Business law

British was the first nation to development market economy business rules and regulations in the
world. All the countries started to follow British business transaction. There is direct of British
impact of business rules in the world. It means our business rules are influenced by British rules.
There is an important role of British business rule to develop our business law. So it is taken as
an important source of Nepalese business law.

Business comprises all profit seeking activities that provide goods and services necessary to an
economic system. Business refers to the economic activities in which goods and service are
supplied in exchange for some payment. It includes buying and selling, manufacturing products,
extracting natural resources.

Law refers to the principles and regulations established by a government applicable to people.

Thus Business law is that portion of legal system which guarantees an orderly conduct of
business affairs and settlement of legitimate dispute. It establishes a set of rules and prescribes
conduct to order to avoid misunderstandings in business relationship.

Business law, also called commercial law or mercantile law, the body of rules, whether by
convention, agreement, or national or international legislation, governing the dealings between
persons in commercial matters.

Business law falls into two distinctive areas: (1) the regulation of commercial entities by the laws
of company, partnership, agency, and bankruptcy and (2) the regulation of commercial
transactions by the laws of contract and related fields

Features of Business Law

 Regulates industry, trade and commerce

 Regulates every business activity
 Promotes rights and interest of business activity
 It is the law of commerce or commercial law as it deals with all the aspects of entering
into selling and purchasing agreements.
 It includes the study of the law of contract which is important in agreements or contracts
that involve two or more parties buying and selling things in exchange for a consideration
or purchase price.
  Business law clearly explains the rights, duties, liabilities and legal obligations of the
parties involved in a contract of sales, purchase or any other kind of contract or
agreement entered into in relation to any kind of business or commercial activity.
 It includes intellectual property law (patents, trademarks, copyrights, etc.) and consumer
protection law.
 Business law will also apply to anyone who plans on opening or starting a business of
their own.
 Business law also deals with banking law, finance law and other important civil laws.

Importance of Business law

 Protection of economic right

 Regulation and systematization of business
 Commencement and development of business
 enforcement

Purpose of Business Law

Enforcement: Provide enforcement that allows contractual relationships to stay intact.

Predictability Allow people in business to enter into multiple transactions with certain
protection.
Uniformity When business owners rely on the same laws to conduct business, they need to
know that State Agencies and Courts apply the laws in a uniform fashion.

Agreement

In simple term agreement means an offer and acceptance of that offer. Section 2 (e) of Indian
Contract Act, 1872, defines agreement as ‘every promise and every set of promises forming the
consideration for each other is an agreement.’ E.g., X offers to sell his car for Rs. 1,00,000 to Y.
Y accepts this offer. This offer after acceptance becomes promise and this promise is treated as
an agreement between X and Y.

Contract
In simple term contract is an agreement between two or more parties to do or not to do
something which is enforceable by law.

A legally binding agreement between two or more persons by which rights are acquired by one
or more to acts or forbearances(abstaining from doing something) on the part of other or others.
(S.W. Anson)

Contract is an agreement which creates and defines obligation between the parties (Salmond)

Every agreement or promise enforceable at law is a contract. (F. Pollock)

Section 2(h) of ICA, 1872, an agreement enforceable by law is contract. According to this
contract must have two elements, (i) agreement and (ii) enforceability of an agreement.

Section 2 (a) of Nepalese Contract Act, 2056, defines contract as ‘an agreement concluded
between two or more parties to do or abstain from doing some act which must be enforceable by
law’. An agreement is said to be enforceable by law if it creates some legal obligation. Parties to
an agreement must be bound to perform their promises otherwise they can sue for damages. But
in case of social or domestic agreements, the usual presumption is that the parties do not intend
to create legal obligation. (Balfour v. Balfour 1919)

The Supreme Court of Nepal has defined the term 'contact as agreement of two or more parties
with conditions'- in the case of Vijaya kumar Basnet vs. Kathmandu Metropolitan et al (Nepal
Kanoon Patrika 2059 p. 37.1
Similarly the Supreme Court of Nepal has Stated 'Contract means meeting of mind between two
or more parties to do or not to do something through offer and acceptance' in the case of Tirtha
kumar vs. Ramashekhar Shrestha (Nepal Kanoon Patrika 2040 p. 298)2

The law of contract is applicable not only to business but also to all day to day personal
dealings. E.g., when you purchase milk, you enter into a contract with the milkman.

Every contract is an agreement, but every agreement is not a contract. An agreement becomes a
contract when the following conditions are satisfied

 There is some consideration for it

 The parties are competent to contract
 Their consent is free
 Their object is lawful
Functions

• Securing that the expectations created by a promise of future performance are fulfilled, or
that compensation will be paid for its breach.

• To facilitate , planning for the future transaction and to make provisions for future
contingencies.

• Establish the value of exchange- how much is paid for the goods or services provided.

• Establish the respective responsibilities of the parties, and the standard of performance to be
expected of them

• The economic risk involved in the transactions are allocated in advance between the parties.

• Finally provide remedies if parties are not fulfilling their part of obligations.

Nature of Contract
A contract is an agreement between two or more parties which is enforceable by law, such
agreement is the outcome of consensus and meeting of mind of the parties. It has some specific
nature which can be mentioned as follows:

a. Civil Nature: The contract has civil nature because it creates rights and obligation to the
parties. It is relating to the property and position. In the case of breach of contract, aggrieved
party has right to claim compensation. There is no question of punishment as criminal law.

b. Social and Business Nature: Contract is relating to social and business sector. It regulates the
social behavior like, sale of goods, court marriage and several transactions of business.

c. Autonomous Nature: Every persons has right to choose his act. Under this freedom of
people, they can make contract to do or not to do something according to made contract. So, it
possesses an autonomous character.

d. Limited Nature: Contract is limited upon the parties. The parties have rights to determine
terms and conditions only for their extent. They have no right to impose any obligation to the
third party. Therefore the contract is limited in nature only to the contracting parties

e. Relating to promise and obligation: Contract emerges from the promise. Promise creates the
agreement and legal enforceability of an agreement is recognized as contract. Therefore contract
is relating to the promise and obligation.
LAW OF CONTRACT CREATES JUS IN PERSONAM AS DISTINGUISHED FROM
JUS IN REM - : • Jus
in rem means a right against or in respect of a thing. • Jus in personam means a right against or in
respect of a specific person. • For ex- A owes a certain sum of money to B. B has a right to
recover this amount from A. The right can be exercised only by B and by none else against A.
The right of B is jus in personam.

Consensus ad idem (meeting of the mind of parties)

The essence of an agreement is the meetings of the minds of the parties in full and final
agreement; there must, be consensus ad idem. This means that the parties to an agreement must
have agreed about the subject matter of the agreement in the same sense and at the same time.
E.g., A who has two cars, one Toyota and one Maruti. B wants to purchase the Toyota, but A
wants to sell Maruti. B asks A to sell the car and A agrees. There is an agreement to buy and sell
the car, but both parties agree on different cars. So there is no meeting of mind of the parties.
Since there is no consensus ad idem, contract cannot be formed.

Difference between Agreement and Contract

SN Basis of Agreement Contrac

Differenc t

e
1 Creation The union of offer and The union of agreement and its
acceptance creates agreement enforceability creates contract

2 Legal Obligation Agreement alone does not Contract alone creates legal
create legal obligation to obligation to perform
perform

3 Binding nature Agreement is not binding upon Contract is binding upon the
the parties to it parties
4 Scope Agreement is a vague term Contract is a limited term

5 Inclusion An agreement does not include Contract includes agreement

contract

Essentials of Contract Law

The human life is full of promise and agreement but all these promise does not transform into
contract. An agreement, which is enforceable by law, is contract. And to enforce by law there
must be some condition or essentials that a valid contract requires. In another word to be
enforceable by law, contract must carry the essential element, which distinguish contract from
invitation to treat, social & familiar agreement are merely to supply information. These elements
are as follows.

(a) Two Parties: The general rule of contract is that there must be two parties i.e. offerer
and accepter. One who purposes to do some thing is offerer & who accept is accepter.
There must be meeting of mind between them that the intention of the offerer is to
obtain assent from acceptor & accepter accept his proposed in same sense which the
offerer put forward.
(b) Offer and Acceptance: offer and acceptance are most important elements. Offer helps
to create an agreement. If somebody offers in one way, other party accepts in another
way, it is not acceptance. E.g., A asks B if he wants to buy his car for Rs. 50000. In
this case A is making an offer to B, it is upon B to accept it or not. If B accepts it then
it amounts to contract.
(c) Competent Parties: The parties of the contract must be equaled footing and competent
in the eye of law. The person who is entering into contract is be a person who
understands what he is doing & is able to form rational judgment as to whether what
he is about to do is to his interest or not. A minor, insane or person of
 unsound mind & person disqualified by law are regarded as incompetent to parties of
contract.
(d) Legal Relationship: The parties must have intention of creating legal relationship.
The element of legal relation binds both parties to fulfill their obligations & seek
remedy if anyone violates the contractual obligation. Agreements of a social or
domestic nature will not constitute contract.
In a case Balfour vs. Balfour: A husband was employed in a government post in
Ceylon. He returned with his wife to England on leave but she was unable to go back
to Ceylon with him for her medical reasons. Husband promised orally to make her an
allowance of £30 a months until she rejoined him. He failed to make this payment and
she sued him. The Court of Appeal held that, husband and wife never intended to
make bargain which conduct be enforced in law. Hence wife could not claim the
money.

(e) Legality of Object: The object of the agreement must be lawful. In other words an
object must not be illegal immoral, opposed to public policy. Law does not recognize
the contract which has an illegal objective & against the law. e.g. When a landlord
knowingly lets a house to a gambler to carry illegal gambling he cannot recover the
rent through a court of law.
(f) Free Consent: The party should not be influenced by the external force while doing
the contract. The consent of the parties is said to be free when they are of the same
mind on all the material form of contract and which is not caused by coercion, fraud,
mistake etc.
(g) Consideration: It is another element for the agreement to enforce legally. The parties
should gain something by loosing something. An agreement without consideration is
void.
(h) Not Expressly Declare Void: A contract to be valid must not expressly declared void
by law like contract prohibiting someone’s occupational right, immoral and against
public right etc.
 (i) Certainty: The meaning and terms of contract should be clear and certain as law
provides remedy for those with clear meaning. e.g., A agrees to sell B ‘hundred tons
of oil’. There is nothing whatever to show what kind of oil was intended. It may be
kerosene oil, may be sunflower oil and may be coconut oil.
(j) Possibility of Performance: The contract should be certain not to be vague and
possible to perform because law provides remedy only if it is possible to perform.
This is based on the principle lex non cogitad impossibilia which means law does not
compel to do what is impossible. E.g., a contract to draw a line in sky
(k) Written form and registration: According to the Indian Contract Act, a contract may
be oral or in writing. But in certain special cases it lays down that the agreement to be
valid must be in written form and registered. But there is no specific provision in
Nepal which made that contract should be registered. If parties wish they can register
it but not mandatory.
(l) Formalities: A contract may be made expressly but some contracts are recognized
after fulfilling certain legal formalities. Section 88 of Nepal Contract Act, 2056 has
the provision that- "in case any current laws prescribes that any specific procedure
must be followed for executing any specific contract or that any specific contract
must be registered at a government office, a contract signed without fulfilling such
formalities shall not be valid. An agreement becomes enforceable by law when all the
essential elements of a valid contract are present.

Classification of Contract

Contract is classified on the following grounds

(a) Creation (b) execution (c) Enforceability

a) on the basis of creation

i) Express: express contract is one which is made by words spoken or written whose terms
and conditions are set by the parties. In order to determine its validity and enforceability
court typically examine the nature of communications between the parties and the context
in which it was formed. Eg,. A offers B to but his car for Rs 500000/- in telephone and B
accepts therein. It is an express contract.
ii) Implied: implied contract is one which is made otherwise than by words spoken or
written, generally made by the conduct or act of the parties. E.g., travel in bus; obtaining
cash from ATM etc
iii) Quasi Contract: contract resulted by law is quasi contract. Quasi contract is based on the
principle that “a person shall not be allowed to enrich himself unjustly at the expense of
other.” E.g., A leaves the goods of B in C’s place by mistake. C treats them as his own.
Here, C is obliged to pay for them.

b) on the basis of execution

i) executed: it is a contract where both the parties to the contract have fulfilled their
respective obligation under the contract. E.g., car sold and delivered
ii) executory: it is a contract where both the parties to the contract have still to perform
their respective obligation under the contract. E.g., car sold and price taken but car
not yet delivered
iii) partly executed and partly executory: it is a contract where one of the parties to the
contract has fulfilled their respective obligation and other party has still to perform his
obligation under the contract. E.g., car’s price on credit for a month but car delivered
c) on the basis of enforceability

i) Valid contract: a contract which satisfies all the conditions prescribed by law.
ii) Void contract: a void contract is a contract which was valid when entered into but
which subsequently become void (inoperative) due to impossibility of performance,
change of law etc. e.g., X offers to marry Y. Y accepts but later Y dies.
iii) Voidable contract: a voidable contract is a contract which can be repudiated or
avoided at the option of the aggrieved party. E.g., coercion, fraud etc
iv) Illegal contract: contract made by incorporating illegal act or objects. E.g.; contract
to kill someone, destroying someone’s property etc
v) Unenforceable contract: it is a contract which is actually valid but cannot be enforced
because of some technical defect. E.g. oral agreement for arbitration

Distinction between Void and Voidable Contract

S.N Basis of Void contract Voidable contract

distinctio
n
1 Validity It becomes void from the It becomes void only
formation when the court declares it
to be void

2 Third party’s Third party cannot have Third party can have
right rights over the goods rights if he has
acquired purchased the goods
before the contract was
avoided

3 Enforceability It is not enforceable It is enforceable if the

party does not take action
within specified time

4 Damages No recovery of damages Aggrieved party can

have damages from the

other party

Features of Nepalese Contract Act 2056

1. Existence: after restoration of democracy this Act came into existence repealing
Contract Act 2056 on 2057/3/14. The Act has 13 chapters and 90 sections.
2. Cost to be borne by losing Party: sec 22(c), (d) and 84(2) have provision related to this.
Losing party shall borne the cost of wining party as well.
3. Third party’s claim can be entertained: third party can claim benefit from contract if
done for his/her benefit. Sec 78
4. Provision related to special contract: Act included special contracts like bailment,
pledge, guarantee etc.
5. Freedom of contracting party: freedom to choose subject matter, time and date of
performance.
 6. Time limitation: extended to 2 yrs from the date of reason. (previous 6 months)
Legality of Objects

Legality means conformity with law or legal validity and object means design or purpose. The
object and consideration of an agreement must be lawful, otherwise the agreement is void.
Generally, every agreement is made with an object and for a consideration. Object here means
design or purpose and consideration means something in return. But only the existence of object
and consideration is not enough. For enforceability, the lawful object and consideration are
necessary in agreement. Section 13 of NCA mentions contract shall be void if it has illegal
object, or against morality or public welfare. Likewise Section 10 of ICA mentions, all
agreements are contract if they are made for lawful consideration and with a lawful object.

The consideration or the object of an agreement is unlawful in the following cases:

1) Agreements opposed to Statutes:

a) If it is forbidden by law:
If the object or the consideration of an agreement is the doing of an act which is forbidden by
law, the agreement is void. An act is said to be forbidden by law when it is punishable by the
law of the country or by special legislation. Example: A promises B to obtain an employment in
public service, and B promises to pay Rs.10, 000 to A. the agreement is void as the
consideration for it is unlawful.

b) If it defeats the provisions of any law:

If the object or the consideration of an agreement is of such nature that, if permitted, it would
defeat the provisions of any law, the agreement is void. Example, X borrowed Rs. 1, 00,000
from Y and agreed not to raise any objection as to the limitation and that Y may recover the
amount even after the expiry of limitation period. This agreement is void as it defeats the
provisions of the Law of Limitation Act.

c) If it is fraudulent:
If the object or the consideration of an agreement is to defraud others, the agreement is void.
Example, A, B and C enter into an agreement of the division among them of gains acquired, or
be acquired by them by fraud. The agreement is void, as its object is unlawful.

d) if it involves or implies injury to a person or property of another:

If the object or the consideration of an agreement is to injure a person or the property of another,
the agreement is void. Example; X promised to pay Rs 10,000 to Y when he agreed to publish a
libel (defamatory article against someone). It was held that Y could not recover the amount
because the agreement was void as it involved injury to someone.

e) if the court regards it as immoral or opposed to public policy:

If the object or the consideration of an agreement is immoral or is opposed to the public policy,
the agreement is void. Example; X let a flat to Y on a monthly rent of Rs 10,000. Y was a
prostitute and used the flat for prostitution and did not pay the rent. X cannot recover the rent if
he knew the purpose otherwise he can.

2) Agreements opposed to public policy

Public policy is that principle of law under which freedom of contract or private dealing is
prohibited by law for the good of community. What government says and do or not to do is
public policy. Agreement having tendency to injure public interest or welfare is opposed to
public policy. Agreement opposed to public policy is not valid and such agreement is unlawful
and void.

a) Agreement of trading with alien enemy

Agreement between the persons of two enemy countries at the time of outbreak of war is void
and inoperative.

b) Agreement interfering with parental right

Every parent has right to take care of their children. In absence of mother, father can exercise
right of guardianship. Agreement made with the intention of depriving such right is void as being
against to public policy.

