MEANING AND IMPORTANCE OF BUSINESS LAW

Commercial law (also known as business law) is the body of law that governs business and
commercial transactions. It is often considered to be a branch of civil law and deals with issues
of both private law and public law.

Business law is the general field of law relating to business organizations, business structures,
and business transactions. Also included in the business law field are issues related to real
estate, tax, and the environment.

“A legally binding agreement between two or more persons by which rights

are acquired by one or more to acts of forbearance (Abstaining from doing
something) on the part of the others”
“An agreement between two or more persons which is intended to be
enforceable at law and is constituted by the acceptance by one party of an
offer made to him by the other party to do or abstain from doing some act”

IMPORTANCE
THE business law studies are very important as it helps the management
professionals in realizing the business ethics, he or she must follow in order to run
a proper & authenticated business. This must be in accordance with the law &
regulations prevailing in the society. The business law studies are necessary for
every management graduate whether he want to setup a proper business, or
willing to join a service as a manager.

Doing a proper business with an authenticated business license and registration

gives confidence. They makes business case laws studies very important . it has
been proven, that most clients are comfortable in doing businesses, provided
they have a govt. license in hand,& an approval stamp for their business. It gives
immense confidence in handling day to day business requirements to those who
know the legal aspect of business.
INDIAN CONTRACT ACT
A contract is a legally enforceable agreement between two or more parties with mutual
obligations. The remedy at law for breach of contract is "damages" or monetary
compensation. In equity, the remedy can be specific performance of the contract or an
injunction. Both remedies award the damaged party the "benefit of the bargain" or
expectation damages, which are greater than mere reliance damages, as in promissory
estoppels

An agreement b/w 2 or more person which is intended to be enforceable at law & is

constituted by the acceptance by one party of an offer made to him by the other party to do
or abstain from doing some act.

NATURE OF CONTRACT

MOST IMPORTANT BRANCH OF LAW

CIRCUMSTANCES CREATED BY PARTIES SHALL BE LEGALLY BINDING ON THEM.

WHAT A MAN HAS BEEN LED TO EXPECT SHALL COME TO PASS

REALIZATION OF THE REASONABLE IN COURT OF LAW

RIGHT IN PERSONUM AS AGAINST RIGHTS IN REM

LIMITING PRINCIPLES

TORTS, CIVIL WRONGS, QUQSI CONTRACTS, JUDGEMENTS OF COURTS

THE INDIAN CONTRACT ACT 1872

1. General Principles of Law of Contract (Secs. 1 - 75)
2. Special Contracts (Secs. 124 - 238)
- Indemnity and Guarantee
- Bailment and Pledge
- Agency
ESSENTIAL ELEMENTS OF A VALID CONTRACT
Sec. 10
-
“All agreement are contracts if they are made by ‘FREE CONSENT’ of Parties
‘COMPETANT TO CONTRACT’, for a ‘LAWFUL CONSIDERATION’ and with
‘A LAWFUL OBJECT’ and are ‘NOT DECLARED TO BE VOID”
Therefore “All agreements are not contracts but all contract are agreements”
Contracts do not include future agreements:
1. Offer and Acceptance
2. Intention to create a legal relationship
3. Lawful consideration
4. Capacity of Parties
5. Free and Genuine Consent
6. Lawful Object:
- Forbidden by law
- Defeats the provisions of law
- Fraudulent
- Involves injury to person and property
- Immoral and opposed to public policy
7. Agreement not declared void
8. Certainity and possibility of performance
9. Legal formalities
10. Consensus Ad-Idem
Offer and its acceptance
Free consent of both parties
Mutual and lawful consideration for agreement
It should be enforceable by law. Hence, intention should be to create legal relationship.
Agreements of social or domestic nature are not contracts
Parties should be competent to contract
Object should be lawful
Certainty and possibility of performance
 Contract should not have been declared as void under Contract Act or any other law

CLASSIFICATION OF CONTRACTS
VALIDITY
Valid Contracts
Void Contract & Void Agreement
Voidable Contract
Illegal agreement
Unenforceable
Agreement
FORMATION
Express Contract
Implied Contract
Constructive or quosi
PERFORMANCE
Executed Contract
Electuary Contract
Unilateral Contract
Bilateral contract

2. Void Contract :- VOID CONTRACT - A contract which ceases to be enforceable by law becomes
void when it ceases to be enforceable. [section 2(j)]. - - Thus, initially a contract cannot be void, i.e. a
contract cannot be void ab initio. The simple reason is that in such a case, it is not a contract at all to
begin with. Hence, only a valid contract can become void contract due to some subsequent events. e.g. the
person dies or property is destroyed or Government imposes a ban etc. - - A void agreement is void ab
initio. It never becomes a contract. It is nullity and cannot create any legal rights.

3. Voidable Contract :- VOIDABLE CONTRACT - An agreement which is enforceable by law at

the option of one or more of the parties thereto, but not at the option of the other or others, is a voidable
contract. [section 2(i)]. - - (a) When consent is obtained by coercion, undue influence, misrepresentation
or fraud is voidable at the option of aggrieved party i.e. party whose consent was obtained by
coercion/fraud etc. However, other party cannot avoid the contract. (b) When a contract contains
reciprocal promises and one party to contract prevents the other from performing his promise, the contract
becomes voidable at the option of the party to prevented. (section 53). Obvious principle is that a person
cannot take advantage of his own wrong (c) When time is essence of contract and party fails to perform in
time, it is voidable at the option of other party (section 55). A person who himself delayed the contract
cannot avoid the contract on account of (his own) delay.

