The Indian Contract Act, 1872
- Short title.
This Act may be called the Indian Contract Act, 1872.
Extent, Commencement. -It extends to the whole of India 1[except the State of Jammu and Kashmir]; and it shall come into force on the first day of September 1872.
Saving.- 2[* * *] Nothing herein contained shall affect the provisions of any Statute, Act or Regulation not hereby expressly repealed, nor any usage or custom of trade, nor any incident of any contract, not inconsistent with the provisions of this Act.
- Subs. by Act 3 of 1951, sec. 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- The words “The enactments mentioned in the Schedule hereto are repealed to the extent specified in the third column thereof, but” rep. by Act 10 of 1914, sec. 3 and Sch. 11.
- Interpretation -clause
In this Act the following words and expressions are used in the following senses, unless contrary intention 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 a person to whom the proposal is made, signifies his assent thereto, the proposal is said to be accepted. A proposal, when a accepted, becomes a promise;
(c) The person making the proposal is called the “promisor”, and the person accepting the proposal is called “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, forming the consideration for each other, is an agreement;
(f) Promises which form the consideration or part of the consideration for each other, are called reciprocal promises;
(g) An 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;
(j) A contract which ceases to be enforceable by law becomes void when it ceases to be enforceable.
At the desire of the promisor
Suit would lie for the recovery of a promised subscription where on the faith of the promisee, the promiser entered into a contract with a contractor; Kedarnath Bhattacharji v. Gorie Mohomed, (1886) ILR 14 Cal 64.
Consideration and motive
A promise founded on motive of generosity, prudence and natural duty is a promise without consideration; Abdul Aziz v. Masum Ali, (1914) ALJR 36 All 268.
A contract comes into existence only when all the terms and conditions have been finalised. If the facts of a particular case show that execution of a written contract was a condition precedent for coming into force of the contract between the parties, then it cannot be said that any concluded contract in absence of a written contract being executed has come into force between the parties; J.K. Industries Ltd. v. Mohan Investments and Properties Pvt. Ltd., AIR 1992 Del 305.
Proposal: Offer and statement of intention
The proposal when accepted gives rise to an agreement. It is at this stage that the agreement is reduced into writing and a formal document is executed on which parties affix their signature or thumb impression so as to be bound by the terms of the agreement set out in that document. Such an agreement has to be lawful; Tarsem Singh v. Sukhmider Singh, AIR 1998 SC 1400.
The consideration should be something which not only the parties regard but the law can also regard as having some value. It must be real and not illusory, whether adequate or not; Chidambara v. P.S. Renga, AIR 1965 SC 193: (1966) 1 SCR 168.
When Strangers may not sue – the general rule
A person not a party to a contract can sue on it; Venkata Chinnaya Rau Garu v. Venkataramaya Garu, 1881 ILR 4 Mad 137.
Creating legal relations
If there being no agreement, there was no breach of contract committed by the respondent and also that since there was no breach of contract, the petitioner cannot retain or forfeit the earnest money deposited by the respondent by way of penalty; State of Tripura v. Bhowmik & Co., AIR 2004 Gau 21.
Chapter I – Of the Communication, Acceptance and Revocation of Proposals
- Communication, acceptance and revocation of proposals.
The communication of proposals, the acceptance of proposals, and the revocation of proposals and acceptance, respectively, are deemed to be made by any act or omission of the party proposing, accepting or revoking, by which he intends to communicated such proposal, acceptance or revocation, or which has the effect of communicating it.
Communication of acceptance
An offer is accepted when the acceptance is communicated. The communication must be made to the offeror and a communication of acceptance made to a third person creates no contract; Felthouse v. Bindely, (1862) 6 LT 157.
Exposure of goods: offer or not
The Exposure of goods by a shopkeeper does not amount to an offer to sell. On picking the goods, it is an offer by the customer to buy, and sale is not effected until the buyer’s offer price is accepted by the shopkeeper; Pharmaceutical Society of Great Britain v. Boots Cash Chemists (Southern) Ltd., (1952) 2 QB 795.
Offer to the whole world
Though an offer may be made to the whole world, a contract can arise only by acceptance of the offer. Hence knowledge of the terms of the offer is essential for acceptance. Thus where a person sent his servant in search of his missing boy and subsequently offered a reward to any one who would find the boy, the servant, on finding the boy, could not claim the reward, as his search for the boy could not be regarded as a consideration for the promise of reward; Lalman Shukul v. Gauri Dat, (1913) 11 AQLJ 489.
Unaccepted offer creates no right or obligation
A mere making of an offer does not form part of the cause of action for damages for breach of contract which has resulted from the acceptance of the offer. Ordinarily it is the acceptance of the offer and intimation of that acceptance which results in a contract; Bhagwan Das Goverdhan Das Kedia v. Girdhari Lal & Co., AIR 1966 SC 543.
- Communication when complete
The communication of a proposal is complete 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.
(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.
(c) A revokes his proposal by telegram.
The revocation is complete as against A when the telegram is despatched.
It is complete as against B when B receives it.
B revokes his acceptance by telegram. B’s revocation is complete as against B when the telegram is despatched, and as against A when it reaches him.
Communication of proposal and acceptance
The advertisement of the Corporation for tenders was an ‘invitation to make an offer’. The tenders when submitted to the Corporation were ‘offers’ or ‘proposals’ in terms of section 4 of the Act and the ‘communication’ of ‘proposal’ or ‘offers’ was complete when received by the Corporation. In terms of section 4 of the Act, the ‘acceptance’ was not complete as it was never made, and never put into transmission. The revocation within the meaning of section 4 was complete as it was received and within the knowledge of the Corporation. The offers on tenders were revoked before it was accepted. The contract never saw the light of the day; Shyam Biri Works Pvt. Ltd. v. U.P. Forest Corporation, AIR 1990 All 205.
Where an offer is made by a method of instantaneous communication like telex, the contract is only complete when the acceptance is received by the offerer, and the contract is made at the place where the acceptance is received; Entores Ltd. v. Miles Far East Corporation, (1955) 2 All ER 493: (1955) 2 QB 327: (1955) 3 WLR 48.
Contract by correspondence: Antecedents and subsequent negotiations
The communication of acceptance of the highest bid is necessary for completed contract; Haridwar Singh v. Begum Sumbrui, AIR 1972 SC 1942.
Dispensing with notice of acceptance
A notification of acceptance is required for the benefit of the person who makes the offer, the person who makes the offer may dispense with notice to himself if he thinks it desirable to do so: there can be no doubt that where a person in an offer made by him to another person expressly or impliedly, intimates a particular mode of acceptance as sufficient to make the bargain binding, it is only necessary for the other person to whom such offer is made to follow the indicated mode of acceptance; and if the person making the offer expressly or impliedly intimates in his offer that it will be sufficient to act on the proposal without communicating acceptance of it to himself, performance of the condition is a sufficient acceptance without notification; Carlill v. Carbolic Smoke Ball Co., (1893) 1 QBD 256.
- Revocation of Proposals and acceptance
A proposal may be revoked at any time before the communication of its acceptance is complete as against the proposer, but not afterwards.
An acceptance may be revoked at any time before the communication of the acceptance is complete as against the acceptor, but no afterwards.
A proposes, by a letter sent by post, to sell his house to B.
B accepts the proposal 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.
