Business Law_Malavika Sharma_Units 1,2.pptx

Notes

1. Business Law By Malavika Sharma Compiled from Bare Acts With descriptions and explanations Compiled by Malavika Sharma

2. Units 1 and 2 Unit 1: Contract Act of India 1872 Unit 2: Special Contracts (Under the Contract Act of India 1872) Compiled by Malavika Sharma

3. Unit 1: Contract Act of India 1872 What is a contract? “Essentials of a Valid Contract” Who can enter into a contract? Reverse – who cannot enter into a contract Types of Contract Performance and Discharge of a Contract Remedies for Breach of Contract Compiled by Malavika Sharma

4. What is a Contract? A contract is an agreement enforceable by law. An Agreement : Every promise and set of promises forming the consideration for each other. Promise + Consideration = Agreement Compiled by Malavika Sharma

5. “Essentials of a Valid Contract” Two or more Parties need to be there Intent Of Legal Obligations – they should wish to enter into a legal relationship Case Specific Contracts Some contracts have special conditions that if not observed would render them invalid or void Similarly, in the case of contracts like contracts for immovable properties, registration of contract is necessary under the law for these to be valid. Certainty of Meaning – the contract should be “meaningful and not deal in abstracts” Possibility Of Performance Of an Agreement – the performance of the agreement should be something which can actually be done. Eg someone promises to bring some dead relative back as a part of the agreement? Free Consent – ie no one was forced into the contract. Competency Of the Parties – ie all parties are “competent to enter into a contract” (Sec 11) Consideration – for a contract to be Valid there has to be “something in return” given ie consideration Lawful Consideration – Under Sec 23 – the Consideration has to be legal one it is forbidden by law . Eg Buying and selling of Liquor in Bihar and GUjrat is of such a nature that, if permitted, it would defeat the provisions of any law, or is fraudulent. involves or implies, injury to the person or property of another . Eg X enters into a contract to give his house to Y, if Y burns the property of Z the Court regards it as immoral or opposed to public policy Compiled by Malavika Sharma

6. Who can enter into a contract? (Under Sec 11) He should not be a minor – ie he / she should be above 18 years or more In case he / she is a minor, a valid contract can only be made by a “Legal Guardian” If the individual doesn’t have a “Legal Guardian”, the court shall appoint an appropriate “Legal Guardian” Further the Courts / legal authorities should be satisfied that the “contract is in favour of the minor” Compiled by Malavika Sharma

7. Who can enter into a contract? (Under Sec 11) contd. 2. He / She should be of sound mind while making a contract. If a person is normally of unsound mind – but during the period of contracting, he is medically proven to be of sound mind. Proving mental conditions can only be done by a Govt Recognized Hospital / Medical facility If a person is normally of sound mind, but is of unsound mind during the contracting – the person shall not be valid to enter into a contract. Proving mental conditions can only be done by a Govt Recognized Hospital / Medical facility Compiled by Malavika Sharma

8. Who can enter into a contract? (Under Sec 11) contd. 3. He / She is not disqualified from contracting by any other law to which he is subject There are other laws of the land that disqualify certain persons from contracting. They are:- He/she is a convict under the law. Insolvent person – one who has filed for insolvency under the law Alien Enemy – as defined by law Foreign Nations – sovereigns – diplomatic staff etc Compiled by Malavika Sharma

9. Types of Contract Contracts are defined into types based on the following 3 criterions: On the basis of its enforcement On the basis of mode of creation On the basis execution Compiled by Malavika Sharma

10. Types of Contract I. On the basis of its enforcement A. Valid Contract An agreement enforceable by law is a “Valid Contract” They should have the following elements There is some consideration for it. The parties are competent to contract Their consent is free. Their object is lawful B. Voidable Contract A voidable contract remains valid until rescinded . Ie once any of the parties rescinds, it is deemed Void C. Void Contract A void agreement is not enforceable at the option of either party. D. Unenforceable Contract A valid contract which cannot be enforced due to an error or a technicality. Correction of this error then makes it enforceable E. Illegal/unlawful Contract Anything which contracts to do an “unlawful act” or illegal act as an object or consideration Compiled by Malavika Sharma

