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BBA Contract Act

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BBA Contract Act

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CORPORATE LEGAL ENVIRONMENT

STUDY NOTES FOR BBA 4th SEMESTER GRAPHIC ERA UNIVERSITY


ISSUED BY DR. GIRISH LAKHERA MA, MBA, PGDT

INTRODUCTION

Meaning
Law is set of rules and regulations imposed for controlling external human actions, so as to maintain
the social harmony and order.

According to Prof Keaton “We cannot confine jurisprudence in a straight jacket as it always strives
to escape from it”. Hence it is difficult to define law. Law assumes progressive changes; hence a
definition given today may not have its relevance in future. However the scholars have defined law
in its best sense.

Justice Austin:- Law is Rules of conduct imposed and enforced by sovereign

Salmond “Law is the body of principles recognized and applied by the state in the administration of
justice”

Holland defines law as “Rules of external human action enforced by the sovereign political authority

Object of Law: The object of law is order. In society its main object is to secure justice and remove
the prevailing socio-economic imbalance from the society. Primarily law provides security to the
citizens and ensures their welfare.

Characteristics of Law:
• Law presupposes a state
• Law aims to regulate the external human action
• Law is imposed and enforced by the state
• Law is applied in administration of justice
• Law applies to all without discrimination
• Law is always supreme

Ignorantia juris non excusat

Law and society are closely related. No society can exist without law. Law is required for the
preservation of peace and orderliness in the society. The legal system of a country reflects the rules
of the society.
Ignorantia juris non excusat is a familiar maxim, which means ignorance of law is no excuse. Thus
it is essential for every person to have knowledge of the law of land.

Meaning & Nature of Business Law: Govt should give assistance to the development of industry
in legitimate manner. It therefore has provided various statutes which acts as a guiding force for
corporate houses.

Business law may be defined as that branch of law which prescribes a set of rules for the governance
of certain transactions and relations between

(a) Business persons themselves


(b) Business persons and their customers, dealers, suppliers etc
(c) Business persons and the state

In the context of Indian business, some of these transactions and relations concern the following:-
• Regulations of restrictive and unfair business practices
• Foreign exchange management & Regulations
• Insolvency of business persons
• Regulations of companies incorporated under companies act 1956/2013 etc.
Various statues
• Negotiable instruments
• Patents, trademark & Copy rights
• Import and Export regulations
• Contract of sales of goods, guarantee, indemnity, bailment, pledge, mortgage,
partnerships, insurance, carriages of goods
• Prevention of food adulteration, regulations of essential commodities.
• Regulations of stock exchange and financial securities.
• Tax on income/wealth etc.
Objective: from the description of the nature and meaning of business law, it can be inferred that
the subject has many objectives to achieve.

• Law lays down the framework within which the business activities shall be carried out
• Business persons can resort to various judicial and quasi judicial authorities against the
Govt. in case their legal rights are violated.
• Some laws are made to facilitate the business persons to achieve their goals, smoothly.
• Business laws has social objectives too. The anti competition laws, pollution control law etc
are some of the examples.
• Business laws aim to prevent concentration of economic power and help in the adjustment
of claims of individuals against each other.

Sources of Indian Business Law


• Statues (Indian contract act 1872, Sale of goods Act 1930, Partnership Act 1932, etc.
• Common Law: In the absence of a legal provision on a subject, Indian courts apply English
common law
• Customs and Usages: Various customs and usages prevailing in particular trade or
business are regarded as law (Hundi system is still regarded as law)
• Precedents: Precedents are the past judgments/verdicts given by the courts which are
referred to or applied as law in decision makings in similar future cases.
• Justice equity & Good conscience: the courts act according to the principles of Equity,
justice and good conscience in the absence of any specific law or usage in matters placed
before the court.

The rights of a person are classified into two types

Rights in Rem: Those rights which are available to a person against the whole world are known
as Rights in Rem. For example the owner of a house has right of quite possessions and
enjoyment against the whole world.
Rights in Personam: Those rights which are available to a person only against another particular
person. For example where a person lends some money to another, he has right to recover that
money from that another person only.

The Indian contract act 1872 deals with the right in personam only and does not deal with rights in
rem (also known as jus in rem & jus in personam)

LAW OF CONTRACT (INDIAN CONTRACT ACT 1872)

The Law relating to contracts is contained in the Indian contract act 1872. For business executives,
law of contract is tremendously significant because it underlies or is related to all major areas of law
affecting business. We enter into contracts every day some of these are made consciously eg. Sale
of a plot of land or shares. Sometimes we do not even realize that we are making a contract, eg.
Hiring a taxi, boarding a bus or buying a book etc. In any case, contracts are agreements
enforceable by law, made between at least two parties by which rights are acquired by one and
obligations are created on the part of another.

