Unit 1 Indian Contract Act: Capacity of Party

Unit 1 Indian contract act
Capacity of Party
For a valid contract, the parties to a contract must have capacity i.e. competence to enter into a
contract. Every person is presumed to have capacity to contract but there are certain persons
whose age, condition or status renders them incapable of binding themselves by a contract.
Incapacity must be proved by the party claiming the benefit of it and until proved the ordinary
presumptions remains.
Section 11 of the Contract Act deals with the competency of parties and provides that "every
person is competent to contract who is of the age of majority according to the law to which he is
subject, and who is of sound mind and is not disqualified from disqualified from contracting by
any law to which he is subject."
Every person is competent to contract:

(a) Who is of the age of majority.
(b) Who is of sound mind.
(c) Who is not disqualified from making a contract.
It follow that the following person are incompetent to contract.

(a) minor
(b) person of unsound mind, and
(c) Person disqualified by any law to which they are subject.
Contract entered into by the persons mentioned above are void.
RULES REGARDING MINOR'S AGREEMENT
1. Agreement with or by a minor is void: An agreement with or by a minor is void and

inoperative ah initio.These agreements are considered to be nullity and non-existent in
the eyes of law. These cannot be enforced against a minor.
2. Minor’s agreement cannot be ratified by him:

An agreement by a minor cannot be ratified by him on attaining the age of majority. They term
‘ratification’ may be defined as the act of confirming or approving. The doctrine of no
ratification’ implies that an agreement made by a minor (during the period of minority), cannot
be confirmed by him on attaining majority.
This is so because minor’s agreement is voidable initio (i.e., void from the very beginning) and,
therefore, cannot be made valid by ratification. However, if the minor wants to carry out the
Sapna Thukral Page 22

agreement, a fresh agreement should be made on attaining majority, it may be noted that a new
agreement will also require fresh consideration.
Eg: F, an infant speculated on the stock exchange and became liable to the stockbrokers for
Rs.547. After attaining the age of majority, he gave two bills for Rs 50 each in satisfaction of the
original debt. Held F was not liable on the bills
3. No estoppels against a minor ( A minor Can plead his minority)

Where a minor by misrepresenting his age has induced the other party enter into a
contract with him, he cannot be made liable on the contract. There can be no estoppel against a
minor. It means he is not estoppel from pleading his infancy in order to avoid a contract.
Eg: A minor borrowed Rs. 1000 on a fraudulent representation that he was a major, and he spent
the whole of the money in a picnic tour of Kashmir. In this case the creditor cannot sue for the
realization of the money so advanced by him.
(b) A minor fraudulently over states his age and takes delivery of a motor car after executing a
promissory note in favour of the trader for its price, though the minor cannot be compelled to pay
on the promissory note
4.No specific performance of the agreements:

There can be no specific performance of the agreements, entered into by minors as they are void
ab initio.
5.No compensation by minors:

If a minor has received any benefit under a void agreement, he cannot be asked to compensate or
pay for it.
6.Minor as a partner:
The partnership of partners results from their agreement. A minor, being incompetent to enter
into a contract, cannot be a partner in the firm. However, he may be admitted only to the benefits
of the firm with the consent of all other partners
7.No restitution: When a contract becomes void, it is not to be performed by either party. But if
any party has received any benefit under such a contract from the other party he must restore it or
make compensation for it to the other party. This is called restitution.
A minor is not liable to repay any money or compensation for any benefit that he might have
received under a void contract. Court, may however, in certain cases, while ordering for the
cancellation of an instrument at the instance of the minor, require him to pay compensation to the
other party to the instrument

8.Minor as Agent: A minor can be appointed as an agent. He can represent his principal in
dealings with other parties. Since minor does not incur any personal liability, he cannot be held
responsible for his any act of negligence or fault. Therefore the principal will be responsible to
the third parties for the acts of his minor agent. He cannot hold the minor agent personally liable
for any wrongful acts. Thus the principal runs a great risk.
9. Surety for a minor: A person who stands as a surety for a loan taken by the minor will be
liable to the creditor for payment of the loan, even though minor was not liable.
Exceptions
1.Mino’s liability for necessities: All contracts relating to the necessities supplied to a minor
according to this status in life are valid. But only the minor’s property is liable for necessities,
and no personal liability is incurred by him.
Necessities must be things which the minor actually needs; therefore it is not enough that they be
of a kind which a person of his condition may reasonably want for ordinary use, they will not be
necessities if he is already sufficiently supplied with things of that kind, and it is immaterial
whether the other party knows this or not. Objects of mere luxury cannot be necessities nor can
objects which, though of real use, are excessively costly. The fact that buttons are normal part of
any kinds of clothing, but it will not make pearl or diamond buttons necessities.
Example:
A grocer supplies monthly rations for 6 months to B who is aged 17 years. On B’ failure to pay,
he sues him for the realisation of his dues. In this case B’s property is liable for the payment of
credit rations consumed by B during the period of his minority.
Costs incurred in successfully defending a suit on behalf of a minor in which his property was in
jeopardy are “necessities”.
2. Contract by guardian: A contract entered into on his behalf by his parent /guardian or the
manager of his estate, can be specifically enforced by or against minor provided that the contract
is:-
a) Within the scope of the authority of the parent /guardian or manager, and
(b) For the benefit of the minor.
Minor as a beneficiary: All such contracts under which the minor is to receive some benefit or
which are beneficial to him are valid. These contracts include agreements which provide for the

