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BA LLB
Subject: Law of Contract-II
Paper Code: LLB 102
Unit-I: Indemnity, Guarantee and Agency
a. Distinction between Indemnity and Guarantee b. Right and Duties of Indemnifier and Discharge c. Rights and Duties of Bailor/Bailee, Lien, etc d. Definitions of Agent and Principal, Creation of Agency and its Termination
Unit-II: The Indian Partnership Act, 1932 a. Nature of Partnership Firm b. Rights /Duties of Partners inter se
c. Incoming and Outgoing Partners, Position of Minor d. Dissolution and Consequences
Unit-III: The Sale of Goods Act, 1940 a. Definitions, Distinction between Sale and Agreement to Sale b. Conditions and Warranties c. Passing of Property d. Rights of Unpaid Seller and Remedies for Breach of Contract
Unit-IV: The Negotiable Instrument Act, 1881 a. Definition and Kinds of Negotiable Instruments b. Holder and Holder-in-Due Course c. Material Alterations and Crossing of Cheque, etc.
d. Dishonour of Negotiable Instruments
Unit-I: Indemnity, Guarantee and Agency
A. Indemnity and Guarantee
Indemnity
Contract of Indemnity and Guarantee are special types of contract. The contract of indemnity means a compensation to be paid to the person who is victim of loss or any compensation to save him from the loss caused by different cause.
A contract of Indemnity is a contract by which a person promises to other that he will indemnify that person from contingent loss.
In the Contract of Indemnity, one party promises to save the other party from damage or loss caused to him by the conduct of the promisor or by the conduct of any third party. Indemnifier: The person who promises to indemnify the loss. Indemnified or Indemnity holder: The promise whose loss is indemnified.
Indian Contract Act, 1872 has defined the contract of Indemnity. According to the Section 124 of ICA, "A contract by which one party promises to save the other from the loss caused to him by the conduct of the promisor himself or by the conduct of any person is called a contract of Indemnity"
According to the English Law a contract of indemnity is ' a promise to save another harmless from loss caused as a result of a transaction entered into at the instance of the promisor." English Law in comparison to the Indian law is wider in relation to the definition of the term.
According to the Indian contract Act;
The loss must be caused either by the conduct of the promisor or any other person and if loss is caused by accident there would not be contract of indemnity.
But the According to English law seems wide than Indian law and also covers the loss caused by accident or natural causes etc.
Features of Contract of Indemnity:
- The contract is made for protecting the promise against anticipated or contingent loss.
- The liability of the indemnifier started as soon as the loss is occurred to the indemnified.
- Indemnification is made for actual loss.
- The event specified in the contract must be happen.
- The Indemnified himself responsible for the loss if the loss is caused by his own misconduct.
- Contract may be implied and expressed.
institutions, Commercial Banks, Development Banks, Finance Companies, Co-operatives are mostly relied on the contract of guarantee for the security of their issued loan.
Section 126 of the ICA
A contract of guarantee is a contract to perform the promise to discharge the liability of a third person in case of his default.
A contract of guarantee is an agreement with the objective of enabling a person to get a loan or goods on credit or an employment.
If 'A" advances a loan of Rs. 5000/- to 'B' and 'C' promises to 'A' that if 'B' does not repay the loan, 'C' will do so. This is a contract of Guarantee.
There are triangular relationship between the parties are as follows; a. Between the creditor and debtor creating loan
b. Between the surety and the creditor creating liability of surety in case of debtor's default and c. An implied contract between the surety and the debtor that the debtor will indemnify the surety the later has paid the creditor on the debtor's default. Thus the contract of guarantee is the tripartite nature.
a. Debtor
b. Surety
Creditor
Features of Contract of Guarantee
a. A tripartite agreement between creditor, surety and principal debtor. b. No misrepresentation or concealment of the facts regarding the contract.
c. No direct consideration between the surety and the creditor. Consideration of the principal debtor is considered to be adequate for the surety. d. Primary liability is of the principal debtor and secondary liability is of the surety.
e. The involvement of competent parties is a must along with the other essentials of a valid contract. f. As a conditional contract, liability of the surety arises only when the principal debtor (primarily liable) defaults. g. A contract relating to guarantee must be concluded in writing (In Nepal and England)
Distinctions between Indemnity and Guarantee
1.In indemnity a promisor is primarily and independently liable to the promise and therefore there are only two parties.In Guarantee the liability of the surety is only secondary. the primarily principal debtor is liable for the contract hence here the concurrence of three persons is essentials.
