Business Law Notes

1. Business Law Notes
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Business Law Notes

2. Business Law Notes
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Contents Page No.
1. Essentials of Valid Contract..................................................................................................................................3
2. Kinds of Offer.......................................................................................................................................................5
3. Essentials of Valid proposal .................................................................................................................................6
4. Essentials of Valid Acceptance.............................................................................................................................7
5. Discharge or Termination of Contract .................................................................................................................8
6. Remedies for Breach of Contract.......................................................................................................................11
7. Contracts of Bailment ........................................................................................................................................13
Essentials.....................................................................................................................................................................14
Duties of Bailor............................................................................................................................................................15
Duties of Bailee...........................................................................................................................................................16
Rights of Bailee............................................................................................................................................................17
Rights of Bailor............................................................................................................................................................18
8. Finder of Lost Goods:.........................................................................................................................................18
9. Contract of Pledge or Pawn: ..............................................................................................................................19
10. Contract of Indemnify........................................................................................................................................22
11. Contract of Guarantee.......................................................................................................................................23
12. Contract of Agency.............................................................................................................................................28
13. Contract of Sale of goods...................................................................................................................................34
Author : Bilal Ahmed Hakro

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Contract
A contract is an agreement enforceable at law made between two or more persons, by which rights are acquired by
one or more to acts or forbearance on the part of the other or others.
An Agreement enforceable by law is called a contract.
A contract is an agreement which legally binds the parties. The analysis of the above definition reveals that a
contract has following two elements:
(a) Agreement
Every promise or every set of promises, forming the consideration for each other is an
agreement.
Agreement = Promise + Consideration
 Promise
When a person make a proposal (offer) to another and the second person
accept the proposal it is called promise.
Promise = Proposal + Acceptance
 Consideration
Consideration means something in return. An agreement will be done if both
parties give something and get something.
(b) Enforceability
If any of the party refuses to perform the contract and the other party can enforce in a
court it is called enforceable by law. So, we may conclude that
Proposal + Acceptance = Promise
Promise + Consideration = Agreement
Agreement + Enforceability = Contract
Enforceability

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Essentials of Valid Contract
The essentials of a valid contract are shown below:
1) Proposal1
The act of making an offer
A person is showing his willingness for something to do or not to do to other person with consent of other
person.
2) Acceptance: - To accept the offer of a person
3) Agreement: - An acceptance of offer with the all terms & conditions mentioned in contract by the both
parties.
Example: - XYZ computer sellers has a customer who is interested to buy a laptop. The seller is willing to sell
Laptop A for Rs. 50,000 to the customer. The customer agrees to buy and paid the price.
4) Agreement must be in written form & must be registered from high authority.
5) Consideration: - Agreement between parties where each gets something in return for his or her promise. It
can be money, property etc. as long as lawful.
Example: - A agrees to sell his book to B for Rs. 20. Here the consideration for A is Rs. 20, and for B it is the
book. The consideration is measured lawful unless it is forbidden through law.
6) Legal Relationship: - The parties to contract must create legal relationship. If any of the party doesn’t have
intention to enter in legal relationship; agreement will not be considered as contract.
Example: A invited B on a dinner at his home. B accepted the invitation. It is a social agreement. If A fails to
serve dinner to B than B cannot go to court for enforcing the agreement and similarly if B did not turn up
than A cannot go to court for enforcing the agreement.
7) Lawful Object/ Subject matter: - It is compulsory that the agreement should be made for lawful object. The
object or subject matter must not be fraudulent, illegal, immoral opposed to public policy, imply injury to the
person or property of another.
1
Proposal and offer are the same words; both are synonyms of each other. The word offer is general word and proposal is used
in business contracts.
Essentials
of Valid
Contract
Proposal
Acceptance
Agreement
Legal
formalities
Consideration
Legal
Relationship
Lawful
Object
Certain &
Definite
Competency
of parties
Free consent
Not declared
void

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Example: - John has sold a stolen car to Max for $ 2000. This contract is illegal.
8) Certain & Definite: - If the contract is legally or physically impossible to perform, the agreement cannot be
enforced by law.
Example: - A agrees to bring treasures by magic for B, and B has to pay him Rs. 4000. B agrees.
9) Competency of parties: - The parties to an agreement necessarily be a competent2
to contract. If any party
to the contract is not competent to contract, the contract is not valid.
Example: A (Minor3
) borrowed Rs. 100,000 from B and executed mortgage of his property in favour of the
lender. This is not a valid contract because A is not competent to contract.
10) Free consent4
: - Two or more persons are said to be consented when they agree upon the same thing in the
same sense. for a valid contract, it is necessary that the consent of contracting parties must be free.
Example: A beats B and compels him to sell his bike for Rs. 20,000. Here, B’s consent has been obtained by
coercion because beating someone is an offence under the Pakistan Penal Code.
11) Not declared void: - The agreement must not be one of those agreements which have been expressly
declared to be void by the law.
Example: - A promises to pay Rs. 20000 to B if Pakistan wins the cricket match from England on particular
day.
After discussing the essential elements of a valid contract, it should now be clear to you that all these
elements necessity be present in an agreement so that it becomes a valid contract. If any one of them is
missing or absent, the agreement will not be enforceable through law.
Kinds of Offer
1. Express Offer: - An express offer is one where the conditions are clearly stated in words, spoken or written.
Example: - M says to N that he will sell his motorcycle to him for Rs. 40,000. It is an express offer.
2. Implied Offer: - An implied offer appears from the actions, postures, facial expressions, conduct of parties,
course of dealings or circumstances of the case.
Example: - A railway coolie carries the luggage of B without asking to do so. B allows him to do so.
It is an implied offer
3. Specific Offer: - Offer made to a specific person or group of persons is specific offer. Specific offer can be
accepted only by the person or person to whom it is made.
Example: - M make an offer to N to sell his motorcycle for Rs. 20,000, it is specific offer.
4. General Offer: -An offer made to general public is a general offer and it may be accepted by any person who
fulfill the conditions mentioned in it.
Example: - A announce in a newspaper a reward of Rs. 500 for anyone who will return his lost radio. It is
general offer.
5. Cross Offer: When two parties make similar offers to each other without having knowledge of other’s offer, it
is called cross-offer. The acceptance of cross offer does not result in formation of a contract.
2
Competent parties are those persons which are legally and mentally capable of entering into agreements that are enforceable
by law. In virtually all states a person is considered an adult at age of eighteen for the purpose of making a contract.
3
A person below the age of 18 which are not enforceable by law.
4
Parties should be free from any force or influence or in other words we can say that consent is said to be free if it is not caused
by coercion, undue influence, fraud, misrepresentation and mistake.

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Example: A wrote to B to sell him 1 ton of iron for Rs. 1 lac. On the same day B wrote to A to buy 1 ton of iron
for Rs. 1 lac. There is no contract.
Essentials of Valid proposal
1) It may be express offer or implied offer.
2) It must create legal Relations: An offer will not become a promise even after it has been accepted unless it is
made with a view to make legal obligations. The offer should be legal not illegal. It is so because the very
purpose of entering into an agreement is to create it enforceable in a court of law.
3) It must be definite and Clear:
No contract can be shaped if the conditions of the offer are vague, loose, and indefinite. The terms of the offer
must be sufficiently specific to allow the offeree to understand and accept the offer. The language must be easy
to understandable, terms of contract must be stated clearly.
4) It is different from invitation to offer:
An offer is different from an invitation to offer. In an invitation to offer, the person making invitation to the
persons. It does not make an offer but only invites the other party to make an offer. His object is to inform that
he is willing to deal with anybody who is willing to deal with him.
Examples: - An auctioneer advertised in a newspaper that a sale of office furniture will be held on a sure date. A
person with the intention to buy furniture came, from a distant lay for the auction, but the auction was
cancelled. He cannot file a suit against the auctioneer for his loss of time and expenses because the
advertisement was merely a declaration of intention to hold auction,
5) It must not contain negative conditions:
An offeror5
cannot say that if acceptance is not communicated up to a certain date, the offer would be
considered as accepted. Or if offeree does not reply to the offer, It will be considered accepted.
Example: - A writes to B "I offer to sell my scooter to you for Rs. 7,000. If I do not receive a reply through
Wednesday after that, I shall assume that you have accepted the offer." If B does not reply, it shall not imply
that he has accepted the offer. Hence, there will be no contract.
6) It may be specific offer or general offer.
7) It must be communicated to the offeree6
:
An offer necessity is communicated to the person to whom it is made. It means that an offer is complete only
when it is communicated to the offeree.
Example: -S offered a reward to anyone who returns his lost dog. F brought the dog without any knowledge of
the offer of reward. It was held that F was not entitled to the reward because F cannot be said to have accepted
the offer which he was not aware of.
8) It may be subject to any terms & condition:
The offeror can put any condition in the offer (legal). Offer will proceed to become a contract only if the
conditions of the offer are accepted. If offeree agrees with the conditions, the offer is accept, otherwise the
offeror may reject it.
9) It must not contain cross offer.
5
The person making the offer is called the offeror or promisor.
6
The person to whom the offer is made is called the offeree.

