CA Foundation

CA Foundation Business Laws Study Material Chapter 10 Formation of Contract of Sale

INTRODUCTION

The Sale of Goods Act, 1930, governs transfer of property in goods. It does not include transfer of immovable property which is governed by the Transfer of Property Act, 1882.

• Contract of Sale of Goods is a special contract. Originally, it was part of Indian Contract Act itself in chapter VII (sections 76 to 123). Later these sections in Contract Act were deleted, and separate Sale of Goods Act was passed in 1930.
• The Sale of Goods Act, 1930, contains 66 sections in VII Chapters. It came into force on the 1st of July 1930 as, ‘The Indian Sale of Goods Act, 1930’. Later in 1963, the word “Indian” was omitted and it became “The Sale of Goods Act, 1930”.
• The Sale of Goods Act, extends to the whole of India except the State of Jammu and Kashmir.
• As per section 3 of the Sale of Goods Act, the principles of the Contract Act relating to formation of contract, performance of contract, law of damages etc. are also applicable to contract of the sale of goods insofar as they are not inconsistent with the express provisions of the Sale of Goods Act.

A. WHAT IS A CONTRACT OF SALE?
Sec. 4(1) of the Sale of Goods Act defines a contract of sale of goods as -“a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a price”.
 contract of sale of goods, like any other contract, results by an offer by one party and its acceptance by the other. The parties are free to decide the terms and conditions of performance of their contract. Wherever the contract is silent, rules provided by the Sale of Goods Act apply to the relevant issue.

Buyer means a person who buys or agrees to buy goods. [Sec. 2(1)]
Seller means a person who sells or agrees to sell goods. [Sec. 2(13)]
Property means the general property in goods, and not merely a special property. Sec. 2(11). Property means ownership. If A who owns goods pledges them for raising money to B, A has the general property in the goods, while B (pledgee, person with whom goods are pledged) has a special property or interest in them, e.g. pledgee has a right to retain the pledged goods until he is paid by A (pledgor) the entire amount of his loan with interest.

Essential characteristics of a contract of sale

1. Two parties – there must be two parties a buyer and a seller.
2. Transfer of property – a transfer of property i.e. ownership, in goods from the seller to the buyer must take place (in the case of sale) or ownership should be agreed to be transferred (in the case of agreement to sell)
3. Goods – the subject matter of sale must be goods.
4. Price – transfer of property must take place for some money consideration called price.
5. It includes both a ‘sale’and ‘an agreement to sell’.
6. A contract of sale may be absolute or conditional [Sec. 4(2)].
7. It may be in writing/oral or implied
8. Essential elements of a valid contract must be present.

B. SALE & AGREEMENT TO SELL
A contract for the sale of goods may be either a sale or an agreement to sell.
Sale
Where under a contract of sale the property in the goods (Le. the ownership) is transferred from the seller to the buyer the contract is called a sale. Sec. 4(3). The transaction is a sale even though the price is payable at a later date or delivery is to be given in the future, provided the ownership of the goods is transferred from the seller to the buyer.
Example: S makes a contract with P for sale of his Nano Car for Rs. 80,000. P makes the payment and takes the delivery of car. This is the transaction of sale where the ownership has passed from S to P for a price.

Agreement to sell
When the transfer of ownership is to take place at a future time or subject to some condition to be fulfilled later, the contract is called an agreement to sell. [Sec. 4(3)]
Example: S agrees to sell his Car to P for Rs. 2,00,000 after one month. P agrees to buy the car and make payment after one month. This an agreement to sell and it will become a sale after one month when P make the payment and gets the ownership of car.
The conditional contract of sale like goods sent op “sale or return” basis are in the nature of an agreement to sell.

When an agreement to sell becomes a sale?
An agreement to sell becomes a sale when the prescribed time elapses or the conditions, subject to which the property in the goods is to be transferred, are fulfilled. [Sec. 4(4)]
Thus, if goods are delivered to the buyer on approval Le. “on sale or return”, the transaction is an agreement to sell, but it becomes a sale and the property in the goods passes to the buyer where the buyer gives his approval or acceptance to the seller.

Sale & Hire-Purchase
Hire purchase agreement is a contract for the hire of an asset, which contains a provision giving the hirer an option to purchase. A hire purchase agreement has two elements:

1. Element of bailment, since the possession of goods is given to the buyer
2. Element of sale, since it contemplates an eventual sale.

The hirer is given an option either to become the owner after the payment of the stipulated hire charges/instalments or to return the goods and put an end to the hiring. The agreement must give the hirer an option to terminate the agreement and to refuse payment for further instalments, if he so desires. If the hirer defaults in paying the instalments, the seller can terminate the agreement and resume the possession of the goods.
If there is an immediate transfer of ownership of goods, it is a sale, even though, the price is paid by instalments.

Sale and contract for work and labour
A contract of sale involves transfer of property in goods for a price. A contract for work and labour involves exercise of skill or labour. The main object is providing service by using skills, though goods are also delivered under the contract. For example, where a goldsmith is given gold for making ornaments or an artist is given paint and canvas to paint a picture, These are contracts of work and labour.

• Nagpur Computer Services Ltd. has taken a comprehensive maintenance contract of computers which covers not only the maintenance of computers but also the supply of spares. This is a contract of work and labour.
• A lady gave a plain saree to Jariwala Brothers for embroidering with Jari, to be purchased by Jariwala Brothers. It was held by the court that it was contract for work and labour and not a sale.

Sale and bailment
In case of bailment possession of goods is transferred from the bailor to bailee for some purpose, e.g., safe custody, repair, etc. The goods are to be returned on the fulfilment of purpose. In case of sale there is transfer of ownership, and the question of return of goods does not arise. The following are the points of distinction:

C. FORMALITIES OF CONTRACT OF SALE [SEC. 5]
A contract of sale is formed by offer and acceptance. There is an offer to sell or buy goods for a price and the acceptance of such an offer.
– The contract shall provide for delivery of goods. Delivery may be immediate, simultaneous, by instalments or in future.
– The contract shall provide for payment of price. Payment of price may be immediate, simultaneous, by instalments or in future.
Contract of Sale. – How it is Made?

1. May be in writing
2. May be by word of mouth
3. May be partly in writing and partly oral
4. May be implied from the conduct of parties or by course of their business.

D. GOODS: SUBJECT MATTER OF CONTRACT OF SALE
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 severed before sale or under the contract of sale. Section 2(7).
Actionable claim means a right to a debt or to any beneficial interest in movable property not in the possession of the claimant, which can be recovered by a suit or legal action. Money means the legal tender or currency of the country and It does not include old coins and foreign currency.
A. Classification of Goods

1. Existing Goods
   1. Specific
   2. Ascertained
   3. Unascertained
2. Future Goods
3. Contingent Goods

1. Existing goods
A. Specific goods
The goods which are identified and agreed upon at the time when the contract of sale is §; made, are called ‘specific goods’ (Section 2(14). For example, a Videocon washing machine, a specified and finally decided car or scooter etc.

B. Ascertained goods
The term ‘ascertained goods’ is not defined in the Sale of Goods Act but has been judicially interpreted. Ascertained goods are those goods which are identified in accordance with the agreement after the contract of sale is made. When out of a large number or large quantity * of unascertained goods, the number or quantity contracted for is identified and set aside for such contract, such number or quantity is said to be ‘ascertained goods’. E.g. A whole seller of wheat has 100 bags in his godown. He agrees to sell 10 bags of wheat and these bags are identified and set aside. On selection the goods become ascertained.
Both, specific or ascertained goods in the ultimate analysis mean identified goods. The dif-ference is in the point of time when identified. In case of specific goods, they are identified at the time of making of the contract, while in case of ascertained goods, they are identified after the making but before the performance of the contract, the process being conducted in conformity with the agreement. ,

C. Unascertained goods
The goods which are not specifically identified and agreed upon at the time when the contract of sale is made, are called ‘un-ascertained goods’. For example, X is a wholesaler dealing in wheat. He agrees to sell 50 bags of wheat to Y. This contract is for the sale of un-ascertained goods because the bags of wheat have not been identified at the time of the contract of sale.
If I have 3 cars of the same kind and I offer to sell one particular car, the goods are un-ascertained till one particular car is appropriated towards the contract. On appropriation the goods become ascertained. If the identity of contract goods is not established by appropriating them towards the contract, the contract remains in respect of un-ascertained goods.

2. Future goods
Those goods which are yet to be manufactured or produced or acquiredby the seller after the making of the contract of sale, are called ‘future goods’. Sec. 2(6). For e.g. A gives an advance of t 2 lakhs for booking a Maruti car which is to be delivered after three months. This is the contract for the sale of future goods. A contract for the sale of future goods is always an agreement to sell It is never actual sale because a man cannot transfer what is not in existence.

3. Contingent goods
As per section 6(2) of the Act, contingent goods are those goods the acquisition of which by the seller depends upon a contingency (uncertain event) which may or may not happen. It may be noted that although the contingent goods are a type of future goods but they are different from future goods in the sense that the procurement of contingent goods is dependent upon an uncertain event or uncertainty of occurrence, whereas the obtaining of future goods does not depend upon any uncertainty of occurrence.
Example: A car dealer agrees to sell a yellow colour car to a customer provided it is available with the manufacturer. This agreement is for a sale of contingent goods and it will become void if the yellow colour car is not available with the manufacturer.
Quality of Goods includes their stai^ or condition. [Sec. 2(12)]

B. Effect of Destruction or Perishing of Goods
The destruction or perishing of goods may take at any of the following stages:
a. Goods perishing before making the contract [Section 7]

• Where specific goods had perished or become damaged
• before the contract was made
• without the knowledge of the seller, the contract is void.

Thus, the contract of sale shall be void on the perishing of goods, if the following conditions are satisfied:

1. It must be a contract for sale of specific goods;
2. The goods must have perished before making the contract; and
3. The seller must not be aware of the perishing or damaging.

Example: A agrees to sell B a certain horse. It turns out, that the horse was dead at the time of agreement, though neither party was aware of the fact. The agreement is void.

b. Goods perishing before sale but after agreement to sell [Section 8]

• Where specific goods had perished or became damaged
• without the fault of seller or buyer
• after the agreement to sell is made and before the risk passes to the buyer
• the contract becomes void.

Thus, the agreement to sell become void in the following circumstances:

1. The contract of sale must be an agreement to sale and an actual sale
2. The agreement to sale must be for specific goods
3. The goods must perish or become damaged after agreement to sale but before sale
4. The goods get perished or damaged without any wrongful act or default on the part of the seller or the buyer.

For example, an agreement to sell a car after a certain period becomes void, if the car is de-stroyed or damaged in the intervening period.
Note:

1. Perishing of goods means not only physical destruction of the goods but it also covers loss by theft or the loss in the commercial value of the goods (e.g. where cement is spoiled by water and becomes stone)
2. It should be noted that both the Sections 7 and 8 as mentioned above, apply only to ‘specific goods’. It is only perishing of specific and ascertained goods that affects a contract of sale. Where, un-ascertained goods are perished the contract will remain valid and the seller is bound to supply the goods. For example if X agrees to sell to Y 10 bags of wheat out of 100 bags lying in his godown and the bags in the godown are totally destroyed by fire, the contract does not become void. X must supply 10 bags of wheat or pay damages for the breach.

E. PRICE
Price is an essential condition of a contract of sale of goods. According to Section 2(10), price is the
money consideration for a sale of goods. Money means legal tender money in circulation. Old and
rare coins are not included in the definition of money.
How is the price of the goods ascertained?
Section 9 provides 4 modes of ascertainment of price. The price in a contract of sale may be—

1. fixed by the contract
2. may be left to be fixed in an agreed manner (such as market price or fixation of price by a third party).
3. may be determined by the course of dealings between parties, (such as manufacturing cost, market price).
4. a reasonable price (if price cannot be fixed in accordance with the above provisions).

What is a reasonable price is a question of fact dependent on the circumstances of each particular case. [Sec. 9(2)]
Consequence of Non-Fixation of Price by Third Party [Section 10]

1. The parties may agree to sell and buy goods on the terms that the price is to be fixed by the valuation of a third party. If such third party fails to make the valuation the contract becomes void.
2. However, if the buyer has received and appropriated the goods or any part thereof, he becomes bound to pay reasonable price.
3. If the third party is prevented from making the valuation by the fault of the seller or the buyer, the innocent party may maintain suit for damages against the party in fault.

Stipulations regarding payment of price [Sec. 11]
In a contract of sale, stipulations as to time may be of two kinds:

– Stipulations relating to time of payment, and
– Stipulations not relating to time of payment, for e.g. relating to time of delivery of goods

• Stipulations as to time for payment of price are not regarded as essence of contract, unless a different intention appears from the terms of the contract. Thus if the payment is not made in time, the seller cannot avoid the contract but can claim damages. For example A sells a laptop computer to B with a stipulation that payment should be made within 3 days. B makes the payment after 7 days of the contract. Here A cannot avoid the contract on the ground of breach of stipulation as to time of payment.
  However, time of payment can be made essence of the contract, if there is an express provision in the contract of sale. If there is no express provision in the contract of sale, with regard to time of payment, then time of payment is not deemed to be the essence of contract.
• Whether any other stipulation as to time (c.g. of delivery of goods) is of the essence of contract, will depend upon the terms agreed upon. It means that time of delivery of goods etc., can also be made essence of the contract of sale if an express provision to this effect is made in it. If no such provision is made, then time of delivery of goods will not be the essence of contract. (Sec. 11) Suppose if time of delivery of goods is made the essence of the contract of sale by providing express terms in this regard – what will be the remedy for the buyer, if the seller does not make the delivery within the stipulated time? (The buyer can avoid the contract)
• It may be noted that in ordinary commercial contracts for sale of goods, time is prima facie of the essence with respect to delivery.

