Unit 2 Contracts-II
Contract of INDEMNITY
Indemnity means compensation. Therefore essential ingredient of a contract of indemnity is a promise of compensation.
Definition:
A contract by which one party promises to save the other from loss caused to him by the conduct of promisor himself, or by any other person.
Contract of insurance is also contract on indemnity but insurance is about losses caused by accidents it wont be covered in indemnity
Example: A contracts to indemnify B against the consequences of any proceedings which C may take against B in respect of certain sum of rs.200
In every contract of indemnity there are two parties, the indemnifier (promisor) and indemnity holder (promisee).
RIGHTS OF INDEMNITY HOLDER
The promisee of the contract would have the right to enforce the promise of the identifier. All damages which he may be compelled to pay in any suit in respect of any matter to
which the promise to indemnify applies.
The indemnifier will be liable to indemnify. Holder for any loss that the latter may suffer on account of any reason which has been included in the promise of the indemnifier i.e. loss caused by the accident.
RIGHTS OF INDEMNIFIER
The Indian contract act is silent regarding the rights of indemnifier in the contract of indemnity. It may be said on authority of English law, that the rights of indemnifier are analogous to the rights of surety under sec.141.
Contract of GUARANTEE
Definition:
It is a contract to perform a promise, or to discharge the liability of a third person in case of his default.
Person who gives guarantee --- surely (s)
Person in respect of whose default the guarantee is given---- principal debtor (b) Person to whom the guarantee is given ---- creditor (c)
Thus there are three persons in the contract of guarantee
Example: A lends money to B and C promises A that in case B fails to pay money he will pay the money. This is a contract of guarantee
Essential requirements of guarantee
• It must fulfill all the effects of a valid contract: there must be consideration for promise of guarantee.
Parties must be competent to the contract. if surety is minor—void contract
If P.D. is a minor ---valid contract between surety and creditor but it will be as a contract between these two
If anything is known to the creditor which will effect the surety must be known to the surety. Any silence would undertake contract of guarantee.
• A guarantee can be given only for an enforceable obligation: to become a valid guarantee it is necessary that there must exist a real and valid obligation of a person which in case of his default, has been promised to be fulfilled by another person
Difference between indemnity and guarantee
Indemnity
• Contains one contract • Two parties
• Promisor gives promise on his own • Liability of promisor is primary • Indemnity is promised generally as
a compensation for a loss
Guarantee
• Contains three contracts • Three parties
• Promisor gives promise as request of debtor
• Liability of promisor is secondary • Guarantee is given to secure
Guarantee can be given in two ways they are specific and continuing. Specific:
Guarantee given for only one specific transaction between debtor and creditor. It comes to an end when transaction is completed.
Continuing guarantee:
Guarantee intended for series of transactions. Lapse of continuing guarantee
A continuing guarantee can come to an end for the future transactions in the following ways By revocatoi: the surely may revoke his guarantee for transactions which have not yet
been made a continuing guarantee can be revoked by the surety anytime by notice to the creditor.
By death of surety: the termination of guarantee shall take place even if there is no notice of death to the creditor
By reasons which discharge a specific guarantee: A surety’s liability can come to an end under certain circumstances, continuing/specific shall come to an end.
Rights of a surety He has rights against:
• The creditor • The debtor • The co-sureties
Rights against creditor: Before payment of the principal dept, a surety can file a suit for declaration that the principal debtor shall be the person liable to pay the amount.
Rights against the debtor: The surety, upon payment or performance of all that he is liable for. Is invested with all the rights which the creditor had against the principal debtor (sec. 140). He is also entitled to recover from the principal debtor whatever sum he has rightfully paid under the guarantee, but no sums which he has paid wrongfully(sec. 145) Rights against co-sureties: The co-sureties are, in the absence of any agreement to the
Surety is favored debtor
For the creditor, the surety is as much a debtor as the principal debtor himself is. But law has granted to the surety a much comfortable position towards the creditor as compared to the principal debtor. This is clear from the following:
Surety’s liability is discharged under certain circumstances, while the debtor’s liability may continue
A surety can demand a share in securities with the creditor even when the creditors claim against the debtor has remained partly unsatisfied. But a debtor cannot demand such a share.
