LEGAL ASPECTS OF BUSINESS AND ETHICS

Course Code: 24MBACC203

Module – I
Contract Act 1872:
Introduction Overview of Business laws in India, Sources of business law, Salient features
covering essentials of Contract, offer, acceptance, consideration, Exceptions to the rule "no
consideration, no contract’’, Capacity of Parties, Free Consent, Quasi Contract, Legality of
Object, Performance, Termination and Breach of Contract, Remedies for breach of a contract.
Law of Agency: Essentials, kinds of agents, Rights and Duties of Principal and Agent,
Creation of Agency, Termination of Agency, Bailment and Pledge –Bailment, Definition,
Essential Elements, Rights and Duties of Bailor and Bailee

INTRODUCTION:
Legal Aspects of Business and Ethics encompass the laws, regulations, and ethical
principles that govern commercial activities, ensuring fair practices, protecting stakeholders,
and fostering a positive business environment.
What are Legal Aspects of Business?
Definition:
These are the laws and regulations that govern how businesses operate, from their
formation to their daily operations and eventual dissolution.
Scope:
They cover a wide range of areas, including contract law, corporate law, competition
law, consumer protection, intellectual property, and employment law.
Importance:
Understanding these aspects helps businesses stay compliant, avoid legal pitfalls, and
navigate complex regulatory environments.
Examples:
1. Contract Law: Deals with agreements and obligations between parties, ensuring that
contracts are legally binding and enforceable.

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 2. Corporate Law: Governs the formation, structure, and operation of companies,
including regulations related to ownership, management, and financial reporting.
3. Competition Law: Prevents anti-competitive practices, such as monopolies and
price-fixing, ensuring fair competition in the marketplace.
4. Consumer Protection: Protects consumers' rights in business transactions, including
regulations related to product safety, advertising, and fair trade practices.

What are Business Ethics?

Definition:
Business ethics are the principles and standards that guide business decisions and
actions, ensuring that businesses operate in a fair, honest, and responsible manner.
Importance:
Ethical behavior builds trust with stakeholders, enhances corporate reputation, and
contributes to long-term business success.
Examples:
1. Integrity and Honesty: Businesses should be truthful and transparent in their
dealings with customers, employees, and other stakeholders.
2. Fairness and Justice: Businesses should treat all parties fairly and avoid
discrimination or exploitation.
3. Social Responsibility: Businesses should consider the impact of their actions on
society and the environment, and strive to operate in a sustainable and responsible
manner.
4. Conflict of Interest: Businesses should avoid situations where their personal interests
could conflict with their professional duties.
The Interrelation of Legal Aspects and Business Ethics:
1. Complementary: Legal compliance is a minimum standard, while ethical behavior
goes beyond that, promoting a culture of integrity and responsibility.
2. Shared Goals: Both legal aspects and business ethics aim to ensure that businesses
operate in a fair, just, and sustainable manner.
3. Ethical Behavior is not always Legal: While some ethical standards are embedded
in law, many ethical considerations extend beyond legal requirements.
4. Legal Consequences of Unethical Behavior: Unethical behavior can lead to legal
penalties, reputational damage, and loss of customer trust.

INTRODUCTION TO BUSINESS LAW:

Meaning of Business law:

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 Business law, also called Commercial or Mercantile law, is the branch legal system,
which regulates business activities. It is that branch of law, which governs and regulates the
trade & commerce. It is that portion of law which deals with the rights and obligations arising
out of mercantile transaction between mercantile persons.
Definition:
1. “Business Law is that portion of the legal system which guarantees an orderly conduct of
business affairs and the settlement of legitimate disputes in a just manner.”
2. “Business Law establishes a set of rules and prescribes conduct that enables us to avoid
misunderstandings and injury in our business relationships.”
Scope of Business Law:
Definition According to S R Davar, business law “means that branch of law which is
applicable to or concerned with trade and commerce in connection with various mercantile or
business transactions”.
Scope of business law is indeed vast. It usually deals with the topics of
a) Licenses – monopolies – contracts
b) Issue of securities – large houses
c) Property – agency – negotiable instruments
d) Foreign exchange regulations –partnership
e) Companies – insurance- sales- bailment
f) Guarantees- labor- surety ship
g) Bankruptcy/ insolvency- Business crimes
h) Raising loans from financial institutions
i) Obtaining electricity- custom clearance
j) Import of capital goods
k) Monopolies and restrictive trade practices
l) Environmental protection
m) Consumer protection.
The following legislation enacted by Indian Legislature from time to time is covered in the
Indian Business Laws:
a) The Indian Contract Act, 1872.
b) The Negotiable Instruments Act, 1881.
c) The Sale of Goods Act, 1930.
d) The Indian Partnership Act, 1932.

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e) The Insurance Act, 1972. f) The Arbitration & Conciliation Act, 1996.
g) The Law of Insolvency.
h) Law Relating to Carriage of Goods.
Objectives of Business Law:
1. Define the Rules of the Business activities within which it should be carried on:
2. Enable enforcement of rights: Businessmen like other citizens have rights – rights which
are judicially enforceable. Thus the businessmen may turn to High court or Supreme Court to
enforce his claims against debtors, patent or copyright infringement and so on.
3. Facilitate Industrial Growth: By selectively issuing licenses to deserving enterprises, by
ensuring cordial relations and by providing other needed facilities, business law contributes
considerably to the growth of industries.
4. Achieve Social Justice: Business law has social objectives too, It seeks to check
exploitation of Child Labor and discrimination in Employment and/or remuneration on the
basis of sex, caste or religion. Reckless exploitation of resources – Business Law prohibits
practices which are harmful to public interest.
5. Fix priority of wants: Individuals and groups have an affinity of wants that they seek to
satisfy. Obviously not all these wants can be wholly satisfied. So the legal rules of Business
Law, decides the priority among unlimited wants.
OVERVIEW OF BUSINESS LAWS IN INDIA:
Business laws in India are a comprehensive set of legal rules and principles that
regulate how businesses are established, operated, and dissolved. These laws are designed to
ensure smooth commercial transactions, protect the rights of stakeholders, maintain ethical
standards, and promote economic growth. India's business legal framework is influenced by
its Constitution, parliamentary enactments, judicial decisions, and administrative regulations.
One of the foundational pillars of business law in India is the Indian Contract Act,
1872, which governs all types of contracts. It defines the essentials of a valid contract,
including offer, acceptance, consideration, and capacity to contract. It also addresses specific
contracts like those of indemnity, guarantee, bailment, pledge, and agency. This Act forms
the backbone of business transactions, ensuring that agreements are legally enforceable.
The Companies Act, 2013 is the principal legislation governing corporate entities in
India. It outlines the procedures for company incorporation, defines the roles and
responsibilities of directors, mandates corporate governance norms, and sets out rules for
accounting, auditing, and disclosure. The Ministry of Corporate Affairs (MCA) and the
Registrar of Companies (ROC) are the main regulatory bodies ensuring compliance with this
Act.
For businesses formed through partnership, the Indian Partnership Act, 1932, and the
Limited Liability Partnership (LLP) Act, 2008, lay down the rules regarding the formation,
registration, and functioning of partnerships and LLPs. These laws clarify the duties and
liabilities of partners and provide mechanisms for resolving disputes among them.

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 Labour and employment laws form a crucial part of business regulations. Key
legislations such as the Factories Act, 1948, Industrial Disputes Act, 1947, and the
Employees’ Provident Funds Act, 1952, among others, aim to protect the rights of workers
and ensure fair treatment in the workplace. In recent years, the government has introduced
four consolidated Labour Codes to simplify and modernize labour laws, covering wages,
industrial relations, social security, and occupational safety.
Taxation laws are another vital area. The Goods and Services Tax (GST) Act, 2017,
has revolutionized indirect taxation by replacing multiple state and central taxes with a single,
unified system. The Income Tax Act, 1961, governs direct taxes and outlines procedures for
the assessment and collection of income tax. These laws ensure the government’s revenue
and require businesses to maintain financial discipline.
To protect consumers, the Consumer Protection Act, 2019, provides a legal
framework for grievance redressal, product liability, and regulation of e-commerce platforms.
It empowers consumers and introduces new provisions like penalties for misleading
advertisements and the establishment of Consumer Protection Councils.
India’s Competition Act, 2002, seeks to promote fair competition in the market by
prohibiting anti-competitive agreements, abuse of dominant position, and regulating mergers
and acquisitions. The Competition Commission of India (CCI) oversees compliance and
promotes healthy business practices.
Intellectual Property Rights (IPR) laws such as the Patents Act, 1970, Trade Marks
Act, 1999, and Copyright Act, 1957, provide creators and inventors with exclusive rights
over their innovations and works. These laws encourage innovation and creativity by
safeguarding ownership and usage rights.
Environmental laws, including the Environment (Protection) Act, 1986, Air
(Prevention and Control of Pollution) Act, 1981, and Water (Prevention and Control of
Pollution) Act, 1974, impose obligations on businesses to adopt sustainable practices and
control pollution. These laws ensure that business growth does not come at the cost of
environmental degradation.
The Foreign Exchange Management Act (FEMA), 1999, governs foreign exchange
transactions and facilitates foreign direct investment (FDI) in India. It ensures orderly
development of the foreign exchange market and is administered by the Reserve Bank of
India (RBI).
Lastly, the Insolvency and Bankruptcy Code (IBC), 2016, provides a time-bound
process for resolving insolvency and bankruptcy for companies, LLPs, and individuals. It
aims to improve the ease of doing business by ensuring speedy recovery of dues and
restructuring of stressed assets. The Insolvency and Bankruptcy Board of India (IBBI)
oversees its implementation.
The business laws in India offer a well-defined structure for conducting business
activities. They not only regulate internal corporate functioning but also ensure fair practices,
consumer protection, and compliance with national interests. A clear understanding of these
laws is essential for entrepreneurs, managers, and professionals to operate successfully and
legally in the Indian business environment.

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SOURCES OF INDIAN BUSINESS LAW:
The business law in India is mainly based upon the English Mercantile law. However
necessary modifications have been made to provide for the local wages and trade. It is
important to note that in the absence of any specific law or custom or usage on a particular
point, the rules of the English common law are still applied by the courts in India.
The important sources of business law may be discussed under the following heads:
1. English Mercantile Law:
The English Mercantile Law is the important source of the Indian mercantile law. For
instance, India’s Sale of Goods Act, Companies Act have been directly adopted from the
English Law. So, in order to trace the origin of legal principles governing commercial
transactions in India, it is necessary to know the sources of English Law.
These sources are:
a. English Common Law: The Term ‘common law’ is used to denote the case law
based upon English customs, usages or traditions, which were developed over
centuries by the English courts. A particular Act, usage practiced by a group of people
for a longer period, which is ‘unwritten’ law becomes a custom.

b. Principles of Equity (Natural Justice): Law based on the principles of equity,

justice and good conscience, which is also an ‘unwritten law’. For the relief which the
common law courts couldn’t give, the people had to petition to the chancellor and
then to organized courts known as ‘Courts of Equity’. And relief was granted by these
courts on the principles of justice, equity and good conscience. It may be noted that
the law based on equity was flexible as compared to common law.

c. Law Merchant/ LexMercatoria: The Laws which were based on customs and
usages prevalent among merchants and traders is known as LexMercatoria. The law
of merchant was developed in order to obtain quick relief and to protect them against
lawlessness among traders and merchants. The Traders established their own tribunals
consisting mainly of the merchants themselves. The rules pronounced by these
tribunals became the law, popularly known as LexMercatoria.

d. British Statute Law/ Acts of British legistlature: It is the source of law which is
lacunae in Acts passed by the legistlature/Parliament. It is the written law, most
efficient and usual source of law.