G, a father of two minor sons, agreed to transfer the guardianship of those boys in favour of A,
and also agreed not to revoke the transfer during his life. G sued back the boys. Here, G got
back the custody of the boys as the agreement was interfering with parental right. [Guddu
Narayanish v. Annie Besant (1915)]

c) Agreement restraining personal freedom

Agreement which restricts the personal liberty of an individual is void.

e.g.; restricting an individual to go out of country etc…

d) Agreement to obtain or transfer of public offices

The agreements which affect the normal working of government offices are void as they are
opposed to public policy.

e.g., A paid certain sum of money to B, and B agreed to obtain a seat for A’s son in medical
college.; money paid for transfer; promotion etc

e) Agreement in restraint of trade

Article 12(3) of Constitution of Nepal provides that every individual has right to choose his
profession. Therefore, an agreement to restraint individual from choosing his profession or trade
is void.

f) Agreement in restraint of marriage

Individual reaching the age of majority can marry as per the choice. Hence agreement to restraint
an individual from marriage according to the choice is void.

g) Marriage brokerage agreement

An agreement to procure marriage of a person in consideration of a sum of money is called
marriage brokerage agreement. Such agreements are opposed to public policy and are void.

e.g., A, a father of a girl, promised to give certain sum of money to B, a father of a minor boy. A
and B agreed to marry his minor son with A’s daughter. Agreement is void.

h) Agreement interfering with course of justice

An agreement which obstructs the ordinary process of justice is void.

e.g.; A, a moneylender filed a recovery suit against B. A induced C his friend to give false
evidence against B. And A agreed to give Rs 500 to C for his work. The agreement is void.

i) Agreement for shifting prosecution

An agreement not to prosecute an offender or to withdraw a pending prosecution is void.

e.g., A had instituted prosecution against B for recovery. A promised to drop the prosecution and
B promised to restore the value of the robbed goods. Agreement is void as it is agreement to shift
prosecution.

j) Agreement tending to create monopolies

An agreement with the intension to create business monopoly or exclusive right in the market is
against to public policy and therefore void.

e.g., A local body grants a monopoly to b to sell fruits in a particular locality.

k) Agreement for champerty

The term champerty may be defined as a bargain in which a stranger promises to give assistance
(monetary or otherwise) to another person in recovering the property. And also promises to share
the profit obtained by legal action. Such agreement is void.

e.g., A agreed to supply funds to B to enable him to file a suit for the recovery of his property
and B promised to give him 3/4th share in his property, if recovered. The agreement was held to
champaterious and void.
Void agreements

An agreement, the legal status of which is null without validity is called a void agreement. No
contractual right and obligation arises out of such agreement. Void agreement is a mere
agreement and not a contract at all and it cannot be enforced by law as it is void ab initio.

Following are void agreements

a) Agreement in restraint of marriage

b) Agreement having unlawful object and consideration
c) Agreement by bilateral mistake of fact
d) Agreement without consideration
e) Agreement with/by incompetent parties
f) Agreement in restraint of public facility: any individual enjoys the facilities as provided
to the public. If an agreement has been entered with the intention to restraint anyone from
enjoying such facilities, the agreement is void. E.g, public toilet, water etc
g) Agreement in restraint of legal proceedings: nobody can prevent another from exercising
his legal right.
h) Agreement to do impossible acts: if an agreement contains the act which cannot be
performed by the human being is void. E.g., an agreement to bring stars etc
i) Agreement having uncertain meaning: meaning and terms should be certain
j) Agreement contingent on impossible event: e.g., A agrees to pay a sum of 2000 to B if B
marries C, A’s daughter. The agreement is void.

Free Consent

The English term ‘consent’ was derived from the Latin term ‘consentire’ which means
‘permission’ or ‘agree to do on ‘agreement’. A contract is the consensual outcome of all the
contracting parties. It means that a meeting of the mind of the contracting parties is necessary to
be a contract in the absence consensus ad idem (the identity of mind) no effective contract can
came into existence.

Nepalese contract act 2056 section 2 ( c ) defines it as ‘the consent given by the person to whom
a proposal has been presented in the substance of that proposal’. In the same way Indian contract
act 1872, section 13 has also defined contract by means of consent Thus, consent is the
agreement of the concerned parties upon the same thing and in the same sense.

Free consent
Free means ‘not under the control of anyone else or able to do what one wants’, or not confined.
Whereas consent is agreement. The agreement without any control or not costing any value is
‘free consent’. In other words ‘mutual understanding between the parties represents agreement
on the same thing and in same sense
Free consent is a genuine acceptance of the agreed parties from their free minds. Consent is said
to be free when it is not caused by coercion, fraud, Undue influence misrepresentation and
mistake.

When Consent is not free

To prove that the consent is ‘not free the complainant must prove that if he had known the truth
or had not been forced to agree, he would not have entered into the contract. If he can prove it,
then the contract will turn out to be voidable at the option of the party whose consent is so
caused.

Example: A is forced to sign a promissory note at the point of pistol. A knows what he is signing
but his consent is not free. The contract in this case is voidable at his option. In this example the
consent is not altogether missing. It is there, but is not free.

There are certain circumstances or weaknesses on which the law presumes that, the consent of
the parties is not free such a circumstances is neither binding nor satisfying the negative
concerned parties. The circumstances are cleared by the following chart:

As mentioned in section 14 of Nepalese contract act 2056 may be made voidable at the option of
party whose consent is not free. They are the contract concluded through the exercise of
coercion, undue influence, and fraud. In this case ‘consent is not free’ and deceit, mistake is dealt
by section 13 (g).

Importance of free consent

 Secures the freedom of parties to enter into a contract

 Brings an opinion or views in similar nature
 Assures that the parties are free from any compulsion or pressure
 Ignores all types of pressure to enter into a contract
 Furnishes legal remedy to the parties
 Signifies validity of a contract

Coercion

‘To coerce’ means to force or threaten somebody to do something. When a person is compelled
to enter into the contract by the use of force by the other party or under a threat against the law
‘coercion’ is said to be employed. It is one of the circumstances when consent given by the party
is not free. An agreement, in which consent is accused by coercion, is voidable at the option of
the party whose consent was so obtained. Here, physical force is used but there is an absence of
mental and psychological force.

Contract Act 2056, section 14 has provided the provision relating to the circumstances of
coercion, under void able contract such contract can be made void by the aggrieved party.
Explanation to section 14 (a) of Nepal contract Act states that when somebody has detained or
threatened to detain property or has threatened to commit any act forbidden by the law for
causing any person to enter into a contract against his will, the person is said to have coercion.

Section 15 of the Indian contract Act also has defined coercion in a similar manner as Nepal law
which states ‘Coercion as threat with intention to enter into an agreement’. The threat amounting
to coercion need not necessarily proceed from a party to the contract. It may proceed even from a
stranger to the contract. Likewise it may be directed against anybody necessarily to other
contracting party.

Examples:
A threatens to shoot B if he (B) does not release him (A) from a debt which A owes to B. B
releases A under the threat the release has been brought about by coercion. But, the English law
only used the near equivalent of the term ‘coercion’ that is ‘duress’ which denote the act or threat
aimed at the life or liberty of other party to the contract or the members of his family. But, the
scope of ‘coercion’ is much wider than ‘Duress’ as it also includes threats over the property also.
But a threat to file a suit, a threat to suit, a threat to commit suicide , high price or rate of interest
are not regarded as coercion. These above mentioned cases forbidden by the Indian penal code. It
depends on the circumstances and that is determined by the natures of the cases. Similarly
common code of Nepal has also prescribed the list of criminal cases in its section 9 of the
provision of Judiciary agreement. Among them fraud and deception came under the hindrance of
free consent.

Consequences of Coercion Contract:

The contract which is created on the ground of coercion is void able nature. Such a contract can
be turned into void by the aggrieved party (Section 14(2), NCA 2056) as victim party of a
voidable contract he may either exercises the option to affirm the transaction and hold the other
party bound by it or repudiate the transactions by exercising a right of rescission. If the aggrieved
party rescinds the contract, he must restore any benefit has received, to the other party from
whom he has received. The burden of proof lies on the aggrieve party, but there must be
completion of contract to claim ‘coercion’. According to section 84 of Nepalese contract act he
gains competition if the transaction has happened.

Undue Influence

 ‘Undue influence’ is ‘the domination will of the other by moral coercion’.

 It is an abuse of position and one’s moral to achieve unfair benefits.
 It is also a cause of voidable contract, which is up to the aggrieved party whether to
affirm it or to make void.
 It is a kind of ‘mental coercion’ as opposed to physical coercion as defined by section is
of Indian contract act 1872. Sometimes a party is compelled to enter into an agreement
against his will as a result of unfair persuasion by the other party. This happens when a
special kind of relationship exists between the parties such that one party is in the
position to exercise undue influence over the other.

Explanation of section 14 (b) of the contract Act 2056, has defined ‘undue influence’. The
subsection b (2) further provides the types of persons are under influence to mobilize for own
interest. Section 16 of Indian contract Act defines it is the same sense as Nepalese contract act
which states ‘a contract is said to be induced by undue influence where.

i) One of the parties is in a position to dominate the other’s will and

ii) He uses the position to obtain an unfair advantage over the other. (I.e. when
parties not in equal footing). So, Undue influence is an influence which compels
another person to do something which he would not have done if he had been a free
mind.

For Example: F, having advanced money to his son B during his minority, upon B’s coming of
age obtains by misuse of parental influence, a bond from B for a greater amount than the sum
advanced F employs undue influence in this case.

a) Real or apparent authority: where a person holds real or apparent authority over the other
person he can dominate the will of other. Eg. Master and servant, principal and temporary
teacher. Etc

b) Fiduciary relation: every relationship of trust and confidence is fiduciary relation. E.g.,
lawyer and client, doctor and patient, spiritual advisor and his devotee etc.

c) Mentally or physically weak person: a person taking care of a person who is mentally or
physically sick is in the position of dominating the will of such person.

Undue influence may be presumed to exist in the following cases

 Consideration is inadequate
 There is a fiduciary relationship between the parties
 There is inequality between the parties in respect of social status, position age etc
 A greater sum demanded than the actual sum
 There is absence of independent advisors for weaker party

Effects of Undue Influence:

 An agreement induced by Undue Influence is void able at the option of the aggrieved
party
 Aggrieved party must go to court within the time limit specified by law, i.e. within 1 year
 Undue influence by a person, who is not a party to a contract, may make the contract void
(NCA- 2056, Section. 14 (2)).
 Generally, the burden of proof that lies onto dominant party to prove non use of
undue influence
 If contract declared void the party shall refund or repay money or anything received
to other party

In dealing with cases of undue influence the court in Mohamed Bakshi v. Hosseni Bibi,
mentioned that the court should consider the following four questions as followers:
 a. Whether it is a thing which a right minded or reasonable person might to expected to
do?
b. Whether the contract suggests the idea that the donor was not master of him and not
in a state of mind to weight what he was doing?
c. Whether it was a matter requiring a legal advisor?
d. Whether the intention of making the gift originated with the donor?

Fraud:

 ‘Fraud’ means, ‘to cheat’.

 ‘Fraud’ means a Criminal deception intended to gain money or person advantage.
 Fraud is the false statement made to trick someone.
 Fraud means a false representation of fact made intentionally or knowingly by a party to
another party.
 Where there is negligence with the intention to deceit others there is Fraud.
 Fraud is also one of the Flaws or hindrances of free consent that turns contract into void
able class.

For e.g., A sells a ring to B stating that it is made of pure gold though he knows that it is not
true. B purchase the ring believing A’s statement to be true. It is fraud by A.

Section 14 (c) of the Nepalese contract Act 2056, “when, with an intent to deceive the other
party to the contract or his agent, a party or his agent, a party or his agent induces him to believe
a thing as true, which is not true, conceals actively any subject matter of the contract and does
some such act as Nepalese current laws specially declare fraudulent, that is said to be fraud.”

This definition includes the following things under fraud if committed by a party to the contract
or his agent with a view to deceiving another party or his agent

i) To induce a party to believe a false act as a true one

ii) To conceal actively any factual truth
iii) To do any act by which the party believes false as true and
iv) To do some such act which is declared to be fraudulent by other Nepalese law in force

It is to be noted that mere commendation or praising of one’s own good is not fraud Traders and
manufacturers are inclined to speak optimistically of their products

For Example:
‘A’ brought a gun from ‘B”. The gun was defective but unknowingly ‘B’ plugged it. ‘A’ did not
examine the gun right there and while using later it burst. It does not amount Fraud.

Essentials of Fraud:

To constitute a fraud, it must satisfy the following essentials:

 a) By a party to a contract: The party to the contract or his agent has to commit fraud. It
must not be committed by third party. E.g., A prospectus containing false statement was
issued by the directors of a company. A shareholder subscribed for the shares on the faith
of such prospectus and wanted to avoid the contract. Held, the shareholder was entitled to
do so because the false statement made by the directors was fraud. [Reese River Silver
Mining co. v. Smith (1869)]

b) False representation: there must be a representation and it must be false, and must be
made with the knowledge of its falsehood. E.g., A fraudulently informs B that his estate
is free from encumbrance. B purchases the estate on the faith of A’s statement. In fact,
the estate is subjected to mortgage.

c) Relation of representation with fact: the representation must relate to the fact. A mere
opinion, a statement of expression, or intention does not amount to fraud. e.g., A, while
negotiating with B for the sale of certain goods, tells him it costs Rs 5000. This is a
statement of fact. But if states it’s around Rs5000, this is a statement of opinion.

d) Actually deceived: the fraud must have actually deceived the other party who has acted
on the basis of false representation.

e) Suffered from damage: it is a common rule of law that “there is no fraud without damage.
As such fraud without damage or damage without fraud fails to give rise to an action on
deceit. Therefore, the party acting on the representation must have suffered damages.
Damages may consists of actual or temporary injury, money’s loss etc.

Effects of Fraud

 The party who is aggrieved by fraud can take action against the other party to avoid
contract
 Instead of taking action, the aggrieved party can accept the contract and demand to put
him in the same position in which he would have been if fraud was not made
 If the party whose consent was caused by fraud suffers some loss, he can claim

damages In following conditions contract induced by fraud is not voidable

i) If the subject matter of the contract has been consumed or destroyed

ii) If such party after becoming aware of the fraud takes a benefit under the contract
iii) If such party does not go to court within time limitation(i.e. 1 year from the time of
having knowledge)

Silence regarding fraud

 a) Mere Silence is not fraud:
Mere silence is not a fraud is the general rule based on the latin principal caveat emptor(let the
buyer beware). The general rule is that a person entering into a contract is not bound to disclose
to another party the material facts. There is no such duty under law to make him disclose the
facts material to the contract to another party. Here the party entering into a contract has to have
full knowledge about all the matters related to the contract.

NCA has not stipulated any provision in respect of silence as to facts but explanation to Section
17 of ICA provides that mere silence as to facts likely to enter into a contract is not a fraud.

e.g. A sold a horse to B for Rs 25,000. A knew that the horse was ill but A never made any
representation to B to the effect that his horse was ill. Here knowledge of horse’s sickness will
not give B a ground to avoid the contract.

b) Silence is fraudulent:
Under certain circumstances no party to the contract has right to keep silence about the subject
matter and terms and conditions of the contract or facts material to it. This is guided by the
principle uberrimae fidei. In contract based on this principle, if one of the parties has any
information concerning to the subject matter which would affect the willingness of other party,
the party is bound to disclose all the facts.

Duty to disclose arises in following conditions:

i) Statutory obligation to disclose: the law may include certain provisions, which can bind
the party knowing certain facts to disclose to the other party.
ii) Contract of utmost confidence: where contracting parties stand in such a relation that
utmost confidence or good faith is required, either of them has to make full disclosure of
relevant facts. Contract between parent and child, doctor and patient, etc. E.g, insurance
iii) Changes in circumstances: if any changes are made about the fact or subject matter of the
contract, its holder has to communicate to other party.
iv) Silence equivalent to speech: if silence is in itself equivalent to speech it amounts to
fraud. E.g, A says to B if you do not deny I shall think the bike is in good condition. B says
nothing. Here B’s silence is equivalent to speech. If the bikes turns out to be not in good
condition, B’s silence turns out to be fraud.
Misrepresentation:

A representation means a statement of fact made by one party to the other, either before or at the
time of contract, relating to some matter essential to the formation of the contract, with an
intention to induce the other party to enter into the contract.

A representation when wrongly made, either innocently or intentionally, is termed as

misrepresentation.

Misrepresentation means a misstatement or a false representation of fact made by a party to

another.
So, we can say, misrepresentation is a representation wrongly made by a party to the contract
innocently or without any intention to deceive the other party.

Section 14 (d) of Nepalese contract act provides the provision relating to misrepresentation.
Misrepresentation means submission of a false statement on any matter without any reasonable
basis of fact, misleading a party so as to aggrieve him and inducing mistake about the subject
matter of the contract.

According to its explanation the following activities are regarded as misrepresentation.

a. Submitting a false statement or particulars of any fact without any reasonable basis
b. Causing any party of the contract to his prejudice or misleading him so as to aggrieve
him.
c. Causing a mistake deliberately about the subject matter of the contract ( i.e. only
speaking a baseless statement but it should lead to aggrieve somebody)

About misrepresentation, a prominent writer Prof. Anson has written ‘a false statement which the
person making it honestly believes to be true or which at any rate he does not know to be false. It
can include non-disclosure of material fact of contract but there is no intention to deceive other
party.

a) By a party to a contract: The party to the contract or his agent has to make
misrepresentation. It must not be made by third party.

b) False representation: there must be a representation and it must be false but the person
making it must honestly believe it to be true.

c) Relation of representation with fact: the representation must relate to the fact. A mere
opinion, a statement of expression, or intention cannot be regarded as misrepresentation.
e.g., A sold his hotel to B and stated that a part of the hotel is occupied by a tenant who is
most desirable. However, A could recover the rent from him only under pressure and the
rent was currently much in arrears. Held, B was entitled to avoid the contract because the
statement made by A amounted to misrepresentation. [Smith v land and House Property
Cor.(1884)

d) Actually acted: the party to whom representation is made must have acted on its faith.

e) A false representation to whom: A false representation need not be made directly to the
plaintiff. A wrong or false representation made to a third person with an intention of
communicating it to the plaintiff is also misrepresentation.

