LEGAL ASPECTS OF BUSINESS

B N SRINIVAS RAO

By
B N Srinivas Rao

UNIT -1

ESSENTIALS OF A CONTRACT
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B N SRINIVAS RAO

1ST SESSION
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Copying of these slides is not authorized. Prof. B N Srinivasa Rao

INTRODUCTION
The law of contract is the most important branch of Mercantile Law. Without such a law it would be difficult, if not impossible, to carry on any trade or business in a smooth manner. The law of contract is applicable not only to business but also to all day-to-day personal dealings.

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WHAT IS LAW?

Before learning the meaning of the term 'Law' you must know as to why we need law. No civilized society can exist without law. It is required for the preservation of peace and orderliness in every society. Without law, no person will care for others and their dealings may not materialize. With the growth of society and the concept of welfare state, it became necessary to regulate the conduct of people and protect their property and contractual rights. Hence, each country enacted laws suited to its various needs and the value system it cherished.

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DEFINE LAW

"Law is a rule of civil conduct, prescribed by the supreme power of stale, commanding what is right and prohibiting what is wrong." ------ Blackstone. 'Law is the body of principles recognised and applied by the state in the administrator of justice."
-

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Salmond.
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MEANING OF MERCANTILE LAW

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

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

SOURCES OF MERCANTILE LAW

English Mercantile Law Indian Statute Law
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SOURCES

Judicial Decisions

Customs and Usages

ENGLISH MERCANTILE LAW:

Our laws are based primarily on the English laws which developed through customs and usages of Merchants or traders in England, These customs and usages governed these merchants in their dealings with each other.

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This law is also known as 'Common Law'.

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

The Acts passed by the Indian Legislature are the main source of 1ndian mercantile law. The important Acts passed by the Indian Legislature are the Indian Contract Act 1872,

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The Negotiable Instruments Act Essentials of a Contract 1881, The Sale of Goods Act 1930, The Indian Partnership Act 1932, The
Companies Act 1956, and so on

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JUDICIAL DECISIONS:

The past judicial decisions of courts are another important source of law. They are generally followed by the courts while deciding similar cases before them. The past decisions have persuasive and guiding value. Wherever the law is silent on a point, the judge has to decide the case according to the principle of equity, justice and good conscience. The decisions of English courts are also frequently referred to as precedents in deciding various cases and for interpreting the Indian Statutes.

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CUSTOMS

AND

USAGES:

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

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B N SRINIVAS RAO

2ND SESSION
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INDIAN CONTRACT ACT, 1872

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WHAT IS A CONTRACT?

Broadly speaking, a contract is an agreement made between two or more persons to do or to abstain from doing a particular act. A contract invariably creates a legal obligation between the parties by which certain rights are given to one party and a corresponding duty is imposed on the other party. A contract has been defined by different authorities in various ways. Some of the important definitionsare as follows:
A contract is an agreement, creating and defining the obligations between parties. - Salmond
A contract is an agreement enforceable at law made between two or more persons by which rights are acquired by one or more to acts or forbearance on the part of others. - Sir William Anson Every agreement and promise enforceable at law is a contract.
- Sir Fredrick Pollock

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A CONTRACT ESSENTIALLY CONSISTS OF TWO ELEMENTS:

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an agreement

its enforceability by law

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AGREEMENT

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

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In this context a promise refer to a proposal (offer) which has been accepted. For example, Ramesh offers to sell his ,scooter for Rs. 8,000 to Shyam. Shyam accepts this offer. It becomes a promise and treated as an agreement between Ramesh and Shyam. In other words, an agreement consists of an offer by one party and its acceptance by the other.

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offer

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AGREEMENT

acceptance
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DIFFERENTIATION
AGREEMENT

BETWEEN

:
CONTRACT

Offer and its acceptance constitute an Agreement May not create a legal obligation Every agreement need not be a contract. Agreement is not concluded and binding on concerned parties.

enforceability of an agreement constitute a contract creates a legal obligation All contracts are agreements

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Contract is concluded and binding on concerned parties.

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CLASSIFICATION OF CONTRACTS

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contract

On the basis of creation

On the basis of execution

On the basis of enforceability.

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ON THE BASIS OF CREATION

A contract may be (i) made in writing or by word of mouth or (ii) inferred from the conduct of the parties or circumstances of the case. The first category of contract is termed as 'express contract' and the second as 'implied contract'
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EXPRESS CONTRACT

An express contract is one where the terms are clearly stated in words, spoken or written.
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For example, A wrote a letter to B stating offer to sell my car for Rs. 30,000 to you", B accepts the offer by letter sent to A. This is an express contract. Similarly, when A asks a scooter mechanic to repair his scooter and the mechanic agrees, it is an express contract made orally by spoken words.