MULTIPLE CHOICE QUESTIONS:

1. The code governing sale of goods was earlier contained in
(a) the Indian Contract Act
(b) the Transfer of Property Act
(c) the Hire Purchase Act
(d) None of the above

2. The Sale of Goods Act, 1930 governs the transfer of property in
(a) movable property
(b) immovable property
(c) both movable and immovable property
(d) all type of properties

3. “Goods” means
(a) every kind of movable property other than actionable claims and money
(b) some kinds of immovable property only
(c) every kind of movable property including actionable claims and money
(d) Both ‘a’ and ‘b’

4. Where under a contract of sale the property in goods is transferred from the seller to the buyer, the contract is called.
(a) an agreement to sell
(b) a sale
(c) both ‘a’ and ‘b’
(d) either ‘a’ or ‘b’

5. A valid sale must have two parties who
(a) must be competent to contract
(b) may not be competent to contract
(c) must be Indian citizens
(d) must be residents of the same state

6. An agreement to sell is
(a) an executory contract
(b) an executed contract
(c) neither ‘a’ or ‘b’
(d) sometime ‘a’ or ‘b’

7. Specific goods are such goods which are
(a) existing and identified at the time of making the contract
(b) identified after the making of contract but before the performance of contract
(c) both ‘a’ and ‘b’
(d) neither ‘a’ nor ‘b’

8. ‘Future goods’
(a) can be the subject matter of sale
(b) cannot be subject matter of sale
(c) sometimes may be the subject matter of sale
(d) depends on circumstances

9. When there is a contract for un-ascertained goods, and goods perish without the fault of the seller or buyer before the risk passes to the buyer, the contract
(a) can be avoided
(b) cannot be avoided
(c) becomes void
(d) becomes unenforceable

10. To constitute a Contract of Sale, the transfer of property in goods
(a) must be for monetary consideration
(b) may be for non-monetary consideration
(c) must be for both monetary and non-monetary consideration
(d) may be either monetary or non-monetary consideration

Answers:

STATE WHETHER THE FOLLOWING ARE TRUE OR FALSE:

1. The term “goods” under Sale of Goods Act, 1930 includes actionable Claims.
2. The Sale of Goods Act, 1930 deals with movable goods only.
3. The Sale of Goods Act, 1930 covers mortgage and pledge of goods.
4. The provisions of Sale of Goods were originally contained in the Indian Contract Act, 1872.
5. In case of hire purchase the hirer can pass title to a bona fide purchaser.
6. In a contract of sale, subject matter of the contract must always be money.
7. In a contract of sale. The agreement may be expressed or implied from the conduct of the parties.
8. The property in goods means possession of goods.
9. The goods are at the risk of the party who has the ownership of the goods.
10. A lady gave a plain saree to Jariwala Brothers for embroidering with lari, to be purchased by Jariwala Brothers. It was held by the court that it was contract of sale.

Answers:

CA Foundation Business Laws Study Material Chapter 9 Discharge of Contract

METHODS OF TERMINATION OF CONTRACT

When the obligations created by a contract come to an end, the contract is said to be discharged or terminated. A contract may be discharged or terminated in any of the following ways:

I. DISCHARGE BY PERFORMANCE
The obligations of a party to a contract come to an end where he performs his promise. Performance by all the parties, of the respective obligations, put’s an end to the contract completely. This is the normal and natural mode of discharging a contract.

II. DISCHARGE BY ATTEMPTED PERFORMANCE
The offer of performance or tender has the same effect as performance. If a party to a contract offers to perform his promise but the offer is not accepted by the other party, the obligations of the first party are terminated.

III. DISCHARGE BY MUTUAL AGREEMENT
By agreement of all parties, a contract may be cancelled or its terms altered or a new agreement substituted for it. Whenever any of these things happen, the old contract is terminated. “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. ” Sec. 62.

Termination by mutual agreement may occur in any one of the following ways
A. NOVATION
Novation occurs when a new contract is substituted for an existing contract either between the same parties or between different parties. The consideration for the new contract is the discharge of the old contract.

• To effect a novation, there must be a valid enforceable new substituted contract.
• Consent of all parties is necessary for novation.
• Novation should take place before the breach or expiry of old contract.

Example: A is indebted to B and B to C. By mutual agreement B’s debt to C and A’s debt to B is cancelled and C accepts A as his debtor. There is novation. (See Scarf v. Jardine in leading case laws at the end of the chapter)

B. ALTERATION
Alteration of a contract means change in one or more of the terms of a contract. Alteration is valid if it is done with the consent of all the parties to the contract.
In alteration there is change in the terms of the contract but no change of the parties to it. In novation there may be change of parties.

C. REMISSION
Remission means acceptance of lesser amount, or lesser degree of performance than what was contracted for in full discharge of the contract.
According to Sec. 63 a party may:

• Dispense with or remit performance wholly or in part; or
• Extend the time for performance or
• Accept any other satisfaction instead of performance

For such a release or promise there no need for consideration or new agreement.
Example: A owes B Rs. 5,000. A pays to B and B accepts in full satisfaction for the whole debt Rs. 2,000. The old debt is discharged.
A promise by the promise to give concession to the promisor in one or the other form is binding even if without consideration. In Gopala v. Venkata, it was stated that after the remission has been communicated to the promisor and accepted by him, the promise cannot claim the remitted (sacrificed) amount.

D ACCORD AND SATISFACTION
Under the English law, these terms are used as counter part of the term remission. Under the English Law, “accord” means the promise to accept less than what is due under the original contract. ‘Satisfaction’ means the actual payment or the fulfilment of the smaller obligation. In the English Law a promisee cannot remit a part of the amount unless a fresh promise is supported by consideration. However, this doctrine of accord and satisfaction as applied in England, has no place in India. Sec.63 clearly states that if the promisee agrees to accept a lesser amount in full satisfaction of the whole claim, this promise is valid and therefore enforceable.

E. RESCISSION
Rescission occurs when the parties to a contract agree to dissolve the contract. In the case of rescission only the old contract is cancelled and no new contract comes to exist in its place. The parties come out of the contract by mutual agreement.

F. WAIVER
Waiver means the abandonment of a right. A party to a contract may relinquish (waive) his rights under the contract. Thereupon the other party is released from his obligations. For example, waiver of former’s loan by bank.

G. MERGER
When a superior right and an inferior right coincide and meet in one and the same person, the inferior right vanishes into the superior right. This is known as merger.
Illustration:

1. A man holding property under a lease buys the property. His rights as a lessee ^ vanish. They are merged into the rights of ownership which he has now acquired.
2. A may agree to work as a part-time employee of B. Later, they may decide that A will work as full-time employee.

IV. DISCHARGE BY BREACH OF CONTRACT
When a contract is broken by one party the other party or parties are freed from the obligation of performing the contract. They can also take the remedial measures to which they are entitled. Breach of contract may arise in two ways:

1. By actual breach or present breach.
2. By anticipatory breach.

A. ACTUAL BREACH OF CONTRACT
Actual breach of contract occurs when during the performance of the contract or at the time when the performance of the contract is due, one party either fails or refuses to perform his obligations under the contract. The refusal of performance may be express (i.e. by word or by writing) or implied (le. by conduct of the party or by non-action) or abstaining from doing something. D agrees to deliver to B, 5 tons of sugar on 1st June. He fails to do so. There is breach of contract by D.

B. ANTICIPATORY BREACH OF CONTRACT (Sec. 39)
Anticipatory breach of contract occurs :

• when a party before the time for performance is due announces that he is not going to perform the contract or,
• when a party by his own act disables himself from performing the contract.
  • C enters into a contract to supply B with certain articles on the 1st June. Before 1st June he informs B that he will not be able to supply the goods.
  • X agrees to marry Y. Before the agreed date of marriage, he marries Z.

CONSEQUENCES OF ANTICIPATORY BREACH
When anticipatory breach occurs, the aggrieved party can take the following steps:
(A) May treat the contract as discharged-

1. He can treat the contract as discharged, so that he is no longer bound by any obligations under the contract; &
2. He can immediately adopt the legal remedies available to him for breach of contract, viz., hie a suit for damages or specific performance or injunction.

(B) May not treat the contract as discharged-
Anticipatory breach, by itself, does not discharge the contract. The contract is discharged, when the aggrieved party chooses to treat it as discharged. The aggrieved party may decide not to rescind the contract but to treat the contract as alive and operative and wait for the time of performance. In such a case the consequences are as follows:

1. The contract will be operative for the benefit of both the parties. The contract will continue to exist and may even be performed by the other party.
2. If the contract is not rescinded and subsequently an event happens which discharges the contract legally (e.g. a supervening impossibility) the aggrieved party loses his right to sue for damages.

For example, A agrees to supply one ton of sugar to B by 20th August. On 10th August, A informs B that he cannot supply sugar B did not accept the refusal and preferred to wait till 20th August. On 15th August, the Minister declares nationalisation of sugar industry. Now the contract is discharged and B has no remedy against A.

V. DISCHARGE BY OPERATION OF LAW
A contract terminates by operation of law in case of death insolvency, and merger.

A. Death
In contracts involving personal skill or ability, death terminates the contract. In other cases, the rights and liabilities pass on to the legal representatives of the dead man.

B. Insolvency
When a person is adjudged insolvent, he is discharged from all liabilities incurred prior to his adjudication. Upon insolvency, the rights and liabilities of the insolvent are, with certain * exceptions, transferred to an officer of the court, known as the Official Assignee/Receiver.

C. Merger
Means coinciding and meeting of inferior and superior right in one and the same person. In such a case, inferior right available to a party under the contract will automatically vanish.

D. Lapse of time
Contracts may be terminated by lapse of time. In civil suits the obligations and liabilities in contracts are barred by limitation. The provisions of law are stated in the Limitation Act.

E. Unauthorised material alteration 
If the terms of a contract is materially altered by a party to the contract without the consent of the other parties, the contract is discharged and cannot be enforced any more.

VI. SUBSEQUENT OR SUPERVENING IMPOSSIBILITY
Pre-contractual Impossibility
A contract which at the time was entered into was impossible to perform, is void ab-initio and creates no rights and obligations. Sec. 56(1) states that “An agreement to do an act impossible in itself is void. “Such fact of impossibility may be-

1. Known to the parties:
   In such a case the agreement is void ab-initio and creates no rights and obligations. For example a promise to ride a horse to the Sun or A agrees with B to discover treasure by magic. The agreement is void.
2. Unknown to the parties:
   When both the parties are ignorant of the impossibility at the time of making the contract, the contract, is void on the ground of mutual mistake. For example: A agrees to sell his horse to B but unknown to both the parties the horse had already died at the time of making the contract. The contract is void.
3. Known only to the promisor:
   On the contrary, if the promisor alone knew about the impos-sibility of performance at the time of making the contract, he shall have to compensate the promisee for any loss which such promisee sustains through the non-performance of the promise. [Sec. 56(3)]

Post-contractual Impossibility
A contract, which at the time was entered into, was capable of being performed may subsequently become impossible to perform or unlawful. In such cases the contract becomes void. This is known as the doctrine of Supervening Impossibility. It is also known as the Doctrine of Frustration. Frustration occurs where it is established that due to subsequent change in circumstances, the contract has become impossible to perform or it has been deprived of its commercial purpose.

“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”. [Sec.56]Para 2.

Grounds of Frustration
Supervening impossibility may occur in many ways, some of which are explained below:
(i) Destruction of the subject matter of contract
On the destruction of the subject matter, a contract is discharged and no party is liable to perform. (Refer Taylor v. Caldwell in leading case laws at the end of the chapter.)

(ii) Change of Law
The performance of a contract may become unlawful by a subsequent change of law. In such cases, the original contract becomes void. (Refer Shiam Sunder v. Durga’m leading case laws at the end of the chapter.)

(iii) Failure of pre-conditions
When a contract is entered into on the basis of the continued existence of a certain state of things, the contract is discharged if the state of things change.

• Illustration: A & B contract to marry each other. Before the time fixed for the marriage, A goes mad. The contract becomes void.
• Illustration: H hired a room from K for two days with the object (as both parties know) of using the room to view the coronation procession of Edward VII although the contract continued no reference to the procession. Owing to the king’s illness the procession was abandoned. Held, that the contract was discharged and H was excused from paying rent of the room as the existence of the procession was the basis of the agreement.

(iv) Death or incapacity for personal services
Where the personal qualification of a party is the basis of the contract the contract is discharged in cases of death or personal incapacity.
G contracts to act of a theatre for six months in consideration of a sum paid in advance by H. On several occasions G is too ill to act. The contract to act on these occasions becomes void.

(v) Outbreak of war
A contract entered into during war with an alien enemy is void ab-initio. A contract entered into before the war commenced between citizens of countries subsequently at war, remains suspended during the pendency of the war. After the termination of the war, the contract revives and may be enforced.
Exceptions
Impossibility of performance, is, as a rule, not an excuse from performance. Only physical or legal impossibility will excuse the parties. The performance of the contract should have become impossible due to any of the circumstances mentioned above. The doctrine of frustration or supervening impossibility does not apply in the following cases. Le. in these cases the contract is not discharged,

1. Difficulty of performance
Difficulty does not excuse performance of contract.
The contract will not be affected if performance has become difficult because of disruption of traffic routes. In the case of Tsakiroglou & Co v. Noblee Thori (1962) AC 93, the closure of Suez Canal in 1956 because of outbreak of war there had caused problems in completion of many contracts involving transportation via the Suez Canal. But, the judicial view was that unless it could be proved that transport via Suez Canal was an express or implied term of the contract, its closure could not be said to make the contract impossible.

