SPECIAL CONTRACTS Indemnity and GuaranteeMeaning and Definition of Indemnity

Section 124 defines a contract of indemnity as “A contract of indemnity is a contract whereby one party promises to save the other from loss caused to him by the conduct of the promisor himself or by the conduct of any other person. Definition of Indemnity under Section 124 is restrictive [Gajnan Moreshwar v. Moreshwar Madan].

Commencement of Indemnifier’s Liability Diversified views expressed by courts. According to earlier view – indemnifier

does not become liable until the indemnified has incurred on actual loss.

But according to later view – indemnifier may compel the indemnifier to place him in a position to meet liability.

Contract of Guarantee

Meaning and DefinitionA contract of guarantee is defined by the Indian Contract Act, as “A contract to perform the promise or discharge the liability of a 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’.”

Distinction

In case of guarantee, surety has a secondary liability but in case of indemnity, the liability of the indemnifier is primary.

A contract in which ‘A’ says to ‘B’, ‘If you lend ₤20 to ‘C’, I will see that your money comes back’

is a contract of indemnity.

On the other hand, an undertaking in these words, ‘If you lend ₤20 to ‘C’, and he does not pay you, I will’ is a contract of guarantee.

Nature of Surety’s Liability

Secondary but co-extensive

Unless otherwise agreed, it can be

neither less nor more than the liability of

the principal debtor.

Minor Principal Debtor vis-à-vis Liability

of Surety.

Kinds of Guarantees

Specific Guarantee

Continuing Guarantee

Specific Guarantee

A guarantee is a “specific guarantee”, if it is intended to be applicable to a particular debt and thus comes to an end on its repayment.

A specific guarantee once given is irrevocable. Even the death of the surety does not result in revocation of the guarantee. Legal successor(s) continue to remain liable. However, their liability shall be limited to the value of the assets inherited.

Continuing Guarantee

A guarantee which extends to a series of transactions is called a “continuing guarantee”, e.g., (i) fidelity guarantee, (ii) overdraft.

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).

Joint Guarantee

Where joint sureties have guaranteed an equal amount

Liability shall be equal.

Where joint sureties have guaranteed different amounts

Liability shall be equal

subject to the amount

guaranteed (Section 147).

Examples:

1. ‘A’, ‘B’ and ‘C’ as sureties for ‘D’, enter into three several bonds, each in a different penalty, namely, ‘A’ in the penalty of Rs.10,000/-, ‘B’ in that of Rs.20,000/-, ‘C’ in that of Rs.40,000/-, conditioned for ‘D’s duly accounting to ‘E’. ‘D’ makes default to the extent of Rs.30,000/-. ‘A’, ‘B’ and ‘C’ are each liable to pay Rs.10,000/-.

2. In the above example, if ‘D’ makes default to the extent of Rs. 40,000/-, ‘A’ is liable to pay Rs.10,000/-, and ‘B’ and ‘C’ Rs.15,000/- each.

Bailment and Pledge

What is Bailment? Section 148 defines Bailment as:

“The 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 the person delivering them.” The person delivering the goods is called the ‘Bailor’, and the person to whom goods are delivered is called the ‘Bailee’.

Essentials of Bailment

1. Goods: Bailment can be effected only with respect to goods.

2. Delivery: Delivery of goods by one person to another is essential. ‘Delivery’ includes: Physical delivery Constructive delivery Symbolic delivery

Essentials of Bailment

3. To be returned Without demand unless agreed

otherwise.

4. In specie i.e., the same goods are to be returned

and not the equivalent. including any accretion, e.g., bonus

shares, calf born to a cow.

Duties of Bailor

1. To disclose faults in goods Only known faults where bailment

is gratuitous. All faults including not known but

existing at the time of bailment in case of non-gratuitous bailment.

Duties of Bailor

2. To bear expenses Gratuitous Bailment: All expenses –

ordinary or extra-ordinary. Non-Gratuitous Bailment: Only extra-

ordinary expenses.

3. To indemnify for loss caused because of defective title.

Duties of Bailee

1. To take care of the goods bailed As much care as a man of ordinary

prudence will take in respect of his own goods of the same nature and value.

2. Not to make unauthorized use of goods

Duties of Bailee

3. Not to mix bailor’s goods with his own/other bailor’s.

If does, then: Where goods can be separated

Bailee to bear cost of separation. Where goods can not be separated

Bailor to be compensated for loss.

4. To return the goods in specie

Pledge

Section 172

“Pledge is the bailment of goods as

security for payment of debt or

performance of a promise.”

Delivery Essential

Discussion on Bailment applicable to pledge also.

Right of a pledgee to effect sale of goods without intervention of Court (Sec.176): After giving reasonable notice to the

pledger. Sale without reasonable notice shall make

pledgee liable to pay damages to the pledger.

However, sale will be valid.

Agency NOT FOR IMI

Agent is a “person employed to do any act for another or to represent another in dealings with the third person”.

Position of an Agent Conduit pipe, i.e. connecting link between

the Principal and third party. Therefore, competency of agent is

immaterial. Even a minor or lunatic may be appointed

as an agent. Principal must be competent to contract.

