INDIAN CONTRACT ACT, 1872 Definition of Contract
An agreement enforceable by law is a contract. Thus to make a contract, there must be [I] an agreement [ii] agreement should be enforceable by law.
Definition of Agreement
Every promise and every set of promises forming the consideration for each other. Definition of promise
Promise is defined as an accepted proposal.
Thus- A contract is an agreement, an agreement is a promise and a promise is an accepted proposal. Thus every contract is an agreement but every agreement is not a contract
An agreement grows into a contract when following conditions are satisfied :-1] There is some consideration for it.
2] Parties are competent to contract. 3] Their consent is free.
4] Their object is lawful.
Proposal or offer – Proposal is the starting point.
DEFINITION: When one person signifies to another his willingness to do or abstain from doing anything, with a view to obtaining the assent of that other to such act or abstinence, he is said to make a proposal.The person who makes the proposal is called “offerer” and the person to whom it is made is called the “offeree”
Communication of proposal
The first part of the definition of “proposal” lays emphasis upon the requirement that the willingness to make a proposal should be ‘signified’. To signify means to indicate or declare. It further means that the proposal should be communicated to the other party. The process of making a proposal is completed by the act of communicating it to the other party. The communication may be made by words of mouth or by writing or by conduct. The communication of the proposal is complete when it comes to the knowledge of the person to whom it is made.
ACCEPTANCE Definition.
When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. A proposal when accepted becomes promise. Thus, ‘acceptance’ is the assent given to a proposal and it has the effect of converting the proposal into promise.
Communication of Acceptance
The definition clearly requires that the assent should be signified. It may be oral or written or by conduct. The acceptance must be communicated to the offerer himself. A communication to any other person is as ineffectual as if no communication has been made.
Ex. – B had been supplying coal to railway company without any formal agreement. B suggested that a formal agreement should be drawn up. The agents of both the parties met and drew up a draft of agreement. It had some blanks when it was sent to B for his approval. He filled up the blanks including the name of arbitrator and then returned it to the company. The agent of the company put the draft in his drawer and it remained there without final approval having been signified. B kept up his supply of coals but on the new terms and also received the payments on new terms. A dispute having arisen, B refused to be bound by the agreement.
The conduct of company’s agent in keeping the agreement in his drawer was an evidence of the fact that he had mentally accepted it. But he had not expressed his mental determination and therefore the mere putting of agreement was not a sufficient acceptance. But the subsequent conduct of the parties in supplying and accepting coal on the basis of the proposed agreement was a conduct that evidenced their intention. The final acceptance was clearly given when the company commenced a course of dealing.
Mode of Communication
Acceptance has to be made in the manner prescribed or indicated by the offerer. An acceptance given in any other manner may not be effective. When no mode of acceptance is prescribed, acceptance must be expressed in some usual and reasonable manner.
When communication of acceptance is complete – When a letter of acceptance is posted and is out of power of the acceptor, the proposer becomes bound. But the acceptor will become bound only when the letter is received by the proposer.
Revocation of Acceptance – An acceptance may be revoked at any time before the communication of the acceptance is complete as against the acceptor, but not afterwards.
Thus the communication of revocation should reach earlier than the acceptance itself. What will be the result if they reach together. The section does not make this point clear. Ex. – A proposes by letter sent by post, to sell his house to B. B accepts the proposal by a letter sent by post. B may revoke his acceptance at any time before or at the moment when the letter communicating it reaches A, but not afterwards.
CONSIDERATION
(Examine the role of consideration in a contract. State the exceptions to the rule No consideration, No Contract. Define and analyse consideration)
Definition – When, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstain from doing or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise.
At the desire of the promisor – The definition clearly emphasises that an act or abstinence which is to be a consideration for the promise must be done or promised to be done in accordance with the desire of the promisor. In other words, the act shall not be a good consideration for a promise unless it is done at the desire of the promisor.
Ex. – The Plaintiff, on the order of Collector of a town, built at his own expense, certain shops in a bazar. The shops came to be occupied by the defendants who, in consideration of Plaintiff having expended money in the construction, promised to pay him a commission on articles sold through their agency in the bazar. The Plaintiff’’s action to recover the commission was rejected. The court held that the only ground for making of the promise is the expenses incurred by Plaintiff in establishing the market but it is clear that anything done in that way was not “at the desire” of the defendants, so as to constitute consideration. The act was the result not of the promise but of the collector’s order.