2.In the case of contract of indemnity it is not necessary for the indemnifier to act at the request
of the debtor.Whereas, in the case of a contract of guarantee it is necessary that the surety should give the guarantee at the request of the debtor.
3.In the case of Indemnity, the possibility or risk of any loss happening is the only contingency against which the indemnifier undertakes to indemnify.In the case of guarantee there is an existing debt or duty, the performance of which is guaranteed by the surety.
4.In the case of indemnity, the indemnifier can not sue third parties in his own name, unless there be assignment. He must bring the suit in the name of indemnifier.In contract of guarantee where the surety discharges the debt payable by the principal debtor to the creditor, the surety, on such payment, is entitled in law to proceed against the principal debtor in his own right.
5The person giving indemnity has some interest in the transaction apart from his indemnity.While the surety is totally unconnected with the contract except by means of his promise to pay on debtor's default. In fact, surety must not have any financial interest in the contract.
6.Rights of indemnity may arise out of express or implied contract or out of obligation imposed by laws e.g. as between principal and agent or master and servant.The liability of the surety arises only out of contract between him and the creditor. The surety undertakes an obligation at the express or implied request of the principal debtor.
Types of Guarantee
Fro the viewpoint of nature objective and the act, the guarantee may be classified as follows;
1. Absolute and conditional guarantee :
An absolute guarantee is one by which the guarantor unconditionally promises to pay the debt, on the default of the principal debtor. But, if some contingency other than the default of the principal debtor arises then is a conditional guarantee.
2. General and special Guarantee
The guarantee that can be accepted by the general public is a general guarantee and the one that can be accepted only by the particular person is special guarantee.
3. Limited and unlimited guarantee
When a guarantee is limited there is a liability by time and amount that is limited, whereas if a guarantee is not limited there is a liability for the surety by time amount and transaction there is an unlimited guarantee.
4. Prospective and retrospective guarantee
A guarantee that is given for future transactions that ay be one or more transactions is a prospective guarantee and if it is given for the past or existing transactions it is called a retrospective.
5. Specific and continuing guarantee
· When a guarantee is extended to a single transaction or debt, it is called a specific guarantee. Such a guarantee comes to an end when the transaction stops or is duly discharged or the promise is duly performed.
such a case the surety is exonerated. c. Right to Share Reduction
If there are more than one surety exists for the same principal debtor. If any default made by the principal, all the sureties have the rights to divide the default to the extent of their guarantee. d. Right to set off:
Set off means to counter a claim. The surety is also entitled to the benefit of any set of or counter claim, which the principal debtor might possess against the creditor in respect of the same transaction. For example if the creditor owes the debtor something, or has his hand something belonging to the debtor for which the debtor could have counter claimed , the surety can also put that counter claim.
- Rights against principal debtor a. Right to subrogation
When the surety has paid the guaranteed debt on the default of the principal debtor, he become the creditor and will be able to exercise as against the principal debtor all these rights and remedies which could be exercised by the creditor. b. Right to indemnity
In every contract of guarantee there is an implied promise by the principal debtor to indemnify the surety and the surety is entitled to demand from the principal debtor whatever he has paid under the guarantee.
- Right against Co sureties a. Right to contribution
Where a debt is guaranteed by more than one sureties, they are called co-sureties. In such a case all the co-sureties are liable to contribute towards the payment of the guaranteed debt as per the agreement among them. But in the absence of any such agreement if one of the co-securities is compelled to pay entire debt, he has a right to contribution from others.
C. Bailment and Pledge
Contract Meaning of Bailment
The term "bailment" is derived from a French word ' Baillier" which means to deliver or handing over. Bailment means delivery or hand over of goods for a certain period of time or purpose. Bailor- who deliver goods Bailee- To whom the goods is delivered.
A bailment arises when one person ( the bailor) transfers possession of goods to another person (the bailee) on condition that the bailee will restore them to the bailor after the purpose for which they were delivered is accomplished.
According to Section 148 of the Indian Contract Act , " A bailment is the delivery of goods by one person to another for some purpose upon a contract that they shall, when the purpose is accomplished be returned or otherwise disposed off according to the direction of the person delivering them"
From the above definition the bailment contract has following features:
Rights of Bailee;
a. Right to claim indemnity b. Right to claim reimbursement of expenses
c. Right to claim compensation if the bailor refused to receive back the goods after the term of baiment is over. d. Right to recover lose in case of defective title e. Right to receive remuneration f. Right to deliver goods to one of several joint bailors. g. Right to deliver goods to bailor h. Right to lien
Duties of Bailee
a. To take reasonable care of goods delivered to him
b. Not to make unauthorized use of goods entrusted to him. c. Not to mix goods bailed with his own goods (Sec. 28) d. To return the goods (Sec 29) e. To deliver any accretion to the goods f. Not to set up any adverse title.