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IMPLIED

CONTRACT

A contract may be created by the conduct or acts of parties (and not by their words spoken or written). It may result from a continuing course of conduct of the parties. For example, where a coolie in uniform carries the luggage of A to be carried out of railway station without being asked by A to do so and A allows it, the law implies that A has agreed to pay for the services of the coolie. This is a case of an implied contract between A and the coolie. Similarly, when A boards a BMTC bus, an implied contract comes into being. A is bound to pay the prescribed fare.

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ON THE BASIS OF EXECUTION

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

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and

(ii) executory contracts.

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EXECUTED CONTRACTS:

It is a contract where both the parties have fulfilled their respective obligations under the contract. For example, A agrees to sell his book to B for Rs. 30. A delivers the book to B and B pays Rs. 30 to A. It is an executed contract.

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EXECUTORY CONTRACTS:

It is a contract where both the parties to the contract have still to perform their respective obligations. For example, A agrees to sell a book to B for Rs. 30. If the book has not been delivered by A and B has not paid the price. the contract is executory. A contract may sometimes be partly executed and partly executory. It happens where only one of the parties has performed his obligation. In the example given above, if A has delivered the book to B but B has not paid the price. the contract is executed as to A and executory as to B.

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

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

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ON

THE

BASIS

OF

ENFORCEABILITY

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CONTRACT

VALID

VOID

contract

Contract

VOIDABLE contract

ILLEGAL

contact

UNENFORCEABLE contract

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VALID CONTRACT:

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

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VOID CONTRACT:

According to Section 2 (0) A contract which ceases

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

It is a contract without any legal effects and is a nullity. A contract may become void due to impossibility of performance, change of law or some other reasons. Section 2(g) says that an agreement nor

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enforceable by law is said to be void.

In the case of void agreement no contract comes into existence. Such an agreement confers no rights on any person and creates no obligations. It is void ab-intio i.e., from the very beginning. A void agreement never matures into a contract, it is void from the very beginning.

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VOIDABLE CONTRACT:

According to Section 2(i) of the Contract Act,

An agreement which is enforceable by law at the option of one or more of the parties thereon, but not at the option of the other or others, is a voidable contract.
Thus, a voidable contract is one which can be set aside or repudiated at the option of the aggrieved party. Until it is set aside or avoided by the party entitled to do so, it remains a valid contract.

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DISTINCTION BETWEEN:
VOID CONTRACT It is void from the very beginning. A contract is void if any essential element of a valid contract (other than free consent) is missing. It cannot be enforced by any party. Third party does not acquire any rights. Question of damages does not arise VOIDABLE CONTRACT It remains valid till it is repudiated by the aggrieved party. A contract is voidable if the consent of a party is not free. If the aggrieved party so decides, the contract may continue to be valid and enforceable. An innocent party in good faith and for consideration acquires good title before the contract is avoided. If it is not avoided within a reasonable time it may become valid. The aggrieved party can also claim damages.
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ILLEGAL

OR UNLAWFUL CONTRACT:

The word illegal' means contrary to law. You know that contract is an agreement enforceable by law and therefore, it cannot be illegal. It is only the agreement which can be termed as illegal or unlawful. Hence, it is more appropriate to use the term 'illegal agreement' in place of 'illegal contract'. An 'illegal agreement' is one which has been specifically declared to be unlawful under the provisions of the Contract Act or which goes against the provisions of any other law of the land. Such agreement cannot be enforced by law. For example, A agrees to pay Rs.50,000 to B if B kills C. This is an illegal agreement because its object is unlawful. Even if B kills C, he cannot claim the agreed amount from A.

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UNENFORCEABLE

CONTRACT:

It is a contract which is actually valid but cannot be enforced because of some technical defect. This may be due to non-registration of the agreement, non-payment of the requisite stamp fee, etc. Sometimes, the law requires a particular agreement to be in writing. If such agreement has not been put in writing, it becomes unenforceable. For example, an oral agreement, for arbitration are unenforceable because the law requires that an arbitration agreement must be in writing. It is important to note that in most cases, such , contracts can be enforced if the technical defect involved is removed.

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B N SRINIVAS RAO

2ND SESSION
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ESSENTIALS

OF A VALID CONTRACT

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Proper offer and its proper acceptance Intention to create legal relationship
Free consent

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Capacity of parties to contract

Lawful consideration

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Lawful object

Agreement not expressly declared void Certainty of meaning

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Possibility of performance

Legal formalities

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PROPER

OFFER AND PROPER ACCEPTANCE:

In order to create a valid contract it is necessary that there must be at least two parties, one making the offer and the other accepting it. For example, the offer must be definite and duly communicated to the other party. Similarly, the acceptance must be unconditional and communicated to the offeror in the prescribe mode, and so on. Unless such conditions with regard to the offer and the acceptance are satisfied the agreement does not become enforceable.