teaching, instruction or employment of a minor. It is to be noted that only his property is liable
for liabilities arising out of such contracts. In no case he will be personally liable.
English law has expressly made a contract for the minor’s benefit enforceable. But in India all
contracts made by minors are void. Still majority of the contracts for the benefit of minor have
been held to be enforceable on the ground that it will be unjust in the circumstances to deprive a
minor of a benefit which he may be entitled to get under a contract.
PERSON OF UNSOUND MIND
As explained earlier, as per Section 11 of contract Act, for a valid contract each party to the
contract must have a sound mind. Contract made by person of unsound mind are void. The
reason is that a contract requires assents of two minds but a person of unsound mind has nothing
which the law recognizes as a mind.
Section 12 deals with the question as to what is a sound mind for the purpose of entering into
contract. It lays down that, "A person is said to be of sound mind for the purpose of making a
contract if, at the time when he makes it he is capable of understanding it and of forming a
rational judgment as to its effects upon his interest."
Unsoundness of mind may arise from:
(a) Idiocy. An Idiot is a person with no intervals of saneness. He is in capable. His mental
powers of understanding even ordinary matters are absent because of lack of development of
brain. The agreement with an idiot is void.
(b) Lunacy or Insanity. It is disease of brain. A lunatic loses the use of his reason due to some
mental strain or disease. He may have Lucid Intervals of sanity. He can enter into contract during
that period when he is of sound mind.
(c) Drunkenness. It produces temporary incapability till the man is under the effect of
intoxication creating impotence of mind. He stands on the same footing as a lunatic.
(d) Hypnotism. It also produce temporary incapability till the person is under the impact of
artificially induced sleep.
(e) Mental decay. It is on account of old age etc.

So, an agreement with person of unsound mind is void. But under Section 68, the property of
such person is always liable for necessaries supplied to him or to anyone whom he is legally
bound to support.
PERSON DISQUALIFIED FROM CONTRACTING BY ANY OTHER LAW

It refers to statutory disqualification imposed on certain person in respect of their capacity to
contract.
1. Alien enemies: An alien is competent to contract with citizens of the indian living in India. He
can maintain as action on a contract enter onto by him during peace him time. But if a war is
declared, an alien enemy cannot enter into a contract with the Indian citizen. Contract entered
into before the declaration of war are either stayed or terminated but contract into during the war
are unenforceable.
2. Foreign sovereigns and ambassadors: These person are immune from the jurisdiction of
local courts, unless they voluntarily submit to its jurisdiction. These persons have a right to
contract but can claim the privilege of not being sued. The rules regarding suits by or against
foreign sovereigns are laid down in section 84 to 87 of Civil Procedure Code.
3. Insolvent: An insolvent cannot enter into a contract as his property vests in the official
receiver or official assignee. This disqualification of an insolvent is removed after he is
discharged.
4. Convict: A convict while undergoing imprisonment in incapable of entering into a contract.

But this disability comes to an end on the expiry of the sentence.
5. Corporations: A Corporation is an artificial person recognised by law. It exists only in the

eyes of law. It is competent to enter into a contract only through its agent.
Free consent

5. Depending upon an Impossible Event: Sometimes the Contingent Contract may depend
upon impossible event. Such a type of Contingent Contract is abinitio void.
Example: there is a contract between A and B where A will pay Rs.100000/- to B if B marry C.
Assume that C was dead 5 years ago, now element of impossibility can be seen and their contract
is abinitio void.
Difference between Contingent and Wagering Agreement:
 Contingent Contract is a valid contract in nature. Wagering agreements are void in

nature.
 Under Contingent Contract, future uncertain events are collateral to the main purpose of
the contract. Under Wagering agreement, future uncertain event is the key element of the
agreement.
 In Contingent Contract, there may or may not be reciprocal promises. Reciprocal
Promises are definite.
 Parties have real interest in the happening or non-happening of an event. . Parties are not
interested in the happening of an event except for the winning or loosing of the bet
amount.
 Contingent agreements are not a game of chance. Wagering agreements are a game of
chance.
Discharge of a contract
Discharge of a contract means termination of the contractual relations between the parties to a
contract. A contract is said to be discharged when the rights and obligations of the parties under
the contract come to an end. . A contract may be discharged in the following modes:-

1. Dis1charge by performance – Discharge by performance takes place when the parties to

a contract fulfill their obligations arising under the contract within the time and in the
manner prescribed. Performance may be actual performance or attempted performance.
 Actual performance: when each party to a contract fulfill his obligation
arising under the contract within the time and in the manner prescribed.
Eg: A makes a contract to sell his house to B for Rs. 1000000. Here when B pays Rs.
1000000 and takes possession of the house, the contract is deemed to be discharged.
 Attempted Performance: 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 tendered performance.
For example, A contracts to deliver to B, 100 tons of basmati rice at his warehouse, on 6
December 2015. A takes the goods to B‘s place on the due date during business hours,
but B, without assigning any good reason, refuses to take the delivery. Here, A has
performed what he was required to perform under the contract. It is a case of attempted
performance and A is not responsible for non-performance of B, nor does he thereby lose
his rights under the contract.’