3.Quasi Contract :- Quasi’ means ‘almost’ or ‘apparently but not really’ or ‘as if it were’. This
term is used when one subject resembles another in certain characteristics but there are
intrinsic differences between the two. ‘Quasi contract’ is not a ‘contract’. It is an obligation which
law created in absence of any agreement. It is based on equity. There are certain relations
resembling those created by contract. These are termed as ‘quasi contracts’.  These are – (a)
Supply of necessaries (section 68) (b) Payment of lawful dues by interested person (section 69)
(c) Person enjoying benefit of a gratuitous act (section 70) (d) Finder of goods (section 71) (d)
Goods or anything delivered by mistake or coercion (section 72).
OFFER AND ACCEPTANCE
OFFER -
Inception of every Contract -
Definite Proposal -
Unqualified Acceptance -
Concluded Contract
 DEFINITION
Sec. 2(a) : A person is said to have made a proposal, when he “signifies to another his
willingness to do or to abstain from doing anything with a view to obtaining the
assent of the that other to such Act or Abstinence.”
Eg.: ‘A’ says to ‘B’ “Will you purchase my car for Rs.1 Lakh?”
Offerer, Proposer or Promisor
Offeree, Proposee / Acceptor or Promisee

HOW AN OFFER IS MADE

1. Express Order
2. Implied Order
TO WHOM AN OFFER CAN BE MADE
1. Specific Offer
2. General Offer
LEGAL RULES AS TO OFFER
1. Offer must be such that it is capable of being accepted and giving
rise to a legal relationship
2. Offer must be definite, unambiguous, certain and not loose and vague
- Conditions for ascertaining
3. Offer must be communicated
4. Offer must be made with a view to obtain assent
5. Offer must not contain a term the non-compliance of which amounts
to acceptance
6. A mere statement of price is not an offer
7. Offer to be distinguished from :
- A declaration of intention and an announcement
Eg. : Auction Sale
- An invitation to make an offer to do business
- Catalogues

Offer and Acceptance

 For an agreement
There has to be a clear and
definite offer by one person and,
Its unconditional acceptance
by the person to whom the offer is
made.

Offer
An offer is a proposal by one
party to another to enter in
to a legally binding
agreement with him.
Offer may be express(spoken or
written words) or
implied.(inferred from conduct)
Constituents of an offer (essential
elements)
The offer must show the obvious intention


on part of the offerer to be bound by it.

The offerer must make the offer with the


view to obtain the assent of the offeree.

 It must be definite.

 It must be communicated to the offeree.

 Offer may be conditional

Rules of legal offer

Offer must be such that as in law it
is capable of being accepted and
giving rise to a legal relationship.


Terms of offer must be definite,

clear and certain.
The offer must not thrust a burden
of acceptance on the offeree.
Invitation to offer, a few possibilities

 Display of goods for sale

 Price lists, catalogues

 Advertisements

 Declaration of intention
 Auctions

 Tenders

 Offer of public issue of shares

Termination of offer


Sec.6 of the Act deals with termination

of offer.
2.Revocation-offer may be revoked at any

time before its acceptance is complete.

3.Lapse of time.(specified time or

reasonable time.)
4.Failure of the acceptor to fulfill the

condition precedent to acceptance.

5.Death or insanity of proposer.

Other instances of termination of offer

 As per sec.6 of the Act.

 Rejection

 Counter offer

Failure to accept according to the

mode prescribed.
Subsequent illegality or destruction
of subject matter.

Acceptance
Acceptance is the act of assenting by the


offeree to an offer.
It indicates that the person making it is


willing to be bound by the terms of the

offer.
Acceptance may be express or implied.


Sec.2(b)’when the person to whom



proposal(offer) is made signifies his

assent thereto, the proposal is said to be
accepted. A proposal when accepted
becomes a promise.(i.e.a contract)
Legal rules as to acceptance
It must be absolute and unqualified.
It must be made by the party to whom
the offer is made.
The acceptance must be expressed in
usual or reasonable manner.

 It must be given in reasonable time.

 It cannot be made in ignorance of offer.

 It must be given before the offer lapses.

 It must be communicated to the offerer.

 Mere mental acceptance is no acceptance.

 (possible cases of acceptance by silence)

Communication of offer, when

complete
(the spirit of the law is that the
message reaches the concerned party.)
Sec.4 provides that the communication
of proposal is complete when it comes
to the knowledge of the person for
whom it is made.
Communication of acceptance, when
complete
Sec.4 ‘The communication of
acceptance is complete
as against proposer: when it is put in a
course of transmission to him, so as to
be out of power of the acceptor.
as against the acceptor: when it comers
to the knowledge of the proposer.
Consideration

Consideration is something of value given by a promissor to a promisee in

exchange for something of value given by a promisee to a promissor. Typically,
the thing of value is an act, such as making a payment, or a forbearance to act
when one is privileged to do so, such as an adult refraining from smoking.

Consideration consists of a legal detriment and a bargain. A legal detriment is a

promise to do something or refrain from doing something that you have the legal
right to do, or actually doing or refraining from doing something that you don't
have to do. A bargain is something the promisor (the party making promise or
offer) wants, usually being one of the legal detriments. The legal detriment and
bargain principles come together in consideration and create an exchange
relationship, where both parties agree to exchange something that the other wishes
to have.

The purpose of consideration is to ensure that there is a present bargain, that the
promises of the parties are reciprocally induced. The classic theory of
consideration required that a promise be of detriment to the promissor or benefit to
the promisee. This is no longer the case.

Consequences of Breach of Contract

- Compensation is payable for breach of contract. Penalty is also payable if provided in
contract. Breach of contract may be actual or anticipatory.

Summary of principles of compensation and damages - Following points are important - *

Compensation for loss or damage is payable. Since the word used is ‘compensation’, punitive
damages cannot be awarded. * These should be in usual course or known to parties i.e. both
parties must be aware * No compensation for remote and indirect loss or damage * Same
principle applies to quasi contract also.

GENERAL DAMAGES – General damages are those which result from ‘direct and proximate’
consequences from breach of contract. Normally, what can be awarded is compensation for
loss or damage which can be directly or proximately attributed to the breach of contract. One
way of assessing damages is the difference between the contract price and the market price on
date of breach of contract, plus reasonable expenses incurred by him on account of the breach
plus cost of suit in court of law.

