INDIAN CONTRACT ACT, 1872:

List out certain General rules relating to Contract?

Write a note on essential elements of Contract?

Ans:   In common usage there is no big difference between agreement and contract. However, in the eye of law the difference is striking and significant difference to note.  Any understanding between two or more can be called as an agreement but not contract. In order to call any agreement as contract, it must possess following essentials:

1) Parties to agreement must competent and not disqualified by law

2) The purpose of agreement must be lawful and entered with an intention to create legal relations. 

3) Parties must be entered into agreement with free consent

4) Such agreement must not be declared void by law

4) It must comply with legal formalities like: writing, Stamp, registration etc., Agreement required to be in writing or stamped or registered or attested only if it is demanded by law. 5) Agreement must be for consideration

6) Conditions imposed under agreement must be certain and possible to perform.

7) There must be offer by one party and acceptance by other party.

If any of the above rules not satisfied the agreement does not become a contract.

Write a note on rules relating to offer and Acceptance?

Ans: For every contract there must be at least two parties, one making an offer or proposal and another accepting it.  The legal rules relating to proposal are:

1. Proposal conveys a promise to do or to abstain from doing anything, with a view to obtaining the assent of the person to whom proposal is made to such act or abstinence. If the proposal doesn’t involve a promise in law, its acceptance cannot mature into a promise.
2. The proposal must be capable of creating legal relations. It must be such that, when it is accepted, a contract is formed. No contract can come into existence, if the terms are vague, indefinite or illusory, or unenforceable at law.

The legal rules relating to acceptance are:  

1) It must be communicated to offeree.

2) It must be absolute & unqualified,

3) It must be according to the mode prescribed or usual mode.

4) It can’t come before offer is made.

S.4 talks about Communication, acceptance and revocation of offer:

Who are competent to enter into contract?

Competence of parties to contract: Competence refers to power of parties to enter into contract. Capacity of a party is an essential element of a valid contract.

According to Sec.11, every person is competent to contract, who is of the age of majority, sound mind, not expressly disqualified.

Consequences if contract is entered with minor, lunatic, unsound mind?

Position of Minors Agreements:

1. An agreement with or by a minor is void and in operative abinitio i.e., from the beginning: All agreements with minors are void ab-initio i.e., from the beginning. The relevant case law is Mohiri bibi Vs. Dharma Das Ghosh.
2. He can be a promise or a beneficiary: a minor is incapable to enter into a contract but he can always be a beneficiary in a contract. Such contracts may be enforced at his option, but not at the option of the other party.  Ex: L Who is aged 17 years, agreed to purchase a second hand car for Rs.7,000/- from m and paid 1,000/- rupees as advance with the promise that he will pay the remaining amount the next day.  When L went with the money the next day M said that he has changed his mind and is ready to return the advance.  Held, the M cannot avoid the contract but if L chooses he may.
3. His agreement cannot be ratified by him on attaining the age of majority

Write a note on consideration?

Consideration: S.10 ICA says Consideration is one of the essential elements of a contract. According to S.25 of ICA an agreement without consideration is void.

S.2(d) ICA defines consideration. It says: When at the desire of the promisor, the promisee or any other person has done or abstained from doing, does or abstains from doing, promises to do or abstain from doing something, such act, abstinence or promise is called consideration for the promise.

(a) Consideration must pass at the desire of the promisor only, that is an act or abstinence must be done at the desire of the promisor. It is done at the instance of a third party or without the desire of promisor, it will not be a valid consideration.

Ex: A saves B’s goods from the fire without being asked for it. A cannot demand payment for it.

(b) It may move from the promisee or any other person: Consideration may move from the promisee or any other person. It means as long as there is a consideration, it is immaterial, who furnishes it. Thus in India there is no privity of consideration. Ex: Mother gifted property to defendant by deed stipulating that she would give annuity to plaintiff. Defendant held liable to pay annuity to plaintiff. 

(c) Consideration may be past, present or future

(d) Act, abstinence or promise constitutes consideration: Consideration must be of some value, not necessary in monetary from, always.

(i) Forbearance to sue is a valid consideration: Plaintiff has a right of action against the defendant but on a promise by the defendant, he refrains from bringing the action. It applies only if the claim is immediately due. An agreement to compromise a bonafide action pending in the court is a valid consideration.

Consideration need not be adequate: Section.25, Explanation (2) says an agreement to which the consent is freely given is not void merely because the consideration is inadequate, though it must have some value in the eye of law.  However, it can be considered whether contract is outcome of free consent or not.

Agreement without consideration is void and Exceptions to this rule:

S.25 of ICA says an agreement without consideration is void. However, they are some well-recognized exceptions to this rule. They are:

(a) A written registered agreement based on natural love and affection between near relatives is enforceable even without consideration.

(b) A contract of agency

(c) S.25 Explanation (1) says a completed gift. In this case there need not be nearness of relationship or natural love and affection between the donor and donee.

(d) A promise to pay for a Past voluntary service

(e) A promise by debtor to pay a time-barred debt is enforceable provided it is made in writing &signed by the debtor or his agent.

(f) Charitable Subscriptions.

Privity of contract: Stranger to a contract: Only parties to the contract can enforce contractual obligations, but no other, even if it solely for the benefit of third party. It is known as privity of contract. But it has no applicability in India. It was held by the S.C in M.C.Chacko Vs. State Bank of Travancore. Thus a person who is not a party to the contract can enforce contractual obligations. The following are the situations:

(a) The beneficiary may enforce a contract though he is a stranger to the contract creating trust.