2. Discharge by Agreement or Consent – A Contract comes into existence by an agreement

and it may be discharged also by an agreement. If the parties to a contract make a new contract,
or reject the prevailing contract or make changes in it then performance of the prevailing contract
becomes irrelevant and is not required. The following are modes of discharge of a contract by an
agreement –
a) By Novation – Novation means the substitution of a new contract for the original contract
when both the parties to an existing contract, agree to make a new contract to replace the existing
one between the parties, novation is said to take place. Such a new contract may be either
between the same parties or between different parties.
Eg: A makes an agreement with B to supply him 5 kg of rice at rs 45 per kg. on a certain date.
Before the date of delivery, B proposes to buy 10 kg of rice at rs 40 per kg, to which A agrees
this will amount to novation.
b) By Rescission – Rescission of a contract takes place when all or some of the terms of the
contract are cancelled. It may occur by mutual consent or where one party fails in the
performance of his obligations, the other party may rescind the contract. Rescission means
cancellation of the contract by any party or all the parties to a contract.
Example X promises Y to sell and deliver 100 Bales of cotton on 1st Oct. at his god own and Y
promises to pay for goods on 1st Nov. X does not supply the goods. Y may rescind the contract.
c) By alteration – When one or more of the terms of contract are altered by mutual consent of
all of the parties to the contract, it is said that a contract has been altered. In alteration, only the
terms of the contract are charged without affecting any change in the parties to the contract.
When any alteration is made to the contract with the consent of the parties the original contract is
discharged and need not be performed.
If a material alteration in a written contract is done by mutual consent, the original contract is
discharged by alteration and the new contract in its altered form takes its place.
For eg: A promises to supply 3000 meter of certain cloth at Rs 10 per meter to B within 3
months. Later A and B make an alteration in the contract to the effect that A will supply 200

meter of superior cloth at certain price within 4 months. The alteration discharges the old
contract and a new contract is initiated.
d) By Remission or waiver – Remission means acceptance of a lesser fulfillment of the promise

made,.According to Section 63, “Every promisee may dispense with or remit, wholly or in part,
the performance of the promise made to him, or may extend the time for such performance, or
may accept instead of it any satisfaction which he thinks fit.”
Example i) A promises to paint a picture for B. B afterwards forbids him to do so. A is no longer
bound to perform the promise.
ii) A owes B Rs 5,000. A pays to B, and B accepts, in satisfaction of the whole debt, Rs 2,000
paid at the time and place at which Rs 5,000 were payable. The whole debt is discharged.
e) By Merger – Merger takes place when an inferior right accruing to a party under a contract
merges into a superior right accruing to the same party under the same or some other contract.
For eg. P holds a property under a lease. He later buys the property. His rights as a lessee merge
into his rights as an owner.
3. Discharge by impossibility of performance – If a contract contains an undertaking to

perform an impossibility, it is void ab initio. As per Section 56, impossibility of performance
may fall into either of the following categories –
(i) Impossibility existing at the time formation of the contract – This is know as pre-
contractual impossibility. The fact of impossibility may be –
a) known to the parties – Both the parties are aware or know that the contract is to perform an
impossible act. For eg. A agrees with B to put life into dead wife of B, the agreement is void.
b) unknown to the parties – Both the parties are unaware of the impossibility. The contract
could be on the ground of mutual mistake of fact. For eg.A contract to sell his house at Andaman
to B. Both the parties are in Mumbai and are unknown to the fact that the house is actually
washed away due to Tsunami.

(ii) Impossibility arising subsequent to the formation of the contract – Where

impossibility of performance of the contract is caused by circumstances beyond the control of the
parties, the parties are discharged from further performance of the obligation arising under the
contract.
Discharge by Supervening Impossibility
A contract is discharged by supervising impossibility in the following cases
1. Destruction of subject-matter of contract: When the subject-matter of a contract,

subsequent to its formation, is destroyed without any fault of the parties to the contract,
the contract is discharged.
Example: C let a music hall to T for a series of concerts on certain days. The hall was
accidentally burnt down before the date of the first concert. Held the contract was void.
2. Non-existence or Non-occurrence of a particular state of things: Sometimes, a

contract is entered into between two parties on the basis of a continued existence or
occurrence of a particular state of things. If there is any change in the state of things
which ought to have occurred does not occur, the contract is discharged.
Example: A and B contract to marry each other. Before the time fixed for the marriage, A goes
mad. The contract becomes void.
3. Death or Incapacity for personal service: Where the performance of a contract depends
on the personal skill or qualification of a party, contract is discharged on the illness or
incapacity or death of that party. The man’s life is an implied condition of the contract.
Example: An artist undertook to perform at a concert for a certain price. Before she could do so,
she was taken seriously ill. Held she was discharged due to illness.
4. Change of law: When subsequent to the formation of a contract change of law takes
place, and the performance of the comerge becomes impossible the contract gets
discharged.

Example: D enters into a contract with P on 1st March for supply of imported goods in the month
of September of the same year in June the import of such goods is banned. The contract is
discharged.
5. Outbreak of war : A contract entered into with an after enemies during war is unlawful
and therefore impossible for performance. Contracts entered into before the outbreak of
war are suspended during the war and may be revived after the war is over.
4. Discharge by lapse of time – The Limitation Act, 1963 lays down certain specified periods
within which different contracts are to be performed and be enforceable. If a party to a contract
does not perform, action can be taken only within the time specified by the Act. Failing which
the contract is terminated by lapse of time.
For eg. A sold a gold chain to B on credit without any period of credit, the payment must be
made or the suit to recover it, must be instituted within three years from the date of delivery of
the instrument. If the price is not paid and creditor does not file a suit against the buyer for the
recovery of price within three years the debt becomes time-barred and hence irrecoverable.
5. Discharge by Operation of Law – A contract may be discharged independently of the

wished of the parties i.e. by operation of law. This includes discharge –
1-material alteration.: Sometimes a contract is contained in a written document. And one party
alters it in material particular without the consent of the other party. In such cases, the effect of
alteration would be the same as that of cancellation of the document.
Example.:
Example. A contracted to sell his plot of 500 sq. yards to B for Rs.100,000. the sale deed was
executed in possession of A. before the registration of the sale deed, A altered the deed and made
it a deed for sale of 300 sq. yards plot for Rs.100,000. in this case, the contract is discharged and
B is not bound to purchase the plot.
2-Insolvency.: Sometimes a person is declared insolvent by the Court of Law. In such cases, he
is discharged from all liabilities and debts incurred prior to the court orders.
3- Death of a promisor.:

Death of a promisor. Sometimes, the contract involves personal skills or qualifications of the
promisor himself. In such cases, the contract is discharged on the death of promisor.
Example :
Example A, an expert, agreed with B to translate some part of book from F rench to E nglish. A
died before the translation work started. In this case, the contract is of personal nature as it
involves the personal qualification of the promisor A. and thus, the contract is discharged on the
death of A.
4-Merger of rights.:
4-Merger of rights. Sometimes, the inferior rights and the superior rights coincide and meet in
one and the same person. In such cases, the inferior rights merge into the superior rights. On
merger, the inferior rights vanish and are not required to be enforced.
Example.:
Example. A gave his land on lease to B. subsequently, B bought the land which he was holding
under the lease. In this case, B becomes the owner of the property and his rights as a lessee
merge into his rights as the owner. And thus, his rights as a lessee vanish, and are not to be
enforced.
6. Discharge by Breach of Contract – A breach of contract occurs when a party thereto

without lawful excuse does not fulfill his contractual obligation or by his own act makes it
impossible that he should perform his obligation under it. A breach to a contract occurs in two
ways :-
a) Actual Breach – When a party fails, or neglects or refuses or does not attempt to perform his
obligation at the time fixed for performance, it results in actual breach of contract. For eg. A
promises to deliver 100 packs of ice-cream to B on his wedding day. A does not deliver the
packs on that day. A has committed actual breach of the contract.
b) Anticipatory Breach – Anticipatory Breach is a breach before the time of the performance of
the contract has arrived. This may take place either by the promisor doing an act which makes

the performance of his promise impossible or by the promisor , in way showing his intention not
to perform it.
Eg: A contracts to supply B with certain articles on 1 st September. On august 20 he informs B

that he will not be able to supply the goods.

Breach of Contract and remedies for Breach of Contract
Discharge by Breach
Where the promisor neither performs his contract nor does he tender performance, or where
the performance is defective, there is a breach of contract. If any party fails to carry out his/her
obligation, he has said to have committed breach of contract. Breach means failure of a party to
perform his or her obligation under a contract
The breach of contract may be (i) actual or, (ii) anticipatory.
Actual Breach : When a party fails, or neglects or refuses or does not attempt to perform his
obligation at the time fixed for performance, it results in actual breach of contract.
Actual breach means breach committed either; (i) at the time when the performance of the
contract is due; or (ii) during the performance of the contract.
Example: (i) agrees to supply to B on the 1st February, 1975, 1000 bags of sugar. On 1st
February, 1975 he fails to supply. This is actual breach of contract at the time when the
performance is due. The breach has been committed by A.
(ii) “A” contracted with a railway company for the supply of certain quantity of railway chairs at
a certain price. The delivery was to be made in installments. After few installments had been
supplied, the railway company asked A to deliver no more. A could sue for breach of contract.
Anticipatory Breach
Breach of a contract committed before the date of performance of the contract is called
anticipatory breach of contract. The contract in this case is repudiated before the time fixed for
its performance arrives and is so discharged. This may take place either by the promisor doing an
act which makes the performance of his promise impossible or by the promisor , in way showing
his intention not to perform it.
Example: (i) A agrees to employ B from 1st of March. On 1st February, he writes to B that he
need not join the service, the contract has been expressly repudiated by A before the date of its
performance.(expressed)
(ii) A agrees to marry B. But before the date A marries C. The contract has been repudiated by
A by his conduct before the due date of its performance.(Implied)
Anticipatory breach of contract does not give rise to a right of action unless the promisee elects
to treat it as equivalent to actual breach.

Remedies in the case of anticipatory breach

Two remedies are open to a promisee in the case of an anticipatory breach of contract. He may
exercise any one of them:
1. To take the anticipatory breach as actual breach and sue for damages and other rights that
may be available to him under the law. Thus, promisee may treat the contract as over without
waiting for the arrival the due date of the performance of the contract.
Example: K promised to marry F soon after the death of K’s father. During the father’s lifetime
K absolutely refused to marry F. It was held that through the time of performance of the contract
had not arrived. F was entitled to sue for the breach of promise to marry.
Damage Calculation: the quantum of damages will be assessed by the difference of prices
prevailing on the date of breach and the contract price.
2. To wait till the due date of performance of the contract and then avail of legal remedies in
case of breach of contract available against the party guilty of breach.
 Damage Calculation: damages will be measured by the difference between the
contract price and the prices prevailing on the date fixed for the performance of
the contract.
 In a case when the promisee keeps the contract alive the contract will remain
operative for the benefit of both the parties. If during the interval i.e. the date of
breach and the due date for the performance of the contract, special circumstances
intervene which operate which discharges the contract , the promisor will be
discharged from his liability.
 The promisor may elect to perform on due date and in that case , the promisor will
be bound to accept the performance.
REMEDIES FOR BREACH

Where a contract is broken, the injured party has several courses of action open to/ him. The
appropriate remedy in any case Will depend upon the subject-matter of the contract and the
nature of the breach.
(i) Remedies for Breach of Contract
In case of breach of contract, the injured party may:
(a) Rescind the contract and refuse further performance of the contract;
(b) Sue for damages;

