INDIAN CONTRACT ACT, 1872

1.5. CONSIDERATIONS
INTRODUCTION
One of the essential elements of a contract is consideration. Consideration means something in
return. For example, if A agrees to sale goods to B for a price of Rs. 20,000/-, the amount is the
consideration for A for parting with the goods.
An agreement without consideration is not enforceable and therefore is void.
In this chapter rules regarding consideration, exceptions to the rule of ‘no consideration no
contract’ and other legal provisions are discussed.
LEGAL RULES REGARDING CONSIDERATIONS
The consideration or object of an agreement is lawful, unless—
It is forbidden by law; or is of such a nature that, if permitted, it would defeat the provisions of
any law; or is fraudulent; or involves or implies injury to the person or property of another; or
the Court regards it as immoral, or opposed to public policy.
In each of these cases, the consideration or object of an agreement is said to be unlawful. Every
agreement of which the object or consideration is unlawful, is void.
Illustrations
(a) A agrees to sell his house to B for 10,000 rupees. Here B’s promise to pay the sum of 10,000
rupees is the consideration for A’s promise to sell the house, and A’s promise to sell the
house is the consideration for B’s promise to pay the 10,000 rupees. These are lawful
considerations.
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(b) A promises to pay B 10,000 rupees at the end of six months, if C who owes that sum to B,
fails to pay it. B promises to grant time to C accordingly. Here the promise of each party
is the consideration for the promise of the other party and they are lawful
considerations.
(c) A promises, for a certain sum paid to him by B, to make good to B the value of his ship if
it is wrecked on a certain voyage. Here A’s promise is the consideration for B’s payment,
and B’s payment is the consideration for A’s promise, and these are lawful considerations.
(d) A promises to maintain B’s child and B promises to pay A 1,000 rupees yearly for the
purpose. Here the promise of each party is the consideration for the promise of the other
party. They are lawful considerations.
(e) A, B and C enter into an agreement for the division among them of gains acquired, or to
he acquired, by them by fraud. The agreement is void, as its object is unlawful.
(f) A promises to obtain for B an employment in the public service, and B promises to pay
1,000 rupees to A. The agreement is void, as the consideration for it is unlawful.
(g) A, being agent for a landed proprietor, agrees for money, without the knowledge of his
principal, to obtain for B a lease of land belonging to his principal. The agreement between
A and B is void, as it implies a fraud by concealment by A, on his principal.
(h) A promises B to drop a prosecution which he has instituted against B for robbery, and B
promises to restore the value of the things taken. The agreement is void, as its object is
unlawful.
(i) A’s estate is sold for arrears of revenue under the provisions of an act of the legislature, by
which the defaulter is prohibited from purchasing the estate. B, upon an understanding
with A, becomes the purchaser, and agrees to convey the estate to A upon receiving from
him the price which B has paid. The agreement is void, as it renders thetransaction, in
effect, a purchase by the defaulter, and would so defeat the object of the law.
(j) A, who is B’s power of attorney holder, promises to exercise his influence, as such, with B
in favour of C, and C promises to pay 1,000 rupees to A. The agreement is void,
because it is immoral.
(k) A agrees to let her daughter to hire to B for concubine. The agreement is void, because it is
immoral, though the letting may not be punishable under the Indian Penal Code, (45 of
1860).
UN LAWFUL CONSIDERATIONS
The Agreements are void, if Considerations and objects unlawful in part.
If any part of a single consideration for one or more objects, or any one or any part of any one
of several considerations for a single object, is unlawful, the agreement is void.
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Illustration
A promises to superintend, on behalf of B, a legal manufacture of indigo, and an illegal traffic
in other articles. B promises to pay to A a salary of 10,000 rupees a year. The agreement is void,
the object of A’s promise and the consideration for B’s promise, being in part unlawful.
NO CONSIDERATIONS
An agreement made without consideration is void, unless—
(1) Agreement without consideration void, unless it is in writing and registered.—It is
expressed in writing and registered under the law for the time being in force for the
registration of documents, and is made on account of natural love and affection between
parties standing in a near relation to each other, or unless.
(2) Or is a promise to compensate for something done.— It is a promise to compensate,
wholly or in part, a person who has already voluntarily done something for the promisor,
or something which the promisor was legally compellable to do, or unless.
(3) Or is a promise to pay a debt barred by limitation law.— It is a promise, made in writing
and signed by the person to be charged therewith, or by his agent generally or specially
authorized in that behalf, to pay wholly or in part a debt of which the creditor might have
enforced payment but for the law for the limitation of suits.
In any of these cases, such an agreement is a contract.
Explanation 1: Nothing in this section shall affect the validity, as between the donor and donee,
of any gift actually made.
Explanation 2: An agreement to which the consent of the 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.
Illustrations
(a) A promises, for no consideration, to give to B Rs. 1,000. This is a void agreement.
(b) A, for natural love and affection, promises to give his son, B, Rs. 1,000. A puts his promise
to B into writing and registers it. This is a contract.
(c) A finds B’s purse and gives it to him. B promises to give A Rs. 50. This is a contract.
(d) A supports B’s infant son. B promises to pay A’s expenses in so doing. This is a contract.
(e) A owes B Rs. 1,000, but the debt is barred by the Limitation Act. A signs a written promise
to pay B Rs. 500 on account of the debt. This is a contract.
(f) A agrees to sell a horse worth Rs. 1,000 for Rs. 10. A’s consent to the agreement was freely
given. The agreement is a contract notwithstanding the inadequacy of the consideration.
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(g) A agrees to sell a horse worth Rs. 1,000 for Rs. 10. A denies that his consent to the agreement
was freely given. The inadequacy of the consideration is a fact which the court should
take into account in considering whether or not A’s consent was freely given.
1.6. VOID AGREEMENTS
INTRODUCTION
One of the essential elements of an enforceable agreement i.e. a contract is the lawfulness of
the object. Behind any enforceable agreement there is an intention to create legal relationship
which implies that there is some transaction. The object of such transaction should be lawful,
else agreements shall not be enforceable by law.
AGREEMENT IN RESTRAINT OF MARRIAGE VOID
Every agreement in restraint of the marriage of any person, other than a minor, is void.
AGREEMENT IN RESTRAINT OF TRADE VOID
Every agreement by which anyone is restrained from exercising a lawful profession, trade or
business of any kind, is to that extent void.
Saving of agreement not to carry on business of which goodwill is sold.—
Exception 1.—One who sells the goodwill of a business may agree with the buyer to refrain
from carrying on a similar business, within specified local limits, so long as the buyer, or any
person deriving title to the goodwill from him, carries on a like business, therein :
Provided that such limits appear to the Court reasonable, regard being had to the nature of the
business.
AGREEMENTS IN RESTRAINT OF LEGAL PROCEEDINGS VOID
Every agreement,—
(a) by which any party thereto is restricted absolutely from enforcing his rights under or in
respect of any contract, by the usual legal proceedings in the ordinary tribunals, or which
limits the time within which he may thus enforce his rights; or
(b) which extinguishes the rights of any party thereto, or discharges any party thereto from
any liability, under or in respect of any contract on the expiry of a specified period so as to
restrict any party from enforcing his rights, is void to that extent.
Savings of contract to refer to arbitration dispute that may arise.—
Exception 1.—This section shall not render illegal a contract, by which two or more persons
agree that any dispute which may arise between them in respect of any subject or class of
subjects shall be referred to arbitration, and that only the amount awarded in such arbitration
shall be recoverable in respect of the dispute so referred.