 (b)Where a an agreement is made in connection with marriage and a provision is made for the benefit of a person, he may take advantage of the agreement although he is not a party to it. 

(c) If a provision is made in a partition or family arrangement for maintenance or marriage expenses of female members, such members though not parties to agreement can sue on the footing of the agreement. 

(d) If a charge is created in favour of a stranger in respect of a specific immovable property.

(e)Acknowledgment or estoppel 

(f) Covenants running with the land

Consent: Two or more person agreeing about same thing in same sense.

Free consent:  Consent is said to be free if the approval of the parties is not affected by: (1) Coercion (Sec.15) (2) Undue Influence (Sec.16) (3) Fraud (S.17) (4) Misrepresentation (S.18) (5) Mistake (S.20, 21, 22).

If the consent to the proposal has been through any of the above means, the contract become voidable at the option of the party whose consent has been so obtained. Contract resulted without free consent is Voidable contract except in case of Mistake of fact.

 Coercion: Committing or threatening to commit any act forbidden by the IPC or unlawful detaining or threatening to detain any property, to the prejudice of any person, with an intention to get approval of the party to a contract is called Coercion. Even the threat to commit suicide amounts to coercion.

Undue Influence- Sometimes the relationship between the parties is such that one party is in a position to influence the will of another.  In such a case undue influence is said to have been employed. Sec(16) defines undue influence as “A contract is said to be induced by undue influence where the relations subsisting between the parties are such that one of the parties is in a position to dominate the will of the other and uses that position to obtain an unfair advantage over the other. The following relationships usually raise a presumption of undue influence viz,. Parent and child, Guardian and ward, Trustee and beneficiary, Religious adviser and disciple, Doctor and Patient, Solicitor and client, Finance and Financer.

Misrepresentation: S.16 ICA deals with it. Misrepresentation is a statement of fact which one party makes in the course of negotiations to another with an intention to induce the other party to enter into a contract.  Representations may be expressed by words spoken or written or implied from the behaviour of the parties.

Fraud: An intentional material representation of a fact with an intention to induce a party to enter into a contract and act upon it. Due to which, party acted upon it and suffered an injury.

S.17ICA deals with it. The following acts committed by a party to a contract with an intent to deceive another party or to induce him to enter into the contract are also called as frauds:

(i) A false suggestion known to be false or not believed to be true

(ii) The active concealment of a fact, with knowledge or belief of the fact

(iii)A promise not intended to be performed,

  (iv) Doing any other act fitted to be deceive

(v) Doing any such act or omission as the law specially declares to be fraudulent.              

Mere silence as to facts likely to affect the willingness of a person to enter into a contract is not fraud unless the circumstances of the case reveal:

(a) That it is duty of the person keeping silence to speak; or

(b) his silence is, in itself equivalent to speech. 

In either case of misrepresentation or fraud the aggrieved party can:

(a) Avoid or rescind the contract (Voidable).

(b)Accept the contact but insist that he shall be placed in the position in which he would have been if the representation made had been true (rescission).

Mistake – kinds of Mistake: Section.20,21,22 of ICA deals with Mistake. Mistake may be defined as an erroneous belief about something. It can be either of fact or law. Mistake of fact occur either due to both parties or one of the party. S.20 deals with bilateral mistake. S.22 deals unilateral mistake. S.21 deals with mistake of law.  Mistake of law is not an excuse. However, mistake of foreign law is treated as mistake of fact.

Bilateral Mistake: If either party to an agreement are under a mistake as to a matter of fact essential to the agreement, the agreement is void. However, an erroneous opinion as to the value of thing which forms the subject-matter of the agreement, is not to be a deemed a mistake as to a matter of fact.

Explanation: Mistake must be mutual. A unilateral error due to one’s own stupidity, ignorance, carelessness doesn’t effect. It was his duty to know or he has means of knowledge, knowledge will be imputed to him in law debarring him from avoiding the contract.

Ex: X sold the property to Y upon the belief that he is the owner of the property. The same was also got registered and developed by Y believing that X is the owner of the property. Subsequently, it was it came to light that Aneel is the actual owner of the property. Since X and Y are mistaken belief as to the title of X, the sale becomes void. However, u/s.65 of ICA, Y recover purchase price from the defendant.

Unilateral Mistake: If one of the party to the contract is mistaken regarding the subject matter or understanding the terms of the agreement, the mistake is unilateral. It is not allowed as a defence to avoid the contract. But in certain cases if the consent is given under a mistake which is so fundamental to the agreement that the agreement is declared void.

The following are the situations: (a) If there is a mistake as to the identity of the person contracted with.           (b) If there is a mistake as  to the nature of the contract. Ex: If a person signing a document of a different class. A old man having poor eye sight endorsed a Cheque thinking that it was a guarantee. It is not a contract as the mind of the signer didn’t accompany the signature.

According to S.23 ICA the consideration or object of an agreement is lawful, unless- it is forbidden by law; or is of such a nature that if permitted it would defeat the provisions of any law; or is fraudulent; or involves or implies, injury to the person or property of another; or the court regards it as immoral or opposed to public policy. Such agreements are voidabintio.

List out agreements declared voidable under Contract Act and HMA.

List agreements declared void under Contract Act and Hindu marriage Act:

Void agreements are unenforceable in the court of law. Many provisions of the contract Act expressly declared which are void agreements.  They are: S.10, 20, 22, 23, 25 to 30, 34, 35, 36, 56. As per S.64 & 65: If the agreement is discover void (S.64) or voidable(S.65) contract is rescinded, the party who receives benefit shall compensate the other party or bound to restore the benefit received.

