Mercantile Law The Indian Contract Act Special Contracts - Indemnity, Guarantee, Bailment

1. GM06 Business Law and Corporate
Governance
Monica

2. What is Law?
 A set of rules recognised and enforced by the state to
control and regulate the conduct of people, to protect
their property, contractual rights with a view to secure
justice, peaceful living and social security.
 Ignorance of LAW is NO excuse
 Mercantile Law or Business Law or Commercial
Law: Part of Civil Law that deals with rights and
obligations of Mercantile persons arising out of
Mercantile transactions in respect of Mercantile
property
 Includes laws relating to various contracts,
partnership, companies, negotiable instruments,
insurance, carriage of goods, arbitration etc.

3. Nature of Law:
 Contractual situations and rights and obligations
arsing out of mercantile transactions between
mercantile persons (single individual, partnership
or joint stock company)
 Mercantile Law>Aggregate body of Legal rules
connected with trade, industry and commerce.

4. LAW OF CONTRACT:
 Branch of Law that determines the circumstances in
which promises made by the parties to a contract
shall be legally binding on them.
 Contract > Agreement made between two parties
which the law will enforce
 “Agreement enforceable by Law”
 Agreement > every promise / set of promises forming
consideration for each other .
 Promise >Accepted Proposal.
 Before Agreement, there should be Consensus ad
idem (parties agreed to subject matter of the
agreement in the same sense at the same time) and
legal obligation.

5. Essential elements of a Valid
Contract
1. Offer and Acceptance
2. Intention to create legal relationship.
3. Lawful Consideration.
4. Capacity of parties > Competency.
5. Free and genuine consent.
6. Lawful object.
7. Agreement not declared void.
8. Certainty and possibility of performance.
9. Legal Formalities
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6. Consent and Free Consent:
 Acquiescence or act of assenting to an offer.
Agree upon the same thing at the same time.
 Consent is said to be free, when it is not caused
by:
 Coercion
 Undue Influence
 Fraud
 Misrepresentation
 Mistake.
 No Consent means No Contract

7. Flaw in Consent

9. Coercion
 Committing or threatening to commit any act
forbidden by the IPC 1860 or the unlawful
detaining or threaten to detain any property.
Immaterial whether the IPC is in force in the place
where coercion is employed.
 Threat may proceed even from a stranger to the
contract and can b directed at any body. Intention
should be to make the person being coerced
enter the contract.
 Includes fear, physical compulsion and menace to
goods.
 Effect>Consent not sought hence voidable
Contract.
 Threat of suicide amount to coercion (Sec 15)

10. Undue Influence
 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. A person is deemed to be in
a position to dominate the will of the other:
 Where he holds a real or apparent authority over the
other.
 Where he stands in a fiduciary (Trust and Confidence)
relation to the other.
 Where he makes a contract with a person whose mental
capacity is temporarily or permanently affected by
reason of age, illness or mental or body distress.
 Also called “Moral Coercion”.
 Effect >Voidable at the option of the party whose
consent was so obtained

11. Relationships which raise
presumption of undue influence
 Parent and child
 Guardian and ward
 Trustee and beneficiary.
 Religious adviser and disciple.
 Doctor and patient
 Solicitor and Client
 Fiance and Fiancee
By reason of confidence is able to take unfair
advantage over the other.

12. Burden of Proof
 The plaintiff has to establish the other person was
in a position to dominate his will and the other
party used this influence to seek the plaintiff’s
consent
 The transaction is unconscionable
(unreasonable). Unreasonable use of superior
power over the other and enters into bargain
which is so much to his advantage that it “shocks
his conscience”.

13. Misrepresentation
 False statement which the person making it honestly
believes to b true or which he does not know to be
false
 Nondisclosure of a material fact or facts without any
intent to deceive the other party.
 There is misrepresentation when:
 A person positively asserts that a fact is true when his
information does not warrant it to be so, even if he
believes it to be true.
 When there is any breach of duty by a person which
brings an advantage to the person committing it by
misleading another to its prejudice.
 A party causes however innocently the other party to the
agreement to make a mistake as to the substance of the
thing which is the subject of the agreement.