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Suits barred by such contracts.—When such a contract has been made, a suit may be brought
for its specific performance, and if a suit, other than for such specific performance, or for the
recovery of the amount so awarded, is brought by one party to such contract against any other
such party, in respect of any subject which they have so agreed to refer, the existence of such
contract shall be a bar to the suit.
Saving of contract to refer questions that have already arisen.—Exception 2.— Nor shall this
section render illegal any contract in writing, by which two or more persons agree to refer to
arbitration any question between them which has already arisen, or affect any provision of any
law in force for the time being as to references to arbitration.
AGREEMENTS VOID FOR UNCERTAINTY
Agreements, the meaning of which is not certain, or capable of being made certain, are void.
Illustrations
(a) A agrees to sell to B “a hundred tons of oil”. There is nothing whatever to show what kind
of oil was intended. The agreement is void for uncertainty.
(b) A agrees to sell to B one hundred tons of oil of a specified description, known as an article
of commerce. There is no uncertainty here to make the agreement void.
(c) A, who is a dealer in coconut oil only, agrees to sell to B “one hundred tons of oil”. The
nature of A’s trade affords an indication of the meaning of the words, and A has entered
into a contract for the sale of one hundred tons of coconut oil.
(d) A agrees to sell to B “all the grain in my granary at Ramnagar”; There is no uncertainty
here to make the agreement void.
(e) A agrees to sell to B “one thousand maunds of rice at a price to be fixed by C”. As the price
is capable of being made certain, there is no uncertainty here to make the agreement void.
(f) A agrees to sell to B “my white horse for rupees five hundred or rupees one thousand”.
There is nothing to show which of the two prices was to be given. The agreement is void.
AGREEMENTS BY WAY OF WAGER VOID
Agreements by way of wager are void; and no suit shall be brought for recovering anything
alleged to be won on any wager, or entrusted to a person to abide by the result of any game or
other uncertain event on which any wager is made.
Exception in favour of certain prizes for horse-racing.—This section shall not be deemed to
render unlawful a subscription, or contribution, or agreement to subscribe or contribute, made
or entered into for or toward any plate, prize or sum of money, of the value or amount of five
hundred rupees or upwards, to be awarded to the winner or winners of any horse-race.
Section 294A of the Indian Penal Code not affected.—Nothing in this section shall be deemed
to legalize any transaction connected with horse-racing, to which the provisions of section
294A of the Indian Penal Code, (45 of 1860) apply.
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1.7. CONTINGENT CONTRACTS
INTRODUCTION
There are some contracts wherein there is no element of uncertainty in their performance. In
other words there performance is not dependent upon a particular event.
CONTINGENT CONTRACT
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.
Illustration
A contracts to pay B Rs. 10,000 if B’s house is burnt. This is a contingent contract.
ENFORCEMENT OF CONTRACTS CONTINGENT ON AN EVENT HAPPENING
Contingent contracts to do or not to do anything if an uncertain future event happens cannot
be enforced by law unless and until that event has happened.
If the event becomes impossible, such contracts become void.
Illustrations
(a) A makes a contract with B to buy B’s horse if A survives C. This contract cannot be enforced
by law unless and until C dies in A’s lifetime.
(b) A makes a contract with B to sell a horse to B at a specified price, if C, to whom the horse
has been offered, refuses to buy him. The contract cannot be enforced by law unless and
until C refuses to buy the horse.
(c) A contracts to pay B a sum of money when B marries C. C dies without being married to B.
The contract becomes void.
ENFORCEMENT OF CONTRACTS CONTINGENT ON AN EVENT NOT HAPPENING.
Contingent contracts to do or not to do anything if an uncertain future event does not happen
can be enforced when the happening of that event becomes impossible, and not before.
Illustrations
A agrees to pay B a sum of money if a certain ship does not return. This ship is sunk. The
contract can be enforced when the ship sinks.
WHEN EVENT ON WHICH CONTRACT IS CONTINGENT TO BE DEEMED
IMPOSSIBLE, IF IT IS THE FUTURE CONDUCT OF A LIVING PERSON
If the future event on which a contract is contingent is the way in which a person will act at an
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INDIAN CONTRACT ACT, 1872
A 16
unspecified time, the event shall be considered to become impossible when such person does
anything which renders it impossible that he should so act within any definite time, or otherwise
than under further contingencies.
Illustrations
A agrees to pay B a sum of money if B marries C.
C marries D. The marriage of B to C must now be considered impossible, although it is possible
that D may die and that C may afterwards marry B.
WHEN CONTRACTS BECOME VOID WHICH ARE CONTINGENT ON HAPPENING
OF SPECIFIED EVENT WITHIN FIXED TIME
Contingent contracts to do or not to do anything if a specified uncertain event happens within
a fixed time become void if, at the expiration of the time fixed, such event has not happened, or
if, before the time fixed, such event becomes impossible.
When contracts may be enforced which are contingent on specified event not happening
within fixed time.—
Contingent contracts to do or not to do anything if a specified uncertain event does not happen
within a fixed time may be enforced by law when the time fixed has expired and such event
has not happened, or, before the time fixed has expired, if it becomes certain that such event
will not happen.
Illustrations
(a) A promises to pay B a sum of money if a certain ship returns within a year. The contract
may be enforced if the ship returns within the year, and becomes void if the ship is burnt
within the year.
(b) A promises to pay B a sum of money if a certain ship does not return within a year. The
contract may be enforced if the ship does not return within the year, or is burnt within the
year.
AGREEMENTS CONTINGENT ON IMPOSSIBLE EVENTS VOID
Contingent agreements to do or not to do anything if an impossible event happens, are void,
whether the impossibility of the event is known or not to the parties to the agreement at the
time when it is made.
Illustrations
(a) A agrees to pay B 1,000 rupees if two-straight lines should enclose a space. The agreement
is void.
COMMERCIAL & INDUSTRIAL LAWS A 17
(b) A agrees to pay B 1,000 rupees if B will marry A’s daughter C. C was dead at the time of
the agreement. The agreement is void.
1.8. THE PERFORMANCE OF CONTRACTS
INTRODUCTION
Every Contract creates certain obligation on each of the parties involved in it. When both the
parties to the Contract fulfill their obligations towards each other, the contract is said to be
performed.
OBLIGATION OF PARTIES TO CONTRACTS
The parties to a contract must either perform, or offer to perform, their respective promises,
unless such performance is dispensed with or excused under the provisions of this Act, or of
any other law.
Promises bind the representatives of the promisor in case of the death of such promisor before
performance, unless a contrary intention appears from the contract.
Illustrations
(a) A promises to deliver goods to B on a certain day on payment of Rs. 1,000. A dies before
that day. A’s representatives are bound to deliver the goods to B, and B is bound to pay Rs.
1,000 to A’s representatives.
(b) A promises to paint a picture for B by a certain day, at a certain price. A dies before the
day. The contract cannot be enforced either by A’s representatives or by B.
EFFECT OF REFUSAL TO ACCEPT OFFER OF PERFORMANCE
Where a promisor has made an offer of performance to the promisee, and the offer has not
been accepted, the promisor is not responsible for non-performance, nor does he thereby lose
his rights under the contract.