2. Commercial Impossibility
A wholesale dealer’s contract to deliver goods is not discharged because a manufacturer has not produced the goods concerned. Similarly increase of wages of prices of raw materials, unseasonable weather or lack of adequate profits do not excuse performance. The reason is that if the parties did not stipulate to the contrary, they must have intended to take the risk of occurrences like these.

3. Strikes, lock-outs, civil disturbances and riots
These events do not terminate contracts unless there is a clause in the contract providing that in such cases the contract is not be performed or that the time of performance is to be extended.

4. Failure of one of the objects
When there are several purposes for which a contract is entered into, failure of one of the objects does not terminate the contract.

THE DOCTRINE OF FRUSTRATION

When the common object of a contract can no longer be carried out, the court may declare the contract to be at an end. This is known as the Doctrine of frustration. Anson says: “Most legal systems make provisions for the discharge of a contract where, subsequent to its formation, a change of circumstances renders the contract legally or physically impossible of performance.’’
In Satyabharata Ghoshv. MugniramBengur A\R(\954) S.C. 44 : The Supreme Court of India discussed the English cases relating to frustration and came to the following conclusions:

The doctrine of frustration of contract comes into play when a contract becomes impossible of performance, after it is made, on account of circumstances beyond the control of the parties. It ; comes within the purview of Sec. 56 of the Indian Contract Act. The word ‘impossible’ in this section has not been used in the sense of physical or literal impossibility. The performance of an act may not | be literally impossible but it may be impracticable and useless from the point of view of the object [ and purpose which the parties had in view; and if an untoward event or change of circumstances totally upsets the very foundation upon which the parties rested their bargain, it can be said that the promisor finds it impossible to do the act which he promised to do.

“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”- [Sec. 56] para-2.
Grounds of frustration of contract and supervening impossibility are similar.
The effect of frustration – Frustration automatically discharges a contract from the date of the frustrating event.

REMEDIES FOR BREACH OF CONTRACT

I. Rescission of the contract
When there is a breach of contract by one party, the other party may rescind the contract and need not perform his part of obligations under the contract. This is called the right of rescission which means a right to cancel or to set aside (i.e., reject) the contract.
Further, section 75 provides that a person who rightfully rescinds a contract is entitled to compen- j sation for any damages which he has sustained through the non fulfilment of the contract.
A contracts to supply 100 Kg. of tea leaves to B on 25 April. If A does not supply the tea leaves on the j appointed day, B need not pay the price. B may also file a ‘suit for rescission’ and claim damages.

II. Suit for damages
Damages are the monetary compensation allowed by a court of law to the aggrieved party for the loss or injury suffered by him. The loss or injury suffered is known as damage. This is the difference j between “Damage” and “Damages”.
The foundation of modern law of damages in India is based on the judgment in a case of Hadley v. Baxendale (1854) 9E. 341, and is incorporated in sec.73 of the Indian Contract Act.

H’s mill was stopped by a breakage of the crankshaft. He delivered the shaft to B, a common carrier, to take it to the manufacturers at Greenwich as a pattern for a new one. By some neglect on ; the part of B the delivery of the shaft was delayed beyond a reasonable time. H claimed from B s compensation for the wages of workers and depreciation charges during the period the factory was idle for the delayed delivery and for loss of profits which might have been made if the factory was working. The first two items, were allowed because they were natural consequences of the breach. The last item, loss of profits was disallowed because it was a remote consequence. (Hadley v. Baxendale).

COMPENSATION FOR LOSS OR DAMAGE CAUSED BY BREACH OF CONTRACT: (Sec. 73)
“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 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.

• Nature
  Damages under the Contract Act are not granted by way of punishment. They are compensatory in nature. The object is to compensate the injured party and bring him on the same position in which he would have been, if there was no breach of contract.
• If there is no damage, damages cannot be claimed.
  Damages are claimed to compensate any loss or damage caused by breach of contract. If there is no actual loss than damages cannot be claimed. For example, A contracts to buy B’s car for X 60,000/- but breaks his promise. B then sells to C for the same price. B cannot claim any damages Under the law of contract damages are not granted by way of punishment.

RULES
1. Ordinary damages are recoverable
Ordinary damages are those which naturally arise in the usual course of things from such breach. They are the natural and probable consequence of the breach, which the aggrieved
party suffering can recover from the defaulting party.

2. Special damages are recoverable only if the parties knew about them.
Apart from ordinary damages, special damages can also be claimed. Special damages are for loss which arises on account of the unusual circumstances affecting the plaintiff. They are not recoverable unless the special circumstances were brought to the knowledge of the defendant so that the possibility of the special loss was in the contemplation of the parties.
Thus, special damages are those which result from a breach of contract under some special or unusual circumstances which are in the knowledge of the parties at the time of making the contract.

• The extent of liability depends upon the knowledge of the parties at the time of the contract about the probable result of the breach.
  A, having contracted with B to supply B with 1,000 tons of iron at 100 rupees per 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.
  Compensation is recoverable for:
• Damages arising naturally in the usual course of things.
• Damages arising out of special circumstances in contemplation of parties.

3. Remote or indirect damages are not recoverable
Damages cannot be claimed for any remote or indirect loss or damage sustained by reason of the breach. Remote damages are those which are not reasonably foreseeable. The party breaking the contract shall not make compensation in respect of loss or damage indirectly
or remotely caused.
For example, 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 B anything except the principal sum he contracted to pay together with interest up to the day of payment. This is so because B’s total ruination is an indirect loss.

Nominal damages for no loss suffered: Where the injured party has not in fact suffered any loss by reason of the breach of a contract, the damages recoverable by him are nominal,
Le., very small. For example a rupee or cent. These damages merely acknowledge that the plaintiff has proved his case and won. In Charter v. Sullivan, the defendant refused to buy a car from the plaintiff which was sold to another customer and no loss was occasioned.
He was, thus, held entitled to only nominal damages and not for any loss of profits.

Vindictive or exemplary damages: Damages for breach of contract are given by way of compensation for loss suffered, and not by way of punishment for wrong inflicted. Hence, ‘vindictive’ or ‘exemplary’ damages have no place in the law of contract because they are punitive by nature. But in case of

1. breach of a promise to marry, and
2. dishonour of a cheque by a banker wrongfully when he possesses sufficient funds to the credit of the customer, the Court may award exemplary damages.

Other Heads for Damages:
Damages for inconvenience caused by breach.
Damages for mental pain and suffering. In%a Scottish case, a photographer who agreed to take photographs at a wedding, failed in breach of his contract to appear there. As a result the bride had no photographs of her wedding. She was allowed damages for resulting injury to her feelings.
Damages for pre-contract and wasted expenditure.
Damages for delay in delivery.

4. Defaulting party liable to compensate as per market price,
5. Such damages are also payable in case of breach of a quasi-contract too.
6. It is the duty of the injured party to minimise the damage suffered.
7. The injured party is entitled to get the costs of getting the decree for damages from the defaulter party.
8. Liquidated Damages and Penalty
Liquidated Damages: Where the party fixes a genuine pre-estimate of the probable damage, it is called liquidated damages. Liquidated damages are predetermined damages agreed at the time of contract, which are considered reasonable by both the parties. It is a genuine estimate of the actual loss or damage likely to be suffered by the aggrieved party.
Penalty: Where the sum fixed before-hand for the breach of contract does not bear the relationship to the actual damage which the aggrieved party is likely to suffer in the event j of actual breach of contract, it is called penalty. Such an amount acts as a deterrent from committing a breach of contract.

A contract sometimes contains a clause in which a sum of money is named as the amount payable f in case of breach of contract. According to English law, the amount of money payable is interpreted either as liquidated damages or as a penalty. It is considered to be liquidated damages when the amount is fixed by the parties on the basis of a reasonable estimate of the probable actual loss , which a party will suffer in case of breach. On the other hand, the amount fixed is considered to be a penalty if it is not based upon a reasonable calculation of actual loss but is fixed by way of punishment and as a threat. A penalty will not be enforced by the Court.

In India, the distinction between liquidated damages and penalty is not recognised. Sec. 74 of the Contract Act which deals with predetermined damages, lays down that if the parties have fixed what the damages will be, the courts will never allow more. But the court may allow less. A decree is to be passed only for reasonable compensation, not exceeding the sum named by the parties.
Thus, section 74 makes no distinction between a liquidated damages and penalty and the aggrieved party is entitled to reasonable compensation not exceeding the amount so named, regardless whether it is penalty or not.

Under section 73, the actual loss or damage has to be proved but under section 74, the proof of actual loss or damage is not essential.
The difference between the liquidated damages and penalty depends on the facts and circumstances of each case and the intention of the parties which is to be gathered from the whole contract.

• If the intention is to secure performance of The contract by imposition of a fine or penalty, the sum specified is penalty; but if on the other hand, the intention is to assess the damages for breach of contract, it is liquidated damages.
• Liquidated damages are the amount assessed on the basis of actual or probable loss by both the parties. Penalty is not based on actual or probable loss. Penalty is payable in the event of breach with a view to prevent a party from committing breach.
• Liquidated damages are imposed by way of compensation. Penalty is imposed by way of punishment. The amount of penalty is exorbitant, extravagant and unconscionable.
• Courts in England usually allow liquidated damages without any regard to the actual loss sustained and treat penalty clause as invalid. But under the Indian law, section 74 of the Contract

Act does not recognize any difference between liquidated damages and penalty. The courts are required to allow reasonable compensation so as to cover the actual loss sustained, not exceeding the amount so mentioned in the contract.

A stipulation for higher rate from the date of default may be taken as a penalty if the enhanced rate is exorbitant. If it is reasonable, then, it shall be allowed. The leading case on the matter is Mackintosh v. Crow (1883) 9 Cal 689. If the normal rate of interest is fixed at 12% and the rate of interest from the date of default is to be 36%, this may be taken by court as very unreasonable and may be reduced.
Earnest Money and Security Deposit : Sometimes, when a contract is formed, one party gives to the other a sum as a deposit. This deposit may take two forms: earnest money and security deposit. Earnest money is a kind of advance payment of price by one party to the other out of a larger amount payable. B agrees to buy goods from C and pays him Rs. 5,000 in advance as earnest money. This amount shall be adjusted against the total price payable by B to C. The earnest money paid may or may not be liable to be forfeited under the contract if buyer breaks the contract.
Security deposit is a payment made as a guarantee that the contract shall be fulfilled by the person who has paid the deposit. If the contract is not fulfilled, then, the deposit shall be forfeited under the contract.
Where a buyer has paid earnest money which is liable to be forfeited if buyer breaks the contract, then, on the contract being broken by him, the seller may forfeit the amount if it is a reasonable amount (Shree Hanuman Cotton Mills v. Tata Aircraft Ltd. [1969] 3 SCC 522).

III. SUIT FOR SPECIFIC PERFORMANCE OF THE CONTRACT
There are cases where the damage or loss suffered cannot be measured in terms of money. The court, may, in such cases where the ordinary remedy by a claim for damages is not adequate compensation, direct the defaulting party to perform the contract specifically. (Under Sec. 12. of the Specific Relief Act, 1963). Specific performance is an order of the Court directing the defendant to fulfil his obligations under the contract. Specific performance is a discretionary remedy and is only available where damages are not an adequate remedy.
Some of the cases where specific performance is ordered by the court are:

1. Where the act itself is such that monetary relief for its non-performance is not adequate.
2. Where no standard is available to ascertain the value of the actual damage caused by non-performance.
3. Where it is not probable that the compensation money will be available.

Examples: The specific performance is granted in contracts connected with land, buildings, rare articles and unique goods having special value etc. because injured party will not be able to get an exact substitute in the market.
Specific performance is not allowed in the following cases:

• Where monetary compensation is an adequate relief.
• Where the contract is of personal nature, e.g. a contract to marry or a contract to paint a picture or,
• Where it is not possible for the court to supervise the performance of the contract e.g. a building contract.
• Where one of the parties to the contract is not competent to contract like a minor.

IV. SUIT FOR AN INJUNCTION
‘Injunction’ is an order of a court restraining a person from doing a particular act. It is a mode of securing the specific performance of the negative terms of the contract. To put it differently, where a party is in breach of a negative term of the contract (ie., where he is doing something which he promised not to do); the court may, by issuing an injunction, restrain him from doing what he promised not do so. Thus ‘injunction’ is a preventive relief. It is particularly appropriate in case ‘anticipatory breach of contract’ where damages would not be an adequate relief.
N, a him actress agreed to act exclusively for Warner Bros, for one year. During the year she contracted to act for X. Held, she could be restrained by an injunction from acting for X. Warns Bros. v. Nelson. It is to be noted that in this case an order directing N to act for Warner Bros. (Specific performance of the contract) was not passed because the contract was of a personal nature and performance could not have been supervised by the courts.

V. SUIT FOR QUANTUM MERUIT
Quantum Meruit means ‘as much as merits ‘or ‘as much as deserves or earns’. In legal sense, it means ‘payment in proportion to the work done’. In other words, quantum meruit means that a person can recover compensation in proportion to the work done or service rendered by him.
Normally, a person cannot claim performance from the other party, unless he has performed his obligation in full. But under the claim of quantum meruit, a person who has performed some work can claim payment in proportion to the work done. The right to claim quantum meruit is not conferred by the contract but it is conferred by the law. It is quasi-contractual in nature. This right is not similar to that of the damages, which arises out of the contract. Two things should be noted.