11. Types of Contract II. On the basis of mode of creation A. Express Contracts That which is defined in terms of Object, Consideration and Performance. This maybe both verbal or written B. Implied Contracts These are “implied” by virtue of behavior. Eg when you buy a plane ticket – your seat, behavior etc are defined implicitly – and in turn the service by the Air Plane staff is implicit C . Quasi-Contract A contract which does not arise by virtue of any agreement between the parties, but due to certain special circumstances, the law recognizes it as a contract. Compiled by Malavika Sharma

12. Types of Contract III. On the basis execution A. Executed Contracts When both parties have performed their obligations B. Executory Contract A contract in which one or both parties are still to perform their obligations. C. Unilateral Contract A one sided contract D. Bilateral Contracts A legally binding contract formed by the exchange of reciprocal promises. Compiled by Malavika Sharma

13. Performance and Discharge of a Contract Discharge of Contract by Performance When the parties to a contract perform their respective promises, the contract is said to have been performed. This is the normal and natural mode of discharging a contract . Actual Performance : The contract is said to have been performed, if both the parties to the contract have performed their respective promises. Offer to Perform or Tender : Tender is an offer to perform the obligation under the contract. When one party offers to perform its part of the promise and the other party refuses to accept the performance, the first party is discharged from its obligation provided the offer or tender to perform the contract was valid. Discharge of Contract by Mutual Agreement If both the parties to the contract, expressly or impliedly, agree to terminate the contract, the contract is said to have been discharged by mutual consent. Compiled by Malavika Sharma

14. Remedies for Breach of Contract When a promise or agreement is broken by any of the parties we call it a breach of contract . 1] Recession of Contract If one side does not perform its side of the contract, the other side can rescind. 2] Sue for Damages If a Contract isn’t performed - the other party has the right to sue in court 3] Sue for Specific Performance If a Contract isn’t performed - the other party has the right to sue for specific performance of the contract 4] Injunction An injunction is a court order restraining a person from doing a particular act. 5] Quantum Meruit It literally translates to “as much is earned”. At times when one party of the contract is prevented from finishing his performance of the contract by the other party, he can claim quantum meruit . Compiled by Malavika Sharma

15. Unit 2: Special Contracts Indemnity Concepts Rights and Duties of Parties Guarantee Concepts Difference between Indemnity and Guarantee Bailment Concepts Sale, Rights and Duties of Parties Pledge Concepts Rights and Duties of Parties Agency Intro and Essentials Nature of Relationship - Test of Agency Agent Vs Employee Compiled by Malavika Sharma

16. Indemnity Concepts ‘ Indemnity ’ literally means security against loss. Indemnification refers to the act of being held not liable or being protected from costs by shifting them to another party. If a person is promised by another that he will be protected or compensated in case of loss or damage, he is said to be indemnified . Rights and Duties of Parties Rights of an Indemnity Holder The indemnifier will have to pay damages which the indemnity holder will claim in a suit. The indemnity holder can even compel the indemnifier to pay the costs he incurs in litigating the suit. If the parties agree to legally compromise the suit, the indemnifier has to pay the compromise amount. Duties of the indemnity-holder are: To act prudently. To act carefully and not negligently. To act with good intention and. To follow the direction or to act with the authority of the indemnifier. Compiled by Malavika Sharma

17. Guarantee Concepts Defined under Sec 126 A contract of guarantee as a contract to perform the promise or discharge the liability of the defaulting party in case he fails to fulfill his promise. Difference between Indemnity and Guarantee The main difference between guarantee and warranty lies in the dissimilarity of expectations in both the cases. Generally , it is believed that one can get his money back with the strength of a guarantee , if the product is defective or does not provide the assured standard. Compiled by Malavika Sharma

18. Difference between Indemnity and Guarantee Compiled by Malavika Sharma Basis for Comparison Indemnity Guarantee Meaning A contract in which one party promises to another that he will compensate him for any loss suffered by him by the act of the promisor or the third party. A contract in which a party promises to another party that he will perform the contract or compensate the loss, in case of the default of a their person, it is the contract of guarantee. Defined in Section 124 of Indian Contract Act, 1872 Section 126 of Indian Contract Act, 1872 Parties Two, i.e. indemnifier and indemnified Three, i.e. creditor, principal debtor and surety Number of Contracts One Three Degree of liability of the promisor Primary Secondary Purpose To compensate for the loss To give assurance to the promisee Maturity of Liability When the contingency occurs. Liability already exists.