2. Precedents/ Past judicial decisions/Case law:

The past judicial decisions of courts are generally followed by the courts in deciding
similar cases before them. In India, the Supreme Court is the highest court, and its decisions
have binding force on all its courts sub-ordinate to it - High Courts, District Courts. It is
based on the principle that what has been decided in the earlier case is binding in a similar
case unless there is a change in the circumstance of this case.

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3. Indian Statute Law/ Acts of India Legislature:
The Acts passed by Indian legislature are the main sources. In India the Central and
State legislature possess law making powers. The important Acts passed by the Indian
legislature are the Indian Contract Act – 1872, The Negotiable Instruments Act – 1881, The
Sale of Goods Act – 1930, The Indian Partnership Act – 932, The Companies Act – 1956,
MRTP Act – 1969, Consumer Protection Act – 1986, Environment Protection Act – 1986, IT
Act – 2000
4. Local Customs and Usages:
Custom means a usage or practice common to many or to a particular place. It is a long
established practice considered ‘unwritten law’. A particular Act, usage or conduct practiced
by a group of people for a long period becomes a custom. Customs to become binding on the
parties, must satisfy certain requirements.
a. Definite and certain
b. Reasonable
c. Consistent with the law
d. Uniformly accepted in ordinary courts of business
e. Not to be opposed to any legislature enactment
When a custom is accepted by a court it is incorporated in a judicial decision, it becomes a
legally recognized custom.
THE INDIAN CONTRACT ACT, 1872:
In India, the law relating to contracts is contained in the INDIAN CONTRACT ACT,
1872. The Act came into force on the 1st day of September 1872, and it applies to the whole
of India except the State of Jammu and Kashmir. The act does not deal with all the branches
of law of contracts. The contracts relating to Partnership, Sale of Goods Act and Negotiable
Instruments Act are outside the scope of the Indian Contract Act. The Indian Contract Act
deals with:
1. The general principles applicable to all contracts;
2. The conditions, which are essential for making a valid contract;
3. The principles applicable to quasi contracts;
4. The principles, which are applicable to a few special contracts, namely,
a) The contracts of indemnity,
b) The contracts of guarantee,
c) The contracts of bailment and agency,
d) The contracts of agency.

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 The law of contracts deals with agreements, which can be enforced through law
courts. Law of contracts is the most important branch of mercantile law. It affects every
person in one way or the other, as all of us enter into some kind of contract every day.
The object of the law of contracts is to introduce definiteness in commercial and other
transactions, and to ensure the realization of reasonable expectation of the parties, who enter
into a contract. CONTRACT The word contract is derived from the Latin word “contractum”
which means “drawn together”. It denotes a drawing together the minds of two or more
persons to form a common intention giving rise to an agreement. A contract is an agreement
enforceable by law, which offers personal rights and imposes personal obligations, which the
law protects and enforces against the parties to the agreement.
Definition:
Section 2 (h) of the Indian Contract Act defines a contract as “an agreement
enforceable by law”. Therefore, a contract essentially consists of two elements: 1.
Agreement: Section 2 (e) defines an agreement as, “every promise and every set of promises
forming the consideration for each other”. In other words, an agreement is formed where one
party makes the proposal and the other party accepts it.
SALIENT FEATURES COVERING ESSENTIALS OF CONTRACT:
Essential Elements of a Valid Contract:
The following are the essential elements of a contract, arrived at on the basis of a combined
reading of Section 2(h) and Section 10 of the Indian Contract Act:
1. Offer and Acceptance: There must be a ‘lawful offer’ and ‘lawful acceptance’ of the
offer, thus resulting in an agreement. For example: If X offers to sell his Maruti Car to Y for
Rs. 2,25,000 and Y agrees to pay X Rs. 2,25,000 for the Maruti Car. Here X is called the
offeror or promisor and Y is the offereeor promise.
2. Consensus ad idem: For a valid agreement, there must be a complete identity of minds
between the contracting parties. For example: A has two buffaloes but B is aware of only one
of these. B proposes to buy the buffalo of which he is aware. A’s Consents to sell the other
buffalo. Since there is confusion in the minds of the parties, there is no consensus and hence
no agreement follows.
3. Free Consent: The contracting parties must give their consent freely. It must not be given
due to coercion, undue influence, fraud, misrepresentation or mistake. The absence of free
consent would affect the legal enforceability of a contract. For example: An illiterate woman
executes a deed of gift under the impression that she is executing a deed authorizing her
nephew to manage her agricultural land. The deed is not read or explained to her. Here, there
is no consent, therefore no contract.
4. Capacity of the parties: The parties making the contract must be legally competent in the
sense that each must be of the age of majority, of a sound mind, and not expressly
disqualified from contracting (Section 11). An agr, kieement by incompetent parties shall be
a legal nullity. For example: A, a minor, borrows Rs. 5,000 from B and executes a
promissory note in B’s favour. After attaining majority A executes a fresh promissory note in

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favour of B for this amount. B cannot sue on this promissory note as the agreement is void
for lack of consideration.
5. Lawful Consideration: An agreement to be enforceable by law must be supported by
consideration. Without consideration, a contract is regarded as a nudum pactum. Each of the
contracting parties must give as well as get something. Moreover, the consideration must be
lawful. For example: X lets his house for being used as a gambling den. The agreement is
illegal as the object of agreement is unlawful.
6. Lawful object: The object of the agreement must be lawful. It is considered unlawful if it
is (i) illegal (ii) immoral, (iii) fraudulent, (iv) of a nature that, if permitted, it would defeat the
provisions of any law, (v) causes injury to the person or property of another, or (vi) opposed
to public policy. For example: A promises to obtain a job for B in government service in
consideration of Rs. 50,000. The agreement is void because it is forbidden by law.
7. Not expressly declared void: The agreement must not have been declared void by any law
in force in India. The Act has itself declared void certain types of agreements such as those in
restraint of marriage, or trade, or legal proceedings as well as wagering agreements.
8. Intention to create legal relations: There must be an intention among the parties that the
agreement should be attached by legal consequences and create legal obligations. For
example: A wife withdraws a complaint against her husband under an agreement that
husband will pay her allowance. Court held it as a binding contract.
9. Certainty of meaning: The terms of the agreement must be certain and unambiguous.
Section 29 of the Act, “agreements the meaning of which is not certain or capable of being
made certain are void”. For example: A agrees to sell a car to B out of his 5 cars. There is
nothing whatever to show which car was intended. The agreement is void for uncertainty.
10. Legal formalities: The agreement must comply with the necessary formalities as to
writing, registration, stamping etc. if any required in order to make it enforceable by law.
Classification of Contracts:
Section of the Act, which is called the ‘interpretation clause’, besides defining a contract in
clause (h), also provides the basis for the classification of contracts.
Contracts may be classified as follows:
1. On the basis of Enforceability:
a) Valid Contract: A contract which satisfies all the legal requirements laid down in Section
10 of the Act is a valid contract. Such a contract creates rights in persona and is legally
enforceable.
b) Void Agreement: Section 2(g) defines it as, “an agreement not enforceable by law is said
to be void”. Such agreements are void ab initio which means that they are unenforceable right
from the time they are made. For example: X agrees with Y, in consideration of Rs. 100, to
draw two parallel lines in such a way as to cross each other. The agreement is impossible to
perform and, therefore void.

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c) Void Contract: Section 2(j) provides that "a contract which ceases to be enforceable by
law becomes void when it ceases to be enforceable." Following are the examples of such
circumstances which render a contract void:
(i) Supervening impossibility or illegality as described in Section 56.
(ii) In the case of a voidable contract when the party whose consent is not free, repudiates the
contract.
(iii) A contingent contract to do or not to do something on the happening of an event becomes
void when the event becomes impossible (Section 32). For Example: A agrees to sell 1000
tonnes of wheat to B @ Rs. 500 per tonne in case his ship reaches the port safely by 15th
February. The ship fails to reach by the stipulated date. The contract between A and B is
void.
d) Voidable Contract: According to Section 2(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 other or others, is a
voidable contract." In a voidable contract, a right or option is open to the aggrieved party i.e.,
the party whose consent is not free that either to repudiate the contract or to abide by it. Thus,
a voidable contract continues to be valid and enforceable till it is repudiated by the aggrieved
party. For example: A threatens to kill B if he does not give him a loan of Rs. 50,000 for 25
years B gives the loan. This is a voidable contract as consent of B is obtained by coercion.
e) Illegal agreement: An agreement which is either prohibited by law or otherwise against
the policy of law is an illegal agreement. Such an agreement is a nullity and is void abintio.
f) Unenforceable Contract: An unenforceable contract is that which is valid and
enforceable, but for certain technical defects such as want of proof, expiry of the period
within which enforceable, absence of writing, registration and attestation, insufficient stamp
etc., it becomes unenforceable. For example: If a document embodying a contract is under
stamped, the contract is unenforceable, but if the requisite stamp is affixed (if allowed), the
contract becomes enforceable.
2. On the basis of mode of creation:
a) Express Contract: An express contract is that which is made in writing or by the words
of mouth. For example: A writes to B, ‘I am prepared to sell my horse for a sum of Rs. 500.
B accepts A’s offer by a telegram. The contract will be termed as express contract. b) Implied
Contract: An implied contract is one which arises out of acts or conduct of the parties or out
of the dealings between them. For example: A takes a seat in a bus. There is an implied
contract that he will pay the prescribed fare for taking him to his destination.
c) Quasi Contract: Under certain circumstances, law itself creates legal rights and
obligations against the parties. These obligations are known as quasi contracts. For example:
A supplies B, a lunatic with necessaries suitable to his condition in life. A is entitled to be
reimbursed from B’s property.
3. On the basis of execution:
a) Executed Contract: When a contract has been completely performed, it is termed as
executed contract, i.e., it is a contract where, under the terms of a contract, nothing remains to
be done by either party. For example: X sells a radio set to Y for Rs. 300. Y pays the price.
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Both the parties have performed their respective obligations, and therefore, it is an executed
contract.
b) Executory Contract: Where one or both the parties to the contract have still to perform
their obligations in future, the contract is termed as executory contract. For example: A
agrees to paint a picture for B and B in consideration promises to pay A a sum of rupees one
hundred. The contract is executor.
c) Unilateral Contract: A unilateral contract is one sided contract in which only one party
has to perform his promise or obligation to do or forebear. For example: A, a coolie, puts B’s
luggage in the carriage. The contract comes into existence as soon as the luggage is put. It is
now for B to perform his obligation by paying the charges to the coolie.
d) Bilateral Contract: A bilateral contract is one in which both the parties have to perform
their respective promises or obligations to do or forbear. For example: A promises to sell his
car to B after 15 day. B promises to pay the price on the delivery of the car. The contract is
bilateral as obligations of both the parties are outstanding at the time of the formation of the
contract.
OFFER AND ACCEPTANCE:
It is an established principle that an agreement arises only when an offer is made by
one person and is accepted by the other person, to whom it is made. Thus, an offer and its
acceptance is the starting point in the making of an agreement.
According to Section 2 (a) of the Indian Contract Act, 1872 defines a proposal as
follows: “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”. The person making the proposal is called the ‘promisor or offeror’. The
person to whom the proposal is made is called the ‘promisee or offeree’. Example: X says to
Y, “I want to sell my car to you for Rs. 1, 00,000”. Here, “to sell car” is an offer or proposal.
X who has made the offer is called offeror or promisor. Y to whom the offer has been made is
called the offeree or promisee.
Essentials Characteristics of a Valid Offer:
1. The offer must be capable of creating legal relations: An offer must intend to create
legal relationship among the parties. If the parties have agreed that the breach of the
agreement would not confer any right on either party to go to the court of law for enforcing
the agreement, it will not be a valid offer.
2. The offer must be certain, definite and not vague: The terms of the offer must be certain
and unambiguous and not vague. If the terms of the offer are vague, no contract can be
entered into because it is not clear as to what exactly the parties intended to do.
3. The offer must be communicated to the other party: The offer must be communicated
to the person to whom it is made. Thus, an offer accepted without its knowledge, does not
confer any legal rights on the acceptor.
4. The offer must be made with a view to obtaining the consent of the offeree: If a person
merely makes a statement without any intention to be bound by it, then it is not a valid offer.
Merely making an enquiry does not constitute an offer.
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5. The offer must be distinguished from an answer to a question: The terms of an offer
should be clear so that there is no confusion whether it is a valid offer or an answer to a
question. An answer to a question cannot be taken as an offer.
6. Invitation to an offer is not an offer: Price lists, catalogues, display of goods in a show
window, tenders, advertisements, prospectus of a company, an auctioneer's request for bids,
etc., are instances of invitation to offer. In case of an invitation for an offer, there is no
intention on the part of the person sending out the invitation to obtain the assent of the other
persons to such an invitation.
7. The offer must be distinguished from mere statement of intention: The terms of an
offer should be clear so that there is no confusion whether it is a valid offer or a mere
statement of intention. Such statement or declaration merely indicates that an offer may be
made or invited in future.
8. Special conditions attached to an offer must also be communicated: In such cases the
rule is that the party shall not be bound by the conditions unless conditions printed are
properly communicated.
9. The offer may be positive or negative: An offer to do something is a positive offer. And
an offer not to do something is a negative offer.
10. The offer may be express or implied: An offer which is expressed by words, written or
spoken, is called an express offer. The offer which is expressed by conduct, it is called an
implied offer.
11. The offer may be specific or general: When an offer is addressed to a specific
individual or a group of individuals, called it as specific offer. When an offer is addressed to
an unascertained body of individuals or to the public at large, it is said to be a general offer.
12. The offer should not contain a term the non-compliance of which would amount to
acceptance: One cannot say while making the offer that if the offer is not accepted by a
certain time, it will be presumed to have been accepted.
Different Kinds of Offers:
1. Express offer: An express offer is one which is made by words spoken or written.
2. Implied offer: An implied offer is one which is made otherwise than in words. In other
words, it is inferred from the conduct of the person or the circumstance of the particular case.
3. Specific offer: A specific offer can be accepted only by that definite person or that
particular group of persons to whom it has made.
4. General offer: A general offer is one which is made to the world at large or public in
general.
5. Standing or Open or Continuing offer: An offer for a continuous supply of certain goods
and services in any quantity at a certain price as and when required it will be termed as a
standing or open offer.
6. Counter offer: A Counter offer is rejecting the original offer and making a new offer. The
new offer is the counter offer.