Contract: According to section 2(h) of ICA (Indian contract Act) “an agreement enforceable by law”
Thus, a contract essentially consists of two elements (a) an agreement (b) its enforceability by law.

Agreement: Section 2(e) of ICA defines an agreement as “Every promise or set of promises forming
consideration for each other”. In a contract there are two parties one of them makes offer (proposal)
to the other, to do something, with a view to obtaining the assent of that other to such act. When
the person to whom the proposal is made signifies his assent thereto, the proposal is said to be
accepted. A proposal when accepted becomes a promise. Person making the proposal is called
“promisor” and the person accepting the proposal is called the “promise” Section 2 (c).
Agreement = Offer + Acceptance

Offer or Proposal:- Sec 2(a) defines offer as “ When one person signifies to another his willingness
to do or to abstain from doing anything with a view to obtaining the assent of that other person to
such act or abstinence, he is said to make a proposal”
An offer may be general or specific. An offer must be made to a specific person. An offer may be
made to the world at large. But the contract is made only with the person who accepts and fulfills
the conditions of the proposal. An offer should be made with an intention of creating legal obligation.
• An offer must be definite and certain.
• An offer may be express or implied.
• A statement of intention and an invitation to offer are not offers
• An offer along with its terms and conditions including special condition if any must be
communicated to the offeree
Mere invitation to an offer do not constitute offer eg. An advertisement for tenders or inviting
application for a job, display of goods in showcase with prices marked upon them etc are mere
invitation to an offer.
Cross Offers: Two identical offers, made by one party to other, in ignorance of each other’s offer
are known as cross offers.
Counter offer: When in place of accepting the terms of an offer as they are, the offeree accepts the
same subject to certain conditions or qualification, he is said to make a counter offer.
Acceptance of an offer: According to section 2(b) “When the person to whom the proposal is made
signifies his willingness thereto the proposal is said to be accepted. A proposal, when accepted,
becomes promise.”
Acceptance can only be given by the person to whom offer has been made. If an offer is made to a
group of persons, then all or some of the persons can accept it. If an offer is made to the public at
large, then any person or persons, who have the notice of the offer, can come forward and accept
the offer.
• Acceptance must be express or implied
• Acceptance must be absolute and unqualified
• Acceptance must be in the mode prescribed or usual and reasonable mode
• Acceptance must be communicated
• Acceptance must be given by the person to whom the proposal is made.

Enforceability by law: The agreement must be such which is enforceable by law so as to become
a contract. There are certain agreements which do not become contracts as its element of
enforceability by law is absent. For example an agreement to go for a picnic or an agreement to
attend dinner party, does not become a contract and therefore neither rights nor obligations are
created on the part of the parties to the agreement. It is therefore aptly said that all agreements
are not contracts but all contracts are agreements.

Essential elements of a valid Contract


According to Section 10 of the Act, “All agreements are contracts if they are made by the free consent
of the parties, competent to contract for a lawful consideration and with a lawful object and not
expressly to be declared void”.

• Agreement:- An offer when accepted becomes an agreement. Thus there are two parties
agreeing upon something.
• Intention to create legal relationship:- Agreements of a moral or social nature do not
contemplate legal relations and as such are not contract. Thus there may be an intention to
create legal relationship i.e. a duty or obligation enforceable by law. E.g. A invites B on
dinner, there is agreement between the parties in this example but there is no obligation on
any of the parties. Thus if B fails to attend dinner A cannot take any action and if A fails to
host dinner B cannot take action.
• Free Consent: It is essential that the consent of the parties must be free. Under Section 13
the parties must have understood the terms of contract in the same sense and at the same
time. There should be “consensus ad Idem” or “Identity of minds”
The validity of contract depends not only on consent of the parties but their consent must
also be free. According to section 14, consent is said to be free when it is not caused by
(i) Coercion: (Sec 15) Coercion is committing or threatening to commit any act forbidden
by the Indian Penal Code.
(ii) Undue Influence: (section 16) where one of the parties under contract is in a position
to dominate the will of the other and uses that position to obtain an unfair advantages
over the other, the party is said to have induced undue influence over the other party.
(iii) Fraud: (Sec 17) Fraud exists when a person makes a misrepresentation of a material
fact known to him to be untrue which induces another to enter into a contract.
(iv) Misrepresentation: (Sec 18) Before entering into a contract, parties will make certain
statements. Such statements are known as representation. If the representation is
false or misleading, it is known as misrepresentation. A misrepresentation may be
innocent or intentional. Intentional misrepresentation is defined as fraud under
section 17. Section 18 deals with innocent misrepresentation.
(v) Mistake :( Sec 20-21) ordinarily mistake means misunderstanding of the meaning. It
may be defined as an erroneous belief on the part of the parties to the contract
concerning something pertaining to the contract.