19. Bailment Concepts Sec 148 It 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 bailor and the person to whom they are delivered is called bailee Sale , Rights and Duties of Parties Compiled by Malavika Sharma

20. Bailment Contd. A contract of bailment has the following essential’ features ; 1. CONTRACT The first condition is that there must be a contract between the two parties for the delivery of goods. Such contract may be express or implied, written or oral. , 2. DELIVERY OF GOODS This contract is for the delivery of some movable goods from one person ( bailor ) to another person ( bailee ) or to his authorized agent. If the goods are immovable the contract will not be a contract of bailment. 3. CHANGE OF POSSESSION The possession of goods must be affected by such contract. Mere custody without possession is not a contract of bailment. 4. PURPOSE OF DELIVERY The delivery of the goods is for temporary purposes. It may be for safe-custody, repair, carriage or for gratuitous use by the bailee . 5. NUMBER OF PARTIES There is two parties tinder such contract e.g., the bailor and bailee . The person delivering the goods is called the bailor and the person to whom the goods are bailed is called the bailee . Compiled by Malavika Sharma

21. Bailment Contd. 6. RIGHT OF OWNERSHIP In a contract of bailment, the right of ownership remains with an owner ( bailor ) and is not changed. If the ownership is transferred, the contract will be a contract of sale and is not of bailment. 7. CHANGE OF FORM If the goods bailed are altered in form by the bailee , such as cloth. is converted into a shirt still, the contract is one of bailment. 8. GOODS IN POSSESSION OF BAILEE The delivery of the goods is not essential if the goods are already in the possession of the person who enters into the contract as bailee . 9. REDELIVERY OF GOODS Under such contract, the goods are redelivered to the bailor or according to his directions upon the fulfillment of the purpose by the bailee . 10.RIGHT OF REWARD In a contract of bailment, both the parties bailor and the bailee can get a reward but it depends on the nature of the transaction. Compiled by Malavika Sharma

22. Bailment Contd . RIGHTS OF THE BAILOR 1. RIGHT TO GET BACK THE GOODS The bailor has a right to get back the goods bailed by him as soon as the purpose of bailment is accomplished. If the bailee fails to do so, is entitled to get reasonable compensation from the bailee due to 2. RIGHT TO TERMINATE THE CONTRACT The bailor has a right to terminate the contract of bailment if the bailee does any act with the goods bailed to him. which is inconsistent with the terms of the contract. For example- bailor gives his tonga to bailee for his personal use, but he uses it for carrying passengers. 3 . EXPENSES OF SEPARATION If the bailee has mixed the goods of bailor with someone other goods not belonging to bailor without the consent of the bailor , the bailor has a right to get from bailee the expenses which he has to bear for the separation of his goods from others. 4 . COMPENSATION FOR GOODS: If the bailee has mixed the goods of the bailor with someone other goods not belonging to bailor without the consent of the bailor and bailors goods cannot be separated from the other goods, the bailor has a right 10 get reasonable compensation from bailee tor his goods. 5 . COMPENSATION FOR UNAUTHORISED USE If the bailee make’s any use of the goods bailed, which is not in accordance to the conditions of the bailment, the bailor has a right to get Compensation from the bailee for any damage arising to the goods from or during such unauthorized use of the goods. 6 . COMPENSATION FOR DELAY IN TIME According to The Contract Act, the bailee is responsible to return, deliver or to tender the goods to the bailor at a proper time. If he fails to do the bailor has a right to get compensation from bailee for any loss, destruction or deterioration of the goods due to such delay in time. 7. RIGHT TO SHARE PROFIT The bailor has a right to share with bailee any profit earned from the goods bailed if it is so provided by the contract. Compiled by Malavika Sharma