The surety’s liability is secondary. So if surety has become insolvent before default of the debtor, the creditor will have no rights against him. But the debtor will have no obligations on the insolvency
The surety is liable for the amount defaulted by the debtor where as the debtor is liable for the full amount of liability
Discharge of surety:
A surety is discharged when its liability comes to an end. The various modes of discharge are as follows
1. By revocation: This includes revocation by a. surety by giving a notice (sec. 130). b. death of surety (sec. 131) and c. Novation (sec. 62)
2. By conduct of creditor: this recovers cases of a. variance in terms of contract (sec. 133) b. release or discharge of principal debtor (sec. 134), c. compounding by creditor with principal debtor(sec 135), d. creditor’s act or omission impairing surety’s eventual remedy (sec 139), and e. loss of security (sec 141)
3. By invalidation of contract: this includes guarantee a. obtained by misrepresentation (sec. 142) or concealment (sec. 143) b. given on a condition that a creditor shall not act upon it until a co-surety joins the surety and the co-surety does not join (sec. 144), A surety is also discharged where there is failure of consideration.
Sale of goods act 1930
Sec4 of the sale of goods act defines a contract of sale as under:
“A contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the property in goods to a buyer for a price”
A contract of sale consists of the following: 1. Sale [or absolute sale]
2. Agreement to sell [or conditional sale] Sale or absolute sale:
Where the property {ownership) in goods is immediately transferred from the seller to the buyer, and nothing is left on the part of seller, there is a sale or absolute sale. Ex: counter sale in a shop is a sale or an absolute sale
Agreement to sell or conditional sale:
Where the transfer of property (ownership) in the goods shall take place in future or on the fulfillment of certain conditions, it shall be an agreement to sell or a conditional sale. The property (ownership) in goods shall not be transferred from the seller to the buyer until and unless some condition is fulfilled for the completion of the contract of sale.
General principles of contract of sale of goods: 1. Essentials of contract of sale
2. Difference between sale and agreement to sell ESSENTIALS OF CONTRACT OF SALE
To constitute a valid contract of sale, the following essentials must be present. (1)A Valid Contract
A contract of sale is just like any other contract made under Indian contract act, 1872. Therefore constitute a valid contract of sale, it should satisfy all the essentials of a valid contract namely, a valid offer, a valid acceptance, free consent of parties, a valid and lawful consideration, parties must be competent to contract and lawful object etc.
(2)Two Parties
Examples: (a) A partnership firm was dissolved and the surplus assets including some goods were divided among the partners in specie. Tax officer wanted to tax this as a sale. The court held that it was not a sale as the partners were themselves joint owners of goods and they could not be both sellers and buyers. Moreover no money consideration was passed. [State of Gujarat v. Raman lal and co. AIR 1965 Guj60].
(b) A club supplies food and drinks to its members at fixed price. This was held to be not a sale as a member of club pays to the members jointly (i.e. to the club). ”Members of a club are undivided joint owners and not part owners” [Graft v. Evans. (1882). 8. QBD 373].
There are certain expectations to rule that the same person cannot be both a purchaser and a seller. These are
-(a)Where a person’s goods are not sold in execution of a decree, he may himself buy them. (b)A part owner can sell his share to the other part owner so as to make the other part owner the sole owner of the goods.
(c)Where a Pawnee sells the goods pledged with him on non payment of bill money, the pawnor may himself buy such goods.
(d)A partner may also buy the goods from the firm in which he is a partner and vice versa.
(e)In case there is sale by auction, the seller may reserve right of making at bid at the auction and may thus purchase his own goods.
(3)Agreement for the transfer of ownership
To constitute a valid contract of sale, there should be immediate transfer or an agreement to transfer general property in goods sold or agreed to be sold. It is essential to transfer the general property in goods from the seller to the buyer with or without physical possession of the goods.
(4)Goods
Example: Where the trees were sold so that they were to be cut out and separated from land and taken away by the buyer. The contract was for sale of trees as movable goods. [Kurser vs. Timber operators & contractors Ltd. (1927)]
A debt is not goods because it can only be assigned as per transfer of property act but cannot be sold.
Example: according to a contract between the hotel and resident customers the hotel made a consolidated charge for residents, services and supply of food. Not rebate was allowed if food was not taken. On a question being raised whether the supply of food amounted to sale it was held that it was simply provision of service as the transaction was an indivisible contract of multiple services and did not involve any sale of food. [Associated hotels of India v. excise and taxation officer AIR 1966.Punjab, 249].
Money, actionable claims and immovable property are excluded from the definition of “goods”. (1) Money, which is legal tender, is an essential aspect of every sale because the price of
goods has to be expressed in terms of money and therefore, “money” itself cannot be the subject of sale.