Every such offer must fulfill the following conditions :—
(1) it must be unconditional
(2) it must be made at a proper time and place, and under such circumstances that the person
to whom it is made may have a reasonable opportunity of ascertaining that the person by
whom it is made is able and willing there and then to do the whole of what he is bound by
his promise to do:
(3) if the offer is an offer to deliver anything to the promisee, the promisee must have a
reasonable opportunity of seeing that the thing offered is the thing which the promisor is
bound by his promise to deliver.
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A 18
An offer to one of several joint promisees has the same legal consequences as an offer to all of
them.
Illustrations
A contracts to deliver to B at his warehouse, on the first March, 1873,100 bales of cotton of a
particular quality. In order to make an offer of a performance with the effect stated in this
section, A must bring the cotton to B’s warehouse, on the appointed day, under such
circumstances that B may have a reasonable opportunity of satisfying himself that the thing
offered is cotton of the quality contracted for, and that there are 100 bales.
EFFECT OF REFUSAL OF PARTY TO PERFORM PROMISE WHOLLY
When a party to a contract has refused to perform, or disabled himself from performing his
promise in its entirety, the promisee may put an end to the contract, unless he has signified, by
words or conduct, his acquiescence in its continuance.
Illustrations
(a) A, a singer, enters into a contract with B, the manager of a theatre, to sing at his theatre
two nights in every week during the next two months, and B engages to pay her 100
rupees for each night’s performance. On the sixth night A willfully absents herself from
the theatre. B is at liberty to put an end to the contract.
(b) A, a singer, enters into a contract with B, the manager of a theatre, to sing at his theatre
two nights in every week during the next two months, and B engages to pay her at the rate
of 100 rupees for each night. On the sixth night A willfully absents herself. With the assent
of B, A sings on the seventh night. B has signified his acquiescence in the continuance of
the contract, and cannot now put an end to it but is entitled to compensation for the damage
sustained by him through A’s failure to sing on the sixth night.
PERSON BY WHOM PROMISE IS TO BE PERFORMED
If it appears from the nature of the case that it was the intention of the parties to any contract
that any promise contained in it should be performed by the promisor himself, such promise
must be performed by the promisor. In other cases, the promisor or his representatives may
employ a competent person to perform it.
Illustrations
(a) A promises to pay B a sum of money. A may perform this promise, either by personally
paying the money to B or by causing it to be paid to B by another; and, if A dies before the
time appointed for payment, his representatives must perform the promise, or employ
some proper person to do so.
(b) A promises to paint a picture for B: A must perform this promise personally.
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EFFECT OF ACCEPTING PERFORMANCE FROM THIRD PERSON
When a promisee accepts performance of the promise from a third person, he cannot afterwards
enforce it against the promisor.
DEVOLUTION OF JOINT LIABILITIES
When two or more persons have made a joint promise then, unless a contrary intention appears
by the contract, all such persons, during their joint lives, and after the death of any of them, his
representative jointly with the survivor, or survivors, and after the death of the last survivor,
the representatives of all jointly, must fulfill the promise.
ANY ONE OF JOINT PROMISORS MAY HE COMPELLED TO PERFORM
When two or more persons make a joint promise, the promisee may, in the absence of express
agreement to the contrary, compel any one or more of such joint promisors to perform the
whole of the promise.
Each promisor may compel contribution.—Each of two or more joint promisors may compel
every other joint promisor to contribute equally with himself to the performance of the promise,
unless a contrary intention appears from the contract.
Sharing of loss by default in contribution.— If any one of two or more joint promisors makes
default in such contribution, the remaining joint promisors must bear the loss arising from
such default in equal shares.
Explanation: Nothing in this section shall prevent a surety from recovering from his principal,
payments made by the surety on behalf of the principal, or entitle the principal to recover
anything from the surety on account of payments made by the principal.
Illustrations
(a) A, B and C jointly promise to pay D 3,000 rupees. D may compel either A or B or C to pay
him 3,000 rupees.
(b) A, B and C jointly promise to pay D the sum of 3,000 rupees. C is compelled to pay the
whole. A is insolvent, but his assets are sufficient to pay one-half of his debts, C is entitled
to receive 500 rupees from A’s estate, and 2,250 rupees from B.
(c) A, B and C are under a joint promise to pay D 3,000 rupees. C is unable to pay anything,
and A is compelled to pay the whole. A is entitled to receive 1,500 rupees from B.
(d) A, B and C are under a joint promise to pay D 3,000 rupees, A and B being only sureties for
C. C fails to pay. A and B are compelled to pay the whole sum. They are entitled to
recover it from C.
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EFFECT OF RELEASE OF ONE JOINT PROMISOR
Where two or more persons have made a joint promise, a release of one of such joint promisors
by the promisee does not discharge the other joint promisor or joint promisors; neither does it
free the joint promisor so released from responsibility to the other joint promisor or joint
promisors.
DEVOLUTION OF JOINT RIGHTS
When a person has made a promise to two or more persons jointly, then, unless a contrary
intention appears from the contract, the right to claim performance rests, as between him and
them, with them during their joint lives, and, after the death of any of them, with the
representative of such deceased person jointly with the survivor or survivors, and. after the
death of the last survivor, with the representatives of all jointly.
Illustration
A, in consideration of 5,000 rupees, lent to him by B and C, promises B and C jointly to repay
them that sum with interest on a day specified. B dies. The right to claim performance rests
with B’s representative jointly with C during C’s life, and after the death of C with the
representatives of B and C jointly.
1.9. TIME AND PLACE FOR PERFORMANCE
TIME FOR PERFORMANCE OF PROMISE, WHERE NO APPLICATION IS TO BE MADE
AND NO TIME IS SPECIFIED
Where, by the contract, a promisor is to perform his promise without application by the
promisee, and no time for performance is specified, the engagement must be performed within
a reasonable time.
Explanation: The question “What is a reasonable time” is, in each particular case, a question of
fact.
TIME AND PLACE FOR PERFORMANCE OF PROMISE, WHERE TIME IS SPECIFIED
AND NO APPLICATION TO BE MADE
When a promise is to be performed on a certain day, and the promisor has undertaken to
perform it without application by the promisee, the promisor may perform it at any time during
the usual hours of business on such day and at the place at which the promise ought to be
performed.
Illustration
A promises to deliver goods at B’s warehouse on the 1st January. On that day A brings the
goods to B’s warehouse, but after the usual hour for closing it, and they arc not received. A has
not performed his promise.
COMMERCIAL & INDUSTRIAL LAWS A 21
APPLICATION FOR PERFORMANCE ON CERTAIN DAY TO BE AT PROPER TIME AND PLACE
When a promise is to be performed on a certain day, and the promisor has not undertaken to
perform it without application by the promisee, it is the duty of the promisee to apply for
performance at a proper place and within the usual hours of business.
Explanation : The question “What is a proper time and place” is, in each particular case, a
question of fact.
PLACE FOR PERFORMANCE OF PROMISE, WHERE NO APPLICATION TO BE MADE
AND NO PLACE FIXED FOR PERFORMANCE.
When a promise is to be performed without application by the promisee, and no place is fixed
for the performance of it, it is the duty of the promisor to apply to the promisee to appoint a
reasonable place for the performance of the promise, and to perform it at such place.
Illustration
A undertakes to deliver a thousand maunds of jute to B on a fixed day. A must apply to B to
appoint a reasonable place for the purpose of receiving it, and must deliver it to him at such
place.
