MEANING AND IMPORTANCE OF BUSINESS LAW

Commercial law (also known as business law) is the body of law that governs business and commercial transactions. It is often considered to be a branch of civil law and deals with issues of both private law and public law.

Business law is the general field of law relating to business organizations, business structures, and business transactions. Also included in the business law field are issues related to real estate, tax, and the environment.

“A legally binding agreement between two or more persons by which rights are acquired by one or more to acts of forbearance (Abstaining from doing something) on the part of the others” “An agreement between two or more persons which is intended to be enforceable at law and is constituted by the acceptance by one party of an offer made to him by the other party to do or abstain from doing some act”

IMPORTANCE

THE business law studies are very important as it helps the management professionals in realizing the business ethics, he or she must follow in order to run a proper & authenticated business. This must be in accordance with the law & regulations prevailing in the society. The business law studies are necessary for every management graduate whether he want to setup a proper business, or willing to join a service as a manager.

Doing a proper business with an authenticated business license and registration gives confidence. They makes business case laws studies very important . it has been proven, that most clients are comfortable in doing businesses, provided they have a govt. license in hand,& an approval stamp for their business. It gives immense confidence in handling day to day business requirements to those who know the legal aspect of business.

INDIAN CONTRACT ACT

A contract is a legally enforceable agreement between two or more parties with mutual obligations. The remedy at law for breach of contract is "damages" or monetary compensation. In equity, the remedy can be specific performance of the contract or an injunction. Both remedies award the damaged party the "benefit of the bargain" or expectation damages, which are greater than mere reliance damages, as in promissory estoppels

An agreement b/w 2 or more person which is intended to be enforceable at law & is constituted by the acceptance by one party of an offer made to him by the other party to do or abstain from doing some act.

NATURE OF CONTRACT

MOST IMPORTANT BRANCH OF LAW

CIRCUMSTANCES CREATED BY PARTIES SHALL BE LEGALLY BINDING ON THEM.

WHAT A MAN HAS BEEN LED TO EXPECT SHALL COME TO PASS

REALIZATION OF THE REASONABLE IN COURT OF LAW

RIGHT IN PERSONUM AS AGAINST RIGHTS IN REM

LIMITING PRINCIPLES

TORTS, CIVIL WRONGS, QUQSI CONTRACTS, JUDGEMENTS OF COURTS

THE INDIAN CONTRACT ACT 1872

1. General Principles of Law of Contract (Secs. 1 - 75)

2. Special Contracts (Secs. 124 - 238)

- Indemnity and Guarantee

- Bailment and Pledge- Agency

ESSENTIAL ELEMENTS OF A VALID CONTRACT Sec. 10 - “All agreement are contracts if they are made by ‘FREE CONSENT’ of Parties ‘COMPETANT TO CONTRACT’, for a ‘LAWFUL CONSIDERATION’ and with ‘A LAWFUL OBJECT’ and are ‘NOT DECLARED TO BE VOID” Therefore “All agreements are not contracts but all contract are agreements” Contracts do not include future agreements: 1. Offer and Acceptance 2. Intention to create a legal relationship 3. Lawful consideration 4. Capacity of Parties

5. Free and Genuine Consent 6. Lawful Object: - Forbidden by law - Defeats the provisions of law - Fraudulent - Involves injury to person and property - Immoral and opposed to public policy7. Agreement not declared void8. Certainity and possibility of performance9. Legal formalities 10. Consensus Ad-Idem Offer and its acceptanceFree consent of both partiesMutual and lawful consideration for agreementIt should be enforceable by law. Hence, intention should be to create legal relationship. Agreements of social or domestic nature are not contractsParties should be competent to contractObject should be lawfulCertainty and possibility of performance  Contract should not have been declared as void under Contract Act or any other law

CLASSIFICATION OF CONTRACTS VALIDITY Valid ContractsVoid Contract & Void Agreement Voidable ContractIllegal agreement Unenforceable Agreement

FORMATION Express ContractImplied ContractConstructive or quosiPERFORMANCE Executed ContractElectuary ContractUnilateral ContractBilateral contract

2. Void Contract :- VOID CONTRACT - A contract which ceases to be enforceable by law be-comes void when it ceases to be enforceable. [section 2(j)]. - - Thus, initially a contract cannot be void, i.e. a contract cannot be void ab initio. The simple reason is that in such a case, it is not a contract at all to begin with. Hence, only a valid contract can become void contract due to some subsequent events. e.g. the person dies or property is destroyed or Government imposes a ban etc. - - A void agreement is void ab initio. It never becomes a contract. It is nullity and cannot create any legal rights.

3. Voidable Contract :- VOIDABLE CONTRACT - An agreement which is enforceable by law at the option of one or more of the parties thereto, but not at the option of the other or others, is a voidable contract. [section 2(i)]. - - (a) When consent is obtained by coercion, undue influence, misrepresentation or fraud is voidable at the option of aggrieved party i.e. party whose consent was obtained by coercion/fraud etc. However, other party cannot avoid the contract. (b) When a contract contains reciprocal promises and one party to contract prevents the other from performing his promise, the contract becomes voidable at the option of the party to prevented. (section 53). Obvious principle is that a person cannot take advantage of his own wrong (c) When time is essence of contract and party fails to perform in time, it is voidable at the option of other party (section 55). A person who himself delayed the contract cannot avoid the contract on account of (his own) delay.

3.Quasi Contract :- Quasi’ means ‘almost’ or ‘apparently but not really’ or ‘as if it were’. This term is used when one subject resembles another in certain characteristics but there are intrinsic differences between the two. ‘Quasi contract’ is not a ‘contract’. It is an obligation which law created in absence of any agreement. It is based on equity. There are certain relations resembling those created by contract. These are termed as ‘quasi contracts’.  These are – (a) Supply of necessaries (section 68) (b) Payment of lawful dues by interested person (section 69) (c) Person enjoying benefit of a gratuitous act (section 70) (d) Finder of goods (section 71) (d) Goods or anything delivered by mistake or coercion (section 72).