14. Requirements
 Rep of a material fact . Not a mere expression of
opinion even if it turns out to be wrong.
 Made before conclusion of the contract inducing the
other party to enter.
 Made with the intention that it should be acted upon
by the person to whom it is addressed.
 Actually been acted upon and induced the contract.
 Be wrong but the person who made it honestly
believed it to be true.
 Made without any intention to decieve the other party.
 Need not be made directly to the plaintiff.Can bemade
to a 3rd person with the intention of communcating it
to the plaintiff.

15. Consequences:
 The aggrieved party can
 Avoid or rescind the contract.
 Accept the contract but insist that he shall be placed
in the same position he would have been if th rep
was true.
Aggreived party loses the right to rescind or avoid if
he’s aware of the misrep and seeks benefit or affirm
it in another way.

16. Fraud
 False representation made
 Knowingly
 Without belief in its truth.
 Recklessly not caring whether its true or false.
 Concealment of a material fact. Partial statement
of a fact withholding info.
 Intention of party making fraudulent misrep is to
deceive the other.

17. Essential elements of Fraud:
 Misrep or assertion which must be false
 Rep should relate to a material fact which exists
now or existed in the past.
 Rep made before the conclusion of the contract
with the intention of inducing the other party to act
upon it.
 Rep made with a knowledge of its falsity or
without belief in its truth or recklessly not caring
whether its true or false .
 The other party must be induced to act upon the
rep or assertion.
 Other party must have relied upon the rep and
must have been deceived.

18. Consequences:
 Rescind the contract.
 Insist on performance claiming position if the rep
had been true.
 Sue for damages.

19. Exceptions:
 Party can discover the truth by ordinary
dilligence.
 Party enters into contract with ignorance.
 Before contract is avoided, third party intervenes.
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20. Silence as to facts:
 Mere silence is not fraud. Active concealment is.
 Exceptions:
 Duty of the person keeping silence to speak.
 Rep becomes false due to change of circumstances
 No full disclosure of facts.
 Seller fails to inform buyer of defects.

21. Mistake of Law:
 Erroneous belief about something.
 By Law: mistake of law of the country
 Ignorantia non excusat Ignorance not excused.
 Mistake of law of a foreign country: treated as
mistake of fact and agreement is void.

22. Mistake of Fact >Bilateral
Mistake
 Both parties are under a mistake wrto a fact
essential to agreement.
 Mutual mistake
 Relate to a matter of fact essential to the
agreement.
 Cases:
 Mistake as to subject matter: existence, identity,
quality, quantity, title, price.
 Possibility of performing the contract: physical
impossibility.

23. Unilateral Mistake:
 One of the parties is mistaken.
 Exceptions:
 Identity of the person contracted with: holds true
when identity of the contracting person is important.
 Nature of the contract: consent is missing.

24. Consideration:
 The term consideration is used in the sense of quid pro quo i.e.
something in return
 Consideratiotn must result in a benefit to the promisor and a
detriment or loss to the promisee or a detriment to both.
 Agreement made without consideration is nudum pactum (a
nude contract)

25. Essentials of a valid consideration:
 It must move at the desire of the promisor : done at the instance of
third party not a good consderaton.
 It must move from the promisee or any other person : As long as there is
a consideration for a promise, it is immaterial who has given it. It may
move from the promisee or if the promisor has no objection, from any
other person. Stranger can sue only f he is a party.
 It may be past, present or future :
Past consideration : When the consideration for a present promise
was given before the date of promise, it is said to be past consideration.
Present consideration : When the consideration for a promise is
given simultaneously with the promise it is called present consideration.
Future consideration : A future or executory consideration is a
promise to do or give something in return in future for the promise then
made.
 It need not be adequate : Inadequacy of the consideration is no ground
for refusing the performance of the promise, unless it is evidence of proof

26.  Consideration must be real : Consideration must be real and
not illusory. It must be competent. If it is physically
impossible, vague or legally impossible, the contract cannot be
enforced.
 Consideration must be lawful : An agreement is void if it is
based on unlawful object. An agreement is considered
unlawful if :
a) it is forbidden by law
b) is of a nature that if permitted it would defeat the provisions
of any law
c) is fraudulent
d) involves or implies injury to the person or property of another
e) the court regards it as immoral or opposed to public property
 It must be something which the promisor is not already bound
to do : A promise to do what one is already bound to do, either
by general law or under an existing contract, is not a good
consideration for a new promise.