• Consideration

Consideration means something in return. It is one of the essentials of valid contract. Sec 2(d) of
the Act defines consideration as “When at the desire of the promisor the promisee or any other
person has done or abstain from doing, or does or abstains from doing, or promises to do or
abstain from doing something, such act or abstinence or promise is called a consideration for the
promise. Consideration is price for the promise. An agreement whih is not supported by
consideration is a ‘nudum pactum’ (a nude or bare promise). The term consideration is used in the
sense of “quid pro quo” which means something in return.

➢ Consideration should be furnished at the desire of the promisor

➢ Consideration may move from the promise or any other person

➢ Consideration may be past present or future

➢ Consideration must be something of value

➢ Consideration must be real

➢ Consideration must be lawful

• Capacity to contract:- Legal disability of the parties would render the agreement entered
into between them unenforceable in a court of law. By declaring certain classes of persons
having no contractual capacity, law seeks to protect their interests from being exploited by
deceitful persons.

Section 2 lays down that “Every persons is competent to contract who is of the age of majority
according to law to which he is subject and who is of sound mind and is not disqualified from
contracting by any law to which he is subject”

Section 2 declares following persons to be incompetent

(1) Minor (2) Person of unsound mind (3) persons disqualified by law to which they are subject.

Minors:- Minor is a person who has not attained the age of majority. According to Indian Majority
Act 1875 the age of 18 years is a major. The law protects minor’s rights and estates. Law
excuses their shortcoming and negligences and assist them in their pleadings.

A minor’s agreement is void-ab-initio. A minor who has made an agreement by


misrepresentation of his age may disclose his real age. There is no estoppel against him. He/she
can’t be sued for his deceit. If a minor obtains property or goods by misrepresentation of his age,
he can be compelled to restore it but only so long as the same is traceable in his possession.
Suppose the minor has sold the goods, he can’t be made to repay the value of the goods. A minor
is allowed to enforce a contract which is of some benefit to him and under which he is required to
bear no obligations. A minor can only be beneficiary under a contract.

Persons of unsound mind:- As per section 12 A person is said to be of sound mind for the
purpose of making a contract if at the time when he makes it, he is capable of understanding it and
of forming a rational judgement as to its effects upon his interests.

A persons who is usually of unsound mind, but occasionally of sound mind, may make contract
when he is of sound mind.

A person who is usually of sound mind but occasionally of unsound mind may not make a contract
when he is of unsound mind.

The following persons are not considered to be of sound mind

(i) Idiot (2) Lunatic (3) Drunkard

Persons disqualified by law:-

(1) Alien enemy

(2) Foreign Sovereigns

(3) Insolvent

(4) Convicts

• Legality of objects:- For a valid contract it is essential that the object of the agreement
must be lawful. According to section 23, the object of an agreement shall be unlawful in the
following cases.

1. If it is forbidden by law

2. If it is fraudulent

3. If it is against the public policies

4. If the court regards it as immoral

• Legal Formalities:- Section 10 states that where the statute states that the contract should
be in writing and should be witnessed or registered, the same must be observed.
Otherwise the agreement can’t be enforced.

CLASSES OR TYPES OF CONTRACT

On the basis of enforceability, contracts may be classified as follows:-

Valid contract: A contract which satisfies all the legal requirements provided under section 10.
Void Contract: Some times it may happen that an agreement which is valid in the beginning may
become void subsequently due to various reasons such as impossibility of performance or illegality
such contracts are termed as VOID. An agreement void from the beginning is known as void ab-
initio

Voidable Contract:- An agreement which is enforceable by law at the option of one or more of the
parties thereto but not at the option of the other or others is a voidable contract.

Illegal Contract:- There is nothing like a legal contract or a illegal contract it is right to call illegal
agreement. An agreement is illegal when it is against the law of the land. Eg. An agreement to
commit fraud, crime etc.

