LEGAL ASPECTS OF BUSINESS

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UNIT -1

ESSENTIALS OF A CONTRACT

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INTRODUCTION The law of contract is the most important

branch of Mercantile Law. Without such a law it would be difficult, if not

impossible, to carry on any trade or business in a smooth manner.

The law of contract is applicable not only to business but also to all day-to-day personal dealings.

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WHAT IS LAW?

Before learning the meaning of the term 'Law' you must know as to why we need law.

No civilized society can exist without law. It is required for the preservation of peace and orderliness in every society.

Without law, no person will care for others and their dealings may not materialize.

With the growth of society and the concept of welfare state, it became necessary to regulate the conduct of people and protect their property and contractual rights.

Hence, each country enacted laws suited to its various needs and the value system it cherished.

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DEFINE LAW…

"Law is a rule of civil conduct, prescribed by the supreme power of stale, commanding what is right and prohibiting what is wrong."

------- Blackstone.

'Law is the body of principles recognised and applied by the state in the administrator of justice."

- Salmond.

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MEANING OF MERCANTILELAW

Mercantile law or commercial law is not a separate branch of law.

It is a part of civil law which deals with the rights and obligations of mercantile persons arising out of mercantile transactions in respect of mercantile property

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SOURCES OF MERCANTILE LAW

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ENGLISH MERCANTILE LAW:

Our laws are based primarily on the English laws which developed through customs and usages of Merchants or traders in England, These customs and usages governed these merchants in their dealings with each other. This law is also known as 'Common Law'.

As a matter of fact, it is an unwritten law based on customs, usages and precedents. The most important part of mercantile law, namely, the Law of Contracts, is still a part of Common Law in England.

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INDIAN STATUTE LAW:

The Acts passed by the Indian Legislature are the main source of 1ndian mercantile law.

The important Acts passed by the Indian Legislature are the Indian Contract Act 1872, The Negotiable Instruments Act Essentials of a Contract 1881, The Sale of Goods Act 1930, The Indian Partnership Act 1932, The Companies Act 1956, and so on

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JUDICIAL DECISIONS:

The past judicial decisions of courts are another important source of law. They are generally followed by the courts while deciding similar cases before them.

The past decisions have persuasive and guiding value.

Wherever the law is silent on a point, the judge has to decide the case according to the principle of equity, justice and good conscience.

The decisions of English courts are also frequently referred to as precedents in deciding various cases and for interpreting the Indian Statutes. 10

CUSTOMS AND USAGES:

The customs and usages of particular trade are yet another important source of Indian mercantile law.

They play an important role in regulating the dealings between the merchants of that trade. But it is necessary that such customs or usages must be widely known, reasonable, constant and must not be inconsistent with the law, The Indian Contract Act recognises this fact by providing that "nothing contained therein shall affect any usage or custom of trade.” 11

INDIAN CONTRACT ACT, 1872

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WHAT IS A CONTRACT? Broadly speaking, a contract is an agreement made

between two or more persons to do or to abstain from doing a particular act. A contract invariably creates a legal obligation between the parties by which certain rights are given to one party and a corresponding duty is imposed on the other party. A contract has been defined by different authorities in various ways. Some of the important definitionsare as follows:

A contract is an agreement, creating and defining the obligations between parties. - Salmond

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 others. - Sir William Anson

Every agreement and promise enforceable at law is a contract. - Sir Fredrick Pollock

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A CONTRACT ESSENTIALLYCONSISTS OF TWO ELEMENTS:

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AGREEMENT

Section 2(e) of the Contract Act defines agreement as “every promise and every set of promises forming the consideration for each other.

In this context a promise refer to a proposal (offer) which has been accepted.

For example, Ramesh offers to sell his ,scooter for Rs. 8,000 to Shyam. Shyam accepts this offer. It becomes a promise and treated as an agreement between Ramesh and Shyam.

In other words, an agreement consists of an offer by one party and its acceptance by the other.

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DIFFERENTIATION BETWEEN :

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CLASSIFICATION OF CONTRACTS

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ON THE BASIS OF CREATION

A contract may be

(i) made in writing or by word of mouth

or

(ii) inferred from the conduct of the parties or circumstances of the case.

The first category of contract is termed

as 'express contract' and the second as 'implied contract' 19

EXPRESS CONTRACT An express contract is one where the terms

are clearly stated in words, spoken or written.

For example, A wrote a letter to B stating “ offer to

sell my car for Rs. 30,000 to you", B accepts the offer by letter sent to A. This is an express contract.

Similarly, when A asks a scooter mechanic to repair his scooter and the mechanic agrees, it is an express contract made orally by spoken words.