Conditional contract: Performance of contract depends upon future uncertain event. It is called Contingent Contract. It can be happening or non happening.

Ex: A Contracts to pay B Rs.1000/- if B’s house is burnt. This is a contingent contract.

S.32: Event Happening: Performance can be demanded in the event of happening uncertain future event.

If the event becomes impossible such contracts becomes void.

Ex: A promises to pay Rs.10,000/- if the ship reaches Mumbai port on or before 31/5/2014. If the ship reaches before 31/5/14 contract can be enforced.

If the ship reaches after 31/5/14 or Sunks: It is void.

S.33: Event Non-Happening: Performance can be demanded in the event of non-happening uncertain future event. If the event becomes impossible such contracts becomes valid. Ex: A promises to pay Rs.10,000/- if the ship doesn’t reach Mumbai port on or before 31/5/2014. If the ship reaches after 31/5/14 contract can be enforced – Valid.  If it reaches before  31/514 contract can’t be enforced Void.

If there occurred an event which makes it impossible to return prior to 31/5/14- Contract is enforceable. If the ship reaches before 31/5/14 or Sunks: It is valid.

S.35: Performance of contract depends upon happening or non-happening of an even within the time fixed, contract becomes void if the even doesn’t happen.

Contract performance can also be enforced if before the time fixed, occurrence event become impossible.

S.36: If condition imposed is impossible to happen, it is a void condition.

Write a note on Wagering Agreement?

Ans: 1. A wager is a promise to pay money or money’s worth on the happening or non-happening of an uncertain event.

2. A contingent contract need not necessarily be a wager. Thus we can say that all wagering agreements are contingent but all contingent contracts are not wager.
3. In case of a wagering agreement promise must be mutual.
4. Example. In wagering agreement A agrees to pay B 20 rupees if it rains on Monday and if it does not rain B will pay 20 rupees to A. In the above example there is mutuality of agree­ment but this mutuality of promises is not necessary in case of a contingent contract.
5. In a wagering agreement there is no independent interest apart from the money to be won or lost.

Example: A promises to pay Rs. 100 to B if it rains on Monday. It is a wagering agreement as A has no independent interest.

6. In a wagering agreement determination of an uncertain event is the main condition of the contract.

Who has to perform the promise?

Promisor or his legal representative can perform the contract. However, if contract only promisor shall perform the contract, he shall alone perform the contract.

If the promise accepts performance from third party, he can’t later seek its enforcement from third party. In case contract has to be performed by several promissors, promise may compel any one to perform the promise. (Joint liability)

Ex: Three taking debt from one.  One of the joint promissory who performed the contract can seek other promissors to compensate him to contribution.

 How to perform the promise?

S.46: If the time is not specified for the performance of the contract, it can be performed within reasonable time.  S.47: If time is specified at any time during usual hours.

S.48: If the promise is to be performed on a certain day and the promissor has not undertaken to perform it without application by the promise, it is the duty of the promise to apply for the performance at a proper place and time within the usual business hours.

S.49: If the promise is to be performed without the application of the promisee, and no place is fixed for the performance of it, it is the duty of the promisee to apply for the performance to appoint a reasonable place for the performance of the promise.

S.50: The performance of any promise may be made in any manner or at any time which the promise prescribed or sanctions.

Time is the essence of Contract (S.55): In a contract if time is specified for the performance of contract + Parties intention is that contract must be performed within the stipulated time= Such contract is called as time is the essence of contract.  Intention can be gathered from the terms of contact. It is a voidable contract.

When performance in case of Reciprocal promises:

Ans:  a) Willful prevention: If the performance of promise depends upon another and same is prevented by another, he is exempted from performance.

     b)  Failure to do some positive condition agreed upon by parties: If the performance of promise depends upon promise of another and same is not performed, the other party is exempted from performance. In both cases (S.53 & 54) compensation can be claimed.

Difference between S.53 & 54: In both the case other person didn’t perform his part of contract. However, reasons for such non-performance are different and person entitled for compensation are different. Under S.53 it is due to willful prevention to perform and whereas under S.54 such non-performance other is due to failure to do some positive condition agreed upon.  The other important difference is that under S.53, party who is prevented to perform will be given compensation and whereas under S.54 who is failed to perform compensation shall give compensation.

Whether performance of promise can be demanded in case contract consists of legal and illegal promises?

Ans: This is dealt under S.57, 58. They say merely because a contract consists of promise of which some are legal and remaining are illegal. The same is the case with alternative promise. The part to the extent is legal is valid. The illegal agreement is void.

Ex (S.57): A and B agree that A shall sell B a house for 10,000 rupees, but that, if B uses it as a gambling house, he shall pay A 50,000 rupees for it. The first set of reciprocal promises, namely, to sell the house and to pay 10,000 rupees for it, is a contract. The second set is for an unlawful object, namely, that B may use the house as a gambling house, and is a void agreement.

Ex (S.58): A and B agree that A shall pay B 1,000 rupees, for which B shall afterwards deliver to A either rice or smuggled opium. This is a valid contract to deliver rice, and a void agreement as to the opium.

What Contracts that need not be performed?

Ans: The following contracts need not be performed.  They are dealt under S.37, S.56, 62, 67, 63.

S.37:  If the performance is dispensed or exempted by law.

S.38: If the promise refuses to accept the performance, promisor need not perform.