27. Stranger to contract:
Under the Indian Contract Act 1872
Stranger to a consideration cannot also enforce the contract.
Stranger to a contract cannot sue or be sued upon it doctrine of privity of
coontract.
Conseqences:
 Cannot sue even if he provides consideration or contract is for his benefit.
 Contract cannot enforce rights or obligations on any person other than the
parties.
Exceptions :
 A trust or charge: beneficiary on whose favor trust and interest payable.
 Marriage settlement or partitions.
 Acknowledgement or estoppel: constitute himself as an agent of a 3rd party.
 Contracts entered through agents
 Covenants running within the land

28. Exceptions where stranger to
a contract can sue
 Trust : In case of trust, the beneficiary may enforce the contract
even though he is stranger to the contract creating trust.
 When provision is made in a marriage settlement. : Where an
agreement is made in connection with marriage and a provision is
made for the benefit of a person he may take advantage of that
agreement although he is not a party to it.
 When provision is made in a partition or family settlement : A
mother promised to pay her younger son in case the elder son fails
to pay the amount which fell short of the younger son’s share in
the assets left by his father. Hence, the promise was valid creating
a liability for mother under the family arrangement.
 Where a charge is created in favour of a stranger on a specific
immovable : A stranger to a contract can sue for the money made
payable to him by it where the money is charged on immovable
properties.

29.  Where a promisor has by his conduct created privity of
contract with the stranger : If ‘A’ admits to ‘C’ that he had
received money from ‘B’ for the payment to ‘C’ , he
constitutes himself as the agent of ‘C’ who can successfully
recover the amount from ‘A’.
 Contract entered into by an agent can be enforced by the
principal : The principal can enforce the contract entered by
his agent where the agent has acted within the scope of his
authority and in name of the principal.
 Covenants running with the land : In this case, the person
who purchases the land with the notice that the owner of
land is bound by certain duties affecting land, the covenant
affecting the land may be enforced by the successor of the
seller.

30. Contract without consideration is void
>exceptions:
 Natural love and affection : A written or registered agreement
based on natural love and affection between the parties standing
in near relation to each other is enforceable even without
consideration.
 Compensation for services rendered : In order that a promise to
pay for the past voluntary services be binding, the following
essentials must exist
a) the act must be done voluntarily
b) for the promisor or it must be something which was the legal
obligation of the promisor
c) the promisor must be in the existence at the time when the act
was done
d) the promisor must agree now to compensate the promisee
 Time barred debt : Where a promise in writing signed by the
person making it or by his authorized agent, is made to pay a debt
barred by the limitation it is valid without consideration.

31.  Completed gifts: In this case the rule “No consideration, No contract”
shall not affect the validity as between the donor and the donee, of any
gift actually made. Thus gifts do not require consideration.
 Agency: According to section 185 of the Indian Contract Act, no
consideration is required to create an agency.
 Remission: No consideration is required for an agreement to receive less
than what is due. This is called remission in the law.
 Guarantee: There is no consideration required in the case of a contract of
guarantee.

32. Doctrine of Promissory
Estoppel
The person making the representation or promise becomes bound by the
same, if another person has acted on the faith of such promise or
representation. The promisee can ask for enforcing the promise even
if there is no consideration.
Example : Mr. X establishes an industrial unit on the faith of tax
concession announced by a state govt. for a particular specified
period. The state govt. is bound by the estoppel and cannot
withdraw tax concession earlier than promised by it.

33. Capacity to contract:
For a valid Contract the parties to a contract must
have capacity that is competence to enter into a
contract.
Section 11 of the Contract Act deal with the
competency of parties and provides that “every
person is competent to contract who is of the age
of majority according to the law to which he is
subject , and who is of sound mind and is not
disqualified from contracting by any law to which
he is subject .”