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Essentials of Valid Acceptance
1) It must be given by the offeree:
An offer can be accepted only by the person to whom it is made. It cannot be accepted by another person without
the consent of offeror. When an offer is made to a specific group, it can be accepted by any member of that group. If
the offer is made to general public, it can be accepted by any person who has knowledge of that offer.
2) It must be absolute and Unconditional:
The acceptance must be absolute (fixed) and unconditional. In case the offeree attaches any condition with the
acceptance, it would not be called as valid acceptance but a counter offer and there will be no contract.
Example: A offers to sell his scooter to B for Rs. 8,000 and B agrees to buy it for Rs. 7,500. It is a counter offer
and not an acceptance. If only a part of the offer is accepted the acceptance will not be valid.
Example: A offers to sell 100 quintals of wheat to B at a sure price. B accepts to buy 70 quintals only. It is not a
valid acceptance since it is not for the whole of the offer. Therefore, an offer should be accepted as it is,
without any reservations, variations, or circumstances.
3) It must be in particular manner.
Where the offeror has prescribed a mode of acceptance, it is necessary to accept the offer in that manner which is
described by the offeror. If the offer is not accepted in the prescribed manner it is up to the offeror to accept or
reject such acceptance.
Example: A creates an offer to B and says "send your acceptance through telegram". B sends his acceptance
through a letter. A can refuse this acceptance on the ground that it was not accepted in the prescribed
manner. But, if A fails to inform B within a reasonable time he will be deemed to have accepted the acceptance
through ordinary letter and it will result in the formation of a valid contract:
4) It must be communicated to the offeror:
The acceptance is complete only when it has been communicated to the offeror. An offer to supply coal to the
railway Co, was made. The manager wrote on the letter 'accepted', put it in his drawer, and forgot all in relation to
the it. It was held that no contract was made because acceptance was not communicated. Even if the letter of
acceptance is lost in transit or delayed, the offeror is bound through the acceptance because the acceptor has done
all that is required of him. You should note that the offeror, while creation an offer, cannot impose a burden on the
other party to communicate his refusal or rejection. He can certainly prescribe the manner in which the offer is to be
accepted. But, he cannot lay down the manner in which it is to be refused. For instance, the offeror cannot say that if
he does not hear anything from the other party within seven days, the offer will be deemed to have been accepted.
5) It must follow the offer:
Acceptance must be given after the offer is made. It cannot precede the offer. Otherwise the offeree may not be
able to claim the subject matter of the offer.
Example: A offered a reward for anyone who finds his lost dog. B in ignorance of the offer, finds and return the dog.
B cannot claim the reward.
6) It may be express or implied.
The acceptance can be in express or implied way, but in business contract the acceptance of offer must be in express
way.
7) It must be given in a reasonable time:

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Sometimes the offerer while creation the offer fixes the era within which the offer should be accepted. In such a
situation, the acceptance necessity be given within the prescribed time and if no time is prescribed, it should be
accepted within a reasonable time. What is the reasonable time depends upon the facts of the case. Where an offer
to buy shares of a company was made in June but the acceptance was communicated in November, it was held that
because acceptance was not given within a reasonable time the offer had elapsed.
Discharge or Termination of Contract
Discharge of contract or termination of contract means end of contract or free from contract. The term 'discharge of
a contract' means that the parties to it are no more liable under the contract.
After the formation of the contract the logical thing for parties is to perform their respective promises. When the
parties to the contract perform the respective obligations, the contract comes to an end.
A contract may be discharged in any one of the following methods:
1) Discharge by Performance: An individual is relieved from his duties under a contract once he has fully or
substantially performed those duties. The individual is “discharged” from the contract. In joint performance,
if one of the several parties performs the promise, he alone is discharged from the contract. Performance
may be actual performance or tender
a. Actual: when each party of the contract fulfils the obligation arising under the contract, in
accordance to the terms and conditions of the contract, it is called actual performance of the
contract and contract comes to end.
Example: A agrees to sell his watch to B for Rs. 400. A delivers the watch to B and B makes the
payment. This is actual performance.
b. Offer of performance (Tender/ Tender of Performance): It is not an actual performance but
equivalent to actual performance. Sometimes, when the performance becomes due, the promisor
offers to perform his obligation but the promisee refuses to accept the performance. This is
recognized as attempted performance or 'tender'.
Example: A. promises to deliver sure goods to B. A takes the goods to the appointed lay throughout
business hours but B refuses to take the delivery of goods. Therefore, A has done what he was
required to do under the contract, It is, an attempted performance
Modes of
Discharge of
Contract
Discharge by
Performance
Actual
Offer of
performance
Discharge by
Agreement
Novation
Alteration
Rescission
Remission
Waiver
Discharge by
Subsequent
Impossibility
Destruction of
subject matter
Failure of
ultimate purpose
Death or personal
incapacity
Change of law
Declaration of
war
Discharge by
Lapse of Time
Discharge by
operation of law
Insolvency
Merger
Unauthorized
Material
Alteration

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2) Discharge by Agreement: Presently as a contract is created through means of an agreement, it can be
terminated or discharged through mutual agreement. If the parties to a contract agree to create a fresh
contract in lay of the original contract, the original contract is discharged. A contract can be discharged
through mutual agreement in any of the following methods:
a. Novation: The term 'novation' means Replacement of the existing contract by the new contract. The
new contract may be between the new parties or the same parties.
Example: A owes money to B under a contract. It is agreed between A, B and C that B shall now accept C
as his debtor; instead of A. The old debt of A to B no longer exists and a new debt from C to B has been
contracted.
b. Alteration: It means a change in one or more of the conditions of a contract with consent of all the
parties. Alteration has the effect of terminating the original contract. In an alteration there is a change in
the conditions of a contract but no change of parties to it. In novation there may be change of parties.
Example: X promise to sell and deliver 500 bales of cotton, on 1st November and Y promises to pay for
goods on 1st December. Afterwards, X and Y mutually decide that the goods shall be delivered in five
equal instalments at Z's godown. Here, original contract has been discharged and a new contract has
come into effect.
c. Rescission: Means the cancellation of the contract by mutual consent. A contract can be cancelled by
agreement between the parties at any time before its performance. In this case, all the parties are
discharged from their obligations arising from the contract.
Example: X promise to sell and deliver 500 bales of cotton, on 1st November and Y promises to pay for
goods on 1st December. Afterwards, X and Y mutually decide that the goods shall be delivered in five
equal instalments at Z's godown. Here, original contract has been discharged and a new contract has
come into effect.
d. Remission: When one party have not paid the whole amount to other party. The part show the other
party of his problems and issue of not paying whole amount. And other party agreed to pay lesser
amount, it is called remission. Acceptance of lessor amount or lessor fulfilment of a promise than what
is stipulated in the contract. E.g. discount in price or extension in time etc.
Example: A owes B Rs. 5,000. A pays to B Rs. 3,000 who accepts it in full satisfaction of the debt. The
whole debt is discharged.
e. Waiver: Waiver means give up the rights from contract. When a party waives his rights under a contract,
the other party is released from his obligations.
Example: A promises to paint a picture for B. B afterwards forbids him to do so. A is no longer bound to
perform the promise.
3) Discharge by Subsequent Impossibility: You learnt that for a contract to be valid it necessity be capable of
being performed. But sometimes, due to some reasons which are beyond the manage of the parties, the
performance of a contract becomes impossible. In such cases, the contract is discharged on the ground of
impossibility of performance. If the contract was capable of performance at the time of creation, but
subsequently because of some event the performance becomes impossible or unlawful, the contract
becomes void and the parties are discharged from their obligations. The performance of a contract may
become subsequently impossible due to any of the following reasons:
a. Destruction of subject matter: If the subject-matter of a contract is destroyed after the formation of the
contract, without the fault of either party, the contract becomes void.
Examples: A person agreed to deliver a part of a specific crop of potatoes. The potatoes were destroyed
through a pest through no fault of the party. The contract was held to be discharged
b. Failure of ultimate purpose: Where the formation of contract depends upon happening of a certain
event and if that event does not happen, the contract is discharged. When there is change in certain
things which are necessary for performance, the contract becomes void on the ground of impossibility to
perform.

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Example: A contract to hire a room at a hotel to attend seminar to be held on a particular date. The
seminar is postponed. The contract is discharged.
c. Death or personal incapacity: When the performance of the contract depends upon the skills or
qualification of the person. Then the contract may discharge upon the illness, incapacity or death of that
person.
Example: A agreed to perform at a concert on a specified day. A fell seriously ill and so could not
perform on the said day. It was held that the contract is discharged on the ground of impossibility.
d. Change of law: A contract which was lawful at the time of creation it but becomes unlawful through
reasons of subsequent change in law, the performance becomes impossible and the contract is
discharged.
Examples: A agreed to sell his land to B. Subsequently, the land was acquired through the Government.
Now A cannot perform his promise, the contract was held to become void on the ground of impossibility
e. Declaration of war: If a war is declared subsequent to the formation of the contract, all pending
contracts are either suspended or declared as void. If the war is of a short duration, such contracts may
be revived after the end of the war.
Example: A contracts to take in cargo for B at a foreign port. A's Government afterwards declares war
against the country in which the port is situated. The contract becomes void when the war is declared.
4) Discharge by Lapse of Time: The limitation act, 1908 states that in case of breach of contract, legal action
should be taken within specified period. If the contract is not performed and no legal action is taken by the
promisee within the period of limitation, he is debarred from enforcing the contract. If the aggrieved party
do so, in such case he will not be able to enforce the contract. For simple contract, the period of limitation
for contract is 3 years. If the three years expire and creditor fail to file a suit to recover their amount, the
debtor is discharged from his liabilities.
Example: A sold goods to B amounting to Rs. 10,000 on a credit of 1 year on January 1, 2012. On due date
i.e. December 31, 2012 B defaulted in payment. In the given scenario A can file suit against B by December
31, 2015.
Discharge by operation of law: A contract may be discharged through operation of law in the following
cases.
a. Insolvency: Insolvency means to become a bankrupt. It occurs when the bankrupt is not capable of
meeting its outstanding financial liabilities. When a person is declared insolvent through an
Insolvency Court, he is discharged from his obligation existing at that time. So, if a promisor is
declared insolvent, he is discharged from his liability.
Example: A promises to sell his car to B for Rs. 2 lacs. Before the performance of the contract, A
declared as Insolvent by the court. The contract is discharged.
b. Merger: This is the situation in which two companies combine to form one. When the inferior right
to a party merges into superior rights available to the same party. In such case the former contract
stands discharged automatically. For example: When part time lecturer is made full time lecturer,
the contract of part time lectureship is discharge by merger.
c. Unauthorized Material Alteration: If the contract terms are changed without the consent of the
other party, the contract is discharged.
Example: A executes a pro-note in favor of B for Rs. 300. B exceeds the amount from Rs. 300 to Rs.
3000 by alteration. A may refuse to pay Rs 300.
5) Discharge by Breach of contract: A party who is not relieved from her duty of performance and fails to
perform her obligations under a contract is said to breach the contract and the contract is discharged. In
case of breach the aggrieved party is relieved from performing his obligation and gets a right to proceed
against the party at fault. A breach of contract may arise in two methods:
a. Actual breach: When a party fails to perform the contract and the performance is due. Actual breach
of contract may take lay either on the due date of performance or throughout the course of
performance. For instance, A agreed to deliver 100 bags of rice to B at a sure price on 10th July. If A

