Business Laws

(MBA 022)

Overview

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IMPORTANCE OF BUSINESS LAWS
Knowledge Of Business Laws Is Important Due To:
 Subject included in the Syllabus of MBA.
 It gives an edge to managers and improves their
business acumen.
 Acquaints managers to statutory provisions of
business.
 It is beneficial to persons interested in floating their own
business.
 Beneficial to managers at higher positions
 It is beneficial to existing entrepreneurs
 Beneficial to managers as corporate consultants
 Beneficial to all of us as common man (viz: rights of
consumers, contracts etc)

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Unit 1
 Contract Act, 1872
 Introduction
o Definition of a Contract and its essentials.
o Formation of a valid Contract
o Offer and Acceptance.
o Consideration.
o Capacity to Contract.
o Free consent.
o Legality of object.
o Discharge of a Contract by performance.
o Impossibility and Frustration.
o Breach.
o Damages for breach of a contract.
o Quasi contracts.
o Contract of Indemnity and Guarantee.
o Bailment and Pledge, Agency.

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INDIAN CONTRACT ACT,
1872

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What is Contract?
Let us acquaint ourselves with some common terms:
Proposal (Offer): Sec 2(a): When a person signifies to
another his willingness to do or to abstain from doing
anything, with a view to obtaining the assent of that
other to such act or abstinence, he is said to make a
proposal.
Promise: Sec 2(b): A proposal when accepted
becomes promise
Agreement: Sec 2(e): Every promise and every set of
promises forming consideration for each other is
called agreement
Contract: Sec 2(h): An agreement enforceable by law is
contract

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 UNDERSTANDING CONTRACT
 Proposal + Acceptance = Promise

 Promise + Consideration = Agreement

 Agreement + Enforceability by Law = CONTRACT

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Essentials Elements of a Contract
1. There must be a promise or a set of
promises
2. There must be consideration for both the
parties
3. Agreement thus made by promise and
consideration must be enforceable by law.
Note: Obligations arising out of a contract are
“rights in personam” and not the “rights in
rem”

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Formation of a valid contract:
(Sec. 10)
 Offer & acceptance (Agreement)
 Consideration
 Agreement enforceable by law
 Capacity to contract
 Free consent
 Legality of object
 Certainty of meaning
 Possibility of performance
 Writing & registration
 Not expressly declared to be void.

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Offer/Proposal: Sec.2(a)
“A proposal is defined as “when a person signifies to
another his willingness to do or to abstain from doing
anything, with a view to obtaining the assent of that
other to such act or abstinence, he is said to make a
proposal”.
Ex1: A offers to sell his book to B. A is making an offer
to do something, i.e. to sell his book.
Ex2: A offers not to file a suit against B, if the latter pays
A the amount of Rs 200 out standing. (abstaining)

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How an Offer is made?(Sec - 3)
(a) By Words (written or oral): The written offer can be
made by letters, telegrams, telex, adv etc. The oral
offer can be made either in person or over telephone.
(b) By Conduct: A bus standing at bus stop meant for a
particular destination
(c) Offer by Omission: A offers not to file a suit against
B, if the latter pays A the amount of Rs 200
outstanding. This is an offer by abstinence or
omission to do something

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Specific and General Offers
An offer can be made:
1. To a definite person or group of persons
(Specific Offer)
Ex: A offers to sell his house to B
2. To the public at large (General Offer)
Ex; The patent medicine company adv that it
would reward Rs 200 to anyone who
contracted influenza after using the
inoculation of the company

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Offer/Proposal: Sec.2(a)
 Essentials of offer:
 It must be an expression of the willingness to do
or abstain from doing something.
 Such expression must be to another person.
 Such expression must be made with the
intention to obtain the assent of the other person
to such an act or abstinence.

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Rules regarding a valid offer:
 Offer may be express or implied.
 Must give rise to legal consequences & be capable of creating
legal relationship.
 Terms must be certain & not vague.
 May be specific or general.
 Must not be an invitation to offer.
 Can be made subject to any terms & conditions.
 Must be communicated to offeree.
 Invitation to offer, cross offers & counter offers.
 Communication of special terms
 Prescribed mode of acceptance.