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7. Cross offer: Where identical offers are made by parties in ignorance of each other, the
offers are said to be cross offers.
Lapses of offer:
[When does an offer come to an end] Section 6 of the Act deals with the various modes of
revocation of an offer. Accordingly, an offer may come to an end in any of the following
ways:
1. By communication of notice of revocation by the proposer: The proposer can revoke or
withdraw his offer at any time before the acceptor posts his letters of acceptance. A notice of
revocation to be effective must be communicated to the acceptor.
2. By lapse of prescribed time: An offer lapses if acceptance is not communicated within the
time prescribed in the offer, or if no time is prescribed, within a reasonable time.
3. By non-fulfillment of a condition by acceptor: A proposal comes to an end when the
acceptor fails to fulfill a condition precedent to the acceptance of the proposal.
4. By the death or insanity of the offeror: A proposal comes to an end by the death or insanity
of the offeror if the fact of the death or insanity comes to the knowledge of the acceptor
before acceptance.
ACCEPTANCE
An acceptance is the manifestation by the offeree of his willingness to be bound by the terms
of the offer. According to Section 2 (b) of the Act, “When the person to whom the offer is
made signifies his assent thereto, the proposal is said to be accepted. A proposal when
accepted becomes a promise”. Example: X offers to sell his car to Y for Rs. 1,00,000. Y
agrees to buy the car for Rs. 1,00,000. Y’s act is an acceptance of X’s offer.
Essential and Legal Rules for A Valid Acceptance:
1. The acceptance must be communicated: An acceptance to be valid must be
communicated to the proposer. If the person to whom the proposal is made remains silent and
does nothing to show that he has accepted the proposal, no contract is formed.
2. Acceptance must be absolute or unqualified: Acceptance, in order to be binding, must
correspond with all the terms of the offer. Offer must be accepted in toto. A qualified and
conditional acceptance amounts to marking of a counter offer which puts an end to the
original offer and it cannot be revived by subsequent acceptance.
3. Acceptance may be express or implied: Acceptance given by words is known as express
acceptance. But an acceptance given by conduct is said to be implied. Implied acceptance
may arise from
(a) doing of a particular act as prescribed in the offer, and
(b) by accepting a benefit offered by the offeror.
4. The acceptance must be given in some usual and reasonable manner: It is another
important legal rule of an acceptance that where no mode is prescribed, acceptance must be
given in some usual and reasonable manner.

13
5. The acceptance must be given before the lapse of offer: A valid contract can arise only
when the acceptance is given before the offer has elapsed or withdrawn.
6. The acceptance cannot be implied from silence: The offeror does not have the legal
rights to say that if no answer is received within a certain time, the offer shall be deemed to
have been accepted.
7. Acceptance means acceptance of all the terms of the offer: When an offer is accepted, it
would mean acceptance of all the terms of offer. The acceptance of offer cannot be partial at
all.
8. If acceptance has been given conditional there will be no contract: When an acceptance
by a person is made conditional i.e., ‘subject to a formal contract’ or ‘subject to approval by
certain person – such as solicitors etc’, no contract will arise till a formal contract is entered
into or consent of such persons is obtained.
CONSIDERATION:
The consideration is one of the essential elements of a valid contract. The term
‘consideration’ may be defined as the price of the promise. This term is used in the sense of
quid pro quo (i.e., something in return). Accordingly, an agreement which is not supported by
consideration is a nudum pactum (a nude or a bare agreement), and the effect of a nude
agreement is expressed in the legal maxim, ex nudo pacto non orilur actio meaning no cause
of action arises from a bare agreement. The most popular definition of consideration is given
by Lush J. in Currie vs. Misa. According to him, “A valuable consideration, in the sense of
the law, may consist either in some right, interest, profit or benefit accruing to the one party,
or some forbearance, detriment, loss or responsibility given, suffered, or undertaken by the
other”.
Definition:
Section 2 (d) of the Act defines consideration as under: "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 or to do or abstain from doing something, such act or abstinence or
promise is called a consideration for the promise".
Essentials of Consideration:
1. Consideration must move at the desire of the promisor: The act or abstinence of the
promise or any other person must be done at the desire or request of the third party or
voluntary acts would not constitute a valid consideration. The desire of the promisor may be
express or implied from the conduct of the parties.
2. Consideration may move from the promisee or any other person: It is not necessary
that the consideration should proceed only from the promisee. Consideration furnished by a
third party will also be valid if it has been done at the desire of the promisor. This is termed
as ‘Doctrine of Constructive Consideration”.
3. Consideration may be past, present or future: The words, has done or abstained from
doing, does or abstains from doing, or promises to do or to abstain from doing; indicate that
the consideration may be past, present or future.

14
a) Past consideration: When the present promise is based on the consideration already taken
place (i.e., before the date of the promise), it is termed as consideration.
b) Present consideration: When the promisor receives consideration simultaneously with his
promise, it is termed as present consideration.
c) Future consideration: When the consideration for a promise is rendered in future it is
termed as future or executory consideration.
4. Consideration need not be adequate: The consideration need not be adequate to the
promise but it must be of some value in the eye of the law. According to explanation 2 to
Section 25, 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.
5. Consideration must be real and not illusory: Consideration must be real and be of some
value in the eyes of law. Consideration of the following type are not real:
(a) Physical impossibility: For instance as promising to put life into B's dead wife should B
pay him Rs. 500, is void for lack of physical possibility.
(b) Legal impossibility: If consideration consists of something illegal, the agreement will be
void.
(c) Uncertain consideration: An uncertain or vague consideration will make the agreement
void.
(d) Illusory consideration: It consists of a promise to do something which a person is
already bound to do by law or contract. It must be something more than what a promisee is
already bound to do.
6. Consideration must be lawful: Section 23 of the Act which says that “every agreement of
which the consideration is unlawful, is void”. It means that an agreement must be supported
by lawful consideration.
7. Consideration must not be illegal, immoral or opposed to public policy: The
consideration of an agreement is unlawful if:
a) it is forbidden by law; or
b) it is of such a nature that if permitted it would defeat the provisions of any law; or
c) it is fraudulent; or
d) it involves or implies injury to the person or property of another; or
e) the court regard it as immoral or opposed to public policy.
EXCEPTIONS TO THE GENERAL RULE OF “NO CONSIDERATION, NO
CONTRACT”
The following circumstances under which the agreement is valid and enforceable even if it is
made without consideration:

15
1. Agreements made on account of natural love and affection [Sec. 25 (1)]: This clause
lays down four essential requirements for the validity of an agreement made without
consideration. They are
a) The agreement must be in writing;
b) It is registered under the law;
c) It is made on account of natural love and affection; and
d) It is between parties standing in a near relation to each other.
Example: A, for natural love and affection, promised to give Rs. 1,000 to his son B. A put his
promise to B in writing and registered it. This is valid contract.
2. Promise to compensate for past voluntary services [Sec. 25 (2)]: Such promise made
without consideration is valid:
a) If the act was done voluntarily;
b) For the promisor or something which the promisor was legally bound to do;
c) The promisor must be in existence at the time when the act was done; and
d) The promisor must agree now to compensate the promise.
Example: X finds Y’s purse and gives it to him. Y promises to give Rs. 500 to X. This is a
valid
contract even though the consideration did not move at the desire of Y, the promisor.
3. Promise to pay time-barred debt [Sec. 25 (3)]: When a debtor makes a written and
registered promise, under signature of his own or that of his agent, to pay a time-barred debt,
no fresh consideration is needed. The following conditions must be satisfied for the
application of this exception:
a) The promise to pay must be definite and express;
b) The promise must be in writing;
c) The promise must be signed by the promisor or his authorized agent;
d) The debt must be time-barred, i.e., the limitation period for the recovery of the debt, must
be expired. Example: X owed Rs. 2,000 to Y. This debt was barred by Limitation Act i.e., the
limitation period for the recovery of debt has already expired. X signed a written promise to
pay Rs. 1,000 to Y on account of this debt. This is a valid contract.
4. Completed gift [Explanation 1 to Sec. 25]: The gifts actually made by a donor and
accepted by the done are valid even without consideration. Thus, a completed gift needs no
consideration.
5. Contracts of agency: [Sec. 185]: No consideration is necessary to create an agency.
6. Remission: [Sec. 63]: No consideration is required for an agreement to receive less than
what is actually due.