CONSEQUENTIAL LOSS OR SPECIAL DAMAGE – Special damages or consequential

damages arise due to existence of special circumstances. Such damages can be awarded only
in cases where the special circumstances were foreseeable by the party committing the breach
or were specifically known to the party. Consequential losses like loss of profit due to breach,
which may occur  indirectly due to breach cannot be normally awarded unless there are special
circumstances which parties were aware. Loss of profit can be awarded only in cases where
seller could have foreseen those losses and arose directly as result of breach.

PROMISEE SHOULD TAKE STEPS TO MITIGATE THE LOSS OR DAMAGE – Explanation to

section 73 specifically provides that in estimating loss or damage, the means available for
remedying the inconvenience caused by breach of contract shall be taken into account. Thus,
promisee should take all reasonable steps to mitigate the losses e.g. if promisor does not supply
goods, he should make efforts to procure from alternate sources may be even at higher price, to
reduce his losses arising out of breach of contract.

VINDICTIVE OR EXEMPLARY DAMAGES – Vindictive or exemplary damages cannot be

awarded under Contract Act. However, these may be awarded by Court under tort under special
circumstances e.g. * Dishonour of cheque by Bank when there was balance in account, as it
causes loss of reputation of credit worthiness of person issuing cheque * Breach of contract to
marry, as it hurts both feelings and reputation.

Quantum Meruit – ‘Quantum meruit’ means ‘as much as earned’. A contract may come to end by *
breach of contract * contract becoming void or * Voidable contract avoided by party. In such case, if a
party has executed part of contract, he is entitled to get a proportionate amount i.e. ‘as much as earned by
him’. This is not by way of ‘damages’ or ‘compensation for loss’. - - The principle is that even when
contract comes to a premature end, the party should get amount proportional to the work done/services
provided/goods supplied by one party.  One party should not get enriched at the cost of other.

Contract of indemnity - A contract by which one party promises to save the other from loss caused to him
by the conduct of the promisor himself, or by the conduct of any other person, is called a ‘contract of
indemnity’.  - - Illustration - A contracts to indemnify B against the consequences of any proceedings
which C may take against B in respect of a certain sum of 200 rupees. This is a contract of indemnity.
[section 124].

Contract of guarantee  - A “contract of guarantee” is a contract to perform the promise, or discharge the
liability, of a third person in case of his default. The person who gives the guarantee is called the “surety”;
the person in respect of whose default the guarantee is given is called the “principal debtor”, and the
person to whom the guarantee is given is called the “creditor”. A guarantee may be either oral or written.
[section 126]. - - [Person giving guarantee is also called as ‘guarantor’. However, Contract Act uses the
word ‘surety’ which is same as ‘guarantor’]. - - Three parties are involved in contract of guarantee.
Contract between any two of them is not a ‘contract of guarantee’. It may be contract of indemnity.
Primary liability is of the principal debtor. Liability of surety is secondary and arises when Principal
Debtor fails to fulfill his commitments. However, this is so when surety gives guarantee at the request of
principal debtor. If the surety gives guarantee on his own, then it will be contract of indemnity. In such
case, surety has all primary liabilities.

CONSIDERATION FOR GUARANTEE - Anything done, or any promise made, for the benefit of the
principal debtor, may be sufficient consideration to the surety for giving the guarantee. - - Illustrations -
(a) B requests A to sell and deliver to him goods on credit. A agrees to do so, provided C will guarantee
the payment of the price of the goods. C promises to guarantee the payment in consideration of A’s
promise to deliver the goods. This is sufficient consideration for C’s promise. (b) A selms and delivers
goods to B. C afterwards requests A to gorbear to sue B for the debt for a year, and promises that if xe
does so,`C will pay for them in default of payment by B. A agrees to forbear as requested. This is a
sufficient consideration for C’s promise. (c) A sells and delivers goods to B. C afterwards, without
consideration, agrees to pay for them in default of B. The agreement is void. [section 127].
Bailment - Bailment is another type of special contract. Since it is a ‘contract’, naturally all basic
requirements of contract are applicable. - - Bailment means act of delivering goods for a specified
purpose on trust. The goods are to be returned after the purpose is over. In bailment, possession of goods
is transferred, but property i.e. ownership is not transferred.  A “bailment” is the delivery of goods by
one person to another for some purpose, upon a contract that they shall, when the purpose is
accomplished, be returned or otherwise disposed of according to the directions of the person delivering
them. The person delivering the goods is called the “bailor”. The person to whom they are delivered is
called the “bailee”. - - Explanation : If a person already in possession of the goods of another, contracts
to hold them as a bailee, he thereby becomes the bailee, and owner becomes the bailor, of such goods,
although they may not have been delivered by way of bailment. [section 148]. [Thus, initial possession of
goods may be for other purpose, and subsequently, it may be converted into a contract of bailment, e.g.
seller of goods will become bailee if goods continue in his possession after sale is complete].

Bailment can be only of ‘goods’.  As per section 2(7) of Sale of Goods Act, ‘goods’ means every kind of
movable property other than money and actionable claim. - - Thus, keeping money in bank account is not
‘bailment’. Asking a person to look after your house or farm during your absence is not ‘bailment’, as
house or farm is not a movable property.

Bailment of pledges - Pledge is special kind of bailment, where delivery of goods is for purpose of
security for payment of a debt or performance of a promise. Pledge is bailment for security. Common
example is keeping gold with bank/money lender to obtain loan. Since pledge is bailment, all provisions
applicable to bailment apply to pledge also. In addition, some specific provisions apply to pledge. The
bailment of goods as security for payment of a debt or performance of a promise is called “pledge”. The
bailor is in this case called the “pawnor”. The bailee is called the “pawnee”. [section 172].