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Invitation to Offer, Cross Offer, Counter Offer
(i) Offer vis-à-vis Invitation to Offer: A prospectus issued
by a college for admission is an invitation to Offer. By
filling the admission form attached with the prospectus
a student is making an offer for admission. By granting
the admission to student college is accepting the offer.
(ii) Cross Offers: A wrote to B to sell his horse to him for
Rs 500. At the same time B wrote to A to buy his
horse for Rs 500. There letters crossed in post. This is
cross offer and can not be treated as acceptance.
(iii) Counter Offer: An offer terminates by counter offer of
the offeree. “An offer to sell rice was accepted with an
endorsement on the sold and bought note that yellow
and wet grain will not be accepted.

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Lapse & revocation of an offer:
 Lapse of stipulated or reasonable time.
 Acceptance not in prescribed mode.
 Rejection.
 Death or insanity of offeror or offeree before
acceptance.
 Revocation.
 Non-fulfillment of condition precedent.
 Subsequent illegality or destruction of subject-matter.

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Acceptance: Sec 2(b)
“When the person to whom the proposal is
made signifies his assent thereto, the
proposal is said to be accepted.

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Essentials of a Valid Acceptance

 Acceptance must be absolute & unqualified

(Sec 7).
 Must be communicated to the offeror.
 Must be according to the mode prescribed
 Within reasonable time.
 Acceptance must succeed an offer.
 Rejected offers can be accepted only if
renewed.

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Consideration: Sec2(d)
 In simple terms “Consideration is what a
promisor demands as the price for his promise”.
 As per Sec 2(d): When at the desire of the
promisor, the promisee or any other person has
done or abstained from doing, promises to do or
promises to abstain from doing is called a
consideration for the purpose.
 Ex: A agrees to sell his house to B for Rs 10000.
here B’s promise to pay Rs 10000 is consideration
for A’s promise and A’s promise to sell the house is
the consideration for B’s promise.

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Consideration: Sec2(d)
 Essentials of consideration:
 Consideration must move at the desire of offeror.
 May move from offeree or any other person.
 Stranger to a contract cannot sue; except in case of
trust created, an addressee of an insured article;
family settlement.
 May be past, present or future.
 Must be of some value.
 Must be real.

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Consideration: Sec2(d)
 When at the desire of the promisor, the
promisee or any other person has done or
abstained from doing, promises to do or
promises to abstain from doing something,
such act or abstinece or promise is called a
consideration for the promise.
 Ex. ‘A’ agree to sell his house to ‘B’ for Rs
10,000. Here B’s promise to pay the sum of
Rs 10000 is consideration for A’s promise and
A’s promise to sell the house is the
consideration for B’s promise

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 “No Consideration, No Contract”-
Exceptions:
General rule is that “no consideration no contract” but there are
certain exceptions of the rule:
 Natural love & affection. (Ex. An elder brother agrees to pay
the debts of his younger brother)
 Agreement to compensate for past voluntary service. (A finds
B’s purse and returns it, B promises to pay Rs 50 )
 Payment of time-barred debt. (A owes B Rs 1000 but the debt
is time barred by limitation act. A signs a promise to return Rs
500 in return of debt. This is valid contract)
 No consideration is required to create an agency

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 Capacity to Contract: (Sec 11)
 Sec 11 provides “every person is competent to
contract who is of the age of majority and
who is of sound mind and not disqualified by
any law.
 Incapacity to Contract:
1.Minority
2.Mental Incompetence
3.Status

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Capacity to Contract: (Sec 11)
1. Minor : Sec 3 of Indian Majority Act 1875: A
minor is a person who has not completed
18 years of age. However in the following
two cases, a minor attains majority after 21
years of age:
(i) Where a guardian of minor’s person or
property has been appointed under the
Guardians and Wards Act 1890 or
(ii) Where the superintendence of minor’s
property is assumed by a court of wards

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 1. Minors’ Contracts:
 Void & inoperative : Minor can not bind himself by a contract
 Minor can be promisee or beneficiary
 No ratification on attaining the age of majority.
 If a minor has received any benefits under a void contract,
he can not be asked to refund
 Minor is always allowed to plead minority (even when he
had procured a loan misrepresenting him as major)
 Minor can not be a partner to a partnership firm
 Minor’s state liable to a person who supplies necessaries
of life to him
 Minor’s parents/ guardians are not liable to a minor’s
creditor for the breach of contract by the minor except
when the minor acts as an agent of parents
 A minor can act as an agent and bind his principal by his
acts without incurring personal liability.