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refuses or fails to deliver the goods on time, there occurs an actual breach. If the promisor has
performed part of the contract and then refuses or fails to deliver the remaining goods, it is also
actual breach of contract.
b. Anticipatory Breach: Anticipatory breach occurs when the party declares his intention of not
performing the contract before the performance is due. This intention may be declared expressly or
impliedly. For instance, A agrees to supply sure goods to B on 10th July. Before this date A informs B
that he shall not supply the goods. Anticipatory Breach may happen in the following ways:
i. Express Breach: When a party to the contract communicates to the other party his intention
not to perform the contract before the due date of performance arrives. For instance, A
agrees to supply sure goods to B on 10th July. Before this date A informs B that he shall not
supply the goods.
ii. Implied Breach: When a party on whom the performance is due does an act which
ultimately makes the performance of the contract impossible. Example – Supplier A
promises to provide raw material to Producer B on 1 Sept however, Seller A sold it to C
before the due date.
Remedies for Breach of Contract
A remedy can be defined as a manner in which a right is enforced or satisfied by a court when some harm or injury,
recognized by society as a wrongful act, is imposed upon an individual.
When a party breaks the contract by refusing to perform his promise the breach of contract takes place. When a
contract is broken through a party, the aggrieved party face some damages from the guilty party. For recovering
these damages, there are many courses of action (remedies) which the other party may pursue. These remedies
contain:
1. Suit for Rescission of the court: Rescission means cancelation of a contract. The termination of a contract
that may have been entered into as a result of misrepresentation, fraud, or undue influence. In such case the
aggrieved (affected) party asks for cancellation of the contract. He requests the court to formally discharge
him from performing his set of obligations under the Contract. In such a case aggrieved party is discharged
from all the obligations under the contract and is entitled to claim compensation for the damage which he
has sustained because of the non-performance of the contract.
Example: A agrees to supply 10 tons of wheat to B on 20th November. B promises to pay for the goods on its
receipt. A does not supply the goods on the due date. Here, B is discharged from the liability of paying the
price. B is entitled to rescind the contract and to claim compensation for the damage which he has sustained
because of non-supply of goods on the due date.
2. Suit for Damages: If the party wants to sue the guilty party for damages for breach of contract, he must sue
for rescission of the court. When the court grant rescission, the aggrieved party is free from his obligation
and can claim for compensation of any loss or damage sustained through the non-fulfillment of the contract.
In case of breach of contract, the aggrieved party can claim the following kinds of damages:
a) Nominal Damages: These are neither awarded to compensate the aggrieved party, nor to punish the
guilty party. In this case, the breach has occurred but there are no financial losses occurred as a
result or the aggrieved party failed to prove the damages or the damages incurred because of the
aggrieved party. When the aggrieved party suffers no loss, the court may reward him nominal
damages.
Example: A promise to sell cement to B for Rs. 200 per bag. A does not supply. At the time of breach,
the market rate of cement is the same. B is entitled to nominal damages.

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b) Special Damages: These damages are claimed in case of loss of profit, etc. When there are certain
special or extraordinary circumstances present and their existence is communicated to the promisor,
the non-performance of the promise entitles the promisor to not only the ordinary damages but also
damages that may result therefrom. The communication of the special circumstances is a
prerequisite to the claim for special damages.
Example: A contract to C to buy 1 ton of iron for Rs. 80,000. A also contracts to sell 1 ton of iron for
Rs. 1 lac to B. C fails to supply. As a result, A cannot supply to B. C is liable for loss of profit which A
would have earned from B.
c) Exemplary Damages: Exemplary (also described punitive or vindictive damages), These damages
awarded to punish the guilty party for the breach of contract. They are sometimes awarded in cases
where the defendant's willful acts were malicious (hateful), violent, oppressive (unfair), fraudulent,
wanton (cruel) or grossly reckless (without concern of danger to others). Exemplary damages are
designed to deter such wrongful conduct by the defendant in the future, rather than compensate
the plaintiff for a particular loss or injury. Such damages are an exception to the rule that damages
are to compensate not to punish. The amount of exemplary damages awarded in within the
discretion of the judge or the jury.
Example: OS Bank promised to give loan to W for a trip to California by crediting his account. Bank
fail to do so and W’s check was dishonored. The court is allowed exemplary damages for the
emotional distress.
d) Liquidated Damages: Sometimes parties themselves at the time of entering into a contract agree
that a particular sum will be payable by a party in case of breach of the contract by him. It represents
a fair estimate of loss which any of the party in the contract may suffer. In case of breach, the court
will allow the compensation as agreed in the contract but not exceeding than that. Even if the losses
are more than the agreed amount, still the court cannot increase the penalty than the agreed
amount.
Example: A contracts to pay Rs. 20,000 as damages to B, if he fails to pay Rs. 5 lac on given day. A
fails to pay on that day. B can recover damages not exceeding Rs. 20,000
3. Suit upon Quantum Merit: The term quantum merit means “payment in proportion to the work done” or
“reasonable value of the work done”. When a person has done some work under a contract and other party
cancels the contract, or an even some event happens which creates the further performance of the contract
impossible, then the party who has already performed the work can claim payment for the work he has
already done. This right of claiming the payment for work already done, before the repudiation of the
contract or its further performance becoming impossible is described the right to quantum merit.
Example: X, a writer, was occupied through M who is the editor of a magazine to write a series of twelve
articles to be published in the magazine. After X had delivered six articles, the publication of the magazine
was discontinued. X is entitled to receive payment for the six articles already written. You will revise more in
relation to the quantum merit later in this unit.
4. Suit for Specific Performance: Where damages are not an adequate remedy, the court may direct the party
in breach to carry out his promise according to the term of the contract. This is called specific performance
of the contract. Some of the instance where court may direct specific performance are: a contract for the
sale of particular house or some rare article (antique) or any other thing for which monetary compensation
is not enough because the injured party will not be able to get an exact substitute in the market.
Example: A agreed to sell an old painting to B for Rs. 10,000. Subsequently, A refused to sell the painting.
Here, B may file a suit against A for the specific performance of the contract.
5. Suit for Injunction: Injunction means an order of the court prohibiting a person to do something where a
party is in breach of a negative term of contract (i.e., where he does something which he promised not to

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do), the court may by, issuing an order, prohibit him from doing so. It is a mode of securing specific
performance in the negative form.
Example: A agreed to play cricket for Stars Cricket Club during the contract period of 3 years. During the
contract period, A made a contract with Lions Cricket Club and refused to play cricket for Apple Cricket Club.
Here, A could be restrained by injunction from doing so.
Contracts of Bailment
A bailment is a situation where the owner of personal property gives the property to another person to hold or to
use in a specific manner.
OR
A bailment is delivery of goods by an owner to another person for some purpose under a contract.
After fulfilling the purpose, the person receiving the goods is bound to return or dispose off the goods according
to the directions of the owner.
There is no bailment if the goods are delivered without any contract by mistake.
Example: A delivers a piece of cloth to B to make a suit. This is a contract of Bailment between A and B
Parties
Bailor: The owner of the property is called the “Bailor”.
Bailee: And the person receiving the property is called the “Bailee”.
Example: A sells good to B who leaves them in possession of A. A becomes the bailee and B becomes the bailor.
Types
Benefit for Bailor: This is the case where a contract of bailment is executed only for the benefit of the bailor, and the
bailee does not derive any benefit from it. For instance, if you are going out of station and leave your valuable goods
with your neighbor for safety, it is you as bailor, who alone is being benefited through this contract.
Benefit for Bailee: This is the case where the contract of bailment is executed only for the benefit of the bailee and
the bailor does not derive any benefit from the contract. For instance, if you lend your books to a friend, without
charge, so that he can revise for his exams, it is your friend as the bailee, who alone is going to be benefited through
this contract.
Benefit for both parties: In this case both the bailor and the bailee derive some benefit from the contract of
bailment. For instance, if you provide your shirt to be stitched through the tailor, both of you is going to be benefited
through this contract, while you get a stitched shirt, the tailor gets the stitching charges. This is the actual business
bailment.

