Contract of Indemnity
In a contract of indemnity, when does the liability commence?
The commencement of liability in indemnity agreements is an important feature that determines when the indemnifier becomes obligated to pay and when the indemnity-holder is entitled to recover indemnity.
It is true that under the English Common Law, no action could be maintained until actual loss had been incurred. It was very soon realized that an indemnity might be worth very little indeed, if the indemnified could not enforce his indemnity until he had actually paid the loss. If a suit was filed against him, he had actually to wait until a judgment was pronounced, and it was only after he had satisfied the judgment that he could sue on his indemnity. It is clear that this might, under certain circumstances, throw an intolerable burden upon the indemnity-holder. He might not be in a position to satisfy the judgment and yet he could not avail himself of his indemnity until he had done so. Therefore, the Court of Equity stepped in and mitigated the rigour of the common law. The Court of Equity held that, if his liability had become absolute then he was entitled, either to get the indemnifier to pay off the claim or to pay into court sufficient money, which would constitute a fund for paying off the claim whenever it was made
Sections 124 and 125 of the Indian Contract Act are not exhaustive of the law of indemnity. The courts would apply the same equitable principles that the courts in England do. Therefore, if the indemnified has incurred a liability and that liability is absolute, he is entitled to call upon the indemnifier to save him from that liability and to pay it off. [Gajanan Moreshwar Parelkar vs Moreshwar Madan Mantri, (1942) 44 Bom LR 703; AIR 1942 Bom 302]
Write short note on Indemnity Insurance.
Indemnity Insurance—Indemnity insurance is a way for a company (or individual) to obtain protection from indemnity claims. This insurance protects the holder from having to pay the full sum of an indemnity, even if the holder is responsible for the cause of the indemnity.
With indemnity insurance, one party commits to compensate another for prospective loss or damage. In insurance policies, in exchange for premiums paid by the insured to the insurer, the insurer offers to compensate the insured for any potential damage or losses.
Many companies make indemnity insurance a requirement, as lawsuits are common. Everyday examples include malpractice insurance, which is common coverage for those in the medical field, and errors and omissions insurance (E&O), which protects companies and their employees against claims made by clients and applies to any given industry. Some companies also invest in deferred compensation indemnity insurance, which protects the money that companies expect to receive in the future.
What is the letter of indemnity?
Letter of indemnity—A letter of indemnity (LOI) is a document that guarantees certain provisions will be met between two parties to a contract or compensation will be provided. These letters promise to make one or more parties to a contract whole again, if a contractual obligation is not fulfilled. For instance, in finance, LOIs can be used to protect against losses from lapses in security, documentation, or procedure. Banks or insurance companies issue LOIs to cover parties against financial losses from a breach of contract. These offer contracting parties some protection and greater ease when entering a transaction, knowing they will be covered should there be any losses from another party’s failure to fulfill the contract.
CONTRACT OF GUARANTEE
What is demand guarantee?
Demand guarantee—The liability under a contract of indemnity is wholly independent of the liability, if any, that arises between the parties to the underlying contract. A demand guarantee is a good example of a contract of indemnity. It is a type of payment bond; similar, in some sense, to a letter of credit.
A demand guarantee is a type of protection that one party (the beneficiary) in a transaction can impose on another party (the principal). In the event that the principal/second party does not perform as promised to pre-defined contract specifications, the beneficiary/first party will receive a specific amount of compensation. A guarantor—usually a bank—will pay the required compensation to the beneficiary and the principal will be responsible to repay the guarantor.
A demand guarantee is usually issued in lieu of a cash deposit—This may be done to preserve the liquidity of the companies involved, particularly if there is not enough free cash on hand. While this situation can be seen as a solvency issue leading to counterparty risk, the demand guarantee can help a company with limited cash reserves continue to operate without tying up more capital while also reducing the risk for the party receiving the guarantee.
A demand guarantee might also be called a bank guarantee, a performance bond, or an on-demand bond depending on the usage—For example, a performance bond can be issued by an insurer or a bank to guarantee that a party fulfils its obligations in a contract. How a demand guarantee is implemented and enforced can vary by legal jurisdiction. In some countries, a demand guarantee is separate and independent from the underlying contract between the parties in question.
What is Bank Guarantee? Briefly discuss the kinds of Bank Guarantee.
Bank Guarantee—A bank guarantee is a promise from a bank that the liabilities of a debtor will be met in the event that the debtor fails to fulfil the contractual obligations. It is a promise from a bank or other lending institution that if a particular borrower defaults on a loan, the bank will cover the loss.
A bank guarantee is a kind of guarantee from a lending institution. The bank guarantee means a lending institution ensures that the liabilities of a debtor will be met. In other words, if the debtor fails to settle a debt, the bank will cover it. A bank guarantee enables the customer, or debtor, to acquire goods, buy equipment or draw down a loan.
Bank Guarantees are classified in three types—
(1) Financial Guarantee—Financial Guarantees are issued by bank on behalf of customer’s requirement to deposit a cash security or earnest money. Most of the government departments before contract is awarded to contractor, insist on an Earnest Money Deposit.
