ALGAPPA UNIVERSITYKARAIKUDI – 630 003 TAMILNADU

DIRECTORATE OF DISTANCE EDUCATIONB B A

(II YEAR)

PAPER 2.4BUSINESS LAW

Paper 2.2

Commercial Law : Business Law

Indian Contract Act 1872 : Meaning and essentials of a validcontract Formation of contract – Performance of contract –Termination and discharge of contract – Remedies for breach ofcontract – Quast contract

Special Contracts : Indemnity of guarantee – Bailment – Agency

Sale of Goods Act, 1930 : Contract of sale – Conditions andwarranties – Transfer of property – Performance of the saleRights of an unpaid seller

Negotiable Instruments Act, 1881 : Negotiable instruments –Parties to a negotiable instrument – Material alteration –Crossing of cheques – Endorsement Payment and collection ofcheques

Indian Partnership Act, 1932 : Meaning and test of partnership –Registration of firms – Relations of partners – dissolution offirms

Arbitration Act, 1940 : Arbitration – Arbitration withoutintervention of court – Arbitration in suits

Carriage of Goods : Classification of Common Carriers – Rightsduties and liabilities of common carrier – Carriage by rail –Contract of affreightment – Charter Party – Bill of Lading –Carriage by air – Documents relating thereto – Liability of theair Carrier

Contract of Insurance : Basic elements – Kinds of Insurance –Fire Insurance – Marine Insurance

Books for reference1. Kapoor, N D Elements of Mercantile Law2. Sen and Mitra Commercial Law3. Shukla, M. C. Mercantile Law4. Relevant bare acts

Course Material prepared by – Dr. S. Sudalaimuthu,Reader in Department of Corporate SecretaryshipAlgappa University, Karaikudi.

Lesson No. Title

1. Indian Contract Act. 1972

Special Contracts

2. Contract of Indemnity and Guarantee

3. Contract of Bailments

4. Contract of Agency

5. Sale of Goods Act. 1930

6. Negotiable Instruments Act, 1881

7. Partnership Act. 1932

8. Arbitration Act. 1940

9. Common Carriers Act

10 Contract of Insurance

LESSON 1INDIAN CONTRACT ACT. 1872

MEANING

The law relating to the contracts is contained in the IndianContract Act. 1872. It is that branch of law which lays down theessentials of a valid contract, the different modes ofdischarging the contract and the remedies available to theaggrieved parts in the case of breach on contract. It is the mostimportant branch of business law. It is of particular importanceto people engaged in trade, commerce and industry as bulk oftheir business transactions are based on contracts.

A contract is an agreement made between two or more parties whichthe law will enforce Sec. 1 the of the Indian Contract Actdefines it as “An agreement enforceable by law” Sec 10 lays downthat “All agreements are contracts if they are made by the freeconsent of parties competent to contract for a lawfulconsideration and with a lawful object and are not hereby –expressly declared to be void.

ESSENTIALS OF A VALID CONTRACTS

A valid contact must have the following essentials

1. Two parties : for a valid contract, there must be two parties

2. Offer and acceptance: There must be an offer and acceptance Oneparty has to make an offer and the other party has to acceptit.

3. Consensus-ad-idem or Identity of Minds: The parties to the contractmust have agreed about the subject matter of the contract atthe same time and in the same sense.

Illustration: A has two houses, one at Chennai and another atCoimbatore. He has offered to sell one to B. B accepts thinkingto purchase the house at Coimbatore, while A, when he offers, hasin his mind to dispose of house at Chennai. There is noConsensus-as-idem.

4. Consideration: It means “Something in return” Every contractmust be supported by consideration.

Illustration : A offers to sell his watch for Rs. 500 to B and Baccepts the offer. Thus Rs. 500 is the consideration for thewatch and vice-versa.

5. Capacity; The parties to the contract must be competent tocontract. For example a contract by a minor is void

6. Free Consent: The consent of the parties must be free from anyflow – it must not be caused by a mistake or coercion orundue influence

7. Lawful consideration: The consideration to a contract must belawful

Illustration: A promises to pay Rs. 500 – to B, in considerationof B murdering C. The consideration is illegal.

8. The objects of the contact must be lawful

Illustration: A promises to pay Rs. 500 – for letting B’shouse for running a brothel. The objects is illegal. Hence,the contract is void.

Thus, “the essence of legal contract is that there shall bean agreement between two persons, that one of them shall dosomething either for the benefit of the other or for his owndetriment and that these persons intend that the agreementshall be enforceable at law”

CLASSIFICATION OF CONTRACTS

Contracts may be classified according to their validity,formation or performance.

I. Classification According to validity

A contract is based on an agreement. An agreement becomes acontract when all the essential elements referred to aboveare present. In such a case, the contract is a validcontract. If one or more of these elements are missing, thecontract is either voidable, void, illegal or unenforceable.

Voidable Contract

An agreement which is enforceable by law at the option of oneor more of the arties thereto, but not at the option of theother or others, is a voidable contract. Sec.2(i).

Example : A promises to sell his house to B for Rs. 2,00,000.His consent is obtained by use or force. The contract isvoidable at the option of A. He may avoid the contract.

Void Contract

A contract which is at enforceable by law is a void contract.

Example : A contract enter4ed into by a minor is void.

Illegal Agreement

An illegal agreement is one which is criminal is nature orwhich is immoral. Such an agreement is a void contract. Allillegal agreements are void but all more agreements orcontracts are not necessarily illegal.

Unenforceable Contract

An unenforceable contract is one which cannot be enforced in aCourt of aw because of some technical defect, such asabsence of writing or where the remeds has been barred bylapse of time.

II CLASSIFICATIONS ACCORDING TO FORMATION

Contracts may be classified according to the mode of theirformation as follows:

Express Contract

If the terms of a contract are expressly agreed upon whetherby words spoken or written at the time of the formation ofthe contract, the contract is said to be an expresscontract.

Implied Contract

An implied contract is one which is inferred from the acts orconduct of the parties or course of dealings between them.It is not the result of any express promise or promises bythe parties but of their particular act.

Example: A enters into a hotel and takes lunch. It is an impliedcontract that he has to pay the cost of lunch after takingit.

III CLASSIFICATION ACCORDING TO PERFORMANCE

These may be classified as Executed contracts or Executorycontracts. Unilateral contracts or Bilateral contracts.

Executed Contracts

An executed contract as one in which both the parties haveperformed have performed their respective obligations.

Example: A agrees to supply a watch to B for Rs. 500. When Asupplies the watch and B pays the price, the contracts issaid to be executed.

Executory Contracts

An executory contract is one in which both the parties haveyet to perform their obligations. Thus in the above example,the contract is executor if A has not yet supplied the watchand B has not paid the price.

Unilateral Contract

A unilateral or one-sided contract is one in which only oneparty has to fulfil his obligation at the time of theformation of the contract, the other party having fulfilledhis obligation at the time of the contract or before thecontract comes into existence.

Bilateral Contract

A bilateral contract is one in which the obligations on thepart of both the parties to the contract are outstanding atthe time of the formation of the contract. In this sense,bilateral contracts are similar to executor contracts.

OFFER AND ACCEPTANCE

OFFER

An offer is also called a proposal. Sec. 2 (a) of the IndianContract Act defines a proposal as, :When one personsignifies to another his willingness to do or to abstainfrom doing anything. With a view to obtaining the assent ofthat other to such act or abstinence, he is said to make aproposal.” The person making the proposal is called the“prosper” or “offerer” and the person to whom the proposalis made is called “offeree”

LEGAL RULES RELATING TO OFFER

1. It must contain either definite terms or capable of beingmade definite.

Montreal dfgdfgdfghgdh : It was held in this case, that a clause tofavourate consider the applies that renewal is ambinguousand not binding the compans

2. It must intend to give use to legal consequences

Gdfgjdfkgjdflkgd : A husband promised to pay Rs. 1000/- per monthto his wife, staying away from him. Held that the promise wasnever intended to b e enforced in law.

3. It must be distinguished from a quotation or an invitationto offer

Ghdkjdfkgjdkgjdgdfgkj : P offered to buy D’s property for Rs. 6000.D replied, “Won’t accept less than 10,000” P agreed to pay Rs.10,000. But D sold it to another person. It was held that merestatement of price by D contained no implied contract to sellit at that price.

A catalogue or price list or tenders invited for the supplierto goods are not proposals.

4. An offer may be made to an individual or addressed to theworlds at large. An offer is called a specific offer when itis made to a particular person.

Gdfgdfgdfgdfgdf fgdfgd dfgd dfg: The company has offered byadvertisement, a reward of £ 100 to anybody contractinginfluenza after using their smoke ball according to theirdirection. Mrs. Carlill used it as directed but still had anattack of influenza. So, she sued for the award of £ 100. Itwas held that she was entitled to the award since an offermade at large, can ripen itself into a contract with anybodywho performs the terms of the offer.

5. An offer is different from a tender

A offers to supply goods at a particular rate for aparticular period from a certai9n trade. If this offer isaccepted by B, it is called a tender. It becomes anacceptance only when B places an order for a part of thegoods.

6. An offer must be communicated to the offeree

Gdfg dfgdf dfg dfg dfg : A’s nephew was missing is who wasan employee of A, volunteered his services to search for theboy. Meanwhile, A had announced a reward to anybody whocould trace the boy. It found the boy and brought him backto home and sued for the reward. It was held that he was notentitled to the reward as he was ignorant of the offer.

Section 4 lays down that the communication of an offer iscomplete only when it reaches the offeree. So an offer bindsthe offeror only when the offeree has the knowledge of anoffer.

ACCEPTANCE

Section 2 the of the Indian Contract Act defines acceptancesas. When the person to whom the proposal is made signifieshis assent thereto the proposal is said to be accepted. Aproposal when accepted becomes a promise. An offer whenaccepted becomes a contract.

An offer can be accepted only by the persons to whom the offeris made.

Boulton Vs Jones A sold his business to B. This sale is notknown to V’s customers. So Jones who is a usual customer ofthe vendor places an order for goods with the vendor. A byname B, the new owner receives the order and supplies, thegoods without disclosing the fact of sale of business tohim. It was held that the price could not be recovered asthe contract was not entered into with him.

Essentials of Valid Acceptance

1. Acceptance must be communicated in usual and reasonablemanner. It may be made by express words, spoken or writtenor by conduct of the parties, i.e. by doing an act whichamounts to acceptance according to the terms of the offer orby the offeree accepting the benefit offered by the offeror.

Any method can be prescribed for the communication ofacceptance. But silence can never be prescribed as a methodof communication. Hence, mere mental assent withoutexpressing it and communicating it may means of word or anact, is not sufficient.

Brogden Vs Metropolitan Railway Co. The Manager of a railwaycompany simply wrote on the proposal “approved” and kept itin a drawer. By oversight it was not communicated. It washeld that the acceptance was not communicated and hencethere was no contract.

2. Communication of acceptance may be warved by the offeror :This rule is established in the case of Carill V’s gdfg gdfgng gdf where the advertisement never wanted thecommunication apart from fulfilling the conditions of offer.

3. Acceptance should be made before the offer lapses or isrevoked or is received

4. Acceptance must be absolute and unconditional and shouldcorrespond with the terms of the offeror. Otherwise, itamount to counter offer which may be accepted or rejected bythe offeror. For example, A offeror to sell his car for S. 1lakh B asks for Rs. 70,000. It is not an acceptance but acounter offer only.

5. Acceptance once made, concludes the contract

CONSIDERATION

Consideration means “something in return for something”. Section2 of the Indian Contract Act defined consideration thus “When atthe desire of the promisor, the promise or any other person hasdone or abstained from doing, or does or abstains from doing, orpromises to do or abstain from doing something, such act orabstinence or promise is called a consideration for the promise.”

1. Consideration at the Desire of the Promisor

Consideration must proceed at the request of the promisor.Hence acts done voluntarily or at the request of thirdparties do not constitute a valid consideration.

Durga Prasad Vs Baldev : A built a market at the request ofthe Collector of the place B promised to pay. A commissionon the articles sold in the market. It was held that B’spromise to pay commission did not constitute a validconsideration because A did not build the market at therequest of B.

2. The Promisee or any other Person

Consideration may move from the promise or any third party.Hence, a stranger to consideration can sue on the contract.

3. Has done or abstained from doing or does or abstain fromdoing

a) Consideration may be executed, i.e. an act or forbearancemade or suffered for the promise given, or

b) Consideration may be executor, i.e. a promise to act orabstain from doing in future, or

c) Consideration may be past, i.e. an act or forbearancealready taken place before the contract was entered into

4. Something

Consideration may not be adequate. But it must be real andlawful. Example : A agrees to sell a cow worth Rs. 1200 forRs. 10. He has given his consent freely. The agreement is acontract though consideration is inadequate.

An agreement made without consideration is void. But thefollowing are exceptions.

(1) An agreement expressed in writing and registered andmade on account of natural love and affection betweenparties standing in neat relation to each other.

(2) A promise to compensate a person who has alreadyvoluntarily done something for the promisor, or

(3) A promise to discharge a time-barred debt.

CAPACITY TO CONTRACT

The parties who enter into a contract must have the capacity todo so ‘Capacity’ means competence of the parties to enter into avalid contract. According to Sec. 10, an agreement becomes acontract if it is entered into between the parties who arecompetent to contract. Thus Sec. 11 declares the following personto be incompetent to contract.

(i) Minors

(ii) Persons of unsound mind, and

(iii) Persons disqualified by any law to which they aresubject.

Incapacity to contract

Fgsdklgjfdsklg asdgjsdlkgsdfg sgsdf Mental deficiency

Ing incapacity arising of hdfgdf

1. Foreign Suvereigns and Ambassadors

They may enter into contracts. But they cannot be sued exceptwith the permission of the Central Government and certifiedby the Secretary.

2. Alien Enemy

The enemy’s status is to be determined by the place atresidence of the individual, but not by his nationality. Ifa contract is already entered into into before thedeclaration of war, its performance will be suspended duringthe period of war and in case the war continues to whereperiod, the contract becomes void on the ground ofimpossibility of perticugdfgdf contract.

3. Conviet

He is no competent to contract during the period ofsentence.

4. Bankrupt

He cannot enter into contract and bind his property as hisproperty shall be vested in the official receiver when he isadjudged an insolvent.

5. Artificial Person : Corporation

It is a person in the eye of law. It is a legal entity. Itcan purchase properties enter into contracts, sue and besued on such contracts. Its contractual capacity is limited.For example, it cannot enter into contract to marry or whichis ultra vires its powers.

(B) INCAPACITY ARISING FROM MENTAL DEFICIENCY

A person is sand to be mentally deficient when (a) he does notattain majority. E.g. a minor or (b) he is of unsound mind.

1. When he does not attain majority: Minor

A minor is a person who has not completed 18 years of age. Heattain majority on completion of his 21 year in England and18 year in India. A minor cannot enter into a validcontract.

2. When he is of Unsound Mind

Section 12 lays down that : A person is said to be of soundmind for the purpose of making a contract if at the timewhen he makes it, he is capable of understanding it and of

forming a rational judgement as to tis effect upon hisinterests. A person who is usually of unsound mind, butoccasionally of sound mind may mase a contract when he is ofsound mind.

Illustration: a patient in a lunatic asylum, who is atintervals of sound mind may contract during those intervals.

MINOR IN INDIAN LAW

A minor is a person who is not a major. He attains majority oncompletion of 21 years in England and 18 years in India. Even inIndia he attains majority on completion of 21 years when hisproperty is managed by a court of wards or a guardian.

1. In Indian law, a contract by a minor is void. It cannot beeven ratified by him after attaining majority.

2. A contract entered into by a minor by fraudulentlymisrepresenting his age is void. He cannot be stopped fromsetting up the plea of minority.

3. “Minors can have no privilege to cheat men”, though lawprotects them, so that people may not exploit their tenderage. So, if a minor receives goods on credit while paymentcannot be enforced goods can be recovered, if restitution ispossible.

4. The property of the minor is liable for the necessariessupplied to him, provided the goods are suitable tot ehcondition of his life and status. Even here, he is notpersonally liable, but his estate only is liable.

5. While a sale or mortgage by a minor is void, a sale ormortgage in favour of a minor is enforceable by him.

6. A contract by a guardian on behalf of the minor isenforceable by or against the minor, provided the guardianis competent to contract and the contract is beneficial to

the minor. But he cannot purchase immovable property withoutobtaining the consent of the court.

7. Under Sec. 3 of the Indian Partnership Act a minor may beadmitted to the benefits of partnership with the consent ofall the partners.

CONSENT AND FREE CONSENT

Consent: It means acquiescence or act of assenting to an offer.“Two or more persons are said to consent when they agree uponthe same thing in the same sense”. (Sec. 13)

Free Consent: Consent is said to be free when it is not caused by

(1) Consent as defined in Sed. 15 or

(2) Undue influence as defined in Sec. 16, or

(3) Fraud as defined in Sed. 17, or

(4) Misrepresentation as defined in Sec. 18, or

(5) Mistake, subject to the provisions of Secs. 20, 21, and22 (Sec. 14)

When there is no consent, there is no contract

Example : A is forced to sign a promissory note at the point ofpistol. A knows what he is signing but his consent is not free.The contract in this case is voidable at this option.

FLOW IN CONSENT

Coercion (Sec. 15)

Undue influence (Sec. 16)

Misrepresentation

Mistake

Fraudulent or Willful (Sed.

17)

Innocent or unintentional (Sec. 18)

Mistake of law (Sec. 21)

Mistake of fact (Sec. 20)

COERCION

When a person is compelled to enter into a contract by the useof force by the other party or under a threat, “coercion” is saidto be employed. Coercion is the committing, or threatening tocommit, any act forbidden by the Indian Penal Code 1860 or theunlawful detaining, or threatening to detain, any property, tothe prejudice of any person whatever, with the intention ofcausing any person to enter into an agreement.

Example: a threatens to kill B if he does lend Rs. 1000 to C. Bagrees to lend the amount to C. The agreement is entered intounder coercion.

A threat to commit suicide also amounts to coercion.

EFFECT OF COERCION

When consent to an agreement is caused by coercion, fraud ormisrepresentation, the agreement is a contract voidable at theoption of the party whose consent was so caused (Sec. 19)

UNDUE INFLUENCE

Sometimes a party is compelled to enter into an agreement againsthis will as a result of unfair persuasion by the other party.This happens when a special kind of relationship exists betweenthe parties such that one party is in a dominant position toexercise undue influence over the other.