Unenforceable contract:- An unenforceable contract is one which is valid but for certain technical
reasons such as want of proof, expiry of period, absence of writing or registration etc, it becomes
unenforceable.

On the basis of Mode of creation

Express Contract:- If the terms of the contract are expressly agreed upon whether by words
spoken or written at the time of the formation of the contract, the contract is said to be an express
contract.

Implied contract:- An implied contract is one which arises out of acts or conduct of the parties or
out of the dealings between them.

Quasi Contract:- A quasi contract is created by Law.

On the basis of the extent of execution

Executed contract:- Where both the parties to the contract have performed their respective
obligation, contract is said to be executed.

Executory Contract:- Where one or both the parties to the contract have still to perform their
respective promises in future or under the terms of the contract something remains to be done, the
contract is an executory one.

PERFORMANCE OF CONTRACTS (SEC 37-67)

A contract creates obligations, performance of contract means the carrying out of obligations under
it. The parties to contract must either perform or offer to perform their respective promises under
contract unless such performance is dispensed with or excused under the provisions of the Indian
Contract act or some law. Performance may be (a) Actual performance (b) attempted performance
or offer to perform.

Actual Performance: - When parties to a contract fulfill their obligations arising under a contract
within the time and in the manner prescribed, it amounts to actual performance of the contract.

Attempted performance or Offer to perform: It may happen that the promisor offers
performance of his obligation under the contract at the proper time and place but the promisee
refuses to accept the performance. This is called as ‘Tender’ or “Attempted performance”. If a
valid tender is made and is not accepted by the promise, the promisor shall not be responsible for
the non performance.

Who must perform:-

(1) The promisor himself:- Section 40 of the Act suggest that where personal skill is involved,
the contract must be performed by the promisor himself.

(2) The promsor or his agent:- Where personal skil is not involved, the promise can be
performed by the promisor or his agent

(3) The Legal representative:- In case of death of the promisor, the legal representative must
perform the promise.

In case of joint Promisors:- When two or more persons have made a joint promise, then unless a
contrary intention appears from the contract, all such persons, during their lifetime, must jointly
fulfill the promises. If any of the joint promisors die, his legal representative will be jointly liable for
the performances along with other promisors.

DISCHARGE OF CONTRACT

When the rights and obligations arising out of a contract are extinguished, the contract is said to be
discharged or terminated. A contract may be discharged in any of the following ways:-

(1) By performance:- When a contract is duly performed by the parties, the contract is
discharged by due performance. Performance may be (a)actual or (b)attempted

(2) Discharge by mutual consent or agreement:- If the parties to a contract agree to


substitute a new contract for it, or to rescind it or alter it, the original contract is discharged.
A contract may terminate by mutual consent in any of the following ways

• Novation:- Novation means substitution of a new contract for the original one. The
new contract may be substituted either between the same parties or between
different parties.

• Rescission:- This means cancellation of all or some of the terms of the contract.
Where parties mutually decide to cancel all or some of the terms of the contract, the
obligation of the parties there under terminates.

• Alteration:- If the parties mutually are to change certain terms of the contract, it has
the effect of terminating the original contract. There is however no change in the
parties.

• Remission:- It is the acceptance of a lesser sum than what was contracted for a
lesser fulfillment of the promise made.
• Waiver:- It means relinquishment or abandonment of a right. Where a party waives
his rights under the contract, the other party is released of his obligations.

(3) By lapse of time:- The Limitation Act provides that a contract should be performed within
specified period otherwise the contract shall be terminated.

(4) By operation of law:- Discharge of contract by operation of law may take place in four
way

(i) By Death:- Death of the promisor results in termination of the contract


in cases involving personal skill or ability

(ii) By insolvency:- The insolvency of promisor discharges him from all


obligations.

(iii) By merger:- Where an inferior right accruing to a party in a contract


merges into the superior rights accruing to the same party, the earlier
contract is discharged.

(iv) By unauthorized alteration:- Where any of the parties alters any of


the terms of the contract without seeking the consent of the other party
to it, the contract terminates.