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OFFER

OR PROPOSAL

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

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

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Offer must intend to create legal relations:

Terms of offer must be certain and not vague:

offer must be distinguished from a mere declaration of intention

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Offer must be distinguished from an invitation to offer

The offer must be communicated:

Offer should not contain a term the non-compliance of which would be acceptance

Special terms or conditions in an offer must also be communicated

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ACCEPTANCE

Section 2(b) of the Indian Contract Act defines the term 'acceptance' as "when the person to

whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. A proposal when accepted becomes a promise. "

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Acceptance must be absolute and unqualified

Acceptance must be in the prescribed manner

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Acceptance must be communicated

Acceptance must be communicated by a person who has the authority to accept Acceptance must be made within the time prescribed or within a reasonable time Acceptance must be given before the offer lapses or is withdrawn

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LAPSE OF AN OFFER

By lapse of stipulated or reasonable time By death or insanity of the offerer or the offeree before acceptance B N SRINIVAS RAO By rejection of offer by the offeree If it is not accepted in the prescribed or usual mode By counter offer by the offeree By revocation By subsequent illegality or destruction of subject-matter

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INTENTION

TO CREATE LEGAL RELATIONSHIP:

There must be an intention among the parties to create a legal relationship, If an agreement is not capable of creating a legal obligation it is not a contract. In case of social or domestic agreements, generally there is no intention to create legal relationship. For example, In an invitation to dinner there is no intention to create legal relationship and therefore, is not a contract. Similarly, certain agreements between husband and wife do not become contracts because there is no intention to create legal relationship.

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CASE:

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

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FREE

CONSENT:

For a contract to be valid, it is essential that there must be free and genuine consent of the parties to the contract. They must have made the contract of their own free will and not under any fear or pressure. According to Section 14, consent is said to be

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free when it is not caused by ( i ) coercion, (ii) undue influence, (iii) fraud, (iv) misrepresentation, or ( v ) mistake.
But if the agreement is induced by mutual mistake which is material to the agreement, it would be void.

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CONSENT:

Section 13 of the Indian Contract Act defines the term 'Consent' as Two or more persons are

said to consent when they agree upon the same thing in the same sense.

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COERCION

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

( i ) the committing or threatening to commit, any act forbidden by the Indian Penal Code; or (ii) the unlawful detaining or threatening to detain, any property, to the prejudice of any person whatever, with the intention of causing any person to enter into an agreement

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UNDUE

INFLUENCE:

Section 16 (i) of the Contract Act defines undue influence as 'A contract is said to be

induced by undue influence' where the relations subsisting between the parties are such that one of the parties is in a position to dominate the will of the other and uses that position to obtain an unfair advantage over the other

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FRAUD

The term 'fraud' is defined by Section 17 of the Indian Contract Act as follows:

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

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MISREPRESENTATION

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

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MISTAKE

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CAPACITY

OF PARTIES:

The parties to an agreement must be competent to contract i.e., they must be capable of entering into a contract. If any party to the contract is not competent to contract, the contract is not valid. Section 11 of the Act which says that every

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person is competent to contract who is of the age of majority according to the law to which he is subject and who is of sound mind, and is not disqualified from contracting by any law to which he is subject.

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THUS, A PERSON TO BE COMPETENT TO

CONTRACT SHOULD NOT BE

1
2

a minor
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of an unsound mind disqualified from contracting

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A MINOR:

According to Section 3 of the Indian Majority Act, a person is deemed to have attained Majority (i) when he completes 18 years or (ii) where a guardian of person or property or both. has been appointed by a Court of Law (or where his property has passed under the superintendence of the Court of Wards), he attains Majority on completion of 21 years.

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POSITIONS OF MINOR:

Contract with a minor is void ab initio Fraudulent representation by a minor is void Ratification of a contract by n minor on attaining the age of majority is void Minor as a partner A minor cannot be a partner in a partnership firm. However, a minor may, with the consent of all the partners for the time being, be admitted to the benefits of partnership Minor can be an agent Minor as a shareholder A minor cannot be declared insolvent because he is incapable of contracting debts.

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EXCEPTIONS
Contract

for the benefit of a minor Contract by Guardian Contract for Supply of Necessaries

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WHO

IS A

PERSON

OF

SOUND MIND?