Sec. 16(1) defines : undue influence” as follows

A contract is said to be induced by undue influence wherethe relations subsisting between the parties are such that one ofthe parties is in a position to dominate the will of the otherand uses that position to obtain an unfair advantage over theother.

The following relationships usually raise a presumption of undueinfluence viz.

(i) Parent and child

(ii) Guardian and ward

(iii) Trustee and beneficiary

(iv) Doctors and patient

(v) Solicitor and client, and

(vi) Finance and fiancée

The presumption of undue influence applies whenever therelationship between the parties is such that one of them isby reason of confidence reposed in him by the other, able totake unfair advantage over the other.

EFFECT OF UNDUE INFLUENCE

When consent to an agreement is obtained by undue influence,the agreement is a contract voidable at the option of theparty whose consent was so obtained. Any such contract maybe set aside either absolutely or if the party who isentitled to avoid it has received any benefit thereunder,

upon such terms and conditions as to the Court may seem justand equitable (Sec. 19-A)

DIFFERENCE BETWEENS COERCION AND UNDUE INFLUENCE

S. No. Coercion Undue Influence

1. The consent is givenunder the threat of anoffence

The consent is given by aperson who is so situatedin relation to anotherthat the other person isin a position to dominatehis will

2. Coercion is mainly of aphysical character. Itinvolves mostly use ofphysical or violentforce.

Undue influence is ofmoral character. Itinvolves use of moralforce or mental pressure.

3. There must be intentionof causing any person toenter into an agreement

Here the influencingparty uses its positionto obtain an unfairadvantage over the otherparty

4. It involves a criminalact

No criminal act isinvolved

MISREPRESENTATION AND FRAUD

MISREPRESENTATION

Misrepresentation is a false statement which the person making ithonestly believes to be true or which he does not know to be

false. It also includes non-disclosure of a material fact orfacts without any intent to deceive the other party.

Sec. 18 defines “misrepresentation” According to it, there ismisrepresentation

(1) When a person positively asserts that a fact is truewhen his information does not warrant it to be so, though hebelieves is to be true.

(2) When there is any breach of duty by a person whichbrings an advantage to the person committing it bymisleading another to his prejudice.

(3) When a party causes, however innocently, the otherparty to the agreement to make a mistake as to the substanceof the thing which is the subject of the agreement.

FRAUD

Fraud exists when it is shown that a false representation hasbeen made (a) knowingly, or (b) without belief in its truth, or(c) recklessly, not caring whether it is true or false, and themaker intended the other party to act upon it.

MISTAKE OF LAW

Mistake of law be (1) mistake of law of the country or (2)mistake of law of a foreign country.

1. Mistake of law of the country: Ignorantta juris non exerts Ex.Ignorice of laws is no exclause : is a well settled rule oflaw. A party cannot be allowed to get any relief on theground that it had done a particular act in ignorance oflaw. A mistake of law is, therefore, no excuse, and thecontract cannot be avoided.

Example: A and B enter into a contract on the erroneousbelief that a particular debt is barred by the Indian Law ofLimitation. This contract may be voidable.

2. Mistake of law of a foreign country: Such a mistake is treated asmistake of fact and the agreement in such a case is void.(Sec. 21)

MISTAKE OF FACT

Mistake of fact may be (1) a bilateral mistake, or (2) aunilateral mistake

1. Bilateral Mistake

Where both the parties to an agreement are under a mistake asto a matter of fact essential to the agreement, there is abilateral mistake. In such a case the agreement is void(sec. 20). The following two conditions have to be faucedfor the application of Sec. 20.

(i) The mistake must be mutual i.e. both the parties shouldmisunderstand each other and should be at a cross-purposes.

Example: A agreed to purchase B’s motor-car which waslying in B’s garage. Unknown to either party, the car andgarage where completely destroyed by fire a day earlier.The agreement is void

(ii) The mistake must relate to a matter of fact essential tothe agreement. As to what facts are essential in anagreement will depend upon the nature of the promise ineach case.

Example: A man and a woman entered into a separation agreementunder which the man agreed to pay a weekly allowance to thewoman mistakenly believing themselves lawfully married leldthe agreement was void as there was mutual mistake on a pointof fact which was material to the existence of the agreement.

The various cases which fail under bilateral mistake are asfollows:

Mistake as to the Subject – Matter:

Where both the parties to an agreement are working under amistake relating to the subject-matter, the agreement is void.Mistake as to the subject-matter covers the following cases.

(1) Mistake as to the existence of the subject-matter: If both theparties believes the subject-matter of the contract to be inexistence, which in fact at the time of the contract is non-existent, the contract is void.

Example: A agrees to buy from B a certain goat. It turns outthat the goat was dead at the time of the bargain, thoughneither parts was aware of the fact. The agreement is void.

(2) Mistake as to the identity of the subject-matter: It usuallyarises where one party intends to deal in one thing and theother intends to deal in another.

Example: W agreed to buy from R a cargo on cotton to arriveex-peerless from Bombay”. There were two ships of that namesailing from Bombay, one sailing in October and the other inDecember. W meant the former ship R meant the latter. Held,there was a mutual or a bilateral mistake and there was nocontract.

(3) Mistake as to the quality of the subject-matter: If the subjectmatter is something essentially different from what theparties thought it to be the agreement is void.

Example: A sells to B a prece of silk B thinks that it isforeign silk. A knows that B thinks so but knows that it isIndian silk only.

(4) Mistake as to the quantity of the subject-matter: If both theparties are working under a mistake as to the quantity ofthe subject-matter the agreement is void.

Example: A silver bar was sold under a mistake as to itsweight. There was a difference in value between the weightof the bar as it was and as it was supposed to be Held theagreement was void.

(5) Mistake as to the title to the subject-matter: If the seller asselling a thing which he is not entitled to sell and boththe parties are acting under a mistake, the agreement isvoid.

Example: A person took a lease of a fishery which, unknown toeither party already belonged to him. Held, the lease wasvoid.

(6) Mistake as to the price of the subject-matter: if there is amutual mistake as to the price of the subject-matter, theagreement is void.

Example: C wrote to D offering to sell certain property forRs. 15,000. He had earlier declined an offer from D to buythe same property for Rs. 20,000. D who knew that his offerof Rs. 15,000 was a mistake for Rs. 25,000, immediatelyaccepted the offer. Held, D knew perfectly well that theoffer was made by mistake and hence the contract could notbe enforced.

Mistake as to the Possibility of Performing the Contract

Consent is nullified if both the parties believe that inagreement is capable of being performed when in fact this is notthe case. The agreement, in such a case, is void on the ground ofimpossibility.

Impossibility may be—

(i) Physical Impossibility

Example: A contract for the hire of a room for witnessing thecoronation procession of Edward VII was held to be voidbecause unknown to the parties the procession had alreadybeen cancelled.

(ii) Legal Impossibility: A contract is void if it provides thatsomething shall be done which cannot, as a matter of lawbe done.

2. Unilateral Mistake

When in a contract only one of the parties is mistakenregarding the subject matter or in expressing orunderstanding the terms or the legal effect of the agreementthe mistake is a unilateral mistake. According to Sec. 22, acontract is not voidable merely because it was caused by oneof the parties to it being under a mistake as to a matter offact. A unilateral mistake is not allowed as a defence inavoiding a contract unless the mistake is brought about bythe other party’s fraud or misrepresentation.

Example: A offers to sell his house to B for an intended sumof Rs. 44,000. By mistake he makes an offer in writing ofRs. 40,000. He cannot plead mistake as a defence.

LEGALITY OF OBJECT

A contract must have a lawful object. The word object meanspurpose of design. In some cases consideration for an agreementmay be lawful but the purpose for which the agreement is enteredinto may be unlawful. In such cases the agreement is void. Assuch both the object and the consideration of an agreement mustbe lawful otherwise the agreement is void.

The consideration or object of an agreement is unlawful

1. If the object is forbidden by law

Example: A promise to obtain for B an employment in thepublic service and 18 promises to pay Rs. 1,00,000 to A. theagreement is void, as the consideration is unlawful.

2. If the object is permitted, it would defeat the provisionsof any law

Example: N agreed to enter a company’s service inconsideration of a weekly wage of Rs. 75 and a weeklyexpense allowance of Rs. 25. Both the parties knew that theexpense allowance was a device to evade tax. Held theagreement was unlawful.

3. If the object is fraudulent: An agreement which is made fora fraudulent purpose is void. Thus an agreement in fraud ofcreditors with a view to defeating their rights is void.

4. If the Court regards the object as immoral

Example: A agrees to let her daughter to B for concubinage(state of living together as man and wife without beingmarried. The agreement is unlawful, being immoral.

5. Where the Court regards it as opposed to public policy.

UNLAWFUL AND ILLEGAL AGREEMENTS

An unlawful agreement is one which, like a void agreement, is notenforceable by law. An illegal agreement is not only, void asbetween the immediate parties but has further effect that thecollateral transactions to it also become tainted withillegality.

Example: T lends Rs. 50,000 to B to help him to purchase someprohibited goods from T, an alien enemy. If B enters into anagreement with T, the agreement will be illegal and the agreementbetween B and T shall also become illegal, because it iscollateral to the main transaction. T cannot, therefore, recoverthe amount.

AGREEMENTS OPPOSED TO PUBLIC POLICY

An agreement is said to be opposed to public policy when it isharmful to the public welfare. Some of the agreements which areopposed to public policy and are unlawful are as follows.

1. Agreements of trading with enemy: An agreement made with an alienenemy in time of war is illegal on the ground of publicpolicy.

2. Agreement to commit a crime: Where the consideration in anagreement is to commit a crime, the agreement is opposed topublic policy. The Court will not enforce such an agreement.

3. Agreements which interfere with administration of police: An agreement,the object of which is to interfere with the administrationof justice is unlawful, being opposed to public policy. Itmay take any of the following forms.

(a) Interference with the course of justice: An agreement which obstructsthe ordinary process of justice is unlawful.

(b) Stifling prosecution: It is in public interest that if a personhas committed a crime, he must be prosecuted and punished.

(c) Maintenance and champerty: Maintenance’ is an agreement togive assistance, financial or otherwise, to another toenable him to bring or defend legal proceedings when theperson giving assistance has got no legal interest of hisown in the subject-matter.

4. Agreements in restraint of legal proceedings : Sec. 28 which deals withthese agreements.

(a) Agreements restricting enforcement of rights: Anagreement which wholly or partially prohibits any partyfrom enforcing his rights under or in respect of anycontract is void to that extent.

(b) Agreements curtailing period of limitation: Agreementswhich curtail the period of limitation prescribed by theLaw of Limitation are void because their object is todefeat the provisions of law.

5. Trafficking in public offices and rules: Agreements for the sale ortransfer of public offices and titles or for the procurementof a public recognition like Padma Vibhushan or Param VeerChakra for monetary consideration are unlawful being opposedto public policy.

Example: R paid a sum of Rs, 2,50,000 to A who agreed toobtain a seat for R’s son in a Medical College. On A’sfailure to get the seat, R filed a suit for the refund ofRs. 2,00,000. Held, the agreement is void on the ground ofpublic property.

6. Agreements tending to create interest opposed to duty: If a person entersinto an agreement whereby he is bound to do something which

is against his public or professional duty the agreement isvoid on the ground of public property.

7. Agreements in restraint of paternal rights: A father, and in hisabsence the mother, is the legal guardian of his/her minorchild. This rights of guardianship cannot be bartered awayby any agreement.

8. Agreements restricting personal liberty: Agreements which undulyrestrict the personal freedom of the parties to it are voidas being against public policy.

9. Agreements in restraint of marriage: Every agreement in restraint ofthe marriage of any person, other than a minor, is void(Sec. 26). This is because the law regards marriage andmarried status as the right of every individual.

10. Marriage brokerage or brocage agreements: An agreements bywhich a person for a monetary consideration, promises inreturn to procure the marriage of another is void beingopposed to public policy.

11. Agreements interfering with marital duties: Any agreement whichinterferes with the performance of marital duties is voidbeing opposed to public policy. Such agreements have beenheld to include the following.

(a) A promise by a married person to marry during thelifetime or after the death of spouse.

(b) An agreement in contemplation of divorce e.g. anagreement to lend money to a woman in consideration ofher getting a divorce and marrying the lender.

(c) An agreement that the husband and wife will always stayat the wife’s parents’ house and that the wife will neverleave her parental house.

12. Agreements to defraud creditors or revenues authorities: Anagreement the object of which is to defraud the creditors orthe revenue authorities is not enforceable being opposed topublic policy.

13. Agreements in restraint of trade: An agreement which interfereswith the liberty of a person to engage himself in any lawfultrade profession or vocation is called an agreement inrestraint of trade.

VOID AGREEMENTS

A void agreement is one which is not enforceable by law [Sec. 2 ]Such an agreement does not give rise to any legal consequencesand exaused ab initio.

The following agreements have been expressly deciared to be voidby the Contract Act.

1) Agreements by incompetent parties (Sec. 11)

2) Agreements made under a mutual mistake of fact [Sec. 20].

3) Agreements the consideration or object of which is unlawful(Sec. 23)

4) Agreements the consideration or object of which is unlawfulin part (Sec. 24)

5) Agreements made without consideration (Sec. 25)

6) Agreements in restraint of marriage (Sec. 26).

7) Agreements in restraint of trade (Sec. 27)

8) Agreements in restraint of legal proceedings (Sec. 28)

9) Agreements the meaning of which is uncertain (Sec. 29)

10) Agreements by way of wager (Sec. 30)

11) Agreements contingent on impossible events (Sec. 36)

12) Agreements to do impossible acts (Sec. 56)

13) In case of reciprocal promises to do things legal andalso other things illegal, the second set of reciprocalpromises is a void agreement (Sec. 57)

WAGERING AGREEMENTS OR WAGER

A wager is an agreement is an agreement between two parties bywhich one promises to pay money or money’s worth on thehappening of some uncertain event in consideration of theother party’s promise to pay if the event does not happen.Thus if A and b enter into an agreement that A shall pay BRs. 100 if it rains on Monday, and that B shall pay A thesame amount if it does not rain, it is a wagering agreement.

Essentials of Wagering Agreement:

(1) Promise to pay money or money’s worth: The wageringagreement must contain a promise to pay money or money’sworth.

(2) Uncertain event: The promise must be conditional on anevent happening or not happening.

(3) Each party must stand to win or lose: Upon thedetermination of the contemplated event, each party shouldstand to win or lose.

(4) No control over the event: Neither party should havecontrol over the happening of the event one way or the other

(5) No other interest on the event: Neither party shouldhave nay interest in the happening or non-happening of theevent other gdfgjdg sum or stake he will with or lose

CONTINGENT CONTRACTS

‘Contingent’ means that which is dependent on something else. AContingent Contract is a contract to do or not to do something,if some event collateral to such contract, does or does nothappen (Sec. 31). For example, goods are sent on approval thecontract is a contingent contract depending on the act of thebuyer to accept or reject the goods.

There are three essential characteristics of a contingentcontract.

1. Its performance depends upon the happening or non-happeningin future of some event. It is this dependence on a futureevent which distinguishes a contingent contract from othercontracts.

2. The event must be uncertain. If the event if bound tohappen, and the contract has got to be performed in any caseit is not a contingent contract

3. The event must be collateral, i.e. incidental to thecontract

Contracts of insurance, indemnity and guarantee are thecommonest instances of a contingent contract.

RULES REGARDING CONTINGENT CONTRACTS

1. Contingent contracts dependent on the happening of anuncertain future event cannot be enforced until the eventhas happened. If the event becomes impossible, suchcontracts become void (Sec. 32)

Example: A contracts to pay B a sum of money when B marriesC. C dies without being married to B. The contract becomesvoid.

2. Where a contingent contract is to be performed if aparticular event does not happen, its performance can beenforced when the happening of that event becomesimpossible. (Sec. 33)

Example: A agrees to pay B a sum of money, if a certain shipdoes not return. The ship is sunk. The contract can beenforced when the ship sinks.

3. If a contract is contingent upon how a person will act at anunspecified time, the event shall be considered to becomeimpossible when such person does anything which renders itimpossible that he should so act within any definite time,of otherwise than under further contingencies (Sec. 34)

Example: A agrees to pay B a sum of money if B marries C. Cmarries D. The marriage of B to C must not be consideredimpossible, although it is possible that D may die and thatC may afterwards marry B.

4. Contingent contracts to do r onto to do anything, if aspecified uncertain event happens within a fixed time,become void if the event does not happen or its happeningbecomes impossible before the expiry of that time.

Example: A promises to pay B a sum of money if a certainship returns within a year. The contract may be enforced ifthe ship returns within the year and becomes void if theship is burnt within the year.

5. Contingent agreements to do or not to do anything, if animpossible event happens are void, whether or not the factis known to the parties (Sec. 36).

PERFORMANCE OF CONTRACT

Performance of a contract takes place when the parties to thecontract fulfil their obligations arising under the contractwithin the time and in the manner presented.

OFFER TO PERFORM

Sometimes it so happens that the promisor offers to perform himobligation under the contract at the proper time and place butthe promise does not accept the performance. This is known as“attempted performance” or “tender”.

REQUISITES OF A VALID TENDER

1. It must be unconditional. It becomes conditional when it isnot in accordance with the terms of the contract.

2. It must be of the whole quantity contracted for or of thewhole obligation. A tender of an installment when thecontract stipulates payment in full is not a valid tender.

3. It must be by a person who is in a position, and is willing,to perform the promise.

4. It must be made at the proper time and place. A tender ofgoods after the business hours or of goods or money beforethe due date is not a valid tender.

5. It must be made to proper person, i.e. the promise or hisduly authorized agent. It must also be in proper form.

6. It may be made to one of the several joint promises. In sucha case it has the same effect as a tender to all of them.

7. In case of tender of goods, it must give a reasonableopportunity to the promise for inspection of goods.

8. In case of tender of money, the debtor must make a validtender in the legal tender money.

RECIPROCAL PROMISES

Promises which form the consideration or part of theconsideration for each other are called: reciprocal promises”[Sec. 2(f)]. Where, for example: A promises to do or not to dosomething and consideration of B is promise to do or not to dosomething the promises are reciprocal.