Effects of Misrepresentation

 The party who is aggrieved by misrepresentation can take action against the other party to
avoid contract
  Instead of taking action, the aggrieved party can accept the contract and demand to put
him in the same position in which he would have been if misrepresentation was not made
 If the party whose consent was caused by misrepresentation suffers some loss, he can
claim damages

In following conditions contract induced by misrepresentation is not voidable

iv) If the subject matter of the contract has been consumed or destroyed
v) If such party after becoming aware of the misrepresentation takes a benefit under the
contract
vi) If such party does not go to court within time limitation(i.e. 1 year from the time of
having knowledge)

Mistake:

Mistake may be defined as an erroneous belief concerning something. Consent cannot be said to
be ‘free’ when an agreement is entered into under a mistake. ‘Mistake’ is ‘Misconception”. It is a
slip which is made not by design but by mischance. Mistake is a wrong opinion about something.
When an offer is accepted in another sense than the offer was made, it is said to be assented by
mistake. ‘Mistake’ and ‘free consent’ does not exist in the same side, they always exists in the
opposite side. Such a contract cannot prove ‘consensus ad idem’ of the concerned parties.

Section 13 of Nepalese contract act has prescribed ‘mistake’ under the void contract. It states in
the section 13 (g) that ‘a contract cannot be performed because the subject matter of the contract
is not clearly known to the contracting parties’. In this regard section 20 of Indian contract act
clearly defines it as’ where both the parties to an agreement are under mistake as to the matter of
fact essential to agreement is void’.

e.g., B makes an offer to A with intent to buy his Red horse. A accepts B’s offer to sell black
horse. Here, intention of A and B is different and both they are mistaken on the color of the
horse. This is void agreement.

Classification of Mistake

A) Mistake of Law:
There is a popular maxim ‘Ignorantia juris non excusat’ means ‘ignorance of law is non
excusable’ has settled a rule of law. ‘Ignorance of law is not caused by inability’ Legal mistake
of a contract turns it as void condition because a contract also stands on a legal ground. If the
ground is erased no contract can stand on. Mistake of law not only makes the contract void but is
also punishable to the parties depending upon the volume and its nature.
Types:
a. Mistake of general law of the country or mistake of law(municipal law)
b. Mistake of foreign law ( In the contract act 2056, there is no such provision)
Mistake of foreign law may be allowed because it is not compulsory that everyone has to know
foreign law. And also ‘mistake of law of foreign country is regarded equivalent to the mistake of
fact and is sometime excusable according to Indian contract Act.

B) Mistake of fact:
A mistake connected with the subject matter of the contract is mistake of fact. A contract entered
into by making a mistake of fact may be either valid or void. Mistake of Facts are of two types.

Unilateral Mistake :
Where only one of the contracting parties is mistaken as to a matter of fact, the mistake is
unilateral mistake. Thus, if one of the parties to the contract is mistaken about the subject matter
or in expressing or understanding the terms or the legal effect of an agreement, the mistake is
known as unilateral mistake.

NCA is silent regarding to mistake made by one of the contracting parties. But as stipulated in
section 13(g) of the Act, it can be presumed that if one of the parties is mistaken in fact essential
to the contract, the contract may be valid. Regarding the effect of unilateral mistake on the
validity of contract, section 22 of Indian contract act provides that, “a contract is not voidable
merely because it was caused by one of the parties to it being under a mistake as to a matter of
fact’.

Example: A wants to sell his house to B for Rs. 50000. By mistake he makes an offer of Rs.
40000 in writing. He cannot plead mistake.

Bilateral Mistake:
Where the parties to an agreement misunderstood each other and are at cross purpose, there is a
bilateral mistake. In case of bilateral mistake of essential fact, the agreement is void ab-intio.
NCA is silent regarding to mistake made by one of the contracting parties. However, Section
13(g) provides that where the fact essential to the contract is not known to the parties and the
contract becomes impossible to perform due to such ignorance, the agreement is void.

From this it becomes clear that to become mistake of fact

i) Parties to the contract should not have known the subject matter
ii) Subject matter must be related to contract
iii) Performance of contract should be impossible

Section 20 of Indian contract act provides that ‘where both the parties to an agreement are under
a mistake as to a matter of fact essential to the agreement, the agreement is void’. But,

 There must be a mistake of fact as to the formation of contract.

 The mistake must be of the both parties.
 It must be a fact essential to agreement.

Example:
A wants to buy a particular horse. B has two horses’ one cart horse and another race horse. A
wanted to buy a race horse but B thinks he is selling a cart horse. Agreement is void as there is
bilateral mistake as to the identity of subject matter.

Effects of mistake

 Voidable at the option of the parties

 Party must go to the court within 1 year
 Any benefit obtained must be returned to the party from whom it was obtained
 Burden of proof lies on the party claiming the contract by mistake

Quasi-Contract

Quasi means almost or apparently but not really or as if it were. Quasi contract is not a contract
at all because one or the other essentials for the formation of a contract are absent. It is an
obligation imposed by law upon a person for the benefit of another even in the absence of a
contract. The relationship of the parties by which one party is bound to pay money in
consideration of an act done or suffered by the other party even in the absence of contract is
quasi contract. It is based on latin maxim, ‘nemo debet locuplatari ex liena justua’, which means
no man must grow rich out of another person’s cost; which means no person shall be allowed
to unjustly enrich himself at the expense of another.

Features of Quasi contract

 It is imposed by law and does not arise from any agreement

 The duty of a party and not the promise of any party is the basis of such contract
 The right under it is always a right to money
 The right under it is available against specific person
  A suit for its breach may be filed in the same way as in case of a complete contract

Kinds of Quasi Contract/ Rules regarding Quasi contract

a) Right to recover the price of necessaries supplied

The person who has supplied the necessaries to a person who is incapable of contracting or
anyone whom such incapable person is legally bound to support, is entitled to claim their price
from the property of such in capable person. Example; necessaries supplied to minors, lunatic etc

Following points should be satisfied:

i) The supplies are or real necessities

ii) The necessities are supplied at the time when actually needed
iii) The price is reasonable
iv) Supplies are not of gratuitous nature
v) Necessities supplied are payable only when the incapable person has property for
them

b) Right to recover money paid for another person

A person, who is interested in the payment of money which another is bound by law to pay,
and who therefore pays it, is entitled to be reimbursed by the other. E.g., B holds land in Bengal
on a lease granted by A. A’s land is advertised for sale due to non payment of revenues. B to
prevent the sale and cancellation of lease pays government sum due from A. A is liable to B for
the sum paid.

Condition:

i) Person making the payment must necessarily be concerned with the payment of
amount
 ii) Payment must not be of voluntary nature
iii) Payment of money must be one which another was legally bound to pay

c) Right to recover for non gratuitous act

Non gratuitous means ‘not done free’. The act which are done with the intention of being paid
are called non gratuitous act.

Right to recover arises if the following three conditions are satisfied:

i) the thing must have been done or delivered lawfully;

ii) the person who has done or delivered the thing, must not have intended to do so
gratuitously; and
iii) the person for whom the act is done must have enjoyed the benefit of the act
Example: A, a tradesman, leaves goods at B’s house by mistake. B treats the goods as his own.
He is bound to pay A for them.

d) Responsibility of finder of goods

A person who finds goods belonging to another, and takes them into his custody, is subject to the
same responsibility as a bailee. Example: X guest found a diamond ring at a party of Y. X told Y
and other guests about it. He has performed his duty to find the owner. If he is not able to find
the owner he can retain the ring as bailee.

A found a diamond on the floor of B’s shop and handed it over to B to keep it till the true owner
is found. Best efforts were made to trace the true owner and advertisement was given in
newspaper. True owner couldnot be traced. After sometime A tendered to B the expenses
incurred by him for tracing true owner and requested him to return the diamond. B refused to
return the diamond to A. it was held that b must return the diamond to A as he alone was entitled
to retain it against everyone except true owner. (Hollins v Fowler 1957 )
 e) Right to recover from a person to whom money is paid or thing is delivered by mistake
or under coercion:
A person to whom money has been paid, or anything delivered by mistake or under coercion,
must repay or return it. Example: A and B jointly owe Rs 100 to C. A alone pays the amount C,
and B, not knowing this fact, pays Rs 100 over again to C. C is bound to repay the amount to B.

Performance of contract
Contract is an agreement between the two or more parties to do not to do something, which is
enforceable by law. It mean’s when there is a contract there is something to perform.
Performance of contract means fulfillment of contractual duties by both the promisor and the
promisee. So performance is very essential for contract because:-

→ if there is no performance there is no contract.

→ To fulfill the contractual obligation.

→ Peaceful settlement of the contract.

At last we say that performance of contract is very essential to the very existence of the contract.

Provides 100

Liter oil

Rs 10 thousand

In this case if A provides B 100 liters oil and gives Rest 10 thousand instead of oil both perform
their contractual duties. The both parties duly perform when contract, the contract to a ending
and no thing more remains. Performance by all the parties o the respective obligation is the
normal and natural mode of the discharging of terminating a contract. So it is also known as a
method of discharging a contract peacefully because when person perform the contractual
obligation there is no dispute remain.

Section 71 of NCA focuses on methods of performance and section 74 means each party to a
contract shall fulfill their obligations under contract.

General Rules of Performance

The General Rules of performance of contract is that performance must exactly match that the
party agreed too do. If x provides Y 100 Q rice 30 of March 2005 and Y gives Rs 20 thousand in
same day. They fulfill their contractual obligation.

In the case of Remore and company Vs Landamer and company (1921) same principle was
applied.

RE more and company Landamer and company

Provides 3000 tin Fruits

30 tin in each packet

Provides same

quality But 24 tin in

each

Packet

So refuse to take or receipt the delivery. Court said that contract must be performed on
prescribed mode and conditions so defendant has right to take or not to take the fruits.

Essentials of a valid performance:

  Performance should be unconditional
 Performance should be precise and exact
 Performance must be made at proper time and place
 It must be made to proper person
 Party must be given reasonable opportunity to examine the performance of promise
 Performance must be of whole obligation
 Person must be able and willing to perform his obligation

Types of performance

a) Actual performance

Actual performance means to fulfill the contractual liabilities completely according to the
terms and conditions of the contract. The contracts come to an end and the party is discharged of
contract after actual performance. E.g., If A provides 100litres of oil to B in 15 Jan 2005 in Jhapa
and B provides A Rs 20 thousand instead of oil there is actual performance of contract. The main
assumptions of the contract law are honestly performing the contractual obligation by the
entire contract. So contract is terminated after actual performance.

b) Partial Performance

Against the general rule of the performance of contract but partial performance is accepted in
contract because of the doctrine of quantum merits it’s also known as quasi contract. E.g. A and
B signed the agreement that A will make a home to B in Rs 10 lakh within 6 months. After three
months A completed half of the construction and he was unable to finish left part of the
construction. In such situation A is entitled to get Rs 5 lakh because he did half of the work or
he performs a part or the contract. If doses not get any thing another party takes unusual benefit.
c) Attempted performance / tender of performance

Tender is a offer by one party; who is ready, willing and able to perform, to the other party to
perform his obligation under the contract. This offer is called tender of performance. It is then for
other party to accept the performance. If he doesn’t accept, the promiser is not responsible for
non-performance. The tendering party doesn’t lose his right of the contract. In other words, the
tender of performance if rejected by the other party excuse the promiser from further
performance and entitles his to use the promiser for breach of the contract.

Rules of performance contract

A) Responsible person to demand performance (Who to ask for performance)

a) By the promisee
Only the promise is entitled to demand the performance of a contract. E.g., A promised
to paint a picture for B. Here only B has the right to demand the performance from A.

b) By the legal representative

In case of death of the promisee before performance the liability of performance falls on his legal
representatives. But in the case of contracts involving personal skill the legal representatives are
not bound to perform the contract. Such contract comes to end on the death of the promisee. E.g.,
A contracted to sing a song in B’s theatre on 1st Jan 2015 for Rs 5000. A died before this date.
This contract cannot be performed by A’s representatives as it involves the use of personal skill.

c) Third party
General rule in a common law system is that, a person cannot acquire rights to demand
performance under a contract to which s/he is not a party to such contract. This is known as
privity of contract.
This rule does not apply
 In case of beneficiary
 In case of family settlements, trusts, etc

d) joint promisees
When two or more persons have made a joint promise all such person must jointly fulfill the
promise and promisees can demand for such performance. Section 78(2) of NCA mentions
except otherwise provided all promisees can demand performance. ICA is clearer on this context.
It provides

Circumstance Provisio
s n
In case all the promisees are alive All promisees shall jointly demand for
performance

In case any one of the joint promisees dies Heir/ legal representative of dead promisee
along with other promisees jointly

In case all joint promisees dies Heirs/legal representatives of all dead

promisees jointly
B) Responsible person to perform contract (Who perform the contract )

a) By the promisor himself Sec. 77 of NCA an sec 56 of ICA)

In the case of a contract involving personal skill, test or credit, promisor must himself
perform the contract.

b) By the promisor or his agent: sec77 (1) NCA

In the case of a contract of impersonal nature for eg. a contract of sale of goods or a contract to
lend a sum of money, the promiser himself of his agent may perform the contract.

Promises to pay sum of money

A B

A may perform this promise either by personally paying the money to B or by causing it to be
paid to B by another. Sec 40 of the ICA states that when the promisor appoint agent he must be
competent to do that. Sec 40 of ICA & sec 77(1) of NCA states that contractual only right can
be.Sec 77 (2) of NCA further states that one the promise accepts the act done by the contract
must be performed promisor. In the case of Lal kapurchand V Mir Nawab Azamjah (1963) court
laid this principle. When a promise accepted lesser amount from the third party in full
satisfaction of his claim, it was held that he can not enforce the promise against the promisor. So
under this section performance of the promise, discharges the promisor, although the promisor
has neither authorized nor ratified the act of the third party.

c) By the legal representative

In case of death of the promisor before performance the liability of performance falls on his legal
representatives. But in the case o contracts involving personal skill the legal representatives are
not bound to perform the contract. Such contract comes to end on the death of the promisor.
d) performance of joint promise [Sec 77 (3) (4) (5)]

i) All the person must jointly fulfill the promise:-

When two or more persons have made a joint promise all such person must jointly fulfill the
promise. E.g., A, B, C, are jointly liable to pay Rs 3 lakh to D under a contract indicated them to
pay it jointly.

ii) Any one or more of joint promisors may be compelled to perform:-

When two or more persons make a joint promise the promise is entitled to compel any one or
more or such joint promises to perform the whole promise. E.g., X,Y,Z are complelled to pay Rs
3 lakhs to A under a contract and A may compel either X, Y, Z (all) or X or y or Z or any of
them to pay 3 lakh.

In the case of Phani Bhusan V. Rajendra A.I.R. (1947) The court has held that a decree against
some only of the joint promisors constitutes a bar to a second suit against other co-promisors,
even if the promise fails to release the whole of the decrials amount for his claim merges in the
decrials amount for his claim of the decision is that the liability of joint promises is joint and
alternative.

iii) Right to contribute inter-se between joint promise : if one of several joint promises is made to
perform the whole contract, he may require equal contribution from the other joint promises.

Promise to pay

A, B&C D

Rs 3 lakh
If ‘A’ is compeled to pay entire amount of Rs 3 lakh to D we can realize from B and C Rs 1 lakh
each.

iv) Sharing of loss by default in contribution:-

If any one of the joint promises makes default in making contribution the remaining joint
promises such default in equal shares.

A, B & C Promise to give D

Rs 30 thousand

If A unable to pay the money B and C joint must pay whole Rs 30 thousand.

v) Effect of release of one joint promisor:-

In case of joint promise, if one of the joint promisors if released from his liability by the
promise, his liability to the promise ceases but this doesn’t discharge the other joint promisors
form their liability neither does it free the joint promisor so released from his liability to
contribute to the other joint promisors.

X, Y, Z D

Promise to pay 30lakh

If X pays Rs10 lakh and release from the contract in this situation other parties are bound to pay
rest amount of money.

e) Third Party
Unless otherwise mentioned in a contract third party can perform the contract on behalf of
promisor.

Conclude a contract

A& B C

Performed by C on behalf of A

C ) Time of performance

Sec 71 of NCA

a) The performance of contract must take place within the time. Sec 71 (1)
If the contract stipulates time for performance of the contract should be performed within
that time.

Provides 100 kg

A B

Rice in 31 of Dec.2005

A must provides 100 Kg rice in 31 of Dec2005. Otherwise contract laps or terminates and B has
right to claim damages with A for breaching the contract.

b) If the contract is specific in nature it must be performed in that time. Sec 71 (2)

If Biratnagar Sugar Mill call the notice for the workers, workers join the mill in
November, December not in March or April.
c) If there is no stipulation of time the contract can be performed within reasonable time sec
71(3)

There is no clear cut definition about reasonable time so it is depends on nature of the contract.
The transactions between the parties about the land and goods may have long time there may be
one two weeks or months but the transaction of gold or dollar has man few time may be hour. So
it is always depends upon third person eyes. But time must be adequate to persons that work.

D) Place for performance (sec72)

a) If the Place of performance is fixed in the contract the contract must be performed on said
place [sec 72 (1)]

provide 1000 copy of books in

Biratnagar A B

Here, A must provides 1000 copy of books in Biratnagar to B.

b) At the place of storage of goods: If the contract is delivery of goods and contract is silent
about the place delivery where the goods are situated shall be the place of delivery (sec 72
(2)
c) At a particular place: If the contract dies not stipulate the place of performance and certainly
type of Act can be done certain place only are there is custom of doing the act in certain
place such place shall be the place for performance of contract (sec 72 (3)
d) At a reasonable place: where the situations explained in above ( b) and (C) doesn’t exist the
performing party shall apply to other party to fix the place of performance for the
performance of contract sec 72 (4)
E.g
 Provides 500 Kg

A B

Potato

If the situation of (b) and (c) is not exist A told B to fix the place of performance. In such
situation B must show the place of performance.

