Indian Contract Act 1872

• The law relating to contracts is contained in the Indian

Contract Act, The general principles of the law of contracts
are covered in 75 sections.

• Further the Indian Contract Act does not affect any usage
or custom of trade. Thus, the parties to a contract, which
clearly provide for the application of usages into their
contracts, are expressly saved from the operation of this
Act.
 Contract
• Contract. A contract is an agreement,
enforceable by law, made between at least
two parties by which rights are acquired by
one and obligations are created on the part of
another.
• Agreement. Section 2(e) defines an agreement
as “every promise and every set of promises
forming consideration for each other”.
 Business and its Environment

Privity of Contract
The concept of privity of contracts is illustrated below:
M M = Manufacturer
Goods Rs. W = Wholesaler
W R = Retailer
B = Buyer
Goods Rs B is in privity of contract with
R R only but not with W and M

Goods Rs
B Privity of Contract

Classification of Contracts. Contracts may be classified in terms of their (i) Validity or

enforceability, (ii) Mode of formation and (iii) Performance.
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 Proposal (or offer) and Acceptance [Ss.3-9]

• Modes of Making an Offer

 Express offer
 Implied offer
 Offer by abstinence
 Specific and general offers
 Philosophy underlying general offers
 Implied offer
 Counter offer
 Cross Offer
Difference between Offer and Invitation to Offer. An offer is to be distinguished from an
invitation to offer. A prospective shareholder by filling up a share application form,
usually attached to the prospectus, is making the offer. An auctioneer at the time of
auction inviting offers from the bidders is not making an offer.
 Capacity to contract [Ss.10-12]

• Persons who are Competent to Contract. Any one cannot enter into a contract;
he must be competent to contract according to the law. Every person is
competent to contract if he (i) is of the age of majority, (ii) is of sound mind, and
(iii) is not disqualified from contracting by any law to which he is subject (s.11).
• Capacity of a Minor to Enter into a Contract. The contract law defines maturity
as the age of majority. That usually is 18 years. Does this mean that a minor is
not competent to contract? No, a minor may make a contract, but he is not
bound by the contract; however the minor can make the other party bound by
the contract.
• A minor’s parents/guardians are not liable to his creditors for the breach of a
contract by him whether the contract is for necessaries of life or not.
 Consent and Free consent

• Meaning of Consent. We have seen earlier that an offer by one party is

accepted by the other party. The consent of the offeree to the offer by the
offeror is necessary. It is essential to the creation of a contract that both
parties agree to the same thing in the same sense. When two or more persons
agree upon the same thing in the same sense they are said to consent.

• Free consent. For a contract to be valid it is not only necessary that the parties
consent but also that they consent freely. Where there is a consent but no free
consent the contract is voidable at the option of the party whose consent was
not free. Thus, free consent is one of the essentials of a valid contract. A
consent is said to be free when it is not caused by: (i) coercion, (ii) undue
influence, (iii) fraud, (iv) misrepresentation or (v) mistake.
 Elements of Free Consent
• Meaning of Coercion (Ss. 15 and 72). Coercion is (i) the committing or threatening
to commit any act forbidden by the Indian Penal Code or (ii) the unlawful
detaining.
• Meaning of Undue Influence (s.16). Undue influence consists in the improper
exercise of power over the mind of one of the contracting parties by the other.
• Meaning of Misrepresentation (Ss.18-19). Misrepresentation is also known as
simple misrepresentation whereas fraud is known as fraudulent
misrepresentation.
• Meaning of ‘Mistake’ [Ss.20-21]. Mistake may be defined as an erroneous belief
on the part of the parties to the contract concerning something pertaining to the
contract.
• Meaning and Effect of ‘Unilateral Mistake’. There is a unilateral mistake where
only one party to a contract is under a mistake as to a matter of fact.
 Consideration [Ss.2(d), 23-25,185]