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 2. Unsound mind: Sec 12
 (i) Usually of unsound mind , but occasionally of sound mind : may
make a contract when he is of sound mind
 (ii) Usually of sound mind but occasionally of unsound mind: may not make
a contract when he is of unsound mind
 Causes:
 idiocy (permanently of unsound mind)
 Lunacy ( mentally deranged, however he has some intervals of sound mind.)
 Drunkenness
 Hypnotism
 Mental decay
 Effects:
 Void & inoperative
 Similar to agreements entered into by minors.

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3. Disqualified persons:
 Alien enemies :
(i) Contracts during the war: Can neither contract with Indian subject
nor can sue in an Indian court except by licence from Central Govt.
(ii) Contract made before the war: Stands dissolved or suspended for the
period of war
 Foreign sovereigns & ambassadors: Can enter into contracts and
enforce these contracts in our courts. However they can not be
proceeded against in Indian courts without sanction of Central Govt.
 Convicts: Incapable to contract while serving the imprisonment
 Company: Can not enter into contracts which are ultra vires
 Insolvents: Incompetent to contract
 Position of Married women: Has the capacity to contract

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CONSEN T (SEC 13)
Sec 13 defines consent “ two or more
persons are said to consent when they
agree upon the same thing in the same
sense”

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4. Free consent: Sec 14
Consent is said to be free if it is not caused by:
 Coercion
 Undue influence
 Misrepresentation
 Fraud
 Mistake

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Coercion: Sec 15
 Committing or threatening to commit any act forbidden by the
IPC with an intention to cause any person to enter into an
agreement.
 The unlawful detaining or threatening to detain, any property
with an intention to cause any person to enter into an
agreement.
 The act constituting coercion, may be directed at any person
& not necessarily at the other party to the agreement.
 It does not matter whether the IPC is or is not in force where
the coercion is employed. If suit is filed in India the said
provision will apply.

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Effects of Coercion:
 Voidable
 The party exercising coercion exposes himself
to criminal liability under the IPC, besides an
action in contract.
 Burden of proof lies on the party who wants to
set aside the contract on the plea of coercion.

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Undue Influence: Sec 16
 A contract is said to be induced by undue
influence when the relation subsisting between
the parties is such that one of the parties is in a
position to dominate the will of the other and he
uses this position to obtain an unfair advantage
over the other.

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Presumption of Undue Influence:
 In the following cases undue influence is presumed to exist &
the burden of proof lies on the party who is in a position to
dominate the will of the other:
 The person holds a real or apparent authority over the
other, e.g., master & servant, police officer & accused.
 Fiduciary relationship e.g., father & son, doctor & patient.
 The contracting parties mental capacity is temporarily or
permanently affected due to age, illness, mental or bodily
distress, e.g., old illiterate persons.
 Unreasonable bargains, high prices, high rate of interest etc
are instances of circumstances when undue influence is
presumed.

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No presumption of undue
influence:
 In the following cases law does not presume undue
influence & the burden of proof lies on the party alleging
that undue influence existed:
 Mother & daughter
 Grandson & grandfather
 Husband & wife
 Creditor & debtor
 Landlord & tenant.

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Effects of Undue Influence:
 Voidable
 Sec. 64: Court has the discretion to direct the
aggrieved party to refund the benefit in part or
in whole or set aside the contract without any
direction for refund of benefit.
 There is no criminal liability in case of undue
influence.

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Misrepresentation: Sec 18
 A representation means a statement of fact made by
one party to the other either before or at the time of
contract, relating to some matter essential to the
formation of the contract, with an intention to induce
the other party to enter into a contract.
 It may be expressed by words spoken or written or
implied from the acts or conduct of the parties.
 In law, a representation when wrongly made without
an intention to deceive the other party is known as
misrepresentation.

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Misrepresentation: Example
A who wanted himself to be ensured, gives
his age as 24 yrs in the proposal form,
while in fact he was of 27 yrs. A was not
aware about his correct age. He gave his
age as per school certificate. Here A gains
some advantage in terms of less premium.
So it amounts to misrepresentation.

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Effects of misrepresentation:
 Voidable
 May choose to rescind the contract or
 Affirm the contract & insist that he be put in a
position in which he would have been, if the
representation made had been true.
 The remedy is lost if the other party had
sufficient means of discovering the truth with
ordinary diligence.