Where an offer gives the offerer an option to accept within a fixed period, it may be withdrawn even before the expiry of that period unless there is some consideration for keeping it open; Airfred Schonlank v. Muthurayna Chetty, (1892) 2 Mad LJ 57.
- Revocation how made
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 the death or insanity comes to the knowledge of theacceptor before acceptance.
- Acceptance must be absolute
In order to convert a proposal into a promise the acceptance must –
(1) be absolute and unqualified.
(2) be expressed in some usual and reasonable manner, unless the proposal prescribes 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.
Acceptance must be unqualified and without condition
The cardinal principle in the light of section 7 of the Act is that the offer and acceptance of an offer must be absolute without giving any room of doubt. It is well settled that the offer and acceptance must be based or founded on three components—Certainty, commitment and communication. If any one of three components is lacking either in the offer or in the acceptance there cannot be a valid contract; Kilburn Engineering Ltd. v. Oil and Natural Gas Corporation Ltd., AIR 2000 Bom 405.
When the acceptor puts in a new condition while accepting, the contract already signed by the proposer is not complete until the proposer accepted the condition; Haridwar Singh v. Begum Sumbrui, AIR 1972 SC 1942.
An acceptance with a variation is no acceptance; it is simply a counter proposal which must be accepted by the original promisor before a contract is made; Haji Mohd. Haji Jiva v. E. Spinner, (1900) 24 Bom 510.
No second acceptance
The rule of law is that a mere offer to sell property, which can be withdrawn at any time, and which is made dependant on the acceptance of the person to whom it is made, is a mere nudum pactum. The person to whom, the offer has been made, cannot, by acceptance make a binding contract after he knows that the person who has made the offer has sold the property to someone else; Dickinson v. Dodds, 1876 Ch. D. 463.
- Acceptance by performing conditions, or receiving consideration .
Performance of the conditions of proposal, for the acceptance of any consideration for a reciprocal promise which may be offered with a proposal, is an acceptance of the proposal.
Performance by act: Interference of acceptance
The defendant company advertised that they would pay pound 1,000 to any person who used their carbolic smoke ball for a certain time any yet contracted influenza. The plaintiff purchased the medicine, used it for the stated time but contracted the disease. It was held that the contract was accepted by being acted upon, that the defendant had not stipulated for any communication of acceptance and therefore the plaintiff was entitled to recover the amount; Carlill v. Carbolic Smoke Ball Co., (1893) 1 QBD 256.
- Promise, express and implied
In so far as the proposal or acceptance of any promise is made in words, the promise is said to be express. In so far as such proposal or acceptance is made otherwise than in words, the promise is said to be implied.
A contract can be implied and it is very clear from section 9 of the Contract Act, but it is a fundamental principle of law that the court should not make a contract for the parties. A contract implied in fact requires meeting of minds. The court should refuse to read an implied term into a contract which is silent on the point or did not clearly indicate the nature of the term. However, when the stipulations are clear and in contemplation of the parties or which necessarily arise out of the contract between the parties, they will be implied; State of Maharashtra v. Saifuddin Mujjaffarali Saifi, AIR 1994 Bom 48.
Chapter II – Of contracts, violable, contracts and void agreements
- What agreements are contracts
All agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void.
Nothing herein contained shall affect any law in force in 1India, and not hereby expressly repealed, by which any contract is required to be made in writing 2or in the presence of witnesses, or any law relating to the registration of documents.
Breach of statutory provision
Railway invited tenders for the supply of jaggery to the railway grain shops. The respondent submitted his tender for the supply of 14,000 imperial maunds of cane jaggery during the month of February and March and the tender was accepted by the letter. So far, the offer of a supply of a definite quantity of jaggery during a specified period at a certain rate and the acceptance of the offer would constitute an agreement, but would fall short of amounting to a legal contract inasmuch as the date of delivery of the jaggery was not specified. Once the order is placed for such supply on such dates, that order amounts to a binding contract making it incumbent on the respondent to supply jaggery in accordance with the terms of the order and also making it incumbent on the Dy. General Manager to accept the jaggery delivered in pursuance of that order; Union of India v. Maddala Thathaiah, (1964) 3 SCR 774.
What agreements are Contract
If entering into a contract containing prescribed terms and conditions is a must under the statute then that contract becomes a statutory contract. If contract incorporates certain terms and conditions in it, which are statutory then the said contract to that extent is statutory; Thermal Power Ltd. v. State of Madhya Pradesh, AIR 2000 SC 1005.
In order to constitute a contract, both the parties must consent to the agreement; Steel Authority of India Ltd. v. Salem Stainless Steel Suppliers, AIR 1994 SC 1415.
A person who by reason of infancy is incompetent to contract cannot make a contract within the meaning of the Act. The question whether a contract is void or voidable presupposes the existence of a contract within the meaning of the Act, and cannot arise in the case of an infant; Mohoribibi v. Dharmodas Ghose, (1903) 30 IA 114.
What agreements are not Contract
Agreement subject to ratification by others who are not parties to it is not a conclusive contract; M.V. Shankar Bhat v. Claude Pinto (Deceased) by LRs, (2003) 4 SCC 86.
- Subs. by Act 3 of 1951, sec. 3 and Sch., for “Part A States and Part C States”. Earlier the words “Part A States and Part C States” were substituted by the A.O. 1950, for the words “the Provinces”.
- See e.g., sec. 25, the Copyright Act, 1957 (14 of 1957), section 19, the Carriers Act, 1865 (3 of 1865) sections 6 and 7; the Companies Act, 1956 (1 of 1956) sections 12, 30, 46 and 109.
- Who are competent to contract
Every person is competent to contract who is of the age of majority according to the law to which he is subject, and who is sound mind and is not disqualified from contracting by any law to which he is subject.
Minor’s contract of service
A contract of marriage, entered into by a father for the benefit of his minor child is not void for want of consideration, unlike a contract of service by a minor which is a contract of service entered into by a father on behalf of the minor which is not enforceable as it is void for want of consideration; Raj Rani v. Prem Adib, AIR 1949 Bom 215.
Minor’s contract void
Where a mortgage was made by a minor and the money lender who had advanced money to the minor on the security of the mortgage sued the minor on the strength of the contract. It is held, having regard to sections 2, 10 and 11 of the Contract Act, that the Act makes it essential that the contracting parties should be competent to contract and that a minor’s contract is void; Mohoribibee v. Dharmodas Ghose, (1903) ILR 30 Cal 539 (PC).
- See the Indian Majority Act, 1875 (9 of 1875).
- What is a sound mind for the purposes of contracting
A person is said to be of sound mind for the propose of making a contract, if, at the time when he makes it, he is capable of understanding it and of forming a rational judgement as to its effect upon his interest.A person who is usually of unsound mind, but occasionally of sound mind, may make a contract when he is of sound mind. A person who is usually of sound mind, but occasionally of unsound mind, may not make a contract when he is of unsound mind.
(a) A patient in a lunatic asylum, who is, at intervals, of sound mind, may contract during those intervals.
(b) 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.
- “Consent” defined –
Two or more person are said to consent when they agree upon the same thing in the same sense.
- “Free consent” defined –
Consent is said to be free when it is not caused by –
(1) coercion, as defined in section 15, or
(2) undue influence, as defined in section 16, or
(3) fraud, as defined in section 17, or
(4) misrepresentation, as defined in section 18, or
(5) mistake, subject to the provisions of section 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.