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IMPLIED CONTRACT A contract may be created by the conduct or acts

of parties (and not by their words spoken or written). It may result from a continuing course of conduct of the parties.

For example, where a coolie in uniform carries the

luggage of A to be carried out of railway station without being asked by A to do so and A allows it, the law implies that A has agreed to pay for the services of the coolie. This is a case of an implied contract between A and the coolie.

Similarly, when A boards a BMTC bus, an implied contract comes into being. A is bound to pay the prescribed fare. 21

ON THE BASIS OF EXECUTION

On the basis of the extent to which the contracts have been performed, we may classify them as

(i) executed contracts,

and (ii) executory contracts.

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EXECUTED CONTRACTS:

It is a contract where both the parties have fulfilled their respective obligations under the contract.

For example,

A agrees to sell his book to B for Rs. 30. A delivers the book to B and B pays Rs. 30 to A. It is an executed contract.

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EXECUTORY CONTRACTS:

It is a contract where both the parties to the contract have still to perform their respective obligations.

For example,

A agrees to sell a book to B for Rs. 30. If the book has not been delivered by A and B has not paid the price. the contract is executory.

A contract may sometimes be partly executed and partly executory. It happens where only one of the parties has performed his obligation.

In the example given above, if A has delivered the book to B but B has not paid the price. the contract is executed as to A and executory as to B.

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On the basis of execution, a contract can also be classified as unilateral or bilateral.

A unilateral contract is one in which only one party has to perform his obligation, the other party had fulfilled his part of the obligation at the time of the contract itself. For example, A buys a ticket from the conductor and is waiting in the queue for the bus. A contract is created as soon as the ticket is purchased. The other party is now to provide a bus wherein he could travel.

A bilateral contract is one in which the obligations on the part of both the parties are outstanding at the time of the formation of the contract. 25

ON THE BASIS OF ENFORCEABILITY

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VALID CONTRACT:

A contract which satisfies all the conditions prescribed by law is a valid contract. If one or more of these elements is/are missing, the contract is either void, voidable, illegal or unenforceable.

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VOID CONTRACT: According to Section 2 (0) A contract which

ceases to be enforceable by law becomes void when it ceases to be enforceable.

It is a contract without any legal effects and is a nullity.

A contract may become void due to impossibility of performance, change of law or some other reasons. Section 2(g) says that an agreement nor enforceable by law is said to be void.

In the case of void agreement no contract comes into existence. Such an agreement confers no rights on any person and creates no obligations. It is void ab-intio i.e., from the very beginning.

A void agreement never matures into a contract, it is void from the very beginning.

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VOIDABLE CONTRACT:

According to Section 2(i) of the Contract Act, An agreement which is enforceable by law at the option of one or more of the parties thereon, but not at the option of the other or others, is a voidable contract.

Thus, a voidable contract is one which can be set aside or repudiated at the option of the aggrieved party. Until it is set aside or avoided by the party entitled to do so, it remains a valid contract.

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DISTINCTION BETWEEN:

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ILLEGAL OR UNLAWFUL CONTRACT: The word illegal' means contrary to law. You know that

contract is an agreement enforceable by law and therefore, it cannot be illegal. It is only the agreement which can be termed as illegal or unlawful. Hence, it is more appropriate to use the term 'illegal agreement' in place of 'illegal contract'.

An 'illegal agreement' is one which has been specifically declared to be unlawful under the provisions of the Contract Act or which goes against the provisions of any other law of the land. Such agreement cannot be enforced by law.

For example, A agrees to pay Rs.50,000 to B if B kills C. This

is an illegal agreement because its object is unlawful. Even if B kills C, he cannot claim the agreed amount from A.

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UNENFORCEABLE CONTRACT: It is a contract which is actually valid but cannot

be enforced because of some technical defect. This may be due to non-registration of the

agreement, non-payment of the requisite stamp fee, etc.

Sometimes, the law requires a particular agreement to be in writing. If such agreement has not been put in writing, it becomes unenforceable.

For example, an oral agreement, for arbitration are

unenforceable because the law requires that an arbitration agreement must be in writing. It is important to note that in most cases, such , contracts can be enforced if the technical defect involved is removed. 32

ESSENTIALS OF A VALID CONTRACT

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PROPER OFFER AND PROPER ACCEPTANCE:

In order to create a valid contract it is necessary that there must be at least two parties, one making the offer and the other accepting it.

For example, the offer must be definite and duly communicated to the other party. Similarly, the acceptance must be unconditional and communicated to the offeror in the prescribe mode, and so on. Unless such conditions with regard to the offer and the acceptance are satisfied the agreement does not become enforceable. 36

OFFER OR PROPOSAL

Section 2(a) defines the term 'proposal' as follows:

When one person signifies to another his willingness to do or to abstain from doing anything, with a view to obtaining the assent of that other to such act or abstinence, he is said to make a proposal.