These promises have been classified is follows:

(1) Mutual and Independent: Where each party must performhis promise independently and irrespective of the factwhether the other party has performed or is willing toperform his promise or not the promises are mutual andindependent.

Example: In a contact of sale, B agrees to pay the price ofgoods on of instant. S promises to supply the goods on 2nd

instant. The promises are mutual and independent.

(2) Conditional and Dependent: Where the performance of thepromise by one party depends on the prior performance of thepromise by the other party the promises are conditional anddependent.

Example: A promises to remover certain debris lying in frontof B’s house provided B supplies him with the cart. Thepromises in this case are conditional and dependent. A need

not perform his promise if B fails to provide him with thecart.

(3) Mutual and Consent: Where the promises of both theparties are to be performed simultaneously they are said tobe mutual and concurrent. The example of such promises maybe sale of goods for cash.

Rules Regarding Performance of Reciprocal Promises

1) Simultaneous performance of reciprocal promises

2) Order of performance of reciprocal promises

3) Effect of one party preventing another from performingpromise

4) Effect of default as to promise to be performed first.

5) Reciprocal promise to do things legal and also other thingsillegal

TIME AS THE ESSENCE OF THE CONTRACT

The expression “time is of the essence of the contract “ meansthat a breach of the condition as to the time for performancewill entitle the innocent party to consider the breach as arepudiation of the contract.

Sec. 55 deals with the question of “time as the essence of thecontract” and provides.

1. When time is of the essence: In a contract, in which timeif of the essence of the contract, if there is a failure onthe part of the promisor to perform his obligation within

the fixed time. The contract (or so much of it as remainsunperformed becomes voidable at the option of the promise(Sec. 55 para 1). If, in such a case the promise acceptsperformance of the promise after the fixed time, he cannotclaim compensation for nay loss occasioned by the non-performance of the promise at the agreed time. But if at thetime of accepting the delayed performance he gives notice tothe promisor of his intention to claim compensation, he cando so (Sec. 55 para 3)

In commercial or mercantile contracts which provide forperformance within a specified time, time is ordinarily ofthe essence of the contract. This is so because businessmenwant certainty.

Example: In a contract for the sale or purchase of goods theprices of which fluctuate rapidly in the market, the time ofdelivery and payment are considered to be of the essence ofthe contract.

2. When time is not of the essence: In a contract, in whichtime is not of the essence of the contract, failure on thepart of the promisor to perform his obligation within thefixed time does not make the contract voidable, but thepromise is entitled to compensation for any loss occasionedto him by such failure (Sed. 55 para 2)

Intention to make time as the essence of the contract, ifexpressed in writing, must be in a language which isunambiguous and unmistakable. The mere fact that a certaintime is specified in a contract for the performance of apromise does not necessarily make time as the essence of thecontract. If the contract includes clauses providing forextension of time in certain contingencies or for payment offine or penalty for every day or week the work undertakenremains unfinished on the expiry of time provided in the

contract, such clauses are construed as renderingineffective the express provision relating to the time beingof the essence of the contract.

TERMINATION AND DISCHARGE OF CONTRACT

Discharge of contract means termination of the contractualrelationship between the parties. A contract is said to bedischarged when it ceases to operate, i.e. when the rights andobligations created by it come to an end.

A contract may be discharged

1. By Performance

2. By Agreement or Consent

3. By impossibility

4. By Lapse of Time

5. By operation of Law

6. By Breach of Contract

1. Discharge by Performance

Performance means the doing of that which is required by acontract. Discharge by performance takes place when theparties to the contract fulfill then obligations arisingunder the contract within the time and in the mannerprescribed.

Performance of a contract is the most usual mode of itsdischarge. It may be

(1) Actual Performance: When both the parties perform theirpromises the contract is discharged. Performance should

be complete precise and according to the terms of theagreement.

(2) Attempted Performance or Perfer: Tender is not actualperformance but is only an after to perform theobligation under the contract.

2. Discharge by agreement or consent

(a) Sec. 62 lays down that if the parties to a contractagree to substitute a new contract for it or to rescindor to alter it the original contract is discharged andneed not be performed.

The various cases of discharge of contract by mutualagreement are dealt with in Sec. 62 and 63 are given below.

Rescission Sec. 62: Novation takes place when a newcontract is substituted for an existing one between the sameparties.

Example: A owes money to B under a contract. It is agreedbetween A, B and C that B shall henceforth accept C as hisdebtor, instead of A. the old debt of A to B is at an endand a new debt from C to B has been contracted.

(b) Rescission Sec. 62: Rescission of a contract takesplace when all or some of the terms of the contract arecancelled. It may occur

(i) By mutual consent of the parties or

(ii) Where one party fails in the performance of hisobligation in such a case the other party may rescindthe contract without prejudice to his right to claimcompensation for the breach of contract.

Example: A promises to supply certain goods to B six monthsafter date. By that time, the goods go out of fashion. A andB may rescind the contract.

(c) Alteration (Sec 62): Alteration of a contract may takeplace when one or more of the terms of the contract isare altered by the mutual consent of the parties to thecontract. In such a case, the old contract is discharged.

Example: A enters into a contract with B for the supplyof 100 bales or cotton at his Godown No. 1 by the firstof the next month. A and B may after the terms of thecontract by mutual consent.

(d) Remission Sec. 63) Remission means acceptance of alesser fulfilment or the promise made, i.e. acceptance ofa lesser sum than what was contracted for the dischargeof the whole of the debt.

Example: A owes B Rs. 50,000. A pays to B and B acceptsin satisfaction of the whole debt. Rs. 20,000 paid at thetime and place at which Rs. 50,000 were payable. Thewhole debt is discharged.

(e) Waver: Waver takes place when the parties to a contractagree that gdfsg shall no longer be bound by thecontract. This amounts to a mutual thandonment at rightsby the parties to the contract.

(f) Merger: Merger tales place when an inferior rightaccuring to a party under a contract merger into asuperior right accruing to the same party under the sameon some other contract.

Example: P holds a property under a lease. He later buysthe property. His rights as a lessee merge into hisrights as an owner.

3. DISCHARGE BY IMPOSSIBILITY OF PERFORMANCE

If an agreement contains an undertaking to perform animpossibility, it is void ab initio. This rule is based onthe following maxims:

1. Impossibility existing of the time of agreement: Sec. 56 lays down thatcan agreement to do an impossible act itself is void”. Thisis known as pre-contractual or initial impossibility.

2. Impossibility arising subsequent to the formation of contract: Impossibilitywhich arises subsequent to the formation of a contract(which could be performed at the time when the contract wasentered into) is called post-contractual or superveningimpossibility.

Discharge by Supervening Impossibility

A contract is discharged by supervising impossibility in thefollowing cases

1. Destruction of subject-matter of contract: When the subject-matter of a contract, subsequent to its formation, isdestroyed without any fault of the parties to the contract,the contract is discharged.

Example: C let a music hall to T for a series of concerts oncertain days. The hall was accidentally burnt down beforethe date of the first concert. Held the contract was void.

2. Non-existence or Non-occurrence of a particular state ofthings: Sometimes, a contract is entered into between twoparties on the basis of a continued existence or occurrenceof a particular state of things. If there is any change inthe state of things which ought to have occurred does notoccur, the contract is discharged.

Example: A and B contract to marry each other. Before thetime fixed for the marriage, A goes mad. The contractbecomes void.

3. Death or Incapacity for personal service: Where theperformance of a contract depends on the personal skill orqualification of a party, contract is discharged on theillness or incapacity or death of that party. The man’s lifeis an implied condition of the contract.

Example: An artist undertook to perform at a concert for acertain price. Before she could do so, she was takenseriously ill. Held she was discharged due to illness.

4. Change of law: When subsequent to the formation of acontract change of law takes place, and the performance ofthe comerge becomes impossible the contract discharged.

Example: D enters into a contract with P on 1st March forsupply of ghdkjfg imported goods in the month of Septemberof the same year in June gdfg fgdf Parliament the import ofsuch goods is banned. The contract is discharged.

5. Outbreak of war : A contract entered into with an afterenems during war is unlawful and therefore impossible forperformance. Contracts entered into before the outbreak ofwar are suspended during the war and may be revived afterthe war is over.

4. DISCHARGE BY LAPSE OF TIME

The Limitation Act 1963 laws down that a contract should beperformed within a specific period called period of limitation.If it is not performed and if no action is taken by the promisewithin the period of limitation he is deprived of his remedy at

law. For example the price of goods sold without any stipulationas to credit should be paid within three years of the delivery ofthe goods. If the price is not paid and creditor does not file asuit against the buyer for the recovery of price within threeyears the debt becomes time-barred and hence irrecoverable.

5. DISCHARGE BY OPERATION OF LAW

A contract may be discharged by operation of law. Thisincludes discharge

(a) By Death: In contracts involving personal skill orability, the contract is terminated on death of thepromissory. In other contracts the rights and liabilitiesof a deceased person pass on to the legal representatives ofthe deceased person.

(b) By Merger: When an inferior right accruing to a partymerges into a superior rights accruing to the same partyunder the same or some other contract the inferior rightaccruing to the party is said to be discharged.

(c) By Insolvency: When a person is adjudged insolvent, heis discharged from all liabilities incurred prior to hisadjudication.

(d) By Authorised Alteration of the terms of a writtenagreement: Where a party to a contract makes any materialalteration in the contract without the consent of the otherparts, the other parts can avoid the contract. A materialalteration is one which changes in a significant manner thelegal identity or character of the contract or the rightsand liabilities of the parties to the contract.

(e) B y Rights and Liabilities becoming visited of thedfgdfg Person: Where the rights and liabilities under a

contract vested in the same person for example when a billgets into the hands of the acceptor, the other parties aredischarged.

6. DISCHARGE BY BREACH OF CONTRACT

Breach of contract means a breaking of the obligation whicha contract imposes. It occurs when a party to the contractwithout lawful excuse does not fulfil his contractualobligation or by his own act makes it impossible that heshould perform his obligation under it. It confers a rightof action for damages on the injured party.

REMEDIES FOR BREACH OF CONTRACT

When a contract is broken, the injured party has one or more ofthe following remedies:

1. Rescission of the contract

2. Suit for damages

3. Suit upon quantum meruit

4. Suit for specific performance of the contract

5. Suit for injunction

1. RESCISSION

When a contract is broken by one party, the other party maysue to treat the contract as rescinded and refuse furtherperformance. In such a case, be is absolved of all hisobligations under the contract.

Example: a promises B to supply 10 bags of cement on acertain day. B agrees to pay the price after the receipt of

the goods. A does not supply the goods. B is discharged fromliability to pay the price.

The Court may grant rescission.

(a) Where the contract is voidable by the plamtiff of

(b) Where contract is unlawful to fgdfg but apparent offits face and the defendant is more to blame thatn the gdfgdf

When a party treats the contracts as rescinded be makes himselfliable to restgdf any benefits he has fgdfg of under the contractto the party from whom such benefits were received. But if aperson rightfully rescinds a contract he is entitled tocompersation for any damage which he has sustained through non-fulfilment of the contract by the other party.

2. DAMAGES

Damages are a moctars compensation allowed to the injuredparty by the Court for the loss or injurs suffered by him bythe breach of a contract. The object of awarding damages forthe search of a contract is to put the injured party in thesame position, so far as money am the it, as if he had notbeen injured, i.e. in the position in which he would havebeen had there been performance and not breach. This iscalled the doctrine of restitution.

The rules relating to damages may be considered as under

1. Damages arising naturally – Ordinary damanges

When a contract has been broken, the injured party canrecover from the other party such damages as naturally anddirectly arose in the usual course of things from the

breach. This means that the damages must be the proximateconsequence of the breach of contract. These damages areknown as ordinary damages.

Example: A contracts to sell and deliver 50 quintals of FarmWheat to B at Rs. 1000 per quintal, the price to be paid atthe time of delivery the price of wheat rises to Rs. 1200per quintal and A refuses to sell the wheat B can claimdamages at the rate of Rs. 200 per quintal.

2. Damages in contemplation of the parties – Special damages

Special damages can be claimed only under the specialcircumstances which would result in a special loss in caseof breach of a contract. Such damages knows as specialdamages cannot be claimed as a matter of right.

Example: A. a builder, contracts to erect a house for B bythe 1st of January. The order that B may give possession ofit at that time to C to whom B has contracted to hfdg it. Ais informed of the contract between B and C. A builds thehouse so badly that before the 1st January, it falls downand has to be rebuilt by B fgdfg vonsequence loses the rentwhich be was to have received from C, and gdfgdfgdf to makecompensation to C fvor the breach of the contract. A mustmake cgdfgdfgd to gdfg for the cost of rebuilding the housefor the rent lost, and for the compensation made to.

3. Vindictive or Exemplary damages

Damages for the breach of a contract are given by way ofcompensation for loss suffered, and not by way ofpunishement for wrong inflicted. Hence vindictive orexemplary’ damages have no place in the law of contractbecause they are punitive involving punishment by nature.But in case of (a) breach of a promise to marry and the

dishonor of a cheque by a banker wrongfully when hepossesses sufficient funds by the credit of the customer,the Court may award exemplary damages.

4. Nominal damages

Where the injured party has not in fact suffered any loss byreason of the breach of a contract, the damages recoverableby him are nominal. These damages merels acknowledge thatthe plaintiff has proved his case and won.

Example: A firm consisting of four partners employed B for aperiod of two years. After six months two partners rebredthe business being carried on by the other two B declined tobe employed under the continuing partners. Held, he was onlyentitled to nominal damages as he had suffered no loss.

5. Damages for loss of reputation

Damages for loss of reputation on case of breach of acontract are generally not recoverable. An exempuon to thisrule exists in the case of a banker who wrongfully refusesto honour a customer’s cheque. If the customer happens to bea tradesman, he can recover damages in respect of any lossto his trade reputation byh the breach. And the rule of lawis the smaller the amount of the cheque dishonoured thelarger the amount of damages awarded. But if the customer isnot a tradesman be can recover only nominal damages.

6. Damages for inconvenience and discomfort

Damages can be recovered for physical inconvenience anddiscomfort. The general rule in this connection is that themeasure of damages is not affected by the motive or themanner of the breach.

Example: A was wrongfully dismissed in a harsh andhumiliating manner by from his employment. Held (a) A couldrecover a sum representing his wages for the period ofnotice and the commission which he would have earned duringthat period but (b) he could not recover anything for hisinjured feelings or for the loss sustained from the factthat his dismissal made it more difficult for him to obtainemployment.

7. Mitigation of damages

It is the duty of the injured party to take all reasonablesteps to mitigate the loss caused by the breach. He cannotclaim to be compensated by the party in default for losswhich the ought reasonably to have avoided. That is hecannot claim compensation for loss which is really due notto the breach, but due to his own neglect to mitigate theloss after the breach.

8. Difficulty of Assessment

Although damages which are incapable of assessment cannot berecovered the fact that they are difficult to assess withcertainty or precision does not prevent the aggrieved partyfrom recovering them. The Court must do its best estimatethe loss and a contingences may be taken into account.

Example: H advertised a beauty competition by which gfdgfkof certain newspapers were to select fifty ladies. Hehimself was to select twelve out of these fifty. Theselected twelve were to be provided theatrical encagements.C was one of the fifty and by H’s breach of contract she wasnot present when the final section was made. Held C wasentitled to damages although it was difficult to assessthem.

9. Cost of Decree

The aggrieved party is entitled in addition to damages toget the cost of getting the decree for damages. The cost ofsuit for damages is in the discretion of the Court.

10. Damages agreed upon in advance in case of breach

If a sum is specified in a contract as the amount to be paidin case of its gdfgdf or if the contract contains any otherstipulation by way of gdfgdfg dfg failure to perform theobligations the aggrieved party is entiled to gfdgd from thegdfgd has broken the contract a reasonable compensation notexceeding the fgdfg named.

Example: A contracts with B to pay Rs. 1000 if he fails topay gdfgdf g given day. B is entitled to recover from Asuch compensation not exceeding Rs. Dfgd as the Courtconsiders reasonable.

Liquidated Damages and Penalty

Sometimes parties to a contract stipulate at the time of itsformation that on the breach of the contract by either of them acertain specified sum gdfgd be payable as damages. Such a sum mayamount to either liquidated damages or a penalty. Liquidateddamages represent a sum fixedc or ascertained by the parties inthe contract which is a fair and genuine pre-estimate of theprobable loss that gdfg fgd fg as a result of the breach. If ittakes place. A penalty is a sum named in the contract at the timeof its formation, which is dispropoetionate to the damages likelyto fdgdfgd as a result of the breach. It is fixed up with a viewto securing the performance of the contract.

Payment of Interest

The largest number of cases decided under Sec. 74 relate tostipulation if a contract providing for payment of interest. Thefollowing rules are observed with regard to payment of interest.

1. Payment of interest in case of default.

2. Payment of interest at higher rate

a. From the date of the bond, and

b. From the date of default

3. Payment of compound interest on default

a. At the same rate as simple interest and

b. At the rate higher than simple interest

4. Payment of interest at a lower rate, if interest paid on duedate.

3. QUANTUM MERUIT

The phrase quantum meruit ghdfgfdgh much as earned. A rightto sue on a quantum meruit arises where a ggdfg performed byone party has become discharged to the breach of thecontract dghdfghdf party.

4. SPECIFIC PERFORMANCE

In certain cases of breach of contract damages are not anadequate remedy. The Court may, in such cases direct theparty in breach to carry out his promise according to theterms of the contract.

Some of the cases in which specific performance of acontract may in discretion of the Court be enforced are asfollows:

(a) When the act agreed to be done is such thatcompensation in money for its non performance is not anadequate relief.

(b) When there exists no standard for ascertaining theactual damage caused by the non-performance of the actagreed to be done.

(c) When it is probable that the compensation in moneycannot be got for the non-performance of the act agreedto be done.

5. INJUNCTION

Where a party is in breach of a negativbe term of a contractthe where gdfg is doing something which he promised not todo, the Court may be issuing an order restrain him fromdoing what he promised not to do. Such an order of the Courtis known as injunction’.

Example: W agreed to sing at L’s theatre, and during acertain period to sing nowhere else. Afterwards W madecontract with Z to sing at another theatre and refused toperform the contract with L. Held, W could be restrained byinjunction from singing for Z.