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Essentials
Contract: A bailment is based on a contract between the bailor and bailee. There is no bailment if the goods are
delivered without any contract by mistake. Mention all essentials of contract in the bailment contract and consider all
terms and conditions which include contract.
Specific purpose: The bailment of goods must be made under specific purpose. If the goods are delivered without
any purpose, there is no bailment contract. When the purpose is accomplished, the goods will be returned to bailor.
Example: A gives his watch for repair. This is bailment.
Delivery of goods: For bailment, it is necessary that the goods should be delivered to the bailee. It is the essence of
the contract of bailment. It follows that bailment can be of movable goods only. It is further necessary that the
possession of the goods should be voluntarily transferred and is in accordance with the contract. In bailment only
possession is transferred to the Bailee, while the ownership remains with the bailor.
Example: U entered in restaurant for dinner. H, the waiter, took his coat and hung it on hook. Later the coat was
missing. The owner of restaurant was held liable.
No change of ownership: Under a bailment, only possession of goods passes from the owner to other person and
not the ownership.
Return of same goods: The goods must be returned to the real owner in original or altered form but not different
goods.
Essentials
Contract
Specific
purpose
Delivery of
goods
No change
of
ownership
Return of
same
goods
Essentials
of valid
contract

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Essentials of valid contract must be present: All the essentials required in a contract must exist in a contract of
Bailment.
Duties of Bailor: A bailor is the person who delivers the goods The duties of bailor are as follows:
1. Duty to disclose faults: The law of bailment imposes a duty on bailor to disclose the defects in the goods
bailed. Bailor is under an obligation to inform those defects in the goods which would interfere with the use
of the goods for which the goods being bailed or would expose the bailee to some risk. In case of non-
gratuitous bailment, a bailor is liable to all the faults in the goods whether known or unknown to him. If the
bailor doesn’t disclose the faults, bailee has the right to claim for the damages.
For instance, A the owner of a scooter allows B, his friend, to take his scooter for a joy ride. A knows that the
brakes of the scooter were not working well. A does not discloses this information to B. Consequently, B
meets with an accident. A is liable to compensate B for damages.
Example: A hires a carriage of B. The carriage is unsafe though B is not aware of it. A is injured. B is
responsible to A for injury.
2. Duty to repay necessary7
expenses: In case of gratuitous bailment it is the duty of the bailor to indemnify
bailee for all the necessary expenses which the bailee has incurred for the purpose of bailment.
Example: A leaves his car with B, a friend, for safe custody for six months. B has to pay Rs. 1,000 per month
to the night watchman for keeping a watch over the car. It is the duty of A to pay B the necessary expenses
incurred by B.
3. Duty to pay extra ordinary8
expenses: In all kinds of bailment, the bailor must bear the extra-ordinary
expenses, if any, incurred by the bailee regarding the goods is bailed.
Example: A delivers a horse to B for safe custody. The horse becomes sick and expenses have to be incurred.
Now A is liable to pay that expenses.
4. Duty to Indemnify for defective title: Where the title of the bailor to the goods is defective and as a result
the bailee suffer loss, the bailor is responsible to indemnify the bailee for such loss.
Example: A asks his friend B to provide him cycle for one hour. B instead of his own cycle provides C's cycle
to A. While A was riding, the true owner of the cycle catches A and surrenders him to police custody. A is
entitled to recover from B all costs, which A had to pay in getting out of this situation
7
Necessary expenses
8
Extra ordinary expenses:
Duties of
Bailor
Duty to disclose faults
Duty to repay necessary
expenses
Duty to pay extra
ordinary expenses
Duty to Indemnify for
defective title
Duty to Receive Goods
Duties of
Bailee
Duty to take reasonable
care
Duty not make
unauthorized use
Duty not mix the goods
Duty to return goods
Duty to return increase
Rights of
Bailee
Right to claim damages
Right to claim expenses
Right to deliver the goods
Right to compensation
Right to stop the delivery
Right to sue
Right to lien
Rights of
Bailor
Right to claim damages
Right to demand return of
goods
Right to claim increase of
goods
Right to terminate the
bailment
Right to sue:

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5. Duty to Receive Goods: It is the duty of the bailor that when the bailee, in accordance with the conditions of
bailment, returns the goods to him. the bailor should receive them. If the bailor, without any reasonable
cause, refuses to take the goods back, when they are offered at a proper time and at a proper lay, the bailee
can claim compensation from the bailor for all necessary and incidental expenses, which the bailee
undertakes to stay and protect the goods.
Example: A bails his cow to B feeding for 2 months. A does not take his back after 2 months. B has to spend
more money on the feeding the cow. A is liable to compensate B.
Duties of Bailee
1. Duty to take reasonable care: In all cases of bailment, the bailee is bound to take as much care of the goods
bailed to him as a man of ordinary prudence would, under similar circumstances, take of his own goods of
the same bulk, quality and value as the goods bailed.
If the bailee does not take care of the goods bailed and goods are damaged by his negligence, he is
responsible for the loss.
Example: Imran entered a restaurant for dining. His coat was taken by a waiter who hung it on a hook
behind Imran. When Imran rose to leave, the coat was gone. The proprietor of the restaurant will be liable
for the loss.
2. Duty not make unauthorized use: The bailee must uses the goods according to the terms of bailment. If
bailee uses goods in a manner which is not according to the terms of the contract, he shall be liable to
compensate bailor for any loss arising due to inconsistent use of goods bailed.
Example: A lends a laptop to B for his use only. B allows C, a member of his family, to use the laptop. C uses
with care, but the laptop accidently falls and its LCD braked. B is liable to make compensation to A for the
injury caused to the laptop.
3. Duty not mix the goods: A bailee is bound to keep the goods bailed separately. He must take consent from
bailor to mix with his own goods. If the bailor and bailee shall have an interest in mixing the goods, there will
be no breach of contract
 If the bailee mixes the goods without the consent of the bailor and the goods can be separated or
divided, the bailee is liable for the expenses of separation or division
 If the bailee mixes the goods without the consent of the bailor and the goods cannot be separated,
then the bailee is liable to the bailee for the loss of the goods.
Example: A bails 100 bales of cotton marked with a particular mark to B. B, without A’s consent, mixes the 100
bales with other bales of his own, bearing a different mark. A is entitled to have his 100 bales returned and B is
bound to bear all the expenses incurred in the separation of the bales, and any other incidental charges.
Example: A bails a bag of farm wheat worth Rs. 550 to B. B without A’s consent, mixes the wheat with imported
wheat of his own, worth only Rs. 250 a bag. B must compensate A for the loss of his wheat.
4. Duty to return goods: It is the duty of the bailee to return the goods bailed without demand as soon as the:
 According to the direction of bailor
 Time for which they were bailed has expired or
 Purpose for which they were bailed has been accomplished unless otherwise agreed upon.
If the bailee fails to do so, he is responsible for any loss, destruction or deterioration of the goods from
that time.
Example: A delivered some CDs to B for watching. He pressed for their return, but B neglected to return
them although more than reasonable time had elapsed. A fire accidently broke out on B, premises and
the CDs were burnt. B was liable for the loss although he was not negligent, because of his failure to
deliver the CDs within a reasonable time.

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5. Duty to return increase: In the absence of any contract, it is the duty of the bailee to return to the bailor
any:
 increase or
 profit
if the goods are bailed. This is happened in case of animal.
Example: A leaves a cow in the custody of B to be taken care of. The cow has a calf. B is bound to deliver the
calf as well to A.
Rights of Bailee
1. Right to claim damages: The bailor should have to disclosed the faults in the goods of which he knows
about it. If the bailor does not disclose the fault in the goods of which he is aware and the bailee suffers
some loss due to such faults, the bailee has a right to claim damages.
Example: A lends a horse to B which he knows to be vicious but does not disclose this fact to B. B is thrown
from the horse and gets injured. A is responsible to B for the injuries sustained.
2. Right to claim expenses: Bailee can claim necessary and extra ordinary expenses incurred by him for the
purpose of bailment from bailor.
Example: A delivers his horse to B for safe custody. The horse become sick and B spends Rs. 200 on medical
care. B can recover Rs. 200 from A.
3. Right to deliver the goods: In absence of any contract to the contrary, the bailee has a right to deliver back
the goods in accordance with the instructions of one joint owner without the consent of the joint owners.
Example: A, B & C jointly bail a car to X for 5 days. X can return the car to any one of them.
4. Right to compensation: If the bailor has no right to bail the goods, or to receive them back, or to give
direction regarding them and as a result, the bailee suffer losses, the bailee is entitled to receive such loss
from bailor.
If the bailor has no title to the goods, and the bailee, in good faith, delivers them back to, or
according to the directions of the bailor, the bailee is not responsible to the owner in respect of such
delivery.
Example: A bails X’s scooter to B without his permission. X sues B and receives compensation. B can recover
such compensation from A.
5. Right to stop the delivery: If a person other than the bailor claims the goods bailed, the bailee may apply to
the court to stop the delivery of goods to the bailor and to decide the title to the goods.
Example: A bails goods to B. X claims that he is the owner of those goods and demands from B. B can stop
the delivery of goods to A and request the court to decide about the ownership.
6. Right to sue: If a third person wrongfully deprive the bailee of the use or possession of the goods bailed
then the bailee may use such remedies as the owner might have used and either the bailor or the bailee
may bring a suit against the third person for such deprivation or injury.
Example: X delivered a TV to Y for repairs. Z forcefully takes possession of TV from Y’s shop. In this case,
either X or Y may sue Z, if Y files the suit, he shall hand over the amount received after deducting his repair
charges to X.
7. Right to lien: Lien means right to retain goods which is in his possession, belonging to another, until some
debt or claim is paid. A bailee has the right to retain that particular property in respect of which he has
rendered some services and his charges are due or bailor are not ready to pay expenses but if bailee does
not complete the work within the agreed time, he will not be entitled to any lien.
Example: A delivers a rough diamond to B, a jeweller, to be cut and polished, which is accordingly done. B is
entitled to retain the stone till he is paid for the services he has rendered.
Example: A gives his watch to B for repair. B promises A to deliver the watch next day but takes more time
to repair. B cannot retain the watch.

