Overview of the Indian Contract Act 1872 | Civil Law for Judiciary Exams PDF Download

Case Law: Fateh Chand v. Balkishan Dass (1963)

• Facts: A contract for the sale of property included a clause that ₹25,000 paid as earnest money would be forfeited on breach. The buyer defaulted, and the seller sought to retain the entire amount.
• Held: The forfeiture clause was a penalty. The seller was entitled to reasonable compensation for the actual loss suffered, not the entire ₹25,000.
• Significance: Established that courts will award only reasonable compensation under Section 74, regardless of whether the stipulated sum is a penalty or liquidated damages.
• Example: A contract stipulates that if A fails to deliver goods on time, they will pay B ₹50,000. If the actual loss to B is ₹20,000, the court will award only ₹20,000, regardless of whether the ₹50,000 was labeled as liquidated damages or a penalty.

Discharge of Contracts

A contract is discharged when the obligations under it are terminated, and the parties are released from their duties. Discharge of a contract can occur in various ways, as outlined below.

Modes of Discharge

1. By Performance : A contract is discharged when both parties fulfill their obligations as per the terms.
   Types of Performance:
   • Actual Performance: When obligations are fully performed.
   • Attempted Performance (Tender): When one party offers to perform but the other refuses.
   • Example: A agrees to deliver 100 kg of rice to B, and B agrees to pay ₹5000. If A delivers the rice and B pays the amount, the contract is discharged by performance.
2. By Agreement: Parties may mutually agree to terminate the contract or alter its terms.
   Methods:
   • Novation: Substituting a new contract for the old one.
   • Rescission: Canceling the contract before performance is due.
   • Alteration: Changing the terms of the contract with mutual consent.
   • Remission: Accepting lesser performance than originally agreed.
   • Waiver: Voluntarily relinquishing a right under the contract.
   • Example: A and B agree that instead of delivering goods, A will pay B ₹10,000. This novation discharges the original contract.
3. By Impossibility of Performance (Frustration): A contract becomes void if performance becomes impossible due to unforeseen events (Doctrine of Frustration).
   Causes:
   • Destruction of subject matter.
   • Change in law.
   • Death or incapacity of a party (in personal contracts).
   • Outbreak of war.
     Example: A contracts to rent a hall for an event, but the hall is destroyed by fire. The contract is discharged due to impossibility.
4. By Breach: A contract is discharged if one party fails to perform their obligations.
   Types of Breach:
   • Actual Breach: Failure to perform when performance is due.
   • Anticipatory Breach: Declaring an intention not to perform before the due date.
   • Example: A agrees to deliver goods by June 1 but informs B on May 15 that they will not deliver. This anticipatory breach discharges the contract.
5. By Operation of Law: A contract may be discharged due to legal reasons, such as:
   • Merger: When a higher obligation absorbs a lower one.
   • Insolvency: When a party is declared bankrupt.
   • Unauthorized material alteration of the contract.
   • Example: If A becomes insolvent, their contracts may be discharged by operation of law.
6. By Lapse of Time: If a contract is not performed within the stipulated or reasonable time, it may be discharged.
   • Example: A contract to deliver goods within 30 days lapses if not performed within that period.

Quasi-Contracts

Quasi-contracts are not true contracts but obligations imposed by law to prevent unjust enrichment. They arise in the absence of an agreement, based on the principle of equity.

Features of Quasi-Contracts

• No mutual consent or agreement between parties.
• Imposed by law to ensure fairness.
• Based on the doctrine of unjust enrichment.
• Enforceable like a contract.

Types of Quasi-Contracts

(As per the Indian Contract Act, 1872, Sections 68–72)

1. Supply of Necessaries (Section 68)
   • If necessaries are supplied to a person incapable of contracting (e.g., minor), the supplier is entitled to reimbursement from the person’s property.
   • Example:
     A supplies food to a minor. A can recover the cost from the minor’s property.
2. Payment by an Interested Person (Section 69)
   • A person who pays a debt they are not legally bound to pay, but has an interest in paying, can recover the amount from the person liable.
   • Example:
     A tenant pays the landlord’s property tax to avoid seizure of the property. The tenant can recover the amount from the landlord.
3. Obligation to Pay for Non-Gratuitous Acts (Section 70)
   • If a person lawfully does something for another (not gratuitously) and the other benefits, the latter must compensate.
   • Example:
     A repairs B’s house without request, and B benefits. B must pay A reasonable compensation.
4. Responsibility of Finder of Goods (Section 71)
   • A person who finds lost goods must take reasonable care of them and return them to the owner. They are entitled to reimbursement for expenses.
   • Example:
     A finds B’s lost wallet and incurs expenses to return it. A can recover those expenses from B.
5. Money Paid by Mistake or Under Coercion (Section 72)
   • Money paid by mistake or under coercion must be repaid.
   • Example:
     A pays B ₹5000 by mistake, thinking it was owed. B must return the amount.

Contingent Contracts

A contingent contract is a contract to do or not do something if some event, collateral to the contract, does or does not happen (Section 31, Indian Contract Act, 1872).

Features of Contingent Contracts

• Depends on the occurrence or non-occurrence of an uncertain future event.
• The event must be collateral (related but not part of the main obligation).
• Enforceable only when the contingent event occurs or does not occur, as per the contract.