Promisee or any other person
Consideration be done by “the promisee or any other person”. It may move from the promisee or if the promisor has no objection, from any other person.
Ex. – A person had a daughter to marry and in order to provide her a marriage portion he intended to sell a wood of which he was possessed at the time. His son (the defendant) promised that if *the
father would forbear to sell at his request, he would pay the daughter say Rs. 15,000/-. The father accordingly forbore but the defendant did not pay. The daughter and her husband sued the defendant for the amount.
It is clear that the defendant gave this promise to his father and it was father alone, who, by abstaining from selling the wood, had furnished consideration, for the promise. The Plaintiff was neither privy to the contract, *nor interested in the consideration*. But it is equally clear that the whole object of the agreement was to provide a portion to the plaintiff. It would have been highly inequitable to allow the son to keep the wood and yet to deprive his sister of her portion, he was accordingly held liable.
Has done or abstained from doing
It means that consideration is an act which has already been done at the desire of the promisor or is promised to be done in future. Past consideration is good consideration in India.
Ex. - If A saves B from drowning and B later promises A, a reward. The promise would be enforceable such act, abstinence or promise is called consideration.
Consideration must be of some value. It does not mean that even a worthless act will suffice to make a good consideration. Ex. – A promises to give his New Maruti 1000 car to B, provided B will fetch it from garage. The act of fetching the car can not be called a consideration for the promise. Therefore, consideration must be of some value in the eyes of the law.
Exceptions to the consideration
1) natural love and affection – A written and registered agreement based on natural love and affection between near relatives is enforceable without consideration. *Near relatives* include parties related by blood or marriage.
Ex. – A sued B, his brother, for share in certain lands. But the suit was dismissed as B solemnly affirmed that the property was not ancestral, B then agreed by registered writing to give A one half of the same property. The present suit was brought to obtain that share.
The Plaintiff admitted that he and his brother had long been on bad terms. But in spite of the strained relations, the court held *that this is just the case to which. 25(1) should be held to apply. The defendant had such natural love and affection for his brother that in order to be reconciled to him, he was willing to give him his property.
2) past voluntary service – A promise to compensate wholly or in part, a person who has already voluntarily done something for the promisor is enforceable. Ex. – A promise made after attaining majority to pay for goods supplied to the promisor during minority has been held to be within the exception.
3) time-barred debts – A promise to pay a time barred debt is enforceable. The promise should be in writing. It should also be signed by the promisor. The promise may be to pay the whole or any part of the debt. Ex. – where a tenant in a letter to landlord referred to the arrears of time-barred rent and said, *I shall send by the end of month of March.* It was held that the document falls under this provision.
4) Agency —By a contract of Agency, a person employees another person to do any act for him or to represent him in dealing with third persons so as to bind himself by the acts of such another person.No consideration is necessary to create an agency.
5) Charity - Where a person promises to contribute to charity and on the faith of this promise, the promisee undertakes a liability to the extent not exceeding the promised subscription, the contract shall be valid
Who are the persons competent to contract?
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.
Thus following persons are incompetent to contract :
1) Minors
2) Persons of unsound mind
3) Persons disqualified by law to which they are subject
Age of majority : The age of majority is 18 years except when a guardian of minor’s person or property has been appointed by the court in which case it is 21 years. Parties to the contract must be competent and hence minor is not competent.
Persons of unsound mind : The agreement of a person of unsound mind is absolutely void. A person is said to be of sound mind for the purpose of making a contract if at the time when he makes
it, he is capable of understanding it and of forming a rational judgement as to its effects upon his interest.
Disqualified persons : Ex. – Insolvent, etc.
SHORT NOTES ON FREE CONSENT, UNUD EINFLUENCE, MISREPRESENTATION, COERCION: DEFINE CONSENT. FULLY EXPLAIN WHEN CONSENT IS SAID TO BE FREE.
Free consent is an essential requirement of valid contract. A consent is said to be free when it is not caused by 1) coercion 2) undue influence 3) fraud 4) misrepresentation 5) mistake.
Where consent to an agreement is caused by coercion, undue influence, etc. the agreement is a contract voidable at the option of the party whose consent was so caused. Ex. – if a person is induced to sign an agreement by fraud, he may, on discovering the truth, either uphold the contract or reject it. If he confirms it, the contract becomes binding on both the parties.