- “Coercion” defined
“Coercion” is the committing, or threating 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.
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.
An act forbidden by the Penal Code
The threat of suicide amounts to coercion within section 15; Chikam Amiraju v. Chickam Seshamma, (1912) 16 IC 344.
- “Undue influence” defined
1[16.‘Undue influence’ defined.—(1) A contract is said to be induced by “under influence” where the relations subsisting between the parties 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 prejudice to the generally of the foregoing principle, a person is deemed to be in a position to dominate the will of another –
(a) where he hold 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 reason 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 the sub-section shall affect the provisions of section 111 of the Indian Evidence Act, 1872 (1 of 1872)
(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.
(c) A, being in debt to B, the money-lender of his village, contracts a fresh loan on terms 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.]
The circumstance that a grandfather made a gift of a portion of his properties to his only grandson a few years before his death is not on the face of it an unconscionable transaction; Subhas Chandra Das Mushib v. Ganga Prasad Das Mushib, AIR 1967 SC 878.
Merely because the parties were nearly related to each other no presumption of undue influence can arise; Subhas Chandra Das Mushib v. Ganga Prasad Das Mushib, AIR 1967 SC 878.
Undue influence and fraud
(i) Undue influence is said to be a subtle species of fraud whereby mastery is obtained over the mind of the victim, by insidious approaches and seductive artifices; Mahboob Khan v. Hakim Abdul Rahim, AIR 1964 Raj 250.
(ii) Where pardanashin and illiterate woman acting under full confidence of the defendant who projected a false impression of the contents of a documents, put this thumb impression on such documents, their comment is a vitiated one; Kharbuja Kuer v. Jangbahadur Rai, AIR 1963 SC 1203.
What to prove—Burden of proof
If the transaction appears to be unconscionable then the burden of proving that the contract was not induced by undue influence is to lie upon the person who was in a position to dominate the will of the other; Shrimati v. Sudhakar R. Bhatkar, Air 1998 Bom 122.
- Subs. by Act 6 of 1899, sec. 2, for section 16.
- “fraud defined “
“Fraud” means and includes any of the following acts committed by a party to a contract, or with his connivance, or by his agents,1 with intent to deceive another party thereto his agent, or to induce him to enter into the contract;
(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 silence as to facts likely to affect the willingness of a person to enter into a contract is not fraud, unless the circumstances of the case are such that, regard being had to them, it is the duty of the person keeping silence to speak2, or unless his silence, is, in itself, equivalent to speech.
(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.
(c) B says to A—‘‘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.
Cases where there is duty to speak
It is the duty of the assured to put the insurer in possession of all material facts affecting the risk covered; Mithoo Lal Nayak v. L.I.C. of India, AIR 1962 SC 814.
Pleading and proof of fraud
The transaction designed to defeat the plaintiff creditors was fraudulent. Fraud was fully carried into effect in letter and spirit. In as much as the plaintiff himself was the preparator of fraud, he should not be granted any discretionary relief. Once it is found that the parties are in pari delicto the court will not assist the party who enters into illegal transaction and makes that transaction the basis of his claim; Sultan Ahmad v. Rashid Ahmad, AIR 1990 All 47.
- Cf. section 238, infra.
- See section 143, infra.
- “Misrepresentation” defined
“Misrepresentation” means and includes –
(1) the positive assertion, in a manner not warranted by the information of the person making it, of that whichis 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 anyone 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 agreement, to make a mistake as to the substance of the thing which is subject of the agreement.
A statement is said to be warranted by the information of the person making it when he receives the information from a trustworthy source. It should not be a mere hearsay; Mohanlal v. Sri Gungaji Cotton Mills Co., (1900) 4 CWN 369.
- Voidability of agreements without free consent
When consent to an agreement is caused by coercion, 1fraud or misrepresentation, the agreement is a contract voidable at the option of the party whose consent was so caused. A party to contract, whose consent was caused by fraud or mispresentation, may, if he thinks fit, insist that the contract shall be performed, and that he shall be put on the position in which he would have been if the representations made had been true.
Exception : If such consent was caused by misrepreentation or by silence, fraudulent within the meaning of section 17, the contract, neverthless, 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.
(a) A, intending to deceive B, falsely represents that five hundred 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 five hundred maunds of indigo are made annually at A’s factory. B examines the accounts of the factory, which show that only four hundred maunds of indigo have been made. After this B buys the factory. The contract is not voidable on account of A’s misrepresentation.
(c) A fraudulently informs B that A’s estate is free from incumbrance. 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 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.
(e) 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.
The defendant represented himself to be a partner of the firm by his conduct and through documents and got a loan of Rs. 60,000 from the plaintiff bank. The plaintiff bank gave loan to all the defendants believing them to be partners of the defendant. It was held that the defendant had represented himself to be a partner and therefore liable with other defendants; Oriental Bank of Commerce v. S.R. Kishore & Co., AIR 1992 Del 174.
- The words “undue influence” rep. by Act 6 of 1899, sec. 3.
19-A. Power to set aside contract induced by undue influence –
When consent to an agreement is caused by undue influence, 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 Court may seem just.
(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.
(b) 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 the Rs. 100 with such interest as may seem just.]
- Ins. by Act 6 of 1899, sec. 3.
- Agreement void where both parties are under mistake as to matter of fact
Where both the parties to an agreement are under a mistake as to a matter of fact essential to the agreement the agreement is void.
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.
(a) A agrees to sell to B a specific cargo of goods supposed to be on its way from England to Bombay. It turns out that, before the day of the bargain the ship conveying the cargo had been cast 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 agreement, but both parties were ignorant of the fact. The agreement is void.
There can be a mistake of identity only when a person bearing a particular identity exists within the knowledge of the plaintiff and the plaintiff intends to deal with him only; King’s Nortan Metal Co. v. Edridge, Merrett & Co., (1897) 14 TLR 98 (CA).
- Effect of mistake as to law
A contract is not voidable because it was caused by a mistake as to any law in force in 1India; but mistake as to a law not in force in India has the same effect as a mistake of fact.
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.
- The original words “British India” have successively been amended by the A.O. 1948 and the A.O. 1950 to read as above.
- Paragraph 2 omitted by the A.O. 1950. Earlier paragraph 2 was inserted by the A.O. 1937.
- The second Illustration rep. by Act 24 of 1917, sec. 3 and Sch. II
- Contract caused by mistake of one party as to matter of fact
A contract is not voidable merely because it was caused by one of the parties to it being under a mistake as to a matter of fact.
- What consideration and objects are lawful, and what not
The consideration or object of an agreement is lawful, unless -It is forbidden by law; oris of such nature that, if permitted it would defeat the provisions of any law or is fraudulent; ofinvolves or implies, injury to the person or property of another; orthe 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.
(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’s promise to sell the house is the consideration for B’s promise to pay the 10,000 rupees. These are lawful considerations.
(b) A promises to pay B 1,000 rupees at the end of six 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 lawful considerations.
(d) A promises to maintain B’s child, and B promises to pay A 1,000 rupees yearly for the purpose. Here, the promise of each party is the consideration for the promise of the other party. 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.
(f) 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) A, 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 A, 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.
(j) A, 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, becuase 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).