(2) Actionable claims means claims which can be enforced by a legal action or a suit, e.g., a book debt evidenced by an entry by the creditor in his account books. A book debt is not goods because it can only be assigned as per the transfer of property act, 1882 but cannot be sold. Similarly, a bill of exchange or a promissory note represents a debt, i.e., an actionable claim. These can be transferred under negotiable instruments act, 1881 by mere delivery or endorsement and delivery, such instruments can be sold.
(3) The sale of immovable property is no covered under the sale of goods act, 1930. The sale of immovable property is governed by a separate act i.e., transfer of property act, 1882
(5)Price
To constitute a valid contract of sale, consideration for transfer must be money paid or promised. Where there is no money consideration the transaction is not a contract of sale, as for instance goods given in exchange for goods or as remuneration for work or labours however, an existing debt due from the seller to the buyer is sufficient .further, there is nothing to prevent the consideration from being partly in money and partly in goods or some other articles of value.
Example: A refrigerator company supplies a new refrigerator of RS.9000 in exchange of old refrigerator and RS.6000 in cash. It is a sale under the sale of goods Act.
Sale and agreement to sell distinction
Nature of contract:
An agreement to sell is an executor contract, is a contract pure and simple and no property passes; whereas a sale is an executed contract plus a conveyance.
Transfer of ownership:
In sale the property in goods passes from seller to buyer immediately and buyer becomes the owner of the goods immediately.
But in an agreement to sell the property in goods passes from seller to buyer at some future date or subject to the fulfillment of certain conditions i.e., the seller continues to be the owner of the goods supplied until the agreement to sell becomes a sale.
Sellers right of resale:
In a sale the seller cannot resell the goods even if he is in possession of the goods after sale. If he does so, the new buyer does not get the good title and the first buyer can recover the goods.
In an agreement to sell, the seller may sell the goods since ownership is with the seller. If he does so, he may become liable for breach of agreement. But in this case the new buyer gets good title.
Sale distinguish from other areas
Sale and hire purchase agreement:
A hire-purchase agreement is a contract whereby the owner of the goods lets them on hire to another person called hirer or hire purchaser on payment of rent to be paid in installments and upon an agreement that when a certain number of such installments is paid, the property in the goods will pass to the hirer. The hirer may return the goods at any time without any obligation to pay the balance rent. A hire-purchase agreement is not a contract of sale but only a bailment and the property in the goods remains in the owner during the continuance of the bailment. In other words, it is a bailment plus an agreement to sell.
be compelled to exercise the option. But where a buyer has no rights to terminate the agreement and is bound to pay the price, agreement is a contract of sale.
Ex: B hires a piano for H on an agreement that B should pay Rs.100 a month as rent. The situation is that if he regularly pays the rent for 36 months the piano becomes his property at the end of 36 months. Further it is provided that B can return the piano at any time and he need not pay any more. This is hire purchase agreement proper.
Sale and gift
Where goods are transferred by one person to another person without any price or consideration, the transaction is called a gift and not a sale. Sale is always for a consideration
Sale and bailment
In a sale, the property in goods is transferred from the seller to the buyer. In bailment, there is only transfer of possession from the bailor to the bailee. This may be for any one of the objects, namely, safe custody, use, carriage from one place to another, etc. In a sale, the buyer can deal with goods in any way he likes. The bailee can deal with the goods according to the directions of the bailor.
Sale and barter system
Where the property in goods is transferred from the seller to buyer for price, it is called a sale. Where goods are exchanged for goods, the transaction is called a barter system.
Contract of agency:
Who is an agent and a principal?
An agent is a person employed to do an 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.’ The relation ship between them is called ‘agency.’ An agent therefore brings the principal and the third person.
Rules for agency:
There are two important rules of agency:
1. Whatever a person can do personally, he can do through an agent. This rule is of course subject to certain well-known exceptions as when the act to be performed is personal in character or is annexed to public office
consequences as if the contracts had been entered into and the acts done by the principal in person.
Example: T buys goods from A, knowing that he is an agent for their sale, but not knowing who the principal is. A’s principal is the person entitled to claim from T the price of goods. T cannot in a suit by the principal set off against that claim a debt to himself from A.
Creation of agency:
The relationship of principal and agent may arise-1. By express agreement, or
2. By implied agreement, or 3. By ratification, or
4. By operation of law
By express agreement:
Normally the authority given by a principal to his agent is an express authority which enables the agent to bind the principal by acts than within the scope of authority. The agent in such a case, be appointed either by word of mouth or by an agreement in writing.
