Under section 2(h) of the Indian Contract Act, 1872, a contract is:

Every promise forming consideration for another

A proposal that has been accepted

Any agreement between two competent persons

The Privy Council decision in Mohori Bibee v Dharmodas Ghose (1903) established that:

A minor's agreement is voidable at the minor's option

A minor can ratify an agreement on attaining majority

A minor is personally liable for necessaries

Which flaw in consent makes an agreement VOID rather than voidable?

Bilateral mistake as to a fact essential to the agreement

The rule that damages for breach cover only loss arising naturally from the breach or loss the parties knew was likely when they contracted, embodied in section 73, comes from:

Carlill v Carbolic Smoke Ball Co.

In a contract of guarantee the liability of the surety is:

Secondary, but co-extensive with that of the principal debtor

Primary and independent of the principal debtor

Limited to half the debt unless otherwise agreed

Enforceable only after the creditor exhausts remedies against the debtor

Under the Sale of Goods Act, 1930, in an agreement to sell:

Property in the goods passes at a future time or on fulfilment of a condition, and risk stays with the seller

Property passes immediately and the seller may sue for the price

The buyer bears the risk of loss from the date of agreement

The contract is void until the goods are delivered

Which of the following is NOT an exception to the doctrine of caveat emptor under section 16 of the Sale of Goods Act?

Goods bought under a patent or trade name with no reliance on the seller's skill

Goods bought by description from a dealer in such goods

Condition as to fitness annexed by usage of trade

A holder in due course differs from an assignee of a debt in that the holder in due course:

Takes the instrument free from defects in the title of prior parties

Must give notice of the transfer to the debtor

Acquires the right only through a written deed

Takes the instrument subject to all equities against the transferor

Business Law I: Contract Act, Special Contracts, Sale of Goods and Negotiable Instruments

Unit 9 is examined as a legal-literacy paper: definitions, section numbers, the distinctions between neighbouring concepts, and a small set of leading cases. This first chapter takes the three nineteenth-century statutes that still govern everyday commerce — the Indian Contract Act of 1872, the Sale of Goods Act of 1930 carved out of it, and the Negotiable Instruments Act of 1881 — and lays out for each what is asked: the essentials of a valid contract and the flaws that make one void or voidable, how contracts end and what a breach costs, the five special contracts, the sale-versus-agreement-to-sell line with caveat emptor and the unpaid seller's rights, and the three instruments with negotiation, dishonour and discharge. Section numbers are given where the paper habitually asks them.

1. Indian Contract Act, 1872: elements of a valid contract, capacity and free consent

Section 2(h) defines a contract as an agreement enforceable by law; section 2(e) defines an agreement as every promise or set of promises forming the consideration for each other; and a promise is an accepted proposal. Sir William Anson's formula — contract equals agreement plus enforceability — is the one the paper quotes. Section 10 lists what makes an agreement a contract: free consent of parties competent to contract, a lawful consideration and a lawful object, and the agreement not being expressly declared void. Case law adds the intention to create legal relations (Balfour v Balfour, where a husband's promise of housekeeping money was held a domestic arrangement) and certainty of terms. Consideration under section 2(d) may move from the promisee or any other person, may be past, present or future, and need not be adequate; section 25 makes an agreement without consideration void except when it is written and registered out of natural love and affection between near relations, compensates a past voluntary service, or promises to pay a time-barred debt.

Section 11 makes competent every person who is of the age of majority, of sound mind and not disqualified by any law. A minor's agreement is void ab initio — the Privy Council in Mohori Bibee v Dharmodas Ghose (1903) refused to let a moneylender recover from a minor who had mortgaged property — and a minor cannot ratify it on attaining majority, though a minor may be a beneficiary and is liable for necessaries supplied, out of the minor's property under section 68. Section 12 tests soundness of mind at the time of contracting by the capacity to understand the contract and form a rational judgment about its effect on one's interests.