The notification permitting refund of sales tax was contrary to the statute. The tax paid is not an amount spent by the appellant but realised on sale by it. The constitutional requirements of levy of tax being for the welfare of the society and not for a specific individual the agreement or promise made by the Government was in contravention of public purpose thus violative of public policy and void under section 23 of the Contract Act; Amrit Bansapati Co Ltd. v. State of Punjab, AIR 1992 SC 1076.
Illegal and void agreements
The distinction between illegal and void contracts is very thin but it is there. The law may either forbid an agreement to be made, or it may merely say that if it is made the courts will not enforce it. In the former case, it is illegal in the latter only void; Nutan Kumar v. IInd Additional District Judge, Banda, AIR 1994 All 298.
Object of agreement is valid thereof
The exemption clause containing that the carrier shall be under no liability for any damages to passengers, is valid and it legally excludes all liability for negligence and such clause cannot be held bad under section 23 of Act; Indian Airlines v. Madhuri Chowdhuri, AIR 1965 Cal 252.
If an agreement is merely collateral to another or constitutes an aid facilitating the carrying out of the object of the other agreement which though void, is not prohibited by law it may be enforced as a collateral agreement. Where a person entering into an illegal contract promises expressly or by implication that the contract is blameless such a promise amount to collateral agreement upon which the other party if in fact innocent of turpitude may sue for damages; Rajat Kumar Rath v. Government of India, AIR 2000 Ori 32.
The appellation ‘void’ in relation to a juristic act, means without legal force, effect or consequence, not binding, invalid, null, worthless, cipher, useless and ineffectual etc.; Nutan Kumar v. IInd Additional District Judge, Banda, AIR 1994 All 298.
An agreement offending a statute or public policy or forbidden by law is not merely void but it is invalid from nativity. It cannot become valid even if the parties thereto agree to it; Nutan Kumar v. IInd Additional District Judge, Banda, AIR 1994 All 298.
While the term ‘object’ unlike the term ‘consideration’ has not been defined in section 2 of the Act, but has been held to mean as ‘purpose’ or ‘design’ of the contract. If the object is opposed to public policy or tends to defeat any provision of law, it becomes unlawful and thereby it is void under section 23 of the Act; Nutan Kumar v. IInd Additional District Judge, Banda, AIR 1994 All 298.
The term ‘law’ in section 23 of the Act must be understood in the sense of the term explained in the Article 13(3) of the Constitution; Nutan Kumar v. IInd Additional District Judge, Banda, AIR 1994 All 298.
- See sections 26, 27, 28 and 30, infra.
- Agreements void, if consideration are objects unlawful in part
If any part of a single consideration for one or more objects, or any one or any part of any one of several consideration of a single object, is unlawful, the agreement is void.
A promises to superintend, on behalf of B, a legal manufacturer of indigo, and an illegal traffic in other articles. B promises to pay to 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.
Non-compoundable offences, which are a matter of public concern, cannot be subject matter of private bargains and administration of criminal justice should not be allowed to pass from the hands of judges to private individuals. Where the offence is of public nature, no agreement can be valid that is founded on the consideration of stifling of a prosecution for it. The payment of 470 million US dollars by the Union Carbide Corporation to Union of India was held not to be stifling of prosecution and the payment not unlawful; Union Carbide Corporation v. Union of India, AIR 1992 SC 248.
- Agreement without consideration, void, unless it is in writing and registered or is a promise to compensate for something done or is a promise to pay a debt barred by limitation law –
An agreement made without consideration is void, unless –
(1) it is expressed in writing and registered under the law for the time being in force for the registration of1documents, and is made on account of natural love and affection between parties standing in a near relation to each other; or unless.
(2) it is a promise to compensate, wholly or in part, a person who has already voluntarily done something for the promisor, or something which the promisor was legally compellable to do; or unless.
(3) it is a promise, made in writing and signed by the person to be charged therewith or by his agent generally or specially authorised in that behalf, to pay wholly or in part 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 promisor 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.
(a) A promises, for no consideration, to give to B Rs. 1,000. This is a void agreement.
(b) A, 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 a contract.
(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.
(f) A agrees to sell a horse worth Rs. 1,000 for Rs. 10. A’s consent to the agreement was freely given. The agreement is a contract notwithstanding the inadequacy of the consideration.
(g) A agrees to sell a horse worth Rs. 1,000 for Rs. 10. A denies that his consent to the agreement was freely given.
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.
Natural love and affection as a consideration
In order to rely upon clause (1) of section 25, the existence of the factum of natural love and affection between parties standing in a near relation to each other is a condition precedent; Rajlukhy Dabee v. Bhootnath Mookherjee, (1900) 4 CWN 488.
If the services are rendered voluntarily, without the desire of the promisor or otherwise than at his request and the promisor undertakes to recompense the person who has rendered his services for it. In such cases, the promise does not need a consideration to support it, and the case falls under section 25 of the Act; Sindha Shri Ganpatsingji v. Abraham alias Vazir Mahomed Akuji, (1895) 20 Bom 755.
- Subs. by Act 12 of 1891, sec. 2 and Sch. II, Pt. I, for “assurances”.
- Agreement in restraint of marriage, void-
Every agreement in restraint of the marriage of any person, other than a minor, is void.
Agreement in restraint of marriage
An agreement between two co-widows that if any of them remarried, she should forfeit her right to her share in the deceased husband’s property is not in restraint of marriage; A. Suryanarayan Murthi v. P. Krishna Murthy, AIR 1957 Ori 125.
- Agreement in restraint of trade, void
Every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void.
Exception 1 : Saving of agreement not to carry on business of which good will is sold – One who sells the goodwill of a business may agree with the buyer to refrain from carrying on a similar business, within specified local limits, so long as the 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.
Agreement in restraint of trade
The words “restrained from exercising a lawful profession, trade or business”, do not mean an absolute restriction, and are intended to apply to a partial restriction, a restriction limited to same particular place;Mahbub Chander v. Raj Coomar, (1874) XIV Bengal Law Reports 76.
1.Exceptions 2 and 3 rep. by Act 9 of 1932, sec. 73 and Sch. II.
- Agreements in restrain of legal proceedings, void –
1[***]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 the extent.
Exception 1 : Saving of contract to refer to arbitration dispute that may arise.This section shall not render illegal contract, by which two or more persons agree that any dispute which may arise between them in respect of any subject or class of subject shall be referred to arbitration, and that only and amount awarded in such arbitration shall be recoverable in respect of the dispute so referred.
Exception 2: Saving of contract to refer question that have already arisen – Nor shall this section render illegal any contract in writing, by which two or more persons agree to refer to arbitration any question between them which has already arisen, or affect any provision of any law in force for the time being as to reference to arbitration. 3
Agreement restricting law of limitation
The clause in the agreement that the appellant would not have any right under the bond after the expiry of six months from the date of termination of the contract has been held not to be contrary to section 28 of the Act nor it imposed any restriction to file a suit within six months; Food Corporation of India v. New India Assurance Co. Ltd., AIR 1994 SC 1896.
Jurisdiction of the proper court
It has been held that it is not open to the parties by agreement to confer jurisdiction on any court which it did not otherwise possess under section 20 of Code of Civil Procedure; Patel Roadways v. Prasad Trading Company, AIR 1992 SC 1514.
- Subs. by Act 1 of 1997, sec. 2, for certain words (w.e.f. 8-1-1997).
- The second clause of Exception 1 rep. by Act 1 of 1877, sec. 2 and Sch.