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Fraud: Sec 17
 Fraud means & includes any of the following acts
committed by a party with an intention to deceive or
induce the other party to enter into a contract:
1. A false statement made intentionally is fraud
2. Active concealment of a material fact by a person having
knowledge of the fact is fraud. However, mere non-
disclosure is not a fraud, if there is no duty to disclose.
3. A promise made without an intention of performing it.
4. Any act or omission declared by law to be fraudulent.
5. Any other act fitted to deceive.

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Fraud: Example
 A says to B that his coat is made of pure
wool, though he knows that it is untrue. B
purchases the coat believing A’s statement
to be true. It is a fraud by A, and therefore
contract is voidable at B’s option.

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Silence & fraud:
 Mere silence as to facts likely to affect the
willingness of a person to enter into a contract
is not fraud, unless:
1. Such a person is under a duty to speak or
2. Silence is in itself equivalent to speech.

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Effects of fraud:
 Right to rescind the contract.
 Affirm the contract and ask for restitution, i.e.,
to be put in a position, he would have been, if
the statement made had been true.
 The aggrieved party can also claim damages.
 Fraud by a stranger to the contract does not
affect the contract.

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Action for fraud:
 Fraudulent statement must be instrumental in
inducing the party to enter into a contract.
 The plaintiff must have been actually deceived by
the fraudulent statement.
 No action will lie if the plaintiff does not sustain
any loss or injury.
 The contract is not Voidable if the party had
enough means at its disposal to discover the truth
with ordinary diligence.

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Mistake: (Sec 21)
Mistake may be of two kinds:
(i) Mistake of Law:
(a) Mistake of law of the country (“Ignorantia juris
non- excusat ” Every one is supp to know the law
of his country. Ignorance of law has no excuse)
Effect: Will not render contract void
(b) Mistake of foreign law
Effect: will be considered as mistake of fact
(ii) Mistake of Facts:
(a) Bilateral Mistakes Effect: No agreement
(b) Unilateral Mistakes Effect: Will not be void

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 5. Legality of Object S-23, 24
An agreement will not be enforceable by law if its object or
consideration is unlawful. An object or consideration
becomes unlawful in the following cases:
 Forbidden by law: an object or consideration is said to be
forbidden by law when it is a punishable by the criminal law
of the country or by any special law of the land
Ex: A loan grants to the guardian of a minor to celebrate the
marriage party of the minor.
 If it is of such a nature that, if permitted it would defeat the
provisions of any law, that is it would indirectly lead to the
violation of law.
Ex: A rents a flat to B for Rs 1200 pm and made two agreements
one for rent @ Rs 500 pm and services @ Rs 700 in order to
avoid tax
 If it is fraudulent.

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Contd..
 Where it implies or involves injury to the
person or property of another.
Ex: A borrowed Rs 100 from B and A executes
bond promising to work without pay for 2 yrs
and in case of default will pay int at exorbitant
rates
 If court regards it as immoral:
Ex: Acts against good public morals.

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Effects:
 Void
 No restitution.

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Discharge of contract:
 Discharge of a contract refers to a
process, by which the rights and
obligations arising out of a contract come
to an end. Thus, discharge of a contract
means termination of a contract.
 A contract may be discharged in any of
the following ways:

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Contd..
1. By performance
2. By mutual consent or agreement
3. By subsequent or supervening
impossibility or illegality
4. By lapse of time
5. By operation of law
6. By breach of contract.

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Discharge of Contract by Performance :
 Under a contract legal obligations are created, which
both the parties to a contract are under a duty to
fulfill. Fulfilling of such legal obligations, or
performance of the promise under a contract by both
the parties is known as performance of a contract.
 Performance of all the obligations arising out of a
contract, by all the parties to a contract is the normal
& natural mode of discharging a contract.

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 Rules regarding performance:
 Only the promisee can demand performance of the
promise under a contract, a third party cannot demand
performance, even though it was made for his benefit.
 A contract involving personal skill, taste etc., must be
performed by the promisor itself. Where it appears from
the nature of the contract, that the parties intend that the
promise of the contract should be performed by the
promisor itself; then it must be performed by the
promisor only.

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 Contd..
 Where a contract is of an impersonal nature, then
either the promisor himself or his agent may perform
the contract.
 Where death of the promisor occurs, before the
performance of the contract, then in such case the
liability of performance falls on his legal
representatives; unless a contrary intention appears
from the contract.
 Where a promisee accepts performance of the promise
from a third person, however afterwards he cannot
enforce it against the promisor.

