Professional Documents
Culture Documents
Business Law
Indian Contract Act 1872 : Meaning and essentials of a valid contract Formation of
contract Performance of contract Termination and discharge of contract Remedies
for breach of contract Quast contract
Indian Partnership Act, 1932 : Meaning and test of partnership Registration of firms
Relations of partners dissolution of firms
Arbitration Act, 1940 : Arbitration Arbitration without intervention of court Arbitration
in suits
Carriage of Goods : Classification of Common Carriers Rights duties and liabilities of
common carrier Carriage by rail Contract of affreightment Charter Party Bill of
Lading Carriage by air Documents relating thereto Liability of the air Carrier
MEANING
The law relating to the contracts is contained in the Indian Contract Act. 1872. It is that
branch of law which lays down the essentials of a valid contract, the different modes of
discharging the contract and the remedies available to the aggrieved parts in the case
of breach on contract. It is the most important branch of business law. It is of particular
importance to people engaged in trade, commerce and industry as bulk of their
business transactions are based on contracts.
A contract is an agreement made between two or more parties which the law will
enforce Sec. 1 the of the Indian Contract Act defines it as An agreement enforceable by
law Sec 10 lays down that All agreements are contracts if they are made by the free
consent of parties competent to contract for a lawful consideration and with a lawful
object and are not hereby expressly declared to be void.
Illustration: A has two houses, one at Chennai and another at Coimbatore. He has
offered to sell one to B. B accepts thinking to purchase the house at Coimbatore, while
A, when he offers, has in his mind to dispose of house at Chennai. There is no
Consensus-as-idem.
4. Consideration: It means Something in return Every contract must be
supported by consideration.
Illustration : A offers to sell his watch for Rs. 500 to B and B accepts the offer. Thus Rs.
500 is the consideration for the watch and vice-versa.
CLASSIFICATION OF CONTRACTS
Contracts may be classified according to their validity, formation or performance.
I. Classification According to validity
A contract is based on an agreement. An agreement becomes a contract when all
the essential elements referred to above are present. In such a case, the contract
is a valid contract. If one or more of these elements are missing, the contract is
either voidable, void, illegal or unenforceable.
Voidable Contract
An agreement which is enforceable by law at the option of one or more of the arties
thereto, but not at the option of the other or others, is a voidable contract.
Sec.2(i).
Example: A promises to sell his house to B for Rs. 2,00,000. His consent is obtained
by use or force. The contract is voidable at the option of A. He may avoid the
contract.
Void Contract
A contract which is at enforceable by law is a void contract.
Example: A contract entered into by a minor is void.
Illegal Agreement
An illegal agreement is one which is criminal in nature or which is immoral. Such an
agreement is a void contract. All illegal agreements are void but all more
agreements or contracts are not necessarily illegal.
Unenforceable Contract
An unenforceable contract is one which cannot be enforced in a Court of law
because of some technical defect, such as absence of writing or where the
remeds has been barred by lapse of time.
Express Contract
If the terms of a 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 is inferred from the acts or conduct of the parties or
course of dealings between them. It is not the result of any express promise or
promises by the parties but of their particular act.
Example: A enters into a hotel and takes lunch. It is an implied contract that he has
to pay the cost of lunch after taking it.
III CLASSIFICATION ACCORDING TO PERFORMANCE
These may be classified as Executed contracts or Executory contracts. Unilateral
contracts or Bilateral contracts.
Executed Contracts
An executed contract as one in which both the parties have performed have
performed their respective obligations.
Example: A agrees to supply a watch to B for Rs. 500. When A supplies the watch
and B pays the price, the contracts is said to be executed.
Executory Contracts
An executory contract is one in which both the parties have yet to perform their
obligations. Thus, in the above example, the contract is executor if A has not yet
supplied the watch and B has not paid the price.
Unilateral Contract
A unilateral or one-sided contract is one in which only one party has to fulfil his
obligation at the time of the formation of the contract, the other party having
fulfilled his obligation at the time of the contract or before the contract comes into
existence.
Bilateral Contract
A bilateral contract is one in which the obligations on the part of both the parties to
the contract are outstanding at the time of the formation of the contract. In this
sense, bilateral contracts are similar to executor contracts.
CONSIDERATION
Consideration means something in return for something. Section 2 of the Indian
Contract Act defined consideration thus When at the desire of the promisor, the
promise or any other person has done or abstained 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.
1. Consideration at the Desire of the Promisor
Consideration must proceed at the request of the promisor. Hence acts done
voluntarily or at the request of third parties do not constitute a valid consideration.
Durga Prasad Vs Baldev : A built a market at the request of the Collector of the place
B promised to pay. A commission on the articles sold in the market. It was held
that Bs promise to pay commission did not constitute a valid consideration
because A did not build the market at the request of B.
Consideration may not be adequate. But it must be real and lawful. Example : A
agrees to sell a cow worth Rs. 1200 for Rs. 10. He has given his consent freely.
The agreement is a contract though consideration is inadequate.
An agreement made without consideration is void. But the following are exceptions.
(1) An agreement expressed in writing and registered and made on account of
natural love and affection between parties standing in neat relation to each other.
(2) A promise to compensate a person who has already voluntarily done something
for the promisor, or
(3) A promise to discharge a time-barred debt.
CAPACITY TO CONTRACT
The parties who enter into a contract must have the capacity to do so Capacity means
competence of the parties to enter into a valid contract. According to Sec. 10, an
agreement becomes a contract if it is entered into between the parties who are
competent to contract. Thus Sec. 11 declares the following person to be incompetent to
contract.
(i) Minors
(ii) Persons of unsound mind, and
(iii) Persons disqualified by any law to which they are subject.
Incapacity to contract
Fgsdklgjfdsklg asdgjsdlkgsdfg sgsdf Mental deficiency
3. Conviet
He is no competent to contract during the period of sentence.
4. Bankrupt
He cannot enter into contract and bind his property as his property shall be
vested in the official receiver when he is adjudged an insolvent.
Fraudulent or Innocent or
Willful (Sed. 17) unintentional
(Sec. 18)
COERCION
When a person is compelled to enter into a contract by the use of force by the other
party or under a threat, coercion is said to be employed. Coercion is the committing, or
threatening to commit, any act forbidden by the Indian Penal Code 1860 or 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.
Example: a threatens to kill B if he does lend Rs. 1000 to C. B agrees to lend the
amount to C. The agreement is entered into under coercion.
A threat to commit suicide also amounts to coercion.
EFFECT OF COERCION
When consent to an agreement is caused by coercion, fraud or misrepresentation, the
agreement is a contract voidable at the option of the party whose consent was so
caused (Sec. 19)
UNDUER INFLUENCE
Sometimes a party is compelled to enter into an agreement against his will as a result of
unfair persuasion by the other party. This happens when a special kind of relationship
exists between the parties such that one party is in a dominant position to exercise
undue influence over the other.
Sec. 16(1) defines : undue influence as follows
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.
The following relationships usually raise a presumption of undue influence viz.
(i) Parent and child
(ii) Guardian and ward
(iii) Trustee and beneficiary
(iv) Doctors and patient
(v) Solicitor and client, and
(vi) Finance and fiance
The presumption of undue influence applies whenever the relationship between the
parties is such that one of them is by reason of confidence reposed in him by the
other, able to take unfair advantage over the other.
FRAUD
Fraud exists when it is shown that a false representation has been made (a) knowingly,
or (b) without belief in its truth, or (c) recklessly, not caring whether it is true or false, and
the maker intended the other party to act upon it.
MISTAKE OF LAW
Mistake of law be (1) mistake of law of the country or (2) mistake of law of a foreign
country.
1. Mistake of law of the country: Ignorantta juris non exerts Ex. Ignorice of laws is
no exclause : is a well settled rule of law. A party cannot be allowed to get any
relief on the ground that it had done a particular act in ignorance of law. A
mistake of law is, therefore, no excuse, and the contract cannot be avoided.
Example: A and B enter into a contract on the erroneous belief that a particular
debt is barred by the Indian Law of Limitation. This contract may be voidable.
2. Mistake of law of a foreign country: Such a mistake is treated as mistake of
fact and the agreement in such a case is void. (Sec. 21)
MISTAKE OF FACT
Mistake of fact may be (1) a bilateral mistake, or (2) a unilateral mistake
1. Bilateral Mistake
Where both the parties to an agreement are under a mistake as to a matter of fact
essential to the agreement, there is a bilateral mistake. In such a case the
agreement is void (sec. 20). The following two conditions have to be fauced for
the application of Sec. 20.
(i) The mistake must be mutual i.e. both the parties should misunderstand each
other and should be at a cross-purposes.
Example: A agreed to purchase Bs motor-car which was lying in Bs garage.
Unknown to either party, the car and garage where completely destroyed by
fire a day earlier. The agreement is void
(ii) The mistake must relate to a matter of fact essential to the agreement. As to
what facts are essential in an agreement will depend upon the nature of the
promise in each case.
Example: A man and a woman entered into a separation agreement under which the
man agreed to pay a weekly allowance to the woman mistakenly believing
themselves lawfully married leld the agreement was void as there was mutual
mistake on a point of fact which was material to the existence of the agreement.
The various cases which fail under bilateral mistake are as follows:
Mistake as to the Subject Matter:
Where both the parties to an agreement are working under a mistake relating to the
subject-matter, the agreement is void. Mistake as to the subject-matter covers the
following cases.