Methods /procedure of performance

a) contract must be performed in given procedure [sec 71 (1)]

b) In the case of specific nature of contract it must be perform in the procedure [sec 71(2)]
c) If procedure methods are not fixed the reasonable method should apply.

Contracts which need not be performed [sec 73]

a) If one party absolves the other party from fulfilling the obligations according to the contract
73 (a)
b) which may have a void able contract, made void does so sec 73(6)
c) Violation by other party sec 73 (c)
d) It becomes unnecessary to perform the work mentioned in this Act, {for eg. Sec 13
contracts need not be performed}. If such situation arises contract is not enforceable. It is
void.
e) It becomes unnecessary to comply with the contract under sec 79
f) Contract need not executed in the event of fundamental changes in the situations.
Discharge of Contract

(Termination of Contract)
Discharge of contract means termination of the contractual relationship between the parties to a
contract. A contract is said to be discharged when it ceases to operate, i.e., when the rights and
obligations created by it ends.

Modes of discharge of contract

1) Discharge by performance: a contract is said to be discharged by performance in any of the

following ways
a) By actual performance: a contract is said to be discharged by actual performance when the
parties to the contract perform their promises in accordance with the terms of the contract.
E.g., A agrees to sell B his care for Rs 50,000/-. Here B pays and A delivers his car is actual
performance.
b) By attempted performance: a contract is said to be discharged by attempted performance
when the promisor has made an offer of performance to the promise but it has not been
accepted by the promise. E.g. E.g., A agrees to sell B his care for Rs 50,000/-. Here A
delivers the car but B refuses to pay.

2) Discharge by mutual agreement: since a contract is created by mutual agreement, it can

also be discharged by mutual agreement. A contract can be discharged by mutual agreement
in any of the following ways
a) Novation: novation means the substitution of a new contract for the original contract. Such a
new contract may be either between the same parties or between different parties. E.g., A
owes money to B under a contract. It is agreed between A, B and C that B shall henceforth
accept C as his debtor, instead of A.
b) Rescission: rescission means cancellation of the contract by any party or all the parties to a
contract. E.g., A promises D to sell and deliver 100 bales of cotton on 1 st January at his
godown and D promises to pay for goods on 1st feb. A does not supply the goods, D may
rescind the contract.
c) Alteration: alteration means a change in the terms of a contract with mutual consent of the
parties. Alteration discharges the original contract and creates a new contract. However,
parties to a new contract must not change. E.g., A promises D to sell and deliver 100 bales
of cotton on 1st January at his godown and D promises to pay for goods on 1st feb.
Afterwards, A and D mutually decide that the goods shall be supplied in 5 installments.
Here, the original contract has been discharged and a new contract came into effect.
d) Remission: remission means acceptance by the promisee of a lesser fulfillment of the
promise made. E.g., A owes B Rs 5000. A pays to B, and B accepts, in satisfaction of the
whole debt, Rs 2000 paid at the time and place at which Rs 5000 were payable. The whole
debt is discharged.
e) Waiver: waiver means intentional relinquishment of a right under the contract. Thus, it
amounts to releasing a person of certain legal obligation under a contract. E.g., B owes D Rs
2000. Subsequently D exempts B from debt.
3) Discharge by operation of law : a contract may be discharged by operation of law in the
following cases:
a) by death of the promisor
b) by insolvency
c) by unauthorized material alteration: if any party makes any material alteration in the terms of
the contract without the approval of the other party the contract comes to an end.

4) By impossibility of performance (Doctrine of frustration) : Sometimes the performance of a

contract is possible when made between the parties but sometimes due to the disappearance
of the subject matter, the contract becomes physically impossible. This type of impossibilities
is called frustration.

a) Destruction of the subject matter: -

If the subject matter of a contract is destroyed without any fault of the parties than the
contract terminates. In the Howell v. Coupland (1876) 1 QBD 258 (CA) The defendant
contracted to sell a specified quantity of potatoes to be grown on his farm, but failed to supply
them as the crop was destroyed by a disease. Delivering the judgment of the court of Appeal,
MELLISH LJ said: Suppose the potatoes had been fully grown at the time of the contract, and
afterwards the disease had come and destroyed them; accordance to the authorities it is clear that
the performance would have been excused; and I cannot think it makes any differences that the
potatoes were not then in existence…Here there was an agreement to sell and buy two hundred
tons out of a crop to be grown on a specific things; therefore neither party is liable if the
performance becomes impossible.

Regarding the destruction of the subject matter there has been the provision in the NCA .It has
been mentioned in the section 79(2)(c) which provides that, in case anything essential for
executing the contract is destroyed or damaged, or no longer exists, or cannot be obtained.

b) Change of circumstances

Sometimes certain change in the circumstances may directly affect the contract. In that case
the contract may be impossible to perform and can automatically terminate. We can discuss by
taking the example, A and B did a contract of supplying particular cloths to A from the particular
factory of the B. latter what happened is that the particular factory was destroyed by the fire. In
this case the contracting parties did not foresee the happening of this incident. This sort of
change in circumstances frustrates the parties and could easily be terminated. A contract will
frustrate “where circumstances arise which make the performance of contract impossible in the
manner and at the time contemplated”.

Section 79(2)(b) of the NCA has mention the frustration takes place during the change of the
circumstances. It provides that, in case it becomes impossible to execute the contract due to
emergence of such situations as war, floods, landslides, fire, earthquakes, and volcano eruptions,
which are beyond the control of human beings.

c) Death or incapacity of party: -

It is impossible to perform the contract incase of death of the either party or becomes incapable
of performing it. Such a cause of termination often happens in contract based on personal skill
and qualification. It has been defined in the case of Robinson v. Davison (1871) LR Exch 269:
40 LJ Ex 172 in which; There was a contract between the plaintiff and the defendant’s wife, who
was an eminent pianist that she should play the piano at a concert to be given by the plaintiff on a
specified on a specified day. On the morning of the day in the question she informed the plaintiff
that she was too ill to attend the concert. The concert had to be postponed and the plaintiff lost a
sum of money.The plaintiff’s action for breach of contract failed. The court said that under the
circumstances she was not merely excused from playing, but she was also not at liberty to play, if
she was unfit to do so. The contract was clearly subject to the condition of her being well enough
to perform: The whole contract is based on the assumption of the continuance of life, and on the
conditions, which existed at the time. Both make that assumption; it is really the foundation of
the contract. It does not require close reasoning to prove that if the foundation fails, the whole
contract must fail. Here the foundation was wanting for there was on Mrs. Davison’s part an
entire and total incapacity to do the thing contracted for. Therefore it shows that, in case of the
contract, which is based upon the personal skill and quality, if the party fails to perform its act
due to bad health or death. The contract terminate to this extend.

Likewise, it has been mentioned in the provision of NCA. It has been provided in section 79(2)
(d), where it has stated as, in case anything essential for executing the contract is destroyed or
damaged, or no longer exists, or cannot be obtained;

d) Government or illegality of performance: -

In this case when the contract is taken place there was no legal intervention but latter on
government made such a legal provision which may effect the contract than at that time the
contract will be effected by the doctrine of frustration and that contract get terminated. I would
like to illustrate with the help example that A and B made a contract to buy and sell wood
of the certain forest, when there was no restriction of sell and purchase of wood but later
on the performance become impossible due to the restriction applied by the government that
cutting of trees is crime than at this situation the contract get frustrated and the contract terminate
than and over.

Regarding the legislative intervention NCA has mentioned the provision under the section 79(2)
(a) where it has provided that, in case the contract becomes illegal and therefore, shall not be
executed.

e) Change of law
Contract was valid when entered but it becomes unlawful due to subsequent changes in law is
void.

Above mention are the conditions where the impossibility of performance applies. Therefore,
there are other conditions where the impossibility does not apply. There are various instances
that the situation or circumstances contemplated by the parties at the time of formation of
contract changes before or at the time of performance such changes may be from slight or
fundamental. In minor change of circumstances the parties are not discharged from performance.
The change must be so severe that performance is made possible. If the slightest changes also are
allowed each party will claim impossibility if performance becomes less beneficial.

Under section 79(3) of NCA the following situations are not allowed for discharge although the
situations may put the parties in more difficult position than contemplated at the time of
formation of contract.

a) Difficult in performance: -

Where the changes of circumstance make the performance difficult the party cannot claim of
discharge on the ground of impossibility. Let me clear through the example. H and S agreed that
S would supply 1000 eggs per day to H at the price of Rs 4 per egg for one year. But latter on
due to widespread poultry disease it was difficult to collect 1000 eggs. Here S cannot claim
doctrine of impossibility to be discharged from supply eggs.

b) Commercial impossibility: -

Commercial impossibility means less profit or loss in the transaction. When performance of
contract leads to less profit then excepted or loss it may be commercially profitable not to
perform. But Doctrine of impossibility doesn’t apply here. He has to perform the contract
although there may be less profit or loss.

e.g., A, furniture manufacturer agreed with B to supply furniture on an agreed rate. But before
the delivery the rate of timber and daily wages of worker increased rapidly, which would amount
loss to A if he supplies. A didn’t supply the furniture to B. here B can sue for damages as A is
liable to supply as per the contract.

c) Impossibility due to default of third person: -

Section 79(3)c states wherein case any party to a contract is dependent upon any third party who
is not a party to the contract for performing the contract, if the third party commits a mistake or
becoming unfit than the contract is not discharged because of impossibility caused by default of
or incapacity of the third person.

In Samual fiza and company v. standard cotton company (1945) AIR, Mad 291 where the
defendants placed and an order with the plaintiff for supply of tapestries of certain kind, making
it clear that they intended to sell them in Australia. But the Australian government prohibited the
import of such goods. The defendants lost their market and cancelled the order. The court held
that the foundation of contract was not that the goods were to be resold. That cannot be read on
the contract that enforceability of the contract was dependent upon the ability of the purchaser to
fine customers for goods.
d)Strikes and lockouts: -

The parties of contract are not discharged from performing the contract where the impossibility
of contract is caused due to strikes and locks outs. It is because a strike is manageable (as labor is
available otherwise) and latter is self-induced.

e) Additional tax: -

For example A agreed to supply a car to B for 3500000/-. Latter custom duty for import
of car is increased. A cannot refused to supply the car on the ground that the custom duty is
increased.

f) Failure to one of the objects: -

A contract made for more than one purpose is not discharged due to failure of one or more
object. The other objects need to be fulfilled i.e. performed. For example ram agrees to sale his
houses one for Rs 300000/- and other for 700000/-. One house is destroyed by fire. The object to
sell the destroyed house is discharged. But the object to sell the next house remains to be
performed.

5) By lapse of time: a contract is discharged if it is not performed or enforced within a specified

time called the period of limitation.

6) By breach: a contract is said to be discharged by breach of contract if any party to the

contract refuses or fails to perform his part of the contract or by his act makes it impossible
to perform his obligation under the contract.
Breach of contract takes place when
 Any party does not fulfill liability according to contract
 He renounces about the performance of promise
 His conduct shows his incapability of performance

Breach of contract occurs on following ways:

a) Actual breach of contract

Actual breach of contract occurs either on due date of performance or during the course of
performance. E.g., A agrees to sell a car to B on 1st June 2016. He fails to deliver on the due date.

b) Anticipatory breach of contract

Anticipatory breach of contract occurs when the party declares his intention of not performing
the contract before the performance is due.

e.g., A contracted to supply to B 100 pieces of plugs on 15 th dec 2015. But before due date of
performance A informed B that he is not going to deliver. A and B may put an end to contract.

AGENCY

Agent: A person, employed to do any act for another, or to represent in dealing with third
person is called Agent.

Principal: A person for whom such act is done or who is so represented is called principal.

A contract of agency is such type of relation between the principal and agent

The Indian contract Act 1872 (Sec 182) defines agent as a person employed to do any act for
another or to represent another in dealings with third person. The person for whom such an act is
done or who is represented is called the principal.
Similarly An agent is appointed to fulfill various objectives and to do various act on behalf of the
principal (the person who authorized another to carry out some responsibility) such as buying
and selling, to draft or send the money from one place to another or from one country to another
country or to sell the share of the company etc. the important thing is that if the agent is appoint
for achieve the objective but he is doing work for his principal. But if he committed the wrong at
that time the principal is liable. For e.g. ram appoint the shyam as his agent to bring 100 tones of
cement from gopal on credit. Shyam brings the cement that cost Rs. 60000 from gopal of his
principal ram. Ram is liable for the payment of price because the cement is purchased for Ram.

Essentials for a valid agency

1. There must be an agreement between principal and the agent

2. The agent must act in representative capacity i.e. power to create legal relationship of
his principal with third party
 3. The principal must be competent to contract
4. Consideration is not necessary (agent can be remunerated by way of commission)

Principles of Agency

The agency relationship is based upon following two principles

a) Whatever a person can lawfully do himself, he may also do the same through an agent
except in case of contracts involving personal expertise
b) He who acts through another is considered to have acted personally, i.e., the acts of the
agent are considered the acts of the principal

Types of Agent:

1. Mercantile or Commercial Agent: Mercantile agent may be defined as an agent who has the
authority either to sell the goods or to consign the goods for the purpose of sale, or to buy or to
raise the money on the security of goods on the behalf of the Principal. Mercantile agent can be
further classified as:

a. Factor: A factor is a mercantile agent to whom the possession of the goods is given for the
purpose of selling the same. A factor usually sells the goods in his own name.

b. Broker: A broker is an mercantile agent who is appointed to negotiate and make contracts
for the sale or purchase of goods on behalf of his principal. He is not given the possession of the
goods. his main function is to bring about a contractual relationship between his principal and the
parties who wish to buy or sell goods.

c. Auctioneer: An auctioneer is a mercantile agent who is appointed to sell the goods at a public
auction i.e. to sell the goods at the higher price in public competition.

d. Commission Agent: A commission agent is a mercantile agent who buys and sells the goods
on behalf of principal and receives the commission for his charges.

e. Del credere agent: A del credere agent is a mercantile agent who, in addition to his work of
bringing a contract between his principal and third parties, also undertakes to be liable to the
principal for the default of the third party to perform the contract. In other words he also
guarantees the principal about the performance of the contract by the third party. He gets
extra commission for the extra risk, the commission of such is called del credere commission.

f. Banker: Generally, the relationship between a banker and customer is that of a creditor and
debtor. However, when the banker buys or sells securities, collects cheques, dividends, etc on
behalf of his customer, he also acts as an agent.

2. Non-Mercantile Agent : He is agent appointed by principal to do some acts which are not
done by mercantile agents. Some of the non-mercantile agents are

a. Insurance Agent: An insurance agent is an agent who is appointed to effect insurance policies
on behalf of principal. he receives commission for his service.

b. Counsels or Advocates: A Counsel or advocate is a person who is engaged to conduct the

legal proceedings on behalf of his principal (i.e. client). he receives fee for his service.

3. On the basis of Authority

a. General Agent: A general agent is an agent who is appointed to perform all acts relating to a
particular trade or business for which he is appointed. A general agent can do all the legal acts
for the purpose of carrying on that trade or business on behalf of his principal. His authority is
continuous until terminated.

b. Special Agent: A special agent is an agent who is appointed to perform a special act. In other
words, he is the agent who represents his principal in some particular transaction, e.g., an
agent employed to sell a piece of land or buy a house. He has a limited authority which comes
to an end after the fulfillment of the act prescribed.

c. Universal Agent: A universal agent is an agent who is appointed to do all the various trades
of business of his principal. In other words, he is an agent who is authorized to do all the acts
which his principal can lawfully do under the provisions of law of the land. he has more power
than that of special or general agent.

Modes of creating agency.

The relationship between the principal and an agent is called agency. An agency is created by
various ways which are given below.

1. Agency by express authority:

An express agreement creates an agency, which may be either written or oral. By this mode the
agent so appointed gets formal power in a written, stamped, signed document etc while doing
agreement. In Nepal it is done only in written form. But in India it can be both written and oral
form. Here, the usual form of a written agreement is power of attorney, which gives an authority
to an agent to act on behalf of the person who gives the authority.
2. Agency by Implied authority
It arises from the conduct, situation or relationship of parties. Whenever a person places another
in a situation in which that other is understood to represent or to act for him, he becomes an
implied agent. For e.g., husband and wife, master and servant etc.

Agency by implied authority includes:

a) Agency by Estoppels

The term estoppel may be defined as prevention of a claim or assertion by law. In other
words, when someone makes another person to believe that a particular thing or fact is true, then
later on he cannot be allowed to deny the truth or thing or fact. If a person by his words or
conduct, has willfully led another to believe that certain circumstances or facts exists the other
person, who had acted on that belief, may create an agent once accepted acts or facts cannot be
rejected again he agent is based on doctrine of estoppels[estoppel means prevention of a claim or
assertion by law]. For e.g., X tells Y in presence and within the hearing of Z that he
(x) is the agent of Z. Z does not contradict the statement. Later Y contracts with X believing him
to be Z’s agent. In such case Z is bound by the contract in a suit between X and Y, Z is not
permitted to say that X was not his agent.

b) Agencies by necessity
Although the power of the agents are, ordinarily, limited to particular acts; yet sometimes
extraordinary emergencies may arises in which a person may be compelled to act as an agent of
some person without requiring the consent or authority. Such an agency is called agency by
necessity.

However, to constitute a valid agency by necessity the following conditions must be satisfied:

 There must be real emergency and necessity to act on behalf of the principal
 The agent must not be in a position to communicate with the principal or to obtain
instructions
  The agent must act honestly and in the interest of the principal
 The agent must adopt reasonable and practicable course under the circumstances of the
case

e.g. A, the master of petrol tanker is agent of B. A brings petrol from Birjung for B. On the way,
a problem arises, there is a leakage and it cannot be sealed and it is impossible to carry the petrol
to Kathmandu. A sells the petrol to a pump in hetauda. So A becomes a sales agent by necessity.

