LAW OF CONTRACT II

Chanderprabhu Jain College of Higher Studies & School of Law
Plot No. OCF, Sector A-8, Narela, New Delhi – 110040
(Affiliated to Guru Gobind Singh Indraprastha University and Approved by Govt of NCT of Delhi & Bar Council of India)
BALLB / BBALLB (SECOND SEMESTER)
LAW OF CONTRACT II
UNIT I
CONTRACT OF INDEMNITY, GUARANTEE,
BAILMENT AND AGENCY

CONTRACT OF INDEMNITY AND GUARANTEE
● Indemnity is defined in Section 124 of Indian Contract Act, 1872, while in Section
126, Guarantee is defined.
● In the contract of indemnity, one party makes a promise to the other that he will
compensate for any loss occurred to the other party because of the act of the
promisor or any other person. In the contract of guarantee, one party makes a
promise to the other party that he will perform the obligation or pay for the liability,
in the case of default by a third party.
● In indemnity, there are two parties, indemnifier and indemnified but in the contract
of guarantee, there are three parties i.e. debtor, creditor, and surety.

● The liability of the indemnifier in the contract of indemnity is primary whereas if we
talk about guarantee the liability of the surety is secondary because the primary
liability is of the debtor.
● The purpose of the contract of indemnity is to save the other party from suffering
loss. However, in the case of a contract of guarantee, the aim is to assure the creditor
that either the contract will be performed, or liability will be discharged.

CONTRACT OF BAILMENT
● Section 148 of the Indian Contract Act states that, Bailment is 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 otherwise 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 they
are delivered is called the “Bailee”.
● In a contract of bailment, delivery of goods for a specific purpose is the main
essential which implies that if the goods are delivered without any purpose then it
does not forms a valid contract of bailment

● Rights of the Bailor
❖ Right to enforce bailee’s performance.
❖ Right to claim damages.
❖ Right to claim compensation against unauthorized use of goods.
❖ Right to demand return of goods along with accretion to, if any.
● Duties of Bailor
❖ Duty to disclose faults.
❖ Duty to repay bailee’s expenses.
❖ Duty to indemnify the bailee.
❖ Duty to compensate bailee for breach of warranty.
❖ Duty to claim back the goods

CONTRACT OF AGENCY
● A contract of agency is the employment of a person by another in order to bring the
later into legal relation with third person. The one who appoints the other person is
said to be Principal and the one who is been appointed is said to be Agent
● According to S. 182 of the Indian Contract Act, 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 'Principal'.
● One of the essential element of contract of Agency is that as per S. 185 “ no
consideration is necessary to create contract of agency.” Although an agent is
generally remunerated by way of commission for services rendered yet no
consideration is immediately necessary at the time of his appointment.

● Modes of Creating Agency
❖ By express appointment by the principal
❖ By implied appointment by the principal
❖ Apparent / Ostensible authority
❖ By necessity
❖ By Estoppel
❖ Ratification by the Principal
● Modes of Termination of Agency
Firstly, By Act of Parties
❖ By mutual consent (by both the parties)
❖ By revocation by Principal
❖ By renunciation by Agent

❖ By the performance of the contract of agency. This happens when agency is created
for single specific transaction.
❖ By the expiration of the period fixed/implied in the contract.
Secondly, By Operation of Law
❖ By the death of either principal or agent.
❖ By the subsequent insanity of either principal or agent.
❖ By the bankruptcy/insolvency of principal.
❖ By the happening of an event which renders the agency unlawful.

UNIT II
The Indian Partnership Act, 1932

The Indian Partnership Act, 1932
● Section 4 of the said act, defined partnership as “the relation between persons who
have agreed to share the profits of business carried on by all or any of them acting
for all”.
● The persons who own the partnership business are individually called ‘partners’ and
collectively they are called as ‘firm’ or ‘partnership firm’. The name under which
partnership business is carried on is called ‘Firm Name’. In a way, the firm is
nothing but an abbreviation for partners.
● In a Partnership firm, every partner is both an agent and principle for himself and
other partners that is he can bind by acts the other persons and can be bound by acts
of other partners. Hence, it enables every partner to carry on the business on behalf
of others.