1. The claim for quantum meruit can be made only when the original contract has been discharged. If the original contract exists, the party who has done something for the other party cannot have quantum meruit remedy but he is to rely on the remedy in damages, and
2. Generally, the party who is not in default should bring the claim for quantum meruit.

The claim on quantum meruit arises in the following cases:-
1. Where there is breach of the contract
Where a party performs a part of the contract, but the other party breaks it in between, then the injured party can claim compensation for the work done or the service rendered.

1. A agreed to write an article for B. The article was to be published in instalments. After 3 instalments were published, the magazine was closed. Can A claim on the basis of quantum meruit?
   Ans: Yes, Example (Planche v. Colburn).
2. A boy was engaged for a complete journey against a lump sum payment of Rs. 500. The boy died before the journey was completed. Can his legal representatives claim the amount? Can a claim on the basis of quantum meruit arise in this case?
   Ans: No, as the contract is not divisible. (Cutter v. Powell).

2. When an agreement is discovered to be void
Where some work has been done and accepted under a contract which is subsequently dis-covered to be void, then the person who has performed the part of the contract is entitled to recover the amount for the work done. (Sec. 65)
Example: C was appointed as ‘managing director’ of a company at certain remuneration, by the board of directors. Subsequently it was discovered that the board was not qualified to make this appointment and hence it was void C, in the meantime, rendered services to the company. He sued the company for remuneration for the period he provided services. The court held that C could recover on ‘Quantum Meruit’  [Craven Ellis v. Canons Ltd. [1936] 2 K.B. 403]

3. When something has been done non-gratuitously
When something has been done non-gratuitously: Le., has been done with the intention of getting payment. (Sec. 70)

4. Where work has been done by the person guilty of breaking the contract
In such a case defaulting party would be liable for consequences of breach, but for the work done by him he may be entitled to get payment in the following circumstances:
(a) Where the work to be done was divisible: A contract is divisible and a party performs a part of it and refuses to perform the remaining part, the defaulting party can claim reasonable compensation for the part performed, on the basis of quantum meruit. Thus two conditions should exist :

1. If the contract is divisible and,
2. If the party not at fault has enjoyed the benefit of part performance.

Example: A. agreed to supply 1000 bales of cotton to B @ Rs. 11000 per bale. The bales were to be supplied in two instalments of 500 each. A supplied the first instalments but failed to supply the second. B must pay for 500 bales.

(b) On the other hand, if the contract is not divisible, i.e., it requires complete performance as a condition for payment, the party in default cannot claim payments for work done, on the basis of quantum meruit.

5. When the indivisible contract is performed substantially/fully
If a lump sum is to be paid for the completion of the entire work and the work has been completed in full, though badly, the person who has performed the contract can claim the lump sum; but the other party can also claim a deduction for bad work.
Example: A agreed to do decorate the flat of B for Rs. 1,00,000. The work was done but B complained of faulty workmanship. It was estimated that it could be rectified by spending Rs. 30,000 more. It was held that B could adjust this amount from the total amount due (of Rs. 1,00,000).

MULTIPLE CHOICE QUESTIONS:

1. Ordinary damages will be awarded in cases where
(a) The loss naturally flows from the breach of contract
(b) The loss is remotely connected with the breach of contract
(c) The loss is unusual and arises out of special circumstances peculiar to the contract
(d) None of these

2. Where the parties to a contract have agreed that a certain sum of money would be paid in case of breach of contract, the Court will ensure that
(a) The exact amount mentioned in the contract is paid to the injured party
(b) An amount not exceeding the stipulated amount is awarded
(c) Reasonable compensation not exceeding the amount stipulated is awarded
(d) A sum exceeding the amount stipulated is awarded

3. The word ‘impossible’ in section 56 connotes
(a) Physical impossibility
(b) Literal impossibility
(c) Commercial impossibility
(d) Impracticability of performance

4. In the case of wrongful dishonour of a cheque by a banker the damages awarded will be
(a) Nominal
(b) Special
(c) Exemplary
(d) Ordinary

5. If loss or damage arose naturally and directly in the usual course of things from a breach of contract, the aggrieved party would be eligible for
(a) Special damages
(b) Nominal damages
(c) Ordinary damages
(d) Exemplary damages

6. Anticipatory breach of contract takes place when there is
(a) Breach of contract when performance is actually due
(b) Breach of contract in the course of perfor-mance of the contract
(c) Breach of contract prior to the date of performance
(d) None of the above

7. Impossibility of performance occurs due to:
(a) Strike
(b) Lock-out
(c) Partial failure of object
(d) Destruction of subject-matter.

8. Object of granting damages is:
(a) to penalize the party,
(b) to monetarily compensate the party,
(c) to set an example before the society,
(d) none of the above.

9. Specific performance is ordered where:
(a) the contract is of personal nature,
(b) monetary compensation is an adequate remedy,
( c) monetary compensation is not an adequate remedy,
(d) performance is illegal.

10. An injunction order is granted by the Court in case:
(a) specific performance of the contract is possible.
(b) specific performance of the contract is impossible.
(c) the Court wants to restrain a party from committing a breach of contract.
(d) the contract is against public interest.

11. In the Indian Contract Act, Novation means
(a) Substitution of an existing contract with a new one
(b) No frustration of executed contracts
(c) Frustration due to change of circumstances
(d) Impossibility does not mean mere commercial difficulty

12. Hadley v. Baxendale case is a leading case on
(a) Breach of implied term
(b) Anticipatory breach
(c) Law of damages
(d) None of these

13. The remedies open to a person, suffering from breach of contract are
(a) Damages
(b) Injunction
(c) Quantum Meruit
(d) All of the above

14. Where the parties to a contract agree to substitute a new contract for it, it is known as
(a) Injunction
(b) Novation
(c) Rescission
(d) Alteration

15. A party to a contract committing breach, is liable to pay compensation in respect of
(a) The direct consequences flowing from the breach
(b) Loss or damage caused indirectly
( c) Losses caused whether directly or indirectly
(d) Losses caused remotely

16. A borrows Rs. 10,000 from B with interest at 12 per cent per annum, with a stipulation that in case of default A shall be liable to pay interest at 75 per cent from the date of default. A commits the default. B is entitled to recover from A
(a) 12% interest
(b) 75% interest
(c) 8796 interest
(d) Such compensation as the Court considers reasonable

Answers:

STATE WHETHER THE FOLLOWING ARE TRUE OR FALSE:

1. A claim for Quantum Meruit cannot succeed when an indivisible contract for a lump sum is partly performed.
2. Nominal damages are never granted by way of compensation for loss.
3. Penalty can be recovered under the Indian Contract Act.
4. A person who himself is guilty of breach of contract cannot get compensation under the doctrine of quantum meruit.
5. The order for injunction and specific performances are simultaneously issued by the court.
6. The aggrieved party is always entitled to compensation no matter whether he has suffered some loss or not.
7. Special damages are recoverable only when the parties knew about them.
8. The aggrieved party is not responsible to mitigate the loss caused by the breach.
9. The measure of ordinary damages is the difference between the contract price and the market price.
10. The claim for quantum meruit can be made only when the original contract has been discharged.
11. Commercial impossibility is not a valid excuse for the non performance of a contract.
12. For the default in the repayment of loan on the agreed date, interest can be increased retrospectively from the date of lending.
13. Commercial impossibility does not make the contract void.
14. Cancellation of a contract by mutual consent of the parties is called waiver.

Answers:

CA Foundation Business Laws Study Material Chapter 8 Performance of Contract

WHAT IS PERFORMANCE?

Definition: A contract creates legal obligations. “Performance of a contract” means the carrying out of these obligations. Each party must perform or offer to perform the promise which he has made. Sec. 37 para 1, of the Contract Act lays down that:
“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.”
In case of death of the promisor before performance, the representatives of the promisor are bound to perform the promise unless a contrary intention appears from the contract.
Illustration – X promises to deliver a horse to Y on a certain day on payment of Rs. 1,000. X dies before that day. X’s representatives are bound to deliver the horse to Y and Y is bound to pay Rs. 1,000 to X’s representatives.

WHAT IS ACTUAL PERFORMANCE & ATTEMPTED PERFORMANCE?

Performance may be:

1. Actual performance; or
2. Attempted performance or Tender.

(1) Actual Performance
When each party to a contract fulfils his obligation arising under the contract within the time and in the manner prescribed, it amounts to actual performance of the contract and the contract comes to an end or stands discharged.
(2) Attempted Performance or Tender
When the promisor offers to perform his obligation under the contract, but is unable to do so because the promisee does not accept the performance, it is called “attempted performance” or “tender”. Thus, “tender” is not actual performance but is only an “offer to perform” the obligation under the contract. A valid tender of performance is equivalent to performance.

ESSENTIALS OF A VALID TENDER

A valid tender or offer of performance must fulfil the following conditions: (Sec. 38)

1. It must be unconditional. (A tender is conditional where it is not in accordance with the term of the contract).
2. It must be made at proper time and place.
3. It must be of the whole obligation contracted for and not only of the part.
4. If the offer/tender relates to delivery of goods, it must give a reasonable opportunity to the promisee for inspection of goods so that he may be sure that the goods tendered are of con-tract description.
5. It must be made by a person who is in a position and is willing to perform the promise.
6. It must be made to the proper person i.e., the promisee or his duly authorised agent. Tender made to a stranger is invalid.
7. If there are several joint promisees, an offer to any one of them is a valid tender.
8. In case of tender of money, exact amount should be tendered in the legal tender money.

Exception
If a debtor has properly offered to pay money, and the creditor refuses to accept payment, the debtor’s liability to pay shall not come to an end. However, he will get one relief starting from the date of rejection of the tender. He will not be liable to pay interest on the due amount from the date of rejection.

Effect of refusal of party to perform promise wholly [Sec. 39]
When a party to a contract has refused to perform, or disabled himself from performing his promise in it’s entirely, the promisee may put an end to the contract, unless he has signified, by words or conduct, his acquiescence in its continuance.
Illustrations:
(a) X, a singer enters into a contract with Y, the manager of a theatre to sing at his theatre two nights in every week during the next two months, and Y engages to pay her t 100 for each nights performance. On the sixth night X wilfully absents herself from the theatre. Y is at liberty to put an end to the contract.
(b) If in the above illustration, with the assent of Y, X sings on the seventh night, Y is presumed to have signified his acquiescence in the continuance of the contract and cannot put an end to it; but is entitled to compensation for the damages sustained by him through X’s failure to sing on the sixth night.

BY WHOM MUST A CONTRACT BE PERFORMED? [SECS. 40 & 41 ]

1. By promisor himself
   If that was the intention of the parties, ie. where personal consideration is the foundation of the contract. (Sec. 40)
2. By agent
   Where personal consideration is not the foundation of contract, a person can perform his obligations through an agent. (Sec. 40)
3. By legal representatives
   In case of death of the promisor, the legal successors are bound to perform the contract, unless the contract is of personal nature.
4. By joint promisors
   When two or more persons have made a joint promise, then unless a contrary intention ap-pears from the contract, ‘
   1. all such persons must jointly fulfil the promise.
   2. If any of them dies, his legal representative must, jointly with the surviving promisors, fulfil the promise.
   3. If all the promisors die, the legal representatives of all of them must fulfil the promise jointly.
5. Performance by third person
   When a promisee accepts a performance of the promise from a third person, he cannot afterwards enforce it against the promisor. (Sec. 41) Acceptance of performance from a third party involves waiver of right of performance by the promisor. According to the Calcutta High Court a consignee after receiving compensation for the loss from an insurer cannot again sue the carrier who was actually liable for causing the loss of goods in transit.

Who can demand performance?

1. The promisee
   The promise, i.e.; the person who was given the promise, can demand performance.
2. The agent
   The agent can also demand performance on behalf of the promisee.
3. The legal representative
   In case of death of the promisee before performance, his legal representative, can demand performance.
4. Performance of joint promises
   When a person has made a promise to several persons, then, unless a contrary intention appears from the contract, the right to claim performance rests with all of them. When one of the promisee dies, it rests with his legal representatives jointly with the surviving promisees.
   When all the promises die, it rests with their legal representatives jointly.

WHEN CONTRACTS NEED NOT BE PERFORMED?

Sections 62 to 67 of the Contract Act are listed under the heading “Contracts which need not be performed”. The relevant provisions are as follows:

1. If the parties to the contract agree to substitute a new contract for it or to rescind or alter it, the original contract need not be performed. (Sec. 62).
   Where the parties to a contract agree to substitute the existing contract for a new contract, that is called novation. In the well-known case of Scarf v. Jardine (1882) 7 App Cas-345 it was stated that novation is of two kinds,
   1. involving change of parties; or
   2. involving substitution of a new contract in place of the old. (see next chapter for more details)
2. If the promisee dispenses with or remits wholly or in part, the performance of promise made to him or extends the time for such performance or accepts in satisfaction for it, the contract need not be performed. (Sec. 63)
3. When a voidable contract is rescinded, the other party need not perform his promise. (Sec. 64).
4. “If the 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 non-performance caused thereby”. (Sec. 67).

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.

DEVOLUTION OF JOINT LIABILITIES & JOINT RIGHTS [SECS. 42 TO 45]

Devolution of joint liabilities (Section 42)
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 representatives jointly with the survivor or survivors and, after death of the last survivor, the representatives of all jointly, must fulfil the promise.
According to this section joint promisors must, during their joint lives, fulfil the promise. And if any of them dies, his representative must, jointly with the surviving promisors, fulfil the promise and so on. On the death of the last survivor, the representatives of all of them must fulfil the promise. But this is subject to any private arrangement between the parties. They may expressly or impliedly prescribe a different rule.

