Consideration- Elements

Define and explain the term Consideration and state its rules. 

What are the contracts without consideration? 

Section 2 (d) of the Contract Act defines consideration as – ‘When at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or abstain from doing, something, such act or abstinence or promise is called consideration for the promise.’ In the words of Pollock, “an act or forbearance of one party, or the promise thereof, is the price for which the promise of the other is bought, and the promise thus given for value is enforceable.”

In every contract, every party must stand to gain something in return of what it agrees to do or not to do. This something given or received is the consideration. Consideration is the essential element of contract. An agreement without consideration cannot be contract and hence is not enforceable by law. If the person who makes the promise gains nothing in return of the promise made, such promise cannot be enforced against him. Hence the principle – ‘No consideration – No contract’. 

Essential elements of Consideration

The analysis of the definition of consideration would show that following are the essential elements of valid consideration.1.Consideration must move at the desire of the promisor. The definition of consideration starts with the assertion that consideration must move at the desire of the promisor. Hence, an act done at the desire of any third party is not consideration. Similarly, acts done voluntarily or services rendered without any request cannot form consideration.2. Consideration may be furnished by anyone. Consideration need not be from the promisee alone, but may proceed from third person also. Thus as long as there is consideration, it does not matter from whom it is given. It may move from the promisee or any other person.It therefore follows that a person who is a stranger to the consideration can sue for the performance of the contract, because the consideration moves on his behalf from some other person.3.Consideration may be past, present or future. The words used in the definition clearly indicate that the consideration (either in the form of some act or abstinence) may have been given in the past, or being given in the present, or promised now but to be given at some future time. Therefore, it is not only the act or abstinence of the past or present (something done or not done in the past and something being done or not done in the present), but also a promise to do or not to do certain act in the future which constitutes consideration.4. Consideration must be ‘something of value’ in the eyes of law. The fourth essential element of consideration is that it must be something of value in the eyes of law. It should be noted that what is adequate consideration is to be decided by the parties and not by the law. The law insists on the presence of consideration and not on its adequacy. 

When no consideration is necessary 

Although as a general rule there cannot be any contract without consideration, there are some exceptions where an agreement is a valid contract even without consideration. These are the exceptions to the rule- No Consideration -No Contract.1.Agreement made on account of natural love and affection: An agreement made without consideration is enforceable as valid contract, if it is, a) expressed in writing, b) registered under the law for the time being in force for the registration of documents, c) made on account of natural love and affection and is d) between the parties standing in a near relation to each other. Under Section 25 (1), if the four conditions are satisfied, an agreement is a contract even without consideration.2. Agreement to compensate for past voluntary services. If a promise is made to a person who has already voluntarily done something for the promisor in the past, such promise is a valid contract even though at the time of promise there is no consideration moving from that person to the promisor.3. Agreement to pay a time-barred debt. The law of limitation lays down the period during which a suit can be filed to recover a debt. If that time expires, no recovery can be made through law. A time-barred debt is the debt which cannot be legally recovered, as the remedy to recover the same is lost under the law of limitation. Section 25 (3) of the Contract Act provides that where there is an agreement, made in writing and signed by the debtor or by his authorized agent, to pay wholly or in part, a debt barred by law of limitation, the agreement is a valid contract even though it is not supported by any consideration. What is necessary for the contract to fall under this exception is that 1) the contract must be in writing, 2) it must be signed by the debtor or by his authorized agent and 3) there has to be an express promise to pay.4. Completed gift. An agreement whereby one person promises to give a gift to another is obviously not a contract, because there is no consideration. However, where the transaction of actually giving the gift is complete, it is a contract in the eyes of law. The gift so given cannot be demanded back on the ground that there was no contractual obligation to give the gift.5.Contract of agency: Section 185 of the Contract Act provides that in the contract of agency, there is no need of consideration for creating agency.6. Remission of promise:(waiver of rights) Remission of contractual rights takes place where the creditor agrees to accept less than what is outstanding. Thus, a banker, who fears that the total loan given to a borrower may turn out to be bad debt, may accept part of the loan amount in full settlement of the loan dues. No consideration is necessary for this contract. Similarly, under section 63, a contract whereby the time for performance of contract is extended, needs no consideration.7.Contribution to charity:A promise to contribute to the charity, though gratuitous, would be enforceable, if on the faith of the promised contribution, the promisee materially alters his position and incurs a liability. For example, where A promises to pay a certain sum by way of contribution for the purpose of extension of a hospital building and if the hospital authorities, on the faith of the promised contribution, undertake the construction activity, the promise can be enforced against A, though it is without consideration.

Unpaid Seller - Rights

14. Who is an unpaid seller? State and explain the rights available to an unpaid seller.

A seller of goods is deemed to be an unpaid seller –
a.  when the whole of the price has not been paid or tendered; or
b.  when a conditional payment was made by a bill of exchange or other negotiable instrument and the instrument has been dishonored. In other words, an unpaid seller is one who has sold goods on cash terms and has not received the whole of the price. It does not include a seller who has sold goods on credit, unless the period of credit has expired and the whole price has not been paid. A seller is an unpaid seller even if a part of the price remains unpaid. 