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ACCEPTANCE

Section 2(b) of the Indian Contract Act defines the term 'acceptance' as "when the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. A proposal when accepted becomes a promise. "

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LAPSE OF AN OFFER

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INTENTION TO CREATE LEGAL RELATIONSHIP:

There must be an intention among the parties to create a legal relationship, If an agreement is not capable of creating a legal obligation it is not a contract.

In case of social or domestic agreements, generally there is no intention to create legal relationship.

For example,

In an invitation to dinner there is no intention to create legal relationship and therefore, is not a contract. Similarly, certain agreements between husband and wife do not become contracts because there is no intention to create legal relationship.

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CASE:

This point can well be illustrated by the famous case of Balfour v. Balfour. Mr. Balfour had promised to pay f 30 per month to his wife living in England when she could not accompany him to Caulon where he was employed. Mr. Balfour failed to pay the promised amount. Mrs. Balfour filed a suit against her husband for breach of this agreement, It was held that she could not recover the amount as it was a social agreement and the parties never intended to create any legal relations. 43

FREE CONSENT:

For a contract to be valid, it is essential that there must be free and genuine consent of the parties to the contract. They must have made the contract of their own free will and not under any fear or pressure.

According to Section 14, consent is said to be free when it is not caused by ( i ) coercion,‘ (ii) undue influence, (iii) fraud, (iv) misrepresentation, or ( v ) mistake.

But if the agreement is induced by mutual mistake which is material to the agreement, it would be void.

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CONSENT:

Section 13 of the Indian Contract Act defines the term 'Consent' as Two or more persons are said to consent when they agree upon the same thing in the same sense.

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COERCION

. Section 15 of the Contract Act defines 'coercion' as Coercion is

( i ) the committing or threatening to commit, any act forbidden by the Indian Penal Code; or

(ii) the unlawful detaining or threatening to detain, any property, to the prejudice of any person whatever, with the intention of causing any person to enter into an agreement

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UNDUE INFLUENCE:

Section 16 (i) of the Contract Act defines undue influence as 'A contract is said to be induced by undue influence' where the relations subsisting between the parties are such that one of the parties is in a position to dominate the will of the other and uses that position to obtain an unfair advantage over the other

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FRAUD The term 'fraud' is defined by Section 17 of the

Indian Contract Act as follows: Fraud means and includes any of the

following acts committed by a party to a contract or by any one with his connivance or by his agent, .with intent to deceive another party thereto or his agent, or to induce him to enter into the contract: i) the suggestion, as to a fact, of that which is not true, by one who does not believe it to be true; ii) the active concealment of a .fact by one having knowledge or belief of the fact; iii) a promise made without an,y intention of performing it; iv) any other act fitted to deceive; v) an9 such act or omission as the law specially declares to be fraudulent."

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MISREPRESENTATION

A representation, when wrongly made, either innocently or intentionally, is called 'misrepresentation'.

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MISTAKE

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CAPACITY OF PARTIES:

The parties to an agreement must be competent to contract i.e., they must be capable of entering into a contract. If any party to the contract is not competent to contract, the contract is not valid.

Section 11 of the Act which says that every person is competent to contract who is of the age of majority according to the law to which he is subject and who is of sound mind, and is not disqualified from contracting by any law to which he is subject. 51

THUS, A PERSON TO BE COMPETENT TO CONTRACT SHOULD NOT BE

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A MINOR:

According to Section 3 of the Indian Majority Act, a person is deemed to have attained Majority

(i) when he completes 18 years or

(ii) where a guardian of person or property or both. has been appointed by a Court of Law (or where his property has passed under the superintendence of the Court of Wards), he attains Majority on completion of 21 years.

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POSITIONS OF MINOR: Contract with a minor is void ab initio Fraudulent representation by a minor is void Ratification of a contract by a minor on

attaining the age of majority is void Minor as a partner

A minor cannot be a partner in a partnership firm. However, a minor may, with the consent of all the partners for the time being, be admitted to the benefits of partnership

Minor can be an agent Minor as a shareholder A minor cannot be declared insolvent because

he is incapable of contracting debts. 54

EXCEPTIONS

Contract for the benefit of a minor

Contract by GuardianContract for Supply of

Necessaries

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WHO IS A PERSON OF SOUND MIND? Section 12 of the Indian Contract Act which reads

a person is said to be of sound mind for the purpose of making a . contract, if at the time when he makes it, he is capable of understanding it and of forming a rational judgement as to its effect upon his interests. Thus soundness of mind of a person depends on two facts:

i) his capacity to understand the terms of the contract, and

ii) his ability to form a rational judgement as to its effect upon his interests. If a person is incapable of both, he suffers from unsoundness of mind. Idiots, lunatics and drunken persons are examples of those having an unsound mind

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Lunatics: A lunatic is a person who is mentally deranged due to some mental strain or other.persona1 experience.