Any one of joint promisors may be compelled to perform [Section 43]
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 com-pel 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.

Illustrations

1. 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.
2. A, B and C jointly promise to pay D fee sum of 3,000 rupees. C is compelled to pay the whole. A is insolvent, but his assets are sufficient to pay one-half of his debts. C is entitled to receive 500 rupees from A’s estate, and 1,250 rupees from B.
3. 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.

This section lays down three rules:

• Firstly, when a joint promise is made, and there is no express agreement to the contrary, the promisee may compel any one or more of the joint promisors to perform the whole of the promise. “A, B and C jointly promise to pay D 3000 rupees. D may compel either A or B or C to pay him 3000 rupees.” This implies that unless there is a contract to the contrary, each joint-promisor is individually liable for the entire performance. Thus the liability of joint-prom¬isors is joint as well as several “Several” means severable or separable. Several liability of a joint-promisors is a liability which can be separated from the joint liability and becomes an individual liability.
• Secondly, a joint promisor who has been compelled to perform the whole of the promise, may require the other joint promisors to make an equal contribution to the performance of the promise, unless a different intention appears from the agreement. A, B and C are under a joint promise to pay D 3000 rupees. D recovers the whole amount from A. A may require B and C to make equal contributions.
• Thirdly, if any one of the promisors makes a default in such contribution, the remaining joint promisors must bear the deficiency in equal shares. A, B and C are under a joint promise to pay D 3000 rupees, C is unable to pay anything. The deficiency must be shared by A and B equally. If C’s estate is able to pay one-half of his share, the balance must be made up by A and B in equal proportions.

Section 43 allows an action to be brought against any one of the joint promisors without impleading the others as defendants. Suppose now that the creditor sues only one joint promisor, can he subsequently sue the others?
According to the English law he cannot, but according to Indian Law he can subsequently sue the others. The creditor is also given the right to release anyone of the joint promisors from his liability and this does not discharge the others from their liabilities.

Effect of release of one joint promisor [Section 44]
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.
This section gives to the promisee a right to release any one or more of the joint-promisor from the liability under the joint promise. Once the release is granted, the promisee will not be able to file a suit against the released joint-promisor. But, the liability of the other joint-promisor shall continue unchanged. Similarly, the liability of the released joint-promisor towards other joint-promisors for contribution shall also continue. The net result is that there is no substantive gain to the released joint promisor.
This also marks a departure from the English Common Law, according to which a discharge of one joint promisor amounts to a discharge of all, unless the creditor expressly preserves his rights against them.

Devolution of joint rights [Section 45]
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 representatives 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 5000 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 Cs life, and after the death of C with the representatives of B and C jointly.

TIME AND PLACE OF PERFORMANCE [SECS. 46 TO 50]

Time and place of performance of a contract are matters to be determined by agreement between the parties themselves. If there is no such agreement, then provisions of sections 46 to 50 apply.
Where no time for performance is specified
Where no time for performance is specified, the promisor must perform the promise within a reasonable time (sec. 46). The question, “what is a reasonable time” is in each particular case, a question of fact.
When a promise is to be performed on a certain day
When a promise is to be performed on a certain day, 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 (sec. 47)
Illustration: A promises to deliver goods at B’s warehouse on the first January. On that day A brings the goods to B’s warehouse, but after the usual hour for closing it, and they are not received. A has not performed his promise.
If no time and place is fixed for the performance of, the promise
If no time and place is fixed for the performance of the promise, the promisor must apply to the promisee to fix the day and time for performance (secs. 48 & 49)
Illustration: A undertakes to deliver a thousand tons 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.
According to Sec. 50
According to Sec. 50 the performance of any promise may be made in any manner or at any time which the promisee prescribes or sanctions.

RECIPROCAL PROMISES [SECS. 51 TO 54 ANC 57]

According to Sec. 2(f) promises which form the consideration or part of the consideration for each other, are called reciprocal promises. Such promises are mutual promises, Le. a promise for a promise. When one party gives a promise in consideration for the other’s promise, both the promises are called reciprocal promises. For example, in a transaction of sale, there are two reciprocal promises:

1. The buyer promises to pay the price and,
2. The seller promises to deliver the goods.

Kinds of reciprocal promises

1. Mutual and independent promises
   Where one party has to perform his promise independently without waiting for the performance or willingness of the other party, the promises are mutual and independent. For example, A agrees to sell the car and deliver the same to B on 1-1-2009 while B agrees to pay the price on 15-1-2009. The promises are independent.
2. Mutual and dependent
   Where the performance of the promise by one party depends upon the prior performance of the promisor or by the other party, the promises are conditional and dependent. For example, X agrees to construct a house for Y. Y agrees to supply cement for building the house. The promises are conditional and dependent.
3. Mutual and concurrent
   Where the two promises are to be performed simultaneously, they are said to be mutual and concurrent.

Rules regarding performance of reciprocal promises [Secs. 51 to 54]

1. When reciprocal promises have to be simultaneously performed the promisor is not bound to perform, unless the promisee is ready and willing to perform his promise. [Sec. 51]
Illustrations:

1. A agrees to sell goods to B on cash payment, which B agrees. If A find that B is not ready to pay the cash then and there, he need not sell the goods.
2. A and B make a contract for sale of goods, the payment to be made by B in instalments.
   Goods are to be delivered on the payment of first instalment. If B is not ready and willing to pay the first instalment, A need not deliver the goods.

2. The reciprocal promises must be performed in the order fixed by the contract. [Sec. 52]
Illustration: A and B contract that A shall build a house for B for a fixed price. A’s promise to build the house must be performed before B’s promise to pay for it.

3. If one party prevents the other party from performing his reciprocal promise, the contract become voidable and the party so prevented can claim compensation. [Sec. 53]
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.

4. Where the nature of reciprocal promises is such that one cannot be performed unless the other party performs his promise in the first place, then if the latter fails to perform he cannot claim performance from the other, but must make compensation to the first party for his loss. [Sec. 54]
Illustrations:

1. hires B’s ship to take a cargo from Calcutta to Mauritius. A fails to supply the cargo. A cannot force B to perform his obligation. Rather, A has to give compensation to B for any loss that B may suffer by the non-performance of the contract.
2. A contracts to construct a building for B. B^was to supply some material necessary in the construction work. B fails to supply the material. A need not construct the building. He may take compensation from B.

5. Reciprocal promise to do things legal and also things illegal – The first is a contract, but the latter is a void agreement. (Sec. 57)
Illustrations:

1. A and B agree that A shall sell B a house for Rs. 10,000 but that if B uses it as a gambling house, he shall pay A Rs. 50,000 for it.
   The first set of reciprocal promises, namely, to sell the house and to pay Rs. 10,000 for it, is a contract. The second set is for an unlawful object, viz. that B may use the house as a gambling house, and is a void agreement.
2. A and B agree that A shall pay B 1000 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.

TIME AS THE ESSENCE OF CONTRACT

Parties generally fix time for the performance of the contract. What happens if the contract is not performed within the fixed time? Does it become void or voidable?
This will depend upon “whether time was the essence of the contract”. The phrase “time as the essence of the contract” means that performance within time is the most vital condition of the contract. If time is the essence of the contract then the other party can avoid the contract and if it is not, the other party cannot avoid the contract.
When is the time the essence of the contract?

1. Whether time is of the essence of the contract, depends upon
   1. The intention of the parties
   2. Nature of the transaction
   3. The terms of the contract Le. if the parties to the contract have expressly agreed that performance within a limited time was necessary;
2. Even where a time is specified for the performance of a certain promise, “time may not be of the essence of the contract” and one has to look at the nature and construction of the contract and the intention of the parties in order to ascertain whether “time is of the essence of the contract” or not;
3. It is well settled that unless a different intention appears from the terms of the contract, ordi-narily in commercial contracts the time of delivery of goods is of the essence of the contract but not the time of payment of the price;
4. In contracts for the purchase of land, usually time is not of the essence of the contract because land values do not frequently fluctuate.

Effects of failure to perform a contract within the stipulated time
Sec. 55 deals with the subject and lays down the following rules:

1. Where “time is of the essence of the contract”and there is failure to perform within the fixed time, the contract (or so much of it as remains unperformed) becomes voidable at the option of the promisee. He may rescind the contract and sue for the breach.
2. Where “time is not of the essence of the contract”, failure to perform within the specified time does not make the contract voidable. It means that in such a case the promisee cannot rescind the contract and he will have to accept the delayed performance. But he would be entitled to claim compensation from the promisor for any loss caused to him by the delay. This rule is, however, subject to the condition that the promisor should not delay the performance beyond a reasonable time, otherwise the contract will become voidable at the option of the promisee.
3. In case of a contract voidable on account pf the promisor’s failure to perform his promise within the agreed time or within a reasonable time, as the case may be, and if the promisee, instead of rescinding the contract, accepts the delayed performance, he cannot afterwards claim compensation for any loss caused by the delay, unless, at the time of accepting the delayed performance, he gives notice to the promisor of his intention to do so.

APPROPRIATION OF PAYMENTS

Appropriation of payment means the application of payment by a creditor to the discharge of same particular debt. When money is paid, it must be applied according to the rule of the payer and not the receiver. Appropriation is a right primarily of the debtor and for his benefit. Sections 59 to 61 lays down 3 rules regarding appropriation of payments.

1. If the debtor indicates
As per section 59, where the debtor, owing several distinct debts indicates at the time of actual payment that the payment should be applied towards the discharge of a particular debt, the creditor must do so. If there are no clear instructions from the debtor but the circumstances of the case imply that the payment should be applied to a particular debt, then the accepted payment must be applied accordingly.

2. If the debt to be discharged is not indicated [Sec. 60]
If the debtor does not indicate, then the creditor may apply the payment at his discretion to any lawful debt. He cannot, however, apply the payment to a disputed or unlawful debt, but he may apply it to a debt which is barred by the law of limitation.

3. Where the debtor does not intimate and the creditor fails to appropriate [Sec. 61]
The payment shall be applied in discharge of the debts in order of time. If the debts are of the same date, the payment shall be applied in discharge of each proportionately.

[Summary: APPROPRIATION OF PAYMENTS: The debtor has at the time of payment, right of choice of appropriating the payment, in default of the debtor; the creditor has the right to appropriate, in default of either, the law will allow appropriation of debts in order of time.] [Rule in Clayton’s Case: Where the parties have a current account between them, appropriation impliedly takes place in the order in which the receipts and payments take place and are entered in the account. The first item on the debit side of the account is discharged or reduced by the first item on the credit side].

ASSIGNMENT OF CONTRACT

Definition
Assignment means transfer. The rights and liabilities of a party to a contract can be assigned under certain circumstances. Assignment may occur

1. by act of parties or
2. by operation of law.

Rules: The rules regarding assignment of contracts are summarised below:

ASSIGNMENT BY ACT OF THE PARTIES

1. Contracts involving personal skill, ability, credit, or other personal qualifications, cannot be assigned Examples: a contract to marry, a contract to paint a picture, a contract of personal service etc.
2. The obligations under a contract, i.e., the burden and the liabilities under the contract cannot be transferred. For example, if X owes Y Rs. 100 he cannot transfer the liability to Z, and force Y to collect his money from Z.
   Exception: In both cases 1 and 2, the parties to a contract may agree to replace the original contract by a new one under which the obligations of one of the parties are shifted to a new
   party. Thus, in the example given above if Y agrees to accept Z as his debtor in place of X, the liability to pay the debt is transferred from X to Z. Such cases are known as Novation.
3. A contract may be performed through the agency of a competent person, if the contract does not contemplate performance by the promisor personally – Sec. 40. But in this case the original party remains responsible for the proper performance of the obligations under the contract.
4. The rights and benefits under a contract (not involving personal skill or volition) can be as-signed. Thus if X is entitled to receive Rs. 500 from Y, he can assign his right to Z where upon Z will become entitled to receive the money from Y. But in this case the assignment is subject to all equities between the original parties. Thus if Y had already paid a portion of the debt to X, he will pay to Z correspondingly less.
5. Actionable claims can be assigned but only by a written document. Notice must be given to the debtor. An actionable claim is a claim to any debt or to any beneficial interest. E.g. A money debt.

ASSIGNMENT BY OPERATION OF LAW

Assignment by operation of law occurs in cases of death or insolvency. Upon the death of a party his rights and liabilities under a contract devolve upon his heirs and legal representatives (except in the case of contract involving personal qualifications). In case of insolvency, the rights and liabilities of the person concerned pass to the Official Assignee or the Official Receiver. Assignment by operation of law occurring upon the death of a party is known as succession.

Distinction between succession and assignment
In succession, the benefits of a contract are succeeded to by a process of law to the legal heirs. Here both, the burden and benefits attaching to the contract devolve on the legal heir. When a son succeeds to the estate of his deceased father he is liable to pay the debts and liability of his father, to the extent of property inherited by him.
In case of assignment, however the benefits of a contract can only be assigned and not the liabilities thereunder. This is because when liability is assigned, a third party gets involved therein. Thus, a debtor cannot relieve himself of the liability to creditor by assigning to someone else his obligation to repay the debt.

MULTIPLE CHOICE QUESTIONS:

1. Where a party to a contract fails to perform at or before a specified time and it was the intention of the parties that time should be of the essence,
(a) The contract becomes voidable
(b) The contract does not become voidable but the aggrieved party is entitled to compensation
(c) The contract becomes void
(d) None of these

2. A owes B Rs. 1,000 but the debt is barred by the Limitation Act. A signs a written promise to B for Rs. 500 on account of the debt. This is a :
(a) Valid contract
(b) Voidable contract
(c) Void contract
(d) Unenforceable agreement

3. A contracts with B to construct a building for a fixed price, B supplying the necessary timber. This reciprocal promise is :
(a) Mutual and Independent
(b) Mutual and Dependent
(c) Mutual and Concurrent
(d) None of the above

4. A contract of personal nature can be performed by:
(a) The promisor,
(b) The agent,
(c) The legal representative,
(d) None of the above.