Rights of an unpaid seller: An unpaid seller has two-fold rights, namely – 
· Rights against goods; and 
· Rights against the buyer personally. 
Rights of unpaid seller against goods

An unpaid seller has the following rights against goods notwithstanding the fact that the property in goods has passed to the buyer.

1. Right of lien,
2. Right of stoppage of goods in transit
3. Right of resale

Right of lien

‘Lien’ is the right to retain possession of goods and refuse to deliver them to the buyer until the price due in respect of them is paid or tendered. An unpaid seller in possession of goods sold is entitled to exercise his lien on the goods in the following conditions:
a) Where the goods have been sold without any stipulation as to credit;
b) Where the goods have been sold on credit, but the period of credit has expired; and
c)  Where the buyer becomes insolvent, even though the period of credit may not have expired.

The right of lien can be exercised only for the non-payment of the price and not for any other charges, e.g. maintenance or custody charges which the seller may have incurred in respect of the goods

As already stated, lien depends on the physical possession of goods. Once the possession is lost, the lien is also lost. In following cases, the unpaid seller loses his right of lien:
a)  When he delivers the goods to a carrier or other bailee for the purpose of transmission to the buyer without reserving the right of disposal of goods; or
b) When the buyer or his agent lawfully obtains possession of the goods; or
c)  When the seller expressly or impliedly waives his right of lien.

Right of stoppage of goods in transit

It is a right of stopping further transit of the goods while they are with a carrier for the purpose of transmission to the buyer, resuming possession of the goods and retaining the possession until the price is paid. Thus, in a way this right is an extension of the right of lien.

An unpaid seller can exercise this right only when-
a. The buyer becomes insolvent;
b. The property (ownership) has passed to the buyer;
c.  The goods are in the course of transit.

It must be noted that this right can be exercised only when the goods are still in transit to the buyer; and this right comes to end when the buyer has obtained possession of the goods. Therefore, it is necessary to know as to what is the duration of transit. (To know about duration of transit, students are advised to refer to short notes.)

Right of Resale

The third right available to unpaid seller is the right of resale. It is called right of resale because there has been already a sale by which the ownership has passed to the buyer. This right is perhaps more valuable than the other two rights. In the absence of this right, the other rights would be useless for the simple reason that other two rights entitle the unpaid seller only to retain or regain possession of goods. However, if the buyer continues to be in default, the seller would be helpless particularly in the case of perishable goods. An unpaid seller can resell the goods in the following cases:

a)  Where the goods are of a perishable nature; or
b)  Where such a right is expressly reserved in the contract in case the buyer should make a default; or
c)  Where the seller has given notice to the buyer of his intention to resell and the buyer does not pay or tender the price within a reasonable time.

If on a resale, there is a loss to the seller, he can recover the same from the defaulting buyer. But if there is a surplus, the seller can keep it with him because the defaulting buyer cannot take advantage of his own wrong. However, if no notice is given by the seller to the buyer of his intention to resell (notice is required when the goods are not perishable and right of resale is not expressly reserved in the contract of sale), the seller cannot recover any loss that he may incur on resale. Additionally, if he makes any surplus on the resale, he has to share it with the buyer.

Rights of unpaid seller against buyer personally

In addition to the rights against the goods which we have discussed above, the unpaid seller has the following rights against the buyer personally: 1. Suit for price. Where the property in the goods has passed to the buyer, the seller is entitled to sue for price, whether the possession is with the buyer or the seller. Similarly, where the price is payable on a certain day irrespective of delivery, the seller may sue for the price, if it is not paid on that day, although the property in goods has not passed.2. Suit for damages for non-acceptance. Where the buyer wrongfully neglects or refuses to accept and pay for the goods, the seller has a right to sue the buyer for damages for non-acceptance. Here, the seller seeks to recover the loss sustained by him due to breach of contract by the buyer rather than the price of the goods.

The Act lays down the rules for calculating the damages payable to seller in such case. Accordingly, where there is a ready market for the goods, the damages would be equal to the difference between the contract-price and the market-price. Where there is no available or ready market for the goods, the measure of damages would depend on the facts of each case. Such damages may be equal to the full price of the goods plus reasonable charge for the care and custody of the goods.

Agency - Creation, Termination

(a) Explain the terms ‘Agency’, ‘Agent’ and ‘Principal’. How is agency created and terminated?

(b) What are the various types of Agent? Explain the rights, duties and liabilities of Agent and Principal : Agency is a special type of contract. Under ordinary contracts, the parties to the contract act entirely by themselves. When instead another person is engaged to do the acts under the contract, it is called agency. Section 182 of the Contract Act defines the terms Agent and Principal as follows:

Agent is a person employed to do any act for another or to represent another in dealings with third persons.

The person for whom such act is done, or who is represented, is called Principal.

The contract which creates the relationship of ‘Principal’ and ‘Agent’ is called an agency.
Creation of agency:

Contract of agency is like any other contract with the difference that there is no need of consideration in contract of agency. A contract of agency comes into existence in any of the following ways.