• The term consideration is used in the sense of quid pro que, i.e., “something in
return”. This something or consideration need not be in terms of money.
• Abstinence or promise is called a consideration for the promise”.
• “No Consideration, No Contract” [Ss.10 and 25]. A promise without consideration
cannot create a legal obligation. The benefit so received or the loss, damage or
inconvenience so caused is regarded in law as the consideration for the promise.
• Rules Regarding Consideration
1. Consideration must move at the desire of the promisor
2. Consideration may move either from the promisee or any other person
3. Consideration need not be adequate
4. Consideration must be real and competent
5. Consideration must be legal
6. A consideration may be present, past or future
 Agreements Declared Void [Ss.26-30]

• The Act declares certain agreements to be void. Some of them (such as the
following) have already been explained: (i) agreements entered into through a
mutual mistake of fact between the parties (s.20); (ii) agreements, the object or
consideration of which is unlawful (s.23); (iii) agreements, part of consideration
of which is unlawful (s.24); (iv) agreements made without consideration (s.25).
Some other agreements which are declared to be void are below.
 Agreements Against Public Policy (Ss.26-28).
 Agreement in Restraint of Trade. Section 27
 Restraint of Legal Proceedings (s.28)
 Uncertain or Ambiguous Agreements (s.29)
 Wagering Agreements (s.30)
 Contingent Contracts [Ss.31-36]

• Contingent Contract Defined (s.31). A contingent contract is

a contract to do or not to do something, if some event,
collateral to such contract does or does not happen.
• Essential Characteristics of a Contingent Contract. (i) The
performance of a contingent contract. (ii) The event must
be uncertain. (iii) The event must be collateral, i.e.,
incidental to the contract.
• Types of Contingent Contracts
• Rules Regarding Enforcement of Contingent Contracts
(Ss.32 to 36)
 Quasi Contracts [Ss.68-72] (Certain Relations
resembling those created by contracts)

• Meaning of Quasi Contracts. ‘Quasi Contracts’ are so-called because the

obligations associated with such transactions could neither be referred
as tortious nor contractual, but are still recognised as enforceable like
contracts, in courts. According to Dr Jenks, quasi contract is “a situation
in which law imposes upon one person, on grounds of natural justice,
an obligation similar to that which arises from a true contract, although
no contract, express or implied, has in fact been entered into by them”.
The principle underlying a quasi contract is that no one shall be allowed
unjustly to enrich himself at the expense of another, and the claim
based on a quasi contract is generally for money.
 Cases which are Treated as Quasi Contracts

• Claim for necessaries supplied to a person incapable of contracting or on his

account.
1. Reimbursement to a person paying money due by another in payment of which
he is interested.
2. Obligation of a person enjoying benefits of non-gratuitous act.
3. Responsibility of finder of goods.
4. Liability of a person to whom money is paid, or thing delivered by mistake or under
coercion (s.72).
• Quantum Meruit
1. When a contract is discovered to be unenforceable (s.65)
2. When one party abandons or refuses to perform the contract
3. When a contract is divisible
4. When an indivisible contract is completely but badly performed
 Performance of contracts [Ss.37-67]

• Meaning of Performance of Contract. A contract creates obligations. ‘Performance’ of

contract means the carrying out of obligations under it.
• Meaning of Offer to Perform. It may happen that the promisor offers performance of
his obligation under the contract at the proper time and place but the promisee
refuses to accept the performance. This is called as ‘Tender’ or ‘Attempted
Performance’.
 Contracts which Need Not be Performed
 Rules Regarding the Time, Place and Manner of Performance of Contracts (Ss.46-
50)
 Reciprocal Promises (Ss.51-54)
 Appropriation of Payments (Ss. 59-61)
 Assignment of Contracts
Different modes of discharge of contracts [Ss.73-75]

• Discharge of Contracts by Performance or Tender

 Meaning of Mutual Consent (s.62)
 Accord and Satisfaction
 Discharge of Contracts by Impossibility of Performance
• “Subsequent or supervening impossibility” as a mode discharge of contract (s.56)
• Circumstances of supervening impossibility
i. Destruction of the subject matter of the contract
ii. By the death or disablement of the parties
iii. Subsequent illegality
iv. Declaration of war
v. By operation of Law
vi. Non-existence or non-occurrence of a particular state of things
 Remedies for breach of contracts