(c) Sue for specific performance;
(d) Sue for an injunction to restrain the breach of a negative term; and
(e) Sue on quantum meruit

i) Rescission of the contract: it means to terminate a contract. When a party to a contract

has broken the contract, the other party may treat the contract as rescinded and he is relived
from all his obligations under the contract.
When a party treats the contract as rescinded, he makes himself liable to restore any
benefits he has received under the contract to the party from whom such benefits were
received.
if a person rightfully rescinds a contract he is entitled to a compensation for any damage
which he has sustained through the non-fulfillment of the contract by the other party.
Example: “A” promises to B to supply 100 bags of rice on a certain date and B promises to
pay the price on receipt of the goods. A does not deliver the goods on appointed date, B
need not pay the price.
Suit for Damages
Damages mean monetary compensation payable by the defaulting party to the aggrieved party
in the event of the breach of a contract. The object of providing damages is to put the aggrieved
party in the same position, so far as money can do, in which he would have been, had the
contract been performed.
The Indian contract act allows the aggrieved party to claim the damages as follows
 which naturally arose in the usual course of things from such breach, called as Ordinary
damages
 Or which the parties knew when they made the contract, to be likely to result from the breach
of it. They are referred as Special damages.
 Such compensation is not to be given for any remote and indirect loss or damage sustained
by reason of the breach.
A railway passenger’s wife caught cold and fell ill due to her being asked to get down at a
place other than the railway station and she had to walk a long distance in drizzling night to
reach home. In a suit by plaintiff against the railway company, it was held that the damages
for the personal inconvenience of the plaintiff alone would be granted, but not for the
sickness because it was a remote consequence.
Types of Damages
Damages may be.
1. Ordinary damages.
2. Special damages.
3. Exemplary or vindictive damages.
4. Nominal damages.
1. Ordinary damages: Damages which arise in the ordinary course of events from the breach of
contract are called ordinary damages. These damages constitute the direct loss suffered by the

aggrieved party. They are estimated on the basis of circumstances prevailing on the date of the
breach of the contract. The measure of the ordinary damages is the difference between the
contract price and the, market price on the date of the breach
Eg: A contracts to deliver 1000 bags of rice at rs 100 per bag on a future date. On the due date
he refuses to deliver the market price on that day is re 110 per bag the measure of damages is the
difference between the market price on the date of the breach and the contracted price i.e. Rs
110-100= 10 per bag. The total amount of ordinary damage recoverable shall thus be 100 bags *
Rs 100 per bag = Rs 1000
2. Special damages: Special damages are those damages that are payable for the loss arising
on account of some special or unusual circumstances. That is, they are not due to the
natural and probable consequences of the breach of the contract. Indirect loss experienced
by the affected party out of breach of contract is treated as special damage.
Special damages can be recovered only when the other party, while signing the contract, is
informed of the special circumstances which are responsible for the special losses. Subsequent
knowledge of special circumstances will not create any special liability.
Example: “A” who is a builder , agrees to erect and finish a house by 1 march 2017 in-order that
“B” may give possession of it at that time to “C to whom “B had contracted to let it. “A” is
informed of the contract between “B” and “C”. “A” builds the house so badly that it falls down
before 1st march and has to be rebuild by “B”. as consequence , “B” loses the rent which he was
to received from “C” and is obliged to make compensation to “C” for the breach of contract. A
must make compensation to “B” for the cost of rebuilding the house, for the rent lost, and the
compensation made to “C”.
Example: S a manufacturer used to exhibit his samples of his equipment at agricultural
exhibitions. He delivered his samples to Railway Company to be exhibited at New Castle. On the
occasion he wrote “must reach at New Castle on Monday certain”. On the account of negligence
on the part of Railway Company, the samples reached only after the exhibition was over. S,
claimed damages from Railway Company for his loss of profits from the exhibition. The court
held that the railway company was liable to pay these damages as it had the knowledge of special
circumstances, and must have contemplated that a delay in delivery might result in such loss.
3. Exemplary or vindictive damages: At time breach of contract by one party not only
results in monetary loss to the injured party but also subjects him to disappointment and
mental agony. In such cases monetary compensation alone cannot provide an appropriate
remedy to the sufferings of the injured party. Thus there is a need for vindictive damages.
Vindictive damages are awarded with a view to punish the defendant, and not solely
with the idea of awarding compensation to the plaintiff. They are quite heavy in
amount and are awarded only in two cases:
1. Breach of a contract to marry.
2. Dishonour of a customer’s cheque by the bank without any proper reason. These damage are
awarded with the intention of punishing the defaulting party. They are of a different nature and
their object is to prevent the parties from committing breach. In the case of breach of contract to

marry damages will include compensation for the loss of the feelings and the reputation of the
aggrieved party. In the case of dishonour of a cheque damages are awarded taking into
consideration the loss to the prestige and goodwill of the customer and the general rule is that the
smaller the cheque the greater is the amount of damages.
(4) Nominal Damages: These damages are quite small in amount. They are never granted by
way of compensation for the loss. In such usually actual loss is very negligible. They are
awarded simply to recognize the right of the party of claim damages for breach of the contract.
These are awarded in case where there is only a technical violation of the legal right , but no
material loss is suffered .
For ex: A contracted to purchase ‘LML Scooter’ from B, a dealer, for Rs. 25, 000. But A failed
to purchase the Scooter. However, the demand for the Scooter far exceeded the supply and B
could sell the Scooter to Z for Rs. 25, 000, i.e., without any loss of profit. Here if B makes a
claim upon A for breach of contract, he will be entitled to nominal damages only.
5) Damages for deterioration caused by delay: in case of deterioration caused by delay,
damages can be recovered from carrier even without notice. The word “deterioration” implies
not only physical damages to the good but also loss of opportunity for sale.
Example the plaintiff has bought velvet for making cap for sale during the spring. But due to
delay in transit, he was unable to utilize it for making cap for sale during the season. It was helf
that the fall in price of cloth arrived after season amounted to deterioration so plaintiff can
recover damages without notice.
6) Damages for inconvenience and discomfort: when a party has suffered physical discomfort
and inconvenience as a result of breach of contract, the party can file a suit for claim of
compensation.
Liquidated damages
As per black law dictionary liquidated damages means, “an amount contractually stipulated as a
reasonable estimation of actual damages to be recovered by one party if the other party breaches
the contract”. In layman’s language, before entering into a contract the party stipulates a sum of
money which has to be paid by the one who has breached the contract to the other party who has
been aggrieved and this sum of money has been termed as liquidated damages.
Provisions related to liquidated damages in India
In India, liquidated damages are dealt under Indian Contract Act, 1872 within section 73 and
section 74. Sec. 73 states that “when a contract has been broken, the aggrieved party is entitled
to get compensation or any loss or damages which has been inflicted to him/her naturally during