Section 12 of the Indian Contract Act which reads a

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

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depends on two facts: i) his capacity to understand the terms of the contract, and ii) his ability to form a rational judgment as to its effect upon his interests. If a person is incapable of both, he suffers from unsoundness of mind. Idiots, lunatics and drunken persons are examples of those having an unsound mind

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Lunatics: A lunatic is a person who is mentally deranged due to some mental strain or other.persona1 experience. Idiots: An idiot is a person who is permanently of unsound mind. Idiocy is a congenital defect. Such a person has no lucid intervals. He cannot make a valid contract.
Drunken Persons: Section 12 of the Indian Contract Act reads: A same man is delirious

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from fever or who is so drunk that he cannot understand the terms of a contract or form a rational judgment as to its effects on his interest cannot contract while such delirium or drunkenness lasts.

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PERSONS DISQUALIFIED BY LAW

Alien Enemy
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Foreign Sovereigns and Ambassadors

Convicts

Insolvents

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HOME

STUDY:MAKE A REPORT ON MOHIRIBIBI VS DHARMODAS GHOSH CASE

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LAWFUL

CONSIDERATION:

An agreement must be supported by consideration, Consideration means something in return. It is also defined as the price paid by one party to buy the promise of the other. However, this price need not always be in terms of money. For' example, A agrees to sell his book to B for Rs. 20. Here the consideration for A is Rs. 20, and for B it is the book.

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

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

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LEGAL RULES FOR VALID CONSIDERATION

Consideration must move at the desire of the promisor
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Consideration may move from the promisee or any other person Consideration may be past, present or future Consideration must be of some value

Consideration must be Legal

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LAWFUL

OBJECT:

The object of an agreement must be lawful. An agreement made for any act which is prohibited by law will not be valid. For example, if A rents out a house for use as a gambling den, the agreement is void because the object of the agreement is unlawful. If the object is unlawful for any of the reasons mentioned in Section 23, the agreement shall be void. Thus, the consideration as well as the object ,of

the agreement should be lawful.

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AGREEMENT

NOT EXPRESSLY DECLARED VOID:

The agreement must not have been expressly declared void under Contract Act. Sections 24 to 30 specify certain types of agreements which have been expressly declared void. They are . agreement in restraint of marriage, agreement in restraint of legal proceedings, agreement in restraint of trade and agreement by way of wager. For example, A agreed to pay Rs. 1,000 to B if he (B) does not marry throughout his life. B promised not to marry at all. This agreement shall not be valid because it is in restraint of marriage which has been expressly declared void under Section 26.

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CERTAINTY

OF MEANING:

Section 29 of the Contract Act provides that Agreements, the meaning of which is not

absolutely essential that its terms must be clear and not vague or uncertain. For a example, A agreed to sell 100 tonnes of oil to B. Here it is not clear what kind of oil is intended to be sold. Therefore, this agreement is not valid on the ground of uncertainty.

certain or capable of being made certain, are void. Thus to make a valid contract it is

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POSSIBILITY

OF PERFORMANCE:

The terms of the agreement must also be such as are capable of performance. An agreement to do an act impossible in itself is void (Section 56.) If the act is impossible of performance, physically or legally, the agreement cannot be enforced by law. For example, A promises to B that he will enclose some area between two parallel lines or that he will run at a speed of 200 kms. per hour or that he will bring gold from the sun. All these acts are such which are impossible of performance and therefore the agreement is not treated as valid.

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LEGAL

FORMALITIES:

The Contract Act does not require that a contract must be in writing to be valid. But, in some cases the Act has specified that the agreement must be made in writing. For example, a promise to pay a time barred debt must be in writing and an agreement for a sale of immovable property must be in writing and registered under the Transfer of Property Act, 1882. In such a situation, the agreement must comply with the necessary formalities as to writing, registration, etc. If these legal formalities are not carried out, then the contract is not enforceable by law.

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WAGERING AGREEMENTS
A wager is an agreement by which one promises to pay money or moneys worth on the happening of some uncertain event in consideration of the other partys promise to pay if the event does not happen. It is essential that each party may either win or loose If either of the parties may win but cannot loose or may loose but cannot win is not wagering.

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CHARACTERISTICS AGREEMENT

OF A

WAGERING

Promise to pay money or moneys worth.

The promise is conditional on the happening of an uncertain future event.

Each party must stand to win or lose.

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There is no control over the event.

There is no other interest in the event. There is no other consideration.

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FOLLOWING TRANSACTIONS ARE NOT WAGER :

A crossword competition involving skills for its successful solution. Games of skill. A subscription / contribution / agreement to subscribe or contribute towards any plate, prize or sum of money of Rs 500 or above to be awarded to a winner of a horse race. Share market transaction in which delivery is intended.