• When someone breaches a contract, the other party is no longer

obligated to keep its end of the bargain. From there, that party may
proceed in several ways: (i) the other party may urge the breaching
party to reconsider the breach; (ii) if it is a contract with a merchant,
the other party may get help from consumers’ associations; (iii) the
other party may bring the breaching party to an agency for
alternative dispute resolution; (iv) the other party may sue for
damages; or (v) the other party may sue for other remedies.
 Remedies
 Remedies for Breach of Contracts
• Rescission of the contract
• Damages (s.75)
 Different types of damages:
1. Ordinary damages
2. Special damages
3. Vindictive or punitive damages
4. Nominal damages
 Meaning of Specific Performance. There are other remedies in a contract suit
besides damages. The main one is specific performance.
 Remedy of Injunction. Injunction means an order of the court prohibiting
a person to do something where a party is in breach of a negative term of contract.
 Remedy by Way of a Suit on Quantum Meruit. The phrase ‘quantum meruit’
means as much as is merited (earned).
 Guarantee
• When a company needs some money for its business it approaches a bank. The
bank requires that the managing director M promises to repay the loan
personally should the company default.

• The relationship between M and the bank is called a guarantee or surety. It is a

contractual relationship resulting from the unconditional promise of M (known
as the surety or guarantor) to repay the loan to the creditor (the bank) for the
obligation of the principal debtor (the company) should it default.

• The law relating to the contracts of guarantee is given in the Indian Contract Act,
1872 (Ss.126-147). The sections quoted in this chapter refer to the Act unless
otherwise stated.
 Main Features
• Purpose of Guarantee
i. The guarantee is generally made use of to secure loans.
ii. The contracts of guarantee are sometimes called
performance bonds.
iii. Bail bonds, used in criminal law, are a form of contract of
guarantee.
iv.Oral or Written Guarantee.
v. Specific and Continuing Guarantee.
vi.A Guarantee may either be for the Whole Debt or a Part of the
Debt.
 Bailment
• At one time or another, we enter into a legal
relationships, called bailment and pledge.
Bailment is quite common in business also.
Traders often store their surplus goods in
warehouses; and utilise the services of cold
storages for keeping their goods to be taken back
as and when required; and factory owners often
send machinery back to vendors for repairs. Also,
goods are pledged for securing loans.
 Definition and Characteristics
• Definition of Bailment (s.148). Bailment is
defined as the “delivery of goods by one to
another person for some purpose.
1.Delivery of goods
2. Bailment is based on a contract
3. Return of goods in specie
4. Ownership of goods
 Duties
• Duties of a Bailor
1. To disclose know faults in the goods (s.150)
2. Liability for breach of warranty as to title
3. To bear expenses in case of gratuitous bailments
4. In case of non-gratuitous bailments
• Duties of a Bailee
1. To take care of the goods bailed (s.151)
2. Not to make unauthorised use of goods (s.154)
3. Not to mix bailor’s goods with his own (Ss. 155-157)
4. To return the goods bailed without demand (s.160)
5. To return any accretion to the goods bailed (s.163)
• Rights of a Bailee
1. The duties of the bailor
2. Another right of bailee is the right of lien (Ss. 170-171)
3. Right against wrongful deprivation of or injury to goods (Ss.180-181)
 Business and its Environment

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The following are thus the essentials of a contract of sale of goods:

BILATERAL CONTRACT
TRANSFER OF PROPERTY
GOODS: THE SUBJECT MATTER MUST BE SOME GOODS.
PRICE OR MONEY CONSIDERATION
ALL ESSENTIAL ELEMENTS OF A VALID CONTRACT MUST BE PRESENT IN A
CONTRACT OF SALE.

1– 24
Sale and Bailment

A "BAILMENT" IS A TRANSACTION UNDER WHICH GOODS ARE

DELIVERED BY ONE PERSON (THE BAILOR) TO ANOTHER (THE
BAILEE) FOR SOME PURPOSE, UPON A CONTRACT THAT THEY BE
RETURNED OR DISPOSED OF AS DIRECTED AFTER THE PURPOSE
IS ACCOMPLISHED (SECTION 148 OF THE INDIAN CONTACT ACT,
1872).