5. Liability of the joint promisor is :
(a) Joint
(b) Several
(c) Joint and several
(d) None of the above

6. If neither the debtor nor the creditor appropriates the payment, the payment will be appropriated:
(a) As per the desire of the promisor,
(b) As per the desire of the promisee,
(c) In order of time,
(d) None of the above.

7. Agreement by way of wager are
(a) Valid and enforceable by law
(b) Void
(c) Voidable at the option of party
(d) Illegal

8, 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 Rs. 100 for each night’s performance. On the sixth night, A wilfully absents herself from the theatre.
(a) B is at liberty to put an end to the contract
(b) B cannot put an end to the contract
(c) The contract is left at the liberty of A
(d) None of these

9. A and B contract to marry each other before the time fixed for the marriage. A goes mad. The contract becomes :
(a) Void
(b) Voidable
(c) Unenforceable
(d) None of these

10. If a contract is based on personal skill or confi¬dence of parties, the death of a party in such a case :
(a) Puts an end to the contract
(b) Does not put an end to the contract
(c) The representatives of the deceased can be made liable to perform such a contract
(d) None of these

11. A modification or revocation of the contract requires a of each contracting party.
(a) Denial
(b) Consensus
(c) Modification
(d) Revocation

12. If the performance of contract becomes impos¬sible because the subject matter of contract has ceased to exist then :
(a) Both the parties are liable
(b) Neither party is liable
(c) Only offerer is liable
(d) Only acceptor is liable

13. A doctor teaching in a medical college pre-vented from doing private practice, such a restriction is :
(a) Valid
(b) Partial lawful
(c) Unlawful
(d) Partial Unlawful

14. A contracts to sing for B for a consideration of Rs. 5,000 which amount is paid in advance. A becomes unwell and is not able to perform. B suffers a loss of Rs. 10,000. A is liable to pay B
(a) Rs. 15,000
(b) Rs. 10,000
(c) Rs. 5,000
(d) Nothing

15. 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 are not received. Which one of the following is correct?
(a) A has not kept his promise
(b) A kept his promise as time was not specified
(c) A performs his duty as the time is not the essence of the contract
(d) All of these

Answers:

STATE WHETHER THE FOLLOWING ARE TRUE OR FALSE:

1. When a promisee neglects to give the promisor reasonable facilities for the performance of a promise, the promisor is still liable for performance.
2. Under the Contract Act the liability of joint promisors is joint as well as several.
3. A contract involving the exercise of personal skill, volition or credit can also be performed by an agent or a legal representative.
4. A debtor sends a payment but the creditor refuses to accept it. Even then the debtor is not discharged from the debt.
5. The promisee may compel any one of the joint promisors to perform the promise.
6. A debtor while making the payment expressly informs the creditor that the payment should be applied to particular debt, the creditor is not bound to do so.
7. A release of one promisor does not discharge the other joint promisors.
8. In a contract where time is the essence of the contract, if the promisor fails to perform in time, the contract becomes void.
9. A legal representative of a deceased promisee can demand performance of a contract under all circumstances.
10. In the absence of the debtor’s intimation to the creditor regarding appropriation of a payment, the cred¬itor can utilise the payment even towards payment of a time-barred debt.
11. In case of joint promise by two or more persons, the promisee may compel any of such joint promisors to perform the whole of the promise.
12. If a party to a contract has promised to do certain things, at a particular time, and fails to do by that time, the contract shall become voidable at the option of the promisee.
13. Performance of the contract may be made only by the parties to the contract.
14. If one of the joint promisors is made to perform the whole contract, he can ask for equal contribution from others.
15. The burden of the contract cannot be assigned without the consent of the other party or parties of the contract.
16. A promise under a contract can be performed by the promisor himself.
17. When the promisee does not accept the offer of performance, the promisor is not responsible for the non-performance.
18. Payments made by a debtor are always appropriated in a chronological order.
19. If the promisees are joint, the right to claim performance is joint and not joint and several.
20. It is mixed question of law and fact whether time was the essence of the contract.

Answers:

CA Foundation Business Laws Study Material Chapter 7 Contingent Contracts and Quasi Contracts

WHAT IS A CONTINGENT CONTRACT?

Definition
“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” – [Section 31]. Contracts of insurance, indemnity and guarantee are examples of contingent contract.

Meaning of Collateral Event
According to Pollock and Mulla, collateral event means an event which is, “neither a performance directly promised as part of the contract, nor the whole of the consideration for a promise For e.g. A contracts to pay B Rs. 1,00,000 if B’s house is burnt. This is a contingent contract, because the burning of B’s house is neither a performance promised as part of the contract nor it is the consideration obtained from B. The liability of A arises only on the happening of a collateral event which is an independent event but collateral to the main contract.

• A contract can also be contingent if it depends on act of a party to the contract or that of a third person. For example, a promise to purchase a computer if the managing director of the company approves it is a valid contract. A entered into a contract for the supply of timber to the Govt. One of the terms of the contract was that the timber would be rejected if it is not approved by the Superintendent of the Gun Carriage Factory for which the timber was required. The timber supplied was rejected. A filed a suit for breach of contract. Will he succeed?
• However, if the contingent event depends on the mere will and pleasure of one of the parties to the contract, it would not be valid. Thus, in a contract of service to pay as the employer pleases is no promise.
• The collateral event should not be a part of the reciprocal promises forming the contract. Thus, A agrees to construct a swimming pool for B for Rs. 80,000. The payment is to be made by B only on the completion of the pool. It is not a contingent contract, because these are mutual promises forming part of the contract.
• Where a contract provides that the goods would be delivered as and when they arrive, is not a contingent contract but it merely provides a particular mode of performance.

ESSENTIALS OF CONTINGENT CONTRACTS

1. ]The performance of such contracts depends on a contingency Le., on the happening or non-happening of the future event.
2. The event must be collateral i.e., incidental to the contract.
3. The event must be uncertain. If the event is bound to happen the contract is due to be per¬formed in any case then it is not a contingent contract.
4. The contingent event should not be the mere will of the promisor.

RULES REGARDING CONTINGENT CONTRACTS

Sections 32 to 36 of the Contract Act contain certain rules regarding contingent contract, they are summarised below:
Rules regarding contingent contract
1. Sec. 32: Dependent on the happening a future uncertain event
enforceable, when that event happens.
The happening of a future uncertain event: Contracts contingent upon the happening of a future uncertain event, cannot be enforced by law unless and until that event has happened, If the event becomes impossible, such contracts become void. [Sec 32]
Illustrations: 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.
Illustrations: A contracts to pay B a sum of money when B marries C. C dies without being : married to B. The contract becomes void.
Illustrations: Where a car was insured against loss in transit, the car was damaged without being put in the course of transit, the insurer was held to be not liable.

2. Sec. 33: Dependent on non-happening of an uncertain future event.
enforceable, when the happening of that event becomes impossible, and not before.
The non-happening of an uncertain future event: Contracts contingent upon the non-happen¬ing of an uncertain future event, can be enforced when the happening of that event becomes impossible and not before. [Sec. 33]
Illustrations: A agrees to pay B a sum of money if a certain ship does not return. The ship is sunk. The contract can be enforced when the ship sinks.
Illustrations: A agrees to pay sum of money to B if a certain ship does not return. The ship, returns back. The contract has become void.

3. Sec. 35(1): Dependent on the happening of an event within a fixed time
enforceable, if the event happens within that time.
The happening of an event within a fixed time: Contracts contingent upon the happening of an event within a fixed time become void if, at the expiration of the fixed time, such event has not happened or if, before the time fixed, such event becomes impossible. [Sec. 35(1)]
Illustrations: A promises to pay B a sum of money if a certain ship return within a year. The contract may be enforced if the ship return within a year, and becomes void if the ship is burnt within a year (since the event becomes impossible).

4. Sec. 35(2): Dependent on the non-happening of an event within a fixed time.
enforceable, if the event does not happen or becomes impossible within that time.
The non-happening of art event within a fixed time: Contracts contingent upon the non-hap- pening of an event 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. [Sec. 35(2)]
Illustrations: 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 a year.

5. Sec. 34: Dependent on the future conduct of a person acting in a particular way
enforceable, if that person acts in that way or
the future conduct of any person is considered impossible, if that person does something which makes it impossible to perform in the given circumstances.
When event to be deemed impossible if it is the future conduct of a living person: If a contract is contingent upon how a person will act at an unspecified time, the event shall be considered to become impossible when such person does anything which renders it impossible that he should so act within any definite time, or otherwise than under further contingencies. [Sec. 34]
In other words, if a promise depends on the act of a third party, it will become void should such third party refuse to do the act or if he incapacitates himself from doing it. For e.g. S sells goods to B and B promises to pay the price after C has fixed it. If C refuses to fix the price or if he dies before fixing it, the agreement becomes void.
Illustration: 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.
Illustrations: In Frost v. Knight, the defendant promised to marry the plaintiff on the death of his father. While the father was still alive, he married another woman. It was held that it had become impossible that he should marry the plaintiff and she was entitled to sue him for the breach of the contract.

6. Sec. 36: Dependent on an impossible event.
is void ab initio.
Impossible event: 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. [Sec. 36]
Illustrations: 1. A agrees to pay B Rs. 1,000 if two straight lines should enclose a space. The agreement is void.
Illustrations: 2. A agrees to pay B Rs. 1,000 if B will marry A’s daughter C. C was dead at the time of the agreement. The agreement is void.

A DIFFERENCE BETWEEN CONTINGENT CONTRACT AND WAGERING AGREEMENTS:

QUASI CONTRACT : WHAT IT IS?

The term ‘Quasi’ means ‘as if’or ‘similar to’. A quasi-contract is similar to a contract. Just like a contract it also creates legal obligations. But the legal obligations created by quasi contract do not rest on any agreement but are imposed by law. It is therefore, contractual in law, but not in fact.

A Quasi Contract can be defined as a fictional contractual obligation created by law, in certain circumstances. (In the absence any mutual agreement between the parties.)
In reality it is not a contract since the essential elements of contract like offer and acceptance, lawful consideration etc. are not present. It is an obligation which the law creates in the absence of any agreement, when the acts of the parties or others have placed in the possession of one person, money or its equivalent, under such circumstances that in equity and good conscience he ought not retain it, and which ex aqeuqo bono (in justice and fairness) belongs to another. Quasi contract is fictitiously deemed contractual, in order to fit the cause of the action to the contractual remedy.
The Indian Contract Act describes quasi contract as ‘certain relations resembling those created by contracts’.

BASIS OF QUASI CONTRACT

Quasi contracts are based on principles of equity, justice and good conscience. They aim at prevention of “unjust enrichment” i.e. no man shall be allowed to enrich himself at the cost of another.
Another theory regarding the judicial basis of such contract is that it is implied, notional or fictional contract imputed by law out of equitable considerations.
The salient features of quasi-contractual right are as follows:

1. Such a right is always a right to money, and generally, though not always, to a liquidated sum of money,
2. It does not arise from any agreement of the parties concerned, but is imposed by the law,
3. It is a right which is available not against all the world, but against a particular person or person only, so that in this respect it resembles a contractual right, &
4. Damages can be claimed for breach of quasi-contractual right.

TYPES OF QUASI CONTRACTS

Sections 68 to 72 of the Contract Act deals with five different types of quasi contracts. In each of these cases there is no real contract between the parties, but due to peculiar circumstances in which they are placed, the law imposes in each of these cases a contractual liability.

(1) Claim for necessaries supplied to persons incapable of contracting [Sec. 68]
If necessaries are supplied to a person who is incapable of contracting, e.g., a minor or a person of unsound mind, the supplier is entitled to claim their price from the property of such a person.
Sec. 68 states “If a person, incapable of entering into a contract, or any one 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. ”
Accordingly, if A supplies to B, a lunatic, necessaries suited to B’s status in life, A would be entitled to recover their price from B’s property. He would also be able to recover the price for necessaries supplied by him to his (B’s) wife or minor child since B is legally bound to support them. However, if B has no property, nothing would be realizable. It should, however, be noted that in such circum¬stances, the price only of necessaries and not of article of luxury, can be recovered.

(2) Right to recover money paid for another person [Sec. 69]
A person who has paid a sum of money which another is obliged to pay, is entitled to be reimbursed by that other person provided the payment has been made by him to protect his own interest.
Example: B holds land in Bengal, on a lease granted by A, the Zamindar. The revenue payable by A to the Government being in arrears his land is advertised for sale by the Government. Under the revenue law the consequences of such sale will be annulment of B’s lease. B to prevent 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.
Conditions: The following are the conditions mentioned in Sec. 69.

1. The payment made should be bona fide for the protection of one’s interest.
2. The payment should not be a voluntary one.
3. The payment must be such as the other party was bound by law to pay.

(3) Obligation of a person enjoying benefits of non-gratuitous act [Sec. 70]
Such an obligation arises under the provision of Section 70 reproduced below:
“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”.
It thus follows that for a suit to succeed, the plaintiff must prove:

1. That he had done the act or had delivered the thing lawfully,
2. That he did not do so gratuitously, and
3. That the other person enjoyed the benefit.

Examples:

1. A, a tradesman, leaves goods at B’s house by mistake. B treats the goods as his own. He is bound to pay for them to A.
2. 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.