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EFFECT

OF

WAGERING AGREEMENTS

Wagering Agreements have been declared void in India. Such agreements are illegal in Maharashtra and Gujarat. No suit can be maintained for recovery or enforcing the result of any game or uncertain event. Money deposited with stakeholder cannot be recovered. An agent cannot recover any money from the principal. The principal cannot sue the agent for not carrying out his instruction. Agent is bound to hand over the winnings to principal. Collateral transactions are not affected except in Maharashtra and Gujarat.

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CONTINGENT CONTRACTS

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

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Performance depends on happening of some uncertain event.

Performance depends on some uncertain event. The event must be collateral.

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RULES

REGARDING CONTINGENT CONTRACT

Cannot be enforced until the event has happened. If the event becomes impossible such contract becomes void. (Sec 32) Where the contract is to be performed if a particular event does not happen, performance can be enforced on the event becoming impossible. (Sec 33) Contract contingent upon how a person will act at an unspecified time, the event shall be considered to become impossible when the person does anything rendering it impossible. (Sec 34)

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Contract to do or not to do anything if a specified uncertain event happens within a fixed time, becomes void if the event does not happen or its happening becomes impossible before the expiry of that time, and vice versa. (Sec 35) Contingent agreement to do or not to do anything, if an impossible event happens are void whether or not the fact is known to the parties. (Sec 36)

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DISCHARGE

OF

CONTRACT

A contract is said to be discharged when it ceases to operate. The rights and obligations created by it comes to an end. A contract may be discharged By Performance Actual performance doing what the parties intended to do when they entered in to the contract. Attempted performance or tender It is the legitimate attempt on the part of the promisor to perform his obligations

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BY MUTUAL AGREEMENT

OR

CONSENT

Novation

Rescission
Alteration Remission Waiver Merger

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BY

OPERATION OF

LAW

By death.

By merger.
By insolvency. By unauthorized alteration of terms of a written contract. By rights and liabilities becoming vested in the

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same person.
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BY IMPOSSIBILITY

OF

PERFORMANCE

Impossibility existing at the time of agreement

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Known to the parties the agreement is void

ab initio.

Unknown to the parties the agreement is

void on the ground of mutual mistake.

Impossibility arising subsequent to the formation of the contract.

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BY SUPERVENING IMPOSSIBILITY

Destruction of subject matter of contract

Non-existence or non-occurrence of a
particular state or things Death or incapacity for personal services Change of law or stepping in of a person with statutory authority Out break of war

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

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In the following cases a contract is not discharged on the ground of supervening impossibility: Difficulty of performance, Commercial impossibility, Impossibility due to failure of a third person, Strikes, lock-outs and civil disturbances, and Partial Impossibility.

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BY

BREACH OF CONTRACT
On the due date of performance.

Actual Breach

a)

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b) During the course of performance of contract.

i)
ii)

Express Repudiation.
Implied Repudiation.

Anticipatory Breach

a)

By express renunciation.
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b) Making the performance of promise become impossible by doing some act.

REMEDIES

FOR

BREACH

OF

CONTRACT

When the contract is broken, the injured party

has one or more of the following remedies:

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Rescission of the contract. Suit for damages. Suit upon quantum meruit. Suit for specific performance.

Suit for injunction.

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RESCISSION

OF THE CONTRACT

Rescission means a right not to perform an obligation. In case of breach of contract the promisee need not perform his obligation,

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he is not only discharged from his liabilities but also he is entitled to claim compensation for damages which he might have sustained due to non performance of the contract. [Section 39]

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SUIT

FOR DAMAGES

Damages are monetary compensation allowed

to the injured party for the loss suffered.

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The object of awarding damages is not to punish the party at fault but to make good the financial loss suffered by the injured party due to breach of contract.

87

RULES

RELATING TO DAMAGES

Ordinary damages arising in the usual course of things. special damages such damages which the parties knew to be likely to result from the breach. Compensation is not given for any remote or indirect loss or damages, and

B N SRINIVAS RAO

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

88

Exemplary or Vindictive damages essentially in the nature of punishment for wrong inflicted. Nominal Damages the injured party has not in fact suffered any loss due to the breach of contract. Damages for loss of reputation the smaller the amount of cheque dishonoured, higher the amount of damages. Damages for inconvenience and discomfort generally not recoverable.

B N SRINIVAS RAO

89

Liquidated damages represent a sum, fixed or ascertained by the parties in the contract, which is a fair and genuine pre-estimate of the probable loss that might ensue as a result of the breach if it takes place. Penalty is a sum named in the contract which is disproportionate to the damages likely to accrue as a result of the breach. In India no such distinction is made and the court allow only reasonable compensation.

90

B N SRINIVAS RAO

QUANTUM MERUIT
When an agreement is discovered to be void. [Sec 65] When something is done without any intention to do gratuitously. [Sec 70] When there is an express or implied contract to render service but no agreement as to remuneration. When the completion of the contract has been prevented by the act of the other party to the contract. When a contract is divisible. When an indivisible contract is completely performed but badly.