1.  Agency by express Agreement: The contract of agency may be made orally or in writing. In most of the business dealings the agency is created by a word of mouth. If this form was not recognized by law, the trade and industry could hardly go on. Agency is also created by a contract in writing. Agency is normally preferred in the dealings of immovable property. The common form of an agreement in writing is “power of Attorney” whereby, authority is given to the power of attorney holder, either generally or specifically, to act on behalf of the Principal. A general power of attorney authorises the Agent to do all things on behalf of the Principal i.e. to act generally in the business of the Principal. A specific power of attorney empowers the Agent to do or perform a single transaction e.g. selling of house or borrowing money on a mortgage etc. 2. Agency by implied Agreement: Implied agency may arise by conduct or situation of the parties of the circumstances of the case. Such an agency may take any of the following forms: a)  Agency by estoppel: Such an agency is based on the principle of estoppel. The rule of estoppel can be stated thus: Where a person, by his words or conduct, has willfully led another to believe that certain set of circumstances or facts exist, and that other person has acted on that belief, he is estopped from denying the truth of such statements. In other words, estoppel arises when one is precluded from denying the truth of anything which he has represented as a fact, although it is not a fact.b)  Agency by holding out: Such agency is based on the principle of holding out which is a part of the principle of estoppel. The only distinction is that in this case some affirmative conduct by the Principal is necessary. For example, a dealer in iron usually sent his employee to buy on credit and paid for it afterwards. On one occasion, he sent the employee with cash, who bought the iron on credit and pocketed the money. It was held that the iron merchant was liable to pay for the iron, as the previous dealings justified the seller in assuming that the Agent had authority to buy on credit. The employer’s conduct in ‘holding out’ his employee to be his agent estops him from denying the existence of authority of the employee. However, if the Agent is held out as having only a limited authority to do acts, the Principal is not bound by an act outside the authority. c)  Agency by necessity: In certain circumstances, the law authorises a person to act as agent for another without any regard to the consent of the Principal. A wife deserted by her husband and forced to live separate from him, can pledge her husband’s credit to buy all the necessaries of life according to the position of the husband even against the wish of the husband and the husband can be held liable for the same. In other cases where in order to save the property of another, one has to act before the instructions of the owner can be received, he is, by necessity, authorised to act as Agent and the consent of the owner as Principal is assumed in law. An Agent exceeding his authority, bona fide, in an emergency or the carrier of the goods acting as bailee and doing anything to protect or preserve the goods in an emergency, although there is no express authority, are the examples of implied agency by necessity. 3. Agency by ratification: Ratification means the subsequent adoption and acceptance of an act originally done without instructions or authority. Thus, where an Agent exceeds his authority (except under emergency), the acts of the Agent are not binding on the Principal. The Principal, however, may afterwards confirm and adopt the contract so made and this is known as ratification. Section 196 of the Contract Act provides for ratification and states that ‘where acts are done by one person on behalf of another, but without his knowledge or authority, he may elect to ratify or to disown such acts. If he ratifies them, the same effects will follow as if they had been performed by his authority.’ 
Termination of agency

An agency may be terminated either by – 1) act of the parties, or 2) operation of law.

By act of the parties: 1. By agreement: An agency, like any other contract, can be terminated at any time by a mutual agreement between the Principal and the Agent. 2. Revocation by the Principal: The Principal is empowered to revoke the authority of the Agent at any time. The agency stands terminated from the time such revocation is effected. Revocation can be express or implied.

a.  In the case of a continuous agency, it can be terminated by revocation only for the future. It cannot be revoked in relation to the acts already done by the Agent. In other words, revocation cannot be with retrospective effect. Reasonable notice should be given to the Agent and also the third parties before revocation. b. An agency, which is created for a fixed period, can be terminated by revocation even before the expiry of that period. However, the Principal is bound to pay compensation to the Agent, even if the authority is revoked after giving notice. 3. Renunciation by the Agent: It is the termination of the agency at the instance of the Agent, when he no longer wishes to continue working as Agent. The Agent has to give a reasonable notice to the Principal of his intention to renounce the agency; otherwise he is liable to compensate the Principal for any loss due to renunciation without notice. Further, if the agency is for a fixed period and the Agent renounces it without sufficient cause before the expiry of the period, he shall have to compensate the Principal for the resulting loss, if any.

By operation of law:

An agency comes to end automatically by operation of law in the following conditions:

1. Completion of business of agency: If the purpose for which the agency is created is served and achieved, the agency stands terminated, e.g.  where an advocate is appointed to appear in a suit, his authority comes to end when the adjudication is complete and the judgment is delivered. 2. Expiry of time: When the agency is created for a specified period of time, the agency comes to end with that period, even though the business or reason for which the agency was created continues. 3. Death of the Principal or the Agent: An agency is terminated automatically on the death of the Principal or the Agent. In the event of the death of the Principal, the Agent must take all reasonable care to protect the interests of the deceased Principal, which were entrusted to him. 4. Insanity of the Principal or the Agent:  If the Principal or the Agent becomes of unsound mind, the agency is terminated automatically. Here also, in the case of insanity of the Principal, the duty of the Agent is the same as in the event of death of the Principal. 5. Insolvency of the Principal: When the Principal becomes insolvent, the agency is terminated. However, the termination of agency on the insolvency of the Agent is at the discretion of the Principal. 6. Destruction of the subject matter: Where the agency is created with reference to a particular property or subject matter, it stands terminated automatically with the destruction of that property. When the Agent is appointed for the sale of a house, the agency is terminated when the house is destroyed by fire. 7. Dissolution of a Company: It is like the death of the Principal or the agent. When Principal or the Agent is an artificial person created only in the eyes of law (such as incorporated companies), the agency is terminated with the dissolution of that company.

