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Special contracts by bhawani nandan prasad it director

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Special contracts by bhawani nandan prasad it director

  1. 1. UNNI IIM-C Special Contracts Bhawani Nandan Prasad SMP – IIM Calcutta MBA – Stratford University B.E. IT
  2. 2. UNNI IIM-C Special Contracts  In India, the Law of Contracts is contained in the Indian Contract Act,1872.  The Act lays down the general principles relating to formation, performance and enforceability of contracts and the rules relating to certain special types of contracts like Indemnity and Guarantee; Bailment and Pledge, and Agency.  The Partnership Act; the Sale of Goods Act; the Negotiable Instruments Act; though technically belonging to the Law of Contracts, have been covered by separate enactments Indemnity  A contract by which one party promise to save the other from loss caused to him by the conduct of the promisor himself or by the conduct of any other person is a “Contract of Indemnity"
  3. 3. UNNI IIM-C Special Contracts  X contracts to indemnify Y against the consequences of any proceedings which Z may take against Y in respect of a certain sum This is a contract of Indemnity. The definition provides the following essential elements -  There must be a loss  The loss must be caused either by the promisor or by any other person.  Indemnifier is liable only for the loss.  Thus, it is clear that this contract is contingent in nature and is enforceable only when the loss occurs
  4. 4. Special Contracts Rights of the indemnity holder The promisee (Indemnity holder) in a contract of indemnity, acting within the scope of his authority, is entitled to recover from the promisor  All damages that he is compelled to pay in a suit in respect of any matter to which the promise of indemnity applies.  All costs that he is compelled to pay in any such suit  All sums which he may have paid under the terms of a compromise in any such suite Disadvantages of Indemnity  An indemnity holder cannot hold the indemnifier liable until he has suffered an actual loss.  This is a great disadvantage to the indemnity holder in cases where the loss is imminent and he is not in the position to bear the loss
  5. 5. UNNI IIM-C Special Contracts Contract of Guarantee  A contract of guarantee is a contract to perform the promise, or to discharge the liabilities of a third person in case of his default.  The person who gives the guarantee is called Surety, the person in respect of whose default the guarantee is given is called Principal Debtor, and the person to whom the guarantee is given is called Creditor.  A Guarantee may be either oral or written."  Illustration: X promises to a shopkeeper Y that X will pay for the items being bought by Z if Z does not pay, this is a contract of guarantee. In this case, if Z fails to pay, Y can sue X to recover the balance.
  6. 6. UNNI IIM-C Special Contracts  A contract of guarantee has the following essential elements 1. Principal Debtor - The main function of a guarantee is to help a credit-unworthy person to get a loan or financial assistance  Thus, there must exist a principal debtor for a recoverable debt for which the surety is liable in case of the default of the principal debtor. 2. Consideration - As with any valid contract, the contract of guarantee also must have a consideration.  The consideration in such contract is anything done or the promise to do something for the benefit of the principal debtor  In general, if the principal debtor is benefited as a result of the guarantee, it is sufficient consideration for the sustenance of the guarantee.
  7. 7. UNNI IIM-C Special Contracts 3. A guarantee obtained by misrepresenting facts that are material to the agreement is invalid,  Similarly a guarantee obtained by concealing a material fact is invalid as well Continuing Guarantee  A guarantee which extends to a series of transactions is called a continuing guarantee.  A continuing guarantee can be revoked at any time by the surety by notice to the creditor.  Once the guarantee is revoked, the surety is not liable for any future transaction however he is liable for all the transactions that happened before the notice was given.
  8. 8. UNNI IIM-C Special Contracts Rights of the Surety  Guarantee being a contract, all rights that are available to the parties of a contract are available to a surety as well.  The following are the rights specific to a contract of guarantee that are available to the surety. Rights against principal debtor 1. Right of Subrogation : Where a guaranteed debt has become due, the surety upon payment is invested with all the rights which the creditor had against the principal debtor.  This means that the surety steps into the shoes of the creditor  Whatever rights the creditor had, are now available to the surety after paying the debt.