Contract of Agency - Agency is a special type of contract. The concept of agency was
developed as one man cannot possibly do every transaction himself. Hence, he should have
opportunity or facility to transact business through others like an agent. The principles of
contract of agency are – (a) Excepting matters of a personal nature, what a person can do
himself, he can also do it through agent (e.g. a person cannot marry through an agent, as it is a
matter of personal nature) (b) A person acting through an agent is acting himself, i.e. act of
agent is act of Principal. - - Since agency is a contract, all usual requirements of a valid contract
are applicable to agency contract also, except to the extent excluded in the Act. One important
distinction is that as per section 185, no consideration is necessary to create an agency.

AGENT AND PRINCIPAL DEFINED - An “agent” is a person employed to do any act for another or to
represent another in dealings with third persons. The person for whom such act is done, or who is so
represented, is called the “principal” [section 182].

WHO MAY EMPLOY AGENT - Any person who is of the age of majority according to the law to which
he is subject, and who is of sound mind, may employ an agent. [section 183]. - - Thus, any person
competent to contract can appoint an agent.

WHO MAY BE AN AGENT - As between the principal and third persons any person may become an
agent, but no person who is not of the age of majority and of sound mind can become an agent, so as to
be responsible to his principal according to the provisions in that behalf herein contained. [section 184].
- - The significance is that a Principal can appoint a minor or person of unsound mind as agent. In such
case, the Principal will be responsible to third parties. However, the agent, who is a minor or of unsound
mind, cannot be responsible to Principal. Thus, Principal will be liable to third parties for acts done by
Agent, but agent will not be responsible to Principal for his (i.e. Agent’s) acts.
CONSIDERATION NOT NECESSARY - No consideration is necessary to create an agency. [section
185]. Thus, payment of agency commission is not essential to hold appointment of Agent as valid.

Authority of agent – An agent can act on behalf of Principal and can bind the Principal.

AGENT’S DUTY TO PRINCIPAL - An agent has following duties towards principal. * Conducting
principal’s business as per his directions * Carry out work with normal skill and diligence * Render
proper accounts  [section 213]. * Agent’s duty to communicate with principal  [section 214] * Not to
deal on his own account, in business of agency [section 215].  * Agent’s duty to pay sums received for
principal  [section 218] *  Agent’s duty on termination of agency by principal’s death or insanity -
[section 209].

REMUNERATION TO AGENT - Consideration is not necessary for creation of agency.

However, if there is an agreement, an agent is entitled to get remuneration as per contract.

RIGHTS OF PRINCIPAL - * Recover damages from agent if he disregards directions of Principal *

Obtain accounts from Agent * Recover moneys collected by Agent on behalf of Principal * Obtain details
of secret profit made by agent and recover it from him * Forfeit remuneration of Agent if he misconducts
the business.

DUTIES OF PRINCIPAL - * Pay remuneration to agent as agreed * Indemnify agent for lawful acts
done by him as agent * Indemnify Agent for all acts done by him in good faith * Indemnify agent if he
suffers loss due to neglect or lack of skill of Principal.

TERMINATION OF AGENCY - An agency is terminated by the principal revoking his authority;

or by the agent renouncing the business of the agency; or by the business of the agency being
completed; or by either the principal or agent dying or becoming of unsound mind; or by the
principal being adjudicated an insolvent under the provisions of any Act for the time being in
force for the relief of insolvent debtors. [section 201]. - - In following cases, an agency cannot
be revoked – * Agency coupled with interest (section 202) * Agent has already exercised his
authority (section 203) * Agent has incurred personal liability.

Unit 3
1. Contract of indemnity - A contract by which one party promises to save the other from loss caused
to him by the conduct of the promisor himself, or by the conduct of any other person, is called a ‘contract
of indemnity’.  - - Illustration - A contracts to indemnify B against the consequences of any proceedings
which C may take against B in respect of a certain sum of 200 rupees. This is a contract of indemnity.
[section 124].

2.Contract of guarantee  - A “contract of guarantee” is a contract to perform the promise, or

discharge the liability, of a third person in case of his default. The person who gives the guarantee is
called the “surety”; the person in respect of whose default the guarantee is given is called the “principal
debtor”, and the person to whom the guarantee is given is called the “creditor”. A guarantee may be either
oral or written. [section 126]. - - [Person giving guarantee is also called as ‘guarantor’. However, Contract
Act uses the word ‘surety’ which is same as ‘guarantor’]. - - Three parties are involved in contract of
guarantee. Contract between any two of them is not a ‘contract of guarantee’. It may be contract of
indemnity. Primary liability is of the principal debtor. Liability of surety is secondary and arises when
Principal Debtor fails to fulfill his commitments. However, this is so when surety gives guarantee at the
request of principal debtor. If the surety gives guarantee on his own, then it will be contract of indemnity.
In such case, surety has all primary liabilities.

CONSIDERATION FOR GUARANTEE - Anything done, or any promise made, for the benefit of the
principal debtor, may be sufficient consideration to the surety for giving the guarantee. - - Illustrations -
(a) B requests A to sell and deliver to him goods on credit. A agrees to do so, provided C will guarantee
the payment of the price of the goods. C promises to guarantee the payment in consideration of A’s
promise to deliver the goods. This is sufficient consideration for C’s promise. (b) A selms and delivers
goods to B. C afterwards requests A to gorbear to sue B for the debt for a year, and promises that if xe
does so,`C will pay for them in default of payment by B. A agrees to forbear as requested. This is a
sufficient consideration for C’s promise. (c) A sells and delivers goods to B. C afterwards, without
consideration, agrees to pay for them in default of B. The agreement is void. [section 127].