8.  Becoming an alien enemy: If the Principal or the Agent is a citizen of another country and the war breaks between India and that country, the contract of agency is automatically terminated, as the continuance of the same is unlawful.

Contract Idemnity - types of guarantee

Explain the meaning and nature of contract of indemnity.

State the rights of indemnity holder and indemnifier.

Contract of indemnity: A contract, by which one party promises to save the other from loss caused to him by the conduct of the promisor himself or by the conduct of any other person, is called a contract of indemnity. The person who promises to compensate the loss is called the indemnifier and the person who is so promised is called the indemnity holder. According to the definition of indemnity, the loss to be made good must be caused either by the conduct of the promisor himself or by the conduct of any other person, and, so if the loss is caused by accident or by the conduct of the promisee (indemnity holder), there would be no indemnity. However, the Indian Courts have taken the view that this interpretation is not correct and that indemnity cannot exclude insurance.

A contract of indemnity being basically a contract, it has to possess all the essential elements of a valid contract such as free consent, lawful consideration and competence of parties to enter into contract etc. Further, a contract of indemnity can be either express or implied. An implied contract of indemnity can be inferred from the conduct of the parties or the circumstances of the case.

Since the Contract Act has not stated the time of the commencement of the indemnifiers liability to indemnify and the word ‘loss’ has been used in Section 124, doubt arises as to the commencement of the promisors liability. However, it is the settled position of law that the indemnified (promisee) does not have to wait till the time he has to actually sustain the loss. He can compel the indemnifier to place him in a position to meet the liability that may be cast upon him without waiting until the promisee has actually discharged it.

Rights of indemnity holder : As we have already seen, contract of indemnity is a contract where the indemnifier promises the indemnity holder to save the latter from any loss that may be caused to him under the contract. From this, the rights of the indemnity holder can be stated as follows:
1. If the indemnity holder has to pay any compensation to any party in any suit in respect of any matter pertaining to which the indemnity applies, he can recover the same from the indemnifier;
2. He can recover from the indemnifier all costs of suit which he has to pay to such third party (provided he has acted in good faith, under the authority of the indemnifier and as per his instructions);
3. If any amount has been paid by the indemnity holder to any third party in any such suit by way of compromise, he can recover the same from the indemnifier, provided such compromise was not contrary to the orders of the indemnifier. Rights of indemnifier: The Act is silent as to the rights of the indemnifier. However, his rights are similar to the rights of Surety under contract of guarantee. For example, he becomes entitled to all securities which the creditor has against the principal debtor. (Students are advised to refer to “rights of Surety” under the contract of guarantee.)

State the nature and features of contract of guarantee. Explain various types of guarantee.

(b) Explain the rights and liabilities of Surety and co-Surety. When is Surety discharged from his liability? (a) Contract of guarantee and its types

According to section 126, ‘A contract of guarantee is a contract to perform the promise, or discharge the liability of a third person in case of his default.’The person who gives the guarantee is called the ‘Surety’ and the person in respect of whose default the guarantee is given is called the ‘principal debtor’ and the person to whom the guarantee is given is called the ‘creditor’. A guarantee can be oral or written.

In a contract of guarantee it is essential that there are three parties, viz. the Surety, the principal debtor and the creditor. It is also necessary that there is a liability, existing or future, enforceable by law. The moment there is a default on the part of the principal debtor, the Surety immediately becomes liable as if he were the principal debtor. He has no right to ask the creditor to first proceed against the principal debtor nor can he demand a notice from the creditor that the principal debtor has defaulted, because it is the Surety’s duty to ensure that the principal debtor pays or performs his obligation. 

A contract of guarantee is like any other contract and therefore all the essential elements of valid contract, such as free consent, competence of parties etc. have to be present in the contract of guarantee also. However, so far as consideration is concerned, it is not separately needed for the Surety in the Contract of guarantee: Section 127 expressly provides that –‘anything done or any promise made, for the benefit of the principal debtor, may be sufficient consideration to the Surety for giving the guarantee.’

Types of Guarantee:

A guarantee may be either ‘specific guarantee’ or ‘continuing guarantee.’

Specific Guarantee: It is given for single debt or obligation and comes to an end when the debt guaranteed has been paid or obligation guaranteed has been discharged. Thus, where A gives a loan to B for which C stands guarantee, it is a case of a specific guarantee. In this case, there is a specific debt and the guarantee shall come to an end the moment the loan is repaid.

A specific guarantee cannot be revoked. Once the guarantee is given it cannot be withdrawn or revoked and even after the death of the Surety (guarantor), it continues to operate making his legal representatives liable for the same.Continuing Guarantee: On the other hand, a continuing guarantee is one where the guarantee given is not for a single or specific debt or obligation, but for a series of debts.

