Special Contract Act

LAW ASSIGNMENT ON

SPECIAL CONTRACT ACT &

PUBIC AND PRIVATE

COMPANY

LAW ASSIGNMENT ON SPECIAL CONTRACT ACT & PUBIC AND PRIVATE COMPANY

INDEX

S. No TOPIC PAGE No.

1 GUARANTEE 2-8

2 INDEMNITY 9-11

3 BAILMENT 12-20

4 PLEDGE 21-25

5 AGENCY 26-33

6 PRIVATE AND PUBLIC

LIMITED COMPANIES

34-39

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SECTION 1

GUARANTEE

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DEFINITION

A contract of guarantee is defined by the Indian Contract Act, as “ A contract to perform the

promise or discharge the liability of third person in case of his default. The person who gives the

guarantee is called the surety”, the person for whom the guarantee is given is called the

‘principal debtor’, and the person to whom the guarantee is given is called the ‘creditor’. In India

the contract of guarantee may be in oral or written but under English law the contract must be in

written.

Example: When A requests to B to lend Rs.10, 000 to C and guarantees that C will repay the

amount within the agreed period of time and that C failing to do so, he will himself pay to B,

there is a contract of guarantee.

KINDS OF GUARANTEES

1. A contract of Guarantee may be oral or in writing (section 126), though a creditor

always prefer in writing the contract to avoid disputes, while in case of oral agreement

it is very difficult to prove.

2. It is of two types:

Specific

Continuing

1) Specific Guarantee: It is a type of Guarantee which is intended on a particular debt and

came to an end on its repayment. This type of guarantee once given is irrevocable, and

even the death of the surety does not result in revocation of the guarantee.

2) Continuing Guarantee: When a guarantee extends to a series of transactions.

Examples:

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(a) A in consideration that B will employ C in collecting the rents of B’s Zamindari,

promises B to be responsible, to the amount of 5,000 rupees, for the due collection

and payment of those rents. This is continuing Guarantee.

(b) A guarantees payment to B, a tea dealer, to the amount of Rs.10, 000, for any tea

from time to time supply to C. B supplies C with tea to the above value of Rs.10, 000,

and C pays B for it. Afterwards B supplies C with tea to the value of Rs.15, 000. C

fails to pay. The guarantee given by A was continuing guarantee and he is

accordingly liable to B to the extent of Rs.10,000.

A guarantee regarding the conduct of another is a continuing guarantee, unlike specific

guarantee which is irrevocable; a continuing guarantee can be revoked regarding future

transactions (section 130).

Example:

A guarantee to B to the extent of Rs.10, 000, that C shall pay all the bills that B shall draw

upon him. B draws upon C. C accepts the bill. A gives notice of revocation. C dishonors the

bill at maturity. A is liable upon his guarantee.

The death of the surety operates, in the absence of any contract to the contrary, as a

revocation of a continuing guarantee, so far as regards future transactions (Section 131).

RIGHTS AND OBLIGATIONS OF THE CREDITOR

RIGHTS: The rights of a creditor are:

(a) The creditor has the right to demand from the surety as soon as the principal debtor

refuses to pay or makes default in payments.

(b) Where surety is insolvent, the creditor is entitled to proceed in the surety’s insolvency

and claim the pro rata dividend.

OBLIGATIONS: The Indian Contract Act, 1872 imposes the following obligations:

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(a) Not to change any terms of the original contract: Under section 133, the creditor is not

allowed to make any changes in the contract without seeking the consent of the surety.

Any variance made in the contract without consent, then the terms of the contract

between the principal debtor and the creditor, discharges he surety as to the transactions

subsequent to the variance.

Example: A banker contracts to lend X Rs.5000 on March 4.A guarantees repayment.

The banker pays X Rs.5,000 on January .A in this case is discharged from his liability as

the contracts has been varied as much as the banker might sue X before March 4, but it

cannot sue A as the guarantee is from March 4.

(b) Not to release or discharge the principal debtor: The creditor is under an obligation

not to release or discharge the principal debtor. Section 134 states: “the surety is

discharged by a contract between the creditor and the principal debtor, by which the

principal debtor is released, or by any act or omission of the creditor, the legal

consequence of which is the discharge of the principal debtor.

(c) Not to compound, or give time to, or agree not to sue the principal debtor: Section

135 provides, ‘A contract between the creditor and the principal debtor, by which the

creditor makes a composition with or promises to give time to, or not to sue the principal

debtor, discharges the surety, unless the surety assents to such contract’.

(d) Not to do any act inconsistent with the rights of surety (section 135): Where C lends

money to B on the security of joint and several promissory notes made in C’s favor by B

and by A as surety for B, together with a bill of sale of B’s furniture, which gives power

to sell the furniture and apply the proceeds in discharge of the note. Sub sequentially, C

sells the furniture, but, owing to his misconduct and willful negligence, only a small price

is realized, then A is discharged from liability on the note.

RIGHTHS OF SURETY

It can be classified under three heads:

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1) Rights against the creditor: In case of fidelity guarantee, the surety can direct creditor

to dismiss the employee whose honesty he has guaranteed, in the event of proved

dishonesty of the employee. The creditor’s failure to do so will forgive the surety from

his liability.

2) Rights against the principal debtor:

(a) Right of subrogation: Section 140 states that when the surety has to pay all the debts

of principal debtor, then he has all the rights of creditor against the principal debtor.

