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

B.Com 1st Year Special Contracts Short Question Answer Notes :- In this post is very useful for BCOM Students you will get full information related to Indemnity Guarantee Bailment And pledge, Agency. All Topic Wise Chapter Wise Notes Study Material Question Answer With Notes Available in over site parultech.com.

Short Question Answer

Q.1. Explain contract of indemnity. (2015)

Ans. 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. It is a part of the general class of ‘contingent contracts and the contingency upon which the whole contract of indemnity depends is the happening of loss.

In such a contract, the person who promises to protect another from a loss is called the indemnifier and the person who is so protected is called the indemnity holder.

A contract of indemnity must have the following two essential elements:

1. The indemnifier expressly promises to indemnify the indemnity holder.

2. The promise here is to protect the indemnity holder against loss that could be the result of an act on the part of the promisor (i.e. the indemnifier or a third party). According to English law, a contract of indemnity is defined as ‘a promise to save another person from harm or loss caused as a result of a transaction entered into at the instance of the promisor’. It may be express or implied and is a form of general contract.

Q.2. What are the rights of indemnified and indemnifier?

Ans. Rights of indemnified or indemnity holder are:

1. An indemnity holder can sue for specific performance of the contract of indemnity if he incurs absolute liability that is covered by the contract of indemnity,

2. An indemnity holder when sued is entitled to recover from the indemnifier all the damages which are compelled to pay in any suit with respect to any matter to which the promise to indemnify is applied.

3. All sums are under the terms of any compromise of any suit that may not be contrary to the orders of the promisor or must be authorised by the promisor and must be one that would be prudent for the promisee to make.

4. Al costs which he may be compelled to pay in any such suit in defending it such that the indemnity holder had not contravened the orders of the promisor and acted prudently.

The indemnifier is the promisor in the contract of indemnity who have some rights also. He has all those rights that are available to the indemnity holder in order to protect himself once the indemnifier has fulfilled his obligation towards indemnity holder. Such rights include:

(a) Right to subrogation.

(b) Right to equities.

(c) Right to refuse indemnity.

Q.3. What do you mean by ‘Contract of guarantee’? Give its essential features.

Ans. Contract of Guarantee: It is a contract to perform a promise or discharge the liability of a third person in case of his default. In such a contract, the person giving the guarantee is called ‘surety’. me 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 contract of guarantee must have all the essential elements of a valid contract. The essential features of a contract of guarantee are:

1. It is a tripartite agreement between the principal debtor, creditor and the surety.

2. There must be a consent of all these three parties for a contract to be valid.

3. All the essentials of a valid contract must be present in a contract of guarantee.

 4. A contract of guarantee can be oral or written and cannot be an implied contract.

5. There must be an existing liability or a promise whose performance is guaranteed and this must be enforceable by law.

6. Any guarantee that is obtained by means of misrepresentation made by the creditor is invalid.

7. Any guarantee that the creditor has obtained by means of keeping silence as to the material circumstances is invalid, i.e. the guarantee may not be obtained by concealment of material facts.

Q.4. Discuss the different types of guarantee.

Or What are the different kinds of guarantee? How is continuing guarantee revoked? (2016)

Ans. A guarantee is of the following types:

1. Oral or Written Guarantee: A contract of guarantee may either be oral or written though a creditor prefers writing to avoid any dispute regarding the terms. The existence of oral agreement is difficult to prove.

2. Retrospective Guarantee: This guarantee is with respect to an existing or an old debt of a party.

3. Guarantee for the Whole Debt or a Part of the Debt: Difficult questions arise in case of a guarantee for a limited amount as there is difference between a guarantee for only a part of the whole debt and a guarantee for the whole debt subject to a limit.

4. Prospective Guarantee: A guarantee for a future debt or obligation is a prospective guarantee. Such a contract of guarantee may be:

(a) Specific Guarantee: If a guarantee is intended to be applicable to a particular debt and thus comes to an end on its repayment, it is specific guarantee. It extends to a single transaction or debt and comes to an end as the debt is discharged or the discharge of the performance of a promise.

(b) Continuing Guarantee: It is also a specific guarantee that extends to a series of transactions,

This guarantee is regarding the conduct of another and is irrevocable unlike a specific guarantee. Its salient features are:

  • It is valid for a series of transactions.
  • It is applicable to specific transactions involving a specific amount of money,

(iii) This guarantee terminates in the event of death of the guarantor.

Q.5. Define bailment and give its characteristics.

Or Explain ballment.(2016)

 Ans. Bailment: According to the Indian Contract Act, ‘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 off according to the directions of the person delivering them!

Bailer: The person delivering the goods is called the bailor.

Bailee: The person to whom they are delivered is called the

baileement. The transaction between bailor and bailee is called the bailment.