(b) Rights and liabilities of Surety and co-Surety and discharge of Surety:

 The rights of Surety can be discussed under three heads:

 1. Rights against the creditor;

2. Rights against Principal debtor; and

3. Rights against co-Surety

 Surety’s rights against creditor

 1. Right to benefit of creditor’s securities: At the time of entering into the contract of guarantee, the creditor may have certain securities in his possession given by the Principal debtor against the performance. The Surety is entitled to demand from the creditor, at the time of payment (or discharge of liability) all the securities, which the creditor has against the principal debtor at the time when the contract of Suretyship is entered into or subsequently acquired. It is not necessary that the Surety should have knowledge of the existence of such securities. If the creditor loses or parts with the securities, which are acquired at the time of contract, the Surety is discharged to the extent of value of such securities lost. But if the securities are lost due to act of God or unavoidable accident, the Surety would not be discharged. Similarly, if the creditor parts with the securities, which he has acquired subsequent to the contract of Surety, the Surety’s liability is not reduced. It should be noted that the right of Surety to benefit of the securities arises only after the payment in full of the debt of the principal debtor to the creditor. He cannot claim the benefit of the part of the securities merely because he has paid a part of the debt.2. Right to claim set-off, if any: The Surety is also entitled to the benefit of any set-off or counter claim, which the principal debtor might possess against the creditor in respect of the same transaction. In other words, the principal debtor may have certain claims against the creditor arising out of the same transaction. Upon default by the principal debtor in discharging his liability, the Surety may make use of the said counter claim in reducing his liability.

Surety’s rights against the Principal debtor: The Surety enjoys the following two rights against the Principal debtor.

 1. Right of subrogation: When the Surety pays off the debt on default of the principal debtor, he is invested with all the rights, which the creditor had against the principal debtor. In other words, the Surety steps into the shoes of the creditor and will be able to exercise all those rights and remedies, which could be exercised by the creditor against the principal debtor. The Surety is subrogated to all rights, which the creditor had against the principal debtor. He is entitled to the securities held by the creditor and also can sue the principal debtor for recovery of the debt paid by the Surety. 2. Right to claim indemnity: In every contract of guarantee there is an implied promise by the Principal debtor to indemnify the Surety and the Surety is entitled to recover from the Principal debtor whatever sum he has rightfully paid under the guarantee. However, he cannot claim the amounts which he has paid wrongfully. Thus, a Surety is entitled to be indemnified by the Principal debtor for whatever amount he has rightfully paid to the creditor under the contract of guarantee.It should be noted that the Surety is entitled to recover from the Principal debtor only that amount which he has actually paid to the creditor and no more. Thus, where there is a compromise between the creditor and the Surety under which the Surety pays a lesser amount, he can get from the Principal debtor only the amount actually paid.

Surety’s right against the Co-sureties: Where a debt is guaranteed by two or more Sureties, they are called co-sureties. In such a case, all the co-sureties are liable to contribute towards the payment of the guaranteed debt as per the agreement between them. But in the absence of any agreement, if one co-surety is compelled to pay the entire debt, he is entitled to contribution from the other co-surety or co-sureties.