(b) Right to indemnify: The surety has the right to recover from the principal debtor, the

amounts which he has rightfully paid under the contract of guarantee.

3) Rights against co-sureties:

(a) Rights of contribution: Where a debt has been guaranteed by more than one person,

they are called as co-sureties. Section 146 provides for a right of contribution between

them. When a surety has paid more than his share, he has a right of contribution from

the other surety who are equally bound to pay with him.

(b) Where the co-sureties have guaranteed different sums, they are bound under section

147 to contribute equally, subject to the limit fixed by their guarantee, and not

proportionately to the liability undertaken.

LIABILITIES OF SURETY (SECTION 128)

Unless the contract provides otherwise, the liability of the surety is co-extensive with that

of the principal debtor. In other words, the surety is liable for all those amounts, the

principal debtor is liable for.

Example: A guarantees to B the payment of a bill of exchange by C, the acceptor. The

bill is dishonored by C. A is liable not only for the amount of the bill but also for any

interest and charges which may have become due to it.

POSITION OF SURETY IN CASE OF A MINOR DEBTOR

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According to the decision of the Bombay High Court in Kashiba v. Shripat I.L.R. 10

Bom.1927 the surety can be held liable, though a minor debt is not liable.

DISCHARGE OF SURETY

The liability of a surety under a contract of guarantee may at any time be revoked by the

surety, as to the future transactions, by notice to the creditor.

However, where one of the co-sureties informs the creditor that the debtors are likely to

wind-up their business and withdrawn his guarantee and the other surety does not take

such step, the Himachal Pradesh High Court in Anil Kr. And others v. Central Bank of

India AIR 1997 HP 5 held that the other surety shall be liable along with the principal

debtors for the repayment of the loan.

1) By death of surety (Section 131): The death of the surety operates, in the

absence of any contract to the contrary, as a revocation of a continuing

guarantee, so far as regards future transactions.

2) By variance in terms of contract (Section 133): Any variance, made without

the surety’s consent, in the terms of contract between the principal debtor and

the creditor, discharges the surety as to transactions subsequent to the

variance.

3) By release of discharge of principal debtor (Section 134): The surety is

discharged by any contract between the creditor and the principal debtor, by

which the principal debtor is released, or by any act or omission of the

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creditor, the legal consequence of which is the discharge of the principal

debtor.

Example: A contracts with B for a fixed price to build a house for A within a

stipulated time, B supplying the necessary timber. C guarantees A’s

performance of the contract. B omits to supply the timber. C is discharged

from his surety ship.

4) By compounding with, or giving time to, or agreeing not to sue, principal

debtor (section 135): A contract between the creditor and the principal debtor

by which the creditor makes a composition with, or promises to give time to,

or not to sue the principal debtor, discharges the surety. The surety shall,

however, be not discharged if (a) he assets to such contract, (b) the contract to

give time to the principal debtor is made by the creditor with a third person,

and not with the principal debtor.

Example: C, the holder of an overdue bill of exchange drawn by A as surety

for B, and accepted by B, contracts with M to give time to B. A is not

discharged.

5) Loss of security: If the creditor loses or parts with any security given to hi, by

the principal debtor at the time of contract of guarantee was made, the surety

is discharged to the extent of the value of the security, unless the surety

consented to the release of such security (section 141).

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SECTION 2

INDEMNITY

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DEFINITION

A contract in which one party promises to set aside the other from loss caused due to him by the

conduct of the promisor himself, or by the conduct of any other person is called a contract of

indemnity (Section 124). The contracts of indemnity have all the essentials of a valid contract

just like other contracts. The person who promises to make good the loss is called the

indemnifier (i.e. promisor). The person whose loss is to be made good is called indemnified or

indemnity holder (promise). A contract of indemnity could be raised either by: an express

promise to indemnify or cases where the loss is caused by the conduct of the promisor himself or

by conduct of any other person.

It could be exemplified as: ‘A’ and ‘B’ claims that certain goods from a railway company as

adversary owners. ‘A’ takes the goods by agreeing to compensate the railway company loss

whereas ‘B’ turns out to be the real owner of the goods. Here, there is a contract of indemnity

between ‘A’ and the railway company.

RIGHT OF THE INDEMNIFIED (i.e. THE INDEMNITY HOLDER)

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In section 125, it deals with right of indemnity holder when sued. According to it that person is

entitled to recover from the promisor in following ways:

a. All damages which may be required to pay in any suit in respect of any matter to which

the promise to indemnity applies.

b. All the cost in which he may be required to pay in bringing or defending such suits. He

may have acted under the authority of the indemnifier or if he didn’t acted in breaking of

orders of the indemnifier and in such way as a sensible man would act in his own case.

c. All sums which he could have paid under the terms of any compromise of any such suit.

The compromise should not be contrary to the order of the indemnifier and should be

prudent or authorized by the indemnifier.

RIGHT OF INDEMNIFIER

The Indian contract act is still about the rights of the indemnifier in the contract of indemnity.

However, his rights, in such cases are similar to the rights of the surety under section 148. He

becomes entitled to the benefits of all the securities which the creditor has against the principle

debtor whether he was responsive of them or not.

COMMENCEMENT OF INDEMNIFIER’S LIABILITY

The requirement of indemnity is that the party which is to be indemnified should never be called

upon to be paid. Indemnity is not necessary given by repayment after payment. The indemnified

may induce the indemnifier to place him in a position to meet liability that may be casted upon

him without waiting until the promise (indemnified) has actually discharged it.