(2) Performance Guarantee—Performance Guarantees are issued by the bank on behalf of its customer whereby the bank assures a third party, which the customer will perform the contract as per condition stipulated in the contract. These are issued on behalf of customer, who enters into contracts to do certain things on or before a given date. It involves a contractual obligation.
(3) Deferred Payment Guarantee—It is issued in favour of suppliers to guarantee payment of instalments for capital goods purchased on deferred payment basis. Under this type of guarantee, the banker guarantees payment of instalment spread over a period. It is required when goods or machinery are purchased on long term credit and payment is made through cheques or bills of different dates.
SURETY
Explain the surety’s right of set-off.
Right of set off—Set-off is a common law right allowing parties (each of which being both a creditor and a debtor) that have debts owing to each other to set them off. Where the right of set-off is applicable, the parties can meet their payment obligations, and, as a result, will be liable to pay the remaining balance only.
The result is either that the debt is completely discharged, or a sum remains which represents the balance of the debt owed by one of the parties to the other. Although sometimes invoked as a self-help remedy, it is usually applied as a countervailing claim in answer to a plaintiff’s claim in proceedings before a court. It is important to note that, for the right of set-off to arise, the debts to be set-off must be monetary and must be mutual (in other words, a debtor is not entitled to use another person’s debt to satisfy its own liability).
Surety is entitled to the right to set-off—In a situation where the creditor sues the surety for the given guarantee, the surety can claim for set-off against any due by the creditor against the principal debtor. It means that the surety has a right to deduction in the amount of his guarantee to the extent of any dues of the creditor towards the principal debtor in any different contract or agreement.
For example, A is the surety, B is the principal debtor, and C the Creditor. So, if C owes A something, or if C has in his possession something belonging to B, for which C could have counter-claimed, the surety can also put up for his claim on that thing. Other than that, the surety can also claim a right against the third parties who have derived the principal debtor’s title from the creditor.
Set-off clause—A set-off clause is a legal clause that gives a lender the authority to seize a debtor’s deposits when they default on a loan. A set-off clause can also refer to a settlement of mutual debt between a creditor and a debtor through off-setting transaction claims. This allows creditors to collect a greater amount than they usually could under bankruptcy proceedings.
Set-off clauses are most commonly used in loan agreements between lenders, such as banks, and their borrowers. They may also be used in other kinds of transactions where one party faces a risk of payment default, such as a contract between a manufacturer and a buyer of its goods.
Lender’s the right of set-off—Set-off clauses give the lender the right of set-off, i.e., the legal right to seize funds from the debtor or a guarantor of the debt. They are part of many lending agreements, and can be structured in various ways. Lenders may elect to include a set-off clause in the agreement to ensure that, in the event of default, they will receive a greater percentage of the amount that is owed them than they might otherwise. If a debtor is unable to meet an obligation to the bank, the bank can seize the assets detailed in the clause.
Equitable set-off—Another means of circumventing the restrictions associated with legal set-off is equitable set-off. Equitable set-off is a self-help remedy which becomes relevant where a contract does not contain any express set-off provisions either allowing or prohibiting the same.
Pledge, Pawnor, Pawnee
Write short note on pledge by mercantile agent.
Pledge by a mercantile agent–According to section 178 of the Indian Contract Act—Where a mercantile agent is, with the consent of the owner, in possession of goods or the documents of title to goods, any pledge made by him, when acting in the ordinary course of business of mercantile agent, shall be as valid as if were expressly authorised by the owner of the goods to make the same; provided that the pawnee acts in good faith and has not at the time of the pledge notice that the pawnor has no authority to pledge.
Section 178 emphasizes that a mercantile agent shall be in possession of documents of title with the consent of the true owner thereof. If he is in such possession and pledges the goods by transferring the documents of title to the said goods, by fiction he is deemed to have expressly been authorized by the owner of the goods to make the same. The condition of consent and the fiction of authorization indicate that he is doing what the owner could have done. [Morvi Mercantile Bank Ltd. vs Union of India, AIR 1965 SC 1954]
Essential conditions—All the following conditions must be fulfilled before a pledge made by mercantile agent can be binding on the true owner of the goods pledged—
(1) The pledge must be made by a mercantile agent—A pledge by a mere servant or wife is not valid, even though in possession of goods with the consent of the owner. The general rule is expressed by the maxim nemo dat quod non habet, that is, no one can convey a better title than what he has. To this maxim, to facilitate mercantile transactions, the Indian Law has grafted some exceptions in favour of bonafide pledge by transfer of documents of the title from persons, whether owners of goods or their mercantile agents who do not possess the full bundle of rights of ownership at the time the pledges are made.
(2) Possession of mercantile agent—The mercantile agent must be in possession of the goods or documents of title to goods with the consent of the true owner. Thus, the goods obtained by theft cannot be the subject of a valid pledge.
(3) Pledge by the mercantile agent—The pledge must be made by the mercantile agent while acting in the ordinary course of business of a mercantile agent.
(4) Acting in good faith—The pawnee must act in good faith and without notice that the pawnor has no authority to pledge.