QUASI CONTRACTSUnder certain circumstances, a person may receive a benefitto which the law regards another person as better entitled,or for which the law considers he should pay to the otherperson, even though there is no contract between theparties. Such relationships are termed quasi-contracts,because, although there is no contract or agreement betweenthe parties, they are put in the same position as if therewere a contract between them.

A quasi-contract rests on the ground of equity that a personshall not be allowed to enrich himself unjustly at the expenseof another. The principle of unjust enrichment requires:

That the defendant has been ‘enriched’ by the receiptof a ‘benefit’

That this enrichment is at the expense of theplaintiff, and

That the retention of the enrichment is unjust.

Law of quasi-contracts is also known as the law ofrestitution. Strictly speaking, a quasi-contract is not acontract at all. A contract is intentionally entered into. Aquasi-contract, on the other hand, is created by law.

KINDS OF QUASI-CONTRACTS

1. SUPPLY OF NECESSARIES (Sec. 68)

If a person, incapable of entering into a contract, or anyonewhom he is legally bound to support, is supplied by anotherwith necessaries suited to his condition in life, the personwho has furnished such supplies is entitled to be reimbursedfrom the property of such incapable person.

Example: A supplies B, a lunatic, with necessaries suitable tohis condition in life. A is entitled to be reimbursed fromB’s property.

2. PAYMENT OF INTERESTED PERSON (Sec. 69)

A person who is interested in the payment of money whichanother is bound by law to pay, and who therefore pays it,is entitled to be reimbursed by the other.

Example: P left his carriage on D’s premises. D’s landlordseized the carriage as distress for rent. P paid the rent toobtain the release of his carriage. Held, P could recoverthe amount from D.

The essential requirements are as follows:

(a) The payment made should be bonafide for the protectionof one’s interest.

(b) The payment should not be voluntary one.

(c) The payment must be such as the other party was boundby law to pay.

3. OBLIGATION TO PAY FOR NON-GRATUITOUS ACTS (Sec. 70)

When a person lawfully does anything for another person ordelivers anything to him, not intending to do so gratuitously,and such other person enjoys the benefit thereof, the latteris bound to make compensation to the former in respect of, orto restore, the thing so done or delivered.

Example: a, a tradesman, leaves goods at B’s house by mistake.B treats the goods as his own. He is bound to pay for them toA.

Before any right of action under Sec. 70 arises, threeconditions must be satisfied.

(a) The thing must have been done lawfully.

(b) The person doing the act should not have intended to doit gratuitously

(c) The person for whom the acts is done must have enjoyedthe benefit of the act.

4. RESPONSIBILITY OF FINDER OF GOODS (sec. 71)

A person, who finds goods belonging to another and takes theminto his custody, is subject to the same responsibility as abailee. He is bound to take as much care of the goods as aman of ordinary prudence would, under similar circumstances,take of his own goods of the same bulk, quality and value.he must also take all necessary measures to trace its owner.If he does not, he will be guilty of wrongful conversion ofthe property. Till the owner is found out, the property ingoods will vest in the finder and he can retain the goods ashis own against the whole world (except the owner).

Example: F picks up a diamond on the floor of S’s shop. Hehands it over to S to keep it till true owner is found out.No one appears to claim it for quite some weeks in spite ofthe wide advertisements in the newspapers. F claims thediamond for S who refuses to return. S is bound to returnthe diamond to F who is entitled to retain the diamondagainst the whole world except the true owner.

The finder can sell the goods in the following cases:

When the thing found is in danger of perishing.

When the owner cannot, with reasonable diligence, befound out.

When the owner is found out, but he refuse to pay thelawful charges of the finder, and

When the lawful charges of the finder, in respect of thething found amount to two-thirds of the value of thething found. (Sec. 169)

5. MISTAKE OR COERCION (Sec. 72)

A person to whom money has been paid, or anything delivered,by mistake or under coercion, must repay or return it to theperson who paid it by mistake or under coercion. The word‘coercion’ is used in Sec. 72 in its general sense and notas defined in Sec. 15.

Example: A and B jointly owe Rs. 100 to C. A alone pays theamount to C and B, not knowing this fact, pays Rs. 100 overagain to C. C is bound to pay the amount to B.

QUANTUM MERUIT

‘Quantum meruit’ literally means ‘as much as earned’ or asmuch as it merited’. When a person has done some work undera contract, and the other party repudiates the contract, orsome event happens which makes the further performance ofthe contract impossible, them the party who has performedthe work can claim remuneration for the work he has alreadydone. Likewise, where one person has expressly or impliedlyrequested another to render him a service without specifyingany remuneration, but the circumstances of the request implythat the service is to be paid for, there is implied apromise to pay quantum meruit, i.e. so much as the partyrendering the service deserves. The right to claim quantummeruit does not arise out of contract as the right todamages does, it is a claim on the quasi-contractualobligation which the law implies in the circumstances.

The claim for quantum meruit arises only when the originalcontract is discharged. If the original contract exists, theparty not in default cannot have quantum meruit remedy, hehas to take resort to remedy in damages. Further the claimfor quantum meruit can be brought only by the party who isnot in default.

The claim for quantum meruit arises in the following cases

(a) When an agreement is discovered to be void (Sec. 65)

(b) When something is done without any intention to do sogratuitously (Sec. 70)

(c) When there is an express or implied contract to renderservices but there is no agreement as to remuneration

(d) When the completion of the contract has been preventedby the act of the other party to the contract

(e) When a contract is divisible

(f) When an indivisible contract is completely performedbut badly.

Review Questions

1. Define contract. What are the essentials of a validcontract?

2. What are legal rules relating to offer?

3. What are the rules relating to consideration?

4. Discuss the nature of contract entered into with minors.

5. What are the different modes of discharging the contract?

6. What are the remedies for breach of contract?

7. What are quasi-contracts? Enumerate the instances of quasi-contracts laid down under the Act.

SPECIAL CONTRACTSLESSON – 2

INDEMNITY AND GUARANTEE

DEFINITION

Section 124 of the Indian Contract Act defines it as “a contractby which one party promises to save the other from loss caused tohim by the conduct of the promisor himself or by the conduct ofany other person”. The person who promises is called theIndemnifier and the person to whom the promise is made is calledthe Indemnified or Indemnity Holder.

Illustration: A promises not to construct buildings on aparticular site so as to prevent light and air to B’s house andin case of breach of such promise, to indemnify for theconsequent loss.

This is a contract of indemnity. A contract of insurance is alsoa contract of indemnity.

RIGHTS OF AN INDEMNITY HOLDER

He is entitled to recover—

All damages

All costs which he may be compelled to pay in any suit inrespect of any matter to which the promise to indemnityapplies, and

All sums which he may have paid under the terms of anycompromise of any such suit provided, such compromise was

not contrary to the orders of the promisor and was prudentor the promisor authorizes him to compromise the suit.

CONTRACT OF GUARANTEE

Section 126 of Indian Contract Act defines it as “a contract toperform the promise, or discharge the liability, of a thirdperson in case of his default”. The person who gives theguarantee is called the “surety”, the person in respect of whosedefault, the guarantee is given is called the “principal debtor”,and the person to whom the guarantee is given is called the“creditor”.

Illustration: A purchases goods from B on credit. C agrees tostand as a surety which means that if A does not pay the price ofthe goods, he will pay. Here, A is the principal debator, B isthe creditor and C is the surety or guarantee.

Distinction between Contract of Indemnity and Contract ofGuarantee

Contract of Indemnity Contract of Guarantee

1 There are two parties,namely Indemnifier andthe Indemnified.

There are three parties, vizthe principal debtor, thecreditor and the surety

2 The liability of theIndemnifier is primary

The liability of the surety issubsidiary

3 The liability of theIndemnifier iscontingent

The liability of the surety issubsisting

4 The Indemnifier cannotsue the third party inhis name even aftermaking good the loss

The surety can sue theprincipal debtor in his ownname after paying the creditor

unless there is anassignment in hisfavour from theindemnified.

RIGHTS OF SURETY

Rights against the Principal Debtor

1) After discharging the liability of the principal debtor, thesurety is entitled to all those rights which the creditorhimself exercises against the principal debtor. This rightof the surety is called “subrogation”.

Illustration: The right of the creditor to receive dividendsfrom the official assignee when the principal debtor becomesbankrupt, can be exercised by the surety.

2) The surety can proceed against all those securities of theprincipal debtor, which the creditor himself can proceedagainst.

3) The surety is entitled to be indemnified for all paymentsrightfully made by him.

Illustration: B is indebted to C, and A is surety for thedebt. C demands payment form A, and on his refusal sues himfor the amount. A defends the suit, having reasonable groundsfor doing so but is compelled to pay the amount of the debtwith costs. He can recover from B the amount paid by him forcosts as well as the principal debt.

Rights against the Creditor

1) The surety may require the creditor to sue the debtor. Buthe cannot compel the creditor to do so.

2) In the case of fidelity contracts, he can insist upon thecreditor to dispense with the services of the principaldebtor when his dishonesty is established.

3) He can claim set off or counter-claim which the principaldebtor could have obtained against the creditor.

4) On payment of the guaranteed debt, ha can require thecreditor to assign to him all the securities held by thecreditor in respect of the debt. If the creditor loses orparts with such securities without the consent of thesurety, the surety is discharged to the extent of the valueof the security.

Illustration: C advances to B, his tenant, Rs. 2000 on theguarantee of A. C has also a further security for the sum ofRs. 2000 by mortgage of B’s furniture. C cancels the mortgage.B becomes insolvent and C sues A on his guarantee. A isdischarged from liability to the amount of the value of thefurniture.

Rights against the Co-Sureties

1) All the sureties shall bear equally, the loss caused by theinsolvency of the principal debtor. If one of them bears theentire loss in the first instance he can claim contributionfrom other co-sureties.

2) Where the co-sureties agreed to become liable in differentsums, they should contribute, according to English Law,proportionately.

Illustration: A, B and C have agreed to become liable for Rs.10,000, 20,000 and 40,000 respectively, as sureties for D’sliability. D’s indebtedness was Rs. 30,000. A,B and C would

contribute in the ratio of 1 : 2 : 4. But according to IndianLaw they shall bear such loss equally but not exceeding thesums which they have agreed to pay. So, A, B and C will haveto pay Rs. 10,000 each.

SURETY DISCHARGED FROM LIABILITY

1. The surety is discharged from liability if the contract ofguarantee becomes void or voidable, on the ground ofmisrepresentation by the creditor with regard to amaterial circumstance, or on the ground that the guaranteewas given on condition that another person will join as aco-surety and that such other person has not joined assuch.

Illustration: A engages B as clerk to collect money for him.B fails to account for some of his receipts and A inconsequence, calls upon him to furnish security for hisaccounting. C gives his guarantee for B’s accounting. A doesnot acquaint C with B’s previous conduct. B afterwards makesdefault. The guarantee is invalid.

2. The surety is discharged by revocation as to futuretransaction in case of continuing guarantee.

3. The surety is discharged

a. By variance of contract: Any variance in the terms of thecontract between the principal debtor and the creditorwithout the surety’s consent discharges the surety.

Illustration: C, contracts to lend B Rs. 5000 on the1st of March. A guarantees repayment. C pays Rs. 5000to B on the 1st of January. A is discharged from hisliability, as the contract has been varied in as muchas C might sue B for the money before the 1st of March.

b. By release or discharge of principal debtor: The surety isdischarged by any contract between the principal debtorand the creditor by which the principal debtor isdischarged or by any act or omission of the creditor,the legal consequence of which is the discharge of theprincipal debtor.

Illustration: A, contracts with B for a fixed price to build ahouse for B within a stipulated time, B supplying thenecessary timber. C guarantees A’s performance of thecontract. B omits to supply the timber. C is discharged fromhis surety ship.

c. By composition with debtor: The surety is discharged whenthe principal debtor and creditor enter into a contractby which the creditor (1) composition with or (2)promises to give time or (3) promises not to sue theprincipal debtor.

d. By act or omission impairing surety’s remedy: The surety isdischarged if the creditor does any act inconsistentwith the rights of the surety or omits to do any actwhich his duty to surely requires him to do.

Illustration: A puts M as apprentice to B, and gives aguarantee in B for M’s fidelity. B promises on his part thathe will, at least once a month, see M make up the cash. Bomits to see this done as promised and M embezzles. A is notliable to B on his guarantee.

e. Loss of security: the surety is discharged if the creditorlosses or parts with the securities belonging to theprincipal debtor, without the consent of the surety.

The surety is not discharged in the following cases:

1. A surety is not discharged when a contract to give time tothe principal debtor is made by the creditor with a thirdperson and not with the principal debtor.

Illustration: C, the holder of an overdue bill of exchangedrawn by A as surety for B, and accepted by B, contractswith M to give time to B. A is not discharged.

2. Mere forbearance on the part of the creditor to sue theprincipal debtor does not discharge the surety.

Illustration: B owes C, a debt guaranteed by A. The debtbecomes payable C does not sue B for a year after the debthas become payable. A is not discharged from his liability.

3. Release of one co-surety does not discharge the other.

LESSON – 3CONTRACTS OF BAILMENTS

Section 148 of the Indian Contract Act defines that “a bailmentis the delivery of goods by one person to another for somepurpose, upon a contract that they shall when the purpose isaccomplished, be returned or otherwise disposed of according tothe directions of the person delivering them.” The persondelivering the goods is called the “bailor”. The person to whomthey are delivered is called the “bailee”.

Essentials of Bailments

1. There must be delivery of goods: Such delivery may be actualor constructive.

2. The delivery must be made for some specific purpose.

3. The delivery must be made on condition that the goods shallbe returned in specific when the purpose is over, ordisposed of according to the direction of the bailor.

4. Only possession but not the ownership of the goods istransferred.

Examples: Delivery of a radio for repair.

DUTIES OF A BAILEE

1. To take reasonable care of the goods bailed to him

Section 151 lays down that in all cases of bailment the baileeshould take that much of care which an ordinary prudent manwould take of his own goods under similar circumstances.Section 152 lays down that the bailee is not responsible, inthe absence of any special contract, for the loss,

destruction or deterioration of the thing bailed, if he hastaken the amount of care described above.

Illustration: A gives to B, to be made into an ornament. Bkeeps them in a safe where he usually keeps his ownvaluables. B is not liable if the goods are lose by him.

2. Not to make unauthorized use of goods bailed

The bailee should not make use of goods for purposesinconsistent with the terms of the contract. If he does so,the bailor is entitled to terminate the contract and claimdamages, if any.

Illustration: A lends a horse to B for his own riding only. Ballows C, to ride the horse. C rides carefully but the horseaccidentally falls and is injured. B is liable to compensateA for the injury caused to the horse.

3. Not to mix the goods of the bailor with his own goods

a) If a bailee mixes the goods of the bailor with his own goodswith the consent of the bailor, both the bailor and thebailee shall have proportionate interest in the mixture.

b) If the goods mixed by the bailee without the consent of thebailor and the goods are separable, the bailee is bound tobear the expenses of separation and pay damages if any.

c) If the goods are mixed by the bailee without the consent ofthe bailor and the goods are inseparable, the bailee shouldcompensate the bailor for the loss of goods.

Illustration: A bails a barrel of Cape flour worth Rs. 45 toB. B without A’s consent, mixes the flour with country flour

of his own, worth only Rs. 25 a barrel. B must compensate Afor the loss of his flour.

4. Not to set up adverse title

The bailee should not deny the bailor’s title. He should notset up his own title or that of a third party.

5. To return the goods bailed

The bailee should return goods bailed, to the bailor when thefixed period is over or when the purpose is accomplished.The bailee should also deliver any increase or profit whichmay have accrued from the goods bailed.

Illustration: A leaves a cow in the custody of B to be takencare of The cow has a calf B is bound to deliver the calf aswell as the cow to A.

DUTIES OF A BAILOR

1. To disclose the faults in the goods bailed

The bailor should disclose to the bailee, faults in the goodsbailed, of which he is aware. If he does not disclose, hewill be liable for the loss resulting therefrom.

Illustration: A lends a horse which he knows to be vicious toB. He does not disclose this fact. The horse runs away. B isthrown down and injured. A is responsible to B for damagessustained.

2. To bear extra-ordinary expenses

While the ordinary expenses are payable by the bailee, extra-ordinary expenses shall be borne by the bailor.

Illustration: Where a horse is lent for a journey, the baileeshall bear the expenses of feeding the horse. But in case of thehorse becoming sick, the bailor shall have to bear the necessaryexpenses for its recover.

3. Responsibility for want of title

The bailor is responsible to the bailee for any loss sustainedby he latter by the reason, that the bailor was not entitledto make the bailment or to receive back the goods or to givedirections respecting them.

RIGHTS OF BAILOR

1. He is entitled to the increase or profit from goods bailed

2. In the case of gratuitous loan, the lender may require thegoods to be returned, even though he lent it for a fixedperiod for specific purpose. But if such a request causesloss to the bailee exceeding the benefit he derives, thebailor should indemnify the borrower.

3. The bailor is entitled to terminate the contract when thebailee does any act inconsistent with the terms of bailment.

Illustration: A gives a horse to B for hire for his ownriding. B drives the horse in his carriage. The bailment canbe terminated at the option of A.

LIEN

Lien is a right of a person, who has possession of goods ofanother, to return such possession until a debt due to himhas been discharged. This right is called a “Possessorylien”.

Lien is of two kinds: 1. Particular lien, and 2. General lien

1. A Particular Lien is one which is available only againstthat property in respect of which the skill and labour areexercised or any expenses are incurred.

Illustration: A delivers a watch for repairs to B, arepairer. B has a right to retain the watch till he is paidfor the services rendered.

The bailees, repairers and unpaid vendors of goods areentitled to particular lein.

2. A General Lien is the right to retain the property ofanother for a general balance of accounts. Bankers, canexercise this right for any debt due to them.

The duties and rights of A finder of lost goods

A person who finds an article need not take charge of it. But ifhe takes them into his possession, be becomes a bailee.

Duties and Rights

1. He must take as much care of the goods as an ordinaryprudent man would, under similar circumstances, take of hisown goods.

2. He cannot sue for remuneration for trouble and expenseincurred by him to preserve the goods or to find out theowner of the goods.