the usual course of breach of contract or about which the parties to the contract has prior
knowledge when they entered the contract .”
Sec 74 states “When a contract has been broken, and if a sum is named in the contract as the
amount to be paid for such breach, or if the contract contains any other stipulation by way of
penalty, the party complaining of the breach is entitled, whether or not actual damage or loss is
proved to have been caused thereby, to receive from the party who has broken the contract
reasonable compensation not exceeding the amount so named or, as the case may be, the penalty
stipulated for”. The main purpose of fixing a pre-determined amount and its benefits were
discussed by the court:
 Method of pre-determining the loss at the time of entering a contract facilitates the
recovery of damages
 At the same time reduces the calculation error.
 It decreases the expense and inconvenience while proving the actual loss and damage.
 It reduces the risk of under-compensation and in cases where the results of the breach
of contract are ascertain, in it to an extend avoids the problem in assessment.
EXAMPLE: “ A” contracts with “B” that if “A” practices as a surgeon in Kolkata, he will pay “B “
Rs. 5000. “A” practices as a surgeon in Kolkata. B is entitled to such compensation.
Rules on Measure of Damages in Breach of Contract

Cost of Suit: The aggrieved party is entitled, in addition to the damages, to get the costs of
getting the decree for damages tram the defaulter party. The cost of suit for damages is in the
discretion of the court.
The principal upon which damages are to be assessed is that where a party sustains a loss by
reason of breach of contract, he is, so far as money can do it, to be placed in the same situation
with respect to damages if the contract had been performed.
1.Aggrieved party shall be allowed compensation only for the actual loss suffered by him.
2. A party who sustains loss by the breach of a contract is entitled to recover from the party
breaking it, compensation for any loss or damages caused to him:
3. Compensation can be claimed for damages:-
(a) Which arise naturally in the usual course of things from breach of contract itself. (Hadley V.
Baxendale, 1854) Damages are paid only for the proximate consequences of the breach of a
contract; or

(b) As may reasonably be supposed to have been in the contemplation of both the parties, at the
time they made the contract, as the probable result of the breach of it.
Claim for damages must be fair and reasonable.
4. Special or indirect loss can be recovered only when the special circumstances have been
made known to the other party. Examples (1) A contracts to buy of B, at a stated price, 50
maunds of rice, no time being fixed for delivery. A afterwards informs B, that he will not accept
the rice if tendered to him. B is entitled to receive from A, by way of compensation, the amount,
if any, by which the contract price exceeds that which B can obtain for the rice at the time when
A informs B that he will not accept it.
(ii) A contracts with B to pay B Rs. 1,000 if he fails to pay B Rs. 500 on a given day. A fails to
pay B Rs. 500 on that day. B is entitled to recover from A such compensation, not exceeding Rs.
1,000 as the court considers reasonable.
5. The party suffering from the breach is expected to take reasonable step to minimise the loss.
He cannot claim as damages any loss which he has suffered due to his own negligence.
Example
A hires B’s ship to go to Bombay, and agrees to take on board on the first of January, a cargo
which A is to provide, and to bring it to Calcutta, the freight to be paid, when earned. B’s ship
does not go to Bombay, but A has opportunities of procuring suitable conveyance for the cargo
upon terms as advantageous as those on which he had chartered the ship. A avails himself of
those opportunities; but is put to trouble and expense in doing so. A is entitled to receive
compensation from B in respect of such trouble and expense.
6. Damages are given by way of restitution and compensation and not by way of punishment.
Aggrieved party can recover only the actual pecuniary loss sustained by him and not exemplary
damages, except in the circumstances already stated in the previous pages.
7. Nominal damages may be granted when breach of a contract is committed without any real
loss.
8. As regards damages arising from the breach of contracts for the payment of money on a
particular date, interest on the principal sum from the date on which the sum was agreed to be
paid till the actual date of payment will be sufficient compensation to the aggrieved party.
Suit for Quantum Meruit
Literally speaking the words “Quantum Meruit” mean “as much as merited” or “as much as
earned”. It is principle which provides for payment of compensation under certain circumstances,
to a person who has rendered goods or services to another person under a contract which could
not or has not been fully performed.

Example (i) :A person renders some service to a company under contract of employment which
is duly approved by the Board of Directors of that compnay. Subsequently the constitution of
Board of Director’s found to be illegal and, therefore, the contract of employment becomes void.
The employee who has rendered some service to the company shall be entitled to claim
remuneration for his service under the doctrine of quantum meruit.
(ii) X forgets certain goods at Y’s house. He had no intention to have them with him
gratuitously.Y uses those goods for his personal benefit. X can compel Y to pay for those goods.
The aggrieved party may file a suit upon quantum meruit and may claim payment in proportion
to work done or goods supplied in the following cases:
I. Where work has been done in pursuance of a contract, which has been discharged by the
default of the defendant.
Illustrations
(a) P agreed to write a volume on ancient armour to be published, in a magazine owned by C.