PERFORMANCE IN MANNER OR AT TIME PRESCRIBED OR SANCTIONED BY
PROMISEE
The performance of any promise may be made in any manner, or at any time which the promisee
prescribes or sanctions.
Illustrations
(a) B owes A 2,000 rupees. A desires B to pay the amount to A’s account with C, a banker. B,
who also banks with C, orders the amount to be transferred from his account to A’s credit,
and this is done by C. Afterwards, and before A knows of the transfer, C fails. There has
been a good payment by B.
(b) A and B are mutually indebted. A and B settle an account by setting off one item against
another, and B pays A the balance found to be due from him upon such settlement. This
amounts to a payment by A and B respectively of the sums which they owed to each
other.
(c) A owes B 2,000 rupees. B accepts some of A’s goods in deduction of the debt. The delivery
of the goods operates as a part payment.
(d) A desires B, who owes him Rs. 100, to send him a note for Rs. 100 by post. The debt is
discharged as soon as B puts into the post a letter containing the note duly addressed to A.
CIA-3
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1.10. PERFORMANCE OF RECIPROCAL PROMISES
PROMISOR NOT BOUND TO PERFORM UNLESS RECIPROCAL PROMISEE READY
AND WILLING TO PERFORM
When a contract consists of reciprocal promises to be simultaneously performed, no promisor
need perform his promise unless the promisee is ready and willing to perform his reciprocal
promise.
Illustrations
(a) A and B contract that A shall deliver goods to B to be paid for by B on delivery.
A need not deliver the goods, unless B is ready and willing to pay for the goods on delivery.
B need not pay for the goods, unless A is ready and willing to deliver them on payment.
(b) A and B contract that A shall deliver goods to B at a price to be paid by installments, the
first installment to be paid on delivery.
A need not deliver, unless B is ready and willing to pay the first installment on delivery.
B need not pay the first installment, unless A is ready and willing to deliver the goods on
payment of the first installment.
ORDER OF PERFORMANCE OF RECIPROCAL PROMISES
Where the order in which reciprocal promises are to be performed is expressly fixed by the
contract, they shall be performed in that order; and,
where the order is not expressly fixed by the contract, they shall be performed in that order
which the nature of the transaction requires.
Illustrations
(a) A and B contract that A shall build a house for B at a fixed price. A’s promise to build the
house must be performed before B’s promise to pay for it.
(b) A and B contract that A shall make over his stock-in-trade to B at a fixed price, and B
promises to give security for the payment of the money. A’s promise need not be performed
until the security is given, for the nature of the transaction requires that A should have
security before he delivers up his stock.
LIABILITY OF PARTY PREVENTING EVENT ON WHICH THE CONTRACT IS TO TAKE EFFECT
When a contract contains reciprocal promises, and one party to the contract prevents the other
from performing his promise, the contract becomes voidable at the option of the party so
prevented; and he is entitled to compensation from the other party for any loss which he may
sustain in consequence of the non-performance of the contract.
COMMERCIAL & INDUSTRIAL LAWS A 23
Illustration
A and B contract that B shall execute certain work for A for a thousand rupees. B is ready and
willing to execute the work accordingly, but A prevents him from doing so. The contract is
voidable at the option of B; and, if he elects to rescind it, he is entitled to recover from A
compensation for any loss which he has incurred by its non-performance.
EFFECT OF DEFAULT AS TO THAT PROMISE WHICH SHOULD BE FIRST PERFORMED,
IN CONTRACT CONSISTING OF RECIPROCAL PROMISES.
When a contract consists of reciprocal promises, such that one of them cannot be performed, or
that its performance cannot be claimed till the other has been performed, and the promiser of
the promise last mentioned fails to perform it, such promisor cannot claim the performance of
the reciprocal promise, and must make compensation to the other party to the contract for any
loss which such other party may sustain by the non-performance of the contract.
Illustrations
(a) A hires B’s ship to take in and convey, from Calcutta to the Mauritius, a cargo to be provided
by A, B receiving a certain freight for its conveyance. A does not provide any cargo for the
ship. A cannot claim the performance of B’s promise, and must make compensation to B
for the loss which B sustains by the non-performance of the contract.
(b) A contacts with B to execute certain builder’s work for a fixed price, B supplying the
scaffolding and timber necessary for the work. B refuses to furnish and scaffolding or
timber, and the work cannot be executed. A need not execute the work, and B is bound to
make compensation to A for any loss caused to him by the non-performance of the contract.
(c) A contracts with B to deliver to him, at a specified price, certain merchandise on board a
ship which cannot arrive for a month, and B engages to pay for the merchandise within a
week from the date of the contract. B does not pay within the week. A’s promise to deliver
need not be performed, and B must make compensation.
(d) A promises B to sell him one hundred bales of merchandise, to be delivered next day, and
B promises A to pay for them within a month. A does not deliver according to his promise.
B’s promise to pay need not be performed and A must make compensation.
TIME IS ESSENCE OF THE CONTRACT
When a party to a contract promises to do a certain thing at or before a specified time, or certain
things at or before specified times, and fails to do any such thing at or before the specified time,
the contract, or so much of it as has not been performed, becomes voidable at the option of the
promisee, if the intention of the parties was that time should be of the essence of the contract.
Effect of such failure when time is not essential—If it was not the intention of the parties that
time should be of the essence of the contract, the contract does not become voidable by the
COMMERCIAL & INDUSTRIAL LAWS
INDIAN CONTRACT ACT, 1872
A 24
failure to do such thing at or before the specified time; but the promisee is entitled to
compensation from the promisor for any loss occasioned to him by such failure.
Effect of acceptance of performance at time other than that agreed upon.—If, in case of a
contract voidable on account of the promisor’s failure to perform his promise at the time agreed,
the promisee accepts performance of such promise at any time other than that agreed, the
promisee cannot claim compensation for any loss occasioned by the non-performance of the
promise at the time agreed, unless, at the time of such acceptance, he gives notice to the promisor
of his intention to do so.
AGREEMENT TO DO IMPOSSIBLE ACT
An agreement to do an act impossible in itself is void.
Contract to do act afterwards becoming impossible or unlawful.—A contract to do an act
which, after the contract is made, becomes impossible, or, by reason of some event which the
promisor could not prevent, unlawful, becomes void when the act becomes impossible or
unlawful.
COMPENSATION FOR LOSS THROUGH NON-PERFORMANCE OF ACT KNOWN TO
BE IMPOSSIBLE OR UNLAWFUL
Where one person has promised to do something which he knew, or, with reasonable diligence,
might have known, and which the promisee did not know to be impossible or unlawful, such
promisor must make compensation to such promisee for any loss which such promisee sustains
through the non-performance of the promise.
Illustrations
(a) A agrees with B to discover treasure by magic. The agreement is void.
(b) A and B contract to marry each other. Before the time fixed for the marriage, A goes mad.
The contract becomes void.
(c) A contracts to marry B, being already married to C, and being forbidden by the law to
which he is subject to practise polygamy. A must make compensation to B for the loss
caused to her by the non-performance of his promise.
(d) A contracts to take in cargo for B at a foreign port. A’s Government afterwards declares
war against the country in which the port is situated. The contract becomes void when
war is declared,
(e) A contracts to act at a theatre for six months in consideration of a sum paid in advance by
B. On several occasions A is too ill to act. The contract to act on those occasions becomes
void.