3. He may exercise particular lien against the goods for suchremuneration.

4. If a reward has been offered for the return of the goods, hecan sue for such reward.

5. If the goods are the subject of the sale and if the owner isnot found or when found refuses to pay the lawful charges,the finder may sell the goods.

a. When the goods are about to perish or

b. When they lose the greater part of their value of

c. When lawful charges amount to two-thirds of their value

PLEDGE

A pledge is a “bailment of goods as security for payment of adebt or performance of a promise”. The bailor is called the“pawnor” and the bailee is called the “pawnee”. In the case ofpawn, there is no transfer of property in goods. Only possessionof the goods is transferred. Hence, it is different frommortgage. Pawn is also different from lien, as in the case oflien, there is not power to sell the article while a pawnee cansell, subject to some conditions.

Rights of Pawnor

Even after the expiry of a stipulated period, he may redeem thegoods pledged at any subsequent time before the actual sale of the goodspledged. But he must pay expenses which may have arisen from hisdefault.

Rights of Pawnee

1. He can retain the goods pledged until he recovers the debt,interest and other expenses incidental to possession orpreservation of the goods.

2. He cannot retain the goods for debts other than those forwhich pawn is made.

3. He is entitled to receive extra-ordinary expenses incurredfor the preservation of goods.

4. If the pawnor makes a default, the pawnee may

a. Bring a suit upon the debt or promise and

b. Retain the goods pledged or

c. Sell the goods by giving a reasonable notice of sale tothe pawnor.

If the proceeds of such are less than the amount due inrespect of the debt or promise, the pawnor is still liableto pay the balance. If the proceeds of the sale are greaterthan the amount so due, the pawnee shall pay over thebalance to the pawnor.

LESSON – 4CONTRACT OF AGENCY

Section 182 of the Indian Contract Act defines an agent as personemployed to do any act for another or to represent another indealings with third persons. The person for whom such act isdone, or who is so represented is called the “principal”.

ESSENTIALS OF A CONTRACT OF AGENCY

1. The principal and third parties must be competent intocontracts

An agent may be even a minor who can effectively bind hisprincipal. But the principal cannot make the minor agentliable for misconduct or negligence.

Example: P, a principal gives M, a minor, a jewel worth Rs.100 and instructs fgdgdf to sell it on credit or for lessthan Rs. 500. M sells the jewel on credit for Rs. 400. Pcannot make him liable while he is bound by the sale..

Consideration is not essential. That the principal gives hisconsent to be represented by the agent is sufficientconsideration for the agent gdg dfgd dfgd.

CREATION OF AGENCY

An agency may be created in the following ways:

1. By Express Authority: The authority of any agency may beexpressed in words spoken or written. For example, a

contract of agency can be written by means of power ofattorney.

2. By Implied Authority: The authority of an agent can be interredfrom the circumstances of the case.

Illustration: A living in Bombay, owns a shop in Madras and heoccasionally visits it. B is managing the shop and is in thehabit of ordering goods from C in the name of A for thepurpose of the shop and of paying to them out of A’s fundswith A’s knowledge. B has an implied authority from A to ordergoods from C in the name of A for the purpose of the shop.

3. By Necessity: Sometimes, exigencies of circumstances require aman to act for another as an agent, though not appointed assuch.

Illustration: A horse was sent by rail. The owner had nottaken delivery of the same at the destination. So, the stationmaster had to feed it. It was held that the station master hadbecome an agent by necessity and was therefore entitled torecover the charges incurred by him.

4. By Holding Out: Where a master usually sends his servant topledge his credit for certain mangdfgfd he is bound by theacts of the servant for similar purposes though done withouthis consent.

5. By Estoppel: When one man by words or conduct causes another tobelieve that some other person is his agent and that anotherperson had acted on that belief, he would be stopped fromdenying the authority of that another person to act on hisbehalf.

Illustration: a tells B in the presence and within the hearingof P that he (A) is P’s agent and P does not contradict thisstatement B, on the faith of this statement, subsequentlyenters into a contract with A, taking him to be P’s agent. Pis bound by that contract.

6. By Ratification or Expost Eacto Agency : Section 196 of the IndianContract Act lays down that where acts are done by oneperson on behalf of another, but without his knowledge ofauthority, he may elect to ratify or to disown such acts. Ifhe ratifies them the same effects will follow as if they hadbeen performed by his authority. Thus ratification relatesback to the date of the original contract and binds theprincipal as if he has expressly authorized it.

TERMINATION OF CONTRACT OF AGENCY

A contract of agency is terminated in the following ways:

1. When the period of agency expires or

2. When the purpose of the agency is accomplished or

3. When the principal or agent dies or becomes of unsound mind

4. When the principal becomes insolvent

5. When the subject matter of the contract is destroyed

6. When the object of the contract becomes unlawful

7. When the agent renounces the authority

8. When the principal revokes his authority

The termination that takes effect so far as regards the agent,the moment, it becomes know to him and so far as regardsthird persons, the moment it becomes know to them. So, if an

agent knowing the termination of agency, contracts withthird persons who are not aware of the termination, thebecomes liable to the principal for damages while thecontract binds the principal and third persons.

An Agency cannot be terminated in the following cases:

(a) When the agency is one, coupled with interest. A, givesauthority to B to sell A’s land and to pay himself, out ofthe proceeds, the debts sue to him (B) from A. A cannotrevoke this authority nor can it be terminated by hisinsanity or death.

(b) When the agent has incurred personal liability and

(c) When the authority ahs been partly exercised by theagent.

RIGHTS OF AN AGENT

1. He is entitled to remuneration and other expenses properlyincurred by him in the agency. But if he is guilty ofmisconduct, he is not entitled to receive the remuneration.

Illustration: A employs B to recover Rs. 1000 from C.Through B’s misconduct, the money is not recovered. B isentitled to no remuneration for his services and must makegood the loss.

2. He is entitled to retain the goods, papers and otherproperty, movable on immovable, of the principal for hisclaims.

3. The agent has a right to be indemnified by the principal forall lawful acts.

Illustration: B at Singapore under instructions from A ofCalcutta, contracts with C to deliver goods. A does not send

the goods to B and C sues B breach of contract. B informs Aof the suit and A authorizes him to defend the suit. Bdefends and is compelled to pay damages etc. A is liable toB for such damages etc.

4. The agent is entitled to be indemnified for the injurycaused to him by the principal’s neglect or want of skill.

Illustration: A employs B as a brick-layer in building in ahouse and puts a scaffolding himself unskillfully and B isin consequence, hurt. A must compensate B.

5. When an agent acts in good faith, the employer mustindemnify him for the consequence of that act, through itcauses an injury to the rights of third parties.

Illustration: B, at the request of A, sells goods in thepossession of A, but which A had no right to dispose of Bdoes not know this and hands over the sale proceeds to A.afterwards C the true owner sues A and recovers the value ofgoods and costs. A must indemnify B for what he has paid andfor B’s own expenses.

DUTIES OF AN AGENT

1. He should act according to the directions of the principaland in default, indemnify the principal for the loss, if any

2. In the absence of instructions, he must act according to thetrade custom.

Illustration: A, an agent engaged in carrying on for B, abusiness, in which it is the custom, to invest from time totime, at interest the monies which may be in hand, omits tomake such investment. A, must make good to B the interestusually obtained by such investment.

3. In case of difficulty, he must be diligent in communicatingwith the principal and obtaining his instruction.

4. He must conduct the business of agency with as much skill asis generally possessed by persons engaged in similarbusiness, unless the principal has notice of want of skill.

Illustration: A, having authority to sell on credit, sellsgoods to B without enquiring about his solvency, B at the timeof sale, is bankrupt. A must make good the loss.

5. He must render proper accounts on demand.

6. He must not delegate his authority without the consent ofthe principal.

7. He must deliver all monies including secret commission, tothe principal. He can deduct his remuneration and otherlawful expenses spent by him.

8. He should not set up his own title or title of third partiesto the goods of the principal in hi hands.

9. If, by the nature of profession, an agent is purported tohave special skill, he must exercise that degree of skillordinarily expected from the members of the profession.

Illustration: A solicitor, who started the proceedings under awrong section or field a suit in a court having nojurisdiction, is liable.

10. He should not disclose confidential information.

11. His interest should not conflict with his duty.

CONDITIONS UNDER WHICH THE AGENT IS PERSONALLY LIABLE

1. An agent is liable for breach of warranty of authority. Heis liable to third parties when he exceeds his ostensibleauthority. He becomes liable to pay damages to theprincipal, when he exceeds his actual authority but actswithin the ostensible authority and enters into contracts

with third parties who are not aware of the curtailment ofhis authority.

2. An agent cannot claim performance of a contract entered intoby him apparently on behalf of the principal but really onhis own account.

3. An agent is personally liable

a. When the contract expressly provides

b. When he does not sign the negotiable instrument asagent

c. When he acts for a foreign principal

d. When he acts for an undisclosed principal

e. When the agency is coupled with interest

f. When the trade usage makes him liable, and

g. When the principal cannot be sued as he is a minor or aforeign sovereign etc.

REVIEW OF QUESTIONS

1. Define Contract of Indemnity and Contract of Guarantee andbring out differences between them.

2. What are the rights of the Surety against (i) Principaldebtor, (ii) Creditor and (iii) Co-Sureties

3. When the Surety is discharged from his liabilities?

4. Define bailment. What are the rights and duties of bailorand bailee?

5. What are the duties of finder of lost goods?

6. What are the different methods of creation of agency?

7. What are the rights and duties of an agent?

LESSON – 5SALE OF GOODS ACT, 1930

Section 4 of the Sale of Goods Act defines a contract of sale as“a contract whereby the seller transfers or agrees to transferthe property in goods to the buyer for a price”. The term“contract of Sale” includes an actual sale as an agreement tosell. It may be absolute or conditional.

When the property in the goods is transferred, the contract iscalled a sale. The contract called an agreement to sell, when thetransfer of property is take place at a future time or subject tofulfilment of some condition. An agreement to sell becomes asale, when the time lapses or such condition is fulfilled.

Differences between a sale and an agreement to sell may besummarized as follows:

Sale Agreement to Sell

1. Ownership is transferredto the buyer

Ownership does not pass tothe buyer. It remains withthe seller.

2. It is an executedcontract

It is an executor contract

3. It creates rights inrem.

It creates rights inpersonam

4. The seller can sue forthe price though thegoods are in the hispossession

The seller can sue for thedamages if the buyer refusesto take delivery and pay theprice

5. If the seller re-sellsthe goods, the buyer canclaim damages forconversion and exerciseright of recovery ofgoods from third partieswho are aware of theprior sale

In case of re-sale the buyercan only claim damages.

6. If the goods aredestroyed by accident,the buyer has to bearthe loss, though thegoods are in thepossession of the seller

In such cases, the sellerhas to bear the loss, evenif the goods are in thepossession of the buyer

7. If the buyer becomesinsolvent, the seller,in the absence of alien, must deliver thegoods to the officialreceiver and claim onlyratable dividend for theprice due

If the buyer becomesbankrupt before payment ofprice, the seller may refuseto deliver the goods unlesspaid for since ownershiprests with the seller

8. If the seller becomesinsolvent, the buyer canrecover the goods fromthe official receiversince the ownership haspassed to him.

In such cases, the buyer whohas paid the price can onlyclaim retable dividend.

CONDITION AND WARRANTY

A term or a stipulation in a contract of sale with reference togoods may be either a condition or a warranty. A condition is a

term which is essential to main purpose of the contract and henceis the foundation of the contract. The effect of a breach ofcondition is that it gives the right to the aggrieved party totreat the contract as void and also to claim damages, if any.

A warranty is a term which is collateral to the main purpose ofthe contract and hence is only a subsidiary promise. The breachof warranty does not give right to the aggrieved party to treatthe contract as void but entitles him to claim damages only. Inthe absence of contract to the contrary, time of delivery ofgoods is treated as condition and for payment of price, aswarranty.

In the following cases, the breach of a condition will be treatedas breach of warranty only.

(i) When the buyer waives the condition or

(ii) When the buyer treats the breach of conditionas a breach warranty and does not treat thecontract as void or

(iii) Where the contract of sale is inseparable andthe buyer has accepted the goods or partthereof or

(iv) Where the contract is for specific goods, theproperty in which has passed to the buyer.

Condition and warranties may be express or implied, When they aredefinitely written in the contract, they are called expressconditions and warranties. They are called implied conditions andwarranties, when they are not written in the contract and appliedto the contract either by operation of law or by trade custom.

IMPLIED CONDITIONS

1. As to title to goods: There is an implied condition that theseller has a right to sell in case of sale and that in the

case of agreement to sell, he will have the right to sellthe goods at the time when the property is to pass.

Rowland Vs Divall: A purchased a car from B for a certain priceand used it for some period. Subsequently, it was found thatthe car was stolen by B and therefore, A had returned backthe car to the true owner. It was held that A could recoverthe full price paid to B.

2. Sale by description: The implied condition is that the goodsdelivered must correspond with the description

Example: Where a machine was described as almost new and usedvery little but when delivered, was found to be an old andrepaired one, it was held that the buyer was entitled toreject the machine.

3. Sale by sample: The implied condition as ---

a. That the goods delivered shall correspond with thesample

b. That the buyer shall have a reasonable opportunity ofcomparing the bulk with the sample and

c. That the goods shall be free from any defect renderingthem unmerchantable, which would not be apparent onreasonable examination of the sample.

Drummond & Sons Vs Van Ingen & Co.: Where worsted coating wassupplied corresponding with the sample but not suitable forstitching due to a latent defect, it was held that the buyerwas entitled to reject the goods.

4. Sale by sample as well as description: In the case of sale of goods bysample as well as description, the goods delivered mustcorrespond with both sample as well as description.

5. As to quality or fitness: The general rule is “Caveat Emptor”, i.e.let the buyer beware. So, the seller need not disclose the

faults in the goods he sells nor need he guarantee that thegoods are fit for the purposes of the buyer. So, the buyertakes them as they come. But in the following cases, thereis an implied condition as to quality or fitness of goodsfor any particular purpose.

a. Where the buyer makes known the purpose to the seller,who is ordinarily dealing with sale of goods of thatdescription and the buyer relies on the judgement ofthe seller.

b. Where the seller does not disclose the faults in hisgoods and such faults cannot be detected on reasonableexamination.

c. Where the seller makes a statement and the buyer reliesupon it.

Baldry V’s Marshall: A purchased a motor car from B forusing it as a tourist car. B, the seller knew the purpose.The car turned out to be unfit for the purpose. Held, A thebuyer could repudiate the contract.

But there is not implied condition as to fitness orquality of goods when they are sold under the patent ortrade name.

E.W. Evans V’s Stella Benjamin: Where a refrigeratorwas sold, it was held that the name of the article itselfimplies that it is fit for a particular purpose.

6. As to Merchantability: In case of sale of good by description,there is an implied condition that the goods shallcorrespond with the description and also that they shall beof merchantable quality.

Brant Vs Australian Knitting Mills Ltd.: The buyer was supplied wollenunderpants by the manufacturers. The buyer wore them forsometime and contracted a skin disease. Held, that the buyerwas entitled to damages.

Exception: If the buyer has examined the goods, there is notimplied condition as to quality of goods as regards defectswhich such examination must have revealed.

7. As to wholesomeness: In the case of sale of vision, there is animplied condition that they are fit for immediate use, A,purchased a bun from B and injured his teeth by biting astone in the bun. B was held liable.

IMPLIED WARRANTIES

1. Warranty of Quiet Possession: There is an implied warranty thatthe buyer shall have and enjoy quiet possession.

2. Warranty against Encumbrances: There is an implied warrantythat the goods shall be free from encumbrance or charges infavour of any third party not declared or known to the buyerbefore or at the time of contract.

RIGHTS OF AN UNPAID SELLER

The seller of goods is deemed to be an “unpaid-seller” where—

a) The whole of the price has not been paid or tendered or

b) When a bill of exchange or any other negotiable instrumenthas been given as conditional payment but the same has beendishonoured.

An unpaid vendor has the right of withholding the delivery ofgoods when the property in goods has not passed to the buyer.

He has the following rights when the property in goods has passedto the buyer.

1. Rights of Lien

The unpaid vendor who is in possession of the goods, can retainsuch possession until the price is paid or rendered. And if thegoods are partly delivered, the an exercise this right on theremaining goods except when such part delivery amounts to showthat he has give up the right of lien. This right of lien extendsto the whole of goods in the possession of the unpaid vendor andcan be exercised only for the recovery of the price of goods butnot the amounts like godown rent, incurred in storing the goodsin exercise of lien for the practice.

He can exercise the right of lien –

Where the goods have been sold without any stipulation asto credit

Where the goods have been sold on credit, but the term ofcredit has expired and the price remains unpaid.

Where the buyer becomes bankrupt

This right of lien is lost—

When the goods are delivered by him to a carrier, orother bailee for the purpose of transmission withoutreserving the right of disposal,

When the buyer or his agent lawfully obtains thepossession of goods

When the unpaid vendor has given up his right of lien

2. Right of stoppage of goods in transit

When the seller has parted with the possession of goods, he mayregain and retain such possession by stopping the goods intransit, from being delivered to the buyer. This right is

available (1) when the goods are in transit and (2) when thebuyer becomes bankrupt.

Following are the rules regarding duration of transit

a) Goods are deemed to be in transit so long as the buyer orhis agent does not take delivery of the goods

b) The transit is at an end, when the buyer or his agentobtains delivery before the arrival of the goods at theirdestination

c) The transit is at an end, if the carrier or other baileeacknowledges to the buyer after the arrival of the goods atthe destination the he holds the possession of goods as abailee for the buyer.

d) The goods are in transit, if the buyer or his agent rejectsthe goods.

e) The transit is at an end if the carrier or other baileewrongfully refuses to deliver the goods to the buyer.

The unpaid vendor must give notice of his claim to the carrier orother bailee, who is in possession of the goods, in order toexercise this right of stoppage. Such notice takes effect when itreaches the carrier or his agent who is in actual possession ofgoods. On receipt of notice of the stoppage, the carrier must re-deliver the goods to or according to the directions of theseller. The seller shall have to bear the expenses of such re-delivery.

3. Right of Re-Sale

The unpaid vendor can re-sell the goods—

1) without notice to the buyer if the goods are perishablegoods and

2) With notice to the buyer of his intention to re-sell. If thegoods are not perishable.