Characteristics or Essential Features: The bailment has the following characteristics or features:

1. It is a Delivery of Movable Goods by One Person to Another Person (Not being his servant):

When the bailee physical possession of the goods then, it is called actual delivery or constructive delivery.

2. The Goods are Delivered for some Purpose: When goods are delivered by mistake without any purpose, there is no bailment within the meaning of its definition in case of contract. Act.

3. The Goods are Delivered Subject to the Condition: The goods are delivered subject to the condition that when the purpose is accomplished the good are to be returned in special or disposed off according to the directions of the bailor either in their original form or in an altered form.

Q.6. What are the different kinds of bailment?

Ans. Different kinds of Bailment: Bailment may be classified from the ledde R point of view of 1. benefit and 2. reward to the parties:

1. Kinds from ‘Benefit’ Point of View: From ‘benefit’ point of view, bailments can be grouped into three classes:

(a) Bailment for Exclusive Benefit of the Bailor: leaves goods in the safe custody of the bailee without any compensation to be paid.

(b) Bailment for the Exclusive Benefit of the Bailee: A loan of some article, thus, where A borrow B’s fountain pen to use in the examination hall, the bailment is for the benefit of A, the bailee.

(c) Bailment for the Mutual Benefit of the Bailor and Bailee: It is the most common type of bailment. Contract for repair, hire, etc. Fall within this class, wherein the bailor

receives the benefit of service and the bailee gets benefitted by the receipt of the agreed charges.

2. Kinds from ‘Reward Point of View: Bailment may also be classified on the basis of reward also:

(a) Gratuitous Bailment: It is the one in which neither the bailor nor the bailee is entitled to any remuneration, e.g. loan of a book to a friend, deposition of goods for safe custody without any charge.

(b) Non-gratuitous Bailment: It is also called as a ‘bailment for reward’. Here either the bailor or the bailee is entitled to a remuneration, e.g. motor car let out for hire, cloth given for tailoring for charges.

Q.7. Write a short note on termination of bailment.

Ans. Bailment can be terminated in the following conditions:

1. In Case of Doing an Act Inconsistent with terms of Bailment: The bailer has the right to terminate the contract if the bailee defaults in adhering to the terms of bailment.

2. In Case of Gratuitous Bailment at the Desire of the Bailor: In such a case, the bailor can demand the return of goods at any time he pleases and terminates the bail agreement.

3. On the Expiry of Period: If the contract of bailment stipulates the bailment to be for a specific period according to section 160, it comes to an end at the expiry of such period,

4. On Accomplishment of Object: When the object for which the bailment was made is achieved, the bailment terminates.

5. Death of the Bailor or Bailee: The death of the bailor or bailee terminates the contract in case of gratuitous bailment according to section 162.

Q.8. What do you understand by contract of pledge? What are its essentials?

Ans. The bailment of goods as security for the payment of a debt or performance of a promise according to Section 172, is called pledge. The bailor is called pawnor or pledger and the bailee is called pawnee or pledge. If the purpose of a bailment is to provide security for the payment of a loan or the performance of a promise then such a bailment is called a pledge. In its contract, the pawnor delivers the goods to the pawnee.

The essential features of a pledge are:

1. It is only of movable goods and immovable property is beyond the scope of a pledge.

2. Pledge involves judicial possession of goods. Mere possession of goods can’t give the possessor the right to pledge such goods.

3. Pledge involves return of goods. When the object of the pledge is accomplished, the pawnee returns the goods in his possession to the pawnor and the contract is terminated.

4. Pledge involves transfer of possession. The goods pledged must be transferred from the pawnor to the pawnee in a contract of pledge.

5. Pledge can only be a saleable commodity. If the pawnor is not able to clear his debt, the pawnee can recover the amount of loan by selling goods pledged to him. (2014)

Q.9. Explain Bailment and Pledge.

Or Distinguish between pledge and bailment.

Ans. Contract of a pledge is a type of a bail contract. Both arise from an agreement between the parties to the contract and the goods have to be returned after the object of the contract and the time period have been met.

S.No. Basis of difference Pledge Bailment
  Purpose Pledge is a bailment of goods for a specific purpose like repayment of a debt or performance of a duty. Bailment is a delivery of goods for the purpose of repairs like carriage, etc.
  Parties Parties involved are pawnor and pawnee. Parties involved are bailor and bailee.
  Right of use Pawnee has no right to use the pledged goods. Bailee may use the goods bailed with the consent of bailor.
  Consideration Pawnee has the right to sell the goods in case of non-payment of debt. Bailee can get only particular lien on the goods in return for lawful demands.
  Right to sell Pawnee can sell the goods pledged after giving notice to the pawnor. Bailee can retain the goods or sue the bailor for his dues.
  Contract termination It is not necessarily terminated by the return of goods for a limited purpose to the pawnor. The contract comes to an end on the return of goods bailed.