Duties of Agent

1.To conduct the business in accordance with the Principal’s directions. Lilley v. Doubleday In the absence of instructions, follow the

custom of the business at the place where it is conducted.

2.To conduct the business with skill and diligence that is generally possessed by persons engaged in similarly business except where principal knows that the agent is wanting in skill.

Duties of Agent

3. To render proper accounts.

4. In cases of difficulty to communicate with the principal.

5. Not to make any secret profits.

6. Not to deal on his own account.

7. Not to disclose confidential information.

SALE OF GOODS ACT, 1930

Conditions and Warranties- meant to offer protection to consumers

Condition?Section 12(2) defines a ‘condition’ as a ‘stipulation essential to the main purpose of the contract, the breach or which gives rise to a right to treat the contract as repudiated.

Warranty?

Section 12(3) defines a warranty as a “stipulation collateral to the main purpose of the contract, the breach of which gives rise to a claim for damages but not to a right to reject the goods and treat the contract as repudiated.”

Distinction between Condition and Warranty

Implied Conditions and Warrantiesdeemed to be incorporated in

every contract of sale of goods unless the terms of the contract show a contrary intention.

1. Condition as to Title. (Sec.14)

Title means ownership sale of goods involves transfer of ownership

by seller to the buyer. Seller must, therefore, either be the owner or

must have the right to sell the goods. Unless otherwise agreed between the parties

the buyer may terminate the contract and claim refund of price as well as damages in case the title of the seller turns out to be not good.

2. Sale by Description (Section 15)

Where goods are sold by description, they must correspond to the description.

3. Condition as to Fitness

General rule is Caveat-Emptor – let the buyer beware.

If following conditions are satisfied, then the goods must be fit for the purpose they have been purchased for:

the purpose must have been disclosed (expressly or impliedly); (ii) the buyer must have relied on the seller’s skill or judgement; and (iii) the seller’s business must be to sell such goods.

Condition as to fitness shall also not apply where the buyer fails to make known to the seller special circumstances, if any.

4. Merchantable Quality

i.e. the goods must be of business quality. In other words, they must be capable of being used as the goods of that description.

Goods should, therefore, be free from any latent defects.

The condition does not cover those defects which can be detected by an ordinary physical examination.

5. Condition as to Wholesomeness

In case of physically consumable items, condition as to merchantability is also referred as condition as to wholesomeness i.e. the goods must be worthy of human consumption.

6. Sale by Sample (Section 17)

Sale by sample means a sale where there is a term in the contract, express or implied, to that effect.

Merely that a sample is shown sale does not become a sale by sample.

Implied conditions in case of sale by sample: Bulk to correspond with sample. Buyer to be given reasonable opportunity to

compare the goods with the sample. Goods to be of merchantable quality.

Implied Warranties

Only two implied warranties, namely,Warranty of Quiet Possession

[Section 14(b)].Warranty of Freedom from

Encumbrances [Section 14(c)].

Doctrine of Caveat Emptor

Means Let the buyer Beware In other words, it is no part of the

seller’s duty to point out defects of his own goods. The buyer must inspect the goods to find out if they will suit his purpose.

Doctrine of Caveat Emptor

Exceptions: Seller guilty of fraudulent

misrepresentation. Seller actively conceals defeat. In case of goods having latent defect

(i.e., unmerchantable), Where conditions as to fitness is

applicable.

NEGOTIABLE INSTRUMENTS ACT, 1881

Meaning and Definition of a Negotiable Instrument

Section 13 defines a Negotiable Instrument as follow: “A ‘negotiable instrument’ means a

promissory note, bill of exchange or cheque payable either to order or to bearer.” Any other instrument possessing features of a Negotiable Instrument shall also be considered as Negotiable.

Main features of a Negotiable Instrument

1. Free Transferability It’s transferable, by mere delivery

where payable to bearer; and by endorsement and delivery where payable to order.

An instrument marked non-transferable can never be a negotiable instrument, e.g. FDR.

2. Negotiability

i.e., title of the transferee who is a holder in due course shall be good even if the title of the transferor was defective.

Holder-in-due course means A holder Who has received the instrument in good

faith For consideration, and Before maturity.

3. Transferability Infinitum

A negotiable instrument can be transferred infinite number of times till its satisfaction.

4. Subject to certain Presumptions e.g.

Every negotiable instrument is deemed to have been made, drawn, accepted, endorsed, negotiated or transferred for consideration.

Every negotiable instrument bears the date on which it is made or drawn.

Post dated cheques. The holder of the negotiable instrument is a holder in due course.

Promissory Note (P/N) [Section 4]

A promissory note is an instrument in writing (not being a bank note or a currency note) containing an unconditional undertaking, signed by the maker to pay a certain sum of money to, or to the order of, certain person or to the bearer of the instrument (Section 4).

Characteristic features of Promissory Note

1. In writing

2. Contains promise to pay as against an order to pay. Mere acknowledgement is not a

promissory note, e.g. (IOUs) But acknowledgement followed by promise

to pay makes it a promissory note. However, it is not necessary that the word

‘Promise’ must have been used.