(1) Mistake as to the existence of the subject-matter: If both the parties believes
the subject-matter of the contract to be in existence, which in fact at the time of
the contract is non-existent, the contract is void.
Example: A agrees to buy from B a certain goat. It turns out that the goat was
dead at the time of the bargain, though neither parts was aware of the fact. The
agreement is void.
(2) Mistake as to the identity of the subject-matter: It usually arises where one
party intends to deal in one thing and the other intends to deal in another.
Example: W agreed to buy from R a cargo on cotton to arrive ex-peerless from
Bombay. There were two ships of that name sailing from Bombay, one sailing in
October and the other in December. W meant the former ship R meant the latter.
Held, there was a mutual or a bilateral mistake and there was no contract.
(4) Mistake as to the quantity of the subject-matter: If both the parties are
working under a mistake as to the quantity of the subject-matter the agreement is
void.
Example: A silver bar was sold under a mistake as to its weight. There was a
difference in value between the weight of the bar as it was and as it was
supposed to be Held the agreement was void.
(5) Mistake as to the title to the subject-matter: If the seller as selling a thing
which he is not entitled to sell and both the parties are acting under a mistake,
the agreement is void.
Example: A person took a lease of a fishery which, unknown to either party
already belonged to him. Held, the lease was void.
2. Unilateral Mistake
When in a contract only one of the parties is mistaken regarding the subject
matter or in expressing or understanding the terms or the legal effect of the
agreement the mistake is a unilateral mistake. According to Sec. 22, a contract is
not voidable merely because it was caused by one of the parties to it being under
a mistake as to a matter of fact. A unilateral mistake is not allowed as a defence
in avoiding a contract unless the mistake is brought about by the other partys
fraud or misrepresentation.
Example: A offers to sell his house to B for an intended sum of Rs. 44,000. By
mistake he makes an offer in writing of Rs. 40,000. He cannot plead mistake as a
defence.
LEGALITY OF OBJECT
A contract must have a lawful object. The word object means purpose of design. In
some cases consideration for an agreement may be lawful but the purpose for which
the agreement is entered into may be unlawful. In such cases the agreement is void. As
such both the object and the consideration of an agreement must be lawful otherwise
the agreement is void.
Example: T lends Rs. 50,000 to B to help him to purchase some prohibited goods from
T, an alien enemy. If B enters into an agreement with T, the agreement will be illegal and
the agreement between B and T shall also become illegal, because it is collateral to the
main transaction. T cannot, therefore, recover the amount.
(a) Interference with the course of justice: An agreement which obstructs the
ordinary process of justice is unlawful.
(b) Stifling prosecution: It is in public interest that if a person has committed a
crime, he must be prosecuted and punished.
(c) Maintenance and champerty: Maintenance is an agreement to give
assistance, financial or otherwise, to another to enable him to bring or defend
legal proceedings when the person giving assistance has got no legal interest of
his own in the subject-matter.
VOID AGREEMENTS
A void agreement is one which is not enforceable by law [Sec. 2 ] Such an agreement
does not give rise to any legal consequences and exaused ab initio.
The following agreements have been expressly deciared to be void by the Contract Act.
1) Agreements by incompetent parties (Sec. 11)
2) Agreements made under a mutual mistake of fact [Sec. 20].
3) Agreements the consideration or object of which is unlawful (Sec. 23)
4) Agreements the consideration or object of which is unlawful in part (Sec. 24)
5) Agreements made without consideration (Sec. 25)
6) Agreements in restraint of marriage (Sec. 26).
7) Agreements in restraint of trade (Sec. 27)
8) Agreements in restraint of legal proceedings (Sec. 28)
9) Agreements the meaning of which is uncertain (Sec. 29)
10)Agreements by way of wager (Sec. 30)
11) Agreements contingent on impossible events (Sec. 36)
12)Agreements to do impossible acts (Sec. 56)
13)In case of reciprocal promises to do things legal and also other things illegal, the
second set of reciprocal promises is a void agreement (Sec. 57)
WAGERING AGREEMENTS OR WAGER
A wager is an agreement is an agreement between two parties 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. Thus if A and b enter into an agreement that A shall pay B Rs. 100 if it
rains on Monday, and that B shall pay A the same amount if it does not rain, it is
a wagering agreement.
CONTINGENT CONTRACTS
Contingent means that which is dependent on something else. 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). For example, goods are sent on approval the contract is
a contingent contract depending on the act of the buyer to accept or reject the goods.
There are three essential characteristics of a contingent contract.
3. If a contract is contingent upon how a person will act at an unspecified time, the
event shall be considered to become impossible when such person does
anything which renders it impossible that he should so act within any definite
time, of otherwise than under further contingencies (Sec. 34)
Example: A agrees to pay B a sum of money if B marries C. C marries D. The
marriage of B to C must not be considered impossible, although it is possible that
D may die and that C may afterwards marry B.
OFFER TO PERFORM
Sometimes it so happens that the promisor offers to perform him obligation under the
contract at the proper time and place but the promise does not accept the performance.
This is known as attempted performance or tender.
RECIPROCAL PROMISES
Promises which form the consideration or part of the consideration for each other are
called: reciprocal promises [Sec. 2(f)]. Where, for example: A promises to do or not to
do something and consideration of B is promise to do or not to do something the
promises are reciprocal.
These promises have been classified is follows:
(1) Mutual and Independent: Where each party must perform his promise
independently and irrespective of the fact whether the other party has performed
or is willing to perform his promise or not the promises are mutual and
independent.
Example: In a contact of sale, B agrees to pay the price of goods on of instant. S
promises to supply the goods on 2nd instant. The promises are mutual and
independent.
(2) Conditional and Dependent: Where the performance of the promise by one party
depends on the prior performance of the promise by the other party the promises
are conditional and dependent.
(3) Mutual and Consent: Where the promises of both the parties are to be performed
simultaneously they are said to be mutual and concurrent. The example of such
promises may be sale of goods for cash.
Sec. 55 deals with the question of time as the essence of the contract and provides.
1. When time is of the essence: In a contract, in which time if of the essence of the
contract, if there is a failure on the part of the promisor to perform his obligation
within the fixed time. The contract (or so much of it as remains unperformed
becomes voidable at the option of the promise (Sec. 55 para 1). If, in such a case
the promise accepts performance of the promise after the fixed time, he cannot
claim compensation for nay loss occasioned by the non-performance of the
promise at the agreed time. But if at the time of accepting the delayed
performance he gives notice to the promisor of his intention to claim
compensation, he can do so (Sec. 55 para 3)
In commercial or mercantile contracts which provide for performance within a
specified time, time is ordinarily of the essence of the contract. This is so
because businessmen want certainty.
Example: In a contract for the sale or purchase of goods the prices of which
fluctuate rapidly in the market, the time of delivery and payment are considered
to be of the essence of the contract.
2. When time is not of the essence: In a contract, in which time is not of the
essence of the contract, failure on the part of the promisor to perform his
obligation within the fixed time does not make the contract voidable, but the
promise is entitled to compensation for any loss occasioned to him by such
failure (Sed. 55 para 2)
Intention to make time as the essence of the contract, if expressed in writing,
must be in a language which is unambiguous and unmistakable. The mere fact
that a certain time is specified in a contract for the performance of a promise
does not necessarily make time as the essence of the contract. If the contract
includes clauses providing for extension of time in certain contingencies or for
payment of fine or penalty for every day or week the work undertaken remains
unfinished on the expiry of time provided in the contract, such clauses are
construed as rendering ineffective the express provision relating to the time being
of the essence of the contract.
TERMINATION AND DISCHARGE OF CONTRACT
Discharge of contract means termination of the contractual relationship between the
parties. A contract is said to be discharged when it ceases to operate, i.e. when the
rights and obligations created by it come to an end.
1. Discharge by Performance
Performance means the doing of that which is required by a contract. Discharge
by performance takes place when the parties to the contract fulfill then
obligations arising under the contract within the time and in the manner
prescribed.
Performance of a contract is the most usual mode of its discharge. It may be
(1) Actual Performance: When both the parties perform their promises the
contract is discharged. Performance should be complete precise and
according to the terms of the agreement.
(2) Attempted Performance or Perfer: Tender is not actual performance but is
only an after to perform the obligation under the contract.
2. Discharge by agreement or consent
(a) Sec. 62 lays down that if the parties to a contract agree to substitute a new
contract for it or to rescind or to alter it the original contract is discharged and
need not be performed.
The various cases of discharge of contract by mutual agreement are dealt with in
Sec. 62 and 63 are given below.
Rescission Sec. 62: Novation takes place when a new contract is substituted for
an existing one between the same parties.
Example: A owes money to B under a contract. It is agreed between A, B and C
that B shall henceforth accept C as his debtor, instead of A. the old debt of A to B
is at an end and a new debt from C to B has been contracted.
(b) Rescission Sec. 62: Rescission of a contract takes place when all or some of
the terms of the contract are cancelled. It may occur
(i) By mutual consent of the parties or
(ii) Where one party fails in the performance of his obligation in such a case
the other party may rescind the contract without prejudice to his right to
claim compensation for the breach of contract.
Example: A promises to supply certain goods to B six months after date. By that
time, the goods go out of fashion. A and B may rescind the contract.