- Cf. the Arbitration Act, 1940 (10 of 1940) and the Companies Act, 1956 (1 of 1956), section 389.
- Agreements void for uncertainty –
Agreements, the meaning of which is not certain, or capable of being made certain, are void.
(a) A agrees to sell B “a hundred tons of oil”. There is nothing whatever to show what kind of oil was intended. The agreement is void for uncertainty.
(b) A agrees to sell 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) A, 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 B “all the grain in my granary at Ramnagar”. There is no uncertainty here to make the agreement void.
(e) A agrees to sell to B “one thousand maunds of rice at a price to be fixed by C”. As the price is capable of being made certain, there is no uncertainty here to make the agreement void.
(f) A agrees to sell to B “my white horse for rupees five hundred or rupees one thousand”. There is nothing to show which of the two prices was to be given. The agreement is void.
- Agreements by way of wager, void
Agreements by way of wager are void; and no suit shall be brought for recovering anything alleged to be won on any wager, or entrusted to any person to abide the result of any game or other uncertain event on which may wager is made. Exception on favour of certain prizes for horse-racing: This section shall not be deemed to render unlawful a subscription or contribution, or agreement to subscribe or contribute, made or entered into for or toward any plate, prize or sum of money, of the value or amount of five hundred rupees or upwards, to be rewarded to the winner or winners of any horse-race.
Section 294A of the Indian Penal Code not affected : Nothing in this section shall be deemed to legalize any transaction connected with horse-racing, to which the provisions of section 294A of the(45 of 1860) apply.
To treat an agreement by way of wager as void is that the law discourages people to enter into games of chance and make earning by trying their luck instead of spending their time, energy and labour for more fruitful and useful work for themselves, their family and the society; Subhash Kumar Manwani v. State of Madhya Pradesh, AIR 2000 MP 109.
A chit-fund does not come within the scope of wager; Narayana Ayyangar v. K.V. Ambalam, (1927) ILR 50 Mad 696 (FB).
Chapter III – Of contingent contracts
- “Contingent contract” defined
A “contingent contract” is a contract to do or not to do something, if some event, collateral to such contract, does or does not happen.
A contracts to pay to B Rs.10,000 if B’s house is burnt. This is a contingent contract.
- Enforcement of Contracts contingent on an event happening
Contingent contracts to do or not to do anything in an uncertain future event happens, cannot be enforced by law unless and until that event has happened. If the event becomes impossible, such contracts become void.
(a) A makes 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.
(b) 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 B a sum of money when B marries C. C dies without being married to B. The contract becomes void.
The essential idea upon which doctrine of frustration is based is that of impossibility of performance of contract; Satyabrata Ghose v. Mugneeram Bangur, AIR 1954 SC 44.
- Enforcement of contract contingent on 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 that event becomes impossible, and not before.
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.
- When event on which contract is contingent to be deemed impossible, if it is the future conduct of a living person-
If the future event on which a contract is contingent is the way in which a person will act at an unspecified time, the event shall be considered to become impossible when such person does anything which renders it impossible that the should so act within any definite time, or otherwise than under further contingencies.
A agrees to pay B a sum of money if B marries C, C marries D. The marriage of B to C must now be considered impossible, although it is possible that D may die and that C may afterwards marry B.
- When contracts become void, which are contingent on happening of specified event within fixed time
Contingent contracts to do or not to do anything, if a specified uncertain event happens within a fixed time, become void, if, at the expiration of the time fixed, such event has not happened, or if, before the time fixed, such event becomes impossible.
When contracts may be enforced, which are contingent on specified event not happening within fixed time : Contingent contract tutu or not to do anything, if a specified uncertain event does not happen within a fixed time, may be enforced by law when the time fixed has expired and such event has not happened, or before the time fixed has expired, if it become certain that such event will not happen.
(a) 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.
- Agreements contingent on impossible event void
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 agreement at the time when it is made.
(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 marry A’s daughter C. C was dead at the time of the agreement. The agreement is void.
Chapter IV – Of the performance of contracts which must be performed
- Obligations of parties to contract –
The parties to a contract must either perform, or offer to perform, their respective promises, unless such performance in dispensed with or excused under the provision of this Act, or of any other law.
Promises bind the representative of the promisor in case of the death of such promisors before performance, unless a contrary intention appears from the contract.
(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, and B is bound to pay the Rs. 1,000 to A’s representatives.
(b) 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
Assignment of Contract
A person cannot be subject to the obligation of a contract to which he is not a party and the logical consequence is that a stranger cannot acquire rights under a contract; Harnam Singh v. Purbi Devi, AIR 2000 HP 108.
If the agreement makes express provision for enhancement of rate of interest, held, bank need not put borrower on notice before charging higher rate on the basis of the agreement; Syndicate Bank v. R. Veeranna, (2003) 2 SCC 15.
It is well settled principle of law that an arbitration clause is assignable, if the main contract is assignable. An arbitration agreement will find not only the actual parties to it, but also an assignee of the contract containing it; R. K. Associates v. V. Channappa, AIR 1993 Kant 248.
- Effect of refusal to accept offer of performance
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 non-performance, 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 whom it is been made is able and willing there and then to do the 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 a 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.
A contracts to deliver to B at his warehouse, on the 1st 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 have a reasonable opportunity of satisfying himself that the thing offered is cotton of the quality contracted for, and that there are 100 bales.
Tender must be strict
Where the instructions have been issued to Bidders asking them to state against each work item unit rate in Indian Currency and in U.S. Dollar or Japanese Yen. Then the quoating of the unit rate 50 per cent. in Indian Rupee and 50 per cent. in U.S. Dollar will not be treated as clerical or Mechinical error and cannot be allowed to be corrected; West Bengal Electricity Board v. Patel Engg. Co. Ltd., AIR 2001 SC 683.
- Effect of refusal of party to perform promise wholly
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, by words or conduct, his acquiescence in its continuance
(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 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. 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.
- Person by whom promises is to be performed –
If it appears from the nature of the case that it was the intention of the parties to any contract that any promise contain in it should be performed by the promisor himself, such promise must be performed by the promisor.
In other cases, the promisor or his representative may employ a competent person to perform it.
(a) A promises to pay B a sum of money. A may perform this promise, either by personally paying the money to B 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 personally.
- Effect of accepting performance from this person
When a promisee accepts performance of the promise from a third person, he cannot afterwards enforce it against the promisor.
- Devolution of joint liabilities
When two or more person 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.
- Any one of joint promisors may be compelled to perform
When two or more persons make a joint promise, the promise may, in the absence of express agreements to the contrary, compel any 1one or more of such joint promisors to perform the whole promise.
Each promisor may compel contribution : Each of two or more joint promisors may compel every other joint promisor to contribute equally with himself to the performance of the promise, unless a contrary intention appears from the contract.
Sharing of loss by default in contribution : If any one of two or more joint promisors make default in such contribution, the remaining joint promisors mus 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 payments made by the principal.
(a) A, B and C jointly 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 sufficient to pay one-half of his debts. C is entitled to receive 500 rupees from A’s estate, and 1,250 rupees from B.
(c) A, B and C are under a joint promise to pay D 3,000 rupees. 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.
- Subs. by Act 12 of 1891, sec. 2 and Sch. II Pt. I, for “one”.