The five flaws in consent (section 14) and their effect
Flaw and section	Meaning	Effect on the contract
Coercion, s. 15	Committing or threatening any act forbidden by the Indian Penal Code, or detaining property, to make a person enter an agreement	Voidable at the option of the coerced party
Undue influence, s. 16	One party in a position to dominate the will of the other uses it to obtain an unfair advantage; presumed in fiduciary relations	Voidable; burden of proof shifts to the dominant party
Fraud, s. 17	A false statement made knowingly, or without belief in its truth, or active concealment, with intent to deceive; mere silence is not fraud unless there is a duty to speak	Voidable, and damages may be claimed
Misrepresentation, s. 18	An innocent false statement believed to be true	Voidable, but no damages; the deceived party may insist on being put in the position as if it were true
Mistake, ss. 20–22	Bilateral mistake of fact essential to the agreement	Void; unilateral mistake and mistake of Indian law do not affect validity

⚠️ Void, voidable, illegal and unenforceable

A void agreement (s. 2(g)) is not enforceable by law at all and never was — a minor's agreement, a wagering agreement (s. 30), an agreement in restraint of trade (s. 27) or of marriage (s. 26). A voidable contract (s. 2(i)) is enforceable at the option of one party only — the one whose consent was not free — and stays valid until that party avoids it. An illegal agreement is void and taints collateral transactions too; a merely void agreement does not. An unenforceable contract is otherwise valid but cannot be sued on for a technical defect such as want of stamping or limitation.

2. Discharge of a contract, breach and remedies, quasi contracts

By performance — actual, or an attempted performance (tender) that the other side refuses, which discharges the promisor (s. 38).
By agreement — novation (a new contract substituted), rescission, alteration (s. 62), remission of performance (s. 63), and waiver.
By impossibility — initial impossibility makes the agreement void (s. 56, first paragraph); supervening impossibility after formation — destruction of the subject matter, death or incapacity in a personal contract, change of law, outbreak of war — discharges it under the doctrine of frustration (s. 56, second paragraph; Satyabrata Ghose v Mugneeram Bangur, 1954). Commercial hardship, strikes and a third party's default are not impossibility.
By lapse of time — the Limitation Act bars the remedy after the prescribed period, generally three years.
By operation of law — death, insolvency, merger of rights, or unauthorised material alteration of a written contract.
By breach — actual breach at the time of performance, or anticipatory breach (s. 39) when a party refuses or disables itself before the time is due; the injured party may treat the contract as ended at once or wait for the due date.

The remedies for breach are rescission, damages, specific performance and injunction (the last two under the Specific Relief Act, 1963), and a suit on quantum meruit for the value of work already done when the contract is discharged without the fault of the claimant. Section 73 allows damages for loss that arose naturally in the usual course of things from the breach, or that the parties knew when they contracted was likely to result — the two limbs of Hadley v Baxendale (1854), in which a mill-owner could not recover profits lost through a carrier's delay because the carrier did not know the mill was idle. Remote and indirect loss is not recoverable, and the injured party must mitigate. Section 74 governs a sum named in the contract as payable on breach: the court awards reasonable compensation not exceeding that sum, whether it was described as liquidated damages or as a penalty — Indian law, unlike English law, does not treat the two differently in kind.

ℹ️ Quasi contracts, sections 68 to 72

The Act calls them 'certain relations resembling those created by contract': obligations the law imposes without any agreement, on the principle that no one should be unjustly enriched at another's expense. Section 68 — necessaries supplied to a person incapable of contracting, recoverable from that person's property; s. 69 — payment by an interested person of money another was bound to pay; s. 70 — a non-gratuitous act whose benefit the other enjoys must be compensated; s. 71 — the finder of goods has the responsibilities of a bailee; s. 72 — money paid or a thing delivered by mistake or under coercion must be repaid or returned.