(c) Alteration (Sec 62): Alteration of a contract may take place when one or more
of the terms of the contract is are altered by the mutual consent of the parties
to the contract. In such a case, the old contract is discharged.
Example: A enters into a contract with B for the supply of 100 bales or cotton
at his Godown No. 1 by the first of the next month. A and B may after the
terms of the contract by mutual consent.
(e) Waver: Waver takes place when the parties to a contract agree that gdfsg
shall no longer be bound by the contract. This amounts to a mutual
thandonment at rights by the parties to the contract.
(f) Merger: Merger tales place when an inferior right accuring to a party under a
contract merger into a superior right accruing to the same party under the
same on some other contract.
Example: P holds a property under a lease. He later buys the property. His
rights as a lessee merge into his rights as an owner.
3. DISCHARGE BY IMPOSSIBILITY OF PERFORMANCE
If an agreement contains an undertaking to perform an impossibility, it is void ab
initio. This rule is based on the following maxims:
1. Impossibility existing of the time of agreement: Sec. 56 lays down that can
agreement to do an impossible act itself is void. This is known as pre-contractual
or initial impossibility.
2. Impossibility arising subsequent to the formation of contract: Impossibility which
arises subsequent to the formation of a contract (which could be performed at the
time when the contract was entered into) is called post-contractual or
supervening impossibility.
5. Outbreak of war : A contract entered into with an after enems during war is
unlawful and therefore impossible for performance. Contracts entered into before
the outbreak of war are suspended during the war and may be revived after the
war is over.
(a) By Death: In contracts involving personal skill or ability, the contract is terminated
on death of the promissory. In other contracts the rights and liabilities of a
deceased person pass on to the legal representatives of the deceased person.
(b) By Merger: When an inferior right accruing to a party merges into a superior
rights accruing to the same party under the same or some other contract the
inferior right accruing to the party is said to be discharged.
(c) By Insolvency: When a person is adjudged insolvent, he is discharged from all
liabilities incurred prior to his adjudication.
(d) By Authorised Alteration of the terms of a written agreement: Where a party to a
contract makes any material alteration in the contract without the consent of the
other parts, the other parts can avoid the contract. A material alteration is one
which changes in a significant manner the legal identity or character of the
contract or the rights and liabilities of the parties to the contract.
(e) B y Rights and Liabilities becoming visited of the dfgdfg Person: Where the rights
and liabilities under a contract vested in the same person for example when a bill
gets into the hands of the acceptor, the other parties are discharged.
1. RESCISSION
When a contract is broken by one party, the other party may sue to treat the
contract as rescinded and refuse further performance. In such a case, be is
absolved of all his obligations under the contract.
Example: a promises B to supply 10 bags of cement on a certain day. B agrees
to pay the price after the receipt of the goods. A does not supply the goods. B is
discharged from liability to pay the price.
The Court may grant rescission.
(a) Where the contract is voidable by the plamtiff of
(b) Where contract is unlawful to fgdfg but apparent off its face and the defendant is
more to blame thatn the gdfgdf
When a party treats the contracts as rescinded be makes himself liable to restgdf any
benefits he has fgdfg of under the contract to the party from whom such benefits were
received. But if a person rightfully rescinds a contract he is entitled to compersation for
any damage which he has sustained through non-fulfilment of the contract by the other
party.
2. DAMAGES
Damages are a moctars compensation allowed to the injured party by the Court for
the loss or injurs suffered by him by the breach of a contract. The object of
awarding damages for the search of a contract is to put the injured party in the
same position, so far as money am the it, as if he had not been injured, i.e. in the
position in which he would have been had there been performance and not
breach. This is called the doctrine of restitution.
4. Nominal damages
Where the injured party has not in fact suffered any loss by reason of the breach
of a contract, the damages recoverable by him are nominal. These damages
merels acknowledge that the plaintiff has proved his case and won.
Example: A firm consisting of four partners employed B for a period of two years.
After six months two partners rebred the business being carried on by the other
two B declined to be employed under the continuing partners. Held, he was only
entitled to nominal damages as he had suffered no loss.
7. Mitigation of damages
It is the duty of the injured party to take all reasonable steps to mitigate the loss
caused by the breach. He cannot claim to be compensated by the party in default
for loss which the ought reasonably to have avoided. That is he cannot claim
compensation for loss which is really due not to the breach, but due to his own
neglect to mitigate the loss after the breach.
8. Difficulty of Assessment
Although damages which are incapable of assessment cannot be recovered the
fact that they are difficult to assess with certainty or precision does not prevent
the aggrieved party from recovering them. The Court must do its best estimate
the loss and a contingences may be taken into account.
Example: H advertised a beauty competition by which gfdgfk of certain
newspapers were to select fifty ladies. He himself was to select twelve out of
these fifty. The selected twelve were to be provided theatrical encagements. C
was one of the fifty and by Hs breach of contract she was not present when the
final section was made. Held C was entitled to damages although it was difficult
to assess them.
9. Cost of Decree
The aggrieved party is entitled in addition to damages to get the cost of getting
the decree for damages. The cost of suit for damages is in the discretion of the
Court.
Payment of Interest
The largest number of cases decided under Sec. 74 relate to stipulation if a contract
providing for payment of interest. The following rules are observed with regard to
payment of interest.
1. Payment of interest in case of default.
2. Payment of interest at higher rate
a. From the date of the bond, and
b. From the date of default
3. Payment of compound interest on default
a. At the same rate as simple interest and
b. At the rate higher than simple interest
4. Payment of interest at a lower rate, if interest paid on due date.
3. QUANTUM MERUIT
The phrase quantum meruit ghdfgfdgh much as earned. A right to sue on a
quantum meruit arises where a ggdfg performed by one party has become
discharged to the breach of the contract dghdfghdf party.
4. SPECIFIC PERFORMANCE
In certain cases of breach of contract damages are not an adequate remedy. The
Court may, in such cases direct the party in breach to carry out his promise
according to the terms of the contract.
Some of the cases in which specific performance of a contract may in discretion
of the Court be enforced are as follows:
(a) When the act agreed to be done is such that compensation in money for its
non performance is not an adequate relief.
(b) When there exists no standard for ascertaining the actual damage caused by
the non-performance of the act agreed to be done.
(c) When it is probable that the compensation in money cannot be got for the
non-performance of the act agreed to be done.
5. INJUNCTION
Where a party is in breach of a negativbe term of a contract the where gdfg is
doing something which he promised not to do, the Court may be issuing an order
restrain him from doing what he promised not to do. Such an order of the Court is
known as injunction.
Example: W agreed to sing at Ls theatre, and during a certain period to sing
nowhere else. Afterwards W made contract with Z to sing at another theatre and
refused to perform the contract with L. Held, W could be restrained by injunction
from singing for Z.
QUASI CONTRACTS
Under certain circumstances, a person may receive a benefit to 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 termed quasi-contracts, because, although there
is no contract or agreement between the parties, they are put in the same
position as if there were a contract between them.
A quasi-contract rests on the ground of equity that a person shall not be allowed to
enrich himself unjustly at the expense of another. The principle of unjust enrichment
requires:
That the defendant has been enriched by the receipt of a benefit
That this enrichment is at the expense of the plaintiff, and
That the retention of the enrichment is unjust.
Law of quasi-contracts is also known as the law of restitution. Strictly speaking, a
quasi-contract is not a contract at all. A contract is intentionally entered into. A quasi-
contract, on the other hand, is created by law.
KINDS OF QUASI-CONTRACTS
1. SUPPLY OF NECESSARIES (Sec. 68)
If a person, incapable of entering into a contract, or anyone whom he is legally
bound to support, is supplied by another with necessaries suited to his condition in
life, the person who has furnished such supplies is entitled to be reimbursed from
the property of such incapable person.
Example: A supplies B, a lunatic, with necessaries suitable to his condition in life. A
is entitled to be reimbursed from Bs property.
Before any right of action under Sec. 70 arises, three conditions must be satisfied.
(a) The thing must have been done lawfully.
(b) The person doing the act should not have intended to do it gratuitously
(c) The person for whom the acts is done must have enjoyed the benefit of the act.
QUANTUM MERUIT
Quantum meruit literally means as much as earned or as much as it merited.
When a person has done some work under a contract, and the other party
repudiates the contract, or some event happens which makes the further
performance of the contract impossible, them the party who has performed the
work can claim remuneration for the work he has already done. Likewise, where
one person has expressly or impliedly requested another to render him a service
without specifying any remuneration, but the circumstances of the request imply
that the service is to be paid for, there is implied a promise to pay quantum
meruit, i.e. so much as the party rendering the service deserves. The right to
claim quantum meruit does not arise out of contract as the right to damages
does, it is a claim on the quasi-contractual obligation which the law implies in the
circumstances.
The claim for quantum meruit arises only when the original contract is discharged. If
the original contract exists, the party not in default cannot have quantum meruit
remedy, he has to take resort to remedy in damages. Further the claim for
quantum meruit can be brought only by the party who is not in default.
The claim for quantum meruit arises in the following cases
(a) When an agreement is discovered to be void (Sec. 65)
(b) When something is done without any intention to do so gratuitously (Sec. 70)
(c) When there is an express or implied contract to render services but there is no
agreement as to remuneration
(d) When the completion of the contract has been prevented by the act of the other
party to the contract
(e) When a contract is divisible
(f) When an indivisible contract is completely performed but badly.
