NAME: SHEEN PANDITA

PRN: 19010126047

DIVISION: A

SUBJECT: SPECIAL CONTRACTS (2ND INTERNAL ASSESSMENT)

 FACTUAL MATRIX

Mr. Anish owns a popular garment line in Pune called ‘India Fashion.’ The nature of his
business entails imports of ‘Silk fabrics’ from various countries into India, which is further
refined and designed into best-selling sarees, kurtas and lehengas. ‘India Fashion,’ has a
strong presence throughout the state of Maharashtra. However, Mr. Anish loves keeping
himself updated with the latest trends in fashion, for which he plans a trip to Paris to attend
the ‘Paris Fashion Week’ that year. In order to take care of his business during his absence,
he appoints Mr. Ravi as his agent by executing a Power of Attorney (PoA) in his favor. The
PoA provides that Mr. Ravi can undertake any activity necessary to carry on the business of
‘India Fashion’ during the absence of Mr. Anish.

While Mr. Anish is away in Paris, Mr. Ravi comes across a consignment of silk which was
supposed to be exported to China, but the export was cancelled due to sudden outbreak of the
coronavirus. There was a possibility to procure silk at a price lower than the market price and
Mr. Ravi wanted to grab this opportunity. In order to purchase the silk consignment, Mr. Ravi
borrows Rs.10 Crores on behalf of ‘India Fashion’ from Madras Finance and executes a
personal guarantee by Mr. Anish (as his authorized signatory). He also pledges the entire
inventory in Pune warehouse as security but retains the possession of the inventory.

Mr. Ravi bought the silk consignment and ordered lehengas and kurtas to be manufactured
from it. However, during the tailoring process it was discovered that the silk was of
substandard quality and therefore the lehengas and kurtas manufactured from them could not
be sold at the desired price. Due to this ‘India Fashion’ sustained massive loss and it
defaulted on the payment of the loan.
 PROBLEM 1

ISSUES RAISED

ISSUE I: Whether Mr. Anish is bound by the personal guarantee executed on his behalf by
Mr. Ravi.

ISSUE II: Can Mr. Anish sue Mr. Ravi for the loss sustained by him.

ISSUE III: Whether Mr. Anish can take any legal steps to protect his inventory against
claims of Madras Finance.
 ISSUE I: WHETHER MR. ANISH IS BOUND BY THE PERSONAL GUARANTEE
EXECUTED ON HIS BEHALF BY MR. RAVI

Material Facts

 Mr. Anish owns a popular garment line in Pune called ‘India Fashion.’
 He travelled to Paris in order to attend the ‘Paris Fashion Week’, and in order to take care
of his business during his absence, appoints Mr. Ravi as his agent by executing a Power
of Attorney (PoA) in his favor, which provided that Mr. Ravi can undertake any activity
necessary to carry on the business of ‘India Fashion’ during the absence of Mr. Anish.
 During his absence, Mr. Ravi came across a consignment of silk which was supposed to
be exported to China but the export was cancelled due to sudden outbreak of the
coronavirus, and there was a possibility to procure the silk at a price lower than the
market price and Mr. Ravi wanted to grab this opportunity.
 Mr. Ravi borrows Rs.10 crores on behalf of ‘India Fashion’ from Madras Finance and
executed a personal guarantee by Mr. Anish. He also pledges the entire inventory in Pune
warehouse as security but retains the possession of the inventory.
 Mr. Ravi bought the silk consignment and ordered lehengas and kurtas to be
manufactured from it, but the silk was substandard and hence the lehengas and kurtas
could not be sold at the desired price.
 ‘India Fashion’ sustained massive loss and defaulted on the payment of the loan.

Interpretation of Relevant Legal Provision and Cases to Support such

Interpretation
I. Section 182 in The Indian Contract Act, 1872:

‘Agent’ and ‘principal’ defined — “An ‘agent’ is a person employed to do any act for
another, or to represent another in dealings with third person. The person for whom such act
is done, or who is so represented, is called the ‘principal’.”1

In P. Krishna Bhatta v. Mundila Ganapati Bhatta,2 the concept of agency was properly
defined. In this case, the court observed that every person who acts for another is not an
agent. It is only when he acts as a representative of another in business negotiations, and has
representative character and derivative authority to that regard, that he is an agent.

In the present case, Mr. Anish appointed Mr. Ravi as his agent and gave him the authority to
undertake any activity necessary for the benefit of his business. Hence, Mr. Ravi was acting
as a representative in ‘India Fashion’s’ business negotiations and thereby is the agent and Mr.
Anish is the principal.