3. Special contracts: indemnity, guarantee, bailment, pledge and agency

The five special contracts, with the distinctions the paper tests
Contract and section	Definition	Parties	Key rule
Indemnity, s. 124	One party promises to save the other from loss caused by the conduct of the promisor or any other person	Two — indemnifier and indemnity-holder	One contract; liability is primary and contingent on loss; loss by accident or act of God is outside the section's wording
Guarantee, s. 126	A contract to perform the promise or discharge the liability of a third person in case of default	Three — surety, principal debtor, creditor	Three contracts; surety's liability is secondary but co-extensive with the debtor's (s. 128); a continuing guarantee covers a series of transactions and may be revoked for the future (s. 130); the surety is discharged by variance, release of the debtor or creditor's act impairing remedy (ss. 133–139)
Bailment, s. 148	Delivery of goods by one person to another for some purpose, upon a contract that they be returned or disposed of as directed when the purpose is done	Bailor and bailee	Only goods, only possession passes; bailee must take the care of a person of ordinary prudence (s. 151); bailee's particular lien (s. 170) and general lien of bankers, factors, wharfingers, attorneys and policy brokers (s. 171)
Pledge, s. 172	Bailment of goods as security for payment of a debt or performance of a promise	Pawnor and pawnee	A special kind of bailment; pawnee may retain the goods, sue, or sell after reasonable notice on default (s. 176); pledge by a mercantile agent or a person with a voidable title can be valid (ss. 178–178A)
Agency, s. 182	An agent is a person employed to do any act for another or to represent another in dealings with third persons	Principal, agent, third party	No consideration is necessary (s. 185); the principal must be competent, the agent need not be (ss. 183–184); created by express or implied agreement, ratification (s. 196), estoppel, necessity; terminated by revocation, renunciation, completion, death, insanity or insolvency (s. 201), but an agency coupled with interest cannot be revoked to the agent's prejudice (s. 202)

🧠 Indemnity versus guarantee in four contrasts

Parties: two against three. Contracts: one against three (creditor–debtor, creditor–surety, surety–debtor implied). Liability: primary against secondary. Purpose: to make good a loss against to secure a debt. And after paying, a surety steps into the creditor's shoes by subrogation (s. 140) and may recover from the principal debtor (s. 145); an indemnifier has no one to recover from.

4. Sale of Goods Act, 1930 and Negotiable Instruments Act, 1881

Section 4 of the Sale of Goods Act defines a contract of sale as one whereby the seller transfers or agrees to transfer the property in goods to the buyer for a price. Where the property passes at once it is a sale; where it is to pass at a future time or on a condition it is an agreement to sell. The difference decides who bears the risk — risk follows property (s. 26) — who can sue for the price rather than damages, and what happens on insolvency of either party or resale to a third person. 'Goods' means every kind of movable property except actionable claims and money, and includes stock, shares, growing crops and things attached to land agreed to be severed. A condition is a stipulation essential to the main purpose whose breach lets the buyer repudiate; a warranty is collateral and its breach gives only damages (s. 12); a buyer may treat a breach of condition as a breach of warranty, and must where the goods have been accepted (s. 13). Implied conditions include title, correspondence with description, sample, and merchantable quality and fitness for purpose in the cases section 16 allows.

🎯 Caveat emptor and where it stops

Section 16 opens with the rule — there is no implied condition as to quality or fitness; let the buyer beware — and then lists its exceptions, which are what the paper asks. The seller is bound where the buyer made known the particular purpose and relied on the seller's skill, and the goods are of a kind the seller supplies (not where the buyer asked for a patent or trade name); where goods are bought by description from a dealer in such goods, they must be of merchantable quality, save for defects a buyer who examined them ought to have found; where a condition is annexed by usage of trade; where the seller obtains consent by fraud or conceals a defect; and in a sale by sample or by description.

An unpaid seller (s. 45) is one to whom the whole price has not been paid or tendered, or whose negotiable instrument was dishonoured. Against the goods the unpaid seller has a lien to retain possession while unpaid (ss. 47–49), a right of stoppage in transit when the buyer becomes insolvent and the goods are with a carrier (ss. 50–52), and a right of resale after notice where the goods are perishable or the contract reserved it (s. 54). Against the buyer personally the seller may sue for the price, for damages for non-acceptance, and for interest. The buyer's rights are to damages for non-delivery, specific performance for specific or ascertained goods, and damages for breach of warranty. Where a seller resells goods after a valid stoppage or lien, the original buyer's title is defeated; the doctrine of nemo dat — no one gives a better title than they have (s. 27) — has exceptions for sale by a mercantile agent, by a joint owner, under a voidable contract before rescission, and by a seller or buyer in possession after sale.