23. Bailment Contd. DUTIES OF THE BAILOR DUTIES OF THE BAILOR The duties and liabilities of the bailor with regard to the contract of bailment are as under: 1.  TO DISCLOSE FAULTS The bailor is bound to disclose to the bailee faults in the goods bailed, of which the bailor is aware, and which materially interfere with the use of them or expose the bailee to extraordinary risks; and if he does not make such disclosure, he is responsible for damage arising to the bailee directly from such faults Sec. 150. Illustration;  A lends a horse, which he knows to be vicious to B. He does not disclose the fact that the horse is vicious. The horse runs away. B is thrown and injured. A is responsible to B for damage sustained. 2. TO REPAY NECESSARY EXPENSES Where under the contract of bailment, the goods have been carried by the bailee or he has done some work upon them for the bailor and the bailee has received no remuneration, the bailor must repay to the bailee necessary expenses incurred by him for the purpose of bailment. Illustration; A is a friend of B and repairs B is television set free of cost. On this repair, he bears Rs. 500 actual Expenses due to a replacement of parts. B is bound by law to pay Rs. 500, the actual cost of repair to A. 3. TO REPAY EXTRA-ORDINARY EXPENSES When the contract of bailment is for reward but bailee does some work for the benefits of the bailor and bears extraordinary expenses, the bailor is bound to repay these extraordinary expenses in excess of the original reward. Illustration; A keeps his bicycle for safe custody with B for reward the bicycle gets punctured without the negligence of B and B repairs it. Now A is bound to pay these repair expenses to B in excess of the original amount. 4. TO INDEMNIFY BAILEE The bailor is responsible to the bailee for any loss which the bailee may sustain by reason that the bailor was not entitled to make the bailment, or to receive back the goods, or to give direction respecting. Illustration; A gives B’s car for use to C without the permission of B. Later on, B gets compensation from C. Now C’ has legal right 10 be indemnified by A. Compiled by Malavika Sharma

24. Bailment Contd . RIGHTS OF THE BAILEE The rights of the bailee in respect of bailment are as follows: 1. TO RECOVER DAMAGES The bailee is entitled to recover all the damages and losses suffered by the bailee due to the defects in the goods bailed to him with the knowledge of the bailor . 2. RECOVERY OF EXPENSES The bailee is also entitled to recover all the expenses incurred for the purpose of bailment and for providing services 10 the bailor .- 3. RECOVERY OF COMPENSATION The bailee can also recover compensation from the bailor for any loss caused to him due to any defect in the bailor’s title. 4. RIGHT OF ACTION AGAINST THE THIRD PARTY The bailee has a right to take legal action as an owner of the goods, against the third party who wrongfully deprives the bailee of the use of goods bailed or does them any injury. The compensation received from such claims must be dealt between the bailor and bailee in accordance with their respective interests. 5. RIGHT OF LIEN When the bailee has rendered any service involving the exercise of labour or skill in respect of the goods bailed, he has in the absence of a contract to the contrary, a right to retain such goods until he receives due remuneration for the services he has rendered in respect of them. Sec 170. Compiled by Malavika Sharma

25. Bailment Contd. DUTIES AND LIABILITIES OF THE BAILEE 1. TO TAKE CARE OF GOODS According to section 151, the bailee is bound to take as much care of the goods bailed to him as a common person takes off his own goods. 2. EXPENSES OF SEPARATION If the bailee without the consent of the bailor mixes the goods of the bailor with his own goods, and goods can be separated or divided, the bailee is bound to bear the expenses of separation or division, and any damage arising from the mixture. Sec 156. 3. UNAUTHORISED USE OF GOODS If the bailee makes any use of the goods bailed, which is not according to the conditions of the bailment, he is liable to make compensation to the bailor for any damage arising to the goods from or during such use of them. Sec 154. 4. INCONSISTENT ACT A contract of bailment is voidable at the option of the bailor , if the bailee does any act with regard, to the goods bailee inconsistent with the conditions of the bailment. Sec 153. 5. COMPENSATION If the bailee without the consent of the bailor mixes the goods of the bailor with his own goods in such a manner that it is impossible to separate the goods bailed from the other goods and deliver them back, the bailor is entitled to be compensated by the bailee for the loss of the goods. Sec 157. 6. RETURN OF GOODS It is the duty of the bailee to return or deliver, according to the bailor’s directions the goods bailed, without demand, as soon as the time for which they were bailed has expired, or the purpose for which they were bailed has been accomplished; Sec. 160. 7. RETURN OF GOODS AT PROPER TIME The bailee is responsible to return, deliver or tender the goods to the bailor at a proper time. If he fails to do so, he is responsible to the bailor for any loss, destruction or deterioration of the goods from that time. Sec 161. 8. RETURN OF PROFIT In the absence of any contract to the contrary, the bailee is bound to deliver to the bailor , or according to his directions, any increase or profit which may have accrued from the goods bailed Sec 163. Compiled by Malavika Sharma