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Performance of joint promises:
 Where several joint promisor’s with a single
promisee.
 Where a single promisor makes a promise with
several joint promisee’s.
 Where several joint promisor’s make a promise
with several joint promisee’s .

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Rules regarding joint promises:
 Unless a contrary intention appears from the contract,
the right to claim performance rests with all the
promisees jointly & a single promisee cannot claim
performance.
 Unless a contrary intention appears from the contract,
all promisors must jointly fulfill the promise.
 In the absence of an express agmt. to the contrary, the
promisee is entitled to compel any one or more of the
joint promisors to perform the whole of the promise.

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 Contd..
 Where one of the joint owners is made to perform the whole
contract, he may realize equal contribution from other joint
promisors, unless a contrary intention appears from the contract.
 Where any one of the joint owners fails to make a contribution,
then the remaining joint promisors must bear the loss arising
from such failure, in equal shares.
 In case of a joint promise, if one of the joint promisors is released
from his liability by the promisee, his liability to the promisee
ceases, but this does not discharge the other promisors from their
liability; neither does it free the joint promisor so released from
his liability to contribute to the other joint promisors.

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Impossibility of acts: [Sec 56]
 An agreement to do an act impossible in itself is
void.
 Ex: A enters into agreement with B to dig a
well on moon in order to fetch water.
 Since the event is impossible in nature the
contract is void

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 Supervening impossibility or
Frustration of contract

 FRUSTRATION OF CONTRACT: A
contract when subsequent to its formation,
becomes legally or physically impossible to
perform is known as frustration of contract.
 In England, it is popularly known as “Doctrine of
Frustration”.

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 Subsequent impossibility leading to
frustration of contract
 Destruction of subject matter
 By the death or disablement of parties
 By subsequent illegalities
 By declaration of war

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Breach of contract:
 Breach of contract brings an end to the
obligations arising out of a contract, and
hence the contract stands discharged.
 The aggrieved party can sue for damages.
 Breach of contract may be anticipatory or
actual.

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 Anticipatory breach:
 Such a breach occurs before the time stipulated for
performance has arrived.
 Anticipatory breach may be express or implied.
 The aggrieved party may sue the other party for
breach, immediately or wait until the due date
arrives and then sue.
 Where he chooses to wait until the due date, the
contract remains in operation and the other party
may either perform his part of the contract or take
advantage of any supervening impossibility.

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Actual breach:
 Actual breach occurs when a party fails to
perform his obligations upon the date fixed
for performance of contract.
 There can be no actual breach so long as
the time for performance has not yet
arrived.
 The aggrieved party may sue for damages.

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Remedies for breach of contract:
 Rescission of contract
 Suit for damages
 Suit upon quantum merit (as much as
merited, breach of part performance)
 Suit for specific performance
 Suit for an injunction (order of prohibition
from court)

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Rescission of contract
 Parties may cancel the contract on mutual
consent
 Ex: A entered into contract with B for the
supply of 1000 bales of cotton at Rs 10 k.
B does not supply cotton, A need not pay.

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Suit for damages:
 Monetary compensation awarded to the aggrieved
party for the loss suffered by him, caused by the
breach of contract by the other party is known as
‘damages’.
 The award of damages is based on the principle
of compensation & not punishment.
 The purpose of damages is to put the injured
party in the position he would have been, had
there been no breach.

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Contd..
 Damages are awarded to the aggrieved party only
if actual loss is proved.
 The loss suffered must not be remote or an
indirect result of the breach.
 While estimating the loss caused to a party by
breach, the inconvenience caused should also be
considered.
 Special damages should also be taken into
account.

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Kinds of damages:
 Ordinary or compensatory damages
 Special damages
 Exemplary or punitive damages
 Nominal damages

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Ordinary Damages:
 Ordinary damages are restricted to direct or
proximate consequences of breach of
contract.
 They arise naturally & directly in the usual
course of things from breach of contract.
 Remote & indirect losses are not
considered.

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 Special damages:
 They arise on account of special or unusual circumstances
affecting the plaintiff.
 They are remote in nature & not the natural & probable
consequence of breach.
 Such damages cannot be claimed as a matter of right, they can
be claimed only if the special circumstances which would result
in special loss in case of breach are brought to the notice of the
other party.
 Such damages must be in contemplation of the parties at the
time of entering the contract, subsequent knowledge of the
special circumstances will not create any special liability on the
guilty party.