(5) Discharge by impossibility of performance:- A contract may be discharged because of


impossibility of performance. There are two types of impossibility (i) Impossibility of
performance at the time of making the contract (an agreement to do an impossible act)
such agreements are void. (ii) Subsequent or supervening impossibility

Subsequent or supervening impossibility:- Impossibility which arises subsequent to the


formation of the contract is called supervening impossibility. The contract was capable of
performance at the time of making it, but subsequently due to some event (over which neither
party has any control) the performance becomes impossible, the contract becomes void and
the parties under the contract are discharged from their obligations under the contract. Section
56 of the Act has termed it as ‘Doctrine of supervening impossibility’

Circumstances of supervening impossibility:- A contract is deemed to have become


impossible of performance and thus void under the following circumstances:-

(i) Destruction of subject matter:- Where the subject matter of the contract is
destroyed for no fault of the promisor, the contract becomes void by impossibility
of performance.

(ii) Non existence or non occurrence of a particular state of things:-


Sometimes a contract between the two parties is entered into on the basis of a
continued existence or occurrence of a particular state of things. If there is any
change in the state of things which formed the basis of the contract, the contract
is discharged. This kind of failure of object of a contract is often called as
frustration of contract (Doctrine of frustration)
(iii) By death or disablement of parties:- Where the performance of the contract
must be executed personally by the promisor, his death or physical disability to
perform shall render the contract void and thus exonerate him from the
obligation.

(iv) Change of law:- A contract which was lawful at the time of making it but
becomes unlawful by reason of subsequent change in law, the performance
becomes impossible and the contract is discharged.

(v) Outbreak of war:- A contract entered into before the outbreak of war remains
suspended during the war.

(6) Discharge of contract by Breach:- A breach of contract is one party’s failure to perform
without legal excuse. A contract comes to an end by breach of contract. If the promisor
has not performed his promise in accordance with the terms of the contract or where the
performance is not excused by mutual consent of the parties or impossibility or operation of
law, then this amounts to a breach of contract on the part of the promisor. The breach of
contract arises in two ways (a) Actual breach (b) Anticipatory breach

(a)Actual breach of contract:- Actual breach occurs when a party fails to perform his
obligations upon the date fixed for the performance of contract. Actual breach entitles the
aggrieved party to treat the contract as discharged and to sue the party at fault for
damages for breach of contract

(b) Anticipatory breach of contract:- Anticipatory breach of contract occurs when a party
repudiates it before the time fixed for performance has arrived or when a party by hs own
act disables himself from performing the contract. It may take place in two ways (i)
expressly by words spoken or written. (ii) Impliedly by the conduct of defaulter.

REMEDIES FOR BREACH OF CONTRACTS:- When someone breaches a contract, the other
party is no longer obligated to keep its end of the bargain. The other party becomes entitled to
certain relieves. In the case of breach of contract the injured party becomes entitled to any one or
more of the following remedies against the guilty party.

(a)Rescission of contract:- When there is breach of contract by one party, the other party may
rescind the contract and need not perform his part of obligations under the contract. But in case
the aggrieved party intends to sue the guilty party for damages for breach of contract, he has to file
a suit for rescission of the contract. When court grants rescission, the aggrieved party is free from
all his obligations and becomes entitled to compensation for any damage which he has sustained.

(b)Suit for damages:- Damages are monetary compensation allowed to the injured party for the
loss or injury suffered by him as a result of the breach of contract. The fundamental principle
underlying damages is not punishment but compensation. By awarding damages the court aims to
put the injured party into the position in which he would have been, had there been performance
and not to punish the defaulting party. Damages may be of four kinds
(i) Ordinary or general damages:- Damages which arise in the ordinary course of events from the
breach of contract are known as ordinary damages. These damages constitute the direct loss
suffered by the aggrieved party.

(ii) Special damages:- These are damages which the aggrieved party may claim, besides general
damages. Special damages will be granted for the remote losses which the party has suffered
owing to special circumstances known to both the parties at the time of contracting.

(iii) Exemplary, punitive or vindictive damages:- These damages are awarded with a view to
punish the guilty party for the breach only in the following cases:-

• Breach of a contract to marry

• Dishonour of a customer’s cheque by the bank without any proper reason

In case of breach of contract to marry, damages will include compensation for the loss to the
feelings and the reputation of the aggrieved party

In the case of dishonour of a cheque, damages are awarded taking into consideration the loss to
the prestige and goodwill of the customer and the general rule is that the smaller the cheque the
greater is the amount of damage

(iv) Nominal damages:- Nominal damages are awarded for the name sake. These are the
damages awarded in case where there is a technical breach but the injured party has not suffered
any loss. Nominal damages are awarded to establish the right of the injured party.