26. Pledge - Concepts Concepts A pledge is only a special kind of bailment, and chief basis of distinction is the object of the contract. Where the object of the delivery of goods is to provide a security for a loan or for the fulfilment of an obligation, that kind of bailment is pledge. Under Indian Contract Act, 1872 the ‘Pledge’ has been defined in section 172 as: S 172. “Pledge”, “ pawnor ”, and “Pawnee” defined .- The bailment of goods as security for payment of a debt or performance of a promise is called “pledge”. The bailor is in this case called the “ Pawnor ”. The Bailee is called the “Pawnee”. Compiled by Malavika Sharma

27. Pledge Contd. – Rights and Duties of Parties Rights of a Pawnee 1.       Right of retainer (Section 173- 174) – As per section 173, the pawnee may retain the goods pledged, not only for a payment of a debt or the performance of the promise, but also for the interest of the debt, and all necessary expenses incurred by him in respect of the possession or for the preservation of the goods pledged . 2.      Right to extra ordinary expenses (Section 175) – As per section 175,  the pawnee is entitled to receive from the pawner extra ordinary expenses incurred by him for the preservation of the goods pledged . 3.        Right of sale (Section 176) – As per section 176 (Pawnee’s right where pawnor makes default) – If the pawnor makes default in payment of the debt or performance at the stipulated time, of the promise, in respect of which the goods were pledged, the pawnee may bring a suit against the pawnor 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 reasonable notice of the sale. Compiled by Malavika Sharma

28. Pledge Contd. – Rights and Duties of Parties Duties of a Pawnee Duty to take reasonable care Duty to give back the goods after repayment of the loan Duty not to make unauthorized use of goods Duty to give back the owner any increment in the goods Duty not to mix the goods Compiled by Malavika Sharma

29. Pledge Contd. – Rights and Duties of Parties Rights of a Pawner 1.       Right to redeem goods 2.      Right to claim damages or compensation  Compiled by Malavika Sharma

30. Pledge Contd. – Rights and Duties of Parties Duties of a Pawner 1.       Duty to pay the loan 2.      Duty to pay extraordinary expenses incurred by Pawnee. 3.        Duty to pay claims and damages or compensation to Pawnee Compiled by Malavika Sharma

31. Agency Intro and Essentials When one party delegates some authority to another party whereby the latter performs his actions in a more or less independent fashion, on behalf of the first party, the relationship between them is called an agency. Agency can be express or implied . Who is an Agent? The Indian Contract Act, 1872 defines an ‘Agent’ in Section 182 as a person employed to do any act for another or to represent another in dealing with third persons. Who is a Principal? According to Section 182 , The person for whom such act is done, or who is so represented, is called the “principal”. Therefore, the person who has delegated his authority will be the principal . Who can appoint an Agent? According to Section 183 , any person who has attained the age of majority and has a sound mind can appoint an agent. In other words, any person capable of contracting can legally appoint an agent. Minors and persons of unsound mind cannot appoint an agent. Who may be an Agent? In the same fashion, according to Section 184 , the person who has attained the age of majority and has a sound mind can become an agent. A sound mind and a mature age is a necessity because an agent has to be answerable to the Principal. Compiled by Malavika Sharma