A stored some furniture in B’s house, free of charge. Thereafter, they lost the contacts with each
other. After three years B needed the space occupied by the furniture. He obtained A’s address
from his bank and wrote two letters to him. But he received no reply. B then sold the furniture.
Subsequently, A turned out and claimed for furniture from B. it was held that there was no
agency by necessity as there was nothing in the nature of an emergency compelling B to sell the
furniture. [Sachs v. Milkos (1948)]

c) Agency by holding out

Such agency arises when a person by his past or positive conducts leads third party to believe
that the person is doing some act on his behalf with authority.

For e.g. A is the servant of B and A can bought the goods from the shop of C on credit day to
day for his master and master paid that money time to time. But on one occasion A bought goods
for himself not master on credit from C’s shop on the name of B. B was liable to pay. He cannot
say that I won't pay. B is liable on acts of A by his prior conduct and A is his agent.
3. Agency by operation of law

Such agency is said to arise where the law treats one person as an agent of another. For e.g., on
formation of a partnership firm, every partner becomes the agent of another.

A, B and C were the partners of a firm which was carrying on the business of shoe making. A
bought some raw materials from D on credit, for the purpose of firm. And the raw material was
bought in the name of the firm. In this case, the firm is bound by the purchases made by A and
is liable to pay the price to D.

4. Agency by ratification
Ratification may be defined as the confirmation of acts already done. Even if the agent enters
into a contract without the authority of the principal, he may subsequently ratify, that is to say
adopt the benefit and liability of a contract made on the principal behalf.

Where an agent does an act for his principal without consent, and the act is accepted by the
principal afterwards, it is called agency by ratification, thus the act performing the act of
ratifying by the principal may create an agency and it depends on the wish of he principal
whether to ratify the act or not.

e.g

A is the insurance agent and B is the businessman. A insures the goods of B without his
consent. If B ratifies the act of A, the policy of insurance is valid with retrospective effect as if A
was authorized to the insure goods.

Rules regarding ratification

1. The agent must expressly contract as an agent and the contract can only be ratified by a
principal who’s name is mentioned or disclosed.
2. The principal must be in existence at the time of contract.
 3. The whole contract can only be ratified. The principal cannot say he is ratifying only a
part of the contract
4. The principal must have contractual capacity at the date of contract.
5. Ratifier must communicate his ratification to the agent.
6. Ratification should not put a third party to damage.
7. Lawful acts can only be ratified.

Is wife an agent to her husband?

A wife living with her husband has the implied authority of the husband to buy articles of
household necessity. As long as people continue to live in houses the wife will normally do the
household shopping, and the husband will pay the bills the law of principal and agent will
always out deeply into the law of house hold and wife. However, the husband is bound to pay for
the credit purchases made by his wife only if following conditions are satisfied

a) The husband and wife must be living together

b) The husband and wife must be living together in a domestic establishment of their own
that means wife should be incharge of domestic establishment
c) The wife must purchase the articles suited to the style in which the husband chooses to
live
When all the above conditions are satisfied, the wife is presumed to be the agent of her husband.
And the husband is bound by the acts of his wife. However, husband can escape the liability on
following circumstances

a) where the goods purchased on credit are not necessaries

b) where the wife is given sufficient money for purchasing necessaries

c) where the wife is forbidden from purchasing anything on credit or contracting debts

d) where the trader has been expressly warned not to give credit to his wife
A was the manager of a hotel where his wife B was working as manageress. They were living in
a same hotel but they did not have any domestic establishment of their own. The wife purchased
some cloths from C on credit. C demanded the payment from A, husband of B. the court laid
down the principle that, ‘They must be living together in a domestic establishment of their own.
The mere fact of the marriage does not make the wife an agent in law of her husband" nor is the
fact of living together sufficient. There must be a domestic establishment of which the wife is the
in charge, if there is a domestic establishment of which a person is acting as the manager, the
presumption of agency will arise even if that person is not the wife this well known principle
was establish.’ Debenham v. Mellon (1880) AC 24

Husband not implied agent of wife.

A husband has no original, inherent or implied power to act as an agent for his wife. His
authority can arise from an appointment as agent, expressly or impliedly or by ratification
by his wife of his acts done by him on her behalf.

Rights of an agent (Duties of Principal)

a) Right to remuneration
The agent has the right to receive the agreed remuneration from his principal. If no remuneration
is fixed, agent is liable to receive reasonable remuneration. Remuneration becomes due when the
following conditions are fulfilled

i) When the act undertaken by the agent is completed

ii) When the transaction that has resulted, is the result of agent’s services and efforts

e.g., A was appointed as an agent by a newspaper agency for securing orders for advertisements.
It was agreed, that A would be paid the commission on the publication of the
advertisements. Advertisements were published on newspaper. Hence the agent is liable to
receive remuneration.

b) Right to lien
Right of lien is the right of a person to retain the possession of the property of another until the
charges due to the person in possession of the goods, is paid. The agent has the right to retain the
possession of the goods belonging to his principal for the payment of his commission or other
charges. Thus, agent has the right to retain goods or properties of principal until dues are paid.
The following conditions must be satisfied for the exercise of his right:

i) The agent must have the possession of the goods belonging to his principal
ii) The agent must have received such possession of the goods in his capacity as an agent
iii) The agent must be lawfully entitled to receive his dues from the principal
iv) There must not be any contrary agreement
e.g., A appointed B, as his agent for the purpose of buying some goods on his behalf. B
purchased those goods on behalf of principal, and the principal paid the purchase price. The
goods were however in the possession of B. Afterwards, A failed to pay the agreed amount of
B’s commission. In this case, B may retain the possession of goods until his dues for commission
are paid by A

c) Right to indemnity
Indemnity means to compensate other party who has suffered loss. The agent has the right to be
indemnified against all losses and expenses incurred by him in the course of agency business. It
must be noted that, agent can be indemnified agent against lawful acts only.

e.g., A appointed B, as his agent, for the purchase of 10 drums of oil for him. B entered into a
contract with C, oil dealer for the purchase of oil. Accordingly, C delivered the oil to A, but he
refused to take delivery of oil. In consequence C filed a suit against B for breach of contract. B
informed A about the suit. But A cancelled the contract. B defended the suit and was compelled
to pay damages and cost. In such case B is liable to claim damages and cost from A.
 d) Right to compensation
The agent has also the right to receive compensation for the losses suffered due to principal’s
negligence or want or skill. But if injury is caused due to the negligence of agent principal is not
liable to pay compensation for the injury.

e.g., A, a contractor, employed, B, a brick-layer, for the construction of a house. A put up the
scaffolding (temporary structure for making or repairing a building). But the scaffolding was
unskillfully put up which broke down and B was injured. In this case, A must make
compensation to B for the injuries sustained by him.

Duties of an Agent (Rights of Principal)

i) duty to act according to the directions of principal

The agent must act according to the directions and instructions of the principal. If no directions
are given, then the agent shall act according to custom of trade.

e.g, A instructed his agent B to store his (A’s) goods at a particular place. B stored part of the
goods at a different warehouse which was equally safe. These goods were destroyed by fire
without the negligence of B. in this case B was liable to A for the loss of the goods destroyed as
he did not act according to the instructions given by A. [Lilley v. Doubleday (1881)]

ii) duty to act with reasonable care and skill

Agent should carry on the business of agency with reasonable care and skill. The standard of
reasonable care required from the agent depends upon the nature of his business and
circumstances. If the principal suffers any loss due to agent’s neglect, want of skill or
misconduct, the agent must compensate his principal for such loss.

e.g., A was an agent of B. A had the authority to sell the goods of his principal on credit. A sold
the goods to C on credit without proper information related to C. At the time of sale C was
insolvent. In this case the agent is liable to compensate for the loss caused due to C’s
insolvency.

iii) duty to maintain accounts

It is the duty of agent to keep true and correct account of all his transactions and to explain the
same to the principal whenever he asks for the same.

iv) duty to communicate with principal and to obtain principal’s instructions

Sometimes an agent is involved in certain difficulties, in such situation agent should make
reasonable efforts to communicate with principal and obtain his instructions. However, in cases
of emergency where there is no time to communicate with the principal, the agent may act in
good faith without consulting the principal.

e.g., A, consigned certain goods to B, his agent at Calcutta, and directed him to send the goods
immediately to C at Cuttack. On receiving the goods, B found that the goods could not bear the
journey to Cuttack without spoiling. And, thus B sold the goods in Calcutta as he acted in good
faith and for the benefit of principal.

v) duty not to make secret profit from agency

The relationship between principal and agent is of mutual trust and understanding. Hence, agent
shall not make secret profit out of agency business. If agent makes any secret profit, without the
knowledge of principal, then the principal can claim from agent any such benefit which has
resulted to him from transaction.

e.g., A directed B to sell certain goods belonging to him. B sold the goods to C and received
secret commission from him as well in addition to commission given by A. Here, B is liable to
handover secret commission to A received from C.

vi) duty to pay sum received for principal

It is the duty of an agent to pay his principal all money’s received on his behalf. However, the
agent is entitled to deduct his lawful charges from the money received on account of his
principal.

e.g., A appointed B, as his agent for the purpose of collecting rents from the tenants of his estate.
B collected Rs 10,000/- as rents of the estate and incurred Rs 200/- as his travelling expenses. In
this case, it is B’s duty to pay the amounts of rent collected to A after deducting the travelling
expenses incurred by him and his remuneration.

vii) duty not to delegate authority

A principal always appoints an agent in whom he has full trust and confidence about his integrity
and competence. Thus, the agent must do personally, the work delegated to him by his
principal. And it is his duty not to further delegate the work which has been delegated to him
personally by the principal.

Personal liabilities of Agent

An agent being the representative of principal establishes a legal relationship of the principal
with third party. Hence, generally, the agent is not personally liable for any acts performed by
him for or on behalf of principal in the course of agency business. But under following
conditions agents can be made liable

 when he contracts with a third person in relation to any transactions accepting personal
liability
 when he has done any act for or on behalf of undisclosed principal and the principal
cannot be identified
 when the principal cannot be sued for any reason
 when he makes a contract on his own name
 when any cheat or fraud has been committed in the course of transaction
  when the nature of work requires the agent must be personally liable
 when the interest of agent is also involved in the transaction
Sub agent and substituted agent

Sub agent is a person who is employed by the original agent and who acts under the control of
the original agent in the business of agency.

a) in case of proper agent

 principal is bound
 original agent is responsible for the acts of sub agent
 the subagent is responsible for his acts to original agent but not to principal, except in
cases of fraud
b) not properly appointed
 principal is not bound
 original agent is responsible for the acts of sub agent both to principal and third party
 subagent is responsible for his acts to the original agent but not to principal
Substituted agent

Substituted agent is a person who is named by agent holding an express or implied authority to
name another person, to act for the principal. Such person is the agent of the principal. For e.g.,
A directs B, his lawyer, to sell his estate by auction, and to employ an auctioneer for this
purpose, B names C to conduct sale. C is not sub agent but A’s substituted agent for the conduct
of sale.

(No provision in NCA)

S.N. Sub- Substituted Agent

Agent
1 A sub agent is appointed by the agent, A substituted agent is also appointed
and also works under his control, i.e. by the agent, but he works under the
a sub agent is the agent of the original control of the principal i.e. the
 agent substituted agent is the agent of the
principal

2 Sub agent is responsible to the A substituted agent is responsible to

original agent alone, and not to the the principal alone and not to the
principal except for fraud original agent

3 The original agent is responsible to The original agent is not responsible

the principal for the acts of sub agent for the acts of substituted agent if he
has taken reasonable care in
appointing him

4 There is no direct contract between the There is a direct contract between the
sub agent and the principal. Sub agent sub agent and the principal.
cannot directly sue principal nor Substituted agent can directly sue
principal can directly claim damages principal and principal can directly
from sub agent claim damages from sub agent

Termination of Agency

End of relationship between principal and agent

A) By act of parties
i) by mutual agreement
Agency can be terminated by mutual agreement between the principal and agent.

ii) by revocation of authority by principal

Principal can revoke the authority any time before agent exercises his power. Revocation of
agent’s authority by his principal is subject to following condition
 a) where the agent has partly exercised his authority, the principal may revoke the agency
for further acts only.
b) Where the agency is created for a fixed period, the principal may revoke the agency
before the expiry of fixed period.
c) If the agency is of continuous nature, then the principal must give to a agent, a
reasonable notice of revocation of the agency.
iii) by renunciation of agency by agent
The agent may renounce the business of agency in the same manner as principal because a
person cannot be compelled to work against his will.

B) by operation of law
a) on completion of business of agency
The agency relationship is terminated on the completion of agency business. Thus, where an
agency is for single transaction, the agency comes to an end on the completion of the transaction.

b) on death or unsound mind

The agency relationship is automatically terminated, when either the principal or his agent dies
or becomes insane (unsound mind).

c) on insolvency of principal
The agency is terminated when the principal is declared insolvent.

d) on expiry of fixed period

Sometimes the agency is created for a fixed time. In such cases, the agency terminates on
expiry of time irrespective of whether the purpose has been fulfilled or not.

e) on destruction of subject matter

The agency is also terminated when the subject matter of the contract of agency is terminated.

f) On dissolution of company
If agent is appointed by a company, the agent gets terminated on dissolution of a company.
g) On principal or agent becoming an alien enemy
In this situation also agency comes to an end.

h) Termination of sub agent’s authority

In case of termination of agent, sub agent appointed by him also gets terminated.

Nepalese context,

The history of business law in Nepal is not so long. But to manage the business agency it is
necessary to develop the law relating to agency. The law relating to Agency Act 2014 has
mentioned about the definition, registration, recognition, renewal and transfer, punishment,
consequence of breach of law etc. After that the Nepalese contract Act 2056 tried to fulfill the
lacks of the Agency Act, in NCA there is some provision, regarding agency i.e. agency contract,
right and duties, principal, personal liabilities appointment and termination of agency etc.

Registration

The law relating to agency provide that no one can acts as agent without registering his name
with the department of commerce, Nepal Govt.(NG) otherwise s\he will penalized with fine up to
NRS 1000 (sec-3).

Procedure for registration:

Those who wants to acts as an agent should apply the authority with the particularized matter
sec4 (1) the authority should registered his name as an agent after fulfilling some procedure
like s\he has to pay Rs 25 for application and RS 100 for the registration charge, security and
with some bonds sec 4 (2).

If the NG department of commerce rejects the application at that time the charge of registration
should be refunded by NG and application charge should not refunded. (Agency Regulation
2019. (4)}

Renewal:
Registration is valid for only 1 year. The registration of agency is valid until last of the chaitra. If
they want to continue the business has to renew by attaching NR 20 (renew charge). (Agency
reg. 5)

To submit the statement of account:

Each registered agency has to submit statement of account to the authority (NG, dept. of
commerce) every three month. The statement has to mention the particular relating to the goods
sold, stocks received and their prices (sec-5, reg, -6)

Transfer of agency:

An agent can transfer his business to other people but he has to take consent of his principal.
Both can give their written statement those who want to buy agency. The agency regulations
made provision regarding transfer of agency in (rules-7) before transfer of agency he has to
submit application with attached RS 25, in HMG, department of commerce.

Penalties:

There are some penalties for those who breach the provision of Act.

1. If any agency breaches the provision of registration of an agency. in a government office

he has to pay RS 1000 for penalty. And government prohibits that business agency to run
for 2 yrs. This is very nominal penalty we have to change this punishment.
2. If an agency breaches the provision of bond in accordance with sec-4 (2), the party will
have to pay NR 500/ for penalty and the government can prohibit from business for 5 yrs.
3. If an agency breaches any other provision they will pay NR 200/ for penalty or prohibits
running business agency for 2 yrs.

Contract of Sale of Goods

Meaning
Goods denote movable property except actionable claims and money. Actionable claims is that
type of claim, which can be enforced through court for eg. debt. Likewise money indicates the
coins and notes of practice not the rear one. Such actionable claims and money cannot be sold
and bought, so they are not considered as goods. "Goods" shall denote any of moveable property
other than current money, securities or actionable claim which may be bought and sold. Sale
means selling of thing of any kinds. Thus, Sale of goods denotes the sell of any goods.

Contract of sale of goods denotes the contract to transfer the goods in return of money. Contract
of sale of goods is a contract under which one party transfers or agrees to transfer his goods for a
price and the other pays or agrees to pay price for goods. Thus, a contract as to sale and purchase
of goods for price made between two persons is called a contract of sale of goods.

Thus, contract of sale of goods results from an offer made by one party and its acceptance by
other party. The person who sells the goods is called seller and who buys the goods is called
buyer.

Essential Elements of a contract of sale

1) Seller and buyer

The two parties are the primary requirement of the contract of sale of goods known as seller and
buyer. Seller is the person who sale or agrees to sale. Buyer is the person who buys or agrees to
buy. So who buy or agrees to buy goods in a fixed price is buyer and who sell or agrees to sale
in a fixed price is seller. In a contract both the seller and buyer cannot be a same person.
Generally it is assumed that they are different because no one will buy their own goods.

2) Goods
Goods are the major subject matter of the contract of sale of goods. As the contract on sale of
goods is done with a view to buy and sell so there is a need of movable goods. "Goods" shall
denote any of moveable property which is purchable.

3) Transfer of ownership
The sale of goods indicates the transfer of ownership from seller to buyer. Only transfer of
possession is not sufficient but there must be transfer of ownership. Section 48 of NCA, has
prescribed the modes of transferring the ownership of the goods.