1– 25
Sale and Hire Purchase Agreement

"SALE", IS A CONTRACT BY WHICH PROPERTY IN GOODS PASSES

FROM THE SELLER FB THE BUYER FOR A PRICE.
A "HIRE PURCHASE AGREEMENF' IS BASICALLY A CONTRACT OF
HIRE, BUT IN ADDITION, IT G!VES THE HIRER AN OPTION TO
PURCHASE THE GOODS AT THE END OF THE HIRING PERIOD.

1– 26
Goods

THE SUBJECT MATTER OF THE CONTRACT OF SALE IS

ESSENTIALLY GOODS. ACC9RDING TO SECTION 2(7) "GOODS'"
MEANS EVERY KIND OF MOVABLE PROPERTY' OTHER THAN
ACTIONABLE CLAIMS AND MONEY AND INCLUDES STOCK AND
SHARES, GROWING CROPS, GRASS AND THINGS ATTACHED TO OR
FORMING PART OF THE LAND WHICH ARE AGREED TO BE SERVED
BEFORE SALE OR UNDER THE CONTRACT OF SALE.

1– 27
 Business and its Environment

Actionable claims and money are not goods and cannot be brought and sold under this Act. Money means current money, i.e., the recognised currency in circulation in the country, but not old and
rare coins which may be treated as goods. An actionable claim is what a person cannot make a present use of or enjoy, but what can be recovered by him by means of a suit or an action.
Goods may be (a) existing, (b) future, or (c) contingent. The existing goods may I be (i) specific or generic, (ii) ascertained or unascertained.
Existing Goods

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 Business and its Environment

INTRODUCTION
Transactions in the nature of sale of goods form the subject matter of the Sale of
Goods Act, 1930. The Act covers topics such as the concept of sale of goods,
warranties and conditions arising out of sale, delivery of goods and passing of
property and other obligations of the buyer and the seller. It also covers the field
of documents of title to goods and the transfer of ownership on the basis of such
documents. The Act came into force on 1 July, 1930. It extends to the whole of
India, except Jammu and Kashmir.

Indian business persons, conducting their business against the backdrop of the
Sale of Goods Act, have not found it difficult to work out the several varieties of
contracts of sale of goods as resorted to in national and transnational business,
such as f.o.b. (free on board), c.i.f. (cost, insurance and freight) and ex-ship.
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 Business and its Environment

Definition and essentials of A contract of sale

Definition and Essentials of a Contract of Sale
1. There must be at least two parties
2. Transfer or agreement to transfer the ownership of goods
3. The subject matter of the contract must necessarily be goods
4. Price is the consideration of the contract of sale
5. A contract of sale may be absolute or conditional [s.4(2)].
6. All other essentials of a valid contract as per the Indian Contract Act, 1872
must be present
Sale and Agreement to Sell. Where under a contract of sale, the property
(ownership) in the goods is transferred from the seller to the buyer, it is called a
sale [s. 4(3)]. Thus, sale takes place when there is a transfer of ownership in
goods from the seller to the buyer. A sale is an executed contract. Cont….

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 Business and its Environment

Distinction between sale and agreement to sell

The difference between sale and agreement to sell is as follows:
Sa le Agre e m e nt to se ll
1. A sa le is a n executed contra ct. It is a n executory contra ct.
2. Since the ownership ha s pa ssed to the buyer, the In ca se of breach, the seller ca n only sue for
seller can sue the buyer for the price of the goods, if da ma ges, unless the price wa s pa ya ble a t a
the la tter ma kes a defa ult in pa yment. sta ted da te.
3. It crea tes a right in rem, i.e., aga inst the whole It creates a right in personam, i.e., a ga inst
world. specified person only.
4. In ca se of loss of goods, the loss will fa ll on the The loss in this ca se sha ll be borne by the
buyer, even though the goods a re in the possession seller, even though the goods are in the
of the seller. It is beca use the risk is a ssociated with possession of the buyer.
ownership.
5. In ca se, the buyer pa ys the price a nd the seller In this ca se, the buyer ca nnot cla im the
therea fter becomes insolvent, the buyer can cla im goods but only a ra teable dividend for the
the goods from the official receiver or a ssignee, a s money pa id.
the ca se ma y be.
6. If the buyer becomes insolvent without pa ying the Under this, the seller ca n refuse to deliver
price, the ownership ha ving pa ssed to the buyer, the the goods to the official receiver or
seller shall ha ve to deliver the goods to the officia l a ssignee, a s the ca se ma y be.
receiver or a ssignee, a s the ca se ma y be, except
where he ha s a lien over the goods.
Cont….