S.39: Promisee may put an end to contract, if the promissory refused to perform or failed to perform.

S.56: a) An agreement to do an impossible act is void.

     b) Contract to do an act afterwards becoming impossible or unlawful (DOF)

S.62: a) Parties agree to substitute a new contract, b) Parties to contract rescind or alter it.

S.63: Promisee may dispense with or remit, wholly or in part the performance of the promise made to him. It may extend the time for such performance or may accept, instead of it any satisfaction which he thinks fit.

Write a note on Quasi Contracts?

Ans: The concept of quasi contracts is dealt under S.68 to 72.

S.68: If a person under obligation or to a person who can’t enter into contract is supplied with Necessaries suited to his condition in life, The person who has furnished such supplied must be reimbursed from the property of that person.

S.69: Person who is interested in payment of money which another is bound to pay.

S.70: Obligation of person enjoying benefit of non-gratuitous act:  New Model car.

S.71: Responsibility of finder of goods.

Appropriation of debts (Several debts):  S.58 if a person owes several distinct debts to same person money paid shall be applicable as per direction of the debtor. If not indicated, they apply as per order in time including time barred debts. If neither party indicated, court would apply in order of time It can also be applied to a debt even though it is barred by limitation. If the debts are of equal standing, the payment shall be applied in discharge of each proportionally.

Agreement to do impossible act-

The following agreements or contracts need not be performed:

1) An agreement to do an act impossible in itself is void.

2) Contract to do act afterwards becoming impossible or unlawful

3) A contract to do an act which, after the contract is made, becomes impossible by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful.

If one person has promised to be something which he knew or, with reasonable diligence, might have known, and which the promisee did not know to be impossible or unlawful, such promisor must make compensation to such promise for any loss which such promisee sustains through the non-performance of the promise.

Illustrations

(a) A agrees with B to discover treasure by magic. The agreement is void.

b) A and B contract to marry each other. Before the time fixed for the marriage, A goes mad. The contract becomes void.

(c) A contracts to marry B, being already married to C, and being forbidden by the law to which he is subject to practise polygamy. A must make compensation to B for the loss caused to her by the non-performance of his promise.

Comment: Doctrine of frustration: Contract whose performance is possible, at the beginning, becomes either impossible or unlawful, due to a subsequent event, such a situation is often referred as frustration of contract or Doctrine of frustration. It has been aptly explained by Viscount Simon LC in Satyabrat Ghosh Vs. Mugneeram Bangur.

The grounds of frustration are as follows:  (a)Destruction of the subject matter                                         (b)Change of circumstances             (c) Non-occurrence of contemplated event       (d) Death or incapacity of the party (e) Government of legislative intervention (f)Intervention by war.

Breach of Contract:

S.73: The court in the event of breakage of contract can award damages. The court while awarding damages would take following issues into consideration:

1) Loss or damage that would arouse in the usual course of thing because of such breach.

2) The loss or damage that would occur, which parties had knowledge at the time of entering into contract itself.

The above rules are laid down by Court of England in Hadley v. Bexendale, 9 Ex 742. The object of this rule is that damages cannot include compensation for any remote and indirect loss or damages even if it is due breach of contract.

The same rules will apply with respect to quasi contracts upon assumption that parties having knowledge of loss or damage occur in the event of breakage of contract or violation of condition of contract.

S.74: If the contract stipulates amount as penalty for its violation in the event of breach of contract the court can award such amount as damages or reasonable compensation.  Thus court has discretion to award either of the one.

   INDEMNITY AND GUARANTEE:

There are sections twenty three sections spread over S.124 to 147 of the Act.

Contract of Indemnity:  As per Section 124 of the ICA, the contract of indemnity is defined as “a contract by which one party promises to save other from loss caused to him by the conduct of the promisor himself, or by the conduct of any other person’.

Ex: Suppose you are hired by a newspaper to write articles for them as a freelancer. Typically, your contract would have an indemnity clause so that if you write something against a very important person and that person files a suit against the newspaper for defamatory material, the newspaper can show the indemnity clause that you signed, protecting them from any form of loss caused due to your conduct. Then, the onus of fighting the defamation suit becomes your responsibility. A person who promises to bear the loss is known as indemnifier and the person whose loss is covered is known as indemnified. These types of contracts are mainly formed between insurance companies and their customers.

Contract of Guarantee: As per S.126, of the Act, a contract of guarantee is defined as, “a contract to perform the promise, or discharge the liability of a third person in case of his default.” This type of contract is formed mainly to facilitate borrowing and lending money.

The three parties involved in this type of contract are:

Surety: is the person by whom the guarantee is given.

Principal Debtor: is the person from whom the assurance is given.

Creditor: is the person to whom the guarantee is given.

