LAW OF CONTRACT-II
UNIT-I
SPECIAL CONTRACT
1 2 3 4
Contract of contract of contract of contract of pledge
Indemnity guarantee bailment
CONTRACT OF INDEMNITY (Sec 124 of Indian Contract Act)- wherein a person promises to save another from loss caused to him.
1. by the act of promisor himself or
2. by act of other party.
Eg: ‘A’ contracts to indemnify ‘B’ against the consequences of any proceedings which ‘C’ may take against ‘B’ in respect of sum of Rs.200 advanced by ‘C’ to ‘B’. In consequence, when ‘B’ is called upon to pay the sum of money to ‘C’ fails to do so; ‘C’ would be able to recover the amount from ‘A’.
Essentials:
NOTE: Contracts of insurance are not indemnity contracts under Indian Law.
2 parties:
1. 2.
Indemnifier Indemnity-holder/indemnified
(who makes promise (whose loss is made good)
to make good the loss
caused to another party)
Rights of Indemnity- holder (Sec 125): the promisee acting within the scope of his authority is entitled to recover from the promisor-
(1) All damages- which he was compelled to pay in any suit in respect of matter to which promise of indemnity applies.
(2) All costs- if in bringing/defending such suit he did not contravene the orders of the promisor and he acted as it would have been prudent for him to act in absence of any indemnity.
(3) All sums- which he may have paid under the terms of any compromise of any such suit, if promisor authorised him to compromise the suit.
Case: Bihal Chandra v Chattur Sen AIR 1967 All 506: where seller promised to the purchaser to indemnify him against dues, if any, it was held that such indemnity clause would include only then existing dues and not those subsequently imposed though retrospectively.
Duties of Indemnity-holder = Rights of Indemnifier:
Case: Osman Jamal & Sons ltd v Gopal Purushottam 1928 ILR 56 Cal 262: held indemnity is not necessarily given by repayment after payment. Indemnity requires that the party to be indemnified shall never be called upon to pay.
CONTRACT OF GUARANTEE (Sec 126)
A contract to perform a promise or discharge the liability of third person in case third person makes a default.
Eg: ‘A’ says to ‘C’ “lend money at interest to B and if B fails to pay back, I shall”.
Here ‘A’ is guarantor/surety; ‘B’ is principal debtor; ‘C’ is creditor.
3 parties:
3 types of contract:
2 types of guarantee:
(a) Specific Guarantee: when surety is liable for a particular transaction only.
(b) Continuing Guarantee: when liability of surety extends to a series of transaction in future; Eg: promise of surety to produce the debtor in court from time to time as and when required.
Eg: ‘A’ becomes surety of ‘C’ for B’s conduct as manager in C’s bank and ‘B’ is appointed on faith of this guarantee. Now ‘A’ cannot revoke the continuing guarantee so long as ‘B’ is the manager since a continuing relationship has been established.
Liability of surety is co-extensive i.e. up to the same extent as that of principal debtor. (Sec 128).
Eg: ‘A’ guarantees to ‘B’ payment of a bill of exchange due from ‘B’ to ‘C’, the acceptor. The bill is dishonoured by ‘C’. ‘A’ is liable not only for amount of bill, but also for any interest and charges which may have become due on it.
# Who must creditor sue first?
Case: Bank of Bihar v Damodar Prasad AIR 1969 SC 297: wherein the defendant guaranteed a bank loan. On default, the defendant was sued. The trial court held that bank shall enforce the guarantee only after having exhausting its remedies against the principal debtor. Patna H.C. confirmed the decree. But SC held that it is on the discretion of creditor whether to first sue the principal debtor or the creditor first. The very object of guarantee is defeated if the creditor is asked to postpone his remedies against the surety.
Case: Union of India v Manku Narayan (1987)2 SCC 335: held that creditor must first proceed against the mortgaged property and then against the surety for the balance.
Discharge of surety’s liability:
Eg: ‘A’ stands as surety for the rent payable by ‘B’ to ‘C’ for C’s house. If ‘B’ and ‘C’ agree on a higher rent without the consent of ‘A’, then ‘A’ is discharged from his liability.
Eg: ‘A’ contracts with ‘B’ to build a house for him. ‘C’ stands as surety for ‘B’. If ‘A’ discharged ‘B’ from his obligation to build the house, ‘C’ will also stand discharged.
Rights of surety:
CONSIDERATION for past debt: The section says that “anything done...for the benefit of principal debtor” is good consideration. But will “anything done” include things done before the guarantee is given?
Case: Gulam Husain v Faiyaz Ali AIR 1940 Oudh 346: answered in affirmative. A lessee was to pay the sum due by certain instalments. After a few days a person become the surety of lessee. Court held that the bond was not without consideration.
CONTRACT OF BAILMENT (Sec 148)
Bailment: an act of delivering goods by one person to another for some purpose. Herein delivery of a thing is given but ownership is not transferred.
Eg: giving of cloth to tailor for stitching a shirt.
Bailor: the person delivering the goods.
Bailee: the person to whom they are delivered.
There is a contract between bailor and bailee wherein they agree that after the purpose if fulfilled, the goods will either be returned to the bailor or delivered to any other person as per orders of the bailor.
Case: Ultzen v Nicolls (1894)1 QB 92 wherein an old customer went into a restaurant, a waiter took his coat and hung it on a hook behind him. When the customer was about to leave, the coat went missing. Held that though what the waiter did might be no more than an act of voluntary courtesy towards the customer, yet the restaurant was held liable as bailee.
Case: Ram Gulam v Govt of UP AIR 1950 All 206: the plaintiff’s ornaments, having been stolen, were recovered by the police and while in police custody, were stolen again. The plaintiff’s action against the state for loss was dismissed. Held that the ornaments were not made over to govt under any contract therefore the govt never occupied the position of bailee and is not liable.
RIGHTS OF BAILOR
Eg: ‘A’ leaves a cow in the custody of ‘B’. The cow has a calf while in B’s custody. ‘B’ is bound to deliver the calf as well as cow to ‘A’.
DUTIES OF BAILOR
RIGHTS OF BAILEE
(A) To claim damages (Sec 150) – if bailee is injured or is put to loss because of the defect in the goods bailed.
(B) Right to get expenses (Sec 158) – which the bailee has to incur for the maintenance of the thing bailed.
(C) Right of lien (Sec 170) – right to keep the thing bailed with him until bailor makes the payment due to him.
DUTIES OF BAILEE
(a) Duty to take good care of the goods bailed (Sec 151, 152)- care as expected from an ordinary prudent man.
(b) Not to act in contravention of the terms of bailment (Sec 153)
(c) Not to make unauthorised use of goods (Sec 154)- if he does so and loss is caused to the thing bailed, then bailee is liable to bailor.
(d) Not to mix bailed goods with his own goods (Sec 155, 156, 157) without the consent of bailor.
(e) To return goods (Sec 160, 161, 163) after completion of the time or after completion of the object for which thing was bailed.
PLEDGE (Sec 172)
A pledge is a form of bailment, the only difference being that there is a delivery of goods as security for a debt or promise. Pledge is only of movables.
Essentials:
Delivery by attornment: When goods are in possession of third person and the pawnor directs the third person to hold them on pledgee’s (pawnee’s) behalf, that is enough delivery.
Case: Morvi Merchantile Bank v Union of India AIR 1965 SC 1954: certain goods were consigned with the railways to “self” from Bombay for transit to Okhla. The consigner endorses the railway receipts to the appellant bank against an advance of Rs.20,000. The goods having been lost in the transit, the bank as endorsee of the railway receipts and pawnee of goods sued the Railways for the loss. Held that delivery of railway receipts was the same thing as delivery of goods therefore it was valid pledge and pawnee was entitled to sue for the loss.
RIGHTS OF PAWNEE
PLEDGE BY PERSON OTHER THAN THE OWNER
General rule: a thing can be validly pledged only by the owner of the goods.
Exceptions: sometimes possessor of the goods can pledge them.
Case: Phillips v Brooks Ltd. (1919)2 KB 243: a fraudulent person induced the plaintiff to give him a valuable ring in return for his cheque which later proved worthless. Before the fraud was discovered, the ring was pledged with the defendant. Pledge was held valid because it was made by a person in possession under a voidable contract.
LAW OF CONTRACT-II
UNIT-III
SPECIFIC RELIEF ACT, 1963 = concerned with enforcing civil rights
Ubi jus ibi remedium = Where there is a right there is a remedy.
RECOVERY OF PROPERTY
Immovable property movable property
Recovery of possession of immovable property (Sec 5, 6)
(Sec 5) “A person entitled to possession of specific immovable property may recover it in the manner provided by Code of Civil Procedure, 1908”
Title: whoever proves a “better title” is entitled to possession.
Ownership possession
Eg: ‘A’ enters into peaceful possession of a land although he had no title to it, still he can sue another who has forcibly ousted him from possession and who has no better title to it, because ‘A’ has at least possessory title.
(Sec 6) Suit by person dispossessed of immovable property:
Essentials:
Possession = not necessarily actual possession, with or without a rightful origin.
Eg: if a trespasser continues to be in possession of a property and the owner does not object to it, the trespasser will gain possession.
Eg: possession of tenant after termination of tenancy = juridical possession.
Case: Anima Mallick v Ajoy Kumar Roy (2000)4 SCC 119: ‘A’ was in possession of garage owned by his sister ‘B’. ‘B’ dispossessed ‘A’. Held that possession of ‘A’ was purely gratuitous and even if without his knowledge, his sister disposed him, it was not a fit case for high court to interfere under Article 227 of the Constitution.
Recovery of possession of movable property (Sec 7, 8)
(Sec 7) Recovery of specific movable property
Essentials:
---special/temporary right:
(a) By act of owner of goods (bailment, pledge etc) wherein the bailee, pawnee has special right.
(b) Not by act of owner (finder of lost goods- has a special right to possession except against true owner)
---a trustee is entitled to immediate possession of trust property u/s 7.
Eg: ‘A; pledges certain jewels with ‘B’ to secure a loan. ‘B’ disposes the jewels to ‘C’ before he is entitled to do so. ‘A’ without having paid the amount of loan, sues ‘C’ for possession of jewels. ‘A’ is not entitled to immediate possession of jewels.
Eg: coins and grains = not specific movable property since they cannot be separated from other coins and grains.
---it must be capable of being seized and delivered.
(Sec 8) Liability of person in possession, not as owner, to deliver to person entitled to immediate possession:
Essesntials:
Case: Wood v Rowcliffe (1884)3 Hare 304: ‘A’ was going abroad, so he left his furniture under care of ‘B’ (friend). Held that ‘B’ = trustee of articles and is bound to return them when demanded.
Case: Falcke v Gray 113 RR 493: held that when articles of rare value (like original paintings of deceased partner) are in possession of another. Since they are of irreplaceable nature and their market value is unascertainable, the owner has a right to recover them specifically.
SPECIFIC PERFORMANCE OF CONTRACTS =- actual performance of the agreed act according to its terms and conditions.
Contracts which are specifically enforceable (Sec 10)
Rebuttable presumptions = which can be proved contrary by the party against whom
presumption is drawn:
---breach of a contract to transfer immovable property cannot be adequately compensated in money,
---breach of contract to transfer movable property can be compensated in money except—
---where property is of special value/interest; or is not easily obtainable in market
---where defendant holds property as agent/ trustee of the plaintiff
Case: M.S. Madhusoodhanan v Kerala Kaumudi (P)Ltd AIR 2004 SC 909 ‘A’ contracts to sing at B’s theatre for 1 year and not to sing elsewhere. To sing is a contract which depends upon personal qualifications of parties and hence cannot be specifically enforced. But negative part of the contract that ‘A’ will not sing anywhere else can be specifically enforced. Held ‘A’ can be compelled by injunction not to sing elsewhere.
Contracts- not specifically enforceable (Sec 14)
(a) Where compensation is adequate: where aggrieved party can be adequately compensated in terms of money.
Eg: a contract to lend or borrow money.
(b) Contracts involving personal skill: Which depends on personal qualification or volition of the parties.
Eg: contracts involving artistic skill like to paint, to sing.
(c) Contracts of determinable nature: Eg: ‘A’ and ‘B’ contract to become partners in a certain business. The contract did not specify the duration of the proposed partnership. The contract cannot be specifically enforced. Because if it was enforced, then either ‘A’ or ‘B’ might at once dissolve the partnership.
(d) Contract requiring constant supervision: Performance of which requires performance of a continuous duty which court cannot supervise.
Eg: a tenant’s undertaking to cultivate a farm in a particular manner—cannot be specifically enforced.
(e) Arbitration: a contract to refer a present or future dispute to arbitration should not be specifically enforced. An arbitration agreement operates as a bar to the filing of the suit.
Case: Jaina Beevi v Govindaswami AIR 1967 Mad 369 where a tenant vacated a site for purposes of reconstruction under an understanding that the portion of building would be reallocated to him, the court held that landlord was bound to provide the premises as promised.
Who can obtain specific performance? (Sec 15)
Case: T.M. Balakrishna Mudaliar v M. Satyanarayana Rao AIR 1993 SC 2449 held that the expression ‘representative-in-interest’ includes assignee of a right to purchase the property and therefore he would have title to claim specific performance.
Specific performance of a part of the contract / Part performance (Sec 12)
General rule: it is not granted
Exceptions: where unperformed part of the contract---
(a) if it can be compensated in terms of money, specific performance of the rest will be granted only when plaintiff has paid his consideration as reduced by the amount of compensation of the unperformed part.
(b) If it cannot be compensated, specific performance of the rest will be granted only when the plaintiff has paid his whole consideration.
INJUNCTIONS = a party is ordered to do or to refrain from doing a particular act or thing
= it can be issued against individual, public bodies or even State
= disobedience = punishable as contempt of court.
Kinds
Temporary perpetual mandatory
Temporary injunction: which is to continue till a specified time or till further order of court.
= can be granted at any stage of the suit.
= regulated by Civil Procedure Code, 1908.
= interim relief
=preventive relief
Granted in following cases:
When: --property is in danger of being wasted, damaged or alienated by any party to the suit, or wrongfully sold in execution of a decree; or
--defendant threatens or intends to remove or dispose of his property to defraud the creditors; or
--defendant threatens to dispossess the plaintiff or cause injury to the plaintiff in relation to property in dispute.
Court may grant temporary injunction to restrain such act, or make such order for preventing wastage, damage or alienation of the property.
Court may restrain a party from committing the breach of contract or its continuance.
Case: Ravi Singhal v Monali Singhal (2001)8 SCC 1, in an application for interim relief in respect of a settlement, held that it is at the discretion of the court to grant interim relief and exercise of discretion should not be irrational.
Conditions for granting temporary injunction:
PERPETUAL/ PERMANENT INJUNCTION = forbids the defendant from asserting a right or from committing an act which is contrary to the rights of the plaintiff.
= it can be granted only by a decree made upon hearing a suit on merits.
= it finally decides the rights of the parties.
Grant of perpetual injunction (Sec 38)
Sec 42: but where a contract comprises of a positive + negative agreement, and if one part is not specifically enforceable, the court can restrain another by injunction.
Eg: ‘A’ contracts to sing at B’s theatre for 1 year and not to sing elsewhere. To sing is a contract which depends upon personal qualifications of parties and hence cannot be specifically enforced. But negative part of the contract that ‘A’ will not sing anywhere else can be specifically enforced. So ‘A’ can be compelled by injunction not to sing elsewhere.
Case: S. Ganapathi v Kunjammal AIR 2004 Mad 436 ‘A’ is an advocate. In the course of his employment, certain papers belonging to his client (B) came into his possession. ‘A’ threatens to make these papers public. ‘B’ may sue ‘A’ to restrain him from doing so. Held that a legal practitioner is under an obligation in the nature of trust not to disclose secrets of his clients.
Case: Municipal Board v Abdul Hammeed 1981 All LJ 376 where plaintiff fails to establish his legal right to the property or his legal right to continue in possession, held that he could not be granted perpetual injunction against the owner or the manager of the property.
Injunction when not granted (Sec 41)
a) To restrain a person from prosecuting a judicial proceeding pending at institution of suit in which injunction is sought, unless it is necessary to prevent multiplicity of proceedings;
b) To restrain a person from instituting any proceeding in court superior to that in which injunction is sought;
c) To restrain a person from applying to any legislative body;
d) To restrain a person form instituting any proceeding in a criminal matter;
e) To prevent breach of contract which cannot be specifically enforced;
f) To prevent an act on the ground of nuisance, which is not reasonably clear to be a nuisance;
g) To prevent continuing breach in which plaintiff has acquiescence;
h) When an actually effective remedy can be sought for by any other mode
i) When conduct of plaintiff or his agent has disentitled him to the assistance of the court;
j) When plaintiff has no personal interest in the matter.
MANDATORY INJUNCTION (Sec 39) = an instruction which commands the defendant to do something.
Eg: destruction of copies produced by piracy of copyright and of trademarks improperly used by defendant.
Mandatory injunction when not granted
Case: Dhaniya Bhai v Jiwan AIR 2003 MP 71 Sister constructed a house adjacent to her brother’s house and brother actively participated in construction activity and allowed her to take support of his wall. 2 years later, brother claimed demolition of the construction. Held demolition cannot be granted.
LAW OF CONTRACT-II
UNIT-II
AGENCY
Agent (Sec 182): a person employed to do any act for another; or to represent another in dealings with third person.
Agent has power to represent his principal in dealings with third persons.
The essential point: agent makes his principal answerable to third persons for his acts because whatever he does in that capacity he does for and on behalf of the principal and not his own behalf.
Note: Representative character and derivative authority -------distinguishing feature of an agent.
Principal: the person for whom such act is done; or who is so represented.
Contract of agency: the relationship that exists between agent and principal.
Eg: ‘A’ authorizes ‘B’ to collect rent of the properties belonging to ‘A’ and to look after his properties. Here, ‘A’ = principal; ‘B’ = agent; the relationship between ‘A’ and ‘B’ is agency.
Case: Krishna v Ganapathi AIR 1955 Mad 648: held that every person who acts for another is not his agent…it is only when he acts as a representative of the other in business negotiations, between that other and third person, that he is an agent. Representative character and derivative authority are the distinguishing features of an agent.
ESSENTIAL FEATURES of contract of agency:
Principal should be capacity to consideration liability of
competent to contract become agent not necessary principal
Case: Unit Trust of India v Ravinder Kumar Shukla AIR 2005 SC 3528, a cheque was sent by UTI by registered post, but it was not received by the payee. There was no understanding with or request by the payee that it should be sent by post. Held- that the post office acted as the agent of UTI. Liability for non-delivery was that of the UTI and not the post office.
Creation of agency (modes)
By agreement by ratification by estoppel by necessity by law
(i) By agreement: an agent can be appointed expressly or impliedly; it can be by words spoken or written.
Eg: ‘A’ owns a shop and ‘B’ manages the shop. Though ‘A’ being the owner orders purchases for the shop, ‘B’ by virtue of his position can also purchase as an agent.
Case: Delhi Electric Supply Undertaking v Basanti Devi (1999) 8 SCC 229: under Salary Saving Scheme adopted by LIC of India, the employer (DESU) was authorized by LIC to collect premium amount from the salary of an employee and forward it to LIC. Thus DESU became an agent of LIC for that purpose. Thus, on failure of DESU to collect premium whereby the policy was about to lapse on the death of the employee, LIC was held liable to make payment under the policy.
(ii) By ratification: It is necessary when the agent acts without the knowledge or approval of the principal; the principal can later ratify/approve the act of the agent and thus become bound by the acts of the agent. If he does not ratify the act, the agent is answerable to the third party for his acts.
Rules of ratification:
a) Ratification can be done only by a person, for whom the act was done, professing him to be a principal.
b) Ratification dates back to the date of the act.
c) It can be express or implied by the acts of the principal.
d) Ratification must be of whole act and cannot be of a part of it.
e) Ratification cannot be done to cause injustice to the third party.
f) Ratification cannot be done if the principal ratifying is in knowledge of facts which are materially defective.
g) Illegal and void acts cannot be ratified.
(iii) By estoppel: when principal by his own acts places an agent in such a situation that an ordinary prudent person is justified in presuming that such agent has authority to perform a particular act; the principal is estopped from denying the agent’s acts against the third person.
Eg: In presence of ‘B’, ‘A’ tells ‘C’ that he is an agent of ‘B’ and ‘B’ remains silent on it. ‘C’, believing ‘A’ to be agent of ‘B’, gives a loan of Rs.1000 to ‘A’. Here ‘B’ cannot escape his liability as principal and is liable to pay Rs.1000 to ‘C’.
(iv) By necessity: When a person is not appointed as an agent but under certain circumstances one has to do some act for another which are necessary.
Conditions which enable a person to act as agent of necessity:
Eg: An occasion for a person to act as agent of necessity arises when an injured person is in urgent need of medical attendance. Any person acting on his behalf may call the services of a doctor. The injured person is bound to pay charges of the services.
(v) By law: employment of any agent by any authority authorized by law to make the employment (not necessarily by principal only).
Duties of agent:
To execute reasonable care not to make not to delegate
mandate and skill secret profit
follow instructions avoid conflict maintain account
of interest
Effect of failure: he will be absolutely liable to principal for any loss.
Eg: an estate agent cannot make binding contract on behalf of his principal with third party.
Effect of failure: agent must make good any loss suffered by principal and if any profit accrues to agent, he must account for it.
Case: Bank of Bihar v Tata Scob Dealers AIR 1960 Cal 475: a bank was instructed to collect a certain amount on principal’s behalf and remit it to him. There was no specific instruction as to the manner of remittance. The bank sent the amount by draft placed in a letter sent by ordinary post. Bank was held negligent in sending the amount like that.
Effect of failure: if principal suffers any loss, agent has to compensate him, but not in respect of any loss which is caused indirectly by such neglect, want of skill or misconduct.
----such dealing caused disadvantage to him.
Eg: ‘A’ discovers a mine on principal’s estate and without disclosing this fact buys estate for himself. Principal may repudiate the transaction.
Secret profit = any advantage obtained by agent over and above his agreed remuneration and which he would not have been able to make but for his position as an agent.
DELEGATUS NON POTEST DELEGARE (Sec 190)
= a delegated authority cannot further delegate.
=when principal appoints an agent for some purpose, such agent cannot for that purpose appoint a sub-agent.
=confidence in a particular person employed is at the core of the contract.
=Sub-agent: a person appointed by an agent and to whom principal’s work is delegated.
Eg: ‘A’ appoints ‘B’ for looking after his business believing in the efficiency of ‘B’ but ‘B’ appoints ‘C’ for executing that work. ‘A’ is not liable for the cats of ‘C’ (sub-agent).
Exceptions:
Eg: an agent authorized to file a suit may engage a lawyer.
Eg: architects generally appoint surveyors.
Eg: authority to sign.
RIGHTS OF AGENT
To claim remuneration right to lien right to recover loss
a) Right to claim remuneration (Sec 219-220): agent is entitled to remuneration for performance of his act. If principal declines—agent is entitled to damages which will be equal to remuneration which he would have earned if transaction had been duly completed.
b) Right to lien (Sec 221): till the amount due to himself for commission and services has been paid to him, the agent can retain goods, property of the principal received by him, in absence of contract to the contrary.
c) Right to recover loss (Sec 225): loss caused to agent due to negligence or lack of skill on the part of principal.
Eg: ‘A’ employs ‘B’ as bricklayer in building a house and puts up scaffolding himself. The scaffolding is put up unskillfully and ‘B’ is hurt. ‘A’ must make compensation to ‘B’.
Relation between agent and sub-agent
Effect: ---principal is not bound by the acts of the sub-agent.
---sub-agent is not responsible to the principal.
---here agent stands in the position of the principal towards that sub-agent.
---agent is responsible for his acts towards third party.
Effect: ---principal is bound by the acts of sub-agent.
---there is no privity of contract between principal and sub-agent.
---agent is responsible to principal for acts of sub-agent.
---sub-agent is responsible to the agent for his acts.
---in case of fraud/willful wrong only, sub-agent is responsible to principal.
Note: sub-agent is bound by all the duties of an ordinary agent. His rights cannot go beyond those of an agent.
Substituted agent = a person appointed by the agent with express/implied authority of the principal.
= he is another agent of the principal (whereas sub-agent is agent of the agent)
Eg: ‘A’ directs ‘B’ (solicitor) to sell his estate by auction and to employ an auctioneer for the purpose. ‘B’ names ‘C’, an auctioneer, to conduct the sale.
Here ‘A’=principal; ‘B’=agent, ‘C’=substituted agent
Relation between substituted agent and principal:
---substituted agent is also an agent of principal
---he is responsible to principal and not to the agent
---agent is not responsible to principal for the cats of substituted agent.
TERMINATION OF AGENCY
Revocation renunciation death/insanity insolvency
by principal by agent of principal
Completion expiry of time
of business
1) Revocation of authority of agent: (Sec 207)---express/implied conduct of principal.
Eg: ‘A’ empowers ‘B’ to let A’s house. Afterwards ‘A’ himself lets it. This is an implied revocation.
---Principal cannot revoke after authority has been partly exercised. (Sec 204)
---reasonable notice must be given of such revocation to the agent, otherwise any damage caused to the agent must be made good by the principal.
2) Renunciation by agent: (Sec 206) agent may himself renounce the business of agency.
---if agency is for a fixed period—agent will have to compensate principal for any premature renunciation without sufficient cause.
---a reasonable notice of renunciation is necessary, otherwise agent will have to make good any loss suffered by the principal.
3) Completion of business: (Sec 201) when the business is completed, agency automatically and by operation of law is terminated.
Eg: authority of agent appointed to sell goods terminates when sale is completed.
4) Expiry of time: (Sec 201) agency automatically ends on expiry of its term.
Eg: where agency was to run a petrol pump for a specified period, it was held that agent was bound to vacate the premises on expiry of that period.
Case: Turner v Goldsmith (1891)1 QB 544: an agent was appointed by a shirt manufacturer as a canvasser and traveller for 5 years. The principal’s factory was burned down by a chance fire while there were still 3 years for the agency to terminate. The principal never resumed business and ended the agency. Principal was held liable in damages as the agency was created for a definite term.
5) Death/insanity of principal or agent: (Sec 201) agency automatically terminates on death of principal or agent. But acts done by agent before death will remain binding.
6) Insolvency of principal: (Sec 201) agency ends on the principal being adjudicated insolvent.
Effects of termination (Sec 208)
Termination of agency:
Between principal and agent----the authority of agent ends when he comes to know of the termination.
Eg: where authority of agent to sell goods is revoked, but he sells the goods before receiving letter of revocation, the sale is valid.
As regards third person---- agency does not terminate until they come to know of the fact of termination.
Termination of sub-agency (Sec 210):
Once authority of an agent terminates---authority of sub-agent appointed by him also terminates.
Agent’s duty on termination (Sec 209):
= to protect principal’s interest where principal has died or has become a person of unsound mind.
LAW OF CONTRACT-II
UNIT-IV
THE INDIAN PARTNERSHIP ACT, 1932
THE NATURE OF PARTNERSHIP
Part = to share the profits
Partnership = relation between persons- to share the profits of a business carried by all or any of them.
Essentials: (Sec 4)
(i) Agreement
(ii) Share profits
(iii) Business
Partnership arises from a contract.
Thus, partnership---different from---Hindu Undivided Family carrying on a family business.
Nature of partnership = voluntary and contractual.
Agreement 1. express
2. implied
There must be:
Eg: co-owners of a land who share profits from the rent arising out of it are not partners, because there is no business.
Eg: ‘X’ and ‘Y’ buy certain bales of cotton and agree to sell on their joint account and to share profits equally. X and Y are partners.
Each partner carrying on the business is principal and agent for all other partners. Act of one partner on behalf of firm will bind all the partners.
Case: Cox v Hickman: wherein a firm which took debt from Cox transferred their partnership business for some time to Cox so that Cox could take the profits so as to satisfy the debt. Later, Cox contracted with Hickman. There was a breach of contract and Hickman sued Cox as being partner of the firm. Cox contended that firm should be sued and not Cox. Held that sharing of profits is not the only test of partnership, regard must be had to the relation between the parties. Thus firm is liable.
DOCTRINE OF HOLDING OUT (Sec 28) = partnership of estoppel
When a person-
a) Represents himself as partner of a firm, or
b) knowingly allows himself to be represented as the partner,
c) And creditor acts on such representation
d) Then he is liable as a partner
Eg: ‘X’ and ‘Y’ are partners in a firm. ‘X’ introduces ‘A’ as his partner to ‘Z’. Z(trader) believes ‘A’ to be partner and supplied 100 T.V. sets to the firm on credit. Z filed a suit against ‘X’ and ‘A’ for recovery of price. Here ‘A’ is also liable.
RELATION OF PARTNERS to one another and to outsiders
MUTUAL RIGHTS AND DUTIES OF PARTNERS (Sec 13)
These are governed by the contract agreed by them. Subject to such contract, mutual rights and duties are:
RIGHTS:
Partners = share profits equally
= and also contribute equally to the losses.
Exception: if there is an express agreement allowing interest on the capital subscribed by the partner; or if there is trade/custom to that effect; or a statutory provision to that effect; then interest is to be given only from the profits.
DUTIES:
1. 2. 3. 4.
Absolute render true a/c to be diligent not to earn personal
good faith profits
5. 6. 7.
carry business to to indemnify properly use
greatest common for fraud firm’s property
advantage
a) Duty of absolute good faith: Basis of partnership = mutual confidence
= trust in one another
Therefore business goes on.
b) Duty to carry on business to greatest common advantage: a partner should not earn private advantage at the expense of the firm. All endeavours should be made to secure maximum profit to the firm.
c) Duty to render true account and full information of all things affecting firm: --Every partner is bound to keep and render true account of all partnership money.
--Partnership funds must be spent properly for the purpose of firm’s business.
--He should not mix his money with that of the firm.
--Concealment of facts will make him liable to other partners.
d) Duty to indemnify for fraud: a partner’s conduct should be fair and honest towards other partners and towards third party else he is liable for any loss.
e) Duty to be diligent: means working with careful effort.
--he is liable for consequences of his negligence.
f) Duty to properly use firm’s property: he should properly use firm’s property exclusively for firm’s business. If he derives any profit from using firm’s property, he is accountable for the same.
g) Duty not to earn personal profits or not to compete: whatever advantage accrues—it is to be shared by all and not merely to the one who brought that advantage.
--a partner has a fiduciary character since he is agent, thus nay profit made out of the business must be disclosed.
--he should not carry competing business of same nature; else he is accountable and has to pay all the profits accrued due to such competing business.
Case: M. Govinda & Co. V Commissioner of Income Tax, A.P. AIR 1975 SC 2284: held that where partners have agreed to share the profits in certain proportions, the presumption is that the losses are to be shared in like proportions.
Partnership Property (Sec 14) = property of the firm
= all property, rights and interests to which the firm (all partners) are entitled.
(1) All property, rights and interests which partners have brought into common stock as their contribution to the common business;
(2) All property, rights and interests acquires or purchased by/for the firm in the course of its business;
(3) Goodwill of the business.
Whether Goodwill of a business is property of firm? --- always subject to contract between the parties.
Goodwill = value of reputation of a business house in respect of profits expected in future over and above the normal level of profits earned by undertaking belonging to same class of business.
When goodwill is part of the property of the firm—it can be sold separately or along with other properties of the firm.
Case: Arm Group enterprises Ltd. v Waldrof Restaurant, 2003(1)RCR(Rent)594(SC): held that property which exclusively belongs to a person does not become partnership property merely because it is used for partnership business. It can so become only if there is an agreement.
RELATION OF PARTNERS TO THIRD PARTIES (Sec 18-30)
Implied authority of a partner
Every partner = agent of all other partners.
His act binds all others only if act is done in the firm name, or
expressing or implying an intention to bind the firm
A partner has implied authority to bind the firm by all acts done by him in matters connected with partnership business (and not beyond the scope of business).
Eg: he may pledge partnership property; he may buy goods on account of partnership;
He may sign, transfer, and endorse negotiable instruments, in the name and on account of partnership.
Acts beyond implied authority (Sec 19)
Submit a dispute relating to business to arbitration;
Open a bank account on behalf of firm;
Compromise or relinquish any claim by firm against third party;
Withdraw a suit/proceedings filed on behalf of firm;
Admit any liability in suit/proceedings against the firm;
Acquire immovable property on behalf of firm;
Transfer immovable property of firm;
Enter into partnership on firm’s behalf.
Unless there is custom/usage in that behalf.
Sec 20: implied authority of partners can be extended or restricted by a contract.
Case: Dalichand v Mathuradas AIR 1928 Cal 57: held that a payment made to a partner falls within his implied authority, but it is not within the implied authority of a partner to set off his own separate debt against the debt due to his firm.
Liability to third party: (Sec 25-27)
(i) Contractual liability: Partners are jointly and severally liable for the acts done on behalf of the firm.
Eg: where infringement of a trade mark by the firm took place, held that all partners were liable for damages arising out of said infringement, it being immaterial that damages arose after dissolution of the firm.
(ii) Liability for tort: if any loss/ injury is caused to third party, the firm and the partners have liability to the same extent, if the acts are done---in ordinary course of business of the firm and with the authority of the partners.
(iii) Liability for misappropriation by a partner: where a firm/partner receives money/property from a third person and misapplies it, he is liable for the loss.
MINOR’S POSITION AS PARTNER
A minor cannot be bound by a contract (since minor’s contract is void).
Thus, minor cannot become a partner.
But he can share the benefits of partnership, with the consent of all partners, u/s 30 of Partnership Act.
Case: I.T. Commissioner, Bombay v Dwarkadas Khetan & Co. AIR 1961 SC 680: held that where a minor is made a full partner, the whole deed is invalid vis-a-vis all the partners and not only the minor.
Rights:
(i) Minor partner has right to his share of profits as agreed,
(ii) He can have access to the accounts of the firm,
(iii) He can sue the partners for payment of his share only after severing his connection with the firm,
(iv) On attaining majority, within 6 months he can elect to be or not to be the partner.
Liabilities:
(i) His shares are liable for acts of the firm but he is personally not liable.
(ii) Within 6 months of attaining majority, he has to give public notice that he elects not to be a partner; else he will be deemed to be a partner.
INCOMING AND OUTGOING PARTNERS
Introduction of new partner (Sec 31): --- with the consent of all existing partners (subject to contract between partners).
Liability of new partner
Case: Commissioner of I.T v Seth Govindram Sugar Mills AIR 1966 SC 24: held that this section does not apply to a partnership of 2 partners which is automatically dissolved by death of one of them. Here there is no partnership at all for any new partner to be introduced into it without the consent of others.
Retirement of a partner (Sec 32):
(i) With consent of all partners,
(ii) By express agreement between the partners, or
(iii) By giving notice to all partners (if partnership by will).
Case: Jain Nautamal V. Wadhwan v Shri Vivekanada Cooperative Housing Society AIR 1986 Guj 162: held that a partner who is retired is not liable if the creditors were informed individually though no public notice of his retirement was given.
Rights of outgoing partners:
a) Competing business: He may carry a competing business subject to contract: but cannot use the name of the firm, cannot solicit customers of the firm he has left,
b) Right to receive share: On retirement, he has right to receive his share of the property of the firm,
c) Right to claim interest: He can claim interest @6% p.a. on the amount of his share in firm’s property.
Liabilities of outgoing partner:
-----for acts done after retirement: he will be liable if no public notice is given. But he will be not liable if third party deals with the firm without knowing him to be the partner.
-----for acts done before retirement: he is liable, unless contract to the contrary.
DISSOLUTION
Dissolution of firm = discontinuation of jural relation between all the partners.
It can be done: (Sec 39-44)
a) By agreement: dissolution may take place as a result of agreement between all the partners.
b) Compulsory dissolution: when all partners become insolvent; or all partners except one becomes insolvent.
c) Contingent dissolution: dissolution on happening of certain contingency like-
---expiry of stipulated time;
---completion of object for which business was commenced;
---death of a partner (and partnership consists of more than 2 partners);
---insolvency of a partner
d) By notice: in case of partnership at will, when a partner gives notice of his intention to dissolve the firm, then the firm gets dissolved form the date given in the notice, or from the date of communication of notice(if no date mentioned in notice).
Case: P.Venkateswarlu v Lakshmi Narasimha Rao AIR 2002 AP 62: held that in case of dissolution of partnership, a firm may be dissolved by any partner giving notice in writing to all other partners of his intention to dissolve.
e) By court: dissolution by court when-
---partner becomes of unsound mind;
---partner becomes permanently incapable to perform his duties;
---misconduct of a partner;
---persistent breach of agreement b partner;
---transfer/sale of whole interest of a partner;
---if business cannot be carried on except on loss;
---if court is satisfied that firm should be dissolved.
Case: Suraj Bahadur v Mahadeo AIR 1963 Raj 241: held that court has discretion in a case of a partner’s claim to a decree of dissolution to invoke court’s protection on equitable grounds in spite of the terms in which the rights and obligations of the partners might have been defined by the partnership contract. But discretion cannot be fettered by rigid rules.
CONSEQUENCES OF DISSOLUTION (Sec 45-52)
(A) Continuing liability until public notice: Until public notice of dissolution is given, partners remain liable for any act done by them, which would be act of firm if done before dissolution.
Eg: partners X and Y executed a deed on 1 December for dissolution of firm from the said date. On 20 December, X borrowed sum money in firm’s name from R who did not know about its dissolution. Here, Y would also be liable for the amount.
(B) Rights to enforce winding up: upon dissolution, every partner/ his representatives have right ----to apply the property of the firm for payment of debts of the firm
----to distribute the surplus amongst them according to their respective rights.
(C) Settlement of partnership accounts:
Payment of losses:
firstly, out of profits;
secondly, out of capital;
lastly, out of profit shares of the partners in proportion.
Assets of the firm to be applied in following order:
In paying debts of third parties;
In paying to each partner sum due to him from the firm for advances;
In paying each partner sum due to him on account of capital;
In distributing the residue, partners are to get their share profits in proportion.
(D) Personal profits earned after dissolution: in case of dissolution by death, any personal profits earned before the firm is fully wound up is accountable to other partners.
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