3.Bailment - Bailment is another type of special contract. Since it is a ‘contract’, naturally all basic
requirements of contract are applicable. - - Bailment means act of delivering goods for a specified
purpose on trust. The goods are to be returned after the purpose is over. In bailment, possession of goods
is transferred, but property i.e. ownership is not transferred.  A “bailment” is the delivery of goods by
one person to another for some purpose, upon a contract that they shall, when the purpose is
accomplished, be returned or otherwise disposed of according to the directions of the person delivering
them. The person delivering the goods is called the “bailor”. The person to whom they are delivered is
called the “bailee”. - - Explanation : If a person already in possession of the goods of another, contracts
to hold them as a bailee, he thereby becomes the bailee, and owner becomes the bailor, of such goods,
although they may not have been delivered by way of bailment. [section 148]. [Thus, initial possession of
goods may be for other purpose, and subsequently, it may be converted into a contract of bailment, e.g.
seller of goods will become bailee if goods continue in his possession after sale is complete].

Bailment can be only of ‘goods’.  As per section 2(7) of Sale of Goods Act, ‘goods’ means every kind of
movable property other than money and actionable claim. - - Thus, keeping money in bank account is not
‘bailment’. Asking a person to look after your house or farm during your absence is not ‘bailment’, as
house or farm is not a movable property.

Bailment of pledges - Pledge is special kind of bailment, where delivery of goods is for purpose of
security for payment of a debt or performance of a promise. Pledge is bailment for security. Common
example is keeping gold with bank/money lender to obtain loan. Since pledge is bailment, all provisions
applicable to bailment apply to pledge also. In addition, some specific provisions apply to pledge. The
bailment of goods as security for payment of a debt or performance of a promise is called “pledge”. The
bailor is in this case called the “pawnor”. The bailee is called the “pawnee”. [section 172].

4.Contract of Agency - Agency is a special type of contract. The concept of agency was
developed as one man cannot possibly do every transaction himself. Hence, he should have
opportunity or facility to transact business through others like an agent.

The principles of contract of agency are –

(a) Excepting matters of a personal nature, what a person can do himself, he can also do it
through agent (e.g. a person cannot marry through an agent, as it is a matter of personal
nature)
 (b) A person acting through an agent is acting himself, i.e. act of agent is act of Principal. - -
Since agency is a contract, all usual requirements of a valid contract are applicable to agency
contract also, except to the extent excluded in the Act. One important distinction is that as per
section 185, no consideration is necessary to create an agency.

AGENT AND PRINCIPAL DEFINED - An “agent” is a person employed to do any act for another or to
represent another in dealings with third persons. The person for whom such act is done, or who is so
represented, is called the “principal” [section 182].

WHO MAY EMPLOY AGENT - Any person who is of the age of majority according to the law to which
he is subject, and who is of sound mind, may employ an agent. [section 183]. - - Thus, any person
competent to contract can appoint an agent.

WHO MAY BE AN AGENT - As between the principal and third persons any person may become an
agent, but no person who is not of the age of majority and of sound mind can become an agent, so as to
be responsible to his principal according to the provisions in that behalf herein contained. [section 184].
- - The significance is that a Principal can appoint a minor or person of unsound mind as agent. In such
case, the Principal will be responsible to third parties. However, the agent, who is a minor or of unsound
mind, cannot be responsible to Principal. Thus, Principal will be liable to third parties for acts done by
Agent, but agent will not be responsible to Principal for his (i.e. Agent’s) acts.

CONSIDERATION NOT NECESSARY - No consideration is necessary to create an agency. [section

185]. Thus, payment of agency commission is not essential to hold appointment of Agent as valid.

Authority of agent – An agent can act on behalf of Principal and can bind the Principal.

AGENT’S DUTY TO PRINCIPAL - An agent has following duties towards principal. * Conducting
principal’s business as per his directions * Carry out work with normal skill and diligence * Render
proper accounts  [section 213]. * Agent’s duty to communicate with principal  [section 214] * Not to
deal on his own account, in business of agency [section 215].  * Agent’s duty to pay sums received for
principal  [section 218] *  Agent’s duty on termination of agency by principal’s death or insanity -
[section 209].

REMUNERATION TO AGENT - Consideration is not necessary for creation of agency.

However, if there is an agreement, an agent is entitled to get remuneration as per contract.

RIGHTS OF PRINCIPAL - * Recover damages from agent if he disregards directions of Principal *

Obtain accounts from Agent * Recover moneys collected by Agent on behalf of Principal * Obtain details
of secret profit made by agent and recover it from him * Forfeit remuneration of Agent if he misconducts
the business.

DUTIES OF PRINCIPAL - * Pay remuneration to agent as agreed * Indemnify agent for lawful acts
done by him as agent * Indemnify Agent for all acts done by him in good faith * Indemnify agent if he
suffers loss due to neglect or lack of skill of Principal.

TERMINATION OF AGENCY - An agency is terminated by the principal revoking his authority;

or by the agent renouncing the business of the agency; or by the business of the agency being
completed; or by either the principal or agent dying or becoming of unsound mind; or by the
principal being adjudicated an insolvent under the provisions of any Act for the time being in
force for the relief of insolvent debtors. [section 201]. - - In following cases, an agency cannot
be revoked – * Agency coupled with interest

5. Contingent contract - A “contingent contract” is a contract to do or not to do something, if

some event, collateral to such contract, does or does not happen. Illustration - A contracts to
pay B Rs. 10,000 if B’s house is burnt. This is a contingent contract.

OF CONTINGENT CONTRACTS
31. “Contingent contract” defined
A “contingent contract” is a contract to do or not to do something, if some event, collateral to such
contract, does or does not happen.
32. Enforcement of Contracts contingent on an event happening
Contingent contracts to do or not to do anything in an uncertain future event happens, cannot be enforced
by law unless and until that event has happened. If the event becomes impossible, such contracts
become void.
33. Enforcement of contract contingent on an event not happening
Contingent contracts to do or not to do anything if an uncertain future event does not happen, can be
enforced when the happening of that event becomes impossible, and not before.
34. When event on which contract is contingent to be deemed impossible, if it is the future
conduct of a living person
If the future event on which a contract is contingent is the way in which a person will act at an unspecified
time, the event shall be considered to become impossible when such person does anything which renders
it impossible that the should so act within any definite time, or otherwise than under further contingencies.