OFFER AND ACCEPTANCEOFFER - Inception of every Contract - Definite Proposal - Unqualified Acceptance - Concluded Contract

DEFINITION Sec. 2(a) : A person is said to have made a proposal, when he “signifies to another his

willingness to do or to abstain from doing anything with a view to obtaining the assent of the that other to such Act or Abstinence.” Eg.: ‘A’ says to ‘B’ “Will you purchase my car for Rs.1 Lakh?” Offerer, Proposer or PromisorOfferee, Proposee / Acceptor or Promisee

HOW AN OFFER IS MADE 1. Express Order 2. Implied Order TO WHOM AN OFFER CAN BE MADE 1. Specific Offer 2. General Offer LEGAL RULES AS TO OFFER 1. Offer must be such that it is capable of being accepted and giving rise to a legal relationship

2. Offer must be definite, unambiguous, certain and not loose and

vague

- Conditions for ascertaining3. Offer must be communicated 4. Offer must be made with a view to obtain assent 5. Offer must not contain a term the non-compliance of which amounts to acceptance 6. A mere statement of price is not an offer 7. Offer to be distinguished from : - A declaration of intention and an announcement Eg. : Auction Sale - An invitation to make an offer to do business - Catalogues

Offer and Acceptance For an agreement

There has to be a clear and definite offer by one person and,

Its unconditional acceptanceby the person to whom the offer ismade.

Offer An offer is a proposal by one

party to another to enter into a legally bindingagreement with him.Offer may be express(spoken or

written words) or implied.(inferred from conduct)

Constituents of an offer(essential elements)

The offer must show the obvious intention

on part of the offerer to be bound by it. The offerer must make the offer with the

view to obtain the assent of the offeree.

It must be definite.

It must be communicated to the offeree.

Offer may be conditional

Rules of legal offer Offer must be such that as in law it

is capable of being accepted and giving rise to a legal relationship.

Terms of offer must be definite, clear and certain. The offer must not thrust a burden

of acceptance on the offeree.

Invitation to offer, a few possibilities

Display of goods for sale

Price lists, catalogues

Advertisements

Declaration of intention

Auctions

Tenders

Offer of public issue of shares

Termination of offer

Sec.6 of the Act deals with termination of offer. 2.Revocation-offer may be revoked at any

time before its acceptance is complete. 3.Lapse of time.(specified time or

reasonable time.) 4.Failure of the acceptor to fulfill the

condition precedent to acceptance. 5.Death or insanity of proposer.

Other instances of termination of offer

As per sec.6 of the Act.

Rejection

Counter offer

Failure to accept according to themode prescribed. Subsequent illegality or destruction

of subject matter.

Acceptance

Acceptance is the act of assenting by the

offeree to an offer. It indicates that the person making it is

willing to be bound by the terms of the offer. Acceptance may be express or implied.

Sec.2(b)’when the person to whom

proposal(offer) is made signifies hisassent thereto, the proposal is said to beaccepted. A proposal when acceptedbecomes a promise.(i.e.a contract)

Legal rules as to acceptance It must be absolute and unqualified.

It must be made by the party to whom

the offer is made. The acceptance must be expressed in

usual or reasonable manner.

It must be given in reasonable time.

It cannot be made in ignorance of offer.

It must be given before the offer lapses.

It must be communicated to the offerer.

Mere mental acceptance is no acceptance.

(possible cases of acceptance by silence)

Communication of offer, when complete (the spirit of the law is that the

message reaches the concerned party.) Sec.4 provides that the communication

of proposal is complete when it comesto the knowledge of the person forwhom it is made.

Communication of acceptance, when complete Sec.4 ‘The communication of

acceptance is complete

as against proposer: when it is put in a course of transmission to him, so as to be out of power of the acceptor. as against the acceptor: when it comers to the knowledge of the proposer.

Consideration

Consideration is something of value given by a promissor to a promisee in exchange for something of value given by a promisee to a promissor. Typically, the thing of value is an act, such as making a payment, or a forbearance to act when one is privileged to do so, such as an adult refraining from smoking.

Consideration consists of a legal detriment and a bargain. A legal detriment is a promise to do something or refrain from doing something that you have the legal right to do, or actually doing or refraining from doing something that you don't have to do. A bargain is something the promisor (the party making promise or offer) wants, usually being one of the legal detriments. The legal detriment and bargain principles come together in consideration and create an exchange relationship, where both parties agree to exchange something that the other wishes to have.

The purpose of consideration is to ensure that there is a present bargain, that the promises of the parties are reciprocally induced. The classic theory of consideration required that a promise be of detriment to the promissor or benefit to the promisee. This is no longer the case.

Consequences of Breach of Contract

- Compensation is payable for breach of contract. Penalty is also payable if provided in contract. Breach of contract may be actual or anticipatory.

Summary of principles of compensation and damages - Following points are important - * Compensation for loss or damage is payable. Since the word used is ‘compensation’, punitive damages cannot be awarded. * These should be in usual course or known to parties i.e. both parties must be aware * No compensation for remote and indirect loss or damage * Same principle applies to quasi contract also.

GENERAL DAMAGES – General damages are those which result from ‘direct and proximate’ consequences from breach of contract. Normally, what can be awarded is compensation for loss or damage which can be directly or proximately attributed to the breach of contract. One way of assessing damages is the difference between the contract price and the market price on date of breach of contract, plus reasonable expenses incurred by him on account of the breach plus cost of suit in court of law.