For this he was to receive $ 100 on completion. When he had completed part, but not the whole,
of his volume, C abandoned the magazine. P was held entitled to get damages for breach of
contract and payment quantum meruit for the part already completed.).
(b) A, engages B, a contractor, to build a three storied house. After a part is constructed A
prevents B from working any more. B, the contractor, is entitled to get reasonable compensation
for work done under the doctrine of quantum meruit in addition. to the damages for breach of
contract.
Notice that in both the above cases the contract was wrongfully terminated by the defendant, and
both damages as well as payment quantum meruit have been allowed.
2. Where work has been done in pursuance of a contract which is discovered void’ or
‘becomes void,’ provided the contract is divisible.
Illustrations.
(a) C was appointed as managing director of a company by the board of directors under a written
contract which provided for his remuneration. The contract was found void because the directors
who constituted the ‘Board’ were not qualified to make the appointment. C nevertheless,
purporting to act under the agreement, rendered services to the company and sued for the sums
specified in the agreement, or, alternatively, for a reasonable, remuneration on a quantum meruit.
Held, C could recover on a quantum meruit. (Craven-Ellis vs Canons Ltd. ).
(b) A contracts with B to repair his’ house at a piece rate. After a part of the repairs were carried
out, the house is destroyed by lightning. Although the contract becomes void and stands
discharged because of destruction of the house, A can claim payment for the work done on
‘quantum meruit’. Note that if under the contract a lump sum is to be paid for the repair job as a
whole, then A cannot claim quantum meruit because no money is due till the whole job is done.

3. When a person enjoys benefit of non-gratuitous act although there exists no express
agreement between the parties. One of such cases is provided in Section 70. Section 70 lays’
down that when services are rendered or goods are supplied by a person, (i) without any
intention of doing so gratuitously, and (ii) the benefit of the same is enjoyed by the other party,
the latter must compensate the former or restore the thing so delivered.
Illustrations
(a) A, a trader, leaves certain goods at B’s house by mistake. B treats the goods as his own. He is
bound to pay A for them.
(b) Where A ploughed the field of B with a tractor to the satisfaction of B in B’s presence, it was
held that A was entitled to payment as the work was ‘not intended to be gratuitous and the other
party has enjoyed the benefit of the same.
4. A party who is guilty of breach of contract may also sue on a quantum meruit provided
both the following conditions are fulfilled:
(a) The contract must be divisible, and
(b) The other party must have enjoyed the benefit of the part which has been performed,
although he had an option of declining it.
Illustrations
(a) Where a common carrier fails to take a complete consignment to the agreed destination, he
may recover pro-rata freight. (He will, of course, be liable for breach of the contract.)
(b) S had agreed to erect upon H’s land two houses and stables for $ 565. S did part of the work
and then abandoned the contract. H himself completed the buildings using some materials left on
his land by S. In an action by S for the value of work done and of the materials used by H, it was
held that S could recover the value of the materials (for H had the option to accept or to reject
these) but he’ could not recover the value of the work done (for H had no option with regard to
the partly erected building, but to accept that). The court observed, ‘“The mere fact that a
defendant is in possession of what he cannot help keeping, or even has done work upon it,
affords no ground for such an inference. He is not bound to keep unfinished a building which in
an incomplete state would be a nuisance on his land.”
Suit for Specific performance: Law courts can at their discretion, order for the specific
performance of a contract according to the provisions of the Specific Relief Act in those cases
where compensation will not be an adequate remedy or actual damages cannot accurately be
assessed.
Specific performance means the actual carrying out by the parties to contract, and in proper cases
the court will insist on the parties carrying out their agreement. Specific performance of
agreement will not be granted in the following cases:-

(1) Where the agreement has been made without consideration.

(2) Where the court cannot supervise the execution of the contract e.g. a building contract.
(3) Where the contract is of a personal nature.eg contract of marriage
(4) Where on of the parties is a minor.
Specific performance is usually granted in contracts connected with land or sale of rare articles.
It is, however, to be noted that the plaintiff who seeks specific performance must, in his term
perform all the terms of the contract which he ought to have performed at the date of the action
Suit for Injunction:
Where a contract is of a negative character, i.e., a party has promised not to do some thing and he
does it, and thereby commits a breach of the contract, the aggrieved party may under certain
circumstances, seek the protection of the court and obtain an injunction forbidding the party from
committing breach. An injunction is an order of the court instructing a person to refrain from
doing some act which has been the subject matter of a contract, Courts, at their discretion, may
grant a temporary or a perpetual injunction for an indefinite period.
For example: A agreed to sing at B’s theatre and to sing nowhere else for a certain period.
Afterwards A made a contract with E to sing at E’s theatre and refused to sing at B’s theatre. The
court refused to order specific performance as the contract was of a personal nature but granted
an injunction to restrain the breach of A’s promise not to sing else where.
Example: “G” agreed to buy the whole of electric energy required for his house from a certain
company. He was, therefore restrained by injuction from buying electricity from any other
person.
Indemnity Contract
In the contract of Indemnity, a person agrees to rescue another person who is a party of some
other contract and come across any loss out of the same. The loss can be incurred from the act of
any party or by any means in that contract. In the indemnity contract, the person who comes to
the rescue of the other person to make good the loss is known as Indemnifier. The other one
whose loss is made good is known as Indemnified or also called as Indemnity-Holder.
Example: A and B are in the contract of Indemnity. B is in a contract with C regarding a sum of
Rs 10000/-. According to the contract of indemnity between A and B, A agrees to rescue B from
any consequence that occurs from the contract of B’s of Rs 10000/- with C.