COMMERCIAL & INDUSTRIAL LAWS A 25
RECIPROCAL PROMISES TO DO THINGS LEGAL, AND ALSO OTHER THINGS
ILLEGAL
Where persons reciprocally promise, firstly, to do certain things which are legal, and, secondly,
under-specified circumstances, to do certain other things which are illegal, the first set of
promises is a contract, but the second is a void agreement.
Illustration
A and B agree that A shall sell B a house for 10,000 rupees, but that, if B uses it as a gambling
house, he shall pay A 50,000 rupees for it.
The first set of reciprocal promises, namely, to sell the house and to pay 10,000 rupees for it, is
a contract.
The second set is for an unlawful object, namely, that B may use the house as a gambling
house, and is a void agreement.
ALTERNATIVE PROMISE, ONE BRANCH BEING ILLEGAL
In the case of an alternative promise, one branch of which is legal and the other illegal, the
legal branch alone can be enforced.
Illustration
A and B agree that A shall pay B 1,000 rupees, for which B shall afterwards deliver to A either
rice or smuggled opium.
This is a valid contract to deliver rice, and a void agreement as to the opium.
1.11. APPROPRIATION OF PAYMENTS
APPLICATION OF PAYMENT WHERE DEBT TO BE DISCHARGED IS INDICATED
Where a debtor, owing several distinct debts to one person, makes a payment to him, either
with express intimation, or under circumstances implying that the payment is to be applied to
the discharge of some particular debt, the payment, if accepted, must be applied accordingly.
Illustrations
(a) A owes B, among other debts, 1,000 rupees upon a promissory note which falls due on the
first June. He owes B no other debt of that amount. On the first June A pays to B 1,000
rupees. The payment is to be applied to the discharge of the promissory note.
(b) A owes to B, among other debts, the sum of 567 rupees. B writes to A and demands payment
of this sum. A sends to B 567 rupees. This payment is to be applied to the discharge of the
debt of which B had demanded payment.
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INDIAN CONTRACT ACT, 1872
A 26
APPLICATION OF PAYMENT WHERE DEBT TO BE DISCHARGED IS NOT INDICATED
Where the debtor has omitted to intimate and there are no other circumstances indicating to
which debt the payment is to be applied, the creditor may apply it at his discretion to any
lawful debt actually due and payable to him from the debtor, whether its recovery is or is not
barred by the law in force for the time being as to the limitation of suits.
APPLICATION OF PAYMENT WHERE NEITHER PARTY APPROPRIATES
Where neither party makes any appropriation the payment shall be applied in discharge of the
debts in order of time, whether they are or are not barred by the law in force for the time being
as to the limitation of suits. If the debts are of equal standing, the payment shall be applied in
discharge of each proportionatly.
CONTRACTS WHICH NEED NOT BE PERFORMED EFFECT OF NOVATION,
RESCISSION AND ALTERATION OF CONTRACT
If the parties to a contract agree to substitute a new contract for it, or to rescind or alter it, the
original contract need not be performed.
Illustrations
(a) A owes money to B under a contract. It is agreed between A, B and C that B shall thenceforth
accept C as his debtor, instead of A. The old debt of A to B is at an end, a new debt from C
to B has been contracted.
(b) A owes B 10,000 rupees. A enters into an agreement with B, and gives B a mortgage of his
(A’s) estate for 5,000 rupees in place of the debt of 10,000 rupees. This is a new contract
and extinguishes the old.
(c) A owes B 1,000 rupees under a contract, B owes C 1,000 rupees. B orders A to credit C with
1,000 rupees in his books, but C does not assent to the arrangement. B still owes C 1,000
rupees, and no new contract has been entered into.
PROMISEE MAY DISPENSE WITH OR REMIT PERFORMANCE OF PROMISE
Every promisee may dispense with or remit, wholly or in part, the performance of the promise
made to him, or may extend the time for such performance, or may accept instead of it any
satisfaction which he thinks fit.
Illustrations
(a) A promises to paint a picture for B. B afterwards forbids him to do so A is no longer bound
to perform the promise.
(b) A owes B 5,000 rupees. A pays to B, and B accepts in satisfaction of the whole debt, 2,000
COMMERCIAL & INDUSTRIAL LAWS A 27
rupees paid at the time and place at which the 5,000 rupees were payable. The whole debt is
discharged.
(c) A owes B 5,000 rupees. C pays to B 1,000 rupees, and B accepts them, in satisfaction of his
claim on A. This payment is a discharge of the whole claim.
(d) A owes B, under a contract, a sum of money, the amount of which has not been ascertained.
A without ascertaining the amount gives to B, and B, in satisfaction thereof, accepts the
sum of 2,000 rupees. This is a discharge of the whole debt, whatever may be its amount.
(e) A owes B 2,000 rupees, and is also indebted to other creditors. A makes an arrangement
with his creditors, including B, to pay them, a composition of eight annas in the rupee
upon their respective demands. Payment to B of 1,000 rupees is a discharge of B’s demand.
CONSEQUENCES OF RESCISSION OF VOIDABLE CONTRACT
Where a person at whose option a contract is voidable rescinds it, the other party thereto need
not perform any promise therein contained in which he is promisor. The party rescinding a
voidable contract shall, if he has received any benefit thereunder from another party to such
contract, restore such benefit, so far as may be, to the person from whom it was received.
OBLIGATION OF PERSON WHO HAS RECEIVED ADVANTAGE UNDER VOID
AGREEMENT OR CONTRACT THAT BECOMES VOID
When an agreement is discovered to be void, or when a contract becomes void, any person
who has received any advantage under such agreement or contract is bound to restore it, or to
make compensation for it, to the person from whom he received it.
Illustrations
(a) A pays B 1,000 rupees in consideration of B’s promising to marry C, A’s daughter. C is
dead at the time of the promise. The agreement is void, but B must repay A the 1,000
rupees.
(b) A contracts with B to deliver to him 250 maunds of rice before the 1st of May. A delivers
130 maunds only before that day, and none after. B retains the 130 maunds after the first
day of May. He is bound to pay A for them.
(c) A, a singer, contracts with B, the manager of a theatre, to sing at his theatre for two nights
in every week during the next two months, and B engages to pay her a hundred rupees for
each night’s performance. On the sixth night, A wilfully absents herself from the theatre,
and B, in consequence, rescinds the contract. B must pay A for the five nights on which
she had sung.
(d) A contracts to sing for B at a concert for 1,000 rupees, which are paid in advance. A is too
ill to sing. A is not bound to make compensation to B for the loss of the profits which B would
have made if A had been able to sing, but must refund to B the 1,000 rupees paid in advance.
COMMERCIAL & INDUSTRIAL LAWS
INDIAN CONTRACT ACT, 1872
A 28
MODE OF COMMUNICATING OR REVOKING RESCISSION OF VOIDABLE
CONTRACT
The rescission of a voidable contract may be communicated or revoked in the same manner,
and subject to the same rules, as apply to the communication or revocation of a proposal.
EFFECT OF NEGLECT OF PROMISEE TO AFFORD PROMISOR REASONABLE
FACILITIES FOR PERFORMANCE
If any promisee neglects or refuses to afford the promisor reasonable facilities for the
performance of his promise, the promisor is excused by such neglect or refusal as to any nonperformance
caused thereby.
Illustration
A contracts with B to repair B’s house.
B neglects or refuses to point out to A the places in which his house requires repair.