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CAPACITY TO CONTRACT/PARTIES:
One of the essential conditions for the enforceability of an agreement is that the concerned
parties must be competent to enter into an agreement. The ‘capacity to contract’ means the
competence (i.e., capability) of the parties to enter into a valid contract. According to Sec. 11
of the Contract Act, “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 of a sound mind, and is not-
disqualified from contracting by any law to which he is subject”.
Persons not Competent to Contract:
As per the statement of Section 11 of the Indian Contract Act, the following persons are not
competent to contract, i.e., they are incapable of entering into a valid contract.
(i) Minors;
(ii) Persons of unsound mind; and
(iii) Persons disqualified for contracting by any other law. (i) MINORS According to Section
3 of the Indian Majority Act, 1875, a person who has not completed his age of 18 years
(majority), is considered to be a minor. In the following two cases, a person becomes major
on completing the age of 21 years:
a) Where a guardian of a minor’s person or property has been appointed under the Guardians
and Wards Act, 1890; and
b) Where the superintendence of minor’s property is assumed by a Court of Wards.
Rules Regarding Minor's Agreements: The law protects minor’s rights because they are
not mature and may not possess the capacity to judge what is good and what is bad for them.
The position of a minor as regards his agreements may be stated as under:
1. An agreement with or by a minor is void ab initio: An agreement with a minor has been
held to be void ab initio. It is not only void, but is absolutely void.
2. A minor can be a promisee or a beneficiary: A promissory note executed in favour of
the minor can be enforced. He can draw, negotiate or endorse a negotiable instrument so as
not to incur any liability upon himself.
3. No ratification: Since a contract with or by a minor is altogether void, he cannot ratify
contracts entered into by him during his minority, even after attaining the majority. There can
be no ratification of a contract void ab intio.
4. No restitution: Sometimes, the minor receives some property or money by falsely
representing his age. In such cases, the minor can be asked to restore such property or money
so long as the same is traceable in his possession.
5. The liability of Minor’s parents or guardian: A contract made by the minor's parents or
guardian or manager of his estate can be specifically enforced by or against the minor
provided:
(a) the contract is within the scope of authority of the parent, etc., and
(b) it is for the benefit of the minor

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6. No Estoppel: Where a minor represents fraudulently or otherwise that he is of age and
thereby induces another to enter into contract with him, he in an action founded on the
contract, is not estopped from setting up infancy.
7. Minor’s property liable for necessaries: Sometimes, a person supplies necessaries to a
minor. In such cases, the supplier of necessaries can claim reimbursement from the property
of minor.
8. Minor’s liability for tort: A minor is liable for negligently causing any injury or damage,
or for converting property that does not belong to him. But, he is not liable for a tort directly
connected with a contract which as an infant he would be entitled to avoid. In other words, a
person cannot convert a contract into a tort to enable him to sue an infant.
9. Minor as an agent: Minor can act as an agent and bind his principal by his acts without
incurring any personal liability.
10. Minor as a partner: A minor cannot be a partner in a firm. But under Section 30 of the
Partnership Act, he can be admitted to the benefits of partnership with the consent of all the
members.
11. Minor as an insolvent: A minor cannot be declared insolvent because he is not
competent to contract.
FREE CONSENT:
In order to create a valid contract, there should be perfect identity of mind, i.e., “consensus ad
idem” between the contracting parties regarding the subject matter of the contract. Section 10
of the Indian Contract Act laid down in clear terms free consent is one of the essentials of a
valid contract.
CONSENT:
According to Section 13 of the Act has defined consent as “two or more persons are said to
consent when they agree upon the same thing in the same sense”. According to this section
which has laid down the basic principle of consensus ad idem on which the law of contract is
based, the parties to an agreement should have identity of minds regarding the subject matter
of the agreement.
FREE CONSENT: If the consent is there but it is not free or real, then the contract will be
voidable at the option of the contracting parties whose consent is not free. The word “free
consent” is defined in Section 14 of the Contract Act as follows – “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 Sections 20, 21 and 22.

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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 (SEC. 15)
QUASI CONTRACTS:
Under the Law of Contracts, the contractual obligations are voluntarily undertaken by the
contracting parties. However, under certain circumstances, a person may receive a benefit to
which the law regards another person as better entitled or for which the law considers he
should pay to the other person, even though there is no contract between the parties. Such
relationships are called quasi-contracts, because, although there is no contract or agreement
between the parties, they are put in the same position as if there were a contract between
them.
Definition:
Quasi contract is defined as “an obligation to pay a sum of money, whether liquidated or un
liquidated, which arises independently of any contract, on the ground that in the
circumstances of the case, it is considered by the law to be just debt”. It is a debt or obligation
constituted by the act of the law apart from any consent or intention of the parties or any
privacy of contract. These relationships are termed as quasi-contracts or constructive
contracts under the English Law and “certain relations resembling those created by contracts”
under the Indian Law. A quasi-contract rests on the ground of equity that a person shall not
be allowed to enrich himself unjustly at the expense of another. That is why the law of quasi-
contracts is known as the law of restitution.
Strictly speaking, a quasi-contract is not a contract at all. A contract is intentionally entered
into. A quasi-contract, on the other hand, is created by law.
BASIS OF QUASI CONTRACTS:
The quasi contracts are based on the maxim of ‘nemodebetlocuplatari ex lienajustua’, i.e., no
man must grow rich out of another person’s costs. In other words, these are based on the
equitable principle that a person shall not be allowed to enrich himself at the expense of
another.
FEATURES OF QUASI-CONTRACTS:
The salient features of a quasi-contract are as under:
a) It is imposed by law and does not arise from any agreement.
b) The duty of a party and not the promise of any party is the basis of such contract.
c) The right under it is always a right to money and generally, though not always, to a
liquidated sum of money.
d) The right under it is available against specific person(s) and not against the world.
e) A suit for its breach may be filed in the same way as in case of a complete contract.
KINDS OF QUASI CONTRACTS:
The quasi contractual obligations are contained in Sections 68 to 72 of the Contract Act,
1872. These have been described below:

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1. Supply of necessaries to persons incompetent to contract [Section 68]: The person who
has supplied the necessaries to a person who is incompetent to contract or anyone who is
dependent on such incompetent person, is entitled to claim their price from the property of
such incapable person. Example: A supplies B, a lunatic, some necessaries suitable to the
maintenance of his life. A is entitled to be reimbursed from B’s property.
The following conditions are necessary for the applicability of the provisions of Section 68:
a) There must be the supply of necessaries to a person who is incompetent to contract such as
a minor or a person of unsound mind or dependents of such incompetent person.

LEGALITY OF CONSIDERATION AND OBJECT:

For a valid contract it is essential that the object or consideration of the agreement must be
lawful. According to Sec. 23 of the Indian Contract Act, the objects and the consideration of
an agreement shall be unlawful in the following cases:
1. Where it is forbidden by law: As a matter of fact, an act is forbidden by law, when it is
punishable by criminal law of the country, or when it is prohibited by special legislation or by
the regulations made by a competent authority under power derived from the legislature.
2. Where it defeats the provision of any law: It is of such nature that, if permitted, it would
defeat the provisions of law, e.g., purchase of land being sold for arrears of land revenue by
the defaulter, or an agreement by a debtor not to raise the plea of limitation in a suit by the
creditor.
3. Where it is fraudulent: If the two parties agree to practice a fraud on third party, then the
agreement between the parties is unlawful and void.
4. Where it is injurious either to the person or his property: It involves or implies injury to the
person or property of another, e.g., an agreement to indemnify a person against the
consequences of publication of a libel.
5. Where it is regarded as immoral: The term ‘immoral’ depends upon the standard of
‘morality’ prevailing at a particular place and time. If the consideration for the agreement is
an act of sexual immorality, for example, illicit co-habitation and prostitution, the agreement
is illegal.
6. Where it is opposed to public policy: The agreements that are injurious to the public or
which are against the public good or public welfare are void.
b) The term 'necessaries' shall be construed in accordance with the situation in life of the
incompetent person, the nature of goods, the extent of supplies, etc.
c) The supplier can claim only reasonable value for the supplies made.
d) The reimbursement of the price of goods supplied can be obtained from the property of the
incompetent person who cannot be held personally liable.
2. Payment by an interested person [Section 69]: A person who is interested in the
payment of money which another is bound by law to pay, and who, therefore, pays it, is

20
entitled to be reimbursed by the other”. Example: X is bound by law to make a certain
payment. Y is interested in such a payment, and he makes it, there will be a quasi-contractual
obligation of X to reimburse Y. In order to make Section 69 applicable, the following
conditions must be satisfied:
a) The plaintiff should be interested in making the payment in order to protect his own
interest and the payment should not be voluntary one.
b) The payment must be such as the other party was bound by law to pay.
c) The payment must not be such as the plaintiff himself was bound to pay.
3. Liability to pay non-gratuitous acts [Section 70]: Where a person lawfully does
anything for another person, or delivers anything to him not intending to do so gratuitously
and such other person enjoys the benefits thereof, the latter is bound to make compensation to
the former in respect of, or to restore, the things so done or delivered. Example: A, a
tradesman, leaves goods at B’s house by mistake. B treats the goods as his own. He is bound
to pay A for them. A claim under this Section can be made only when the following
conditions are satisfied:
a) The thing must have been done or delivered lawfully;
b) The person who has done or delivered the thing, must not have intended to do so
gratuitously; and
c) The person for whom the act is done/to whom thing is delivered must have enjoyed the
benefit of the act done/thing delivered.
4. Responsibility of a finder of goods [Section 71]: A person who finds goods belonging to
another, and takes them into his custody, is subject to the same responsibility as a bailee.
Example: X, a guest found a diamond ring at a birthday party of Y. X told Y and other guests
about it. He has performed his duty to find the owner. If he is not able to find the owner he
can retain the ring as bailee.
5. Payment 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. Example: A paid
some money to B by mistake which was in fact due to C. In this case, B must repay the
money to C as it had been paid under a bonafide mistake.
PERFORMANCE OF THE CONTRACT:
The term ‘performance’ in its literal sense means the performance of a task or action. In its
legal sense “performance” means the fulfilment or the completion of the obligations which
they have towards the other party by virtue of the contract entered by them. For example, ‘A’
and ‘B’ enter a contract, the terms of the contract state that A must deliver a book to B on
payment of the consideration of five hundred rupees. Here, B pays five hundred rupees to A
and as stipulated in the contract, A delivers him the book.
Definition:
According to Section 37 of the Indian Contract Act,1872 “The parties to a contract must
either perform, or offer to perform, their respective promises, unless such performance is