Idiots: An idiot is a person who is permanently of unsound mind. Idiocy is a congenital defect. Such a person has no lucid intervals. He cannot make a valid contract.

Drunken Persons: Section 12 of the Indian Contract Act reads: A same man is delirious from fever or who is so drunk that he cannot understand the terms of a contract or form a rational judgement as to its effects on his interest cannot contract while such delirium or drunkenness lasts.

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PERSONS DISQUALIFIED BY LAW

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HOME STUDY:

MAKE A REPORT ON MOHIRIBIBI VS DHARMODAS GHOSH CASE

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LAWFUL CONSIDERATION:

An agreement must be supported by consideration, Consideration means something in return. It is also defined as the price paid by one party to buy the promise of the other.

However, this price need not always be in terms of money.

For' 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.

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Section 2(d) of the Indian Contract Act defines consideration as

when at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing something, such act or abstinence or promise is called a consideration for the promise.

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LEGAL RULES FOR VALID CONSIDERATION

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LAWFUL OBJECT:

The object of an agreement must be lawful. An agreement made for any act which is

prohibited by law will not be valid. For example,

if A rents out a house for use as a gambling den, the agreement is void because the object of the agreement is unlawful. If the object is unlawful for any of the reasons mentioned in Section 23, the agreement shall be void.

Thus, the consideration as well as the object ,of the agreement should be lawful.

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AGREEMENT NOT EXPRESSLY DECLARED VOID:

The agreement must not have been expressly declared void under Contract Act. Sections 24 to 30 specify certain types of agreements which have been expressly declared void. They are .

agreement in restraint of marriage, agreement in restraint of legal proceedings, agreement in restraint of trade and agreement by way of wager. For example, A agreed to pay Rs. 1,000 to B if he (B) does

not marry throughout his life. B promised not to marry at all. This agreement shall not be valid because it is in restraint of marriage which has been expressly declared void under Section 26.

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CERTAINTY OF MEANING:

Section 29 of the Contract Act provides that Agreements, the meaning of which is not certain or capable of being made certain, are void. Thus to make a valid contract it is absolutely essential that its terms must be clear and not vague or uncertain.

For a example, A agreed to sell 100 tonnes of oil to B.

Here it is not clear what kind of oil is intended to be sold. Therefore, this agreement is not valid on the ground of uncertainty.

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POSSIBILITY OF PERFORMANCE:

The terms of the agreement must also be such as are capable of performance. An agreement to do an act impossible in itself is void (Section 56.)

If the act is impossible of performance, physically or legally, the agreement cannot be enforced by law.

For example,

A promises to B that he will enclose some area between two parallel lines or that he will run at a speed of 200 kms. per hour or that he will bring gold from the sun. All these acts are such which are impossible of performance and therefore the agreement is not treated as valid. 66

LEGAL FORMALITIES: The Contract Act does not require that a contract

must be in writing to be valid. But, in some cases the Act has specified that the agreement must be made in writing.

For example, a promise to pay a time barred debt must

be in writing and an agreement for a sale of immovable property must be in writing and registered under the Transfer of Property Act, 1882. In such a situation, the agreement must comply with the necessary formalities as to writing, registration, etc.

If these legal formalities are not carried out, then the contract is not enforceable by law. 67

UNIT 2

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CONTINGENT CONTRACTS69

CONTINGENT CONTRACTS

A Contingent contract is a contract to do or not to do something, if some event, collateral to such contract, does or does not happen. [Sec 31]

Performance depends on happening of some uncertain event.

Performance depends on some uncertain event.

The event must be collateral.70

RULES REGARDING CONTINGENT CONTRACT Cannot be enforced until the event has

happened. If the event becomes impossible such contract becomes void. (Sec 32)

Where the contract is to be performed if a particular event does not happen, performance can be enforced on the event becoming impossible. (Sec 33)

Contract contingent upon how a person will act at an unspecified time, the event shall be considered to become impossible when the person does anything rendering it impossible. (Sec 34) 71

Contract to do or not to do anything if a specified uncertain event happens within a fixed time, becomes void if the event does not happen or its happening becomes impossible before the expiry of that time, and vice versa. (Sec 35)

Contingent agreement to do or not to do anything, if an impossible event happens are void whether or not the fact is known to the parties. (Sec 36) 72

DISCHARGE OF CONTRACT (REFER BOOK) A contract is said to be discharged when it ceases

to operate. The rights and obligations created by it comes to

an end. A contract may be discharged -

BY PERFORMANCE Actual performance – doing what the parties

intended to do when they entered in to the contract.