Types of Indemnity
The indemnities are of two types;
1. The Express Contract of Indemnity
2. The Implied Contract of Indemnity
Express Contract of Indemnity: When the contract of indemnity is written or orally consented,
then such indemnity contracts are said to be Express Contract of Indemnity.
Example: A and B are into the contract of Indemnity. A agrees to reimburse the loss incurred by
B from a contract with C of some so-called amount.
Implied Contract of Indemnity: When the contract of indemnity is applied by a statute or by a

common law that is in existence, then such indemnity contracts are said to be Implied Contract
of Indemnity.
Example: A and B are agent and principal. A has to supply goods to B for his business. A
supplied goods but B did not want them and denied taking the same. A can sell the goods and if
he incurs any loss while selling them, then B has to make good the loss of A and the statue or the
common law will ensure the same.
In Indian Law, the express contract of indemnity is only covered and the implied contract of
indemnity is also covered by the decision of the court. The law in India says that the loss that
incur shall be due to the conduct of the person. The claim is actionable in India. The contract of
indemnity do not applies to the contract of Insurance.
In English law, both the express and the implied contracts of indemnities are covered. The loss
that was incurred can be in any way. The law also states that the indemnity can be assigned. The
insurance contract is an indemnity contract in English Law.
Indemnity and Guarantee Contract
Indemnity Contract: A contract where one party promises to save the other from any loss
caused to him by the conduct of promissor himself or any other person is called contract of
indemnity, (Section 124) Indian Contract Act, 1872.
Indemnity contract includes two parties namely; Indemnifier and Indemnity holder. The person
who is promising to pay compensation is called Indemnifier and the person who`s loss is
compensated is called Indemnity holder.
 Example: There is a contract between X and Y according to which X has to Sell a tape
recorder (which is selected) to Y after three months. On the next day of their contract Z has come
to X and has insisted on selling the same tape recorder to him (Z). Here Z is promising to
compensate X for any loss faced by X, due to selling the tape recorder to Z. X has agreed. Now
the contract which has got formed between X and Z is called indemnity contract, where Z is
indemnifier and X is indemnity holder.
Guarantee Contract: A contract to perform the obligation or to discharge the liability of a third
party in case of its default is called contract of guarantee, (Section 126) Indian Contract Act,
1872.

Guarantee contract includes three parties namely; Creditor, Principal Debtor and Surety. The
person who is granting the loan, the person who is utilizing the amount of loan is principal debtor
and the person who is giving guarantee is called surety or guarantor or favored debtor. In case of
guarantee contract there will be two types of liabilities namely; Primary liability and secondary
liability. Primary liability will be with principal debtor and Secondary liability goes to surety.
 Example: Y is in need of Rs. 10000/-. Upon guarantee by Z, Y has got the amount from
X. Here X, Y and Z are creditor, principal debtor and surety respectively.
Difference between Indemnity Contract and Guarantee Contract
Number of Parties: Indemnity contract includes two parties namely, indemnifier and indemnity
holder. But guarantee contract includes three parties namely creditor, Principal debtor and surety.
Number of Contracts: In case of indemnity contract, as there are only two parties, there is
possibility for existence of one contract only. But a contract of guarantee includes three sub-
contracts.
Nature: As indemnity contract includes two parties and one contract, it can be said that
indemnity contract is simple in nature. But guarantee contract includes three parties and three
sub-contracts and hence be said that guarantee contract is complex in nature.
Liability: In contract of guarantee there will be two types of liabilities namely; primary and
secondary liabilities which will be with principal debtor and surety respectively. But in contract
of indemnity there is no classification and sharing of liability where the absolute liability rests
with indemnifier.
Recovery: In case of indemnity contract the indemnifier, after compensating indemnity holder`s
loss, cannot recover that amount from any person. But in contract of guarantee, if surety makes
payment to creditor, he (surety) can recover that amount from principal debtor.
Interest of parties: Indemnity contract gets formed upon indemnifier`s interest and guarantee
contract gets formed upon principal debtor`s interest.

Unit 1 Indian Contract Act: Capacity of Party

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Unit 1 Indian Contract Act: Capacity of Party

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Unit 1 Indian contract act

Every person is competent to contract:

It follow that the following person are incompetent to contract.

RULES REGARDING MINOR'S AGREEMENT

1. Agreement with or by a minor is void: An agreement with or by a minor is void and

2. Minor’s agreement cannot be ratified by him:

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3. No estoppels against a minor ( A minor Can plead his minority)

4.No specific performance of the agreements:

5.No compensation by minors:

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(b) For the benefit of the minor.

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Unsoundness of mind may arise from:

(e) Mental decay. It is on account of old age etc.

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PERSON DISQUALIFIED FROM CONTRACTING BY ANY OTHER LAW

4. Convict: A convict while undergoing imprisonment in incapable of entering into a contract.

5. Corporations: A Corporation is an artificial person recognised by law. It exists only in the

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Difference between Contingent and Wagering Agreement:

 Contingent Contract is a valid contract in nature. Wagering agreements are void in

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1. Dis1charge by performance – Discharge by performance takes place when the parties to

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2. Discharge by Agreement or Consent – A Contract comes into existence by an agreement

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d) By Remission or waiver – Remission means acceptance of a lesser fulfillment of the promise

3. Discharge by impossibility of performance – If a contract contains an undertaking to

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(ii) Impossibility arising subsequent to the formation of the contract – Where

Discharge by Supervening Impossibility

A contract is discharged by supervising impossibility in the following cases

1. Destruction of subject-matter of contract: When the subject-matter of a contract,

2. Non-existence or Non-occurrence of a particular state of things: Sometimes, a

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5. Discharge by Operation of Law – A contract may be discharged independently of the

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6. Discharge by Breach of Contract – A breach of contract occurs when a party thereto

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Eg: A contracts to supply B with certain articles on 1 st September. On august 20 he informs B

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Breach of Contract and remedies for Breach of Contract

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Remedies in the case of anticipatory breach

REMEDIES FOR BREACH

(b) Sue for damages;

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i) Rescission of the contract: it means to terminate a contract. When a party to a contract

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Provisions related to liquidated damages in India

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Rules on Measure of Damages in Breach of Contract

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Suit for Quantum Meruit

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(a) P agreed to write a volume on ancient armour to be published, in a magazine owned by C.