By implied agreement:
Implied agency arises from the conduct, situation or relationship of parties. It may be inferred from the circumstances of the case, and things spoken or written or the ordinary course of dealing, may be accounted as circumstances of the case
Example: A and P are brothers. A lives in Delhi while P lives in Meerut. A with the knowledge of P leases P’s lands in Delhi. He realizes the rent and remits it to P. A is the agent of P, though not expressly appointed as such.
By ratification:
A person may act behalf of another without his knowledge or consent.
agent exceeds the authority bestowed upon him by the principal, the principal may ratify the unauthorized act
By operation of law:
Sometimes an agency arises by operation of law. When a company is formed, its promoters are its agents by operation of law. A partner is the agent of the firm for the purposes of the business of the firm, and the act of the partner, which is done to carry on, in usual way, business of the kind carried on by the firm, binds the firm(secs 18and 19 of the Indian partnership act, 1932). In all these cases, agency is implied by operation of law.
Classification of agents:
A general classification of agents from the point of view of the extent of their authority is as follows:
1. Special agent: He is the agent who is appointed to perform a particular act or to represent his principal in some particular transactions.
Example: A principal employed an agent to sell house.
2. General agent: A general agent is one who has authority to do all acts connected with a particular trade or business.
Example: the manager of a firm has an implied authority to carry out the business 3. Universal agent: A universal agent is one whose authority to act for the principal is
unlimited. He has authority to bind his principal by any act he does provide that is legal and agreeable by the law.
Example: government Rights and duties of agent: Rights:
1. Rights of retainer.
2. Right to receive remuneration. 3. Right of lien.
4. Right of indemnification. 5. Right of compensation. Duties
1. To carry out the work according to the direction given. 2. To carry out the work with reasonable care, skill. 3. To render proper according to principal.
6. To pretend and preserve the interests of principal. Rights and duties of agent:
The principal owes the following duties to an agent: Rights
1. To recover damages.
2. To attain an account of secret profits and recover them. 3. To resist agents claim for indemnity against incurred.
Duties
1. To indemnity the agent against the consequences of all lawful acts
2. To indemnity the agent against the consequences of all lawful acts done in good faith. 3. To indemnity agent for injury caused by principal’s neglect.
Termination of agency
The various modes of termination of agency as mentioned in sec.201 and other modes are shown below
By act of parties: 1. Agreement
2. Revocation by the principal 3. Revocation by the agent By operation of law
1. By performance of the contract 2. Expiry of time
3. Death of either party 4. Insanity of either party 5. Insolvency of either party
6. Destruction of the subject matter 7. Principal becoming an alien enemy 8. Dissolution of the company
9. Termination of sub-agents authority Condition
A condition is a stipulation which is essential to the main purpose of the contract the breach of which gives rise to a right to treat the contract as repudiated.
Warranty
A warranty is a stipulation which is collateral to the main purpose of the contract the breach of which is given rise to claim for the damages but not to right to reject the goods.
Difference between Condition and Warranty
Difference as a value: A condition is a stipulation which is essential to the main purpose of the contract. A warranty is a stipulation which is collateral to the main purpose of the contract. Difference as a breach: If there is a breach of a condition, the aggrieved party can repudiate the contract of sale; in case of a breach of a warranty, the aggrieved party can claim damages only. Difference as to treatment: A breach of condition may be treated as a breach of warranty. This would happen where the aggrieved party is contented with damages only. A breach of a warranty, however, cannot be treated as a breach of a condition.
Express and Implied conditions and warranties
In a contract of sale conditions and warranties may either be express or implied. The conditions and warranties which are agreed upon between the parties in express words, either spoken or written are called express conditions and warranties. Implied conditions and warranties are those [contained in secs 14 to 17] are those which the law implies into the contract unless the parties stipulate to the contrary.
Implied conditions:
Whether any express condition is made or not law presumes certain standards which are to be ensured by the seller before selling the any product .These presumptions as to nature, quality, and rightful ownership of the product are termed as implied conditions. The implied conditions in sale of goods are laid down in sections 14 to 17.
1. Condition as to title:
that-(a).in the case of a sale, the seller has the right to sell.
(b).in the case of an agreement to sell the seller will have a right to sell at the time of sale. Example: B bought a second hand car from S a car dealer. After few months the car was taken away by the police as it was a stolen one. The court observed that it was a breach of condition as to title as S had no right to sell the car. It was held that B could recover full price from S.