A is excused for the non-performance of the contract if it is caused by such neglect or refusal.
CLAIM FOR NECESSARIES SUPPLIED TO PERSON INCAPABLE OF CONTRACTING,
OR ON HIS ACCOUNT
If a person, incapable of entering into a contract, or anyone whom he is legally bound to support,
is supplied by another person with necessaries suited to his condition in life, the person who
has furnished such supplies is entitled to be reimbursed from the property of such incapable
person.
Illustrations
(a) A supplies B, a lunatic, with necessaries suitable to his condition in life. A is entitled to be
reimbursed from B’s property.
(b) A supplies the wife and children of B, a lunatic, with necessaries suitable to their condition
in life. A is entitled to be reimbursed from B’s property.
REIMBURSEMENT OF PERSON PAYING MONEY DUE BY ANOTHER IN PAYMENT
OF WHICH HE IS INTERESTED
A person who is interested in the payment of money which another is bound by law to pay,
and who therefore pays it, is entitled to be reimbursed by the other.
Illustration
B holds land in Bengal, on a lease granted by A, the zamindar. The revenue payable by A to the
Government being in arrear, his land is advertised for sale by the Government. Under the
revenue law, the consequence of a such sale will be the annulment of B’s lease. B, to prevent
COMMERCIAL & INDUSTRIAL LAWS A 29
the sale and the consequent annulment of his own lease, pays to the Government the sum due
from A. A is bound to make good to B the amount so paid.
OBLIGATION OF PERSON ENJOYING BENEFIT OF NON-GRATUITOUS ACT
Where a person lawfully does anything for another person/or delivers anything to him, not
intending to do so gratuitously, and such other person enjoys the benefit thereof, the latter is
bound to make compensation to the former in respect of, or to restore, the thing so done or
delivered.
Illustrations
(a) A, a tradesman, leaves goods at B’s house by mistake, B treats the goods as his own. He is
bound to pay A for them.
(b) A saves B’s property from fire. A is not entitled to compensation from-B, if the circumstances
show that he intended to act gratuitously.
RESPONSIBILITY OF FINDER OF GOODS
A person who finds goods belonging to another, and takes them into his custody, is subject to
the same responsibility as a bailee.
LIABILITY OF PERSON TO WHOM MONEY IS PAID, OR THING DELIVERED BY
MISTAKE OR UNDER COERCION
A person to whom money has been paid, or anything delivered, by mistake or under coercion,
must repay or return it.
Illustrations
(a) A and B jointly owe 100 rupees to C. A alone pays the amount to C, and B, not knowing
this fact, pays 100 rupees over again to C. C is bound to repay the amount to B.
(b) A railway company refuses to deliver up certain goods to the consignee, except upon the
payment of an illegal charge for carriage. The consignee pays the sum charged in order to
obtain the goods He is entitled to recover so much of the charge as was illegally excessive.
THE CONSEQUENCES OF BREACH OF CONTRACT COMPENSATION FOR LOSS OR
DAMAGE CAUSED BY BREACH OF CONTRACT
When a contract has been broken, the party who suffers by such breach is entitled to receive,
from the party who has broken the contract, compensation for any loss or damage caused to
him thereby, which naturally arose in the usual course of things from such breach, or which
the parties knew, when they made the contract, to be likely to result from the breach of it.
Such compensation is not to be given for any remote and indirect loss or damage sustained by
reason of the breach.
COMMERCIAL & INDUSTRIAL LAWS
INDIAN CONTRACT ACT, 1872
A 30
Compensation for failure to discharge obligation resembling those created by contract.—
When an obligation resembling those created by contract has been incurred and has not been
discharged, any person injured by the failure to discharge it is entitled to receive the same
compensation from the party in default, as if such person had contracted to discharge it and
had broken his contract.
Explanation : In estimating the loss or damage arising from a breach of contract, the means
which existed of remedying the inconvenience caused by the non-performance of the contract
must be taken into account.
Illustrations
(a) A contracts to sell and deliver 50 maunds of saltpetre to B, at a certain price to be paid on
delivery. A breaks his promise. B is entitled to receive from A, by way of compensation,
the sum, if any, by which the contract price falls short of the price for which B might have
obtained 50 maunds of saltpetre of like quality at the time when the saltpetre ought to
have been delivered.
(b) A hires B’s ship to go to Bombay, and there take on board on the first of January a cargo
which A is to provide, and ( bring it to Calcutta, the freight to be paid when earned. B’s
ship does not go to Bombay, but A has opportunities of procuring suitable conveyance for
the cargo upon terms as advantageous as those on which he had chartered the ship. A
avails himself of those opportunities, but is put to trouble and expense in doing so. A is
entitled to receive compensation from B in respect of such trouble and expense.
(c) A contracts to buy of B, at a stated price, 50 maunds of rice, no time being fixed for delivery.
A afterwards informs B that he will not accept the rice if tendered to him. B is entitled to
receive from A, by way of compensation, the amount, if any, by which the contract price
exceeds that which B can obtain for the rice at the time when A informs B that he will not
accept it.
(d) A contracts to buy B’s ship for 60,000 rupees, but breaks his promise. A must pay to B, by
way of compensation, the excess, if any, of the contract price over the price which B can
obtain for the ship at the time of the breach of promise.
(e) A, the owner of a boat, contracts with B to take a cargo of jute to Mirzapur, for sale at that
place, starting on a specified day. The boat, owing to some avoidable cause, does not start
at the time appointed, whereby the arrival of the cargo at Mirzapur is delayed beyond the
time when it would have arrived if the boat had sailed according to the contract. After
that date, and before the arrival of the cargo, the price of jute falls. The measure of the
compensation payable to B by A is the difference between the price which B could have
obtained for the cargo at Mirzapur at the time when it would have arrived if forwarded in
due course, and its market price at the time when it actually arrived.
(f) A contracts to repair B’s house in a certain manner, and receives payment in advance. A
repairs the house, but not according to contract. B is entitled to recover from A the cost of
making the repairs conforming to the contract.
COMMERCIAL & INDUSTRIAL LAWS A 31
(g) A contracts to let his ship to B for a year, from the first of January, for a certain price.
Freights rise, and, on the first of January, the hire obtainable for the ship is higher than the
contract price. A breaks his promise. He must pay to B, by way of compensation, a sum
equal to the difference between the contract price and the price for which B could hire a
similar ship for a year on and from the first of January.
(h) A contracts to supply B with a certain quantity of iron at a fixed price, being a higher price
than that for which A could procure and deliver the iron. B wrongfully refuses to receive
the iron. B must pay to A, by way of compensation, the difference between the contract
price of the iron and the sum for which A could have obtained and delivered it.
(i) A delivers to B, a common carrier, a machine to be conveyed, without delay, to A’s mill,
informing B that his mill is stopped for want of the machine. B unreasonably delays the
delivery of the machine and A, in consequence, loses a profitable contract with the
Government. A is entitled to receive from B, by way of compensation, the average amount
of profit which would have been made by the working of the mill during the time that
delivery of it was delayed, but not the loss sustained through the loss of the Government
contract.
(j) A, having contracted with B to supply B with 1,000 tons of iron at 100 rupees a ton, to be
delivered at a stated time, contracts with C for the purchase of 1,000 tons of iron at 80
rupees a ton, telling C that he does so for the purpose of performing his contract with B. C
fails to perform his contract with A, who cannot procure other iron, and B, in consequence,
rescinds the contract. C must pay to A 20,000 rupees, being the profit which A would have
made by the performance of his contract with B.