The three negotiable instruments
Instrument and section	Nature	Parties	Points the paper tests
Promissory note, s. 4	Unconditional undertaking in writing, signed by the maker, to pay a certain sum to or to the order of a certain person or to the bearer	Two — maker and payee	Contains a promise, not an order; a bank note is excluded; a note payable to bearer on demand can be issued only by the RBI or the Central Government
Bill of exchange, s. 5	Unconditional order in writing, signed by the maker, directing a certain person to pay a certain sum to or to the order of a certain person or to the bearer	Three — drawer, drawee, payee	Needs acceptance by the drawee to bind them; a usance bill gets three days of grace (s. 22); inland (s. 11) and foreign (s. 12) bills; accommodation bills carry no consideration
Cheque, s. 6	A bill of exchange drawn on a specified banker and payable on demand, including the electronic image of a truncated cheque and a cheque in electronic form	Drawer, drawee bank, payee	No acceptance, no days of grace; crossing (ss. 123–131) — general, special, 'account payee', 'not negotiable'; a cheque is valid for three months under RBI direction; dishonour for insufficiency of funds is an offence under s. 138

Negotiation (s. 14) is the transfer of an instrument so as to constitute the transferee its holder — by delivery alone for a bearer instrument (s. 47), by endorsement and delivery for an order instrument (s. 48). Assignment transfers the right under the ordinary law of transfer of property: it needs a written document, the assignee takes subject to all defects in the assignor's title, and notice must be given to the debtor — whereas a holder in due course (s. 9), who takes the instrument for consideration, before maturity and without notice of any defect, takes it free of prior defects and can sue all prior parties in their own name. Endorsements are blank, full (special), restrictive, partial (invalid), conditional or sans recourse. An instrument is dishonoured by non-acceptance (s. 91, bills only) or by non-payment (s. 92); notice of dishonour must go to all prior parties the holder wishes to hold liable (s. 93), and a foreign bill must be protested (s. 104) after optional noting by a notary. Discharge of the instrument releases all parties — by payment in due course (s. 82(c)), by the holder cancelling the acceptor's name, or by the acceptor becoming the holder at or after maturity (s. 90); discharge of a single party happens by cancellation, release or payment.

Key takeaways

Contract equals agreement plus enforceability (s. 2(h)); section 10 needs free consent, competent parties, lawful consideration and object; a minor's agreement is void ab initio (Mohori Bibee) and cannot be ratified.
Coercion, undue influence, fraud and misrepresentation make a contract voidable; bilateral mistake of essential fact makes it void; misrepresentation gives no damages, fraud does.
Section 73 follows Hadley v Baxendale's two limbs; section 74 caps a stipulated sum at reasonable compensation whether called penalty or liquidated damages; anticipatory breach is section 39, frustration section 56.
Indemnity has two parties and primary liability, guarantee three parties and secondary co-extensive liability; pledge is bailment as security; agency needs no consideration and the principal, not the agent, must be competent.
Sale passes property now, agreement to sell later, and risk follows property; caveat emptor (s. 16) has listed exceptions; the unpaid seller has lien, stoppage in transit and resale; a holder in due course takes free of prior defects, an assignee does not.

Practice questions (9)

Attempt each one before opening the answer. Every explanation names the tempting wrong option as well as the right one, because that is where marks are lost.