Review Questions
DEFINITION
Section 124 of the Indian Contract Act defines it as 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. The person who promises is called the
Indemnifier and the person to whom the promise is made is called the Indemnified or
Indemnity Holder.
CONTRACT OF GUARANTEE
Section 126 of Indian Contract Act defines it as a contract to perform the promise, or
discharge the liability, of a third person in case of his default. The person who gives the
guarantee is called the surety, the person in respect of whose default, the guarantee is
given is called the principal debtor, and the person to whom the guarantee is given is
called the creditor.
Illustration: A purchases goods from B on credit. C agrees to stand as a surety which
means that if A does not pay the price of the goods, he will pay. Here, A is the principal
debator, B is the creditor and C is the surety or guarantee.
RIGHTS OF SURETY
Rights against the Principal Debtor
1) After discharging the liability of the principal debtor, the surety is entitled to all
those rights which the creditor himself exercises against the principal debtor. This
right of the surety is called subrogation.
Illustration: The right of the creditor to receive dividends from the official assignee
when the principal debtor becomes bankrupt, can be exercised by the surety.
2) The surety can proceed against all those securities of the principal debtor, which
the creditor himself can proceed against.
3) The surety is entitled to be indemnified for all payments rightfully made by him.
Illustration: B is indebted to C, and A is surety for the debt. C demands payment form
A, and on his refusal sues him for the amount. A defends the suit, having reasonable
grounds for doing so but is compelled to pay the amount of the debt with costs. He
can recover from B the amount paid by him for costs as well as the principal debt.
Rights against the Creditor
1) The surety may require the creditor to sue the debtor. But he cannot compel the
creditor to do so.
2) In the case of fidelity contracts, he can insist upon the creditor to dispense with
the services of the principal debtor when his dishonesty is established.
3) He can claim set off or counter-claim which the principal debtor could have
obtained against the creditor.
4) On payment of the guaranteed debt, ha can require the creditor to assign to him
all the securities held by the creditor in respect of the debt. If the creditor loses or
parts with such securities without the consent of the surety, the surety is
discharged to the extent of the value of the security.
Illustration: C advances to B, his tenant, Rs. 2000 on the guarantee of A. C has also
a further security for the sum of Rs. 2000 by mortgage of Bs furniture. C cancels the
mortgage. B becomes insolvent and C sues A on his guarantee. A is discharged from
liability to the amount of the value of the furniture.
Essentials of Bailments
1. There must be delivery of goods: Such delivery may be actual or constructive.
2. The delivery must be made for some specific purpose.
3. The delivery must be made on condition that the goods shall be returned in
specific when the purpose is over, or disposed of according to the direction of the
bailor.
4. Only possession but not the ownership of the goods is transferred.
Examples: Delivery of a radio for repair.
DUTIES OF A BAILEE
1. To take reasonable care of the goods bailed to him
Section 151 lays down that in all cases of bailment the bailee should take that much
of care which an ordinary prudent man would take of his own goods under similar
circumstances. Section 152 lays down that the bailee is not responsible, in the
absence of any special contract, for the loss, destruction or deterioration of the
thing bailed, if he has taken the amount of care described above.
Illustration: A gives to B, to be made into an ornament. B keeps them in a safe where
he usually keeps his own valuables. B is not liable if the goods are lose by him.
2. Not to make unauthorized use of goods bailed
The bailee should not make use of goods for purposes inconsistent with the terms of
the contract. If he does so, the bailor is entitled to terminate the contract and
claim damages, if any.
Illustration: A lends a horse to B for his own riding only. B allows C, to ride the horse.
C rides carefully but the horse accidentally falls and is injured. B is liable to
compensate A for the injury caused to the horse.
3. Not to mix the goods of the bailor with his own goods
a) If a bailee mixes the goods of the bailor with his own goods with the consent of
the bailor, both the bailor and the bailee shall have proportionate interest in the
mixture.
b) If the goods mixed by the bailee without the consent of the bailor and the goods
are separable, the bailee is bound to bear the expenses of separation and pay
damages if any.
c) If the goods are mixed by the bailee without the consent of the bailor and the
goods are inseparable, the bailee should compensate the bailor for the loss of
goods.
DUTIES OF A BAILOR
1. To disclose the faults in the goods bailed
The bailor should disclose to the bailee, faults in the goods bailed, of which he is
aware. If he does not disclose, he will be liable for the loss resulting therefrom.
Illustration: A lends a horse which he knows to be vicious to B. He does not disclose
this fact. The horse runs away. B is thrown down and injured. A is responsible to
B for damages sustained.
RIGHTS OF BAILOR
1. He is entitled to the increase or profit from goods bailed
2. In the case of gratuitous loan, the lender may require the goods to be returned,
even though he lent it for a fixed period for specific purpose. But if such a request
causes loss to the bailee exceeding the benefit he derives, the bailor should
indemnify the borrower.
3. The bailor is entitled to terminate the contract when the bailee does any act
inconsistent with the terms of bailment.
Illustration: A gives a horse to B for hire for his own riding. B drives the horse in his
carriage. The bailment can be terminated at the option of A.
LIEN
Lien is a right of a person, who has possession of goods of another, to return such
possession until a debt due to him has been discharged. This right is called a
Possessory lien.
Lien is of two kinds: 1. Particular lien, and 2. General lien
1. A Particular Lien is one which is available only against that property in respect of
which the skill and labour are exercised or any expenses are incurred.
Illustration: A delivers a watch for repairs to B, a repairer. B has a right to retain
the watch till he is paid for the services rendered.
The bailees, repairers and unpaid vendors of goods are entitled to particular lein.
2. A General Lien is the right to retain the property of another for a general balance
of accounts. Bankers, can exercise this right for any debt due to them.
PLEDGE
A pledge is a bailment of goods as security for payment of a debt or performance of a
promise. The bailor is called the pawnor and the bailee is called the pawnee. In the
case of pawn, there is no transfer of property in goods. Only possession of the goods is
transferred. Hence, it is different from mortgage. Pawn is also different from lien, as in
the case of lien, there is not power to sell the article while a pawnee can sell, subject to
some conditions.
Rights of Pawnor
Even after the expiry of a stipulated period, he may redeem the goods pledged at any
subsequent time before the actual sale of the goods pledged. But he must pay
expenses which may have arisen from his default.
Rights of Pawnee
1. He can retain the goods pledged until he recovers the debt, interest and other
expenses incidental to possession or preservation of the goods.
2. He cannot retain the goods for debts other than those for which pawn is made.
3. He is entitled to receive extra-ordinary expenses incurred for the preservation of
goods.
4. If the pawnor makes a default, the pawnee may
a. Bring a suit upon the debt or promise and
b. Retain the goods pledged or
c. Sell the goods by giving a reasonable notice of sale to the pawnor.
If the proceeds of such are less than the amount due in respect of the debt or
promise, the pawnor is still liable to pay the balance. If the proceeds of the sale
are greater than the amount so due, the pawnee shall pay over the balance to
the pawnor.
LESSON 4
CONTRACT OF AGENCY
Section 182 of the Indian Contract Act defines an agent as 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.
Example: P, a principal gives M, a minor, a jewel worth Rs. 100 and instructs fgdgdf
to sell it on credit or for less than Rs. 500. M sells the jewel on credit for Rs. 400.
P cannot make him liable while he is bound by the sale..
Consideration is not essential. That the principal gives his consent to be represented
by the agent is sufficient consideration for the agent gdg dfgd dfgd.
CREATION OF AGENCY
An agency may be created in the following ways:
1. By Express Authority: The authority of any agency may be expressed in words
spoken or written. For example, a contract of agency can be written by means of
power of attorney.
2. By Implied Authority: The authority of an agent can be interred from the
circumstances of the case.
Illustration: A living in Bombay, owns a shop in Madras and he occasionally visits it.
B is managing the shop and is in the habit of ordering goods from C in the name of A
for the purpose of the shop and of paying to them out of As funds with As
knowledge. B has an implied authority from A to order goods from C in the name of A
for the purpose of the shop.
3. By Necessity: Sometimes, exigencies of circumstances require a man to act for
another as an agent, though not appointed as such.
Illustration: A horse was sent by rail. The owner had not taken delivery of the same
at the destination. So, the station master had to feed it. It was held that the station
master had become an agent by necessity and was therefore entitled to recover the
charges incurred by him.
4. By Holding Out: Where a master usually sends his servant to pledge his credit for
certain mangdfgfd he is bound by the acts of the servant for similar purposes
though done without his consent.
5. By Estoppel: When one man by words or conduct causes another to believe that
some other person is his agent and that another person had acted on that belief,
he would be stopped from denying the authority of that another person to act on
his behalf.
Illustration: a tells B in the presence and within the hearing of P that he (A) is Ps
agent and P does not contradict this statement B, on the faith of this statement,
subsequently enters into a contract with A, taking him to be Ps agent. P is bound
by that contract.
6. By Ratification or Expost Eacto Agency : Section 196 of the Indian Contract Act
lays down that where acts are done by one person on behalf of another, but
without his knowledge of authority, he may elect to ratify or to disown such acts. If
he ratifies them the same effects will follow as if they had been performed by his
authority. Thus ratification relates back to the date of the original contract and
binds the principal as if he has expressly authorized it.