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Rights of Bailor
1. Right to claim damages:
 A bailor has the right to recover the damages caused to the goods from the bailee if he has not taken
reasonable care of goods.
 The bailor can also claim compensation for any loss which may arise due to unauthorized mixing of
goods with Bailee's own goods.
2. Right to demand return of goods:
 Bailor has the right to demand goods when the purpose of bailment is accomplished or the time of
bailment expires.
 If the bailee couldn’t return the goods, the bailor is entitled for compensation.
 In case of gratuitous bailment, the bailor can demand for goods any time.
3. Right to claim increase of goods: In the absence of any contract, it is the right of the bailor to claim from the
bailee any:
 increase or
 profit
if the goods are bailed. This is happened in case of animal.
Example: A leaves a cow in the custody of B to be taken care of. The cow has a calf. B is bound to deliver the
calf as well to A.
4. Right to terminate the bailment: A bailor can terminate the contract even before its expiry if the bailee use
the goods in a way which is against the terms and conditions of the contract.
5. Right to sue:
a. A bailor can sue bailee for the breach of contract if the goods are not return or disposed off according
to the directions of bailor.
b. A bailor can also sue the third party for damaging the goods while in the possession of bailee.
Finder of Lost Goods:
A person who finds the goods belonging to another and takes them into his own custody is subject to the same
responsibility as a bailee.
Duties:
1. Find out the owner
It is the duty of the finder to take a reasonable effort to find out the real owner of the goods. He must adopt any
possible mean to find the owner, if he fails to find, he is liable.
Example: If at a birthday party, a guest discovers a gold ring and he tells the host and few other guests in relation to
it, he has performed his duty to discover the owner. If he is not able to discover the owner, he can stay the ring as
bailee.
2. Take a reasonable care
The finder should take reasonable care of the goods as his own. If, in spite of reasonable care, the goods are lost or
destroyed, he is not liable for any loss
3. Duty not to use the goods
A finder must not use the goods found for his own purpose. If he uses it, he is liable for the damage.
4. Duty not to mix the goods
A finder must not mix the goods found with his own goods, if he mixes he would be liable for the damages.

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Rights
1. Right to retain: A finder has the right to retain possession of the goods against everyone except the real
owner. The ownership will always remain with the real owner and only finder has right to retain the goods
until the real owner will come.
2. Right to lien: Lien means right to retain possession of another’s property. In case finder faces some expenses
and trouble incurred through him is finding out the true owner and real owner are not ready to pay these
expenses. Finder of goods has the right to stay the goods in his possession till he is paid his expenses. But he
cannot sue the real owner for this purpose as he did everything voluntarily.
3. Right to sue for rewards: If the true owner of goods has declared some award for the return of lost goods,
the finder can sue the owner for such award. He will have the right of lien, in excess of the goods till he
receives the award.
4. Right to sale: A finder can sell the goods in following cases
a) When finder fails to find out the true owner with reasonable diligence
b) When the real owner refuses to pay the lawful charges to the finder.
c) When goods are perishing or losing greater part of its value
d) When lawful charges of the finder become two-thirds of the value of goods.
Termination of Bailment
1. Expiry of Time:
 When a contract of bailment is made for a specified period of time, the bailment is terminated after
the expiry of that specified time period.
2. Accomplishment of purpose:
 If a contract of bailment is made for a specific purpose, the bailment terminates when the purpose is
accomplished.
3. Unauthorized used:
 If the bailee does any act which is against the terms of bailment, the bailor can terminate the
bailment even before the expiry or the purpose is accomplished.
4. On death of any party:
 A gratuitous bailment terminates on the death of the bailor or bailee.
 In case of non-gratuitous bailment, the termination depends on the terms and conditions of the
contract.
5. Destruction of subject matter:
 A bailment terminates when subject matter of the bailment is destroyed or due to change in its
nature, it become incapable of use for the purpose of bailment.
6. Termination by Bailor:
 A bailor can terminate gratuitous bailment before the specified time, even if it was for a specific
purpose or specific time.
 In case bailee suffer a loss due to termination, the bailor is liable for loss.
Contract of Pledge or Pawn:
Deposit of movable goods to another by way of security for money borrowed;

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The bailment of goods as a security for payment of a debt or for performance of a promise is called pledge.
OR
Pawn or Pledge is a special type of bailment where a movable thing is bailed as security for the repayment of a debt
or for the performance of a promise.
Example: if you borrow rupees one hundred from B and stay your cycle with him as security for repayment, it is a
contract of pledge.
The party which gives the goods for pawn or pledge is called as pawnor or pledger and the one who receives it is
called as pawnee or pledgee.
Essentials
1. Movable property: A pledge relates to movable goods only. It includes different goods, valuables,
documents etc.
Example: A gives his car to B as a security and borrows Rs. 1 lac as loan. This is a pledge between A&B.
2. No change of ownership: In pledge, only possession of the asset is transferred while the ownership remains
with the pledger.
Example: C pledges ornaments with B and gets a loan of Rs. 1lac. The possession of ornaments transfers
from C to B but not ownership.
3. Limited interest: When a person pledges goods in which he has only limited interest, the pledged is valid to
the extent of that interest only.
Example: A gives his T.V to B for repair. A does not pay Rs. 500 as repair charges. B pledges the T.V with X to
borrow Rs. 900. A pledge with X is valid up to Rs.500.
4. Transfer of possession: In pledge, only possession of the asset is transferred while the ownership remains
with the pledger.
Example: M pledges his car with and gets a loan of Rs. 2 lacs. The ownership of car remains with M.
5. Not mere custody: Goods belongs to pledger so, pledgee having the custody of goods cannot pledge them to
another.
Essentials
Movable
property
No change
of
ownership
Limited
interest
Transfer of
possession
Not mere
custody

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Example: T puts some goods in the custody of his servant, S. In this case T is pledger and S is pledgee. S
pledges the goods with B. It is not valid pledge.
Rights of Pledgee
1. Right to retain: The pledgee has right to retain the pledged goods till his payments are made. He can retain
the goods for the following payments:
 Payment of the debt or the performance of the promise.
 For the interest of the debt and
 All necessary expenses incurred by him in respect of the possession or for the preservation of the goods
pledged.
Example: A borrows Rs. 100,000 for a period of 1 month on an interest of 1% per month (Rs 1,000 ) from ABC
Bank and kept his laptop as security.
ABC Bank has a right to keep laptop of A in its custody until the loan amount i.e. Rs. 100,000 and mark up i.e. Rs.
1,000 is paid in full.
2. Right to retain for other debt: It is the presumption that when the pledgee lends another money to the
same pledger after the date of the pledge. The right of the retainer over the pledged goods extends to
subsequent advances also unless otherwise agreed upon. If the goods are separately secured, then such
presumption will not prevail.
3. Right to extra ordinary expenses: A pledgee has a right to recover any extraordinary expenditure incurred
for preservation of the goods pledged. This right does not entitle the pledgee to retain the goods for
recovery of such expenses, though, he can sue the pledger to pay such amount.
4. Right to sue and sell: If the person makes default in payment of the debt or performance of the promise
then the pledgee can exercise the following rights:
Right to sue:
The pledgee may file a suit against the pledger upon the debt or promise and may retain the goods pledged
as a collateral security.
Right to sell:
The pledgee may sell the goods pledged after giving pledger a reasonable notice of the sale. He can recover
from the pledger any deficiency arising on the sale of the goods by him. However, he shall have to hand over
the surplus to the pledger, if any, realized on the sale of the goods.
Example: ABC Bank granted a loan of Rs. 10 million to XYZ Limited against the pledge of shares of a listed
company. XYZ Limited defaulted on repayment of the loan. The market value of the shares at the time of
default was Rs. 9 million.
Rights of Pledgee
•Right to retain
•Right to retain for other debt
•Right to extra ordinary expenses
•Right to sue and sell
Rights of Pledger
•Right to redeem
•Right to claim damages
•Right to claim increase
•Right to redeem debt

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Here, ABC Bank can file a suit for the recovery of the defaulted amount and retain the pledged shares or
after giving reasonable notice to XYZ Limited may sell the shares of the listed company to recover the
defaulted amount and sue XYZ Limited for the remaining amount.
Rights of Pledger
1. Right to redeem: If the pledgee makes an unauthorized sale e.g. without giving reasonable notice, the
pledger can file the suit for redemption of goods, treating the sale as void after depositing the dues with the
court.
2. Right to claim damages: If a pledgee mixes the goods pledged with his own goods or converts them into
other forms, the pledger has the right to claim damages.
3. Right to claim increase: A pledger has the right to receive the pledged goods along with increase after the
debt is completely paid off.
4. Right to redeem debt: If the pledger makes default in payment of the debt or performance of the promise at
the stipulated time, he may still redeem the goods pledged at any subsequent time before the actual sale of
them. In this case he must pay, in addition, any expenses which have arisen from his default.
Contract of Indemnify
The term indemnity literally means “security against loss”.
A contract of indemnity is a contract whereby one party promises to save the other from loss caused to him (the
promisee9
) by the conduct of the promisor10
himself or by the conduct of any other person. A contract of insurance is
a glaring example of such type of contracts.
Indemnity is when one party promises to compensate the loss occurred to the other party, due to the act of the
promisor or any other party.
A contract of indemnity is made to protect the promisee against an anticipated loss. It depends upon happening of
loss.
Example: A promises to deliver certain goods to B for Rs. 2,000 every month. C comes in and promises to indemnify
B’s losses if A fails to so deliver the goods. This is how B and C will enter into contractual obligations of indemnity.
Parties
Indemnifier(Promisor): The person who promises to compensate for the loss is described as the "indemnifier"
Indemnity holder(Promisee): The person to whom this promise is made: or whose loss is to be made good is
recognized as "indemnity-holder" or "indemnified".
Example: A contracts to indemnify B against the consequences of any proceedings which C may take against B in
respect of a sure sum of money. This is a contract of indemnity, here A is the indemnifier, and B is the indemnified.
Rights of Indemnity holder
The indemnity-holder may recover from the indemnified (promisor), the following amounts provided the acts within
the scope of his power:
Sometime indemnifier is not agreed to pay the damages which is incurred by Indemnity holder because it is a duty of
indemnifier to recover all damages incurred by indemnity holder. In such case Indemnity holder sue against the
9
Promisee=A person to whom a promise is made.
10
Promisor=A person who makes a promise.