(1) Coercion – is the committing or threatening to commit, any act forbidden by Indian Penal Code or the unlawful detaining or threatening to detain any property to the prejudice of any person whatever with the intention of causing any person to enter into an agreement. Ex. – A consent obtained at the point of pistol or by threatening to cause hurt.
(2) Undue Influence – Sometimes the parties to an agreement are so related to each other that one of them is able to dominate the will of the other. Ex. – A spiritual advisor (Guru) induced the plaintiff his devotee to gift to him the whole of his property to secure benefits to his soul in the next world. Such a consent is said to be obtained by undue influence.
A person is deemed to be in a position to dominate the will of the other when he holds authority over the other or when he stands in a fiduciary relation to the other. Ex. – A father by reason of his authority over the son can dominate the will of the son. Husband can dominate the will of wife. (3) Fraud – It means and includes any of the following acts committed by a party to contract with intend to deceive another party to enter into the contract.
i) the suggestion as to a fact which is not true ii) active concealment of fact
iii) a promise made without any intention of performing it iv) any other act fitted to deceive
Ex. – The director of a company issued a prospectus containing a statement of facts which were false. It was held that a person who had taken shares on the faith of prospectus could repudiate the contract on the ground of fraud.
(4) Misrepresentation – where a person asserts something which is not true, though he believes it to be true, his assertion amounts to misrepresentation. It is misstatement of facts by one which misleads the other. Ex. – A makes a positive statement to B that C will made the director of the company. A makes the statement on information derived not directly from C but from M. B applies for shares on the faith of the statement which turns out to be false. The statement amounts to misrepresentation because the information received second hand did not warrant A to make the positive statement to B.
(5) Mistake – When both the parties to an agreement are under a mistake to a matter of fact essential to the agreement, the agreement is altogether void. However, an unilateral mistake i.e. mistake of one party does not render the agreement void. Ex – (Both parties under mistake) A agrees to sell to B a specific cargo of goods supposed to be on its way from England to Mumbai. It turns out that before the day of bargain, the ship had been cast away and the goods lost. Neither of the parties was aware of these facts. The agreement was void. Ex. – (unilateral mistake) A agrees to purchase from B 18 carat gold thinking to be pure gold, B had not been instrumental to the creation of such an impression. It is valid contract.
SHORT NOTES : LAWFUL OBJECT, LEGALITY OF OBJECTS
LAW FUL OBJECT – An agreement, the object or consideration of which is unlawful is void. It is unlawful in the sense that it is criminal or law will not enforce it. Consideration or object is unlawful if it is forbidden by law or is fraudulent or involves injury to the person or property of another or is immoral or opposed to public policy.
Ex. – A agrees to pay Rs. 100/- to B on B’s stealing C’s purse. In this case, court cannot compel A to pay B because theft is hit by Indian Penal Code.
Ex. – (Unlawful consideration) A promises to obtain for B an employment and B promises in return, to pay Rs.One Lac to A. The agreement is void as the consideration is unlawful.
In law public policy covers certain specified topics. E.g. trading with enemy, marriage brokerage, agreement in the restraint of trade, agreement in restraint of legal proceedings, etc.
DEFINE AND EXPLAIN VALID CONTRACT, VOIDABLE CONTRACT AND VOID AGREEMENTS VALID CONTRACT – All agreements are contracts if they are made by free consent of parties competent to contract, for lawful consideration and with lawful object.
VOID CONTRACT- It is one of which the law does not give effect. An agreement not enforceable by law is said to be void.
The following types of agreements are declared to be void.
1) Agreements without consideration – This is of course subject to few exceptions contained in sec. 25.
2) Agreements in restraint of marriage – Every agreement in restraint of marriage of any person other than minor is void. This is to discourage the agreements which restrain freedom of marriage. The restrain may be that the party may be restrained from marrying at all or from marrying for a fixed period or from marrying a particular person which agreement will be void.
3) Agreements in restraint of trade – Freedom of trade and commerce is a fundamental right protected by the constitution of India. The principle is that every man shall be at liberty to work for himself using his labour, skill and talent and that by any contract this right can not be taken out. Ex. – The plaintiff and defendant were rival shopkeepers in a locality in Calcutta. The defendant agreed to pay a sum of money to the plaintiff if he would close his business in that locality. The plaintiff accordingly did so, but the defendant refused to pay. It was held that agreement was void.
Exceptions
1) Sale of Goodwill – One who sells the goodwill of a business my agree with the buyer to refrain from carrying on a similar business within specified local limits.