The termination that takes effect so far as regards the agent, the moment, it
becomes know to him and so far as regards third persons, the moment it
becomes know to them. So, if an agent knowing the termination of agency,
contracts with third persons who are not aware of the termination, the becomes
liable to the principal for damages while the contract binds the principal and third
persons.
RIGHTS OF AN AGENT
1. He is entitled to remuneration and other expenses properly incurred by him in the
agency. But if he is guilty of misconduct, he is not entitled to receive the
remuneration.
Illustration: A employs B to recover Rs. 1000 from C. Through Bs misconduct,
the money is not recovered. B is entitled to no remuneration for his services and
must make good the loss.
2. He is entitled to retain the goods, papers and other property, movable on
immovable, of the principal for his claims.
3. The agent has a right to be indemnified by the principal for all lawful acts.
Illustration: B at Singapore under instructions from A of Calcutta, contracts with C
to deliver goods. A does not send the goods to B and C sues B breach of
contract. B informs A of the suit and A authorizes him to defend the suit. B
defends and is compelled to pay damages etc. A is liable to B for such damages
etc.
4. The agent is entitled to be indemnified for the injury caused to him by the
principals neglect or want of skill.
Illustration: A employs B as a brick-layer in building in a house and puts a
scaffolding himself unskillfully and B is in consequence, hurt. A must compensate
B.
5. When an agent acts in good faith, the employer must indemnify him for the
consequence of that act, through it causes an injury to the rights of third parties.
Illustration: B, at the request of A, sells goods in the possession of A, but which A
had no right to dispose of B does not know this and hands over the sale
proceeds to A. afterwards C the true owner sues A and recovers the value of
goods and costs. A must indemnify B for what he has paid and for Bs own
expenses.
DUTIES OF AN AGENT
1. He should act according to the directions of the principal and in default, indemnify
the principal for the loss, if any
2. In the absence of instructions, he must act according to the trade custom.
Illustration: A, an agent engaged in carrying on for B, a business, in which it is the
custom, to invest from time to time, at interest the monies which may be in hand,
omits to make such investment. A, must make good to B the interest usually
obtained by such investment.
3. In case of difficulty, he must be diligent in communicating with the principal and
obtaining his instruction.
4. He must conduct the business of agency with as much skill as is generally
possessed by persons engaged in similar business, unless the principal has
notice of want of skill.
Illustration: A, having authority to sell on credit, sells goods to B without enquiring
about his solvency, B at the time of sale, is bankrupt. A must make good the loss.
5. He must render proper accounts on demand.
6. He must not delegate his authority without the consent of the principal.
7. He must deliver all monies including secret commission, to the principal. He can
deduct his remuneration and other lawful expenses spent by him.
8. He should not set up his own title or title of third parties to the goods of the
principal in hi hands.
9. If, by the nature of profession, an agent is purported to have special skill, he must
exercise that degree of skill ordinarily expected from the members of the
profession.
Illustration: A solicitor, who started the proceedings under a wrong section or field a
suit in a court having no jurisdiction, is liable.
10. He should not disclose confidential information.
11. His interest should not conflict with his duty.
When the property in the goods is transferred, the contract is called a sale. The contract
called an agreement to sell, when the transfer of property is take place at a future time
or subject to fulfilment of some condition. An agreement to sell becomes a sale, when
the time lapses or such condition is fulfilled.
IMPLIED WARRANTIES
1. Warranty of Quiet Possession: There is an implied warranty that the buyer shall
have and enjoy quiet possession.
2. Warranty against Encumbrances: There is an implied warranty that the goods
shall be free from encumbrance or charges in favour of any third party not
declared or known to the buyer before or at the time of contract.
RIGHTS OF AN UNPAID SELLER
The seller of goods is deemed to be an unpaid-seller where
a) The whole of the price has not been paid or tendered or
b) When a bill of exchange or any other negotiable instrument has been given as
conditional payment but the same has been dishonoured.
An unpaid vendor has the right of withholding the delivery of goods when the property in
goods has not passed to the buyer.
He has the following rights when the property in goods has passed to the buyer.
1. Rights of Lien
The unpaid vendor who is in possession of the goods, can retain such possession until
the price is paid or rendered. And if the goods are partly delivered, the an exercise this
right on the remaining goods except when such part delivery amounts to show that he
has give up the right of lien. This right of lien extends to the whole of goods in the
possession of the unpaid vendor and can be exercised only for the recovery of the price
of goods but not the amounts like godown rent, incurred in storing the goods in exercise
of lien for the practice.
He can exercise the right of lien
Where the goods have been sold without any stipulation as to credit
Where the goods have been sold on credit, but the term of credit has expired
and the price remains unpaid.
Where the buyer becomes bankrupt
This right of lien is lost
When the goods are delivered by him to a carrier, or other bailee for the
purpose of transmission without reserving the right of disposal,
When the buyer or his agent lawfully obtains the possession of goods
The unpaid vendor must give notice of his claim to the carrier or other bailee, who is in
possession of the goods, in order to exercise this right of stoppage. Such notice takes
effect when it reaches the carrier or his agent who is in actual possession of goods. On
receipt of notice of the stoppage, the carrier must re-deliver the goods to or according to
the directions of the seller. The seller shall have to bear the expenses of such re-
delivery.
3. Right of Re-Sale
The unpaid vendor can re-sell the goods
1) without notice to the buyer if the goods are perishable goods and
2) With notice to the buyer of his intention to re-sell. If the goods are not perishable.
He can retain the profit resulting form such re-sale and claim damages from the
original buyer for loss if any. But if he does not give notice to the buyer of his
intention to re-sell the goods where necessary, he must pay back the surplus or
profit to the original buyer and bear the loss, if any.
REVIEW QUESTIONS
1. Distinguish between sale and agreement to sell
2. What are the implied conditions and warranties laid down under the Sale of
Goods Act
3. What are the rights of an unpaid seller?
LESSON 6
NEGOTIABLE INSTRUMENTS ACT, 1881
FEATURES
1. The property in it passes either by mere delivery or by endorsement and delivery
2. The holder in due course is not affected by the defect in the title of his transferor
or any previous party.
3. The holder in due course, can sue in his own name. He need not give notice to
the debtor that he has become the holder.
4. He is not affected by certain defects like fraud to which he is not a partly
5. Consideration is presumed to have passed
6. It is convenient method of discharging payments
The Act does not stipulate that only bills of exchange, promissory notes and cheques
are only the negotiable instruments. So, other instruments may also be added to
the list of negotiable instruments provided.
They are transferable by mere delivery and
The holder in due course can sue in his own name
Hence, Dividend Warrants, Port Trust or Improvement Trust Debentures, Railway
Bonds, payable to bearer or Railway Receipts having the feature of negotiability
are all negotiable instruments. So, a negotiable instrument is an ordinary chattel
for chose-in-action clothed with the feature of negotiability.
MATERIAL ALTERATION
Material alteration refers to changes introduced on a cheque which affects its
fundamental character. In other words, any change in any instrument which makes it
speak a different language, for all legal purposes from what it spoke originally would
constitute a material alteration. If the alteration is material, it renders the cheque invalid.
KINDS OF CROSSING
Is is of two kinds (1) General Crossing and (2) Special Crossing
1. General Crossing
Sec. 123 of the Negotiable Instruments Act defines General Crossing as, where
a cheque bears across its, face an addition of the words And Company or any
abbreviation thereof between two parallel transverse lines or of two parallel
transverse lines simply, either with or without the words not negotiable, that
addition shall be deemed to be a crossing and the cheque shall be deemed to be
crossed generally.
Two parallel transverse lines across the face of the cheque with or without the
words, & Co., Account Payee only, Not Negotiable, constitute general
crossing. The cheque which is crossed generally, is payable only to banker.
Specimens of General Crossing
2. Special Crossing
Sec. 124 of the Negotiable Instruments Act defines Special Crossing as, where
a cheque bears across its face an addition of the name of a banker, with or
without the words not negotiable, that addition shall be deemed a crossing and
the cheque shall be deemed to be crossed specially and to be crossed to that
banker. When a cheque is crossed specially, the amount is payable by the
drawee only, only to the bank named in the crossing.
When the words not negotiable are added either in general or special crossing, the
person taking the cheque cannot have and cannot give a better title than what his
transferor has. So, a not negotiable cheque is transferable. But the transferee gets no
better title than what the transferor has.
RULES OF CROSSING
1. An uncrossed cheque may be crossed generally or specially by the drawer or the
holder.
2. A cheque crossed generally, may be crossed specially by the holder.
3. The holder may add the words not negotiable.
4. The banker to whom the cheque is crossed specially, may re-cross it, but only to
another bank as his agent for collection.
5. Where an uncrossed cheque or a cheque crossed generally is sent to a banker
for collection, he may cross it specially to himself. But he cannot enjoy Statutory
protection against being sued for conversion.
INDORSEMENTS
It means the writing of a persons name (otherwise than as maker) on the face or back
of a netgotiable instrument or on a slip of paper (called alloonge) annexed thereto, for
the purpose of negotiation (Sec. 15). The person who signs the instrument is called the
indorser. The person to whom the instrument is indorsed is called the indorsee.