Lien
Right of Lien: the right to retain possession of the property or goods belonging to another until some debt or claim is paid, is called right of lien. The right depends on possession and is lost as soon as possession of the goods is lost. As such it is also called as “possessory lien”.
TYPES OF LIEN:
- Particular Lien
- General Lien
Particular Lien: Section 170 provides that “where the bailee has, in accordance with the purpose of the bailment, rendered any service involving the exercise of labour or skill in respect of the goods bailed, he has, in the absence of a contract to the contrary, a right to retain such goods until he receives due remuneration for the services he had rendered in respect of them.:”
Conditions:
- The bailee must have rendered some services.
- It must involve the exercise of some labour or skill.
- The services must be in accordance with the directions of the bailor.
- The goods mst be in possession of the bailee.
- There must not be a contract to the contrary.
- In bailment goods are bailed for different purposes such as safe custody, repair, hire etc. In Pledge goods are pledged for a specific purpose such as to provide security of loan or promise.
- No security is required at the time of bailment Security is essential at the time of pledge
- Goods are bailed either on offer/request of bailor to the bailee or on offer/ request of bailee to the bailor. Goods are pledged only at request of the pledger to the pledge.
5.The bailor can use the goods bailed in accordance with the terms and conditions of the contract Generally the pledgee can not use the goods pledged but can use them if the pledger allows the pledgee to do so.
- The bailment may be both either gratuitous or non-gratuitous.
In Pledge contract consideration is available to either party. It means the pledger has to pay interest to pledgee.
- Bailment incudes movable goods only The pledge includes both types of movable and immovable goods.
- In bailment no loan transaction exists In pledge loan transaction may exists.
- Bailee is not entitled to sell the goods bailed. He can retain them until he get remuneration. Pledgee can sell the goods pledged to recover his amount after giving notice to pledger in case of default by the pledger.
Rights and duties of Pawner & Pawnee
Rights of Pawner
- Right to receive back the goods pledged from the Pawnee
- Right to receive accretion to the goods pledged. (benefit, achievement and incensement)
- Right to claim compensation against the pledge for any losses he suffers due to negligently handling, mixture, and unauthorized use of goods etc.
- Right to receive a notice from the pawnee before sale or auction of the goods pledged.
- Right to sue the pawnee in the court to recover the goods in case sale or auction took place without notice.
- Right to have surplus or excess amount obtained by the sale or auction of the goods pledged.
- Right to redeem the goods pledged before sale or transferred by repaying the debt, interest, fine and other expenses. Duties of Pawner
- Pawner has the dutiy to disclose all the defects in the goods to be pledged.
- Pledger or pawnee has the duty to repay his loan, interest, expenses if any within or at the specified time.
- Pledger has to bear extra-ordinary expences for taking care of goods pldeged or has to bear additional liabilities due to default of repaying loan.
- Not to pledge the goods which is not belongs to him.
Rights of Pawnee or Pledgee
- Pledgee has right to retain the goods pledged until the pledger repay his debt, interest and other expenses if any.
- Pledgee has right to sell or auction the goods pledged if pledger is unable to repay within specified a time.
- Pledgee has right to transfer the goods in his own name if the pledged loan is not recovered by selling or auctioning.
- Pledgee has right to claim compensation against the pledger for any loss suffered by him due to default in payment of debt in time.
- If loan amount including interest and other expences is not recovered by selling or auctioning the pledged goods the pledgee can recover the due amount for other assets of the pledger.
- If the pledger pledged the goods obtained by him under viodable contract unknowingly, as soon as he aware about the fact he can rescind the contract.
Duties of Pawnee or Pledgee
- Pledgee has to take reasonable care of the goods pledged.
- Pledgee should not make any unauthorized use of the goods pledged.
- Pledgee should not mix the goods pledged with his own without consent of pledger.
- Pledgee should return the goods pledged to the pledger after the payment of the debt or completion of work.
- Pledgee has to return the accretion or increase or profit from the pledged goods.
- Pledgee has to indemnify the pledger for any loss suffered by him if the good is lost, damaged, destroyed etc.