Under section 2(h) of the Indian Contract Act, 1872, a contract is:
1. An agreement enforceable by law
2. Every promise forming consideration for another
3. A proposal that has been accepted
4. Any agreement between two competent persons
Show answer
Answer: A — An agreement enforceable by law
Section 2(h) — a contract is an agreement enforceable by law. The second option is the definition of an agreement (s. 2(e)) and the third of a promise (s. 2(b)); competence alone does not make an agreement a contract.
The Privy Council decision in Mohori Bibee v Dharmodas Ghose (1903) established that:
1. A minor's agreement is void ab initio
2. A minor's agreement is voidable at the minor's option
3. A minor can ratify an agreement on attaining majority
4. A minor is personally liable for necessaries
Show answer
Answer: A — A minor's agreement is void ab initio
The Council held a minor's mortgage void from the beginning, so the lender could recover nothing. Because it is void and not voidable, ratification is impossible, and liability for necessaries under section 68 is against the minor's property only, never the minor personally.
Which flaw in consent makes an agreement VOID rather than voidable?
1. Bilateral mistake as to a fact essential to the agreement
2. Coercion
3. Fraud
4. Misrepresentation
Show answer
Answer: A — Bilateral mistake as to a fact essential to the agreement
Section 20 makes an agreement void where both parties are mistaken about an essential fact. Coercion, undue influence, fraud and misrepresentation each make the contract voidable at the option of the party whose consent was so caused.
The rule that damages for breach cover only loss arising naturally from the breach or loss the parties knew was likely when they contracted, embodied in section 73, comes from:
1. Hadley v Baxendale
2. Balfour v Balfour
3. Carlill v Carbolic Smoke Ball Co.
4. Salomon v Salomon & Co.
Show answer
Answer: A — Hadley v Baxendale
Hadley v Baxendale (1854) laid down the two limbs of remoteness that section 73 adopts. Balfour is about intention to create legal relations, Carlill about general offers and acceptance by conduct, Salomon about the separate legal personality of a company.
In a contract of guarantee the liability of the surety is:
1. Secondary, but co-extensive with that of the principal debtor
2. Primary and independent of the principal debtor
3. Limited to half the debt unless otherwise agreed
4. Enforceable only after the creditor exhausts remedies against the debtor
Show answer
Answer: A — Secondary, but co-extensive with that of the principal debtor
Section 128 makes the surety's liability co-extensive with the principal debtor's unless the contract provides otherwise; it is secondary in that it arises on default, but the creditor need not first sue the debtor. Primary liability is the mark of indemnity.
Under the Sale of Goods Act, 1930, in an agreement to sell:
1. Property in the goods passes at a future time or on fulfilment of a condition, and risk stays with the seller
2. Property passes immediately and the seller may sue for the price
3. The buyer bears the risk of loss from the date of agreement
4. The contract is void until the goods are delivered
Show answer
Answer: A — Property in the goods passes at a future time or on fulfilment of a condition, and risk stays with the seller
An agreement to sell is executory: property, and with it risk (s. 26), remain with the seller until the future time or condition. Immediate passing of property is a sale, where the seller can sue for the price rather than only damages.
Which of the following is NOT an exception to the doctrine of caveat emptor under section 16 of the Sale of Goods Act?
1. Goods bought under a patent or trade name with no reliance on the seller's skill
2. Buyer made known the particular purpose and relied on the seller's skill
3. Goods bought by description from a dealer in such goods
4. Condition as to fitness annexed by usage of trade
Show answer
Answer: A — Goods bought under a patent or trade name with no reliance on the seller's skill
The proviso to section 16(1) restores caveat emptor where the buyer specifies a patent or trade name, because there is then no reliance on the seller's skill. The other three are the listed exceptions that place an implied condition on the seller.
Under the Negotiable Instruments Act, 1881, an instrument containing an unconditional undertaking signed by the maker to pay a certain sum to a certain person is a:
1. Promissory note
2. Bill of exchange
3. Cheque
4. Hundi
Show answer
Answer: A — Promissory note
A promissory note (s. 4) contains a promise and has two parties. A bill of exchange (s. 5) contains an order directed to a drawee and has three parties; a cheque (s. 6) is a bill drawn on a specified banker payable on demand.
A holder in due course differs from an assignee of a debt in that the holder in due course:
1. Takes the instrument free from defects in the title of prior parties
2. Must give notice of the transfer to the debtor
3. Acquires the right only through a written deed
4. Takes the instrument subject to all equities against the transferor
Show answer
Answer: A — Takes the instrument free from defects in the title of prior parties
Section 9 gives a holder in due course — value, before maturity, without notice of defect — a title better than the transferor's, which is the essence of negotiability. Assignment needs writing and notice, and the assignee takes subject to all defects and equities; those three options describe assignment.