91

B N SRINIVAS RAO

SPECIFIC PERFORMANCE
The remedy of Specific Performance is in the nature of equitable remedies based on the principles of equities. Among the remedies are specific performance, injunction, rectification and cancellation of instruments and rescission of contract. In the discretion of the court, specific performance may be enforced: where there is no standard for ascertaining the actual damage caused by the nonperformance; or where compensation in money for the nonperformance would not afford adequate relief.

92

B N SRINIVAS RAO

SUIT

FOR INJUNCTION

It is a judicial process whereby a party to the contract is ordered to refrain from doing a particular act or thing, or to do a particular act or thing. It a discretionary remedy and it acts only in personam. Injunction means a prohibitory order of the court to a person to not to do a particular act he has promised not to do under a contract, or to do an act which he has promised, under a contract, to do.

93

B N SRINIVAS RAO

QUASI CONTRACTS
Sometime a person may receive a benefit which the law regards another person as better entitled, or for which the law considers he should pay to the other person, even though there is no contract between the parties. Such relationships are called quasi contracts because although there is no contract or agreement between the parties, they are put on the same pedestal as though there was a contract between them. This is based on the principles of equity.

94

B N SRINIVAS RAO

KINDS

OF QUASI CONTRACTS

Right to recover the price of necessities

supplied. [Sec 68]

B N SRINIVAS RAO

Payment by an interested person. [Sec 69] Right to recover for non-gratuitous Act. [Sec 70] Responsibility of the finder of Goods. [Sec 71] When money is paid or things are delivered by mistake or under coercion. [Sec 72]

95

B N SRINIVAS RAO

CONTRACTS OF INDEMNITY AND GUARANTEE

96

CONTRACTS OF INDEMNITY
In

a contract of indemnity one party promises to compensate the other party against loss suffered by the latter. 125 confines itself to losses occasioned due to an act of promisor or due to act of any other persons.

Section

contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself or by the conduct of any other person is called a contract of indemnity. [Sec 124]
97

 If

a person who is interested in the payment of money which another is bound to pay and pays it, he is entitled to be indemnified. [Sec 69] surety has a rights to claim indemnity from the principal debtor for sums he has rightfully paid towards the guarantee. [Sec 145] principal is liable to indemnify the agent for all amount paid by him during the exercise of his authority. [Sec 222]
98

The

The

RIGHTS OF INDEMNITY HOLDER [SEC 125]

All

damages that he may be compelled to

pay in a suit in respect of any matter to

which the promise to indemnify applies.

All

cost that he may be compelled to pay in sums which he may have paid under the

bringing or defending such suit.

All

terms of any compromise of any such suit.

99

CONTRACT
A

OF

GUARANTEE

contract of guarantee is essentially a contract perform the promise or

to

discharge in

the liability of a third person

case of his default. basic function of a contract of guarantee

The

is
to

enable a person to get a loan, or goods, or an employment. [Sec 126]

100

ESSENTIAL FEATURES OF GUARANTEE

Surety. Principal Creditor. Not

Debtor.

be vitiated by incapacity, flaw in consent, and unlawful character of the agreement. May be oral and it may either be expressed or implied. Concurrence of parties. Existence of Principal debt. Essential of a valid contract like Consideration and Free consent.
101

EXTENT
The

OF SURETY'S LIABILITY

liability of surety is coextensive with that of the principal debtor. [Sec 128] The Surety may limit his liability by an express agreement. The liability of the surety arises immediately when a default is made by the principal debtor. The creditor can sue the surety without suing the principal debtor. If the guarantee is conditional upon another person joining it as co-surety, the guarantee is not valid if that person does not join. [Sec 144]
102

KINDS
Specific

OF

GUARANTEES

guarantee extends to a specific transaction or a single debt. The liability of surety comes to an end when the guaranteed debt is duly discharged. Continuing guarantee extends to a series of transaction. This kind of guarantee is intended to cover a number of transactions over a period of time. Whether the guarantee is continuing guarantee or not is a question of intention, subject matter & circumstance.
103

REVOCATION OF CONTINUING GUARANTEE

By Notice By Death of Surety By Novation. (Sec 62) By variance in the terms of contract. (Sec 133) By release or discharge of principal debtor. By compounding with the principal debtor. (Sec 135) By creditor's act or omission imparting surety's eventual remedy. (Sec 139) By loss of security. (Sec 142)

104

RIGHTS

OF

SURETY

Against Creditor Right of Security Right of set-off. Right of subrogation. Against principal debtor Right to be relieved of liability. Right to indemnity. Against co-sureties Right of contribution Co-sureties liable to contribute equally. Liability of co-sureties bound in different sums. Release of co-surety. 105