- Effect of release of one joint promisor
Where two or more persons have made a joint promise, a release of one of such joint promisors by the promisee does not discharge the other joint promisor,neither does it free the joint promisor so released from responsibility to the other joint promisor or joint promisors.1
- See section 138. infra.
- Devolution of joint rights
When a person has made a promise to two or more persons jointly, then unless 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 one 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.1
A, in consideration of 5,000 rupees lent to him by B and C, promises B and C jointly to repay them that sum with interest on a day specified. B dies. The right to claim performance rests with B’s representative jointly with C during C’s life, and after the death of C, with the representatives of B and C jointly.
- For an exception to section 45 in case of Government securities, see the Public Debt Act, 1944 (18 of 1944), section 8.
- Time for performance of promise, where no application is to be made and no time is specified
Where, by the contract, a promisor is to perform his promise without application by the promisee, and no time for performance is specified, 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 and place for performance of promise, where time is specified and no application to be made –
When a promise is to be performed on a certain day, and the promisor has undertaken to perform it without the application by the promisee, 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.
A promises to deliver goods at B’s warehouse on the first January. On the day A brings the goods to B’swarehouse, but after the usual hour closing it, and they are not received. A has not performed his promise.
- Application for performance on certain day to be at proper time and place –
When a promise is to be performed on a certain day, and the promisor has not undertaken to perform it without application by the promisee, it is the duty of the promisee to apply for the performance at a proper place within the usual hours of business.
Explanation : The question “what is proper time and place” is, in each particular case, a question of fact.
- Place for the performance of promise, where no application to be made and no place fixed for performance –
When a promise is to be performed without application by the promisee, and not place is fixed for the performance of it, it is the duty of the promisor to apply to the promisee to appoint a reasonable place for the performance of the promise, and to perform it at such a place.
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.
- Performance in manner or at time prescribed or sanctioned by promise –
The performance of any promise may be made in any manner, or at any time which the promisee prescribes or sanctions
(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 is done by C. Afterwards, and before A knows of the transfer, C fails. There has been a good payment by B.
(b) 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.
Manner and time of performance
If any agreement states that a particular act relating to the furtherance of a contract is to be done in a particular manner, it should be done in that manner and it is not open to the parties to chalk out his own manner of performing his part of contract; Bishamber Nath Agarwal v. Kishan Chand, AIR 1990 All 70.
- Promisor not bound to perform, unless reciprocal promisee ready and willing to perform-
When a contract consists of reciprocal promises to be simultaneously performed, no promisor need perform his promise unless the promisee is ready and willing to perform his reciprocal promise.
(a) A and B contract that A shall deliver goods to B to be paid for by B on delivery. 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.
(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.
- Order of performance of reciprocal promises-
Where the order in which reciprocal promises are to be performed is expressly fixed by the contract, they shall be performed in that order, and where the orders is not expressly fixed by the contract, they shall be performed in that order which the nature of transaction requires.
(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.
(b) A and B contract that A shall make over his stock-in-trade to B at a fixed price, and B promise 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 transaction requires that A should have security before he delivers up his stock.
- Liability of party preventing event on which contract is to take effect-
When a contract contains reciprocal promises and one party to the contract prevents the other from performing his promise, the contract becomes voidable at the option of the party so prevented; and he is entitled to compensation 1from the other party for any loss which he may sustain in consequence of the non-performance of the contract.
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 ofB; 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.
1.See section 73, infra.
- Effect of default as to the promise which should be performed, in contract consisting or reciprocal promises-
When a contract consists of reciprocal promises, such that one of them cannot be performed, or that its performance cannot be claimed till the other has been performed, and the promisor of the promise last mentioned fails to perform 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.
(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 take 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 scaffolding 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 specified price, certain merchandise on board a ship which cannot arrive for a month, and B 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.
- Effect of failure to perform a fixed time, in contract in which time is essential
When a party to a contract promises to do a certain thing at or before a specified time, or certain thins at or before a specified time and fails to do such thing at or before a specified time, and fails to do such thing at or before a specified time, the contract or so much of it as has not been performed, becomes voidable at the option of the promisee, if the intention of the parties was that time should be of essence of the contract.
Effect of such failure when time is not essential: If it was not the intention of the parties that time should be of the essence of the contract, the 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 of performance at time other than agreed upon: If, in case of a contract voidable on account of the promisor’s failure to perform his promise at the time agreed, the promisee accepts performance of such promise at any time other than agree, the promisee cannot claim compensation of any loss occasioned by the non-performance of the promise at the time agreed, unless, at the time of acceptance, he give notice to the promisor of his intention to do so.1
Time – whether essence of Contract
The parties, may make time of the essence either expressly in terms which unmistakably provide that they intended to do so. Alternately, making of time as the essence of a contract may be inferred from the nature of the contract, the property or the surrounding circumstances; Swarnam Ramchandran v. Aravacode Chakungal Jayapalan, AIR 2000 Bom 410.
When the contract itself provides for extension of time, the same cannot be termed to be the essence of the contract and default, however, in such a case it does not make the contract voidable; Arosan Enterprises Ltd. v. Union of India, AIR 1999 SC 3804.
The deferred clause indicated that time was not the essence of the contract. But in the present case the defendants had kept quite for an unreasonably long time so the defendants cannot rely on this clause but the plaintiffs can seek the relief of possession prayed for; Y.A. Kader v. Muthulakshmi Ammal, AIR 1992 Mad 208.
In a contract for the sale of land or immovable property, it would normally be presumed that time was not of the essence of the contract; Gomathinayagam Pillai v. Palaniswami Nadar, AIR 1967 SC 868: (1967) 1 SCR 227.
- Cf. sections 62 and 63, infra.
- Agreement to do impossible act-
An agreement to do an act impossible in itself is void. Contract to do act afterwards becoming impossible or unlawful: A contract to do an act which, after the contract is made, becomes impossible or, by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful.1
Compensation for loss through non-performance of act known to be impossible or unlawful: Where one person has promised to be something which he knew or, with reasonable diligence, might have known, and which the promisee did not know to be impossible or unlawful, such promisor must make compensation to such promise for any loss which such promisee sustains through the non-performance of the promise.
(a) A agrees with B to discover treasure by magic. The agreement is void.
(b) 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 Government 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 too ill to act. The contract to act on those occasions becomes void.
Contracting party must not be in default
In contracts in which the performance depends on the continued existence of a given person or thing, a condition is implied that the impossibility arising from the perishing of the person or thing shall excuse performance; Taylor v. Caldwel, 122 ER 30.
It is not permissible for the courts to travel outside the provisions of the section and import the principles of English law de hors the statutory provisions; Satyabrata Ghose v. Mugneeram Bangur & Co., AIR 1954 SC 44.
Impossibility may be in law or in fact
The doctrine of frustration is really an aspect or part of the law of discharge of contract by reason of supervening impossibility or illegality of the act agreed to be done and hence comes within the purview of section 56; Satyabrata Ghose v. Mugneeram Bangur, AIR 1954 SC 44.
Scope and applicability
Section 56 lays a positive rule relating to frustration and does not leave the matter of frustration to the court to be determined. There can be no agreement on altered circumstances and it has also been held that if a consideration of the terms of the contract in the light of the circumstances when it was made shows that the parties never agreed to be bound in a fundamentally different situation which unexpectedly arises the contract ceases to bind at that point, not because the court in its discretion considers it just but on true construction it does not apply in that situation; Shyam Biri Works Pvt. Ltd. v. U.P. Forest Corporation, AIR 1990 SC 205.