  9. 9. UNNI IIM-C Special Contracts 2. Right to get Indemnified  In every contract of guarantee there is an implied promise by the principal debtor to indemnify the surety; and the surety is entitled to recover from the principal debtor whatever sum he has rightfully paid under the guarantee Rights against creditor  Right to securities : Surety is entitled to the benefit of every security which the creditor has against the principal debtor at the time when the contract of guarantee is entered into  If the creditor loses or without the consent of the surety parts with such security, the surety is discharged to the extent of the value of the security.
  10. 10. Special Contracts  Right of set off : If the creditor sues the surety, the surety may have the benefit of the set off, if any, that the principal debtor had against the creditor.  He is entitled to use the defences that the principal debtor has against the creditor.  Thus if the creditor owes the principal debtor something, for which the principal debtor could have counter claimed, then the surety can also put up that counter claim. Discharge of Surety  A surety is said to be discharged from liability when his liability comes to an end.  A variance made without the consent of the surety in terms of the contract between the principal debtor and the creditor, discharges the surety as to the transactions after the variance.
  11. 11. UNNI IIM-C Special Contracts  The surety is discharged by any contract between the creditor and the principal debtor by which the principal debtor is discharged;  The liability of a surety is co-extensive with that of the principal debtor, unless it is otherwise provided in the contract. Main Differences between Indemnity and Guarantee  In a contract of indemnity there are two parties i.e. indemnifier and indemnified. A contract of guarantee involves three parties i.e. creditor, principal debtor and surety.  An indemnity is for reimbursement of a loss, while a guarantee is for security of the creditor.  In a contract of indemnity the liability of the indemnifier is primary and arises when the contingent event occurs. In case of contract of guarantee the liability of surety is secondary and arises when the principal debtor defaults.
  12. 12. UNNI IIM-C Special Contracts  The indemnifier after performing his part of the promise has no rights against the third party, whereas in a contract of guarantee, the surety steps into the shoes of the creditor on discharge of his liability, and may sue the principal debtor Guarantees and Debt Instruments by Corporates  It is very common in a business transaction to support a loan with a bank guarantee  However in 2009 RBI had to intervene with a regulation which had the effect of banning banks from issuing guarantees in the case of corporate debt instruments like debentures  This essentially followed SBI’s guarantee to Tata Motors’ Rs 4,200 crore non-convertible debentures (NCDs) in May 2009
  13. 13. Special Contracts  Theoretically these NCDs could be bought by foreign funds and if that happens the SBI guarantee will mean that a bank is indirectly guaranteeing a foreign investment  RBI wants to avoid a situation where Banks may go out of control by issuing such guarantees which could result in a higher exposure than their net worth, similar to the case of American International Group (AIG) in the US  As result of SBI's guarantee of timely payment of dues to the institutional investors, the Tata Motors bond issue obtained a higher rating from credit rating agencies, which in turn ensured lower interest rates. UNNI IIM-C
  14. 14. Special Contracts Bailment and Pledge  A 'bailment' involves the delivery of goods by one person to another for some purpose upon a contract that they shall, when the purpose is accomplished be returned or disposed of according to the directions of the person delivering them.  The person delivering the goods is called the 'bailor' and the person to whom the goods are delivered is called the 'bailee'.  The examples of a contract of bailment are:-leaving luggage in a cloak room; leaving garments with a tailor etc. UNNI IIM-C
  15. 15. UNNI IIM-C Special Contracts  The important feature of bailment is the transfer of possession.  The ownership remains with the owner and there cannot be a bailment of immovable property like land. Pledge  A 'pledge' involves a bailment of goods where the goods are delivered as a security for payment of a debt or performance of a promise.  The bailor is called the 'pledgor' or 'pawnor' and the bailee is called the 'pledgee' or 'pawnee'.  Thus, pledge is a special kind of bailment and can be made only of movable properties.  In order to make the pledge legally valid it is essential that the pledgor has the legal right/title to retain the goods.