Discharge of Surety from liability: A Surety is freed from his obligation under the contract of guarantee under any of the following circumstances. 1. Notice of revocation: A guarantee given for a specific transaction or for a specific debt cannot be revoked. But a continuing guarantee may be revoked at anytime by the Surety as regards the future transactions. Thus, the liability of Surety comes to an end in respect of future transactions which may take place between the creditor and principal debtor. 2. Death of Surety: In case of continuing guarantee, the death of Surety discharges him from liability as regards the transactions after his death and the estate of the Surety shall not be liable. Death of the Surety acts as revocation and it is not necessary that the creditor should have knowledge of the death of the Surety. If the creditor enters into any fresh transactions after the Surety’s death without the knowledge of the death of the Surety, the estate of the deceased Surety shall not be liable for such transactions. 3. Variance in terms of contract: Any variance made without the Surety’s consent, in the terms of the contract between the principal debtor and the creditor, discharges the Surety as to the transactions subsequent to the variance. In other words, if there is any alteration in the terms of the contract, under which the Surety has undertaken the liability, without his consent, such alteration will discharge him from his liability. It is immaterial whether the variance is very small or even when it is to the benefit of the principal debtor. Strictly speaking, this rule is applicable to continuing guarantee, but the principle involved here is also applicable to specific guarantee. When there is any alteration in the terms of the contract of guarantee, even though it is for a specific debt, the Surety has a right to disown his obligation on the ground that the contract is no longer the same, which he had entered into. 4. Release or discharge of Principal debtor: The Contract Act provides for the following two ways in which the Surety will be discharged:a. A Surety will be discharged if the creditor makes a contract with the Principal debtor by which the Principal debtor is released. Any release of the Principal debtor is the release of the Surety also.b. The Surety is also discharged by any act or omission on the part of the creditor, the legal consequence of which is the discharge of the Principal debtor. 5. Arrangement by creditor with Principal debtor without the consent of Surety: Where the creditor, without the consent of the Surety, makes an arrangement with the Principal debtor for composition or promises to give time or not to sue him, the Surety will be discharged. However, mere forbearance on the part of the creditor to sue the Principal debtor does not discharge the Surety. For example, B owes to C a debt guaranteed by A. The debt becomes payable, but C does not sue B for a year. A is not discharged from the liability of suretyship. 6. Creditor’s act or omission impairing Surety’s eventual remedy: If the creditor does any act, which is inconsistent with the rights of the Surety, or omits to do any act, which his duty to the Surety requires him to do, and the eventual remedy of the Surety himself against the Principal debtor is thereby impaired, the Surety is discharged. In other words, it is the duty of the creditor to do every act necessary for protection of the rights of Surety and if he fails in this duty, the Surety is discharged. Thus, where the integrity of a cashier is guaranteed, it is the duty of employer to give information to the Surety about any dishonest act done by the employee. If the employer continues to employ him after an act of dishonesty, the Surety is discharged, if he is not informed within a reasonable time. In this case, the eventual remedy of the Surety to take appropriate action against the employee is lost. 7.  Loss of security: If the creditor loses or without the consent of the Surety parts with any security given to him at the time of the contract of guarantee, the Surety is discharged from liability to the extent of the value of the security.  This loss of the security however, should be due to the negligence of the creditor. If it is due to the act of God or unavoidable accident, the Surety is not discharged. If a loan, guaranteed by Surety is also secured with the mortgage of the property of the borrower and the creditor subsequently cancels the mortgage, thus parting with the security, the Surety is discharged. 8. Invalidation of contract of guarantee: A Surety is discharged from liability when contract of guarantee (in between creditor and Surety) is invalid. A contract of guarantee is invalid for the following reasons: a. Where the guarantee has been obtained by means of misrepresentation or fraud or by keeping silence as to the material facts of the transaction, by the creditor or with the knowledge of the creditor. However, it should be noted that if the misrepresentation or concealment is done by the debtor without the knowledge of the creditor, the Surety is not discharged. b.  Where a person gives guarantee upon a contract that the creditor shall not act upon it until another person has joined in it as co-surety, the guarantee is not valid if that other person does not join. c.Where the contract of guarantee does not possess any of the essential elements of a valid contract; for example, competence to contract or the legality of object etc.

Offer,Valid Offer,Acceptance,essential,Legal rules to offer

(a) Define Offer. What are the essentials of a valid Offer?

(b) How can an offer be accepted? What are the rules regarding Communication of Acceptance?

The words ‘offer’ and ‘proposal’ are synonymous and they mean one and the same thing. Offer is the first step in the formation of contract. When a valid offer is made and accepted, contract comes into existence, provided the other essential elements are present.

Section 2 (a) of the Contract Act defines Offer as – ‘when one person signifies to another his willingness to do or to abstain from doing anything, with a view to obtaining the assent of that other to such act or abstinence, he is said to make an offer'. 

The analysis of the definition would show that the following elements are present in an offer:

a) There is an expression of willingness to do or abstain from doing something;

b) The expression is from one person to another;

c) The expression is for seeking the assent of that other person.

The person making the offer is called the ‘offerer’ and the person to whom the offer is made is called the ‘offeree’. An offer to be valid must satisfy the following conditions. They are the essentials of a valid offer or essentials of valid Acceptance:1.Offer may be express or implied: An offer may be made either by words or by conduct. When an offer is made by words, written or spoken, it is called an express offer. When the intention to make an offer is gathered from the conduct of the person, it is called an implied offer.

2.Offer must contemplate of giving rise to legal consequences: If the offer does not intend to give rise to legal consequences, it is not a valid offer in the eyes of law. An offer made jocularly or in jest is not a valid offer. It must be the intention of the person making the offer that if the offer is accepted, it should give rise to a binding contract between them. In business transactions, it is assumed that the parties intend to create relations and the breach of the agreement should be followed by legal consequences. On the other hand, in domestic or social agreements, it is assumed that the parties do not intend to give rise to legal consequences.
3.The terms of the offer must be certain: If the terms of the offer are not certain or definite, it is not a valid offer. It is rightly observed that unless all the material terms of the contract are agreed, there is no binding obligation. Therefore, the terms of the offer must not be loose or vague. They should not be capable of different or various interpretations and it must be possible to correctly ascertain the intention of the parties.
4.Offer must be distinguished from invitation to make offer: An offer is different from ‘invitation to offer’. In the case of invitation to offer, the person sending his invitation is merely calling upon the others to place their offers. There is no offer from his side, but he is expecting offers. His intention is merely to circulate the information that whosoever is willing to transact with him on the terms laid down in the invitation, he is ready to deal with him. Thus, goods displayed in the shop with the price marked on them are an invitation to offer. Similarly, an advertisement for sale of goods by auction, quotations, catalogues of prices are all examples of invitations to offer. 5.Offer may be general or specific: An offer is said to be general when it is made to an unascertained body of individuals. It is made to the public at large and anyone may accept the same. A specific offer is made to a definite person or persons and hence can be accepted only by the same person or persons. Where A offers to B to sell his scooter for Rs.10, 000/-, it is a case of specific offer. When A offers a reward of Rs. 500/- to whosoever finds his lost scooter, it is a general offer.
6. Every offer must be communicated: Offer must be communicated to the offeree; otherwise it is not effective in the eyes of law. There cannot be any acceptance without the knowledge of offer. Thus, where A finds an article lying on a street and restores it to the owner without any knowledge about the reward offered by the owner, he cannot claim the reward from the owner because there was no communication of offer to him.7. Communication of special terms: This rule is in a way an extension of the above rule. It requires that the special terms of the offer must be specifically brought to the notice of the person to whom it is made; otherwise they are not binding on the acceptor. Where a person buys a traveling ticket from a tourist company for his journey by bus, the tourist company is under obligation to provide the bus service till the journey is complete. In case the bus suffers from breakdown, the company cannot claim that in such event it is not responsible to make alternate arrangement. The company can take such defence if such term was brought to the notice of the tourist at the time when he bought the ticket.