Rules Governing Contingent Contracts

(As per Sections 32–36, Indian Contract Act, 1872)

1. Contracts Dependent on an Event Happening (Section 32)
   • Enforceable only if the specified event happens.
   • Example:
     A agrees to pay B ₹10,000 if a ship arrives at port. The contract is enforceable only if the ship arrives.
2. Contracts Dependent on an Event Not Happening (Section 33)
   • Enforceable only if the specified event does not happen.
   • Example:
     A agrees to pay B ₹5000 if a ship does not arrive. The contract is enforceable if the ship fails to arrive.
3. Contracts Dependent on an Event Happening Within a Fixed Time (Section 35)
   • Enforceable if the event happens within the specified time; otherwise, the contract becomes void.
   • Example:
     A agrees to pay B if a ship arrives within 30 days. If the ship does not arrive in 30 days, the contract is void.
4. Contracts Dependent on an Impossible Event (Section 36)
   • Void, whether the impossibility was known or unknown at the time of contracting.
   • Example:
     A agrees to pay B if the sun rises in the west. The contract is void.
5. Contracts Where Performance Depends on a Party’s Will (Section 34)
   • Not contingent if the event depends on a party’s discretion.
   • Example:
     A agrees to pay B if A decides to sell his car. This is not a contingent contract.

Difference Between Contingent Contracts and Wagering Agreements

Contract of Indemnity (Section 124)

A contract of indemnity is a promise by one party (the indemnifier) to save another party (the indemnified) from loss caused by the conduct of the promisor or any other person.

Key Features:

• Definition: The indemnifier undertakes to compensate the indemnified for any loss suffered due to specified causes.
• Scope: Only covers losses caused by the conduct of the promisor or a third party. It does not include losses due to events beyond human control (e.g., natural disasters).
• Rights of Indemnified: The indemnified can recover all damages, costs, and sums paid under a compromise, provided the compromise is not contrary to the indemnifier’s orders.
• Examples: Insurance contracts, where the insurer indemnifies the insured against losses.

Case Law:

Gajanan Moreshwar v Moreshwar Madan (1942): The court adopted a broader view of indemnity, holding that indemnity is not confined to losses caused by human agency alone but may extend to other specified causes, depending on the contract’s terms.

Contract of Guarantee (Section 126)

A contract of guarantee is a contract to perform the promise or discharge the liability of a third person in case of their default.

Key Features:

• Parties Involved:
  • Principal Debtor: The person who is primarily liable.
  • Creditor: The person to whom the guarantee is given.
  • Surety: The person who gives the guarantee and undertakes to discharge the liability in case of default.
• Nature of Liability: The surety’s liability is co-extensive with that of the principal debtor (Section 128), meaning the surety is liable for the same amount as the debtor unless otherwise specified.
• Types of Guarantee:
  • Specific Guarantee: For a single transaction.
  • Continuing Guarantee: Extends to a series of transactions.
• Rights of Surety:
  • Right to subrogation: Surety steps into the shoes of the creditor after paying the debt.
  • Right to indemnity from the principal debtor.
  • Right to contribution if there are co-sureties.
• Discharge of Surety: By revocation, death, variation in terms, release of the principal debtor, or impairment of the surety’s remedy.

Case Law:

Bank of Bihar v Damodar Prasad (1969): The court held that the surety’s liability is co-extensive with the principal debtor’s, and the creditor can proceed against the surety without first exhausting remedies against the debtor.

Bailment and Pledge (Sections 148–181)

A. Bailment (Section 148)

Bailment involves the delivery of goods by one person (bailor) to another (bailee) for a specific purpose, with the obligation to return the goods or dispose of them as per the bailor’s instructions.

Key Features:

• Delivery of possession (actual or constructive).
• Delivery for a specific purpose (e.g., repair, safekeeping).
• Obligation to return the goods or deal with them as directed.

• Gratuitous: For the benefit of the bailor or bailee, without reward.
• Non-gratuitous: For reward (e.g., hire).

• Disclose defects in the goods.
• Bear extraordinary expenses.
• Indemnify the bailee for losses due to defective title.

• Take reasonable care of the goods.
• Not make unauthorized use of the goods.
• Not mix the goods with their own.
• Return the goods as per the contract.
• Rights of Bailee: Right to compensation, lien (particular or general), and to sue third parties for interference.

B. Pledge

Pledge is a special type of bailment where goods are delivered as security for the payment of a debt or performance of a promise.

Key Features:

• Pawnor: The person who pledges the goods.
• Pawnee: The person who receives the goods as security.

• Delivery of goods as security.
• Goods must be returned upon repayment of the debt or performance of the promise.

• Retain goods until the debt is paid.
• Sell the goods after giving notice to the pawnor.
• Recover any extraordinary expenses.

Rights of Pawnor: Redeem the goods before sale and enforce the pawnee’s duties.

Contract of Agency (Sections 182–238)

A contract of agency is a relationship where one person (agent) acts on behalf of another (principal) and binds the principal by their actions within the scope of authority.

Key Features:

• Principal: The person who authorizes the agent.
• Agent: The person who acts on behalf of the principal.

• Express: By written or oral agreement.
• Implied: From conduct or circumstances.
• Necessity: When the agent acts in an emergency to protect the principal’s interests.
• Ratification: When the principal accepts the agent’s unauthorized act.

• Act within the scope of authority.
• Exercise skill and diligence.
• Avoid conflict of interest.
• Not delegate authority (unless permitted).
• Maintain accounts and render them to the principal.

• Right to remuneration.
• Right to lien on the principal’s property.
• Right to indemnity for lawful acts.
• Liability of Principal: The principal is liable for acts of the agent done within the scope of authority, whether express or implied.

• By act of parties: Revocation by the principal or renunciation by the agent.
• By operation of law: Death, insanity, insolvency, or expiry of the contract term.

Case Law:

Pannalal Jankidas v Mohanlal (1951): The court held that the principal is liable for the agent’s acts done within the scope of authority, even if the act causes loss, provided it was within the agent’s apparent authority.