2) Partnership Act – It provides that the partners during the continuance of the firm to restrict their mutual liberty by agreeing that none of them shall carry on any business other than that of business. It also restrains the outgoing partner from carrying on similar business within a specified period. Such agreements are void.
4) Agreements in restraint of legal proceedings – Any clause in the agreement providing that neither party shall have the right to enforce the agreement by legal proceeding is void.
5) Uncertain agreements – Agreements, the meaning of which is not certain or capable of being made certain, are void. Ex. – A agrees to sell to B a hundred tons of oil. There is nothing whatever to show what kind of oil was intended. The agreement was void for uncertainty.
6) Wagering agreements – These agreements are void. Wager is a promise to give money upon the determination of uncertain event.
Ex:-X promises to pay Rs.Ten Thousand to Y if it rained on a particular day and Y promises to pay Rs.Ten Thousand to X if it did not. Such agreement is a wagering agreement.
BREACH OF CONTRACT
We have so far seen how a contract is made, the essential elements that go to make a valid contract and also how a contract is to be performed and how a contract may be put an end to. We shall now discuss about the breach of contract and also the mode in which compensation for breach of contract is estimated.
Anticipatory breach of contract
It is important concept under the law of contractual relationship. When the promisor refuses altogether to perform his promise and signifies his unwillingness even before the time for performance has arrived, it is called Anticipatory Breach. We shall now explain this difference in the amount of damages by means of an illustration, X agrees to sell to Y a certain quantity of say, wheat at Rs. 1000/- per quintal to be delivered, say on 3rd March. On the 2nd Feb, X gives notice expressing his unwillingness to sell wheat, and the price of wheat on the date is Rs.1,110/- per quintal. If Y repudiates the contract forthwith (Which he is entitled to do at his option) he would be able to recover damages @ Rs.110/- per quintal, being the difference between market price on the 2nd Feb and the contract price. If instead of taking the action forthwith, he keeps the contract alive till the 3rd March and in the mean time, the price increases to Rs. 1,125/- per quintal on the date. Y would be able to recover damages @ Rs.125/- per quintal. If, on the other hand, during the intervening period between 2nd Feb and 3rd March, private sale of wheat is prohibited by the Govt., the contract would become void, and Y would not be able to recover any damages whatever. Thus you observe that if the promise keeps the contract alive, he does so not only for his own benefit but also for the benefit of the promisor. The promisor in that event, not only would be entitled to perform the contract
notwithstanding his previous repudiation but also would be able to take advantage of any supervening circumstances whereby he is benefited.
Actual breach of contract
In contract to anticipatory breach, it is a case of refusal to perform the promise on the scheduled date. The parties to a lawful contract are bound to perform their respective promises. But when one of the parties breaks the contract by refusing to perform his promise he is said to have committed a breach. In that case, the other party to the contract obtains a right of action against the one who has refused to perform his promise.
The Act in sec. 73, has laid down the rules as to how the amount of compensation is to be determined. On the breach of contract, the party who suffers from such a breach, is entitled to receive, from the party who has broken the contract, compensation for any loss or damage caused to him by the breach. A compensation can be claimed for any loss or damage which naturally arises in the usual course of events. A compensation can also be claimed for any loss or damage which the party knew when they entered into the contract, as likely to result from the breach. That is to say, special damage can be claimed only on a previous notice. But no compensation is payable for any remote or indirect loss. Again in estimating loss or damage, the means, if any, available to the aggrieved party for remedying the inconvenience caused due to the non-performance of the contract must be taken into account. In other words, the party suffering from the breach is bound to take reasonable steps to minimise the loss.
The rules relating to compensation were clearly enunciated in (Hadley v. Baxendale (1854) 9 Ex. 341). In that case, the plaintiff mill was stopped by the breakage of a crank shaft. It was necessary to send the broken shaft as a pattern for a new one. It was communicated to the defendant, who were the carriers, that the mill has been stopped and that the shaft must be sent to the manufacturer immediately. But they were not appraised of the fact that the working of the mill could not be resumed without the new shaft. Due to negligence on the part of the defendants, the delivery of the shaft to the manufacturer was delayed with the result that the plaintiff did not receive the shaft until some days after they would otherwise have received. The restarting of the mill was thereby delayed and the plaintiffs could not make profit which they would have otherwise earned. It was held in that case that loss of profit could not be taken into account for estimating the damage. The reason for this was that
the circumstances as communicated to the defendants did not show that the mill could not be re-started without the shaft; that a delay in delivery would entail loss of profit due to stoppage of the mill and that the plaintiffs did not have another shaft or there did not exist any other defects in the machinery to cause the stoppage. If the plaintiff had informed the defendants of the fact that the mill was stopped for want of the shaft, the plaintiff would have been entitled to receive from the defendants as compensation the average amount of profit which would have been made by working of the mill for the time the delivery of the shaft was delayed.