● Essential elements of a Partnership Firm
❖ Partnership Agreement
❖ Two or more persons.
❖ Carrying on of business in a partnership
❖ Sharing of Profits
❖ Mutual Agency in a Partnership
● “Minor” As Partner
❖ Section 30 of the Indian Partnership Act governs the admittance of a minor into a
partnership as a partner only with the consent of all other partners but he could be
admitted only as a beneficiary that ilies a minor cannot be held not liable for the
liabilities of the partnership firm .

● Rights /Duties of Partners inter se
Rights of Partners:
❖ Every partner has a right to take part in the conduct and management of business.
❖ Every partner has a right of free access to all records, books and accounts of the
business, and also to examine and copy them.
❖ Every partner is entitled to share the profits equally.
❖ A partner who has contributed more than the agreed share of capital is entitled to
interest at the rate of 6 per cent per annum. But no interest can be claimed on capital.
❖ A partner is entitled to be indemnified by the firm for all acts done by him in the
course of the partnership business,

Duties of Partners:
❖ Every partner is bound to diligently carry on the business of the firm to the greatest
common advantage. Unless the agreement provides, there is no salary.
❖ Every partner must be just and faithful to the other partners.
❖ A partner is bound to keep and render true, proper, and correct accounts of the
partnership and must permit other partners to inspect and copy such accounts.
❖ Every partner is bound to indemnify the firm for any loss caused by his willful
neglect or fraud in the conduct of the business.
❖ A partner must not carry on competing business, nor use the property of the firm for
his private purposes. In both cases, he must hand over to the firm any profit or gain
made by him but he must himself suffer any loss that might have occurred.

● Liability of Partners
❖ Joint & Several: Every partner is liable jointly and severally for all the acts of the
firm done while he was a partner. The liability of a partner is always unlimited.
❖ Liability for Losses caused by any partner: Every partner shall be liable to make
good any loss caused to the firm by his fraud or willful neglect in the conduct of
business. No partner can in any way exempt himself from such loss.
❖ Liability for Secret Profits: A partner is liable to account for and pay to the firm
any private profits earned from the business of the firm or property or goodwill of
the firm.
❖ Liability for Profits From Competing Business: If a partner carries on any
business of the same nature and competing with that of the firm, he would be liable
to account for and pay to the firm all profits made by him in that business.
❖ Liability to bear losses of the firm: As a partner has a right to share the profits of
the firm so is he liable to share the losses equally unless otherwise agreed upon.

● Dissolution of a Partnership Firm
Dissolution without the intervention of the Court.
❖ By Agreement
❖ Compulsory Dissolution in case of :
➢ Insolvency of Partner
➢ Insanity of Partner
➢ Death of Partner
➢ Unlawful Business
➢ Retirement of a Partner
❖ Dissolution on the happening of contingent event
❖ Dissolution on completion of tenure of partnership firm.

Dissolution by Court:-
❖ On breach of agreement by partner
❖ On dispute among partners
❖ On transfer of interest in partnership firm by a partner to the third party
❖ On Continuous Losses to the firm that is where losses occurs more than profits then
it is always advisable to dissolve the firm.
❖ On Just and Equitable Ground in the eyes of Court of Law.

UNIT III
The Sale of Goods Act, 1940

The Sale of Goods Act, 1940
● As per the Sale of Goods Act,1940 ‘Contract of Sale‘ is a type of contract whereby
one party (called as seller) either transfers the ownership of goods or agrees to
transfer it for the consideration (i.e., money) to the other party (called as buyer).
● A contract of sale can be a sale or an agreement to sell. In a contract of sale, when
there is an actual sale of goods, it is known as Sale whereas if there is an intention to
sell the goods at a certain time in future or some conditions are satisfied, it is called
an Agreement to sell.
● The transfer of property in the goods from the seller to the buyer is the essence of a
contract of sale. Here the transfer of property in goods impies to the transfer of
“Ownership” of the goods. Mere transfer of Possession does not forms a valid
contract of sale

Condition And Warranties
● As per S.12(2) of the Sale of Goods Act, the term 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 repudiated.
● As per S.12(3) of the Sale of Goods Act, the term 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 repudiated.
Note:Where a particular stipulation in contract is a condition or warranty depends on the
interpretation of terms of contract. Mere stating 'Conditions of Contract' in agreement
does not mean all stipulations mentioned are 'conditions' within meaning of section 12(2).