Liquidated damages and penalty:- Sometimes parties themselves at the time of entering into a
contract agree that a particular sum will be payable by a party in case of the breach of contract.
Such a sum may either be by way of liquidated damages or it may be by way of penalty. Thus
Liquidated damages are a genuine pre estimate of the probable loss. It is an assessment of the
amount, which in the opinion of the parties will compensate for the breach. Liquidated damages
are to be granted in full, irrespective of the extent of loss, which may be greater or less than the
estimates of the parties. Courts have no power to reduce or enhance the amount.

Penalty does not measure actual loss or damage. It is a sort of coercion or pressure on the party
used to prevent him from committing breach of the contract.

(c) Suit upon Quantum Meruit:- The another remedy for a breach of contract available to an
injured party against the guilty party is to file a suit upon ‘quantum meruit’ The phrase literary
means ‘as much as is earned” or according to the quantity of work done. This remedy may be
availed either for claiming reasonable compensation only for work done (i.e. without damages) or
in addition to claiming damages for breach (i.e claiming reasonable compensation for part
performance and damages for the remaining unperformed part).

(d)Suit for specific performance:- Where damages are not an adequate remedy, the court may
direct the party in breach to carry out his promise according to the term of the contract. This is
called specific performance of the contract. Some of the instances where court may direct specific
performance are a contract for the sale of particular house or some rate (antique) article or any
other thing for which monetary compensation is not enough.

(e) Suit for an injunction:- Where a party is in breach of a negative term of contract i.e. where he
does something which he promised not to do. The court may by issuing an order, prohibit him from
doing what he promised not to do. Such an order of the court is termed as an injunction.

CONTRACT OF INDEMNITY & GUARANTEE

Contract of indemnity and guarantee are special types of contracts. Specific provisions have been
made in the Indian Contract Act 1872 with regard to these types of contracts.

Indemnity

The term indemnity means security against hurt, loss or damage. It means making a promise to
provide indemnity. Contract of indemnity is special type of contract. As a contract all general
principles of contract shall apply to such type of contract.

According to section 124 “A contract by which one party promises to save the other from loss
caused to him by the conduct of the promisor himself or by the conduct of any other person is
called a ‘contract of indemnity’

A promisor in this case is known as indemnifier and to whom the promise is made is known as
indemnified or indemnity holder

To indemnify means to compensate or make good the loss. The contract of indemnity is entered
into with the object of protecting the promisee against anticipated loss.

Essentials of contract of Indemnity:-

(i) There must be two parties

(ii) A contract of indemnity may be express of implied.

(iii) This contract being a species of contract is subject to all the rules of contract such as
free consent, legality of object etc.

(iv) A contract of indemnity is enforceable only when the promise suffers a loss, the
happening of which is unknown and against which the indemnity holder was promised
to be protected

Contract of Guarantee:- The contract of guarantee are among the most common business
contracts and are used for a number of purposes. These are (i) to secure loan (ii) performance
bonds (iii) fidelity bonds (good conduct) (iv) bail bonds used in criminal law etc.

A contract of guarantee as per section 126 is a contract to perform the promise or discharge the
liability of a third person in case of his default. The person who gives the guarantee is called
surety, the person for whom the guarantee is given is called the principal debtor and the person to
whom guarantee is given is called the creditor

In a contract of guarantee there must in fact be two contracts, a principal contract between the
principal debtor and creditor and secondary contract between the creditor and surety. The surety
ship relation is one of the trust and confidence and the validity of contract depends upon good faith
on the part of the creditor.

Kinds of guarantees:-

(i) Oral or written guarantee

(ii) Specific and continuing guarantee. A contract of guarantee may either be continuing or
specific. A specific guarantee is one which intended to be applicable to a particular
debt and thus comes to end on its repayment. A specific guarantee once given is
irrevocable. A guarantee regarding the conduct of another person is a continuing
guarantee unlike a specific guarantee which is irrevocable, a continuing guarantee con
be revoked regarding further transactions.

CONTRACT OF BAILMENT & PLEDGE

Bailment: Bailment means to deliver or to handover the goods. Bailment signifies a contract
resulting from delivery of goods. It involves change of possession and not transfer of ownership. It
implies a sort of relationship in which the personal property of one person temporarily goes into the
possession of of another person. Custody of goods without possession does not constitute
bailment.

According to section 148 of ICA “A bailment is the delivery of goods by one person to another for
some purpose, upon a contract that they shall, when the purpose is accomplished be returned or
otherwise disposed of according to the directions of the person delivering them”

The person delivering the goods is called the ‘bailor’, the person to whom they are delivered is
called the bailee.