35. When contracts become void, which are contingent on happening of specified event within
fixed time
Contingent contracts to do or not to do anything, if a specified uncertain event happens within a fixed
time, become void, if, at the expiration of the time fixed, such event has not happened, or if, before the
time fixed, such event becomes impossible.
When contracts may be enforced, which are contingent on specified event not happening within fixed time
: Contingent contract tutu or not to do anything, if a specified uncertain event does not happen within a
fixed time, may be enforced by law when the time fixed has expired and such event has not happened, or
before the time fixed has expired, if it become certain that such event will not happen.
36. Agreements contingent on impossible event void

Contingent agreements to do or not to do anything, if an impossible event happens, are void, whether the
impossibility of the event is known or not to the parties to agreement at the time when it is made

OF INDEMNITY AND GUARANTEE

124. “Contract of indemnity” defined
A contract by which one party promises to save the other from loss caused to him by the contract of
the promisor himself, or by the conduct of any other person, is called a “contract of indemnity”.
125. Right of indemnity-holder when sued
The promisee in a contract of indemnity, acting within the scope of his authority, is entitled to
recover from the promisor-
(1) all damages which he may be compelled to pay in any suit in respect of any matter to which the
promise to indemnify applies;
(2) all costs which he may be compelled to pay in any such suit, if in bringing of defending it, he did not
contravene the orders of the promisor, and acted as it would have been prudent for him to act in the
absence of any contract of indemnity, or if the promisor authorised him to bring or defend the suit;
(3) all sums which he may have paid under the terms of any compromise of any such suit, if the
compromise was not contract to the orders of the promisor, and was one which it would have been
prudent for the promise to make in the absence of any contract of indemnity, or if the promisor authorised
him to compromise the suit.
126. “Contract of guarantee”, “surety”, “principal debtor” and “creditor”
A “contract of guarantee” is a contract to perform the promise, or discharge the liability, of a third person
in case of his default. The person who gives the guarantee is called the “surety”, the person in respect of
whose default the guarantee is given is called the “principal debtor”, and the person to whom the
guarantee is given is called the “creditor”. A guarantee may be either oral or written.
127. Consideration for guarantee
Anything done, or any promise made, for the benefit of the principal debtor, may be a sufficient
consideration to the surety for giving the guarantee.
128. Surety’s liability
The liability of the surety is co-extensive with that of the principal debtor, unless it is otherwise
provided by the contract.
129. Continuing guarantee
A guarantee which extends to a series of transaction, is called, a “continuing guarantee”.
130. Revocation of continuing guarantee
A continuing guarantee may at any time be revoked by the surety, as to future transactions, by
notice to the creditor.

131. Revocation of continuing guarantee by surety’ death

The death of the surety operates, in the absence of any contract to the contrary, as a revocation of ma
continuing guarantee, so far as regards future transactions.
132. Liability of two persons, primarily liable, not affected by arrangement between them
that one shall be surety on other’s default
Where two persons contract with third person to undertake a certain liability, and also contract with each
other that one of them shall be liable only on the default of the other, the third person not being a party to
such contract the liability of each of such two persons to the third person under the first contract is not
affected by the existence of the second contract, although such third person may have been aware of its
existence.

Negotiable instrument
A negotiable instrument is a document guaranteeing the payment of a specific amount of
money, either on demand, or at a set time. According to the Negotiable Instruments Act, 1881 in
India there are just three types of negotiable instruments i.e., promissory note, bill of exchange
and cheque.

More specifically, it is a document contemplated by a contract, which

(1) warrants the payment of money, the promise of or order for conveyance of which is
unconditional;
(2) specifies or describes the payee, who is designated on and memorialized by the instrument;
and

(3) is capable of change through transfer by valid negotiation of the instrument.

Types of negotiable instrument

[edit] Promissory note

A negotiable promissory note is an unconditional promise in writing made by one person to

another, signed by the maker, engaging to pay on demand to the payee, or at fixed or
determinable future time, sum certain in money, to order or to bearer. (see Sec.194) Bank note is
frequently referred to as a promissory note, a promissory note made by a bank and payable to
bearer on demand.

[edit] Bill of exchange

A bill of exchange or "draft" is a written order by the drawer to the drawee to pay money to the
payee. A common type of bill of exchange is the cheque (check in American English), defined as
a bill of exchange drawn on a banker and payable on demand. Bills of exchange are used
primarily in international trade, and are written orders by one person to his bank to pay the bearer
a specific sum on a specific date. Prior to the advent of paper currency, bills of exchange were a
common means of exchange. They are not used as often today

DRAWER, DRAWEE AND PAYEE - The maker of a bill of exchange or cheque is called the “drawer”; the person
thereby directed to pay is called the “drawee” [section 7 para 1].  -  - The person named in the instrument, to whom,
or to whose order the money is by the instrument directed to be paid, is called the “payee” [section 7 para 5]. - -
However, a drawer and payee can be one person as he can order to pay the amount to himself.

AT SIGHT, ON PRESENTMENT, AFTER SIGHT  - In a promissory note or bill of exchange the expressions “at
sight” and “on  presentment” mean ‘on demand’. The expression “after sight” means, in a promissory note, after
presentment for sight, and, in a bill of exchange, after acceptance, or noting for non-acceptance, or protest for non-
acceptance. [section 21]. - - Thus, in case of document ‘after sight’, the countdown starts only after document is
‘sighted’ by the concerned party.