● RIGHTS OF UNPAID SELLER
"Unpaid seller" means a person who has sold the goods for a price but price has not been
paid to him.
❖ Right of Lien
Right to retain goods by unpaid seller till amount is recovered is called right of lien. If
unpaid seller wants to exercise right of lien, he has to fulfill the following conditions.
➢ He must be unpaid seller
➢ There should be no credit terms in the Contract of Sale.
➢ After completion of credit period, right of lien can be exercised.
➢ The unpaid seller should have obtained those goods lawfully.
➢ Amount must be due on those goods only against which right of lien is decided.

❖ Right of Stoppage in Transit
Unpaid Seller has right to stop the goods in the transit itself if the transit was already
initiated and the possession of the same is not yet delivered to the buyer . To exercise this
right the following conditions are to be fulfilled.
● He must be unpaid seller.
● Buyer must be insolvent.
● There should be no credit terms in the Contract of Sale. After expiry of Credit
period, this right can be exercised.
● Amount must be due on those goods only against which this right is desired.

❖ Right to Re-Sale
The unpaid seller can re-sale the goods for non-payment of price by buyer. He can
exercise this right by fulfilling following conditions:
➢ When the goods are of perishable nature, the right of re sale arises with the seller.
➢ By giving a valid notice period to the buyer before exercising such right.
➢ The goods can be re sell only after the expiration of notice period given to the buyer.
● BUYER’S REMEDIES AGAINST SELLER IN CASE OF BREACH OF
CONTRACT
❖ Suit for Damages
❖ Suit for Price
❖ Suit for Specific Performance.

❖ Suit for Damages for Non-Delivery- When the seller wrongfully neglects or refuses
to deliver the goods to the buyer, the buyer may sue the seller for damages for non-
delivery. This is in addition to the buyer's right to recover the price, if already paid,
in case of non-delivery.
❖ Suit for price- Where the buyer has paid the price and the goods are not delivered to
him, he can recover the amount paid.
❖ Suit for specific performance- When the goods are specific or ascertained, a buyer
may sue the seller for specific performance of the contract and compel him to deliver
the same goods. The court orders for specific performance only when the goods are
specific or ascertained and an order for damages would not be an adequate remedy.
Specific performance is generally allowed where the goods are of special
significance or value e.g. a rare paining, a unique piece of jewellery,etc.

UNIT IV
The Negotiable Instrument Act, 1881

The Negotiable Instrument Act, 1881
● The word “negotiable” means “Transferable by delivery” and the word
“instrument” means “a written document by which a right is created in favour of
some person. Thus, the term “negotiable instruments” means “a written document
transferable by delivery.”
● According to Section 13 (1) of the Negotiable Instruments Act, 1881, A
“negotiable instrument” means a promissory note, bill of exchange or cheque
payable either to order or to bearer.
● The Act mentions only three kinds of Negotiable Instruments:
❖ Promissory Note
❖ Bill of Exchange
❖ Cheque

PROMISSORY NOTE
● A "promissory note" is an instrument in writing (not being a bank-note or a currency
note) containing an unconditional undertaking signed by the maker to pay a certain
sum of money only to, or to the order of, a certain person or to the bearer of the
instrument.
● The person making the promise to pay is called the "maker" and the person to whom
the payment is to be made is called the "payee".
Essentials of Valid Promissory Note:
● It must be in writing.
● Promise must be certain and unconditional.
● The instrument must be signed by the maker.
● Promise to pay must be in legal tender money.
● Bank note or currency note is not a promissory note.