(4) Responsibility of a finder of goods [Sec. 71]
“A person who finds goods belonging to another and takes them into his custody, is subject to the same responsibility as a bailee”.
Conditions:

1. A person who finds goods and takes possession of it is responsible as a bailee.
2. That is, he is liable—
   1. To try and find out the true owner and
   2. To take due care of the property [Sec. 151]
3. Finder is entitled to a lien until paid compensation, but cannot file a suit to recover such compensation.
4. Finder is entitled to possession against all except the true owner.
5. When owner declares reward, finder can sue for reward.
6. Right of re-sale: If the owner is not found or if he refuses to pay lawful charges, the finder may sell—
   1. When the thing is in danger of perishing or losing the greater part of its value.
   2. When the lawful charges amount to two-thirds of its value.

Example: Hollins vs. Howler L. R. & H. L., H picked up a diamond on the floor of F’s shop and handed over the same to F to keep till the owner was found. In spite of best efforts, the true owner could not be traced. After the lapse of some week, H tendered to F the lawful expenses incurred by him and requested to return the diamond to him. F refused to do so. Held, F must return the diamond to H as he was entitled to retain goods found against everybody except the true owner.

(5) Liability for money paid or thing delivered by piistake or under coercion [Sec. 72]
“A person to whom money has been paid, or anything delivered by mistake or under coercion must repay or return it (Sec. 72)”. Thus, a payment made by A to B under the mistaken belief that he is liable in respect of a municipal tax on a mis-construction of the terms of the lease, can be recovered from the municipal authorities.
Examples:
A and B jointly owe Rs. 100 to C. A alone pays the amount to C & B, not knowing this fact, pays Rs. 100 over again to C. C is bound to pay the amount to 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 as much of the charge that is illegally excessive.

MULTIPLE CHOICE QUESTIONS:

1. A makes a contract with B to buy B’s horse if A survives C. This is
(a) a Quasi-contract
(b) a Void contract
(c) a Contingent contract
(d) a Conditional contract

2. An insurance contract is—
(a) Contingent contract
(b) Wagering agreement
(c) Unenforceable contract
(d) Void contract

3. If the contingent depends on the mere will of the promisor it would be—
(a) Valid
(b) Void
(c) Illegal
(d) Depends on the circumstances

4. A contract of life insurance, the performance of which depends upon a future event falls under the category of
(a) Contract of Indemnity
(b) Contract of Guarantee
(c) Contingent Contract
(d) Special type of Contract

5. Which one of the following is not an essential feature of a wagering agreement?
(a) Insurable interest
(b) Uncertain event
(c) Mutual chances of gain or loss
(d) Neither party to have control over the event

6. The contingent contract dependent on the happening of the future uncertain event can be enforced when such event:—
(a) Happens
(b) Does not happen
(c) Does not become a impossible
(d) Both (a) & (c)

7. Contract contingent upon the happening of a future uncertain event becomes void.
(a) If the event becomes impossible
(b) If the event happens
(c) If the event does not happen
(d) None of the above.

8. Contracts contingent upon the non-happening of the future uncertain event becomes void when such event:—
(a) Happen
(b) Does not happen
(c) The event becomes impossible
(d) None of the above

9. Contract contingent upon the non-happening of the future uncertain event becomes enforceable
(a) When the happening of that event becomes impossible and not before
( b) When the happening of that event becomes possible and not before
(c) When the event happens
(d) None of the above.

10. A promises to pay B a sum of money if a certain ship does not return within a year. The ship is sunk within a year. The contract is
(a) Enforceable
(b) Void
(c) Voidable
(d) Illegal

11. Contingent contract to do or not to do anything, if an impossible event happens are:—
(a) Valid
(b) Void
(c) Voidable
(d) Illegal

12. Contingent contract dependent on the non-hap-pening of the event within a fixed time can be enforced, if the event:—
(a) Does not happen within the fixed time
( b) Before the time fixed such event becomes impossible
(c) Both (a) & (b)
(d) None of the above

13. In a contingent contract which event is contingent—
(a) Main event
(b) Collateral event
(c) Both (a) & (b)
(d) None of the above.

14. Under section 70 of the Indian Contract Act, 1872, if a person who enjoys the benefit of any other person’s work, the beneficiary must pay to the benefactor for the services rendered, provided the intention of the benefactor was :
(a) Gratuitous
(b) Non-gratuitous
(c) To create legal relations
(d) None of these

15. A finder of goods can:
(a) file a suit to recover his expenses,
( b) sell the goods if he likes,
(c) can sue for a reward, if any.
(d) None of the above.

16. A finder of goods can sell the goods if the cost of finding the true owner exceeds:
(a) 1/4 of the value of the goods,
(b) 1 /3 of the value of the goods,
(c) 1 /2 of the value of the goods,
(d) 2/3 of the value of the goods.

17. The contract uberrimae fidei means a contract
(a) Of goodwill
(b) Guaranteed by a surety
(c) Of utmost good faith
(d) Of good faith

18. A finder can sell the goods if:
(a) the goods are ascertained,
(b) the goods are un-ascertained,
(c) the goods are valuable,
(d) the goods are perishable.

Answers:

STATE WHETHER THE FOLLOWING ARE TRUE OR FALSE:

1. The event in a contingent contract may be certain or uncertain.
2. A contract of insurance is not a contingent contract.
3. A wagering agreement is a contingent contract.
4. Contracts of indemnity are contingent contracts.
5. Contracts contingent upon the happening of an uncertain specified event within a fixed time can become void only after the expiry of the fixed time.
6. A finder of goods can sue the true owner for recovery of expenses incurred for the safety of the goods.
7. Any person making payment for another can get reimbursement from the person for whom he has paid.
8. A person supplying articles of the necessities to the wife of a lunatic is entitled for reimbursement from the property of the lunatic.
9. A person cannot recover from another an amount paid under a mistake of law.
10. A person who enjoys the benefit of a non-gratuitous act is bound to make compensation.
11. A finder of lost goods is a bailee.
12. In Quasi-contract the promise to pay is always an implication of law and not of facts.

Answers:

CA Foundation Business Laws Study Material Chapter 6 Void Agreements

UNLAWFUL AGREEMENTS

According to sec. 23, the consideration or the object of an agreement is unlawful in following cases:

1. If it is forbidden by law.
Illustration: A promises 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.
If it is of such a nature that, if permitted, it would defeat the provisions of any law.
Illustration: A’s estate is sold for arrears of revenue under the provisions of an Act of the Legislature, by which the defaulter is prohibited from purchasing the estate. B, upon an understanding with A, becomes the purchaser and agrees to convey the estate to A upon receiving from him the price which B has paid. The agreement is void, as it renders the transaction, in effect, a purchase by the defaulter, and would so defeat the object of the law.

2. If it is fraudulent.
Illustration:

1. A, being an 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.
2. A scheme of fraud among partners in a firm to cheat income tax authorities or among directors of a company to cheat the investors is void.
3. An agreement between some persons to purchase shares in a company with a view to induce other persons to believe, contrary to the fact, that there is a bona fide market for the shares is void. [GherulalParekhv. Mahadeo A.I.R. (1956) S.E. 781].

3. If it involves or implies injury to the person or property of other.
Illustration: A borrowed ? 100 from B. He (A) executed a bond promising to work for B without pay for 2 years and in case of default agreed to pay interest at a very exorbitant rate and the principal amount at once. Held: The contract was void. [Ram Saroop v. Bansi 42 Cal. 742].

4. If the court regards it as immoral.
Illustration: A let a cab on hire to B, a prostitute, knowing that it would be used for immoral pur-poses. The agreement is void. [Pearce v. Brooks (1886) L.R. 1 Ex. 213]

5. If the court regards it as opposed to public policy.
Illustration: A promises to obtain for B an employment in the public service and B promises to pay A ? 1,000. This is an unlawful agreement.

6. Every agreement of which the object or consideration is unlawful is void.

AGREEMENTS OPPOSED TO PUBLIC POLICY

An agreement, which is injurious to the public or is against the interests of the society is said to be opposed to public policy. Public policy is not capable of exact definition. It varies from time to time. The Courts do not usually go beyond the decided cases on the subject. It has been said in the House of Lords that, “public policy is always an unsafe and treacherous ground for legal decision”. Courts are generally disinclined to create a new item in the list of agreements against public policy.
The agreements which have been declared against public policy by Courts can be described under the following heads:

1. Agreements for trading with the enemy.
2. Agreements for stifling (suppressing) prosecution. When an offence has been committed, the guilty party must prosecuted and any agreement which seeks to prevent the prosecution of such a person is opposed to public policy and is void.
3. Agreements of champerty and maintenance: Champerty and Maintenance are British terms and can be described as the promotion of litigation in which one has no self interest.
   When a person helps (financial or otherwise) another in litigation in which he is not himself interested and does not share in the proceeds of the action, it is called MAINTENANCE.
   When a person helps another in litigation in exchange of a promise to hand over a portion of the fruits of the litigation, if any, it is called CHAMPERTY.
   Ex: P files a suit against Q for the recovery of a claim of ? 1 lakh. X promises to advance ? 20,000 to P for the costs of the litigation and P promises to give to X ? 40,000 if he is successful in his suit. This is an agreement by way of champerty. Had P been liable to return to X only the amount taken by him, then it would have been a mere maintenance agreement.
   In India, an agreement to finance litigation in return of a portion of the results of the litigations is valid provided the litigation was instituted with a bona fide motive and the terms are not unfair or unjust to the helped person. If, however, the litigation was inspired by a malicious motive or to instigate litigation or is of a gambling character, or is against public policy, the agreement is bad.
4. Agreements interfering with the course of justice. Any agreement whose purpose or effect is to use improper influence of any kind with judges or officers of justice is void.
5. Agreements for marriage brokerage.
6. Agreements tending to create interest against obligation.
7. Agreements for sale of public offices, titles and appointments.
8. Agreements tending to create monopolies.
9. Agreements not to bid.
10. Agreements restraining personal liberty.
11. Agreements in restraint of parental rights.
12. Agreements interfering with marital duties.
13. Agreements to influence public servants to act opposed to their duty.
14. Agreements in restraint of marriage.
15. Agreements in restraint of trade.
16. Agreements in restraint of legal proceedings.

VOID AGREEMENTS

The following agreements have been expressly declared as void under the Indian contract Act.

1. Agreements by a minor or a person of unsound mind. (Sec. 11)
2. Agreements made under a bilateral mistake of fact material to the agreement. (Sec. 20)
3. Agreements whose objects or considerations are unlawful. (Sec. 23)
4. Agreements whose objects or considerations are unlawful in part and the illegal part cannot be separated from the legal part. (Sec. 24)
5. Agreements made without consideration. (Sec. 25)
6. Agreements in restraint of marriage. (Sec. 26)
7. Agreements is restraint of trade. (Sec. 27)
8. Agreements in restraint of legal proceedings. (Sec. 28)
9. Agreements the meaning of which is uncertain. (Sec. 29)
10. Agreements by way of wager. (Sec. 30)
11. Agreements contingent on impossible events. (Sec. 36)
12. Agreements to do impossible acts. (Sec. 56)

Serial numbers 1 to 5 have already been discussed in preceding chapters.

Agreements in restraint of marriage [Sec. 26]
Every agreement in restraint of marriage of any person other than a minor, is void. So if a person, being a major, agrees for good consideration not to marry, the promise is not binding.

Agreements in restraint of trade [Sec. 27]
Agreements in restraint of trade: “Every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind, to that extent void.” [Sec. 27.]
“Public policy requires that every man shall be at liberty to work for himself and shall not be at liberty to deprive himself of the fruit of his labour skill or talent, by any contract that he enters into”. The constitution of India guarantees Freedom of Trade.
“To that extent”- It means that only that portion of agreement is void which is restrictive.
Illustration: Twenty-nine out of thirty manufacturers of combs in the city of Patna agreed with R to supply him with combs and not to any one else. Under the agreement R was free to reject the goods if he found there was no market for them. Held: The agreement amounted to restraint of Trade and was thus void [Shaikh Kalu v. Ramsaran Bhagat (1909) 13 C.W.N. 388].

 An Agreement in restraint of Trade is void. State the Exceptions to the Rule
Agreement in restraint of trade is valid in the following cases:
A. Statutory Exceptions:
(a) Sale of goodwill (Sec. 21)
The seller of the goodwill of a business can be restrained from carrying on

1. a similar business
2. within specified local limits,
3. so long as the buyer or his successor in interest carries on a similar business provided
4. the restraint is reasonable in point of time and place.

(b) Partners’ Agreements (Exceptions given in the LLP and Partnership Act)

1. Partner’s competing business: A partner of a firm may be restrained from carrying on a similar business, so long as he remains a partner [Sec. 11(2) Partnership Act]
2. Rights of outgoing partner: A partner may agree with his partners that on ceasing to be a partner he will not carry on a similar business within a specified period or within specified local limits. [Sec. 36(2), Partnership Act.]
3. Partner’s similar business on dissolution: Partners may, in anticipation of the dissolution of the firm, agree that all or some of them shall not carry on similar business within a specified period or within specified local limits [Sec. 54, Partnership Act.]
4. An agreement between any partner and the buyer of the firm’s goodwill that such partner will not carry on any business similar to that of the firm within a specified period or within specified local limits provided the restrictions imposed are reasonable [Sec. 55(3) Partnership Act]

Note: It should be noted that such agreements can also be entered into by the partners of Limited Liability Partnership incorporated under LLP Act, 2008.