  16. 16. UNNI IIM-C Special Contracts Main Differences between Bailment and Pledge  Purpose:- A pledge is made for a specific purpose (to raise a loan), while bailment can be made for any purpose  Property:- In bailment, the bailee gets only the possession of goods bailed and the ownership remains with the bailor.  In the case of pledge, the pledgee acquires a special property in the goods pledged whereby he gets possession coupled with the power of sale, on default.  Right of sale :- Bailee can exercise a lien on the goods bailed and he has no right of sale (lien means the right to retain possession)  But in case of a pledge, the pledgee can sell the goods after due notice to pledgor.
  17. 17. Special Contracts Contract of Agency  Agency is a special type of contract. The principles of contract of agency are – 1. Except matters of a personal nature, what all things a person can do himself can also be done through agent 2. A person acting through an agent is acting himself, i.e. act of agent is act of Principal. - -  Since agency is a contract, all general requirements of a valid contract are applicable to agency contract also  One important distinction is that no consideration is necessary to create an agency.  An agent is a person employed to do any act for another or to represent another in dealings with third persons.  The person for whom such act is done, or who is so represented, is called the principal
  18. 18. UNNI IIM-C Special Contracts  Any person who is of the age of majority and who is of sound mind, may employ an agent.  As between the principal and third persons any person may become an agent, but no person who is not of the age of majority and of sound mind can become an agent, so as to be responsible to his principal  An agent can act on behalf of Principal and can bind the Principal. Agent’s main duties to Principal  Conducting principal’s business as per his directions  Carry out work with normal skill and diligence  Render proper accounts  Agent’s duty to communicate with principal  Agent’s duty to pay sums received for principal
  19. 19. UNNI IIM-C Special Contracts Main Powers of Principal  Recover damages from agent if he disregards directions of Principal  Obtain accounts from Agent  Recover moneys collected by Agent on behalf of Principal Main Duties of Principal  Pay remuneration to agent if it is agreed  Indemnify agent for lawful acts done by him as agent  Indemnify Agent for all acts done by him in good faith  Indemnify agent if he suffers loss due to neglect or lack of skill of Principal.
  20. 20. UNNI IIM-C Special Contracts Termination of Agency  An agency is terminated by 1. the principal revoking his authority; or 2. by the agent renouncing the business of the agency or; 3. by the business of the agency being completed; or 4. by either the principal or agent dying or principal becoming a person of unsound mind; or 5. by the principal being adjudicated an insolvent
  21. 21. UNNI IIM-C Special Contracts Sale of Goods  Sale of Goods is one of the special types of Contract and initially this was part of Indian Contract Act itself  Later on a separate Sale of Goods Act was passed in 1930.  The Sale of Goods Act is complimentary to Contract Act.  Fundamental provisions of Contract Act apply to contract of Sale of Goods also.  Thus provisions dealing with offer and acceptance, legally enforceable agreement, mutual consent, parties competent to contract, free consent, lawful object, consideration etc. apply to contract of Sale of Goods also.
  22. 22. UNNI IIM-C Special Contracts  A contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a price.  A contract of sale may be absolute or conditional.  A contract of sale may be made in writing or by word of mouth, or partly in writing and partly by word of mouth or may be implied from the conduct of the parties  Two parties are required for contract are the Buyer who buys or agrees to buy goods and Seller who sells or agrees to sell goods  Where under a contract of sale the property in the goods is transferred from the seller to the buyer, the contract is called a sale, but where the transfer of the property in the goods is to take place at a future time the contract is called an agreement to sell
  23. 23. UNNI IIM-C Special Contracts  “Goods” means every kind of movable property other than actionable claims and money; and includes stock and shares, growing crops, grass, and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale. Conditions and Warranties  Stipulation in a contract of sale with reference to goods which are the subject thereof may be a condition or a warranty.  A condition is a stipulation essential to the main purpose of the contract, the breach of which gives rise to a right to treat the contract as cancelled.  A warranty is a stipulation collateral to the main purpose of the contract, the breach of which gives rise to a claim for damages but not to a right to reject the goods and treat the contract as cancelled
  24. 24. UNNI IIM-C Special Contracts  Caveat Emptor - The principle termed as ‘caveat emptor’ means ‘buyer be aware’.  Generally, buyer is expected to be careful while purchasing the goods and seller is not liable for any defects in goods sold by him.  However with the evolution of Consumer Protection Laws this concept is becoming outdated  Delivery of goods to buyer : Delivery of the goods and payment of the price are concurrent conditions, unless otherwise agreed  This means that the seller shall be ready and willing to give possession of the goods to the buyer in exchange for the price, and the buyer shall be ready and willing to pay the price in exchange for possession of the goods.