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Vindictive & exemplary:
 The purpose of such damages is to punish the
guilty party for breach.
 The cardinal principle of contract law is that in
case of breach of contract, damages are awarded
to the aggrieved party, to compensate for the loss
suffered and not to punish the guilty party.
 Exemplary damages are hence not recoverable
for the breach of contract, as a general rule;
however there are two exceptions to this rule.

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Exceptions:
 Breach of a contract to marry: damages
depend upon the extent of injury to party’s
feelings.
 Dishonor of a cheque by a banker when
there are sufficient funds to the credit of the
customer: the smaller the amount of
cheque, greater the amount of damage.

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Nominal damages:
 Such damages are awarded for namesake.
They are neither awarded by way of
compensation to aggrieved party nor by
way of punishment to the guilty party.
 Such damages are awarded only to
establish that a right has been violated by
the breach of contract & the aggrieved
party has not suffered any actual damage,
i.e., it is of insignificant value.

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Sec 74:
 It lays down that the courts are not bound to treat
the sum mentioned in the contract (either
liquidated damages or penalty) as the sum
payable for damages for breach.
 The courts allow reasonable compensation to
cover actual loss sustained, not exceeding the
amount mentioned in the contract.
 The amount mentioned in the contract, regardless
whether it is liquidated damages or penalty,
determines only the maximum limit of liability, in
case of breach of contract.

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 Suit upon Quantum meruit:
 The term Quantum Meruit means “ in
proportion to the work done”.
 A suit for quantum meruit is generally filed
in the following cases:
1. Where work has been done in pursuance of
a contract, which has been discharged due
to the default of the defendant. In such a
case, generally, damages & payment of
quantum meruit is allowed.
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Suit for specific performance:
 Specific performance means the actual carrying
out of the contract as agreed.
 Such a suit is filed in the court, in order to obtain a
decree from the court, directing the defendant to
actually perform the promise made.
 Such a suit may be filed in addition to a suit for
damages.
 Such a decree is not granted for contracts of
every description, it is granted only in cases
where the legal remedy is inadequate or
defective.

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Specific performance not granted in
the following cases:
 Where monetary compensation is an
adequate relief.
 Where court cannot supervise the actual
execution of the contract.
 Where contract is for personal services.

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Suit for an injunction:
 It is an order of a court restraining a person from
doing a particular act.
 Injunction is a preventive remedy and is
appropriate in case of anticipatory breach of
contract, where damages would not be an
adequate relief.
 When a court issues an injunction order, it
restrains the defaulting party from committing an
act, which he promised not to do under the
contract.

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 CONTRACT OF INDEMNITY S. 124
 Introduction : Sometimes, a person does not enter into a
business due to the risk involved in it. In such a situation, if
anybody agrees or promises to bear the risk or damage which
may occur in future, then the former can commence that
business without any hesitation . This contract between the
former and the latter party is known as the contract of indemnity.
 Indemnity is a protection against the loss, especially in the form
of a promise to pay for the loss of money or goods by a person
to the other while entering in to a transaction with the third party.
 The person who makes the promise is known as the indemnifier
and the person to whom the promise is made is known as the
indemnity holder.

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 CONTRACT OF INDEMNITY S. 124 {CONTD…
 According to Section 124 of Indian Contract ACt, 1872, the contract
of indemnity means a contract where 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.
 Essentials of the Contract of Indemnity : The following are the
essential attributes for a contract of indemnity.
 1. Promise : There should be a promise by one person to the
other person.
 2. Saving from Loss : The second condition is that the promise
should be for the purpose of saving the person from the loss.
 3. Loss by Human Agency : The loss should have been caused
due to the conduct of the human agency.

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CONTRACT OF GUARANTEE
 General : Sometimes, a person takes the responsibility
to repay the loan taken by some other, in case of his
default. These types of contracts are called contracts of
guarantee.
 Sec. 126 of the Contract Act says that guarantee is a
contract to perform the promise or discharge the liability
of a third person in case of his default.
 The person who gives the guarantee is called the
“surety” and for whom it is given is called the principal
debtor and to whom it is given is called the creditor.

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 Nature of Contract of Guarantee

 1. Contract of guarantee may be oral or in writing.

 2. It is essential that there should be principal debt in
existence at the time of contract.
 3. Benefit to the principal debtor is the sufficient
consideration for a contract of guarantee.
 4. Consent of the surety should not have been
obtained by fraud or by concealment of the material
facts or through misrepresentation (Sec 142 &143).
There should be free consent of the surety.