- Pledgee has to refund the surplus amount to the pledger after selling or auctioning the pledged goods.
Finder of lost goods Meaning
· Finder of goods means a person who has found goods not belonging to him and keeps them with him.
· Though there is no definition of the term provided in Nepalese Contract Act 2056, Sec. 11 of the Act has made the provision relating to responsibilities of the finder of goods as same as bailee.
· According to Sec.71 if the Indian Contract Act, " A person who finds goods belonging to another person and takes them into his custody, he is subject to the same responsibility as bailee"
Rights and Duties of Finder of lost goods Rights of finder of lost goods
- The finder of lost goods has right to possess the goods until the true owner of the goods is found.
- The finder of lost goods has right to reimburse all the expenses from the true owner.
- The finder of lost goods has right to lien. It means he can refuse to return the goods until he is reimbursed all the expenses to preserve the goods.
- The finder of the goods can file a suit against the true owner to recover any reward which was offered by the true owner for the return of goods lost.
- Generally the finder of goods has no right to sell the goods found. However, Sec. 169 of the Indian Contract Act provides that the finder can sell the goods in any of the following cases.
a. With certain exceptions, whatever a man competent to contract may lawfully do himself he may do by another.
b. The acts of the agent are the acts of the principal. In other words he who acts through an agent is himself acting.
Characteristics of Agency:
a. Appointment of Agent on the wish of principal. b. Appointment may be either expressed or implied. c. The Principal delegates his authority to his agent d. The works of the agent binds the Principal to the third person. e. No need of consideration, it is internal matter of principal and agent. f. The Principal must be competent to contract but the agent may be incompetent to contract.
g. Agency is based on good faith. It means the agent has to inform his principal all the information as he know and the agent must not set up adverse title.
Modes of Creation of Agency
· The Contract of agency, like any other contract may be express or implied; but consideration is not an essential element in this contract.
· Agency may also arise by estoppels, holding out, necessity or subsequent ratification by the principal of the act done by the agent. · The relationship of principal and agent may be created by statute. · There are numbers of modes of creation of agency;
1. Agency by expressed agreement: · The contract of agency, normally created by an expressed agreement with certain exception. · Agreement may be writing and registration and may be made orally or in the writing. · In fact in a large number of business dealings agencies are created by word of mouth.
· The usual form of a written contract of agency is the Power of Attorney which gives him the authority to act as agency on behalf of the principal in accordance with the terms and conditions mentioned therein. · Power of Attorney may be different types;
a. General Power of Attorney: The agent is authorized to do all dealings, i.e. to act generally in the business of agency.
b. Special Power of Attorney: The agent is authorized to do a special transaction only i.e. selling land.
c. Particular power of Attorney: The agent is authorized to do a single act e.g. to present a document before the Registrar of registration.
2. Agency by implied agreement: · Implied agency arises when there is no express agreement appointing a person as an agent. · It happens from the conduct, situation or relationship of the parties. · Partners, wives are usually regarded as agent by implications of their relationship.
· Implied agency would therefore, include agency by estoppels, agency by holding out and agency of necessity.
a. Agency by Estoppel:
· Estoppel is a legal doctrine which prevents a person from denying a fact or circumstance which he has accepted.
· Where a person by his words or conduct has willfully led another to believe that certain set of circumstances or facts exists and that other person has acted on that belief, he is estopped or prevent from denying the truth of such statement.
· A tells B in the presense and within the hearing of C that he "A" is C's agent and C does not contradict this statement and later on B enter into a transaction with A believing that A he is C's agent. C is bound by this transaction and in a suit between himself and B, cannot be permitted to say that A was not his agent. b. Agency by Holding out: · It is also a branch of estoppel but is something more than that.
· An agency by holding out requires some affirmative or positive act of conduct by the principal to establish agency.
· A who is domestic servent of B generally purchase goods on credit from C and pays them regularly. C can assume that A is B's implied agent. c. Agency by necessity :
· In some cases the agency can be created because of the necessity where one may need to work being an agent of another even in the absence of express agreement.