CONSEQUENTIAL LOSS OR SPECIAL DAMAGE – Special damages or consequential damages arise due to existence of special circumstances. Such damages can be awarded only in cases where the special circumstances were foreseeable by the party committing the breach or were specifically known to the party. Consequential losses like loss of profit due to breach, which may occur  indirectly due to breach cannot be normally awarded unless there are special circumstances which parties were aware. Loss of profit can be awarded only in cases where seller could have foreseen those losses and arose directly as result of breach.

PROMISEE SHOULD TAKE STEPS TO MITIGATE THE LOSS OR DAMAGE – Explanation to section 73 specifically provides that in estimating loss or damage, the means available for remedying the inconvenience caused by breach of contract shall be taken into account. Thus, promisee should take all reasonable steps to mitigate the losses e.g. if promisor does not supply goods, he should make efforts to procure from alternate sources may be even at higher price, to reduce his losses arising out of breach of contract.

VINDICTIVE OR EXEMPLARY DAMAGES – Vindictive or exemplary damages cannot be awarded under Contract Act. However, these may be awarded by Court under tort under special circumstances e.g. * Dishonour of cheque by Bank when there was balance in account, as it causes loss of reputation of credit worthiness of person issuing cheque * Breach of contract to marry, as it hurts both feelings and reputation.

Quantum Meruit – ‘Quantum meruit’ means ‘as much as earned’. A contract may come to end by * breach of contract * contract becoming void or * Voidable contract avoided by party. In such case, if a party has executed part of contract, he is entitled to get a proportionate amount i.e. ‘as much as earned by him’. This is not by way of ‘damages’ or ‘compensation for loss’. - - The principle is that even when contract comes to a premature end, the party should get amount proportional to the work done/services provided/goods supplied by one party.  One party should not get enriched at the cost of other.

Contract of indemnity - A contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself, or by the conduct of any other person, is called a ‘contract of indemnity’.  - - Illustration - A contracts to indemnify B against the consequences of any proceedings which C may take against B in respect of a certain sum of 200 rupees. This is a contract of indemnity. [section 124].

Contract of guarantee  - A “contract of guarantee” is a contract to perform the promise, or discharge the liability, of a third person in case of his default. The person who gives the guarantee is called the “surety”; the person in respect of whose default the guarantee is given is called the “principal debtor”, and the person to whom the guarantee is given is called the “creditor”. A guarantee may be either oral or written. [section 126]. - - [Person giving guarantee is also called as

‘guarantor’. However, Contract Act uses the word ‘surety’ which is same as ‘guarantor’]. - - Three parties are involved in contract of guarantee. Contract between any two of them is not a ‘contract of guarantee’. It may be contract of indemnity. Primary liability is of the principal debtor. Liability of surety is secondary and arises when Principal Debtor fails to fulfill his commitments. However, this is so when surety gives guarantee at the request of principal debtor. If the surety gives guarantee on his own, then it will be contract of indemnity. In such case, surety has all primary liabilities.

CONSIDERATION FOR GUARANTEE - Anything done, or any promise made, for the benefit of the principal debtor, may be sufficient consideration to the surety for giving the guarantee. - - Illustrations - (a) B requests A to sell and deliver to him goods on credit. A agrees to do so, provided C will guarantee the payment of the price of the goods. C promises to guarantee the payment in consideration of A’s promise to deliver the goods. This is sufficient consideration for C’s promise. (b) A selms and delivers goods to B. C afterwards requests A to gorbear to sue B for the debt for a year, and promises that if xe does so,`C will pay for them in default of payment by B. A agrees to forbear as requested. This is a sufficient consideration for C’s promise. (c) A sells and delivers goods to B. C afterwards, without consideration, agrees to pay for them in default of B. The agreement is void. [section 127].

Bailment - Bailment is another type of special contract. Since it is a ‘contract’, naturally all basic requirements of contract are applicable. - - Bailment means act of delivering goods for a specified purpose on trust. The goods are to be returned after the purpose is over. In bailment, possession of goods is transferred, but property i.e. ownership is not transferred.  A “bailment” is the delivery of goods by one person to another for some purpose, upon a contract that they shall, when the purpose is accomplished, be returned or otherwise disposed of according to the directions of the person delivering them. The person delivering the goods is called the “bailor”. The person to whom they are delivered is called the “bailee”. - - Explanation : If a person already in possession of the goods of another, contracts to hold them as a bailee, he thereby becomes the bailee, and owner becomes the bailor, of such goods, although they may not have been delivered by way of bailment. [section 148]. [Thus, initial possession of goods may be for other purpose, and subsequently, it may be converted into a contract of bailment, e.g. seller of goods will become bailee if goods continue in his possession after sale is complete].

Bailment can be only of ‘goods’.  As per section 2(7) of Sale of Goods Act, ‘goods’ means every kind of movable property other than money and actionable claim. - - Thus, keeping money in bank account is not ‘bailment’. Asking a person to look after your house or farm during your absence is not ‘bailment’, as house or farm is not a movable property.

Bailment of pledges - Pledge is special kind of bailment, where delivery of goods is for purpose of security for payment of a debt or performance of a promise. Pledge is bailment for security. Common example is keeping gold with bank/money lender to obtain loan. Since pledge is bailment, all provisions applicable to bailment apply to pledge also. In addition, some specific provisions apply to pledge. The bailment of goods as security for payment of a debt or performance of a promise is called “pledge”. The bailor is in this case called the “pawnor”. The bailee is called the “pawnee”. [section 172].

Contract of Agency - Agency is a special type of contract. The concept of agency was developed as one man cannot possibly do every transaction himself. Hence, he should have

opportunity or facility to transact business through others like an agent. The principles of contract of agency are – (a) Excepting matters of a personal nature, what a person can do himself, he can also do it through agent (e.g. a person cannot marry through an agent, as it is a matter of personal nature) (b) A person acting through an agent is acting himself, i.e. act of agent is act of Principal. - - Since agency is a contract, all usual requirements of a valid contract are applicable to agency contract also, except to the extent excluded in the Act. One important distinction is that as per section 185, no consideration is necessary to create an agency.