DISCHARGE
By Discharge Variance Release

OF

SURETY

Revocation of Guarantee

by conduct of creditor

in the terms of the contract

or discharge of principal debtor

Compounding

by creditor with principal

debtor
Creditor Creditor Creditor

compounding with principal debtor

promising to give time to the principal debtor

agreeing not to sue the debtor. 106

 By

impairing surety's remedy Loss of security by the creditor Discharge of surety by invalidation of contract Guarantee obtained by misrepresentation Guarantee obtained by concealment Guarantee on contract that creditor shall not act on it until a co-surety joins Failure of consideration
107

BAILMENT & PLEDGE

"A

bailment is the delivery of goods by one person to another for some purpose, upon a contract that they shall, when the purpose is accomplished, be returned or otherwise disposed of according to the direction of the person delivering them. The person delivering the goods is called the bailor and the person to whom the goods are delivered is called the bailee."
108

ESSENTIAL
There There The

REQUISITE OF BAILMENT

must be a contract. must be a delivery of possession. to be made by the owner, called

delivery be of goods.

Delivery

bailor.
Delivery
Delivery Delivery

be to another person, called bailee.

for specific purpose.

on the condition that they be returned.

109

KINDS OF BAILMENT
On the basis of reward
Gratuitous

Bailment Bailment

Non-Gratuitous

On the basis of Benefit

For
For For

the exclusive benefit of bailor.

the exclusive benefit of bailee.

mutual benefit.
110

DUTIES
To To To

OF A

BAILOR

disclose known faults [Sec 150] bear extraordinary expenses [Sec 158] indemnify bailee for loss in case of

premature termination of gratuitous

bailment. [Sec 159]

To To

receive back the goods indemnify the bailee against the

111

defective title of the bailor [Sec 164]

DUTIES
To
Not Not Not To To

OF A

BAILEE

take reasonable care of the goods bailed.

to mix goods bailed with his own goods. to make unauthorized use of goods. to set up an adverse title.

return the accretion to the goods. return the goods.

112

RIGHTS OF BAILOR
Right

to claim damages in case of negligence. Right to terminate the contract in case of unauthorized use. Right to claim compensation in case of unauthorized use. Right to claim separation of goods in case of unauthorized mixture. Right to claim separation of goods in case of unauthorized mixture of goods which cannot be separated. Right to demand return of the goods. Right to claim compensation in case of unauthorized retention of goods. Right to demand accretion to the goods.
113

RIGHTS
Delivery

OF

BAILEE

of goods to one of the several joint

of goods without title.

bailors of goods.
Delivery Right Right

to apply to court to stop delivery. of action against trespassers. Lien.

114

Bailee's

TERMINATION
On On

OF

BAILMENT

the expiry of the period.

the achievement of the object. use of goods. of subject matter.

Inconsistent Destruction Gratuitous Death

bailment.

of bailor or bailee.
115

FINDER
A
is

OF

GOODS

person who finds goods belonging to another and takes them into his custody,
subject to the same responsibilities as a bailee. [Sec 71] must take reasonable care. must not use the goods for his own purpose. must not mix goods with his own. must try to find out the owner of the goods.
116

He He He He

RIGHTS
Right Right

OF

FINDER

OF

GOODS

of lien. to sue for rewards.

Right

of sale.

117

PLEDGE
The

bailment of goods as security for payment of a debt or performance of a promise. [Sec 172] A pledge can be created only in respect of a chattel (movable possession) capable of delivery. The general property in the goods remains in the owner, but a special property in them passes to the pawnee who may sell the goods. The person delivering goods is Pledger or Pawnor. The person to whom goods are delivered is Pledgee or Pawnee.
118

RIGHTS OF PAWNEE / PLEDGEE

Right

174] Right to extraordinary expenses Right against true owner, when the Pawnor's title is defective Pawnee's right where Pawnor makes default Under Section 176 the Pawnee has the following three rights: may file a suit against the Pawnor; or he may sell the goods after giving reasonable notice; or can recover any deficiency arising on the sale. 119

to retain goods pledged [Section 173 and

RIGHTS
Right

OF

PAWNOR / PLEDGER

to get back goods. Right to redeem debt. Preservation and maintenance of goods. Rights of an ordinary debtor.

120

PLEDGE
Pledge Pledge

BY NON-OWNERS

by Mercantile Agent. by a person in possession under a where pawnor has limited interest.

voidable contract.
Pledge

Pledge
Pledge

by seller in possession after sale.

by buyer in possession before sale.