  25. 25. UNNI IIM-C Sale of Software ???? Software Licences  Software is never sold as any other product; it is always viewed as an intangible property.  It is only licensed and this is the most popular form of agreement being made in relation to software.  Under this agreement the person who develops the software, licenses certain rights in relation to the software to the user.
  26. 26. UNNI IIM-C Sale of Software ????  What these contracts normally grant is a non-exclusive and non-transferable licence to run the software on a single computer at a time.  The licensee is not in any way empowered to transfer this right to any third party.  Since the licence is non-exclusive in nature the Licensor can grant these rights to other parties.  The Licensee has the limited right to use the software only on one computer at a given time  If anybody loads the same software into his computer by making a copy from the Licensee then the Licensee is deemed to have violated the Licence agreement.
  27. 27. Sale of Software ???? Shrink Wrap Agreements  It is a sub category of software licences which intend to establish a binding legal agreement between the software vendor and the user.  The agreement can be generally seen inside the box containing the software, printed on the envelope containing the CD-ROM or disks, or may be printed in the user manual.  There is a warning to the user not to open the software envelope or use the software unless and until he or she fully agrees with the terms and conditions of the agreement.  Shrink-wrap licences have traditionally been widely used in the computer software industry in mass market transactions  Interestingly the word "shrink-wrap" has been linked to the fact that such agreements used to be included on the outside of the software packaging, which was visible through the clear plastic shrink-wrap which was used to seal the package.
  28. 28. Special Contracts Partnership  Partnership is one of the special types of Contract and earlier this was part of Indian Contract Act itself but later converted into separate Act in 1932.  The Indian Partnership Act is complimentary to Contract Act.  Basic provisions of Contract Act apply to contract of partnership also.  Basic requirements of contract i.e. legally enforceable agreement, mutual consent, parties competent to contract, free consent, lawful object, consideration etc. apply to partnership contract  One crucial disadvantage of partnership is the unlimited liability of partners for the debts and liabilities of the firm.  Any partner can bind the firm and the firm is liable for all liabilities incurred by any firm on behalf of the firm.
  29. 29. UNNI IIM-C Special Contracts  Partnership Firm is not a legal entity though it has limited identity for purpose of tax law.  Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any one of them acting for all.  It is not a distinct legal entity apart from the partners Constituting it  Each partner is ‘agent’ of all the remaining partners and thus partners are ‘mutual agents’.  As per normal provision of contract, a ‘partnership’ agreement can be either oral or written.  However an Agreement in writing is necessary to get the firm registered.