21
dispensed with or excused under the provisions of the act, or any other law. Promises bind the
representatives of the promisors in case of the death of such promisors before performance,
unless a contrary intention appears in the contract. Thus, it is the primary duty of each
contracting party to either perform or offer to perform its promise.
Types of Performance:
1. Actual performance:
When a promisor has made an offer of performance to the promisee and the offer has been
accepted by the promisee, it is called an actual promisee. The contractual obligations are
actually performed whereby the liability of a party under the contract comes to an end.
2. Attempted performance or tender of performance:
Where the promisor has made an offer of performance to the promisee, and the offer has not
been accepted by the promisee, it is called an attempted performance [Section 38]. Such
refusal to accept offer of performance by promisee discharges the party from its liability and
from its performance.
Types of Tenders:
a. Tender of goods and services: The discharge of the contract to deliver goods and services
is completed when the goods are tendered for acceptance in accordance with the terms of the
contract. If the goods and services so tendered are not accepted, they are to be taken back by
the offeror and he is discharged from his liability.
b. Tender of money: Where the debtor tenders the money, which is to be paid to the creditor,
but the creditor refuses to accept the money. The debtor is not discharged from the liability to
pay back the money. Therefore, a tender of money can never result in the discharge of debt.
Offer of Performance/Tender:
The essentials of a valid offer of performance are stated under Section 38 of the Indian
Contract Act, 1872:
a) The offer should be unconditional.
b) It must be made at a proper time and place so as to allow the party to have a reasonable
time to ascertain that the person who is making the offer to him is competent to enter into a
contract.
c) If the offer to the offeree is such as to deliver some goods addressed to the offeree, then it
is the duty of the offeror to provide reasonable time to the offeree in which he can ascertain
that the goods offered to him is the same by which the offeror is bound under the terms of the
contract.
Discharge of Contract- Meaning:
The term discharge of contract means ending of the contractual relationship between the
parties. A contract is said to have been discharged when it ceases to operate i.e. when the
rights and obligations created by the parties came to an end. A contract can be discharged if

22
the parties mutually agree to terminate the contract. Also there are different methods through
which contracts can be discharged.
Methods of discharge of contract:

● Discharge by Performance

● Discharge by Agreement or Consent

● Discharge by Impossibility of Performance

● Discharge by Lapse of Time

● Discharge by Operation of Law

● Discharge by Breach of Contract

1. Discharge by Performance:
Performing means doing all those things which are required by a contract. Discharge of
performance occurs when the parties to the contract fulfill their obligations set out under the
contract within the specified time and in the manner prescribed. In such a case, parties are
discharged and contracts come to an end. But if only one of the party performs, he alone is
discharged. Such a party gets the right of action against the other party who is guilty.
Discharge of Performance may be:
a. Actual Performance
b. Attempted Performance
a. Actual Performance:
When both the parties perform their performance, then the contract is said to be discharged.
Performance should be complete and precise according to the terms of the agreement.
Majority of the contracts are discharged by performance in this manner.
b. Attempted Performance:
Attempted performance is only an offer to perform the obligation under the contract. When
the promisor agrees to perform the contract but the promisee refuses to accept the
performance, then in such case, it is termed as discharge of contract by attempted
performance or tender.
2. Discharge by Agreement or mutual consent:
a. Novation:
The term novation means the substitution of the new contract by the original one. The new
agreement may be with the same parties or with the new parties. For a contract to be valid
and effective, the consent of all the parties including the new one if any is necessary.
Moreover, the second party must be capable of enforcement of law, the consideration for
which is the exchange of promise not to carry out the original contract.

23
b. Alteration:
This refers to change in one or more terms of a contract with the consent of all the parties
entered in the contract. Alteration leads to formation of new contracts but the parties to it
remain the same.
c. Remission:
This means the acceptance by the promisee of a lesser sum than what was mentioned in the
contract, or a lesser fulfillment of the promise made.
d. Recession:
The term recession refers to cancellation of all or some of the material terms of the contract.
If the parties entered into the contract, mutually agreed to do so, then in such case the
respective contractual agreement of the parties gets terminated.
e. Waiver:
The term waiver means abandonment of rights. When one party deliberately abandons his
right under the contract, the other party is released of his oblig ations, else binding upon it.
3. Discharge by Impossibility of Performance:
If it is impossible for any of the parties entered in the contract to perform their obligations,
then the impossibility of performance of contract leads to discharge of contract. If the
impossibility of performing the contract exists from the start, then it is termed as
impossibility by ab-initio. However, impossibility of performing the contract may also arise
later due to:

● An unforeseen change in the law

● Destruction of subject-matter of the contract

● Non-existence or Non-occurrence of a particular state of things.

● Outbreak of War

Example:
John enters into the contract with this friend Tom to marry his sister within 6 months.
Howbere, John met with an accident and became insane. This impossibility of performance
leads to discharge of contract.
4. Discharge of Contract by a Lapse of a Time:
According to The Limitation Act, 1963, there is a specific time period for the performance of
a contract. If the promisor failed to perform his duties and the promisee failed to take action
within this specified period, then the promisee in such a case cannot be deprived of his
remedy through law. Here, the contract is said to be discharged due to the lapse of time. For
example: John takes a loan from one of his friends and agrees to pay him installments every
month for the next five years. However, he does not pay even a single installment. His friend
calls him several times but then gets busy and takes no action. After three years, he

24
approaches the court to help him recover his money. However, the court rejects his complaint
because he has crossed the time-limit of three years to recover his debts.
5. Discharge of Contract By Operation of Law:
A contract can be discharged by the operation of law in the following circumstance:
a. Unauthorized Material Alteration of Written Document: A party can discharge the contract
i.e from his side if the other party changes the terms such as price or quantity of contract
without taking any permission from the former.
b. By Insolvency
c. By Death

6. Discharge by Breach of Contract:

A contract is obliged to perform according to its terms. But when a promisor fails to perform
a contract according to the terms of the contract, then he is said to have committed a breach
of contract. The breach of contract is of two types
a. Actual Breach
b. Anticipated Breach
a. Actual Breach: Actual breach of contract refers to failure to perform the obligation when
the performance is due. For example, if a seller fails to deliver the goods by the appointed
time, or the goods are delivered but not upto the mark in terms of quality or quantity specified
in the contract.
b. Anticipatory Breach: Anticipatory Breach, also known as Breach by Contradiction, takes
place when one party before the arrival of the fixed date for performance states that it cannot
or will not able to perform material part of the contractual obligation on the specified date or
it aims to perform the contract in a way that is inconsistent with the deeds specified in the
contract at the initiation.
TERMINATION OF THE CONTRACT:
Terminating a contract is the conclusion of the agreement, whether it’s an early termination –
before one or more parties fulfill their contract obligations – or the natural end of a
relationship between the parties. When a contract is terminated, the obligations within the
contract typically also end, except for those that are intended to “survive” (that it stays around
and effective) after termination. This means that even though a contract may be over, for
better or worse, the parties may still have post-termination obligations and that even though a
contract is terminated, the parties might not be precluded parties from pursuing claims for
damages under common law or the contract’s termination conditions.
The reasons for a contract’s termination may vary, and can depend on each party’s situation.
But when and how the contract is terminated will determine whether any of the parties are
liable for breach of the contract before it was terminated.

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Why Does a Contract Get Terminated?
Contracts are terminated for various reasons including:
1. Expiration of the terms of the contract: Contract terminates when its specified date
or duration expires. Example: John’s one-year lease, starting on January 1, 2024,
expires on December 31, 2024. At that point, the contract terminates unless both
parties agree to renew it.
2. Termination for convenience (T for C clause): One party terminates the contract for
practical reasons, without any breach by the other party. Both parties are typically
satisfied when this outcome occurs. Example: Party’s needs change, Party arranges a
different party to complete the contract
3. Impossibility of performance (Force Majeure): Unforeseen, unpredictable,
uncontrollable events make it impossible to fulfill the contract obligations. Example:
Serious injury, illness, death, weather, war, natural disasters, or legislated law changes
that impact the project.
Six Types of Contract Breaches:
Another reason for contract termination is a breach of the agreement. There are six types of
contract breaches and they often need a judge to come sort things out:
1. Minor Breach (Partial Breach):
A party fulfils most of the terms of the contract, but fails to meet a minor promise in the
contract. Often the promise that is not fulfilled does not significantly impact the other
contract terms so it does not lead to severe consequences.
2. Material Breach:
This is similar to a minor breach in that one party fails to meet a promise in the contract.
However, a material breach has a significant consequence and often gives the non-breaching
party legal rights to terminate a contract.
3. Actual Breach:
Both “minor breaches” and “material breaches” are subsets of actual breach. For example, if
you contract for a web design service due by December 1, and the designer doesn’t complete
by that date, it is an actual breach. Whether it is material or minor will depend on other terms
in the contract.
4. Anticipatory Breach:
A party indicates that they will not be able to fulfill their obligation, for example, by the
agreed-upon date. If this occurs, the non-breaching party can potentially terminate the
contract or seek remedies, such as payment, before the breach happens. Typically, this
happens when a party finds out the other party is about to commit a repudiatory breach (👇).
5. Repudiatory Breach:
This occurs when a party demonstrates that it is unwilling or unable to fulfill its obligations.
This is often viewed as a serious matter and leads to contract termination and legal action.

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6. Mutual Breach:
A mutual breach may occur if both parties have breached the contract or are in the process of
doing so. Typically, this will end in a negotiated result – but it might end up in a fight over
whose breach was worse!
What Are The Conditions for Terminating a Contract?
Contracts can be terminated under various conditions, ensuring fairness and legality in
agreements. Key reasons for termination include fraud or mistakes during formation, changes
in law rendering the contract illegal, breaches by any party, and mutually agreed-upon terms
for ending the contract under specific circumstances. Understanding these conditions helps in
effectively managing and dissolving contracts when necessary.
Example Conditions for Contract Termination:
1. Fraud or a mistake: If the contract was formed under circumstances that include
fraud, the contract can be terminated.
2. Illegality: If the main subject of the contract becomes illegal because of a new law,
the contract may become illegal and, therefore, must be legally terminated.
3. Breach of the contract: All contract parties have a responsibility to perform
obligations according to the contract. If a party fails to perform them, blocks the other
party from performing the same, or violates the terms of the contract, they will have
breached the contract, and the contract can be terminated.
4. Prior agreements: The contract parties may agree together to allow the termination
of the contract under specific circumstances. Those specific conditions must be in
place in order to prevent a breach of a contract.
How Does a Party Terminate a Contract?
A contract is a legally binding document that ties parties together and can range from simple
to extremely complex. Terminating a contract can be tricky, as there are several legal and
ethical aspects to consider, which should be clearly outlined in the contract language and
must be carefully reviewed before taking any actions. Parties should specifically look for
termination clauses that help define legitimate reasons that would allow a contract to end
early.
Contract Termination Notice:
Contract termination often starts with a termination notice or letter, with the terms and
conditions for delivering this notice being outlined within the agreement. This is a formal
communication from one party to the other that expresses the intention to terminate a
contract. The notice will state the grounds for termination, including specific contractual
clauses that legally justify the action. If the contractual requirements in the agreement are not
met, termination notices could lead to legal disputes or challenges.
Contract Termination Letter Checklist:
1. Business letter format on company letterhead
2. Clear statement of termination intent
3. Reference to the originally-signed contract
4. Detailed explanation for termination
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 5. Specific termination date
6. Authorized company representative signatures
Dispute Resolution:
If a dispute arises during the termination process due to termination validity or compensation,
there are a few common dispute resolution mechanisms that help address these issues in a
formal manner. These include: negotiation, mediation, arbitration, or litigation.
1. Negotiations: When parties seek to resolve a dispute amicably, they often try
negotiation first. This occurs when parties communicate openly seek to find potential
compromises that will avoid protracted legal proceedings.
2. Mediation: The goal of mediation is for a neutral third party to facilitate discussions
between the parties to reach a mutually acceptable resolution. Mediation allows
parties to openly share their feelings and explore their grievances in a controlled
environment.
3. Arbitration: Some contracts specify arbitration as the preferred method for resolving
disputes. This is a more formal process when an arbitrator or a panel of arbitrators,
which are neutral third parties that serve as judges, renders a binding decision after
hearing both sides argue their case. Once arbitrators render a decision, it is typically
confidential and cannot be appealed.
4. Litigation: This is usually the least-preferred method of dispute resolution as it can
be costly and timely. However, when all other efforts fail, parties turn to litigation
through the court system. It will include a plaintiff and defendant – both making their
case in front of a judge of jury. The verdict will stay on the public record. Litigation
can often end in the pre-trial period of a case with a settlement agreement between
parties.
What are Contract Termination Remedies?
Contract termination remedies are the different options available for parties to address
contract breaches or violations, including:
1. Compensatory (Monetary) Damages: Financial compensation, that is a reasonable
estimate to the actual harm suffered, to cover losses that result from the breach.
2. Specific Performance: Breaching party must fulfil their contractual obligations.
3. Liquidated Damages: Breaching party must provide a specified, predetermined
amount of damages to the other party. The amount must be reasonable and
proportional to the potential harm.
4. Rescission (Restitution): The contract is cancelled and the parties are restored to
their pre-contractual positions.
REMEDIES FOR BREACH OF CONTRACT:
When one among the party commits a Breach of the Contract, the opposite party becomes
entitled to any of the subsequent reliefs:

● Rescission of the Contract

● Damages for the loss suffered

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● Suit for the specific (precise) performance

● Suit for the injunction

● Suit upon quantum meruit

1. Rescission of the Contract:

When one among the parties commits a Breach of Contract, another party shall
additionally treat the Contract as void or cancel. Once the Contract is cancelled, the
affected party is mechanically discharged from all the commitments beneath the Contract.
Section 64 of the Act provides that the party cancel the Contract if he has received any
profit under it from the opposite party; restore such profit to the person from whom it had
been received. Further, the one that truly cancels the Contract is entitled to compensation
for any loss that he faced from the non-fulfilment of the Contract.
2. Damages for the Loss Suffered:
The term “Damages” means that financial compensation collectable by the defaulting
party to the affected party for the loss suffered by him once the Contract was broken.
Therefore, the aggrieved party could bring associate action for damages against the party
who are guilty of the Breach of Contract. The party is guilty of the Breach and is
vulnerable to pay damages to the aggrieved party.
Types of Damages:
A. Normal Damages or General Damages:
Damages that arise within the normal course of events from the Breach of Contract are
referred to as normal damages.
B. Special Damages:
Special damages are those damages that are collectable for the loss arising on account of
some special or uncommon circumstances. That is, they undue the natural and probable
consequences of the Breach of the Contract.
C. Exemplary or Vindictive Damages:
These damages are awarded against the party who has committed a Breach of the
Contract with the thing of gruelling the fallible as a defaulting party and to compensate
the aggrieved party. Generally, these damages are awarded just in case of action on loss
D. Nominal Damages:
These damages are in little quantity. They’re awarded merely to acknowledge the
correctness of the party to say damages for the Breach of the Contract. Sometimes, the
damages aren't associated with an adequate remedy for Breach of the Contract. In such
cases, the Court could, at the suit of the party not in Breach, direct the party in Breach to
hold out his promise as per the terms of the Contract. This can be referred to as the
precise performance of the Contract.
3. Sue for Specific Performance:
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 This means the party in breach will actually have to carry out his duties according to the
contract. In certain cases, the courts may insist that the party carry out the agreement. So
if any of the parties fails to perform the contract, the court may order them to do so. This
is a decree of specific performance and is granted instead of damages. In certain cases,
the court cannot order specific performance. Such cases are,
i. when monetary compensation is a sufficient redressal.
ii. where the court cannot oversee the performance or execution of the contract
iii. when the contract entered into is of personal services
iv. one of the parties of a contract is a minor
4. Injunction:
An injunction is basically like a decree for specific performance but for a negative
contract. An injunction is a court order restraining a person from doing a particular act.
So a court may grant an injunction to stop a party of a contract from doing something he
promised not to do. In a prohibitory injunction, the court stops the commission of an act
and in a mandatory injunction, it will stop the continuance of an act that is unlawful.
5. Quantum Meruit:
Quantum meruit literally translates to “as much is earned”. At times when one party of
the contract is prevented from finishing his performance of the contract by the other
party, he can claim quantum meruit. So he must be paid a reasonable remuneration for the
part of the contract he has already performed. This could be the remuneration of the
services he has provided or the value of the work he has already done.
LAW OF AGENCY:
The law of agency governs the legal relationship between a principal and an agent, where
the agent is authorized to act on behalf of the principal, creating legal relations with third
parties, and outlining their rights, duties, and responsibilities.
Definition:
Agency law deals with situations where one person (the principal) delegates authority to
another person (the agent) to act on their behalf.
Examples of Agency:
Agency is a common relationship in the business world. Different types of agents include:
1. Sales agents: act on behalf of a business to either sell or buy goods (e.g.,
pharmaceutical representative, manufacturer's representative, etc.)
2. Insurance agents: act on behalf of an insurance company to sell insurance to the
public and help with any insurance claims
3. Real estate agents: act on behalf of a seller or buyer of a home or land
4. Talent agents: act on behalf of artists (including writers, actors, etc.) or athletes to
negotiate contracts
Contract of Agency:

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Agent is “a person employed to do any act for another or to represent another in dealings with
third person”. Thus, agent is a person who acts in place of another. The person for whom or
on whose behalf he acts is called the Principal. Any person who is of the age of majority
according to the law to which he is subject and who is of sound mind, may employ agent. A
contract of agency may be created by an express agreement or by implication (implied
agreement) or by ratification. Implied agency arises from the conduct, situation or
relationship of parties. Implied agency includes agency by estoppel, agency by holding out
and agency of necessity.
ESSENTIALS OF AGENCY:
The legal validity of an agency relationship hinges on specific essential elements:
1. Competency of the Principal (Section 183): The principal must have the legal
capacity to contract, i.e., they must be of sound mind, of the age of majority, and not
disqualified by law.
2. Competency of the Agent (Section 184): An agent need not have full contractual
capacity. Even a minor can act as an agent, provided the principal and the third party
are competent to contract.
3. Consideration Not Necessary (Section 185): Unlike other contracts, no
consideration is required to form an agency relationship. The agent’s acceptance of
the role is sufficient.
KINDS OF AGENTS:
The classification of agents depends on the scope of their authority, the nature of their
appointment, and the type of work they perform. Below is a detailed exploration of the
primary types of agents:
1. General Agent:
A general agent is authorized to act on behalf of the principal in all matters regarding a
specific area of business or a particular set of transactions. Their authority is broad but
restricted to the domain specified in their appointment.
Example: A property manager is entrusted with managing every aspect of a rental property.
Key Features:
1. Widely empowered in one area.
2. Authority persists unless terminated by the principal in an express manner.
2. Special Agent:
A special agent is designated for a particular job or performance. Contrary to the general
agent, their powers are circumscribed by the given mandate and cannot transcend beyond
such.
Example:
1. An estate agent who has been commissioned for the sale of a given house.
2. A lawyer hired only for a particular lawsuit.

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3. Sub-Agent:
A sub-agent is authorized by an agent to help the former discharge the duties accorded the
principal. Such is not always required to get the original principal's approval. Duties are owed
both by a sub-agent and to an original agent.
Example:
An older lawyer authorizes an underling to undertake responsibilities on a file on behalf of
the latter.
Key Features:
1. A subsidiary is under the overall supervision of the principal agent.
2. An original agent answers for whatever the sub-agent does.
4. Del Credere Agent:
A del credere agent acts as a guarantor in addition to being a sales agent. They guarantee the
principal that the third party will fulfil their obligations, such as making payments. If the third
party defaults, the del credere agent is personally liable.
Example:
1. Export-import trade.
2. Wholesale markets.
Key Features:
1. Combines the roles of an agent and a guarantor.
2. Reduces the principal’s risk in transactions.
5. Broker:
A broker is an intermediary who facilitates agreements between a buyer and a seller. They do
not take possession of the goods or services involved and normally receive a commission for
their services.
Example:
1. A stockbroker in financial markets.
2. A real estate broker negotiating property sales.
Key Features:
1. Does not act in his name but on behalf of the principal.
2. Limited to arranging contracts.
6. Factor:
A factor is an agent granted possession of goods in order to sell the same. They mostly trade
under their names but for the benefit of the principal. Factors acquire implied authority to sell
the goods, extend credits to buyers, and to even collect payments.
Example:

32
 1. A wholesaler that is marketing goods on behalf of the manufacturer.
Key Features:
1. Trades in its own name but for the principal's benefit.
2. Normally associated with the commercial selling of goods.
7. Auctioneer:
An auctioneer is an agent authorized to sell goods or property through a public bidding
process. He is a special agent representing the seller until the auction is complete.
Example:
1. An auctioneer selling antiques or art pieces in an auction house.
Key Features:
1. He has limited authority only for the auction process.
2. He can collect payment on behalf of the seller.
8. Gratuitous Agent:
A gratuitous agent is one who agrees to act on behalf of a principal without anticipating any
form of compensation. Still, despite no payment being involved, they are held liable for
acting with reasonable care and diligence.
Example:
1. A friend negotiating a deal and not seeking remuneration.
Key Features:
1. No financial compensation is involved.
2. Still liable for negligence.
9. Universal Agent:
A universal agent has implied authority to act on behalf of the principal. These agents are
relatively few and rare, and appointments are mainly made through a power of attorney.
Example:
A person authorized to handle all financial, legal, and business matters of another.
Key Characteristics:
1. The authority is general.
2. The agent acts for the principal in all concerns.
10. Co-Agent:
Co-agents refers to two or more agents appointed by one and the same principal to act
independently or collectively on a certain task.
Examples:
1. Having multiple lawyers represent a party in court.
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 2. Joint agents handling an estate.
Key Features:
1. Tasks may be handled either jointly or severally.
2. Each co-agent is bound to his area of speciality.
RIGHTS AND DUTIES OF PRINCIPAL AND AGENT:
Principal:
In the law of agency, the principal is the party who grants authority to another party, the
agent, to act on their behalf, and the principal is accountable for the agent's actions within the
scope of that authority.
Definition:
The principal is the person who delegates authority to another (the agent) to represent them or
act on their behalf in dealings with third parties.
Rights of Agents:
1. Right to Compensation: Agents have the right to receive compensation for their
services as agreed upon in the agency agreement. This compensation can be a fee,
commission, salary, or any other form as specified in the contract.
2. Right to Reimbursement: Agents have the right to be reimbursed for any expenses
incurred while carrying out their duties on behalf of the principal. This includes travel
expenses, communication costs, and other reasonable out-of-pocket expenses.
3. Right to Indemnification: Agents have the right to be indemnified by the principal
for any losses or liabilities incurred while acting within the scope of their authority.
This means that the principal is responsible for covering any legal or financial
consequences arising from the agent’s actions.
4. Right to Information: Agents have the right to access information necessary for the
proper execution of their duties. This includes access to documents, records, and other
relevant information held by the principal.
5. Right to Termination: Agents have the right to terminate the agency relationship if it
is stipulated in the agency agreement or if the principal breaches the contract.
Termination may also be allowed for other valid reasons, depending on the applicable
laws and regulations.

