B.Com 1st Year Special Contracts Long Question Answer Notes

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LONG ANSWER QUESTIONS

Q.1. Define contract of indemnity. What is the difference between ‘Contract of indemnity and “Guarantee’?(2014)

Or What do you understand by the ‘Contract of indemnity’ and ‘Contract of guarantee”? Compare and contrast the two.

Ans. Definition, meaning and Nature of Contract of Indemnity: Sec. 124 of Indian Contract Act, 1872 dennes contract of indemnity. According to this ‘a contract of indemnity’ is a contract by which one party promises to save the other party from loss caused to him by the conduct of the promisor nimself or by the conduct of any other person. The person who promises to indemnity or make the loss good is called the indemnifier and the person whose loss is made good is called the indemnined or the indemnity holder.

For example; A and B go into a shop, B says to the shopkeeper, ‘Let A have the goods, I will pay the money. This is a contract of indemnity between B and the shopkeeper under which shopkeeper is entitled to get the price of goods, taken by A from B.

It may be noted that a contract of indemnity is a type of contingent contract. The contract of indemnity may be expressed, whether oral or implied.

Right of the Indemnity-holder When Sued (Sec. 125)

The promisee (indemnity holder) is a contract of indemnity, acting within the scope of his authority, is entitled to recover from the promisor (indemnifier):

1. All damages which he may be compelled to pay in any suit in respect of matter to which the promise to indemnify applies.

2. All costs which he may be compelled to pay in any such suit if:

(a) In bringing or defending the suit, he did not contravene the orders of the promisor and acted as if a prudent man would act.

(b) The promisor authorized 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:

(a) The compromise was not contrary to the orders of the promisor and it was a prudent decision of the promisee, or

(b) The promisor authorised him to compromise the suit.

Contract of Guarantee

Sec. 126 of Indian Contract Act, 1872 defines contract of guarantee. According to this, ‘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 or guarantor while the person for whom the guarantee is given is called the principal debtor and the person to whom the guarantee is given is called the creditor.

For example: A advances a loan of 5,000 to B and C promises to A that if B does not repay the Joan C will do so. This is a contract of guarantee. Here A is the creditor, B is the principal debtor and C is the surety or guarantor.

It may be noted that in a contract of guarantee, the consideration received by the principal debtor may be a sufficient consideration to the surety for giving the guarantee. For instances, 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 to B. This is sufficient consideration for C’s promise.

Difference between Contract of Indemnity and Guarantee

Following are the important points of distinction between contract of Indemnity and contract of guarantee:

S.No.	Basis of difference	Contract of indemnity	Contract of Gurantee
1.	No. Of parties	There are only two parties, i.e. the indemnifier and the indemnified.	There are three parties, i.e. the surety, the principal debtor and the creditor.
2.	Liability	The liability of the indemnifier is primary.	The liability of the surety is secondary.
3.	Work	The indemnifier undertakes to indemnify on the happening of any loss.	The surety guarantees the performance of and existing promise.

Q.2. Discuss the various rights of a surety.

Ans. Surety gets various rights after discharging the liability of the principal debtor which are:

1. Rights Against the Principal Debtor: The following rights are enjoyed against principal debtor:

(a) Right to subrogation, i.e. substitution of one person by another. A surety acquires all the rights against principal debtor that the creditor possessed as he fulfils his obligation towards creditor.

(b) Right to Claim Indemnity: Principal debtor has an implied promise to indemnify the surety in each and every contract of guarantee and the surety is entitled to recover from principal debtor the sum that has been paid right fully under the guarantee.

2. Rights Against the creditor: It includes the following rights:

(a) Right to Securities: A surety has the right of getting every benefit that the creditor has against the principal debtor under contract irrespective of the knowledge about existence of such security.

(b) Right to Claim Set-off: The surety has such a right which the principal debtor had against the creditors in case the creditor sues him for the payment of liability.

3. Surety’s Rights Against Co-sureties: Co-sureties are those where a debt is guaranteed by two or more sureties. In such cases, all the co-sureties are liable to contribute towards the payment of guaranteed debt according to the agreement among them.