· A person who has been entrusted with another's property, may have to incur unauthorized expenses to preserve it. · Payment of expenses incurred on lost animals and child etc. · Following conditions must be fulfilled; i. It must be impossible to get the principal's instructions. ii. The course taken only practicable one in the circumstances. iii. The agent of necessity must act honestly in the interest of all party
iv. There must be real emergency and necessity to act on behalf of principal. d. Agency by operation of law: · A partner is the agent of the act of the partner to carry out the business as usual of its partners.
d. Agency by ratification:
· If the agent had no authority to contract on behalf of principal or exceed such authority as he had, afterwards confirms and adopt the contract is known as ratification. · It is also known as ex post facto agency. · Contract of agency only be valid if the following conditions are fulfilled. i. The agent must act on behalf of the principal ii. The principal must be in existence at the time of conduct. i. The principal must have contractual capacity ii. The principal must have full knowledge of material facts or rativication iii. Whole transaction must be ratified. iv. Ratification must be done within reasonable time v. Act to be ratified should not be void or illegal vi. Ratification must not injure a third party vii. Act to be ratified must be within power of principal viii. Ratification may be express or implied and ix. Ratification must be communicated to the concerned party.
- Right to revoke or discharge the agency if the agent commit fraud or uses excess authority or deceives him.
- Right to instruct the agent in respect of working procedures.
- Right to claim compensation from agent if he does any work beyond the authority provided by principal or works negligently or carelessly.
- Right to demand secret profit if the agent earned any profit concealing from principal.
- Right to receive account of the transaction.
- Right to reject any transactions done by the agents without having authority from the principal.
Duties:
- To pay remuneration or commission as mentioned in the contract and if not mentioned in the contract reasonable remuneration or commission should be paid to the agent.
- To reimburse or repay amount spent by the agent in the course of agency.
- To provide indemnity to his agent against the consequences of lawful acts and against the consequences of the acts with good faith of the agent.
- To provide the notice to the agent if any information he got from the third party.
- Not to terminate the agency wrongfully.
- To give reasonable compensation in case he removes the agent unduly without prior notice.
- To be responsible for any loss or damage caused by the agent while executing the agency contract.
Delegation of Authority · An agency is a delegation of authority of the principal.
· Delegation of authority means to give authority for conduct certain work to another person from a responsible person. · Generally a delegated power or authority can not be delegated.
· It is based on the Latin Maxim "Delegatus nonpotest delegare" which means a delegate can not further delegate. · An agent being himself a delegate of his principal can not pass on that delegated authority to someone else. · Generally this is because of the confidence in a particular person is at the root of the contract of agency. And
· An agent usually selected in reliance upon some personal qualification so it would be unfair if the agent delegate to other and also harm to the principal.
· The main cause behind the birth of this principal is that the principal can trust the agent appointed by him much than the agent appointed by his agent.
· Section 190 of the Indian Contract Act has also adopted this principal. According to it "an agent can not lawfully employ another to perform acts which he has expressly or impliedly undertaken to perform personally."
· But there are some exceptions of this rule where the agent also can delegate his authority to any other person by appointing sub agent. Exception of the General Rule:
- Where the principal has expressly permitted delegation of such power.
- Where the custom of the trade permits delegation
- Where the principal knows that the agent intends to delegate his authority
- Where the nature of the authority is such that a deputy is necessary to complete the business
- Where the act to be done is purely ministerial and does not involve the exercise of discretion e.g. clerical or routine work.
- In an unforeseen emergency the agent can always delegate.
Sub-agent and Substituted agent Meaning of Sub-agent:
· Where an agent under express or implied delegation of authority appoints another person to act in the matter of the agency is called sub-agent. So the agent appointed by the original agent for conducting principal's work is called sub-agent.
· Section 191 of the Indian Contract Act has defined the term sub-agent as" A sub-agent is a person employed by and acting under the control of, the original agent in the business of agency."
· The relation if the sub-agent to the original agent is as between themselves, that of agent and principal
· Sub-agent acts under the control of the agent and there is no privity of contract between the principal and the sub-agent. Therefore the sub-agent can not use the principal for any money due although he may bind principal as third party.
· If the sub-agent is guilty of fraud or willful wrong the principal has right to proceed both against the agent and the sub-agent.
· In case where the sub-agent is appointed improperly or without authority of the principal the following consequences emerges; a. The principal is not liable and not bound by the works of sub-agent. b. The agent is fully responsible for principal, third party and the sub-agent.
c. The sub-agent is not liable with the principal in any including fraud or willful wrong committed by him.
Termination of agency
i. Revocation by principal
ii. Revocation by agent
iii. Destruction of subject matter
iv. Mutual consent
v. Death (sec. 209, by the death of the either party i.e. principal or agent) vi. Insanity (by the insanity of the either party)
vii. Insolvency of principal (termination in case of insolvency of principal but no effect
in case of insolvency of agent)
viii. Alien enemy
ix. Winding up the company