- See section 65, infra.
- Reciprocal promise to do things legal, and also other things illegal
Where persons reciprocally promise, firstly to do certain things which are legal, and, secondly under specified circumstances, to do certain other things which are illegal, the first set of promise is a contract, but the second is a void agreement.
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 object, namely, that B may use the house as a gambling house, and is a void agreement.
- Alternative promise, one branch being illegal-
In the case of an alternative promise, one branch of which is legal and other other illegal, the legal branch alone can be enforced.
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.
- Application of payment where debt to be discharged is indicated
Where a debtor, owing several distinct debts to one person, makes a payment 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.
(a) A owes B, among other debts, 1,000 rupees upon a promissory note, which falls due on the first 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 demanded payment.
Scope of applicability
To several distinct debts payable by a person and not to the various heads of one debt. The principal and interest due on a single debt or decree passed on such debt carrying subsequent interest cannot be held to several distinct debts. Accepting such an argument would amount to doing violence to the language employed in the section and the purpose sought to be achieved by it. Besides it would also be contradictory in terms; Industrial Credit and Development Syndicate now called I.C.D.S. Ltd. v. Smithaben H. Patel, AIR 1999 SC 1036.
The principle applies to several distinct debts and not to a single debt payable by instalments; Munno Bibi v. Commissioner of Income-tax, AIR 1952 All 514.
- Application of payment where debt to be discharged is not indicated-
Where the debtor has ommitted 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 limitations of suits.
- Application of payment where neither party appropriates
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 payment shall be applied in discharge of each proportionally.
- Effect of novation, rescission, and alteration of contract-
If the parties to a contract agree to substitute a new contract for it, or to rescind or alter it, the original contract need not be performed.
(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.
(b) 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 credit C 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.
Alteration of Contracts
Person entering into agreement under section 8(1)(a) of Requisition and Acquisition of Immovable Property Act cannot later claim a legal right to obtain a court order directing reopening of the agreement, just because a subsequent award granted higher compensation for land similar to his own; Dayal Singh v. Union of India, (2003) 2 SCC 593.
If the parties to a Contract agree
The plaintiff Bank had agreed that the defendants could pay the amount of Rs.10,00,000 which would be convenient to both the parties subsequent to the filing of the suit. The parties have entered into a second agreement to supersede the liability and the entitlement formulated through the transaction and that under the circumstances the said subsequent agreement squarely comes within the ambit of section 62 of the Act; Central Bank of India v. V. G. Naidu & Sons (Leather) Pvt. Ltd., AIR 1992 Mad 139.
A material alteration is one which varies the rights, liabilities or legal position of the parties as ascertained by the deed from its original state, or otherwise varies the effect of the instrument as originally expressed or reduces to certainty some provisions which were originally unascertained and as such void, or which may otherwise prejudice the party bound by the deed as originally executed. The effect of making such an alteration without the consent of the party bound is exactly the same as that of cancelling the deed. The last line in the schedule of property regarding delivery of possession was held to be inserted not on the date of execution of agreement but subequent to it and have material alteration; Janab M. H. M. Yakoob v. M. Krishnan, AIR 1992 Mad 80.
Where an existing mortgage was replaced by a new agreement of mortgage, the new agreement being not enforceable for want of registration, the parties were still bound by the original mortgage; Shanker Lal Damodhar v. Ambalal Ajaipal, AIR 1946 Nag 260.
- Promise may dispense with or remit performance of promise
Every promise may dispense with or remit, wholly or in part, the performance of the promise made to him, or may extend the time for such performance, 1or may accept instead of it any satisfaction which he thinks fit.
(a) A promises to paint a picture for B. B afterwards forbids him to do so. A is no longer bound to perform the promise.
(b) A owes B 5,000 rupees. A pays to B, and B accepts, in satisfaction of the whole debt, 2,000 rupees paid at the time and place at which the 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.2
(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 3[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.
Becomes void – discovered to be void
Section 65 starts from the basis of there being an agreement or contract between competent parties and has no application to a case in which there never was, and never could have been any contract, e.g. where one of the parties was a minor; Mohori Bibee v. Dharmodas Ghose, (1903) ILR 30 Cal 539 (PC).
Necessity for consideration
The plaintiff bank accepted the sum of Rs. 10,00,000 from the defendants towards the full discharge of the suit claim according to second agreement. It was held that having received the said compromise amount, it is not open for the plaintiff to claim the overdue interest to the extent of Rs. 69,571.20 for which there has been no agreement and that under the circumstances the claim, if any made by the plaintiff has been directly hit by section 63 of Contract Act; Central Bank of India v. V. G. Naidu & Sons (Leather) Pvt. Ltd., AIR 1992 Mad 139.
A waiver is nothing unless it amounts to a release. It signifies nothing more than an intention not to insist upon the right; Jagad Bandhu Chatterjee v. Nilima Rani, (1969) 3 SCC 455: (1970) 2 SCR 925: (1971) 1 SCJ 38.
- But See section 135, infra.
- See section 41, supra.
- Subs. by Act 12 of 1891, sec. 2 and Sch. II, Pt. I, for “compensation”.
- Consequence of rescission of voidable contract
When a person at whose option a contract is voidable rescinds it, the other party thereto need to perform any promise therein contained in which he is the promisor. The party rescinding a voidable contract shall, if he have received any benefit thereunder from another party to such contract restore such benefit, so far as may be, to the person from whom it was received.1
1.See section 75, infra.
- Obligation of person who has received advantage under void agreement, or contract that becomes void –
When an agreement is discovered to be void, or when a contract becomes void, any person who has received any advantage under such agreement or contract is bound to restore, it, or to make compensation for it, to the person from whom he received it.
(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 first of May. A delivers 130 maunds only before that day, and none after. B retains the 130 maunds after the first 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 A for the five nights on which she had sung.
(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.
Where under a contract of Insurance the insured gave a cheque to the insurer for payment of first premium amount, but the cheque was dishonoured by the drawee-bank due to inadequacy of the funds in the account of the drawer, the insurer is not liable in such a situation to honour the claim of the insured. Even if the insurer has disbursed the amount covered by the policy to the insured before the cheque was returned dishonoured insurer is entitled to get the money back; National Insurance Company Ltd. v. Seema Malhotra, AIR 2001 SC 1197.
- Mode of communicating or revoking rescission of voidable contract-
The rescission of a voidable contract may be communicated or revoked in the same manner, and subject to some rules, as apply to the communication or revocation of the proposal. proposal.1
1.see sections 3 and 5, supra.
- Effect of neglect or promise to afford promisor reasonable facilities for performance-
If any promisee neglects or refuses to afford the promisee reasonable facilities for the performance of his promise, the promisor is excused by such neglect or refusal as to non-performance caused thereby.
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.
Chapter V – Of certain relations resembling those created by contract
- Claim for necessaries supplied to person incapable of contracting, or on his account –
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.
(a) A supplies B, a lunatic, with necessaries suitable to his condition in life. A is entitled to be reimbursed from B’s property.
(b) A suplies the wife and children of B, a lunatic, with necessaries suitable to their condition in life. A is entitled to be reimbursed from B’s property.
- The property of a Government ward in Madhya Pradesh is not liable under this section; see the C.P. Court of Wards Act, 1899 (C.P. Act 24 of 1899), section 31(I).