The various rights included in it are:

(a) Where they are Sureties for the Same Debt for Similar Amount: The co-sureties have the liability to contribute equally and are entitled to have a share of benefit of securities that is held by any one of the co-sureties equally. It can also be said that, ‘As between co-sureties, there is equality of burden and benefit’. For the application of the principal it is immaterial whether the sureties are liable jointly under one contract or under several of them and whether with or without the knowledge of each other. There is no right of contribution between persons who become sureties for different debts and not for the same debt.

b) Where they are Sureties for the Same Debt for Different Sums: According to the rule, ‘Each surety is to contribute equally subject to the limit fixed by his guarantee!

For example; If A, B and C serving as sureties for D enter into three several bonds each in a different penalty like A in the penalty of 10,000, B in the penalty of 20,000 and C in that of 40,000 conditioned for D‘s accounting to E. Then:

(a) A, B and Care liable to pay 10,000 if D makes default to the extent of 30,000.

(b) A is liable to pay 10,000 and B and C 15,000 each if D makes default to the extent of 40,000.

Q.3. What are the various modes of discharge of a surety? modes of discharge of a surety are as follows:

1. By Revocation of Contract of Guarantee: It includes:

(a) By Notice: A specific guarantee may be revoked by a surety by notice to the creditor as the nability of surety has not yet accrued. A continuing guarantee may be revoked by the surety as future transactions by notice to creditor.

(b) By Death of Surety: It operates as a revocation of continuing guarantee as to future transaction after the death of surety in the absence of any contract in this part.

(c) By Novation: When a fresh contract is entered into either between the same parties or between other parties, a contract of guarantee is said to be discharged by novation.

2. By Conduct of Creditor: It includes:

(a) By Variance in Terms of Contract: In case of a major modification in terms of contract without the agreement of surety, creditor discharges the surety as to transactions subsequent to the variant. Such a variation is not substantial or beneficial to the surety.

(b) By Release or Discharge of Principal Debtor: When the creditor and the principal debtor makes a contract that nullifies the obligation of principal debtor or the creditor does same act, the surety is released from his liability under the guarantee.

(C) By Arrangement between Principal Debtor and Creditor: A contract between the creditor and principal debtor through which the creditor promises to give time to or not to see the principal debtor, discharges the surety unless the surety assents to such contract.

(d) By Creditor’s Actor Omission Impairing Surety’s Eventual Remedy: The surety is discharged if a creditor does any inconsistent act or omits to do an act which is his duty to the surety that requires him to do as such.

(d) Loss of Security: The surety is discharged from liability to the extent of value of security if the creditor loses or parts with security given to him without the consent of surety.

3. By Invalidation of Contract: It includes:

(a) Guarantee Obtained by Misrepresentation: Any guarantee obtained as such concerned with the material part of the transaction is considered as invalid.

(b) Guarantee Obtained by Concealment: According to Section 143, any guarantee that a creditor has obtained by means of keeping silence to material circumstances is regarded as invalid.

(c) Failure of Co-surety to Join a Surety: According to Section 144, a creditor shall not act upon the contract in case where a person gives a guarantee upon a contract until another person has joined in it as co-surety. Such a guarantee is not valid if that person does not join and the surety is absolved of his liability.

Q.4. What is bailment? Explain the rights and duties of a bailor in respect of goods bailed. (2015)

Or Discuss the duties and rights of a ballor and a bailee.

Ans. Bailment: Refer to Section-A, Q.5.

Duties and Rights of Bailor

Duties: Following are the important duties of a bailor:

1. To discharge known faults in the goods to the bailee.

2. To bear necessary expenses of gratuitous bailment.

3. To indemnify bailer for loss, in case of premature termination of gratuitous bailment.

4. To indemnify the bailor, if the bailor was not entitled to make the bailment.

5. To receive back the goods.

Rights: Following are the important rights of a bailor:

1. To enforce duties of the bailee.

2. To terminate the contracts of bailment.

3. To demand back goods.

4. To claim increase of or profit from goods bailed.

Duties and Rights of Bailee

Duties: Following are the important duties of a bailee:

1. To take reasonable care of the goods bailed.

2. Not to make unauthorised use of the goods bailed.

3. Mixture without bailor’s consent when the goods cannot be separated, the bailor is entitled to be compensated by the bailee for loss of goods.

4. Mixture without bailor’s consent when the goods can be separated, the property in the goods remains in the parties respectively; but the bailee is bound to bear the expenses of dividing the goods and also for any damage arising from the mixture.