Differences between Contract of Indemnity and Guarantee:

The following are few important distinctions between a contract of indemnity & contract of guarantee:

1. Number of Parties: In a contract of indemnity only two parties are involved, whereas in a contract of guarantee, three parties are involved.
2. Purpose: A contract of indemnity is formed to provide compensation of loss. There is an agreement to bear loss, in the event of loss. A contract of guarantee is formed to give assurance to the creditor in lieu for his money. It’s an assurance to perform the contract.
3. Nature of Liability: In a contract of indemnity, the indemnifier is the sole person who is held liable. In a contract of guarantee, the liability is shared by the surety and principal debtor.  A Contract to perform the promise, or discharge the liability, of a third person in case of his default is called Contract of Guarantee.
4. Surety has the right to sue the third party (Principle Debtor) directly. The Law puts him in the position of Creditor. Whereas in Contracts of Indemnity, the Indemnifier cannot sue the third party in his name. He has to sue in the name of the Indemnity-holder or after obtaining the rights from him.
5. 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. The guarantor need not personally derive any benefit from the guarantee.
6. The liability of the surety is co-extensive with that of the principal debtor, unless it is otherwise provided by the contract. The creditor can straightway proceed against the guarantor without first proceeding against the principal debtor. The surety however may restrict his liability to part of the Principal debtor’s liability by contract. Surety’s liability is distinct and separate

Continuing Guarantee: A Guarantee which extends to a series of transactions is called a continuing guarantee. A continuing guarantee may at any time be revoked by the surety, as to future transactions, by notice to the creditor. Any variance, made without the surety’s consent, in the terms of the contract between the principal debtor and the creditor, discharges the surety as to transactions subsequent to the variance.

Rights of a surety: The rights of sureties can be classified into two kinds. One is against is creditor and other is against the principal debtor.

As against the Creditor:

S.133: If the creditor shall not vary terms of the contract between the creditor and the principal debtor without the surety’s consent. Any such variance discharges the surety as to transactions subsequent to the variance. However, if the variance is for the benefit of the surety or does not prejudice him or is of an insignificant character, it may not have the effect of discharging the surety.

Sec. 134:- The creditor should not release the principal debtor from his liability under the contract. The effect of the discharge of the principal debtor is to discharge the surety as well. Any act or omission on the part of the creditor which in law has the effect of discharging the principal debtor puts an end to the liability of the surety.

Sec. 135: – If an agreement is made between the Creditor and Principal debtor for compounding the later’s liability or promising him extension of time for carrying out the obligations or promising not to sure, discharges the surety unless he assents to such a contract.

Sec. 139: – The surety is discharged if the creditor impairs the surety’s eventual remedy against the principal debtor.

As against the Principal Debtor:

Right of subrogation:- The surety on payment of the debt acquires a right of subrogation.

S.140:- The surety cannot claim the right of subrogation to the creditor’s securities, if he has signed up as a security for a part of the agreement and security has been held by the creditor for the whole debt.

Surety obtained under following cases is invalid:

Guarantee obtained by means of misrepresentation made by the creditor (S.142 part-I).

Guarantee though obtained with his knowledge and assent but concealing a material part of the transaction, is invalid (S.142 part-II).

Guarantee obtained by means of keeping silence as to material circumstances (S.143).

If a person gives a guarantee upon a contract that the creditor shall not act upon it until another person has joined in it as co-surety, the guarantee is not valid that other person does not join (S.144).

Miscellaneous:

S.145: There is an implied promise by the principal debtor to indemnify the surety and on its basis the latter is entitled to recover from the former whatever sum the latter had rightfully paid under the contract of guarantee; C.K. Aboobacker v. K.P. Ayishu, AIR 2000 Ker 29 (NOC).

S.146: In the absence of the contract to the contrary Co-sureties are liable to contribute equally.

S.147: Co-sureties who are bound in different sums are liable to pay equally as far as the limits of their respective obligations permit.

 BAILMENT:

Bailment: It is a kind of legal relationship where physical possession of personal property, is transferred from one person (the ‘bailor’) to another person (the ‘bailee’) who subsequently has possession of the property. It arises when a person gives property to someone else for safekeeping or for doing specific duty with respect to that property. Further, upon accomplishment the goods must be returned or otherwise disposed of according to the directions of the bailor (S.148).

Ex: Giving your coat to washer man. The person delivering the goods is called the Bailor. The person to whom they are delivered is called the Bailee.

It is different from contract of sale or gift  as it only involves the transfer of possession and not its ownership. Though in lease where possession of the property is handed over to the lessee, there is a transfer of right of enjoyment but bailee can’t do so in the case of Bailment.

S.149: The goods are deemed to have delivered to bailee, if they are put in his possession or any person authorized by bailee.

S.150: It is the duty of the Bailor to disclose the material defects of the goods bailed which materially interfere with the use of them, or expose the bailee to extraordinary risk. If bailor didn’t make such disclosure, he is responsible for damage arising to the bailee directly from such faults.

S.151. The bailee is under an obligation to take as much care of the goods bailed to him as a man of ordinary prudence would, under similar circumstances, take of his own goods of the same bulk, quantity and value as the goods bailed.

S.152: In all cases of bailment the bailee is bound to take as much care of the goods bailed to him as a man of ordinary prudence would under similar circumstances.  However, bailee is not responsible for the loss, destruction or deterioration of the thing bailed, if he has taken the amount of care of it described in section 151 unless there is a special contract in this regard (S.152).

S.153: The contract of bailment is voidable at the option of the bailor, if the bailee does any act with regard to the goods bailed, inconsistent with the conditions of the bailment.

S.154: Bailee is liable to pay compensation for the damage caused if the goods bailed are not used according to the conditions of the bailment.

Ex: (a) A lends a horse to B for his own riding only. B allows C, a member of his family, to ride the horse. C rides with care, but the horse accidentally falls and is injured. B is liable to make compensation to A for the injury done to the horse.

S.155: If the bailee, with the consent of the bailor, mixes the goods of the bailor with his own goods, the bailor and the bailee shall have an interest, in proportion to their respective shares, in the mixture thus produced.