He can retain the profit resulting form such re-sale and claimdamages from the original buyer for loss if any. But if hedoes not give notice to the buyer of his intention to re-sell the goods where necessary, he must pay back the surplusor profit to the original buyer and bear the loss, if any.

REVIEW QUESTIONS

1. Distinguish between sale and agreement to sell

2. What are the implied conditions and warranties laid downunder the Sale of Goods Act’

3. What are the rights of an unpaid seller?

LESSON – 6NEGOTIABLE INSTRUMENTS ACT, 1881

Section 13 of the Negotiable Instruments Act defines that anegotiable instrument means a promissory note, bill of exchangeor cheque, payable either to order or bearer.

FEATURES

1. The property in it passes either by mere delivery or byendorsement and delivery

2. The holder in due course is not affected by the defect inthe title of his transferor or any previous party.

3. The holder in due course, can sue in his own name. He neednot give notice to the debtor that he has become the holder.

4. He is not affected by certain defects like fraud to which heis not a partly

5. Consideration is presumed to have passed

6. It is convenient method of discharging payments

The Act does not stipulate that only bills of exchange,promissory notes and cheques are only the negotiableinstruments. So, other instruments may also be added to thelist of negotiable instruments provided.

They are transferable by mere delivery and

The holder in due course can sue in his own name

Hence, Dividend Warrants, Port Trust or Improvement TrustDebentures, Railway Bonds, payable to bearer or RailwayReceipts having the feature of negotiability are allnegotiable instruments. So, a negotiable instrument is an

ordinary chattel for chose-in-action clothed with thefeature of negotiability.

PARTIES TO NEGOTIABLE INSTRUMENTS

The parties to a bill of exchanges, a promissory note and acheque are as follows:

Parties to a Bill of Exchanges: (1) Drawer, (2) Drawee, (3) Acceptor,(4) Payee, (5) Holder, (6) Indorser, (7) Indorsee, (8)Drawee in case of need, and (9) Acceptor for honour.

Parties to a Promissory Note: (1) Maker, (2) Payee (3) Holder, (4)Indorser and (5) Indorsee

Meker, Drawer: The person who makes a promissory note is calledthe “maker”. The person who makes or draws a bill ofexchange or cheque is called the “drawer”.

Drawee, Acceptor: The person on whom the bill of exchange orcheque is drawn and who is directed to pay is called the“drawee”. In case of a cheque, the drawee is always abanker. In case of a bill of exchange, the drawee becomesthe “acceptor” when he accepts the bill, i.e. signs hisaccent upon the bill and delivers the same or gives noticeof such signing to the holder or to some person on hisbehalf A cheque does not require acceptance as it isintended for immediate payment.

Payee: The person named in the bill, note or cheque, to whom orto whose order the money is to be paid, is called the“payee”. In a bill or cheque, the drawer may himself be thepayee. Where the payee named in a bill is a fictious or non-existing person, the bill is treated as payable to bearer.

Indorser: The person who endorses the bill, note or cheque toanother is called the “indorser”.

Indorsee: The person to whom the bill, note or cheque isendorsed is called the “Indorsee”.

MATERIAL ALTERATION

Material alteration refers to changes introduced on a chequewhich affects its fundamental character. In other words, “anychange in any instrument which makes it speak a differentlanguage, for all legal purposes from what it spoke originally”would constitute a material alteration. If the alteration ismaterial, it renders the cheque invalid.

Examples of Material Alteration

There is material alteration when

The date of the instrument is altered

The time of payment is altered

The amount is altered

The rate of interests altered

The place of payment is altered

The name of payee is altered

A new party is added etc.

There is no material alteration when

A mistake corrected

Alteration is made with the consent of all the parties

Alteration is made to carry out the common intention ofthe parties

Blank indorsement is converted into full indorsement

An inchoate instrument is completed etc.

EFFECT OF MATERIAL ALTERATION

According to Sec. 87 of the Negotiable Instruments Act, if acheque is materially altered it canot be regarded as acheque at all. Therefore material alteration renders thecheque void.

CROSSING OF CHEQUES

Crossing means drawing two parallel transverse lines across theface of the cheque with or without the words “and company” inbetween the lines. It is a direction to the drawee bank not topay the amount at the counter, but only through a bank. It ismade to guard payment against forgery by unscrupulous persons.

KINDS OF CROSSING

Is is of two kinds (1) General Crossing and (2) Special Crossing

1. General Crossing

Sec. 123 of the Negotiable Instruments Act defines GeneralCrossing as, “where a cheque bears across its, face anaddition of the words “And Company” or any abbreviationthereof between two parallel transverse lines or of twoparallel transverse lines simply, either with or without thewords ‘not negotiable’, that addition shall be deemed to bea crossing and the cheque shall be deemed to be crossedgenerally”.

Two parallel transverse lines across the face of the chequewith or without the words, “& Co.”, “Account Payee only”,“Not Negotiable”, constitute general crossing. The chequewhich is crossed generally, is payable only to banker.

Specimens of General Crossing

2. Special Crossing

Sec. 124 of the Negotiable Instruments Act defines SpecialCrossing as, “where a cheque bears across its face anaddition of the name of a banker, with or without the words“not negotiable”, that addition shall be deemed a crossingand the cheque shall be deemed to be crossed specially andto be crossed to that banker”. When a cheque is crossedspecially, the amount is payable by the drawee only, only tothe bank named in the crossing.

Specimens of Special Crossing

“Account Payee Crossing”

When the words “Amount Payee”, “Account Payee only” are addedto the general or special crossing, it is called accountPayee Crossing. The collecting banker must collect theamount of the cheque for the account of the payee only andnone else.

Otherwise, it is not a collection in due course and the bankeris liable if the title of the person for whom the bankcollects, turns out to be defective.

“Not Negotiable” Crossing

When the words “not negotiable” are added either in general orspecial crossing, the person taking the cheque cannot have andcannot give a better title than what his transferor has. So, a‘not negotiable’ cheque is transferable. But the transferee getsno better title than what the transferor has.

RULES OF CROSSING

1. An uncrossed cheque may be crossed generally or specially bythe drawer or the holder.

2. A cheque crossed generally, may be crossed specially by theholder.

3. The holder may add the words “not negotiable”.

4. The banker to whom the cheque is crossed specially, may re-cross it, but only to another bank as his agent forcollection.

5. Where an uncrossed cheque or a cheque crossed generally issent to a banker for collection, he may cross it speciallyto himself. But he cannot enjoy Statutory protection againstbeing sued for conversion.

INDORSEMENTS

It means the writing of a person’s name (otherwise than as maker)on the face or back of a netgotiable instrument or on a slip ofpaper (called alloonge) annexed thereto, for the purpose ofnegotiation (Sec. 15). The person who signs the instrument iscalled the “indorser’. The person to whom the instrument isindorsed is called the ‘indorsee’.

KINDS OF INDORSEMENTS

1. Bank Indorsement or General Indorsement

When the indorser signs his name only, it is called blankindorsement. An instrument endorsed in blank is payable tobearer. The holder of an instrument may write above theindorser’s signature, a direction to pay the amount to or tothe another person. When the holder does so, he does notbecome liable as an endorser on the instrument, as he hadnot signed it.

2. Special or Full Indorsement

If the indorser signs his name and adds a direction to paythe amount to or to the order of a certain person, it iscalled full indorsement.

Illustration : A bill made payable to Smith, may be endorsedin full by him as “Pay A or order”.

[Sd.] Smith

An instrument having been endorsed in blank is indorsed infull the indorser in full is liable to the person to whom itis indorsed in full or to others who derive title through suchperson.

3. Restrictive Indorsement

It is one which prohibits or restricts further negotiation orwhich constitute the indorsee an agent to receive itscontents for his indorser.

Example: (1) “Pay C only” (2) “Pay D for my use” (3) “Pay D onaccount of E” (4) “Pay E or order for collection.

4. Partial Indorsement

When a part of the amount of the instrument is endorsed, it iscalled partial indorsement. It is void:

Example: A holds a bill for Rs. 800 A endorses thus

“Pay Rs. 400 to B or order” (or)

“Pay B or order Rs. 400 and to C or order Rs. 400”

But if the part of the amount of the instrument is alreadypaid, the unpaid balance may be endorsed thus. “Pay B ororder Rs. 400, being unpaid residue of the bill”.

5. Conditional or Qualified Indorsement

This is one which negotiates or limits the indorser’sliability, in the following ways:

(a) By Sans Recourse Indorsement: The indorser excludes hisliability by express words in indorsement.

Examples: (1) “Pay A or order

Sans Recourse”

(Sd) B

(2) “Pay A at his own risk”

(Sd) B

(3) “Pay A without recourse to me”

(Sd) B

(b) By making his liability depend upon the happening of aspecified event, though such event may never happen.

Example : “Pay A or order on his marrying B”

(c) By making the right of the indorsee to receive theamount, depend upon the happening of a specified event,though it may never happen.

(d) By Facultative Indorsement: This is one which extentsthe liability of the indorser.

Example: “Pay A or order

Notice of dishonor waived”

(Sd.) B

PAYMENT AND COLLECTION OF CHEQUE

The paying banker should use reasonable care and diligence inpaying a cheque so as to abstain from any action likely to damagehis customer’s credit.

PRECAUTIONS BEFORE HONOURING A CHEQUE

In order to safeguard his position, the paying banker has toobserve the following precautions before honouring a cheque.

(1) Presentation of Cheque

First of all a paying banker should note whether thepresentation of the cheque is correct. It can be found outby noting the following factors.

(a) Type of Cheque: Cheques may generally be of two types –open or crossed. If it is open one, the payment may be paidat the counter. If it is crossed, the payment must be madeonly to a fellow banker.

(b) Branch: The paying banker should see whether the chequeis drawn on the branch where the account is kept.

(c) Banking Hours: The paying banker should also note whetherthe cheque is presented during the banking hours on abusiness day.

(d) Multination: If the cheque is from into pieces orcancelled or mutilated, then the paying banker should nothonour it.

3. From of the Cheque

Before honouring a cheque, a banker shold see the form ofcheque and find out whether it is regular or not.

(a) Printed Form: The customer should draw cheques only onthe printed leaves supplied by the bankers failing which thebanker may refuse to honour it.

(b) Enconditional Order: The cheque should not contain anycondition

(c) Date: Before honouring a cheque, the paying banker mustsee whether there is a date on the instrument. if a chequeis ante dated, it may be paid if it has not exceeded six

months from the date of its issue otherwise it will becomestale one. If a cheque is post dated, he should honour itonly on its due date.

(d) Amount: The paying banker should see whether the amountstated in the cheque both in words and figures agree witheach other.

(e) Material Alteration: If there is any material alterationthe banker should return it with a memorandum “Alterationrequires drawer’s confirmation”.

(f) Sufficient Balance: If the funds available are notsufficient to honour a cheque, the paying banker isjustified in returning it.

(g) Signature of the Drawer: It is the duty of the payingbanker to compare the signature of his customer found on thecheque with that of his specimen signature.

(h) Endorsement: The banker must verify the regularity ofendorsement, if any, that appears on the instrument.

(i) Legal Bar: The existence of legal bar like Garnisheeorder limits the duty of the banker to pay a cheque.

CIRCUMSTANCES UNDER WHICH A CHEQUE MAY BE DISHONOURED

A paying banker is under a legal obligation to honour hiscustomer’s mandate. He is bound to do so under his contractualrelationship with his customer. A wrongful dishonor will have,the worse effect on the banker. However, under the followingcircumstances, the payment of a cheque may be refused.

a) Countermanding: Countermanding is the instruction given bythe customer of a bank requesting the bank not to honour aparticular cheque issued by him. When such an order isreceived, the banker must refuse to pay the cheque.

b) Upon receipt of notice of death of a customer: When a banker receiveswritten information from an authoritative source, regardingthe death of a particular customer, he should not honour anycheque drawn by that deceased customer.

c) Upon the receipt of notice of insolvency: Once a banker has knowledgeof the insolvency of a customer he must refuse to paycheques drawn by him.

d) Upon the receipt of notice of insanity: Where a banker receivesnotice of a customer’s insanity, he is justified in refusingpayment of the cheque drawn by him.

e) Upon the receipt of notice of Garnishee order: Garnishee order refersto the order issued by a court attaching the funds of thejudgement debtor (i.e. the customer) in the hands of a thirdparty (i.e. the banker). In such a case, the banker mayrefuse payment.

f) Upon the receipt of notice of assignment: The bank balance of acustomer constitutes an asset and it can be assigned to anyperson by giving a letter of assignment to the banker. Insuch case also the banker may refuse payment.

g) When a breach of trust is intended: In the case of trust account,mere knowledge of the customers intention to use the trustfunds for his personal use is a sufficient reason todishonor his cheque.

h) Defective Title: If the person who brings a cheque for paymenthas no title or his title is defective, the banker shouldrefuse to honour the cheque presented by him.

i) Other Grounds: A banker is justified in dishonouring a chequeunder the following circumstances also:

a conditional one,

drawn on an ordinary piece of paper,

a stale one,

post-dated one,

mutilated,

drawn on another branch where the account is not kept,

presented during non-banking hours.

If the words and figures differ,

If there is no sufficient funds,

If the signature of the customer is forged,

If the endorsement is irregular and,

If a crossed cheque is presented at the counter.

COLLECTING BANKER

A collecting banker is one who undertakes to collect theamount of a cheque for his customer from the paying banker.

DUTIES OF COLLECTING BANKER

1. Exercise reasonable care and diligence in his collection work: As anagent, he should exercise reasonable care, diligence andskill in collection work. He should observe utmost care whenpresenting a cheque.

2. Present the cheque for collection without any delay: If there is anydelay in presenting the cheque for presentment by thebanker, the customer may suffer losses due to the insolvencyof the drawer or insufficiency of funds in the account ofthe drawee or insolvency of the banker himself. Hence thecollecting banker has to present the cheque for collectionwithout any delay.

3. Notice to customer in case of dishonor of cheque: If the cheque hecollects has been dishonoured, he should inform him customerwithout any delay.

Review Questions

1. Define Negotiable Instruments. What are the characteristicsof negotiable instruments?

2. What are the different kinds of crossing?

3. What is indorsements? What are the kinds of indorsements?

4. What are the precautions to be taken by a banker whilehonouring a cheque?

5. What are the duties of a collecting banker?

LESSON – 7INDIAN PARTNERSHIP ACT, 1932

Section 4 of the Indian Partnership Act defines it as ‘therelation between persons who have agreed to share the profits ofa business cancelation by gfdg any of them acting for all”Persons who have entered into partnership with one of other arecalled individually “partners” and collectively “a firm”, and thename under which their business is carried on, is called the“firm name”.

ESSENTIALS OF PARTNERSHIP

1. Relationship: Partnership is the abstract relationship betweenpartners

2. Two or More Persons: As no one can be a partner with himself,there must be at least two persons. The maximum number ofmembers is 10 for a partnership carrying on banking businessand 20 for a partnership carrying on any other business.

3. Agreement or Deed: Partnership arises out of an agreement butnot out of status. Such agreement, also called as deed, maybe express or implied from the conduct of the parties. Itmay be oral or written. It contains details relating to—

name of the firm and the names of the partners,

nature and place of business,

the date of commencement and the duration of partnership,

capital and banking account,

sharing of profits and losses,

management,

accounts

arbitration etc.

4. Business: The object of the partnership is to carry on anybusiness, profession, vocation, trading or calling. Suchbusiness must be lawful. Mere holding of property in commonis not partnership, e.g. co-ownership.

5. Profit Sharing: Sharing of profits is essential though it doesnot mean that all those who participate in profits arenecessarily partners.

6. Carried on by all or any of them acting for all: Each partner acts as anagent as well as a principal. Each one can act in the courseof business and bind the other partners by his acts. Assuch, he can be called an agent. Since he is also bound bythe acts of the other partners, he can be called theprincipal. Thus, the law of partnership is a branch of thegeneral law of agency as every partner has implied power tobind other partners for the acts of the firm, done in thecourse of conduct of the business.

KINDS OF PARTNERSHIP

1. Partnership at will: Where the partners have not provided intheir deed, for the duration of partnership or for thetermination of partnership, the partnership is called“partnership at will”. A partner may retire to dissolve thepartnership at his will, by giving a notice to otherpartners, of his intention to do so.

2. Particular partnership: A person may become a partner withanother person in particular adventures or undertakings.

3. Partnership for a fixed term: Where the partners fix the definiteperiod or duration of partnership, it is called apartnership for a fixed term.

TEST OF PARTNERSHIP

In determining whether a partnership exists or not, or whethera person is a partner or not the real relation between theparties as shown by all relevant facts, must be taken intoconsideration.

The joint use of property in common in business for sharing ofprofits is evidence that a partnership exists. But this isnot conclusive evidence to show that a partnership exists.Likewise, an active participation in the conduct of businessis evidenced that a partnership exists. But again, it is noconclusive evidence to establish the fact of existence ofpartnership. For example, a servant may manage the affairs ofa firm. Yet he is not a partner. In the same way, a jointventure having no object of profit sharing is not apartnership, while sharing of profits is evidence, though noconclusive, that a partnership exists. So, Section 6 laysdown that the receipt of a share of profit, or a paymentcontingent or varying with the profits does not of itself,make the recipient a partner. Therefore, the true test ofpartnership is no sharing of the profit, but whether therelationship of agency exists or not.

KINDS OF PARTNERS

Following are different kinds of partners

1. Actual or Ostensible Partner: An actual partner is one whoactively participates in the conduct of the business of thepartnership.

2. Dormant or Sleeping Partner: He is a partner who is not known tothird parties as such. He does nto take active part in theconduct of business. He occupies the position of anundisclosed principal. Hence, third parties can sue him ondiscovering that he is a partner. While he has access toaccounts and examine and verify them, he has not duties to

perform. Hence no notice of his retirement to the public isnecessary nor the firm is dissolved when he becomes insane.

3. Partner by Estoppel: Where a person causes, by his conduct,another to believe him to be a partner and on that beliefsuch other person gives credit to the firm, he is estoppedfrom denying that he is a partner.

Example: X, Y and Z are partners of a firm. X, in thepresence and within the hearing of A, represents to D that Ais a partner of their firm. A does not contradict thisrepresentation. A, on faith of that representation, lent Rs.5000 to the firm, A, is liable as a partner.