Liability for damages
a) Liability for special damages: Where a party to a contract receives notice of special circumstances affecting the contract, he will be liable not only for damages arising naturally and directly from the breach but also for special damages.
b) Liability to pay vindictive or exemplary damages: These damages may be awarded only in two cases, viz. (i) for breach of promise to marry; and (ii) for wrongful dishonour by a banker of his customer’s cheque. In a breach of promise to marry, exemplary damages may be awarded to the other party taking into consideration the injury caused to his or her feelings. The amount of damages recoverable by the drawer of cheque from his banker in case of wrongful dishonour of this cheque may be quite heavy, depending upon the loss of credit and reputation suffered on that account. A business man whose credit has suffered will get exemplary damage even if he has sustained no pecuniary loss.
c) Liability to pay nominal damages: Nominal damages are awarded where the plaintiff has proved that there has been a breach of contract but he has not in fact suffered any real damage. Now you may ask why such damages are at all awarded. The answer is simple. It is awarded just to establish the right to decree for the breach of contract. The amount may be a rupee or even 10 paise. d) Damages for deterioration caused by delay: In the case of deterioration caused to goods by delay, damages can be recovered from carrier even without notice. The word ‘deterioration’ not only implies physical damages to the goods but it may also mean loss of special opportunity for sale.
CONTINGENT AND QUASI – CONTRACTS What is a Contingent Contract?
According to sec. 31 of the Act, a contingent contract is a contract to do or not to do something, if some even collateral to such contract, does or does not happen.
Contracts of Indemnity or of insurance are of this class.
Example: A contracts to pay B. Rs. 1,00,000 if B’s house is destroyed by fire. This is a contingent contract.
Essential of a contingent contract:
1) The performance of a contingent contract is made dependent upon the happening or non-happening of some event. A contract may be subject to a condition precedent or subsequent.
2) The event on which the performance is made to depend, is an event collateral to the contract, i.e., it does not form part of the reciprocal promises, which constitute the contract. Thus the event should neither be a performance promised, not the consideration for a promise. Thus (i) where A agrees to deliver 100 bags of wheat and B agrees to pay the price only afterwards, the contract is a conditional contract and not contingent; because the event on which B’s obligation is made to depend is a part of the promise itself and not a collateral event. (ii) Similarly, where A promises to pay B Rs. 1,00,000 if he marries C, it is not a contingent contract.
3) The contingent event should not be the mere will of the promisor. For instance, if A promises to pay B Rs. 10,000 if he so chose, it is not a contingent contract. (In fact, it is not a contract at all) However, where the event is within the promisor’s will but not merely his will, it may be contingent contract. For e.g. if A promises to pay B Rs.10,000 if A left Delhi for Bombay on a particular day, it is a contingent contract, because going to Bombay is an event no doubt within A’s will, but is not merely his will.
What is a Quasi Contract?
In the case of every contract, the promisor voluntarily undertakes an obligation in favour of the promisee. A similar obligation may be imposed by law upon a person for the benefit of another even in the absence of a contract. Such cases are know as quasi contracts. The obligation created in either of the cases is identical. Quasi contracts are based on principles of equity, justice and good conscience.
:-a) in the first place, such a right is always a right to money and generally, though not always to a liquidated sum of money;
b) Secondly, it does not arise from any agreement of the parties concerned, but is imposed by the law; and
c) Thirdly, it is a right which is available not against the entire world, but against a particular person/ persons only, so that in this respect it resembles a contractual right.
Types of quasi-contracts
(a) Claim for necessaries supplied to persons incapable or contracting (Sec.68) If necessaries are supplied to a person who is incapable of contracting, e.g. a minor or a person of unsound mind, the supplier is entitled to claim their price from the property of such a person. Accordingly, if A supplies to B, a lunatic, necessaries suited to B’s station in life, A would be entitled to recover their price from B’s property. He would also be able to recover the price for necessaries supplied by him to his (B’s) wife or minor child since B is legally bound to support them. However, if B has no property nothing would be realisable.