AGENT AND PRINCIPAL DEFINED - An “agent” is a person employed to do any act for another or to represent another in dealings with third persons. The person for whom such act is done, or who is so represented, is called the “principal” [section 182].

WHO MAY EMPLOY AGENT - Any person who is of the age of majority according to the law to which he is subject, and who is of sound mind, may employ an agent. [section 183]. - - Thus, any person competent to contract can appoint an agent.

WHO MAY BE AN AGENT - As between the principal and third persons any person may become an agent, but no person who is not of the age of majority and of sound mind can become an agent, so as to be responsible to his principal according to the provisions in that behalf herein contained. [section 184]. - - The significance is that a Principal can appoint a minor or person of unsound mind as agent. In such case, the Principal will be responsible to third parties. However, the agent, who is a minor or of unsound mind, cannot be responsible to Principal. Thus, Principal will be liable to third parties for acts done by Agent, but agent will not be responsible to Principal for his (i.e. Agent’s) acts.

CONSIDERATION NOT NECESSARY - No consideration is necessary to create an agency. [section 185]. Thus, payment of agency commission is not essential to hold appointment of Agent as valid.

Authority of agent – An agent can act on behalf of Principal and can bind the Principal.

AGENT’S DUTY TO PRINCIPAL - An agent has following duties towards principal. * Conducting principal’s business as per his directions * Carry out work with normal skill and diligence * Render proper accounts  [section 213]. * Agent’s duty to communicate with principal  [section 214] * Not to deal on his own account, in business of agency [section 215].  * Agent’s duty to pay sums received for principal  [section 218] *  Agent’s duty on termination of agency by principal’s death or insanity - [section 209].

REMUNERATION TO AGENT - Consideration is not necessary for creation of agency. However, if there is an agreement, an agent is entitled to get remuneration as per contract.

RIGHTS OF PRINCIPAL - * Recover damages from agent if he disregards directions of Principal * Obtain accounts from Agent * Recover moneys collected by Agent on behalf of Principal * Obtain details of secret profit made by agent and recover it from him * Forfeit remuneration of Agent if he misconducts the business.

DUTIES OF PRINCIPAL - * Pay remuneration to agent as agreed * Indemnify agent for lawful acts done by him as agent * Indemnify Agent for all acts done by him in good faith * Indemnify agent if he suffers loss due to neglect or lack of skill of Principal.

TERMINATION OF AGENCY - An agency is terminated by the principal revoking his authority; or by the agent renouncing the business of the agency; or by the business of the agency being completed; or by either the principal or agent dying or becoming of unsound mind; or by the principal being adjudicated an insolvent under the provisions of any Act for the time being in force for the relief of insolvent debtors. [section 201]. - - In following cases, an agency cannot be revoked – * Agency coupled with interest (section 202) * Agent has already exercised his authority (section 203) * Agent has incurred personal liability.

Unit 3

1. Contract of indemnity - A contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself, or by the conduct of any other person, is called a ‘contract of indemnity’.  - - Illustration - A contracts to indemnify B against the consequences of any proceedings which C may take against B in respect of a certain sum of 200 rupees. This is a contract of indemnity. [section 124].

2.Contract of guarantee   - A “contract of guarantee” is a contract to perform the promise, or discharge the liability, of a third person in case of his default. The person who gives the guarantee is called the “surety”; the person in respect of whose default the guarantee is given is called the “principal debtor”, and the person to whom the guarantee is given is called the “creditor”. A guarantee may be either oral or written. [section 126]. - - [Person giving guarantee is also called as ‘guarantor’. However, Contract Act uses the word ‘surety’ which is same as ‘guarantor’]. - - Three parties are involved in contract of guarantee. Contract between any two of them is not a ‘contract of guarantee’. It may be contract of indemnity. Primary liability is of the principal debtor. Liability of surety is secondary and arises when Principal Debtor fails to fulfill his commitments. However, this is so when surety gives guarantee at the request of principal debtor. If the surety gives guarantee on his own, then it will be contract of indemnity. In such case, surety has all primary liabilities.

CONSIDERATION FOR GUARANTEE - Anything done, or any promise made, for the benefit of the principal debtor, may be sufficient consideration to the surety for giving the guarantee. - - Illustrations - (a) B requests A to sell and deliver to him goods on credit. A agrees to do so, provided C will guarantee the payment of the price of the goods. C promises to guarantee the payment in consideration of A’s promise to deliver the goods. This is sufficient consideration for C’s promise. (b) A selms and delivers goods to B. C afterwards requests A to gorbear to sue B for the debt for a year, and promises that if xe does so,`C will pay for them in default of payment by B. A agrees to forbear as requested. This is a sufficient consideration for C’s promise. (c) A sells and delivers goods to B. C afterwards, without consideration, agrees to pay for them in default of B. The agreement is void. [section 127].

3.Bailment - Bailment is another type of special contract. Since it is a ‘contract’, naturally all basic requirements of contract are applicable. - - Bailment means act of delivering goods for a specified

purpose on trust. The goods are to be returned after the purpose is over. In bailment, possession of goods is transferred, but property i.e. ownership is not transferred.  A “bailment” is the delivery of goods by one person to another for some purpose, upon a contract that they shall, when the purpose is accomplished, be returned or otherwise disposed of according to the directions of the person delivering them. The person delivering the goods is called the “bailor”. The person to whom they are delivered is called the “bailee”. - - Explanation : If a person already in possession of the goods of another, contracts to hold them as a bailee, he thereby becomes the bailee, and owner becomes the bailor, of such goods, although they may not have been delivered by way of bailment. [section 148]. [Thus, initial possession of goods may be for other purpose, and subsequently, it may be converted into a contract of bailment, e.g. seller of goods will become bailee if goods continue in his possession after sale is complete].