Acceptance: A contract comes into existence when a valid offer is validly accepted. Section 2 (b) of the Contract Act states that, ‘when the person to whom the offer is made signifies his assent thereto, the offer is said to be accepted. (An offer when accepted becomes promise) A valid acceptance must be in conformity with the following rules:1.Acceptance must be given by the person to whom the offer is made: An offer can be accepted only by the person or persons to whom the offer is made; no one else can accept the offer. In simple words, if A intends to contract with B and therefore makes an offer to B, C cannot intervene and accept the offer made to B, without the consent of A. Similarly, an offer to class of persons, can be accepted by any member of that class or group only and not by any other person not belonging to that group.2. Acceptance must be absolute and unconditional: The acceptance must be of the whole offer and without any change in the terms of the offer. A conditional or qualified acceptance is no acceptance in the eyes of law. Even a slight deviation from the terms of the offer would make the acceptance invalid. In fact, a conditional acceptance by itself is a counter-offer and not an acceptance. If A offers an article to B for Rs. 100/-, the acceptance by B to buy the article for Rs. 90/- is no acceptance in the eyes of law.3. Acceptance must be communicated in some reasonable manner, unless the manner is prescribed in the offer itself: If the offerer prescribes any particular mode of acceptance, the acceptance has to be effected in that manner alone. Any other mode of acceptance would not do. The offerer can insist that the acceptance must be expressed in the mode prescribed by him and if not, the acceptance will not bind him, even though the mode prescribed by him may be funny or ridiculous. Where no mode is specified in the offer, acceptance must be communicated in a reasonable manner. What is reasonable manner would depend on the facts of each case.
4. Acceptance must be communicated within reasonable time, unless the time is stipulated in the offer itself: If the terms of the offer stipulate certain period within which the offer has to be accepted, the acceptance must be effected within the time so stipulated. If the acceptance is not communicated within the time stipulated in the offer, it will not bind the offerer since it is no acceptance in the eyes of law. Where no time is specified in the offer for its acceptance, the acceptance must be communicated within a reasonable time. What is a reasonable time would depend on the facts of each case.

Legal Rules Relating to Offer:

1. It must contain definite, unambiguous & certain & not loose & vague terms.2. It must intend to give rise to legal relationship. A social invitation, even if it is accepted, does not create legal relationship because it is not so intended.3. It must be distinguished from a quotation of an invitation to offer.4. An offer may be made to an individual or addressed to the world at large. An offer Is called a specific offer when it is made to a particular person.5. Offer must be made with a view to obtaining the assent. The offer to do not to do something must be made with a view of obtaining the assent of the addressed party & not merely with a view of disclosing the intention of making an offer.6. An offer must be communicated to the offeree.

Contract - Elements, Types

(a) What is a contract? How is it different from agreement?

(b) What are the essential elements of a contract?

Whenever two or more parties agree upon something or transact business with each other with the obvious intention that such agreement should have a legal binding force, there is a contract. Section 2 (h) of the Contract Act defines a contract as “an agreement enforceable by law.”

It therefore follows that an agreement, when possesses certain features which confer upon it the legally binding force with respect to the parties, it is a contract. An agreement is defined as “every promise and every set of promises forming the consideration for each other”. An agreement comes into existence when one party makes an offer or proposal to other party and the other party accepts the same. Thus an agreement is the sum total of offer and its acceptance. However, to become a contract, the agreement must give rise to legal obligations. If the agreement is incapable of creating a duty enforceable at law, it is not a contract. In other words, if the agreement is legally binding in nature or if the breach of agreement leads to legal consequences, it is a contract. If not, it is merely an agreement and not a contract.

Agreements of moral or social nature cannot be contracts because they do not create any legal obligations. The parties also do not intend that breach of such agreement should be followed by legal consequences. For example, agreement to have lunch together at a friend’s house or to have a walk together, or an agreement to speak truth with each other are the agreements, where there is no intention to create a duty enforceable by law. They are all agreements but not contracts. Hence it is said that all contracts are agreements, but all agreements are not contracts. Agreement is a wider term than contract.