DISSIMILARITY BETWEEN CONTRACT OF GUARANTEE AND CONTRACT OF

INDEMNITY

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1. The liability of a promisor is primary and independent in a contract of indemnity. In a

contract of guarantee, the liability of the surety is secondary the primary liability being

that of the principal debtor.

2. In the case of guarantee, there is an existing debt or obligation, the performance of which

is guaranteed by the surety. Whereas in case of indemnity the possibility of any loss

occurrence is a contingency against which the indemnifier undertakes to indemnify.

3. In a contract of guarantee, after discharging the debt, the surety is entitled to proceed

against the principal debtor in his own name while in case of indemnity, the indemnifier

cannot proceed against third parties in his own name, unless there is an assignment in his

favour.

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SECTION 3

BAILMENT

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DEFINITION (SECTION 148)

It is defined as ‘ delivery of goods by one to another person 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 persons delivering them’. Bailor is the person who delivers goods

and Bailee is a person to whom goods are delivered. This section indicates out that delivery of

ownership is not obligatory, where one person who already have the ownership of the goods and

contracts them to be as bailee.

It could be explained by certain illustrations such as: ‘X’ delivers laptop to ‘Y’; person giving his

laptop for repair, ‘X’ delivers diamond to ‘Y’; person giving diamond for making diamond

jewelry.

CHARACTERISTICS

1. Delivery of goods: The real meaning of bailment is liberation of goods by one person to

another for some short-term purpose. The delivery of goods could be actual or

constructive. Delivery which could be made by handling over goods to the bailee is said

to be actual delivery. Constructive deliveries could be made by doing something which

has the effect of depositing the goods in the ownership of the bailee or giving authority to

any person to hold the goods on his behalf. Bailment is concerned with goods only.

Such as: ‘A’ is holding goods on behalf of ‘B’, agrees to hold goods on behalf of ‘C’.

This shows a constructive transfer of ownership from ‘C’ to ‘A’.

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‘A’ was the owner of a car and now he sells it to ‘B’ so, ‘B’ becomes the owner of

the car. ‘B’ leaves his car in the possession of ‘A’, here ‘A’ now becomes a bailee, earlier

he was the owner.

2. Bailment is based on a contract: In bailment the delivery of goods are made under a

contract which means when the purpose of the work is completed, then it should be

returned to the bailor. Like: when a person gives his TV to get repaired in a shop, then a

receipt is given to him and it is agreed that when it is repaired it would be returned back

to him.

Bailment is usually made on contracts, however there are certain exceptions. This could

be illustrated with an example: When a person finds any lost goods, then the finder is

treated as the bailee of the lost article. Though, there was no such contract between the

finder and the real owner. (Section 168)

3. Return of good in specie: The goods are delivered for some purpose and it is agreed that

the particular good would be returned. Return of the precise good (in specie) is a vital

part of the bailment. This means returning the goods in the same condition. Thus, where

an equivalent and not the same are not agreed then there is no bailment.

4. Ownership of goods: In bailment, it is only the possession of goods which is transferred

not the ownership. Hence, the person who is delivering the possession of goods, need not

to be the owner. The purpose is to transfer the possession of goods not the ownership.

KINDS OF BAILMENT

Bailment is classified into six categories:

1. Deposit: The delivery of goods from one person to another for the use of the previous i.e.

bailor.

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2. Commodatum: Goods lend by a person to his friend, who can use it without paying

anything to that person.

3. Hire: Goods lent to the Bailee for hire, i.e. in return for payment of money.

4. Pawn or Pledge: The goods are deposited to another person, in return of some money

borrowed.

5. The delivery of goods either for transporting them or something is to be done about them,

by the Bailee for some reward.

6. The delivery of goods either for transporting them or something is to be done about them,

by the Bailee without reward.

DUTIES AND RIGHTS OF BAILOR AND BAILEE

1. To disclose know faults in the goods (section 150): The goods which are delivered by the

bailor and if the bailor knows that some fault is there and materially interfered with the

use of it or exposed the bailee with extraordinary risks then, the bailor is bound to

disclose the faults of goods to bailee. If the goods are bailed for hire or reward, the bailor

is responsible for any damage in the goods, whether he was or was not aware of the

existence of such faults in the good at the time bailed.

It could be illustrated by an example: ‘A’ lends his bike to ‘B’ and ‘A’ knew that the bike

brakes were not working properly but he didn’t informed ‘B’. Now, ‘B’ drives bike and

had a small accident near his locality and got hurt, at this moment ‘A’ would be

responsible to ‘B’ for damages sustained.

2. Liability for breach of warranty as to title: if there is any loss in which bailor was not

entitled to make the bailment or to receive back the goods or to give directions respecting

them then, bailor is held responsible for it. (Section 164)

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Example: ‘A’ gives ‘B’s car to ‘C’ without taking permission or informing ‘B’ then, ‘B’

can sue ‘C’ for it and could receive compensation from him. ‘A’ who is the bailor is now

responsible to make good this loss to ‘C’, the bailee.

3. To bear expense in case of gratuitous bailment’s: Concerning bailment under which

bailee is to receive no remuneration, under section 158, it states that in the absence of a

contract to the contrary, the bailor is supposed to repay all the necessary expenses

incurred by him for the purpose of the bailment, to the bailee.