Attempted performance or tender – It is the legitimate attempt on the part of the promisor to perform his obligations 73

BY MUTUAL AGREEMENT OR CONSENT

Novation: it occurs when a new contract is substituted for an existing contract, either b/w the same parties or b/w different parties, the consideration mutually being the discharge of the old contract.

Eg.- A is indebted to Band B to C. by mutual agreement B’s debt to C and B’s loan to A are cancelled and C accepts A as his debtor.

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Rescission: a contract may be discharged, before the date of performance by agreement b/w the parties to the effect that it shall no longer bind them. Such an agreement amounts to cancellation.

Eg.- A promises to deliver goods to B, and if A and B mutually agrees to not to continue with the contract.

Alteration: it means change in one or more of the material terms of a contract. If a material alteration in a written contract is done by mutual consent, the original contract is discharged by alteration and a new contract in its altered form takes place.

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Remission: it may be defined as “the acceptance of a lesser sum than what was contracted for a lesser fulfillment of the promise made”.

Waiver: it means the deliberate abandonment or giving up of a right which a party is entitled to under a contract, where upon the other party to the contract is released from his obligation.

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BY OPERATION OF LAW

By death.

By merger.

By insolvency.

By unauthorized alteration of terms of a

written contract.

By rights and liabilities becoming vested in

the same person.

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BY IMPOSSIBILITY OF PERFORMANCE

Impossibility existing at the time of

agreement –

Known to the parties – the agreement is void

ab initio.

Unknown to the parties – the agreement is

void on the ground of mutual mistake.

Impossibility arising subsequent to the

formation of the contract.

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BY SUPERVENING IMPOSSIBILITY

Destruction of subject matter of contract

Non-existence or non-occurrence of a

particular state or things

Death or incapacity for personal services

Change of law or stepping in of a person with

statutory authority

Out break of war

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Impossibility of performance is, as a rule, not an excuse for non-performance.

In the following cases a contract is not discharged on the ground of supervening impossibility:

Difficulty of performance, Commercial impossibility, Impossibility due to failure of a third person, Strikes, lock-outs and civil disturbances, and Partial Impossibility.

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BREACH OF CONTRACT

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BY BREACH OF CONTRACT

Breach of contract means violation of a contract.

It is of two kinds: Anticipatory Breach (breach occurring

before the time fixed) a) By express renunciation. b) Making the performance of promise

become impossible by doing some act.

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Actual Breach (when a party fails to perform his obligations upon the fixed date of performance)

a) On the due date of performance. b) During the course of performance of

contract. i) Express Repudiation. ii) Implied Repudiation

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REMEDIES FOR BREACH OF CONTRACT

When the contract is broken, the injured

party has one or more of the following

remedies:

I. Rescission of the contract.

II. Suit for damages.

III.Suit upon quantum meruit.

IV.Suit for specific performance.

V. Suit for injunction. 84

RESCISSION OF THE CONTRACT

Rescission means a right not to perform an obligation.

In case of breach of contract the promisee need not perform his obligation,

he is not only discharged from his liabilities but also he is entitled to claim compensation for damages

which he might have sustained due to non performance of the contract. [Section 39]

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SUIT FOR DAMAGES

Damages are monetary compensation

allowed to the injured party for the loss

suffered.

The object of awarding damages is not to

punish the party at fault

but to make good the financial loss suffered

by the injured party due to breach of

contract.

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RULES RELATING TO DAMAGES

Ordinary damages – arising in the usual course of things.

special damages – such damages which the parties knew to be likely to result from the breach.

Compensation is not given for any remote or indirect loss or damages, and

Such compensation for damages arising from breach of quasi contract shall be same as in any other contract. 87

Exemplary or Vindictive damages – essentially in the nature of punishment for wrong inflicted.

Nominal Damages – the injured party has not in fact suffered any loss due to the breach of contract.

Damages for loss of reputation – the smaller the amount of cheque dishonoured, higher the amount of damages.

Damages for inconvenience and discomfort –generally not recoverable.

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Liquidated damages – represent a sum, fixed or ascertained by the parties in the contract,

which is a fair and genuine pre-estimate of the probable loss that might ensue as a result of the breach if it takes place.

Penalty – is a sum named in the contract which is disproportionate to the damages likely to accrue as a result of the breach.

In India no such distinction is made and the court allow only “reasonable compensation”.

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QUANTUM MERUIT When an agreement is discovered to be void.