Characteristic features of (P/N) For example, “I acknowledge myself to be indebted

to ‘B’ in Rs.10,000/-, to be paid on demand, for value received.”

3. Unconditional: Promise to pay must not be subject to any conditions:

For example, “I promise to pay ‘B’ Rs.5 lakhs seven days after my marriage with C”.

However, the promise to pay may be subject to a condition which according to the ordinary experience of mankind is bound to happen, e.g., death. Thus, where ‘A’ promises to pay ‘B’ a sum of Rs.10,000/- on the death of ‘C’, the promise is a valid promise for it is certain that ‘C’ shall die.

Characteristic features of (P/N)

4. Signed by the maker Writing one’s name to be passed on as one’s

signatures amounts to signing.

5. Certain Parties i.e. parties should be identified with certainty,

say, A.N. Agarwal S/o _____ r/o _____.

6. Certain sum of money Expressions like ‘Market rate’ make the

amount uncertain. But, where interest is linked to bank rate, it is

certain.

Characteristic features of (P/N)

7. To pay money only.

8. May be payable in instalments

9. May be payable on demand or after a specified period.

10. Cannot be drawn payable to bearer (whether on demand or after a specified period of time) by any person other than RBI/Central Govt. or under authority from RBI/Central Govt. (Section 31 of RBI Act).

11. Must be duly stamped.

Bill of Exchange (Section 5)

Contains an unconditional order to pay instead of Promise or Request to pay.

Three parties, viz. Drawer, Drawee and Payee.

Cannot be drawn payable to Bearer on Demand

May be drawn payable on demand or payable to bearer after a certain period of time.

Cheque (Section 6)

Meaning of Cheques Section 6 of the Negotiable Instruments Act,

as amended by the Negotiable Instruments (Amendment) Act, 2002 defines a cheque as a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand. Further, the expression includes the electronic image of a truncated cheque and a cheque in the electronic form.

Cheque … contd.

A ‘cheque in the electronic form’ means a cheque which contains the exact mirror image of a paper cheque, and is generated, written and signed in a secure system ensuring the minimum safety standards with the use of digital signature (with or without biometrics signature) and asymmetric crypto system.

Cheque … contd.

A “truncated cheque” means a cheque which is truncated during the course of a clearing cycle, either by the clearing house or by the Bank whether paying or receiving payment, immediately on generation of an electronic image for transmission, substituting the further physical movement of the cheque in writing.

Crossing of Cheques

It’s a direction to the paying banker that payment should not be made across the counter.

It’s a coded expression represented by two transverse parallel lines simply or with certain words in between like ‘& Co.’, ‘Not-negotiable’, ‘Payee’s A/c only’ or any combination thereof across the face of the cheque. This is also called General Crossing.

In case of a cheque crossed generally, payment may be collected through any banker.

Special Crossing

Where a cheque bears across its face name of a particular bank either with or without two transverse parallel lines, it is said to be crossed specially. It may also be accompanied by words like ‘Not-negotiable’, ‘Payee’s A/c only’.

In case of special crossing, proceeds of the cheque can be collected only through the specified banker and no other. Thus, the payee must have an account with that bank to realize the proceeds of such a crossed cheque.

Not Negotiable Crossing Doesn’t render the cheque non-transferable. The only effect is that the title of the transferee

shall be subject to the title of the transferor, it cannot be superior.

A/c Payee only Crossing It has the effect of rendering a cheque non-

transferable. Thus, endorsement, if any, on such a cheque

shall be ignored.

Not Negotiable + A/c Payee only Crossing

Not only that the proceeds be credited to the account of payee only but also the payee is a bonafide rightful holder thereof.

Opening of Crossing Crossing may be opened by cancellation of

crossing by putting ‘X’ mark and writing the words ‘Pay cash’ under the full signatures of the Drawer.

Bouncing of Cheques – A Criminal Offence

(Sections 138 to 142) Section 138 provides punishment for

bouncing of cheques, i.e., dishonour for insufficiency of funds.

Punishment provided is imprisonment up to 2 years or fine up to double the amount of the cheque or both.

Bouncing of Cheques

Conditions to be satisfied:

1. Insufficiency of funds. The expression insufficiency of funds

includes: stop-payment closure of account directing the payee not to present

Bouncing of Cheques – Conditions to be satisfied:

2. Legally enforceable debt or liability. Thus, where a person proposes to make an FDR or invest in shares and later changes his mind and stop payment of the cheque, he will not be guilty of an offence under Section 138.

3. Presentment within 6 months from the date on which it is drawn or within the period of validity, whichever is earlier.

- Post-dated cheques?

Bouncing of Cheques – Conditions to be satisfied:

4. Payee/holder should have given notice demanding payment from the Drawer within 30 days of receipt of information of dishonour of cheque from bank.

5. The drawer must have failed to pay within 15 days of such period of notice.

6. Complaint before Metropolitan Magistrate/ First Class Judicial Magistrate should be made within one month of expiry of aforesaid period of 15 days.