32. Agency Contd. Nature of Relationship - Test of Agency Creation of Agency - An agency can be created by : Direct (express) appointment – The standard form of creating an agency is by direct appointment. When a person, in writing or speech appoints another person as his agent, an agency is created between the two. Implication – When an agent is not directly appointed but his appointment can be inferred from the circumstances, an agency by implication is created.   Necessity – In a situation of necessity, one person can act on behalf of another to save the person from any loss or damage, without expressly being appointed as an agent. This creates an agency out of necessity. Estoppel – An agency can also be created by estoppel . In a situation where one person behaves in such a manner in front of a third person, as to make someone believe he is an authorized agent on behalf of someone, an agency by estoppel is created. Ratification – When an act of a person, who acted as another person’s agent (on his behalf) without his knowledge is later ratified by that person, this creates an agency by ratification between the two. Compiled by Malavika Sharma

33. Agency Contd. Types of Agents Special Agent- Agent appointed to do a singular specific act. General Agent- Agent appointed to do all acts relating to a specific job. Sub-Agent-An agent appointed by an agent. Co-Agent- Agents together appointed to do an act jointly. Factor- An agent who is remunerated by a commission (one who looks like the apparent owner of the things concerned) Broker- An agent whose job is to create a contractual relationship between two parties. Auctioneer- An agent who acts a seller for the Principal in an auction. Commission Agent- An appointed to buy and sell goods (make the best purchase) for his Principal Del Credere - An agent who acts as a salesperson, broker and guarantor for the Principal. He guarantees the credit extended to the buyer. Compiled by Malavika Sharma

34. Agency Contd. Authority of an Agent - Authority of an agent can be both express or implied. Express authority According to Section 187, the authority is said to be express when it is given by words spoken or written. Implied authority According to Section 187 , authority is said to be implied when it is to be inferred from the facts and circumstances of the case. In carrying out the work of the Principal, the agent can take any legal action. That is, the agent can do any lawful thing necessary to carry out the work of the Principal. Implied authority is of four main types Incidental authority- doing something that is incidental to the due performance of express authority Usual authority- doing that which is usually done by persons occupying the same position Customary authority- doing something according to the pre-established customs of a place where the agent acts Circumstantial authority- doing something according to the circumstances of the case Illustration Ali owns a shop in Bihar but lives in Mumbai. His shop is managed by a person named John. John takes care of the deals regarding the shop and buys goods from a person named Ram, with Ali’s knowledge. In this case, John has implied authority from Ali to buy these goods. Soham employed Abhay , who is a shipbuilder to build ships for him. In doing so, Abhay may legally buy all the material necessary to build the ships. Compiled by Malavika Sharma

35. Agency Contd. Termination of Agency An agency can be terminated or is terminated in 5 different ways : When the agent’s authority is revoked by the Principal When the agent renounces the business of the agency When the business of the agency is completed When either of the parties dies or becomes mentally disabled When the Principal is adjudicated an insolvent Compiled by Malavika Sharma

36. Agency Contd. Rights of an Agent - An agent has the following 5 rights : Right of retainer – An agent has the right to retain any remuneration or expenses incurred by him while conducting the Principal’s business. Right to remuneration – An agent, when he has wholly carried out the business of the agency has the right to be remunerated of any expenses suffered by him while conducting the business. Right of Lien on Principal’s property- The agent has the right to hold (keep with himself) any movable or immovable property of the Principal until his due remuneration is paid to him by the Principal. Right to be Indemnified – The agent has the right to be indemnified against all the lawful acts done by him during the course of conducting the Principal’s business. Right to Compensation – The Agent has the right to be compensated for any injury or loss suffered by him due to the lack of skill and competency of the Principal. Compiled by Malavika Sharma

37. Agency Contd. Agent Vs Employee An agent is one who is authorized to do some act for or on behalf of the principal . An employee is a on the payroll working for the principal / employer. Note – at the behest of the employer, an employee can be appointed an Agent to act on behalf of the employer (who shall then be called principal) Sometimes the employee is asked to be Agent for "select" items / works Compiled by Malavika Sharma

38. Units 3,4 shall follow  Ask Queries when you have doubts! Also answer your final Question Papers after reading the questions… Note 1 – Attempt Sec B first and then Sec A of your Final Question Paper  Note 2 – Keep an eye on the watch when you answer the paper Compiled by Malavika Sharma