5. To return the goods to the bailor.

6. To deliver any increase of or profit from, goods bailed by bailor.

7. Not to do anything that is inconsistent with the creditors of bailment.

Rights: Following are the important rights of a bailee:

1. To enforce duties of the bailor.

2. To deliver goods to one of several joint owners.

3. Delivery of goods to bailor without title.

4. Right of action against third parties.

5. Right of lien.

Q.5. Define pledge and state the respective rights and duties of pawnor and pawnee.

Ans. Pledge

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

Pawnor: In case of pledge, the bailor is called the pawnor.

Pawnee: In case of pledge, the bailee is called the pawnee.

Example: A borrowed 1000 from B and kept his watch as security for payment of the debt. The bailment of watch is called a pledge.

Rights of Pawnor

The rights of pawnor are as follows:

1. Enforcement of Pawnee’s Duties: The duties of the pawnee are the rights of the pawnor. The pawnor can, therefore, enforce by suit all the duties of the pawnee as his rights.

For example: If the pawnee makes an unauthorised sale, the pawnor can file a suit for redemption of goods treating the sale as void or for damages for conversion. Similarly, the pawnor has a right to receive the pledged goods back along with accretion if any, on making the payment on stipulated date and so forth.

2. Defaulting Pawnor’s Right to Redeem: A pawnor, who defaults in payment of the debt amount at the stipulated date, has a right to redeem the debt at any subsequent time before the actual sale or goods pledged.

Thus, an agreement that the pledge should become irredeemable,if it is not redeemed within a certain time, would be invalid. Of course, th pawnor redeeming after the expiry of the specified time must pay to the pawnee.

Duties of Pawnor

The more important duties of a pawnor are as follows:

1. To compensate the pawnee for any extraordinary expenses incurred by him.

2. To meet his obligation on stipulated date and comply with the terms of the contract.

Rights of Pawnee

The rights of pawnee are as follows:

1. Right of Retainer: The pawnee has the right to retain the goods pledged until his dues are paid. He has the right to retain the goods pledged, not only for payment of the debt of promise, but for the interest due on the debt and all necessary expenses incurred by him in respect of the possession or for the preservation of the goods pledged.

2. Right of Retainer for Subsequent Advances: When the pawnee lends money to the same debtor after the date of pledge without any further security, it shall be presumed that the right of retainer over the pledged goods extend even to subsequent advances.

3. Right to Extraordinary Expenses: The pawnee also has the right to recover from the pawnor extraordinary expenses incurred by him for the preservation of the goods pledged. But he cannot retain the goods, if such an expenses are not paid. He has only a right to sue the pawnor for recovery of such an extraordinary expense.

4. Right to Sue the Pawnor or Sell the Goods on Default of the Pawnor: Where a pawnor makes default in the payment of the debt or performance of the promise the pawnee may exercise either of the following rights:

(a) He may bring a suit against the pawnor for the recovery of the amount due to him and retain the goods pledged as a collateral security.

(b) He may himself sell the thing pledged after giving to the pawnor a reasonable notice of his intention to sell. In connection with the alternative right of sale, the following points must be noted:

(1) The requirement of a ‘reasonable notice’ is a statutory obligation and cannot be waived by agreement.

(ii) The pawnee cannot sell the goods to himself and if he does so then such a sale is void.

(iii) If the proceeds of such a sale are insufficient to meet the full claim of the pawnee he may recover the balance.

Duties of Pawnee

Pledge being a special kind of bailment, the duties of a pawnee are just like a bailee. Thus, a pawnee’s duties may be enumerated as follows:

1. To take reasonable care of the goods pledged.

2. Not to make any unauthorised use of the goods pledged.

3. Not to mix the goods pledged with his own goods.

4. Not to do any act in violation of the terms of the contract of pledge and of the provisions of the contract act.

5. To return the goods pledged on receipt of his full dues.

6. To deliver any accretion to the goods pledged, e.g. bonus shares must also be delivered where shares from the subject is a matter of pledge. The accretion remains the property of the pawnor.

Q.6. What are the rights and duties of an agent?

Ans. Rights of an Agent: The rights of an agent are as follows:

1. An agent is entitled to retain goods, papers and other property, whether movable or immovable of the principal received by him, until the amount due to himself for commission and services in respect of the same has been paid to him.