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 Business and its Environment

Distinction between Sale and some other Transactions

 Sale and hire purchase

 Sale of goods and ‘work and labour’

 Sale and contract for ‘labour and materials’

 Sale and barter

 Sale and bailment

 Sale and lease

 Sale and gift

 Sale and mortgage, pledge and hypothecation of goods

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 Business and its Environment

GOODS AND THEIR CLASSIFICATION

Meaning of Goods. ‘Goods’ means every kind of movable property, other than
actionable claims and money; and includes stocks and shares. The term ‘goods’
excludes money. ‘Money’ means legal tender and not the rare coins which can
be sold and purchased as goods.
Classification of Goods. Goods may be classified as existing, future and
contingent. Existing goods are those which are owned or possessed by the seller
at the time of the contract (s.6). Instances of goods possessed but not owned by
the seller are sales by agents and pledgees.

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 Business and its Environment

CONDITIONS AND WARRANTIES

Conditions and Warranties (Ss.11-17). In a contract of sale, parties make
certain stipulations, i.e., agree to certain terms. All stipulations cannot be
treated on the same footing. Some may be intended by the parties to be of a
fundamental nature, e.g., quality of the goods to be supplied, the breach of
which, therefore, will be regarded as a breach of the contract. Some may be
intended by the parties to be binding, but of a subsidiary or inferior character,
e.g., time of payment, so that a breach of these terms will not put an end to the
contract but will make the party committing the breach liable to damages. The
former stipulations are called ‘conditions’ and the latter ‘warranties’.

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 Business and its Environment

Expressed Conditions and Warranties

Both are stipulations to each other.
Condition is the Main Purpose of the Contract
Warranty is collateral to Main Purpose
Condition Violated Damages Can be claimed by rejecting
If Warranty failed only Damages can be claimed
Condition can be treated as Warranty
Warranty can not be treated as the Condition
Caveat emptor
Buyer Depends upon Seller’s Knowledge
Sale by Sample
Merchantable Quality

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1– 36
1– 37
 Business and its Environment

PASSING OF PROPERTY IN GOODS

Meaning of ‘Property in Goods’. The phrase ‘property in goods’ means
ownership of goods. The ‘ownership’ of goods is different from ‘possession’ of
goods. The ‘possession’ of goods refers to the custody of goods, though
normally a person.
Rules Regarding Passing of Property in Goods from the Seller to the
Buyer. Sections 18 to 25 lay down the rules which determine when property
passes from the seller to the buyer.
 Specific or ascertained goods:
1. Specific goods in a deliverable state
2. Specific goods not in a deliverable state
 Unascertained or future goods
 Risk Prima Facie Passes with Property. Section 26 unless otherwise
agreed, the goods remain at the seller’s risk until the property therein is
transferred to the buyer,

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 Business and its Environment

Transfer of title by non-owners [Ss. 27-30]

Transfer of Title by Non-owners. Section 27 lays down a general rule as to
transfer of title, that is, it is only the owner of goods who can transfer a good title.
No one can give a better title than what he himself has. This rule is expressed by
the maxim, ‘memo dat quod non habet‘ which means that no one can give what
he himself has not.
Exceptions to the general rule
1. Sale by a mercantile agent
2. Sale by a joint owner
3. Sale by a person in possession under a voidable contract
4. Sale by a seller in possession of goods after sale
5. Sale by a buyer in possession of goods
6. Sale by an unpaid seller

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 Business and its Environment

Performance of A contract of sale of goods

Duties of the Seller and the Buyer. It is the duty of the seller to deliver the
goods and of the buyer to accept and pay for them, in accordance with the terms
of the contract of sale (s.31).
(i) terms of the contract, and (ii) rules contained in the Act.
Delivery. Delivery is defined as a voluntary transfer of possession from one
person to another [s.2(2)].

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 Business and its Environment

In Rowland v. Divali (1923) 2 K.B. SOD, 'A' had bought a second hand
motor car from 'B' and paid for it. After he had used it for six months, he
was deprived of it because the seller had no title to it.