4) Price
Price denotes money consideration. In the absence of price the goods cannot be sold or bought.
Price is always paid in terms of money. If it is in terms of goods, it is barter. But partial money
and partial goods is taken as consideration, and then it is assumed as contract of sale of goods. In
the context of Nepal, section 42 of NCA has prescribed the way of determination of price of
goods.

5) Expressed or implied
There is no specific format of contract of sale of goods. According to Indian law it can be written
or oral or behavior. In England the contract should be written if it is related with £10 or above
it. But in Nepal no clear procedure is mentioned. The acceptance can be written even if the
offer is oral and vice versa.
6) Terms of contract of sale
The terms of contract can be absolute or conditional. But both parties must accept the condition
of contract. Both parties must give consent on the transfer of goods, place, time method of the
payment of invoice etc. these terms can be divided into essential and non- essential. Essential
terms are known as condition and less essential terms as warranty. (Deal in different chapter)

7) Other essentials
Beside above essentialities, the general element of contract such as offer, acceptance, capacity of
parties, free consent, legal consideration, legal object etc are also required.

B. Contract of sale of goods

Sale: Sale literally means the act of buying and selling. Under it, the ownership instantly
transferred from seller to buyer. There is no need of delivery and payment.

Agreement to sale: Contract for future selling and purchasing is called agreement to sale. In
another words, if the seller agrees to hand over the goods later or in future, it also is called
agreement to sale. Agreement to sale is changed to sale when conditions are fulfilled or lapse
of time.

Comparison between sale and agreement to sell

Point of Sale Agreement to Sell

comparison

1. Nature of It is executed in present. It is absolute and It is executed in future. It

contract unconditional is not absolute and is
conditional. It is
executed only after the
fulfillment of condition
 or only after the expiry
of time limit.

2. Transfer of Ownership is transferred immediately. Ownership is transferred

ownership in future or after the
condition is fulfilled.

3. Risk Risk is transferred to buyer so s/he is responsible Though, the possession

transfer for any future damage to goods is transferred to buyer,
the risk falls on seller

4. Right of Buyer can file case against seller or even the Buyer can claim only for
buyer against third party if there is any fault in goods damage for default of
seller delivery or other
breaches

5. Right of Seller can claim for payment even if the goods in Seller can file case
seller against the possession of seller against buyer for the
buyer damage not for price if
buyer does not or cannot
pay

6. Right of Seller cannot resale even if buyer has not cleared Seller can resale because
resale the due the seller owns the goods
till it is actually sold

7. In case of Buyer can claim from official receiver Buyer cannot claim from
insolvency of official receiver. If the
seller payment is already done,
 s/he becomes a creditor

8. In case of If goods are not transferred to buyer and buyer is If goods are already
insolvency of declared insolvent, goods are transferred to transferred to buyer,
buyer official receiver and becomes a creditor s/he can claim for return.
If payment is due and
the ownership is not
transferred, seller is
entitled to keep it with
her/himself.

Goods
Good indicates all types of movable property. Section 40(1) of NCA mentions Goods shall
denote any of moveable property other than current money, securities or actionable claim which
may be bought and sold. Goods mean any kind of movable property such as gold coins,
debentures, shares, goodwill, etc which can be sold and bought.

Following points are notable to that effect

 Money generally refers to current coins or notes but not old and rare coins.
 Securities means nay shares, bonds, debentures or stocks issued by a company, and the
term includes the receipt relating to deposits of securities and the rights and entitlement
relating thereto
 Actionable claim implies such a claim which can be enforced in the court of law.
Types of goods

A) Existing goods: these are the goods which are in actual existence at the time of contract
of sale. And the seller is either the owner of the goods or he has the possession of such
goods. Existing goods are further divided as
 i) Specific goods: these are the goods which have been actually identified and agreed by
the parties at the time of contract of sale. For e.g., A had five cars of different model.
He agreed to sell his Fiat car to B and B agreed to purchase the same car. In this case,
the sale is of specific goods
ii) Ascertained goods: goods identified and recognized after the formation of the
contract of sale is ascertained goods. For e.g, bike of different model displayed in a
showroom, once you identify which to buy it is ascertained goods
iii) Unascertained goods: the goods which cannot be specifically identified but indicated
by description at the time of contract of sale. The goods existing by being mixed up
with other goods of the similar nature is unascertained goods unless it is set aside
from the group. E.g., bike of different model displayed in a showroom is
unascertained goods

B) Future Goods: these are the goods which are not in existence at the time of contract of
sale. The seller acquires such goods after the making of contract of sale. Thus, the future
goods are those which are to be acquired or produced by the seller after the contract of
sale is executed. For e.g, A a manufacturer of furniture contracted to sell B 100 table
and chairs at the rate of 2500 each. B agreed to purchase the same. However the table and
chair were yet to be manufactured by A.
Note: future goods should not be confused with unascertained goods. Future goods are
neither in existence nor in possession of the seller at the time of contract of sale, whereas
unascertained goods are in existence or in possession of the seller at the time of contract of
sale.

C) Contingent goods: these are the goods which are also not in existence at the time of
contract of sale. The contingent goods are type of future goods which depends on the
contingent event i.e. happening or non happening of future uncertain event.
For e.g, A agreed to sell B certain goods which are to be arrived by a ship. In this case, the
contract is for the sale of contingent goods as the availability of the goods depends upon the
arrival of the ship.

Note: the distinction between future and contingent goods is that future goods are the
goods to be received in future whereas contingent goods are the goods to be received in
future upon specific contingency i.e. happening or non happening of some events.

Conditions and warranty

I. Condition:

The term condition may be defined as a representation made by the seller which is so important
that its non fulfillment defeats the very purpose of the buyer. As a matter of fact, condition is a
stipulation which forms the basis of a contract of sale i.e., which is essential to the main purpose
of the contract. Condition includes the quality of goods, price, date of delivery etc. The
conditions should be fulfilled before the performance of contract otherwise it may terminate. The
major and essential terms of the contract of sale are called condition. The Nepalese contract act
has not defined the conditions. Section 12(2) of Indian Sale of Goods Act
1872 defines condition as 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.

Thus, a condition is an important representation by the seller which is essential to the main
purpose of the contract. And, if it proves to be false, the buyer has the right to terminate the
contract, and to have refund of the price.

For e.g., A consulted B, a car dealer, and told him that he wanted to purchase a car ‘suitable for
touring purpose’. B, suggested that a ‘Bugatti’ car would be fit for the purpose. Relying upon
this statement, A bought a ‘Bugatti car’. Later on, the car turned out to be fit for the purpose. A
wanted to reject the car and demanded refund of price. It was held that A was entitled to reject
the car and to have the refund of price. In this case, the suitability of the car, for touring purpose,
was a condition of the contract. It was so important that its non-fulfillment defeated the very
purpose for which A bought the car. [Baldry v. Marshall (1925)]

Types of Condition

1. Express Condition: it is a condition, which has been expressly agreed upon by both the
parties at the time of contract of sale. For e.g., a buyer desires to buy a Panasonic radio model
no 2004. Here model number is an express condition
2. Implied condition: it is a condition, which the law implies into the contract of sale. In
other words, it is the stipulation which has not been included in the contract of sale in express
words but law presumes that the parties have incorporated it into their contract. The
implied conditions are stated below:

a. Conditions as to title: it is presumed that the seller has a valid title to the goods, i.e. he has
the rights to sell the goods. If later on, the buyer comes to know that the seller had no valid
right to
sell the goods, then he may reject the goods and claim the refund of the price. As a matter of fact,
in every contract of sale there is an implied condition that the seller has a valid title to the goods.

A bought a second hand car from B, a car dealer. After a few months, the car was taken by the
police as it was stolen one. And A was forced to return the car to the true owner. It was held that
A could recover the full price from B. in this case, there was a breach of condition as to title as B
had no right to sell.

b. Conditions as to description: sometimes the goods are sold by description. In such cases,
the implied condition is that the goods shall correspond with the description. The term
correspondence with description means the goods purchased by the buyer must be same as
described by the seller.

A purchased a car from B which he had never seen. B described the car as a brand new car.
However on delivery A found that the car was used and repaired. A returned he car to b and
claimed for refund of money. Here B is entitled to refund A as the car did not match the
description.

c. Conditions as to sample as well as description: Where there is a contract of sale of goods by

description, there is an implied condition that the goods must be as per the sample showed at the
time of creation of the contract. For e.g., A contracted to sell to B the timbers of 15 mm
thickness but when B received the timber, it was discovered that the thickness varied from 15
mm to 20 mm. here the buyer B has right to reject the goods as they did not correspond with the
description given in the contract.

d. Conditions as to merchantability quality: merchantability quality means commercially

saleable, i.e., the quality and conditions of the goods bought must be such that a reasonable man
after a full inspection would accept them as the goods of that description. Goods sold or to be
sold shall be deemed to be of merchantable quality. If any goods are found to be some defect
then that is not a merchantable quality. The goods are of merchantable quality in following
cases
i) if the goods are purchased for resale, then they should be immediately resalable in the
market under their description. For e.g., cement turned to stone by water is not merchantable

ii) if the goods are purchased for self use, then should be reasonably fit for the purpose for
which they are generally used. For e.g., a watch that will not keep proper time, pen that does not
write etc

A, a shopkeeper sold a radio to B, who purchased it in good faith. The radio had some
manufacturing defects and it did not properly work after some days even after repairing. In this
case the radio was not merchantable and not fit for the ordinary purpose. Thus, the buyer has the
right to reject the goods and get refund of the price.

e. Conditions as to fitness or quality: Generally, the buyer must be aware of the fitness or quality
of the selling goods. However, when the seller tells the buyer about the fitness and quality of the
goods for the particular purpose, there is the implied condition that the goods shall be reasonably
fit and qualitative for the purpose. However, this implied condition will be there only if the
following requirements are satisfied

i) the buyer requires the goods for a particular purpose

ii) the buyer should make known to the seller about that particular purpose

iii) the buyer should rely on seller’s skill and judgment

iv) the seller’s business is to supply such goods whether he is the manufacturer or producer
or not

A, a customer had no knowledge about hot water bottles. He went to B, a chemist and demanded
a hot water bottle from him. B gave a bottle to him and stated that it was meant for hot water.
After a few days, while using the bottle it burst and injured A’s wife. It was found that the bottle
was not fit for use as hot water bottle and seller was held liable for the damages.
f. Conditions as to wholesomeness: condition as to wholesomeness means the article sold should
be fit for human consumption. In case of eatables or food stuffs in addition to the condition of
merchantability, there is another implied condition that the goods shall be wholesomeness. For
e.g., A purchases a milk from B, a diary owner. The milk contains germ of typhoid fever. A’s
wife on consuming the milk gets infection an dies. Here, A is entitled to get damages because the
milk is not fit for consumption. [Frost v.Aylasbary Diary Co. ltd(1905)]

Warranty:

The term warranty may be defined as a representation made by the seller which is not of that
importance as a condition. It supports major conditions and its non fulfillment does not defeat the
very purpose of the buyer. In fact, warranty is a stipulation collateral to the main purpose of the
contract the breach of which gives rise to a right to claim for damages but not a right to reject the
goods and treat the contract as repudiated. Thus, a warranty is a representation, by the seller,
which is not very important factor in sale of goods. It is only collateral to the main purpose of the
contract. And if it proves to be untrue, the buyer cannot put an end to the contract. He can only
claim damages from the seller. NCA has not defined warranty.

For e.g., A, a customer, went to B, a horse dealer, and told him that he wanted to buy a healthy
horse. B pointed at a particular horse and said it to be healthy. Moreover, B informed A that the
particular horse can also run at a speed of 40 k.m. per hour. A bought that particular horse and
subsequently found that the horse to be healthy but it could run only at the speed of 20 k.m. per
hour. A wanted to reject the horse and to have the refund of price. In this case, the representation
made by the seller is a warranty because it is only collateral to main purpose. Thus A cannot
reject the horse.

Kinds of warranties
The warranties of a contract may be either expressed or implied:

1. Express warranty: The warranty, which is expressed by the use of any word as the time
of making the contract, is an expressed warranty.
2. Implied warranty: Implied warranties are those that have not been expressly agreed upon by
the parties but are implied in a contract by the operation of law. They are as follow:

a. Warranty of quiet possession of buyer: according to this warranty, it is presumed that the
buyer shall have and enjoy the quite possession over the goods which mean buyer has the right
to enjoy it as per his wish. There should not be any disturbances in the contract of sale by the
seller.

A purchased a second hand typewriter from B. A used it for some time and also spent some
money on its repair. The typewriter turned out to be stolen one and such A had to return it to true
owner. It is held that A could recover damages from B amounting to the price and money spent
on repair.

b. Warranty of freedom from any encumbrances or charges: The goods should be free from any
charge or encumbrances in favor of any third party. If it is found, the buyer is entitled to the
damage as a breach of warranty.

For e.g., A, obtained a loan of Rs 200 from B and hypothecated his cycle with B as security for
the repayment of loan. Subsequently A sold the cycle to C, an innocent buyer, who had no
knowledge about B’s charge on the cycle. In this case, if C’s possession is disturbed by B who is
having charge on the cycle, then he (C) can claim damages from A for any loss which he may
suffer due to such charge.

c. Warranty by usage of trade: if the sold goods are of defective nature, the duty of the seller is
to make the buyer aware of it e.g. the food must be hygienic, if some defect is found the sold
goods must be returned.

d. Disclosure of dangerous nature of goods: if the goods are of dangerous nature and the seller
knows that buyer is ignorant about them, the seller must warn the buyer about the probable
danger. In case of breach of this warranty, the buyer is entitled to claim damages from the
seller.
A buys a tin of disinfectant powder from B. B knows that the tin was to be opened with special
care; otherwise it might be proved dangerous. He also knows that C is ignorant about it, but does
not warn A. A opens the tin and his eyes are injured by the powder. B is liable to damage as he
should have warned A of the probable danger. [Clarke v. Army & Navy Cooperative Society ltd
(1903)]

Comparison between condition and warranty

Points of Condition Warranty

difference

1. Essential This is the main element and done It is minor element. It is not
v. Collateral to fulfill the objectives. Without its binding.
fulfillment, the contract cannot be
followed.

2. Right of If violated, the aggrieved party can If violated, the aggrieved party
aggrieved party claim for return of goods or can claim for damages but
damages or terminate the contract cannot terminate the contract

3. Performance If violated, the aggrieved party is If violated, the aggrieved party

not obliged to perform has to perform

4. Transfer of If the condition is not fulfilled, the Even if the warranty is not
ownership ownership is not transferred fulfilled, ownership
is transferred

5. Status Violation of condition is considered Violation of warranty cannot be

the violation of warranty. The considered as violation of
buyer can freeze goods and claim condition.
for damages

6. Liability Party has more liability Party has less liability

Meaning and exception to the Doctrine of Caveat Emptor

The expression Caveat Emptor is a Latin term which means let the buyer beware, i.e., a buyer
purchases the goods at his own risk. In other words, it is not the seller’s duty to give to the buyer
the goods which are suitable for a particular purpose of the buyer. The buyer must take care of
his own purpose while purchasing the goods, i.e., it is his duty to purchase the goods of his
requirement. As such, the buyer must take care while purchasing the goods. And if the
buyer makes a wrong choice of the goods, he cannot blame the seller if the goods turn out to
be defective or do not serve his purpose. The seller is not supposed to know the particular
purpose for which the buyer is purchasing the goods. If the buyer discloses the seller that the
goods to be bought are for a particular purpose, the seller must sell the goods suitable for that
purpose. Therefore, the buyer must disclose the seller the purpose for which the goods are to be
bought; otherwise he cannot reject the goods by charging the seller. Thus, when goods are
displayed for sale, it is not seller’s duty to point out the defects in goods but it is the buyer’s duty
to inspect the goods by himself before purchasing them. If the buyer makes a bad choice, he can
neither oppose the seller nor claim any compensation from him.

For For e.g., A sold certain pigs to B by auction. The pigs were sold ‘with all faults and errors of
description’ (i.e. no warranty was given by seller in respect of any fault or error of description).
B paid the price for the pigs. The pigs were ill, and all, except one died of typhoid fever. They
also infected some of buyer’s own ships. It was held that there was no implied condition or
warranty that the pigs were of good health. Thus, B could not recover damages from A. In this
case, it was buyer’s duty to see whether the pigs were healthy or not. [Ward v. Hobbs (1878)]

Exceptions to doctrine of caveat emptor

As a matter of fact, the doctrine of caveat emptor was originated during the time when almost all
the sales took place in open market. And the buyer as well as seller used to come face to face,
and the buyer had the opportunity to examine the goods or their fitness for a particular purpose.
But as the trade expanded it became impossible for buyer to examine the goods due to the
complex structure of modern goods. Moreover some of the transactions are conducted through
correspondence. Thus, it is only the seller who can assure the quality of goods and
their fitness for buyer’s purpose. Because of these reasons, it became necessary to restrict the
application of doctrine of caveat emptor by providing certain exceptions to it. The exceptions are
as follows:

a) Condition as to quality or fitness for buyer’s purpose: if the buyer makes his purpose clear
to the seller and buys the goods relying upon his skill and judgment, then there is an implied
condition that the goods shall be fit for the buyer’s purpose. And in such case the doctrine of
caveat emptor does not apply.
b) In case of misrepresentation by seller: if the seller makes any misrepresentation and buyer
relies on it, then the doctrine does not apply.
c) In case of concealment of defect: if the seller knowingly conceals any defect which cannot be
discovered on a reasonable inspection, the doctrine does not apply.
d) In case of sale by sample as well as description: if the seller sells the goods by sample and
description but the goods supplied by him does not match the description and sample the
doctrine does not apply. For e.g., 250 ml of nestle milk in a tin but later supplied 200 ml of
other brand milk in tin.
e) Condition as to merchantability: sometimes, the goods are sold by description. In such cases,
there is an implied condition that the goods shall be of merchantable quality. Thus, in case of
sale by description the seller is bound to deliver the goods of merchantable quality. Here also
doctrine does not apply.
f) Condition as to trade usage: the implied condition as to quality of fitness for a particular
purpose may be attached by custom or usage of trade. This is so because the parties enter into an
agreement with reference to those known usages.
A sold certain drugs by auction to B. in case of sale by auction, it was a trade usage to declare
any ‘sea damage’ in the goods. In this case, the goods were sold without such declaration.
Subsequently the goods were found to be sea damaged. It was held that the goods sold without
such declaration meant that the goods were free from any sea damage. And thus, B could reject
the drugs and claim the refund of price. [Jones v. Bowden (1813)]
Transfer of ownership (sec 48 of NCA)

The main purpose of sale is the transfer of ownership from seller to buyer. It is also known as
passing of property in goods. The ownership gets transferred or passed from the seller to buyer as
soon as the seller sells his goods to the buyer. According to section 48(5) of the NCA, unless
otherwise provided for in the contract, the title of ownership of goods is deemed to be transferred
from the seller to the buyer at the very moment when they are delivered to him. In this way,
determination of exact or precise moment of time at which the property in goods passes from
seller to buyer personally becomes important, because

a) The general rule is that risk follows the owner, whether delivery has been made or not.
Thus a risk to loss as a rule lies on owner.
b) When there is a danger of the goods being damaged by the action of third parties, it is the
owner who can take action,
c) The seller becomes entitled to recover the price of the goods from the owner only after
the ownership of the goods has been transferred to buyer, and
d) In case of insolvency of either seller or buyer, it is necessary to know whether the goods
can be taken over by the official receiver. The answer will depend upon the property in
the goods was with the party who has become insolvent.