Duties of bailor:-

• To disclose the known facts or faults in goods:- It is the first and foremost duty of the bailor
to disclose the known facts or faults about the goods.

• To bear extra ordinary expenses:- The bailee is bound to bear ordinary and reasonable
expenses of the bailment but for any extra ordinary expenses the bailor is responsible

• To bear expenses in case of gratuitous bailment:- A gratuitous bailment can be terminated


by the bailor at any time even though the baillment was for a specified time or purpose. But
in such a case, the loss accruing to the bailee from such premature termination should not
exceed the benefit. If the loss exceeds the benefit, the bailor shall have to indemnify the
bailee.

• To receive back the goods:- It is the duty of the bailor to receive back the goods when the
bailee returns them after the expiry of the terms of the bailment or when the purpose is
accomplished. If the bailor refuses to receive back the goods the bailee is entitled to
receive compensation from the bailor
• Liability for breach of warranty as to title:- The bailor is responsible to the bailee for any loss
which the bailee may sustain by reason that the bailor was not entitled to make the
bailment or to receive back the goods or to give directions.

Duties of Bailee:-

• To take care of the goods bailed:-

As per Section 151 in all cases of bailment the bailee is bound to take as much care of the
goods bailed to him as a man of ordinary prudence would, under similar circumstances,
take of his own goods of same value.

In case bailee has taken the amount of care as described above, he shall not be
responsible, in the absent of any special contact, for the loss, destruction or deterioration of
the thing bailed (section 152).

• Not to mix bailors goods with his own (sec 155 – 157):- The bailee should not mix the
goods bailed with his own goods if he mixes, the responsibility of separation of goods or
compensation of loss lies with him.

• Not to make unauthorized use of goods bailed:- If the bailee makes any use of the goods
bailed, which is not according to the conditions of the bailment, he is liable to make
compensation to the bailor for any damage arising to the goods from or doing such use of
them.

• To retun the goods bailed (Sec 160):- According to section 160, it is the duty of the bailee
to return or deliver, according to the bailers directions, the goods bailed without demand as
soon as the time for which they were bailed has expired, or the purpose for which they
were bailed has been accomplished.

• To return accretion to the goods bailed:- As per section 163, the bailee is bound to deliver
to the bailor, or according to his directions, any increase or profit which may have accrued
from the goods bailed.

Duties of Bailor are rights of bailee and duties of bailee are rights of bailor

BAILEE’S LIEN

The duties of bailor are the rights of bailee, in addition to this; bailee enjoys the right of Lien. “Lien
is a right available to a person to retain that which is in his possession and which belongs to
another, until the demands of the person in possession are satisfied” or till the debts due to him
are paid. Once the possession is lost, lien is also lost. This right is sometimes known as
possessory lien or bailee’s lien. Lien is of two types viz particular & general

Particular Lien:- (Sec 170) Particular or specific lien means the right to retain the particular goods
until claims arising on those goods are satisfied. This is a special right of bailee to retain the
possession of goods where he has exercised special skill or labour on the goods until he receives
due remuneration for the services, he has rendered.
General Lien:- General lien means the right to retain goods not only for demands arising out of the
goods retained but for general balance of account in favour of certain persons. The provisions of
section 171 empower certain categories of bailees to exercise a general lien. These include
bankers, factors, wharfingers, attorney of high court and policy brokers etc.

TERMINATION OF BAILMENT

A contract of bailment terminates or comes to an end under the following circumstances:-

• On expiry of the stipulated time

• On accomplishment of purpose

• By bailee’s act, inconsistent with conditions of bailment

• A gratuitous bailment may be terminated at any time.

FINDER OF LOST GOODS

A person who finds goods belonging to another and takes them into custody is called a finder of
lost goods. A person who finds goods belonging to others, is not bound to take them in his
custody or take charge of it. But if he picks them up or takes charge of the goods, he becomes the
bailee of those goods.

Rights of Finder of goods

• Finder has the right of lien over the goods for his expenses. As such he can retain the
goods against the owner, until he receives compensation for trouble and expenses for
preserving the goods and finding out owner. But he has no right to sue the owner for any
compensation.

• In case the owner has offered any specific reward for the return of goods, the finder may
sue for such rewards and he may retain the goods until such reward is paid.