4. In case of non-gratuitous bailments, the bailor is held responsible to bear only extra-

ordinary expenses.

Example: ‘A’ lends his car to ‘B’. The ordinary expenses would be like filling up petrol,

which has to be taken care of ‘B’. Now, if the car acquires some problem then the money

spent in its repair will be considered as an extra-ordinary expenditure and is borne by the

bailor.

DUTIES OF A BAILEE

1. To take care of the goods bailed (section 151): In all the cases of bailment, the bailee has

to take care of the goods which were bailed to him, as a man of ordinary cautiousness

would. Under similar circumstances, the goods owned of the same bulk, quantity and

should value as the goods bailed. In case, bailee is taking certain steps to take care of the

goods as expressed above then, he shall not be responsible, in the absence of any special

contract, for the loss, destruction or wear and tear of the thing bailed (section 152).

2. Not to make unauthorised use of goods (section 154): If bailee makes some unauthorised

use of goods which could be done by using them in a way which are not justified by the

terms of bailment then, he is legally responsible to make compensation to the bailor for

any damages occurring to the goods from or during such use of them.

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Example: ‘A’ gives his laptop to ‘B’ so, that ‘B’ could use it only for some work purpose.

‘B’ allows ‘C’ to use the laptop given by ‘A’; but ‘C’ corrupts the laptop system. Now,

‘A’ is legally responsible to take compensation from ‘B’ for the damages done to the

laptop system.

3. Not to mix bailer’s goods with his own (sections 155-157): If the bailee without the

approval of the bailor, mixes the goods of the bailor with his own goods and separates

and divides the goods then, the bailee has to take the responsibility and bear the expenses

of separation or division and any damages arising from the mixture of goods.

Examples: ‘A’ bails 100 bales of cotton with a particular mark to ‘B’. ‘B’ without taking

permission from ‘A’ he mixes his own bales of cotton with a different mark in those 100

bales of cotton. Now, ‘A’ is entitled to have his 100 bales of cotton back from ‘B’ and

now ‘B’ has to bear all the expenses incurred in the separation of the bales and any other

incidental damages.

However, if the goods are mixed in such a manner than it is not possible 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.

Example: ‘A’ bails a 1kg of packet of flour to ‘B’ worth Rs.300. ‘B’ without consent of

‘A’ mixes cheap quality of flour in it which worth only Rs.180. Since ‘A’ is entitled to

have his packet of flour back but it is not possible to separate it so, ‘B’ has to compensate

‘A’ for the loss of flour.

4. To return the goods bailed without demand (section 160): It is a duty of the bailee to

return or deliver the goods bailed according to the bailor’s directions, 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. If the bailee fails to deliver the goods at the proper

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time, he is responsible to the bailor for any loss, destruction or deterioration of the goods

from that time.

5. To return any accretion to the goods bailed (section 163): 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.

RIGHTS OF A BAILEE

1. A bailee can sue a bailor for certain things which are:

a. Calming reimbursement for the damages resulting from non-disclosure of faults in the

goods.

b. If there is any violating of warranty as to the title and the damages resulting from

there.

c. Any extraordinary expenses.

Therefore, in the case of illegal denial the bailee has a right to use the same solution

which the owner might have used in the case like this.

2. Another right of bailee is the right of lien (sections 170-171): Lien is a right in one person

to retain that which is in his possession, belonging to another, until some debt or claim is

paid, Lien, thus assumes two things:

a. The person who has the right of lien is in possession of the goods or securities in the

ordinary course of business.

b. The owner i.e. bailor have got a lawful debt due or obligation to discharge to the

person in possession of the said goods or securities i.e. baliee.

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Lien is available only until the debt or claim is fulfilled, once the debt is fulfilled or

obligations are discharged, the right of lien is put out. There are two types of lien:

a. General lien: It means the right to retain goods not only for due to the rise in demand

out of goods but even for a general balance of account in favour of certain persons.

b. Particular lien: It means the right to retain the particular goods in respect of which the

claim is due.

3. Right against wrongful deprivation of or injury to goods: If a third person wrongfully

deprive the bailee of the use or possession of the goods bailed or causes them injury, the

bailee is entitled to use such remedies as the owner might have used in the like case if no

bailment has been made and either the bailor or the bailee may bring a suit against the

third person for such deprivation or injury. Now, whatever is obtained by the way of

relief or compensation from this is taken care between the bailor and the bailee and is

dealt with according to their respective interest.

RIGHTS OF A BAILOR

1. The bailor could enforce, by suit, all duties or liabilities of the bailee.

2. The bailor could demand his return whenever he pleases, even though he lent it for a

specified time or purpose, in case of gratuitous bailment (i.e. bailment without reward). If

on assurance of such bailment, the borrowers have acted in such a manner that the return

of the thing before the specified time would cause him (i.e. bailee) loss exceeding the

benefit derived by him from the bailment, the bailor must indemnify the borrower for the

loss if he comples an immediate return (section 159).

TERMINATION OF BAILMENT

A contract of bailment terminates or comes to an end under the following circumstances:

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1. At the time of the expiry of the stipulated period. Here, the bailment is for a specific

period, it comes to an end once the specified time has expired.

Example: ‘A’ hires a car from ‘B’ for a period of 4 months. Now, when the specified

time of 4 months are over then ‘A’ has to return back the car to ‘B’.

2. On the completion of the specified purpose. In case, bailment is for specific purpose it

terminates as soon as the purpose is accomplished.