Bailment can be only of ‘goods’.  As per section 2(7) of Sale of Goods Act, ‘goods’ means every kind of movable property other than money and actionable claim. - - Thus, keeping money in bank account is not ‘bailment’. Asking a person to look after your house or farm during your absence is not ‘bailment’, as house or farm is not a movable property.

Bailment of pledges - Pledge is special kind of bailment, where delivery of goods is for purpose of security for payment of a debt or performance of a promise. Pledge is bailment for security. Common example is keeping gold with bank/money lender to obtain loan. Since pledge is bailment, all provisions applicable to bailment apply to pledge also. In addition, some specific provisions apply to pledge. The bailment of goods as security for payment of a debt or performance of a promise is called “pledge”. The bailor is in this case called the “pawnor”. The bailee is called the “pawnee”. [section 172].

4.Contract of Agency - Agency is a special type of contract. The concept of agency was developed as one man cannot possibly do every transaction himself. Hence, he should have opportunity or facility to transact business through others like an agent.

The principles of contract of agency are –

(a) Excepting matters of a personal nature, what a person can do himself, he can also do it through agent (e.g. a person cannot marry through an agent, as it is a matter of personal nature)

(b) A person acting through an agent is acting himself, i.e. act of agent is act of Principal. - - Since agency is a contract, all usual requirements of a valid contract are applicable to agency contract also, except to the extent excluded in the Act. One important distinction is that as per section 185, no consideration is necessary to create an agency.

AGENT AND PRINCIPAL DEFINED - An “agent” is a person employed to do any act for another or to represent another in dealings with third persons. The person for whom such act is done, or who is so represented, is called the “principal” [section 182].

WHO MAY EMPLOY AGENT - Any person who is of the age of majority according to the law to which he is subject, and who is of sound mind, may employ an agent. [section 183]. - - Thus, any person competent to contract can appoint an agent.

WHO MAY BE AN AGENT - As between the principal and third persons any person may become an agent, but no person who is not of the age of majority and of sound mind can become an agent, so as to be responsible to his principal according to the provisions in that behalf herein contained. [section 184]. - - The significance is that a Principal can appoint a minor or person of unsound mind as agent. In such case, the Principal will be responsible to third parties. However, the agent, who is a minor or of unsound mind, cannot be responsible to Principal. Thus, Principal will be liable to third parties for acts done by Agent, but agent will not be responsible to Principal for his (i.e. Agent’s) acts.

CONSIDERATION NOT NECESSARY - No consideration is necessary to create an agency. [section 185]. Thus, payment of agency commission is not essential to hold appointment of Agent as valid.

Authority of agent – An agent can act on behalf of Principal and can bind the Principal.

AGENT’S DUTY TO PRINCIPAL - An agent has following duties towards principal. * Conducting principal’s business as per his directions * Carry out work with normal skill and diligence * Render proper accounts  [section 213]. * Agent’s duty to communicate with principal  [section 214] * Not to deal on his own account, in business of agency [section 215].  * Agent’s duty to pay sums received for principal  [section 218] *  Agent’s duty on termination of agency by principal’s death or insanity - [section 209].

REMUNERATION TO AGENT - Consideration is not necessary for creation of agency. However, if there is an agreement, an agent is entitled to get remuneration as per contract.

RIGHTS OF PRINCIPAL - * Recover damages from agent if he disregards directions of Principal * Obtain accounts from Agent * Recover moneys collected by Agent on behalf of Principal * Obtain details of secret profit made by agent and recover it from him * Forfeit remuneration of Agent if he misconducts the business.

DUTIES OF PRINCIPAL - * Pay remuneration to agent as agreed * Indemnify agent for lawful acts done by him as agent * Indemnify Agent for all acts done by him in good faith * Indemnify agent if he suffers loss due to neglect or lack of skill of Principal.

TERMINATION OF AGENCY - An agency is terminated by the principal revoking his authority; or by the agent renouncing the business of the agency; or by the business of the agency being completed; or by either the principal or agent dying or becoming of unsound mind; or by the principal being adjudicated an insolvent under the provisions of any Act for the time being in force for the relief of insolvent debtors. [section 201]. - - In following cases, an agency cannot be revoked – * Agency coupled with interest

5. Contingent contract - A “contingent contract” is a contract to do or not to do something, if some event, collateral to such contract, does or does not happen. Illustration - A contracts to pay B Rs. 10,000 if B’s house is burnt. This is a contingent contract.

OF CONTINGENT CONTRACTS 31. “Contingent contract” defined

A “contingent contract” is a contract to do or not to do something, if some event, collateral to such contract, does or does not happen. 32. Enforcement of Contracts contingent on an event happening Contingent contracts to do or not to do anything in an uncertain future event happens, cannot be enforced by law unless and until that event has happened. If the event becomes impossible, such contracts become void. 33. Enforcement of contract contingent on an event not happening Contingent contracts to do or not to do anything if an uncertain future event does not happen, can be enforced when the happening of that event becomes impossible, and not before. 34. When event on which contract is contingent to be deemed impossible, if it is the future conduct of a living person If the future event on which a contract is contingent is the way in which a person will act at an unspecified time, the event shall be considered to become impossible when such person does anything which renders it impossible that the should so act within any definite time, or otherwise than under further contingencies.