Duties of Agents:
1. Duty of Loyalty: Agents owe a duty of loyalty to their principals, which means they
must act solely in the best interests of the principal. They cannot engage in self-
dealing or take actions that would benefit themselves at the expense of the principal.
[2]

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 2. Duty of Care: Agents have a duty to exercise reasonable care, skill, and diligence in
carrying out their duties. They must use their expertise and knowledge to the best of
their ability to achieve the goals of the agency.
3. Duty of Obedience: Agents must follow the lawful instructions and directions
provided by the principal within the scope of their authority. They cannot deviate
from these instructions without the principal’s consent.
4. Duty of Accountability: Agents are accountable for their actions and must keep
accurate records of their transactions and activities on behalf of the principal.
Transparency and accountability are essential aspects of agency relationships.
5. Duty of Confidentiality: Agents have a duty to maintain the confidentiality of any
information or trade secrets provided by the principal. They cannot disclose this
information to third parties without the principal’s consent or unless required by law.
Rights of Principals:
1. Right to Performance: Principals have the right to expect that their agents will
perform their duties as agreed upon in the agency agreement. This includes
completing tasks, making decisions, and achieving the objectives set by the principal.
2. Right to Information: Principals have the right to request information and updates
from their agents regarding the progress and status of the tasks or transactions
entrusted to them.
3. Right to Termination: Principals have the right to terminate the agency relationship
for justifiable reasons, such as breach of contract or a change in circumstances.
However, termination must generally be done in accordance with the terms of the
agency agreement or applicable laws.
4. Right to Damages: If the agent breaches their duties or causes harm to the principal
through negligence or misconduct, the principal has the right to seek damages and
compensation for their losses.
Duties of Principals:
1. Duty to Compensate: Principals have a duty to compensate agents for their services
as agreed upon in the agency agreement. Failing to provide the agreed-upon
compensation can lead to a breach of contract.
2. Duty of Good Faith: Principals have a duty to act in good faith and deal fairly with
their agents. They should not engage in deceptive or unfair practices that could harm
the agent’s interests.
3. Duty of Cooperation: Principals must cooperate with their agents and provide the
necessary resources and information to enable the agent to carry out their duties
effectively.
4. Duty of Honesty: Principals should be honest and transparent with their agents
regarding their expectations, instructions, and any relevant information.
CREATION OF AGENCY:
There are two parties in the agency system one is the principal and another the agent. An
agent is a person acting on behalf of his principal. It’s a connecting link between the principal
and the third party. Herein we will discuss the creation of agency under the Indian Contract
Act, 1872. Establishment of a Principal-Agent relationship confers rights and duties upon

35
both the parties. There are various examples of such a relationship: Insurance agency,
advertising agency, travel agency, factors, brokers, Del credere agents, etc. the relationship of
principal and agent may be created in any of the following ways:
Modes of Creation of Agency:
It may be created in any one of the following ways:
1. By Direct Appointment:
Where the agent’s authority is expressed, it is said to be a creation of agency by direct
appointment. The authority of the agent is said to be expressed when it is given by words
spoken or written.
Illustration: X appoints Y as his agent to sell his goods at X’s shop by spoken words. It will
be a creation of agency by direct appointment.
2. By Implication:
When the agency is inferred from the course of dealings between two persons or from the
conduct, the agency is said to be created by implication.
Here the genital authority is not given by words spoken or written but it is assumed by the
conduct or by the dealing of the parties.
Illustration: A owns a shop in Multan and lives in Bahawalpur. The shop is managed by B. B
is in the habit of ordering goods from C in the name of A and makes payment from A’s fund
with A’s knowledge. It means B has implied authority from A to deal with C.
3. Agency by Necessity:
When the agent has no authority from his principal in expressed or any other way, but under
certain emergency circumstances he does any act for the principal, it is known the creation of
agency by necessity.
Illustration: A horse is sent by a train but at arrival, there is no one to receive it the railway
company is bound to take reasonable steps to keep the horse alive.
It will be a creation of agency by necessity. The railway company will have agental position
in such case.

4. Agency by Estoppel:
When an agent without authority done acts or incurred obligations to third persons on behalf
of his principal, the principals are bound, by such acts or obligations if he has by his words or
conduct induced such third persons to believe that such acts and obligations were within the
scope of agent’s authority. It will be the case of creation of agency by estoppels. Sec. 237
Illustration: X consigns goods to Y for sale, and gives him instructions not to sell under a
fixed price. Z, being ignorant of Y’s instructions enters ‘into a contract with Y in X’s
presence to buy the goods at a price lower than the reserved price. X is bound by the contract.
5. Agency by Ratification:

36
Where a person (Principal) ratifies an unauthorized act done by another person (agent) on his
behalf. It is known as creation of agency by ratification.
Illustration: A having no authority from B purchases goods on B’s behalf. But after that B
sells the goods on his account, B’s conduct implies a ratification of the purchase made by A
on his behalf.
6. Agency by Operation of Law:
Under some cases the agency is automatically created by the operation of law enforceable in
Pakistan. For example, a partner is an agent of the firm for the purpose of the business of the
firm.
TERMINATION:
An agency relationship can be terminated by the acts of the principal or agent, by the
completion of the agency's purpose, or by operation of law (death, insanity, or insolvency of
either party).
Modes of Termination of Agency:
The following are the different modes of the termination of the agency:
1. By Mutual Consent:
The principal and the agent can terminate the business of the agency at any time by mutual
consent. When they do so, it is known as termination of an agency by mutual consent
(agreement).
2. Revocation by Principal:
When the principal revokes the authority of his agent, the agency is said to be terminated by
revocation. A principal is at liberty to revoke the time.
Illustration: B who was working as an agent of A to sell his goods at A’s shop. A orders B
not to work at his shop in future. It will be termination of an agency by the revocation of
principal.
3. Renunciation by Agent:
If the agent renounces the business of the agency, then the agency is terminated. But the
condition is that he should give due notice of renunciation of the agency to his principal.
Illustration: X were working as an agent of Y to sold goods at Y’s shop. X gives notice to Y
that he will not work as his agent from next month, so it will be the termination of an agency
by renunciation of the agent.
4. Completion of the Business:
When the agent is appointed to do some particular work, the agency is terminated at the
completion of such work.
Illustration: A company undertakes to construct a road from Multan to Bahawalpur. A
company appoints B as an agent to look after the work and to provide construction material.

37
When work (road) is completed, the agency will be terminated due to the completion of
work.
5. Expiry of Time:
When the agent is appointed for a fixed period of time, the agency is terminated at the expiry
of such time period.
Illustration: X is appointed as an agent only for one year. When one year period is completed,
the agency will be terminated by the expiry -of time.
6. By Death:
When either the agent or the principal dies, the business of the agency comes to an end.
7. By Insanity:
When either the agent or the principal becomes of unsound mind ‘the agency comes to an
end.
8. Winding Up of Company:
When either the principal or the agent is a Joint-stock company, the agency is terminated
automatically, when the business of the company is wound up.
BAILMENT AND PLEDGE:
What is Bailment?
Bailment is a legal term referring to the transfer of possession of a good. This transfer is from
the bailor to the bailee. The purpose of bailment can vary. It can be for safekeeping, repair, or
use of the good. The bailee must return the good after the agreed purpose is fulfilled. During
the bailment, the bailee cannot use the good for any other purpose. The risk of loss generally
falls on the bailee.
Definition:
The Indian Contract Act, 1872 defines bailment as “the delivery of goods by one person to
another for some purpose, upon a contract that they shall, when the purpose is accomplished,
be returned or otherwise disposed of according to the directions of the person delivering
them” (Section 148).
Parties Involved:
The following parties are involved in bailment:
1. Bailor: The bailor is the person who owns the good and transfers its possession to the
bailee. The bailor does this for a specific purpose, such as safekeeping, repair, or use
of the good.
2. Bailee: The bailee is the person who receives the good from the bailor. The bailee
holds the good for a specific purpose agreed upon with the bailor. After fulfilling this
purpose, the bailee must return the good to the bailor. The bailee cannot use the good
for any other purpose and generally bears the risk of loss.
Features of Bailment:

38
The following are the feature of bailment:
1. Transfer of Possession: In bailment, there is a transfer of possession of a good from
the bailor to the bailee.
2. Purpose: The purpose of bailment can be for safekeeping, repair, or use of the good.
3. Return of Good: The bailee must return the good after the agreed purpose is fulfilled.
4. Limited Use: The bailee cannot use the good for any purpose other than the agreed
one.
5. Risk of Loss: The risk of loss generally falls on the bailee.
6. Two Parties Involved: Bailment involves two parties – the bailor (owner of the
good) and the bailee (the one who temporarily possesses the good).
Types of Bailment:
The following are the different types of bailment:
1. Gratuitous Bailment: This is a bailment where only one party benefits. For example,
if you lend a book to a friend, you’re not receiving any benefit.
2. Non-Gratuitous Bailment: This is a bailment where both parties benefit. For
example, when you leave your car at a repair shop, both you and the shop owner
benefit.
3. Constructive Bailment: This type of bailment occurs when a person finds lost
property and takes care of it.
ESSENTIALS OF BAILMENT:
1. Agreement on some purpose
2. Delivery of goods
3. Actual and constructive delivery
4. Return of goods
5. Movable goods
6. The passing of possession and not a transfer of ownership
7. Consideration

1. Agreement on some purpose:

Bailment is created by the form of an agreement between the bailor and the bailee. Due to the
agreement, there is the delivery of goods from the bailor to the bailee for some purpose.
When the purpose is completed or achieved, the goods are to be returned. A finder of lost
goods is an implied bailee.
2. Delivery of goods:
The delivery of goods by one person to another is necessary. Mere custody of goods does not
create a relationship for the bailor and bailee. E.g., a servant has mere custody of the goods.
This is not a bailment. Kaliaperumal Pillai vs. Visalakshmi Achi[ii], a lady wanted to melt
her gold jewellery and make a new one out of it. She employed a goldsmith for this purpose,
and every evening she got back the unfinished jewellery and kept it in a box in the
goldsmith’s place, but took custody of the key of the box. One night, the gold jewellery was
stolen away. As the goldsmith had redelivered the jewellery bailed with him, it was not a
bailment and he was not liable.