3. If the bailee does anything with regard to the goods bailed which is not in agreement with

the conditions of the bailment, the bailor may cease the bailment (section 153).

Example: ‘A’ hires a horse from ‘B’ for his own riding purpose only, but ‘A’ is also

using the horse to pull his carriage then ‘B’ can terminate the contract.

4. A gratuitous bailment could be put to an end at any time (section 159). This is terminated

even when there is death of either the bailor or the bailee. However, if premature

termination causes any loss to the bailee exceeding the benefit derived from the bailment,

then bailor could indemnify.

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SECTION 4

PLEDGE

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DEFINITION

A pledge is a bailment of goods as security for payment of debt or performance of a promise

Pawner is the Bailor of such goods and Pawnee is the Bailee of the goods.

Pledges are form of security to assure that person will repay debt under a contract. In a pledge a

person gives possession temporarily to another person or property. Pledge is a bailment of goods

as security for payment of debt or performance of a promise. Pledges are used in securing loans,

pawning property for cash and guarantying that contracted work will be done. Every pledge has

three parts: two separate parties, an obligation or debt and contract of pledge.

Example1:

A businessman pledged a railway receipt to a bank, duly endorsed. Later he was declared

bankrupt. The official assignee contended that the pledge of a railway receipt was not valid.

Apprehended that the railway receipts in India are titled to goods and that the pledge of the

railway receipt to the bank, duly endorsed, constituted a valid pledge of the goods.

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Similarly, where the goods continue to remain in the borrower’s possession but are agreed to be

held as a ‘Bailee’ on behalf of the pledge and subject to the pledge’s order, it amounts to

constructive delivery, and is a valid pledge.

Example 2:

Suppose if A has taken loan of Rs.10.00 lakh from bank of Maharashtra against the security of

goods kept in the warehouse on 10-07-2007.

On 10-08-2007 you took a clean overdraft of Rs.2.00 lakh without offering any security. On 10-

12-2007, you paid Rs.10.00 lakh with interest towards the first loan and requested the bank to

release the goods from warehouse. The bank is entitled to retain the goods sufficient to cover the

second overdraft of Rs.2.00 lakh and they can release only the proportionate goods.

ADVANTAGES OF PLEDGE

To a creditor, pledge is perhaps the most satisfactory mode of creating a charge on goods. It

offers the following advantages:

1. The goods are in possession of the creditor and therefore, in case the borrower makes a

default in payment, they can be disposed of after a reasonable notice.

2. Stocks cannot be manipulated as they are under the lender’s possession and control.

3. In the case of insolvency of the borrower, lender can sell the goods and prove for the

balance of the debt, if any.

4. There is hardly any possibility of the same good being charged with some other party if

actual possession of the goods is taken by the lender.

WHO MAY PLEDGE?

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As per the rule, only the owner of the goods has a right to pledge the goods. A non-owner of

goods cannot make a valid pledge. However, there are exceptions to the rule when even a non –

owner can make a valid pledge. These exceptions are:

(1) PLEDGE OF GOODS BY MERCHANTILE AGENTS: If a mercantile agent is in

possession of goods or the documents of title to goods with the consent of the owner he

may pledge such goods in the ordinary course of his business provided he is acting under

the express authorization of the owner of goods and the pledge is in the interest of the

owner.

It is important to note here that only a commission agent can make a valid pledge on

behalf of the owner. Any other person who is not an agent and is in possession of another

person’s goods, or is a broker, cannot make a valid pledge.

(2) PLEDGE WHERE PAWNOR HAS LIMITED INTERESTS IN GOODS: Where a

person pledges goods in which he has only a limited interest, the pledge is valid to the

extent of the limited interest. FOR EXAMPLE, A finds a watch belonging to B on the

roadside. A spends Rs.30 on its repair and pledges it for Rs.100. In this case, A’s pledge

will be valid only to the extent of Rs.30 and B can claim his watch by paying Rs.30 to A.

(3) PLEDGE BY A PERSON IN POSSESSION UNDER A VOIDABLE CONTRACT:

Where a person obtains possession of goods under a voidable contract i.e. by fraud, under

influence or coercion.

Example: If Mohan pledges a ratio set which is already sold to Vikas for Rs.300, and

Vikas does not know that the ratio set has already been sold to Mahesh, the contract of

pledge will be a valid contract.

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(4) PLEDGE BY CO-OWNER IN POSSESSION OF GOODS: When the goods belong

to more than one owner, and the goods are in the possession of one of the co-owners, and

if the person bins possession of goods pledge the goods with the consent of the other co-

owners, the pledge so created will be deemed to be valid.

(5) PLEDGE BY A BUYER IN POSSESSION BEFORE SALE IS COMPLETED:

Sometimes before the sale is completed, with the consent of owner of the goods, the

goods are delivered to the buyer. The buyer in such a case is not yet the owners of the

goods. But if the buyer makes a pledge of the goods and Pawnee accepts the pledge, it is

deemed to be valid pledge.

FOR EXAMPLE: Vijay buys a machine in hire-purchase. The transfer of ownership of

the machine will only take place when he has paid all the installments of the hire-

purchase. If he pledge the machine before he has completed the payment due for it, and

the Pawnee accepts it in good faith, it will be a valid contract of pledge.