• A finder has the right to retain possession of the goods against the whole world, except the
true owner

• According to section 169 of the Act, the finder of goods may sell if
(a) The owner cannot with reasonable diligence be found
(b) He refuses upon demand to pay the lawful charges of the finder
(c) The thing is in danger of perishing or of losing the greater part of its value
(d) The lawful charges of the finder in respect of the thing found amounts to two third of its
value
PLEDGE OR PAWN
Section 172 defines a pledge as the bailment of goods as security for payment of a debt or
performance of promise. The person, who delivers the goods as security, is called the pledgor or
pawnor and the person to whom the goods are so delivered is called the pledge.
Rights and duties of pledge are same as that of bailee. In case the pledgor fails to pay his debt or
complete the performance of obligation at the stipulated time, the pledgee can exercise any of the
following right

(i) Bring suit against the pledgor upon the default in redemption of the debt or
performance of a promise and retain possession of goods pledged as a collateral
security or

(ii) Sell the goods pledged on giving ghe pledgor a reasonable notice of sale.

CONTRACT OF AGENCY

Agency refers to a legal contract between two parties whereby one party acquires the right to
represent the other in the day to day affairs of business.

Meaning :- Section 182 defines the terms agent and principal as follows

Agent is a person employed to do any act for another, or to represent another in dealings with third
person. The person for whom such act is done or who is so represented is called the principal.

Agent and Servant:- An agent is employed to bring the principal into legal relations with third
persons or to represent him in dealings with third persons. A servant does not ordinarily create
legalrelations between the employer and third persons. An agent is bound to follow all the alwful
instructions of the principal but he is not subject to the direct control and supervision of the
principal. A servant acts under the direct control and supervision of his employer and is bound to
follow all reasonable orders given to him. An agent may work for several principal at the same
time, but a servant usually serves only one master.

Creation of Agency:-

The relationship of principal and agent may arise by

(i)Express agreement (Express agency): - The authority of an agent may be express or implied.
The agent may in case of express agency be appointed either by words of mouth or by an
agreement in writing. The usual form of a written contract of agency is the power of attorney.

(ii)Agency by Implied agreement (implied agency):- Implied agency arises from the conduct,
situation or relationship of parties. It may be inferred from the circumstances of the case. The
implied agency includes (a) Agency by estoppels (b) Agency by ratification (c) Agency by
necessities

Types of Agents:-

Classification of agents is done on the basis of their nature of work and authority

On the basis of authority agents may be classified as follows:-


(a) Special agent : A special agent is one who is appointed to perform a particular act or to
represent is principal in some particular transaction. Such an agent has a limited authority
and as soon as the act is over his authority comes to an end.

(b) General Agent: General agent is one who has authority to do all acts connected with a
particular trade, business or employment. E.g. Manger of the factory is general agent
being responsible to carry out app transactions pertaining to the factory.

(c) Universal Agent:- A Universal agent is one whose authority to act for the principal is
unlimited. He has authority to bind his principal by any act which he does.

Classification on the basis of nature of work performed by them is as follows:-

Commercial Agents. A mercantile agent is an agent who undertakes all the commercial activities
and transactions pertaining to some business on behalf of principal.

E.g : Factor : He who sells the goods in his own name and is in possession of goods for the
purpose of selling them is Broker He who is employed to buy or sell goods on behalf of another.
He is employed to bring principal and third party under contractual relationship and enjoys the
commission. Commission agent An agent who belongs to indefinite class of agents he is
employed to buy and sell goods for others. Del credere Agent is one who in consideration of an
extra commission, guarantees his principal that the persons with whom he enters into contract
shall perform their obligations he occupies the position of guarantor besides being agent. Banker
Relationship between the banker and customer is as that of a debtor and creditor. But the banker
has the obligation to pay when called upon to do so by means of drafty or order of the customer.
In this way it becomes an agent of the customer. Auctioneer An auctioneer is an agent appointed
by a seller to sell his goods by public auction for a reward generally in the form of commission. He
is primarily the agent of the seller.

Non Mercantile agents: These includes attorneys, solicitors, insurance agents, wife etc

Sub Agent: A sub agent is a person employed by and acting under the control of the original
agent in the business of the agency. He is agent of original agent and relationship between them
is as that of Principal and agent.

Co Agent: Co Agent or substituted agent is a person who is named by the agent on a express or
implied authority from the principal to act for the principal. He is not sub agent but agent for the
principal for some part of the business e.g. an attorney appointed by factory manager (Factory
manager is an agent for all general purposes but attorney is substituted agent for legal matters)

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