2. The principal is bound to indemnify his agent against the consequences of all lawful acts done by such agent, in exercise of the authority conferred upon him.

3. Where one person employs another to do an act and the agent does the act in good faith, the principal is liable to indemnify the agent against the consequences of that act, though it may cause an injury to the right of third person. However, an agent cannot claim to be indemnified against the consequences of an act, which he does, but which is prohibited under the penal law of the country.

4. This principal must compensate his agent in respect of injury caused to such agent, by the principal’s neglect or want of skill.

5. An agent may retain, out of any sums received on account of the principal, all moneys due to himself in respect of:

(a) advance made by him in conducting such business.

(b) expenses properly incurred by him in conducting such business.de

6. An agent is entitled to remuneration for the performance of any act in the business of agency. But an agent, who is guilty of misconduct in the business of agency, is not entitled to any remuneration in respect of that part of the business of the agency, which he has misconducted.

Duties or Obligation of an Agent

The duties of an agent are as follows:

1. An agent is bound to conduct the business of his principal according to the directions given by the principal. In the absence of any such directions, the agent must conduct the business of his principal according to the prevailing customs. Where an agent acts otherwise and some loss is sustained, he must compensate the loss to his principal.

2. An agent is bound to conduct the business of his principal with reasonable diligence. He is also bound to such skill as he possesses, in the conduct of business. Further, an agent skill also compensate his principal for direct consequences of his own neglect, want of skill or misconduct.

3. An agent is bound to render proper accounts to his principal, whenever demanded by the latter.

4. In case of difficulty, an agent must contact his principal to obtain his instructions,

5. An agent is bound to pay, to the principal, all sums received on his account.

Personal Liability of Agent to Third Party: An agent is personally liable to third party in the following cases:

1. Where an agent represents that he has authority to act on behalf of a principal, but who does not actually possess such authority or who has exceeded the authority and the principal does not ratify his acts.

2. Where the contract expressly provides for the personal liability of the agent.

3. Where the agent signs a negotiable instrument in his own name, without making it clear that

he is signing as an agent.

4. Where the agent works for a foreign principal.

5. Where according to usage of trade in certain kinds of business, agents are personally liable.

Q.7. What do you mean by mean ratification? What are the rules governing ratification?

Ans. Ratification: It implies the acceptance or approv done by the agent without his consent or knowledge. According to section 196 of the Indian Contract Act, ‘Where acts are done by one person on behalf of another but without his knowledge or authority, he may elect to ratify or disown such acts. In case he ratifies them, thesame effect will follow as if they had been performed by his authority.’

According to Section 197, ratification can either be express o behaviour of the person on whose behalf the act has been performed.

Rules that govern ratification are based on the provisions of the Indian contract act and the courts from time to time. Some of these rules are:

1. Ratification must be made by the person on whose behalf the act was done. Ratification has no legal significance if it is done by a third party.

2. The act must be in the name of the principal. The agent must act as a

n the name of the principal. The agent must act as an agent and if he has acted i and on his own account, the principal cannot be held responsible to ratify such action.

3. The principal must have contractual capacity. This must be at the time of contract as well as at the time of ratification as this implies the acceptance of the contract at the time, the agent makes it.

4. The principal must be in existence when the contract is made. A company can’t ratify the contracts made by the promoters on its behalf before its incorporation.

5. Ratification must be with full knowledge of facts. The ratification will not be valid if the person doing the ratification has not a knowledge of what he is ratifying. 6. Only lawful acts can be ratified. Acts that are void from the legal standpoint or against the law and punishable by law, cannot be ratified. 7. The whole transaction can be ratified. The ratification will not be valid if an agent makes a commitment without the authority of his principal and the latter ratifies only a part of what the agent has committed on his behalf.

8. Ratification must be Within Reasonable Time: The ratification is not valid if it is done within the specified time. If there is no time limit, the ratification should be done within a reasonable time which depends on the circumstances of the case.

9 Ratification should not Put a Third Party to Damages: If a person does an act which if it was done with the authority of the other person puts a third party to damage or terminates any right or interest of a third party, such an act cannot be ratified,

10 Ratification may be express or implied and must be communicated. This communication must be to the party who is sought to be bound by the act done by the agent.

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B.Com 1st Year Special Contracts Long Question Answer Notes

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