Hundi – a local instrument – Hundi is an indigenous instrument similar to Negotiable Instrument. The
term is derived from Sanskrit word ‘hund’ which means ‘to collect’. If it is drawn in local language, it is
governed by local usage and customs

Cheques - A “cheque” is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise
than on demand. ‘Cheque’ includes electronic image of a truncated cheque and a cheque in electronic form. [section
6].  The definition is amended by Amendment Act, 2002, making provision for electronic submission and clearance
of cheque. The cheque is one form of Bill of Exchange. It is addressed to Banker.  It cannot be made payable after
some days. It must be made payable ‘on demand’.
 Unit 4
Sale of Goods Act is one of very old mercantile law. Sale of Goods is one of the special types of Contract.
Initially, this was part of Indian Contract Act itself in chapter VII (sections 76 to 123). Later these sections in
Contract Act were deleted, and separate Sale of Goods Act was passed in 1930.

The Sale of Goods Act is complimentary to Contract Act. Basic provisions of Contract Act apply to contract of Sale
of Goods also. Basic requirements of contract i.e. offer and acceptance, legally enforceable agreement, mutual
consent, parties competent to contract, free consent, lawful object, consideration etc. apply to contract of Sale of
Goods also.

Contract of Sale - A contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the
property in goods to the buyer for a price. There may be a contract of sale between one part-owner and another.
[section 4(1)]. A contract of sale may be absolute or conditional. [section 4(2)]. 

Thus, following are essentials of contract of sale –

* It is contract, i.e. all requirements of ‘contract’ must be fulfilled

* It is of ‘goods’

* Transfer of property is required

* Contract is between buyer and seller

* Sale should be for ‘price’

* A part owner can sale his part to another part-owner

* Contract may be absolute or conditional.

How Contract of sale is made - A contract of sale is made by an offer to buy or sell goods for a price and the
acceptance of such offer. The contract may provide for the immediate delivery of the goods or immediate payment
of the price or both, or for the delivery or payment by instalments, or that the delivery or payment or both shall be
postponed. [section 5(1)]. Subject to the provisions of any law for the time being in force, a contract of sale may be
made in writing or by word of mouth, or partly in writing and partly by word of mouth or may be implied from the
conduct of the parties. [section 5(2)]. Thus, credit sale is also a ‘sale’.  - - A verbal contract or contract by conduct of
parties is valid. e.g. putting goods in basket in super market  or taking food in a hotel.

Two parties to contract - Two parties are required for contract. - - “Buyer” means a person who buys or agrees to
buy goods. [section 2(1)]. “Seller” means a person who sells or agrees to sell goods. [section 2(13)].  A part owner
can sale his part to another part-owner. However, if joint owners distribute property among themselves as per mutual
agreement, it is not ‘sale’ as there are no two parties.

Contract of Sale includes agreement to sale - Where under a contract of sale the property in the goods is transferred
from the seller to the buyer, the contract is called a sale, but where the transfer of the property in the goods is to take
place at a future time or subject to some condition thereafter to be fulfilled, the contract is called an agreement to
sell. [section 4(3)]. An agreement to sell becomes a sale when the time elapses or the conditions are fulfilled subject
to which the property in the goods is to be transferred. [section 4(4)]. The provision that contract of sale includes
agreement to sale is only for the purposes of rights and liabilities under Sale of Goods Act and not to determine
liability of sales tax, which arises only when actual sale takes place.
Transfer of property -  “Property” means the general property in goods, and not merely a special property. [section
2(11)]. In layman’s terms ‘property’ means ‘ownership’. ‘General Property’ means ‘full ownership’. Thus, transfer
of ‘general property’  is required to constitute a sale. If goods are given for hire, lease, hire purchase or pledge,
‘general property’ is not transferred and hence it is not a ‘sale’.

POSSESSION AND PROPERTY - Note that ‘property’ and ‘possession’ are not synonymous. Transfer of
possession does not mean transfer of property. e.g. - if goods are handed over to transporter or godown keeper,
possession is transferred but ‘property’ remains with owner. Similarly, if goods remain in possession of seller after
sale transaction is over, the ‘possession’ is with seller, but ‘property’ is with buyer.

Goods - “Goods” means every kind of movable property other than actionable claims and money; and includes stock
and shares, growing crops, grass, and things attached to or forming part of the land which are agreed to be severed
before sale or under the contract of sale. [section 2(7)].

Price - “Price” means the money consideration for a sale of goods. [section 2(10)]. Consideration is
required for any contract. However, in case of contract of sale of goods, the consideration should be
‘price’ i.e. money consideration. 

Ascertainment of price - The price in a contract of sale may be fixed by the contract or may be left to be fixed in
manner thereby agreed or may be determined by the course of dealing between the parties. [section 9(1)]. Where the
price is not determined in accordance with the foregoing provisions, the buyer shall pay the seller a reasonable price.
What is a reasonable price is a question of fact dependent on the circumstances of each particular case. [section
9(2)].

Conditions and Warranties - Opening para of section 16 makes it clear that there is no implied warranty
or condition as to quality of fitness of goods for any particular purpose, except those specified in Sale of
Goods Act or any other law. - - This is the basic principle of caveat emptor’ i.e. buyer be aware. However,
there are certain stipulations which are essential for main purpose of the contract of sale of goods. These
go the root of contract and non-fulfilment will mean loss of foundation of contract. These are termed as
‘conditions’. Other stipulations, which are not essential are termed as ‘warranty’. These are collateral to
contract of sale of goods. Contract cannot be avoided for breach of warranty, but aggrieved party can
claim damages. - - A breach of condition can be treated as breach of warranty, but vice versa is not
permissible.

A stipulation in a contract of sale with reference to goods which are the subject thereof may be a condition
or a warranty. [section 12(1)]. A condition is a stipulation essential to the main purpose of the contract, the
breach of which gives rise to a right to treat the contract as repudiated. [section 12(2)]. A warranty is a
stipulation collateral to the main purpose of the contract, the breach of which gives rise to a claim for
damages but not to a right to reject the goods and treat the contract as repudiated. [section 12(3)].
Whether a stipulation in a contract of sale is a condition or a warranty depends in each case on the
construction of the contract. A stipulation may be a condition, though called a warranty in the contract.
[section 12(4)].