(b) Right to recover money paid for another person (sec. 69) A person who has paid a sum of money which another is obliged to pay, is entitled to be reimbursed by that other person provided the payment has been made by him to protect his own interest.
(c) Obligation of a person enjoying benefits of non-quratuitous act (sec. 70) Such an obligation arises under the provision of sec. 70 which is reproduced below:
-“Where a person lawfully does anything for another person, or delivers anything to him not intending to do so gratuitously, and such other person enjoyes the benefit thereof, the latter is bound to make compensation to the former in respect of, or to restore, the thing so done or delivered”
For e.g. K, a govt. servant was ordered to compulsorily retire forthwith. He filed a writ petition and obtained an order from the High Court staying the govt’s direction. The govt did not give him any work but paid the salary in view of the stay order. Finally, the writ petition was dismissed. The govt deducted the amount of salary that was paid to K after the stay order has been issued from his arrears with the govt. K challenges the deduction. The High Court held that K was bound to repay the salary received by him during said period under sec. 70 of the Contract Act.
(d) Responsibility of a finder of goods : Such a responsibility arises under sec. 71 which Sec. is reproduced below
:-“A person who finds goods belonging to another and takes them into his custody is subject to the same responsibility as a bailee”
It is thus evident that the legal liability of a finder of goods is similar to that of a bailee. He is, therefore, required to take proper case of the thing found, not to appropriate it to his own use and when the owner is traced, to restore it to the owner. Further, he must take as much care of the goods found as a man of ordinary pridence would, under similar circumstances, take care of his own goods of the same bulk, quantity and value as those of the goods found.
(e) Liability for money paid or things delivered by mistake or under coercion
Such liability arises under sec. 72 of the Contract Act which Sec. is reproduced below : “A person to whom money has been paid, or anything delivered, by mistake or under coercion must repay or return it.”
Ex:-A and B jointly owe Rs.1000 to C. A alone pays the amount to C and B not knowing this fact pays to C Rs.1000 over and again. C is bound to repay the amount to B
CONTRACTS OF INDEMNITY AND GUARANTEE Contract of Indemnity
A contract of indemnity is a type of contingent contract. “A contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself, or the conduct of any other person is called a “contract of indemnity”. For e.g. A may contract to indemnify B against the consequences of any proceedings which C may take against B in respect of a sum of Rs. 5,000 advanced by C to B. In consequence, when B who is called upon to pay the sum of money to C fails to do so, C would be able to recover the amount from A.
Rights of the indemnity holder (Sec. 125)
The promisee in a contract of indemnity, acting within the scope of his authority, is entitled to recover from the promisor:
(1) all damages which he may be compelled to pay in any suit in respect of any matter to which the promise to indemnify applies;
(2) All costs which he may be compelled to pay in any such suit, if in bringing or defending it, he did not contravene the orders or the promisor and acted as it would have been prudent for him to act in the absence of any contract of indemnity, of if the promisor authorised him to bring or defend the suit. (3) All sums which he may have paid under the terms of any compromise of any such suit, if the compromise was not contrary to the orders of the promisor, and was one which it would have been prudent for the promisee to make in the absence of any contract of indemnity, or if the promisor authorised him to compromise the suit.
Contract of Guarantee (Sec. 126)
A contract of guarantee is a contract to perform the promise made or discharge liability incurred by a third person in case of his default. Thus, if A applies for shares in a limited company and B agrees with the company that any amount, which remains unpaid on the call, shall be paid by him. It is a contract of guarantee.
Implied promise to indemnify surety: “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 had rightfully paid under the guarantee but no sums which he has paid wrongfully.”
Consideration in case of guarantee : “Anything done, or any promise made, for the benefit of the principal debtor may be a sufficient consideration to the surety for giving the guarantee.”
Nature of surety’s liability : “The liability of the surety is co-extensive with that of the principal debtor, unless it is otherwise provided by the contract”. The language of the sec. suggests that the surety is liable to the same extent as the principal debtor. When the debtor cannot be held liable to any defect in the document executed by him, the surety also ceases to be liable on the contract entered into by him. However, a surety’s liability to pay the debt is not discharged even if the creditor omits to sue the principal debtor since the surety is separately liable on the promise of guarantee. On that account though the principal debtor has not been sued, the action is maintainable against the surety.