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indemnifier. If the court gives the decision in favor of Indemnity holder, the indemnifier is entitled to recover these
amounts
1. Rights to claim damages: All damages which he may be compelled to pay in any suit in respect of any matter
to which the promise to indemnify applies;
2. Recover expenses for filling suit: All costs which he may be compelled to pay in bringing or defending such
suits.
3. Recover amount which he paid under any compromise: All sums which he may have paid under the terms
of any compromise of any such suit. In other words, indemnifier should recover all damages for which
indemnity-holder sue against the indemnifier. The compromise should not be contrary to the orders of the
indemnifier and should be a prudent one or authorized by the indemnifier.
Essentials
1. There will be two parties in the contract of indemnity; one is indemnity-holder and other is indemnifier.
2. Loss caused by promisor himself or any party
3. The contract can be in Express or Implied way but mostly in business contract, there is express contract.
4. It must contain all essentials of valid contract must be present.
Contract of Guarantee
'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 substance of contract of guarantee is to enable a person to obtain an employment, a loan or goods on credit.
Example: When A request B to lend Rs. 10,000 to C and guarantees that C will repay the amount within the agreed
time and that on C failing to do so, he will himself pay to B, there is a contract of guarantee.
The guarantee is generally made use of to secure loans. Thus, a contract of guarantee is for the security of the
creditor. Bail bonds, used in criminal law, are a form of contract of guarantee.
Parties
1. Creditor: The person to whom the guarantee is given is called the creditor.
2. Principal Debtor: The person on whose behalf the guarantee is given described 'the principal debtor.
3. Surety: The person who gives the guarantee is described the 'surety'
Example: A and B enter in a shop, and A orders to deliver sure goods to B on credit. The shopkeeper says "I can
provide goods on credit provided A provides the guarantee for the payment". A promises to guarantee the payment.
In this instance, B is the principal debtor, A is the surety and the shopkeeper is the creditor and the contract is a
contract of guarantee.
Essentials
1. Secondary Contract: From the above discussion, it is clear that in a contract of guarantee there must, in
effect, be two contracts, a principal contract between the principal debtor and creditor, and a secondary
contract between the creditor and the surety. In a contract of guarantee there are three parties, viz., the
creditor, the principal debtor and the surety. Therefore, there is an implied contract also between the
principal debtor and the surety. If principle debtor fail to pay the amount to creditor, the principal contract
will terminate and secondary contract will start between surety and creditor.
Example: X takes a loan of Rs. 5000 from Y on the guarantee of Z. The agreement between X and Y is the
principal contract and the contract between Y and Z is secondary contract or contract of guarantee. The liability
of Z will arise if X fails to repay the loan.

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2. Consideration: Like other contract, a contract of guarantee must fulfill all the essentials of a valid contract It
is not necessary that there should be direct consideration flanked by the surety and the creditor i.e., the
surety need not be benefited. It is enough (for the purposes of consideration) that something is being done
or some promise is made for the benefit of principal debtor. It is presumed that the consideration received
through principal debtor is the enough consideration for the surety.
3. No Misrepresentation
4. Tri party: On examining the definition of contract of guarantee, you would discover that as there are three
parties, there are three contracts as well. One contract is flanked by the creditor and the principal debtor,
out of which the guaranteed debt arises. Second contract is flanked by the surety and the principal debtor
who implies that the principal debtor shall indemnify the surety, if the principal debtor fails to pay and the
surety is asked to pay. The third contract is flanked by the surety and the creditor through which surety
undertakes (guarantees) to pay the principal debtor's liabilities (debt) if the principal debtor fails to pay.
5. Concealment
Kinds of Guarantee
A contract of guarantee may either by specific or continuing.
1. Specific Guarantee: A guarantee is a “specific guarantee”, if it is intended to be applicable to a particular
debt/particular transaction and thus comes to end on its repayment. A specific guarantee can’t be
revoked(canceled) even by death of surety. On death of surety, their legal heir will be liable of guarantee
Example: S is a bookseller who supplies a set of books to P, under the contract that if P does not pay for the
books, his friend K would create the payment. This is a contract of specific guarantee and K‟s liability would
approach to an end, the moment the price of the books is paid to S.
2. Continuing Guarantee: A guarantee which extends to a series of transactions is called a “continuing
guarantee”. The surety's liability in this case would continue till all the transactions are completed. Example:
On M‟s recommendation S, a wealthy landlord, employs P as his estate manager. It was the duty of P to
collect rent every month from the tenants of S and remit the similar to S before the 15th of each month. M,
guarantee this arrangement and promises to create good any default made through P. This is a contract of
continuing guarantee.
Rights of Surety
A surety has following rights:
Right Against creditor
A surety has following rights against creditors:
Rights of
Surety
Right Against
creditor
Rights of
securities
Right to claim
set-off
Right Against
Principle
Debtor
Right of
subrogation
Right of
Indemnify
Right against
Co-securities
Similar amount
Different
amount

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a) Rights of securities: Despite of guarantee sometime creditor demand security at the time of contract for
securing the debt. At the time of payment, the surety can demand the securities which creditor has received
from principal debtor at the time of creation of contract, whether surety is aware of such securities or not.
Example: C gives a loan of Rs. 2 lac to B on guarantee of X. C also lease his car to B. B fails to pay the loan and
X pays Rs. 2 lac to C. X can get the car from C.
b) Right to claim set-off: If the principal debtor has some claims against the creditor, the debtor can ask for
adjustment of his debts to the extent of his claims. If creditor sues surety for repayment, the surety can
claim set off, if any, which principal debtors had against creditor.
Example: A supplies furniture worth Rs. 2 lacs to B on the guarantee of C. B claims that furniture is defective
and refuses to pay Rs. 20,000. C can ask for adjustment of Rs. 20,000
Right Against Principle Debtor
A surety has following rights against principle debtor:
a) Right of subrogation: subrogation means that on payment of the guaranteed debt, or performance of the
guaranteed duty, the surety steps into the shoes of creditor in the case when principal debtor default.
When rights of creditors are transferred from principal debtor to surety when principal debtor fail to pay the
amount.
Where a surety has performed the guaranteed duty on the default of the principal debtor, he is invested
with all the rights which the creditor has against the debtor. Further, the creditor must hand over to the
surety, the securities in the same condition as they formerly stood in his hands.
Example: X borrowed money from Y on the guarantee of W and mortgaged his house to Y. X failed to pay
and W paid. Now, W can enforce the mortgage of the house against X.
b) Right of Indemnify: In every contract of guarantee, there is an implied promise through 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. The surety is not entitled to claim any sums which he has paid
wrongfully.
Example: B owes Rs. 2 lac to C, and A is surety for the debt. B fails to pay. C demands payment from A and. A
refuse to pay, on his refusal, C sues him for the amount. A defends the suit, having reasonable grounds for
doing so, but he is compelled to pay the amount of the debt with costs. He can recover from B the amount
paid through him for costs, as well as the principal debt.
Right against Co-securities
Where a debt has been guaranteed by more than one person, they are called co-sureties.
When a debt is guaranteed by two or more sureties, they are called co-sureties. The co-sureties are liable to
contribute, as agreed, towards the payment of the guaranteed debt. When one of the co-sureties makes payment to
the creditor, he has a right to claim contribution from the other co-surety or co-sureties. Following are the rules of
contribution between co-sureties:
a) Similar amount: When there are sureties for the same debt and principal debtor has committed default,
each party is liable to contribute equally to the extent of the default.
Example: A, B and C are sureties to D for a sum of Rs.3,000 lend to E. E makes default in payment. A, B and C
are liable, as between themselves to pay Rs.1,000 each.
b) Different amount: When there are sureties for the same debt for different sums, they are bound to
contribute to the limit fixed by their guarantee.
Example: A, B and C as sureties for D, enter into three separate bonds, of different amounts - A for Rs.
10,000, B for Rs. 20,000 and C for Rs. 40,000, conditional for D’s duly accounting to E.
 D makes default to the extent of Rs. 30,000 than A, B and C are each liable to pay Rs. 10,000.

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 D makes a default to the extent of Rs. 40,000 than A is liable to pay Rs. 10,000 and B and C are liable
to pay Rs. 15,000 each.
 D makes a default to the extent of Rs. 70,000 than A, B and C are liable to pay full penalty of his
bond.
Discharge of surety
1. Revocation by surety: You have learnt that a contract of guarantee may be specific or continuing. A
specific guarantee cannot be revoked if the liability has already accrued. Therefore, if A lends B a sure
sum of the guarantee of C, then C cannot revoke the contract of guarantee. But, if A has not yet given
the sum to B, even though the guarantee has been executed through C, C may revoke the contract
through giving notice. Where the guarantee is a continuing one and extends to a series of transactions, it
may be revoked through the surety for future transactions through giving notice to the creditor.
2. Revocation by death: In specific guarantee, the surety is not discharged from liability on his death if the
liability has already occurred. But in continuing guarantee, the death of surety discharges him from
Discharge
of surety
Revocation by
surety
Revocation by
death
Revocation by
Novation
Variation of
terms
Release of
Principle
debtor by
creditor
Creditor act
or omission
Losses of
securities
Invalidation
of contract
Guarantee
obtained
through
concealment
Failure of co-
surety to join
a surety