Passing of property

Passing of property implies transfer of ownership and not the physical possession of goods. In
order to know the time at which the ownership is transferred from seller to buyer, the goods have
been classified into 3 categories

a) specified or ascertained goods: -goods identified and agreed upon at the time when
contract of sale is made
b) unascertained goods:- goods which has not been identified and agreed upon at the time
when contract of sale is made
 c) goods sent on approval or on sale or return basis:- those goods on respect of which the
buyer has option either to return or retain

Rules for transfer of ownership

1. Rules regarding transfer of ownership of specified or ascertained goods

While entering into the contract for sale, the goods identified and agreed upon are called specific
or ascertained goods. In connection with specific goods, the following rules are applicable to
passing of property:

a) The ownership is transferred at the time of making the contract:

The general rule, in case of specific goods, is that the ownership of the goods is transferred
from seller to buyer at the time of making contract. The ownership of the goods is transferred
at the time of contract only when the following conditions are fulfilled:

i) The sale must be of specific goods

ii) The goods must be in deliverable state: the goods are in deliverable state when they are
acceptable to the buyer and he can take delivery immediately, e.g., if the seller has to paint
the car to make it acceptable to the buyer, it is not in a deliverable state until it is painted

iii) The contract of sale must be unconditional: the contract should not have any conditions
in regard to transfer of ownership.

Note: in case of sale on installments, the intention of the parties is that the ownership
should not be transferred until the last installment is paid. In such cases, the ownership is
not transferred at the time of contract because the contract is conditional

b) The ownership may also be transferred at some other time:

If any of the above conditions is not satisfied then the ownership will not be transferred at the
time of contract of sale, e.g., when the goods are not in deliverable state or the seller has to do
something in relation to the goods etc. in such cases following rules shall apply:

i) Where the goods are to be put in a deliverable state by the seller

Sometimes, the goods are not in deliverable state at the time of contract, and the seller has to do
some act to put them in a deliverable state. In such cases, the ownership is transferred as soon as
the seller has put the goods in a deliverable state and the buyer comes to know about it. The
ownership is transferred to buyer on the fulfillment of following conditions

 When the seller has done his act of putting the goods into deliverable state, and
 When the buyer came to know that the goods have been put into a deliverable state

ii) Where the goods are to be weighed or measured by the seller to ascertain the price

Sometimes, the seller has to do some act e.g., to weigh or to measure the goods for the purpose
of ascertaining price. In such case, the ownership is transferred to the buyer as soon as the seller
has done such act and the buyer comes to know about the act. Thus, the ownership is
transferred to buyer on the fulfillment of following conditions:

 When the seller has done his act of ascertaining the price of the gods, and
 When the buyer came to know that the price has been ascertained by the seller’s act
A sold some quantity of wheat to B at the rate of Rs 10 per k.g. however, A had to weigh the
wheat in order to know the price of entire quantity of wheat sold to B. in such case ownership
is transferred to B as soon as A weighs the wheat and B comes to know about it.

2. Transfer of ownership in case of sale of unascertained goods

In case of, sale of unascertained goods, the ownership of goods is transferred as soon as the
goods are identified and are set apart for the purpose of delivering to the buyer. In case of
unascertained goods, the ownership is transferred on the fulfillment of following conditions:

i) Ascertainment of goods: the term ascertainment may be defined as the process by which
the goods to be delivered under the contract are identified and set apart. It is the unilateral act of
the seller alone to identify and set apart the goods. It may be noted that the ownership is not
transferred merely by the ascertainment of the goods. After ascertaining the goods, these must
be appropriated to the contract.

ii) Appropriation of the goods to the contract: the term appropriation may be defined as the
process by which the goods to be delivered under the contract are identified and set apart with
the mutual consent of the seller as well as the buyer. The seller may appropriate the goods in
one of the following ways

 By separating the contracted goods from the other with the consent of the buyer
 By putting the contracted quantity in suitable receptacles (boxes, bags etc) with the
consent of the buyer
 By delivering the contracted goods to the carrier or other bailee for the purpose of
transmission to the buyer
A sold to B 20 bags of sugar out of large quantity. Four bags of sugar were filled and taken away
by B. later on, A filled 16 more bags and informed B. B promised to take the delivery of those 16
filled bags also. B promised to take delivery of those 16 filled bags also. Before B could take the
delivery, the goods were lost. It was held, that at the time of loss, the ownership had passed to
the buyer. Therefore, he should suffer loss. In this case the appropriation is unconditional and
mutual. The seller appropriated by putting the sugar into bags, and the buyer gave his consent by
promise to take the delivery. [Rhode v. Thwaites (1827)]
 3. Transfer of ownership in case of sale on approval
The term sale on approval may be defined as the sale in which the buyer may return the goods
within a reasonable time, if the goods do not serve his purpose. This is also known as sale on
return basis. In case of sale on approval, the ownership is transferred to the buyer when he
accepts the goods. It may be noted that the seller cannot ask for the return of the goods. He
can only recover the price of the goods if the goods are not returned within a reasonable time. In
case of sale on approval, the ownership is transferred to the buyer in any of the following
condition:

i) Acceptance of goods: the buyer may accept the goods and inform the seller accordingly.
When the buyer gives his acceptance (i.e. approval) to the seller, the ownership is transferred to
the buyer. For e.g., A, a shopkeeper delivered his watch to B on ‘sale on approval’ basis. Later
on B, informed A that he has accepted the watch. In this case, here is an express acceptance of
the watch, and the ownership is transferred to B on approval.

ii) Adoption of transaction: the buyer may adopt the transaction by doing some act in respect
of the goods. When the buyer does some act, which shows that he has adopted the goods, the
ownership is transferred to him on the act of adoption. For e.g., A delivered some jewellery to B
on sale on return basis. B pledged the jewellery to C. it is held that ownership of the jewellery
has transferred to B as he had adopted the transactions pledging the jewellery with C. in this
case, A has no right against C. He can only recover the price of the jewellery from B.
iii) Failure to return the goods: the ownership is also transferred to the buyer when he fails to
return the goods to the seller. It may be further dealt as

a) When the time is fixed for the return of the goods: if the buyer fails to return the goods
within specified time, the ownership gets transferred after the expiry of such time period
b) When no time is fixed for the return of goods: in such cases, if the buyer fails to return
the goods within a reasonable time, the ownership gets transferred.

Sale by non-owner

The general rule is expressed by latin maxim ‘Namo dat quod non habet’ which means that no
one can give what he doesnot himself possess. If the seller’s own title is defective, the buyer’s
title will also be defective. For e.g., X stole a TV and delivered it to Y, an auctioneer; Y sold the
TV to Z at auction. It was held that Z obtained no title over the goods.

Where the goods are sold by a person who is not the owner thereof and who does not sell them
under the authority or with the consent of the owner, the buyer acquires no better title to the
goods than that the seller had. Thus, where goods are sold by a non owner, the buyer does not get
a better title to the goods than that of the seller, i.e., the sale by the non owner doesnot make the
buyer an absolute owner of the goods.

For e.g., A stole a horse and delivered it to B, an auctioneer, for the purpose of selling it, B sold
the horse to C at a public auction. In such case C obtains no right on the horse as the seller had
no title to it.

However there are certain exceptions to this general rule. In these exceptional circumstances, the
buyer gets the valid title even if the seller is not the absolute owner of the goods. The exceptions
to this rule as follows
a) sale by mercantile agent: a mercantile agent is an agent who deals on buying and selling
of goods on behalf of principal. Where a mercantile agent sells good in the ordinary course of
business, the buyer gets the title over it even if he is not the true owner of the goods. However
the buyer will get the valid title over the goods only if the following conditions are fulfilled: on
behalf
 the mercantile agent must be in possession of the goods or of the documents of title to
good
 the mercantile agent must obtain the possession of the goods with the consent of the
owner
 the mercantile agent must sell goods in his capacity as agent
 the buyer must act in good faith
A delivered his car to B, a mercantile agent for sale. A instructed B that the car should be sold at
a particular price and not below that. But B sold the car to C below the stated price. However C
had bought the car in good faith. In this case C will get a valid title over the car and A cannot
recover it from C but he can claim money from B.

b) sale by one of the joint owner

the term joint owner may be defined as a person who ows goods jointly with some other persons.
When the joint owner is in sole possession of the goods, and he sells them to a person who buys
in good faith, the buyer gets a valid title over the goods.

c) sale by a person in possession under a voidable contract

the person in possession of goods under a voidable contract(goods obtained without free consent)
can make a valid sale even if the possession so obtained is not by free consent. And the buyer
from such a person gets a valid title if following conditions are satisfied
  the seller must have obtained the goods under the voidable contract and not under a
void contract
 the contract must not have been put to an end at the time of sale
 the buyer must be unknown about the wrongful possession i.e., must act in good faith
A purchased a refrigerator from C by fraud. Here A is holding the possession under a voidable
contract. Before, the contract is put to an end, A sold the refrigerator to C who bought it in good
faith without knowing A’s defective title. In this case C gets a valid title over the goods even if A
was holding it under voidable contract.

d) sale by a seller in possession after sale

sometimes with the consent of the seller, the buyer gets the possession of the goods which he has
bought or promised to buy from the seller. But the seller still has some lien or other rights over
the goods, and the buyer resale the same goods to a third person. In such cases, the second buyer
gets a valid title over the goods free from seller’s right if he has bought it with good faith.

A agreed to buy some furniture from B. the payment of the price was to be made in two
installments. The furniture was delivered to A but the ownership was to be transferred after the
last installment only. A sold the furniture to C who bought it in good faith. In this case C has a
valid title over the goods.

e) sale by finder of goods

the finder may sell the goods only if the true owner could not be identified and the goods are of
dangerous or perishable nature.
f) sale by a pawnee or pledge

if pawnor makes default in repayment of the amount of loan borrowed from the pawnee, the
pawnee may sell the goods by giving reasonable notice to the pawnor. And the buyer from such
a pawnor gets a valid title over the goods.

g) sale by owner by estoppels

Estoppel is a prevention of claim or assertion of law. In other words, when someone makes
another person to believe that a particular thing or act is true, then afterwards he cannot be
allowed to deny the truth of that thing of fact. If the buyer buys the goods in such belief, later on
the owner cannot say seller had no authority to sell. And the buyer who buys in good faith gets
the valid title.

A said to B, a buyer in the presence of C that he (A) is the owner of the horse, but C remained
silent though the horse belonged to him. B bought the horse from A. here, the buyer B will get a
valid title over the horse though A had no title to the horse. In this case C by his own conduct is
stopped from denying A’s authority to sell the horse.

Performance of Contract of Sale of Goods The term 'performance' is the fulfillment of the
promise. The performance of the contract of sale of goods means the performance of the
respective duties of the seller and the buyer as per the terms and conditions of contract. Thus, the
performance of the contract of sale implies delivery of goods by the seller and acceptance of
the delivery of goods and payment for them by the buyer in accordance with the contract. The
parties are free to provide any terms in their contract about the time, place and manner of
delivery of goods, or acceptance of goods and as well as time and mode of payment of the
price. Delivery of goods from by the seller and payment of price for them by the buyer is the
performance of contract of the sale of goods. There are reciprocal promises in the contract of sale
of goods.

There are three main processes of the performance of a contract of sale of goods.

a. Transfer or delivery of goods.

b. Acceptance of the goods by the buyer.

c. To pay a price for the goods.

Unpaid seller

The term unpaid seller may be defined as the seller to whom the full price of the goods sold has
not been paid.The seller of goods is deemed to be an unpaid seller

- when the whole of the price has not been paid or

- when a conditional payment was made by a bill of exchange or other negotiable
instruments and the same has been dishonored, i.e., the buyer failed to pay the amount on
maturity of the instrument
Note: if goods are sold on credit the seller cannot be said unpaid seller during the credit period.
Where the full price has been paid by buyer and seller has refused to accept it he cannot be
said unpaid seller.

Rights of an unpaid seller

A) Against goods
a) Right of lien: lien is the right to retain possession of goods until the payment of price.
Seller can use right of lien on the following conditions
- goods have been sold without mentioning any credit
 - goods have been sold on credit and the credit period has expired
- when the buyer becomes insolvent
A sold some specific goods to B for Rs 500. The price was to be paid within fifteen days of sale.
B, the buyer, became insolvent before the expiry of this credit period of 15 days. In this case, A
may retain the possession of the goods until the price is paid by A.

b) Right of stoppage of goods in transit: means the right of stopping the goods while they
are in transit to regain them and to retain them till the full price is paid. Unpaid seller
can exercise right if following conditions are fulfilled
- the goods must not be in possession of seller
- the goods must be in course of transit
- the buyer must have become insolvent
Goods are deemed to be in course of transit from time when they are delivered to a carrier for the
purpose of transmission to buyer until buyer or his agent takes delivery of goods.

c) Right of resale: unpaid seller can resale the goods under following conditions
- where the goods are of perishable nature
- where the seller expressly reserves a right of resale if the buyer commits a default in
payment
- where the unpaid seller gives a notice to the buyer about his intention to sell and buyer
does not pay within a reasonable time
B) Against buyer personally
a) Suit for damages: where the buyer wrongfully neglects or refuses to accept the goods and
pay for the goods the seller may sue him for damages.
b) Suit for price: when the property in goods has passed to the buyer and he wrongfully
neglects or refuses to pay for the goods, the seller may sue him for the price of goods and
can even claim interest from the date on which the price was payable.
 Breach of Contract

Breach means to break. Simply, the term breach is refusal of doing something or violation
thereof. A breach of contract means non-fulfillment of obligation, which a contract imposes. A
breach of contract occurs if any party refuses or fails to perform his part of the contract or by his
act makes it impossible to perform his obligation under the contract. In case of breach, the
aggrieved party is relieved from performing his obligation and gets a right to proceed against the
party at fault.

Section 82(1) of NCA 2056, mentions, ‘if a party to a contract fails to fulfill his contractual
obligation under the contract, or gives information to the other party that he will not perform the
work as mentioned in the contract, or if his actions and conduct show that he is incapable of
performing the work as mentioned in the contract, he is deemed to have broken the contract.’

Accordingly, a breach of contract includes the following elements:

 If the party fails to fulfill obligations under the contract

 If the party gives information to the other party that he will not perform the work as
mentioned in the contract
 If by action and conduct the party seems to be incapable of performing the work as
mentioned in the contract

Types of Breach of Contract

a) Actual Breach of Contract: when one of the party to a contract does not perform his
obligation under the contract when due, it is called an actual breach.

It takes place in any of the following ways:

i) On due date of performance: if any party to contract refuses or fails to perform his part of
the contract at the fixed period of time. E.g., X agreed to sell 100 tons of wheat @ Rs
8000 per ton on 20th Oct to Y. On 20th Oct X refused to sell. This is an actual breach on
due date of performance.
ii) During the course of performance: if any party has performed a part of the contract and
then refuses or fails to perform the remaining part of the contract. E.g., X agreed to sell
100 tons of wheat @ Rs 8000 per ton on 20 th and 21st Oct to Y. On 20th Oct X delivered
50 tons and refused to deliver the remaining 50 tons. This is an actual breach during the
course of performance.

b) Anticipatory breach of contract: it occurs when the party declares his intention of not
performing the contract before the performance is due. E.g., X agreed to sell and deliver
100 tons of wheat @ Rs 8000 per ton on 20 th Oct to Y. On 1st Oct X refused to sell and
deliver. This is an anticipatory breach of contract.

Remedies for Breach of Contract

The term remedy can be understood as a legal treatment provided by the court of law or other
formal agency formed under law to the injured party as per his demand. Basically, a question of
remedy arises if one of the parties to the contract breaks it by rejecting the fulfillment of
contractual obligations. Thus, a remedy is the course of action available to an aggrieved party for
the enforcement of a right under a contract.
The various remedies available to the aggrieved party are as follows

a) Rescission:
Rescission may be defined as the cancellation of the contract. Rescission means a right not to
perform obligation. In such a case, the aggrieved party is discharged from all the obligations
under the contract. E.g., X agrees to supply 10 tons of wheat to Y on 2 nd January. Y promises to
pay on the receipt of the goods. X does not supply the goods on due date. Here, Y is discharged
from the liability of paying the price. Y can also claim compensation for the damage which he
sustained due to non-supply of goods on the due date.