Where a particular stipulation in contract is a condition or warranty depends on the interpretation of terms of
contract. Mere stating ‘Conditions of Contract’ in agreement does not mean all stipulations mentioned are
‘conditions’ within meaning of section 12(2).

When condition to be treated as warranty - Where a contract of sale is subject to any condition to be fulfilled by the
seller, the buyer may waive the condition or elect to treat the breach of the condition as a breach of warranty and not
as a ground for treating the contract as repudiated. [section 13(1)]. Where a contract of sale is not severable and the
buyer has accepted the goods or part thereof, the breach of any condition to be fulfilled by the seller can only be
treated as a breach of warranty and not as a ground for rejecting the goods and treating the contract as repudiated,
unless there is a term of the contract, express or implied, to that effect. [section 13(2)]. Nothing in this section shall
affect the case of any condition or warranty fulfillment of which is excused by law by reason of impossibility or
otherwise. [section 13(3)].

Time of payment is not essence of contract but time of delivery of goods is, unless specified otherwise - Unless a
different intention appears from the terms of the contract, stipulations 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. [section 11]. As a general rule, time of payment is not essence of contract,
unless there is specific different provision in Contract. In other words, time of payment specified is ‘warranty’. If
payment is not made in time, the seller can claim damages but cannot repudiate the contract.

Caveat Emptor - The principle termed as ‘caveat emptor’ means ‘buyer be aware’. Generally, buyer is expected to
be careful while purchasing the goods and seller is not liable for any defects in goods sold by him. This principle in
basic form is embodied in section 16 that subject to provisions of Sale of Goods Act and any other law, there is no
implied condition or warranty  as to quality or fitness of goods for any particular purpose. As per section 2(12),
“Quality of goods” includes their state or condition.

Transfer of property as between seller and buyer - Transfer of general property is required in a sale.
‘Property’ means legal ownership. It is necessary to decide whether property in goods has transferred to
buyer to determine rights and liabilities of buyer and seller. Generally, risk accompanies property in goods
i.e. when property in goods passes, risk also passes. If property in goods has already passed on to buyer,
seller cannot stop delivery of goods even if in the meanwhile buyer has become insolvent. - - - Where
there is a contract for the sale of unascertained goods, no property in the goods is transferred to the
buyer unless and until the goods are ascertained. [section 18].

Property passes when intended to pass - Where there is a contract for the sale of specific or ascertained goods the
property in them is transferred to the buyer at such time as the parties to the contract intend it to be transferred.
[section 19(1)].  For the purpose of ascertaining the intention of the parties regard shall be had to the terms of the
contract, the conduct of the parties and the circumstances of the case. [section 19(2)]. Unless a different intention
appears, the rules contained in sections 20 to 24 are rules for ascertaining the intention of the parties as to the time at
which the property in the goods is to pass to the buyer. [section 19(3)].

Specific goods in a deliverable state - Where there is an unconditional contract for the sale of specific goods in a
deliverable state, the property in the goods passes to the buyer when the contract is made, and it is immaterial
whether the time of payment of the price or the time of delivery of the goods, or both, is postponed. [section 20].

Auction sale - Auction sale is special mode of sale. The sale is made in open after making public announcement.
Buyers assemble and make offers on the spot. Person offering to pay highest price gets the goods. Usually,
auctioneer is appointed to conduct auction. Higher and higher bids are offered and sale is complete when auctioneer
accepts a bid.- - - In the case of a sale by auction— (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,
or for the auctioneer knowingly to take any bid from the seller 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.
[section 64].

Delivery of goods to buyer - The Act makes elaborate provisions regarding delivery of goods to buyer. It is the duty
of the seller to deliver the goods and of the buyer to accept and pay for them, in accordance with the terms of the
contract of sale. [section 31]. Unless otherwise agreed, delivery of the goods and payment of the price are concurrent
conditions, that is to say, the seller shall be ready and willing to give possession of the goods to the buyer in
exchange for the price, and the buyer shall be ready and willing to pay the price in exchange for possession of the
goods. [section 32]. - - Note that this is ‘unless otherwise agreed’, i.e. buyer and seller can agree to different
provisions in respect of payment and delivery.

Acceptance of goods by buyer - Contract of Sale is completed not by mere delivery of goods but by
acceptance of goods by buyer. ‘Acceptance’ does not mean mere receipt of goods. It means checking the
goods to ascertain whether they are as per contract. - - -  Where goods are delivered to the buyer which
he has not previously examined, he is not deemed to have accepted them unless and until he has had a
reasonable opportunity of examining them for the purpose of ascertaining whether they are in conformity
with the contract. [section 41(1)]. - - Unless otherwise agreed, when the seller tenders delivery of goods to
the buyer, he is bound, on request, to afford the buyer a reasonable opportunity of examining the goods
for the purpose of ascertaining whether they are in conformity with the contract. [section 41(2)].

Buyer’s and Seller’s duties  - The Act casts various duties and grants certain rights on both buyer and
seller.

Rights of unpaid seller against the goods - After goods are sold and property is transferred to buyer,
the only remedy with seller is to approach Court, if the buyer does not pay. Seller has no right to take
forceful possession of goods from buyer, once property in goods is transferred to him. However, the Act
gives some rights to seller if his dues are not paid.

Suits for breach of the contract - Unpaid seller can exercise his rights to the extent explained above. In
addition, seller can exercise following rights in case of breach of contract. Buyer has also rights in case of
breach of contract.

Measure for compensation and  damages – The Sale of Goods Act does not specify how to measure damages.
However, since the Act is complimentary to Contract Act, measure of compensation and damages will be as
provided in sections 73 and 74 of Contract Act.