Discharge of surety
(1) Any variance made without the surety’s consent in the terms of the contract, between the principal debtor and the creditor, discharge the surety as to the transactions taking place subsequent to the variance. (Sec. 133)
(2) The surety is discharged by any contract between the principal debtor and the creditor by which the principal debtor is released or by any act or ommission of the creditor the legal consequence of which is the discharge of the principal debtor (sec. 134)
(3) Where a creditor makes a composition (i.e. settlement) with, or promises to give time to the principal debtor, or promises not to sue the principal debtor, by a contract between the creditor and the principal debtor the surety is absolved from the liability under the guarantee, unless the surety assents to such new contract (sec. 135)
(4) It may further be noted that if there are co-sureties, a release by the creditor of one of them does not discharge the other co-surety or co-sureties; also that as between the other co-sureties per se it does not absolve the surety so released from his responsibility to another or others. (sec. 138) (5) The surety is also discharged when the creditor does any act which is inconsistent with the rights of the surety or omits to do any act which, his duty to the surety requires him to do, and the eventual remedy of the surety against the principal debtor is thereby impaired. (sec. 139)
Distinction between a Contract of Indemnity and a contract of Guarantee
1] No. of Parties:-In Contract of Indemnity there are two parties i.e. Indemnifier and Indemnity –Holder. In Contract of Guarantee there are three parties i.e. Principal Debtor, Creditor and Surety. 2] No. of Contracts:-In Contract of Indemnity there is only one contract between Indemnifier and Indemnity-Holder. In Contract of Guarantee there are three contracts i.e. between a] creditor and principal debtor b] surety and principal debtor c] surety and creditor
3] Undertaking:-In Contract of Indemnity, Indemnifier undertakes to save the Indemnity –Holder from any loss .In Contract of Guarantee, the surety undertakes for the payment of debt of the principal debtor.
4] Nature of Liability:-In Contract of Indemnity, the liability of Indemnifier is primary and unconditional .In Contract of Guarantee the liability of surety is secondary and conditional.
5] Nature of Event:-In Contract of Indemnity, the liability arises only on happening of contingency. In Contract of Guarantee, the liability arises only on the performance of an existing promise or non-payment of an existing debt.
BAILMENT AND PLEDGE
A bailment is defined under sec. 148, as an act whereby goods are delivered by one person to another for some purpose on a contract that the goods shall, when the purpose is accomplished, be returned or otherwise disposed of according to the directions of the person delivering them. The person who delivers the goods is known as the ‘bailor’ and the person to whom the goods are delivered is known as the ‘bailee’. For e.g. If X delivers his car to Y for repairs, X is the bailor and Y the bailee.
Bailor’s duties
(1) The bailor is bound to disclose to the bailee faults, if any, in the goods bailed of which the bailor is aware. If the bailor does not make such disclosure, he would be responsible for damage suffered by the bailee directly from such faults.
(2) Where goods are given to the bailee to be kept, carried or to be worked upon and the bailment is gratuitous, the bailor must reimburse the bailee for the expenses incurred by him for the purpose of the bailment.
(3) If the bailor was not entitled to make the bailment or to receive back the goods or to give directions in respect of them, he must compensate the bailee for any loss which the bailee may sustain in consequence thereof.
(4) The bailor must compensate the bailee for the loss or damage suffered by the bailee that is in excess of the benefit received, where he had lent the goods gratuitously and decides to terminate the bailment before the expiry of the period of bailment.
Care to be taken by bailee : In all cases of bailment, the bailee is bound to take as much care of the goods bailed to him as a man of ordinary prudence, under similar circumstances, would take of his own goods of the same bulk, quality and value (sec. 151)
Duties of a bailee : In addition to the duties prescribed by sec. 151 and 152, the bailee has the following duties
:-(1) Not to make an unauthorised use of the goods bailed. If the bailee makes the unauthorised use, he would be responsible for damage, if any, suffered on this account and must pay compensation to the bailor. Such a liability would arise even if the bailee is not guilty of any negligence and even if the damage is the result of an accident (sec. 154)
(2) Not to mix the goods bailed with his own Goods without the consent of the bailor. If he does so, it would have to be seen whether the goods mixed with each other can be separated or divided. If it can be done the property in the goods shall remain with the respective owners but the bailee shall have to bear the expenses of separation or division and also any damage arising due to the unauthorised mixing. If however, the goods mixed do not admit of separation or division, the bailor shall be compensated by the bailee for the loss of the goods. (Sec. 156 and 157)
(3) To return the goods bailed on the expiration of the period of bailment or the accomplishment of the purpose of bailment without any demand being made. If the bailee defaults and goods are not returned, delivered, or tendered at the appropriate time, he would be responsible for the loss, destruction or deterioration that occurs subsequently (sec. 160 and 161)
(4) To deliver to the bailor any increase or profit accruing from the goods bailed.