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 Business and its Environment

• It was held that 'A' could recover the full price

from 'B' even though he had used the car for six
months, as the consideration had totally failed.

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 Business and its Environment

In Priest v. Last (1903) 2 K.B. 148, a hot water bottle was bought by the plaintiff, a
draper, who could not be expected to have special skill knowledge with regard to hot
water bottles, from a chemist, who sold such articles. While being used by the
plaintiff's wife, the bottle bursted and injured her.

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 Business and its Environment

• Held, the seller was responsible for

damages.

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 Business and its Environment

In Multanmal Champalal v. Shah & Co., AIR (1970) Mysore 106, goods were
despatched by the seller from Bombay to Bellary through a public carrier.
According to the terms of the contract, the goods were to remain the property
of the seller till the price was paid though the risk was to pass to the buyer
when they were delivered to public carrier for despatch. When the goods
were subsequently lost before the payment of the price (and the consequent
to the passing of the property to the buyer),

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 Business and its Environment

• The Court held that the loss was to be

borne by the buyer.

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 Business and its Environment

In the case of Colley V. Overseas Exporters there was a contract for the sale of some
unascertained leather goods to the buyer. In this case, though the seller sent the goods, yet
they could not be put on board as no definite ship had been named by the buyer. When an
action was brought by the buyer against the seller, it was held that the seller was not entitled
to pay the price as the goods had not yet moved into the possession of the buyer. In the
absence of an agreement relating to the payment of price on a certain day, irrespective of the
delivery,

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 Business and its Environment

• The seller is not entitled to sue the buyer for

payment, but can bring about an action for
damage.

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 Business and its Environment

Rules regarding delivery. The following are the rules regarding delivery of
goods:
1. Place of delivery.
2. Time of delivery.
3. Quality of Delivery.
4. Merchantable Delivery.
5. Instalment delivery.
6. Where goods are delivered to a buyer, which he has not personally
examined.
7. Buyer not bound to return the rejected goods.

Cont….

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 Business and its Environment

Unpaid seller and his rights

Who is an Unpaid Seller? A seller of goods is an unpaid seller when (i) the
whole of the price has not been paid or tendered. (ii) a bill of exchange or other
negotiable instrument has been received as conditional payment.

Rights of an Unpaid Seller. The rights of an unpaid seller may broadly be

classified under two heads, namely: (i) Rights under the Ss.73-74 of the Indian
Contract Act, 1872, i.e., to recover damages for breach of contract. (ii) Rights
under the Sale of Goods Act, 1930:

(a) rights against the goods; (b)

(b) rights against the buyer personally. The rights against the goods are as
follows:

Cont….

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 Business and its Environment

• Right to get a Price

• Right to sue
• Right Collect Damages
• Right Lien
• Right to Resale
• Right stoppage at Transit
• Rights against Person
• Rights against Property
• Rights in case of Insolvency
• Anticipatory Breach

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 Business and its Environment

Remedies for breach of A contract

In addition to the rights of a seller against goods provided in Ss. 47 to 54, the seller has the
following remedies against the buyer personally. (i) suit for price (s.55); (ii) damages for
non-acceptance of goods (s.56); (iii) suit for interest (s.56).

Buyer’s Remedies against Seller. The buyer has the following rights against the seller for
breach of contract: (i) damages for non-delivery (s.57);

(ii) right of recovery of the price;

(iii) specific performance (s.58);

(iv) suit for breach of condition;

(v) suit for breach of warranty (s.59);

(vi) anticipatory breach (s.60);

(vii) recovery of interest (s.61).

Copyright © 2001, S.S. Gulshan

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 Business and its Environment

Sale by auction [s.64]

i. Subject matter of a separate contract of sale.
ii. At an auction, the sale is complete when the auctioneer
iii. A right to bid may be reserved expressly by or on behalf of the seller
iv. Seller not to Participate
v. Pretended bidding to raise the price, voidable at the option of the buyer.
vi. Three Hammer strokes or symbolic declaration.

Copyright © 2001, S.S. Gulshan

1– 53 Business Law Edition (3) S.S. Gulshan Excel Books