The words “in good faith” imply that a pledge is not valid if the pawnee is aware that mercantile agent making the pledge has no authority to make the same or was acting mala fide against the owner.
It has been held in Moody vs Pallmally, (1917) 33 Times LR 306, that a pledge by a mercantile agent, made after the revocation of his authority, is valid, provided the pledgee has not, at the time of the pledge, notice of such revocation. So, the principal can avoid the pledge, if he establishes that the pledge had notice of the revocation of authority of the agent at the time of the pledge.
Agency
Write an exhaustive note on the agency coupled with interest.
Agency coupled with interest—Agency coupled with an interest means an agency in which the agent has a legal interest in the subject matter. Such an agency is not terminated automatically, as are other agencies, by the death of the principal but continue in effect until the agent can realize upon its legal interest.
Section 202 of the Indian Contract Act provides that where the agent has himself an interest in the property which forms the subject-matter of the agency, the agency cannot, in the absence of an express contract, be terminated to the prejudice of such interest. [Section 202]
Illustrations
(a) A gives authority to B to sell A’s land, and to pay himself, out of the proceeds, the debts due to him from A. A cannot revoke this authority nor can it be terminated by his insanity or death.
(b) A consigns 1,000 bales of cotton to B who has made advances to him on such cotton, and desires B to sell the cotton, and to repay himself, out of the price, the amount of his own advances. A cannot revoke this authority, nor is it terminated by his insanity or death.
Thus, as per section 202 of the Contract Act, agency coupled with interest cannot be terminated to the breach of such interest and the agency must have an interest in the property which forms the subject matter of the agency. Only in such cases, the agency becomes agency coupled with interest and such agency cannot be revoked to the breach of such interest. [S Subramanian vs R Dayananthan Madras High Court Judgment Dated 11 January, 2013]
(PART-B) INDIAN PARTNERSHIP ACT
Give in brief the history of the Indian Partnership Act, 1932. Whether the Act is exhaustive.
History of the Act—There was no separate Partnership Act prior to 1932. The law on the subject was contained in the Chapter XI (ss. 239 to 266) of the Indian Contract Act, 1872. Chapter XI of the Contract Act was not exhaustive; certain matters relating to partnership were left unnoticed and even as regards matters dealt with, it was not always clear and definite. Apart from this, the law on the subject enacted more than fifty years ago was found inadequate to deal satisfactorily with many question of importance arising before the courts.
The Indian Contract Act 1872 initially introduced the first principles of Partnership under Chapter XI of section 239-266. The development of trade and commerce in the country and the rise and growth of a separate business class spurred the necessity of implementing another partnership agreement. As a result, the above-mentioned sections were repealed as they were regarded as inefficient, and the new Partnership Act was introduced in 1932. It is stated to be based on the English Partnership Act of 1890 with certain modifications. It does not alter in any substantial way the provisions of the English Law of partnership hitherto prevailing in this country. The chief principles in both English and Indian law of partnership are almost identical.
Whether the Act is exhaustive—The expression define and amend as given in the Preamble clearly signifies that the Act read with section 3 does not profess to consolidate the law on the subject into a complete code. Though the Act is not exhaustive, yet purports to define and amend the law relating to partnership. The un-repealed provisions of the Indian Contract Act, except when they are inconsistent with the express provisions of this Act, still continue to apply to partnership firms. The expressions used in the Indian Partnership Act but not defined in it have the same meaning as is given to them in the Indian Contract Act, 1872.
In what respect, the present Partnership Act is an improvement on the English Partnership Act, 1890.
Act is improvement on the English Act—Undoubtedly the Indian Partnership Act is an improvement on the English Partnership Act, 1890 in the following respects—
(1) There is no provision for the sale of goodwill in English Act whereas Indian Act definitely contains this provision.
(2) There is no provision regarding the consequences of death and bankruptcy of a partner and the mode of administering partnership assets in such an event in English Law, whereas Indian Act lays down necessary provisions for such eventualities.
(3) English Act lays lesser stress on the personality of the firm than the Indian Act.
(4) There exists no provisions in English Act of 1890 that minors should be admitted to the benefits of partnership whereas Indian Act admits minors to the benefits of partnership.
The Indian Contract Act 1872 initially introduced the first principles of Partnership under Chapter XI of section 239-266. The development of trade and commerce in the country and the rise and growth of a separate business class spurred the necessity of implementing another partnership agreement. As a result, the above-mentioned sections were repealed as they were regarded as inefficient, and the new Partnership Act was introduced in 1932. It is stated to be based on the English Partnership Act of 1890 with certain modifications. It does not alter in any substantial way the provisions of the English Law of partnership hitherto prevailing in this country. The chief principles in both English and Indian law of partnership are almost identical.
Whether the Act is exhaustive—The expression define and amend as given in the Preamble clearly signifies that the Act read with section 3 does not profess to consolidate the law on the subject into a complete code. Though the Act is not exhaustive, yet purports to define and amend the law relating to partnership. The un-repealed provisions of the Indian Contract Act, except when they are inconsistent with the express provisions of this Act, still continue to apply to partnership firms. The expressions used in the Indian Partnership Act but not defined in it have the same meaning as is given to them in the Indian Contract Act, 1872.