4. Partner by Holding Out : Where a person represents himself orallows others to represent him as a partner of a particularfirm, he becomes liable to all those who act and lend moneyto the firm, on the faith of such representation.

Example: A, represents himself as a partner of a particularfirm. D on the faith of the representation, lends credit tothe firm. A becomes liable.

REGISTRATION OF FIRMS

The Partnership Act does not provide for the compulsoryregistration of firms. It has left it to the option of the firmsto get themselves registered. But indirectly, by creating certaindisabilities from which an unregistered from suffers, it has madethe registration of firms compulsory.

PROCEDURE FOR REGISTRATION

The registration of a firm may be effected at any time by fillingan application in the form of a statement, giving the necessaryinformation, with the Registrar of Firms of the area.

The application for registration of a firm shall be accompaniedby the prescribed fee. It shall state:

(a) the name of the firm

(b) the place or principal place of business of the firm

(c) the names of other places where the firm carries onbusiness

(d) the date when each partner joined the firm

(e) the names in full and permanent address of the partners

(f) the duration of the firm.

The statement shall be signed by all the partners or by theiragents specially authorized in this behalf [Sec. 58(1)]. It shallalso be verified by them in the prescribed manner [Sec. 58(2)].

When the Registrar is satisfied that the above provisions havebeen duly compiled with, he shall record an entry of thestatement in the Registrar of Firms (maintained by Registrar ofFirms in respect of each registered firm for recording thenecessary information relating to that firm) and file thestatement (Sec. 59). He shall then issue under his hand acertificate of registration. Registration is effective from thedate when the Registrar files the statement and makes entries inthe Register of Firms.

EFFECTS OF NON-REGISTRATION (SEC. 69)

1. Suits between partners and firm: A person suiting as a partner ofan unregistered firm cannot sue the firm or any partners ofthe firm to enforce a right from a contract or conferred bythe Partnership Act.

2. Suits between firm and third parties: An unregistered firm cannotsue a third party to enforce a right arising from a contractuntil –

the firm is registered, and

the names of the persons suing appear as partners in theRegister of Firms [Sec. 69(2)]

3. Clain of set-off: An unregistered firm or any partner thereofcannot claim a set-off in a proceeding instituted againstthe firm by a third party to enforce a right arising from acontract, until the registration of the firm is effected[Sec. 69(3)]

RELATIONS OF PARTNERS

The relations of the partners of a firm to one another areusually governed by the agreement among them. Such agreement maybe express or implied.

RIGHTS OF A PARTNER

1. Right to take part in Business

The partnership agreement usually provides the mode of theconduct of the business. Subject to pay such agreementbetween the partners, every partner has a right to take partin the conduct of business [Sec. 12(a)]. This is based onthe general principal that partnership business is thecommon business of all the partners.

2. Right to be Consulted

Every partner has an inherent right to be consulted in allmatters affecting the business of the partnership andexpress his views before any decision is taken by thepartners.

3. Right of Access to Accounts

Subject to contract between the partners, every partner hasa right to have access to and inspect and copy any of thebooks of the firm.

4. Right to Share in Profit

In the absence of any agreement, the partners are entitledto share equally in the profits earned and are liable tocontribute equally to the losses sustained by the firm.

5. Right to Interest on Capital

The partnership agreement may contain a clause as to theright of the partners to claim interest on capital at acertain rate. Such interest, subject to contract between thepartners, is payable only out of profits, if any, earned bythe firm.

6. Right to Interest on Advances

Where a partner makes, for the purposes of the business ofthe firm, any advance beyond the amount of capital, he isentitled to interest on such advance at the rate of six percent annum. Such interest is not only payable out of theprofits of the business but also out of the assets of thefirm.

7. Right to be Indemnified

A partner has authority, in an emergency, to do all suchacts for the purpose of protecting the firm from loss aswould be done by a person of ordinary prudence, in his owncase, acting under similar circumstances. Such acts of thepartner bind the firm. If as a consequence of any such act,the partner incurs any liability or makes any payment, hehas a right to be indemnified.

8. Right to the Use of Partnership Property

Subject to contract between the partners, the property ofthe firm must be held and used by the partners exclusivelyfor the purposes of the business of the firm. No partner hasa right to treat it as his individual property. If a partneruses the property of the firm directly or indirectly for hisprivate purpose, he must account to the firm for the profitswhich he may have earned by the use of that property.

9. Right of Partner as Agent of the Firm

Every partner for the purposes of the business of the firmis the agent of the firm.

10. No New Partner to be Introduced

Every partner has a right to prevent the introduction of anew partner unless he consents to that or unless there is anexpress term in the contract permitting such introduction.This is because partnership is founded on mutual trust andconfidence.

11. No Liability before Joining

A person who is introduced as a partner into a firm is notliable for any act of the firm done before he became apartner.

12. Right to Retire

A partner has a right to retire (a) with the consent of allother partners, or (b) in accordance with an expressagreement between the partners, or (c) where the partnershipis at will, by giving notice to all the other partners ofhis intention to retire.

13. Right of Outgoing Partner to Share in the SubsequentProfits

Where a partner has died, or has ceased to be a partner byretirement, expulsion, insolvency, or any other cause, thesurviving or continuing partners may carry on the business

with the property of the firm without any final settlementof accounts as between them and the outgoing partner or hisestate. In such a case, legal representative of the deceasedpartner or the outgoing partner is entitled to such share ofthe profits as is proportionate to his share in the propertyof the firm.

DUTIES OF A PARTNER

Partnership is a contract of uberrimae fide. The partnersmust act with utmost good faith as the very basis ofpartnership is mutual trust and confidence. According toSec. 9, which deals with the general duties of partners,partners are bound –

(a) to carry on the business of the firm to the greatestcommon advantage,

(b) to be just and faithful to each other, and

(c) to render true accounts and full information of allthings affecting the firm to any partner or his legalrepresentative.

The other duties are spread over the Partnership Act. Theseduties are summed as under:

1. To carry on business to the greatest common advantage

Every partner is bound to carry on the business of the firmto the greatest common advantage. He is bound, in alltransactions affecting the partnership, to do his best inthe common interest of the firm.

2. To observe faith

Partnership is a fiduciary relation. Every partner must bejust and faithful and observe utmost good faith towardsevery other partner of the firm.

3. To indemnify for fraud

Every partner is bound to indemnify the firm for any losscaused to it by his fraud in the conduct of the business ofthe firm.

4. To attend diligently

It is the duty of every partner to attend diligently to hisduties in the conduct of the business of the firm [Sec.12b], and to use his knowledge and skill to the commonadvantage of all the partners.

5. Not to claim remuneration

A Partner is not entitled to receive any remuneration in anyform for taking part in the conduct of the business of thefirm. It is however, usual to allow some remuneration to theworking partners provided there is a specific agreement tothat effect.

6. To share losses

It is the duty of every partner to contribute to the lossesof the firm. In the absence of an agreement to the contrary,the partners are bound to contribute equally to the lossessustained by the firm. An agreement to share profits impliesan agreement to share losses also.

7. To indemnify for willful neglect

Every partner is bound to indemnify the firm for any losscaused to it by his willful neglect in the conduct of thebusiness of the firm.

8. To hold and use property of the firm exclusively for thefirm

It is the duty of every partner of the firm to hold and usethe property of the firm exclusively for the purposes of thebusiness of the firm

9. To account for personal profits

If a partner derives any benefit, without the consent of theother partners, from partnership transactions, he mustaccount for it and pay it to the firm. This is because therelationship between partners is a fiduciary relationshipand no partner is entitled to make any personal profit.

10. To account for profit in competing business

A partner must not carry on any business of the same natureas competing with that of the firm. If he does that he isbound to account for and pay to the firm all profits made byhim in that business.

11. To act within authority

Every partner is bound to act within the scope of his actualor implied authority. Where he exceeds the authorityconferred on him and the firm suffers a loss, he shall haveto compensate the firm for any such loss.

12. To be liable jointly and severally

Every partner is liable, jointly with all the other partnersand also severally, for all the acts of the firm done whilehe is a partner.

13. Not to assign his rights

A partner cannot assign his rights and interest in the firmto an outsider so as to make him the partner of the firm. Hecan, however, assign his share of the profit and his sharein the assets of the firm.

DISSOLUTION OF FIRMS

Section 39 of the Indian Partnership Act lays down that thedissolution of partnership between all the partners of a firmis called the “dissolution of the firm”. This is differentfrom the dissolution of partnership. A partnership may bedissolved without dissolution the firm. But dissolution offirm involves dissolution of partnership. In the firm of A, Band C, if C dies or retires, the firm will be dissolved. But Aand B may take in D and continue doing the business. This newfirm of A, B and D is called the new or reconstituted firm.

Dissolution of Partnership on the happening of certaincontingencies

A partnership is dissolved by ---

The death of the partner

The completion of the adventure of partnership

The insolvency of a partner, and

The retirement of a partner

In all these cases, the remaining partners, may constitute thefirm. Hence, dissolution of partnership does not necessarilyinvolve dissolution of the firm. If they do not continue,the firm is dissolved automatically.

Dissolution of Firm

A partnership between all the partners is dissolved in thefollowing ways

1) Dissolution by Agreement: (a) By mutual consent of all thepartners, or (b) in accordance with the contract enteredinto by them.

2) Compulsory Dissolution: (a) by the insolvency of al thepartners except one, or (b) by the business of thepartnership becoming illegal or unlawful by subsequentevents.

3) Dissolution of Partnership at Will: The firm may be dissolved by anypartner giving a notice to the other partners of hisintention to dissolve the firm. But the notice must be inwriting and unambiguous. Once given, it cannot be withdrawn.The firm is dissolved from the date mentioned in the notice,or if the date is not mentioned, from the date ofcommunication of the notice.

4) Dissolution through Court: A partnership for a fixed period willbe dissolved by a court where it is not dissolved for thereasons mentioned above.

At the suit of a partner, a firm may be dissolved on any ofthe following grounds:

(a) that a partner has become of unsound mind,

(b) that a partner has become permanently incapable ofperforming his duties,

(c) that a partner is guilty of conduct which is likely toaffect prejudicially, the carrying on of the business.

(d) that a partner persistently commits breach ofagreement. For instance, a firm is dissolved when: (i) apartner commits breach of trust, or (ii takes away thepartnership books etc.

(e) that a partner has transferred his interest to a thirdparty or allowed his share to be charged or sold in therecovery of arrears of land revenue

(f) that the business of the firm cannot be carried on,save at a loss, or

(g) on any other ground which renders it just and equitablethat the firm should be dissolved.

REVIEW QUESTIONS

1. define Partnership. What are the different kinds ofpartnership?

2. What are the rights and duties of partners?

3. What is the procedure for registration of partnership firm?What is the effect of non-registration?

4. What are the modes of dissolution of firm?

LESSON – 8ARBITRATION OF ACT, 1940

Arbitration is one of the oldest methods of settling civildisputes between two or more persons by reference to the disputeto an independent and impartial third person instead oflitigating the matter in the usual way through the Courts.

In Union of India Vs D.P. Wadia & Sons, A.I.R. (1977) Bom. 10, itwas observed that “arbitration is a domestic forum. It is a forumother than a Court of law for determination of disputes anddifferences, after hearing both the sides, in a judicial manner”.The law relating to arbitration is contained in the ArbitrationAct, 1940.

The person appointed to adjudicate upon the difference is calledan arbitrator.

Section 2(a) defines that an “Arbitration Agreement means awritten agreement to submit, present or future differences toarbitration, whether an arbitrator is named therein or not”.

MATTERS REFERRED TO ARBITRATION

1. All disputes of civil and quasi-civil nature

2. All matters affecting the private rights of the partieswhich can be the subject-matter of a civil suit

3. All matters connected with the personal rights of theparties such as marriage, maintenance or conditions on whichhusband and wife may separate etc.

4. Matters of questions of law and fact.

5. A time-barred debt, etc.

But the following matters cannot be referred to arbitration:-

(a) A suit for divorce of restitution of conjugal rights

(b) Right arising out of an illegal transaction

(c) Insolvency proceedings

(d) Matters relating to public charities

(e) Matters of criminal nature, e.g. murder, theft etc.

(f) Proceedings with regard to lunacy.

(g) Testamentary matters

(h) Appointment of a guardian to a minor

Who can refer

A person who is competent to contract, may refer matters toarbitration because a reference or submission is an agreement.

The manager or partner of a Joint Hindu Family

An agent duly authorize by the principal

The official receiver by the leave of court

Trustees acting together, and

A company may refer a dispute.

But an insolvent or a partner in a firm or an executor oradministrator, or a minor cannot refer matters toarbitration.

KINDS OF ARBITRATION

ARBITRATION WITHOUT INTERVENTION OF A COURT

Unless the intention of the parties is otherwise expressed,following provisions shall be implied in an arbitrationagreement.

a) Except when it is provided otherwise, the reference shall beto a sole arbitrator.

b) If the reference is to an even number of arbitrators, thearbitrators shall appoint an umpire not later than one monthfrom the latest date of their respective appointments.

c) The arbitrators shall make their award within four months,after entering on the reference or after having been calledupon to act, by notice in writing, from any party to thearbitration agreement or within such extended time as thecourt may allow.

d) When the arbitrators have either allowed time to expirewithout making an award or expressed in writing, to any ofthe parties to the agreement or umpire, that they cannotagree, the umpire shall forthwith enter on the reference inlieu of the arbitrators.

e) The umpire shall make his award within two months ofentering on the reference or within such extended time asthe court may allow

f) The arbitrators may examine all the parties to the agreementand other persons claiming under them and all documents andpapers relating to the dispute and do all other necessarythings.

g) The award shall be final and binding on the parties.

h) Costs of references and the award shall be borne by theparties, as the arbitrators, at their discretion, maydirect.

ARBITRATION IN SUITS

Arbitration through the Intervention of Court where no Suit isPending

Though the parties have entered into an arbitrationagreement before a suit in respect of any matter relating tothe agreement is field in a court, one of the parties mayapply to the court for the filling up of the agreement withit. Such an application must be in writing, numbered andregistered as a suit. The interested parties shall be madeas plaintiffs and disinterested as defendants. The courthaving heard the objections, if any, of all the parties tothe agreement, issues an order of reference to an arbitratorappointed by the parties or by the court itself. Thereafter,all the rules applicable in the case of arbitration withoutintervention of the court, shall apply.

Arbitration through the Intervention of the Court where a Suitis Pending

On receiving an application from the parties to the suit,the court may refer the matter in difference to anarbitrator appointed by it, for determination within aspecified time. Where some of the parties to the suit applyto the court for reference to arbitration, the other partieswho were not applicants shall be bound by the suit only,which continues so far as it relates to those parties.

ARBITRATOR

An arbitrator is one, who is appointed by the contendingparties for negotiation and settlement of a dispute referredto him. Since, he is appointed by the parties to the disputeat their own choice, anybody, including a minor or one ofthemselves may be appointed as an arbitrator. But when theparties cannot appoint any arbitrator or if an appointedarbitrator neglects or refuses to act or is incapable ofacting or dies, and if such vacancy is not duly filled

within 15 days of the notice by any party on the otherparties to fill such a vacancy, the court, on theapplication of the party who gave notice to other partiesfor filling the vacancy, may appoint an arbitrator orarbitrators. The court, on receiving an application from anyof the parties can remove an arbitrator when he fails toproceed with the reference or when he has misconductedhimself of the proceedings.

POWERS OF ARBITRATOR

1. He can administer oath to the parties and witnesses

2. He can state a special case for the opinion of the courton any matter of law

3. He can state the award in the form of a special case forthe opinion of the court

4. He can make the award conditional or in the negative

5. He can administer necessary interrogatories to any partyto arbitration

6. He can administer necessary interrogatories to any partyto arbitration.

DUTIES

1. He must act judicially as he is an extra-judicial court atthe choice of the parties. So, he must fix the time andplace for hearing and grant adjournments as may be necessaryto do justice.

2. He must observe the fundamental principles of justice. Hemay not strictly follow the technical rules of procedure.But he should not disregard the substance of justice.

3. He must be impartial and act fairly to both the parties.

4. He must not act as an agent or advocate of a party. He mustact as an impartial judge.

5. He must decide on all matters relating to the dispute andmake an award

6. He must not delegate his authority to someone else exceptwhen the delegation involves ministerial acts. He mayhowever, take the assistance of experts like a CharteredAccountant etc. but he must give his own decision.

7. He must not investigate into matters which are outside thescope of terms of reference to arbitration. So, he must notexceed his authority.

8. He must make an award within four months from the date onwhich reference is made or within such extended time as thecourt may allow.

POWERS AND DUTIES OF AN UMPIRE

Where two or more even numbers of arbitrators are appointedand the reference provides that in the event of theirdisagreement, the matter in dispute shall be referred to thedecision of a third person, such third person is called anumpire. So, an umpire may be appointed by the arbitratorswithin one month from the latest date of their respectiveappointments. He may be appointed by the court (1) when thearbitrators do not appoint him or (2) when the parties failto appoint arbitrators. The court may remove him on samegrounds on which an arbitrator is removed, namely, when hefails to proceed with arbitration or when he misconductshimself or the proceedings. He has to make an award withintwo months or such extended period as the court may allow.He may fix the amount of costs and the persons who shall

bear such costs. his other rights and duties are the same asthose of an arbitrator.

AWARD

An award is the final decision of the arbitrators or an umpire inrespect of a dispute referred to arbitration. It must be inwriting and signed by the arbitrators or an umpire. It may befiled in the court which thereupon, gives notice to the partiesof the award. The opinion of the court, on matters which thearbitrators stated a special case for the opinion of the court,shall be added to and forms part of the award. Unless a contraryintention appears, an award is binding on the parties to thearbitration agreements and persons claiming under them.

The court may modify an award:

1. When a part of the award is on matters not referred toarbitration and such part can be separated without affectingdecision or

2. When the award is imperfect in form or contains obviouserror or

3. When the award contains clerical mistake or an accidentalomission.

The court may remit an award for reconsideration:

1) When certain matters referred to arbitration are notdetermined or

2) When the award determines the matters not referred toarbitrations or

3) When the award is incapable of execution or

4) When the legality of the award is objected to and suchobjection is apparent on the face of it.