KINDS OF INDORSEMENTS
1. Bank Indorsement or General Indorsement
When the indorser signs his name only, it is called blank indorsement. An
instrument endorsed in blank is payable to bearer. The holder of an instrument
may write above the indorsers signature, a direction to pay the amount to or to
the another person. When the holder does so, he does not become liable as an
endorser on the instrument, as he had not signed it.
[Sd.] Smith
An instrument having been endorsed in blank is indorsed in full the indorser in full is
liable to the person to whom it is indorsed in full or to others who derive title through
such person.
3. Restrictive Indorsement
It is one which prohibits or restricts further negotiation or which constitute the
indorsee an agent to receive its contents for his indorser.
Example: (1) Pay C only (2) Pay D for my use (3) Pay D on account of E (4)
Pay E or order for collection.
4. Partial Indorsement
When a part of the amount of the instrument is endorsed, it is called partial
indorsement. It is void:
Example: A holds a bill for Rs. 800 A endorses thus
Pay Rs. 400 to B or order (or)
Pay B or order Rs. 400 and to C or order Rs. 400
But if the part of the amount of the instrument is already paid, the unpaid balance
may be endorsed thus. Pay B or order Rs. 400, being unpaid residue of the bill.
5. Conditional or Qualified Indorsement
This is one which negotiates or limits the indorsers liability, in the following
ways:
(a) By Sans Recourse Indorsement: The indorser excludes his liability by express
words in indorsement.
Examples: (1) Pay A or order
Sans Recourse
(Sd) B
(b) By making his liability depend upon the happening of a specified event,
though such event may never happen.
Example : Pay A or order on his marrying B
(c) By making the right of the indorsee to receive the amount, depend upon the
happening of a specified event, though it may never happen.
(d) By Facultative Indorsement: This is one which extents the liability of the
indorser.
Example: Pay A or order
Notice of dishonor waived
(Sd.) B
a stale one,
post-dated one,
mutilated,
drawn on another branch where the account is not kept,
COLLECTING BANKER
A collecting banker is one who undertakes to collect the amount of a cheque for his
customer from the paying banker.
ESSENTIALS OF PARTNERSHIP
1. Relationship: Partnership is the abstract relationship between partners
2. Two or More Persons: As no one can be a partner with himself, there must be
at least two persons. The maximum number of members is 10 for a partnership
carrying on banking business and 20 for a partnership carrying on any other
business.
3. Agreement or Deed: Partnership arises out of an agreement but not out of
status. Such agreement, also called as deed, may be express or implied from the
conduct of the parties. It may be oral or written. It contains details relating to
name of the firm and the names of the partners,
management,
accounts
arbitration etc.
4. Business: The object of the partnership is to carry on any business, profession,
vocation, trading or calling. Such business must be lawful. Mere holding of
property in common is not partnership, e.g. co-ownership.
5. Profit Sharing: Sharing of profits is essential though it does not mean that all
those who participate in profits are necessarily partners.
6. Carried on by all or any of them acting for all: Each partner acts as an agent
as well as a principal. Each one can act in the course of business and bind the
other partners by his acts. As such, he can be called an agent. Since he is also
bound by the acts of the other partners, he can be called the principal. Thus, the
law of partnership is a branch of the general law of agency as every partner has
implied power to bind other partners for the acts of the firm, done in the course of
conduct of the business.
KINDS OF PARTNERSHIP
1. Partnership at will: Where the partners have not provided in their deed, for the
duration of partnership or for the termination of partnership, the partnership is
called partnership at will. A partner may retire to dissolve the partnership at his
will, by giving a notice to other partners, of his intention to do so.
2. Particular partnership: A person may become a partner with another person in
particular adventures or undertakings.
3. Partnership for a fixed term: Where the partners fix the definite period or
duration of partnership, it is called a partnership for a fixed term.
TEST OF PARTNERSHIP
In determining whether a partnership exists or not, or whether a person is a partner
or not the real relation between the parties as shown by all relevant facts, must be
taken into consideration.
The joint use of property in common in business for sharing of profits is evidence
that a partnership exists. But this is not conclusive evidence to show that a
partnership exists. Likewise, an active participation in the conduct of business is
evidenced that a partnership exists. But again, it is no conclusive evidence to
establish the fact of existence of partnership. For example, a servant may manage
the affairs of a firm. Yet he is not a partner. In the same way, a joint venture having
no object of profit sharing is not a partnership, while sharing of profits is evidence,
though no conclusive, that a partnership exists. So, Section 6 lays down that the
receipt of a share of profit, or a payment contingent or varying with the profits does
not of itself, make the recipient a partner. Therefore, the true test of partnership is
no sharing of the profit, but whether the relationship of agency exists or not.
KINDS OF PARTNERS
Following are different kinds of partners
1. Actual or Ostensible Partner: An actual partner is one who actively participates
in the conduct of the business of the partnership.
2. Dormant or Sleeping Partner: He is a partner who is not known to third parties
as such. He does nto take active part in the conduct of business. He occupies
the position of an undisclosed principal. Hence, third parties can sue him on
discovering that he is a partner. While he has access to accounts and examine
and verify them, he has not duties to perform. Hence no notice of his retirement
to the public is necessary nor the firm is dissolved when he becomes insane.
3. Partner by Estoppel: Where a person causes, by his conduct, another to
believe him to be a partner and on that belief such other person gives credit to
the firm, he is estopped from denying that he is a partner.
Example: X, Y and Z are partners of a firm. X, in the presence and within the
hearing of A, represents to D that A is a partner of their firm. A does not contradict
this representation. A, on faith of that representation, lent Rs. 5000 to the firm, A,
is liable as a partner.
4. Partner by Holding Out : Where a person represents himself or allows others
to represent him as a partner of a particular firm, he becomes liable to all those
who act and lend money to the firm, on the faith of such representation.
Example: A, represents himself as a partner of a particular firm. D on the faith of
the representation, lends credit to the firm. A becomes liable.
REGISTRATION OF FIRMS
The Partnership Act does not provide for the compulsory registration of firms. It has left
it to the option of the firms to get themselves registered. But indirectly, by creating
certain disabilities from which an unregistered from suffers, it has made the registration
of firms compulsory.
The statement shall be signed by all the partners or by their agents specially authorized
in this behalf [Sec. 58(1)]. It shall also be verified by them in the prescribed manner
[Sec. 58(2)].
When the Registrar is satisfied that the above provisions have been duly compiled with,
he shall record an entry of the statement in the Registrar of Firms (maintained by
Registrar of Firms in respect of each registered firm for recording the necessary
information relating to that firm) and file the statement (Sec. 59). He shall then issue
under his hand a certificate of registration. Registration is effective from the date when
the Registrar files the statement and makes entries in the Register of Firms.
the names of the persons suing appear as partners in the Register of Firms
[Sec. 69(2)]
3. Clain of set-off: An unregistered firm or any partner thereof cannot claim a set-
off in a proceeding instituted against the firm by a third party to enforce a right
arising from a contract, until the registration of the firm is effected [Sec. 69(3)]
RELATIONS OF PARTNERS
The relations of the partners of a firm to one another are usually governed by the
agreement among them. Such agreement may be express or implied.
RIGHTS OF A PARTNER
1. Right to take part in Business
The partnership agreement usually provides the mode of the conduct of the
business. Subject to pay such agreement between the partners, every partner
has a right to take part in the conduct of business [Sec. 12(a)]. This is based on
the general principal that partnership business is the common business of all the
partners.
2. Right to be Consulted
Every partner has an inherent right to be consulted in all matters affecting the
business of the partnership and express his views before any decision is taken
by the partners.
3. Right of Access to Accounts
Subject to contract between the partners, every partner has a right to have
access to and inspect and copy any of the books of the firm.
4. Right to Share in Profit
In the absence of any agreement, the partners are entitled to share equally in the
profits earned and are liable to contribute equally to the losses sustained by the
firm.
5. Right to Interest on Capital
The partnership agreement may contain a clause as to the right of the partners to
claim interest on capital at a certain rate. Such interest, subject to contract
between the partners, is payable only out of profits, if any, earned by the firm.
6. Right to Interest on Advances
Where a partner makes, for the purposes of the business of the firm, any
advance beyond the amount of capital, he is entitled to interest on such advance
at the rate of six per cent annum. Such interest is not only payable out of the
profits of the business but also out of the assets of the firm.
7. Right to be Indemnified
A partner has authority, in an emergency, to do all such acts for the purpose of
protecting the firm from loss as would be done by a person of ordinary prudence,
in his own case, acting under similar circumstances. Such acts of the partner
bind the firm. If as a consequence of any such act, the partner incurs any liability
or makes any payment, he has a right to be indemnified.
8. Right to the Use of Partnership Property
Subject to contract between the partners, the property of the firm must be held
and used by the partners exclusively for the purposes of the business of the firm.
No partner has a right to treat it as his individual property. If a partner uses the
property of the firm directly or indirectly for his private purpose, he must account
to the firm for the profits which he may have earned by the use of that property.
9. Right of Partner as Agent of the Firm
Every partner for the purposes of the business of the firm is the agent of the firm.
10. No New Partner to be Introduced
Every partner has a right to prevent the introduction of a new partner unless he
consents to that or unless there is an express term in the contract permitting
such introduction. This is because partnership is founded on mutual trust and
confidence.
11. No Liability before Joining
A person who is introduced as a partner into a firm is not liable for any act of the
firm done before he became a partner.