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 Liability of Surety
 Liability of Surety: According to Sec 128 of the Contract
Act, the liability of the surety is coextensive with the
principal debtor. It means that the liability of the surety is
the same as that of the principal debtor. If the amount of
debt of the principal debtor is decreased because of
whatever reason there will be decrease in the liability of
the surety to that extent.
 Suit for Claim Against Surety: The liability of the surety
is joint and several. Hence, the creditor can sue the surety
instead of suing the principal debtor first. The Apex Court
also set aside the condition violating this principle or
policy of law in Bank of Bihar V. Damodar Prasad

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 BAILMENT
 Introduction : Sometimes, we hand over our goods to
some other person, for example, for safety purpose with
a condition of return after the fulfillment of the purpose.
It creates a relation of bailor and bailee between those
persons. Bailment imposes certain duties on the bailee
as well as on the bailor and simultaneously it confers
certain rights on them.
 In our practical life, we enter into many transactions of
this kind such as giving coat to a drycleaner, handing
over watch for repairs etc. Hence, it becomes necessary
to study the concept as it carries practical importance in
our life.

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BAILMENT {CONTD…
 Meaning of Bailment : Bailment is a kind of contract
between the bailor and bailee in which goods are
delivered to the bailee with a condition that the goods be
returned to the bailor after the purpose for which they
had been given is over. In this contract there is delivery
of possession of goods.
 Under the Contract Act, 1872 : According to Sec. 148
bailment is the delivery of goods from one person to
another for some purpose upon a contract that they
shall, when the purpose is accomplished be returned or
otherwise be disposed of according to the directions of
the person delivering them.

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 Essentials of Bailment
 1) Delivery of Possession of Goods : The first condition is
that there should be delivery of possession. The possession
should be changed from one person to another. Possession
includes custody.
 2) Upon a Contract : The goods bailed are given upon a
contract that the goods be delivered to the same person who
delivered them or the goods bailed be disposed of according
to the prescription of the bailor. If there is no such
arrangement between the bailor and the bailee at the time of
entering into the contract, there will be no bailment.
 3) For Some Purpose : The goods have been delivered for
some purpose, the purpose may be safety of the goods, the
repair of the goods, the renewal of goods, etc. The goods be
returned when the purpose is achieved by the parties.

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 Kinds of Bailment
 1. Gratuitous Bailment : When bailment is
for some consideration it is known as
gratuitous bailment.
 2. Non Gratuitous When bailment is not for
some consideration it is known as non
gratuitous bailment.
 3. for the exclusive benefit of the bailor
 4. for the exclusive benefit of the bailee
 5. for the mutual benefit of the bailor & bailee

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Duties and liabilities of Bailee and Bailor

 Duties and Liabilities of Bailor

 1) Duty to Disclose the Defects in the Goods
 2) Duty to Pay the Damages to the Bailee : The bailor
owes a duty to disclose the defect in the
 Duties and Liabilities of the Bailee
 1) Reasonable Care of the Goods
 2) Duty Not to Make Unauthorized Use of the Goods
 3) Duty Not to Mix the Goods
 4) Duty to Return
 5) Duty to Handover the Increase with the Goods

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 PLEDGE
 ‘Pledge’ or ‘Pawn’ is a kind of bailment of goods
with a special purpose. The goods pledged or
pawned serve as security for the payment of a debt
or performance of the promise. The person
pledging the goods is known as the ‘Pawnor’ and
the person with whom the goods are pledged is
known as the ‘Pawnee’ or ‘Pledgee’.
 Essentials of Pledge :
 1) Delivery of Possession
 2) Purpose is security for debt.

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 Rights of Pledgee or Pawnee

 Rights of Pledgee or Pawnee (Secs. 173 to 176) :

A pawnee has the following rights under the Act–
 1) Right to retain the goods pledged. (Secs. 173
and 174).
 2) Right to recover extraordinary expenses
incurred by him. (Sec. 175).
 3) Rights of suit to secure the debt, etc., and sale
of the pledged goods. (Sec. 176).

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 AGENCY
 Introduction : Sometimes, a person opens different branches when
his business progresses. In such a situation, he requires the
assistance of some persons who can act on his behalf. The person
who gives this kind of assistance is called an agent. This assignment
of work creates a specific relationship between those persons.
 Meaning of Agency : The word agency is not defined in the Indian
Contract Act 1872. yet Sec.182 provides that representative
capacity is the basis of agency. Agency is a contract between two
persons where one person gives the authority to the other to
represent him before the third party. The act done by him will be
deemed as if it had been discharged by the person who had given
the authority.
 For example, If A is the agent of B then A can enter into a contract
with C on behalf of A, and C can sue B for any loss or breach of
contract.