Ex:- A leaves a cow in the custody of B to be taken care of. The cow has a calf. B is bound to deliver the calf as well as the cow to A. (Sec. 163)
(5) Not to do anything inconsistent with the conditions of bailment. (Sec 153)
Bailee’s particular lien If in accordance with the purpose of the bailment, any service requiring labour or skill is rendered by the bailee is respect of the goods bailed , he is entitled to remuneration if the bailor refuses to pay for the service, the bailee has the right to retain the goods bailed until he receives his remuneration. This right of the bailee to retain the goods is known as the particular lien of the bailee (sec. 170). Such a lien has been given to the bailee only because he uses labour or skill for improving the goods bailed. It entitles the bailee to retain the goods but originally he has no right to sell the goods to realise his dues. A right to sell may, however, be given to the bailee by special agreement.
General lien
A general lien is the right to retain the property of another for a general balance of account; but a particular lien is a right to retain it only for a charge on account of labour employed or expenses incurred in improving the property bailed.
Bankers, attorneys of a High Court and policy brokers have general lien on goods coming into their possession in the course of their trade. A banker has a general lien on cash, cheques, bills of exchange and securities deposited with him in the character of a banker in respect of any amount due
to him. Suppose, A borrows from his banker Rs. 50000 without any security and later borrows a further sum of Rs.1,0000/- from the same banker on the security of some gold ornaments. Even after A has repaid the second loan of Rs.1,0000 the banker can retain the ornaments as security for the loan of Rs.50,000 which was originally advanced without any security. Similarly, a solicitor can exercise his right of general lien on the papers which he is entrusted with any may retain them until all amounts due to him have been paid.
What is pledge ?
Pledge is a specie of bailment: it is the bailment of goods as security for payment of debt or performance of a promise. When goods have been pledged, the bailor is called in this case the pawnor and the bailee the pawnee. In the case of pledge no transfer of any interest in property takes place, but a special right to property is carved out in favour of the pledge, i.e. he has the right to dispose of the property in certain circumstances.
Pawnee’s rights
(a) Pawnee’s right of retainer (Sec. 173) : The pawnee may retain the goods pledged not only for the payment of the debt or the performance of the promise, but also for the recovery of the interest on the debt and all necessary expenses incurred by him in relation to the possession or for the preservation of the goods pledged. Thus, in a case where H pledges a stock of steel rods with M bank for a loan of Rs.1,00000 at an interest @ 6% p.a., the bank may retain the goods not only for the realisation of the amount of loan but also for realising the interest thereon.
(b) Pawnee’s right of retention in regard to subsequent advances (Sec. 174) : Subject to a contract to the contrary, the pawnee would not be entitled to retain the goods to subsequent advances made by the pawnee, provided this has not been expressly surrendered by a contract.
(c) Pawnee’s right to extraordinary expenses incurred (Sec. 175) : The pawnee is entitled to receive from the pawnor extraordinary expenses for the preservation of the goods pledged.
(d) Pawnee’s right where pawnor makes default (Sec. 177) : If the pawnor makes default in the payment of the debt, or the performance of the promise in respect of which the goods were pledged, the pawnee may bring a suit against the pawner upon the debt or the promise and retain the goods pledged as a collateral security; or he may sell the thing pledged on giving the pawnor a reasonable notice of the sale. If the proceeds of such sale are less than the amount due in respect of
the debt, the pawner would be personally liable for the balance in respect of which a suit can be instituted. If, however, the proceeds of the sale are greater than the amount due, the pawnee must refund the surplus to the pawnor.
Pawnor’s right to redeem (Sec. 177)
If a time is stipulated for the payment of the debt or performance of the promise, for which the pledge is made, and the pawnor makes default, he may redeem the goods pledged at any subsequent time before the goods are sold, but in that case, he must pay, in addition, any expenses occasioned by the default. The period for a suit against pawnee to recover the things pledged is three years from the date of pawnee’s refusal to do so after demand. (The Limitation Act 1963 – schedule, 70).