Essential elements of contract: The features or elements which, when present in agreement, convert the agreement into a contract are known as the essential elements of contract. All of such elements have to be present in the agreement. If any of them is absent, the agreement will not be legally enforceable and hence will be merely an agreement and not a contract. Following are the essential elements of contract, discussed one by one.1) Offer and Acceptance: There must be a lawful offer by one party and its lawful acceptance by the other, to whom the offer is made. Thus, where A offers to sell his house to B for Rs. 50000/- and B accepts the offer, a contract comes into existence, provided the other essential elements are present. The term ‘lawful’ implies that the rules laid down under the Act relating to offer and acceptance must be satisfied.

 2) Intention to create legal relations: There must be a declared intention among the parties that the agreement should give rise to legal relations. In commercial or business transactions, there is a presumption that the parties intend to create a legal relation and legal obligation. Where the husband offers to buy a new sari for his wife if she sings a song, and she sings in acceptance, it is not a contract. If the husband fails to buy a sari, the wife cannot prosecute the husband for breach of agreement, because there is no intention to create legal relationship and hence the agreement cannot give rise to a legal obligation.

Similarly, where in an agreement, it is expressly provided that the parties do not intend to create legal relations between them, the agreement will not become a contract though it may apparently look like a contract. 
3) Lawful Consideration: An agreement is legally enforceable only when each party to the agreement gives something and in return gets something. This ‘something’ given and received in return is called Consideration. It is a price paid by one party to the other in return of what the other party gives. When one buys a pen from the shopkeeper for Rs. 10/-, the pen is the consideration for the buyer and the amount of Rs. 10/- is the consideration for the shopkeeper. Consideration may be in the form of doing something or in the form of abstaining oneself from doing something. It can also be in the form of promising to do something or promising to abstain from doing something. Consideration must be of some value in the eyes of law and it should not be forbidden by law. It should not involve injury to another and must not be opposed to public policy. If, in an agreement, there is no consideration for either party, the agreement is not a contract.4) Capacity of parties:The parties to agreement must be competent to enter into contract; otherwise the agreement will not be enforceable by law. The persons who, 1) have attained the age of majority, 2) are of sound mind and 3) are not disqualified from contracting under any other law, are competent to enter into contract. If any of the parties is suffering from minority, lunacy, drunkenness or any other legal disqualifications, the agreement will not be capable of being enforceable by law.5) Free consent:Consent means that all the parties must have agreed upon the same thing in the same sense. For an agreement to become contract, such consent must be a free consent. If the consent of any party is obtained by coercion, undue influence, fraud, misrepresentation or mistake, the consent is not free. In the absence of free consent, an agreement cannot become contract, except with the choice of the party whose consent is so obtained. In other words, the agreement will not be legally enforceable by the parties who have obtained the consent of the other party by using any of the above means. The contract is voidable at the option of the party whose consent is so obtained.6) Lawful Object:It is also necessary that the object with which the parties enter into agreement must be lawful. The object of the parties must not be illegal, fraudulent, immoral or opposed to public policy. If it is so, the agreement is void and cannot become a contract.7) Certainty:Agreements, the meaning of which is not certain or capable of being made certain, are void. In order to give rise to a contract, the agreement must not be vague or uncertain. The terms of the agreement should be such that the meaning of the agreement must become certain. Otherwise it cannot be enforced. If A agrees to sell to B 5 Kg. of oil and if it is not clear as to what kind of oil is intended to be sold, the agreement cannot become a contract because there is no certainty.8) Possibility of performance:A contract has to be capable of being performed. An agreement to do an act impossible in itself is void. Whatever that has been agreed to be done under an agreement must be possible to be done physically and legally. If not, it is not a contract. For example, where A agrees with B to discover a treasure by magic, the agreement is not enforceable by law.9) Not expressly declared vo:The Contract Act expressly declares certain agreements to be void i.e. not contracts. Such agreements are not legally enforceable. For example, an agreement in restraint of marriage or in restraint of trade, or gambling agreements etc. have been declared to be void. Hence it is essential that the agreement must not suffer on this ground in order to be a contract.10) Writing and Registration:An oral contract is a good and perfect contract as per the provisions of the Contract Act. The Act does not require that contracts have to be in writing. But under certain cases, it lays down that the contract must be in writing. For example, a promise to pay a time-barred debt must be in writing and signed by the promisor. Similarly, certain other Acts also require that certain contracts must be in writing and additionally they must be registered with the competent authorities. A contract whereby immovable property is sold and purchased has to be in writing and it must be registered with the Registering Authority. Therefore, whenever any law requires that the contract has to be writing and registered, an agreement without following such formalities cannot be a contract and hence cannot be enforceable by law.

Classification of Contract: A contract is based on an agreement. An agreement becomes a valid contract when all the essential elements referred in the above-mentioned sections are present. If one or more these elements are missing, the contract is voidable, void, illegal of unenforceable. Voidable Contract: Voidable contract is an agreement that is binding & enforceable, but due to lack of one or more essential elements of a valid contract, the aggrieved party may opt to repudiate it.Void Contract: A void contract which is not enforceable by law is a void contract. It confers no right no right on any person & creates no obligations.Illegal Contract: An illegal contract is the one that is opposed to statutory law or public morals. It is criminal in nature. The effect of an illegal contract is that, it not only makes the transaction between the immediate parties void, but also render the collateral transactions void.Unenforceable Contract: A contract which cannot be enforced in Court of law because of some technical defect is termed as unenforceable contract.