Define the following terms— (a) Act of a firm; (b) Business.
(a) Act of a Firm—According to section 2 (a) of the Act—“An act of a firm means any act or omission by all the partners, or by any partner or agent to the firm which gives rise to a right enforceable by or against the firm.”
An ‘act of a firm’ may be an act or omission by all the partners; or any one or some of the partners; or any agent of the firm. It must give rise to a right enforceable by or against the firm.
Unless both these requisites are fulfilled the act or omission cannot be said to be an act of a firm. In the case of an act or omission by an agent of the firm, the agent must be an authorised one.
(b) Business—According to section 2 (b) of the Act—“business includes every trade or occupation and profession.”
The term ‘business’ signifies any trade, occupation or profession and includes any single commercial adventure. It covers all sorts of enterprises or any activity which if successful would result in profits. It does not necessarily mean some undertaking of an industrial and commercial nature, e.g. two doctors or two barristers can form partnership to treat a patient or to contest the case of a client.
It was held in the case of Minck vs Roshan Lal Shorey, AIR 1931 Lah 390, that where two persons agreed to produce a film and share the profits of hiring it out, it was sufficient to constitute a partnership. Business must include any activity which is aimed at making profits.
In order to decide what is a business and what is not a business, we must look to the special circumstances of each particular case. A single transaction or venture or an isolated act of money-leading does not amount to business and consequently it does not come within the term business as used in the Act.
Define the terms “firm” and “firm name”.
Firm—Section 4 of the Partnership Act specifies that “partnership” is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.
Persons who have entered into partnership with one another are called individually “partners” and collectively “a firm”, and the name under which their business is carried on is called the “firm name”.
So firm is a compendious name of the partners who constitute it. Although in mercantile usage, a firm is deemed to have an existence distinct from the members composing it, in the eye of law it is neither a legal entity nor is it a person. The rights and obligations of the firm are the rights and obligations of the individuals composing the firm.
Firm name—The name under which the partners carry on their business is called the “firm name.” It was observed in Seodayal vs Joharmall that “a firm name in truth is merely description of the individual who compose it. It is nothing more.” There are no prescribed forms for the style of a firm. The partners are at liberty to choose any name they like. However, they must not violate the rules as to trade name, or goodwill. The name should not be too similar or identical to an existing firm doing the same business. The name should not contain words like emperor, crown, empress, empire or any other words which show sanction or approval of the government.
Is sharing of profit the sole criterion of partnership? Or What is the mode of determining the existence of partnership?
Sharing of profit is not a sole criterion—Although sharing the profit of a business is essential, it does not follow that, everyone who participates in the profits of a business, is a partner. In this connection section 6 of the Partnership Act provides that—“In determining whether a group of persons is or is not a firm or whether a person is or is not a partner in a firm, regard shall be had to the real relation between the parties as shown by all relevant facts taken together.”
Explanation 1—The sharing of profits or of gross returns arising from property by persons holding a joint or common interest in that property does not of itself make such persons partners.
Explanation 2—The receipt by a person of a share of the profits of a business, or of a payment contingent upon the earning of profits or varying with the profits earned by a business, does not of itself make him a partner with the persons carrying on the business;
and in particular the receipts of such share or payment—
(a) by a lender of money to persons engaged or about to engage in any business.
(b) by a servant or agent as remuneration,
(c) by the widow or child of a deceased partner as annuity ; or
(d) by a provision owner or part owner of the business as consideration for the sale of the goodwill or share thereof, does not of itself make the receiver a partner with the persons carrying on the business.
Thus, the provisions of section makes it clear that sharing or receiving of profits of the business of the firm is not the only criterion. Sharing of profits is not a conclusive evidence of partnership. The existence of the partnership is to be determined by the relation of persons who constitute partnership and from all other surrounding and connected facts and not only from sharing of profits. A person may get profit of the business in more than one ways, but because of that fact, he does not become a partner. He may share the profits of the firm without being liable as a partner in one or more of the following ways—
(a) as a money lender who lends money to the partners and the firm in the form of interest;
(b) as a servant of the firm in the form of remuneration;
(c) as an agent of the firm in the form of commission;
(d) as a widow or child of the deceased partner in the form of annuity;
(e) as a previous owner or part-owner of the business as consideration for the sale of the goodwill or share thereof.
Distinguish between partnership and agreement for service.
A partnership agreement is a legal document that outlines the rights, responsibilities, and obligations of the partners in a business venture. It is commonly used when two or more individuals or entities want to collaborate and share profits and losses. A partnership agreement typically covers aspects such as capital contributions, profit distribution, decision-making, and dispute resolution.
On the other hand, a service agreement is a contract between a service provider and a client that outlines the scope, terms, and conditions of the services to be provided. It is commonly used in business relationships where one party provides services to another party in exchange for payment. A service agreement typically covers aspects such as the nature of the services, deliverables, timelines, payment terms, and liability provisions.
Distinguish between partnership and club.
Partnership and club—Clubs are not partnerships but they are associations of peculiar nature. In case of partnership, the existence of business is essential, but in case of club, there is no objective to carry on business. The members of the club are not agents of each other as in the case of partnership. Persons become members of a club on agreeing to pay regularly subscription prescribed by the club rules white it is not so in the case of partnership.
What is the provision in the Partnership Act for the personal profit earned by the partners?
Personal profit earned by partners—According to section 16 of the Act—(a) if a partner derives any profit for himself from any transaction of the firm, or from the use of the property or business connection of the firm or the firm name, he shall account for that profit and pay it to the firm;
(b) if a partner carries on any business of the same nature as and competing with that of the firm, he shall account for and pay to the firm all profits made by him in that business.
It should be noted that the above provisions is subject to contract between the partners.
Thus, a partner cannot deal on his own account or without the knowledge and consent of his partners in any transaction affecting the firm. A partner is liable for his personal profits earned by him—
(i) from any transaction of the firm;
(ii) from the use of the property; or
(iii) from the business connection of the firm;
(iv) by use of the firm name;
(v) by setting up a rival business competition with the firm of which he is partner.
It should be noted that the above provisions is subject to contract between the partners
What are the effects of the insolvency of a partner?
Insolvency—The term “insolvency” refers to a situation when the person is no more capable of repaying its debts. It is only when a person has been declared insolvent, the bankruptcy proceedings begin. In other words, it is a position of financial distress when the business or the individual is unable to repay its debts.
Insolvency of a partner [S 34]—According to section 34 of the Act, the effects resulting from the insolvency of a partner may be described as under—
(1) Where a partner in a firm is adjudicated an insolvent, he ceases to be a partner on the date on which the order of adjudication is made, whether or not the firm is thereby dissolved.
(2) Where under a contract between the partners the firm is not dissolved by the adjudication of a partner as an insolvent, the estate of a partner so adjudicated is not liable for any act of the firm and the firm is not liable for any act of the insolvent, done after the date on which the order of adjudication is made.
What is the liability of the estate of the deceased partner?
Liability of estate of deceased partner—The general rule is that in the absence of a contract to the contrary, a firm stands dissolved on the death of any of its partners even though the partnership be for a fixed period. If due to a specific contract between the partners, a firm is not dissolved on the death of a partner, then his legal representatives do not become, nor have they any right to become, partners with the surviving partners, unless there is a contract between the legal representatives and the surviving partners to reconstitute the partnership taking in it, the legal representatives of the deceased, as partners.
If due to a previous contract between the partners, the firm continues without dissolution after the death of a partner then the estate of the deceased partner ceased to be liable for any act of the firm done after his death even though no public notice of his death is given. The estate of the deceased is liable only for the acts of the firm done during the time when the deceased was a partner i.e. during life time of the deceased and after his death the legal representative become entitled to get the accounts and to receive the share, property (estate) of the share of the deceased partner.
In this connection section 35 of the Act provides as under—
“Where under a contract between the partners, the firm is not dissolved by the death of a partner, the estate of a deceased partner is not liable for any act of the firm done after his death.”
PART-D THE SALE OF GOODS ACT, 1930
Define the following terms as used in the Sale of Goods Act, 1930— (a) Property; (b) Specific Goods.
(a) Property—Property in general sense may be defined as the sum of all the ways in which a movable or immovable thing can be lawfully used and enjoyed and it includes the right to possession of it. This term has been defined in sub-section (11) of section 2 of the Sale of Goods Act which lays down that—“Property means the general property in goods and not merely a special property.”
This means, the term property in the Sale of Goods Act has been used in general sense which means ‘ownership’ i. e. right, title and interest in the goods sold or to be sold. Thus, by term ‘property in goods’ under Sale of Goods Act means “ownership-in-goods” and not goods only.
The rules regarding passing of the property i.e. transfer of property from seller to buyer have been specified in sections 18 to 25 of the Act.
(b) Specific Goods—This term has been defined in section 2 (14) of the Sale of Goods Act which provides that “specific goods means goods identified and agreed upon at the time a contract of sale is made.” This provision makes it clear that “if the goods are identified, and agreed upon at the time of the making of the contract of sale, then the goods are known as “specific goods”. Therefore, the essential requirement is that the goods have been agreed upon by the seller and the buyer at the time of the contract of sale. It implies that the goods are in existence and have been ascertained.
This definition of the term as given in the Act should seldom give rise to doubts. The goods must be actually identified; it is not sufficient that they are capable of identification only.
Where the contract is in respect of existing stocks of Bidi leaves in the godowns of the seller at a particular place and the price is fixed at a lump sum for the amount of stock, the sale is of specific goods although the buyer may not have seen the goods. Goods which are not identified and agreed upon at the time when the contract is made are called “generic” or “unascertained goods”.
Distinguish “sale” from the following— (1) Barter and exchange; (2) Hire-purchase agreement; (3) Skill and labour; (4) Labour and materials.
(1) Sale, Barter and Exchange—It is necessary for sale that goods must be exchanged for a money consideration called the price. Where goods are exchanged for goods, it does not amount to sale, but only to barter. If money is exchanged for money, it will be a transaction of exchange and not a sale. But, if the consideration consists partly of money and partly of goods, it would be a contract of sale. If goods on either side are delivered in an exchange, any balance of money payable may be recovered as on a contract of sale. So also, if the party liable to deliver goods in exchange refuses to do so or is unable to do so, the other party may recover the value of the goods given in exchange.
(2) Sale and Hire-Purchase Agreement—(a) In the case of sale, ownership of goods is transferred from the seller to the buyer as soon as the contract is entered into. In the case of hire-purchase agreement, the ownership is transferred from the seller to the hire purchaser only when a certain agreed number of instalments are paid.
(b) The position of the buyer is that of the owner. The position of the hire-purchaser is that of the bailee.
(c) If the payment is made by the buyer in instalment, the amount payable by the buyer to the seller is reduced, for the payment made by the buyer is towards the price of the goods. The instalments paid by the hire-purchaser are regarded as hire charges and not as payment towards the price of the goods till option to purchase the goods is exercised.
(3) Sale, Skill and Labour—In Lee vs Griffin, (1868) IB & S 272, where the contract was to make false teeth and fit them to the mouth of a person. Blackburn J. rules that if the contract results in the transfer of the property in the goods from one person to another, it is a contract of sale. This statement was considered too sweeping and was not followed in Robinson vs Graves (1935) I KB 579, and it was held that a contract to paint a portrait was a contract for skill and labour and not a contract for the sale of goods, despite the fact that it was the object of the contract to transfer the property in the completed portrait. However, much depends upon the circumstances, and a contract for the construction of two ships propellers was held by the House of Lords to be a contract of sale of goods. [Camell Laird & Co. Ltd. vs Manganese Bronz & Brass Co. Ltd., (1934) AC 402]
(4) Sales, Labour and Materials—A contract for the supply of goods to be installed or fitted into a building or construction is normally regarded as a contract for labour and materials and not a contract for the sale of goods; in particular with respect to the time, when the property in the materials passes to the buyer or client. Here again, much will depend upon intention of the parties. For instance, the contract may clearly be intended to be for the sale of the materials to be installed afterwards, even by the seller. If the contract is for labour and materials, the property will pass when the materials have been installed. If it is a sale, the property passes at the time of the contract. [Young & Marten Ltd. vs Mc Manus Childs Ltd., (1969) IAC 454]
What is the effect of goods perishing before making a contract?
Effect of goods perishing before making of a contract—Section 7 of the Sale of Goods Act lays down that—“Where there is a contract for the sale of specific goods, the contract is void if the goods without the knowledge of the seller have, at the time when the contract was made, perished, or become so damaged as no longer answer to their description in the contract.”
It can be said that the effect of such a contract where goods perished before making of contract of sale is that such a contract is void and cannot be enforced in law.
Knowledge of the seller—The knowledge of the seller is the important consideration because the contract is void, if the goods have perished without his knowledge. On the other hand, if the seller knowing the goods to have perished agreed to sell them, he would be liable in damages to buyer, if the buyer did not know of this fact. It is based on the principle that where a person promises for valuable consideration to do something which he knows, he cannot perform, he is liable.
This section deals with the knowledge of the seller, but not about the knowledge of the buyer because it is likely that no one would agree to buy goods which he knew to have perished. In the highly improbable event of both knowing that the goods had perished, the contract would, on general principle, be void.
This provision may be explained by the following examples—
(1) 600 tons of nitrate soda was expected to arrive by a certain ship at a stated place. Unknown to the seller, the goods had before the contract was made, when lying at the port of loading, been destroyed by flood following an earthquake. The sale is void.
(2) There was the sale of 700 bags of nuts, identified by marks, lying in a named warehouse. Unknown to the seller, before the sale, 100 of the bags had been stolen. The sale is void and the buyer cannot be compelled to take the remainder.
What is the effect of goods perishing before sale but after agreement to sell?
Effect of Goods perishing before sale, but after agreement to sell [S 8]—Section 8 of the Sale of Goods Act provides about the effects of goods perishing before sale but after agreement to sell. It lays down that—“Where there is an agreement to sell specific goods and subsequently the goods without any fault on the part of the seller or buyer perish or become so damaged as no longer to answer to their description in the agreement before the risk passes to the buyer, the agreement is thereby avoided.”
This section deals with a case where the goods are in existence at the time of making the contract but perish without the fault of either party before the risk has passed to the buyer. From its nature therefore, this section is confined to agreements for sale and cannot apply to executed contracts of sale.
Under this section the contract is not void ab initio as in case of section 7 stated above. Under section 8, the contract is avoided with the perishing of the goods and the rights vested before that event will not be affected; for example, if there is a day fixed by the contract for the payment of the price, irrespective of delivery and the goods do not perish until after that date, the seller may recover it or retain it if already paid.
The basis of this section is that the perishing is not due to the wrongful act or default of either party: if either party is to blame for the loss or destruction of the goods, he will be liable for their non-delivery or will have to pay the price, as the case may be
What are the stipulations as to the time?
Stipulations as to the time—In every contract of sale, there are certain stipulations. Some of them are of the essence of the contract while others are not of the essence of the contract. This means that certain stipulations are of such nature which are essential for the existence of the contract while others are such which are not essential for the existence of the contract.
The stipulations which are of the essence of the contract are known as conditions while the stipulations which are not of the essence of the contract are known as warranties.
In this connection section 11 of the Sale of Goods Act lays down that—
“Unless a different intention appears from the terms of the contract, stipulation as to time of payment are not deemed to be of the essence of a contract of sale. Whether any other stipulation as to time is of the essence of the contract or not depends on the terms of the contract.”
It is clear from this provision that the stipulations regarding time being of the essence of the contract are based on the agreement between parties to the contract of sale.
Where the defendant agreed to deliver certain quantity of human albumin to the plaintiff within one year with initial delivery commencing by particular month, it was held that “time was of the essence of the contract”. [Andard Mount (London) Ltd. vs Curewel (India) Ltd., New Delhi, AIR 1985 Delhi 45]
In a case, the buyer rejects the goods finding the same not according to the sample. What actions should the buyer take to avoid the responsibility?
Section 17(2) of the Act provides that in case of a contract for sale by sample there is an implied condition that the bulk shall correspond with the sample in quality and if the goods do not correspond with the sample in quality will amount to a breach of the condition. Section 12 (2) of the Act provides that the breach of a condition gives rise to a right to treat the contract repudiated. Section 43 of the Act also provides that the buyer is not bound to return those goods to the seller which the buyer is not bound to keep. It is enough that he refuses to keep them and he intimates to the seller that he refuses to accept the same.
State the circumstances in which a person can make a valid pledge of goods of which he is not the owner.
Making of a valid pledge—There are three cases in which a valid pledge can be made by a person who is not the owner of the goods so pledged—
(1) By a mercantile agent—Where a mercantile agent is, with the consent of the owner, in possession of goods or the documents of title to goods, any pledge made by him, when acting in the ordinary course of business of a mercantile agent, shall be valid as if he were expressly authorised by the owner of the goods to make the same. It is essential that the pawnee acts in good faith and has not at the time of the pledge notice that the pawnor has no authority to pledge.
(2) In case of a person obtaining possession of the goods by undue influence etc.—By a person who having obtained possession of the goods by undue influence, coercion, fraud or misrepresentation has pledged the goods before the contract has been rescinded and the other party has taken the pledge by advancing moneys, acting in good faith and without notice of any defect in the pledgor’s title.
(3) Pledge by a seller or buyer in possession after sale—A seller left in possession after sale, and the buyer to whom possession has been delivered before payment of the price, may make a valid pledge. It is essential that the pledgee has acted in good faith and has no notice of the prior sale or of any charge or lien of the original seller.
Discuss different modes of delivery of goods as provided under the Sale of Goods Act.
Delivery means voluntary transfer of possession from one person to another. Delivery may be—(1) actual or (2) constructive.
Actual delivery—The method is quite simple when the goods to be delivered are in the seller’s possession and custody. In such a case, all that is to be done is to transfer the goods from the hands of the seller to those of the buyer or his agent. This is known as actual delivery.
Constructive delivery—In some cases, the goods may be in the hands of the purchaser himself or of a third person or may be in transit. In such a case, goods can be transferred only by what is known as a constructive delivery. There can be constructive delivery in any of the following forms—
(1) The buyer himself may be in possession, in which case there need only be formal delivery which may be judged from acts done by the buyer indicating his ownership of the goods or at least acts inconsistent with the right of the seller.
(2) The goods may have been in seller’s possession, but after sale, they remain with the seller who may continue to hold them on account of the buyer.
(3) The goods may be in possession of another person who holds them on accounts of seller. In such a case, delivery can be made by asking that person to agree with the buyer to hold the goods in future on his account instead of on account of the seller.
(4) There is another form of constructive delivery which is known as a symbolic delivery which is when delivery of a thing is taken by transfer of something else. For example, delivery of goods in transit etc. When they are at sea or on a railway, they can be sold by handing over the bill of lading or the railway receipt representing the goods.
In mercantile contracts this kind of delivery is effected by transfers of bills of lading, railway receipts, warehouse keepers’ certificates, delivery orders, dock warrants and such other instruments showing title to goods.
The rules relating to the delivery of goods have been laid down in sections 33 to 39 of the Act. The seller is not bound to supply (deliver) goods until buyer applies for delivery. Delivery in part has the same effect as delivery of the whole. The procedure and rules of delivery are to be settled by the parties, but if there is no such agreement between them, then the delivery is to be made within reasonable time. The demand for delivery is to be made by the buyer at a reasonable hour. What is a reasonable time and the reasonable hour is the question of fact to be decided by taking different facts into consideration.
In case of wrong delivery i.e. quantity of goods being less than contracted, the buyer may reject them, but if he accepts goods, he is bound to pay for them. The buyer is not bound to accept delivery in instalment.
Explain the “right of stoppage in transit” and how is it effected.
Right of stoppage in transit—Section 50 of the Sale of Goods Act describes the Right or Stoppage in transit. It lays down that—“Subject to the provisions of this Act when the buyer of goods becomes insolvent, the unpaid seller who has parted with the goods has the right of stopping them in transit that is to say he may resume possession of the goods as long as they are in the course of transit and may retain them until payment or tender of the price.”