However, the court may refuse to rescind the contract in any of the following conditions:

 Where the party entitled to rescission has expressly or impliedly ratified the contract
 Where there has been a change of circumstances after making of the contract and due to
change, the parties cannot be substantially restored to the position in which they would
when the contract was made
 Where during the subsistence of the contract, the third party has acquired the right with
the good faith without notice and for some value
 Where only a part of the contract is sought to be rescinded and such part is not separable
from the rest of the contract
Eg
.

A sold certain goods to B for Rs 2000. On receiving the goods, B used some part of goods and
also sold some of them to C. subsequently B filed a suit against A for the rescission on the
ground that the goods were not of contract quality, and sought to recover the price. It was held
that by using and reselling the goods, B had adopted the contract, and was not entitled to rescind
the contract and recover the price. [Harnor v Grovers, 24 LJCP ]
A fraudulent man, went to the shop of B, a jeweler. A purchased a diamond ring and gave a fake
cheque for the price. Before the discovery of this fraud, A further sold the ring to C, who
purchased it with the value and without any notice of the fraud. In this case the contract cannot
be rescinded as C has acquired right in good faith.

b) Suit for specific performance

Specific performance means actual carrying out of work by the parties of their contract, and in
proper case, the court will insist the parties carrying out their obligation. E.g., P agreed to sell
an old painting to S for Rs 10000. Subsequently, P refused to sell, here, S may file a suit for the
specific performance of the contract.

It may be noted that the party who brings an action for specific performance of the contract must
prove the following:

 That a valid and enforceable contract was concluded between himself and the other party
 That he was ready and willing, at all material dates, to perform his part
Cases where suit for specific performance is not maintainable

 Where the damages are considered as an adequate remedy

 Where the contract is of personal nature
 Where the court cannot supervise the performance of the contract
 Where one of the party is minor
e.g., A contracted to sell 10 pieces of ceiling fans to B. but on the due date of performance A
refused to sell the fans. In this case B cannot obtain specific performance of the contract as he
can easily buy the ceiling fans from other dealer as well.

c) Suit for injunction

Suit for injunction means demanding court’s stay order. Injunction means an order of the court
which prohibits a person to do a particular act. Where a party to a contract does something which
he promised not to do, the court may issue an order prohibiting him from doing so.

e.g., W agreed to sing at L’s theatre only during the contract period. During the contract period,
W made contract with Z to sing at another theatre and refused to perform the contract with L. it
was held that W could be restrained by injunction from singing for Z. [Lumley v. Wagner (1852)
]

d) Suit for damages

Damages are monetary compensation allowed for loss suffered by the aggrieved party due to
breach of contract. The object of awarding damages is not to punish the party at fault but to make
good the financial loss suffered by the aggrieved party due to breach of contract. This is called
doctrine of restitution or compensation. E.g., A delivers to B, a common carrier, a machine to be
delivered without delay to A’s mill informing that his mill has stopped for want of the machine.
B unreasonably delays the delivery of machine, and A, in consequence, loses a profitable
contract with government. A is entitled to receive from B, by way of compensation, the average
amount of profit, which would have been made by the working of the mill during the time that
delivery of it was delayed, but not the loss sustained through the loss of the government contract.

e) Suit upon Quantum Meruit

Quantum meruit means as much as earned. Right to quantum meruit means a right to claim the
compensation for the work already done. Where there is a breach of contract, the injured
party, instead of suing for damages, may claim payment for what he has done under the contract.
Cases of quantum meruit fall under the category of quasi contracts.
The claim of quantum meruit arises:

i) when one party abandons or refuses to perform the contract

P was engaged by C to write a book to be published in installments in a weekly magazine. After
few numbers had appeared the magazine was abandoned. Here, P could recover on a quantum
meruit for the work he had done under the contract. [ Planche v. Colburn (1831)]

ii) when work has been done and accepted under a void contract
A company under a written contract employed C as managing director. The contract was not
binding, because the directors who made it were not authorized to enter into it. C rendered
services and sued for remuneration. Held, he could recover on a quantum meruit. [ Carven v.
Cannons ltd (1936)]

Company law

The word 'Company' is an amalgamation of the Latin word 'Com' meaning "with or together"
and ‘Pains’ meaning "bread". Originally, it referred to a group of persons who took their meals
together. A company is nothing but a group of persons who have come together or who have
contributed money for some common person and who have incorporated themselves into a
distinct legal entity in the form of a company for that purpose. Company is a business enterprise
in which people work together for the manufacturing, buying or selling goods or for providing a
service

According to Company Act 2063 “Company shall denote a company established under this Act.”
[Sec.2 (a)]
According to Indian Company Act 1956
“Company means a company formed and registered under the Companies Act.” [Sec.3 (I)]
According to Black’s Law dictionary: “Company is a union or association of persons for
carrying on a commercial or industrial enterprise; a partnership; corporation; association, Joint
Stock Company.”
Halsbury’s Laws of England, The term "company" has been defined as a collection of many
individuals united into one body under special domination, having perpetual succession under an
artificial form and vested by the policies of law with the capacity of acting in several respect as
an individual, particularly for taking and granting of property, for contracting obligation and for
suing and being sued, for enjoying privileges and immunities in common and exercising a
variety of political rights, more or less extensive, according to the design of its institution or the
powers upon it, either at the time of its creation or at any subsequent period of its existence.
In the case of Salomon v. Salomon and company[ (1895-99) All ER Rep 33:66 LJ Ch35 :75LT
426:13 TLR 46:1897 AC22 ]:A company is a legal person or legal entity separate from, and
capable of surviving beyond the lives of, its members.
Company is a voluntary association of a number of persons called shareholders. It is established
to carry on business for profit with capital divisible into transferable shares. The shareholders are
real owner of the company and they are liable for the shares they have invested or guarantee
provide for the company i.e. limited liability. Management of the company is carried out through
the representatives of the shareholders. The law relating to the company is known as Company
Law.

Company law provides the infrastructure, which enables people to collaborate in productive
business relationship. Generally the wealth on which the whole community depends. It is the
basis on which the companies are formed, given legal powers, operated and managed. It lays
down the rules and procedures through which companies are controlled and financed. Company
law stimulates entrepreneurship, promotes growth, enhances international competitiveness and
creates the condition for the investment and commitment of resources whether of saving or
employment.

Features of Company law

Section (8 ) of the Nepalese Companies Act 2053 has mentioned " company to be a corporate
body". Incorporation of a company offers the following advantages to the business community
as compared with all other kinds of business organizations:

a. Independent Corporate Existence

By incorporation a company, the business organization obtains a corporate personality. The law
recognizes it as a person. It is a distinct legal person existing independent of its members. Other
business organizations like partnership have no existence apart from its members. In the case of
Salomon v. Salomon and company (1997) this principle has been formally established. Salomon
was carrying on business as leather merchant and boot manufacture. in 1892 he formed a limited
company to take overtime business the Memorandum Of Association signed by Mr.Saloman, his
wife, his daughter and four of his one, each subscribed. For one share worth 1 to full the
statutory requirement of at least seven members. Saloman for the business, with him two sons
constituted the board of payment was to give saloman €39,000 to saloman for the business and
the node of payment was to give saloman €10,000 in debenture, secured by a floating change on
the company’s assets and 20,000 shares of €1 each and the company fell on hard times and a
liquidator was appointed. The debts of the unsecured creditors’ assets were approximately
€6,000. The unsecured creditors claimed all the remaining assets on the ground that the company
was a mere alias or agent for Salomon. The court decide that the company was separate and
distinct person. The debenture was perfectly valid, and saloman was entitled to the remaining
assets in part payment of the secured debentures held by him.
Similarly in Lee v. Lee’s Air farming Ltd. (1961) Lees husband held 2,999 of the 3,000 shares
in lee’s Air forming Ltd. The was chief pilot of the company. He was killed while piloting
aircraft during the course of topsoil dressing, and Mrs. Lee claimed compensations from the
company, as a employer of her husband, under the New Zealand Workers Compensation Act
1922. Since he was its governing director, the question arose as to whether the relationship of
employer and employee could exit between the company and him. One of his first acts as
governing director by him-self. It was hold that Lee and Lee’s Air farming Ltd were different
and as such a claim for compensation was valid. Nepalese courts do have also recognize the
same principal of separate legal entity of company.

b. Limited Liability

Privileges of limited liability for business debts, credits are one of the principal advantages of
doing business under the corporate form of organization. The members, shareholders are neither
the owner of the company's asset nor liable for its debts. Their liability is limited by the
maximum amount of the face value of the shares held by them. They shall not personally be
liable to the debts to be borne by the company. Section 9 of the Company Act has mentioned
about this concept of limited liability.

c. Perpetual Succession

An incorporated company has perpetual succession and it never dies. It is an entity with
perpetual succession. A, B and C are the only members of a company, holding all its shares.
Their shares may be transferred to, or inherited by X, Y and Z, who may, therefore becomes the
new members and managers of the company. But the company will remain the same entity.
Perpetual succession, therefore, means that the membership of a company may keep changing
from time to time, but that does not affect the company's continuity. The death or insolvency of
individual members does not, in any way, affect the corporate existence of the company.
Members may come and go but the company can go on forever. Section 8 (1) of the Act says
that the company incorporated under it shall be an autonomous and corporate body having
perpetual succession.

d. Separate Property

The company as a legal person is capable of owing, enjoying and disposing of property in its
own name. The company is an owner of its capital and assets and liable to its debts or other
liabilities. Although the capital of the company is formed from the share capital of the
shareholders. But it distinguishes form the property of individual shareholder. Such a feature is
not found in other business organizations like partnership firm. The property of the company is
not the property of the shareholders; it is the property of the company. Section 8 (3) of the Act
has stipulated the provision relating to the separate property.

e. Transferability of shares

When a company is incorporated the great achievement is attained that the shares of members of
company should be capable of being transferred. It is not possible in the case of partnership.
According to Section 31 of the Company Act, 2053, the share of a company shall be transferred
as a movable property. Thus, incorporation of a company enables a shareholder to sell their
shares in the open market or in such a manner as the Memorandum of Association or Article of
Association provides to get back his/her investment without having to withdraw the money from
the company. But in the case of partnership, it is not possible and if such transfer is made against
the will of the partners, the transferee does not become a partner.

f. Capacity to sue and be sued

A company, being a corporate body, can sue and be sued in its own name. Section 8 (4) of the
Act connotes that a company may sue or be sued in its own name.
g. Common seal of company
Company has seal of it’s own for its functions. Every documents of company for its
authentication must be duly sealed. Without sealed that documents would be invalid.
h. Management by Representative:
The share holders of a company elect the BOD which manager the business affairs of the
company.

Difference Between Private and Public Company:

Although Private and public company has various same feature and they are covered by the
same Acts but they have various differences which are as following.

1) Meaning: Private Company –Pvt.ltd

Public Company – public.Ltd

2) Minimum share Holder : Private company : 1 is sufficient

Public company: at least 7 required

3) Maximum shareholder: Private company : not exceed 50

Public company: unlimited

4) Free Transfer of shares: Private company : restriction in transfer in share market

 Public company: success to transfer.

5) Invitation to Public: Private Company : restriction

Public Company: No restriction

6) Prospectus : Private company : Prohibition on issue of

Prospectus, Public Company: Able on issue of,
Prospectus,

7) Unanimous Agreements : Private company : may have unanimous agreements

Public company: No Provision of unanimous agreements

8) Signature on memorandum and Articles: Private company : 1promoters

Public company: At least 7Prometers,

9) Meeting: Private company : As mention in MOA or AOA

Public company: hold G.M every year within six months from the date of
expiring of its financial year.

10) number of Directors : Private company : As mention in AoA

Public company: not less then 3and not more than 11(sec 70(2))

11) tenure of Directors: Private company :provides in the Articles

Public company: not exceed four years.

12) Publication of notice of G.M.: private company : Provided in the Articles

Public company: share holder shall be notified of the
agenda as well as the date and venue of the meeting in
advance of at least 15 days for S.G.M of published in the
national newspapers for at least two times
 13) Allotment of shares : private company : Unable to allot to the shares to public
Public company: issues the shares to public.

14) Quorum for general Meetings : private company :prescribed in the Articles
Public company: sec 60(2)

67% of to total number of shares

33%of total number of shares for prospered G.M

But it least 7shareholder required.

15) Remuneration of Directors : private company :no restriction

Public company: AS Prescribed in the Articles. Rewards
not exceeding 5%of the net profit,(sec75)

Establishment of Company
Promotion refers to the entire process by which a company is brought into existence. It starts
with the conceptualization of the birth a company and determination of the purpose for which it
is to be formed. The persons who conceive the company and invest the initial funds are known as
the promoters of the company. The promoters enter into preliminary contracts with vendors and
make arrangements for the preparation, advertisement and the circulation of prospectus and
placement of capital. The promoters must make a decision regarding the type of company i.e. a
public company or a private company and accordingly prepare the documents for incorporation
of the company. In this connection the Memorandum and Articles of Association (MA & AA)
are crucial documents to be prepared.
Procedure for Registration
Any person who wants to undertake any enterprise with the motive of earning profits may
establish a company with one or more objectives as incorporated in the Memorandum, personally
or along with others. Any foreigner who has obtained permission pursuant to current law to
undertake any enterprise with the motive of earning profits by making investment within the
Kingdom of Nepal may also establish a company. There shall be at least seven promoters for the
establishment of a public company. But, the number of promoters need not be seven in case any
public company establishes another public company.
Once the documents have been prepared, vetted, stamped and signed, they must be filed with the
Registrar of Companies for incorporating the Company. The following documents must be filed
in this connection: -
 The Memorandum of Association
 The Articles of Association
 In the case of public company, a copy of agreement, if any, which has been concluded
among the promoters before the establishment of the company?
 In the case of a private company a copy of the unanimous agreement, if any
The procedure is mentioned in section 3 and 4 of Nepalese Company Act 2053.
In case an application is received for the establishment of a company complying all the
necessary documents the Registrar with necessary investigations shall register the company
within 15 days from the date of application so received, and issue a certificate of registration of
the company in the prescribed form to the applicant.
But in case of registration of a company according to Sec 33(2) Indian Companies Act 1956, the
declaration must be signed by an Advocate of the Supreme Court or of a High Court or an
attorney or a pleader entitled to appear before a high court or a secretary or a chartered
accountant, in whole time practice in India who is engaged in the formation of a company or a
person named in the articles as a director, manager or secretary of the company.
When the requisite documents are presented for registration, the Registrar has to see whether
they answer the requirements of the Act. He may, however, accept the declaration as sufficient
evidence of compliance. He then registers the company and other documents and places the
name of the company in the Register of the Companies.

Certificate of Incorporation
Once all the above documents have been filed and they are found to be in order, the Registrar of
Companies will issue Certificate of Incorporation of the Company. This document is the birth
certificate of the company and is proof of the existence of the company. For the Act provides that
”from the date of incorporation such of the subscribers of the memorandum and other persons, as
may from time to time be the members of the company, shall be a body corporate, capable
forthwith of exercising all the functions of an incorporated company.”[sec.34 (2)of I.C.A.].
Once, this certificate is issued, the company cannot cease its existence unless it is dissolved by
order of the Court.
Commencement of Business
A private company or a company having no share capital can commence its business
immediately after it has been incorporated. But, in the case of a public company, a further
certificate for the commencement of business has to be obtained. This becomes necessary where
a company has issued prospectus inviting the public to subscribe for its shares.
According to section 49 of Nepalese Company Act 2053, following formalities is to be
completed:
after the amount due on shares to be subscribed by the promoters are fully paid up an application
for permission to commence the business shall be submitted to the office
on receipt of the application the office can give the certificate of commencement
without getting the certificate to commence the business the company should not publish the
prospectus
But the purpose of getting certificate to commence business is different according to the Indian
Companies Act 1956.For this purpose, the following additional formalities have to be complied
with: -
1. If a company has share capital and has issued a prospectus, then: -
Shares up to the amount of minimum subscription must be allotted.
Every director has paid to the company on each of the shares, which he has taken the same
amount as the public has paid on such shares.
No money is or may become payable to the applicants of shares or debentures for failure to apply
for or to obtain permission to deal in those shares or debentures in any recognized stock
exchange.
A statutory declaration in Form 19 signed by one director or the employee - company secretary
or a Company secretary in whole time practice that the above provisions have been complied
with must be filed.
2. If a company has share capital but has not issued a prospectus, then: -
It must file a statement in lieu of prospectus with the Registrar of Companies
Every director has paid to the company on each of the shares, which he has taken the same
amount as the other members have paid on such shares
A statutory declaration in Form 20 signed by one director or the employee - company secretary
or a Company secretary in whole time practice that the above provisions have been complied
with must be filed.
Once the above provisions have been complied with, the Registrar of Companies grants
"Certificate of Commencement of Business" after which the company can commence its
activities.
Power to refuse to Register Company
The Registrar may refuse to register a company in any of the following circumstances:
a) In case the name of the company is identical with the name of any company, which has
already been registered and is still in existence.
In the case of Kothari product limited V. Register of Companies(2002)
Kothari Product Limited was marketing certain edible items under the registered trademark
“Parag”. The trademark Parag was registered under the Trade and Merchandise Act since 1986.
One Parag International Private Limited was registered without the consent of Kothari Product
Limited, the owner of the registered trademark “Parag”. The court held that the name to be
undesirable and accordingly ordered the change thereof.
b) In case the name of the proposed company seems to be inappropriate or undesirable from the
view point of public interest, morality, etiquette etc.
c) In case the objectives of the proposed company are contrary to current law.
d) In case necessary conditions required for the establishment of a company under this Act are
not fulfilled