II. Section 187 in The Indian Contract Act, 1872:

Definitions of express and implied authority— “Authority is said to be express when it is

given by words spoken or written. An authority is said to be implied when it is to be inferred
from the circumstances of the case; and things spoken or written, or the ordinary course of
dealing, may be accounted circumstances of the case. A written contract of agency is a
power of attorney wherein one person empowers the other to represent him/her, or act on
his/her behalf for certain purposes.”3

In the present case, Mr. Anish expressly appointed Mr. Ravi as his agent by executing a
power of attorney in his favor. Hence, Mr. Ravi has been given the authority to undertake any
necessary decision or act on Mr. Anish’s behalf for the benefit of the company, during his
absence.

1
Indian Contract Act, 1872, s.182
2
P. Krishna Bhatta v. Mundila Ganapati Bhatta, AIR 1955 Mad 648
3
Indian Contract Act, 1872, s.187
III. Section 188 of the Indian Contract Act, 1872:

Extent of agent’s authority— “An agent, having an authority to do an act, has authority to do
every lawful thing which is necessary in order to do such act. An agent having an authority
to carry on a business, has authority to do every lawful thing necessary for the purpose, or
usually done in the course, of conducting such business.”4

The principal and agent relationship between Mr. Anish and Mr. Ravi was established when
Mr. Anish appointed Mr. Ravi as his agent by executing a Power of Attorney in his favor.
The Power of Attorney provided that Mr. Ravi could undertake any activity necessary to
carry on the business of ‘India Fashion’ during the absence of Mr. Anish.

In Satnam Channan v. Darshan Singh,5 the extent of the Power of Attorney was defined. In
the case, the court observed that except matter which are required to be done personally, acts
and statements of a power of attorney are attributable to the principal.

In the present case, the Power of Attorney provided that Mr. Ravi could undertake any
activity necessary to carry on the business of ‘India Fashion’ during the absence of Mr.
Anish. Hence, he has the authority to handle all business matters, during the absence of the
principal.

IV. Section 127 of the Indian Contract Act 1872:

Consideration for guarantee— “Anything done, or any promise made, for the benefit of the
principal debtor, may be a sufficient consideration to the surety for giving the guarantee.”6

In Bank of Credit and Commerce International S.A. v. V.K. Abdul Rahiman, 7 the Kerala High
Court observed that for the validity of a contract of guarantee it is adequate consideration if
anything is done or any promise made for the benefit of the principal debtor. The creditor
must have done something for the principal debtor to sustain the validity of the contract of
guarantee. Anything done or any promise made for the benefit of the principal debtor must be
contemporaneous to the surety’s contract of guarantee in order to constitute consideration.

4
Indian Contract Act, 1872, s.188
5
Satnam Channan v. Darshan Singh, AIR 2007 DOC 216
6
Indian Contract Act, 1872, s.127
7
Bank of Credit and Commerce International S.A. v. V.K. Abdul Rahiman, 1998 92 CompCas 739 Ker
In the present case, Mr. Ravi acting as the agent for Mr. Anish, borrowed Rs.10 crores on
behalf of ‘India Fashion’ from Madras Finance, in order to procure the silk at a price lower
than the market price. Hence, this was done for the benefit of the principal debtor and is
sufficient consideration for giving the guarantee.

In the present case, Mr. Ravi had been given the authority to handle Mr. Anish’s business by
executing a power of attorney in his favor, thereby expressly making him an agent under
Section 187 of the Indian Contract Act,1872. Furthermore, the Power of Attorney provided
that Mr. Ravi can undertake any activity necessary to carry on the business of ‘India
Fashion’, thereby defining the extent of the authority given to Mr. Ravi, the agent, under
Section 188 of the Indian Contract Act, 1872. Mr. Ravi, in order to procure the silk at a price
lower than the market price borrowed Rs. 10 crores on behalf of ‘India Fashion’ and executed
a personal guarantee by Mr. Anish.

The question arises whether Mr. Ravi had the authority to execute the personal guarantee and
whether Mr. Anish will be bound by it. It can be concluded that he will be bound by it as Mr.
Ravi had the authority to conduct business matters and had acted in the benefit of the
company keeping in mind its best interests. He felt that procuring the silk at a price lower
than the market price would amount to a huge profit and hence acted in that regard.
Furthermore, Mr. Ravi was Mr. Anish’s authorized signatory and hence Mr. Anish can be
made the guarantor to the loan. Hence, Mr. Anish is bound by the personal guarantee
executed on his behalf by Mr. Ravi.