When the award is remitted for reconsideration, the arbitratorsor umpire shall give their decision within the fixed time, orsuch extended time as the court may allow. Otherwise, the awardbecomes void.

The court may set aside the award:

1) When the arbitrator or umpire misconducts himself or theproceedings,

2) When the award is improperly procured or is otherwiseinvalid,

3) When the award is made after the arbitration has becomeinvalid or has been superseded by an order of the court.

LESSON – 9COMMON CARRIES ACT

A Common Carrier is one whose business is to transport properlyor goods of all persons from place to place for hire.

Section 2 of the Carriers Act 1865, defines that “Common Carrierdenotes a person, other than the government, engaged in thebusiness of transporting for hire, property from place to place,by land or inland navigation for all persons indiscriminately.”But the government or a carrier of passengers or a carrier by asea or air cannot be regarded as a carrier. Further, a commoncarrier is different from a private carrier who carries goods ofparticular persons of his own choice either for hire orgratuitously in a casual occupation or under a special contract.

DUTIES OF COMMON CARRIER

1. He is bound to carry goods for all persons indiscriminately,

2. He is bound to carry goods which he professes to carry, butnot those which he does not profess to carry

3. He is bound to carry the goods safely

4. He is bound to carry goods by his ordinary route to theusual destination or destinations in his customary mannerwithout unnecessary delay or deviation. So, he is not boundto follow the shortest route.

5. He must deliver the goods at the place stated by theconsignor of the goods, except when the consignee instructshim to deliver the goods at a particular place.

6. If the consignee does not take delivery of the goods whenthey reach the destination, he must warehouse them for areasonable time so that the consignee can take deliverythereof.

RIGHTS OF COMMON CARRIER

1. He has a right to have the goods delivered to him.

2. He is entitled to prescribe the hire for the carriage ofgoods by him.

3. He is entitled to exercise a lien on the goods in hispossession for hire and other expenses or charges.

4. He has a right to be reimbursed for the expenses incurred byhim in the protection of the goods when the consigneerefuses to take delivery of them.

5. If the goods are perishable, he can sell away the goods whenthe consignee has not taken delivery of them and the goodsare about to perish or if the goods get spoiled in transit.

LIABILITIES OF COMMON CARRIERS

1. At common law, he is liable as a bailee and hence shouldtake much care of the goods as a man of ordinary prudencewould take care of his own goods.

2. He is liable as an insurer for any loss or damage caused tothe goods whether by his negligence or not. But thefollowing are the exceptions:

a) Act of Nature: He is not liable if the loss of goods iscaused by unforeseen circumstances beyond his control andcontemplation, such as cyclone lighting etc.

b) Alien Enemies: He is not liable for the loss of goods causedby the foreign enemies during wars.

c) “Inherent Fire” in the Goods: He is not liable for inherent defectin the goods such as deterioration of perishable goodslike fruits, vegetables etc.

d) Consignor’s Fault: He is not liable for the loss or damage ofgoods due to consignor’s fault such as bad packing etc.

Liability in respect of Scheduled Goods

In case of unusually valuable goods like gold and silver andunusually perishable goods such as glass, ivory articles, musicalinstruments etc. he is not liable for the loss of goods if thevalue of goods exceeds Rs. 100, unless the consignor or his agentexpressly declares their value and their description to thecarrier.

Liability in respect of Non-Scheduled Goods

The liability of the carrier in respect of loss of these goodscan be limited by a special contract signed by the consignor orowner of the goods, except when such loss is caused by thecriminal acts of negligence of the carrier himself or his agentsor servants.

In order to sue the carrier for loss of goods, notice in writingof the loss of goods must be given to the carrier, within sixmonths from the date on which the plaintiff has the knowledge ofthe loss of goods.

Liability in respect of dangerous goods

In case of dangerous goods like explosives, acids etc theconsignor must sufficiently inform the carrier of the dangerouscharacter of the goods. If not, the consignor would beanswerable. But even if the consignor is unaware of the dangerouscharacter of goods, he would be answerable. On the other hand, ifthe carrier is aware of the dangerous character of the goodscarried, the consignor is not responsible for any consequentloss.

CARRIAGE BY RAIL

Carriage by rail in India is regulated by the Indian RailwaysAct. 1890

Responsibility of Railway Administration as Carriers

Execution of forwarding note (Sec. 72). Any person derivering toa railway administration any animals or goods to be carried byrailway shall execute a forwarding note. The forwarding noteshall be in a form prescribed by the railway administration andapproved by the Central Government. The sender or his agent shallgive the required particulars in the forwarding note in respectof the animals or goods delivered to the railway administrationwhere:

(a) The animals or goods are to be carried by a trainintended solely for the carriage of goods, or

(b) The goods are to be carried by any other train andconsist of articles of any of the following categoriesnamely –

a. Articles carried at owner’s risk rate

b. Articles of a perishable nature

c. Articles mentioned in the Second Scheduled (whichincludes articles of special value which are to bedeclared and insured).

d. Articles in a defective condition or defectivelypacked.

e. Explosives and other dangerous goods.

As per the amended Sec. 73, a railway administration isresponsible for the loss destruction or deterioration in transit

of animals or goods received by it for carriage by rail from allcauses except losses arising from –

Act of God

Act of war

Act of public enemies

Arrest, restraint or seizure under legal process

Orders or restrictions imposed by or on behalf of theCentral or a State Government

Natural deterioration or wastage in weight due to someinherent defect or vice in the goods

Latent defects

Fire, explosion or any unforeseen risk

The railway administration is responsible for the non-deliveryof animals or goods delivered to be carried by railwayarising from any cause except the above.

When any loss destruction, damage, deterioration or non-delivery has occurred as a result of one or more of thecause given above, the railway administration shall beresponsible unless it satisfactorily proves that it hadexercised reasonable care and prudence in the carriage ofgoods or animals.

CONTRACT OF AFFREIGHTMENT

A contract for the carriage of goods by sea is called acontract of affreightment. It is an agreement whereby theship owner undertakes either to carry the goods by water orto supply a ship for the carriage of goods by water inconsideration of a price called “freight”. A contract ofaffreightment is of two kind.

1. Charter-Party and 2. Bill of Lading

CHARTER-PARTY

It is an agreement by which the ship owner agrees to let anentire ship or substantial part of it to a shipper for theconveyance of goods on a certain voyage, to a definite place orfor a specific period in consideration of “freight”.

BILL OF LADING

“A bill of lading is a receipt for the goods shipped on board aship, signed by the person who contracts to carry them, or hisagent and stating the terms on which the goods were delivered toand received by the ship”.

A bill of lading contains the following particulars

1. The name of the ship and its national character.

2. A statement that it is subject to the rules laid downby the Act

3. Marks for the identification of goods, the number ofpackages and the order and condition of the goods

4. The port of loading, the destination and the route

5. The amount of freight

6. Expected perils and other terms of carriage of goods.

A Bill of Lading is a document to title of goods and can besold while the goods are still in transit. The transfer ofbill of lading serves as the symbolic delivery of goods. Butstrictly speaking, it is not a negotiable instrument thoughit is deliverable to a particular person or his order.therefore, it is sometimes described a “quasi-negotiable” or“as good as negotiable”.

CARRIAGE BY AIR

The law relating to carriage of goods and passengers acrossinter-national borders is regulated in India by the Carriage byAir Act, 1972. It also makes provisions for applying the rulescontained in the Warsaw Convention and the Hague Protocol(subject to certain exceptions, adaptations and modifications) tonon-international carriage by air.

DOCUMENTS OF CARRIAGE

When passengers and goods are carried by air, the followingdocuments are issued:

Passenger Tickets: For carriage of passengers, the carrier mustdeliver a passenger ticket which must contain the followingparticulars.

(1) The place and date of issue

(2) The place of departure and of destination

(3) The agreed stopping places, but the carrier may reservethe right to alter the stopping places in case of necessityand the exercise of this right would not deprive thecarriage of its international character;

(4) The name and address of the carrier or carriers;

(5) A statement that the carriage is subject to the rulesrelating to liability contained in the First Schedule [Rule3(1)]

The passenger ticket shall constitute prima facie evidence ofthe conclusion and conditions of the contract of carriage.

LESSON – 10CONTRACT OF INSURANCE

The Contract of Insurance is a contract whereby a ‘personundertakes to indemnify another against a loss arising on thehappening of an event or by pay a sum of money on the happeningof an event. The person who insures is called “Insurer”. Theperson who effects the insurance is called the “Insured” or“Assured”. The price for the risk undertaken by the insurer andpaid by the insured to the insurer is called “Premium” and thedocument which contains the contract of insurance is called“Policy”.

Following are the general principles of contracts of insurance:

1. A contract of insurance is a contract uberrimae fider, i.e.a contract requiring utmost good faith of the parties. So,all material facts which are likely to influence the insurerin deciding the amount of premium payable by the insuredmust be disclosed by the insured. Failure to disclosematerial facts renders the contract voidable at the optionof the insurer.

2. The assured must have, that is called “insurable interest”in the subject matter of the contract of insurance. “He mustbe so situated with regard to the thing insured that hewould have benefit from its existence, loss from itsdestruction”.

3. Every contract of insurance such as life insurance andpersonal accident and sickness insurance, is a contact ofindemnity. So, the insurer pays the actual loss suffered bythe insured. He does not pay the specified amount unlessthis amount is the actual loss to the insured.

4. The insured must take reasonable precautions to save theproperty, ion the event of some mishap to the insured

property. He must act as a prudent uninsured person wouldact in his own case under similar circumstances to mitigateor minimize losses.

5. The insurer must run the risk of indemnifying the insured.If he does not run the risk, the consideration for which thepremium is paid, fails and consequently, he must return thepremium paid by the insured.

6. The insurer is liable for loss which is proximately causedby the risk insured against. The rule is “causa proxima nonremota spectalur”, i.e. the proximate but not the remotecause is to be looked to. So, the loss must be proximatelycaused in order that the insurer is to become liable.

7. Except in the case of life insurance, every contract ofinsurance comes to an end of the expiry of every year,unless the insured continues the same and pays the premiumbefore the expiry of the year.

8. According to the rule of subrogation when the loss is causedto the insured by the conduct of third party, the insurershall have to make good such loss and them have a right tostep into the shoes of the insured and bring an actionagainst such third party who caused the loss to the insured.This right of subrogation is enforceable only when there isan assignment of cause of action by the insured in favour ofthe insurer. The doctrine of subrogation does not apply tolife insurance.

there are different kinds of insurance. (1) Life (2) Fire(3) Marine (4) Accident and (5) Guarantee insurance etc.

LIFE INSURANCE CONTRACT

Life insurance is popularly referred to as life assurance. Inthis case, the underwriter agrees to pay the assured or hisheirs, a certain sum of money on death or on the happening of an

event dependent upon human life in consideration of premiums paidby the assured. It also grants disability and accident benefitsannuities and super-annuation allowances.

A life insurance policy is mainly to two types, (1) the wholelife policy and (2) the endowment policy. In the former one, thepremiums have to be paid either for a specified number of yearsor till the death of the assured. The policy matures on the deathof the assured. But in the case of the latter type, the amountassured is payable either on the death of the assured or on theexpiry of a specified number of years whichever is earlier.

Again, a life insurance policy may be either, (1) with profits or(2) without profits. In the case of the former policy, theassured gets not only the sum assured but also a share in theprofits of the underwriter in the form of bonus. But he has topay more premium in this case than that is payable in respect of“without profits” policy. But in the case of “without profits”policy, the assured is not entitled to any share in the profits.

FIRE INSURANCE

A contract of fire, insurance is a contract whereby the insurerundertakes, in consideration of the premium paid, to make goodany loss or damage caused by fire during a specific period. Thecontract specified the maximum amount which the assured can claimin case of loss. This amount is fixed by the parties at the timeof the contract. It is, however, not the measure of the loss. Theloss can be ascertained only after the fire has occurred. Theinsurer is liable to make good the actual amount of loss norexceeding the maximum amount fixed by the parties.

CHARACTERISTICS OF FIRE INSURANCE CONTRACT

1. It is a contract of indemnity. The assured can, in the eventof loss, recover the actual amount of loss from the insurer.This is subject to the maximum amount for which the subject-matter is insured.

2. It is a contract of uberrinate fider. The assured and theinsurer have to disclose everything which is in theirknowledge and which will affect the contract of insurance.

3. The assured must have insurable interest in the subject-matter both at the time of insurance and at the time ofloss. The insurable interest must be capable of valuation interms of money.

4. The risk covered by a fire insurance contract is the lossresulting from fire or some cause which is the proximatecause of the loss.

5. It is subject to the principles of subrogation andcontribution

6. It is contract from year to year. It comes to an end afterthe expiry of the year. It can, however, be renewed if theassured pays the premium during the days of grace.

TYPES OF FIRE POLICIES

1. Specific Policy

It is policy which covers the loss of the assured up to aspecific amount which is less than the real value of theproperty. Specific policy is a case of under-insurance tocheck under-insurance, the insurers usually insert averageclause in the policy in which case the policy is known asaverage policy.

2. Comprehensive Policy

It is a policy which covers losses against fire, theft,burglary, third party risks, etc. such a policy is also

known as “all-in-one” policy. It may also cover loss ofprofits during the period the business remains closed due tofire.

3. Valued Policy

It is a policy in which the amount payable in case of lossis fixed at the time the policy is taken. In the event ofloss, the fixed amount is payable irrespective of the actualamount of loss. A valued policy can be legally challengedbecause it is not a contract of indemnity.

4. Floating Policy

It is a policy which covers property at different placesagainst loss by fire. It might, for example, cover goodslying in two warehouses at two different places. It isalways subject to average clause

5. Replacement or Reinstatement Policy

In order to prevent fraudulent devices by the assured, theinsurers usually insert a clause in the policy, called there-instatement clause, whereby the insurer undertakes to paythe cost of the replacement of the property damaged ordestroyed by fire.

MARINE INSURANCE

A contract of marine insurance is a contract whereby the insurerundertakes to indemnify the insured, in manner and to the extentthereby agreed, against marine losses, in consideration of apremium paid by the insured. It is a contract of indemnity. It isa contract ‘uberrimae fider”. It must have insurable interest.The doctrine of subrogation applies to it. The usual form of thepolicy is what is called “Lloyd’s Policy”. Lloyds are a registerebody of several members and a broker is always employed in the

case of this policy. Sometimes, a company policy also may beissued.

KINDS OF MARINE POLICIES

1. Time Policy: It insures the subject matter for a certainspecified period, not exceeding twelve months.

2. Voyage Policy: It insures the subject-matter for a certainvoyage only i.e. journey from one fixed port to anotherfixed port.

3. Valued Policy: It specified the agreed value of the subject-manner insured. Insurers are liable only for the loss notexceeding the value mentioned in the policy.

4. Unvalued or Open Policy: It does not specify the value of thesubject-matter. The value is to be ascertained subsequentlyat the time of actual loss.

5. Mixed Policy: It insures the subject-matter for a specifiedvoyage and for a particular period.

6. Floating Policy: It describes the general terms of insurance,leaving other particulars such as the name of the ship etc.to be declared subsequently.

7. Wagering or Honour Policy: It is also known as “policy proof ofinterest” or “Interest or no interest policy”. In this case,the insurer does not have insurable interest in the subject-matter of the contract. It resembles a wages and hence voidLosses are indemnified depending on the honour of theinsurer.

A marine insurance policy contains the following particulars:

1. Name of the ship

2. Name of the parties

3. The time of commencement and duration of the risk

4. “Lost or not lost” clause whereby the insurer is made liablewhether the goods were in existence or not at the time whenthe insurance was effected, except when the insured knewthat the goods were destroyed already.

5. “Touch and Stay” clause which mentions the various partswhich the ship touches and the period of its stay at theseparts.

6. Accepted perils for which the insurer undertakes to beliable.

7. “Free from capture and seizure” clause which exonerates theinsurer from has liability for the loss arising out of thecapture and seizure of the ship.

8. “Free from particular average” or “Free from all average”clause whereby the insurer is exempted from his liabilityfor any particular average loss or for all average losscaused to the subject-matter of the contract.

9. “Barratry” clause relates to the liability of the insurerfor the loss arising out of the wrongful act of the masteror any of the crew of the ship.

10. “Sue, Labour and Travel” clause which entitles theinsured to minimize the loss and claim for expenses frominsurer and to recover the goods lost by falling overboardaccidentally.

11. “Collision or running down” clause whereby the owner ofan insured ship shall indemnify the owner of another ship ifthe former ship collides negligently with the latter.

12. “Inchmaree” clause which protects the insured againstany latent defect in the machinery of the ship.

13. “Expected Perils” clause which specified the risks notcovered by the insurance policy.

A marine policy is thus a formal document signed by theinsurer. It must be stamped. It contains the terms of theinsurance as explained above. It is an actionable claim andcan be transferred by means of an assignment.

REVIEW QUESTIONS:

1. What is an “arbitration”. What are the kinds of arbitration?

2. Define common carriers. What are right, duties andliabilities of common carriers?

3. What are the general principles of contract of insurance?

4. What is marine insurance? What are the kinds of marinepolicies?

BOOKS REFERRED

1. Kapoor, N.D. Elements of Mercantile Law

2. Shukla, M.C. Mercantile Law

3. Subba Rao Mercantile Law

MODEL QUESTION PAPER

BACHELOR OF COMMERCE

PAPER 2.2 : COMMERCIAL LAW

Time 3 hours Maximum Marks :100

Part - A (5 X 8 =40)

Answer any five of the following

All questions carry equal marks

1. Define offer. What are legal rules relating to valid offer?

2. Who is a minor? Discuss the nature of contract entered intowith minors.

3. What are the agreements opposed to public policy?

4. What are the remedies for breach of contract?

5. Distinguish between contract of indemnity and contract ofguarantee.

6. What are the duties of finder of lost goods?

7. What are the principles of contract of insurance?

8. What are the rights of an unpaid vendor?

PART – B (4 x 15 =60)

Answer any Four of the following

All questions carry equal marks

9. Define contract. What are the essentials of a validcontract?

10. What are the different methods of discharging acontract?

11. When the surety is discharged from his liabilities?

12. What are the implied conditions and warranties laiddown under the Sale of Goods Act?

13. What are the rights and duties of an agent?

14. What are the rights, duties and liabilities of commoncarriers?

15. What are the different kinds of arbitration?