35. When contracts become void, which are contingent on happening of specified event within fixed time Contingent contracts to do or not to do anything, if a specified uncertain event happens within a fixed time, become void, if, at the expiration of the time fixed, such event has not happened, or if, before the time fixed, such event becomes impossible. When contracts may be enforced, which are contingent on specified event not happening within fixed time : Contingent contract tutu or not to do anything, if a specified uncertain event does not happen within a fixed time, may be enforced by law when the time fixed has expired and such event has not happened, or before the time fixed has expired, if it become certain that such event will not happen. 36. Agreements contingent on impossible event void

Contingent agreements to do or not to do anything, if an impossible event happens, are void, whether the impossibility of the event is known or not to the parties to agreement at the time when it is made

OF INDEMNITY AND GUARANTEE 124. “Contract of indemnity” defined A contract by which one party promises to save the other from loss caused to him by the contract of the promisor himself, or by the conduct of any other person, is called a “contract of indemnity”. 125. Right of indemnity-holder when sued The promisee in a contract of indemnity, acting within the scope of his authority, is entitled to recover from the promisor- (1) all damages which he may be compelled to pay in any suit in respect of any matter to which the promise to indemnify applies; (2) all costs which he may be compelled to pay in any such suit, if in bringing of defending it, he did not contravene the orders of the promisor, and acted as it would have been prudent for him to act in the absence of any contract of indemnity, or if the promisor authorised him to bring or defend the suit; (3) all sums which he may have paid under the terms of any compromise of any such suit, if the compromise was not contract to the orders of the promisor, and was one which it would have been

prudent for the promise to make in the absence of any contract of indemnity, or if the promisor authorised him to compromise the suit. 126. “Contract of guarantee”, “surety”, “principal debtor” and “creditor” A “contract of guarantee” is a contract to perform the promise, or discharge the liability, of a third person in case of his default. The person who gives the guarantee is called the “surety”, the person in respect of whose default the guarantee is given is called the “principal debtor”, and the person to whom the guarantee is given is called the “creditor”. A guarantee may be either oral or written. 127. Consideration for guarantee Anything done, or any promise made, for the benefit of the principal debtor, may be a sufficient consideration to the surety for giving the guarantee. 128. Surety’s liability The liability of the surety is co-extensive with that of the principal debtor, unless it is otherwise provided by the contract. 129. Continuing guarantee A guarantee which extends to a series of transaction, is called, a “continuing guarantee”. 130. Revocation of continuing guarantee A continuing guarantee may at any time be revoked by the surety, as to future transactions, by notice to the creditor.

131. Revocation of continuing guarantee by surety’ death The death of the surety operates, in the absence of any contract to the contrary, as a revocation of ma continuing guarantee, so far as regards future transactions. 132. Liability of two persons, primarily liable, not affected by arrangement between them that one shall be surety on other’s default Where two persons contract with third person to undertake a certain liability, and also contract with each other that one of them shall be liable only on the default of the other, the third person not being a party to such contract the liability of each of such two persons to the third person under the first contract is not affected by the existence of the second contract, although such third person may have been aware of its existence.

Negotiable instrumentA negotiable instrument is a document guaranteeing the payment of a specific amount of money, either on demand, or at a set time. According to the Negotiable Instruments Act, 1881 in India there are just three types of negotiable instruments i.e., promissory note, bill of exchange and cheque.

More specifically, it is a document contemplated by a contract, which

(1) warrants the payment of money, the promise of or order for conveyance of which is unconditional;

(2) specifies or describes the payee, who is designated on and memorialized by the instrument; and

(3) is capable of change through transfer by valid negotiation of the instrument.

Types of negotiable instrument

[edit] Promissory note

A negotiable promissory note is an unconditional promise in writing made by one person to another, signed by the maker, engaging to pay on demand to the payee, or at fixed or determinable future time, sum certain in money, to order or to bearer. (see Sec.194) Bank note is frequently referred to as a promissory note, a promissory note made by a bank and payable to bearer on demand.

[edit] Bill of exchange

A bill of exchange or "draft" is a written order by the drawer to the drawee to pay money to the payee. A common type of bill of exchange is the cheque (check in American English), defined as a bill of exchange drawn on a banker and payable on demand. Bills of exchange are used primarily in international trade, and are written orders by one person to his bank to pay the bearer a specific sum on a specific date. Prior to the advent of paper currency, bills of exchange were a common means of exchange. They are not used as often today

DRAWER, DRAWEE AND PAYEE - The maker of a bill of exchange or cheque is called the “drawer”; the person thereby directed to pay is called the “drawee” [section 7 para 1].  -  - The person named in the instrument, to whom, or to whose order the money is by the instrument directed to be paid, is called the “payee” [section 7 para 5]. - - However, a drawer and payee can be one person as he can order to pay the amount to himself.

AT SIGHT, ON PRESENTMENT, AFTER SIGHT  - In a promissory note or bill of exchange the expressions “at sight” and “on  presentment” mean ‘on demand’. The expression “after sight” means, in a promissory note, after presentment for sight, and, in a bill of exchange, after acceptance, or noting for non-acceptance, or protest for non-acceptance. [section 21]. - - Thus, in case of document ‘after sight’, the countdown starts only after document is ‘sighted’ by the concerned party.

Hundi – a local instrument – Hundi is an indigenous instrument similar to Negotiable Instrument. The term is derived from Sanskrit word ‘hund’ which means ‘to collect’. If it is drawn in local language, it is governed by local usage and customs

Cheques - A “cheque” is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand. ‘Cheque’ includes electronic image of a truncated cheque and a cheque in electronic form. [section 6].  The definition is amended by Amendment Act, 2002, making provision for electronic submission and clearance of cheque. The cheque is one form of Bill of Exchange. It is addressed to Banker.  It cannot be made payable after some days. It must be made payable ‘on demand’.

Unit 4

Sale of Goods Act is one of very old mercantile law. Sale of Goods is one of the special types of Contract. Initially, this was part of Indian Contract Act itself in chapter VII (sections 76 to 123). Later these sections in Contract Act were deleted, and separate Sale of Goods Act was passed in 1930.