ISSUE II: WHETHER MR. ANISH CAN SUE MR. RAVI FOR THE LOSS
SUSTAINED BY HIM

Material Facts

 Mr. Anish owns a popular garment line in Pune called ‘India Fashion.’
 The nature of his business entails imports of ‘Silk fabrics’ from various countries into
India, which is further refined and designed into best-selling sarees, kurtas and lehengas.
 He travelled to Paris in order to attend the ‘Paris Fashion Week’, and in order to take care
of his business during his absence, appoints Mr. Ravi as his agent by executing a Power
of Attorney (PoA) in his favor, which provided that Mr. Ravi can undertake any activity
necessary to carry on the business of ‘India Fashion’ during the absence of Mr. Anish.
 During his absence, Mr. Ravi came across a consignment of silk which was supposed to
be exported to China but the export was cancelled due to sudden outbreak of the
coronavirus, and there was a possibility to procure the silk at a price lower than the
market price and Mr. Ravi wanted to grab this opportunity.
 Mr. Ravi borrows Rs.10 crores on behalf of ‘India Fashion’ from Madras Finance and
executed a personal guarantee by Mr. Anish. He also pledges the entire inventory in Pune
warehouse as security but retains the possession of the inventory.
 Mr. Ravi bought the silk consignment and ordered lehengas and kurtas to be
manufactured from it, but the silk was substandard and hence the lehengas and kurtas
could not be sold at the desired price.
 ‘India Fashion’ sustained massive loss and defaulted on the payment of the loan.

Interpretation of Relevant Legal Provision and Cases to Support such

Interpretation

I. Section 211 of the Indian Contract Act 1872:

Agent’s duty in conducting principal’s business — “An agent is bound to conduct the
business of his principal according to the directions given by the principal, or in the absence
of any such directions, according to the custom which prevails in doing business of the same
kind at the same place where the agent conducts such business. When the agent acts
otherwise, if any loss be sustained, he must make it good to his principal, and if any profit
accrues, he must account it.”8

8
Indian Contract Act, 1872, s.211
Section 211 provides that an agent is bound to conduct the business of his principal according
to the directions given by the principal and to keep himself within the confines of his
authority. In the absence of directions, the agent has to follow the custom which prevails in
business of the same kind and at the place where the agent conducts such businesses. When
the agent acts otherwise and any loss be sustained, he must make it good to his principal, and
if any profit accrues, he must account for it.

In the case of Ferrer v. Robbins,9 it was held that if the customs of a particular trade require
that goods should not be sold on credit or in return for a negotiable instrument, the agent
should not do so, i.e., in the absence of instructions, business customs must be followed.
Otherwise, the agent will be held liable to the principal for any loss resulting from the
transaction.

In the present case, Mr. Ravi was given the authority to undertake any necessary steps to
carry on the business of ‘India Fashion’, and in order to do so borrowed Rs 10 crores to
procure the silk at price lower than the market price. While he had the authority to borrow the
money, he did not have the authority to buy the silk as it was silk which was to be “ exported”
to China and the nature of ‘India Fashion’ was to entail “imports” of silk fabrics from various
countries into India, which is further refined and designed into sarees, kurtas and lehengas.

In accordance with the facts at hand, a loss has been suffered due to the actions of Mr. Ravi
and hence he must make it good to his principal, Mr. Anish.

II. Section 212 of the Indian Contract Act, 1872:

Skill and diligence required from agent— “An agent is bound to conduct the business of
the agency with as much skill as is generally possessed by persons engaged in similar
business unless the principal has notice of this want of skill. The agent is always bound to
act with reasonable diligence, and to use such skill as he possesses; and to make
compensation to his principal in respect of the direct consequences of his own neglect,
want of skill, or misconduct, but not in respect of loss or damage which are indirectly or
remotely caused by such neglect, want of skill, or misconduct.” 10

9
Ferrer v. Robbins, (1835) 2 CM & R 152
10
Indian Contract Act, 1872, s.212
An agent, except in cases where he is appointed due to the principal’s notice of his
particular skill, must act with as much skill as is expected out of anyone engaged in a
similar business. If due to his neglect or misconduct, there were direct consequences
which led to loss or damage to the principal, he will have to reimburse the principal of the
loss suffered.

The meaning of “direct consequence” was clearly explained in the case of Pannalal
Jankidas v. Mohanlal.11 In this case, an agent, having been instructed to insure certain
goods failed to do so. The goods were lost in an explosion at the docks. Even if the agent
had taken out a fire insurance policy in the usual form it would not have covered a loss of
this kind, as fire due to explosion would have been an excepted peril. But the Bombay
Government passed an Ordinance under which it undertook to pay half loss in case of
uninsured goods. Thus, the principal got only half of what he would have got if the goods
had been insured. The agent contended that as the passing of the Ordinance could not
have been anticipated, the loss was too remote. But it was held as a majority, that the loss
was a direct result of the agent’s negligence.

In the present case, Mr. Ravi procured the silk at a price lower than the market price. But
during the tailoring process it was discovered that the silk was of substandard quality and
hence the lehengas and kurtas could not be sold at the desired price, due to which ‘India
Fashion’ suffered a massive loss. It is evident that it was the neglect of Mr. Ravi which
led him to buy the silk which was of substandard quality and hence ‘India Fashion’
suffering a loss was a direct consequence of his neglect. Thus, he will have to make good
the loss to the principal.