  30. 30. UNNI IIM-C Special Contracts  The partners must come together to share profits and the share need not be in proportion to funds contributed by each partner.  Even though sharing of profit is essential, sharing of losses is not an essential condition for partnership  Since partnership is an ‘agreement’ there must be minimum two partners.  In case of partnership, the number of members must not exceed 10 in case of banking business and 20 in other businesses  Dissolution of a firm can be a) By agreement b) Compulsory dissolution in case of insolvency c) Dissolution on happening of certain contingency d) By notice e) Dissolution by Court
  31. 31. UNNI IIM-C Special Contracts Limited Liability Partnership  The concept of limited liability partnership (LLP) has been introduced in India by the Limited Liability Partnership Act 2008, which came into force from April 1, 2009  LLP tries to combine the advantages of ease of running a Partnership and separate legal entity status and limited liability aspect of a Company.  LLP is a separate legal entity separate from its partners, can own assets in its name, sue and be sued.  Unlike corporate shareholders, the partners have the right to manage the business directly  One partner is not responsible or liable for another partner’s misconduct or negligence.  Compulsory registration to be done with Registrar of Companies
  32. 32. UNNI IIM-C Special Contracts  Minimum of 2 partners and no maximum cap on the number of partners.  LLP has perpetual succession.  The rights and duties of partners in LLP, will be decided by the agreement between partners  The duties and obligations of Designated Partners shall be as provided in the law.  Liability of the partners is limited to the extent of his contribution in the LLP.  No exposure of personal assets of the partner, except in cases of fraud.  Audit of the LLP accounts is required only if annual turnover exceeds Rs.40 lakhs
  33. 33. UNNI IIM-C Special Contracts Negotiable Instruments Act 1881  Negotiable instruments play a very vital role in modern day transactions  These are the principal instruments for making payments and discharging various obligations  To be simple a negotiable instrument is a transferable document which satisfies certain terms and conditions  Since they are transferable, they pass on freely from hand to hand and thereby form an essential part of modern day commercial transactions
  34. 34. UNNI IIM-C Special Contracts  The relevant Indian Law dealing with these instruments is the Negotiable Instruments Act, 1881  However the Act refrains from defining a negotiable instrument instead it only states that a negotiable instrument means a promissory note, bill of exchange or cheque payable either to order or bearer (Sec 13)  In other words the Act does not define a negotiable instrument, it only clarifies that cheque, bills of exchange and promissory notes are negotiable instruments  The most important feature is the good title it confers on the person who receives it genuinely and for value, even if the transferor had defective title to the said instrument
  35. 35. UNNI IIM-C Special Contracts Essential features of negotiable instruments  Negotiable instruments are easily transferable from person to person and the ownership of the property in the instrument is passed on by mere delivery, if it is bearer instrument,  In the cases of order instruments, property in the instrument is passed on by endorsement and delivery  Transferability is an essential feature of a negotiable instrument  A negotiable instrument confers absolute and good title on the transferee, who takes it in good faith, for value and without notice of the transferor’s defective title on the said instrument  Illustration X sells his mobile phone to Y, who makes the payment through a bearer cheque. Even if Y has stolen this cheque from Z, still X will get good title over the said cheque if he has exercised reasonable care at the time of taking the cheque.
  36. 36. UNNI IIM-C Special Contracts  Thus a negotiable instrument is an exception to the general rule that the transferor cannot transfer title better than what he himself possesses Promissory note  Promissory note is an instrument in writing which contains an unconditional promise signed by the maker to pay a certain sum of money only to a certain person or to the order of certain person or to the bearer of the instrument (Sec 4, N.I. Act 1881)
  37. 37. UNNI IIM-C Special Contracts Bill of Exchange  It is an instrument in writing which contains an unconditional order signed by the maker, directing a certain person to pay a certain sum of money only to a certain person or to the order of certain person or to the bearer of the instrument (Sec 5, N.I Act 1881)  Generally this is in the form of an order from the creditor to the debtor to pay a certain sum of money to a person specified.  The maker of the bill is called the drawer, person who is directed to pay is called the drawee and the person who is entitled to receive payment is called the payee
  38. 38. UNNI IIM-C Special Contracts  In many occasions the drawer can be the payee also Cheque  Cheque is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand  Thus in the case of a cheque the drawee is always a banker and a cheque is only payable upon demand  Whereas other bills of exchange are payable after a period of time specified therein, in the case of cheque it is payable only after a demand is made