34.  It follows that the following persons are
incompetent to contract :
1. Minor
2. Person of unsound mind, and
3. Persons disqualified by any law to which
they are subject .
Contracts enter into by persons mentioned
above are void .

35. Minors
According to Indian Majority act ,1875, a minor is
one who has not completed his or her 18th year of
age . WHY
SHOULD MINORS BE PROTECTED ?
A minor has a immature mind and cannot think
what is good or bad for him .minors are often
exploited. So he must be protected by law from any
exploitation but at the same time, the law must not
cause unnecessary hardship to the persons who
deal with minors.

36. Effects of minor’s agreement
 An agreement with or by a minor is void :
 2. No ratification: A minor cannot ratify the agreement
even on attaining majority , because a void
agreement cannot be ratified .
 3. Minor can be a promisee or beneficiary :
 4.NO ESTOPPELAGAINST A MINOR: Where a
minor by misrepresenting his age has induced the
other party to enter into a contract with him , he
cannot be made liable on the contract .There can be
no estoppels against a minor. It means he is not
estopped from pleading his infancy in order to avoid a
contract . The court may direct minor to restore
property . No doubt, minor has got protection but he
has no liberty to cheat others

37. 5. No specific performance except in certain cases : A
minor’s contract been absolutely void, there can be
no question of the specific performance of such a
contract. A guardian of a minor cannot bind the
minor by an agreement for the purchase of
immovable property; so the minor cannot ask for
the specific performance of the contract which the
guardian had no power to enter into.
But a contract enter into by the guardian or
manager on minor’s behalf can be specifically
enforced by
1.The contract is within the authority of the guardian
or manager
2.It is for the benefit of the minor

38. 6. Liability for torts : A tort is a civil wrong . A minor
is liable in tort unless the tort in reality is a breach
of contract . But a minor cannot be made liable for
a breach of contract by framing the action on tort .
You cannot convert a contract into tort to enable
you to sue an infant.
7. No insolvency: A minor cannot be declared in
solvent as he is incapable of contracting debts and
dues are payable from the personal properties of
minor and he is not personally liable .

39. 8. Partnership : A minor being incompetent to
contract cannot be a partner in a partnership firm ,
but under section30 of the Indian Partnership Act,
he can be admitted to the benefits of partnership.
9.Minor can be an agent : A minor can act as an
agent. But he will not be liable to his principal for
his acts . A minor can draw, deliver and endorse
negotiable instruments without himself being liable .

40. 10. Minor cannot bind parent or guardian : In the
absence of authority, express or implied ,an
infant is not capable of binding his parent or
guardian, even for necessaries . The parents
will be held liable only when the child is acting
as an agent for parents .
11. Joint contract by minor and adult : In such a
case, the adult will be liable on the contract and
not the minor .
12. Surety for a minor: In a contract of guarantee
when an adult stands surety for a minor then
he [adult] is liable to third party as there is
direct contract between the surety and the third
party.

41. 13. MINOR AS SHAREHOLDER: A minor, being
incompetent to contract cannot be a shareholder of
the company . If by mistake he becomes a member
the co. can rescind the transaction and remove his
name from register .
14. LIABILITY FOR NECESSARIES: A claim for
necessaries supplied to a minor is enforceable by
law . But a minor is not liable for any price that he
may promise and never for more than the value of
the necessaries . There is no personal liability of
the minor but only his property is liable .

42. Persons of unsound mind:
 As per section 11 of Contract Act , for a valid
contract each party to the contract must have a
sound mind . Contracts made by persons of
unsound mind are void . The reason is that a
contract requires assent of two minds but a
person of unsound mind has nothing which the
law recognizes as a mind . Unsoundness of mind
does not mean weakness of mind or loss of
memory . It means not only lack of capacity to
understand the terms of the contract but also lack
of understanding to realize the effect of the terms
of the contract.

43. Other persons:
Alien enemies : An alien is competent to contract with
citizens of India living in India . He can maintain an
action on a contract entered into by him during peace
time . But if a war is declared , an alien enemy cannot
enter into any contract with an Indian citizen .
2. Foreign sovereigns and Amy minors : These persons
are immune from the jurisdiction of local courts ,
unless they voluntarily submit to its jurisdiction .
These persons have a right to contract but can claim
the privilege of not being sued . The rules regarding
suits by or against foreign sovereigns are laid down
in sections 84 to 87 of Civil Procedure code .