(k) A contracts with B to make and deliver to B, by a fixed day, for a specified price, a certain
piece of machinery. A does not deliver the piece of machinery at the time specified, and in
consequence of this, B is obliged to procure another at a higher price than that which he
was to have paid to A, and is prevented from performing a contract which B had made
with a third person at the time of his contract with A (but which had not been then
communicated to A), and is compelled to make compensation for breach of that contract.
A must pay to B, by way of compensation, the difference between the contract price of the
piece of machinery and the sum paid by B for another, but not the sum paid by B to the
third person by way of compensation.
(l) A, a builder, contacts to erect and finish a house by the first of January, in order that B may
give possession of it at that time to C, to whom B has contracted to let it. A is informed of
the contract between B and C. A builds the house so badly that, before the first of January,
it falls down and has to be rebuilt by B, who, in consequence, loses the rent which he was
to have received from C, and is obliged to make compensation to C for the breach of his
contract. A must make compensation to B for the cost of rebuilding the house, for the rent
lost, and for the compensation made to C.
(m) A sells certain merchandise to B, warranting it to be of a particular quality, and B, in
reliance upon this warranty, sells it to C with a similar warranty. The goods prove to be
COMMERCIAL & INDUSTRIAL LAWS
INDIAN CONTRACT ACT, 1872
A 32
not according to the warranty, and B becomes liable to pay C a sum of money by way of
compensation. B is entitled to be reimbursed this sum by A.
(n) A contracts to pay a sum of money to B on a day specified A does not pay the money on
that day; B in consequence of not receiving the money on that day is unable to pay his
debts, and is totally ruined. A is not liable to make good to B anything except the principal
sum he contracted to pay, together with interest up to the day of payment.
(o) A contracts to deliver 50 maunds of saltpetre to B on the first of January, at a certain price.
B afterwards, before the first day of January, contracts to sell the saltpetre to C at a price
higher than the market price of the first of January. A breaks his promise. In estimating
the compensation payable by A or to B, the market price of the first of January, and not the
profit which would have arisen to B from the sale to’C, is to be taken into account.
(p) A contracts to sell and deliver 500 bales of cotton to B on a fixed day. A knows nothing of
B’s mode of conducting his business. A breaks his promise, and B, having no cotton, is
obliged to close his mill. A is not responsible to B for the loss caused to B by the closing of
the mill.
(q) A contracts to sell and deliver to B, on the first of January, certain cloth which B intends to
manufacture into caps of a particular kind, for which there is no demand, except at that
season. The cloth is not delivered till after the appointed time, and too late to be used that
year in making caps. B is entitled to receive from A, by way of compensation, the difference
between the contract price of the cloth and its market price at the time of delivery, but not
the profits which he expected to obtain by making caps, nor the expenses which he has
been put to in making preparation for the manufacture.
(r) A, a shipowner, contracts with B to convey him from Calcutta to Sydney in A’s ship sailing
on the first of January, and B pays to A, by way of deposit, one-half of his passage money.
The ship does not sail on the first of January, and B, after being, in consequence, detained
in Calcutta for some time, and thereby put to some expense, proceeds to Sydney in another
vessel, and, in consequence, arriving too late in Sydney, loses a sum of money. A is liable
to repay to B his deposit, with interest, and the expense to which he is put by his detention
in Calcutta, and the excess, if any, of the passage money paid for the second ship over that
agreed upon for the first, but not the sum of money which B lost by arriving in Sydney too
late.
COMPENSATION FOR BREACH OF CONTRACT WHERE PENALTY STIPULATED FOR
When a contract has been broken, if a sum is named in the contract as the amount to be paid in
case of such breach, or if the contract contains any other stipulation by way of penalty, the
party complaining of the breach is entitled, whether or not actual damage or loss is proved to
have been caused thereby, to receive from the party who has broken the contract reasonable
compensation not exceeding the amount so named or, as the case may be, the penalty stipulated
for.
COMMERCIAL & INDUSTRIAL LAWS A 33
Explanation: A stipulation for increased interest from the date of default may be a stipulation
by way of penalty.
Exception: When any person enters into any bail-bond, recognizance or other instrument of
the same nature, or, under the provisions of any law, or under the orders of the Central
Government or of any State Government, gives any bond for the performance of any public
duty or act in which the public are interested, he shall be liable, upon breach of the condition of
any such instrument, to pay the whole sum mentioned therein.
Explanation: A person who enters into a contract with the Government does not necessarily
thereby undertake any public duty, or promise to do an act in which the public are interested.
Illustrations
(a) A contracts with B to pay B Rs. 1,000, if he fails to pay B Rs. 500 on a given pay. A fails to
pay B Rs. 500 on that day. B is entitled to recover from A such compensation, not exceeding
Rs. 1,000, as the Court considers reasonable.
(b) A contracts with B that if A practises as a surgeon within Calcutta, he will pay B Rs. 5,000.
A practises as a surgeon in Calcutta. B is entitled to such compensation, not exceeding Rs.
5,000, as the Court considers reasonable.
(c) A gives a recognizance binding him in a penalty of Rs. 500 to appear in Court on a certain
day. He forfeits his recognizance. He is liable to pay the whole penalty.
(d) A gives B a bond for the repayment of Rs. 1,000 with interest at 12 per cent at the end of six
months, with a stipulation that, in case of default, interest shall be payable at the rate of 75
per cent from the date of default. This is a stipulation by way of penalty, and B is only
entitled to recover from A such compensation as the Court considers reasonable.
(e) A, who owes money to B, a money-lender, undertakes to repay him by delivering to him
10 maunds of grain on a certain date, and stipulates that, in the event of his not delivering
the stipulated amount by the stipulated date, he shall be liable to deliver 20 maunds. This
is a stipulation by way of penalty, and B is only entitled to reasonable compensation in
case of breach.
(f) A undertakes to repay B a loan of Rs. 1,000 by five equal monthly instalments, with a
stipulation that, in default of payment of any instalment, the whole shall become due.
This stipulation is not by way of penalty, and the contract may be enforced according to
its terms.
(g) A borrows Rs. 100 from B and gives him a bond for Rs. 200 payable by five yearly
instalments of Rs. 40, with a stipulation that, in default of payment of any instalment, the
whole shall become due. This is a stipulation by way of penalty.
PARTY RIGHTFULLY RESCINDING CONTRACT ENTITLED TO COMPENSATION
A person who rightfully rescinds a contract is entitled to compensation for any damage which
he has sustained through the non-fulfilment of the contract.
COMMERCIAL & INDUSTRIAL LAWS
INDIAN CONTRACT ACT, 1872
A 34
Illustration
A, a singer, contracts with B, the manager of a theatre, to sing at his theatre for two nights in
every week during the next two months, and B engages to pay her 100 rupees for each night’s
performance. On the sixth night, A wilfully absents herself from the theatre, and B, in
consequence, rescinds the contract. B is entitled to claim compensation for the damage which
he has sustained through the non-fulfilment of the contract.
1. 12. INDEMNITY AND GUARANTEE
“CONTRACT OF INDEMNITY” DEFINED
A contract by which one party promises to save the other from loss caused to him by the
conduct of the promisor himself, or by the conduct of any other person, is called a “contract of
indemnity.”