  39. 39. UNNI IIM-C Special Contracts Similarities/ Dissimilarities between Promissory note, Bills of Exchanges and Cheques  The law makes it clear that all these instruments should be in writing  A cheque and a bill of exchange contain an order to the drawee to pay the money whereas the promissory note there is an undertaking by the maker to pay his creditor  Thus in the case of cheque and a bill of exchange the drawer makes an unconditional order on another person to pay the money, while in the case of the promissory note the drawer himself promises to pay
  40. 40. UNNI IIM-C Special Contracts  However one common feature in the case of Promissory note, Bills of Exchanges and Cheques is that the promise or order should be an unconditional one  The main difference between a cheque and a bill of exchange is that a cheque is always drawn on and is payable by the banker, while a bill may be drawn on any person firm or company  Thus only a customer of a bank having an account is entitled to draw a cheque on the banker, with the same branch of the bank where he has an account  A bill of exchange is generally drawn by the seller on his customer or a creditor on his debtor
  41. 41. UNNI IIM-C Special Contracts  In the case of a promissory note, bill of exchange and a cheque another similarity is that the amount of money to be paid must be certain and should be specified clearly  Promissory notes, bill of exchanges and a cheques must be payable either to order or to bearer  Time of payment: A cheque is always payable on demand while in the case of a bill of exchange and promissory note it must be payable after a period of time specified in the instrument
  42. 42. UNNI IIM-C Special Contracts  A negotiable instrument is valid only if it bears the signature of the drawer/promisor  In the case of a cheque, signature of the drawer must tally with the specimen signature given to the bank at the time of opening of account  In the case of a promissory note, bill of exchange they must be stamped while in the case of a cheque this is not required  The valuation depends upon the value of the note or bill  If it is not stamped it cannot be admitted in evidence in case of any disputes
  43. 43. UNNI IIM-C Special Contracts  Another similarity in the case of promissory note, bill of exchange and a cheque is that the holder of these instruments has the right to sue in his own name for the recovery of the amount mentioned in it  All negotiable instruments are transferable from one person to another  Thus the negotiable instrument confers upon the person who acquired it bona fide and for value good title to the instrument, in spite of any defect in the transferor's title  Such a person is called a holder in due course and he gets title against the entire world
  44. 44. UNNI IIM-C Special Contracts Concept of Negotiability Illustration : Assume that A has sold his laptop to B for Rs 40,000/- on three months credit.  In order to ensure that B will pay the money after three months, A may write an order addressed to B that he has to pay after three months, for value of goods received by him, (i.e.Rs.40,000/) to A or anyone holding the order and presenting it before him (B) for payment.
  45. 45. UNNI IIM-C Special Contracts  This order which A writes is called a Bill of Exchange, A is the Drawer, B is the Drawee,  This written document has to be signed by B to show his acceptance of the order, then B becomes the acceptor  Thus A can hold the document with him for three months and on the due date can collect the money from B or A can use the document for meeting different business transactions  Thus after a few days if A wants he can borrow money from C for a period of 2 months and pass on this document to C.
  46. 46. UNNI IIM-C Special Contracts  For transferring the Bill of Exchange to C, A just has to write on the back of the document an instruction to pay money to C, and sign it.  After doing so A has to deliver the Bill of Exchange to C  The above said act of signing on the back of the document is called endorsement, A is the endorser and C is the endorsee  Now C becomes the owner of this document and he can claim money from B on the due date.  In the alternative, C can further pass on the document to D after instructing and signing on the back of the document.  This passing on process may continue further till the final payment is made
  47. 47. UNNI IIM-C Special Contracts  The ease at which the property in a document transfers from one person to another signifies the negotiability of the instrument. This very often happens in the case of a cheque also  if A issues a “ICICI Bank” cheque worth Rs. 5,000/ in favour of B, then B can claim Rs. 5,000/- from ICICI Bank, (A-Drawer, ICICI- Drawee, B-Payee) or  B can transfer it to C to meet any obligation, like paying back a loan that he might have taken from C. (B-Endorser, C-Endorsee)  Once B transfers it, C gets a right to Rs. 5,000/- and C can transfer it to D if needed.  Such transfers may continue till the payment is finally made to somebody.