DUTIES OF A PLEDGOR AND PLEDGEE:

DUTIES OF A PLEDGEE:

1. The pledgee is required to take as much care of the goods pledged to him as a person of

ordinary prudence would, take of his own goods, of a similar nature.

2. The pledge must not put the goods to an unauthorized use.

3. The pledge is bound to return the goods on payment of the debt.

4. Any accruals to the goods pledged belong to pledgor and should be delivered

accordingly.

DUTIES OF A PLEDGOR:

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1. He must disclose to the pledge any material faults or extraordinary risks in the goods to

which the pledge may be exposed.

2. He is responsible to meet any extra ordinary expenditure incurred by the pledge for the

preservation of the goods.

3. Where the pledge has exercised his right of sale of goods, any shortfall has to be made

good by the pledgor.

4. He is liable for any losses caused to the pledge because of defects in his (pledgor’s) title

to the goods.

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SECTION 5

AGENCY

DEFINITION:

Agent is a person employed to do work or represent him on behalf of that person in dealing with

third person. The person for whom the agent worked is called the Principal. The relationship

between the two is called as an Agency which is based on an agreement.

The function of an agent is to bring about contractual relationship between the principal and the

third party or we can say that the agent act as a link between the principal and the third party.

The act of the agent within the scope of the instruction, bind the principal as if he has done them

by himself.

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Agent must be distinguish from servant, as a servant acts under the direct control fo his master

while the agent is bound to do his exercise under lawful instructions and agent may also work for

several principals while servant usually serves one master.

Any person who is a major and also sound minded can employ an agent. No qualification

prescribed by the law for a person to be an agent except that he attained majority and also sound

minded and if an agent acts for a minor or a lunatic, he will be personally liable to third party.

EXAMPLE: Raj appoints Mahesh a minor to sell his car for not less than Rs.80,000. Mahesh

sells it for 70,000. Raj will be held bound by the transaction and further shall have no right

against Mahesh for claiming the compensation for having not obeyed the instructions, since

Mahesh is a minor and a contract with a minor is void abinitio.

DIFFERENT KINDS OF AGENCIES:

A contract of agency may be created by an express agreement or by implication or by

ratification. Thus there are different kinds of agencies are listed below:

1. Express Agency (s.187): A person may be appointed as agent either by word of mouth

or by writing. No particular form is required for appointment of an agent. The usual form

of a written contract is the “power of attorney” on a stamped paper.

2. Implied Agency (s.187): These agencies arise from the conduct, situation or relationship

of parties. It includes three types:

2.1 Agency by Estoppel (s.237): When a person has, by his statements, induced others to

believe that a certain person is his agent, he is estopped sub sequentially denying it.

2.2 Agency by Holding out: Though part of the law of estoppel, some affirmative conduct

by the principal is necessary in creation of agency by holding out.

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2.3 Agency of Necessity (s.189): This arises when there is no express appointment of a

person as agent for another but he is forced to act on behalf a particular person

3. Agency of Ratification (Ss.196-200): When the agent works beyond the authority of the

principal or exceeds the given authority then the principal is not held bound by the

transaction. However s.197 permits if the principal want to ratify the act of the agent,

then it will have the same effect as it was done by his authority. In this case the agency is

said to be created by ratification. In other words, the agency come into existence from

the moment the agent first came into existence.

However, for the rule of relation back to apply, the agent while accepting the offer

should not show lack of authority, e.g., where he accepts, .subject to ratification’, the

rule of ratification does not apply and revocation shall be valid, if communicated prior to

such ratification.

4. Agency Coupled with Interest: When the agent has himself an interest in the subject

matter of the agency, the agency is one coupled with interest.

CLASSIFICATION OF AGENTS

The classification of agents is given below:

1. Special and General Agents: A special agent is a person who is appointed to do some

particular act or enter into some particular contract and has some limited authority and if

he does anything beyond his authority, then he is personally liable to the third party. On

the other hand a general agent is the one who is appointed to represent the principal in all

matters concerning a particular business.

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2. Mercantile or Commercial Agents: A mercantile or commercial agent may be one of

the following forms: Broker, Factor, Commission agent, Del credere agent, auctioneer,

banker, Pakka and Katcha Aditias, and Indentor. A broker is a mercantile agent where he

engaged to buy or sell property or to make bargains contracts between the engager and

third party for a commission.

3. Non-mercantile or Non-commercial Agents: Some of the agents in this category are:

wife, estate agent, counsels (advocate), and attorneys. The following principals provide

guidelines as regards wife as agent of her husband: (i) If the wife and husband are living

together and the wife is looking for necessaries, she is agent. (ii) Where the wife lives

apart from the husband, through no fault of hers, the husband is liable to provide for her

maintenance. But where the wife lives apart under no justifiable circumstances, she is not

her husband’s agent and thus cannot bind him even for necessaries.

4. Sub-agent and Substituted Agent (Ss. 190-195): The general rule is that the agent

cannot appoint agent. But under S.190 Agent may appoint an agent under following

circumstances: (i) where expressly permitted by the principal; (ii) where the ordinary

custom of trade permits delegation; (iii) the nature of agency is such that it cannot be

accomplished without the appointment of sub-agent; (iv) in an unforeseen emergency.

DUTIES AND RIGHTS OF AGENT

1. DUTIES OF AGENT: The duties of agents towards his principal are:

1. To conduct the business of agency according to the principal’s direction: The

agent is not supposed to deviate from the directions of the principal even for the

principal’s benefit.