B. Legal decisions
(a) Trade Combinations
An agreement, the primary object of which is to regulate business and not to restrain it, is valid. Thus, an agreement in the nature of a business combination between traders or manufacturers e.g., not to sell their goods below a certain price, to pool profits or output and to divide the same in an agreed proportion does not amount to a restrain of trade and is perfectly valid. If an agreement attempts to create a monopoly, it would be void (Kameshwar Singh v. Yasin Khan). An agreement between Ice manufacturer not to sell ice below a stated price and to divide profits in a certain proportion is not void under. [Sec. 27]

(b) Negative stipulations in service agreements
An agreements of service by which a person binds himself during the term of the agreement, not to take service with any else, is not in restrain of lawful profession and is valid. Thus, a chartered accountant employed in a company may be debarred from private practice or from serving elsewhere during the continuance of service. But an agreement of service which seeks to restrict the freedom of occupation for some period, after the termination of service is void.
(c) Sole Selling Agent’s Agreement
An agreement between a manufacturer & sole selling agent in which the sole selling agent agrees not to deal with the goods of any other manufacturer, such a restraint in trade is binding. (Refer case laws at the end of the chapter)

Agreements in restraint of legal proceedings. [Sec. 28]
Section 28 declares void 3 types of agreements which restraint the parties to the contract to take recourse to legal proceedings –

1. Agreements which oust jurisdiction of courts in trying the legal dispute.
2. Agreements which curtail the period of limitation and prescribe a shorter period than that prescribed by law.
3. Agreements which provide for forfeiture/waiver/extinguishment of the legal right itself, if no action is commenced within the period stipulated by the agreement. (Amended by Indian Contract (Amendment) Act, 1996 effective from 8-1-1997).

As a result of this amendment personal legal rights by way of agreement can neither be restricted or curtailed by way of limitation of time nor those rights be extinguished. These kinds of clauses were usually found in insurance policy contracts which provide that if a claim is made and rejected and no action is commenced within the time stipulated in the policy, the benefits flowing from policy shall stand extinguished and any subsequent action would be time barred. Therefore, the right which has been extinguished for failure to commence action within the stipulated time could not be enforced, j But, consequent to the amendment to this section in 1996 “every agreement 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 would also be void to that extent”.

Certain exceptions to the above rule may be noted:

1. A contract by which the parties agree that any dispute between them in respect of any subject shall be referred to arbitration and that only the amount awarded in such arbitration shall be recoverable is a valid contract, (agreement to refer present disputes to arbitration)
2. Similarly, a contract by which the parties agree to refer to arbitration any question between them which has already arisen or which may arise in future, is valid; but such a contract must be in writing, (agreement to refer past & future disputes to arbitration)

Agreements with uncertain meanings [Sec. 29]
An agreement, the meaning of which is not certain, is void, but where the meaning thereof is capable of being made certain, the agreement is valid.

Agreements by way of wager [Sec. 30]
What is a wagering agreement?
Definition. A wager is an agreement by which money is payable by one person to another on the happening or non-happening of future uncertain event. “The essence of gaming and wagering is that one party is to win and the other to lose upon a future event, which at the time of the contract is of an uncertain nature-that is to say, if the event turns out one way A will lose but if it turns out the other way he will win”. Thacker v. Hardy.
Characteristics of wagering agreements:

1. The consideration for the promise under a wagering agreement is to pay or get money.
2. The money is payable on the happening or the non-happening of an event.
3. The agreement depends on a future and uncertain event.
4. The essence of gaming and wagering is that one party is to win & the other lose.
5. In wagering agreement no party has control over the event.
6. Commercial transactions are valid, but to pay price differences in a wagering agreement is void.

Exceptions
It has been held that the following transactions are not wagers:
(i) Shares: Share market transactions in which there is clear intention to give and take delivery share. ‘
(ii) Games of skill: Prizes and competitions which are games of skill, e.g. picture puzzles, athletic competitions etc. An agreement to enter into a wrestling contest, in which the winner was to be rewarded by the whole of the sale-proceeds of tickets and the party failing to appear on that day would have to forfeit Rs. 500 was held not to be a wagering agreement. However, crossword puzzles in which prize depends on the correspondence of the competitor’s solution with a previously prepared solution kept with the editor of the newspaper is a lottery and hence a wagering transaction. According to the Prize competition Act, 1955 prize competitions in games of skill are not wagers provided the prize money does not exceed Rs. 1,000. [State of Bombay vs. R.M.D. Chamarbangwala, AIR (1957)].
(in) A statutory exception: An agreement to contribute to the payment of a prize of the value of Rs. 500 or upwards to the winners of a horse race, is valid. This is statutory exception laid down in sec. 30 of the Contract Act.
(iv) Contract of Insurance: A contract of insurance is not a wagering agreement.
(v) Chit Fund: Chit fund does not come within the scope of wager.

Difference between insurance contracts and wagering agreements

The effects of a wagering agreement

An agreement by way of wager is void. It will not be enforced by the courts of law. In the State of j Maharashtra and of Gujarat wagering agreement are, by a local stature, not only void but also j illegal. Though wagering agreements and void, collateral transactions to it would be valid. Thus a | broker in a wagering transaction can recover his brokerage. Similarly a principal can recover from j his agent, the prize money received by him on account of wagering transaction. Thus wagering | v agreements are void but not illegal.

“An agreement to purchase a Lottery authorised by Govt, is valid” Comment.
Lottery is an agreement for the distribution of chance of prizes in money among persons pur¬chasing tickets. The dominant motive of the participants need not be gambling. Where a wagering transaction amounts to lottery, it is illegal as per section 294A of the Indian Penal Code. However, section 294A itself state that this rule will not apply on lotteries run or author ized by a State. The Supreme Court in H Anroj v. Government of Tamil Nadu upheld lotteries with a prior permission of the Government as legal thereby conferring upon the winner of the lottery a right to receive the 1 prize subject to payment of sales tax.

Speculative transactions: Though wagering transactions are void, speculative transactions are generally valid. It is, however, sometimes difficult to distinguish between a speculative transaction and a wagering transaction. A speculative transaction essentially, must have two elements, namely,

1. mutual intention of the contracting parties to acquire or deliver, as the case may be, the commodities; and
2. the undertaking of risk arising from movement in prices. A wager, on the other hand, postulates only the incurring of risk.

RESTITUTION 

Is a party receiving benefit under a void agreement, voidable contract, a void contract bound to return it?
Secs. 64 & 65 which deal with ‘restitution’ are reproduced below.
Consequences of rescission of voidable contract
When 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 there under from another party to such contract, restore such benefit, so for as may be, to the person from whom it was received. (Sec. 64).

Advantage received under void agreement or void contract
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. (Sec. 65).
Examples
(a) A contracts to sing for B at a concert for t 1,000 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 profit which B would have made if A had been able to sing, but must refund to B ? 1,000 paid in advance.
(b) A contractor entered into an agreement with Government to construct a godown and received advance payments for the same. He did not complete the work and the Government terminated the contract. Held, the Government under Sec. 65 could recover the amount advanced
TAXMANN to the contractor under (State of Orissa v. Rajballav, A.I.R. 1976 Ori.10).

Sec. 65 applies to contracts “discovered to be void” and “Contracts which becomes void”. It does not apply to—

1. Contracts which are known to be void when they are entered into. Thus, if P pays Rs. 500 to D to beat T, the money should not be recovered (Inderjit Singh v. Sunder Sing).
2. Contracts of parties who are incompetent to contract e.g., contracts of a minor or of a person of unsound mind. But the Court may, on equitable grounds, order for the restoration of the benefit by the minor where he has misrepresented his age.

MULTIPLE CHOICE QUESTIONS:

1. The period of limitation for simple contract in India is
(a) 2 years
(b) 3 years
(c) 6 years
(d) 8 years

2. A void agreement is
(a) Illegal
(b) Enforceable by law
(c) Not enforceable by law
(d) None of these.

3. An agreement in restraint of parental rights is
(a) Void
(b) Valid
(c) Voidable
(d) Defective.

4. An agreement will be unlawful if:
(a) There is no consent
(b) Consent is not free
(c) There is no consideration
(d) The object is forbidden by law.

5. An agreement in restraint of marriage is:
(a) Voidable
(b) Void
(c) Valid
(d) Illegal.

6. An agreement in restraint of trade is:
(a) Voidable
(b) Valid
(c) Void
(d) Illegal.

7. A wagering agreement is:
(a) Voidable
(b) Void
(c) Valid
(d) Illegal.

8. A contract of insurance is a :
(a) Contract of guarantee
( b) Contract of indemnity
(c) Wagering agreement
(d) Contingent contract

9. In a wagering agreement:
(a) Both the parties win
(b) Both the parties loose
(c) None of the parties wins
(d) One party wins and the other looses.

10. A wagering agreement in India is declared by the Contract Act as
(a) Illegal and void
(b) Void but not illegal
(c) Voidable at the option of the aggrieved party
(d) Immoral

11. Agreement to do an impossible act has been declared
(a) Void
(b) Voidable
(c) Enforceable
(d) None of these

12. An agreement which restricts a person’s freedom to marry or to marry any person of his choice is against public policy and is
(a) Lawful
(b) Illegal
(c) Void
(d) None of these

13. An agreement of service under which an employee agrees that he will serve a particular employer for a certain duration and that he will not serve anybody else during that period, is a
(a) Valid agreement
(b) Void agreement
(c) Illegal agreement
(d) None of these

14. If the contract is impossible in itself physically or legally the agreement is
(a) Void contract
(b) Voidable
(c) Void ab initio
(d) None of these

15. M, who is a dealer in mustard oil only, agrees to sell to N 500 litres of oil’. This agreement is
(a) Valid contract
(b) Void contract
(c) Voidable contract
(d) Unenforceable contract

16. A and B agree that A shall pay Rs. 1000 for which B shall afterwards deliver to A either rice or smuggled opium. In this case
(a) The first agreement is void and the second voidable
(b) The first is voidable and the second is void
(c) The first is valid and the second is void
(d) The first is void and the second is valid

17. A promises B to pay Rs. 100 if it rains on Monday, and B promises A to pay Rs. 100 if it does not rain on Monday. This agreement is
(a) a valid agreement
(b) a voidable agreement
(c) a wagering agreement
(d) an illegal agreement

18. P engages B to kill C and borrows Rs. 100 from D to pay B. If D is aware of the purpose of the loan, the transaction is
(a) Valid
(b) Void
(c) Illegal
(d) Not enforceable

19. A leaves a firm doing a particular business in Mumbai. He agrees with the other partners of the firm not to start a similar business as that of the firm in and around Mumbai for 3 years. This agreement is
(a) Valid
(b) Immoral
(c) Illegal
(d) Void

20. A, while filling up the insurance application form, states his age as 25 believing it to be true. His actual age was 27. The Life Insurance Corporation issued a policy in his favour charging a lower premium than what it should have charged if the actual age had been given. This is a case of
(a) Fraud
(b) Misrepresentation
(c) Undue influence
(d) Mistake of fact

21. B, having discovered a vein of ore on the estate of A, adopts means to conceal, and does conceal, the existence of the ore from A. Owing to A’s ignorance B is enabled to buy the estate at a low price. The contract is
(a) Valid
(b) Void
(c) Voidable at the option of A
(d) Invalid

22. B let a cabin on hire to P a prostitute, knowing that it would be used for immoral purposes. The agreement is .
(a) Enforceable
(b) Valid
(c) Voidable
(d) Void

23. A asks B to beat C, promising to compensate B against the consequences. B beats C and is fined Rs. 100. B can recover from A
(a) Rs. 50
(b) Rs. 100
(c) Nothing
(d) Rs. 100 plus damages

24. A enters into an agreement with B who has robbed A of Rs. 10,000 to drop prosecution against him (B) in consideration of B’s returning Rs. 8,000. Afterwards B refused to pay. A can get from B
(a) Rs. 8,000
(b) Rs. 100
(c) Nothing
(d) Rs. 10,000 plus damages

25. A agrees with B to discover treasure by magic for a consideration of Rs. 500. This is
(a) A void agreement
(b) A void contract
(c) A valid agreement
(d) An unenforceable contract.

26. X, a tailor, employed Y as his assistant under an agreement that Y, on termination of his employment shall not start the business of a tailor. This restraint is
(a) Void
(b) Valid
(c) Illegal
(d) Voidable

27. X promises to marry Y after the death of his wife. This agreement is
(a) Valid
(b) Void
(c) Illegal
(d) Invalid

28. 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
(a) Valid
(b) Void
(c) Voidable
(d) A contract

29. Rajeev entered into a contract with Lata to marry her on a fixed date. However, before the marriage date. Rajeev went mad. With reference to the Indian Contract Act which is the valid response?
(a) Lata can’t marry till Rajeev dies
(b) The executers of Rajeev can enforce the contract against Lata
(c) The contract becomes void
(d) All the statements are correct

Answers:

STATE WHETHER THE FOLLOWING ARE TRUE OR FALSE:

1. An Agreement to discover treasure by magic is valid.
2. An Agreement to refer a future dispute to arbitration is perfectly valid.
3. Lotteries authorised by the Government are not to be taken as of wagering nature.
4. Wagering agreements do not cover insurance contracts.
5. A contract by which two or more persons agree to refer their disputes if any to arbitration shall be illegal.
6. Insurance contracts are basically wagering contracts.
7. Speculative transactions being wagering transactions are void.
8. An agreement which extinguishes personal legal rights of the parties is void.
9. An agreement the meaning of which is not certain or capable of being made certain is not void.
10. Transactions incidental to wagering agreements are not void.
11. An illegal contract is fatal to the main contract, but not to collateral transactions.

Answers: