC 554; H.C. Mills v. Tata Aircraft Lid, AIR 1970 SC at 1994, Para 24:(1969) 2 SCC 554; Satish Batra v. Sudhir Rawal, (2013) 1 SCC 345, 352.

tt

Chiranjit Singh v. Har Swarup, See note on Maula Bur v. Union of India, AIR 1970 SC 1955, Para 7:(1969) 2 SCC 554.

94. Maula Bur v. Unionof India, AIR 1970SC1955 :(1969) 2SCC554: hud 95. 96. 97.

A1,d

Maula Bux v. Union of India, AIR 1970 SC 1955: (1969) 2 SCC 554. Maula Bux v. Union of India, AIR 1970 SC 1955 : (1969) 2 SCC 554; VK Ashokan v. Assistant Excise Commissioner, (2009) 14 SCC 85, 113. Fateh Chand v. Balkishan Dass, AlR 1963 SC 1405: (1964) 1 SCR 515; Maula Bur v. Union of India, (1970) 1 SCR 928 AIR 1970 SC 1955:(1969) 2 SCC 554. 1

244

S. 74

Chapter VI-0f theconsequencesofBreach of Contract

agreement but he contended that Rs. 24,000 was expressly paid out of sale price and the stipulation was in the nature of penalty. It was held by the Supreme Court that Rs. 24,000 was not paid as an earnest money and it was expressly referred to in the agreement as paid "out of sale price". Also there was no evidence that Rs. 24,000 was paid as security for due performance of the contract. It cannot be assumed that because there was a stipulation for forfeiture the amount paid must bear the character of a deposit for due performance of the contract. Hence the plaintiff was only entitled to retain Rs. 1,000/received by him as the earnest money. If there be no forfeiture clause, vendor cannot forfeit earnest money but would be entitled to reasonable compensation.

Deposits other than earnest

money.-Moneys are often deposited as security for

the performance of a contract, without such moneys being earnest money. In such a case there may be a forfeiture clause or not. Where there is no forfeiture clause, the party com-

mitting a breach of the contract is liable only to pay damages and is entitled to the return of the remainder of the moneys deposited.2 Where however, there is a forfeiture clause, the question in England arises whether the deposit represented a genuine pre-estimate of

liquidated damages or was in the nature of penalty.* The question in India is whether such a case falls within the terms of Section 74, so that only reasonable compensation has to be paid whether the amount deposited in by way of liquidated damages or by way of penalty. The words "any other stipulation by way of penalty'" are sufficiently ample to cover the case of a deposit with regard to which there is a stipulator for forfeiture.4 Cases go to show that if the aggrieved party does not prove the natural loss or damage and assertsthe right to forfeit the security deposit only, the Courts are inclined to order the aggrieved party to refund the security deposit, or earnest money This is on the basis that damage or loss caused is a sine qua non for the applicability of the section. Thus, in Kailash Nath Associates,' the Supreme Court did not allow forfeiture of earnest money by DDA even though a buyer had backed out from an auction in (alleged) breach of the contract, since on re-auction DDA had in fact suffered no loss. Consent decree.-Sometimes decrees passed on a compromise provide that if the defendant pays a particular amount within a specified time, the decree is to be marked as satisfied but if the defendant defaults in so paying he should pay an increased amount. In such cases the question is whether the default clause operates as a penalty. The true tests is as follows:

(1) Does the decree holder get more than the amount he claimed in the suit;, if so it Is a penalty.

(2) Does the decree holder get in default, or in execution of the decree, only that much of his just claim to which he was entitled in the suit, in that event there is no penalty.

1.

Mohammad Sultan v. Naina Mohammad, AIR (1973) Mad 233.

2. Mayson v. Clonet, (1924) App Cas 980, Public WorksCommissioner v. Ilil, (1906) App Cas 368. 3. Public Works Commissioner v. Iill, (1906) App Cas 368. 4. Union of India v. Shiam Sunder Lal, (1963) All LJ 251; Fatch Chand v. Balkishan Dass, AIR 1963 SC 1405: (1964) SCRS15; Union of India v. Rampur Distillery and Chemical Co. Ltd, AlIR 1973 SC 1098:(1973) 1 SCC 640.

5. Mis Variety Body Builders v. Union of India, AIR 1973 Guj 256. 6. Fateh Chand v. Balkishan Dass, (1964) 1 SCR 515 (553): AIR 1963 SC 1405; Thiriveedhi Channaiah v. Gudipudi Venkata Subba Rao, (2009) 17 SCC 341, 344 (forfeiture of eamest money not upheld where no damage suffered). 7. Kailash Nath Associates v. DDA, (2015) 4 SCC 136, 162. 8. Juhari Lal v. Mohin Das, AIR 1972 All 457: 1972 All LJ 839.

mpensationfor breach of Contractwherepenaltystipulated for

S. 74

24

"Reasonable compensation."-The words of the section give a wide discretion Court in the assessment of damages. "The only restriction is that the Court cannot ee damages exceeding the amount previously agreed upon by the parties. The dison of the Court in the matter of reducing the amount of damages agreed upon is lef ualified by any specific limitation, though, of course, the expression 'reasonable mpensation' used in the section necessarily implies that the discretion so vested mus exercised with care, caution, and on sound principles."" The term 'reasonable' impli ng regard to the circumstances of each case. In the exercise of this discretion t cial Committee has affirmed a judgment giving, as reasonable in the particular cas mpensation at the same rate as the increased interest stipulated for. And generally

pen to the Court under this section to award as compensation a sum equal to th

ed

penalty,

asonable.It

provided

that it does not appear to the Court to exceed what

has been held by a High Court of Bombay that the measure of damag

breach of a contract to borrow moneys at interest for a certain period is not the difnce between the agreed rate of interest and that realised by the lender from his ban for the full period of the loan, but only for such period as might be reasonab uired to find another borrower of a similar amount at the agreed rate.2

Onus of proof to prove actual extent of damage.-Onus of proof to prove actu

nt of damage is on the aggrieved party.13 On this aspect of the section, the followin ervations of the four leading Supreme Court cases may be noted. In Maula Bux on of Tndia, the Supreme Court observed as follows:

"It is true that in every case of breach of contract the person aggrieved by the brea

ot

required to prove actual loss or damage

suffered by him before he can claim

ee and the Court is competent to award reasonable compensation in case of brea n if no actual damage is proved to have been suffered in consequence of the breach ract. But the expression "whether or not actual damage or loss is proved to ha n caused thereby" is intended to cover different classes of contracts which com re the courts. In case of breach of some contracts it may be impossible for the Cour sess compensation arising from breach while in other cases compensation can be ca

ted in accordance with established rules. Where the Court is unable to assess the pensation, the sum named by the parties if it be regarded as a genuine preestima

be taken into consideration as the measure of reasonable compensation, but not if th named is in the nature of a penalty.

Where loss in terms of money can be deter-

ed, the party claiming compensation must prove the loss suffered by him."l4

In Fateh Chand v. Balkishan Das, the Supreme Court observed thus: "Jurisdiction of Court to award compensation in case of breach of contract is unqualified except as to

maximum stipulated; but compensation has to be reasonable, and that imposes upon

court duty to award compensation according to settled principles. The section

oubtedly says that the aggrieved party is entitled to receive compensation from th y who has broken the contract, whether or not actual damage or loss is proved to hav caused by the breach. Thereby it merely dispenses with proof of "actual loss or age;" it does not justify the award of compensation when in consequence of the

Nait Ram v. Shib Dat, (1882) 5 All 238, 242; Fateh Chand v. Balkishan Dass, AIR 1963 SC 1405

246

S. 74

Chapter V-of theconsequencesofBreach ofContract

breach no legal injury at all has resulted, because compensation for breach of contract can be awarded to make good loss or damage which naturally arose, in the usual course

of things, or which the parties knew when they made the contract, to be likely to result from the breach". 15

In ONGC v. Saw Pipes,6 the Supreme Court observed"Section 74 emphasizes that in case of breach of contract, the party complaining of the breach is entitled to receive reasonable compensation whether or not actual loss is proved to have been caused by such breach. Therefore, the emphasis is on

reasonable compensation. If the compensation named in the contract is by way of penalty, consideration would be different and the party is only entitled to reasonable compensation for the loss suffered. But if the compensation named in the contract for such breach is genuine pre-estimate of loss which the parties knew when they made the contract to be likely to result from the breach of it, there is no question of proving such loss or such party is not required to lead evidence to prove actual loss suffered by him. Burden is on the other party to lead evidence for proving that no loss is likely to occur by such breach." In the same case, the court subsequently also observed "Section 74 is to be read along with Section 73 and, therefore, in every case of breach of contract, the person aggrieved by the breach is not required to prove actual loss or damage suffered by him before he can claim a decree. The Court is competent to award reasonable compensation in case of breach even if no actual damage is

proved to have been suffered in consequences of the breach of a contract... In some contracts, it would be impossible for the Court to assess the compensation arising from breach and if the compensation contemplated is not by way of penalty or unreasonable, Court can award the same if it is genuine pre-estimate by the parties as the measure of reasonable compensation."

Upon an analysis of the relevant authorities (including the three cases above), the Supreme Court in Kailash Nath Associates8 has summarised the law on compensation for breach of contract under Section 74 and held as follows

)

Where a sum isnamed in acontractas aliquidatedamountpayable by way of damages, the party

complaining

of a breach can

receive as

reasonable

compensationsuch liquidated amount only if it is agenuinepre-estimate of )

s)

damages fixed by both parties and found to be such by the court. In other cases, where a sum is named in a contract as a liquidated amount payable by

way ofdamages,onlyreasonablecompensationcan beawarded notexceeding the amount so stated. Similarly, in cases where the anmount fixed is in the

ti

nature of penalty, only reasonable compensation can be awarded not exceeding the penalty so stated. In both cases, the liquidated amount or penalty is the upper limit beyond which the court cannot grant reasonable Compensation.

e

(i) Reasonable compensation will be fixed on well-known principles that are applicable to the law of contract, which are to be found inter alia in Section 73 of the Contract Act.

15.

Fateh Chand v. Balkishan Das, (1964) 1 SCR 515 at 527: AIR 1963 SC 1405.

16. 17.

ONGCv. Saw Pipes Ltd, (2003) 5 SCC 705, 740 : AIR 2003 SC 2629. ONGCv. Saw Pipes Ltd, (2003) 5 SCC 705, 742: AIR 2003 SC 2629.

18.

Kailash Nath Associates v. DDA, (2015) 4 SCC 136, 162.

Party rightfully rescinding contract entitled to compensation

S. 75

247

(1)

Since Section 74 awards reasonable compensation for damage or loss caused by a breach of contract, damage or loss caused is a sine qua non for the applicability of the section.

(iv)

The section applies whether a person is a plaintiff or a defendant in a suit.

(v)

The sum spoken of may already be paid or be payable in future.

(vi)

The expression "whether or not actual damage or loss is proved to have been caused thereby" means that where it is possible to prove actual damage or loss, such proof is not dispensed with. It is only in cases where damage or loss is difficult or impossible to prove that the liquidated amount named in the contract, ifa genuine pre-estimate of damage or loss, can be awarded.

(vii) Section 74 will apply to cases of forfeiture of earnest money under a contract. Where, however, forfeiture takes place under the terms and conditions of a public auction before agreement is reached, Section 74 would have no

application." Not less than: In a managing agency agreement it was provided that in the case of the termination of the managing agency for any reason or cause other than that specified in the agreement the managing agents shall receive as compensation or liquidated amount as damages for the loss of the appointment, a sum equal to the aggregate amount of salary which was not to be less than Rs. 6000 p.m. for the unexpired portion of the agency. The Supreme Court held that the parties having specified the amount of liquidated damages, it excluded the right to claim an unascertained sum as damages. The words "not less than" only emphasise that the compensation would not be computable at a sum less than the amount mentioned. The sum was regarded by the parties as reasonable and intended that it should not be reduced by the Court in its discretion.

Exception mentioned in S.

74Scope-A

bond given by a person to whom the

right of collecting fees from vendors of goods in a market formed by a Local Board under the Madras Local Boards Act, 1884 stipulating that if he exacted fees in excess of the prescribed rates he may be fined not exceeding Rs. 50 imposed by the President of the Board, is a bond "for the performance of a public duty or an act in which the public are interested," but it is not "given under the provisions of any law," as there is no section in the Local Boards Act which authorises or requires the giving of such a bond. Such bond, therefore does not fall within the exception and contractor is not liable to pay the full amount of the penalty on breach of the condition of bond. The Board is only entitled to reasonable compensation.0 Party rightfully rescin-

dingcontracte,ntitledto compensation.

S. 75. A person who rightfully rescinds a conract is entitled to compensation for any damage

which he has sustained through the non-fulfilment of the contract.21

19. Sir Chunlal Mehta v. Century Shipping & Ms Co. Ltd, AIR 1962 SC 1314, 1319: 1962 SCR Supp (3) 549.

20. President of the Taluk Board, Kundapur v. Burde Lakshminarayana, (1908) 31 Mad 54 17 MLJ 537.

21. This section appears fairly to cover the right of a buyer who has paid a deposit on sale to recover it

back if the seller makes default, if any more specific authority is wanted than his remedy for breach of contract under the general provisions of S. 73. But as rightly observed in Piari (or Pyare) Lal v. Mina La, 1928 (50) All 82: 102 1C 766 :(27) AA 621, right to recover money paid for a consideration that has failed is not exhausted by statutory specifications.

248

S.75

Chapter VOf theconsequencesofBreach ofContract Ilustration

A, a singer, contracts with B, the manager of a theatre, to sing at his theatre for two nights in every week during the next two months, and B engages to pay her 100 rupees for each night's performance. On the sixth night, A wilfully absents herself from the theatre, and B. in consequence, rescinds the contract. B is entitled to claim compensation for the damage which he has sustained through the non-fulfilment of the contract.

This section is to be read as supplementary to Sections 39, 53, 55, 64 and 65. The

facts of the illustration resemble those of illustration (a) to Section 39. A party who rescinds on the ground of fraud or the like is in a different position; he rescinds the contract not because fulfilment has been refused or prevented, but because the contract, by reason of the fraud, or as the case may be, is altogether to his disadvantage. It is sometimes said that a party who rescinds for fraud cannot also recover damages. This limitation on the remedy must be confined to wholly executory contracts. In the case of partially executed contract, the two remedies should be available.25

22. SeeHALSBURY'SLaws of England, 3rd edn., Vol. 26, p. 857. 23. See BoWEN L.J. Newbigging v. Adam, (1886) 34 Ch D 582, 592.

CHAPTERVII

3TAASALE OFGOODS r; A1 I0 This chapter of the Act is wholly repealed by the Indian Sale of Goods Act, 1930, (3 of 1930) Section 65, but the numberingof the later

chapters and sections is not atltered.ii,uit

[249

CHAPTERVIII

OF INDEMNITY AND GUARANTEE

"Contract", of indemnity defined.

S. 124. A contract by which one party promise: to save the other from loss caused to him by the

conduct of the promisor himself, or by the conduct of any other person, is called a "contract of indemnity." lustration A contracts to indemnify B against the consequences of any proceedings which C may take against B in respect of a certain sum of 200 rupees. This is a contract of indemnity.

Indemnity-English usage of the word "indemnity" is much wider than this definition. It includes promises to save the promisee harmless from loss caused by events or accidents which do not or may not depend on the conduct of any person, or by liability arising from something done by the promisee at the request of the promisor, in the latter case a promise of indemnity may be inferred as a fact from the nature of the transaction. A contract of insurance is kind of contract of indemnity. The present chapter applies in terms only to express promises; but it should be noted that a duty to indemnify may be annexed by operation of law to various particular kinds of contract (ef. S. 69, above).

Commencement and Extent of Indemnifier's

liability.-The text of the Act leaves

these matters undefined, and in fact the leading English authorities are comparatively recent. It might be supposed that an indemnifier (the person who gives the indemnity) could not be called on till the indemnified (the person for whose protection indemnity is given is called the indemnity holder or indemnified) had incurred actual loss, and this was at one time said to be the rule of English Common Law. But, according to the equitable principles which now prevail, "to indemnify does not merely mean to reimburse in respect of moneys paid, but (in accordance with its derivation) to save from loss in respect of the liability against which the indemnity has been given ... if it be held that payment is a condition precedent to recovery, the contract may be of little value to the person to be indemnified, who may be unable to meet the claim in the first instance"2

The Bombay High Court has held that an indemnity holder could sue for specific performance contract of indemnity even before he incurs the damage provided that it is shown that an absolute liability has been incurred by him and that the contract of indemnity covers the said liabilitys. The reason advanced is that the law of 1.

Dugdale v. Levering. (1875) LR 10 CP 196.

2.

KENNEDY L.J., in Liverpool Mortgage Insurance Co's case (1914) 2 Ch 617, 638.

3. Khetarpal v. Madhukar Pictures, 57 Bom LR 1122 (1126) : AIR 1956 Bom 106; Gajanan Moreshwar v. Moreshwar Madan, 44 Bom LR 703, approving Kumar Nath Bhuttacharjee v. Nobo Kumar, 26 Cal 241; Ramadingathudayar v. Unnamalai Uchi, 38 Mad 791; Shaim Lal v. Abdul Salam, AlR 1931 All 754.

[ 250]

Rights of indemnity holder when sued

S.125

251

indemnity in this Act is not exhaustives. Similarly in the well known case of Osman Jamal & Sons Ltd. v. Gopal Purshottam? the plaintiff company in liquidation were commission agents for the defendant firm in the purchase and sale of certain goods and was to be indemnified against all losses in such transaction. The plaintiff Company in that capacity bought the goods from a vendor. The defendant firm refused to pay for or to take delivery of the goods and so the vendor resold the goods at a loss. He sought to recover it from the plaintiff Company. Hence the plaintiff company was seeking to recover this sum from the defendant firm before paying over the amount of the loss to the vendor on the basis of indemnity given by a contract. It was held that the Official Liquidator could recover the amount from the defendant even though the Official Liquidator had not actually paid it to the vendor. Similarly in a later case of the same High urt° when A had agreed to indemnify B against any loss or injury, B was liability entitled to have recourse to this indemnity and to call upon A to discharge his as soon as the loss or

injury

became

imminent.

B was not bound to wait

until B

actually suffers loss or injury. This view of the Court reflects the opinion expressed by BuCKLEY, L.J in the case of In re Richardson Ex parte the Governors of St. Thomas's Hospital where he observed: Indemnity is not necessarily given by repayment after payment. Indemnity requires that the party to be indemnified shall never be called upon to pay..

Rights

S. 125. The promisee in a contract of indemnity, acting within the scope of his authority, is

of indemnity

holder when sued.

entitled to recover from the promisor (1) all damages which he may be compelled to pay in any suit in respect of any matter to which the promise to indemnify

applies (2) all costs which he may be compelled to pay in any such suit if, in bringing or defending it, he did not contravene the orders of the promisor, and acted as it would have been prudent for him to act in the absence of any contract of indemnity, or if the promisor authorised him to bring or defend the suit;

3) all sums which he may have paid under the terms of any compromise of any such suit, if the compromise was not contrary to the orders of the promisor, and was one which it would have been prudent for the promisee to make in the absence of any contract of indemnity, or if the promisor authorised him to compromise the suit. Rights of indemnity

holders.-The rights conferred upon an indemnity holder

by this section are based upon an essential condition that he must be "acting

within the

scope of his authority." This is clear from the principal part of the section. This aspect is

4.

Khetarpal v. Madhukar Pictures, 57 Bom LR 1122 (1126) AIR 1956 Bom 106; Gajanan Moreshwar v. Moreshwar Madan, 44 Bom LR 703, approving Kumar Nath Bhuttacharjee v. Nobo Kumar, 26 Cal 241; Ramadingathudayar v. Unnamalai Uchi, 38 Mad 791; Shaim Lal v. Abdul Salam, AIR 1931 All 754. 5. Osman Jamal & Sons Ltd. v. Gopal Purshottam, AIR 1929 Cal 208. 6. Profulla Kumar Basu v. Gopee, AIR 1946 Cal 159.

. (1911) 2 KB 705 at 715.

252

Chapter VIlI-of Indemnity andGuarantee

S. 125

further emphasised by the sub-sections. Sub-section (1) requires that the suit must be "in respect of any matter to which the promise to indemnify applies." Sub-sections (2) and (3) also state that in bringing or defending or compromising, such suit, the indemnity holder should have been either (i) authorised by the promisee, or (1i) he did not

contravene the orders of the promisor, or (ii) in absence of such authority or orders, his acts should be acts of a prudent man. It is only when an indemnity holder has complied with the said condition that he would be entitled to recover from the promisor all damages and costs, which he has been compelled to pay in such suit. Sub-sections contemplate that at each stage, the indemnity holder applied for authority or orders of the promisor. In the absence of such authority or orders from the promisor, the indemnity holder has to act as a prudent man.

The provisions of this section deal with the rights of an indemnity holder in the event of being sued, and it is by no means exhaustive of the rights of an indemnity holder who has other rights besides those mentioned in this section. Even before damage is incur-

red by an indemnity holder, it would be open to him to sue for specific performance of the contract of indemnity provided it is shown that an absolute liability has been incurred and the liability is covered by the contract of indemnity. A contract or a bond by a scholar to reimburse the government if he failed to return to India from San Francisco after completing his studies and then serve the government for five years could be a contract of indemnity and the scholar is bound to reimburse the

govemment in the event of his failure to comply with the conditions of the bond Sub-Section 1-As to Sub-section 1, "it is obvious that when a person has altered his position in any way on the faith of a contract of indemnity, and an action is brought against him for the matter against which he was indemnified, and a verdict of a jury obtained against him, it would be very hard indeedif when he came to claim the indemnity, the person against whom he claimed it could fight the question oyer again, view and give an and run the chance of whether a second jury would take a different

opposite verdict to the first. Therefore, by reason of that contract of indemnity, the judgment is conclusive," although the promisor was not a party to it. followed by the Indian Courts.

This rule has been

Sub-Section 2-As to Sub-section 2, "in the case of contracts of indemnity, the liability of the party indemnified to a third person is not only contemplated at the time of the indemnity, but is the very moving cause of that contract; and in cases of such a nature there is a series of authorities to the effect that costs reasonably incurred in resisting or reducing or ascertaining the claim may be recovered." But the costs must be such as would have been incurred by a prudent man.3

Sub-Section

3-As

to Sub-section 3, "if a person has [expressly] agreed to

indemnify another against a particular claim or a particular demand, and an action is brought on that demand, he [the defendant] may then give notice to the person who has agreed to indemnify im to come in and defend the action, and if he does not come in,

8. 9.

Khetarpal v. Madhukar Pictures, 57 Bom LR 1122 (1126-27). M. Sham Singh v. State of Mysore, AIR 1972 SC 2440: (1973) 2 SCC 303.

10.

Parker v. Lewis, (1873) LR 8 Ch 1035, 1059, per MELLISH, LJ.

11.

Nallappa v. Virdhachala, (1914) 37 Mad 270. And the promisee has a cause of action as soon as a decree is passed against him; Chiranji Lal v. Naraini, (1919) 41 All 395.

12.

Bepin v. Chunder Seekur Mookerjee, (1880) 5 Cal 811.

13.

Gopal Singh v. Bhawani Prasad, (1888) 10 All 531.

"Contract of guarantee," "surety, " "Principal debtor"

S. 126

253

and refuses to come in, he may then compromise at once on the best terms he can, and then bring an action on the contract of indemnity."l4

Cause of action and period of limitation.-In one case it was held upon a true con struction of the contract of indemnity that the plaintiff had twocausesof action viz.:

)

it was permissible for the plaintiff to call upon the defendants to pay the amounts claimed in the order of the Sales Tax Officer directly to the autho-

rities (ii)

it was also permissible for the plaintiff to wait till he suffers loss i.e. when he paid the amount of the claim.5

Such a suit will lie within the period of three years under Art. 113 of Limitation Act from the date of payment.o In another case the Supreme Court held that the statute runs on the actual damnification.17

Rights of

promisor.-This

section deals with the rights of a promisee in a contract

of indemnity. There is no provision in the Act for the rights of a promisor in such a con-

tract. The absence, however, of such a provision does not take away the rights which such a promisor has according to English law, and which are analogous to the rights of surety declared in Section 141.18 Contract of guaran-

tee

urety""Princi

pal debtor," "creditor."

S. 126. A "contract of guarantee" is a contract

to perform the promise, or discharge the liability,

and of a third person in case of his default. The person who gives the guarantee is called the "surety," the person in respect of whose default the guarantee is given is called the principal debtor" and the person to whom the guarantee is given is called the "creditor." A guarantee may be either oral or written.

The contract of guarantee presupposes a principal debtor;17 the surety's obligation must be substantially dependent on a third person's default.20 A promise to be primarily and independently liable is not a guarantee, though it may be an indemnity.4 Contracts of suretyship.. . require the concurrence of three persons, namely, the principal debtor, the creditor, and the surety. The surety undertakes his obligation at the request express or implied of the principal debtor," on the true construction of Section 14l as well as Section 126. Accordingly, if A enters into a contract with B; C, without any communication with B, undertakes for a consideration moving fromA to indemnify A against any

14.

MELLISH, LJ, in Parker v. Lewis, (1873) LR 8 Ch 1035 at p. 1059.

15. Abdul Hussain Jambawalla v., Bombay Metal Syndicate, AIR 1972 Bom 252: (1972) 74 Bom LR 43.

16. Abdul Hussain Jambawalla v. Bombay Metal Syndicate, AIR 1972 Bom 252 (1972) 74 Bom LR 43. 17. Shanti Swarup v. Munshi Singh, AIR 1967 SC 1315 :(1967) 2 SCR 312. 18. See Maharana Shri Jasvatsingii Fatesingji v. The Secretary of State India, (1889) 14 Bom 299, 303. 19. Mountstephen v. Lakeman, (1871) LR 7 QB 196, 202, Ex. Ch. affirmed in House of Lords, LR 7 HL 17.

20. 21.

Harburg India Rubber Comb Co. v. Martin, (1902) 1 KB 778 CA. Guild& Co. v. Conrod, (1894) 2 QB 885.

22.

Periamanna Marakkayar v. Banians & Co., (1925) 49 Mad 156, 172, 185 : 95 IC 154: AIR 1926

Mad 544 at 553; Ramachandrav. Shapurji, (1940) Bom 552: 42 Bom LR 50: 1921C 375: AIR 1940 Bom 315; Jagannath Bakhsh v. Chandra Bhukham, (1937) 12 Luck 484: 165 IC 370: AIR 1937 Oudh 19.

254

Chapter VIll-Of Indemnity andGuarantee

S. 126

damage that may arise from a breach of B's obligation this will not make Ca surety for B or give him a right of action in his own name against B in the event of B°s default.25 A contract of guarantee without consideration is void

A contract of guarantee may

be contained in more than one document.2

Distinction between guarantee and indemnity Guarantee Indemnity

(1)

Three parties

(1)

Two parties

(2)

Three contracts: (1) between creditor and debtor, (2) between creditor and surety; (3) between debtor and surety by which principal debtor

(2)

One contract between indemnifier and indemnified.

requests the surety to act as such.2o

(3)

As security of creditor for performance and/or for

(3)

It is for reimbursement of loss only.

(4)

It is an original and direct contract. It creates primary liability for indemnifier which arises even though the promisee has no enforceable rights under the principal contract.28

(5)

A promise to be primarily and inde

liability or for

loss.

(4)

It is only a consequential contract after the

original

is entered into.

Guarantor's liability is secondary and hence if principal debtor is not liable,

guarantor

is

not

liable

also. (5)

There can be no

contract of gua-

pendently liable is not a guarantee

rantee unless there be a principal debtor (i.e. a third person) and the

surety's tantially

obligation dependent

but it may be an indemnity.29

must be subson

a

third

person's default. (6)

In a contract of guarantee the surety assumes a secondary liability to answer for the debtor who is

(6)

In a contract of indemnity the indemnifier assumes a primary liabi-

lity.

primarily liable.

(7)

is In the case of a guarantee there an existing debt or duty, the per-

(7)

In indemnity, the possibility or risk

formance of which is guaranteed

of any loss happening is the only contingency against which the in-

by the surety.

demnifier

undertakes

to

indem-

nify.30

23.

Periamanna Marakkayar v. Banians & Co., (1925) 49 Mad 156, 172, 185: 95 IC 154:: AIR 1926 Mad 544 at 553; Ramachandra v. Shapurji, (1940) Bom 552: 42 Bom LR 550: 192 IC 375: AIR 1940 Bom 315; Jagannath Bakhsh v. Chandra

Bhukham, (1937) 12 Luck 484: 165 IC 370 : AIR

1937 Oudh 19. 24. Janaki Paul v. Dhokar Mall Kidarbux, (1935) Raj 76: ILR (1963) Raj 973.

156 IC 200; Ram Narain v. Hari Singh, AlR 1964

25.

3 SCR 318 : AIR 1965 SC 1856.

S. Chattanatha v. Central Bank of India, (1965)

26. See Ramchandra v. Shapurji, (1940) 42 Bom LR 550: AIR 1940 Bom 315. 27. Eldridge & Morris v. Taylor (1931) 2 KB 416; Temperance Loan Fund Ltd. v. Rose, (l932) 2 KB 28.

522; Unity Finance Lid. v. Woodcock, (1963) 1 WLR 455. Yeoman Credit Ltd v. Latter, (1961) 1 WLR 828; Lakeman v. Mountstephen. (1874) LR 7 HL 17.

29. Guild & Co. v. Conrad (1894) 2 QB 885:63 LJQB 721. 30. Guild & Co. v. Conrad, (1894) 2 QB 885: 63 LJQB 721.

Considerationfor guarantee

S. 127

255

Whether the contract is one of guarantee, or of indemnity, is a question of construction in each case."i In Englanda guarantee is within the statute of frauds and therefore it is not actionable without a "memorandum or note" as is required by S. 4 of the statute, whereas under S. 126 of the Indian Contract Act a guarantee may be either

oral or written. But a contract of indemnity under English Law may be oral.

Law of guarantee What is a guarantee: Performing promise of principal debtor; or discharging liability

of principal debtor(S. 126). Consideration: Past/future benefit to principal debtor (S. 127). Invalidated: (1) By misrepresentation by creditor (S. 142). (2) By silence to material circumstances by creditor (S. 143).

Liability of Surety: Surety's liability is co-extensive with that of

principal debtor

(S. 128). Rights of Surety: (1) Guarantor entitled to be indemnified by principal debtor (S. 145). (2) Guarantor entitled to be subrogated to rights of creditor (Ss. 140, 141).

Discharge of Surety: (1) Release of principal debtor; (2) Act or omission of creditor whereby principal debtor is discharged (Ss. 134, 135, 139).

Revocation of guarantee: (1) By notice to creditor (S. 130). (2) By death of surety (S. 131). (3) By variation of original contract to the prejudice of surety (Ss. 133, 135). Co-sureties liable to contribute equally inter se (Ss. 146, 147).

"Discharge Liability."-By the word "liability" in this section is intended a liability which is enforceable at law, and if such liability does not exist, there cannot be a contract of guarantee. A surety, therefore, is not liable on a guarantee for the payment of a debt

which is barred by the law of limitation.32 Where the question of performing the promise of the principal debtor, or of discharging the liability of the principal debtor, is not involved, there would not arise any contract of guarantee. For example, in case of auction sales by Excise Department, the auction officer may insist upon the bidder to produce a certificate of his solvency; after the auction bid was closed, a person signed under the column headed 'certificate of solvency' in the auction sale list; it was held that the person so signing did not stand guarantee for the bidder.33 Consideration guarantee.

for

S. 127. Anything done, or any promise made, for the benefit of the principal debtor, may be a sufficient consideration to the surety for giving

the guarantee. lhustrations (a) B requests A to sell and deliver to him goods on credit, A agrees to do so, provided C will

guarantee the payment of the price of the goods. C promises to guarantee the payment in consideration of A's promise to deliver the goods. This is a sufficient consideration for C's promise.

31. Moschi v. Lep Air Services Ltd, [1973] AC 331, 339 (HL); State Bank of India v. Mula Sahakari Sakhar Karkhana, (2006) 6 SCC 293, 300 AIR 2007 SC 2361. 32. Manju Mahadeo v. Shivappa, (1918) 42 Bom 444. 33. Joseph Abraham v. Tehsildar Meenachi, AlR 1971 Ker 334,

256

S. 127

Chapter VllI-Of Indemnity andGuarantee

(b) A sells and delivers goods to B. C' afterwards requests A to forbear to sue B for the debt for

a year, and promises that if he does so, C' will pay for them in default of payment by B. A agrees to forbear as requested. This is a sufficient consideration for C's promise.

()A sells and delivers goodsto B. Cafterwards, without considerationagrees to pay for them in default of B. The agreement is void.

Consideration for a contract of guarantee.This is nothing but an application of the wider principle that in all cases of contract the really necessary element of consideration is the legal detriment incurred by the promisee at the promisor's request, and it is immaterial whether there is or is not any apparent benefit to the promisor.* The words "anything done" suggest that past consideration is a sufficient consideration for a contract

ofguarantee. Like any other contract, a contract of suretyship may be invalidated by total failure of the consideration. A surety gave a written guarantee for payment of the judgment debts by instalments, in consideration of the decree-holders consenting to postpone the sale under the execution. lt turned out that the consent of another person was necessary to prevent the sale. In consequence the sale took place. The surety gave notice that the consideration having failed, the guarantee was at an end. The decree-holders represented that when they took the guarantee they had power to stop the sale and that it would be stopped. It was held that the surety was entitled to have the guarantee cancelled,3 or where the consideration was withdrawal of a criminal prosecution against the debtor, but the Court would not sanction the withdrawal as the offence was not compoundable.30

Where A advanced money to B on a bond hypothecating B's property and mentioning C as surety for any balance that might remain due after realisation of B's property, and Cwas no party to the bond, but signed a separate surety bond two days subsequent to the advance of the money, it was held that the subseguent surety bond was void for want

of consideration.3 In an Allahabad High Court case8 the creditor did not promise to do anything and did not do anything "for the benefit of the principal debtor" and so there was no consideration for the Surety's giving the guarantee. The creditor agreed to do nothing and promised nothing in return for the surety's promise. The surety's separate and subsequent bond was not made for the benefit of the principal debtor as required by S. 127 of the Contract Act since the debtor had already received two days earlier the consideration money. Accordingly, the court found that the act of surety was not on behalf of the principal debtor but as security for the benefit of lender alone and therefore there was no consideration under S. 127 of the Act. So also in Tra. Coch. High Court cases" there was held to be no consideration for a contract of guarantee because after the debt had been contracted, the surety came forward and promised that he would see that the debtors duly discharged their obligation. The creditor did not suffer any detriment at the instance

of the surety. Moreover the surety was not personally liable for the discharge of the debt but would see that the debtors repay the debt. The mere tact that A lends money to B on

therecommendationof C is no consideration for a subsequentpromise by C to pay the money in default of B.40

34. Somating v. Pachai Naickan, (1915) 38 Mad 680; Pestonji v. Bai Meherbai, (1928) 30 Bom LR 1407: 112 IC 740: AIR 1928 Bom 539. 35.

Cooper v. Joel, (1859) 1 DF & J 240: (1859) 45 ER 350.

36.

let Ram v. Devi Prasad, (181) 1 All WN 2.

37. Nanak Ram v. 38. Nanak Ram v. 39. Nanak Ram v. 40. Muthukaruppa

Mehin Lal, (1877) 1 All 487; Varghese v. Abraham, AIR 1952 Tra Coch 202 (DB). Mehin Lal, (1877) 1 Al 487; Varghese v. Abraham, AIR 1952 Tra Coch 202 (DB).

Mehin Lal, (1877) 1 All 487, Varghese v. Abraham, AIR 1952 Tra Coch 202 (DB). v. Kathappudyan, (1914) 27 Mad LJ 249.

Surety's liability

S. 128

257

Where after a lease is executed a person becomes surety for the payment of the rent due by the lessee, the contract of suretyship is for consideration." In deciding sufficiency of consideration, it is not necessary to look at the events chronologically. If a sale and the guarantee are substantially one transaction (e.g. goods sold are intended to be guaranteed by manufacturers) it does not matter that a guarantee is given at a date later than the sale.

Surety's liability.

S. 128. The liability of the surety is co-extensive with that of the principal debtor, unless it is

otherwise provided by the contract. llustration A guarantees to B the payment of a bill of exchange by C, the acceptor. The bill is dishonoured by C. A is liable, not only for the amount of the bill, but also for any interest and charges which may have become due on it.

Additional Illustration A guarantees to C the payment of rent becoming due from B to C. B fails to pay rent. A is liable for the rent, but not for interest on the rent, unless the bond contained some such words as

with interest thereon": Maharaja ofBenares v. Hiar Narain Singh, (1906) 28 All25.]

Proof of surety's

liability.-The

liability must be proved against the surety in the

same way as against the principal debtor. A judgment or award against the principal not admissible as against the surety without a special agreement to that effect.43 The present section is merely a re-enactment of the Common Law.*

Madras Agriculturists Relief Act.-A full Bench of theMadras High Court5 has decided that where the principal debt of an agriculturist has been scaled down by the liable for the Madras Agriculturist's Relief Act, a non-agriculturist surety will only be debt as scaled down. Their Lordships distinguished cases in which it was held that discharge of a principal debtor in bankruptcy did not operate as discharge of the sureties.

Liability for whole or part of debt.-A surety may limit his guarantee to a fixed sum. If the debt is an ascertained sum exceeding that sum, the presumption is that the

surety guarantees the whole amount but limits his liability to the fixed sum. But if the debt is a floating balance including sums to become due in the future, the presumption is that the surety guarantees not the whole debt but a part of the debt equal to the fixed sum. This is because "it is inequitable in the creditor, who is at liberty to increase the balance

or not, to increase it at the expense of the surety."4b The surety's liability depends upon the terms of the contract. If the guarantee is of the whole deb the surety does not acquire rights of subrogation of contribution (see Sections. 140, 141 and 146) until he has paid the whole of the fixed sum to which he has limited his guarantee. If the guarantee is for a part of the debt the surety is entitled to the benefit in rateable proportion of any dividends paid by the estate of the principal debtor. 41. Ghulam Husain v. Faiyaz Ali, (1940) 15Luck 656: 188 IC 175: AIR 1940 Oudh 346; Kali Charan v. Abdul Rahman, (1918) CWN 545: 50 1C 651: AIR 1918 PC 226. Thormton v.Jenkhyns, (1840)1 Man & G 166; Tanner v. Moore, (1846) 9 QB 1. 43. Central Bank of India v. CL Vimla, 2015 SCC OnLine SC 393 (agreement providing that judgement obtained by creditor shall be binding on guarantor.) 42.

44. Hajarimal v. Krishnaray, (1881) 5 Bom 647, 650; Sree Meenakshi Mills, Ltd v. Ratilal Tribhovandas, (1941) 43 Bom LR 53 AIR 1941 Bom 108. 45. Subramania v. Narayanaswami, (1951) Mad 305 AIR 1951 Mad 48 (FB); Narayan Singh v. Chhatar Singh, AIR 1973 Raj 347. 46.

Ellis v. Emanuel, (1876) 1 Ex Div 157, 164, Cur per BLACKBURN, J.

47. Subhankhan v. Lalkhan, (1947) Nag 643: AIR 1951 Nag 123; S.N. Prasad v. Monnet Finance Ltd., (2011) 1 SCC 320, 329 (surety not liable for interest where guarantee only extended towards

principal sum).

258

S. 128

Co-extensive

Chapter VIlI-Of Indemnity andGuarantee liability.-This

section limits the liability of a surety unless the con-

tract provides otherwise. The word 'co-extensive' indicates that a surety is liable to the same extent as the principal debtor; he is jointly and severally liable with the principal

debtor.

In Bank of Bihar v. Damodar Prasad

the Supreme Court observed that the

surety is liable to pay the entire amount and his liability is immediate and cannot be

deferred until the creditor exhausts his remedies against the principal debtor. The Court approved LORD ELDON'S observations in Wright v. Simpson, that "Surety cannot restrain an action against him by the creditor on the ground that the debtor is solvent or that the creditor may have relief against the debtor in some other proceedings." Likewise when the creditor has obtained a decree against the surety and the debtor, the surety has no right to restrain execution against him until the creditor has exhausted his remedies

against the debtor. If the principal debtor is not liable on the principal debt, surety is also not liable. If the principal debt is illegal2 or is unenforceable under the Moneylenders Act, the principal debtor and guarantor are not liable. If the principal debtor is discharged by the creditor's breach, surety will not be liable.34 A surety's liability to pay the debt is not removed by reason of the creditor's omission to sue the principal debtor. The creditor is not bound to exhaust his remedy against the principal debtor before suing the surety, and a suit may be maintained against the surety, though the principal debtor has not been sued.55 Nor can the surety ask for an injunction against the creditor restraining him from proceeding against surety until his remedies against the principal debtor are exhausted.

But a document which releases the principal debtor without expressly reserving the creditor's rights against the guarantor, the guarantor would be also released from his

liability.37 If decretal debt is extinguished in whole or in part by substantive statutes8 or by operation of substantive law" e.g. Under Agriculturist Debtors Relief Act, or in appeal,0

48. 49. 50.

Suresh Narain v. Akhauri, AIR (1957) Pat 256; Madho Sah v. Sitaram, AIR 1962 Pat 405. Bank of Bihar v. Damodar Prasad, (1969) 1 SCR 620: AIR 1969 SC 297. Wright v. Simpson, 31 ER 1272, 1282.

S1. Bank of Bihar v. Damodar Prasad, (1969) 1 SCR 620 : AIR 1969 SC 297; Industrial Investment Bank of India Ltd. v. Biswanath Jhunjhunwala, (2009) 9 SCC 478, 483; Union Bank of India v. Satyawati Tondon, (2010) 8 SCCI10, 122: AIR 2010 SC 3413; Ram Kishan v. State of UP, (2012) 11 SCC 511, 519.

52. Swan v. Bank ofSecotland. (1836) 10 Bli (Ns) 627; A.V. Varadarajulu Naidu v. K.v. Thavasi Nadar, AIR 1963 Mad 413.

53. 54.

Eldridge & Morris v. Tayhor, (1931) ZKB 416; Temperance Loan Fund Ltd v. Rose. (1932) 2 KB 522. Unity Finance Ltd. v. Woodcock, (1963) 1 WLR 455.

55.

Sankara v. Virupakshapa, (1883) 7 Bom 146; Depak Datt Chaudhari v. Secy. of State, 118 IC 443:

AIR 1992 Lah 393; Badri Batan v. VindhyaPradesh, AlR 1952 VP 18, Asharfibi v. Prashadilal, AIR 1959 MP 26; MadhoSah v. Sitaram, AIR 1962 Pat 405; Bank of Bihar v. Damodar Prasad AIR 1969 SC 297: (1969) 1 SCR 620. Bank of Bihar v. Damodar Prasad, (1969) 1 SCR 620: AIR 1969 SC 297. Cutler v. McPhail, (1962) 2 QB 292.

S6. $7. 58. Narayan Singh v. Chhatar Singh, AIR 1973 Raj 347 (349); Subramania Chetiar v. Moniam P. Narayaswami Gounder, AIR (1951) Mad 48; Aypunni Mani v. Devassy, AIR 1966 Ker 203; Babu

Rao v. Babu Manaklal, AIR 1938 Nag 413; but compare Gopilal v. Ms. Trac Industries & Components Lid., AIR 1978 Mad 134 (DB).

59. Narayan Singh v. Chhatar Singh, AIR 1973 Raj 347 (349); Subramania Chettiar v. Moniam P. Narayaswami Gounder, AlR (1951) Mad 48; Aypunni Mani v. Devassy, AIR 1966 Ker 203; Babu Rao v. Babu Manaklal, AlR 1938 Nag 413; but compare Gopilal v. Ms. Trac Industries & Components Lid., AIR 1978 Mad 134 (DB). 60.

Shek Suleman v. Shivram, (1888) 12 Bom 71.

Surety's liability

S. 128

259

the surety's co-extensive liability is pro-tanto extinguished, reduced or abates, as the case may be. In Narayan Singh v. Chhatar Singh°l the Rajasthan High Court observed that because the surety's engagement is one of indemnity it would diminish in like proportion

as the liability of the principal debtor diminishes. So if the principal debtor gets any benefit of the provisions of the Act, like Relief of Agricultural Indebtedness Act passed by the State Legislature, those benefits would enure for the benefit of the surety as well because the liability of a surety under a contract could not be more than that of a principal debtor. Moreover the purpose of the beneficial legislation which scales down the debt of the agriculturist with his creditor would be defeated if the surety's liability towards the creditor is not correspondingly reduced because the surety has a right under S. 145 to be reimbursed by the principal debtor for the amount paid by him to the creditor on behalf of

the principal debtor. Accordingly, after the judgment creditor gets from the surety the entire decretal amount without being scaled down, then the surety would exercise his right to be reimbursed by the principal debtor for the amount paid under the decree to the

creditor. By this, the benefit of the Act to scale down the debt would ultimately be lost to the debtor-agriculturist for whose benefit the Act is passed. However, mere failure to sue within the period of limitation or inability to sue by reason of the provisions of one ofthe orders under the Civil Procedure Code, would not render the original contract void. In Mahant Singh v. U Ba Yi the creditor had sued the debtor and surety in one action but on a technical objection by the debtor, had withdrawn the suit against him, without leave of court, and sought to continue the action against the surety. The Privy Council held that the creditor's act amounted to a clear reservation of rights against the surety.03 As seen

earlier a statutory reduction or extinguishment of the principal debtor's liability will operate as a pro tanto reduction or extinguishment of the surety debt but its unenforcea-

bility against the principal debtor by operation of law of Bankruptcy or Limitation Act is quite different.4 A discharge of the principal debtor not by act of the party but by operation of law, does not discharge the surety and the remedy of the creditor against the guarantor (surety) should not be restricted to the amount that the debtor may be operation

of law be compellable to pay5 So a surety in such a case is liable though the claim against the principal

debtor is

barred by statute of limitation or by reason of the bankruptcy of the principal debtor.

Surety's liability where original contract is void or voidable-This section only explains the quantum of a surety's obligation when the term of the contract do not limit it, as they often do. It does not follow, conversely, that a surety can never be liable when the principal debtor cannot be held liable. Thus a surety is not discharged from liability by the mere fact that the contract between the principal debtor and creditor was voidable at the option of the former, and was avoided by the former. And when the original agreement is void, as in the case of a minor's contract in India, the surety is liable as a principal debtor for in such a case the contract of the so-called surety is not a collateral, but a principal,

61.

contract.0o

Narayan Singh v. Chhatar Singh, AIR 1973 Raj 347 (349); Subramania Chettiar v. Moniam P. Narayaswami Gounder, AIR (1951) Mad 48; Aypunni Mani v. Devassy, AIR 1966 Ker 203; Babu

Rao v. Babu Manakla, AlR 1938 Nag 413; but compare Gopilal v. Ms. Trac Industries & Components Lid., AIR 1978 Mad 134 (DB). Mahant Singh v. U. Ba Yi, 66 IA I98:41 Bom LR 742 (748). Mahant Singh v. U. Ba Yi, 66 IA 198:41 Bom LR 742 (748). Aypunni Mani v. Devassy, AlR 1966 Ker 204, Para 7. Bank of India Ltd. v. R.F. Cowasjee, AIR 1955 Bom 419 para 27.

62. 63. 64. 65. 66. Kashiba v. Shripat, (1894) 19 Bom 697; Indar Singh v. 7hakur Singh, (1921) 2 Lah 207; Jagannath Ganeshram v. Shivnarayan, (1940) Bom 387:42 Bom LR 451: 190 1C 73 :AIR 1940 Bom 247.

260

Chapter VII-Of Indemnity andGuarantee

5.129

Limitation-The payment of interest by a debtor before the expiration of the period of limitation does not give a fresh starting point for limitation against the surety under Section 20 of the Limitation Act, 1908" even in the absence of a prohibition by the surety against the payment of interest by the debtor on his account. Payment of interest by the debtor could not be regarded as made by a person liable to pay

the debt, nor can the

surety be, for the purpose of that section, considered the agent of the principal duly authorised to pay the interest.o

But where the terms of a contract with the surety imply

that he would be bound by the acknowledgements of the principal debtor, as when : surety has agreed to a continuing guarantee with a bank, the surety will be bound by the

acknowledgements of the principal debtor,08 See also the commentary on Section 134 Continuing ee

guaran-

S. 129. A guarantee which extends to a series of transaction is called a "continuing guarantee" lhustrations

(a) A, in consideration that B wil employ C in collecting the rents of B°s zamindari, promises C of B to be responsible, to the amount of 5,000 rupees, for the due collection and payment by those rents. This is a continuing guarantee. [See Durga Priya Chowdhur v. Durga Pada (1928) 55 Cal 154: 109 IC 752: (28) AC 204, where this illustration is relied on.]

Roy,

(6) A guarantees payment to B, a tea-dealer, to the amount of £100, for any tea he may from time to time supply to C. B supplies C with tea to the above value of £100 and C pays B for it.

Afterwards B supplies C with tea to the value of £200. C fails to pay. The guarantee given by A was a continuing guarantee, and he is accordingly liable to B to the extent of £l00. simplified from Wood v. Priestner, (1867) LR 2 Ex 66 and 282.]

[Facts

(c) Aguaranteespayment to B of the price of five sacks of flour, to be delivered by B to C and to be paid for in a month. B delivers five sacks to C. C pays for them. Afterwards B delivers four sacks to C which C does not pay for. The guarantee given by A was not a continuing guarantee, and accordingly he is not liable for the price of the four sacks. [Kay v. Groves, (1829) 6 Bing 276.]

Continuing guarantee-In a contract of guarantee the consideration may be an entire consideration (and so outside the scope of S. 129 of the Act) or it may be fragmentary consideration supplied from time to time and therefore divisible (and falling within S. 129 of the Act) In the case of an entire consideration it is indivisible and moves once and for all from the person to whom the guarantee is given (i.e. the creditor). The consideration for the contract has flowed once for all and is contained to a single transaction and does not extend to series of transactions. A guarantee given for the performance of a definite engagement which has already come into existence is of this nature. So a guarantee for due performance even of several payments of rent under a lease constitutes a definite engagement of one transaction and it is not a continuing guarantee.0 The successive payment of rent upon each instalment falling due cannot be treated as successive transactions and it is not a guarantee of the type falling within S. 129 of the Act. Similarly, where a bond was given by a surety for the integrity of a person in consideration of that person's appointment to an office is an example of an indivisible consideration and it is not a continuing

*

guarantee. When the guarantee is not a continuing

guarantee, the guarantor

Corresponding to Section 19 of the Limitation Act XXXVI of 1963.

67. Gopal Daji v. Gopal Bin Sonu, (1903) 28 Bom 248; Brojendra v. Hindustan Co-op. Insurance Society. (1917) 44 Cal 978. 68. Popular Bank Lid. v. United Coir Factories, I.L.R., (1961) Ker 493. 69. Husan Ali v. Waliullah, AlR 1930 All 730. 70.

In re Crace, (1902) 1 Ch 733; See also Lloyds v. Harper, (1880) 16 Ch D 290.

Revocation of continuingguarantee

S. 130

261

cannot end the guarantee at his pleasure nor could it be put to an end by the communication of the death of the guarantor to the creditor." However the position is different when it is not an entire but a fragmentary consideration which is supplied from time to time. In a continuing guarantee a surety may revoke his guarantee after a notice to the creditor and the guarantor is not then responsible with respect to future transactions which may be made by the principal debtor after the surety has revoked the guarantee.

Accordingly, a guarantor is liable for all advances made or all the goods supplied upon his guarantee betore the notice to determine it is given. Whether in a particular case a guarantee is continuing or not is a question of the intention of the parties, "as expressed by the language they have employed, understanding it fairly in the sense in which it is

used; and this intention is best ascertained by looking to the relative position of the par ties at the time the instrument is written."4 A guarantee in this form: "I, M will be be a contianswerable for £50 sterling that Y, butcher, may buy from H" was held nuing guarantee to the extent of £s0 when it appeared from the circumstances that the parties contemplated a continuing supply of stock to Y, in the way of his trade. A guarantee intended to secure advances to be made from time to time in 18 months, the sureties making themselves liable for those advances upto £l000 is a continuing guarantee." B became surety under bond to Government for the treasurer of a collectorate. The collector yearly examined the accounts and struck a balance which he certified to be correct. B on

each occasion executed a new bond, but the old bonds were not cancelled.

Subsequently

the treasurer was discovered to have embezzled moneys during each year. It was held that it was a continuing guarantee. Further, as the new bond was not in substitution of the old bond, there was no novation and the liability of a surety for the old bond remained.* But a guarantee for the due performance of the payment of rent under a lease is not a continuing guarantee as a guarantee has been given for the performance of a definite engagement which has already come into exístence. Stipulation for several payments

were definite engagements constituting one transaction. Guarantee was given for due fulfilment of theseengagements during the lease period. In construing the language of the parties the whole of their expressions must be looked to, and not merely the operative words. A guarantee of the faithful discharge of his duties by a person appointed to a place of trust in a bank is not a continuing guarantee as there are no series of transaction but it is one transaction,o so long as he continues in that place the guarantee remains. Neither is a

guarantee for the payment of a sum certain by instalments within a definite time, a continuing

guarantee.7

The first is a guarantee of an appointment and the second is a

guarantee of a loan.

S. 130. A continuing guarantee may at any time Revocationof conti- be revoked by the surety, as to future transactions, nuing guarantee. by notice to the creditor. Ilustrations (a) A, in consideration of B's discounting, at A's request, bills of exchange for C, guarantees to B, for twelve months, the due payment of all such bills to the extent of 5,000 rupees. B discounts

71. 12.

Lloyds v. Harper, (1880) 16 Ch D 290. BOBILL, C.J., Coles v. Pack, (1869) LR 5 CP 65, 70.

73. 14.

Laurie v. Scholefield, LR 4 CP 622. Lala Bansidhar v. Govt. of Bengal, (1872) 9 BLR 364: 14 MIA 86.

75. Hasan Ali v. Waliulah, AIR 1930 All 730: 128 IC 821 :(1930) ALJ 1271. 76. Sen v. Bank of Bengal, (1920) 47 LA 164. 11. Bhagwamdasv. Secretary of State, (1926) 28 Bom LR 662: 96 IC 248: AIR 1926 Bom 465.

262

Chapter Vll-Of IndemnityandGuarantee

S. 130

bills for C to the extent of 2,000 rupees. Afterwards, at the end of three months, A revokes the guarantee. This revocation discharges A from all liability to B for any subsequent discount. But A is liable to B for the 2,000 rupees, on default of C. (b) A guarantees to B, to the extent of 10,000 rupees, that C shall pay all the bills that B shall draw upon him. B draws upon C, C accepts the bill. A gives notice of revocation. C dishonours the bill at maturity. A is liable upon his guarantee.

Revocation of continuing guarantee.-A under this Act in the following manner:(i)

continuing guarantee can be revoked

by notice to creditor (S. 130)

i) bydeathofsurety,(S.131) ii)

by variance in the terms of the contract between debtor and creditor (S. 133).

Future

transactions.The

words "future transactions" must be taken to imply that

the operation of this section is confined to cases where a series of distinct and separate transactions is contemplated. It is otherwise in the case of an entire consideration. Where a continuing relationship is constituted on the faith of a guarantee.. the guarantee cannot be annulled during the continuance of that relationship," and as the Surety cannot determine it himself by notice, so his death does not relieve his estate from liability unless the nature of the transaction implies a contract to the contrary under Section 131. This rule was applied in Lloyd's v. Harper8 where the father of a person admitted as an underwriting member of Lloyd's gave a guarantee to Lloyd's "for all his engagements in that capacity." Lloyd's was then a voluntary association under which a person once admitted could not be excluded from a membership except for his insolvency. The association as such incurred no liability on the policies underwritten by

its members. In 1871, the society was incorporated by Act of Parliament. In 1876 the father (guarantor) died and notice of his death was given to Lloyd's. In 1878 son became bankrupt and so ceased to be a member of Lloyd's. The question was whether the guarantee terminated with the father's death and notice of it to Lloyd's. It was held that guarantee was not determined by the death of the father or by notice of it but the estate of father was liable in respect of engagements contracted by the son. But a material change in what we may call the guaranteed situation may justify a revocation. Thus, in the common case of a guarantee for a servant's honesty, proved dishonesty on the servant's part entitled the surety to say: "After this you must employ such

a man, if you will, at your own, peril. This section will not apply to a surety to the receiver appointed by a court of law.30

Notice: In a previous suit instituted by the ereditor if the surety denied his liability, that may not operate as a notice under this section1 This section requires a clear specific

notice of revocation. Contracting out.-It is open to the parties to contract out of the right of the surety under this provision,3 Thus, in Sita Ram Guptašs the surety denied any liability under

78. 79.

Lloyd's v. Harper, (1880) 16 ChD 290. Phillips v. Foxall, (1872) LR 7 QB 666, 677, 681.

(1894) 19 Mahomed Ali v. Howeson Bros., (1925) 30 CWN 266; Bai Somi v. Chokshi Ishwardas, Bom 245. 81. Bhikabhai v. Bai Bhuri, 27 Bom 418. AIR 2008 SC 2416; HR 82. Sita Ram Gupta v. Punjab National Bamk, (2008) 5 SCC 711, 714 Basavaraj v. Canara Bank, (2010) 12 SCC 458, 466. See also -Commentary under S. 137 under the heading "Contracting out or waiver of rights by surety". 83. Sita Ram Gupta v. Punjab National Bank, (2008) 5 SCC 711,714: AIR 2008 SC 2416.

80.

132

Liability of twopersons, primarily liable, not affected by

263

the guarantee as it had sent a notice of revocation even before the debt was advanced. The guarantee however was termed as "continuing" and also "irrevocable". It was held

that this wording of the guarantee had the effect of "contracting out" of S. 130, and thus the statutory benefit of revoking the continuing guarantee upon notice to the creditor, would not be available to the surety. Revocation surety's death.

of

con-

S. 131. The death of the surety operates, in the

by absence of any contract to the contrary, as a revocation of a continuing guarantee, so far as regards

future transactions. "Contract to the contrary."-The English rule appears to be that where there is a guarantee subject to revocation by notice, and the surety dies without having revoked it, does not govern the notice of his death to the creditor operates as a revocation.34 But this construction of the present section.3 An express provision that a guarantor or his representatives may determine the guarantee by notice is an example of such a contract to the contrary as this section contemplates; in such a case mere notice of the death will not be enough.86

Liability of two per-

sonsrinanyabe

S. 132.

Where

two

persons

third person to undertake a certain

eontract

with

a

liability, and

m noetnatfsfbeecttw ee db eynthemthat also contract With each other that one of them one shall be surety on shall be liable only on the default of the other, the other's default.

third person not being a party to such contract, the liability of each of such two persons to the third person under the first contract is not affected by the existence of the second contract, although such third person may have been aware of its existence. Ilustration A and B make a joint and several promissory note to C. A makes it, in fact, as surety for B, and C knows that at the time when the note is made. The fact that A, to the knowledge of C, made the note as surety for B, is no answer to a suit by C against A upon the note.

Joint debtors and internally one of them a surety for the other.-Where one of two joint debtors is, to the knowledge of the creditor, in fact a surety for the other as between themselves, his immediate liability to the creditor is not qualified, but he is entitled to the rights of a surety under Sections 133, 134, 135. "When two or more persons bound as full debtors arrange, either at the time when the debt was contracted or subsequently, that inter se one of them shall only be liable as a surety, the creditor, after he has notice of the arrangement, must do nothing to prejudice the interests of the surety in any question with his co-debtors. That appears to me to be the law as settled by the judgments

of this House in Oakeley v. Pasheller3 and Overend, Gurney & Co. v. Oriental Finan-

84. 85.

Coulthart v. Clementson, (1879) 5 QBD 42. Durga Priya Chowdhury v. Durga Pada Roy. (1928) 55 Cal 154, 159: 109 IC 752: AlR 1928 All 204. 86. Re Sihvestor, (1895)1 Ch 573; Durga Priya Chowdhury v. Durga Pada Roy, (1928) 55 Cal 154 109 IC 752: AIR 1928 All 204.

87.OakeleyvP . ashelle(r1,836)4 Ci& F207:42RR1. ,

Aa

Chapter Vl-Of Indemniy andGuarantee

S.133

264

cial Corporation."85 This includes the case where one member of a firm retires and another continues the business and agrees to indemnify the outgoing partner.

The provisions of this section do not apply where the liability undertaken is not the same. A party who accepts bills of exchange for the accommodation of another is not precluded by this section from pleading that he was an accommodation acceptor only. See Negotiable Instruments Act, 1881, Sections. 37, 38. Discharge of surety

byvanancein termsot

contract.

S. 133. Any surety's consent,

variance, made without the in the terms of the contract

between the principal

discharges the surety as to

"[debtor] and the creditor,

transactions subsequent to the variance. llustrations

(a) A becomes surety to C for B's conduct as a manager in C's bank. Afterwards, B and C contract, without A's consent, that B's salary shall be raised, and that he shall become liable for one-fourth of the losses on overdrafts. B allows a customer to overdraw, and the bank loses a sum of money.

A is discharged from his suretyship by the variance made without his consent, and is not liable to make good this loss. (b) A guarantees C against the misconduct of B in an office to which B is appointed by C, and of which the duties are defined by an Act of the Legislature. By a subsequent Act the nature of the

office is materially altered. Afterwards, B misconducts himself. A is discharged by the change from future liability under his guarantee, though the misconduct of B is in respect of a duty not affected by the later Act.

.1)

Cagrees to appoint B as his clerk to sell goods at a yearly salary, uponA^'sbecoming

Surety to C for B's duly accounting for moneys received by him as such clerk. Afterwards, without A's knowledge or consent, C and B agree that B should be paid by a commission on the goods sold by him and not by a fixed salary. A is not liable for subsequent misconduct of B. (d) A gives to Ca continuing guarantee to the extent of 3,000 rupees for any oil supplied by C to B on credit. Afterwards B becomes embarrassed, and, without the knowledge of A, B and C contract that C shall continue to supply B with oil for ready money, and that the payment shall be applied to the then, existing debts between B and C. A is not liable on his guarantee for any goods supplied after this new arrangement.

(e) C contracts to lend B 5,000 rupees on the Ist March. A guarantees repayment. C pays the 5,000 rupees to B on the Ist January. A is discharged from his liability, as the contract has been varied inasmuch as C might sue B for the money before the 1st of March.

.Variation

of contract between creditor and

principa-This

is a rule of long

standing, thus expressed by Lord Cottenham: "Any variance in the agreement to which

the surety hassubscribed, which is made without the surety's knowledge or consent, which may prejudice him, or which may amount to a substitution of a new agreement for a former agreement, even though the original agreement may, notwithstanding such variance, be substantially performed, will discharge the surety.

Again it was laid down ageneration later by a Judicial Committee: "A long series of cases has decided that a surety is discharged by the creditor dealing with the principal or with a co-surety in a manner at variance with the contract, the performance of which the surety has guaranteed. Where a surety handed over a letter of guarantee to the principal

88. Overend, Gurney & Co. v. Oriental Financial Corporation, (l1874) LR 7 HL 348; per LORD WATSON in Rouse v. Bradford Banking Co., (1894) AC 586, 598. *Ins. By Act 24 of 1917, Section 2 snd Sch. I. 89. Bonarv. Macdonald, (1850) 3 HLC 226 at pp. 238, 239; Brahmayya & Co. v. K. Srinivasan, AIR 1959 Mad 122.

90.

Ward v. National Bank of New Zealand, (1883) 8 App Ca 755, 763.

Discharge of surety by variance in terms of contract

S. 133

debtor for a sum of Rs. 25,000/- but the creditor got the said figure reduced 20,000/- and the figure was altered by the debtor, it was held that the guarantor left the letter with the debtor was estopped from pleading want of authority principal debtor to alter. Also the alteration was unsubstantial and to the benefit guarantor and hence the guarantor was not discharged by virtue of such alteration.

265

to Rs. having of the of the

In one case2 a guarantor executed a surety bond for Rs. 25,000/- under Section 145 C.P. Code and in the suit the defendant submitted to a consent decree for Rs. 22,717.12, costs of the suit and interest, with a stipulation that if Rs. 20,000/- were paid the decree

was to be marked satisfied. The plaintiff decree holder took out execution of the decree against the guarantor who pleaded material variation of the guarantee and consequently disclaimed all liability. The Court held that the liability of the surety was reduced by the compromise decree, surety was not prejudiced and the guarantor could not plead variation of the guarantee to his prejudice nor could he disclaim his liability. Where a guarantee is for the performance of several and distinct contracts or duties, a change in one of those contracts or duties will not affect the surety's liability as to the

rest

The intention ofa "settlement" contract, for repurchase of goods by the seller from

the buyer, is not that the original contract shall be discharged but that the two contracts shall stand together; accordingly, a contract of resale to the vendor does not discharge a surety from his original contract.° A stipulation in a contract of guarantee whereby the surety purports to waive all his rights, legal, equitable, statutory or otherwise, which may be inconsistent with the guarantee, will not deprive him of his right to discharge under this section because the surety did not thereby consent to a variation of the contract.' The general clause in the letter of indemnity under which he waived all rights under the statute cannot be read as implying any consent to the variation within the meaning of S. 133 or as entitling the plaintiffs to enforce the liability against the surety even though, according to law, he (surety) is discharged from such liability. The discharge from liability is an incident of the variation and any such general agreement could not be interpreted as amounting to that specific consent to the variation contemplated by S. 133. Such a consent necessarily implies that the surety has knowledge of the nature of variation. A becomes surety to C, for payment of rent by B under a lease. Afterwards B and C contract, without A's consent, that B will pay rent at a higher rate. A is discharged from

his suretyship in respect of arrears of rent accruing subsequent to such variance. A surety for a partner was held to be discharged where the partners had extended the business and increased the capital, thus making the partner for whom the surety stood guar antee liable for greater losses than was contemplated at the date of the bond,0 An attempted variance which is inoperative, as being against the local law applicable as between the creditor and the principal debtor, will not discharge the surety. A Canadian banker's loan and interest were guaranteed, the bank increased the rate of interest from 7 to 8 per cent, 7 per cent being the highest the bank could legally charge in

Canada, the guarantors remained bound for principal and lawful interest. 1.

But it is for

M.S. Anirudham v. Thomcos Bank Ltd, 1963 Supp (1) SCR 63.

2. Amin Abdul Murtaza v. Jivraj Otmal Ratmagiri Bhagidari, AlR (1972) Bom 88: 73 Bom LR 715. 3. Amin Abdul Murtaza v. Jivraj Otmal Ratmagiri Bhagidari, AIR (1972) Bom 88: 73 Bom LR 715. 4. 5.

Skillett v. Fletcher, (1866-67) LR 1 CP217: 1 CP 469.

6. 7.

Uderam v. Shivbhajan, (1920) 22 Bom LR 711. Chitguppi & Co. v. Vinayak Kashinath, (1921) 45 Bom 157 22 Bom LR 659.

Uttam Chand Saligram v. Jewa Mamooji, (1919) 46 Cal 534, 542.

8. Chitguppi & Co. v. Vinayak Kashinath, (1921) 45 9. Khatun Bibi v. Abdullah, (1880) 3 All 9. 10. Jowand Singh v. Tirath Ram, (1939) 183 IC 740: 11. Eghertv. National Crown Bank, (1918) AC 903.

Bom 157 : 22 Bom LR 659.

AIR 1939 Lah 193. 1S

266

S.133

Chapter VIl-Of IndemnityandGuarantee

the promisee (the creditor) to show performance of the contract before he can hold the promisor (the surety) to his promise, and therefore, the guarantor will not be held liable if the promisee has failed to pertorm the original contract. The surety cannot be held bound to something for which he has not contracted. If the original parties have expressly agreed to vary the terms of the original contract, no further question arises. The original contract has gone and unless the surety has assented to the new terms, there is nothing to

which he can be bound, for the final obligation of the principal debtor will be something different from the obligation which the surety guaranteed.s Presumably he is discharged forthwith on the contract being altered without his consent, for the parties have made it impossible for the guaranteed performance to take place. So in the Privy Council case the guaranteed transaction was an advance of Rs. 1,25,000 on security of four properties. The transaction carried out was an advance of Rs. 1,00,000 on security of three properties. It was held that the sureties cannot he held liable in respect of this performance which was not what they contracted to guarantee. If there is a substantial variation in a contract without the consent of the surety will be discharged even though there is no extra prejudice to him. will not go into the question whether there has been any actual prejudice or for the surety to judge whether he will continue to remain liable on the new not. 18

surety, the The Court not.7 It is contract or

If the surety has mortgaged his property as security for his guarantee, any variance in the contract between the creditor and the principal debtor will discharge the surety from

liability andreleasethe property mortgaged. The property will be released even if the surety has not made himself personally liable.20

Contracting out or waiver of rights by Surety.-Section 128 of the Contract Act specifically provides that the liability of surety is co-extensive with that of the principaldebtor, "unless it is otherwise provided by the contract". A similar phrase, enabling contracting out of the provisions of a section, does not appear in the other provisions of Chapter VIIl relating to the rights of sureties. Different views were expressed by the High Courts as to whether it is open to contract outside those provisions of Chapter VIlI relating to the rights of sureties. On one view, it was held that in view of the clear difference in language from S 128 which uses the words "unless it is otherwise provided by contract", the application ofS 133 cannot be contracted out of by the surety2 The Karnataka High Court in T Raju Shetty expressed the view that "unless it is otherwise provided in the contract occurring in Section 128 of the Contract Act would also govern the other provisions contained in Chapter VIlI of the Contract Act and enable the surety

12. Pratapsingh v. Keshavlal,(1935) 62 IA 23: 59 Bom 180:37 Bom LR 315 : 153 IC 700: ("35) APC 21. 13. 14.

AIR 1935 PC 24. AIR 1935 PC 24.

15. Pratapsingh v. Keshavlal, (1935) 62 IA 23: 59 Bom 180:37 Bom LR 315 : 153 IC 700 AIR 135 PC

16.

Pratapsingh v. Keshavlal, (1935) 62 IA 23: 59 Bom 180:37 Bom LR 315: 153 IC 700: AIR 135 PC

17.

Pratapsingh v. Keshavlal, (1935) 62 1A 23: 59 Bom PC 21.

180: 37 Bom LR

315 : 153 IC

700

AIR

135

18. Pratapsingh v. Keshavlal, (1935) 62 IA 23 : 59 Bom 180:37 Bom LR 315: 153 IC 700: AIR 135 PC 21. 19. Bolton v. Salmon, (1892) 2 Ch 48.

20. Smith v. Wood, (1929) 1 Ch 14; Jagjiwandas v. King Hamilton & Co., (1931) 55 Bom 677 33 Bom LR 709: 134 IC 545: AIR 1931 Bom 337. 21. Union of India v. Pearl Hosiery Mills, AIR 1961 Punj 281.

Discharge ofsurety byrelease or discharge of principal debtor

S. 134

267

to give up the rights available to him under Ss. 133, 134, 135, 139 and 141 of the Contract Act by so providing in the surety bond itself2

The view of the Karnataka High Court in T Raju Shetty has now been upheld by the Supreme Court in HR Basavaraj, where it was held that a surety can waive the rights available to him under the various provisions in Chapter VIll of the Contract Act.5

Dischargeof surety by

S. 134. The surety is discharged

by any con-

releaseordischargeof tract between the creditor and the principal principal debtor. debtor, by which the principal debtor is released, or by any act or omission of the creditor, the legal consequence of which is the discharge of the principal debtor lustrations (a) A gives a guarantee to C for goods to be supplied by C to B. C supplies goods to B, and afterwards B becomes embarrassed and contracts with his creditors (including C) to assign to them his property in consideration of their releasing him from their demands. Here B is released from his debt by the contract with C, and A is discharged from his suretyship.

(b) A contracts with B to grow a crop of indigo on A's land, and to deliver it to B at a fixed rate, andC guarantees A's performance of this contract. B diverts a stream of water which is necessary for irrigation of A's land, and thereby prevents him from raising the indigo. C is no longer liable on his guarantee.

) A contractswith B for a fixed price to build ahouse for B within astipulatedtime. B Supplying the necessary timber. C guarantees A's perfomance of the contract. B omits to supply the timber. Cis discharged from his suretyship.

Creditor's discharge of principal debtor"The law upon this subject is clear and well settled. If the creditor, without the consent of the surety, by his own act destroys the debt, or derogates from the power which the law confers upon the surety to recover it against the debtor in case he shall have paid it to the creditor, the surety is discharged."24

But it is to be observed, with regard both to this and to the following section, that if the creditor expressly reserves his remedies against the surety, or generally his securities and remedies against persons other than the principal debtor, the surety is not discharged. In Section 135, the creditor in order to reserve his remedies has to obtain assent of the surety. In England this is as well settled as the main rule; and it is really quite consistent s been followed in with the terms of the present section as well as Section 135. Th India.2 The surety's right to indemnity against the principal debtor is a necessary result of such a reservation. If a creditor, without ceasing to hold the principal debtor liable, prefers to sue the more solvent of two sureties for the debt, this does not discharge the

other surety. But where there is a final and full release of the principal debtor by a complete novation or otherwise, "the remedy against the surety is gone because the debt is extinguished, and where such actual release is given, no right can be reserved because the debt is

satisfied, and no right of recourse remains when the debt is gone." Acceptance of a new debtor instead of the old one puts an end to the liability of a surety for the old debt.2

22. 23.

TRaju Shetty v. Bank of Baroda, AIR 1992 Kant 108, 113. HR Basavaraj v. Canara Bank, (2010) 12 SCC 458, 466 (decided in the context of waiver of rights under S 130).

24.

KELLEY, C.B., in Cragoe v. Jones, (1873) LR 8 Ex 81, 82.

25. Ram Ranjan v. Chief Administrator, AIR 1960 Cal 416:64CWN 126. 26. Bhagwandas v. Secretary of State, (1926) 28 Bom LR 662:96 IC 240: AIR 1926 Bom 465. 27. Commercial Bank of Tasmania v. Jones, (1893) AC 313, 316.

268

Chapter VI-0f IndemnityandGuarantee

S. 134

Where a creditor filed a suit against the principal debtor and the surety but the principal debtor could not be traced and served with the writ of summons and consequently the name of the principal debtor was struck off under O 1X R. 5 of the Civil Procedure Code. The striking off the name of principal debtor would not amount to an omission on the part of the creditor so as to discharge the surety and hence the creditor was entitled to the decree against the surety alone.25

"Act or omission of the

creditor."-The acts or omissions contemplated by this

section may be those referred to in Ss. 39, 53, 54, 55, 63 and 67 (ante). If the principal debtor is discharged from his obligation by reason of any acts or omissions specified in

those sections, the liability of the surety will determine. But the act or omission must be one of which the legal consequence is the discharge of the principal debtor. For further comments read commentary under Section 139.

Creditor's omission to sue principal within limitation

period-The question

whether a surety is discharged when a creditor allows his remedy against the principal

debtor to become barred by limitation may be considered at this stage. On this point there are two opposite views taken by the Indian High Courts. On the one hand, it has been held by the High Courts of Bombay,2 Calcutta,30 Madras, Lahore,32 Allahabad5 and Rangoons" that the surety is not under such circumstances discharged from liability to the creditor; the Judicial Commissioner's Court at Peshawar,5 on the other hand, has held that the surety is discharged. The Madras High Court relies on the

well-known distinction between the barring of the remedy by action and the complete extinction of a debt. It is also thought in England that omission of the creditor to sue within the period of limitation does not discharge a surety for another and more substantial reason, that "the surety can himself set the law in operation

against the

debtor.36 In a Privy Council case3" the reasoning of the majority of the High Courts has been preferred by their Lordships and the point, therefore, may be regarded as settled. In Bombay Dyeing the Supreme Court has also held that a creditor is entitled to recover the debt from the surety though the suit against the principal debtor is barred.5 Recently, in Syndicate Bank the Supreme Court observed that the creditor cannot pursue his claim against the surety if the debt has become time-barred against the principal debtor.3" The

court did not cite any authorities in support of this particular conclusion (including the earlier case of Bombay Dyeing which was of a larger Bench strength and hence binding upon the court in Syndicate Bank). It is therefore respectfully submitted that, to this extent, Syndicate Bank does not lay down the correct position of law and the decision in Bombay Dyeing would continue to bind. 11

28.

Nathabhai v. Ranchhodlal, 16 Bom LR 696; Mahant Singh v. U Ba Yi, 41 Bom LR 742 (749): 66

29. 30. 31.

Sankara v. Virupakshapa, (183) 7 Bom 146. Krishto Kishori Chowdhrain v. Radha Romun, (1885) 12 Cal 330. Subramania v. Gopala, (1909) 33 Mad 308.

32.

Dil Mahommed v. Sain Das, 100 IC 922: AIR 1927 Lah 396; Bharat National Bank v. Thakur Das, (1935) 16 Lah 757: 156 IC 553 : AIR 1935 Lah 729; Nur Din v. Allah Ditta, (1931) 12 Lah 546

198.

133 IC 628 : AIR 1932 Lah 419.

33. 34. 35. 36. 37. 38.

Aziz Ahmad v. Sher Ali, AIR 1956 All 8 (FB). UBa Pe v. Ma Lay, (1932) 12 Rang 398: 1391C 138: AlR 1932 Rang 398. Chattar Singh v. Makhan Singh, AIR 1936 Pesh 20. Per LINDLEY, L.J., Carter v. White, (1883) 25 Ch Div 666, 672. Mahanth Singh v. U. Ba Yi, (1939) 66 IA 198:41 Bom LR 742: 181 IC1: AIR 1939 PC 110. Bombay Dyeing & Manufacturing Co. Ltd. v. State of Bombay, 1958 SCR 1122, 1134, 1135 AIR 1958 SC 328.

39. Syndicate Bank v. Channaveerappa Beleri, (2006) 11 SCC 506, 518: AIR 2006 SC 1874,

135

Discharge of suretywhen creditor compounds with, gives time to

269

The provisions of this section are qualified by Section 13740 Discharge of surety

S. 135. A contract between the creditor and the

when creditor com Pprincipal debtor, by which the creditor makes a poundswith,givestime composition with, or promises to give time to, or to. oragreesnot tosue, not to sue, the principal debtor, discharges the principal debtor. surety, unless the surety assents to such contract. Contract to give time to principal

debtor.The general principle was thus stated

in the earliest decision on this subject: "It is the clearest and most evident equity not to

carry on any transaction without the privity of him who must necessarily have a concem in every transaction with the principal debtor. You cannot keep him bound and transact his affairs (for they are as much his as your own) without consulting him." A contract to give time to the principal debtor means that the creditor is precluded from suing the principal debtor until that time expires.2 A contract whereby the creditor promises to give time to the principal debtor must be distinguished from an unconditional contract not to sue him. In the former case, the

remedy of the creditor is merelysuspendeduntil the determination of the fixed period; in the latter case the principal debtor is completely released from his obligation so as to entitle the surety to a discharge under Section 134, apart from the specific provisions of this section. In either case, the mere formation of the contract is sufficient to operate as a

discharge of the surety irrespective of any forbearance that may be exercised under it. The reason of this rule appears to be that a surety has a right,

immediately on the debt

becoming due, to insist upon proceedings being at once taken by the creditor against the principal debtor, and any contract that would prevent the creditor from suing him would be inconsistent with that right (S. 139).43 In the Supreme Court case an agreement between a creditor Bank and a debtor provided that the debtor should be responsible for the quantity of the goods pledged with the creditor. The goods pledged with the creditor Bank showed shortage of Rs. 35,000 and the Bank immediately asked the debtor to make up the deficit and the debtor promised to make up the deficit within a month but failed to do so. The surety contended that the conduct of the Bank in giving time to the principal debtor to make up the deficit absołlved the surety of the liability under the guarantee. It was held that the Bank's act of giving time to the debtor to make up the deficit did not amount to giving of time within the meaning of S. 135 of the Act.44

A consent decree, made without the surety's consent for payment by instalments of the sum due from the principal debtor, is a composition such as to discharge the surety.45 It is not necessary that the contract should be express; a tacit or implied

contract

inferred from the acts of the parties is equally binding as an express one. Thus the acceptance of interest in advance by a creditor operates as a general rule as an agreement to give time to the principal debtor and consequently as a discharge to the surety, for the

40. 41.

Mahant Singh v. U. Ba Yi, (1939) 66 IA 198:41 Bom LR 742: 181 IC 1: AIR 1939 PC 110. Rees v. Berrington, 2 Ves. Jr. 540 (LORD LoGHBOROUGH).

42.

Kali Prasanna v. Ambica Charan, 1872 9 BLR 261; T.N.S. Firm v. Mahomed Husain, AIR (1933) Mad 756:(1934) 57 Mad 398: 146 IC 608.

43. See Protab Chunder v. Gour Chunder, (1878) 4 Cal 132, 134. 44. Amritlal v. State Bamk of Travancore, AIR 1968 SC 1432, 1435-36: (1968) 3 SCR 724. 45. National Coal Co. v. Kshitish Bose & Co., (1926) 30 CWN 540 :95 IC 409: AIR 1926 Cal 818;

Mahomedalli Ibrahimji v. Lakshmibai Anant Palande, (1930) 54 Bom 118:31 Bom LR 1442: 124 IC 227: AR 1930 Bom 122;Bondru v. Dagadu, 45 Bom LR 438.

270

Chapter VilI-Of Indemnity andGuarantee

S. 136

creditor is in that event precluded from suing the principal debtor until the time covered by the payment in advance has expired."o

Surety's assent.-The operation of the rules as to giving time to the principal debtor may be excluded by express agreement. If the instrument creating the debt and the suretyship declares that the surety or sureties shall be taken, as between themselves and the creditor, to be principal debtors, and shall not be released by reason of time being given, or of any other forbearance, act or omission of the creditor which, but for this

provisions would discharge the sureties, then any defence on these grounds is effectually barred, and it is unnecessary to consider whether the facts would otherwise raise it.4 Assent of the surety to such a contract to give time may be obtained either prior or subsequent to the contract.** The reason for obtaining the assent of the surety is to enable the creditor to reserve his remedy against the surety. Surety not discharged

S. 136.

Where a contract

to give time to the

whenagreemenm t ade principal debtor is made by the withthirdpersontogive third person, and not with the timetoprincipaldebtor. the surety is not discharged.

ereditor with a principal

debtor,

Tlhustration C, the holder of an overdue bill of exchange drawn by A as surety for B, and accepted by B, contracts with M to give time B. A is not discharged.

In the above illustration C is the creditor, B is the principal debtor and A is surety for B. If C agrees with B to give time to B, the contract between C and B for which A stood surety is varied and A is no longer liable. But if C contracts with a stranger M to give B

time, that is a contract which B cannot enforce. B°s liability under his contract with Cis not affected and A is not discharged. In an English case the law was stated as follows: "It is clear that when the creditor enters into a binding contract with the principal

debtor to give him time without the assent of the sureties, and without reserving his remedy against the sureties, such giving of time discharges the sureties... But, to produce this result two things are necessary. There must be a binding contract to give time, capable of being enforced by the principal debtor and hence the contract must be with the principal debtor. If merely made with a third party it will not do, as was decided in Frazer v. Jordan, where in an action by the holder against the drawer of a bill of exchange it was held to be no defence to the drawer that the holder had, without the drawer's consent, made a binding contract with a third party to give time to the acceptor, in consideration of an undertaking by the third party to see the bill paid.If there is no contract with the principal debtor to give time, the mere taking of additional security does not discharge the surety. Creditors forbearance

to sue does not dis-

S. 137. creditor

Mere

forbearance

to sue the

principal

on the part of the debtor

or to

enforce

charge surety.

any other remedy against him does not, in the absence of any provision in the guarantee to the contrary, discharge the surety. 46. 47.

48. 49. 50. S1.

Kali Prasanna v. Ambica Charan, (1872) 9 BLR 261. Greenwood v. Francis, (1899) 1 QB 312 CA; Krishnaswami v. Travancore National Bank, (1940) Mad 757: AIR 1940 Mad 437. Hari Prasad v. Chandrajirao, AIR 1962 MP 69. Frazer v. Jordan, 8 E. & B. 303. Clarke v. Birley, (1889) 41 Ch D 422, 433-434, perNORTH,J. TN. Firm v. Mahomed Hussain, (1934) 57 Mad 398: 146 IC 608: AIR 1933 Mad 756.

Discharge of surety by creditor's act or omission impairing

S. 139

271

Illustration B owes to Ca debt guaranteed by A. The debt becomes payable. C does not sue B for a year after the debt has become payable. A is not discharged from the suretyship.

"Mere forbearance"-Section 135 enacts that a contract between the creditor and the principal debtor by which the creditor promises not to sue the principal debtor discharges the surety. But there must be a positive agreement not to sue and mere neglect to sue will not discharge the surety. The illustration refers to failure to sue before the period of limitation has expired. The case where the creditor fails to sue until the period of limitation has expired is dealt with in the note to S. 134. Reading both sections together, it is evident that the legislature contemplated that mere forbearance would not have the legal consequence of discharging the principal debtor. Release

of one

co-

Suretydoes not discharge others.

S. 138. Where there are co-sureties, by the creditor of one of them does not

a release discharge

the others; neither does it free the surety so released from his responsibility to the other sureties.

Release of one of several sureties.-This section applies to co-surities whether they are joint and/or several. This section is a necessary consequence of the

principle

laid

down in Section 44. It is a deliberate extension of a rule which in the Common Law is

limited to the case of co-sureties contracting severally and not jointly. Having regard to the language of this section and of Section 44, this Act places joint sureties on par with cosureties. Discharge of surety by

creditor's actor omi

Sevseiontnuim paringsuretyS al remedy.

S. 139. If the

creditor does any act which is

inconsistent with the rights of the surety, or omits to do any act which his duty to the surety requires him to do, and the eventual remedy of the surety

himself against the principal debtor is thereby impaired, the surety discharged. llustrations (a) B contracts to build a ship for C for a given sum, to be paid by instalments as the work reaches certain stages. A becomes surety to C for B's due performance of the contract. C, without

the knowledge of 4, prepays to B the last two instalments. A is discharged by this prepayment. (b) C lends money to B on the security of a joint and several promissory note made in C's favour by B, and byA as surety for B, together with a bill of sale of B°s furniture, which gives power to C to sell the furniture, and apply the proceeds in discharge of the note. Subsequently, C sells the furniture, but owing to his misconduct and wilful negligence, only a small price is realised. A is discharged from liability on the note.

(c)

A puts M as apprentice to B, and gives aguaranteeto B for Ms fidelity. B promises on his

part that he will, at least once a month, see M make up the cash. B omits to see this done, as promised, and M embezzles. A is not liable to B on his guarantee.

Act or omission of creditor tending to impair surety's remedy.-The injurious quality to be considered is the tendency diminish the surety's remedy or increase his liability. Transactions having an immediate tendency to cause or permit the principal

debtor to make default are only one species of those to which the surety may object. "In almost every case where the surety has been released, either in consequence of time being

52.

Oriental Financial Corporation v. Overend Gurney & Co., (1871) LR 7 Ch 142, 150 (LORD HATHERLEY); Sankaranarayana v. Kottayam Bank, AIR 1950 Tra-Coch 66.

272

Chapter VIl-Of IndemnityandGuarantee

S. 140

given to the principal debtor, or ofa compromise being made with him, it has been contended that what was done was beneficial to the surety-and the answer has always been

that the surety himself was the proper judge of that-and that no arrangement different from that contained in his contract is to be forced upon him, and bearing in mind that the surety, if he pays the debt, ought to have the benefit of all the securities possessed by the creditor, the question always is whether what has been done lessens that security.5

But mere passive acquiescence by the creditor in irregularities on the part of the principal debtor such as laxity in the time and manner of rendering accounts by a collector of public moneys whose fidelity is guaranteed, will not of itself discharge the surety." The employer of a servant whose due performance of work is guaranteed does not contract with the surety that he will use the utmost diligence in checking the servant's work. If the employer of a servant whose fidelity has been guaranteed continues to employ him after a proved act of dishonesty, the surety is discharged.6 The Mysore High Court held in respect of a surety who had given a fidelity bond for a bank's manager's service that the failure of the directors to carry out scrutiny of cash balances and appointment of a treasurer as required by the bye-laws discharged the

surety.

57

Act or omission impairing surety's eventual remedy-The case in which a party is discharged by an act or omission of the creditor, of which the legal consequence is the discharge of the principal debtor, has been dealt with in Section 134 above. Under the present section a surety will be discharged by acts or (subject to the caution above given)

omissions of the creditor specified therein which, though not having the legal consequence of discharging the principal, impair the eventual remedy of the sure:y against him.3 Where a creditor failed to execute the decree obtained by him against the debtor within one month thereof as required specifically by the bond and allowed the decree to get time barred, it was held that the creditor had impaired the eventual remedy of the surety and hence the latter was discharged. As to negotiable instruments, it is specially provided by Act XXVI of 1881, Section 39, that where the holder of a negotiable instrument without the consent of the indorser destroys or impairs the indorser's remedy against a prior party, the indorser is discharged from liability to the holder to the same extent as if the instrument had been paid at matur-

ity.

S. 140. Where a guaranteed debt has become perfor due, or default of the principal debtor to perform a guaranteed duty has taken place, the surety,

Rights of surety, on

payment or mance.

upon payment or performance of all that he is liable for, is invested with all the rights which the creditor had against the principal debtor. 53. S4. S5. S6.

LoRD LANGDALE, Calert v. London Dock Co., 2 Ken 638 at p. 644. Mayor of Durham v. Fowler, (1889) 22 QBD 394. Mayor of Kington-upon-Hull v. Harding, (1892) 2 QB 494, CA. Phillips v. Foxal, LR 7 QB 666; Co-operative Commission Shop v. Udham Singh. AIR 1944 Lah 424; Radha Kanta v. United Bank of India, AIR 1955 Cal 217. $7. Chandrasekhara Pai v. Town Co-op. Bank, AIR 1965 Mys 209. $8. See Pogose v. The Bank of Bengal. (1877) 3 Cal 174; Ghuznavi v. National Bank of India. (1916) 20 CWN 562. 59.

Hazari v. Chunni Lal, 8 All 260.

Surety's right to benefit of creditor's securities

S. 141

273

This section lays down a general principle of which the most important practical application is to be found in Section 141. It seems that the intention of the Act is to keep alive for surety's benefit any right of the creditor, under a security or otherwise, which would otherwise have been extinguished at law by the payment of the debt or performance of the duty. When a surety is only a surety for a part of the debt, and has paid that part of the debt, he is entitled to receive the dividend which the principal debtor pays in respect of that sum which the surety has discharged.60 In such a case it may be said that "the right of the surety arises merely by payment of the part, because that part, as between him and the principal creditor, is the whole." Such a surety has a right, having paid part of the debt in that way, to stand pro tanto in the shoes of the principal creditor. But a surety who has become surety, though with limited liability in respect of the entire debt, has no rights by way of subrogation or in preference to the creditor until the creditor is fully paid.o So a distinction is made as to whether a person is a surety for a part of the debt only i.e. a person is a surety of a limited amount for an ascertained debt, in which event his right comes into existence immediately on payment of that fraction, for that fraction is, so far as he is concerned the whole.52 On the other hand a person may be a surety

though his liability may be limited in respect of the entire debt, i.e. guaranteeis given for the whole of the debt with a limitation on the liability of a surety to a specified amount, in which case his position is different as he has no right of subrogation until the creditor is

fully paid. Moreover, the benefit of this principle is intended for persons who, though not actually sureties, are in an analogous position. The indorser of a bill of exchange "is primarily liable as principal on the bill, and is not

strictly a surety for the acceptor:"

but "he has this

in common with a surety for the acceptor, that" after notice of dishonour "he is entitled to the benefit of all payments made by the acceptor, and is entitled, on paying the holder, to be put in a situation to have a right to sue the acceptor.3

Seeas to the right of apayer of a bill ofexchangefor the honour of any party liable upon it the provision of the Negotiable Instruments Act XXVI of 1881, Section 114. Surety'sright to bene

S. 141. A surety is entitled

to the benefit

of

fit ofcreditor's secu- every security which the creditor has against the rities

principal debtor at the time when the contract of suretyship is entered into, whether the surety knows of the existence of such security or not; and, if the creditor loses or, without the

consent

of the

surety,

parts

with

such

security,

the

surety

is

discharged to the extent of the value of the security. llustrations (a) C advances to B, his tenant, 2,000 rupees on the guarantee of A. C has also a further security for the 2,000 rupees by a mortgage ofB's furniture. C, cancels the mortgage. B becomes insolvent,

and C sues A on his guarantee. A is discharged

from

liability

to the amount

of the

value

of the furniture. [Cf Pearl v. Deacon, (1857) 1 De G & J 461, where the creditor, being also the debtor's lessor, destroyed the security on the furniture by distraining for rent (which in English law 1s a paramount

60.

right).]

Gray v. Seckham, (1872) LR 7 Ch 680, 683, per MELLISH, L.J.

61. ReSass, (1896) 2 QB 12, 15; he becomes only a creditor of the principal debtor for what he has paid; Darbari Lal v. Mahbub Ali Mian, (1927) 49 All 640: 101 1C 513 AIR 1927 All 538. 62. Bhushayya v. Suryanarayana, AIR 1944 Mad 195, 204. 63.

Duncan Fox & Co. v. North and South Wales Bank, (1880) 6 App Cas 1, 18.

274

Chapter VII-Of Indemnity andGuarantee

S. 141

(b) C, a creditor whose advance to B is secured by a decree, receives also a guarantee for that advance from A. C afterwards takes B's goods in execution under the decree, and then, without the

knowledge of A, withdraws the execution. A is discharged. (c) A, as surety for B, makes a bond

jointly

with B to C, to secure a loan

from

C to B.

Afterwards, C obtains from B a further security for the same debt. Subsequently, C gives up the further security. A is not discharged.

Surety's right to benefit of

securities-The

law in England is different. It has been

stated as follows: "As a surety, on payment of the debt, is entitled to all the securities of

the creditor, whether he is aware of their existence or not, even though they were given after the contract ofsuretyship,0 if the creditor who has, or ought to have had, them in his full p0Ssession or power loses them or permits them to get into the possession of the debtor, or does not make them effectual by giving proper notice, the surety to the extent of such security will be discharged. A surety, moreover, will be released, if the creditor, by reason of what he has done, cannot, on payment by the surety, give him the securities in exactly the same condition as they formerly stood in his hands."0) It will be seen that the present section, by limiting the surety's right to securities held by the creditor at the date of his becoming surety, has adopted a view which in England has now been treated as untenable. In Amritlal v. State Bank of Travancoreo the Supreme Court clarified the point by saying that Section 141 of the Act has limited the surety's right to securities held by the creditor at the date of his becoming surety, while under English law the surety is entitled to the securities given to the creditor both before and after the contract of surety. The rule is not confined to securities in any technical sense. A surety is entitled to

the benefit of the principal debtor's set-off against the creditor, if it arises out of the same transaction; this follows from the surety's right to be indemnified by his principal, combined with the equitable maxim of avoiding circuity of action. The High Court of Bombay has cited the reason of the present rule as laid down by Turner, V.c.o8: "I take it to be, because, as between the principal and surety, the principal is under an obligation to indemnify the surety [see S. 145, below], and it is, as I

conceive

from this obligation that the right of the surety to the benefit of securities held by the v. State Bank of Travancore. the Supreme Court creditor is derived." In Amrit Lal observed that the word security in S. 141 is not used in any technical sense. It includes all

rights which the creditor has against the property at the date of the contract. The surety is entitled, on payment of the debt or performance of all that he is liable for, to the benefit of the rights of the creditor against the debtor. If the creditor has lost or parted with the security, without the consent of the surety, the surety is discharged to the extent of the value of the security lost or parted with. So where the creditor Bank due to its negligence or some other reason lost the pledged goods with itself, it was held that the surety was discharged to that extent. Loss of security by negligence of the creditor cannot be equated with release of security which implies a volitional act of the creditor.0 Similarly in State

64. Seejudgment of HALL, V.C., in Forbes v. Jackson, (1882) 19 Ch D615, 619. 65. Notes to Rees v. Berrington, (1795) in 2 Wh. & T.L.C. as approved by HANNEN, J., Wulff v. Jay, (1872) LR 7QB 756, 764. 66. Amritlal v. State Bank of Travancore, AIR 1968 SC 1432, 1437, para 7: (1968) 3 SCR 724. 67. Bechervaise v. Lewis, (1872) LR 7 CP 372. 68. Yonge v. Reynell, (1852) 9 Hare, at pp. 818-819; Goverdhandas v. Bank of Bengal, (1890) 15 Bom 48, 6.

69. Amrit Lal v. State Bank of Travancore, AIR 1968 SC 1432, 1437, para 7:(1968) 3 SCR 724. 70.

(1980) 4 SCC 516, 523, para 13: AIR 1980 SC 1528.

Surety's right to benefit of creditor's securities

S. 141

275

of M.P. v. Kaluram K. executed a surety bond undertaking to discharge the liability arising out of any act, or omission or negligence or default of a forest contractor who was required to pay the bid sum in four instalments. The Contract rules provided for preventing the contractor from removing the forest goods if there in non-payment of the instalments due. However, the authority responsible for supervising the contract allowed the contractor to remove the felled trees without making the payment. The State of M.P. started proceedings to recover the balance of the amount through surety. It was held that surety was discharged as the State had lost or parted with the security i.e. forest produce. This section is invoked only upon a "deliberate action" by the creditor who loses or parts with the security without the consent of the surety. It does not apply where the creditor loses or parts with the security due to a "fortuitous situation" beyond his control.

"To the extent of the value of the

security."-Where

a creditor sued the principal

debtor and the surety on a mortgage bond, and in his plaint formally relinquished his claim against part of the mortgaged property which was worth the amount guaranteed by the surety, it was held that the surety was discharged."

When surety becomes entitled to benefit of creditor's securities-The Act does not lay down at what point of time the surety is entitled to have the creditor's securities made over to him wholly or in part, whether it is when the debt of the creditor is paid off, or when the surety pays the amount of his guarantee. This point arose in Goverdhandas v. Bank of Bengal,* where it was held that a surety was not entitled to the benefit of a portion of the creditor's securities until the whole of the debt due to the creditor was paid off. In that case a surety who had guaranteed an aliquot and defined portion of a past due debt secured by a mortgage,

claimed to I

entitled, on payment by him of the portion of

the debt which he had guaranteed, to share in the mortgage in proportion to the amount of the debt which he had guaranteed and paid before the mortgagee had been paid the full amount of his mortgage debt. The Court held that the right of the creditor to hold his securities until the whole debt is discharged is paramount to the surety's claim upon such securities, and that the surety's claim could only arise when the creditor's claim against such securities is satisfied. FARRAN, J., in rejecting the surety's claim said: "t seems to me to be a strange doctrine that a creditor not fully secured by a mortgage who obtains

the benefit of a surety for part of his mortgage debt in order to further secure himself by that very act is deprived of portion of the security, the inadequacy of which was a reason for demanding the surety; or that a person advancing say Rs. 10,000 on a mortgage which is valued only at Rs. 5,000 and has Rs. 5,000 of his advance guaranteed by a surety, is

only in reality secured to the extent of Rs. 7,500 by reason of the surety's right to claim the benefit of half the mortgage security on paying his half of the debt. To hold so would, I think, defeat the intention of the parties to such a transaction. A principle of equity is seldom adopted which has that effect. If such were the result of Section 141 of the Contract Act, I should expect to find the wording of Section 140 repeated in Section 141. The striking difference in the language of the two sections is a strong argument against

the plaintiffs contention.

71. State of MP. v. Kaluram, AIR 1968 SC 1432; See also State Bank of Saurashra v. Chitranjan, (1980) 4 SCC 516: AIR 1980 SC 1528; State of MP. v. Kaluram, AIR 1967 SC 1105 (1967) 1 SCR 266. 12.

Industrial Finance Corpn of India Ltd. v. Cannanore Spinning & Weaving Mills Ltd, (2002) 5 SCC 54, 73: AIR 2002 SC 1841 (nationalisation of property over which security had been taken); Krishan Talwar v. Hindustan Commercial Bank Lid., AIR 1957 Punj 310 (partition of India).

73. 74.

Narayan v. Ganesh, (1870) 7 BHCAAC 118.

Goverdhandas v. Bank of Bengal, (1890) 15 Bom 48.

75. Goverdhandasv. Bank ofBengal,(1890) 15 Bom 48 at p. 64,

65.t

ane

276

Chapter VII-Of IndemmityandGuarantee

S..142

It is submitted that the answer lies in deciding the question whether the surety has guaranteed a fraction only of the debt or whether a guarantee is given for the whole debt with a limitation on the liability of a surety to a specified amount, a point which we have already discussed earlier on S. 140 of the Act.

Guarantee obtained by misrepresentation, invalid.

S. 142. Any guarantee which has been obtained

by means of misrepresentation made'by the creditor, or with his knowledge and assent, concerning a material part of the transaction, is invalid.

The English authorities on the subject-matter of this and Section 143 will be dealt with together under that section. Guarantee obtained by concealment, invalid.

S. 143. Any

guarantee which the creditor has

obtained by means of keeping silence as to.a material circumstances, is invalid. llustrations

(a) A engages B as clerk to collect money for him. B fails to account for some of his receipts, and A, in consequence, calls upon him to furnish security for his duly accounting. C gives his guarantee for B's duly accounting. A does not acquaint C with B's previous conduct. B afterwards makes default. The guarantee is invalid.

(b) Aguaranteesto C payment for iron to be supplied by him to B to the amount of 2,000 tons. Band C have privately agreed that B should pay five rupees per ton beyond the market price, such excess to be applied in liquidation of an old debt. This agreement is concealed from A. A is not liable as a surety.

Guarantee obtained by misrepresentation or concealment.-English law is settled that, although the contract of suretyship is "one in which there is no universal obligation to make disclosure"-that is, it is not, like a contract of insurance, liable to be avoided by the mere non-disclosure of any material fact whatever-still the surety is entit-

led to know so much as will tell him what is the transaction for which he is making himself answerable; and he will bedischarged if there is either active misrepresentation of the matter by the creditor, or silence amounting in the circumstances to misrepresentation. "Very little said which ought not to have been said, and very little not said which ought to have been said, would be sufficient to prevent the contract being valid."'6 Thus where a surety guarantees an agent's existing and future liabilities in account with his employer, and the agent is in fact already indebted to the employer for more than the full amount of the guarantee and the statements made about his position are calculated to mislead, though not false in terms, this is evidence of, material misrepresentation on

the creditor's part. To avoid a guarantee under this section it must be proved not only that there was silence as to a material circumstance, but that the guarantee was obtained by means of such silence.78 The meaning of the words keeping silence" in this section was considered by SArGENT, CJ., in a Bombay case. The expression "keeping silence," said

the learned Judge, "clearly implies intentional concealment as distinguished from mere non-disclosure, which no doubt is of itself a fatal objection in insurance policies, and

76.

FRY, J., Davies v. London and Provincial Marins Insurance Co.. (1878) 8 Ch D 469, 475.

17. 78. 79.

Lee v. Jones, (1863) 17 CBNS 482, Ex Ch. Per Cur. in Secretary of State for India v. Nilamekan, (1883) 6 Mad 406, 408. Balkrishna v. Bank of Bengal, (1891) 15 Bom 585, 532.

Implied promise to indemnify surety

S. 145

277

virtually, we think, expresses what is laid down in North British Insurance Co. v. Lloyd,0 that the withholding must be fraudulent, which necessarily must be the case when a material circumstance is intentionally concealed."

Misrepresentation or silence by

creditor-The

or omissions on the part of the creditor and not event, these sections would not apply.31

two sections speak of the said acts

on the part of the

debtor. In the latter

S. 144. Where a person gives a guarantee upon thatcreditorshallnotact a contract that the creditor shall not act upon it Guarantee on contract

untilco-surety until another person has joined in it as co-surety, the guarantee is not valid if that other person does not join.

joins.

A surety who "entered into the obligation upon the understanding and faith that another person would also enter into it .. has a right in equity to be relieved on the ground that the instrument has not been executed by the intended co-surety. Implied promise indemnity surety.

to

S. 145. In every contract of guarantee there is an implied promise by the principal debtor to indemnify the surety; and the surety is entitled to recover from the principal debtor whatever sum he has rightfully paid under the guarantee, but no sums which he has paid wrongfully. lhustrations (a) B is indebted to C, and A is surety for the debt. C demands payment from A and on his refusal sues him for the amount. A defends the suit, having reasonable grounds for doing so, but he is compelled to pay the amount of the debt with costs. He can recover from B the amount paid by him for costs, as well as the principal debt.

(6) C lends B a sum of money, and A at the request of B accepts a bill of exchange drawn by B upon A to secure the amount. C, the holder of the bill, demands payment of it from A, and, on A's refusal to pay, sues him upon the bill. A, not having reasonable grounds for so doing, defends the suit, and has to pay the amount of the bill and costs. He can recover from B the amount of the bill, but not the sum paid for costs, as there was no real ground for defending the action. (c) A guarantees to C, to the extent of 2,000 rupees, payment for rice to be supplied by C to B. Csupplies to B rice to a less amount than 2,000 rupees, but obtains from A payment of the sum of 2,000 rupees in respect of the rice supplied. A cannot recover from B more than the price of the rice actually supplied.

Surety's right to

indemnity.-The

proposition "that as soon as his obligation to pay

becomes absolute, [a surety] has a right in equity to be exonerated by his principal,"33 is treated throughout the English authorities as fundamental, and as furnishing the reason

for several of the more specific rules. Further, it has long been settled in England that "a surety is entitled to come" to the Court "to compel the principal debtor to pay what is due from him," provided that an ascertained debt is actually due; and this relief is not limited, as at one time supposed, to cases where the debtor.34

80.

creditor has refused to sue the

principal

North British Insurance Co. v. Lioyd, 10 Ex 523, 532.

81. Debendra v. Administrator General of Bengal, 33 Cal 713. 82. 83.

Evans v. Bremridge, (1856) 8 DMG 100, 109. Bechervaise v. Lewis, (1872) LR 7 CP 372, 377.

84. Ascherson v. Tredegar Dry Dock, elc., Co., (1909)2Ch 401,406.

) vrohs

20

278

. 145

Chapter VII-Of lndemnity andGuarantee

The surety's only claim is to be fully indemnified and the English rule is followed that the right to indemnity arises as soon as the obligation to pay becomes absolute.3 He and then proceed as if he stood in the cannot compound the debt for which he is liable, creditor's place for the full amount. "Where a surety gets rid of and discharges an obligation at a less sum than its full amount, he cannot, as against his

principal,

make

himself a creditor for the whole amount; but can only claim, as against his principal, what he has actually paid in discharge of the common obligation.86 Whatever sum he has rightfully paid."-Where sureties to a money bond acknowledged their liability before the claim against the principal debtor became time-barred and upon the creditor suing the sureties and obtaining a decree against them and in exe cution of such decree one of the sureties paid the decretal amount, it was held that the amount must be treated as a sum "rightfully paid under the guarantee."8 As per Madhya Pradesh High Court it was important in the aforesaid Bombay case that "the surety had kept the liability alive by bona fide payment of interest within time to the creditor and it was because of these payments of interest within time that the Bombay High Court held that the payment made by the surety to the creditor was not wrongful within the meaning

of S. 145 of the contract Act"35 According to MadhyaPradesh High Court the question whether the payment made by the surety was or was not rightful has to be decided in the

context of the circumstances. If the claim of the creditor is barred by time against both the surety and the debtor, then prima facie the surety's payment to the creditor would not be rightful or just. However, the surety may prove that this payment, though it was made after the expiry of the period of limitation, was yet rightful. This expression includes "not only coin, but also property, of whatever kind, which is parted with in lieu of money, but not the mere incurring of a pecuniary obligation of the creditor in lieu or discharge of the debt owing to him.9 Therefore if the creditor accepts in discharge of the debt a promissory note executed by the surety and another person, that is not equivalent to a payment of the debt by the surety.0 The reason is that, the principal debtor being bound

to indemnity the surety, the cause of action cannot be merely the procuring by the surety of the principal debtor's exoneration from liability to the creditor, but must also include the surety being himself damnified, unless the payment is actually made. High Court holding that S. 145 does principal debtor in cases where he has only become liable "in praesenti to instance is maintainable.

and the surety cannot be said to be damnified But a different approach is taken by the Bombay not debar a surety from making a claim against the not made the payment under the guarantee but has make the payment and a suit for indemnity at his

Guarantee without concurrence of principal debtor.-Where a person becomes a surety without the knowledge and consent of the debtor, the only rights which he acquires are those given by Ss. 140 and 141, and not those given by this section.3

85. 86.

Sripatrao v. Shankarrao, (1930) 32 Bom LR 207: 127 IC 330: AIR 1930 Bom 331 Reed v. Norris, (1837) 2 My & Cr 361, 375, (LORD COTTENHAM). On the point that there is no subrogation, cf. Periamanna Marakkayar v. Banians & Co., (1925) Mad 156 : 95 IC 154 AIR 1926 Mad 544. 87. Raghavendra v. Mahipat, 27 Bom LR 178: 49 Bom 202: AIR 1925Bom 244, Tarachand Lakhmichand Chuhan v. Gopal, AIR 1959 MP 297, 298, para 4. 88. Per BHASHYAM AYYANGAR, J., in Putti Narayanamurthi v. Marimuthu, (1902) 26 Mad 322, 328. 89. 90. Puti Narayanamurthi v. Marimuthu, (1902) 26 Mad 322, 328. 91. Puti Narayanamurthi v. Marimuthu, (1902) 26 Mad 322, 326. 92. Sripatrao Sadashiv v. Shankarrao, AIR 1930 Bom 331. 93. Muthu Raman v. Chinna Vellayan, (1916) 39 Mad 965.

S. 147

Liability ofco-sureties bound in diferent sums

Co-sureties liable contribute equally.

to

S. 146. Where

two or more

persons

279

are co-

sureties for the same debt or duty, either jointly or severally and whether under the same or different contracts, and whether with or without the knowledge of each other, the co-sureties, the absence of any contract to the contrary, are liable, as between themselves, to pay each an equal share of the whole debt,

or of that part of it which remains unpaid by the principal debtor. lustrations (a) A, B and C are sureties to D for the sum of 3,000 rupees lent to E. E makes default in payment, A, B and C are liable, as between themselves, to pay 1,000 rupees each. (b) A, B and C are sureties to D for the sum of 1,000 rupees lent to E, and there is a contract between A, B and C that A is to be responsible to the extent of one-quarter, B to the extent of onequarter, and C to the extent of one-half. E makes default in payment. As between the sureties, A 1s liable to pay 250 rupees, B 250 rupees and C 500 rupees.

Contribution by co-sureties.-This has long been elementary. The earliest case usually cited settled that co-sureties need not be bound under the same contract and laid down that the right to contribution is independent of any agreement for that purpose.4 It must be observed that a "surety has no claim against his co-sureties until he has paid more than his share of the debt to the principal creditor,"> for only then does it become certain that there is ultimately any case for contribution at all. But a judgment against the surety at the suit of the creditor for the full amount of the guarantee (or an equivalent process, such as the allowance of a claim for the sum in the administration of the surety's estate) will have the same effect as payment for this purpose, and entitle the surety or his representatives to a declaration of the right to contribution*» All the co-sureties are entitled to share in the benefit of any security or indemnity which any one of them has obtained from the principal debtor, and this whether they knew of it or not, the surety bringing in, under this rule, what he receives from his

security, may resort again to that security for the liability to which he remains subject, and the co-sureties may again claim the benefit of participation and so on until the cosureties may again claim the benefit of participation and so on until the co-sureties have been fully1 imbursed or the counter security is exhausted.3

Liability ofco-sureties bound in different sums.

S. 147. Co-sureties who are bound in different sums are liable to pay equally as far as the limits of

their respective obligations pernmit. lustrations (a) A, B and C, as sureties for D, enter into three several bonds, each in a different penalty,

namely, A in the penalty of 10,000 rupees, B in that of 20,000 rupees, C in that of 40,000 rupees, conditioned for D's duly accounting to E. D makes default to the extent of 30,000 rupees. 4, B and Care each liable to pay 10,000 rupees.

94.

Dering v. Earl of Winchilsea, (1787) 1 Cox 318. and see other judgments cited by WRIGHT, J., in

Wolmershausen v. Gullick, (1893) 2 Ch 523 seq. 95. Ex parte Snowdon, (1881) 17 Ch Div 44, 48; Shirley v. Burdet, (1911) 2 Ch 418. 96. Wolmershausen v. Gullick, (1893) 2 Ch 514.

97. Steel v. Dixon, (1881) 17 Ch D 825. 98.

Berridge v. Berridge, (1890) 44 Ch D 168.

280

S 147

Chapter Vil-Of IndemnityandGuarantee

(b) A, B and C, as sureties for D, enter into three several bonds, each in a different penalty,

namely, A in the penalty of 10,000rnupees,B in that of 20,000 rupees, C in that of 40,000 rupees, conditioned for D's duly accounting to E. D makes default to the extent of 40,000 rupees. A is liable to pay 10,000 rupees, and B andC 15,000 rupees cach.

(c) 4, B and C, as sureties for D, enter into three several bonds, each in a different penalty, namely, A in a penalty of 10,000 rupees, B in that of 20,000 rupees, C in that of 40,000 rupees, conditioned for D's duly accounting to E. D makes default to the extent of 70,000 rupees. A, B and

Chave to pay each the full penalty of his bond. The wording of this section and its effect as shown by the illustrations is perfectly clear and the use of the words "equally" and not "rateably," departure from the rule as previously understood.

shows an

intention

to make a

deliberate

CHAPTER IX

OF BAILMENT Bailment Definition: Delivery of goods by bailor to bailee for a definite purpose on condition

of their returm or disposal, when purpose is accomplished. (S. 148). Classification: (i) for hire (S. 150); (ii) for custody (S. 158); (ii) for carriage (S. 158): (iv) to have work, labour and skill done thereon (Ss. 158, 170); (v) for loan (S. 159); (vi) Gratuitous (Ss. 159, 162); (vii) for security for repayment of debt (S. 172); (vii) for security for performance of promise (S. 172).

Voidable: Bailor may avoid bailment if bailee wrongfully uses or disposes of goods (S. 153).

Determination: When purpose is accomplished or goods are returned (S. 160); Gratuitous bailment by death of bailor/bailee (S. 162). "Bailment,"

"bailor,"

and "bailee" defined.

S. 148. A "bailment" is 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." Explanation.-If other

a person already in possession of

contracts to hold them as a bailee, he thereby

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

the goods of becomes the

although they

Nature of the transaction. "Bailment" is a technical term of the Common Law, though etymologically it might mean any kind of handing over (Fr. bailler). It involves change of possession. One who has custody without possession, like a servant, or a guest using his host's goods, is not a bailee. But constructive delivery will create the relation of bailor and the bailee as well as actual, as stated in the Explanation. The bailee's duty to deal with the goods according to the bailor's orders is incidental to the contract of bailment, and arises on the delivery of the goods, although those orders may have already been given and accepted in such a manner as to constitute a prior spe-

cialcontract.

Streeter v. Horlock, (1822)1 Bing 34

[281

282

N

00

BAILOR

(i) to put bailee (S. 149).

into

possession

(i) to pay expenses of bailment (S. 158). (ii) to pay damages for non-disclosure material defects (S. 150).

(ii) to disclose material faults (S. 150).

of

(iii) to pay damages for defect in bailor's title (S. 164). (iv) to indemnify gratuitous bailee (S. 159).

12

(i) to take prudent man' s care (S. 151).

(i)

(ii) Not to make wrongful use of goods (S. 154).

to pay damages (a) for failure to take prudent man's care (S. 152).

(iii)

00

(iii) to claim proportionate share in mixed goods (S. 155). (iv) to claim damages due to mixing up of goods (Ss. 156, 157).

to return bailed goods (Ss. 159 , 160). to pay any increase or profit accruing from goods (S. 163).

An attorney is entitled in the exercise of his discretion to enter into a compromise, if he does so in a reasonable, skillful, and bona fide manner, provided that his client has given him no express directions to the contrary,o In one case on the subject, the Court found that the client had authorised his 41. 42. 43. 44. 45.

Brooks v. Hassall, (1883) 49 LT 569. Bradyv. Todd, (1861)9 CBNS 592. Papev. Westacott, (1894) 1 QB 272; Blumberg v. Life Interests, etc., Corporation, (1898) 1 Ch 27; Bharat Suryodaya Mills Co. Lid. v. Shree Ram Mills, AIR 1959 Bom 309. Bridges v. Garret, (1870) LR 5 CP 451. Williams v. Evans, (1866) LR 1 QB 352 (auctioneer has no authority to take bill of exchange in

payment of deposit). 46.

Ferguson v. Um Chand Boid; (1905) 33 Cal 343.

47. Murugesa v. Province of Madras, AIR 1947 Mad 44: 231 IC 76. 48. Sutlej Cotton Mils Ltd. v. Ranjit Singh, AIR 1953 P&H 263. 49. S0. 51.

See Salil Datta v. TM and MC Pvi. Ltd, (1993) 2 SCC 185, 190 Per LoRD ESHER, M.R. in Mathews v. Munster, (1887) 20 QB Div 141, 142. BoWEN, LJ, 20 QB Div at p 144; Jang Bahadur v. Shankar Rai, (1890) 13 All 272; Nundo Lal v. Nistarini, (1900) 27 Cal 428.

52. Johurmull Bhutra v. Kedar Nath Bhutra, (1928) 55 Cal 113 : 104 IC 387: AIR 1927 Cal 714: Sheonandan v. Abdul Fatesh, (1935) 62 IA 196: 14 Pat 545: 37 Bom LR 845 : 156 IC 694 : AIR

1935 PC 119. $3. Neale v. Gordon Lennox, (1902) AC 465; Chuni Lal Mandal v. Hira Lal Mandal, (1928) 32 CWN 44: 106 IC 309

AIR 1928 Cal 378.

54. Askaran Choutmal v. E.LR. Co.. (1925) 52 Cal 386:88 IC 413: AIR 1925Cal 696. 55.

56.

Sourendra Nath Mitra v. Tarubala Dasi, (1930) 57 IA 133: 57 Cal 1311 : 123 IC 545 : AIR 1930 PC 158. Prestwich v. Poley. (1865) 18 CBNS 806.

320

S. 188

Chapter X-Agency

attorney to compromise, and that the compromise was reasonable and proper. The case of a pleader stands on a different footing, and he cannot enter into a compromise on

behalf of his client without his express authority.8 An authority to compromise includes authority to refer the dispute to arbitration. In 1976, Or. 23, Rule 3 of the Code of Civil Procedure 1908 was amended requiring that a compromise be in writing and signed by the paties. It has been held by the Supreme Court that these words included a party's duly authorised agent or counsel; and that a compromise signed by counsel, but not by the parties, was valid and binding, even where it extended beyond the subject matter of the suit.

Authority of factor.-A factor to whom goods are entrusted for sale has authority to sell them in his own name on reasonable credit at such times and such prices as in his discretion he thinks best, to receive payment of the price where he sells them in his own name, and to warrant the goods sold, if in the ordinary course of business it is usual to warrant that particular kind of goods. But he has no implied authority to barter the goods nor to delegate his authority, even if acting under a del credere commission.

Authority of broker.-A broker authorised to sell goods has implied authority to sell on reasonable credit, to receive payment of the price if he does not disclose his prinCipal, and to act on the usages and regulations of the market in which he deals, except so far as such usages or regulations are unlawful or unreasonable° A usage which, by converting the broker into a principal, changes he intrinsic nature of the contract of agency is regarded as

unreasonable.0 He has no implied

authority to cancel, or vary

contracts made by him; nor to receive payment of the price of goods sold on behalf of a disclosed principal; nor, even when the principal is undisclosed, has he implied authority to receive payment otherwise than in accordance with the terms of the contract of sale. A broker has no implied power to delegate his authority even if acting under a del credere commission. Authority of auctioneer.-An auctioneer has implied authority to sign a contract on behalf of both buyer and seller, an authority which does not, howevèr, extend to his clerk.o The implied authority of an auctioneer to sign on behalf of the buyer does not, however, extend to a sale of unsold lots by private contract subsequently to the sale by auction. An auctioneer has no implied authority to take a bill of exchange in payment of the deposit, or of the price ofgoods sold, though it is provided by the conditions of sale that the price shall be paid to him* but he may take a cheque in payment of the deposit according to the usualcustom.0 Authority to sell by auction does not imply any authority to sell by private contract, in the event of the public sale proving abortive, though the auctioneer may be offered a price in excess of the reserve.oo

Authority of shipmaster.-The authorities indicating the extent of the implied authority of master of British ships are very numerous. For present purposes it seems sufficient to cite only some of the more importantcases. Being appointed to conduct the voyage on which the ship is engaged to a favourable termination, a shipowner has implied authority to do all things necessary for the due and proper prosecution of the

57. 58.

Jagannathdas v. Ramdas, (1870) 7 BHCOC 79. Jagapati v. Ekambara, (1897) 21 Mad 274.

59, Jiwibai v.Ramkumar,(1947) Nag 824:229 IC 402: AIR 1947Nag 17. 60. 61. 62. 63. 64. 65. 66.

Byram Pestonji Gariwala v. Union of India, AIR 1991 SC 2234:(1992) 1 SCC 31 Robinson v. Mollett, (1874) LR 7 HL 802. Robinson v. Mollett, (1874) LR 7 HL 802. Bell v. Balls, (897) 1 Ch 663. Williams v. Evans, (1866) LR 1QB 352,| Farrer v. Lacy, (1885) 31 Ch Div 42. Marsh v. Felf, (1862) 3 F & F 234.

S. 189

Agent's authority in an emergency

321

voyage. He may also borrow money on the credit of his principals, if the advance is necessary for the prosecution of the voyage, communication with the principals is impracticable and they have no solvent agent on the spot. The master of a British ship has also implied authority to give bottomry bonds, hypothecating ship, freight, and cargo, for necessary supplies or repairs in order to prosecute the voyage, when it is not possible to obtain them on personal credit, and communication with the respective owners is impracticable8 The cargo alone may be hypothecated (by a contract called respondentia) if necessary for the benefit of the cargo, or for the prosecution of the voyage, but the owners must in all cases be first communicated with if possible.69 In the case of absolute or urgent necessity, as where in consequence of damage it is impossible to continue the voyage, and the ship cannot be repaired except at such a cost as no prudent owner would incur, the master has implied authority to sell the ship. Where repairs are absolutely necessary in order to prosecute the voyage, and communication with the owners of the cargo is impracticable, the master has implied authority to sell a portion of the cargo to enable him to continue the voyage. But his authority as agent of the owners of the cargo is strictly one of necessity, and he is not justified in selling any portion thereof until he has done everything in his power to carry it to its destination. A shipmaster has implied authority to enter into contracts for the carriage of merchandise according to the usual employment of the ship, and to enter into a charter-

party on behalf of the owners if he is in a foreign port, and there is a difficulty in communicating with them. His authority to sign bills of lading is limited to signing for goods actually received on board, and he has no authority to sign at a lower freight than the owners contracted for, or making owners. Agent's authority an emergency.

in

the freight payable to any other person than the

S. 189. An agent has

authority,

in an emer-

gency, to do all such acts for the purpose of protecting his

principal

from loss as would be

done by a

person of ordinary prudence, in his own case, under similar stances.

circum-

1

Illustrations i.(a) An agent for sale may have goods repaired if it be necessary. fb) A consigns provisions to B at Calcutta, with directions to send them immediately to C at Cuttack. B may sell the provisions at Calcutta, if they will not bear the jourmey to Cuttack without spoiling.

Protecting principal in an emergency.-Section is very important. The prior rules lay down duties and restrictions on powers or authority of an agent. In an emergency, those rules may become inapplicable or to follow those rules may jeopardise the interest of the principal. The rule contained in this section is known as the rule

relating to "authority of neces

sity" in English law. 67. Beldonv. Campbell, (1851) 6 Ex 886. 68. Kleinwort v. Cassa Marittima Genon, (1877) 2 App Cas 156. 69.

t

The Onward, (1873) LR 4 Ad 38.

70. Cox v. Bruce, (1886) 18 QB Div 147. The master's signature is prima facie evidence against the stOwners that the goods signed for were put on board, but it is not conclusive against them; Snmith v. Bedouin Steam Navigation Co., (1896) AC 70.

322

Chapter XAgency

S. 190 This

section may apply where in an emergency it is not pOSsible to communicate

with the principal or as a result of steep rise or fall of the market rate if instructions to sell or purchase were

carried out the principal may be put to a loss.

This section, therefore, lays down a very sensible and sound nule of acting prudently as it were a personal case of the agent himself. Illustration (b) seems to be suggested by Story's opinion that, "if goods are perishable and perishing, the agent may deviate from his instructions as to the time or price at which they are to be sold": S.A. Section 193. Under this head comes the authority by which the master of a ship may sell the goods of an absent owner in case of necessity when he is unable to communicate with the owner and obtain his direction. Where a principal's debtor is financially embarrassed, the agent to collect the principal's out-standings may collect from such debtor what cash amount he can and give

credit for the rest.72

Sub-agents When Agent delegate.

cannot

S. 190. An Agent cannot lawfully employ an-

other to perform acts which he has expressly or

impliedly undertaken to perform personally, unless by the ordinary custom of trade a sub-agent may, or, from the nature of the agency, a sub-agent must, be employed. Delegatus non protest delegare.-This section embodies a very important principle viz. one who has a bare power or authority

from another to do an act must execute it

himself and cannot delegate his authority to another. The reason that no such power can be implied as an ordinary incident in the contract of agency is that confidence in the particular person employed is at the root of the contract. Accordingly, auctioneers, fac-

tors, directors of companies, brokers, and other agents in whom confidence is reposed have, generally speaking, no power to delegate their authority. "But the exigencies of business do from time to time render necessary the carrying out of the instructions of a principal by a person other than the agent originally instructed for the purpose, and where that 1s the case, the reason of the thing requires that the rule should be relaxed." And "an authority to the effect referred to may and should be implied where, from the conduct of the parties to the original contract of agency, the usage of trade, or the nature of the particular business which is the subject of the agency, it may reasonably be presumed that the parties to the contract of agency originally intended that such authority should exist, or where, in the course of the employment, unforeseen emergencies arise which impose upon the agent the necessity of employing a substitute." Authority to delegate is implied whenever the act to be done by the sub-agent is purely ministerial, and does not involve the exercise of any discretion.4

In somecasesthecustom of trade justifies the delegation of specialbranches of work. Thus it has been found to be a usage of trade for architects and builders to have the quantities taken out from their designs by surveyors, who are more expert in that work,

71. AustralianSteamNavigationCo. v.Morse,(1872) LR4 PC 22. 72. 73.

Gokal Chand v. Nand Ram, (1939) AC 106 (113). De Bussche v. Alt, (1878) 8 Ch Div 286, 310, 311.

74.

Ex parte Birmingham Banking Co., (1868) LR 3 Ch 651; Allam Services Ltd, (1968) 1 WLR 639.

Representationof principal bysub-agentproperhyappointed

S. 192

323

for the purpose of enabling a proper estimate to be made; and the surveyor can sue the

architect's employer for his charges.

S. 191. A

"Sub-agent" defined.

"sub-agent" is a person employed by,

and acting under the control of, the original agent in the business of the agency. Sub-agent.-The relation of the sub-agent to the original main agent is, as between themselves, that of agent to principal. "It may be generally stated that, where agents employ sub-agents in the business of the agency, the latter are clothed with precisely the same rights, and incur precisely the same obligations and are bound to the same duties, in regard to their immediate employers, as if they were the sole and real principals": S.A. Section 386. In the three next following sections the Act has defined, in accordance with settled law, the relations of the ultimate principal to the sub-agent in different cases. Representation

S. 192.

of

Where

a sub-agent

is

properly

principal by sub-agent appointed, the principal is, so far as regards third properly appointed. persons, represented by the sub-agent, and is

bound by and responsible for his acts, as if he were an agent originally appointed by the principal. for sub-agent.

The agent is responsible to the principal for the acts of the sub-agent.

Sub-agent's responsibility.

The sub-agent is responsible for his acts to the agent, but not to the principal, except in case of

Agent's responsibility

fraud or wilful wrong. Principal, Agent, Sub-agent, third

party.-The last para of the section is based on the principle that there is no privity of contract between the principal and sub-agent. That is the reason why a sub-agent is responsible to the agent and not to the principal. A subagent is not accountable to the principal;o he is liable to account to the agent. The prin-

cipal cannot proceed against the sub-agent except in case of fraud or wilful wrong."n The second para emphasizes that the privity of contract exists between the agent and principal and therefore the agent is responsible for the acts of the sub-agent to the principal. Despite this position inter se amongst the principal, agent and sub-agent, a third party cannot be made to suffer and hence vis-a-vis a third party, the principal is bound by the acts of the sub-agent provided the sub-agent is properly appointed.78 This principle is laid down in the first para of the section. Where authority to appoint a sub-agent in the

nature of a substitute for the first agent "exists" either by agreement or as implied in the nature of the business "and is duly exercised, privity of contract arises between the principal and the substitute, and the latter becomes as responsible to the former for the due discharge of the duties which is employment casts upon him, as if he had been

75. Moon v. Witney Union, (1837) 3 Bing NC 814.

76. Calico Printers' AssociationLtd. v. Barclay's Bank, (1931) LT 51; New Zealand and Australian Land Co. v, Watson, (1881) 7 QBD 374; Nansukhdas v. Birelichand, 19 Bom LR 948.

71. Calico Printers' AssociationLid v. Barclay's Bank, (1931) LT 51; New Zealand and Australian Lamd Co. v. Walson, (1881) 7 QBD 374; Nansukhdas v. Birelichand, 19 Bom LR 948. 78. If thesub-agent is not properly appointed, see Section 193.

324

Chapter X-Agency

S. 193

appointed agent by the principal himself." This is the class of cases contemplated in Section 194. Otherwise the sub-agent looks to and is controlled by the agent who appointed him, and is not under any contract with the principal. If money due to A is paid to P, who is Z's servant, Z having authority from A to collect it, P is accountable only to Z and A cannot recover the money direct from P80 A sub-agent who does not know that his employer is an agent is entitled to the same rights as any other contracting party dealing with an undisclosed principal (sec ss. 231,

232 below). Agent's responsibility for sub-agent.-A commission agent for the sale of goods, who properly employs a sub-agent for selling his principal's goods, is liable to the principal for the sub-agent's fraudulent disposition of the goods within the course of his employment. The last clause of this section, giving a principal in case of fraud or wilful wrong the right of recourse to the sub-agent, does not exclude the principal's normal right of recourse to his agent. In fact, the total effect of the section is to give an option to the principal where a fraud or wilful wrong is committed by the sub-agent.o

S. 193.

Where

an

agent,

without

having

Agent's responsibiltyauthority to do so, has appointed a person to act as a sub-agent, the agent stands towards such person without authority.

in the relation of a principal to an agent, and is responsible for his acts both to the principal and to third persons; the principal is not represented by or responsible for the acts of the person so employed, nor is that person responsible to the principal. Unauthorized sub-agent.-Preceding section dealt with the position when a subagent is duly appointed. This section deals with a situation arising in case a sub-agent is appointed without authority. In such an event, the principal is not bound by the acts of the sub-agent nor is the latter liable to the principal. In such an event, the agent is the principal of the sub-agent and the agent is responsible both to the principal and the third party. The responsibility to the third party is an additional one which was not under the preceding section.

As regards the ratification of unauthorised acts see Sections 196-200 below. Relation

between

S. 194. Where an agent, holding an express or

principal andperson implied authority to name another person to act

dulyappointedbyagent for the principal in the business of the agency, has named another person acordingly, such person is to act in businesso agency.

not a sub-agent, but an agent of the principal for such part of the business of the agency as is entrusted to him. lhustrations (a) A directs B, his solicitor, to sell his estate by auction, and to employ an auctioneer for the

purpose. B names , auctioneer, to conduct the sale. C is nota sub-agent, but is A'Sagent for the conduct of the sale.

79. De Bussche v. Al, (1878) 8 Ch Div 286, 311. 80. Stephens v. Badcock, (1832) 3 B & Ad 354; Summan Singh v. National City Bank of New York, AlR 1952 P&H 172. 81. Calico Printers' Association Lid. v. Barclay's Bank, (1931) LT 51; New Zealand and Australian Land Co. v. Watson, (1881) 7 QBD 374; Nansukhdas v. Birelichand, 19 Bom LR 948.

Agent's duty in naming such person

S. 195

(b) A authorises B, a merchant in Calcutta, to recover the moneys due to A from C &

325 Co. B

instructs, D, a solicitor, to take legal proceedings against C& Co. for the recovery of the money. D is not sub-agent but is solicitor for A.

Substitute

Agent.-In

such cases as are put in the illustrations, B, as between A and

the auctioneer or solicitor, is treated as merely the messenger of A's direct authority. This section apparently means to draw a clearly marked line between an ordinary sub-agent and a person who is put in relation with the principal, a "substitute" as he is called in the

passage already quoted above.8 The following section and this section, read together, show that they do not apply to the case of an agent being instructed to hand over all or part of the business to a certain named person and no other, in such case he is not answerable for the capacity or conduct of that person; his duty is done when he has established relation between the substituted agent and the principal, and the Sections 191, 192 have no place.35 In the Calcutta Case N

purchased from firm C at Calcutta some corrugated iron sheets. N instructed the firm to send the goods to his place at Khulana and collect the price through a local Bank at Khulana. The firm C thereupon sent goods to Khulana and dispatched the Railway Receipt, their bills and demand draft with a covering letter to National Bank of India, their

bankers at Calcutta, instructing them to collect the Bill through the Bank at Khulana, i.e. Khulana Union Bank Ltd. The Bank at Khulana contrary to instructions made over goods to N and N delayed paying the amount. C brought a suit to recover the sum from N and

National Bank of India. It was held that Khulana Union Bank Ltd. was the agent of C firm for the purpose of collecting the bills at Khulana and National Bank was merely the conduit pipe through which C firm of Calcutta communicated their instructions to Union Bank at Khulana and Union Bank at Khulana was not the sub-agent of National Bank, but the agent of the principal. Accordingly defendant Bank (National Bank of India) created privity of contract between plaintiff C firm and Union Bank at Khulana which became the agent of the plaintiff firm C, known as substituted agent and not as the sub-

agent of defendant Bank. Hence the defendant Bank was not liable to the plaintiffs. According to Punjab High Court4 to bring about privity of contract the naming of the Substituted agent should be to the principal himself.

S. 195. In selecting such agent for his principal, an agent is bound to exercise the same amount of naming such person. discretion as a man of ordinary prudence would exercise in his own case; and if he does this, he is not responsible to the principal for the acts or negligence of the agent so selected. Agent's

duty

n

Ilhustrations (a) A

instructs

B, a

merchant,

to buy :

ship for him. B employs a ship surveyor of good

reputation to choose a ship for A. The surveyor makes the choice negligently and the ship tuns out to be unseaworthy, and is lost. B is not, but the surveyor is, responsible to A. (b) A consigns goods to B, a merchant, for sale. B, in due course, employs an auctioneer in good credit to sell the goods of A, and allows the auctioneer to receive the proceeds of the sale. The

82. De Bussche v. Al, (1878) 8 Ch Div 310, 311. 83. T.C. Chowdhury & Bors. v. Girindra Mohan Neogi, (1929) 56 Cal 686:121 IC 636: AIR 1930 Cal

84.

10; Central Bank of India v. Firm Rur Chand, AlR 1959 P&H 159; Nensukhdas Shivnarain v. Birdichand, AIR 1917 Bom 19; Mercantile Bank of India Ltd. v. Chetumal, AIR 1930 Sind 247. T.C. Chowdhury & Bors. v. Girindra Mohan Neogi, (1929) S6 Cal 686: 121 1C 636: AIR 1930 Cal 10; Central Bank of India v. Firm Rur Chand, AIR 1959 P&H 159; Nensukhdas Shivnarain v. Birdichand, AIR 1917 Bom 19; Mercantile Bank of India Ltd. v. Chetumal, AIR 1930 Sind 247.

326

S. 196

Chapter X-Agency

auctioneer afterwards becomes insolvent without having accounted for the proceeds. B is responsible to A for the proceeds.

Discretion.-In exercised.

properly electing a sub-agent, prudent man's

not

discretion is to be

Ratification Right of person as to

S. 196. Where acts are done

by one person on

acts done for him behalf of another, but without his knowledge or without hisauthority. authority, he may elect to ratify or to disown such Effect of ratification.

acts. If he ratifies them, the same effects will follow as if they had been performed by his authority.

Condition of Ratification.-These conditions are as under:(1)

The act must have been done on behalf of another;

(2) The act must have beendone without knowledge or authority of the person on whose behalf the act is done;

If the said conditions are satisfied such other person has two options either to ratify or to disown. If the act is not done on behalf of another or the person has purported to act on his own behalf, the first condition is not satisfied3) In order to do the act on behalf of another, the latter must be legally in existence at the time the act is done.30 Acts done prior to incorporation of a company cannot be said to have been done on behalf of the company which did not then exist.0 A person in order to ratify the act must be competent

to ratify.88 The principal on ratification of the act is bound by it whether it be for his detriment or his advantage, and whether it be founded on a tort or a contract.

But an act which is

void ab initio and hence a nullity is not capable of ratification. An act which is already unauthorised at the time it is done, cannot be ratified. An act done in excess of authority is capable of being ratified.92 Essence of ratification.-The essence of ratification is that there must be an intention to ratify. The ratifier must know that he is ratifying an act done on his behalf. If an act is illegal and the ratifier does not know of the illegality there is no intention to ratify for lack of knowledge ofillegality (see Section 198).1 7.

85. 86. 87. 88.

Raja Rai Bhagwat Dayal v. Debi Dayal, 10 Bom LR 230 (PC): 35 IA 48: 12 CWN 393. Kelner v. Baxter, (1886) LR 2 CP 174 (185) n re Empress Engineering Co., (1880) 16 Ch D 125; Ganesh Flour Mills Co. v. Puran Mal, (1905) Punj Rec No 2. Raja Rai Bhagwat Dayal v. Debi Dayal, 10 Bom LR 230 (PC): 35 LA 48: 12 CWN 393; Irvine v.

UnionBankof Australia(1877)3 Cal280 (285): 4 IA 86:2 AC 366;TukaramRamji 89. 90. 91.

Madhorao Manaji, AlR 1948 Nag 293; Hari Mohan v. Sew Narayan, AIR 1949 Ass 57. Wilson v. Tumman and Fretson, (1843) 6 M & Gr 236 (243): 64 RR 770 (776). Mauji Ram v. Tara Singh, 1881 3 All 852. Raghavachari v. Fakkir Mahomed, (1916) 30 MLJ 497, (501); Keighley Maxted & Co. v. Durant

92. 93.

(1901) AC 240. Secretary of State v. KamacheeBoyce, 7 MIA 476. Premila Debi v. People's Bank, (1938) APC 284:(1939) Lah 1: 178 IC 659; UP. Government v. Church Missionary Trust Association Ltd, (1948) 22 Luck 93: 229 IC421: (1948) AIR Oudh 54.

Right of person as to acts done for him without his authority Ratification may be express or may be effected tion 197).

impliedly

S.1196

by conduct

327

(see Sec-

Legal effect of Ratification.-Ratification must be by the person for whom the to act for agent professes to act. "That an act done for another by a person not assuming whatever, himself, but for such other person, though without any precedent authority becomes the act of the principal, if subsequently ratified by him, is the known and wellestablished rule of law. In that case the principal is bound by the act, whether it be for his detriment or his advantage, and whether it be founded on a tort or a contract, to the same extent as by, and with all the consequences which follow authority."2 Ratification of a part of a transaction may operate as a ratification of the whole transaction" (see Section 199).

A ratification is in Time to

law equivalent to as if the act was done with previous authority.

ratify.-And

where a time is limited for doing an act, and A does it on

behalf of B, but without his authority, within that time, B can ratify it only before the time has expired. The reason for this is not to prejudice a third party (see Section 200). This section is subject to the succeeding provisions.

"Acts done without knowledge or authority"-An act done by an agent in excess of his authority may also be ratified.° But the ratification of an act done without authority does not confer authority to do similar acts in future.

Retrospective effect-Ratification, if effective at all, relates back to the date of the act ratified. If an action is brought in a man's name without his knowledge, he may adopt the proceedings and make them good at any time. The rule goes so far that if A makes an offer to B which Z accepts in B°s name without authority, and B afterwards ratifies the acceptance, an attempted revocation of the offer by A in the time between Z's acceptance and B's ratification is inoperative.

A owes money to B, and Z pays B on behalf of A but without authority from A. If B knowing that Z has no authority accepts payment, heis estopped from pleading Z's want of authority and claiming payment again from A. If B on discovering Z's want of authority returns the money to Z, there is nothing that A can ratify and A cannot rely on the payment as a discharge of his debt to B.10

What act cannot be ratified.-A transaction which is void ab initio cannot be ratified. This is illustrated in England by a line of cases in company law marking the distinction between irregularities capable of being made good if the act is ratified by a general meeting, or the whole body of shareholders, and acts not within the company's object as defined by its original constitution, and therefore incapable of being made binding on the company by any ordinary means known to the law. (See Section 200). 1. Bhavani Shankar v. Gordhandas,46 Bom LR 228: 70 IA 50:(1943) APC 6. 2. 3.

Wilson v. Tumman and Fretson, (1843) 6 Man & Gr 236, 243:64 RR 770 (776), per CUR. Commercial Banking Co. of Sydney v. Mann, (1961) AC 1.

4. Bhavani Shankar v. Gordhanlal, 46 Bom LR 228: 70 IA 50:(1943) APC 6. 5.

Dibbins v. Dibbins, (1896) 2 Ch 348. 6. Secretary of State v. Kamachee Boyce, (1859) 7 MIA 476. 7. Irvine v. Union Bank of Australia, (1877) 3 Cal 280, 287: LR 4 JA 86 :2 App Ca 366, 375; Prat v. E.D. Sasoon, (1938) Bom 421 (PC). 8. Danish Mercantile Bank v. Beaumont, (1951) Ch 680. 9. Bolton Partners v. Lambert, (1889) 41 Ch Div 295. 10. Walter v. James, (1871) LR 6 Ex 124. 11. Mauji Ram v. Tara Singh. (1881) 3 All 852.

328

S. 197

Chapter X-Agency

Agents of Government.-Acts done by public servants in the name of the Government may be ratified by subsequent approval in much the same way as private transactions. Ratification may be expressed or implied.

S. 197. Ratification may be expressed or may be implied in the conduct of the person on whose behalf the acts are done. llustrations

(a) 4, without authority, buys goods for B. Afterwards B sells them to C on his own account; B's conduct implies a ratification of the purchase made for him by 4.

b)A, without B's authority, lends B's money to C. Afterwards B accepts interest on the money from C. B's conduct implies a ratification of the loan.

Express ratification.-An express ratification cannot become complete until communicated; till then it is liable to revocation.s Implied

ratification

by

conduct.-Assent

to an act done on one's behalf,

it is like

the consent to an agreement may be conveyed otherwise than in words; and taking benefit of the transaction is the strongest, as it is the most usual evidence of tacit

adoption. Accepting the results of the agent's proceeding, whether obviously beneficial to the principal or not, will havethe same effect, e.g. receipt of money with the knowledge of the unauthorised contract or disposal of goods received under unauthorised contract. By silence or acquiescence on the part of a landlord in respect of unasked for improvements made by a tenant of the leasehold premises, ratification was implied.6 The conduct must be such as to show an intention to adopt or recognise such act or transaction." Knowledge requisite for valid ratification.

S. 198. No valid

ratification can be made by a

person whose knowledge of the facts of the case is materially defective.

Knowledge of facts to precede

ratification.The

Judicial Committee have laid

down in general terms that "acquiescence and ratification must be founded on a full knowledge of the facts, and further it must be in relation to a transaction which may

be valid in itself and not illegal, and to which effect may be given as against the party by his acquiescence in and adoption of the transaction."ls Again, the Court of Appeal in England has said: "To constitute a binding adoption of acts a priori unauthorised these conditions

must exist : (1) the acts must have been done for and in the name of

the supposed principal, and (2) there must be full knowledge of what those acts were, or such an unqualified adoption that he inference may properly be drawn that the principal intended to take upon himself the responsibility for such acts, whatever they

12. SeeSecretary of State v. Karnachee Boyee, (1859) 7 MIA 476; Collector of Masulipatam v. Cavaty Vencata, (1860) 8 MIA 529, 554.

13. Rajagopalacharyulu v. The Secretary of State of India, (1915) 38 Mad 997, 1008. 14. Hunder v. Parker, (1840) 7 M & W 322. 15. Allard v. Bourne, (1863) 15 CB (NS) 468; Smith v. Hull Glass Co., (1852) 11 CB 897.

16. Prince v. Clark, (1823) I B & C 186; The Australia, (1859) 13 Moore PC 132; Bank Meli Iran v. 17.

Barclay's Bank, (1951) 2 TLR 1057; Parker and Cooper Lid. v. Reading. (1926) Ch 975. Lyell v. Kennedy, (1899) 14 App Cas 437.

18.

La BanqueJacques-Cartier v. LaBangue D'Epargne, etc. (1887) 13 App Ca 111; Premila Debi v. People's Bank, (1939) Lah 1: 178 1C 659: AIR 1938 PC 284.

Termination ofagency

Sec. 201

329

were." A entrusted moneys to B for investment which B without the knowledge of A used in his own business. The Privy Council held that whether the facts supported the

plea of novation or not, the doctrine of ratification could not be applied soas to turn the fund held in a fiduciary capacity into a deposit on ordinary banking terms.

Effect of ratifying

S. 199. A person ratifying any unauthorised act ing part of a transac- done on his behalf ratifies the whole of the transacunauthorized

act

form-

tion of which such act formed a part.

tion.

Effect of ratification of a part.It is obvious that a man cannot at his own choice ratify part of a transaction and repudiate the rest.2 A principal cannot ratify the favourable parts of a transaction and disatfirm the rest as that would enable him to make a partial or a heterogeneous contract which the third party did not intend to make. Ratification

of

un-

authorisedact cannot injure third person.

S. 200. An act done by one person on behalf of another without such other person's authority,

which, if done with authority, would have the effect of subjecting a third person to damages, or of terminating any right or interest of a third person, cannot, by ratification, be made to have such effect. llustrations

(a) 4, not being authorised thereto by B, demands, on behalf of B, the delivery of a chattel, the property of B, from C who is in possession of it. This demand cannot be ratified by B, so as to make C liable for damages for his refusal to deliver. (6) A holds a lease from B. terminable on three months notice. C an unauthorised person, gives notice of termination to A. The notice cannot be ratified by B, so as to be binding on A.

Revocation not to prejudice a third party.-This is the converse of the principle that a voidable transaction cannot be rescinded to the prejudice of third person's right acquired under it in good faith. Rights of property cannot be changed retrospectively by ratification of an act inoperative at the time. The rule is also stated in the form that ratification, to make an act rightful which otherwise would be wrongful, must be at a time

when the principal could still have lawfully done it himself

The ratification of a con-

tract does not give the principal a right to sue for a breach committed before the ratifiauthority, cation.24 A holds a lease from two joint receivers, B and C; B, without C's gives notice to A. The notice cannot be ratified by C so as to be binding on A.

Revocation of Authority S. 201. An agency is terminated by the principal revoking his authority; or by the agent renouncing the business of the agency; or by the business of the agency being Termination ofagency.

19.

Marsh v. Joseph, (1897) 1 Ch 213, 246; Tukaram v. Madhorao, (1947) Nag 710: AIR 1948 Nag 293.

20. Murugappa v. Oficial Assignee of Madras, (1937) 64 IA 343:40 Bom LR1:170 IC 329: AIR 1937 PC 296. 21.

22.

See Keay v. Fenwick,

(1876) 1 CPD 745, 753.

Bristow v. Whitmore, (1861) 9 HL Cas 391; Fitmaurice v. Bayley. (1860) 9 HL Cas 78 (112) Commercial Banking Co. of Sydney v. Mann, (1961) AC1. 23. Birdv. Brown, (1850) 4 Ex 786: 80 RR 775. 24. Kidderminster v. Hardwick, (1873) LR 9 Ex 13. 25. Cassim Ahmed v. Eusuf Haji Ajam, (1916) 23 Cal LJ 453.

330

Sec. 201

Chapter X-Agency

completed; or by either the principal or agent dying or becoming of unsound mind; or by the principal being adjudicated an insolvent under the provisions of any Act for the time being in force for the relief of insolvent debtors. Termination of Agency.-We have to read this section with the following ones to Section 210 inclusive, which modify its effect in various ways.

Termination of agency-This section has provided diverse modes of termination ofagencyas follows: i)

by the principal revoking the authority (by a notice of revocation);

(ii)

by the agent renouncing the business of agency (by notice of renunciation);

ii)

by the completion of the business of agency (e.g. completion of the transaction, expiration of the period for which agency may have been given);

iv)

by death, insolvency or insanity of either the principal or agent; dissolution of an incorporated company.

Besides the above modes, it may be terminated in the folowing (a)

cases:

by destruction of the subject matter of agency (see Section 56)

(b) by the happening of an event which renders agency or its objects unlawful (see Section 56); and (c)

by frustration

of the agency or its objects such as disability,

misadventure,

literal impossibility. Revocation by principal.-For condition for exercise of this mode see Sections 202 to 204. For the method of exercising this right see Sections 206 to 208. Sections 208 involves notice to third persons also. Renunciation by agent.- For the method of exercising this right see Sections 206 and 207.

Completion of business of agency-The Allahabad and Calcutta High Courts hold that where an agent for the sale of goods receives the price, the agency does not terminate on the sale of the goods, but continues until payment of the price to the principal S. 218 provides that "an agent is bound to pay to his principal all sums received on his account. Clearly then the business does not terminate on receipts of the money by the agent, inasmuch as there is a subsequent obligation to account for the sums and to pay them"26 In a Madras case, WALLIS, C.J. , expressed the opinion that the agency terminates when the sale is completed, and that it does not continue until payment of the price. The authority of an agent for sale to contract on the

principal's

behalf ceases as soon as the sale is

completed. He has no power to alter the terms of the contract without fresh authority from the principal.23 The authority of an agent to collect bills and to remit the amount, when realised, by drafts, terminates as soon as the drafts are dispatched.

26.

Babu Ram v. Ram Dayal, (1890) 12 All 541, followed in Fink v. Buldeo Dass, (1899) 26 Cal 715, 724, 725. Venkatachalam v. Narayanan, (1916) 39 Mad 376, 378-379. 27. 28. Blackburn v. Scholes, (1810) 2 Camp 343. 29. Alliance Bank of Simla, Ltd. v. Amritsar Bank, (1915) Punj Rec no 79, p 322.

Termination of agency where agent has an interest in subject-matter Death of

principal.-A

S. 202

331

power of atormey to an agent to present a document for reg

istration is revoked by the death of the principal. It was accordingly held by the Judicial Committee that where the principal died before the presentation, and the Registrar, know ing of the principal's death, accepted and registered the document, the registration was invalid.50 See notes to Section 209 below. Where the agency is for a fixed term.-"Where an agent has been appointed fora fixed term, the expiration of the term puts an end to the agency, whether the purpose of the agency has been accomplished or not; consequently where an agency for sale has expired by express limitation, a subsequent execution thereof is invalid, unless the term has been extended."31

S. 202. Where the agent has himself an interest cy,whereagenthasan in the property which forms the subject-matter of interest in subject the agency, the agency cannot, in the absence of an Termination of agen-

matter.

express contract, be terminated to the prejudice of such interest. llustrations

(a) A gives authority to B to sell A's land, and to pay himself, out of the proceeds, the debts due to him from A. A cannot revoke this authority, nor can it be terminated by his insanity or death.

b) A consigns 1,000 bales of cotton to B, who has madeadvances to him on such cotton, and desires B to sell the cotton, and to repay himself, out of the price, the amount of his own advances. A cannot revoke this authority, nor is it terminated by his insanity or death.

If authority coupled with

interest.-In these cases the current phrase is that the

agent's authority is "coupled with an interest". The principle is thus stated: "that where an agreement is entered into on a sufficient consideration, whereby an authority is given for the purpose of securing some benefit to the donee of the authority, such an authority is irrevocable." In fact, the circumstances must be such that revocation of the authority would be a breach of faith against the agent. Illustration (b) is a variation of the facts of an English case3 where, however, the authority was held to be revocable as it was not given as security for the advances. In the English case the advances were made after the authority had been given, and so the agent's interest arose afterwards and was incidental. In the illustration the advances are made first and then the authority is given for the purpose of being a security.

The expression "has an interest in the property" would include cases where authority is given, by deed or otherwise, giving an interest in the property such as a security or a lien or a special right in respect of advances upon the subject-matter of agency. This interest may include continuation of the subsistence of such security or interest thereon. Mere right to earn commission is not such as interest.3* Irrevocable power of attorney in favour of a purchaser for valuable consideration would be such an interest. The interest which an agent has in effecting a sale and the prospect of remuneration to arise therefrom do not constitute such an interest as would prevent the termination of

30.

Mujid-un-Nissa v. Abdur Rahim, (1900) 23 All 233 LR 28 IA 15.

31. Per MOOKERJEE, J., in Lalljeev. Dadabhai, (1916) 23 Cal LJ 190, 202. 32. Smart v. Sandars, (1848) 5 CB at p 917; Carmichael's case, (1896) 2 Ch 643, 648; Chathu Kuti v.

Kundan, (1931) 61 MLJ 852: 136 IC 776: AIR 1932 Mad 70. 33. 34.

Smart v. Sandars, (1848) 5 CB 895, 918. And see Frith v. Frith, (1906) AC 254. Smart v. Sandars, (1848) 5 CB 895, 918. And see Frith v. Frith, (1906) AC 254.

332

S. 203

Chapter XAgency

the agency.3° Upon the same principle, where an agent is appointed to collect rents, and his salary is agreed to be paid out of those rents, it does not give the agent an interest in the subject-matter of the agency within the meaning of this section.o But where an agent is authorised to recover a sum of money due by a third party to the principal and to pay himself, out of the amount so recovered, the debts due to him from the principal, the agent has an interest in the subject-matter of the agency, and the authority cannot be

revoked.3 Factors for sale of goods.-The question has often arisen as to whether a factor who has made advances as against goods consigned to him for sale has such an interest in the goods consigned as to prevent the termination of his authority to sell. The result of the cases appears to be that the authority of a factor to sell is in its nature revocable, and

the mere fact that advances have been made by him, whether at the time of his employ ment as such or subsequently, cannot have the effect of altering the revocable nature of the authority to sell, unless there, is an agreement express or implied between the parties that the authority shall not be revoked.35 Where the factor is expressly authorised to repay himself the advances out of the sale proceeds, as in illustration (b), he has an interest in the goods consigned to him for sale, and the authority to sell cannot be revoked. ln such a case "an interest in the property" is expressly created. But the "interest need not be so created, and it is enough to prevent the termination of the agency that the "interest" could be inferred from the language of the document and from the course of dealings between the parties. Thus where a factor who had made advances as against goods consigned to him for sale was authorised to sell them "at the best price obtainable," and in the event of a shortfall to draw on the consignor, it was held that this arrangement gave an interest to the factor in the goods, and that the authority to sell could not be revoked." When revoke

authority.

S. 203. The principal may, save as is otherwise agent's provi by the last preceding section, revok the

principal

may

authority given to his agent at any time before the authority has been exercised so as to bind the principal. What amounts "to exercise

of

authority."-An

agent authorised to purchase

goods on behalf of his principal cannot be said to have exercised the authority so given to him "so as to bind the principal"if he merely appropriates to the principal a contract

previously entered into by himself with a third party. Such an appropriation does not create a contractual relation with the third party

and the principal, therefore, may revoke

the authority.0 In that case, before the revocation was received, contractual relationship involving an obligation to a third party was not entered into. Authority given to an auctioneer to sell goods by auction may be revoked at any time before the goods are knocked down to a purchaser and authority given to a policy broker to effect a policy at any time before the policy is executed so as to be legally

35.

Lakmichand v. Chotooram, (1900) 24 Bom 403; Dalchand v. Seth Hazarimal, AIR 1932 Nag 34 27 NLR 378.

36.

Vishnucharya v. Ramchandra, (1881) 5 Bom 253. Pestanji v. Matchet, (1870) 7 BHC AC 10. See also Subramania v. Narayanan, 130, and Jagabhai v. Rustamji, (1885) 9 Bom 311. Jafferbhoy v. Charlesworth, (1893) 17 Bom 520, 542.

37. 38. 39. 40. 41. 42.

(1901) 24 Mad

Kondayya v. Narasimhulu, (1893) 20 Mad 97. Lakmichand v. Chotooram, (1900) 24 Bom 403. Lakmichand v. Chotooram, (1900) 24 Bom 403. In re Hare & O' More's Contract, (1901) 1 Ch 93, Warlow v. Harrison, (1859) 1 E & E 309.

Compensationfor revocation by principał or remunciation by agent

S. 205

333

binding. Authority to pay money in respect of an unlawful transaction may be revoked at any time before it has actually been paid, even if it has been credited in account.45 Revocation

where

S. 204. The principal cannot revoke the autho-

authorityhasbeenpartly rity given to his agent after the authority has been exercised. partly exercised, so far as regards such acts and obligations as arise from acts already done in the agency. llustrations (a) A authorisesB to buy 1,000 bales of cotton on account of A and to pay for it out of A's money remaining in B's hands. B buys 1,000 bales of cotton in his own name, so as to make himself personally liable for the price. A cannot revoke B's authority so far as regards payment for the cotton.

(6). A authorises B to buy 1.000 bales of cotton on account of A, and to pay for it out of A's money remaining in B's hands. B buys 1,000 bales of cotton in A's name, and so as not to render himself personally liable for the price. A can revoke B's authority to pay for the cotton.

Authority partly exercised.-The rule here laid down is connected with the principal's duty to indemnify the agent (S. 222 below). "Ifa principal employs an agent to do Something which by law involves the agent in a legal

liability"-or

even in a customary

liability by reason of usage in that class of transactions known to both agent and principal"the principal cannot draw back and leave the agent to bear the liability at his own expense.lf a principal revokes his agent's authority to carry on an enterprise, and the agent nevertheless carries it on and contrary to expectations makes a profit, the principal cannot then ignore his own revocation and claim the profit. 4

S. 205. Where there is an express on implied Compensation for revocationbyprincipals contract that the agency should be continued for or renunciation by agent.

any period of time, the principal must make com-

pensation to the agent, or the agent to the principal, as the case may

be, for any previous revocation or renunciation of the agency without sufficient cause. Compensation for

revocation.-By

this section "the principal is bound to make

compensation to the agent whenever there is an express or implied contract that the agency shall be continued for any period of time. This would probably always be the case when a valuable consideration had been given by the agent.o

In theabsence of an express or implied contract, the mere undertaking of the agency is not a sufficient ground for compensation. A employed B as his sole agent for the sale of A's coal for seven years. B was not entitled to compensation when A closed his colliery and ceased to supply coal before the end of the term of seven years. The House of Lords held that in the absence of a special term in the contract that A should continue to supply coal during the term, there was no implied obligation on A to carry on business for the benefit of the agent.47

43. 44.

Taylor v. Bowers, (1876) 1 QBD 291. Readv. Anderson, (1884) 13 QB Div 779, 783.

45.

Harihar Prasad Singh v. Kesho Prasad Singh, (1925) 93 IC 454, 605

AIR 1925 Pat 68

5 PLT

Supp (F5) 46.

Per Cur in

Vishucharya v. Ramchandra, (1881) 5 Bom 253, 256.

47.

Rhodes v. Forwood,

(1876) 1 App Ca 256, per LORD PENZANCE at p. 272.

con ignso

334

Chapter XAgency

S. 206

There is a class of cases of which an agent for sale, having proceeded far enough in the transaction to be entitled to commission on its completion, has been deprived of his commission by the principal putting an end to the whole matter. But these cases do not depend on the rule here laid down, or on any rule peculiar to the law of agency. They are examples of the rule that one party to a contract must not prevent another from pertorming his part (Ss. 53, 67 above), or "each party is entitled to the full benefit of his contract without hindrance from the other."*3 See further the commentary on Section 219 below.

Sufficient Cause.-Where a principal refuses to pay the agent his remuneration without sufficient cause, or uses inexcusable language, or uses physical violence, an agent could be said to have a sufticient cause to terminate the agency.

Notice of revocation

S. 206. Reasonable notice must be given of such

revocation or renunciation; otherwise the damage thereby resulting to the principal or the agent, as

or renunciation.

the case may be, must be made good to the one by the other. Notice before revocation.-An authority given by two or more principals jointly may be determined by notice of revocation or renunciation being given by or to any one of the principals. This section provides for giving notice before revoking the authority. If authority revoked without notice, damage, if any, to agent will have to be made good. Revocation

and

S. 207. Revocation and renunciation

may be ex-

renunciation may be pressed or may be implied in the conduct of the expressed or implied.

principal or agent respectively. Ilustration

A empowers B to let A's house. Afterwards A lets it himself. This is an implied revocation of

B's authority. Form of revocation/renunciation.-There is no special form. It may be express or specific or implied by conduct. See Section 201. According to Madras High Court no notice is required to be given when agency is not for a fixed duration. So where there is no express or implied contract that the agency should be continued for any specific period, the principal is entitled to terminate agency without any obligation to give a reasonable notice. The court emphasized that the expression "such revocation or renunciation'" occurring in S. 206 necessarily makes that Section applicable to the cases governed by S. 205 only and not to every revocation or renunciation dealt with by the Act. When termination of

S. 208. The termination of the authority of an

agent'sauthoritytakes agent does not, so far as regards the agent, take to third persons.

effect before it becomes known to him, or, so far as regards

third

persons,

before

it

becomes

known to them. llustrations (a) A directs B to sell goods for him, and agrees to give B 5 per cent commission on the price fetched by the goods. A afterwards, by letter, revokes B°s authority. B, after the letter is sent, but before he receives it, sells the goods for 100 rupees. The sale is binding on 4, and B is entitled to five rupees as his commission.

48.

Prickett v. Budger, (1856) 1 CBNS 296.

49.

Bright Bros (P) Ltd v. J.K. Sayani, AIR 1976 Mad 55.

Agent's duty in conducting principal's business

S. 211

335

(b) 4, at Madras, by letter, directs B to sell for him some cotton lying in a warehouse in Bombay, and afterwards, by letter, revokes his authority to sell, and directs B to send the cotton to Madras. B, after receiving the second letter, enters into a contract with C, who knows of the first leter, but not of the second, for the sale to him of the cotton. C pays B the money, with which B absconds. C's payment is good as against A. 31115923 (c) A directs B, his agent, to pay certain money to C. A dies, and D takes out probate to his will. B, after A's death, but before hearing of it, pays the money to C. The payment is good as against D, the executor.

Time from which revocation operates.

Revocation by the act of the principal takes

effect as to the agent from the time when the revocation is made known to him; and as to third persons when it is made known to them, and not before. [S.A. S. 470.] It stands to

reason that termination should operate when it is known to the agent or the third person, as the case may be. The reason is that for want of notice, he should not be prejudiced. Except as to illustration (c), which removes an anomaly, this section is in accordance with the Common Law. When A trades as B's agent with B's authority (even though the business be carried on in 4 name, if the agency is known in fact), all parties with whom A makes contracts in that business have a right to hold B liable to them until B gives notice to the world that A's authority is revoked; and it makes no difference if in a particular case the agent intended to keep the contract on his own account.30 Agent's

duty

S. 209. When an agency is terminated by the

terminationof agency principal dying or becoming of unsound mind, the by principal's.death or insanity.

agent is bound to take, on behalf of the

repre-

sentatives of his late principal, all reasonable steps for the protection and preservation of the interests

entrusted to him. Agent to protect the interest of the legal representatives of the

principal.-An

agency is terminated under Section 201 by the death of the principal. If the agent thereafter continues in service of the principal's heirs, a new agency is created. There is nothing in this section to indicate that the agency continues on the old terms.3 See notes to Section 208 above. This section provides that after the death of the principal, although agency is determined, the agent must take reasonable steps to protect the interests of the legal representatives.

S. 210. The termination of the authority agent causes the termination (subject to the herein contained regarding the termination agent's authority) of the authority of all sub-agents appointed by

Termination of subagent's authority.

of an rules of an him.

Scope.-This section provides for the automatic termination of sub-agent's authority upon the termination of the authority of the agent.

9wol sdye

i iguorfr Lid

Agent's Druty to Principal S. 211. An conducting principal's business of his Agent's

business.

duty

agent is bound to conduct the principal according to the direc-

tions given by the principal, or, in the absence of any such directions, according to the custom which prevails in doing 50. 51.

Trueman v. Loder, (1840) 11 A & E 589 Madhusudan v. Rakhal Chandra, (1916) 43 Cal 248, 254-255.

336

Chapter XAgency

S. 211

business of the same kind at the place where the agent conducts such business. When the agent acts otherwise, if any loss be sustained, he must make it good to his principal, and, if any profit accrues, he must

account for it. lhustrations (a) A, an agent engaged in carrying on for B a business, in which it is the custom to invest from time to time, at interest, the moneys which may be in hand, on its to make such investments. A must make good to B the interest usually obtained by such investments.

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

Additional Illustrations (

An agent, instructed towarehousegoods at a particular place,warehouses a portion of them

at another place, where they are destroyed, without negligence. He is liable to the principal for the

value of the goodsdestroyed. [Lilley v. Doubleday, (1881) 7Q.B.D. 510.]

(i) An agent, instructed to insure goods, neglects to do so. He is liable to the principal for their value in the events of their being lost. [Smith v. Lascelles, (1788) 2 T.R. 187.]

(i) A broker, entrusted with goods for sale,sells them by auction ataninadequateprice, not having made an estimate of the value in accordance with the custom of the particular trade. He must make good the loss. [Solomon v. Barker, (1862) 2 F. & F. 926, 121 R. R. 828.]

(iv) An auctioneer, contrary to the usual custom, takes a bill of exchange in payment of the price of goods sold. He is liable to the principal for the amount of the bill in the event of its being dishonored. [Ferrers v. Robins, (1835) 2 C.M. & R. 152.]

Obey directions.-The first part of this section contains a rule which is fundamental to a contract of agency. An agent must therefore comply with the directions of his principal. If the directions of the principal are capable of two or more interpretations, he should either act under Section 214 or he should act in a accordance with the interpretation which he honestly and fairly believes to be correct and proper.2 An agent is however not bound to obey directions which are unlawful53

Acts otherwise or departure from

instruction-In

Bostock v. Jardine54 the

defendants were authorised to buy a certain quantity of cotton for the plaintiff. "Instead of complying with their instructions they bought a much larger quantity for the plaintiff and divers other people," so that there was no contract on which the plaintiff could sue as principal. Accordingly, "though a contract was made, it was not the contract the plaintiff authorised the defendants to make," and the plaintiff was entitled to recover back a sum paid to the defendants on account of the purchase-money. If, at a sale by auction without reserve, the auctioneer is instructed not to sell for less than a certain price, he is not liable to the principal for accepting the highest bona fide bid, though it may be lower than that price.36

If any loss be sustained"-measure

of.Where an agent in breach of his duty

sells his principal's goods below the limit placed upon them by the principal, the measure of damages is the actual loss which the principal has sustained, and not the difference

S2.

Woodhouse Etc. Ltd. v. Nigerian Produce Marketing Ltd, (1972) AC 741 (771-77).

53. 54. 55.

Cohen v. Kitell, (1889) 22 QBD 680; T. Cheshire v. Vanghan Bros. & Co. (1920) 3 KB 240. Bostock v. Jardine, (1865) 3 H &C 700. Beaumont v. Boultbee, (1802) 7 Ves 599, 608.

56.

Bexwell v. Christie, (1776) Cowp 395.

Agent's duty in conducting principal 's business

S. 211

337

between the price at which they are sold and the limit of price placed on the goods. Where no loss is suffered, the principal is entitled at least to nominal damages, as the sale IS wrongful.37

As regards remuneration, see Section 220.

As to the duty to account for profits, see Section 216 and commentary thereon. As regards right to indemnity by agent see Sections 222-226.

Customs of

trade.-According

to the custom of trade in Bombay, when a merchant

requests or authorises a firm to order and to buy and send goods to him from Europe, at

fixed price, net free godown, including duty, or free Bombay harbour, and no rate of remuneration is specifically

mentioned the firm is not bound to account for the price at

which the goods were sold to the firm by the manufacturer. And it does not make any difference that the fim receives commission or trade discount from the manufacturer, either with or without the knowledge of the merchant.8 A stock broker instructed to sell or purchase shares is required to do so in accordance with the rules of the Stock Exchange. Del credere agent.-A del credere agent is one who, in consideration of extra undertakes that persons with whom he remuneration, called a del credere commission, enters into contracts on the principal's behalf will be in a position to perform their duties.o A del credere agency may be inferred from a course of dealing between the principal and agent showing that extra remuneration was charged for the risk of bad debts. A del credere agent incurs only a secondary liability towards the principal; he is default by in effect a surety for the person with whom he deals to the extent of any based on a insolvency or something equivalent, but not to the extent of a refusal to pay substantial dispute as to the amount due.03

Usage of the Bombay market known as the pakki adat system-The

following

are the incidents of a contract entered into on pakki adat terms

(1) The pakka adatia has no authority to pledge the credit of the up-country constituent of the Bombay merchant, and no contractual privity is established between the up-country constituent and the Bombay merchant.

(2) The up-country constituent has no indefeasible right to the contract (if any) made by the pakka adatia on receipt of the order, but the pakka adatia may enter into cross-contracts with the Bombay merchant, either on his own account or on account of another constituent, and thereby for practical purposes cancel the same. (3)

The pakka adatia is under no obligation to substitute a fresh contract to meet

the order of his first constituent.

57. 58.

Manchubhai v. Tod, (1894) 20 Bom 633; Chelapathi v. Surayya, (1902) 12 MLJ 375; Mathra Das Mutsaddi Lal v. Kishan Chand Ramji Das, (1925) 7 Lah LJ 84: 86 IC 567: AIR 1925 Lah 332. Paul Beier v. Chotalal Javerdas, (1906) 30 Bom 1; Ram Dev v. Seth Kaku, AIR 1950 East Punj

P.95. 59. 60.

Hawkins v. Pearse, (1903) 9 Com Cas 87. Thomas Gabriel & Sons v. Churchill & Sim, (1914)3 KB 1272, CA.

61. Shaw v. Woodcock, (1827) 7 B &C 73. 62. 63.

Thomas Gabriel & Sons v. Churchill & Sim, (1914) 3 KB 1272; Rushalme & Bolton v. Read. (1955) TWLR 146. Churchil

v. Goddard,

(1937) 1 KB 92, 101.

338

S. 211

Chapter X-Agency

The relation between the pakka adatia and the up-country constituent is not the relation of agent and principal pure and simple. The precise relation may thus be described in

thewordsofJenkins, CJ.:I think thecontract betweenthe partieswas one ofemployment for reward, and the incidents proved appear to me to converge to the conclusion that the contract of a pakka

adatia, in circumstances like the present, is one whereby heundertakes or to word in its

non-technical

use the

sense as businessmen on occasion do use it-guarantees that

delivery 'should, on due date, be given or taken at the price at which the order was accepted, or difference paid: in effect he undertakes or guarantees to find goods for cash or cash for goods or to pay the difference.

I do not say that there is no relation of principal and agentbetween the parties at any stage, there may be up to a point, and that this is legally possible is shown by Mellish, L.J. in Ex parte Whiteb* where he speaks of 'a person who is an agent up to a certain point." So

here there may have been that relation in its common meaning for the purpose of ascertaining the price at which the order was to be completed, and to this point of the transaction all the obligations of that relation perhaps apply. But when that stage is passed, I think the relation is not that of principal and agent, but of the nature I have indicated. Into this contract there is imported by the evidence of custom no such element of unreasonableness as would compel us to reject it on that score." in Manilal Raghunath v. Radha Kison Ramjiwan,0o MACLEOD, C.J., said the only distinction between a pakka adatia and a broker who is liable on his contract is that the former does not contract as agent, but as

principal; in other words, the pakka adatia undertakes business for his principal but the particular contracts by which he carries out that business are his own affair.

Usage of the Bombay market known as the kachhi adat system in cotton business.-Under the kachhi adat system, when an adatia receives an order from an upcountry constituent for the sale or purchase of cotton, he sends for a broker and settles the rate with him. The rate so settled° becomes from that moment binding upon both the adatia and the broker, and the broker remains personally bound until he brings a party willing to take up the contract. The broker in such a case adopts one of two ways: he either procures a party willing to take up the contract and introduces him to the adatia,

and the party and the adatia thus exchange kabalas (contracts) with each other; or, where the broker has got a contract of his own ready, he agrees to transfer it to the adatia and brings together the adatia and the other party to his (broker's) contract, and these two then exchange kabalas with each other. If, when the party is brought to the adatia the market rate is the same as the rate settled by the adatia with the broker, the broker gets nothing beyond his commission. If, the market rate is less than the rate originally settled by the broker, the difference between the two rates has to be borne by the broker and paid to the person with whom the original rate was settled. If, on the other hand, it is more, that person has to bear the difference and pay it to the broker. There is nothing unreasonable in such a usage.08

64.

Ex parte White, (1870-1871) LR 6 Ch 397, at p 403.

65. BhagwandasNarotamdas v. Kanji Deoji. (1906) 30 Bom 205, in app. from (1905) 7 Bom LR 57: Bhagwandas v. Burjorji, (1917) 45 IA 29, 32-33: 42 Bom 377-378. See also Kedarmal Bhuramal v. Surajmal Govindram, (1907) 33 Bom 364; Rem Dev v. Seth Kaku, AlIR 1950 East Punj 92; Sheo Narain v. Bhallar, AlR 1950 All 352.

6. Manilal Raghunath v. Radha Kison Ramjiwan, (1921) 45 Bom 386. 67. The rates are settled in consequence of constant fluctuation in the market, which may rise or fall every two minutes. 68. Fakirchand Lalchand v. Doolub Govindji, (1905) 7 Bom LR 213. As to the discretion to call for margin in the Bombay Cotton Market, Devshi v. Bhikamchand, (1926) 29 Bom LR 147: 100 IC 993: AIR 1927 Bom 125.

Skill and diligence required from agent

Skill and diligence required from agent.

S. 212

339

S. 212. An agent is bound to conduct the business of the agency with as much skill as is

generally possessed by persons engaged in similar business, unless the principal has notice of his want of skill. The agent is always bound to act with reasonable diligence, and to use such skill as he possesses; and to make compensation to his

principal in respect

of the direct consequences of his own neglect, want of skill or misconduct, but not in respect of loss or damage which are indirectly or remotely caused by such neglect, want of skill, or misconduct. lustrations (a) 4, merchant in Calcutta, has an agent, B, in London, to whom a sum of money is paid on A's account, with orders to remit. B retains the money for a considerable time. A, in consequence of not receiving the money, becomes insolvent. B is liable for the money and interest, from the day on which it ought to have been paid, according to the usual rate, and for any further direct loss-as, e.g. by variation of rate of exchange-but not further. (6) A, an agent for the sale of goods, having authority to sell on credit, sells to B on credit, without making the proper and usual inquiries as to the insolvency of B. B, at the time of such sale, IS involvent. A must make compensation to his principal in respect of any loSs thereby sustained.

(c) A, an insurance broker, employed by B to effect an insurance on a ship, omits to see that the usual clauses are inserted n the policy. The ship is afterwards lost. In consequence of the omission of the clauses nothing can recovered from the underwriters. A is bound to make good the loss to B.

(d) 4, a merchant in England, directs B, his agent, at Bombay, who accepts the agency, to send him 100 bales of cotton by a certain ship. B, having it in his power to send the cotton, omits to do so. The ship arrives safely in England. Soon after her arrival, the price of cotton rises. B is bound to make good to A the profit which he might have made by the 100 bales of cotton at the time the ship arrived, but not any profit he might have made by the subsequent rise.

Use of skill.-"When

a skilled labourer, artisan, or artist is employed, there is, on his

part, an implied warranty that he is of skill reasonably competent to the art he undertake.. An express promise or express representation in the particular case is not necessary.. The failure to afford the requisite skill which had been expressly or impliedly promised is a breach of legal duty and therefore misconduct. And the employer is justified in dismissing an employee who shows himself incompetent, though he may have been engaged for a term not expired. How far an agent employed in the general supervision of work has to answer for the skill and diligence of workers under him must depend on the nature of the work and on local usage.'" An agent is bound to know so much of the law material to the business in hand as will enable him to protect the principal's interest, and make the transaction binding on the other party.' Every person acting as a skilled agent is bound to bring reasonable skill and knowledge to the perform-

ance of hisduties.72 Reasonable diligence.-An agent is under a duty to act with reasonable diligence. What is reasonable diligence, will depend upon the circumstances of each case. This rule requires on the part of an agent the exercise of the requisite degree of care in the

69. Hatmer v. Cornelius, (1858) 5 CBNS 236: 116 RR 654, Cur per WILES, J. 70. Nagendra Nath Singha v. Nagendra Bala Chowdhurani, (1926) 43 Cal LW 479: 97 1C 200 1926 Cal 988. 71. Neilson v. James, (1882) 9 QB Div 546. 12. Lee v. Walker, (1872) LR 7 CP 121.

AIR

340

S. 213

Chapter XAgency

performance of his duties. Failure to send the bill of lading within a reasonable time or failure to take special, instructions in case the specific instructions cannot be carried out or failure to insure the goods may amount to acting without reasonable diligence. The bank in remitting moneys must act as a prudent man would.'3 But an agent who is definitely authorised to enter into a particular transaction is not liable to the principal

for any loss which may be suffered in consequence of the imprudent nature of the transactions;* nor is he liable for the consequence of a mere mistake or error of judgment provided he exercises such care and skill as may be reasonably expected under the

circumstances.' Payment of Compensation.-A gratuitous agent is liable for any loss sustained by his principal through the gross negligence of the agent.0 As stated in the section the loss is recoverable only if it is the direct consequence of the agent's negligence. In a case before the Supreme Court' the agent had been directed to insure the goods against fire, which he failed to do. Owing to an explosion in the Bombay docks the goods were destroyed. Under a fire insurance policy, such a loss would not be recoverable, but Gov ernment passed an Ordinance that compensation for goods which were insured would be

fully paid, and only half the value of goods would be paid, if the goods were not insured. The agent obtained half the value of the goods from Government, and it was held that he was liable to compensate the principal for the other half, as the loss inflicted upon the principal was the direct consequence of the agent not insuring the goods as directed. Agent's accounts.

Agent's dutyto

S. 213. An agent is bound to render accounts to his principal on demand.

proper

account-This sectionembodiesa rule ofrenderingproperaccounts

to the principal. This rule therefore implies a duty on the part of an agent (1) to keep the property, effects and money of his principal separate from his own and from those of others and (11) to keep and maintain proper accounts of the dealings, transactions, property and money of the principal. This may involve keeping special forms of accounts. The duty to render accounts is to the principal and therefore not to a third person.9 It

is not discharged by merely delivering to the principala set of written accounts without attending to explain them with the vouchers by which the items of disbursement are supported.o lf an agentneglects to keep proper accounts, everything consistent with established facts will be presumed against him in the event of his being called upon for an account of the agency. The principle is well established that an agent entrusted with money or goods by a principal to be applied on his principal's account cannot dispute the principal's title unless he proves a better title in a third person and that he is defending on

behalf of and with the authority of the third person. The same principle controls the relation of bailor andbailee.32

73.

Bank of Bihar v. Tata Scob Dealers Ltd, AIR 1960 Cal 475.

74. 75. 76. 77.

Overend v. Gibb, (1872) LR 5 HL 480. Lagunas Nitrate Co. v. Lagunas Syndicate, (1899) 2 Ch 392. Agnew v. Indian Carrying Co., (1865) 2 MHC 449. Narayan Deo v. Hanumantha, (1950) Cut 174: AIR 1950 Ori 241.

78. 79.

Pannalal Jankidas v. Mohanlal, AIR 1951 SC 144: 1950 SCR 979. Chidambaram v. Pichappa, (1907) 30 Mad 243.

80.

Annoda Persad v. Dwarknath, (1881) 6 Cal 754. See also Ram Das v. Bhagwat Das, (1904) 1 Al

L 347; Madhusudan v. Rakhal, (1916) 43 Cal 248, 259-260. Gray v. Haig. (1854) 20 Beav 219. 81. Bhawani Singh v. Maulvi Misbah-ud-din, (1929) S6 IA 170: 10 Lah 352 :31 Bom LR 762: 115 IC 82. 729: AIR 1929 PC 119.

S. 213

Agent's acounts

341

A principal may enforce his right to demand accounts by a suit.3 Where two or more co-sharers employ an agent, one of the co-sharers can file a suit for accounts making the other co-sharers defendants, if they are unwilling to join as

plaintiffs.4

A principal can enforce his remedy by

following the property representing

his money or goods in the hands of a third party.3 When a minor comes to Court to have an account taken as between himself and his agent, and it is found on taking that account that the agent has made certain advances to the guardian, and advances have been applied for the benefit of the minor, the agent ought to be allowed these advances in taking the accounts. Here the plaintiff seeks relief from a Court administering equity, and he must do equity himself86 Where an agent enters into contract with a third person in his own name, and subsequently sues on the contract and obtains a decree, the principal is not entitled to maintain a suit for a declaration that he is beneficially interested in the decree and to recover the amount from the judgment-debtor. That the principal is entitled to an amount from the agent does not entitle him to maintain a suit of this kind. He could have adopted the contract and sued on it himself; after a decree is passed for the agent, he is too late.8

Suit by agent against

principal.-Ordinarily

an agent cannot file a suit against the

principal for accounts, but in exceptional cases, as when he cannot claim a specific sum without the principal's accounts being gone into, he is entitled to file a suit for accounts against the principal.33

Legal representatives of agent.-Upon the death ofan agent, his legalrepresentatives are not bound to render accounts under this section. They would be liable to pay the dues of the principal out of the estate of the deceasedagent.3

Liability to account bribe or Secret Commission received by agent.-To accept bribe or secret commission is inconsistent with the duty of even non-fiduciary agent and he cannot during the course of his agency be allowed to make profit out of his crime, as the House of Lords decided in Reading v. Attorney Generaf where an army sergeant was held accountable to the Crown for sums which he had illegally made for his assistance in smuggling illicit goods into Cairo as his presence in official uniform enabled the lorry carrying such goods to pass without being searched by the police. See also the commentary on Section 218 post.

Right of Agent to sue his principal for accounts.-The Supreme Court in Narandas Gajiwala v. S.P.A.M.

Papammal

observed that the Indian Contract Act does not

provide the right of agent to sue the principal for accounts. But the said Act is not exhaustive and guidance may be taken from the English Law where an agent has a right to have an account taken. There may be special circumstances rendering it equitable that the principal should account to the agent, e.g. where all the accounts are in the possession of the principal and the agent does not possess accounts to determine his claims for commission against his principal.

83. 84. 85. 86. 87. 88.

allynath, 7 Cal 654. Digamb Charu Chandra v. Sital Prasad, AIR 1949 Cal 656. Chedworth v. Edwards, (1802) 8 Ves 46. Surendra Nath Sarkar v. Arul Chandra Roy, (1907) 34 Cal 892. Dodhanram v. Jaharmul, (1913) 40 Cal 335. Lakshmiji Sugar Mils Co. Lid v. Banwari Lal, AIR 1959 All 546 (DB).

89. Purshottam v. Ramkrishna, 46 Bom LR 649.

90. Reading v. Attorney General, (1951) AC S07 (1951) All ER 617; cf, Lister & Co. v. Shubbs (1890) 45 Ch D 1.

91.

Narandas Gajiwala v. S.P.A.M. Papammal, AIR 1967 SC 333: 1966 Supp SCR 38.

342

Chapter X-Agency

S. 214

S. 214. It is the duty of an agent, in cases of municatewilhprincipal. difficulty, to use all reasonable diligence in communicating with his principal, and in seeking to obtain his instructions. Agent's duty to com-

Duty to communicate.-This section lays down an important duty of the agent to communicate with the principal for the purposes of obtaining his instructions. In cases of difficulty the agent must use all reasonable diligence in communicating with the principal and obtain his instructions. In an emergency, it may not be possible to communicate with the principal, and in such a case he should act in accordance with the rule contained in Section 189.

Right

of

principal

whenagend t eals,onhis

Oesof e

S. 215. If an agent deals on his own account in the business of the agency, without

first

obtaining

that theconsentof his principal andacquainting him

principal's consent.

with all material circumstances which have come

to his own knowledge on the subject, the principal may repudiate the transaction, if the case shows, either that any

material fact has been dishonestly concealed from him by the agent, or that the dealings of the agent have been disadvantageous to him. 311

lustrations (a) A directs B to sell A's estate. B buys the estate for himself in the name of C. A on discovering that B has bought the estate for himself, may repudiate the sale, if he can show that B has dishonestly concealed any material fact, or that the sale has been disadvantageous to him. (b) A directs B to sell A's estate, B, on looking over the estate before selling it, finds a mine on the estate which is unknown to A. B informs A that he wishes to buy the estate for himself, but

conceals the discovery of the mine. A allows B to buy inignorance of the existence of the mine. A, on discovering that B knew of the mine at the time he bought the estate, may either repudiate or adopt the sale at his option.

Agent not to deal on his own account.-This section and the next section are based upon an assumption that an agent owes, fiduciary duties to his principal viz. complete loyalty

and hence an agent cannot be allowed to deal on his own

account in the business

of the agency except with the previous consent of the principal obtained after a full disclosure of all material facts. An agent having a duty to discharge duty to his principal cannot be permitted to enter into engagements wherein he has a personal interest which is

likely to conflict with the interest of his principal. As observed by the House of Lords "Nevertheless, even if the possibility of conflict is presentbetween personal interest and the fiduciary position the rule of equity must be applied.""2 This would be so even though the agent acts in good faith and without fraud.5

Authoritative illustrations of the principle here laid down might be multiplied almost indefinitely from the English reports. The kind of case given in illustration (a) is the most common, but there is no doubt that the rule is general. "Where an agent employed to sell becomes himself the purchaser, he must show that this was with the knowledge and consent of his employer or that the price paid was the full value of the

92. 93.

Boardman v. Phipps, (1967) 2 AC 46: (1966) 3 All ER 721 : (1966) 3 WLR 1009. Boardman v. Phipps, (1967) 2 AC 46: (1966) 3 All ER 721: (1966) 3 WLR 1009.

alusti

Principal's right to benefit gained by agent dealing

S.216

343

property so purchased; and this must be shown with the utmost clearness and beyond all reasonable doubt." "It is an axiom of the law of principal and agent that a broker employed to sell cannot himself become the buyer, nor can a broker employed to buy become himself the seller, without distinct notice to the principal, so that the latter may object if he thinks

proper." For like reasons an agent for sale or purchase must not act for the other party at the same time, or take a commission from him unknown to the principal," or settle any claim against the principal on exorbitant terms thereby to increase his own profit." An agent must give his principal "the free and unbiased use of his own discretion and judgment."3

Rights of Principal.-Where an agent has dealt on his own account, the principal may either repudiate the transaction under this section. Or he may affirm the transaction and claim the benefits resulting from the transaction, under Section 216. A principal who seeks to set aside a transaction on the ground that the provisions of the section have been violated must take proceedings for that purpose within a reasonable time after becoming aware of the circumstances relied on as otherwise he may be deemed to have acquiesced."

Besides the aforesaid ri the principal may also claim damages for loss caused to him. The agent would not be entitled to claim his remuneration pursuant to the provisions

of Section 220. Principal's right

to

S. 216. If an agent, without the knowledge of

benefigtainedby agent his principal, deals in the business of the agency on dealing o his own account instead of on account of his principal, the principal is entitled to claim of agency. from the agent any benefit which may have resulted to

him from the transaction. llustration A, directs, B, his agent, to buy a certain house for him. B tells A it cannot be bought, and buys the house for himself. A may, on discovering that B has bought the house, compel him to sell it to A at the price he gave for it.

Additional Ilustration A, acting as B's agent, agrees with C for the sale to him of fifty maunds of grain for future delivery. A delivers his own grain to C as against the contract. Subsequently he receives grain from B for delivery to C under the contract, which he sells in the market at a profit. B may, on discovering these facts, claim the profit from A. [Damodar Das v. Sheoram Das, (1907) 29 All. 730.]

Principal's rights to

profits-"It

may be laid down as general principle that in all

cases where a person is, either actually or constructively, an agent for other persons, all profits and advantages made by him in the business, beyond his ordinary compensation,

1.LORD LYNDHURST, Charter v. Trevelyan, (1844) 11 Cl& F at p 732: 65 RR at p 315. In India it Seems to be an ordinary question of fact, see Rameshardas Benrasidas v.7ansookhrai Bashesharlal, 102 IC 366: AIR 1927 Sind 195. 2.

4. 5. 6.

WILLIES, J., in Mollettv. Robinson, (1870) LR 5 CP at p 655. Grant v. Gold exploration etc., Syndicate of British Columbia, (1900) 1 QB 233. Mathra Das Jagan Nath v. Jiwan Mal Gian Chand, (1927)9 Lah 7. Clarke v. Tipping. (1846) Beav 284, 292. Wentworth v. Lloyd, (1864) 10 HL Cas 589.

344

S..216

Chapter X-Agency

are to be for the benefit of his employers": S.A. Section 211, adopted by the Court of Queen's Bench. It is immaterial that in acquiring the profit the agent may have run the risk of loss, and that the principal may have suffered no injury. Accordingly, if an agent for sale receives a share of commission or extra profit from the buyer's agent without the knowledge of his own principal, the principal can recover the sum of money received to his use. Such extra profit or commission is called a secret profit or bribe. The agent and the briber are jointly and severally liable for any loss actually sustained by the principal, eg. a fraudulent addition to the price of the goods in order to provide the secret commission. Interest is recoverable on bribes and on all secret profits received by the agents.10

Forfeiture of commission.-An agent who has wrongfully dealt on his own account is obviously not entitled to recover any commission for the transaction even if the principal adopts it, for the principal could forthwith recover it back from him under this section. Moreover, he has no authority to make a contract with himself, and therefore has earned nothing as agent.

Disclosure to principal-A transaction of this kind may be approved or ratified by the principal, but it must be upon full disclosure. It is not enough for the agent to tell the principal that he has some interest of his own. He must disclose all material facts, and be prepared to show that full information was given and the agreement made with perfect good faith. Notice sufficient to put the principal on inquiry will not do.5 Thus where an agent employed to buy goods sells his own goods to the principal at a price higher than the prevailing market rates, the principal is entitled to repudiate the transaction, and he is not bound by a ratification made in the absence of knowledge that the agent was selling his own goods and was charging him in excess of the market price." An agreement between an agent and a third person which comes within the terms of the present section, or in any way puts the agent's interest in conflict with his duty, is not enforceable unless the principal chooses to ratify it. Where a mehta (clerk), without the knowledge of his master, agreed with his master's brokers to receive a percentage, called sucri, on the brokerage earned by them in respect of transactions carried out through them by the mehta's master, and no express consideration was alleged or proved by the mehta, the Court refused to imply as a consideration an agreement by the mehta to induce his master to carry on business through those brokers, and was of opinion that such an agreement would be inconsistent with the duty a servant owes to his master.

Agent selling his pre-agency property to

principal.-It was decided in an English

case that an agent who without disclosure sells to his principal property purchased before the commencement of the agency is not liable for the

7. 8.

Morison v. Thompson, (1874) LR 9 QB 480, 485; Oficial Assignee v. R.M.P.V.M. Rang 6

which he had profit he has

Firm, (1929) 7

Williams v. Stevens, (1866) LR 1 PC 352.

9., Parker v. Mckenna, (1874) LR 10 Ch 96; Kaluram Bholaram v. Chimaniram Motilal, (1934) 36 Bom LR 68. 10. Tota Ram v. Zalim Singh, (1939) ALJ 1065: 187 IC 277: AIR 1940 All 69.

11. Salomans v. Pender, (1865) 3 H &C 639: 34 LJ Ex 95: 159 ER 682; Joachinson v. Meghjee Vallabhdas, (1909) 34 Bom 292.

12.

Re Haslam,

(1902) 1 Ch 765.

13. 14. 15.

Gluckstein v. Barnes, (1900) AC 240. Damodhar Das v. Sheoram Das, (1907) 29 All 730. Vinayakrav v. Ransordas, (1870) 7 Bom HCROC 90.

16. In re Cape Breton Co., (1885) 29 Ch D 795 CA doubted in Re Olympia Ltd., (1898) 2 Ch 153 but followed in Binland v. Earle, (1902) AC 83.

Agent's dury to pay sumsreceived for principal

S. 218

345

made. The Bombay High Court has held that Section 216 makes no such qualification on the liability of an agent. in such a case the agent is liable for the difference between the price at which he supplies the goods to the principal and the market value at the date, ie. the true value of the goods at that date.

of

S. 217. An agent may retain, out of any sums

retainer out of sums

received on account of the principal in the business

receivedonprincipas l account.

of the agency, all moneys due to himself in respect

Agent's

right

of advances made or expenses properly incurred

by him in conducting such business, and also such remuneration as may be payable to hinm for acting as agent. Agent to retain his dues out of Principal's moneys.-The right conferred in terms by this section is in the nature of retainer, and assumes the agent to have money for which he is accountable to the principal in his hands or under his control. Section 221 below further gives the agent a possessory lien on the principal's property in his custody. Nothing in the Act expressly gives him an equitable lien, i.e. a right to have his claims

satisfied, in priority to general creditors, out of specific funds of the principal which are not under his control. Such a right, however, may exist in particular cases. In the special case of a solicitor it is well-settled that a judgment which he has obtained for his client by his labour or his money should stand, so far as needful, as security for his costs, and he is entitled to have its proceeds pass through his hands. The Court will not allow any collusive arrangement between parties to deprive the solicitor of his benefit.8

Right of retainer can be exercised provided the agent has received moneys on account of his principal. The 'expenses' are qualified by the condition that they should have been properly, incurred in conducting such business. The 'remuneration' has the qualification of "being payable to him for acting as agent" for which see Sections 219 and 220.

Agent's duty to sums received principal.

S. 218. Subject to such deductions, the agent is for bound to pay to his principal all sums received on his account.

pay

Agents' duty to pay to Principal.-Any amount which an agent receives on behalf of the principal has to be paid to the principal. This rule is subject to the provisions of Ss. 217 and 219, i.e., right of retention and detention in respect of the advances, expenses and remuneration.

Mode of

payment.It

follows from his rule that an agent to receive money has gen-

erally no authority to receive anything else as equivalent. As between the principal and a third person, a set-off or balance of account between that person and the agent in his own

right is not a good payment to the agent on behalf of the principal. The debtor "must pay in such a manner as to facilitate the agent in transmitting the money to his principal."i

Payments in respect of illegal transaction.-If an agent receives money on his principal's behalf under an illegal or void contract, the agent must account to the principal for the money so received and cannot set up the illegality of the contract as a justification for withholding payment, which illegalıty the other contracting party had

17. Kaluram Bholaram v. Chimniram Motilal, (1934) 36 Bom LR 68. 18. Ex parte Morrison, (1868) LR QB 153, 156. See Cullianji Sangjibhoyv. Raghowji Vijpal, (1906) 30 Bom 27. 19.

PearsonvS . cott(,1878)9ChD102,108.1) i tsnauilo)saudipoidà o)y lsdauwd0

346

S. 219

Chapter X-Agency

waived by paying the money.0 Upon this principle it has been held that an agent receiving money due to the principal under a wagering contract, is bound under the provisions of this section to pay the same to the principal. But this rule does not apply where

the contract of agency is itself illegal.

S. 219. In the absence of any special contract,

When Agent's remu neration becomes due.

payment for the performance of any act is not due to the agent until the completion of such act; but an agent may detain moneys received by him on account of goods sold, although the whole of the goods consigned to him for sale may not have been sold, or although the sale may not be actualy complete. "Special contract."-When there is an express contract providing for the remuneration of the agent, the amount of the remuneration and conditions under which it becomes payable must primarily be ascertained from the terms of that contract. In the absence of a special contract, the right to remuneration and conditions under which it is payable are held in English law to dependon the custom or usage of the particular business in which the agent is employed.-" The words "special contract" in this section include a contract arising by implication from custom or usage. The same principle applies in India.23

Completion

of such

act."The

questionwhether or not an agent is entitled to

commission ... has repeatedly been litigated and it has usually been decided that, if the relation of buyer and seller is really brought about by the act of the agent, he is entitled to commission, although the actual sale has not been effected by him."0 In other words, the commission becomes due if the broker has induced in the party for whom he acts the contracting mind, the willingness to open negotiations upon a reasonable basis. A broker employed to procure a loan on property becomes entitled to his

commission if he finds a party willing to advance the money, even "it the contract were afterwards to go off from the caprice of the lender, or from the infirmity of the title" He must show that the contract was brought about as a direct result of his intervention, although he may not havebeen the first or only source of the principal's information." It is not sufficient to show that the transaction would not have been entered into but for his services, but he must go further and show that

the transaction

was the direct consequence of the agency.0 Agent

prevented

from

earning

remuneration.-If

in breach

of a «

ntract,

express or implied, with an agent, the principal, by refusing to complete a transaction 20. 21. 22. 23.

Bhola Nath v. Mul Chand. (1903) 25 All 639; Palaniappa Chettiar v. Chokalignam Chettiar, (1921) 44 Mad 334. Bhola Nath v. Mul Chand (1903) 25 All 639. Sykes v. Beadon, (1879) 11 Ch D 170.

Green v. Mules, (1861) 30 LJCP 343 (if it is agreed that commission shall be payable only in the event of success, the agent cannot claim a quantum meruit in the absence of success); Cutter

Powell, (1795) 6 TR 320: Clack v. Wood, (1882) 9 QBD 276; Ayyannath Chetty v. Subramania lyer, (1923) 45 Mad LJ 409 (brokerage payable if title approved). 24. 25. 26.

27.

Read v. Rann, (1830) 10 B &C 438; Baring v. Stanton, (1876) 3 Ch D 502. Setchidananda Dutt v. Nritya Nath Mitter, (1923) 50 Cal 878. Per ERLE, C.J., in Green v. Bartlett, (1863) 14 CBNS 681. Municipal Corporation of Bombay v. Cuverji Hirji, (1895) 20 Bom 124; Abdulla v. Anjmendra,

(1950) SCR 30: AIR 1950 SC15.

28.

Fisher v. Drewit, (1878-79) 48 LU Ex 32; Elias v. Govind (1902) 30 Cal 202.

29.

Jordon v. Ram Chandra Gupta, (1904) 8 CWN 831.

30. Burchell v. Gowie & BlockhouseCollieries Ltd, (1910) AC 614: 80 L PC 41.

Agent not entitled to remuneration for business misconduct

S. 220

347

or otherwise, prevents the agent from earning remuneration, the agent is entitled to damages. If an agent seeks to claim damages from his principal, he must show that the principal has broken a term of the contract. Appellant companies wished to to pay the respondent a commission on the dispose of a certain property and agreed completion of the sale to any purchaser whom he could introduce. He introduced a willing and able purchaser but the appellant Companies then decided to effect the transaction they had in mind by a sale of the shares of the companies and not to proceed with the sale of the property. It was contended that there ought to be implied in the agreement with the respondent a term that the appellants would not without just cause so act as to prevent him from earning his commission. However the House of Lords held that there can be no implied term that the vendor will not refuse to go with a proposed sale so long as matters are still in negotiation and no binding contract has been made between the vendor and the purchaser. There was, therefore, no breach of contract by the appellant companies and they were not liable to respondent in damages. In a case where the contract provides that the agent would be paid his remuneration on completion of the transaction, there cannot be implied a term that the principal would not prevent the agent from having an opportunity to earn his remuneration.33 It is not probable that the principal would fetter his freedom of choice by binding himself vis-avis his agent not to withdraw from the negotiations while he was free vis-a-vis the intending purchaser to withdraw at any time for any reason.54 To imply such a term would be tantamount to giving a subordinate contract greater importance or dominance than to the main contract. This does not stand to reason.5)

Quantum meruit remuneration.-Whether the parties intended to give to the agent reasonable remuneration or a fixed remuneration depends upon the facts of each case. Ordinarily if an intending purchaser withdraws before or at the time of the completion of the sale, the vendor may (1) forfeit the earnest money or (i1) sue for specific performance the last two categories, the agent would be entitled to his or (1i) sue for damages. In remuneration but in the first category, the agent would not be entitled to his commission unless it is possible to infer that in any event parties intended to give reasonable remuneration for his services, trouble and expense.5 In Boot v. E. Christopher & Co. agents were to be paid a percentage of the purchase price if they introduced a person able and willing to purchase on the principal's term. Such an agreement was made and a

deposit was given by the third party to the agents. But the third party failed to complete and directed the agents to hand the deposit to the principal. They did after deducting what they claimed was their commission. The principal sued to recover the entire amount from the hands of the agents without such deduction. It was held that the commission was payable out of the purchase price which made expressly clear that sale had to be effected before the agents were entitled to anything and so the principal was allowed to recover the sum from the agent.

S. 220. An agent who is guilty of misconduct in

Agent not entitled to

remunerationfor business misconduct.

ness which he has

31.

the business of the

misconducted.

Turner v. Goldsmith, (1891) 1 QB 541; Mehta v.

Boots v. E. Christopher

to any

remuneration in respect of that part of the busi-

32. Luxor (Eastbourme) Ltd. v. 33. Luxor (Eastbourne) Ltd. v. 34. Luxor (Eastbourne) Ltd. v. 35. Luxor (Eastbourne) Ltd. v. 36.

agency, is not entitled

Cooper, Cooper, Cooper, Cooper,

&Co.,

(1941) (1941) (1941) (1941)

AC AC AC AC

(1952) 1 QB 89

Cassumbhai,

(1922) 24 Bom LR 847.

108:(1941) 1 Al ER 33. 108: (1941) 1 All ER 33. 108: (1941) 1 All ER 33. 108: (1941) 1 All ER 33. (98-99).

348

S.221

Chapter X--Agency Illustrations

(a) A employs B to recover 1,00,000 rupees from C, and to lay it out on good security. B recovers the 1,00,000 rupees, and lays out 90,000 rupees on good security, but lays out 10,000 rupees on security which he ought to have known to be bad, whereby A loses 2,000 rupees. B is entitled to remuneration for recovering the l,00,000 rupees and for investing the 90,000 rupees. He is not entitled to any remuneration for investing the 10,000 rupees, and he must make good the 2,000 rupees to B [sic in the Act, but it should obviously be A].

(b) A employs B to recover, 1,000 rupees from C. Through B's misconduct the money is not recovered. B is entitled to no remuneration for his services, and must make good the loss.

No remuneration if agent guilty of

misconduct"A

principal is entitled to have

an honest agent, and it is only the honest agent who is entitled to any

commission."

Accordingly where an agent for sale, having sold the property, retained half the deposit as commission with the principal's consent, and also, without the principal's knowledge, received a commission from the buyer, the agent was held liable not only to account for the secret commission to the principal, but to return the usual commission, which he had retained.3/ But an agent who retains discounts received by him from third persons, in the honest belief that he is entitled to retain them, does not thereby forfeit his commission, although he may be liable to account for the discounts as profits received without the knowledge or consent of the principal,.35

Misconduct.-Misconduct of an agent may arise in various ways, such as wrongfully delegating his unauthorised acts, failure to render proper accounts, duties, dishonesty, fraudulently overcharging his principal sale to a company wherein he is a director and a large shareholder*s or receiving secret commission the other side.44 Agent's lien on principal's property.

from

S. 221. In the absence of any contract to the contrary,

an agent is entitled

to retain45 goods,

papers and other property, whether movable or immovable, of the principal received by him, until the amount due to himself for commission, disbursements and services in respect of the same has been paid or accounted for to him. Possessoryand Particular lien-The lien claimable under this section is confined to the commission, disbursements and services in respect of the specifie property only in respect whereof such commission is earned,disbursements are made and services are rendered. The words "in respect of the same" indicate that the lien is particular and not

general. The right of lien conferred by this section is possessory i.e. so long as the agent is in possession of the property, papers and goods. The possessory lien does not involve the right to sell the goods,0 nor the right of stoppage in transit. The latter right arises between seller and purchaser only.

37.

Andrews v. Ramsay & Co., (1903) 2 KB 635.

38. 39.

Hippisley v. Knee Bros., (1905)1 KB 1. White v. Lincoln, (1803) 8 Ves 363.

40. 41.

Beable v. Dickerson, (1885) 1 TLR 654. Rhodes v. Macalister, (1923) 29 Com Cas 19; Andrews v. Ramsay & Co., (1903) 2 KB 635.

42. 43. 44. 45. 46.

Nitedals Tacndstikfabrik v. Bruster, (1906) 2 Ch 671. Salomons v. Pender, (1865) 3 H & C 639: 34 LJ Ex 95: 159 ER 682. Andrews v. Ramsay & Co., (1903) 2 KB 635. Nitedals Taendstikfabrik v. Bruster, (1906) 2 Ch 671

Not sel; Mul Chand-Shib Dhan v. Sheo Mal Sheo Parshad, 123 IC 867: AIR 1929 Lah 666.

S. 221

Agent's lien on principal's property

349

But a lien cannot be acquired by a wrongful act. Nor when property is entrusted to an agent for a special purpose, can the agent claim any lien, the existence of which is

inconsistent with such purpose." In order that an agent may have a valid lien on property in his hands, the following conditions must be satisfied: (1) there should be no arrangement inconsistent with the retention of such property in the exercise of his lien; (2) the property on which the right to lien is claimed should belong to the principal to the knowledge of the agent; (3) it should have been received by the agent in his capacity as agent during the course of his ordinary duties as agent and (4) the agent should be holding the property for and on behalf of his principal and not for and on account of any known third party."5 See further on this subject the commentary on Section 171.

Agent's lien.-One practical consequence of this rule is that a buyer of property from an auctioneer, or other agent known to be in possession of the property and entitled to a lien on it, cannot set up payment to the principal as a defence to an action for the price at the suit of the agent. Similarly, a subsequent charge given by the principal to a third person will be postponedto a factor's lien. An auctioneer, employed to sell furniture at the house of the owner, is sufficiently in possession of the furniture to entitle him to a lien thereon for his charges and commission.30

How far lien effective against third persons. -The lien, whether general or particular, of an agent attaches only on property in respect of which the principal has, as

against third persons, the right to createa lien, and, except in the case of money and negotiable securities, is contined to the rights of the principal in the property at the time when the lien attaches, and is subject to all rights and equities of third persons available against the principal at that time.2 Lien of sub-agents.-A sub agent who is employed by an agent without the authority, express or implied, of the principal has no lien, either general or particular, as against the principal. But a sub-agent who is properly appointed has the same right of lien against the principal in respect of debts and claims arising in the course of the subagency, on property coming into his possession in the course of the sub-agency, as he would have had against the agent employing him if the agent had been the owner of the property; and this right is not liable to be defeated by a settlement between the principal and agent to which the sub-agent is not a party.*

Lien how lost or

extinguished.-The

lien of an agent, being a mere right to retain

possession of the property subject thereto is, as a general rule, lost by his parting with the possessions. But where possession is obtained from the agent by fraud, or is obtained unlawfully and without his consent, his lien is not affected by the loss of possession. An agent's lien is extinguished by his entering into an agreement, or acting in any character,

inconsistent with its continuance, and may be waived by conduct indicating an intention to abandon it. If the goods are accidentally destroyed, the lien is extinguished, but the agent is entitled to claim his commission against the principal.9 47. Buchanan v. Findlay, (1829) 9 B &C 738;, Southern Roadways Lid. v. SM Krishnan, (1989) 4 SCC 603, 608: AIR 1990 SC 673 (agent not allowed to remain in possession of premises after termination of agency). 48. Pestonji v. Ravji Javerchand, AIR 1933 Sind 235. 49. Robinson v. Ruter, (1885) 4 E & B 954. S0. Williams v. Millington, (1788) 1 HB 181:2 RR 724. 51. Cunliffe v. Blackburn Building Society. (1884) 9 App Cas 857. 52. $3. 54. 55. 56.

London and Country Bank v. Ratcliffe, (1881) 6 App Cas 722; In re Llewellin, (1891) 3 Ch l45. Solly v. Rathbone, (1814) 2 M & S 298. Fisher v. Smith, (1878) 4 App Cas 1. Bligh v. Davies, (1860) 28 Beav 211 Kishun Das v. Ganesh Ram, AIR 1950 Pat 481.

350

S. 222

Chapter XAgency

The lien of an agent is not affected by the circumstances that the remedy for recovery of the debt or claim secured thereby becomes barred by the Statutes of Limitation, or that the principal becomes bankrupt or insolvent,8 not by any dealing by the principal with the property subject to the lien,59 after the lien has attached.

Principal's Duty to Agent Agent to be indemni-

S. 222. The employer of an agent is bound to

fiedagainsctonsequen- indemnify him against the consequences of all ces of lawful acts. lawful acts done by such agent in exercise of the

authority conferred upon him. llustrations (a) B, at Singapur, under instructions fromA of Calcutta, contracts with C to deliver certain goods to him. A does not send the goods to B, and C sues B for breach of contract. B informs A of the suit, and A authorises him to defend the suit. B defends the suit, and is compelled to pay damages and costs, and incurs expenses. A is liable to B for such damages, costs and expenses.

(b) B, a broker at Calcutta, by the orders of A, a merchant there, contracts with C for the purchase of 10 casks of oil for A. Afterwards A refuses to receive the oil, and C sues B. B informs A, who repudiates the contract altogether. B defends, but unsuccessfully, and has to pay damages and costs, and incurs expenses. A is liable to B for such damages, costs and expenses.

For, there, i.e. Calcutta," in illustration (b), "we should probably read Singapur": Whiteley Stokes's note, referring to S. 230. Or it must be assumed that in some other way B has made himself personally liable on the contract.]

Limits of agent's indemnity"If an agent has, without his own default, incurred losses or damages in the course of transacting the business of his agency or in following the instructions of his principal, he will be entitled to full compensation therefore... But it is not every loss or damage for which the agent will be entitled to re-imbursement from his principal. The latter is liable only for such losses and damages as are direct and immediate, and naturally flow from the execution of the agency."0

The right of indemnity extends to losses or liabilities incurred in the exercise of the authority according to the rules and customs of the particular trade or market in which the agent is authorised to deal, provided the rule or custom in question is a

reasonable one, or the principal had notice of it at the time when he conferred the authority: but if the rule or custom is unlawful or unreasonable, and was unknown to the principal he is under no liability to indemnify of acting on it.03

the agent against the consequences

The words "consequences of all lawful acts" would include payments which the agent is compelled to make although the principal would not be liable to pay to third person, a payment made an authorised but gratuitous one or where the agent though

57. Curwen v. Milburn, (1889) 42 Ch Div 424. 58. Ex parte Beall, (1883) 24 Ch Div 408.

59. 60.

West of England Bank v. Batchelor, (1882) 51 LJ Ch 199. S.A. S. 339 & 341 cited arguendo in Duncan v. Hill, LR 8 Ex at p 244.

61. 62.

Davis v. Howard. (1890) 24 QBD 691 Ex parte Bishop, (1880) 15 Ch Div 400. Seymour v. Bridge, (1885) 14 QBD 460.

63. Perry v. Barnett, (1885) 15 QB Div 388, Sheffield Corporation v. Barclay. (1907) AC 392. 64. Adams v. Morgan & Co., (1924) 1 KB 751 (Payment of super tax). 65. Britain v. Lloyd, (1845) 14 M & W 762 (773).

Agent to be indemnified against consequences of acts done in good faith under a liability has as yet suffered no losso or where the

S. 223

351

agent made a payment under a

mistake but reasonably.o Right to indemnity being restricted to "acts done in exercise of the authority conferred upon him" would not apply to unauthorised acts, or due to his own negligence,

default, insolvency or breach of duty.8 Ratification by the principal will cure the agent's default and restore his ordinary right to indemnify.59 "Lawful."-A wagering contract is void, not unlawful (see S. 30). When therefore a suit is brought by a betting agent his principal to recover a loss on betting paid by the agent, the principal cannot escape liability on the ground that the agent's act was unlawful. See notes to Section 30 under the head *Agreements collateral to wagering con-

tracts.

S. 223. Where one person employs another to fiedagainsctonsequen- do an act, and the agent does the act in good faith cesofactsdoneingood the employer is liable to indemnify the agent Agent to be indemni-

faith.

against theconsequences of that act, though it may cause an injury to the rights of third persons. lustrations (a) 4, a decree-holder and entitled to execution of B's goods requires the officer of the Court to seize certain goods, representing them to be the goods of B. The officer seizes the goods, and is sued by C, the true owner of the goods. A is liable to indemnify the officer for the sum which he is compelled to pay to C in consequence of obeying A's directions. (b) B, at the request of A, sells goods in the possession of A, but which A had no right to dispose of. B does not know this, and hands over the proceeds of the sale to A. Afterwards C, the true owner of the goods, sues B and recovers the value of the goods and costs. A is liable to indemnify B for what he has been compelled to pay C and for B's own expenses."

Unlawful Acts.-This section is based upon equity. If a person asks another to do an act, of which the illegally does not appear prima facie but which turns out to be tortious and the other party doing the act does not in fact know that he was doing an unlawful act, the latter should have a redress or contribution from the party requesting to do the act. This section must be read along with Section 224.

The preceding section deals with indemnity against the consequences of lawful acts; this section with the consequences of unlawful acts done in good faith. It is clearly settled that an agent cannot claim indemnity in respect of acts which he knows to be unlawful,

66. 67.

Lacey v. Hill, Crowley's Claim, LR (1874) 18 Eq 182 (Stock broker's liability). Petman v. Keble, (1850) 9 CB 701 (expenses to defend action).

68. Lewis v. Samuel, (1846) 8 QB 685 (negligent drawing up of theindictment); Duncan v. Hill, (1873) LR 8 Ex 242 (broker becoming insolvent before the settlement day); Ellis v. Pond, (1898) 1 QB 426

(breachof duty). 69. 70.

Hartas v. Ribbons, (1889) 22 QB Div 254.

Behari Lal v. Parbhu Lal, (1908) Punj Rec no 79; Shibho Mal v. Lachman Das, (1901) 23 All 165; Chekka v. Gajjila, (1904) 14 Mad LJ 326; Pirthi Singh v. Matu Ram, AIR 1932 Lah 356: 33 Pun LR 450 (DB); Bhagwandas v. Deochand, AIR 1951 Nag 392 : 1951 NLJ 487; Bhanwar Lal, (1955) 1 SCR 439: AIR 1954 SC 500.

71. Adamson v. Jarvis, (1827) 4 Bing 66.

72. Smith & Son v. Clinton & Harris, (1908) 99 LT 840: 25 TLR 34. 3i

,nonuun

Kishanlal v.

352

S.224

Chapter XAgency

even if they are not criminal, whether on anexpress or implied promise.

Any such

promise is void as being contrary' to public policy.

Bailif.

A judgment-creditorwhorequiresan officer of the law to take specified

goods, pointing them out as the goods of the debtor, makes that officer his agent, and must

indemnify him if, acting in good faith, he commits a trespass in obeying the

instruction.4

S. 224. Where one person employs

Non-liability of emp-

loyer of agent to do a criminal act.

do an act which is

criminal,

the

another to

employer

is not

liable to the agent, either upon an express or an implied promise, to indemnify him against the consequences of that act. Ilhustrations (a) A employs B to beat C, and agrees to indemnify him against all consequences of the thereupon beats C and has to pay damages to C for so doing. A is not liable to indemnify those damages.

act. B B for

(6) B, the proprietor of a newspaper, publishes, at A's request, a libel upon C in the paper, and A agrees to indemnify B against the consequences of the publication, and all costs and damages of any action in respect thereof. B is sued by C and has to pay damages, and also incurs expenses. A is not liable to B upon the indemnity.

The rule in the text is elementary. The principal is not liable to indemnify the agent against criminal acts done at his instance.

Compensation

to

S. 225. The principal must make compensation

agentforinjurycaused to his agent in respect of injury caused to such by principal's neglect.

agent by the principal's neglect or want of skill. llustration

A employs B as a bricklayer in building a house, and puts up the scaffolding himself. The scaffolding is unskillfully put up, and B is in consequence hurt. A must make compensation to B.

Compensation to agent for injury by neglect or want of skill of principal.--This, as a general rule, needs no proof or illustration. But the agent may be disentitled to relief if the injury was due to his own contributory negligence. For the modern law of

workmen's compensation, see Act VIII of 1923. An agent is not, generally speaking, entitled to sue the principal on any contract made on his behalf, even if the agent is personally liable on the contract to the third party. If a merchant resident abroad employs an agent to buy goods, and the agent buys them and gives his own acceptance for the price, he cannot sue the principal as for goods sold, because the contract between them is not one of buying and selling but of agency.3 Similarly, ifa broker buys goods on behalf of an undisclosed principal, he cannot sue the for non-acceptance of the goods,'o or for goods bargained and sold." His only princi remedy 1s an action for indemnity under Section 222.

73.

D eg iva4l08in.surance: Alkins v. Jupe, (1877) 2 CPD 375. Illegal payment: In re Parker. (1882) 21 Ch

74. Collins v. Evans, (1844) 5 QB 820, 829, 830. 75. Seymour v. Pychlau, (1817) 1 B& Ald 14. 76. Tetley v. Shand, (1872) 25 LT 58.

77. White v. Benekendorfji, (1873) 29 LT 475.

S. 227

Principal how far boundwhen agentexceeds authority

353

Efect ofagency on contracts with third persons Enforcement and con-

sequences of agent's contracts.

S. 226. Contracts entered into through an agent, and obligations arising from acts done by an agent, may be enforced in the same manner, and

will have the same legal consequences, as if the contracts had been entered into and the acts done by the principal in person. Ilustrations (a) A buys goods from B, knowing that he is an agent for their sale, but not knowing who is the principal. B's principal is the person entitled to claim from A the price of the goods, and A cannot in a suit by the principal, set off against that claim a debt due to himself from B.

(b) A, being B's agent with authority to receive money on his behalf, receives from Ca sum of money due to B. Cis discharged ofhis obligation to pay the sum in question to B.

Contracts and acts done through agent enforceable by or against

principal.-

This section lays down a general principle that where a contract is entered into by a principal through his agent or an act is done by a principal through his agent, the principal is bound by the same and they can be enforced by or against the principal. Acts and contracts contemplated by this section, in the light of the two succeeding sections, are those which fall within the authority of the agent. This authority may be actual or ostensible (see Section 237). The section does not say whether the principal is disclosed or not disclosed at the time of the entering of the contract or at the time of the doing of the act. Sections 231 and 232 refer to situations relating to disclosed or undisclosed principals. This section assumes that the contract or act of the agent is one which, as between the principal and third persons, is binding on the principal. If the contract is entered into or the act is done professedly on behalf of the principal, and is within the scope of the actual

authority of the agent, there is no difficulty. The principal is bound though the contract may be entered into or act done fraudulently in furtherance of the agent's own interests, and contrary to the interests of the principal, provided the person dealing with the agent acts in good faith.'5 With regard to contracts and acts which are not actually authorised, the principal may be bound by them, on the principle of estoppel, if they are within the scope of the agent's ostensible authority, but in no case is he bound by any unauthorised act or transaction with respect to persons having notice that the actual authority is being exceeded. This subject is dealt with by Section 237 and the commentary thereon. This section does not touch the conditions under which the agent can sue or be sued on the contract in his own name, as to which see Ss. 230-234 below. The principal must be able to show that the third party dealt with the agent as such. Principal

how

far

S. 227. When an agent does more than he is

bound.when agent authorised to do, and when the part of what he does, which is within his authority, can be separated, from the part hich is beyond his authority, s much only of what he does as is within his authority is binding as between him and

exceeds authority.

hipsrincipal.i bu ite 3nuyeno 78.

Hambro v. Burnard (1904) 2 KB

p,ne

u2siiseu

10. See also Fazal llahi v. East indian Railways Co., (1921) 43

All 623. 79.

See also s.

108 and 178 as to

sales and pledges by persons having possession of goods or

documents of title thereto. 80.

Sims v. Bond, (1833) 5 B & Ad 389.

31

354

Chapter X-Agency

S. 228

Illustration A, being

owner

of a ship and cargo, authorises B to procure an insurance for 4,000 rupees on

the ship. B procures a policy for 4,000 rupees on the ship, and another for the like sum on the cargo. A is bound to pay the premium for the policy on the ship, but not the premium for the policy on the cargo.

The principal is not bound by the unauthorised acts of his agent, but is bound where the authority is pursued, or so far as it is distinctly pursued": S.A. Section 170. This and the following section must be read subject to Section 237 below. This section and Section 228 lay down the principle of what is binding as between the principal and agent. It is only the acts within his authority that bind the principal but Such acts may be separable and inseparable. This section refers to separable part while Section 228 refers to inseparable act.

S. 228. Where an agent does more than he is whenexcess of agent's authorised to do, and what he does beyond the authority is not sep scope of his authority cannot be separated from Principal

not bound

arable.

what is within it, the principal

is not bound to

recognise the transaction. Illustration A authorises B to buy 500 sheep for him. B buys 500 sheep and 200 lambs for one sum of 6,000 rupees. A may repudiate the whole transaction.

The law declared in this and the preceding section is concisely illustrated by an English case where B, an insurance broker at Liverpool, was authorised by A to underwrite policies of marine insurance in his name and on his behalf, the risk not to exceed £100 by any one vessel. B underwrote a policy for Z without 4's authority or knowledge for £150. Z did not know what the limits of B's authority were, but it was well known in Liverpool

that a broker's authority was almost invariably limited, though the limit of the authorised amount in each case was not disclosed. The Court held that A was not liable for the insurance of £150 which he had authorised, and the contract could not be divided so as to

make him liable for £l00.31 Further illustrations are supplied by Indian cases. A authorises B to draw bills to the extent of Rs. 200 each. B draws bills in the name of A for Rs. 1,000 each. A may repudiate the whole transactions A instructs B to enter into a contract for the delivery of cotton at the end of January B enters into a contract for delivery by the middle of that month. A is not bound by the

contract, and any custom of the market allowing B to deviate from A's instructions will not be enforced by the Court.35 Consequences notice given to agent.

of

S. 229. Any notice given to or

obtained by the agent, provided

information

it be given or

obtained in the course of the business transacted by him for the principal, shall, as between the principal and third

parties, have the same legal consequencesas if it had been given to or obtained by the principal 81. 82.

Baines v. Ewing, (1866) LR 1 Ex 320; See also Praboodam v. Premabhai v. Brown, (1870) 10 BHC 319.

83. ArlapaNayakv. NarsiKeshavji,(1817)8BHCAC19.

Miller, AIR 1938 Mad 966.

h

r5Ai unu

ti.

s

S. 229

Consequences of notice given to agent

355

Illustrations (a) A is employed by B to buy from C certain goods, of which C is the apparent owner, and buys them accordingly. In the course of the treaty for the sale, A learns that the goods really

belonged to D, but B is ignorant of that fact. B is not entitled to set off a debt owing to him fromC against the price of the goods. (b) A is employed by B to buy from C goods of which C is the apparent owner. A was, before

he was so employed, a servant of C and then learnt that the goods really belonged to D, but B is ignorant of that fact. In spite of the knowledge of his agent, B may set off against the price of the goods a debt owing to him from C.

Notice to Agent.-The rule laid down in this section is intended to declare a general principle of law. "It is not a mere question of constructive notice or inference of fact, but a rule of law which imputes the knowledge of the agent to the principal, or (in other words) the agency extends to receiving notice on behalf of his principal of whatever is material to be stated in the course of the proceedings."34 In course of business-By the terms of the present section, which are cited in the same judgment the application of the principle is limited by the condition that the agent's knowledge must have been obtained "in the course of the business transacted by him for the principal. "*5 This is further enforced by illustration (b). Knowledge prior to, or outside the course of business of agency may not suffice.30 The following are illustrations from the English authorities of the rule stated in the section. An agent of an insurance company having negotiated with a man who had lost the sight of an eye, it was held that the agent's knowledge of the fact must be imputed to

the company, and that it could not avoid the contract on the ground of non-disclosure thereof by the assured.3 A ship sustained damage in the course of a voyage, and the master subsequently wrote a letter to the owner, but did not mention the fact of the damage. It was held that the master ought to have communicated the fact, and, the owner having insured the ship after receipt of the letter, that the insurance was void on the

ground ofnon-disclosure.38 When principal presumed to have notice.-When the knowledge of an agent is imputed to the principal, the principal, is considered to have notice as from the time when he would have received notice if the agent had performed his duty and communicated

with him with reasonable diligence.9 Duty to communicate and Material to busines.

-The knowledge of an agent is

not imputed to the principal unless it is of something that it is his duty as agent to communicate to the principal. Nor will notice given to or information acquired by an agent of circumstances which are not material to the business in respect of which he is employed be imputed to the principal.0

Fraud on principal-An important exception to the rule that the knowledge of an agent is equivalent to that of the principal exists in cases where the agent has taken part in the commission of a fraud on the principal.

In such cases notice is not imputed to the

84. Judgment of Judicial Committee in Rampal Singh v. Balbhaddar Singh, (1902) 25 All 1, 17: LR 29 TA 203.

85. See Chabildas Lalloobhai v. Dayal Mowji, (1907) 31 Bom 566, 531 :34 IA 179, 184. 86. Wylie v. Pollen, (1863) 32 LJ Ch 782. 87. Bawden v. London etc. Assurance Co., (1892) 2 QB 534. 88.

Gladstone v. King. (1813) 1 M & S 35: 14 RR 392.

89. Proudfoot v. Montefiori, (1867) LR 2 QB 511. 90. Tate v. Hyslop, (1885) 15 QBD 368. See also Texas Co. Bom 139: LR 46 IA 250.

Lid v. Bombay Banking Co., (1920) 44

356

S. 230

Chapter X-Agency

principal of the fraud or the circumstances connected therewith because of the extreme improbability of a person communicating his own fraud to the person defrauded. But the exception does not apply where the fraud is committed, not against the principal, but against a third person.2 Agent

cannot

perso-

nally enforce, nor be bound by contracts,on behalf of principal.

S. 230. In the absence of any erect, tracts

An agent cannot entered into by

contract to that

personally enforce conhim on behalf of his

principal, nor is he personally bound by them.

Such a contract shall be presumed to exist in the following cases: Presumption of con- (1) where the contract is made by an agent for salk tract to contrary.

or purchase of goods for a merchant

resident

abroad; (2) where the agent does not disclose the name of his principal; (3) where the principal, though disclosed, cannot be sued. Enforceability

of contracts by an

agent.-This

section lays down an uniform

rule that in absence of a contract to the contrary, an agent cannot sue nor be sued in

respect of a contract entered into on behalf ofa principal and it is the principal who may sue thereon and who may be sued thereon. If an agent acts as a pretending agent, he is not entitled to sue thereon even though he may have acted as principal (see Section 236) but he is liable thereon under the provisions of Section 235. The first part of the section does not restrict the rights and liabilities of a principal, whether he is disclosed or not. Section 231 provides for the rights of an undisclosed principal at the time of the entering into of a contract. Sections 231 and 232 both contemplate that an undisclosed principal may enforce a contract. The second part of the section lays down a legal fiction or presumption in respect of cases wherein an agent may be sued or may sue personally. Sections 233, 234 and 235 provide for a creditor's right to sue an agent but they do not provide for an agent's right to sue.

Contract to the

contrary.-Whether

an agent, apart from the cases specially

personally, or merely on behalf of the mentioned, is to be taken to have contracted principal, depends on what appears to have been the intention of the parties, to be deduced from the nature and terms of the particular contract and the surrounding circumIn the case of oral contracts the question is purely one of fact.7*If the contract stances. is in writing, the presumed intention is that which appears from the terms of the written agreement as a whole. An agent who signs a contract in his own name without qualification, though known to be an agent, is understood to contract personally, unless a contrary intention plainly appears from the body of the instrument,7° and the mere description of him as an agent, whether as part of the signature or in the body of the contract, is not sufficient indication

91.

Cave v. Cave, (1880) 15 Ch D 639.

92.

Dison v. Winch, (1900) 1 Ch 736.

93.

See BOWSTEAD ON AGENCY, 10th ed., p. 236.

94. Lakeman v. Mountstephan, (1874) LR 7 HL 17; Long v. Mohanakrishnan v. Chemicals & Co., AIR 1960 Mad 452. 95. 96.

Spitle v. Lavender, (1821) 5 Moore 270. Calder v. Dobell, (1871) LR 6 CP 486.

Millar,

(1879) 4 CP Div 650;

Agent cannot personally enforce, nor be bound by contracts

S.230

357

of a contrary intention to discharge him from the liability incurred by reason of the unqual-

ified signature.' On the other hand, if words are added to the signature indicating that he signs "as an agent," or on account or behalf of the principal, he is considered not to contract personally, unless it plainly appears from the body of the contract, notwithstanding the qualified signature, that he intended to make himself a party An agent may be held liable personally under Sections 233-235. It is also settled law that when an agent "has made a contract in the subject-matter of which he has a special property he may, even though he contracted for an avowed principal, sue in his own name." Such is the case of a factor, and of an auctioneer, who "has a possession coupled with an interest in goods which he is employed to sell, not a bare custody, like a servant or a shopman," and a special property by reason of his lien."

The like rule is laid down by Indian Courts: "Where an agententers into a contract as such, if he has interest in the contract, he may sue in his own name." This is not a exception to the rule laid down at the beginning of the section, the agent being in such a case virtually a principal to the extent of his interest in the contract. Whenever an agent has entered into contract in such terms as to be personally liable, he has a corresponding right to sue thereon,' and this right is not affected by his prin-

cipal's renunciation of the contract

Principle of the rule and

exceptions.-The

test question in cases within the

principle of this section is always to whom credit was given by the other party, or, if that cannot be proved as a fact, to whom it may reasonably be presumed to have been given. Thus, in the cases here specially mentioned, the party cannot be supposed to rely excluSively on a foreign principal whom, by general mercantile usage, the agent's contract 1s not understood to bind, or on a person whose name he does not know, and whose stand-

ing and credit he therefore cannot verify, or on a person or body who, for whatever reason, is on the face of the transaction not legally liable

Presumed exceptions: (i) Foreign principal.-This exception is based on convenience and general mercantile usage. It provides that if the principal is resident abroad then the agent can sue and be sued on a contract for sale and purchase of goods which is entered into by the agent on behalf of such principal. The disclosure or non-disclosure of the principal (which is covered by the second exception) is immaterial as far as this exception is concerned." In the case of a British merchant buying for a foreigner, "according to the universal understanding of merchants of and all persons in trade, the for credit is then considered to be given to the British buyer, and not to the foreigner," "a foreign constituent does not give the commission merchant any authority to pledge his credit to those" with whom the commissioner deals on his account. Here, unless a contrary agreement appears, the foreign principal is not a party to the contract at all, and

1.

Hutcheson v. Eaton, (1884) 13 QB Div 861.

2. 3.

Redpath v. Wigg, (1866) LR 1 Ex 335; Gnanasundara Nyagar v. Berton, AIR 1964 Mad 113. 2 Sm LR 415.

4.

Fisher v. Marsh, (1865) 6 B & S 411. 81:2 RR 724. Williams v. Millington, (1788) 1 H BI, 6. Subramania v. Narayanan, (1900) 24 Mad 130; Tashi Delek Gaming Solutions Ltd. v. State of Karnataka, (2006) 1 SCC 442, 451: AIR 2006 SC 661. 7. Agacio v. Forbes, (1861) 14 Moo PC 160. 8. Short v.Spackman, (1831) 2 B & Ad 962. 9. Cochin Frozen Good Exports v. Vachinad Agencies, (2004) 13 SCC 434, 435. 10. Thompson v. Davenport, (1929) 9 B & C at p 87: 32 RR at p 585. I1. Armstrong v. Strokes, (1872) LR 7 QB 598, 605. S.

358

S. 230

can neither sue nor be sued

on it. On the question

whether an agent is to be consid-

ered as having contracted personally the true intention has to be deduced as in other cases, from the terms of the contract and surrounding circumstances. The circumstance that the principal is a foreigner gives rise to a presumption, but only a presumption, of an intention to contract personally, and the presumption may be rebutted by indication of an

intention to the contrary. A company having its registered office in England, but carrying on business in India, will be deemed to be resident in England for the purposes of this section. Where a contract, therefore, is entered into by the "managing agents" of such company in lIndia, it can be enforced against the agents personally unless the foreign company is in writing made the contracting party, and the contract is made directly in its name.

In the context of the changed circumstances of international commerce, the trend of modern authorities in England appears to be that where the intention of the parties is clear

from the terms of the contract itself, there is no question of raising the presumption.o The presumption laid down by this section provides a useful safeguard against undue risks as to finding out the foreign principal, commencing proceedings against a defendant in a foreign country and consequential difficulties of executing a decree against a defen-

dant in a foreign country. (i) Principal undisclosed.-The presumptive rule under this head is so well settled that it will suffice to refer to Indian cases without going back here to the ultimate author ities. The qualifications

expressed in the following sections to Section 233

inclusive are

now part of the doctrine requiring most attention. The decisions establishing them contain ample proof of the rule. The same principles are followed in Indian Courts.. The honorary secretary, therefore, of a school alleged to have been maintained by an association in London was personally liable for the rent of a house hired by him in his name although for the purposes of the school. But if the other party knows that the agent is contracting as such, the presumption laid down in this clause does not arise, although at the time of making the contract the agent does not state the name of the principal, the knowledge being in such a case equivalent to disclosure. Thus the secretary of a club cannot be sued personally for work done for the club, as he had not pledged his personal credit.'9 And similarly he cannot sue a member on behalf of the club for goods supplied to him by

the club.20 A broker is an agent primarily to establish privity of contract between two parties. A broker when he closes a negotiation as the common agent of both parties usually enters it in his business book and gives to each party a note of the transaction which as given to the seller is the sold note and as given to the buyer the bought note. Prima facie a broker is employed to find a buyer or seller and as such is a mere intermediary. He is thus an agent to find a contracting party, and as long as he adheres strictly to the position of

broker, his contract is one of employment between him and the person who employs him

12. 13. 14.

Elbigner Actien-Gesellschaft v. Claye, (1873) LR 8 QB 473. Hutton v. Bullock, (1874) LR 9 QB 572. See the authorities critically reviewed in Miller, Gibb & Co. v. Smith & Tyren, (1917) 2 KB 141

CA. 15.

Tutika Basavaraju v. Parry & Co. (1903) 27 Mad 315.

16.

Teheran-Europe v. S.T. Belhon (Tractors) Lid, (1968) 2 WLR 523: Anglo-4frican Shipping Co. of

17. 18. 19. 20.

New York Inc. v. Mortner (J), (1962) 1, Llord's Report, 610 (616, 617, 619, 621). Bhojabhai v. Hayem Samuel, (1898) 22 Bom 754. Mackinnon v. Lang. (1881) 5 Bom 584 North-Western Provinces Club v. Sadullal, (1898) 20 All 497. Michael v. Briggs. (1890) 14 Mad 362.

Agent cannot personally enforce, nor be bound by contracts

S. 230

359

and not contract of purchase or sale with the party whom he in the courses of such employment finds. A broker may, however, make himself a party to the contract of sale or purchase, for he can go beyond his position of a negotiator or agent to negotiate and by the terms of the contract make himself the agent of his principal to buy or sell. Where he is merely an intermediary, he is not liable on the contract; but if he has entered into a

contract ofpurchase or sale on behalf of his principal, the provisions of this section will apply.2 Thus if the principal is undisclosed, and the note says "sold for you to my principals," i.e. "I, your broker, have made a contract for my principals, the buyers, the broker is merely an intermediary, and he is not, personally liable to his employer. For the same reason he is not liable if the contract says "bought for you from my principals," and the terms "sold by order and for account of transfer to selves for principal," the broker signing as broker, do not bind him personally, and also do not entitle him to sue in his own name for failure to deliver.44 But the broker is personally liable if the contract says "bought of you for my principals," for here the contract is one of purchase by the broker on behalf of undisclosed principals.

(ii) Principal not liable to be sued-There is a rather curious class of cases in whichagreements have been entered into by promoters on behalf of companies intended to be, but in fact not yet, incorporated. In such a case the alleged principal has no legal existence, and the agent is held to have contracted on his own account in order that there may not be a total failure of remedy.

This sub-clause would cover a case of a company which may have either no capacity to make such a contract or no power to authorise delegation to a particular agent. This

is known as the doctrine of ultra vires. A company's public documents give notice of its objects and a person dealing with such company is presumed to have notice of what is contained in such public documents. There cannot, therefore, arise a presumption of an apparent authority in an agent of a company to make a contract which is ultra vires the

company. Sovereign States as principals.-Sovereign States and their rulers would seem to come within the description of possible principals who cannot be sued; but there is a special rule for this case, and it is settled, for sufficient reasons of good, sense and policy, that an agent contracting even in his own name on behalf of a Government is not to be considered as personally a party to the contract. No man would accept public offer at

such risk as a different rule would involve.30 As regards British India the law was thata foreign or native ruler might be sued in a competent Court in India in certain cases with

the consent of the Governor-General-in-Council. Where no such consent was given, it has been held that a suit might be brought against the agent appointed by the native ruler

21.

Patiram v. Kanknarrah Co. Lid, (1915) 42 Cal 1050, 1065-1066.

22.

Southwell v. Bowditch,

(1876) LR 1 CPD 374.

23. Patiram v. Kanknarrah Co. Lid, (1915) 42 Cal 1050. 24.

Nanda Lal Roy v. Gurupada Haldar, (1924) 51 Cal 583 :81 IC 721

25. 26.

Southwell v. Bowditch, (1876) LR 1 CPD 374. at p 379. Re Empress Engineering Co., (1880) 16 Ch Div 125; Lakshmishankar v. Motiram, (1904) 6 Bom LR 1106.

27.

Freeman & Lockeyer v. Buckhurst Park Properties Ltd, (1964) 2 QB 480 (504) : (1964) 1 All ER

630:(1964) 2WLR618. 28. Ernest v. Nicholls, (1857) 6 HL Cas 401; Freeman & Lockyer v. Buckhurst Park Properties Ltd., (1964) 2 QB 480: (1964) 1 All ER 630: (1964) 2 WLR 618. 29. 30.

Houghton & Co. v. Nothard, Lowe & Wills, (1927) 1 KB 246. Palmer v. Hulchinson, (1881) 6 App Ca at p 626; Grant v. Secretary of State for India, (1877) 2 CPD at p 461.

360

S. 231

Chapter X-Agency

for the purposes of the business in respect of which the suit was brought.

See now the

provisions of Section 87-B of the Code of Civil Procedure,1908.

S. 231. If an agent makes a contract with a contractmade by agent person who neither knows, nor has reason to not disclosed. suspect that he is an agent, his principal may Rights of parties to a

require the performance of the contract; but the other contracting party has, as against the

principal, the same rights as he would have

had as against the agent if the agent has been principal.

If the principal discloses himself before the contract is completed, the other contracting party may refuse to fulfil the contract, if he can show that, if he had known who was the principal in the contract, or if he had known

that the agent has not a principal, he would not have

entered into the contract. Undisclosed principal's rights to sueWhere an undisclosed principal wants to sue, his right to sue is preserved but subject to the equities as between the agent and third

party.

"Discloses

himself"-The

High Court of Bombay is of opinion that the right of

the third party to repudiate the contract under the second paragraph arises only where the principal himself makes the disclosure, and that it does not arise where the disclosure is made by some other person or the information reaches him from some other source.32 Performance of con-

tractwithagenstuppos ed to be principal.

S. 232. Where one man makes a contract with another, neither knowing nor having reasonable

ground to suspect that the other is an agent, the

principal, if he requires the performance of the contract, can only obtain such performance subject to the rights and obligations subsisting between the agent and the other party to the contract. lhustration A, who owes S00 rupees to B, sells 1,000 rupees worth of rice to B. A is acting as agent for C in the transaction, but B has no knowledge no reasonable ground of suspicion that such is the case.

C cannot compel B to take the rice without allowing him to set off A's debt.

Sections 231, 232 and 234, taken together, fairly represent modern English law as regards the rights of undisclosed principals.

Rights of a third party if undisclosed principal sues.Sections 231 and 232 refer to a situation arising as a result of an undisclosed principal seeking to enforce the contract entered into by his agent. But for these sections, the third party cannot set off any claim he may have against the agent personally3 nor can he rely upon a payment made to the agent. In Montagu v. Forwood A Employed B to collect general average contributions under an insurance policy. B instructed a broker to collect the contributions,

the broker believing B to be the principal. B owed the brokers some money. In an action by A against the broker for the contributions, as money received to his use, it was held 31. Abdul Ali v. Goldstein, (1910) Punj Rec No 43. 32. Lakshmandas v. Lane, (1904) 32 Bom 356; Kapurji Magniram v. Panaji Devichand, 53 Bom 110. 33. Montagu v. Forwood, (1893) 2QB 350. 34.

Montagu v. Forwood, (1893) 2 QB 350.

S.232

Performance of contract with agent supposed to be principal

361

that the broker was entitled to set off a debt due from B. The equitable rights created in favour of the third party are based upon the fact that at the time of entering into the contract he did not know, nor had he reason to suspect, that the person acting was an agent.

Equities between agent and third

party.-An undisclosed principal coming in to

sue on the contract made by the agent must take the contract, as the phrase goes, subject

to all equities; that is, the third party may use against the principal any defence that would have availed him against the agents) before he had reasonable notice of the principal's existence.36 The rule stated in these sections is based on the ground that the third party did not know, and had no reason to suspect, that the person contracting was acting for a principal.3 The rule laid down in the said two sections is to be distinguished from that laid down in Section 237 which is based on "estoppel" arising in consequence of "holding out with ostensible authority." "The law with respect to the right of set-off by a third person dealing with a factor who sells goods in his own name and afterwards becomes bankrupt is well established by Hudson v. Granger5.. That rule is founded on principles of common honesty. One who satisfies his contract with the person with whom he has contracted ought not to suffer by reason of its afterwards turning out that there was a concealed principal."39

Where, however, the seller's factor for sale told the agent of the buyer that the goods did not belong to him, the buyer cannot plead a set off of his claim against the factor per sonally in a suit by the seller for price of goods.0 The application of the rule of set off is limited to liquidated demands;4 but it "is not contined to the sale of goods. If A employs B as his agent to make any contract for him,

or to receive money for him, and B makes a contract with Cor employs Cas his agent, if B is a person who would be reasonably supposed to be acting as a principal, and is not known or suspected by C to be acting as an agent for anyone, A cannot make a demand

against Cwithout the latter being entitled to stand in the same been a principal. If A has allowed his agent B to appear in the must take the consequences."

position as ifB had in fact character of a principal he

In England it is not necessary for the third party who dealt with the agent as a principal to go beyond showing that he believed him to be a principal. Means of knowledge or "reason to suspect" appears to be material only as tending to negative the alleged belief.s The words of both Ss. 231 and 232, however, are quite clear on this point. But there must be actual belief that one is dealing with a principal. Ignorance or doubt

er

apparent principal is a principal or an agent is not enough; for the ground the rule is that the agent has been allowed by his undisclosed principal to hold out himself as the principal, and the third party has dealt with him as such.* The words "reason to suspect" or "reasonable ground to suspect" cannot cover a case where the third whet

35.

George v. Clagett, (1797) 7 TR 359; Sims v. Bond, (1833) 5 B & Ad 389, 393.

36. Sims v. Bond, (1833) 5 B & Ad 389; Browning v. Provincial Insurance Co. of Camada, LR (1873) 5 PC 263 (272-73). 37. Greer v. Downs Supply Co., (1927) 2 KB 28. 38. Hudson v. Granger, (1821) 5 B&A 27. 39. Turner v. Thomas, (1871) LR 6 CP 610,613, per WILLES., J. 40. Dresser v. Norwood, (1864) 17 CB (NS) 466: 142 RR 455. 41. Dresser v. Norwood, (1864) 17 CB (NS) 466: 142 RR 455. 42. Montagu v. Forwood (1893) 2 QB 350, 355. 43. Borries v. Imperial Ottoman Bank, (1873) LR 9 CP 38. 44. Cooke v. Eshelby, (1887) 12 App Ca 271.

362

S. 233

Chapter X-Agency

party is dealing with a known broker45 If the agent gives an invoice in the name of his principal, the third party cannot take recourse to the said expressions6 because the invoice should leave no doubt in his mind.

The second paragraph of Section 231 is really a branch of the general rule that agreements involving personal considerations of skill, confidence, or the like are not assignable or transferable. Right of person deal-

S. 233. In case where the agent is

personally

ing with agent perso- liable, a person dealing with him may hold either nally liable.

him or his principal, or both of them, liable. llustration

A enters into a contract with B to sell him l100 bales of cotton, and afterwards discovers that B was acting as agent for C. A may sue either B or C, or both, for the price of the coton.

In cases where the agent is personally liable.-As to the cases where an agent is personally liable, see Section 230 and commentary thereon.

This section is a clear departure from English law under which the liability of prinCipal and agent is alternative and not joint." According to this section the creditor may hold either principal or agent as severally liable in the alternative, or at his option hold them jointly liable. If he elects to hold them jointly liable, he can sue them both; but if he elects to sue one only he must be deemed to have given up his rights against the other, since in that case the liability is alternative and not joint.3 Case where the agent is so liable personally, the terms of his liability must be ascertained from the terms of the contract. The agent may as well have intended that both should be liable.49 The agent may have intended to guarantee the performance.

Creditor's election.-A person who has made a contract with an agent may; if and when he pleases, look directly to the principal, unless the liability of the principal has been excluded by the express terms of the contract. He may look directly to the principal, even though he was not aware of the existence of the principal when he made the contract, and even though the agent is personally liable. This is because the law which makes the agent liable *does not detract from the liability of the principal.0 A company is, therefore, liable for moneys advanced in the course of voluntary liquidation to the liquidator authorised by the company to borrow for the purposes of the winding up. Similarly a loan made to the secretary, treasurer and agent of a company authorised to raise moneys for the Company may be recovered from the company. But when once the creditor has elected to sue the agent, and sued him to judgment, he cannot afterwards bring a second action against the principal, though the judgment against the agent may not have been satisfied, and though the creditor was not aware of the existence ofa 45. 46. 47. 48.

Cooke v. Eshelby, (1887) 12 App Ca 271; Dresser v. Norwood, (1864) 17 CB (NS) 466. Butwick v. Grant, (1924) 2 KB 483. Morel Brothers & Co. Ltd. v. Earl of Westmoreland, (1904) AC 11. Shamsuddin Ravuthar v. Shaw Wallace & Co., (1939) Mad 282, 184 IC 153: AIR 1939 Mad 520; Shivlal Motilal v. Birdichand, (1917) 19 Bom LR 370, 40 IC 194.

49. 50. 51.

International Rly. Co. v. Niagra Parks Commission, (1941) AC 328 (342). Calder v. Dobell, (1871) LR 6 CP 486. Inre Ganges Steam Car Co., (1891) 18 Cal 31.

52.

Purmanundass v. Cormack, (1881) 6 Bom 326.

53. Shivlal Motilal v. Birdichand, (1917) 19 Bom LR 370; Bir Bhaddar v. Sarju Prasad, (1887) 9 All 681; Priestly v. Fernie, (1865) 3 HzC 977; and see Morel Broihers & Co. Lid. v. Ear of Westmoreland, (1904) AC 11.

S.235

Liability ofpretendedagent

363

principal when he sued the agent.4 This is on the principle that the signing of the judgment against one party extinguishes the liability of the other and the creditor's election has become final. But where the suit against the agent is dismissed the creditor may subsequently bring a fresh suit against the principal, the reason being that nothing short of a judgment against the agent can amount to a binding election on the part of the creditor to abandon the right to proceed against the principal.

Consequence of indu-

S. 234. When a person

who has

made a con-

cingagentorprincipal tract with an agent induces the agent to act upon to act on belief that the belief that the principal only will be held principal or agent will

beheld exclusively liable, or induces the principal to act upon the liable.

belief that the agent only will be held liable, he cannot afterwards hold liable the agent or principal respectively.

Estoppel against third party. This section is a corollary to the preceding section. Although the third party has the option to proceed against the agent or the principal or both of them, this section restricts that right on the ground of estoppel if he has induced either of them to act on the belief that one of them shall not be held liable. The third party is estopped by its active representations in exercising its option contained in Section 233.

If a third party knowing very well who the principal is, prefers to give credit to the agent and debits the amount to the agento or where a third party agrees to hold the agent

for sale only liable for loss if the goods supplied by the supplier (principal) are not in accordance with the sample, it can be stated that he induced the principal to act on the belief that he would not be held liable and that the agent alone would be held liable.

Inducing belief in agent/principal.-Unless there is an active representation, any unilateral act such as receiving a part payment5 or proving in the bankruptcy of the agent or initiation of proceedings against one of them" may not conclusively prove that he actively induced the belief in the agent or the principal, as the case may be.

S. 235. A person untruly representing himself to be the authorised agent of another, and thereby inducing a third person to deal with him as such agent, is liable, if his alleged employer does not ratify his acts, to make compensation to the other in respeet of any loss or damage which he has incurred by so Liability of pretended

agent.

dealing. Liability of pretended agent to third person.-The law in England is established by Collen v. Wright.o It applies not only to the case of a person who represents that he has authority from another when he has n0 authority whatever, but to the case of a person who represents that he has a certain authority from another when he has authority of another description. The duty is grounded on an implied warranty by the agent that he

54. 55. S6. 51. 58. 59.

Shivlal Motilal v. Birdichand, (1917) 19 Bom LR 370, 380-381. Raman v. Vairavan, (1883) 7 Mad 392, citing Curtis v. Williamson, (1874) LR 10 QB 57. Addison v. Gandasequi, (1812) 4 Taunt 574. Mahadev v. Gauri Shankar, AIR 1951 Assam 42. Curtis v. Williamson, (1874) LR 10 QB 57; Fell v. Parkin, (1882) 52 LJ QB 99. Clarkson Booker v. Andjel, (1964) 2 QB 775:(1964) 3 All ER 76:(1964) 3 WLR 466.

60. Clarkson Booker v. Andjel. (1964) 2 QB 775 : (1964) 3 All ER 76:(1964) 3 WLR 466. 61.

Collen v. Wright, (1857) 7 E&B 301, in Ex. Ch. 8 E&B 647. See Hasonbhoy v. Clapham, (1882)7 Bom 61, 66.

62. Ganpat Prasad v. Sarju, (1911) 9 All LI 8:34 All 168.

364

S. 235

Chapter X-Agency

has authority, and the action, had authority. The doctrine House of Lords.o An agent principal with a third person.

being in contract, lies even if the agent honestly believed he has been fully confirmed by later authorities and by the reports to his principal that he has made a bargain for his The report is incorrect, for the contract is not complete and

goes off altogether. In such a case the agentdoesnot represent himself to be the agent of the third party, and is not liable under the rule in Collen v. Wright.

A public servant acting on behalf of the Government is not deemed to warrant his authority, nor does he make himself personally liable on the contract, and for the same reason of policy. If a man goes through the form of contracting as an agent, but warns the other party that he has at the time no authority, he is obviously not liable under this section.69

"Untruly representing himself"The rule embodied in this section is based upon an untrue representation of authority" and "the other party acting thereon." The representation may be expressed or implied. The words "untruly representing" in this section are intended to restrict the law in India, while in England the law is based on a

wider doctrine of a breach of implied warranty of authority. If unknown to the agent, his authority has ceased to exist because of principal has died or had become insane or insolvent, it cannot be said that he untruly represented his authority. In the Bombay case the agent was not authorised to sign the charter party and hence he untruly represented that he had authority to sign.0o In the Allahabad case the agent was authorised to sell at a particular rate but he sold it at a lower rate and hence he untruly represented his authority to sell at a lower rate. The use of the word 'untruly' is intended not to make an innocent agent liable. The Indian legislature might have contemplated that an agent should not be a guarantor of authority (a situation which would be unduly harsh) and hence it made a departure from the English law. This is evident from the measure of damages provided in

this section which is different from the one under the English law. The liability of a pretended agent under this section does not arise, unless the representation that he is the agent of another is false, and also induces the person to whom the representation is made to deal with him as such agent. A representation by the defendant to the plaintiff that she is the duly authorised agent of her minor son does not render her liable under this section, if the plaintiff knows that the son is a minor. For a minor cannot appoint an agent (S. 183 above), and consequently no warranty such as would support a suit could arise out of such a representation.8

Measure of damages.-In England, the action being founded on contract, and not on tort, the measure of damages is the loss sustained as the consequence

the breach of

the implied warranty. In other words, the person acting on the misrepresentation is entitled not only to recover any loss actually sustained through being misled, but also any profit which he would have gained if the representation had beentrue.5 It is open to question whether in India the compensation recoverable under the section will be assessed on the same principle. The language used seems more appropriate to an action in the nature of an action of deceit than to one founded on a warranty.

63.

Starkey v. Bank of England, (1903) AC 114.

64. 65.

Dunn v. Macdonald,

66.

Hasonbhoy v. Clapham, (1882) 7 Bom 61. Ganpat Prasad v. Sarju, (1911) 9 All LJ 8 : (1912) 34 All 168. Shet Manibhai v. Bai Rupaliba, (1899) 24 Bom 166, citing Beattie v. Lord Ebury, LR 7 HL 102. Firbank v. Humphreys, (1886) 18 QB Div. 54. See Vairavan Chettiar v. Avicha Chettiar, (1915) 38 Mad 275, 278.

67. 68. 69. 70.

(1897) 1 QB 555 CA.

Halbot v. Lens, (1901) 1 Ch 344.

Liability of principal inducing beliefthat agent'sunauthorisedacts

Person falsely contraC

S. 236. A person

with

ting as agent, not been entered into in the entitled to performance.

S. 237

whom a contract

365

has

character of agent, is not

entitled to require the performance of it, if he was

in reality acting, not as agent, but on his own account. Agent acting on his own account not entitled to require

performance.-English

authorities make a distinction in this matter between contracts on behalf of a named principal and those in which the principal is not named. It does not seem possible, however, to read any such distinction into the perfectly general language of the present section; and, indeed, the English rule has never been settled by a Court of appeal. The High Court of Calcutta has held that this section is not restricted to cases where an agent purports to act for the named principal." If a person professing to act as an agent for an undisclosed principal enters into a contract with another, and there is no undisclosed principal in fact, the present section at once applies, and he cannot sue on the contract.72 Conversely, where a man has contracted in writing in terms importing that he is the

sole principal, eg. made a charter-party "as owner of the ship A," another person cannot be allowed to sue on the contract as an undisclosed

principal.3

S. 237. When an agent has, without authority, curred obligations to i rd persons inducing belief that done a r agent's unauthorised on behalf of his principal, the principal is bound Liability ofprincipal

acts were authorised.

by such acts or obligations, if he has by his words or conduct induced such third persons to believe that such acts and obligations were within the scope of the agent's authority. hustrations

(a) A consigns goods to B for sale, and gives him instructions not to sell under a fixed price. C, being ignorant of B's instructions, enters into a contract with B to buy the goods at a price lower than the reserved price. A is bound by the contract.

(b) A entrusts B with negotiable instruments indorsed in blank. B sells them to C in violation of private orders from A. The sale is good.h

Ostensible

authorityThis

section can be called "agency by estoppel". This sec-

tion requires that the principal should have by his conduct or words induced a third person and the third person was induced to act on the basis of such conduct or words.

The words or conduct on the part of the principal and inducement of belief in the third person thereby create an estoppel against the principal vis-a-vis the third person. This form of estoppel is called ostensible authority or apparent authority. The words "by his words or conduct induced such third persons to believe" refer to specific representation and not a representation to the world. In other words "holding out to the world" is ruled out.74 If a third person who is not induced to believe that such acts or obligations were within the scope of the agent's authority, this section would not apply. 0/ 71. Sewdutt Roy Maskara v. Nahapiet, (1907) 34 Cal 628; Nanda Lal Royv. Gurupada Haldar, (1924) S1 Cal 588.

12.

Ramji Das v. Janki Das, (1912) 39 Cal 802; Nanda Lal Roy v. Gurupada Haldar, (1924) 51 Cal 588. 73. Humble v. Hunter, (1848) 12 QB 310; Rederi Aktienbolaget Trans-atlantic v. Fred Drughorn, (1918) 1 KB 394 CA affirmed in HL (1919) AC 203.

74. FarquharsonBrothers & Co. v. King & Co., (1902) AC 325 (341).

ta te tilwi

366

S. 237

Chapter X-Agency

This section must, in point of fact, overlap Section 188 in many cases, but the principles are distinct. Under Section 188 the question is of the tree construction to be put upon a real, tough perhaps not verbally expressed, authority. Here the liability is by

estoppel, and independent of the apparent agent having any real authority

at all the

question is only whether he was held out as being authorised; and this includes secret restrictions on an existing authority of a well-known kind.

tie case of

It is a "well-established principle that, if a person employs another as an agent in a character which involves a particular authority, he cannot by a secret reservation divest him of that authority." *Good faith requires that the principal shall be held bound by the acts of the agent within the scope of his general authority, for he has held him out to the public as competent to do the acts and to bind him thereby." : S.A. Section 127. Where a transaction

undertaken by an agent on behalf of his principal is within his express authority, the principal 1s bound without regard to the agent's motives, and inquiry whether the agent was abusing his authority for his own purposes is not admissible."

Very many illustrations of the principle are to be found in the English authorities, of which the following may be given as typical examples. Where a principal wrote to a third person saying he had authorised the agent to see him, and, if possible, to come to an amicable arrangement, and gave the agent instruction not to settle for less than a certain amount, it was held that he was bound by a settlement by the agent for less than that

amount, the third person having no knowledge of the verbal instructions. An agent was authorised, in cases of emergency, to borrow money on exceptional terms outside the ordinary course of business, and it was held that the principal was bound by a loan on such exceptional terms made by a third person who had no notice that the agent was

exceeding his authority, although noemergencyhad in fact arisen.' Where a solicitor was authorised to sue for a debt, it was held that a tender to his managing clerk was equi-

valent to a tender to the client, though the clerk was forbidden to receive payment, he not having disclaimed the authority at the time of the tender. It must be understood in illustration (b) that the instruments are not handed to B

merely for safe custody. The Privy Council case of Ram Pertab v. Marshall,8 which, however, was not decided with reference to the section, affords an additional illustration. In that case the principal was held liable upon a contract entered into by his agent in excess of his author ity, the evidence showing that the contracting party might honestly and reasonably have believed in the existence of the authority to the extent apparent to him. In Fazal Ilahi v. East Indian Raihway Company Act IV of 1894 prohibited parcel clerk from accepting consignment of fire works for carriage by passenger train. He by mistake accepted such consignment but kept quiet and did not send the consignment by goods train. It was held that the Railway Company was bound by the act of parcel clerk for not carrying out the contract as the latter was held out to the world by the Railway

Company as a person

authorised on behalf of Company to acceptconsignment for dispatch. The parcel clerk was acting on behalf of his principal in the exercise of his apparent authority and his acts 75. 76. 77.

CoCKBURN, C.J., in Edmunda v. Bushell, (1865) LR 1 QB 97,9 Hambro v. Burnard, (1904) 2 KB 10 CA. Trickett v. Tomlincon, (1863) 13 CBNS 663. See also National Bolivian Navigation Co. v. Wilson. (1880) 5 App Cas 176, 209.

78.

Montaignac v. Shitta, (1890) 15 App Cas 357; Bryant v. Quebec Bank, (1893) AC 179.

79.

Moffatv. Parsons, (1814) 1 Mash 55.

80. Ram Pertab v. Marshall, (1899) 26 Cal 701. See also Fazl llahi v. East Indian Railway. (1921) 43

All 62. 81. Fanal Ilahi v. East Indian Railway Company, (1899) 26 Cal 701. See also Fazl Ilahi v. East Indian Railway, (l921) 43 All 62.

Effect, onagreement, of misrepresentation or fraud by agent

S. 238

367

thus bind the Railway Company which could have dispatched the consignment without unreasonable delay by the goods train. Where, however, a person is aware that the agent is acting under a power of attorney and does not trouble to read it, he cannot complain if the principal refuses to be bound by an act beyond the authority of the agent.3

Notice of excess of authority.-No act done by an agent in exces of his actual authority is binding on the principal with respect to persons having notice that the act is unauthorised. This proposition is so obvious that it would be superfluous to cite authorities in support of it.

"On behalf of his principal."--A principal is not bound by any act done by his agent which he has not in fact authorised, unless it is done in the course of the agent's employment on his behalf35 and is within the scope of the agent's apparent authority."* The burden of showing this is on the person claiming against the principal, and the same is essentially a question of fact. Effect, on agreement,

om f isrepresentationor fraud by agent.

S. 238. Misrepresentations made, or frauds committed, by agents acting in the course of their

business for their principals, have the same effect on agreements made by such agents as if such misrepresentations or frauds had been made or committed by the principals; but misrepresentations made, or frauds committed, by agents, in matters which do not fall within their authority, do not affect their principals. Illustrations (a) A, being B's agent for the sale of goods, induces C to buy them by a misrepresentation, which he was not authorised by B to make. The contract is voidable, as between B and C, at the

option of C. (b) 4, the captain of B's ship, signs bills of lading without having received on board the goods mentioned therein. The bills of lading are void as between B and the pretended consignor.

Liability of principal for agent's fraud or misrepresentation.-In order that a principal be liable for misrepresentations or frauds of his agent, the essential requirements are that they should have been committed (i) "in the course of business of agency" and (ii) "in respect of matters within the agent's authority." The aforesaid two conditions indicate that the liability is not vicarious; the words"as is such misrepresentations or frauds had been made or committed by the principals" also indicate that if those two conditions are complied with, the principal is liable as if such acts are his own. This section would cover cases as (1) a servant acting in the course of his employment of his master, and (2) an independent contractor acting for his principal.

In course of business.-An agent having control of his principal's business prefers fraudulently a particular creditor would be an act of fraudulent preference by the prin-

cipal

86

In course of employment.-Theaccordanceof thissection with the modern Common Law is well shown in a judgment delivered in the Judicial Committee by Lord

82. 83. 84. 85.

86.

United Provinces Govermment v. Church Missionary Trust Association Ltd., (1948) 22 Luck 93 : 229 IC 421l: AIR 1948 Oudh 54. McGowan v. Dyer, (1873) LR 8 QB 141. Morarji Premji v. Mulji Ranchhod Ved & Co., (1923) 48 Bom 20. Dilawari Exporters v, Alitalia Cargo and Ors., (2010) 5 SCC 754, 760. Re: Drabble Bros, (1930) 2 Ch 211.

368

S. 238

ChapterXAgency.

Lindley' "The law upon this subject cannot be better expressed than it was by the acting Chief Justice [of New South Wales] in this case. He said: 'Although the particular act which gives the cause of action may not be authorised, still, if the act is done in the course of employment which is authorised, then the master is liable for the act of his servant. This doctrine has been approved and acted upon by this Board in Mackay v. Commercial Bank of New Brunswick,3 Swire v. Francis,33 and the doctrine is as applicable to incorporated companies as to individuals. All doubt on this question was removed by the decision of the Court of Exchequer Chamber is Barwick v. English Joint Stock Banks, which is the leading case on the subject. It was distinctly approved by Lord Selborne, in the House of Lords, in Houldsworth v. City of Glasgow Bank,0 and has been followed in numerous other cases. In the passage here referred to as now the leading authority

Willes, J., delivering the

judgment of the Exchequer Chamber said: "With respect to the question whether a principal is answerable for the act of his agent in the course of his master's business, and for his master's benefit, no sensible distinction can be drawn between the case of fraud and the case of any other wrong. The general rule is, that the master is answerable for every such wrong of the servant or agent,

as is committed in the course of the service and for the master's benefit, though no express command or privity of the master be proved.4 That principle is acted upon every day in running down cases. It has been applied also |in various cases of trespass, false imprisonment by servants of corporations acting in supposed execution of their duties under by-laws, and the like]. In all these cases it may be said, as it was said here, that the master has not authorised the act. It is true, he has not authorised the particular act, but he has put the agent in his place to do that class of acts, and he must be answerable for the manner in which the agent has conducted himself in doing the business which it was the act of his master to place him in. The words "for the master's benefit," which occur in this judgment, were applicable to the case before the Court, but must not be taken as restricting the scope of the rule, though there was for some time considerable authority for that reading. If the act belongs to an authorised class, it is not material whether the agent intends the principal's benefit or not, not whether the principal in fact derives any

benefit. A solicitor's managing clerk, having authority to transact conveyancing business on behalf of the firm, took a client's instructions to sell some property (by his own advice, given with

fraudulent

intent) and got the deeds from her (which he might

properly have done). Then he procured her execution of instruments, being in fact conveyances to himself, which the client supposed (as intended by him) to be merely formal papers; and having thus obtained the means of making an apparently good title in his own name, he dealt with the property for his own purposes. The House of Lords* held that this was a fraud committed by the manager in the course of his employment for

which the principal was answerable. It is clear from the judgments that the rule applies to ostensible as well as to actual authority.

87.

Mackay v. Commercial Bank of New Brunswick, (1874) LRS PC 394.

88.

Swire v. Francis, (1877) 3 App Ca 106.

89.

Barwick v. English Joint Stock Banks, (1867) LR2 Ex 259.

90. 91. 92.

Houldsworth Citizen's Life See Laugher LR 2 Ex 259

93.

94.

v. City of Glasgow Bank, (1880) 5 App Ca at p. 326. Assurance Co. v. Brown, (1904) AC 423, 427. v. Pointer, (1826) 5 B&C 547, at p. 554, 29 RR at pp. 320, 321. at pp. 265, 266.

Lloyedv. GraceSmith & Co., (1912) AC 716,reversing the decision of the CA (1911) 2 KB 489; Dina Bandhu Saha v. Abdul Latif Molla, (1923) 50 Cal 258.

Efect, on agreement, of misrepresentation or fraud by agent

S. 238

369

Bribery of agent.-The rights of the principal against an agent is respect of bribes received in the course of the agency are dealt with in the commentary to Section 213 and Section 216. In addition to what is said there it may be mentioned that the receipt of a bribe by an agent justifies his immediate dismissal without notice, although the contract of agency may provide for its continuance for a specified time. As against the person promising or giving anything in the nature of a bribe to an agent, the principal may avoid any contract made or negotiated by the agent, or in the making of which the agent was in any way concerned, whether he was in fact influenced

by the bribery or not, it being conclusively presumed against the briber that he was so influenced.2 In Shipway v. Broadwood' A agreed to buy a pair of horses from B, if A's agent certified that they were sound. B secretly offered the agent a certain sum if the horses were sold, and the agent accepted the offer. The agent certified that the horses were sound. It was held that A was not bound by the contract, whether the agent was in fact biased by the offer made to and accepted by him, or not.

An agent cannot maintain any action for the recovery of money promised to be given to him by way of a bribe whether he was induced by the promise to depart from his duty to the principal or not." Such a promise, being founded on a corrupt consideration, cannot be enforced by law.

Right of principal to follow property into hands of third persons.-Where the property of the principal is disposed of by an agent in a manner not expressly or ostensibly authorised the principal is entitled, as against the agent and third person, subject to any enactment to the contrary, to recover the property, whosesoever it may be found.°

Personal liability of agent, to repay money received to principal's

use-If

money is paid to an agent on the principal's behalf, and the payer becomes entitled, as against the principal, to repayment, the agent, as a general rule, is not liable to repay it even though the money is still in his possession.

But an agent is personally liable to repay money paid to him under a mistake of fact, unless he has paid it over to the principal in good faith, or unless he has dealt to his detriment with the principal in the belief that the payment was a valid one, before

receiving notice of the intention of the payer to demand repayment. Similar principles apply where the money is paid in respect of a voidable transactions,0 or for a consideration which totally fails,'" or under duress, or in consequence of any fraud or wrong to which the agent is not a party.3 But if the agent has been a party to the wrongful act,

1.

Bostan Fishing Co. v. Ansell, (1888) 39 Ch Div 339. Shipwayv. Broadwood, (1899) 1 QB 369; Bartram v. Lloyed, (1904) 90 LT 357. Shipway v. Broadwood, (1899)1QB 369; Bartram v. Lloyed, (1904) 90 LT 357. Harrington v. Victoria Dock Co., (1878) 3 QBD 549.

2. 3. 4. 5. See, for instance, sec 178; and Section 27 of Indian Sale of Goods Act as to sales and pledges by 6.

7. 8. 9. 10. 11. 12. 13.

persons inpossession of goods or of the documents of title thereto. Farquharson v. King. (1902) AC 325; Colonial Bank v. Cady, (1890) 15 App Cas 267; Mussammat Ram Kaur v. Raghbir Singh, (1920) 2 Lah LJ 516; Karala Valley Tea Co. v. Lachmi Narayan, (1939) 68 Ca LJ 94: 180 IC 141:(39) AC 14. Taylor v. Metropolitan Ry. Co., (1906) 2 KB 55. Newall v. Tomlinson, (1871) LR 6 CP 405. Holland v. Russell, (1863) 4 B&S 14. Holland v. Russell, (1863) 4 B&S 14 Ex parte Bird, (1851) 4 De G &S 273. Owenv. Cronk, (I895) 1 QB 265. East India Co. v. Tritton, (1824) 5 D&R 214.

370

.238

Chapter XAgency

payment over is no defence in the case of wrong-doers. An agent is also personally liable, notwithstanding that he may have paid the money over in good faith, if it was paid to him in regard to a contract made in his personal capacity.d

Money received by agent from a third person by fraud.-In a Bombay case an agent defrauded a third party of a sum of money and then used the money to discharge pro tanto a debt which he owed to the principal. The Court held that as the principal did not know, and had not the means of knowing that the money was wrongfully obtained, the third party had no right to follow the money and to require the principal to repay it.o

14. Ex parte Edwards, (1884) 13 QBD 717. 15.

Newall v. Tomlinson, (1871) LR 6 CP 405.

16.

Mororji v. Mulji RanchhodVed & Co., (1923) 48 Bom 20.

CHAPTERXI

OF PARTNERSHIP

(REPEALED) This chapter of the Act, comprising Ss. 239 to 266, has been repealed by the Indian Partnership Act, 1932, S. 73 and Sch. II.

SCHEDULE ENACTMENTS REPEALED Repealed by the Repealing and Amending Act, 1914 (10 of 1914), S. 3 and Sch. I]

Subject Index ACCEPTANCE

ADVERTISEMENT

absolute and unqualified,

must be, s. 7,

acknowledgment of electronic records, s. 8, P. 46 by performance of conditions, s. 8, p. 46

AGENT See principal and agent

AGREEMENT

by post, S. 4, p. 27

advantage received under, must be restored, s. 65, p. 200

by receiving consideration, s. 8, p. 48 Certainty of, s. 7, p. 42 Condition

41.1A

contract by, s. 2, p. 7, s. 5, p. 36, s. 8, p. 47

p. 42

Communication

1

ambiguous, 5. 29, p. 135 amounting to trading with enemy, s. 23, p. 108

of, s. 3, p. 23

precedent to, S. 6, p. 40

Conveyed by post but revoked by telegram subsequently, s. 4, p. 38

between parties at a distance, s. 4, p. 28

between parties on phone, s. 4, pp. 30-31

in a prescribed manner, s. 7, p. 45

between parties through electronic means,

in ignorance of offer, s. 8, p. 48

S. 4, p. 31

collateral to wagering agreement, s. 30, p. 140 consideration for, unlawful, s. 23, p. 98 contingent on impossible events, s. 33, p.1149

in insurance contract, S. 7, p. 45

lapse of time for, s. 6, p. 39 manner or mode ot, s. 7 &s. 8, pp. 42-47

mirror rule (must match terms of offer), S. 7, p. 42 must be by offerce, s. 13, p. 68

defined, s. 2, p. 6

must be within reasonable time, s. 6, p. 38

distinguished from contract, s. 2, p. 20, S. 10, p. 51

of proposal, s. 2, p. 7, s. 3, p. 23

entire or divisible agreements, s. 24, p. 115

of reward for information, s. 5, p. 36

for promotion of litigation in which one

of reward for information, s. 8, p. 48

has no interest of his own, s. 25, p. l10

revocation of, s. 4, p. 31, s. 5, p. 38

for stifling prosecution, s. 23, p. 109 fraudulent, s. 23, p. 106

silence amounting to, s. 3, p. 25 subject to

formalities, s. 7, p. 44

in restraint of legal proceeding, s. 28,

transmission of, by post, 5. 4, p. 29 usual and reasonable

p. 128

manner, s. 7, p. 45

in restraint of marriage, s. 26, p. 123

when complete, s. 8, p. 49

in restraint of trade, s. 27, p. 123

ACCORD &

SATISFACTION-S. 63,

interfering with course of justice, s. 23,

p. 198

p. 111

not to bid against one another at auction,

ACCOUNT RUNNING

s. 23, p. 113

appropriation of payments in case of,

public policy against, s. 23, p. 107

SS. S8-39, Pp. 189-190

tending to create interest against duty,

ACKNOWLEDGMENT

s.23, p.112

distinguished with promise to pay time

tending to create monopoly, s. 23, p. 113

barred debt, s. 25, p. 121

to do impossible act, s. S6, p. 183

to do lawful and unlawful acts, s. 57, p. 189 to procure marriage for reward, s. 23, p. 112

ADVANTAGE receivedunder voidagreement,s. 65,!>

to traffic in sale of public offices, s. 23,

P. 200

P.

[373]

13

374

Subject Index

BAILMENT-(contd.)