[Sec 65] When something is done without any

intention to do gratuitously. [Sec 70] When there is an express or implied contract

to render service but no agreement as to remuneration.

When the completion of the contract has been prevented by the act of the other party to the contract.

When a contract is divisible. When an indivisible contract is completely

performed but badly. 90

SPECIFIC PERFORMANCE The remedy of Specific Performance is in the

nature of equitable remedies based on the principles of equities.

Among the remedies are specific performance, injunction, rectification and cancellation of instruments and rescission of contract.

In the discretion of the court, specific performance may be enforced:

where there is no standard for ascertaining the actual damage caused by the non-performance; or

where compensation in money for the non-performance would not afford adequate relief.

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SUIT FOR INJUNCTION It is a judicial process whereby a party to the

contract is ordered to refrain from doing a particular act or thing, or

to do a particular act or thing. It a discretionary remedy and it acts only in

personam. Injunction means a prohibitory order of the

court to a person to not to do a particular act he has promised

not to do under a contract, or to do an act which he has promised, under a

contract, to do. 92

QUASI CONTRACTS

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QUASI CONTRACTS Sometime a person may receive a benefit

which the law regards another person as better entitled, or for which the law considers he should pay to the other person, even though there is no contract between the parties.

Such relationships are called quasi contracts because although there is no contract or agreement between the parties, they are put on the same pedestal as though there was a contract between them.

This is based on the principles of equity. 94

KINDS OF QUASI CONTRACTS

Right to recover the price of necessities

supplied. [Sec 68]

Payment by an interested person. [Sec 69]

Right to recover for non-gratuitous Act. [Sec

70]

Responsibility of the finder of Goods. [Sec 71]

When money is paid or things are delivered

by mistake or under coercion. [Sec 72]95

CONTRACTS OFINDEMNITY AND GUARANTEE

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97

CONTRACTS OF INDEMNITY In a contract of indemnity one party promises

to compensate the other party against loss suffered by the latter.

Section 125 confines itself to losses occasioned due to an act of promisor or due to act of any other persons.

A contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself or by the conduct of any other person is called a contract of indemnity. [Sec 124]

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If a person who is interested in the payment of money which another is bound to pay and pays it, he is entitled to be indemnified. [Sec 69]

The surety has a rights to claim indemnity from the principal debtor for sums he has rightfully paid towards the guarantee. [Sec 145]

The principal is liable to indemnify the agent for all amount paid by him during the exercise of

his authority. [Sec 222]

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RIGHTS OF INDEMNITY HOLDER [SEC 125]

All damages that he may be compelled to

pay in a suit in respect of any matter to

which the promise to indemnify applies.

All cost that he may be compelled to pay

in bringing or defending such suit.

All sums which he may have paid under

the terms of any compromise of any such

suit.

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CONTRACT OF GUARANTEE A contract of guarantee is essentially a

contract to perform the promise or discharge the liability of a third person in case of his default. The basic function of a contract of guarantee

is to enable a person to get a loan, or goods, or

an employment. [Sec 126]

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ESSENTIAL FEATURES OF GUARANTEE

Surety. Principal Debtor. Creditor. Not be vitiated by incapacity, flaw in consent,

and unlawful character of the agreement. May be oral and it may either be expressed or

implied. Concurrence of parties. Existence of Principal debt. Essential of a valid contract like Consideration

and Free consent.

102

EXTENT OF SURETY'S LIABILITY

The liability of surety is coextensive with that of the principal debtor. [Sec 128]

The Surety may limit his liability by an express agreement.

The liability of the surety arises immediately when a default is made by the principal debtor.

The creditor can sue the surety without suing the principal debtor.

If the guarantee is conditional upon another person joining it as co-surety, the guarantee is not valid if that person does not join. [Sec 144]

103

KINDS OF GUARANTEES Specific guarantee – extends to a specific

transaction or a single debt. The liability of surety comes to an end when

the guaranteed debt is duly discharged. Continuing guarantee –extends to a series of

transaction. This kind of guarantee is intended to cover a

number of transactions over a period of time. Whether the guarantee is continuing

guarantee or not is a question of intention, subject matter & circumstance.

104

REVOCATION OF CONTINUING GUARANTEE

By Notice By Death of Surety By Novation. (Sec 62) By variance in the terms of contract. (Sec 133) By release or discharge of principal debtor. By compounding with the principal debtor. (Sec

135) By creditor's act or omission imparting surety's

eventual remedy. (Sec 139) By loss of security. (Sec 142)

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RIGHTS OF SURETYAgainst Creditor – Right of SecurityRight of set-off.Right of subrogation.Against principal debtor –Right to be relieved of liability.Right to indemnity. Against co-sureties – Right of contribution –Co-sureties liable to contribute equally. Liability of co-sureties bound in different

sums. Release of co-surety.