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3. Actual and constructive delivery:
Delivery of goods, which involves a change of possession, can be actual and constructive.
Actual delivery involves the literal handing over of physical possession of the goods by one
person to another. In some cases, the delivery may be constructive or symbolic. For example,
handing over keys of a car are symbolic deliveries.
4. Return of the goods:
As soon as the purpose is achieved, the goods shall be returned or disposed of according to
the directions of the bailor. If there is no return of the goods, there is no bailment. But the
bailed goods may be returned in an altered form. Example when a piece of cloth is stitched
into a shirt.
5. Movable goods:
Bailment is concerned only with movable property, other than money and actionable claims.
7. The passing of possession and not a transfer of ownership:
Only the possession of goods passes from the bailor to the bailee, and not the ownership of
property. If the property is transferred for a money consideration, it becomes a sale.
7. Consideration:
The consideration is money payment either by the bailor or bailee.
Example, hiring cycles, cars or giving vehicles for repair, etc. the detriment suffered by the
bailor. Parting with the possession of goods is sufficient consideration for a contract of
bailment.
What is Pledge?
Pledge is a legal term that refers to the transfer of a good’s possession to secure a debt. The
pledgor gives the good to the pledgee. The pledgee holds the good until the debtor repays the
debt. If the debtor fails to repay, the pledgee has the right to sell the good. The pledgor bears
the risk of loss. This process involves three parties: the pledgor, the pledgee, and the debtor.
Parties Involved in Pledge:
The following parties are involved in the pledge:
1. Pledgor: The pledgor is the person who owns the good and transfers its possession to
the pledgee. The pledgor uses the good as security for a debt or obligation.
2. Pledgee: The pledgee is the person who receives the good from the pledgor. The
pledgee holds the good until the debtor repays the debt. If the debtor fails to repay, the
pledgee has the right to sell the good.
3. Debtor: The debtor is the person who owes the debt or obligation. The debtor’s
repayment of the debt leads to the return of the good from the pledgee to the pledgor.
If the debtor fails to repay, the good may be sold by the pledgee.
Features of Pledge:
A pledge has the following features:

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 1. Transfer of Possession: In a pledge, the pledgor transfers the possession of a good to
the pledgee.
2. Purpose: The primary purpose of a pledge is to secure a debt or obligation.
3. Return of Good: The pledgee returns the good to the pledgor once the debtor repays
the debt.
4. Right to Sell: If the debtor fails to repay the debt, the pledgee has the right to sell the
good.
5. Risk of Loss: Loss risk in a pledge falls on the pledgor.
6. Three Parties Involved: A pledge involves three parties – the pledgor, the pledgee
and the debtor.
Types of Pledge:
The following are the different types of pledges:
1. Pawn: This is a type of pledge where the borrower (pawnor) gives an asset to the
lender (pawnee) as security for a loan.
2. Hypothecation: In this type of pledge, the borrower retains possession of the asset
but gives the lender the right to sell the asset if the borrower defaults on the loan.
3. Lien: This is a type of pledge where the lender has the right to retain possession of
the asset until the borrower repays the loan.
Difference between Bailment and Pledge: The Verdict:
Bailment, defined under Section 148 of the Indian Contract Act, 1872, is a concept in law
involving the delivery of goods from a bailor to a bailee. In a contract of bailment, the bailee
holds the goods for a specific purpose, such as safekeeping or repair. There are various types
of bailment.
Each of them is defined by the specific purpose for which the goods remain with the bailee.
After fulfilling this purpose, the bailee must return the goods to the bailor. The duty of the
bailor and the bailee in a bailment contract can also involve constructive delivery, where the
means of accessing the goods are transferred instead of the goods themselves.
On the other hand, a pledge, defined under Section 172 of the Indian Contract Act, 1872,
involves the delivery of goods as security for a debt. In the case of a pledge, the goods are
pledged as security by the pledgor to the pledgee.
The pledgee, or pawnee, can sell the goods if the debtor fails to make payment of a debt.
However, if the debtor manages to redeem the goods by repaying the debt, the pledgee must
return the goods. The key differences between bailment and pledge lie in the purpose of the
transfer and the rights of the possessor of the goods.
Feature Bailment Pledge

Defined As Per Section 148 of Indian Section 172 of Indian

Contract Act, 1872 Contract Act, 1872
Definition Bailment refers to the Pledge is the transfer of
transfer of possession of a possession of a good as

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 good from the bailor to the security for a debt or
bailee. obligation.
Parties Involved Two parties are involved: Three parties are involved:
the bailor and the bailee. the pledgor, the pledgee, and
the debtor.
Purpose The purpose is usually for The purpose is to secure a
the safekeeping, repair, or debt or obligation.
use of the good.
Return of Good The good is returned after The good is returned after
the agreed purpose is the debt is repaid.
fulfilled.
Rights of the Possessor The bailee cannot use the The pledgee has the right to
good for any purpose other sell the good if the debt is
than the agreed one. not repaid.
Risk of Loss The risk of loss generally The risk of loss falls on the
falls on the bailee. pledgor.

RIGHTS AND DUTIES OF BAILOR:

Rights of Bailor:
As the owner of the goods, the bailor in a bailment arrangement has certain rights that are
protected under the law. These rights include:
1. Right to Compensation for Damages: The bailor has the right to claim
compensation for any damages or loss suffered to the goods during the bailment
period. If the bailee fails to take proper care of the goods or breaches the terms of the
bailment, the bailor can seek compensation for the resulting damages
2. Right to Demand Return of Goods: The bailor has the right to demand the return of
the goods from the bailee once the purpose of the bailment is accomplished or when
the agreed-upon time period for the bailment expires. The bailee is bound to return the
goods to the bailor or dispose of them as per the bailor’s instructions
3. Right to Terminate Bailment: The bailor has the right to terminate the bailment at
any time before the purpose of the bailment is accomplished. However, the bailor
must compensate the bailee for any loss incurred due to the premature termination of
the bailment.
4. Right to Sue for Breach of Bailment Contract: If the bailee fails to fulfil the terms
of the bailment contract, the bailor has the right to sue for breach of contract and seek
appropriate legal remedies, including damages for any loss suffered.
5. Termination of bailment by Bailee’s act inconsistent with conditions: A contract
of bailment is avoidable at the option of the bailor, if the bailee does any act with
regard to the goods bailed, inconsistent with the conditions of the bailment.
Duties of Bailor:

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In addition to the rights, the bailor also has certain duties that must be adhered to in a
bailment arrangement. These duties include:
1. Duty to Disclose Known Defects: The bailor has a duty to disclose any known
defects or dangers associated with the goods to the bailee. This duty arises when the
bailor is aware of any hidden defects in the goods that may pose a risk to the bailee or
third parties, and the bailor must disclose such defects to the bailee.
2. Duty to Provide Clear Instructions: The bailor has a duty to provide clear
instructions to the bailee regarding the purpose of the bailment, the intended use of
the goods, and any specific conditions or limitations associated with the bailment. It is
the bailor’s responsibility to communicate the purpose and scope of the bailment
arrangement to the bailee.
3. Duty to Pay Necessary Expenses: The bailor has a duty to pay for the necessary
expenses incurred by the bailee in the ordinary course of the bailment. This includes
expenses such as storage charges, transportation costs, and reasonable costs for
preserving the goods during the bailment period.
4. Duty to Indemnify the Bailee: The bailor has a duty to indemnify the bailee for any
loss or damage suffered by the bailee due to defects in the goods that were not
disclosed by the bailor, or due to the bailor’s failure to provide clear instructions
regarding the bailment.
5. Duty to Allow Inspection: The bailor has a duty to allow the bailee to inspect the
goods before accepting the bailment. This includes a duty to disclose any defects or
damages in the goods that may not be apparent upon inspection. Failure to allow
inspection or disclose defects may render the bailment voidable at the option of the
bailee.
6. Duty to Bear Extraordinary Expenses: If the bailor requires the bailee to incur
extraordinary expenses for the preservation of the goods, the bailor has a duty to
reimburse the bailee for such expenses.
7. Duty to Take Back the Goods: If the bailment is for a specific time period or
purpose, and the purpose is accomplished or the time period expires, the bailor has a
duty to take back the goods from the bailee. Failure to do so may result in the bailor
being liable for any damages or losses suffered by the bailee.
8. Duty to Compensate for Premature Termination: If the bailor terminates the
bailment before the purpose is accomplished, the bailor has a duty to compensate the
bailee for any loss suffered due to the premature termination of the bailment.

RIGHTS AND DUTIES OF BAILEE:

Rights of Bailee:
The Indian Contract Act, 1872 outlines certain rights of the bailee in bailment, which include:
1. Right of Possession: The bailee has the right to possess the goods that are the subject
matter of the bailment. However, this right is limited to the extent of the purpose for
which the goods were entrusted to the bailee. The bailee must use the goods only for
the specific purpose for which they were delivered, and not for any other purpose
without the consent of the bailor.

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 2. Right of Compensation for Expenses: The bailee is entitled to be reimbursed for
any expenses incurred in the ordinary course of bailment. For example, if the bailee
incurs expenses for the preservation or maintenance of the goods, the bailor is
obligated to compensate the bailee for such expenses.
3. Right to Claim Compensation for Damages: If the goods are damaged due to any
fault of the bailor or a third party, the bailee has the right to claim compensation for
such damages. The bailee must take reasonable care of the goods, and if any damage
occurs despite exercising due diligence, the bailee is not liable for such damages.
4. Right to Lien: The bailee has the right of lien, which means that the bailee can retain
possession of the goods until the bailor pays the charges or remunerations due to the
bailee for the services rendered in respect of the goods. However, the right of lien can
only be exercised if the bailee has possession of the goods lawfully, and not if the
goods were obtained through theft, fraud, or any other illegal means.
5. Right to Recover Compensation for Fault of Bailor: If the bailor does not disclose
any faults in the goods that may affect the bailee’s possession or use of the goods, and
the bailee suffers damages as a result, the bailee has the right to recover compensation
for such damages from the bailor.
Duties of Bailee:
The Indian Contract Act, 1872 also imposes certain duties on the bailee in contract of
bailment, which include:
1. Duty to Take Reasonable Care: The bailee is duty-bound to take reasonable care of
the goods entrusted to him/her. The bailee must exercise the same level of care in
preserving the goods as a person of ordinary prudence would exercise in similar
circumstances. The bailee must take necessary precautions to prevent any damage or
loss to the goods, and must use them only for the specific purpose for which they
were entrusted.
2. Duty to Return the Goods: The bailee has a duty to return the goods to the bailor or
dispose of them as per the bailor’s directions once the purpose of the bailment is
accomplished. The bailee must not keep the goods beyond the period of bailment or
use them for any other purpose without the consent of the bailor.
3. Duty to Render Accounts: The bailee is required to render true accounts of all
transactions related to the bailment and provide the bailor with information about the
state and condition of the goods, if requested by the bailor. The bailee must maintain
proper records and be transparent in all dealings related to the bailment.
4. Duty not to Mix Goods: If the bailee has been entrusted with specific goods that are
to be kept separate from the bailee’s own goods, the bailee has a duty not to mix those
goods with his/her own goods. Mixing of goods may result in confusion and may
make it difficult to identify and return the goods to the bailor.
5. Duty not to Make Unauthorized Use: The bailee is prohibited from making any
unauthorized use of the goods that are the subject matter of the bailment. The bailee
must use the goods only for the specific purpose for which they were entrusted and
must not use them for personal gain or for any purpose without the consent of the
bailor.
6. Duty to Compensate for Loss: If the bailee suffers any loss or damage to the goods
due to his/her negligence, the bailee is liable to compensate the bailor for such loss or

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 damage. The bailee must exercise due diligence and take necessary precautions to
prevent any loss or damage to the goods.
7. Duty not to Deny Bailor’s Title: The bailee cannot deny the bailor’s title to the
goods. The bailee must recognize and acknowledge the bailor’s ownership rights in
the goods and must not claim any right or interest in the goods that is inconsistent
with the bailor’s title.

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