AGREEMENT-(contd.)

duty of bailee to return bailed goods,

void, s. 2, p. 5, s. 24, p. 115, s. 26, p. 123,

S. 160. p. 291

S. 28, p. 128, 8. 29, p. 135, s. 30, p. 136, S. 36, p. 183 when a

contract,

where unlawful .

duty to disclose faults in bailed goods, S. I50, p. 284

s. 2, p. 6, s. 10, p. 5 1

consideration in part, s. 24,

I15

AIRLINES-s.

finder of goods, right to reward, s. 168, p. 294

gratuitous, terminated by death of bailor or

151, p. 287

bailee, s. 162, p. 292

ALIEN ENEMIES

increase or profit, entitlement to, s. 163, p. 292 liability of bailee when goods bailed are

contract with, s. 23, p. 108

ALTERATION-

not returned, s. 161, p. 291

of contract, s. 62, p. 193

lien of bailee, particular and general,

of document, s. 62, pp. 194-196

S. 170, pp. 294-295

AMBIGUITY-

may exist without enforceable contract, S. 148, p. 283

agreement void for, s. 29, p. 135

ANTICIPATORY

s

BREACH-.39,

p. 161,

s. 73, p. 229

mixture with bailee's own goods, effect of, s. 155, p. 289

right to sell, s. 169, p. 294

APPROPRIATION OF PAYMENT-S.

59,

190

third party's right, s. 167, p. 293

BANKER'S

ASSIGNMENT-S.

2. p. 15

of contract, s. 37, p. 152 of contract and novation distinguished,

LIEN-s. 171. p. 296

BARRISTER & BID-S.4,

CLIENT-s.

188, p. 319

p. 30, s. 5, p. 36

s. 62, p. 194

BREACH OF CONTRACT-

ATTORNEYS

anticipatory, s. 39, p. 161, s. 73, p. 229

authority, s. 188, p. 319 lien, s. 171, p. 298

.

AUCTION auctioneer at, agent of vendor, s. 5, p. 36 auctioneer's

authority, s. 188, p. 320

mistake as to period

consequences of, S. 73, Pp. 225-226, s. 74,

of rent in, s. 23, p. 99

sale by, s. 5, p. 36

BAILMENTbailee's liability for unauthorised use, s. 154, p. 289

bailor not entitled to make bailment, duty to compensate bailee, s. 163, p. 292

bailor to pay expenses to gratuitous bailee, S. 1D8, p. 290

by several joint owners, s. 165, p. 293

care required by bailee, standard of, s. 151, P. 285, S, 152, p. 288

carrier, common law liability whether affected by contract act, s. 151, p. 286

236

contract for purchase of land, s. 73, p. 235 fraud, as, s. 17, p. 82 measure of damages for, s. 73, p, 225

BROKER authority of, s. 188, p. 320

commission for wagering agreement, s. 30, p.140 BURDEN OF PROOF-s. 12, p. 66, s. 16, p. 79,S. 65,p. 206, s. 151,p. 287

CAPACITY to contract, s. 11, p. 55

CARRIERby air, s. 151, p. 287

by railway, liability for loss of goods,

s.151,pp2.86-2811/, Hii

uAJE

consent in, s. 148, p. 283

by sea, s. 151, p. 287

definition of, s. 148, p. 281

whether contract act applies, s. 151, p. 286

delivery by bailee to one of the joint owners, s. 165, p. 293

delivery to bailee, how made, s. 149,

. 284

CAVEAT EMPTOR-S. 20, p.95 CHAMPERTYs.23, CHARGEs.2,

p. 13

p. 110

Subject Index CHARTER

375

COMPROMISE.2p5 1.1 ,7

PARTY-S. 20, p. 97

COERCION

cONCEALMENT-S. p. 276, 277

defined, s. 14, p. 7

effect of, on agreement, s. 19, pp. 88-89

concurreat, s. 51, p. 175

unconscionable agreements, not amounting

precedent, s. 31, p. 145, s. 51, p. 174

cONFLICT OF LAW-s. 9, p. 50 See also "Foreign Contract"

to, s. 23, p. 114

See also "Duress"

co-HEIRS-s.

17. p. 83, s. 143,

cONDITION

money paid under, s. 72, pp. 218, 222 prejudice, test for, s. 15, p. 72

COHABITATION-S.

0

CONSENT-

23, p. 107

ambiguity in expression s,113, p. 67 apparent, given under mistake, s. 13, p. 66

43, p. 167

cOLLATERAL AGREEMENT

coercion

in void agreement, s. 30, p. 140

excludes, s. 14, p. 70

consent and estoppel, s. 13, p. 68 defined, s. l13, p. 66

COMMISSION TO AGENT5. 216,

free, what is, s. 14, p. 70

. 344

obtained by fraud, s. I7, p. 83

cOMMUNICATION-

statutory one, s. 4, p. 33

by fax, e-mail or other electronic mode,

cONSIDERATION-

S. 4, p. 3

by opening shrinkwrap (plastic) packaging, s. 3, p. 2

electronic form, through, s. 3, p. 25 electronic record, acknowledgment of, s. 8, 46

absence of generally, avoids agreement, S. 25, p. 1T absence of, in law and in fact, difference between, s. 25, p. 117

act, must be at the desire of the promisor, S. 2, p. 10

instantaneous (phone or telex), s. 4, p. 30

adequacy in law, requirement of, s. 2, p. 18 defined, s. 2, pp. 5, 10

non-instantaneous (post, courier or telegram), s. 4, p. 28

doctrine of, s. 2, p. 10

ofacceptance of proposal, s. 3, p. 23 of acceptance of special conditions, s. 3,

..25

executed, s. 2, p. 16 executory, S. 2, p. 16

of proposal, s. 4, p. 28

forbearance to sue as, s. 2, p. 18

silence, through, s. 3, p. 25

forbearance to sue as, S. 25, p. 117

what is, S. 3, pp. 23-26 when complete, s. 4, p. 27

forbidden by law, s. 23, p. 98 illegal, s. 23, pp. 98, 103 immoral, s. 23, p. 106

COMPENSATION-

inadequacy of, s. 25, pp. 116, 122

for breach of contract, s. 73, p. 223

lawful and unlawful, s. 23, p. 99

for failure to discharge obligation

natural love and affection, s. 24, p. 116

resembling contract, s. 73, p. 223 for voluntary service, s. 25, p. 120

past, s. 2, p. 16

practical benefit as, s. 25, p. 118

liability ofparty preventing theother from performing his promise, s. 33 p. 176

p. 121

liability of pretended agent, s. 235, p. 363 obligation arising when agreement is discovered to be void or contract becomes void, s. 20, p. 97, s. 65, p.

200

sum named in contract when it is broken must be reasonable, s. 74, p. 238, 244,

245

to promisee when promisor knew the act impossible or unlawful, s. 56, p. 183, 189

COMPOUND

INTEREST-s.

promise to pay time bartred debt, s. 25,

74, p. 241

promise, S, 2, p.

promissoryestoppel, reconciliation with, S. 2, p. 19 prospective, s. 2, p. 16

public policy, opposed to, unlawful, s. 23,

P. 107 requirement of, in a "firm' offer, s. 5, p. 35 third party may furmish, s. 2, p. 10 total failure of, s. 54, p. 178 unreal, s. 2, p. 19

181HTO7

Subject Index

376 cONTINGENT

CONTRACT-s. 31,

p. 145

CORPORATIONcontract with, not under sent, s. 11, p. 64, s. 65, pp. 204-05

cONTRACTagreement

distinguished

form, s. 2, p. 20

agreement

when, s. 2, p.

5, S. 10, p. 51

ambiguous

contract, s. 29, p. 135

assignment of, s. 37, p. 152 becomes void, s. 2, p. 22

CORRESPONDENCE contract by, s. 4, pp. 27, 29

coVENANTrunning with land, s. 2, p. 15

contingent, S. 31, p. 145

CUSTOMS OF TRADE s. 211, p. 335

definition of, s. 2, p. 5 electronic contract, s. 3, p. 25

DAMAGES-

foreign, s. l, p. 4 formalities,

pp. 227-228, s. 74, p. 238

requirements of, s. 10, p. 52

formation, see "Formation of Contract" freedom to contract, s. 10, p. 51

infant's, s. 11, p. 55

consequences contemplated by parties at the time of contract, liability for, s. 13, p. 223

immovable property, breach of contract for

insanity as bar to, s. 11, pp. 63, 65 law

and requirement of actual loss in, s. 73,

governing, Ss. 1, p. 4

in anticipatory breach, s. 73, p. 229

oral, s. 10, p. >s place of, s. 4, p. 31, s. 9, p.

previous law, s. 1, p. 2

purchase, S. 73, p. 235 interest by way of, s. 73, p. 235

50

proper law of, s. 1, p. 4

quasi contract, ss. 68-72, pp. 208-219 rescission of, s. 62, p. l96

measure of, s. 73, p. 225, s. 236, p. 364

penalty, stipulations for increased interest by way of, s. 74, p. 240 reasonable compensation, s. 74, p. 245

when ready market ofgoods not available, s. 73, p. 228

stranger to, s. 2, p. 12

whether recoverable without actual loss?

time of, s. 4, p. 31

void contract, fallacy in, s. 2, p. 21

void, becomes, s. 2, p. 22

voidable, s.2, p. 5, 21, s. 19, pp. 88, 92, s. 22, p. 97, s. 53, p. 176

S. 73, pp. 227-228

DAMDUPAT-S.

37, p. 153

DEATH OF

wager, by way of, s. 30, p. 137

agent, s. 201, p. 331

with unconscionable, unfair and

bailor or bailee, s. 162, p. 292

unreasonable terms, s. 16, p. 76 writing,

requirement of, s. 10, p. 53

contracting party, s. 37, p. 151 offeree, s. 6, pp. 41, 40

principal, s. 201, p. 331

cONTRACTACT applicability

surety, s. 131, p. 263

of, s. 1, p. 2

corporations, contracts of, s. 11, p. 64, S. 65, p. 204

barred, promise to pay, s. 25, p. 121

introduction of English law in India, s. 1, P.

nativelaw of contract how far applicable, s. 1, p. 2

discharged when performance prescribed, S. 50, p. 173

its meaning in s. 25 of Act, s. 25, p. 122

not retrospective, s. 1, p. 5, saving of usage or custom of trade, s. 1,

P.3

payment of several and distinct, s. 59, p. 190

payment of, incurred by minor, s. 11, p. 62

scope of, s. I, p. 2

usage of trade not to be inconsistent with Act, 5. 1, p. 3

usageor custom of tradereferred in act distinct from general customof merchant, s. 1, p. 3

CONTRIBUTION-S.

DEBT

DEL CREDERE DELAY-.

188, p. 320,

5, p. 179, $.73, p. 233

DELIRIUM-s.

43, p. 167

AGENTs.

S. 211, p. 337

11, p. 65

Subject Inder

377

DELIVERYduty of bailee for bailed goods, s. 160, P. 29 late, s. 73, p. 229 place of, s. 49, p. 172

promisee tohave reasonable opportunity to see in offer, to pertorm or tender, S. 38, Pp. 154

DEPOSIT for performance of contract, s. 74, p. 244

onagreement for purchase of immovable property, s. 74, p. 243 Suit to recover, s. 30, p. 143

EQUITY between agent and third party, s. 232, p. 361

in gross inadequacy of consideration, s. 25, P. 122

ERROR as to person, s. 13-14, pp. 68-69 fundamental, s. 13, p. 67

ESTOPPELs.2.p.

15, s. 11, p. 58, s. 13,

p. 68, S. 234, p. 363 See also "Promissory Estoppel"

EXECUTED

cONSIDERATION-S.

DETENTIONright of, s. 168, p. 294, s. 170, pp.

294-296,

EXECUTORY

CONSIDERATION-s. 2,

P. l6

S. 171, pp. 296-299

DILIGENCE

FACTOR-

required where consent was obtained by

misrepresentation or silence amounting to fraud, s. 19, pp. 88-91 standard of, required from a

bailee, s. 152,

P. 288

authority of, s. 171, p. 297

for sale

FAMILY

goods, s. 171, p. 297

ARRANGEMENT-s.2, p. 14

FIDUCIARY

DISCHARGE OF CONTRACT by alteration of written contract, s. 62, PP. 194-196 by new agreement or novation, s. 62, p.194

RELATIONSHIP-s.

16,

p. 75

FINDER OF GOODSas bailee, s. 148, p. 283

hisright oflien,s.168,p. 29

ite.)

his right to sell, s. 169, p. 294

impossibility of performance by act of parties to contract, s. 53, p. 177 performance and discharge, s. 37, p. 150

his right to sue for reward,s. 168, 1/0 p. 294

FORBEARANCE TO SUE S.25, p. 117

DISCLOSURE by bailor of faults in bailed goods, s. 150, P. 284 failure in certain kinds of facts, s. 17, p. 83

DOCUMENTS

FORBIDDENBYLAW . 23,pp.100, 102 FOREIGN

a CONTRACT-.

1, p. 4

FOREIGN LAW-s.21,p. 98

alteration of, s. 62, p. 194 of title to goods, s. 178, p. 304

FOREIGN

PRINCIPAL-S.

230, p. 357

FORMATION OF CONTRACT-s. 20,

DRUNKENNESS contract while in state of, s. 12, p. 65

p. 95

formation through electronic records, e-mails and website, s. 3, p. 25

DURESS s. 15,pp. 71, 72 economic duress, s. 15, p. 73

shrink-wrap license, s. 3, p. 27

performance of existing duties as, s. 25,

theory of formation, s. 2, p. 6,

p

FRAUD

See also "Coercion

and means of discovering truth, effect on

EARNEST MONEY distinguished from security

agreement, s. 19, p. 89

deposit, s. 74

breach of contract as, s. 17, p. 83 consent procured by, s. 14, p. 70, s. 16,

.244 forfeiture of it,s. 74, p. 243

.2

definition of, s. 17, p. 82

ENEMY

2,

. 16

ALIEN.

11, p. 65, s. 23, p. 108

delay in payment as, s. 17, p. 84

378

Subject Index

FRAUD-(contd.)

HINDU

effect on agreement,

s. 19, p. 88

LAWs.

HOLDING

fraudulent consideration or object of

I,p. 1, s. 23, p. 105

OUT-s. 237, p. 365

HUSBAND& WIFE

agreement, s. 23, pp. 98, 106

fraudulent representation when irrelevant,

as agent of her husband, s. 187, p. 317

authority ofhusbandgenerally required,

S. 19, p. 92

misrepresentation,

relation of, s. 17, p. 84

S. 11,p. 63

but may pledge his credit for necessaries,

non est factum, relation of, s. 18, p. 88

non-disclosure of certain kinds of facts, S. 17, p. 85

want of reasonable beliefas evidence of, s. 18, p. 86

s. 11, p. 63

undue influence between, s. 16, p. 75

IDENTITYerTor as to, s. 13, p. 67

FRUSTRATION OF CONTRACT

ILLEGAL

and rights of promisee when promisor knew impOssibility or act as unlawful, S. 56, p. 183, S. 57, p. 183

CONTRACT-S.

ILLEGALITY-s.

IMMORAL-s.

by total or partial prohibition, s. 56, p. 185 effects, s. S6, p. 188

instances of frustration and no frustration, s. 56, p. 188

23, p. 100

23, pp. 98, 100, 114

23, pp. 99, 106

IMPOSSIBILITYagreementto do impossible act is void, s. 56, p. 183

arisingfrom act of party to contract, s. 56, p.186

under sections of IndianContract Act,

s. 56,p.183

commercial, s. 56, p. 187 legal, s. 56,p. 186

FUNDAMENTAL

of contract, s. 56, p. 183 of performance, some matters as evidence,

eTor, s. 13, p. 67 matter, s. 29, p. 136

s. 56, p. 184

GAMINGSee Wager

strike as, of performance, s. 56, p. 185 ubsequent effect of, s. 56, p. 184

GOVERNMENT

IN PARI

agent of, s. 196, p. 328

DELICTO-S. 23, p. 104, s. 65,

P. 202

as principles, s. 230, p. 359

INDEMNITY

GUARANTEE by misrepresentation or concealment, S. 143, p. 276

considerationfor, s. 127,p. 255

7

continuing, s. 129, p. 260, s. 130, p. 260, s. 131, p. 263

contract of, defined, s. 126, p. 253 contribution between co-sureties, s. 146,

279

contract of, defined, s. 124, p. 250 distinguished form guarantee, s. 126,

254 liability of indemnifier, s. 124, p. 250 ir H1 right of indemnity holder or promisee in contract of,S. 125, p. 251

surety's right of, against principal debtor, S. 145, p. 277

death of suretyand continuingguarantee, S. 131, p. 263

discharge of principal debtor, s. 134, p. 267

implied indemnity, by principal debtor, s. 145, p. 277

obtained by concealment or

INFANTSee Minor

INNKEEPER position with guest, s. 151, p. 287

INSANITY-See lunatic

misrepresentation invalid, s. 143, p. 276 parties to contract of, s. 126, p. 253

INSOLVENCY

surety's extent of liability, s. 128, p. 257

INSURANCE CONTRACT-

surety's right ofsubrogation,ss. 140-141, Pp. 272-276. under Indian&

English law, s. 126, p. 255

where limited in amount, s. 128, p. 257

discharges contract, s. 37, p. 153

acceptance in, ss. 7-8, pp. 45-47 and wagering agreement, s. 30, p. 137

Subject Index

379

LIMITATION-

INTEREST as damages, s. 74, p. 240

or delay in undue influence, s. 16, p. 82

excessive,disallowed in unconscionable bargain, s. 16, p. 81

DAMAGES.74,

LOTTERY-s.31,

stipulations for, s. 74, P. 240

p. 238

p. 144

LUNATIC-

INTERPRETATION of agreement, s. 9, p. 49, s. 29, p. 135

JOINT PROMISEES s. 38, p. 157,s. 44, p. 168

burden of proof, s. 12, p. 66 contract of, s. 12, p. 65 effect of proposer's insanity, s. 6, p. 38 sound mind essentials, s. 12, p. 65

JOINT PROMISORScontribution between, s. 43, p. 167 judgment, unsatisfied effect, s. 43, p. performance by, s. 43, p. 167 rateable distribution on default,

MAHOMEDANLAW 165

release of one joint promissor effect on other, s. 44, p. 168

KACCHIADAT

CONTRACT1AVO 9

KHARCHIPANDAN-S.

2, p. 14

age of, s. 11, p. 55

RATEs. 73, p. 227

MARRIAGE agreement in restraint of, s. 26, p. 123

LAW COMMISSIONrecommendation on, s. 15, p. 72

communication how made, recommendation

23, p. 110

MAJORITY MARKET

incident,s. 211, p. 338

1, p. 1, s. 11,

p. 57, S. 23, p. 105

MAINTENANCE-S. s. 43,

. 167

coercion,

LIQUIDATED

on, s. 3, p. 23

completion of acceptance, recommendation on, s. 5, p. 34, s. 8, p. 49

contract to procure, for reward, in India, S. 23, p. 112

MARRIAGEBROCAGE CONTRACT S. 23, p. 112

MARRIED wOMAN contract with, s. 11, p. 63

Supply ot necessaries to, s. 187, p. 317

consideration, recommendation on, s. 2, p. 20

privity of contract, recommendation on, S.2, Pp. 16

promissory estoppel, recommendation on, S.2, p. 20 restrain of trade, recommendation on, s. 27, P. 128

MAYOR'S cOURT . 1,p.1 MENTAL INCAPACITY See "Lunatic" MERCANTILE

AGENT-s.

178, p. 304

MERCANTILE CONTRACTLAWFULLY-s.

interpretation of, s. 29, p. 136

70, p. 216

MERCANTILE USAGEs. 1,p.3,s.42,

LEASE s. 56, p. 186

p. 164

minors, to, s. 11, p. 61

LEGAL-IILLEGALe)11AAl See Severability LIEN

2703b1r

general and particular, s. 170, pp. 295-296

of agent,s. 221, p. 348 of attorneys-solicitors, S. 171, p. 298 of bailee, s. 170, p. 295

of banker, s. 171, p. 296 of of of of

factor, s. 171, p. 297 finder of goods, s. 168, p. 294 pawnee, s. 173, p. 301, s. 174, p. 301 policy broker, s. T71, p. 296

of wharfinger, s. 171, p. 298

MINOR agreement of, s. 11, p. 56 cannot both repudiate and retain advantage acquired under agreement, . 64, p. 199

capacity to contract by law of domicile,

S. T1,p. 56 debt incurred by, paynment of after. majority, s. 11, p. 62 estoppel, s. 11, p. 58

fraudulent representation of age by, s. 11, p.S57 gift to, s. 11, p. 61 insurance, s. 11, p. 6l

380

Subject Index

MINOR-(contd)

MORTGAGE-(contd.)

lease to, s. 11, p. 61 mortgage, S. 11, pp. 56,.

contributions amongst mortgagors, s. 43, p. 168

necessaries, liability of, s. 11, p. 63, s. 68,

discharge of, s. 38, p. 157

. 209

ratification by, s. 11, p. 62 specific performance, s. 11, p. 62

surety bond, s. 11, p. 61

MISREPRESENTATION-

. 367

.

of material fact, s. 18,

consent obtained by, s. 14, p. 70, s. 18, p. 85

duty to disclose, uberrimae fidei, s. 18,

87 effect of, on agreement, S. 19, p. 88 innocently, S. 18, p. 86

means of discovering truth ofstatement, s. 18, p. 89

means of discovering truth of statement, s. 19, p. 89

of fact and law, s. 18, p. 87 relation of, to fraud, s. l8, pp. 85, 88, s. 238, p. 367

NATURAL LOVE & AFFECTIONS. 25, p.118 11, p. 63, s. 68, p. 209

NEGOTIABLE INSTRUMENTS-S. 25, P. 118, S. 50, p. 173, s. 62, p. 196

NON-GRATUITOUSACT obligation ofperson enjoying benefit of, NOTICE TO

AGENT-s. 229, p. 354

NOTICE TO

PRINCIPAL-s. 229, p. 354

NOVATION-S. 62, p. 193

distinguished from assignment, s. 02,

.

194

OFFER and acceptance, English law, s. 4, p. 30

conditional offer, revocation of, s. 3, p. 34

effect of refusal of offer to perform, s. 39,

irrelevant, s. 19, p. 92

p. 157

firm offer, requirement of consideration,

MISTAKE

S. 5 p. 35

ambiguity, s. 13, p. 67 apparent consent given under,

firm offer, revocation of, s. 5 p. 34 s. 12, p. 66

as to attributes, s. 13, p. 69 as to essential fact, s. 13, p. 67, s. 20,

PP.94,95 as to fundamental

1,p. 2

s. 70, p. 212

definition of, s. 18, p. 85

when

LAWS.

NECESSARIES-.

by agent in course of business, s. 238, by non-disclosure

NATIVE

intention to, s. 2, pp. 7-8 invitation to offer, difference between, s. 2,

. refusal of, s. 6, p. 41

error, s. 13, p. 67, s. 20,

P.

as to law, s. 21, p. 98 as to nature of transaction,

revocation of, s. 4, pp. 29, 30, s. 5, p. 33, s. 6, p. 39

s. 13, p. 67

as to subject matter, s. 14, p. 69

common, s. 20, p. 95

fraud, misrepresentation and non est factum, relation ot, s. 13, p. 67 in formation of contract, s. 14, p. 69 mutual, s. 20, p. 94

non est factum, doctrine of, s. 13, p. 67 nullification and negativing of consent, difference between, s. 20, pp. 94-9S

payment by, liability of payee, s. 72, p. 218 recovery of money paid under, s. 72, p. 218

MONEY PAID under mistake, s. 72, p. 218

MORTGAGE by minor, s. 11, pp. 56, 59

relation of, to proposal, s. 2, p. 7

standing, s. 5, p. 35

to perform, must be unconditional, s. 38, p. 154

PAKKI ADAT CONTRACT

14.3.1

incidents of, s. 30, p. 140, s. 211, p. 337

PARDA-NASHIN WOMEN contract with, s. 16, p. 79

-

41.1

fn122

meaning of, s. 16, p. 80

PAWN-See Pledge

PAYMENTappropriation of (several and distinct debt), S. 59, p. 190

delay in, extent of liability, s. 73, p. 233

made for another, recovery of, s. 68, p. 208 under mistake, s. 72, p. 218

381

Subject Index

POST OFFICE

PENALTY and liquidated damages distinguished,

as agent, s. 4, p. 29, s. 50, p. 173

s. 74, p. 238

POSTING-

compound interest when by way of

acceptance, s. 4, p. 28

penalty, s. 74, p. 241 interest increased, s. 74, pp. 241,

offer, revocation, s. 4, p. 27

240

PRINCIPAL AND AGENT-

reasonable sum paid as earnest money cannot be, s. 74, p. 243

agency, how constituted, s. 187, p. 313

stipulation for, whether by way of penalty, s. 74, p. 242

agent defined, s. 182, p. 311

agent's authority in emergency, s. 189, p.3321

PERFORMANCE

agent's duty to communicate, s. 214, p. 342, s. 229, p. 355

ability and willingness to perform, s. 38,

p.155, s. 51, p. 175

agent's duty to render accounts, s. 213, p. 340 agent's ostensible authority, s. 237,p. 365

breach before time of, s. 39, p. 161

by joint promisors, s. 43, p. 165 death of party, effect on, s. 37, p. 151 default in failure to perform, s. 51, p. 175

failure to, in time, s. 55, p. 178

impossibility created by act of party, s. 53, p.I177 in reasonable time, s. 55, p. 182 manner of, for discharge of debt, s. 50,

agent's position with sub-agent, s. 193, p. 324 alternative remedies against, when both are liable, s. 233, p. 362 authority of agent, extent of, s. 188, p. 318

bribe received by agent, s. 213, p. 341, s. 238, p. 369

p. 173

compensationforrevocationof agency for

not obligatory, when rescission or

a period of time, s. 205, p. 333 consideration for, s. 185, p. 313 coupled with interest, s. 202, p. 331 del credere agent defined, s. 211, p. 337 delegation of authority by agent, s. 190, p. 322

alteration agreed to, s. 62, p. 193

of personal contracts, s. 40, p. 162 of reciprocalpromises, s. 51, p. 174 order of performance, s. 52, p. 176 place for, s. 49, p. 171

promisee accepting, from a third person, s. 41, p. 163

dues of agent, right to retain principal's moneys, s. 217, p. 345

remission of, s. 63, p. 196 simultaneous, s. 51, p. 174

duty ofagent in conduct ofbusiness,

time for, s. 49, pp. 171, 172

duty of principal to agent to give account,

PLEADERs.

S. 211, p.335 s. 213, p. 341 excess of authority, s. 237, p. 367 exercise of authority, s. 203, p. 332 express and implied authority, s. 186,

188, p. 319

PLEDGE by joint owner in possession, s. 178-A, p. 308

.

313 forfeiture of commission for misconduct,

by mercantile agent, s. 178, p. 304

S. 216, p. 344

by person in possession under a voidable agreement, s. 178-A, p. 308 definition of, s. 172, p. 299 lien and mortgage, compared with, s. 172, P. 300 lien of apawnee, s. 174, p. 301, s. 173, p. 301 pawnee's right on pawonr's default, s. 176,

302 pawnee's right to receive extraordinary

implied warranty ofauthority (liability of pretended agent), s. 235, p. 363

indemnity, agent's right of, for acts in course of business, s. 222, p. 350 lien, agent's, for commission and disbursementson principal's property, s. 217, p. 345, s. 221, p. 348

expenses, s. 175, p. 302

redemption of pawned goods, s. 178, . 304

where pawnor has a limited interest, s. P. 309

fraud on principal, s. 229, p. 355 husband and wife, wife's implied authority, s. 187, p. 317

179,

lien, of attorney, s. 188, p. 319 lien, of auctioneer, s. 188, p. 320 lien, of broker, s. 188, p. 320 lien, of factor, s. 188, p. 320

Subject Index

382

PROFITS-

PRINCIPALAND AGENT

loss of on breach of contract, s. 73, p. 233

lien, of pleader, s. 182, p. 312 lien, of shipmaster, s. 188, p. 320

PROMISE

notice to agent, s. 229, p. 354

personal liability of agent on contract, s. 230, p. 356

personal liability of agent on contract, S. 253, p. 362

principal defined, s. 182, p. 311 ratification, ss. 196-200, Pp. 326-329

an accepted proposal, s. 2, p. 5

consideration, s. 2, p. 9 definition of, s. 2, p. 5

existing duty, performance of, s. 25, p. 118 express-implied,

s. 9, p. 49

Joint promisees, s. 44, p. 168

remuneration, ss. 217-220, pp. 345-348

mutual

retainer agent's right of, s. 217, p. 345

reciprocal promises, s. 2, pp. 5, 18, s. 9, p. 49, s. 51, p. 174

revocation of agent's authority, s. 201, 329 sub-agent,

employment of, s. 190, p. 323

sub-agent, his position with agent, s. 193, p. 324 sub-agent, lien of, s. 221, p. 348

sub-agent, termination of his authority, s. 210, p. 335

promises, s. 2, P. 18

to subscribe charity, s. 2, p. 11

PROMISOR-PROMISEE defined, s. 2, p. 5 requirement of, s. 2, p. 8

right of promisee to compensation when promisor knew act impossible or unlaw ful, s. 56, p. 183

substituted agent, s. 194, p. 325

undisclosed principal right of, s. 230,

PROMISSORY ESTOPPEL consideration,

p. 358, s. 231, p. 360

relation with, s. 2, p. 19

whether agent liable when agreement is

doctrine in India, s. 2, p. 19

discovered to be void, s. 65, p. 205 who may be an agent, s. 184, p. 313 who may employ, s. 183, p. 313

Law Commission

recommendation, s. 2,

p. 20

PROPOSAL-SeeOFFER also communication of, s. 3, p. 23

PRINCIPAL AND SURETY and see also Guarantee

meaning, s. 2, p. 5

co-debtors, suretyship

revocation of, how made, s. 5, p. 33

contribution p. 279

between, s. 131, p. 263

between co-sureties, s. 146,

death and continuing guarantee, s. 131,p. 263

dischargeof surety,D

n

principal debtor s. 135, p. 269

to

discharge of surety, by laches of creditor, s. 134, p. 267

discharge of surety, byrelease of principal debtor, S. 134, p. 267

discharge of surety, by variation of contract, s. 133, p. 264

forbearance to sue principal debtor, surety not discharged, s. 137, p. 270 implied indemnity of surety, s. 145, p. 277 liability of surety, extent of, s. 128, p. 257 surety defined, s. 126, p. 253

surety'sSr tof subrogation, s. 140, p. 272

PUBLIC OFFICER contract with, s. 196, p. 328

ratification of his acts, s. 197, p. 328

PUBLICOFFICE-S2.3,P; "°aG

A19

PUBLIC POLICYagreement opposed to, s. 23, pp. 99, 107,

S. 21, p. 126 cases involving a foreign element, S. 23, 108

freedom of contract, upholding ofas,S. 23, p. 108

in restraint of trade, s. 27, p. 126 ncapable of definition, s. 23, p. 107 unconscionable or unfair agreements, s. 23,

p.1I14

what itincludes,s.23, p. 107e

tori

QUANTUM MERUITPRIVITY OF

CONTRACT-s.2, p. 12,

S. 230, pp. 358-359

compensation, s. 65, p. 204, s. 70, p. 215 remuneration, s. 219, p. 347

acquisition of rights by third party, s. 2,

p.12 imposition of liability upon third party S. 2, p.9

QUASI

CONTRACTS, Ss. 68-72, pp. 208-219

RAILWAYcarriage by, s. 151, p. 286

383

Subject Inder RECIPROCAL PERFORMACE-s. 51-54, PP 174-178

RECORDERS

RETAIN right to, s. 174. p. 301, s. 175, p. 302,

COURT-S

S.217.p. 345

I.p. 1

REVOCATION

RECTIFICATION-S. 20,p. 6

ejSTT1Q/AH1L1

notice of, s. 6, p. 38 of acceptance, s. 4, p. 31, s. 5, pp. 33, 38

REFUND of benefit, s. 65. p. 205, s. 183. p. 188 of taxes collected in error, s. 72. p. 220

of agent's authority, s. 201, p. 329 of offer, s. 4, p. 30, s. 5. p. 33, s. 6. p. 39

refusal and revocation, difference between,

REFUSAL of offer, s. 6, p. 41

S. 6, p. 41

revocation and refusal, difference between,

REWARD contract as to, s. 5, p. 36, s. 18, p. 47

s. 6,p.4lA

right to, s. 5, p. 36, S. 18,

REJECTION

P.2t2

RIGHT TO SUE-

See "Refusal"

sovereignstateasprincipal,S. 4,

RELEASE OF-

p. 359

one joint promisor, s. 44. p. 168 SEA

REMISSION OFperformance, s. 63, p. 197

CARRIER-s.

SEAL-s.

REPUDIATION

151, p. 287

65, p. 204

SEVERABILITY

refusal to pertorm, s. 39, p. 157

alternate promises, both legal and illegal, s. 58, p. 189

RESCISSION agreement to rescind, eftfect of, s. 62,. p. 193

based on statutory language, "to that

anticipatorybreach giving promisee right

blue pencil rule, s. 27, p. 127

to rescind, S. 39, p. 16l

extent, S. 27, p. 127, S. 28, p. 134 general rule as to, s. 24, p. 115

election to rescind, s. 64, p. 199 loss of nght to, s. 19, p. 91 of voidable contract, s. 19, p. 92, s. 64, p. 199

reciprocal promises to do things legal and also other things illegal, s. 57, p. 189

téxtual divisibility and substantial severability, difference between, s. 27,

party rightfully rescinding entitled to 16 N

.127

compensation, s. 75, p. 247 SHIP

RESTITUTIONOFadvantage or benefit, s. 64, p. 199, s. 65,

p. 205

amendment to S. 28 in 1997, s. 28, p. 132

SOLICITORauthority of, s. 188, p. 319

etfect, s. 28, p. 128

lien of, s. 171, p. 298

128

limitation of time as, s. 28, p. 132

RESTRAINT OF MARRIAGE-s.

soVEREIGN

26,

. 123

RESTRAINTOF TRADE-

SPECIFIC PERFORMANCE-S. S. 20, p. 96, s. 73, p. 225

Wager

exceptions, s. 27, p. 126

operating beyond contractual

STATES. 230, p. 359 19, p. 92,

SPECULATIVE TRANSACTION-See

effect, s. 27, p. 123

term, s. 27,

125

operating during contractual term, s. 27, what is, s. 27, p. 124

SKILL of principal, s. 225, p. 352 want of, s. 212, p. 339, s. 225, p. 352

DINGS

p.1125

188, p. 320

of agent, s. 212, p. 339

RESTRAINT OF LEGAL PROCEE-

exceptions, s. 28, p.

MASTERs.

STIFLING PROSECUTION agreement of, s. 23, p. 109 STRIKE-S.

56. p. 185

384

Subject Index

SUB-AGENT

See Principal and Agent

SUBROGATION-S.

140, p. 273

TEJI MANDI TRANSACTION-S. 30, P. 139

4, p. 28

TELEPHONES. TELEX-S.4,

to, s.23,p.114 unconscionable

bargains, s. 16, p. 81

AGREEMENTSS.

UNSOUNDNIESSOF MIND

4, p. 30

USAGE OF TRADE

38, p. 154

revocation

of, s. 5 p. 36

23, p. 99

s. 12,p. 65

USAGE OF TRADES. 1, p.3

p. 30

TENDER-s.

USAGE OR

S. 190, p. 322

CUSTOM-S.

I, p. 3

VARIATION OF CONTRACTS. 62,

sale by, s. 5 p. 36

TERMSIMPLIED . 27,p.125,s.29 p. 136

THIRD PARTY5. 2, p. 12, s. 232, p. 360 See also "Privity of contract"

TIME

p. 193

voIDABLE CONTRACTand void,

distinguished, s. 2, p. 21

at option,s. 53, p.17 consequences ofrescission of voidable contract, s. 64, p. 199

failure to perform

in, s. 55, p. 178

for performance of contracts, s. 49, p. 171

limitation of, to enforce contractual rights, performance in reasonable time, s. S6, 182

when not of essence of contract, s. 55, p. 179 when of the essence of the contract, s. 55, p.1179

WITH

effect on party to agreement, s. 2, p. 6

mistake of fact, contract not voidable, S. 22, p. 98

pawnor in possession of pledged goods

S. 28, p. 132

TRADING

unconscionable agreements, not amounting

UNLAWFUL

TELEGRAM-s.

.

UNDUE INFLUENCE-(contd)

ENEMY-s. 23, p. 108

TRUST-S.2, p. 13

under a voidable contract not rescinded

at the time of pledge, s. 178-A, p. 308 when, s. 2, p. 21

where party's consent procured by misrepresentation or by silence amounting to fraud when means of discovering truth with ordinary diligence existed, s. 19, p. 39

WAGER

UBERRIMAE FIDEI-s. 18,p. 87y

broker's

commission on, s. 30, p. 141

collateralagreement,S.30, p.

UNCERTAINTY of agreement, s. 13, p. 69, s. 29, p. 136 of terms, s. 13, p. 69, s. 29, p. 136

UNDUE INFLUENCE-

14011

defined, s. 30, p. 137 deposit paid in respect of, s. 30, p. 141 deposit paid in respect of, s. 30, p. 141 deposit paid in respect of, s. 30, p. 143

burden of proof, s. 16, p. 79 defined, s. 16, p. 74

differences, cases on gambling in, s. 30,

effect on agreement, s. 19-A, p. 92

differences, cases on gambling in, s. 30,

P. 138

equitable doctrine, s. 16, p. 75

option to affirm or avoid once made is final, s. 19A-20, pp. 93-94

p. 141

wagering contract, award on, void, s. 30, 143

wagering policy, s. 30, p. 141

pardanashin woman, s. l6, p. 79

WAIVER

parent-child, s. 16, p. 76

of performance, s. 51, p. 175 of right to rescind, s. 40, p. 162

solicitor, gift to, s. 16, p. 76 spiritual adviser, s. 16, p. 76

trustee, gift to, s. 16, P. 1

9t

Mulla's Indian Contract Act still stands as the classic textbook on contract law

even 95 years after the publication of the first edition and continues to provide clarity on what is an increasingly complex subject. The book lays out the Indian Contract Act (Act 9 of 1872) supplemented by detailed section wise commentary

and suitable case laws and citations. Anyone involved with the law of contract can turn to Mulla secure in the knowledge that it covers all the key areas of law by way of a detailed and in-depth analysis. It will be an essential reading for any

student of contract law and a valuable first point of reference for

practitioners

and academics.

New to the Edition This edition presents an authoritative, revised and fully updated account of the Indian Contract Act (Act 9 of 1872) Includes discussion on important recent cases and legislation, like the Indian Contract (Amendment) Act, 1997, the Information Technology Act, 2000 and the Banking Laws (Amendment) Act, 2012 Corresponding

developments

in

English

law

have

also

been

discussed and thoroughly analyzed.

The author has commented on recent controversies in contract law for instance the "restraint of trade" cases, the IT Act 2000, the 1997 amendments etc.9 66Unlike the other books in the market, it has a clear and lucid style such that it can be read and understood easily, and perhaps this is a reason why this is the only book on Indian Contract law which has been routinely cited by the Supreme Court and the various High Courts.99

Anirudh Wadhwa is a graduate of the University of Oxford and the National Law

School of India University, Bangalore. Anirudh was the editor of the 13th edition of Mulla's Indian Contract Act and also the co-Chief Editor of the 5th edition of Bachawat's Law of Arbitration and Conciliation, both published by LexisNexis. He has previously

practiced in London and Tokyo and he presently

practices in

the areas of commercial litigation and arbitration at Wadhwa Law Chambers in

New Delhi, India.

ISBN 978-93-5143-636-2

LexisNexis 595/