106

DISCHARGE OF SURETYBy Revocation of Guarantee Discharge by conduct of creditorVariance in the terms of the contractRelease or discharge of principal debtorCompounding by creditor with principal

debtorCreditor compounding with principal debtorCreditor promising to give time to the

principal debtorCreditor agreeing not to sue the debtor.

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By impairing surety's remedyLoss of security by the creditorDischarge of surety by invalidation of

contractGuarantee obtained by misrepresentationGuarantee obtained by concealment Guarantee on contract that creditor shall

not act on it until a co-surety joins Failure of consideration

BAILMENT & PLEDGE

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109

BAILMENT“A bailment is the delivery of goods by

one person to another for some purpose, upon a contract that they shall, when the purpose is accomplished, be returned or otherwise disposed of according to the direction of the person delivering them”.

The person delivering the goods is called the bailor and;

The person to whom the goods are delivered is called the bailee."

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ESSENTIAL REQUISITE OF BAILMENT

There must be a contract. There must be a delivery of possession. The delivery be of goods. Delivery to be made by the owner, called

bailor. Delivery be to another person, called bailee. Delivery for specific purpose. Delivery on the condition that they be

returned.

111

KINDS OF BAILMENT

On the basis of rewardGratuitous Bailment Non-Gratuitous Bailment

On the basis of Benefit For the exclusive benefit of bailor. For the exclusive benefit of bailee. For mutual benefit.

112

DUTIES OF A BAILOR

To disclose known faults [Sec 150]

To bear extraordinary expenses [Sec 158]

To indemnify bailee for loss in case of

premature termination of gratuitous

bailment. [Sec 159]

To receive back the goods

To indemnify the bailee against the

defective title of the bailor [Sec 164]

113

DUTIES OF A BAILEE

To take reasonable care of the goods bailed.

Not to mix goods bailed with his own goods.

Not to make unauthorized use of goods.

Not to set up an adverse title.

To return the accretion to the goods.

To return the goods.

114

RIGHTS OF BAILOR Right to claim damages in case of

negligence. Right to terminate the contract in case of

unauthorised use. Right to claim compensation in case of

unauthorised use. Right to claim separation of goods in case of

unauthorised mixture. Right to claim separation of goods in case of

unauthorised mixture of goods which cannot be separated.

Right to demand return of the goods. Right to claim compensation in case of

unauthorised retention of goods. Right to demand accretion to the goods.

115

RIGHTS OF BAILEE

Delivery of goods to one of the several

joint bailors of goods.

Delivery of goods without title.

Right to apply to court to stop delivery.

Right of action against trespassers.

Bailee's Lien.

116

TERMINATION OF BAILMENT

On the expiry of the period.

On the achievement of the object.

Inconsistent use of goods.

Destruction of subject matter.

Gratuitous bailment.

Death of bailor or bailee.

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FINDER OF GOODS A person who finds goods belonging to

another and takes them into his custody, is subject to the same responsibilities as a bailee. [Sec 71]

He must take reasonable care. He must not use the goods for his own

purpose. He must not mix goods with his own. He must try to find out the owner of the

goods.

118

RIGHTS OF FINDER OF GOODS

Right of lien.

Right to sue for rewards.

Right of sale.

PLEDGE119

120

PLEDGE The bailment of goods as security for

payment of a debt or performance of a promise. [Sec 172]

A pledge can be created only in respect of a chattel (movable possession) capable of delivery.

The general property in the goods remains in the owner,

but a special property in them passes to the pawnee who may sell the goods.

The person delivering goods is Pledgor or Pawnor.

The person to whom goods are delivered is Pledgee or Pawnee.

121

RIGHTS OF PAWNEE / PLEDGEE

Right to retain goods pledged [Section 173 and 174]

Right to extraordinary expenses Right against true owner, when the Pawnor's

title is defective Pawnee's right where Pawnor makes default Under Section 176 the Pawnee has the

following three rights: may file a suit against the Pawnor; or he may sell the goods after giving reasonable

notice; or can recover any deficiency arising on the sale.

122

RIGHTS OF PAWNOR / PLEDGOR

Right to get back goods.Right to redeem debt.Preservation and maintenance of

goods.Rights of an ordinary debtor.

123

PLEDGE BY NON-OWNERS

Pledge by Mercantile Agent.

Pledge by a person in possession under a

voidable contract.

Pledge where pawnor has limited interest.

Pledge by seller in possession after sale.

Pledge by buyer in possession before sale.