12. Right to Retire
A partner has a right to retire (a) with the consent of all other partners, or (b) in
accordance with an express agreement between the partners, or (c) where the
partnership is at will, by giving notice to all the other partners of his intention to
retire.
13. Right of Outgoing Partner to Share in the Subsequent Profits
Where a partner has died, or has ceased to be a partner by retirement,
expulsion, insolvency, or any other cause, the surviving or continuing partners
may carry on the business with the property of the firm without any final
settlement of accounts as between them and the outgoing partner or his estate.
In such a case, legal representative of the deceased partner or the outgoing
partner is entitled to such share of the profits as is proportionate to his share in
the property of the firm.
DUTIES OF A PARTNER
Partnership is a contract of uberrimae fide. The partners must act with utmost
good faith as the very basis of partnership is mutual trust and confidence.
According to Sec. 9, which deals with the general duties of partners, partners are
bound
(a) to carry on the business of the firm to the greatest common advantage,
(b) to be just and faithful to each other, and
(c) to render true accounts and full information of all things affecting the firm to
any partner or his legal representative.
The other duties are spread over the Partnership Act. These duties are summed as
under:
1. To carry on business to the greatest common advantage
Every partner is bound to carry on the business of the firm to the greatest
common advantage. He is bound, in all transactions affecting the partnership, to
do his best in the common interest of the firm.
2. To observe faith
Partnership is a fiduciary relation. Every partner must be just and faithful and
observe utmost good faith towards every other partner of the firm.
3. To indemnify for fraud
Every partner is bound to indemnify the firm for any loss caused to it by his fraud
in the conduct of the business of the firm.
4. To attend diligently
It is the duty of every partner to attend diligently to his duties in the conduct of the
business of the firm [Sec. 12b], and to use his knowledge and skill to the
common advantage of all the partners.
5. Not to claim remuneration
A Partner is not entitled to receive any remuneration in any form for taking part in
the conduct of the business of the firm. It is however, usual to allow some
remuneration to the working partners provided there is a specific agreement to
that effect.
6. To share losses
It is the duty of every partner to contribute to the losses of the firm. In the
absence of an agreement to the contrary, the partners are bound to contribute
equally to the losses sustained by the firm. An agreement to share profits implies
an agreement to share losses also.
7. To indemnify for willful neglect
Every partner is bound to indemnify the firm for any loss caused to it by his willful
neglect in the conduct of the business of the firm.
8. To hold and use property of the firm exclusively for the firm
It is the duty of every partner of the firm to hold and use the property of the firm
exclusively for the purposes of the business of the firm
9. To account for personal profits
If a partner derives any benefit, without the consent of the other partners, from
partnership transactions, he must account for it and pay it to the firm. This is
because the relationship between partners is a fiduciary relationship and no
partner is entitled to make any personal profit.
10. To account for profit in competing business
A partner must not carry on any business of the same nature as competing with
that of the firm. If he does that he is bound to account for and pay to the firm all
profits made by him in that business.
11. To act within authority
Every partner is bound to act within the scope of his actual or implied authority.
Where he exceeds the authority conferred on him and the firm suffers a loss, he
shall have to compensate the firm for any such loss.
12. To be liable jointly and severally
Every partner is liable, jointly with all the other partners and also severally, for all
the acts of the firm done while he is a partner.
13. Not to assign his rights
A partner cannot assign his rights and interest in the firm to an outsider so as to
make him the partner of the firm. He can, however, assign his share of the profit
and his share in the assets of the firm.
DISSOLUTION OF FIRMS
Section 39 of the Indian Partnership Act lays down that the dissolution of partnership
between all the partners of a firm is called the dissolution of the firm. This is
different from the dissolution of partnership. A partnership may be dissolved without
dissolution the firm. But dissolution of firm involves dissolution of partnership. In the
firm of A, B and C, if C dies or retires, the firm will be dissolved. But A and B may
take in D and continue doing the business. This new firm of A, B and D is called the
new or reconstituted firm.
In all these cases, the remaining partners, may constitute the firm. Hence,
dissolution of partnership does not necessarily involve dissolution of the firm. If
they do not continue, the firm is dissolved automatically.
Dissolution of Firm
A partnership between all the partners is dissolved in the following ways
1) Dissolution by Agreement: (a) By mutual consent of all the partners, or (b) in
accordance with the contract entered into by them.
2) Compulsory Dissolution: (a) by the insolvency of al the partners except one, or
(b) by the business of the partnership becoming illegal or unlawful by subsequent
events.
3) Dissolution of Partnership at Will: The firm may be dissolved by any partner
giving a notice to the other partners of his intention to dissolve the firm. But the
notice must be in writing and unambiguous. Once given, it cannot be withdrawn.
The firm is dissolved from the date mentioned in the notice, or if the date is not
mentioned, from the date of communication of the notice.
4) Dissolution through Court: A partnership for a fixed period will be dissolved by
a court where it is not dissolved for the reasons mentioned above.
At the suit of a partner, a firm may be dissolved on any of the following grounds:
(a) that a partner has become of unsound mind,
(b) that a partner has become permanently incapable of performing his duties,
(c) that a partner is guilty of conduct which is likely to affect prejudicially, the
carrying on of the business.
(d) that a partner persistently commits breach of agreement. For instance, a firm
is dissolved when: (i) a partner commits breach of trust, or (ii takes away the
partnership books etc.
(e) that a partner has transferred his interest to a third party or allowed his share
to be charged or sold in the recovery of arrears of land revenue
(f) that the business of the firm cannot be carried on, save at a loss, or
(g) on any other ground which renders it just and equitable that the firm should
be dissolved.
REVIEW QUESTIONS
1. define Partnership. What are the different kinds of partnership?
2. What are the rights and duties of partners?
3. What is the procedure for registration of partnership firm? What is the effect of
non-registration?
4. What are the modes of dissolution of firm?
LESSON 8
ARBITRATION OF ACT, 1940
Arbitration is one of the oldest methods of settling civil disputes between two or more
persons by reference to the dispute to an independent and impartial third person
instead of litigating the matter in the usual way through the Courts.
In Union of India Vs D.P. Wadia & Sons, A.I.R. (1977) Bom. 10, it was observed that
arbitration is a domestic forum. It is a forum other than a Court of law for determination
of disputes and differences, after hearing both the sides, in a judicial manner. The law
relating to arbitration is contained in the Arbitration Act, 1940.
The person appointed to adjudicate upon the difference is called an arbitrator.
Section 2(a) defines that an Arbitration Agreement means a written agreement to
submit, present or future differences to arbitration, whether an arbitrator is named
therein or not.
KINDS OF ARBITRATION
ARBITRATION WITHOUT INTERVENTION OF A COURT
Unless the intention of the parties is otherwise expressed, following provisions shall be
implied in an arbitration agreement.
ARBITRATION IN SUITS
Arbitration through the Intervention of Court where no Suit is Pending
Though the parties have entered into an arbitration agreement before a suit in
respect of any matter relating to the agreement is field in a court, one of the
parties may apply to the court for the filling up of the agreement with it. Such an
application must be in writing, numbered and registered as a suit. The interested
parties shall be made as plaintiffs and disinterested as defendants. The court
having heard the objections, if any, of all the parties to the agreement, issues an
order of reference to an arbitrator appointed by the parties or by the court itself.
Thereafter, all the rules applicable in the case of arbitration without intervention of
the court, shall apply.
ARBITRATOR
An arbitrator is one, who is appointed by the contending parties for negotiation
and settlement of a dispute referred to him. Since, he is appointed by the parties
to the dispute at their own choice, anybody, including a minor or one of
themselves may be appointed as an arbitrator. But when the parties cannot
appoint any arbitrator or if an appointed arbitrator neglects or refuses to act or is
incapable of acting or dies, and if such vacancy is not duly filled within 15 days of
the notice by any party on the other parties to fill such a vacancy, the court, on
the application of the party who gave notice to other parties for filling the
vacancy, may appoint an arbitrator or arbitrators. The court, on receiving an
application from any of the parties can remove an arbitrator when he fails to
proceed with the reference or when he has misconducted himself of the
proceedings.
POWERS OF ARBITRATOR
1. He can administer oath to the parties and witnesses
2. He can state a special case for the opinion of the court on any matter of law
3. He can state the award in the form of a special case for the opinion of the
court
4. He can make the award conditional or in the negative
5. He can administer necessary interrogatories to any party to arbitration
6. He can administer necessary interrogatories to any party to arbitration.
DUTIES
1. He must act judicially as he is an extra-judicial court at the choice of the parties.
So, he must fix the time and place for hearing and grant adjournments as may be
necessary to do justice.
2. He must observe the fundamental principles of justice. He may not strictly follow
the technical rules of procedure. But he should not disregard the substance of
justice.
3. He must be impartial and act fairly to both the parties.
4. He must not act as an agent or advocate of a party. He must act as an impartial
judge.
5. He must decide on all matters relating to the dispute and make an award
6. He must not delegate his authority to someone else except when the delegation
involves ministerial acts. He may however, take the assistance of experts like a
Chartered Accountant etc. but he must give his own decision.
7. He must not investigate into matters which are outside the scope of terms of
reference to arbitration. So, he must not exceed his authority.
8. He must make an award within four months from the date on which reference is
made or within such extended time as the court may allow.