2. Sale by description
If you contract to sell peas, you cannot oblige a party to take beans.” This is the rule laid down in section 15, where there is a contract for the sale of goods by description, there is an implied condition that the goods shall correspond with the description
Example: A ship was contracted to be sold as “copper fastened vessel” to be taken with all faults, without any allowance for any defects whatsoever. The ship turned to be partially Copper fastened .The court held that that the buyer was entitled to reject the goods.
Sale of Goods by description may include the following situations
1. Where the buyer has not seen the goods and relies on their description given by the seller.
2. Where the buyer had seen the goods but relies not on what he had seen but on what was stated to him by the seller.
3. Packing of goods may sometimes be part of the description. 3. CONDITION AS TO QUALITY OR FITNESS.
Ordinarily there is no implied condition that the goods supplied by the seller should be fit for the particular purpose of the buyer. The rule Caveat emptor applies instead it means that while buying it is the responsibility of the buyer to ensure that the goods correspond to the particular purpose he wants to meet. However in the following situation the responsibility of the fitness as to Goods falls on the seller.
A the buyer make known to the seller the particular purpose for which he requires goods., B The buyer and seller relies on the skill and judgment of the buyer.
If the goods can be used for many purposes, the buyer should make known the specific purpose to the seller; otherwise the condition as to fitness would not apply
4. CONDITION AS TO MERCHANTABILITY.
Section 16 (2)-Where goods are bought by description from a seller who deals in goods of that description whether he is not the producer or manufacturer or not, there is an implied condition that the goods shall be of merchantable quality.
The above provision reveals that the condition of merchantability is applicable when, a) The goods are sold by description
b) The seller deals with such goods
M asked for a bottle of Stones Ginger Wine at S’s shop. Which was licensed for the sale of wines. While M was drawing the cork, the bottle broke and M was injured. Held the sale was by description and M was entitled to recover damages as the bottle was not of merchantable quality. 5. SALE BY SAMPLE.
A contract of sale by sample is a contract for sale by sample where there is a term express or implied in the contract, to that effect. (Section 17).In the case of contract of sale by sample, there is an implied condition –
1. That the bulk shall correspond to the sample in quality.
2. That the buyer shall have a reasonable opportunity of comparing the bulk with the sample. 3. That the goods shall be free from any defect, rendering them unmerchantable.The defect should not however be apparent on a reasonable examination of the sample.
In the case of patent defect there is no breach of implied condition as to merchantability
Example: Two parcels of wheat were sold by sample. The buyer went to examine the wheat a week later. One parcel was shown to him but the seller refused to show the other parcel as it was not there. In this case the buyer was not given reasonable opportunity to test the bulk with the sample. The court held that the buyer was entitled to reject the contract of sale.
6. CONDITION AS TO WHOLESOMENESS.
Example: C brought a Bun from a baker’s shop .The bun contained a stone which broke of C’s teeth. The court held that the seller was liable to pay damages as he breached the condition of wholesomeness.
Implied warranties:
The implied warranties in a contract of sale are as follows:
1. Warranty of quiet possession [sec, 14(b)]: In a contract of sale, unless there is a contrary intention, there is an implied warranty, that the buyer shall have and enjoy quiet possession of the goods. If the buyer is in any way disturbed in the enjoyment of the goods in consequence of. 2. Warranty of freedom from encumbrances [sec. 14(c)]. In addition to the previous warranty, the buyer is entitled to a further warranty that goods are not subject to any charge or right in favour of the third party. If his possession is in any way disturbed by reason of the existence of any charge or encumbrance on the goods in favour of any third party, he shall have to claim damages for breach of this warranty.
3. Warranty as to quality or fitness by usage of trade [sec. 16(4)]. An implied warranty as to quality or fitness for a particular purpose may be annexed by the usage of trade.
4. Warranty to disclose dangerous nature of goods. Where a person sells goods, knowing that the goods are inherently dangerous or they are likely to be dangerous to the buyer and the buyer is ignorant of the danger, he must warn the buyer of the probable danger, otherwise he will be liable in dangerous.
Example: A sold a tin of disinfectant powder to C. he knew that it was likely to be dangerous to C if it was opened without special care being taken. C opened the tin whereupon the distinct powder flew into her eyes, causing injury. Held, A was liable in damages to C, as he should have warned C of the probable danger.
Exclusion of implied conditions and warranties: Implied conditions and warranties in a contract of sale may be negative or varied by