The Sale of Goods Act is complimentary to Contract Act. Basic provisions of Contract Act apply to contract of Sale of Goods also. Basic requirements of contract i.e. offer and acceptance, legally enforceable agreement, mutual consent, parties competent to contract, free consent, lawful object, consideration etc. apply to contract of Sale of Goods also.

Contract of Sale - A contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a price. There may be a contract of sale between one part-owner and another. [section 4(1)]. A contract of sale may be absolute or conditional. [section 4(2)]. 

Thus, following are essentials of contract of sale –

* It is contract, i.e. all requirements of ‘contract’ must be fulfilled

* It is of ‘goods’

* Transfer of property is required

* Contract is between buyer and seller

* Sale should be for ‘price’

* A part owner can sale his part to another part-owner

* Contract may be absolute or conditional.

How Contract of sale is made - A contract of sale is made by an offer to buy or sell goods for a price and the acceptance of such offer. The contract may provide for the immediate delivery of the goods or immediate payment of the price or both, or for the delivery or payment by instalments, or that the delivery or payment or both shall be postponed. [section 5(1)]. Subject to the provisions of any law for the time being in force, a contract of sale may be made in writing or by word of mouth, or partly in writing and partly by word of mouth or may be implied from the conduct of the parties. [section 5(2)]. Thus, credit sale is also a ‘sale’.  - - A verbal contract or contract by conduct of parties is valid. e.g. putting goods in basket in super market  or taking food in a hotel.

Two parties to contract - Two parties are required for contract. - - “Buyer” means a person who buys or agrees to buy goods. [section 2(1)]. “Seller” means a person who sells or agrees to sell goods. [section 2(13)].  A part owner can sale his part to another part-

owner. However, if joint owners distribute property among themselves as per mutual agreement, it is not ‘sale’ as there are no two parties.

Contract of Sale includes agreement to sale - Where under a contract of sale the property in the goods is transferred from the seller to the buyer, the contract is called a sale, but where the transfer of the property in the goods is to take place at a future time or subject to some condition thereafter to be fulfilled, the contract is called an agreement to sell. [section 4(3)]. An agreement to sell becomes a sale when the time elapses or the conditions are fulfilled subject to which the property in the goods is to be transferred. [section 4(4)]. The provision that contract of sale includes agreement to sale is only for the purposes of rights and liabilities under Sale of Goods Act and not to determine liability of sales tax, which arises only when actual sale takes place.

Transfer of property -  “Property” means the general property in goods, and not merely a special property. [section 2(11)]. In layman’s terms ‘property’ means ‘ownership’. ‘General Property’ means ‘full ownership’. Thus, transfer of ‘general property’  is required to constitute a sale. If goods are given for hire, lease, hire purchase or pledge, ‘general property’ is not transferred and hence it is not a ‘sale’.

POSSESSION AND PROPERTY - Note that ‘property’ and ‘possession’ are not synonymous. Transfer of possession does not mean transfer of property. e.g. - if goods are handed over to transporter or godown keeper, possession is transferred but ‘property’ remains with owner. Similarly, if goods remain in possession of seller after sale transaction is over, the ‘possession’ is with seller, but ‘property’ is with buyer.

Goods - “Goods” means every kind of movable property other than actionable claims and money; and includes stock and shares, growing crops, grass, and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale. [section 2(7)].

Price - “Price” means the money consideration for a sale of goods. [section 2(10)]. Consideration is required for any contract. However, in case of contract of sale of goods, the consideration should be ‘price’ i.e. money consideration. 

Ascertainment of price - The price in a contract of sale may be fixed by the contract or may be left to be fixed in manner thereby agreed or may be determined by the course of dealing between the parties. [section 9(1)]. Where the price is not determined in accordance with the foregoing provisions, the buyer shall pay the seller a reasonable price. What is a reasonable price is a question of fact dependent on the circumstances of each particular case. [section 9(2)].

Conditions and Warranties - Opening para of section 16 makes it clear that there is no implied warranty or condition as to quality of fitness of goods for any particular purpose, except those specified in Sale of Goods Act or any other law. - - This is the basic principle of caveat emptor’ i.e. buyer be aware. However, there are certain stipulations which are essential for main purpose of the contract of sale of goods. These go the root of contract and non-fulfilment will mean loss of foundation of contract. These are termed as ‘conditions’. Other stipulations, which are not essential are termed as ‘warranty’. These are collateral to contract of sale of goods. Contract cannot be avoided for breach of warranty, but aggrieved party can claim damages. - - A breach of condition can be treated as breach of warranty, but vice versa is not permissible.

A stipulation in a contract of sale with reference to goods which are the subject thereof may be a condition or a warranty. [section 12(1)]. A condition is a stipulation essential to the main purpose of the contract, the breach of which gives rise to a right to treat the contract as repudiated. [section 12(2)]. A warranty is a

stipulation collateral to the main purpose of the contract, the breach of which gives rise to a claim for damages but not to a right to reject the goods and treat the contract as repudiated. [section 12(3)]. Whether a stipulation in a contract of sale is a condition or a warranty depends in each case on the construction of the contract. A stipulation may be a condition, though called a warranty in the contract. [section 12(4)].

Where a particular stipulation in contract is a condition or warranty depends on the interpretation of terms of contract. Mere stating ‘Conditions of Contract’ in agreement does not mean all stipulations mentioned are ‘conditions’ within meaning of section 12(2).

When condition to be treated as warranty - Where a contract of sale is subject to any condition to be fulfilled by the seller, the buyer may waive the condition or elect to treat the breach of the condition as a breach of warranty and not as a ground for treating the contract as repudiated. [section 13(1)]. Where a contract of sale is not severable and the buyer has accepted the goods or part thereof, the breach of any condition to be fulfilled by the seller can only be treated as a breach of warranty and not as a ground for rejecting the goods and treating the contract as repudiated, unless there is a term of the contract, express or implied, to that effect. [section 13(2)]. Nothing in this section shall affect the case of any condition or warranty fulfillment of which is excused by law by reason of impossibility or otherwise. [section 13(3)].