CONTRACT OF AGENCY124

125

CONTRACT OF AGENCY An agent is a person employed to do any act

for another, or to represent another, in dealings with third

persons. The person for whom such act is done or who

is so represented, is called the principal." Whatever the principal can do himself, he may

get the same done through an agent,; and What the principal does by another, he does it

himself. The acts of the agents are the acts of the

principal.

126

CREATION OF AGENCY By Agreement – - Express Agreement. - Implied Agreement. Implied agency includes the following – Agency by Estoppel. Agency by holding out. Agency by necessity – Agent acceding his authority in an

emergency. A person entrusted with another's property. Husband and Wife. Agency by ratification.

127

ESSENTIALS OF A VALID RATIFICATION

The agent must act for an identifiable principal.

The principal must be in existence. The principal must have contractual capacity. Ratification must be with full knowledge of

facts. Ratification must be done within a reasonable

time. The act to be ratified must not be void, illegal

or ultra vires. The whole transaction must be ratified. Ratification can be of the acts the principal

had power to do. Ratification should not put a third party to

damages. Ratification relates back to the date of the act.

128

DUTIES OF AGENTS

To carry out the work according to the directions of principal.

To carry out the work with reasonable care, skill and diligence.

To render proper accounts.To communicate with the principal in case

of difficulty.Not to deal on his own account.To pay sums received for the principal.

129

To protect the interest of the principal in case of his death or insolvency.

Not to use information obtained in the course of agency against the principal.

Not to make secret profit.Not to set up an adverse title.Not to put himself in a position where his

interest and duty conflict.Not to delegate authority.

130

RIGHTS OF AGENTS

Right of retainer.

Right to receive remuneration.

Right of lien.

Right of indemnification.

Right of compensation.

Right of stoppage in transit.

131

DELEGATION OF AUTHORITY Delegatus non potest delegar A Sub-agent is a person employed by and acting under the control of the original agent

and the business of the agency. [Section 191] A agent may appoint a sub-agent if - There is a custom of trade. The nature of work is such that sub-agent is

necessary. Where the principal is aware of the intention of

the agent to appoint a sub-agent. Where unforeseen emergencies arise rendering. Where the act to be done is purely ministerial. Where the principal permits appointment of

sub-agent.

132

EFFECT OF APPOINTMENT OF SUB-AGENT [SECTION 192 AND 193]

Where a sub-agent is properly appointed, the following effect follows :

the principal is bound by the acts of the sub-agent;

the agent is responsible to the principal for the acts of the sub-agent;

the sub-agent is responsible for his acts to the agent, but not to the principal, except in case of fraud or willful wrong.

133

Where the sub-agent is not properly appointed, the effect will be :

the principal is not bound by the acts of sub-agent;

the original agent is responsible for the acts of the sub-agent both to the principal and to he third party;

the sub-agent is responsible for his acts to the original agent but not to the principal even in case of fraud or willful wrong.

134

POSITION OF PRINCIPAL AND AGENT IN RELATION TO THIRD PARTIES

Named principal –Acts of the agent are the acts of the

principal. When the agent exceed his authorityNotice given to agent as notice to

principal.Principal inducing belief that agent's

unauthorised acts were authorised.Misrepresentation or fraud of agent. Unnamed principal

135

Undisclosed principal –The position of Principal – contracting party

may sue either the principal or the agent or both.

The principal may also require the performance of contract.

The position of agent – as between the principal and agent, the agent has all the rights of an agent as against the principal;

but as regards the third party, he is personally liable on the contract.

136

The position of third parties – the third party may elect to sue either the

principal or the agent or both. If the principal discloses himself before the

contract is completed, the other party may refuse to fulfill the contract on the ground of mistake of identity of party.

The third party can also claim a right of set-off against the agent.

137

PERSONAL LIABILITY OF AN AGENT - EXCEPTIONS [SEC 230]

When the contract expressly provides. When the agent acts for a foreign principal. When he acts for an undisclosed principal. When he acts for a principal who cannot be

sued. Where he signs a contract in his own name. Where he acts for a principal not in existence. Where he is liable for breach of warranty of

authority. Where he receives or pays money by mistake

or fraud. Where his authority is coupled with interest. Where trade usage or customs makes him

personally liable.

138

TERMINATION OF AGENCY [SEC 201]

Termination of agency by act of parties a) Agreement. b) Revocation by the principal. c) Revocation by agent. Termination of agency by operation of law a) Performance of contract. b) Expiry of time. c) Death or Insanity. d) Insolvency. e) Destruction of subject matter. f) Principal becoming an alien enemy. g) Dissolution of a company.

139

IRREVOCABLE AGENCY

a) Where the agency is coupled with

interest. [Sec 202]

b) Where the agent has exercised part of

his authority. [Sec 204]

c) Where the Agent has incurred

personal liability.

END OF DECK

140