- Reimbursement of person paying money due by another, in payment of which he is interested
A person who is interested in the payment of money which another is bound by law to pay, and who therefore pays it, is entitled to be reimbursed by the other.
B holds land in Bengal, on a lease granted by A, the zamindar. The revenue payable by A to the Government 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 the Government the sum due from A. A is bound to make good to B the amount so paid.
Contribution and reimbursement
Where a person is jointly liable with other to pay, a payment by him of the other’s share would not give him a right of recovery under this section; Jagpatiraju v. Sadnusannama, AIR 1916 Mad 980.
- Obligation of person enjoying benefit of non-gratuitous act
Where a person lawfully does anything for another person, or delivers anything to him, not intending to do so gratuitously, and such another person enjoys the benefit thereof, the letter is bound to make compensation to the former in respect of, or to restore, the thing so done or delivered.
- Responsibility of finder of goods
A person who finds goods belonging to another, and takes them into his custody, is subject to the same responsibility as a bailee.1
1.See sections 151 and 152,infra.
- Liability of person to whom money is paid, or thing delivered, by mistake or under coercion-
A person to whom money has been paid, or anything delivered, by mistake or under coercion, must repay or return it.
(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 illegal and excessive.
Ingredients of unjust enrichment
Under this Section the principle of unjust enrichment cannot be extended to give a right to the State to recover or realise vend fee after the concerned statute for realisation or recovery of vend fee has been struck down; M/s. Somaiya Organics (India) Ltd. V. State of Uttar Pradesh, AIR 2001 SC 1725.
Chapter VI – Of the consequences of breach of contract
- Compensation of loss or damage caused by breach of contract
When a contract has been broken, the party who suffers by such breach is entitled to receive, form 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 of damage sustained by reason of the breach.
Compensation for failure to discharge obligation resembling those created by contract : When an obligation resembling those created by contract has been incurred and has not been discharged, any person injured by the failure to discharge it is entitled to receive the same compensation from the party in default, as if such person had contracted to discharge it and had broken his contract.
Explanation : In estimating the loss or damage arising from a breach of contract, the means which existed of remedying the inconvenience caused by non-performance of the contract must be taken into account.
(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. B is entitled to receive from A, by way of compensation, the sum, if any, by which the contract price falls short of the price for which B might have obtained 50 maunds of saltpetre of like quality at the time when the saltpetre ought to have been delivered.
(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 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.
(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 of compensation, the amount, if any, by which the contract price exceeds 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 take a cargo of jute to Mirzapur, for sale at that place, starting on a specified day. The boat, owing to some avoidable 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 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.
(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.
(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.
(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 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.
(j) 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 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 price 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.
(l) 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 re-built by B, who, in consequence, loses the rent which he was to have received from C, and is obliged to make compensations 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.
(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 C a 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 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 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.
(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 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 too late in Sydney, loses a sum of money. A is liable to repay to B his deposit, with interest, and the 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.
Award of damages
When a contract is broken, the party who suffers by such breach is entitled to receive compensation for any loss or damage caused to him from the party who has broken the contract; K. Narayana Kurup v. Sankaranarayanan, AIR 2000 Ker 296.
Breach of Contract of carriage
A corporation had placed the order on telephone. The entire transaction was oral and no attempt was made to produce any witness of the alleged buyer to support the contention that the market value of the goods was at the rate of Rs. 3,000 per metric ton. The material on record does not show that the price of goods has risen to Rs. 3,000. Therefore the damages as a result of non-delivery of the alleged goods, have not been proved by the plaintiff and he is not entitled to any damages; Thakral and Sons v. Indian Petro Chemicals Corporation Ltd., AIR 1994 Del 226.
Damages for breach of contract
When there is a breach of contract, party to the contract cannot determine as to who has committed breach. Damages could be recovered from the person who has committed breach only after the same is determined. The conditions of contract would be considered as liquidated damages and could be recovered and no power has been conferred on the other contracting party to determine the damages; P.V. Paily v. State of Kerala, AIR 2000 Ker 268.
The party in breach must make compensation in respect of the direct consequences flowing from the breach and not in respect of loss or damage indirectly or remotely caused; Pannalal Jankidas v. Mohanlal, AIR 1951 SC 145: (1950) SCR 979.
Damages for breach of contract of service
A contract of service entered into by father on behalf of minor is void being without consideration; Raj Rani v. Prem Adib, AIR 1949 Bom 215.
Damages when become due
A seller who commits breach will be liable to compensate according to the prices at the place of sale and not at destination; Murlidhar Chiranji Lal v. Harish Chandra Dwarkadas, AIR 1962 SC 366: (1962) 1 SCR 653.
The principle of awarding damages for a reasonable period or reasonable period of notice comes into play only when the contract of employment is not for a fixed period; S.S. Shetty v. Bharat Nidhi Ltd., AIR 1958 SC 12: (1958) SCR 442.
Measure of damages – Breach of contract for sale of goods
Damages are to be awarded as compensation for any loss or damage arising naturally in the usual course of things from the breach of contract; Karsandas H. Thacker v. Saran Engg. Co. Ltd., AIR 1965 SC 1981.
Natural and probable result of breach: Special damage
In cases of breach of contract the damages should be such as may fairly and reasonably be considered as arising naturally or the damages may be such as may reasonably be supposed to have been in contemplation of both parties at the time they made the contract as the probable result of the breach of it. The damages, however cannot include compensation for any remote and indirect loss or damages sustained by reason of the breach; Hadley v. Bexendale, 9 Ex 742.
Taking advantage of benefit resulting from breach of contract
Where a vendee is in default and the vendor subsequently sells at a price higher than the market price on the date of delivery, the fact that by reason of the loss of the contract which the vendee had failed to perform, the vendor obtained the benefit of another contract which was of value to him did not entitle the vendee to the benefit of the later contract; Jamal v. Moola Dawood Sons & Co., (1916) AC 175.
- Compensation of breach of contract where penalty stipulated for
1[When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, or if the contract 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.]
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 2[Central Government] or of any3[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.
(a) A contracts with B to pay B Rs. 1,000 if he fails to pay B Rs. 500 on a given day. A fails to pay B Rs. 500 on that day. B is entitled to recover from A such compensation, not exceeding Rs. 1,000, as the Court considers reasonable.
(b) A contracts with B that, if A practises 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.
4[(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 consideration 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 instalment, 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.]
Courts power to grant damages fined
Where the right to recover liquidated damages under section 74 is found to exit no question of ascertaining damages really arises; Chunilal Mehta & Sons Ltd. v. Century Spinning & Mfg. Co. Ltd., AIR 1962 SC 1314.
Penalty and liquidated damages
A clause in a contract can be described as penal if the party who has to pay a certain amount of money fails to pay the amount within the time stipulated. In such a situation the other party will be at liberty to recover the entire sum with interest and costs. Such a clause would be penal in character. But if half payment is made within the time stipulated, the other party waves his right to the balance amount; Prithvichand Ramchand Sablok v. S.Y. Shinde, AIR 1993 SC 1934.
- Subs. by Act 6 of 1899, sec. 4, for the first paragraph.
- Subs. by the A.O. 1937, for “Government of India ”.
- Subs. by the A.O. 1950, for “Provincial Government”.
- Ins. by Act 6 of 1899, sec. 4(2).