121

CONTRACT
An

OF

AGENCY

agent is a person employed to do any act for another, or to represent another, in dealings with third persons. The person for whom such act is done or who is so represented, is called the principal." Whatever the principal can do himself, he may get the same done through an agent,; and What the principal does by another, he does it himself. The acts of the agents are the acts of the principal.
122

CREATION
By

OF

AGENCY

Agreement - Express Agreement. - Implied Agreement. Implied agency includes the following Agency by Estoppel. Agency by holding out. Agency by necessity Agent acceding his authority in an emergency. A person entrusted with another's property. Husband and Wife. Agency by ratification. 123

ESSENTIALS OF A VALID RATIFICATION

The

agent must act for an identifiable principal. The principal must be in existence. The principal must have contractual capacity. Ratification must be with full knowledge of facts. Ratification must be done within a reasonable time. The act to be ratified must not be void, illegal or ultra vires. The whole transaction must be ratified. Ratification can be of the acts the principal had power to do. Ratification should not put a third party to damages. Ratification relates back to the date of the act.
124

DUTIES
To To To To

OF

AGENTS

carry out the work according to the directions of principal.

carry out the work with reasonable care, skill and diligence. render proper accounts. communicate with the principal in case of difficulty. to deal on his own account. pay sums received for the principal.
125

Not To

 To

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

to use information obtained in the course of agency against the principal. to make secret profit. to set up an adverse title.

Not Not Not Not

to put himself in a position where his interest and duty conflict.

Not

to delegate authority.
126

RIGHTS
Right Right

OF

AGENTS

of retainer. to receive remuneration.

Right
Right Right Right

of lien.
of indemnification.

of compensation.
of stoppage in transit.

127

DELEGATION OF AUTHORITY
Delegatus A

Sub-agent is a person employed by and acting under the control of the original agent and the business of the agency. [Section 191] A agent may appoint a sub-agent if There is a custom of trade. The nature of work is such that sub-agent is necessary. Where the principal is aware of the intention of the agent to appoint a sub-agent. Where unforeseen emergencies arise rendering. Where the act to be done is purely ministerial. Where the principal permits appointment of subagent.
128

non potest delegar

EFFECT OF APPOINTMENT OF SUBAGENT [SECTION 192 AND 193]

Where the the the

a sub-agent is properly appointed, the following effect follows : principal is bound by the acts of the sub-agent; agent is responsible to the principal for the acts of the sub-agent; sub-agent is responsible for his acts to the agent, but not to the principal, except in case of fraud or willful wrong.
129

 Where
the the

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

principal is not bound by the acts of sub-agent; original agent is responsible for the acts of the sub-agent both to the principal and to he third party; sub-agent is responsible for his acts to the original agent but not to the principal even in case of fraud or willful wrong.
130

the

POSITION

OF

PRINCIPAL

AND

AGENT

IN

RELATION TO THIRD PARTIES

Named principal
Acts

of the agent are the acts of the principal.

the agent exceed his authority

When

Notice

given to agent as notice to principal.

Principal

inducing belief that agent's unauthorized acts were authorized. or fraud of agent.
131

Misrepresentation

Undisclosed principal
The

position of Principal contracting party may sue either the principal or the agent or both. principal may also require the performance of contract. position of agent as between the principal and agent, the agent has all the rights of an agent as against the principal; as regards the third party, he is personally liable on the contract.
132

The The

but

 The the If

position of third parties

third party may elect to sue either the principal or the agent or both.

the principal discloses himself before the contract is completed, the other party may refuse to fulfill the contract on the ground of mistake of identity of party.
third party can also claim a right of setoff against the agent.
133

The

PERSONAL LIABILITY OF AN AGENT EXCEPTIONS [SEC 230]

When

the contract expressly provides. When the agent acts for a foreign principal. When he acts for an undisclosed principal. When he acts for a principal who cannot be sued. Where he signs a contract in his own name. Where he acts for a principal not in existence. Where he is liable for breach of warranty of authority. Where he receives or pays money by mistake or fraud. Where his authority is coupled with interest. Where trade usage or customs makes him personally liable.
134

TERMINATION OF AGENCY [SEC 201]

Termination of agency by act of parties a) Agreement. b) Revocation by the principal. c) Revocation by agent. Termination of agency by operation of law a) Performance of contract. b) Expiry of time. c) Death or Insanity. d) Insolvency. e) Destruction of subject matter. f) Principal becoming an alien enemy. g) Dissolution of a company. 135

IRREVOCABLE AGENCY
a)

Where the agency is coupled with

interest. [Sec 202]

b) Where the agent has exercised part of his

authority. [Sec 204]

c)

Where the Agent has incurred personal

liability.
136

END OF DECK

137

B N SRINIVAS RAO