 S.156: If the bailee, without the consent of the bailor, mixes the goods of the bailor with his own goods and the goods can be separated or divided, the property in the goods remains in the parties respectively; but the bailee is bound to be bear the expense of separation or division, and any damage arising from the mixture.

S.157: If the bailee, without the consent of the bailor, mixes the goods of the bailor with his own goods in such a manner that it is impossible to separate the goods bailed from the other goods, and deliver them back, the bailor is entitled to be compensated by the bailee for the loss of the goods.

 S.158: If by the conditions of the bailment, the goods are to be kept or to be carried, or to have work done upon them by the bailee for the bailor, and the bailee is to receive no remuneration, the bailors shall repay to the bailee the necessary expenses incurred by him for the purpose of the bailment.

S.159: The lender of a thing for use may at any time require its return, if the loan was gratuitous, even though he lent it for a specified time or purpose. But if, on the faith of such loan made for a specified time or purpose, the borrower has acted in such a manner that the return of the thing lent before the time agreed upon would cause him losses exceeding the benefit actually derived by him from the loan, the lender must, if he compels the return. indemnify the borrower for the amount in which the loss so occasioned exceeds the benefits so derived.

S.160: It is the duty of the bailee to return, or deliver according to the bailor’s directions, the goods bailed, without demand, as soon as the time for which they were bailed has expired, or the purpose for which they were bailed has been accomplished.

S.161: Bailee’s responsibility when goods are not duly returned.—If by the fault of the bailee, the goods are not returned, delivered or tendered at the proper time, he is responsible to the bailor for any loss, destruction or deterioration of the goods from that time.

S.162: A gratuitous bailment is terminated by the death either of the bailor or of the bailee.

S.163: In the absence of any contract to the contrary, the bailee is bound to deliver to the bailer, or according to his directions, any increase or profit which may have accrued from the goods bailed.

Illustration: A leaves a cow in the custody of B to be taken care of. The cow has a calf. B is bound to deliver the calf as well as the cow to A.

S.164: The bailor is responsible to the bailee for any loss which the bailee may sustain the reason that the bailor was not entitled to make the bailment, or to receive back the goods, or to give directions, respecting them.

S.165: If several joint owners of goods bail them, the bailee may deliver them back to, or according to the directions of, one joint owner without the consent of all in the absence of any agreement to the contrary.

S.166: If the bailor has no title to the goods, and the bailee, in good faith, delivers them back to, or according to the directions of the bailor, the bailee is not responsible to the owner in respect of such delivery.¹

S.167: If a person, other than the bailor, claims goods bailed he may apply to the court to stop delivery of the goods to the bailor, and to decide the title to the goods.

S.168: The finder of goods has no right to use the owner for compensation for trouble and expense, voluntary incurred by him to preserve the goods and to find out the owner; but he may retain the goods again the owner until he receive such compensation; and where the owner has offered a specific required for the return of goods lost, the finder may sue for such reward, and may retain the goods until he received it.

S.169: If the thing which is commonly the subject of sale is lost, if the owner cannot with reasonable diligence be found, or if he refuses upon demand, to pay the lawful charges of the finder, the finder may sell it –

(1) When the thing is in danger of perishing or of losing the greater part of its value, or

(2) When the lawful charges of the finder, in respect of the thing found, amount to two-thirds of its value.

Right to Lien: S.170: If 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 has rendered in respect of them.

Illustrations

(a) A delivers a rough diamond to B, a jeweller, to be cut and polished, which is accordingly done. B is entitled to retain the stone till he is paid for the services he has rendered.

(b) A gives cloth to B, a tailor, to make into a coat. B promises A to deliver the coat as soon as it is finished, and to give a three months credit for the price. B is not entitled to retain the coat until he is paid.

S.171: Bankers, factor, wharfingers, attorneys of a High Court and policy brokers may, in the absence of a contract to the contrary, retain as a security for a general balance of account, any goods bailed to them; but no other person have a right retain, as a security for which balance, goods, bailed to them, unless is an express contract to that effect.

PLEDGE

Definition of terms Pledge, Pawnor and Pawnee (S.172):   The term pledge means bailment of goods as security for payment of a debt or performance of a promise. The bailor is in this case called Pawnor. The bailee is called Pawnee.

Pawnee’s rights:

Right to retain: (S.173): In order secure the debt or performance of promise Pawnee has right to retain the goods pledged. Further, such right can be exercised even to secure interests of the debt and all necessary expenses incurred by Pawnee in respect to the possession or for the preservation of the goods pledged.

This right to retain is can’t be exercised with respect to other goods even though pledged to same Pawnee unless there is a contract to the contrary. However, in the absence of contract to the contrary court shall presume that it extends to subsequent advances made by the Pawnee (S.174).

Further, Pawnee is entitled to receive from the pawnor extraordinary expenses incurred by him for the preservation of the goods pledged (S.175).

Pawnee’s right where pawnor makes default: If the pawnor makes default in payment of the debt, or performance, at the stipulated time, or the promise, in respect of which the goods were pledged, the pawnee may bring as suit against the pawnor upon the debt or promise, and retain the goods pledged as a collateral security; or he may sell the thing pledged, on giving the pawnor reasonable notice of the sale (S.176 part-I).

If the proceeds of such sale are less than the amount due in respect of the debt or promise, the pawnor is still liable to pay the balance. If the proceeds of the sale are greater that the amount so due, the pawnee shall pay over the surplus to the pawnor (S.176 part-I).