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liability regarding the transaction which take place after his death, unless there is a contract to the
contrary. The estate of deceased surety will remain liable for past transaction.
Example: A sells goods to B for Rs. 1 lac. C guarantee payment. A delivers goods worth Rs. 50,000. Later,
C dies. C’s property is liable up to Rs. 50,000.
3. Revocation by Novation: Novation means the substitution of a new contract of guarantee for an old
one. A contract of guarantee is discharged through novation when a fresh contract being entered into,
either flanked by the similar parties or flanked by other parties, the consideration being the mutual
discharge of the old contract. The original contract of guarantee comes to an end and so the surety
stands discharged with regard to the old contract.
4. Variation of terms: Any variance, made without the surety’s consent, in the terms of the contract
between the principal debtor and the creditor. A surety is liable only for what he has positively
undertaken in the guarantee; any alteration made without the surety's consent, in the conditions of
contract flanked by the principal debtor and the creditor, will discharge the surety as to transactions
subsequent to the difference.
Example: C contracts to lend B Rs. 2,000 on 1st January. A guarantees repayment, C pays the amount to
B on 30th August; A is discharged from the liability as the contract has been varied.
5. Release of Principle debtor by creditor: When creditor waiver to principle debtor and give remission to
principle debtor the principle debtor will release and surety will also be released
6. Creditor act or omission: If the creditor does any act which is inconsistent with the right of the surety, or
omits to do any act which his duty to the surety requires him to do and the eventual remedy of surety
himself against the principal debtor is thereby impaired, the surety is discharged.
Example: B contracts to build a ship for C for a given sum, to be paid by instalments as the work reaches
certain stage. A becomes surety to C for B's due performance of the contract. C, without the knowledge
of A, prepays to B the last two instalments. A is discharged by this prepayment. C lends money to B on
the security of a joint and several promissory note, made in C's favor by B, and by A as surety for B,
together with a bill of sale of B's furniture, which gives power to C to sell the furniture, and apply the
proceeds in discharge of the note. Subsequently, C sells the furniture, but, owing to his misconduct and
willful negligence, only a small price is realized. A is discharged from liability on the note.
7. Losses of securities
8. Invalidation of contract: contract of guarantee, like any other contract, may be avoided if it becomes
void or voidable at the option of the surety. A surety may be discharged from liability in the following
cases.
Guarantee obtained through misrepresentation: When a misrepresentation is made through the creditor
or with his knowledge or consent, relating to a material information in the contract of guarantee, the
contract is invalid (Section 142).
Guarantee obtained through concealment: When a guarantee is obtained through the creditor through
means of keeping silence concerning some material part of circumstances relating to the contracts, the
contract is invalid. (Section 143).
Example: A engages B as a clerk to collect money for him. B fails to account for some of his receipts and
A, in consequence calls upon C to furnish security for his duly accounting. C gives guarantee for B's duly
account. A does not inform C about B’s previous conduct. B, afterwards, makes default. C is not liable
because the guarantee was obtained by concealment of facts.
Example: B contracts to build a ship for C for a given sum, to be paid by instalments as the work reaches
certain stage. A becomes surety to C for B's due performance of the contract. C, without the knowledge
of A, prepays to B the last two instalments. A is discharged by this prepayment.
Example: C lends money to B on the security of a joint and several promissory note, made in C's favour
by B, and by A as surety for B, together with a bill of sale of B's furniture, which gives power to C to sell
the furniture, and apply the proceeds in discharge of the note. Subsequently, C sells the furniture, but,

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owing to his misconduct and wilful negligence, only a small price is realized. A is discharged from liability
on the note.
Failure of co-surety to join a surety: When a contract of guarantee gives that a creditor shall not act on
it until another person has joined in it as a co-surety, the guarantee is not valid if that other person does
not join.
Contract of Agency
• When a person cannot alone perform his business activities, he may ask another person to act on behalf of
him.
• The person who acts on behalf of other person is called an agent.
• The person who authorizes other person to act on behalf of him is called a principal.
An agent is someone who is employed by a principal to make contracts on his behalf with third parties.
For instance, Anil appoints Bharat, a broker, to sell his Maruti Car on his behalf. Anil is the Principal and Bharat is his
agent. The relationship between Anil and Bharat is called Agency.
Essentials
1. Agreement: A agency is the result of an agreement between the principal and an agent. The contract of
agency may be express or implied. Under the agreement, the principal is bound by the act of his agent.
2. Contractual Capacity (Principle, Agent): A person who is competent to contract can appoint an agent. In
other words, a principal must have attained the age of majority and have a sound mind. Therefore, a minor,
or a person of unsound mind cannot act as a principal.
Any person may become an agent. It means that a minor or person of unsound mind can be appointed as an
agent. It is so because the act of the agent is the act of the principal and therefore the principal is liable to
third parties for the acts of a minor agent.
3. Consideration is not necessary: In order to create an agency, the consideration is not necessary. The
consideration may or may not exist in an agency. The fact that principal has agreed to be represented by an
agent is consideration for principal. There can be a gratuitous contract of agency and a gratuitous agent will
be as much bound through his contract as a paid agent,
4. Intention: An agent must have intention to act on behalf of the principal. When an agent enters into a
contract for himself, the principal is not liable. The principal is liable only when the agent contracts with the
intention to act on behalf of the principal.
Creation of Agency
1. Agency by express agreement: Generally, an agency is created by an express agreement. When an authority
is given by principal to his agent by words spoken or written, it is called express agency. Generally, the
principal creates a contract of agency by writing a power of attorney or a stamped paper.

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2. Agency by Implied Agreement: It doesn’t arise as a result of express agreement but it arises by any sudden
fact. The implied agency arises from conduct, situation or relationship of parties.
a. Agency by Estoppel: ‘Estoppel’ is a word used in law to mean ‘stop’ or prevent’.
Agency by estoppel arise when a person by his words or conduct induces a third person that a
particular person is his agent, though he is not an agent of that person. The principal should stop or deny the
third person that this person is not the agent of me. If he is not denying the person, agency by estoppel will
arise.
Example: Bilal allows Hammad to represent as his agent by telling Adil that Hammad is Bilal’s agent. Later
on, Adil supplied certain goods to Hammad thinking him to be Bilal’s agent. Bilal shall be liable to pay the
price to Adil. By allowing Hammad to represent himself as his agent, Bilal leads Adil to believe that Hammad
is really his agent.
b. Agency by holding out: The agency by holding out is similar to agency by estoppel. It arises when a
person by his past conduct induces a third person to believe that a particular person doing some act
on his behalf is doing with authority. But if an agent has a limited authority, the principle is not
bound for his act beyond that authority.
Example: B allows his servant A to buy goods for him on credit from K and pay for them regularly. On
one occasion, B pays his servant in cash to purchase the goods. The servant purchases good on
credit pocketing the money. K can recover the price from B since through previous dealings B has
held out his servant Amar as his agent.
c. Agency by necessity: Agency by necessity occurs in circumstances where there is no agreement
between the parties, but an emergency requires that one party (the agent) has to take action to
protect the interests of the other party (the principal). The person can act as an agent under the
following conditions:
i. There must be an emergency to act on behalf of the principal.
ii. There must be a real necessity to act on behalf of the principal
iii. It must not be possible for agent to get the principal’s instructions.
iv. The agent has acted honestly in the interest of the principal.
Examples: A horse is sent by rail and at the destination is not taken delivery by the owner. The
station master has to feed the horse. He has become the agent by necessity and hence the owner
must compensate him.
d. Agency by Ratification (Approval/ Endorsement): “The term ratification means approval of an act
which has been performed by the agent without authority”.
This may happen when a person does some act on behalf of another without his authority and his
act is approved by the latter by principal, there is an agency by ratification. However, the person
who has been named as principal might then choose to accept the contract with the third party.
If the actions of a person claiming to be an agent are not ratified by the person named as principal,
and there is no proof that an agency arrangement exists by agreement, the contract of agency will
not exist.
Example: A may act as B's agent although A has no prior power from B. When B comes to recognized
of it, he may either disown the acts of A or may subsequently accept them.

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Example: A appointed B as his agent to buy wheat for him. In addition to buying wheat, B buys 10
bags of rice for A. 'Afterwards, A agrees to take the delivery of rice as well. A is liable to pay the price
of rice.
e. Agency by Operation of law: Sometimes an agency arises by operation of law.
When a company is formed its first directors are its agents for overall company by operation of law.
A partner is agent of the firm in absence of other partner for the purposes of the business of the
firm.
Duties of Agent
1. Duty to follow the Directions or Customs: A agent is bound to conduct business of agency according to
directions of the principal.
In case there are no directions provided by principal then he would act according to the customs of
that particular business otherwise he would be liable.
Example: Adil is directed by his principal to warehouse the goods at a particular warehouse. He warehouses
a portion of the goods at another place, equally good but cheaper. The goods are destroyed by fire. Adil, the agent,
is liable to make good the loss.
2. Duty to work with Skill and Care:
 An agent must act with reasonable skill and care. A reasonable skill means a skill that is possessed by
an ordinary man.
 If an agent does not work with reasonable skill and acre, he must compensate his principal in case of
loss arise from his act.
Example: A, agent for the sale of goods, having authority to sell on credit, sells to B on credit, without
making the proper and usual enquiries as to the solvency of B. B, at the time of such sale, is insolvent. A has
to compensate his principal in respect of any loss thereby sustained.
3. Duties to submit Accounts:
 An agent is bound to maintain and submit proper accounts to his principal on demand.
 It is duty of an agent to keep true accounts regarding all the property or money of his principal. He
must produce them to his principal on demand
Example: P sends his goods to his agent A to sell on credit. A must keeps proper accounts of sale and render
to P on his demand.
4. Duty to Communicate:
 It is the duty of an agent in case of difficulty to make reasonable effort to contact his principal to
obtain instructions.
 But in case of emergency, if there is no time to contact the principal, the agent may act in good faith
and in interest of is principal.
Example: P sends goods to his agent A in Karachi for the purpose of export. A finds that some goods are
damaged. A must informs P and get instructions in this regard.
5. Duty to Protect: When an agency terminates due to death or insanity of principal, the agent must take
reasonable steps for the protection of interests of the legal representative of late principal.
Example:

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6. Duty to Disclose Facts: An agent must conduct the business in good faith. He must not deal on his own name.
if an agent deals in his own name without permission of his principal or conceals any material facts, the
principal may reject the contract.
Example: P directs A, his agent, to buy a particular house for him. A tells P that it cannot be bought, but buys
the house for himself. P may, on discovering that A has bought the house, compel him to sell it to P at the
price he bought.
7. Duty to Return Benefits: If an agent conducts business of agency in his own account and gets some benefit,
the principal can recover it from the agent.
Example:
8. Duty to Pay Sums
 Any amount which an agent receives on behalf of the principal must be paid to the principal.
 However, an agent can deduct from it is expense and remuneration regarding business of the
agency.
Example: A appointed B to collect rents from X. B collected the rents and incurred Rs. 200 as travelling
expenses. B must remit the amount to A after deducting his travelling expenses.
9. Duty not to Delegate Authority: An agent must perform the work of agency himself. An agent must not
delegate his authority to another person unless custom of trade or nature of agency so requires.
Example: P appoints A as his agent to buy a certain house. A delegates the authority to X to buy a house for
P. A is not authorized to delegate authority to X.
Rights of Agent
1. Right to Retain Money
• An agent has the right to retain all his claims out of the sums received on behalf of the principal.
• The claims may be regarding remuneration, advances or reasonable expense incurred by him in the
business of agency.
Example: P employs A to sell some old furniture and agrees to pay him R. 200 as commission. A sells the
furniture for Rs. 2,000. A can retain Rs. 200 as his commission and pay the balance to P.
2. Right to Receive Remuneration
• An agent has the right to receive the agreed remuneration. If remuneration is not fixed, an agent is
entitled to reasonable remuneration.
• He can receive remuneration only when it becomes due.
• If an agent is guilty of misconduct, he is not entitled to any remuneration.
Example: P employs A to recover Rs. 1 lac from T. Due to A’s misconduct, the money is not recovered. A is not
entitled to any remuneration.
Example: An agent was appointed to introduce a customer to purchase the principal's property. He did
introduce one customer the amount was fixed and earnest money paid. The sale fell because of the
customer's inability to find money. Held, the agent was entitled to his agreed commission.
3. Right to Lien

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 the word ‘lien’ means retaining possession; it can be enjoyed by the agent only where the goods or
papers are in actual or constructive possession of the agent.
• An agent can retain goods, documents and any property of the principal until the amount due to him
for commission, services and expenses is paid to him. This right is subject to a contract between
them.
Example: P employs A to sell 100 books. A sells 50 books. P becomes insolvent. The official receiver of P
claims the remaining 50 books from A. A can refuse to give the books until he receives his commission.
4. Right to Indemnified for Lawful Acts
• An agent has the right to be indemnified against the consequences of all lawful acts done by him in
exercise of authority conferred upon him.
Example: A, an agent refused to deliver goods of T a third party, at the instructions of B (Principal). T sued A
for the goods to which A incurred expense in defending the suit. A is entitled to be indemnified from his
principal.
5. Right to be Indemnified for Acts in Good Faith
• Where an agent does the act in good faith, the employer is liable to indemnify the agent against the
consequences of that act through it causes an injury to the rights of third persons.
Example: B at the request of A, sells goods which A has no right to sell. B does not know this and sends the
money to A. Afterwards C, the true owner of the goods, sues B and recovers the money. A sis liable to
indemnify B.
6. Right to Compensation
• An agent has the right to be compensated for injuries suffered by him due to the principal’s neglect
or want of skill.
• However, the principal is not liable for any compensation for injuries caused by the agent’s
negligence.
Example: A employs B as a bricklayer in building a house and puts up the scaffolding himself. The scaffolding
is unskillfully put up and B is in consequences hurt. A must make compensation to B.
7. Right to Stoppage of Goods
• An agent has the right to stop the goods in transit to the principal like an unpaid seller, if he has
bought the goods with his own money and the principle has become insolvent.
Example: A buys goods for his principal P with his own money. A delivers the goods to carrier for
transmission to P. Afterwards, A comes to know that P has become insolvent. A can stop the goods in transit.
Rights of Principal
1. Right to Recover Damages
 If the principal suffers any loss, he has a right to recover from his agent.
 The agent is liable for loss if he doesn't follow the instruction of the principal or customs of trade.

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 The agent is also responsible If the doesn’t perform the duties with reasonable care, skill or
diligence.
Example: P asks his agent A to sell goods on cash basis. A sells goods on credit and the amount becomes
irrecoverable. P can recover the amount from A.
2. Right to Obtain Benefit
 If the agent without any knowledge of the principal, gets any benefit out of agency, the principal has
the right to recover from the agent.
 In such a case, the agents lose his right of commission.
Example: P asks his agent A to sell his house. A sells the house for Rs. 10 Lac but tells P that he sold it for Rs.
8 lacs. P can recover the balance from A.
3. Right to Refuse to Indemnify
 If the principal shows the agent has acted as a principal himself and not as an agent, he has a right to
refuse to indemnify the agent against the loss suffered by the agent in such a transaction.
Example: P directs his agent A to buy a certain plot from X for him. A makes an agreement with X for himself
and pays Rs. 1 lac as advance. X becomes insolvent. A has suffer a loss. P can refuse to compensate A.
Duties of Principal
1. Duty to Pay Remuneration
• It is the duty of principal to pay the agent all of his dues, remuneration or commission, and to
reimburse all expenses incurred by him in case of his authority.
Example: C, an agent, spent Rs. 500 while performing his duties for B. B is liable to pay such expenses to C.
2. Duty to Indemnify for lawful Acts
• A principal is bound to indemnify the agent against the consequences of all lawful acts done by his
agent in exercise of authority conferred upon him.
Example: Y, on the direction of his principal P, sells goods to X on credit. X does not pay. Y, on the direction
of his principal P, sells goods to X on credit. X does not pay. Sues but is compelled to pay damages. P must
indemnify Y.
3. Duty to Indemnify for Acts in Good Faith
• When an agent does the act in good faith, the principal is liable to indemnify the agent against the
consequences of the act though it causes injury to the rights of the third person.
Example: P employs an agent A to buy a car from M. A buys the car from M which belongs to W. Afterwards,
W recovers the car from A. P is liable to indemnify A.
4. Duty to Indemnify Injury
• A principal must make compensation to his agent in respect of injury caused to such agent by the
principal’s neglect or want of skills.
Example: P employs M, a mason, to build a house. P puts up the scaffolding unskillfully. As a result, M falls
down and gets injured. P is liable to compensate M.
Termination of Agency

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1. Agreement: A contract of agency can be terminated at any time by mutual agreement of principal and agent.
Example:
2. Revocation by Principal
3. Revocation by Agent
4. Completion of Business
5. Expiry of Time
6. Death of Principal or Agent
7. Insanity of Principal or Agent
8. Insolvency of Principal
9. Destruction of Subject matter
10. Becoming an Alien Enemy
11. Change of Law
Contract of Sale of goods
It is a contract by which the ownership of movable goods is transferred from seller to the buyer.
A transfer of ownership of goods as soon as a contract is created (sale)
Essentials
1. Contract
 A contract of sale of goods related to movable goods.
 All essentials of valid contract must be present.
 It can be express or implied.
A contract of sale is a special kind of contract, so all the essentials of a valid contract must be present. If any
of the essential element of a valid contract is missing, then the contract of sale will not be valid.
Example: A agreed to sell his scooter to B without any consideration. This contract of sale is not valid since
there is no consideration.
2. Seller and Buyer: There should be two parties to a contract of sale
 seller and buyer.
 In case of joint property, one seller can sell his part of good to other.
Example: (a) A sells his computer to B for Rs. 40,000. A is the seller and B is the buyer.
(b) A and B jointly own a computer. A sells his share to B. B becomes the sole owner of the
computer.
3. Transfer of Property
 Transfer of proper is essential for the contract of sale of goods.
 The transfer of property means the ownership of the property gives to another

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 On the other hand, when the goods are pledged, it is only the special property which is
transferred i.e., possession of the goods is transferred to the pledgee while the ownership
rights remain with the pledger.
Example: A sells his car to B for Rs. 80,000. The ownership and possession of the car will transfer
from A to B
4. Subject Matter
 Subject matter means the good or things for which the contract of sale is made.
 Only goods can be the subject matter in a contract of sale of goods.
 Includes movable goods electricity, water, gas, stock and shares, growing crops, grass and
things attached to or forming part of the land are agreed to be severed before the sale or
under the contract of sale.
 Actionable claims (debt due from one person on another) and money cannot be included in
the contract of sale of goods.
Example: A sells his car to M for Rs. 3lac. It is a contract of sale because subject matter of contract
i.e. car is a moveable thing
5. Price
 The consideration in a contract of sale must be in the price or cash.
 When goods are sold or exchanged for other goods, the transaction is barter and not a
contract of sale of goods.
 If goods are sold partly for goods and partly for price, it is a contract of sale.
Example: (a) A sells his chair to B for Rs. 2000. It is a contract of sale.
(b) X sells his horse to B against B’s promise to give 100 ton of wheat. It is not a contract of
sale. It is a barter.
6. Sale and Agreement to Sell
 The term contract of sale includes both sale and an agreement to sell.
 When ownership in the goods is transferred from a seller to buyer at the time of formation
of contract, the contract is called a sale.
 When the transfer of ownership in the goods will take place at some future date, the
contract is called an agreement to sell.
Example: A agrees to sell his scooter to B after ten days for Rs. 5,000. B agrees to buy it after ten
days, for Rs. 5,000. It is an 'agreement to sell' and it will become sale after ten-days.
Example: (a) A buys a book from S and pays the whole price on a counter. It is a sale.
(b) A agree to buy B’s car for Rs. 2 lac if his mechanic approves the car. It is an agreement to sell.
7. Other formalities
 There is no specific procedure to make a contract of sale. All essentials of a valid contract
should be there in a contract of sale.