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The Essential Features of an Agency
 1) Existence of the Principal (Sec.183) : The first
essential is that there should be a principal. According to
Sec.183 of the Contract Act, the principal should be
competent to contract.
 2) Existence of the Agent (Sec.184) : There should
be an agent in existence at the time of contract.
 3) Consideration not Necessary (Sec.185) : No
consideration is necessary to create an agency. The
provision has already been mentioned as an exception
to Sec 25 of the Contract Act. From the very nature of
the contract of agency, the principal agrees to be bound
by the acts done by the agent on his behalf.

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MODES OF CREATION OF AN AGENC
The relationship of principal and agent may be created
in any of the following ways :
 1) By Expressed Appointment/Actual Authority
 2) Agency by Implication
 (a) Agency by holding out

 (b) Agency by relationship (Husband & wife)

 (c)Agency by Necessity

 3. Agency by Operation of Law

 4. Agency by Ratification (Sec 196-200)

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 Duties of Agent
 1. Execution of the instructions of principal
 2. Following the Directions of the Principal
 3. To Show Proper Skill and Care (Sec. 212)
 4. Non Delegation of Duty
 5. Due Care in Appointing Substituted Agent
 6. Rendering of proper accounts
 7. Proper Communication with the Principal
 8. Not to Deal on his Own Account Sec 215 & 216 :
 9. Payment of sums received for Principal Sec. 217
& 218

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 RIGHTS AND DUTIES OF AGENT AND
PRINCIPAL
 1. Right to Remuneration Sec 219
 2. Rights to Retain the Sums Sec 217 :
Sometimes, the agent incurs expenses in
conducting the
 3. Right of Lien on the Principal’s Property Sec
219 : The agent is entitled to retain the goods or
 4. Right to be Indemnified : The agent is also
entitled to be indemnified against the consequences
 5. Right to Compensation

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 Liability of the Principal
 i) Principal’s Liability for Notice to
Agent Sec. 229
 ii) Principal’s Liability for Agent’s
Fraud, Misrepresentation and Torts Sec.
238 (Vicarious Liability)

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 TERMINATION OF AGENCY
 1. By Revocation of Agent’s Authority
 2. By Renunciation
 3. By Completion of Business
 4.   By Death or Insanity
 5. By Principal’s Insolvency
 6. By Expiry of Time

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 Quasi contracts: [Sec 68-72]
 In case of quasi contracts there is no offer, acceptance or
consensus; in fact there is no intention on the part of either
parties to enter into a contract; still the law, from the conduct
& relationship between the parties, implies a promise,
imposing obligation on one party & conferring a right in
favor of the other party.
 Definition: Under certain special circumstances, obligations
resembling those created by a contract are imposed by law
although the parties have never entered into a contract.
 The term “Quasi-Contract” is not used in Indian Contract
Act, 1872. Chap V (Section 68-72) of Indian Contract Act,
1872 deals with “Of certain relations resembling those
created by contract .
Doctrine of unjust enrichment:
 A quasi contract rests upon the doctrine of
unjust enrichment which declares that a person
shall not be allowed to enrich himself unjustly
at others expense.
BREACH OF QUASI CONTRACT
 A suit for damages for the breach of contract
can be filed in the case of a quasi contract in the
same manner as in the case of a completed
contract.

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Quasi-contractual obligations:
 A claim for necessaries supplied to a person incapable of
contracting [Sec. 68]
 A person who is interested in the payment of money (in
order to protect his own interest), which another person is
bound by law to pay, and who therefore pays it, is entitled
to be reimbursed [Sec. 69]
 Obligation of person enjoying non-gratuitous act [Sec. 70] :
the act must have been done lawfully in good faith; the act
must be non-gratuitous & the person for whom the act is
done must have enjoyed benefit of the act.
Contd..
 Responsibility of finder of goods [Sec. 71]: law
implies an agreement between the owner & the
finder of goods. It casts duties upon the finder
of the goods.
 Liability of a person to whom money is paid, or
goods delivered by mistake or under coercion
[Sec. 72]
THANK YOU
AUDIENCE

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