Defaulting pawnor’s right to redeem (S.177): If a time is stipulated for the payment of the debt, or performance of the promise, for which the pledged is made, and the pawnor makes default in payment of the debt or performance of the promise at the stipulated time, he may redeem the goods pledged at any subsequent time before the actual sale of them; but he must, on that case, pay, in addition, any expenses which have arisen from his default.

Pledge by mercantile agent(S.178):  If a mercantile agent is in possession of goods or the documents of title to goods, any pledge made by him, when acting in the ordinary course of business of a mercantile agent, is valid.  However, the possession of the agent is with the consent of the principal and he is authorized by contract to pledge (including at the time of pledge) the goods and agent must act in good faith.

Pledge by person in possession under voidable contract (S.178A): If the pawnor has obtained possession of the other goods pledged by him under a contract voidable under section 19 of section 19A, but the contract has not been rescinded at the time of the pledge, the pawnee acquired a goods title to the goods, provided he acts in good faith and without notice of the pawnor’s defect of title.

S.179: If the right of the pawnor is limited in the goods bailed, the pledge is valid to the extent of that interest.

S.180: If a third person wrongfully deprives the bailee of the use of possession of goods bailed, or does them any injury, the bailee is entitled to use such remedies as the owner might have used in the like case if no bailment has been made; and either the bailor or the bailee may bring a suit against a third person for such deprivation or injury.

S.181: Whatever is obtained by way of relief of compensation in any such suit shall, as between the bailor and the bailee, be dealt with according to their respective interests.

LAW OF AGENCY:

                    The law of agency is an area of commercial law dealing with a set of contractual, quasi-contractual and non-contractual relationships that involve a person, called the agent, who is authorized to act on behalf of another (called the principal) to create a legal relationship with a third party. The agent is, thus, required to negotiate on behalf of the principal or bring him and third parties into contractual relationship.

The common law principle in operation is usually represented in the Latin phrase, qui facit per alium, facit per se, i.e. the one who acts through another, acts in his or her own interests and it is a parallel concept to vicarious liability in which one person is held liable in criminal law or tort for the acts or omissions of another.

There are fifty sections under law of Agency: (S.182 to 232)

 Definition of Agent and Principal:  S.182 says an agent is a person who is employed to do any act for another or to represent another in dealing with third person.  The person who is so represented as Principal.

Who may employ agent: S.183 says every person who attained majority and is sound mind can be employed as agent.  However, if a minor or unsound mind is appointed as agent, agent is not responsible between the act of such minor agent and principal (S.184).  An agent can be appointed either orally or by way of writing (S.186). In case of express it must be in writing and whereas in case of implied it can be inferred from such facts and circumstances (S.187).

S.185 says in a contract of agency consideration is not required.

Powers of agent: 

 a) Agent has authority to do every lawful thing which is necessary in order to do such act. Similarly, in case of a person who is acting as agent is conducting business, he has authority to do every lawful thing necessary for the purpose of conducting such business. Further, all the acts that can be usually done in the course of conducing such person (S.188).

  b) Second, in case of emergency he can do such act, which he would in his own case, to prevent any financial loss (S.189).

 c) An agent can’t appoint sub-agent. However if the trade permits or agency is of such nature, sub-agent can be appointed (S.190). The term sub-agent means a person employed by and acting under the control of, the original agent (S.191).

 d) Agent is responsible to the principal for acts of the sub-agent. The sub-agent is responsible to agent for his acts. However, in case of fraud or willful wrong sub-agent is responsible to principal (S.192).

 e) If sub-agent is appointed without the authority of principal, such agent is responsible for the acts of such sub-agent, to third parties and principal (S.193).

 f) If an agent is authorized to name another person to act for principal, the person so appointed by agent is not a sub-agent; he is called as agent (S.194). In selecting such agent for principal, the agent is bound to exercise same discretion as a man of ordinary prudence (S.195).

 g) If a person acts on behalf of another, but without his knowledge or authority, such another person may ratify it. If it is ratified, he is called as agent. Such ratification can be done either expressly or impliedly (S.196 & 197).

h) If the knowledge of the facts is materially defective, ratification is not valid (198).

  i) If part of the act is done by agent is not authorized but transaction is ratified, it is deemed that the unauthorized part is also ratified (S.199).

  j) If ratification of unauthorized act can’t injure third person. An act done by one person on behalf of another, without such other person’s authority, which, if done with authority would have the effect of subjecting a third person to damages, or of terminating any right or interest of a third person, cannot, by ratification, be made to have such effect (S.200).

 k) A minor in India can’t ratify, after attaining majority. That is because a void agreement cannot be ratified. Ratification may be express or implied. Ratification, when valid operates retrospectively. When time is limited for doing ac act, the ratification must be before the expiry of that time. When no time is fixed, the ratification must be within a reasonable time.

Termination of agency: An agent’s authority can be terminated at any time. If the trust between the agent and principal has broken down, it is not reasonable to allow the principal to remain at risk in any transactions that the agent might conclude during a period of notice.

S.201 says an agency is terminated in the following ways:

a) If the principal revokes agent authority,

b) The agent renouncing the business of the agency,

c) The business of agency is completed;

d) The death of principal or agent or any one of them becomes unsound mind, the principal becoming insolvent.

e) The agreement between parties.

f) The efflux of lien, the subject matter ceasing to exist, the principal losing his control over the subject matter.

When agency can’t be revoked: As per S.202 says if agent’s authority is coupled with interest it can’t be revoked. In other words, if the agent himself has interest in the property which forms the subject-matter of the agency, the agency can’t be terminated unless there is an express contract to the contrary.