III. Section 214 of the Indian Contract Act, 1872:

Agent’s duty to communicate with principal — “It is the duty of an agent, in all cases of
difficulty, to use all reasonable diligence of communicating with his principal, and in seeking
to obtain his instructions.”12

In the case of Jayabharathi Corporationn v Sv. P. N. Sn. Rajasekara Nadar,13 the agent
informed his principal that purchases have been effected on his behalf and subsequently

11
Pannalal Jankidas v. Mohanlal, AIR 1951 SC 144
12
Indian Contract Act, 1872, s.214
13
Jayabharathi Corporationn v. Sv. P. N. Sn. Rajasekara Nadar, AIR 1992 SC 596
confirmed it by reporting that the goods would be dispatched as soon as transport strike was
over whereas he had done nothing in the matter, it was held by the Supreme Court that such a
neglect or misconduct of the agent misinforming the principal was squarely within the wide
terms of Section 212. The court held that the agent would have to bear the brunt of paying the
damages.

In the present case it can be seen that Mr. Ravi deviated from the usual business proceedings
where they entail imports and design them into sarees, kurtas and lehengas, and instead used
silk which was being exported to China. Due to this deviation, he had an obligation to inform
the principal as this was not a necessary measure which needed to be taken in order to carry
on the business of ‘India Fashion’. As he had failed to do the same, he is liable to reimburse
the principal for the losses sustained.

In the present case, it is clearly evident that the nature of the business of ‘India Fashion’ was
to entail imports of silk and design them into sarees, kurtas and lehengas. However, the agent,
Mr. Ravi, deviated from that and used silk, which was to be exported to China, and hence is
liable to reimburse the principal under Section 211 of the Indian Contract Act, 1872.
Furthermore, as stated under Section 212 of the Indian Contract Act, 1872, if the principal
incurs losses as a direct consequence of the neglect of the agent, he is liable to reimburse the
principal for the losses incurred. Here, the agent was negligent in his duty of checking the
quality of the silk which was used by ‘India Fashion’ and hence the lehengas and kurtas were
of a substandard quality and could not be sold at the desire price. Also, Mr. Ravi failed to
inform Mr. Anish about the deviation from the usual business proceedings and hence is liable
to make good the losses under Section 214 of the Indian Contract Act.

The point of contention arises whether the act done by Mr. Ravi was an act which was
necessary in order to carry on the business of the ‘India Fashion’. It is clearly evident that the
act was not necessary and was only an act which may have benefitted the company as it was
procured at a price lower than the market price. On the contrary, it led to massive loss as the
silk was of substandard quality. Hence, not only did the agent fail to inform Mr. Anish of the
deviation from usual business proceedings, his neglect in not checking the quality of the silk
led to the loss incurred. Hence, Mr. Anish can sue Mr. Ravi for the loss sustained by him and
Mr. Ravi is liable to reimburse Mr. Anish.
 ISSUE III: WHETHER MR. ANISH CAN TAKE ANY LEGAL STEPS TO PROTECT
HIS INVENTORY AGAINST CLAIMS OF MADRAS FINANCE

Material Facts

 Mr. Anish owns a popular garment line in Pune called ‘India Fashion.’
 The nature of his business entails imports of ‘Silk fabrics’ from various countries into
India, which is further refined and designed into best-selling sarees, kurtas and lehengas.
 He travelled to Paris in order to attend the ‘Paris Fashion Week’, and in order to take care
of his business during his absence, appoints Mr. Ravi as his agent by executing a Power
of Attorney (PoA) in his favor, which provided that Mr. Ravi can undertake any activity
necessary to carry on the business of ‘India Fashion’ during the absence of Mr. Anish.
 During his absence, Mr. Ravi came across a consignment of silk which was supposed to
be exported to China but the export was cancelled due to sudden outbreak of the
coronavirus, and there was a possibility to procure the silk at a price lower than the
market price and Mr. Ravi wanted to grab this opportunity.
 Mr. Ravi borrows Rs.10 crores on behalf of ‘India Fashion’ from Madras Finance and
executed a personal guarantee by Mr. Anish. He also pledges the entire inventory in Pune
warehouse as security but retains the possession of the inventory.
 Mr. Ravi bought the silk consignment and ordered lehengas and kurtas to be
manufactured from it, but the silk was substandard and hence the lehengas and kurtas
could not be sold at the desired price.
 ‘India Fashion’ sustained massive loss and defaulted on the payment of the loan.
Interpretation of Relevant Legal Provision and Cases to Support such
Interpretation