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2. The agent should conduct the business with the skill and diligence: That is

generally possessed by persons engaged in similar business, except where the

principal knows that the agent is wanting in skill (s.212).

3. To render proper accounts: The agent has to render proper accounts, means

maintaining proper accounts supported by vouchers.

4. To communicate with the principal in case of difficulty: It is the duty of the agent,

in case any difficulty to communicate with the principal.

5. Not to make any secret profiy: Agent should deliver to the principal all moneys

including secret commission received by him.

6. Not to deal on his own account: Agent should not deal on his own account without

the principal’s consent.

7. Not to disclose any confidential information: The agent must not disclose any

information of the agency supplied to him by principal.

2. RIGHTS OF AGENTS: Agent has a number of rights. These are:

1. Right to remuneration: Under section 219 and 220 agent is entitled to his agreed

commission or remuneration, but remuneration does not become payable unless he

has carried out the object of the agency, except when there is a contract to a contrary.

2. Right of retainer (s.221): Agent may retain, out of any sums received on account of

the principal in the business of the agency, all money due to himself in respect of

advances made or expenses properly incurred by him in conducting such business of

agency.

3. Right of lien: In the absence of a contract to the contrary, the agent has the right to

retain goods, documents, movable and immovable property of the principal that is in

his custody till time that he receives the payment for commission, services paid or

accounted for by him.

4. Right of stoppage in transit: The agent can stop the goods while in transit in two

cases: (a) If he purchases the goods on behalf of principal either from his own funds

or by incurring a personal liability and the principal become insolvent then he can

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stop the transit of the goods. (b) Where agent holds himself liable to his principal for

the price of the goods sold.

5. Right of indemnification (Ss.222-224): The principal is bound to indemnify agent

against the consequences of all lawful acts done by the agent in exercise of authority

conferred on him.

6. Right to compensation for injury caused by principal’s neglect (s.225): The

principal must make compensation to his agent in respect of injury caused to such

agent by the principal’s neglect or want of skill.

PRINCIPAL’S DUTIES TO THE AGENT AND HIS LIABILITY TO THIRD PARTIES

DUTIES OF A PRINCIPAL

The rights of agents or duties of principal. Thus a principal is:

1. Bound to indemnify the agent against the consequences of all lawful acts done by such

agent in exercise of authority conferred upon him (s.221)

2. Liable to indemnify agent against the consequences of an act done in good faith , though

it causes an injury to the rights of third person (s.223)

3. Bound to compensate his agent in respect of injury caused to such agent by the

principal’s neglect or want of skill (s.225)

The principal is, however, not liable for acts which are criminal in nature though done by the

agent at the instance of the principal (s.224).

LIABILITY OF PRINCIPAL TO THIRD PARTIES

1. Agent being a mere connecting link binds the principal for all his acts done within the

scope of authority (s.226).

2. The principal is liable for the acts of the agent falling not only within the actual authority

but also with in the scope of his ostensible authority.

3. Under (s.227) the only binding between the agent and the principal is the part which

agent performed under the given authority.

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4. The principal remains liable to the third party even his name is not disclosed. The third

parties, on discovering his name, can proceed against him on the contract.

5. The principal is bound by any notice or information given to the agent in the course of

business transacted by him.

6. The liability of the principal continues even in cases where agent is held personally

liable. Section 223 provides an option to the third parties to either sue the principal or

agent or both.

Undisclosed Principal: Where agent, though discloses the fact that he is agent working for some

principal, conceals the name of principal, such a principal is called an undisclosed principal. The

liability of an undisclosed principal is same as disclosed principal. However the principal must

exist at the time of contract.

Concealed Principal: Where agent conceals not only the name of the principal but the very fact

that there is a principal, the principal is called a concealed principal. In such case, the third

parties are not aware of the principal and must look to the agents for payment and performance,

and the agent may sue or be sued on the contract.

TERMINATION OF AGENCY

There are certain circumstances under which the termination of agency takes place. These are

given below:

1. On revocation by the principal: The principal may, by notice, revoke the authority of

agent any time. In case of continuous agency, notice of revocation is essential to the

agent as well as to the third parties who have acted on the agency with the knowledge of

the principal.

2. On the expiry of fixed period of time: When the agency is for a fixed period of time, it

comes to an end on the expiry of that time.

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3. On the performance of the specific purpose: Where agent is appointed to do a

particular act, agency terminates when the act is done or when the performance becomes

impossible.

4. Insanity or death of the principal or agent: Death or insanity of the agent or principal

terminates the agency. But, agent, in such case, should take all reasonable steps for the

preservation of the property, on behalf of the legal representatives of the principal

(s.209).

5. An agency shall also terminate in case the subject matter is either destroyed or rendered

unlawful.

6. Insolvency of the principal: Insolvency of the principal, not of the agent, terminates the

agency.

7. By renunciation of agency by the agent: If principal can terminate the agency by

revocation, agent may renounce his agency by giving a sufficient notice to that effect.

Where, however, agency is for a fixed period and the agency is renounced without a

sufficient cause, the principal must be compensated.

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SECTION 6

PUBLIC & PRIVATE LIMITED

COMPANIES

PRIVATE LIMITED COMPANIES

A private company can be formed by merely two persons by subscribing their names to the

Memorandum of Association. Such a company must have a minimum paid up capital of Rs.1lakh

or such higher paid up capital, as may be prescribed and by its article must:-

Prohibit an invitation to the public to subscribe to its shares and its debentures;

Restrict the rights of its members to transfer shares; and

Limit the number of its member to fifty, excluding its employee-members or past

employee-members; provided that where two or more persons hold one or more shares in

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a company jointly, they shall, for the purpose of its definition, be treated as a single

member.