In this connection section 46 of the Act also provides that notwithstanding that the property in the goods may have passed to the buyer, the unpaid seller of goods as such has by implication of law, in case of the insolvency of buyer, a right of stopping the goods in transit after he has parted with the possession of them.
Thus, it is clear that the “right of stoppage-in-transit is such a right which is provided to a seller, if he is an unpaid seller. The main elements to avail this right may be stated as under—
(1) Seller has sold the goods to the buyer.
(2) Seller has not been paid for the goods and he is an unpaid seller.
(3) Goods have been delivered to the buyer or the seller is not in possession of the goods; he has parted with the possession of them.
(4) Goods are still in transit and have not reached the buyer.
(5) The buyer has become insolvent as defined in this Act.
It will be noticed that the main factor to exercise this right is that the goods are still in transit and the question arises how it is to be determined that the goods are still in transit or not. In this connection section 51 of the Act lays down the rules as to when the goods are deemed to be in transit. Section 51 of the Act provides that—
(1) Goods are to be in course of transit from the time when they are delivered to a carrier or other bailee for the purpose of transmission to the buyer until the buyer or his agent in that behalf takes delivery of them from such carrier or other bailee.
(2) If the buyer or his agent in that behalf obtains delivery of the goods before their arrival at the appointed destination, the transit is at an end.
(3) If, after the arrival of the goods at the appointed destination, the carrier or other bailee acknowledges to the buyer or his agent that he holds the goods on his behalf and continues in possession of them as bailee for the buyer or his agent, the transit is at an end and it is immaterial that a further destination for the goods may have been indicated by the buyer.
(4) If the goods are rejected by the buyer and the carrier or other bailee continues in possession of them, the transit is not deemed to be at an end even if the seller has refused to take them back.
(5) When goods are delivered to a ship chartered by the buyer, it is a question depending on the circumstances of the particular case, whether they are in possession of the master as a carrier or as agent of the buyer.
(6) Where the carrier or other bailee wrongfully refuse to deliver the goods to the buyer or his agent in that behalf, transit is deemed to be at an end.
(7) Where part delivery of the goods has been made to the buyer or his agent in that behalf, the remainder of the goods may be stopped in transit, unless such part delivery has been given in such circumstances as to show an agreement to give up possession of the whole of the goods.
How stoppage in transit is effected?—Section 52 of the Acts lays down rules as to how the stoppage in transit is effected. It provides as under—
(1) The unpaid seller may exercise his right of stoppage in transit either by taking actual possession of the goods or by giving notice of his claim to the carrier or other bailee in whose possession to goods are.
Such notice may be given either to the person in actual possession of the goods or to his principal. In the latter case, the notice, to be effectual, shall be given at such time and in such circumstances that the principal, by the exercise of reasonable diligence, may communicate it to his servant or agent in time to prevent a delivery to the buyer.
(2) When notice of stoppage in transit is given by the seller to the carrier or other bailee in possession of the goods, he shall re-deliver the goods to, or according to the direction of the seller. The expenses of such re-delivery shall be borne by the seller.
Section 54 of the Act provides that a contract of sale is not rescinded by the mere exercise by an unpaid seller of his right of stoppage in transit. On getting the possession of the goods, the seller may retain them till payment of price is made or tendered by the buyer to the seller. After the expiry of reasonable time or if the goods are of perishable nature then the seller may resale them after giving a notice to the buyer. If no notice is given to the buyer, then the seller cannot recover damages or loss from the buyer while on the other hand the buyer shall be entitled to get profits if any on that account.
What are the incidents of sale by auction under the Sale of Goods Act?
Auction Sale—The main incidents of sale by auction are given in section 64 of the Sale of Goods Act, which are as under—
(1) Where goods are put up for sale in lots, each lot is prima facie deemed to be the subject of a separate contract of sale.
(2) The sale is complete when the auctioneer announces its completion by the fall of the hammer or in other customary manner, and until such announcement is made, any bidder may retract his bid.
(3) A right to bid may be reserved expressly by or on behalf of the seller and, where such right is expressly so reserved, but not otherwise, the seller or any one person on his behalf may, subject to the provisions hereinafter contained, bid at the auction.
(4) Where the sale is not notified to be subject to a right to bid on behalf of the seller, it shall not be lawful for the seller to bid himself or to employ any person to bid at such sale for the auctioneer or any such person; and any sale contravening this rule may be treated as fraudulent by the buyer.
(5) The sale may be notified to be subject to a reserved or upset price.
(6) If the seller makes use of pretended bidding to raise the price, the sale is voidable at the option of the buyer.
Write a brief note on Knockout Agreements.
Knockout Agreement—It is an agreement between a group of persons not to bid against each other. Such an agreement is a valid agreement and is not illegal. But when such an agreement is intended to cause harm or injury or is intended to defraud a third person, then it would be void. A combination between the intending bidders to refrain from bidding against each other, commonly known as a knock-out, has been held not to be illegal at common law and the same rule applies in India.