44. Insolvents : An insolvent cannot enter into a
contract as his property vests in the official
receiver or official assignee . This disqualification
of an insolvent is removed after he is discharged .
4. Convict : A convict while undergoing
imprisonment is incapable of entering into a
contract . But this disability comes to an end on
the expiry of the sentence .
5. Corporations : A corporation is an artificial person
recognized by law . It exists only in the eyes of
the law . It is competent to enter into a contract
only through its agents

45. . Professional persons : Doctors and advocates are included
in this class . In England barristers are prohibited by the
etiquettes of their profession from suing for their fees. In
India these personal disqualifications do not exists .
According to the Bar Council Act 1927 an advocate of the
High Court can enter into a contract with his client and
can also bring a suit against him for his fees .
7. Contractual capacity of married women : A woman is
competent to enter into a contract . Marriage does affect
the contractual capacity of a woman . She can even bind
her husband in cases of pressing necessity . A married
women may sue or be sued in her own name in respect of
her separate property .

46. Performance or discharge of the
contract:
 Parties fulfill their obligations within time and
manner prescribed.
 Attemptea performance or tender > Promisor
offers to perform obligations but promisee does
not accept.

47. Offer to perform > Requisites of a
valid tender:
 It must be unconditional . Conditional when not in
accordance with the terms and conditions
 Must be of whole quantity contracted or of the whole
obligation.
 Deviation microscopic is negligible
 Must be by a person who is in a position and willing to
perform the promise.
 Made at the proper time and place.
 Made to the proper person.
 Made to one of the several joint promisees. Same
effect as a tender to all of them.
 In case of goods, reasonable opportunity to promisee
for inspection of goods.
 In case of money, valid tender in the legal tender
money

48. Contracts which need not be
performed
 When performance becomes impossible.
 Parties agree to substitute / rescind/ alter it.
 Illegal contracts.
 Promisee dispenses promise with or remits wholly
or in part. Extends the time or accepts any
satisfaction.
 Promisee neglects or refuses to afford the
promisor reasonable facilities for the performance
of his promise

49. By whom must contracts be
performed?
 Promisor himself
 Agent.
 Legal representatives.
 Third persons.
 Joint promisors

50. Devolutions of joint liabilities and
rights:
 Devolution means “passing from one person to
another”.
 Joint promisors jointly fulfil the promise.on death,
legal rep fulfil
 Sec 42 voluntary discharge of obligations. If
parties don’t discharge as per their own volition,
sec 43 comes into play.three rules
 Any one of the joint promisors may be compelled to
perform.
 Joint promisor compelled to perform may claim
contribution.
 Sharing of loss arising from default.
 Release of a joint promisor from debt by the
promisee does not discharge the other promisors

51. Who can demand performance?
 Only promisee
 Makes no difference for whose benefit.

52. Time and place of performance:
 Where application is to be made and no time is
specified.
 Time is specified and n application is to be made
 Application for perf on a certain day and place.
 Application by the promisor to the promisee to
appoint place.
 Perf in manner or at time prescribed.

53. Time as the essence of the contract:
 Perf of promise by a party is essential within
specified period…
 When time is of the essence
 When time is not of the essence.
Subsequent notice: Longest time required for the
perf.

54. Assignment of contracts:
 Assign means to transfer
 Act of the parties
 Assign of contractual obligations
 Contractual obligations involving personal skills or ability
cannot be assigned.
 A promisor cannot assign his liabilities or obligations under a
contract.
 Assign of contractual rights
 Rights and benefits under a contract not involving personal
skill may be assigned.
 Actionable claim can always be assigned
 Operation f Law
 Death
 Insolvency.