S.205, if the agency is for a fixed period, the principal cannot terminate the agency before the time expired, except for sufficient cause. If he does, he is liable to compensate the agent for the loss caused to him thereby. The same rules apply where the agent, renounces an agency for a fixed period. Notice in this connection that want of skill, continuous disobedience of lawful orders, and rude or insulting behavior has been held to be sufficient cause for dismissal of an agent.

Further, reasonable notice has to be given by one party to the other; otherwise, damage resulting from want of such notice, will have to be paid (s.206). As per s. 207, the revocation or renunciation of an agency may be made expressly or impliedly by conduct. The termination does not take effect as regards the agent, till it becomes known to him and as regards third party, till the termination is known to them (s.208).

Time of revoking agent’s authority: This is dealt under S.203, 204 & 210.

S.203 says The principal may revoke the authority given to agent at any time before the authority has been exercised by agent. However, principal cannot revoke the agent’s authority after it has been partly exercised, so as to bind the principal (section 204),

If an agent’s authority is terminated, it operates as a termination of subagent also (section 210).

Agent’s duty towards principal (S.211 to 221):

S.211: Agent is bound to conduct business according to the directions given by the principal and in the absence of directions as per customs prevailing. If any loss is sustained agent must make it good to his principal and if any profit accrues, he must account for it.

S.212:  Agent has to discharge his duties with skill, care and due diligence. He shall make compensation to his principal in respect of the direct consequences of his own neglect, want of skill or misconduct.

S.213: An agent is bound to render proper accounts to his principal on demand.

S.214: Agent in case of difficulty to use all reasonable diligence in communicating with his principal and in seeking to obtain his instructions.

S.215: If an agent deals on his own account in the business of the agency, without first obtaining the consent of his of his principal and acquainting him with all material circumstances which have come to his own knowledge on the subject, the principal may repudiate the transaction, if the case shows either that any material fact has been dishonestly concealed from him by the agent, or that the dealings of the agent have been disadvantageous to him.

Principal duty to agent (S.222 to 225):

The employer is under an obligation to indemnify the agent for the consequences of all lawful acts done by agent in exercise of the authority conferred upon him (S.222) and similarly for the acts done in good faith (S.223). However, employer is not liable to indemnify the agent even though is to do a criminal act (S.224). The principal must make compensation to his agent in respect of injury caused to agent by the principal’s neglect or want of skill (S.225).

Effect of agency on contracts with third person (s.226 to 238):

Contract entered by agent is treated like as if contract entered by principal himself (S.226) and same is the case with the notice issued by agent (S.229).

If the agent entered into contract beyond his authority, if such contract can be separated from exceeded part, part within the authority can be enforced (S.227). If it can’t be separated, the principal is not bound to recognize the transfer (S.228).

As per S.230, Agent cannot personally enforce contracts entered by him on behalf of his principal. He is also personally not bound by them. However, the following are exception:

1) If there is contract to the contrary

2) If the contract is made by an agent for the sale or purchase of goods for a merchant resident abroad.

3) If the agent does not disclose the name of his principal; and

4) If the principal, though disclosed, cannot be sued.

5) The undisclosed principal can seek for the enforcement of contract. The other contracting part has same rights against the principal. However, if the agent wouldn’t have entered into contract had the principal is known, he can refuse to fulfill the contract (S.231).

Rules relating to Undisclosed Principal:

Undisclosed Principal: Meaning: The anonymous party represented by an agent, authorized to act on the behalf of the principal. The actions of the agent then are legally binding upon the principal.

Rules:

1) An undisclosed principal can enforce only such rights and obligations that subsist between agent and principal (S.232).

2) In cases where the agent is personally liable, a person dealing with him may hold either him or his principal, or both of them (S.233).

3) If contacting party induces that agent (or principal) the agent (or principal) is liable, later he can’t retract (S.234).

4) Pretended agent is liable to make compensation for the loss caused to the contracting party (S.235).  Pretended agent means a person untruly representing himself to be the authorized agent of another. A person, with whom a contract has been entered into in the character of agent, is not entitled to require the performance of it if he was in reality acting, not as agent, but on his own account (S.236).

5) If an agent without authority, done acts or incurred obligations to third persons on behalf of his principal, the principal is bound by such acts or obligations, if he has by his words or conduct induced such third persons to believe that such act and obligations were within the scope of the agent’s authority (S.237).

6) Misrepresentations made, or frauds committed, by agents acting in the course of their business for their principals, treated as if they are made by the principal. However, if they do not fall within their authority, do not affect their principals.

Miscellaneous:

1) If an agent, without the knowledge of his principal, deals in the business of the agency on his own account instead of on account of his principal, the principal is entitled to claim from the agent any benefit which may have resulted to him from the transaction (S.216).

2) Agent is bound to pay to his principal all sums received on his account (S.218).

3) However, an agent may retain, out of any sums received on account of the principal in the business of the agency, all moneys due to himself in respect of advances made or expenses properly incurred by him in conducting such business, and also such remuneration as may be payable to him for acting as agent(S.217).

4) Similarly, he can detain money towards remuneration, if there is no contract to the contrary (S.219).

5) In the absence of any contract to the contrary, an agent has right of lien over the goods, papers, and other property, whether movable or immovable, of the principal received by him, until the amount due to himself for commission, disbursements and services in respect of the same has been paid or accounted for to him(221).

6) An agent who is guilty of misconduct in the business of the agency is not entitled to any remuneration in respect of that part of the business which he has misconducted (220).