BILL OF EXCHANGE
● A bill of exchange is an instrument in writing containing an unconditional order,
signed by the maker, directing a certain person to pay a certain sum of money only
to, or to the order of, a certain person, or to the bearer of the instrument.
● There are three parties viz. ‘Drawer’, ‘Drawee’ and ‘Payee’ to a bill of exchange.
❖ Drawer is the person who makes and draws the bill
❖ The person upon whom the bill of exchange is drawn is known as drawee.
❖ The person to whom the payment is made is known as payee.
(Drawer and Payee is usually the same person.)
Essentials of valid bill of exchange
● It should be in writing.
● It is an order to make payment.
● The order of payment is unconditional.
● The amount must be payable either to a certain person or to his order or to the bearer
of the bills of exchange.
● It should be paid either on the expiry of a fixed period of time or on demand.
● Bill of exchange must be signed by its maker.

CHEQUE
● A “cheque” is a bill of exchange drawn on specified banker and not expressed to be
payable otherwise than on demand.
● There are three parties in Cheque Transaction – Drawer, Drawee and Payee.
❖ Drawer (Maker of Cheque) – The person who issue the cheque or hold the account
with bank.
❖ Drawee – The Person who is directed to make the payment against cheque. In case
of cheque, it is bank.
❖ Payee – A person whose name is mentioned in the cheque or to whom the drawee
makes payment. If drawer has drawn the cheque in favour of self then drawer is
payee.

● HOLDER AND HOLDER IN DUE COURSE
❖ Holder refers to a person; which means the payee of the negotiable instrument, who
is in possession of it. He/She is someone who is entitled to receive or recover the
amount due on the instrument from the parties thereto.
❖ Holder in due course implies a person who obtains the instrument bonafide for
consideration before maturity, without any knowledge of defect in the title of the
person transferring the instrument.
● MATERIAL ALTERATION
❖ The term ‘material alteration‘ indicates alteration or change in the material parts of
the instrument. It may be defined as any change, which alters the very nature of the
instrument. Thus, it is the alteration, which changes and destroys the legal identity
of the original instrument and hence makes the instrument void.

DISHONOUR OF NEGOTIABLE INSTRUMENT
● Dishonour of negotiable instrument means loss of honour or respect for the
instrument in question on the part of the maker, drawee, or acceptor, as the case
may be, which eventually results in non-realization of payment due on the
instrument.
● Modes of Dishonour of Negotiable Instrument:
❖ Dishonour by non-acceptance:
The instrument which may be dishonoured by non-acceptance is bill of exchange
because it is the only negotiable instrument which requires its presentment for
acceptance and non-acceptance thereof, can amount to dishonour.
● A bill is said to be dishonoured by non-acceptance in the following circumstances.
➢ When the drawee or one of the several drawees, not being partners, commit default
in acceptance upon being duly required to accept the bill.

➢ Where the drawee is incompetent to enter into a valid contract.
➢ If the drawee is a fictitious person.
➢ Where presentment is required and the bill remains unrepresented.
❖ Dishonour of negotiable instrument by Non-payment
➢ A promissory note, bill of exchange, or cheque is said to be dishonoured by non-
payment when the maker of the note, acceptor of the bill, or drawee of the cheque
commit default in payment upon being duly required to pay the same.
❖ Dishonour of Cheque for insufficient of funds in the account:
➢ A cheque drawn by a person on an account maintained by him with a bank for
payment of any amount of money to another person can be returned unpaid for lack
of enough funds in the said account. This is called dishonour of cheques for
insufficiency of funds (in the drawer’s account).

❖ Dishonour by non-acceptance vs Dishonour by non-payment:
➢ If a bill is dishonoured either by non-acceptance or by non-payment, the drawer and
all the endorsers of the bill are liable to the holder, provided notice of such dishonour
is given to them. The drawee, on the other hand, shall be liable to the holder only in
the event of dishonour by non-payment.
● Discharge of Negotiable Instrument
➢ By cancellation of the name of a party to the instruments.
➢ By release of any party to the instruments.
➢ By payment.
➢ By non-presentment for acceptance of a bill of exchange.
➢ By operation of law.
➢ By material alteration

THANK YOU

LAW OF CONTRACT II

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LAW OF CONTRACT II