Prohibit any invitation or acceptance of deposits from person other than its members,

directors or their relatives.

A private limited company cannot trade its shares on the stock market.

NAME OF SOME PRIVATE COMPANIES

1. INFOSYS

2. RELIANCE INDUSTRIES LIMITED

3. ADITYA BIRLA GROUP

SPECIAL PRIVILAGES AVAILABLE TO A PRIVATE COMPANY

A private company can proceed to allot shares at minimum subscription, and also can

issue shares without issuing a prospectus.

A private company can issue any kind of shares and allow disproportionate voting rights

since Sections 85 to 89 of the act are not applicable to it.

A private company is not required to hold a statutory meeting or to file a statutory of

report with the registrar of the companies.

The directors of company need not file their written consent to act as directors or to take

up their qualification share. The directors of a private company need not retire by

rotation.

A private company can give financial assistance directly or indirectly for purchase or

subscription of its own share.

No person other than the members of a private company is entitled to inspect, or obtain

copies of profit and loss account of the company under Section 610.

A private company may, by its articles, provide special grounds for vacation of office of

a director.

Provisions regarding prohibition of loan directors, etc. (Section 295) is not applicable to a

private company.

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The company must display ‘Ltd’ after its name. This warns people who lend it money

that its owners have limited liability and may not be able to pay back the debt.

LOSS OF PRIVILIGES BY A PRIVATE COMPANY

Section 43 provides that if a private company contravenes any of the four conditions included in

its articles as per Section 3(1)(iii), then it will be treated as if it is a public company and it will

the result in loss of privileges and exemptions to which it is normally entitled to.

ADVANTAGES OF PRIVAYE LIMITED COMPANIES

1. Limitation of liability is there as there is no distinction between business money and

personal money. The private limited company advantages are that the company is a

separate corporate body and liability for payment of debts stops with the private limited

company, the owners and shareholders are not personally liable.

2. Lower corporation tax offered a private limited company advantages over self-

employment in recent years. Corporation tax rates have increased from 20 per cent to 22

per cent in recent years compared with the sole trader basic rate tax which was reduced

from 22 per cent to 20 per cent in 2008. Incorporation still has tax saving advantages

dependent upon the net taxable profit.

3. Sole trader basic accounts can be quite simple as a formal accounting system is not

required and can be reduced to simple lists of income and expenditure supported by

documentary evidence of sales and purchase invoices, effectively single entry

bookkeeping. Producing a balance sheet is optional. Due to the simplicity then an

accountant may not be required saving a significant cost but is the normal approach and

offsets some of the tax advantages.

4. A private limited company advantages over self-employment also extends to long term

finance. Companies retain more funds within the business to meet future financial

commitments which promote business growth, a more sustainable business and medium

term profits growth over a sole trader.

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DISADVANTAGES OF PRIVAYE LIMITED COMPANIES

1. Many private limited companies are very profitable. Unfortunately, these profits can

become diluted because they must be evenly distributed among all shareholders, and

many PLC’s have up to 50 shareholders.

2. Registered directors of PLC’s must maintain impeccable records of profits and losses for

about seven years and are used to complete the corporation’s tax returns every year.

PLC’s must also pay taxes and insurances for their employees.

3. Shareholders in a PLC’s are not able to sell or transfer their shares to the general public

and also cannot trade them to any stock exchange.

4. Even though shares in a PLC cannot be publicly traded, information concerning the

company is made public.

PUBLIC COMPANIES

A limited company grants limited liability to its owners and management. Being a public

company allows a firm to sell shares to investors this is beneficial in raising capital. Only Public

Limited Companies may be listed on the London Stock Exchange and will have the suffix PLC

on their ticker symbol. Other requirements include: It must be registered as a public company; it

must have at 5 lakhs of authorized share capital.

NAME OF SOME PUBLIC COMPANIES

1. OIL AND NATURAL GAS CORPORATION

2. NATIONAL THERMAL POWER CORPORATION

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3. BHARAT SANCHAR NIGAM LIMITED

4. BHARAT HEAVY ELECTRICALS LIOMITED

ADVANTAGES OF A PUBLIC LIMITED COMPANY

1. .It is able to raise funds and capital through the sale of its securities. This is the reason

why public corporations are so important, historically; prior to their existence, it was very

difficult to obtain large amounts of capital for private enterprises.

2. Securities from a public company typically have an established fair market value at any

given time as determined by the price the security is sold for on the stock exchange where

the security is traded.

3. In addition to being able to easily raise capital, publicly traded companies may issue their

securities as compensation for those that provide services to the company, such as their

directors, officers, and employees.

DISADVANTAGES OF A PUBLIC LIMITED COMPANY

1. It has to meet the requirement to publicly disclose much financial information; such

information could be useful to competitors.

2. Publicly traded companies are also required to spend more for certified public

accountants and other bureaucratic paperwork required of all publicly traded companies

under government regulations.

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http://en.wikipedia.org/wiki/Bureaucracy

http://en.wikipedia.org/wiki/Certified_public_accountant

http://en.wikipedia.org/wiki/Certified_public_accountant

Documents

Special Contract Act