POWERS AND DUTIES OF AN UMPIRE
Where two or more even numbers of arbitrators are appointed and the reference
provides that in the event of their disagreement, the matter in dispute shall be
referred to the decision of a third person, such third person is called an umpire.
So, an umpire may be appointed by the arbitrators within one month from the
latest date of their respective appointments. He may be appointed by the court
(1) when the arbitrators do not appoint him or (2) when the parties fail to appoint
arbitrators. The court may remove him on same grounds on which an arbitrator is
removed, namely, when he fails to proceed with arbitration or when he
misconducts himself or the proceedings. He has to make an award within two
months or such extended period as the court may allow. He may fix the amount
of costs and the persons who shall bear such costs. his other rights and duties
are the same as those of an arbitrator.
AWARD
An award is the final decision of the arbitrators or an umpire in respect of a dispute
referred to arbitration. It must be in writing and signed by the arbitrators or an umpire. It
may be filed in the court which thereupon, gives notice to the parties of the award. The
opinion of the court, on matters which the arbitrators stated a special case for the
opinion of the court, shall be added to and forms part of the award. Unless a contrary
intention appears, an award is binding on the parties to the arbitration agreements and
persons claiming under them.
CARRIAGE BY RAIL
Carriage by rail in India is regulated by the Indian Railways Act. 1890
Act of war
Act of public enemies
CONTRACT OF AFFREIGHTMENT
A contract for the carriage of goods by sea is called a contract of affreightment. It is
an agreement whereby the ship owner undertakes either to carry the goods by
water or to supply a ship for the carriage of goods by water in consideration of a
price called freight. A contract of affreightment is of two kind.
1. Charter-Party and 2. Bill of Lading
CHARTER-PARTY
It is an agreement by which the ship owner agrees to let an entire ship or substantial
part of it to a shipper for the conveyance of goods on a certain voyage, to a definite
place or for a specific period in consideration of freight.
BILL OF LADING
A bill of lading is a receipt for the goods shipped on board a ship, signed by the person
who contracts to carry them, or his agent and stating the terms on which the goods
were delivered to and received by the ship.
A bill of lading contains the following particulars
1. The name of the ship and its national character.
2. A statement that it is subject to the rules laid down by the Act
3. Marks for the identification of goods, the number of packages and the order and
condition of the goods
4. The port of loading, the destination and the route
5. The amount of freight
6. Expected perils and other terms of carriage of goods.
A Bill of Lading is a document to title of goods and can be sold while the goods
are still in transit. The transfer of bill of lading serves as the symbolic delivery of
goods. But strictly speaking, it is not a negotiable instrument though it is
deliverable to a particular person or his order. therefore, it is sometimes
described a quasi-negotiable or as good as negotiable.
CARRIAGE BY AIR
The law relating to carriage of goods and passengers across inter-national borders is
regulated in India by the Carriage by Air Act, 1972. It also makes provisions for applying
the rules contained in the Warsaw Convention and the Hague Protocol (subject to
certain exceptions, adaptations and modifications) to non-international carriage by air.
DOCUMENTS OF CARRIAGE
When passengers and goods are carried by air, the following documents are issued:
Passenger Tickets: For carriage of passengers, the carrier must deliver a passenger
ticket which must contain the following particulars.
(1) The place and date of issue
(2) The place of departure and of destination
(3) The agreed stopping places, but the carrier may reserve the right to alter the
stopping places in case of necessity and the exercise of this right would not
deprive the carriage of its international character;
(4) The name and address of the carrier or carriers;
(5) A statement that the carriage is subject to the rules relating to liability contained
in the First Schedule [Rule 3(1)]
The passenger ticket shall constitute prima facie evidence of the conclusion and
conditions of the contract of carriage.
LESSON 10
CONTRACT OF INSURANCE
The Contract of Insurance is a contract whereby a person undertakes to indemnify
another against a loss arising on the happening of an event or by pay a sum of money
on the happening of an event. The person who insures is called Insurer. The person
who effects the insurance is called the Insured or Assured. The price for the risk
undertaken by the insurer and paid by the insured to the insurer is called Premium and
the document which contains the contract of insurance is called Policy.
Following are the general principles of contracts of insurance:
1. A contract of insurance is a contract uberrimae fider, i.e. a contract requiring
utmost good faith of the parties. So, all material facts which are likely to influence
the insurer in deciding the amount of premium payable by the insured must be
disclosed by the insured. Failure to disclose material facts renders the contract
voidable at the option of the insurer.
2. The assured must have, that is called insurable interest in the subject matter of
the contract of insurance. He must be so situated with regard to the thing
insured that he would have benefit from its existence, loss from its destruction.
3. Every contract of insurance such as life insurance and personal accident and
sickness insurance, is a contact of indemnity. So, the insurer pays the actual loss
suffered by the insured. He does not pay the specified amount unless this
amount is the actual loss to the insured.
4. The insured must take reasonable precautions to save the property, ion the event
of some mishap to the insured property. He must act as a prudent uninsured
person would act in his own case under similar circumstances to mitigate or
minimize losses.
5. The insurer must run the risk of indemnifying the insured. If he does not run the
risk, the consideration for which the premium is paid, fails and consequently, he
must return the premium paid by the insured.
6. The insurer is liable for loss which is proximately caused by the risk insured
against. The rule is causa proxima non remota spectalur, i.e. the proximate but
not the remote cause is to be looked to. So, the loss must be proximately caused
in order that the insurer is to become liable.
7. Except in the case of life insurance, every contract of insurance comes to an end
of the expiry of every year, unless the insured continues the same and pays the
premium before the expiry of the year.
8. According to the rule of subrogation when the loss is caused to the insured by
the conduct of third party, the insurer shall have to make good such loss and
them have a right to step into the shoes of the insured and bring an action
against such third party who caused the loss to the insured. This right of
subrogation is enforceable only when there is an assignment of cause of action
by the insured in favour of the insurer. The doctrine of subrogation does not apply
to life insurance.
there are different kinds of insurance. (1) Life (2) Fire (3) Marine (4) Accident and
(5) Guarantee insurance etc.
A life insurance policy is mainly to two types, (1) the whole life policy and (2) the
endowment policy. In the former one, the premiums have to be paid either for a
specified number of years or till the death of the assured. The policy matures on the
death of the assured. But in the case of the latter type, the amount assured is payable
either on the death of the assured or on the expiry of a specified number of years
whichever is earlier.
Again, a life insurance policy may be either, (1) with profits or (2) without profits. In the
case of the former policy, the assured gets not only the sum assured but also a share in
the profits of the underwriter in the form of bonus. But he has to pay more premium in
this case than that is payable in respect of without profits policy. But in the case of
without profits policy, the assured is not entitled to any share in the profits.
FIRE INSURANCE
A contract of fire, insurance is a contract whereby the insurer undertakes, in
consideration of the premium paid, to make good any loss or damage caused by fire
during a specific period. The contract specified the maximum amount which the assured
can claim in case of loss. This amount is fixed by the parties at the time of the contract.
It is, however, not the measure of the loss. The loss can be ascertained only after the
fire has occurred. The insurer is liable to make good the actual amount of loss nor
exceeding the maximum amount fixed by the parties.
CHARACTERISTICS OF FIRE INSURANCE CONTRACT
1. It is a contract of indemnity. The assured can, in the event of loss, recover the
actual amount of loss from the insurer. This is subject to the maximum amount
for which the subject-matter is insured.
2. It is a contract of uberrinate fider. The assured and the insurer have to disclose
everything which is in their knowledge and which will affect the contract of
insurance.
3. The assured must have insurable interest in the subject-matter both at the time of
insurance and at the time of loss. The insurable interest must be capable of
valuation in terms of money.
4. The risk covered by a fire insurance contract is the loss resulting from fire or
some cause which is the proximate cause of the loss.
5. It is subject to the principles of subrogation and contribution
6. It is contract from year to year. It comes to an end after the expiry of the year. It
can, however, be renewed if the assured pays the premium during the days of
grace.
MARINE INSURANCE
A contract of marine insurance is a contract whereby the insurer undertakes to
indemnify the insured, in manner and to the extent thereby agreed, against marine
losses, in consideration of a premium paid by the insured. It is a contract of indemnity. It
is a contract uberrimae fider. It must have insurable interest. The doctrine of
subrogation applies to it. The usual form of the policy is what is called Lloyds Policy.
Lloyds are a registere body of several members and a broker is always employed in the
case of this policy. Sometimes, a company policy also may be issued.
A marine policy is thus a formal document signed by the insurer. It must be stamped.
It contains the terms of the insurance as explained above. It is an actionable
claim and can be transferred by means of an assignment.
REVIEW QUESTIONS:
1. What is an arbitration. What are the kinds of arbitration?
2. Define common carriers. What are right, duties and liabilities of common
carriers?
3. What are the general principles of contract of insurance?
4. What is marine insurance? What are the kinds of marine policies?
BOOKS REFERRED
1. Kapoor, N.D. Elements of Mercantile Law
2. Shukla, M.C. Mercantile Law
3. Subba Rao Mercantile Law
MODEL QUESTION PAPER
Time 3 hours Maximum Marks : 100
Part - A (5 X 8 = 40)
Answer any five of the following
All questions carry equal marks
PART B (4 x 15 = 60)
Answer any Four of the following
All questions carry equal marks