Time of payment is not essence of contract but time of delivery of goods is, unless specified otherwise - Unless a different intention appears from the terms of the contract, stipulations as to time of payment are not deemed to be of the essence of a contract of sale. Whether any other stipulation as to time is of the essence of the contract or not depends on the terms of the contract. [section 11]. As a general rule, time of payment is not essence of contract, unless there is specific different provision in Contract. In other words, time of payment specified is ‘warranty’. If payment is not made in time, the seller can claim damages but cannot repudiate the contract.

Caveat Emptor - The principle termed as ‘caveat emptor’ means ‘buyer be aware’. Generally, buyer is expected to be careful while purchasing the goods and seller is not liable for any defects in goods sold by him. This principle in basic form is embodied in section 16 that subject to provisions of Sale of Goods Act and any other law, there is no implied condition or warranty  as to quality or fitness of goods for any particular purpose. As per section 2(12), “Quality of goods” includes their state or condition.

Transfer of property as between seller and buyer - Transfer of general property is required in a sale. ‘Property’ means legal ownership. It is necessary to decide whether property in goods has transferred to buyer to determine rights and liabilities of buyer and seller. Generally, risk accompanies property in goods i.e. when property in goods passes, risk also passes. If property in goods has already passed on to buyer, seller cannot stop delivery of goods even if in the meanwhile buyer has become insolvent. - - - Where there is a contract for the sale of unascertained goods, no property in the goods is transferred to the buyer unless and until the goods are ascertained. [section 18].

Property passes when intended to pass - Where there is a contract for the sale of specific or ascertained goods the property in them is transferred to the buyer at such time as the parties to the contract intend it to be transferred. [section 19(1)].  For the purpose of ascertaining the intention of the parties regard shall be had to the terms of the contract, the conduct of the parties and the circumstances of the case. [section 19(2)]. Unless a different intention appears, the rules contained in sections 20 to 24 are rules for ascertaining the intention of the parties as to the time at which the property in the goods is to pass to the buyer. [section 19(3)].

Specific goods in a deliverable state - Where there is an unconditional contract for the sale of specific goods in a deliverable state, the property in the goods passes to the buyer when the contract is made, and it is immaterial whether the time of payment of the price or the time of delivery of the goods, or both, is postponed. [section 20].

Auction sale - Auction sale is special mode of sale. The sale is made in open after making public announcement. Buyers assemble and make offers on the spot. Person offering to pay highest price gets the goods. Usually, auctioneer is appointed to conduct auction. Higher and higher bids are offered and sale is complete when auctioneer accepts a bid.- - - In the case of a sale by auction— (1) where goods are put up for sale in lots, each lot is prima facie deemed to be the subject of a separate contract of sale; (2) the sale is complete when the auctioneer announces its completion by the fall of the hammer or in other customary manner; and, until such announcement is made, any bidder may retract his bid; (3) a right to bid may be reserved expressly by or on behalf of the seller and, where such right is expressly so reserved, but not otherwise, the seller or any one person on his behalf may, subject to the provisions hereinafter contained, bid at the auction;  (4) where the sale is not notified to be subject to a right to bid on behalf of the seller, it shall not be lawful for the seller to bid himself or to employ any person to bid at such sale, or for the auctioneer knowingly to take any bid from the seller or any such person; and any sale contravening this rule may be treated as fraudulent by the buyer; (5) the sale may be notified to be subject to a reserved or upset price; (6) if the seller makes use of pretended bidding to raise the price, the sale is voidable at the option of the buyer. [section 64].

Delivery of goods to buyer - The Act makes elaborate provisions regarding delivery of goods to buyer. It is the duty of the seller to deliver the goods and of the buyer to accept and pay for them, in accordance with the terms of the contract of sale. [section 31]. Unless otherwise agreed, delivery of the goods and payment of the price are concurrent conditions, that is to say, the seller shall be ready and willing to give possession of the goods to the buyer in exchange for the price, and the buyer shall be ready and willing to pay the price in exchange for possession of the goods. [section 32]. - - Note that this is ‘unless otherwise agreed’, i.e. buyer and seller can agree to different provisions in respect of payment and delivery.

Acceptance of goods by buyer - Contract of Sale is completed not by mere delivery of goods but by acceptance of goods by buyer. ‘Acceptance’ does not mean mere receipt of goods. It means checking the goods to ascertain whether they are as per contract. - - -  Where goods are delivered to the buyer which he has not previously examined, he is not deemed to have accepted them unless and until he has had a reasonable opportunity of examining them for the purpose of ascertaining whether they are in conformity with the contract. [section 41(1)]. - - Unless otherwise agreed, when the seller tenders delivery of goods to the buyer, he is bound, on request, to afford the buyer a reasonable opportunity of examining the goods for the purpose of ascertaining whether they are in conformity with the contract. [section 41(2)].

Buyer’s and Seller’s duties  - The Act casts various duties and grants certain rights on both buyer and seller.

Rights of unpaid seller against the goods - After goods are sold and property is transferred to buyer, the only remedy with seller is to approach Court, if the buyer does not pay. Seller has no right to take forceful possession of goods from buyer, once property in goods is transferred to him. However, the Act gives some rights to seller if his dues are not paid.

Suits for breach of the contract - Unpaid seller can exercise his rights to the extent explained above. In addition, seller can exercise following rights in case of breach of contract. Buyer has also rights in case of breach of contract.

Measure for compensation and  damages – The Sale of Goods Act does not specify how to measure damages. However, since the Act is complimentary to Contract Act, measure of compensation and damages will be as provided in sections 73 and 74 of Contract Act.