55. Contract of indemnity
 Species of general contract
 One party promises to save the other from loss
caused to him by the conduct of the promisor
himself or any other third person.
 Person who promises to make good the loss >
Indemnifier or promisor.
 Person whose loss is to be made good >
Indemnified or Indemnity holder or promisee.
 Contract may be expressed or implied
(crcumstances or relationship between parties)

56. Rights of indemnity holder
 Recover from the promisor:
 Damages compelled to pay in any suit
 Costs compelled to pay in bringing or defending
such suits.
 Sums paid under terms of compromise of any such
suit
Rights of Indemnifier:
In eng law, analogous to rights of surety

57. Contract of Guarantee:
 Perform the promise or discharge liability of a 3rd
person in case of his default.
 Person who gives the guarantee is the surety.p
 Person on whose default the guarantee is given
is the Principal Debtor.
 Person to whom the guarantee s given is called
the creditor.
 Tripartite agreement . Triangular relationships
with three collateral contracts.

58. Essential features
 Concurrence.
 Primary liability in some person.
 Essentials of a valid contract.
 Writing not necessary.
 Guarantee is not a contract of uberrimae fidei
>one required full disclosure of all material facts
by the principal debtor or creditor to the surety
before the contract is entered into.

59. Extent of surety liability
 Nature is coextensive.
 Surety liable for what the Principal Debtor is liable
 Limitations of surety liability.
 Guarantee on part of a debt or entire debt
 Liability under continuing guarantee

60. Kinds of guarantee
 Specific.
 Continuing .
 Revocation of a continuing guarantee
 By notice
 By death of surety
 Other modes.

61. Rights of surety
 Against creditor
 Before payment of the guaranteed debt.
 Right of setoff.
 On payment of the guaranteed debt.
 Right to equities.
 Right f subrogation.
 Against principal debtor.
 Right to be relieved of liability.
 Right to indemnity

62.  Against cosureties.
 Right of contribution.
 Cosureties liable to contribute equally.
 Liability of cosureties bound in different
sums.
 Release of a cosurety.

63. Discharge of surety
When liability comes to an end.
 Discharge by revocation.
 By surety by giving a notice.
 By death.
 By novation substitution of a new contract.
 Discharge by the conduct of the creditor.
 Variance in terms of contract.
 Release or discharge of principal debtor.
 Compounding by creditor with principal debtor.
 Creditor’s act or omission impairing surety’s eventual
remedy.
 Loss of security.

64.  By invalidation of contract.
 Obtained by misrepresentation.
 Obtained by concealment
 On contract that creditor shall not act on it until a
cosurety joins.
 Failure of consideration.

65. Bailment
 Ballier “ handing over”. Change of possession of
goods from one person to another.
 Person delivering the goods: “bailor”. Person to whom
it is delivered : “bailee”.
 Requisites:
 Contract.
 Delivery of possession.
 For some purpose.
 Return of specific goods.
Concerned only with goods.
Other examples: hire purchase, seizure of goods by
custom, transport company and railways , post office as
parcel.

66. Classification
 Acc to benefit derived by parties:
 Exclusive benefit of bailor.
 Exclusive benefit of bailee.
 Mutual benefit.
 Also classified as
 Gratuitous bailment: no consideration.
 Non gratuitous bailment: consideration.

67. Duties of bailor
 Disclose known faults.
 Bear extraordinary expenses of bailment.
 Indemnfy bailee for loss in case of premature
termination of gratuitous bailment.
 Receive back the goods.
 Indemnify the bailee.

68. Duties of bailee
 Take reasonable care of the goods bailed.
 Not to make any unauthorized use of goods.
 Not to mix goods bailed with his own goods.
 Not to set up an adverse title.
 Return any accretion to the goods.
 Return the goods.

69. Rights of bailor
 Enforcement of rights.
 Avoidance of contracts.
 Return of goods lent gratuitously.
 Compensation from a wrong doer.

70. Rights of bailee
 Delivery of goods to one of several joint bailors of
goods.
 Delivery of goods to bailor without title.
 Right to apply to court to stop delivery.
 Right of action against tresspassers.
 Bailee’s lien.

71. Termination of bailment
 Expiry of the period.
 Achievement of the objective.
 Inconsistent use of goods.
 Destruction of the subject matter.
 Gratuitous bailment.
 Death of the bailor or bailee