Illustration
A contracts to indemnify B against the consequences of any proceedings which C may take
against B in respect of a certain sum of 200 rupees. This is a contract of indemnity.
RIGHTS OF INDEMNITY-HOLDER WHEN SUED
The promisee in a contract of indemnity, acting within the scope of his authority, is entitled to
recover from the promisor—
(1) all damages which he may be compelled to pay in any suit in respect of any matter to
which the promise to indemnify applies ;
(2) all costs which he may be compelled to pay in any such suit if, in bringing or defending it,
he did not contravene the orders of the promisor, and acted as it would have been prudent
for him to act in the absence of any contract of indemnity, or if the promisor authorized
him to bring or defend the suit;
(3) all sums which he may have paid under the terms of any compromise of any such suit, if
the compromise was not contrary to the orders of the promisor, and was one which it
would have been prudent for the promisee to make in the absence of any contract of
indemnity, or if the promisor authorised him to compromise the suit.
“CONTRACT OF GUARANTEE”, “SURETY”, “PRINCIPAL DEBTOR” AND “CREDITOR”
A “contract of guarantee” is a contract to perform the promise, or discharge the liability, of a
third person in case of his default. The person who gives the guarantee is called the “surety”;
the person in respect of whose default the guarantee is given is called the “principal debtor”,
and the person to whom the guarantee is given is called the “creditor”. A guarantee may be
either oral or written.
COMMERCIAL & INDUSTRIAL LAWS A 35
CONSIDERATION FOR GUARANTEE
Anything done, or any promise made, for the benefit of the principal debtor, may be a sufficient
consideration to the surety for giving the guarantee.
Illustrations
(a) B requests A to sell and deliver to him goods on credit. A agrees to do so, provided C will
guarantee the payment of the price of the goods. C promises to guarantee the payment in
consideration of A’s promise to deliver the goods. This is a sufficient consideration for C’s
promise.
(b) A sells and delivers goods to B. C afterwards requests A to forbear to sue B for the debt for
a year, and promises that if he does so, C will pay for them in default of payment by B. A
agrees to forbear as requested. This is a sufficient consideration for C’s promise.
(c) A sells and delivers goods to B. C afterwards, without consideration, agrees to pay for
them in default of B. The agreement is void.
SURETY’S LIABILITY
The liability of the surety is co-extensive with that of the principal debtor, unless it is otherwise
provided by the contract.
Illustration
A guarantees to B the payment of a bill of exchange by C, the acceptor. The bill is dishonoured
by C. A is liable not only for the amount of the bill but also for any interest and charges which
may have become due on it.
CONTINUING GUARANTEE
A guarantee which extends to a series of transactions is called a “continuing guarantee”.
Illustrations
(a) A, in consideration that B will employ C in collecting the rents of B’s zamindari, promises
B to be responsible, to the amount of 5,000 rupees, for due collection and payment by C of
those rents. This is a continuing guarantee.
(b) A guarantees payment to B, a tea-dealer, to the amount of $100, for any tea he may from
time to time supply to C. B supplies C with tea to above the value of $ 100, and C pays B for
it. Afterwards B supplies C with tea to the value of $200. C fails to pay. The guarantee
given by A was a continuing guarantee, and he is accordingly liable to B to the extent of
$100.
(c) A guarantees payment to B of the price of five sacks of flour to be delivered by B to C and
COMMERCIAL & INDUSTRIAL LAWS
INDIAN CONTRACT ACT, 1872
A 36
to be paid for in a month. B delivers five sacks to C. C pays for them. Afterwards B delivers
fours sacks to C, which C does not pay for. The guarantee given by A was not a continuing
guarantee, and accordingly he is not liable for the price of the four sacks.
REVOCATION OF CONTINUING GUARANTEE
A continuing guarantee may at any time be revoked by the surety, as to future transactions, by
notice to the creditor.
Illustrations
(a) A, in consideration of B’s discounting, at A’s request, bills of exchange for C, guarantees
to B, for twelve months, the due payment of all such bills to the extent of 5,000 rupees. B
discounts bills for C to the extent of 2,000 rupees. Afterwards, at the end of three months,
A revokes the guarantee. This revocation discharges A from all liability to B for any
subsequent discount. But A is liable to B for the 2,000 rupees, on default of C.
(b) A guarantees to B, to the extent of 10,000 rupees, that C shall pay all the bills that B shall
draw upon him. B draws upon C. C accepts the bill. A gives notice of revocation. C
dishonours the bill at maturity. A is liable upon his guarantee.
REVOCATION OF CONTINUING GUARANTEE BY SURETY’S DEATH
The death of the surety operates, in the absence of any contract to the contrary, as a revocation
of a continuing guarantee, so far as regards future transactions.
LIABILITY OF TWO PERSONS, PRIMARILY LIABLE, NOT AFFECTED BY
ARRANGEMENT BETWEEN THEM THAT ONE SHALL BE SURETY ON OTHER’S
DEFAULT
Where two persons contract with a third person to undertake a certain liability, and also contract
with each other that one of them shall be liable only on the default of the other, the third
person not being a party to such contract, the liability of each of such two persons to the third
person under the first contract is not affected by the existence of the second contract, although
such third person may have been aware of its existence.
Illustration
A and B make-A joint and several promissory note to C. A makes it, in fact, as surety for B, and
C knows this at the time when the note is made. The fact that A, to the knowledge of C, made
the note as surety for B, is no answer to a suit by C against A upon the note.
DISCHARGE OF SURETY BY VARIANCE IN TERMS OF CONTRACT
Any variance, made without surety’s consent, in the terms of the contract between the principal
(debtor) and the creditor, discharges the surety as to transactions subsequent to the variance.
COMMERCIAL & INDUSTRIAL LAWS A 37
Illustrations
(a) A becomes surety to C for B’s conduct as a manager in C’s bank. Afterwards, B and C
contract, without A’s consent, that B’s salary shall be raised, and that he shall become
liable for one-fourth of the losses on overdrafts. B allows a customer to overdraw, and the
bank loses a sum of money. A is discharged from his suretyship by the variance made
without his consent, and is not liable to make good this loss.
(b) A guarantees C against the misconduct of B in an office to which B is appointed by C, and
of which the duties are defined by an Act of the Legislature. By a subsequent Act, the
nature of the office is materially altered. Afterwards, B misconducts himself. A is discharged
by the change from future liability under his guarantee, though the misconduct of B is in
respect of a duty not affected by the later Act.
(c) C agrees to appoint B as his clerk to sell goods at a yearly salary, upon A’s becoming
surety to C for B’s duly accounting for moneys received by him as such clerk. Afterwards,
without A’s knowledge or consent, C and B agree that B should be paid by a commission
on the goods sold by him and not by a fixed salary. A is not liable for subsequent misconduct
of B.
(d) A gives to C a continuing guarantee to the extent of 3,000 rupees for any oil supplied by C
to B on credit. Afterwards B becomes embarrassed, and, without the knowledge of A, B
and C contract that C shall continue to supply B with oil for ready money, and that the
payments shall be applied to the then existing debts between B and C. A is not liable on
his guarantee for any goods supplied after this new arrangement.
(e) C contracts to lend B 5,000 rupees on the 1st March. A guarantees repayment. C pays the
5,000 rupees to B on the 1 st January. A is discharged from his liability, as the contract has
been varied, inasmuch as C might sue B for the money before the 1st March.