Q.10. Which persons may make a valid pledge or pawn?

Ans. Only the owner of goods has the right to pledge the goods as per rule but in some cases non owners can make valid pledge. The following persons may make a valid pledge or pawn:

1. Owners of Goods: It includes an authorised agent of the owner. If there are several owners and the goods are in possession of one of them, then one co-owner can create a valid pledge of such goods with the consent of other co-owners.

2. Pledge by Mercantile Agents: A mercantile agent in possession of the goods can create a valid pledge with the consent of real owner.

3. Pledge by Person in Possession of Goods: A person who is in possession of goods under a voidable contract can create a valid pledge.

4. Seller in Possession of Goods: A seller who is in possession of goods can make a valid pledge even after sale.

5. Buyer Who has Obtained Possession of Goods: A buyer who has obtaine before sale can create a valid pledge.

6. Person Who has a Limited Interest in Goods: Such person can create a valid pledge of goods but only to the extent of his own interest.

Q.11. Define the terms “Agent’. ‘Principal’ and ‘Agency’. Discuss the general rules of agency.

Or Who can become an agent? (2016)

Ans. Agent and  Principal: An agent is a person employed to do any act for another or to represent another in dealing with third person. The person for whom such act is done, or who is represented is called the principal.

Agency: The contract which creates the relationship of principal and agent is called an ‘agency.

For example; A appoints B to buy ten bags of sugar on his behalf, A is the ‘principal’, B is the agent and the contract between the two is ‘agency’. If in pursuance of the contract of agency the agent purchases the bags of sugar from C, a wholesale dealer of sugar, on credit, then in the eye of law, the principal and the wholesale dealer are brought into direct contractual relations and the contract of purchase is enforceable both by and against the principal.

General Rules of Agency: There are two important general rules regarding agency listed below:

1. Whatever a person competent to contract may do by himself, he may do through an agent, except for acts involving personal skill and qualifications. Infact, where the work to be done is obviously personal, no agent can be employed.

For example; A person cannot marry through an agent, cannot point à picture through an agent, and so on.

2. ‘He who does through another, does by himself’. In other words, ‘The acts of the agent are, the acts of the principal are for all legal purposes. Contracts entered into through an agent, and obligations arising from acts done by an agent, may be enforced in the same manner, and will have the sa consequences, as if the contracts had been entered into and the acts done by the principal in person.

Q.12. Who is an agent? How does he differ from a servant? Can a minor (i) appoint an agent (ii) be appointed as an agent?

Ans. Agent: Refer to Sec-A, Q.11.

Distinction between Agent and Servant: A servant acts under the direct control and supervision of his emplover that is, he has to act according to the orders of the master in every particular case. He does not create relations between his employer and third person and cannot bind the master to third parties. If for some purpose, he is authorised to bind the master than to that extent he is an agent.

An agent is not subject to the direct control and supervision of the principal. He has often a large discretion to act within the scope of his authority. A principal directs the agents ‘as to what is to be done’ while a ‘master’ has further right to direct ‘how the work is to be done! Thus a very minute difference exists between the two. Further an agent is appointed to bring the principal into contractual relations with third parties.

Hence, an agent as such is not a servant but a servant is generally for some purpose his master’s agent.

A minor or a person of unsound mind can be appointed as an agent. It is so because the act of the agent is the act of the principal and therefore the principal is liable to third parties for the acts of a minor agent.

Of course, in appointing a minor or a person of unsound mind as an agent, the principal runs a great risk because he cannot hold such an agent liable for his misconduct or negligence.

Q.13. What are the different kinds of agents?

Ans. Different kinds of Agents: From the point of view of the extent of their authority, agents may be classified into:

1. General Agent: A general agent is one who is employed to do all acts which are connected with a particular business or employment, e.g. a manager of a firm. He can bind the principal by doing anything which falls within the ordinary scope of that business, whether he is actually authorised for any particular act or not, is immaterial, provided the third party acts bonafide.

2. Special Agent: A special agent is one who is employed to do some particular act or represents his principal in some particular transaction, e.g. an agent employed to sell a motor car. As soon as the act is performed, the authority of such an agent comes to an end.

If a special agent does anything outside his authority, the principal is not bound by it.

3. Universal Agent: The universal agent is said to be one whose authority is unlimited i.e. who is authorised to do all the acts which the principal can lawfully do and can delegate. He enjoys extensive powers to transact every kind of business on behalf of his principal.

From the point of view of the nature of work performed by them, agent may be classified into:

1. Mercantile Agent: A mercantile agent is one who has authority either to sell goods or to buy goods or to raise money on the security of goods. The various kinds of mercantile agent are as follows:

(a) Factor: A factor is a mercantile agent to whom goods are entrusted for sale. He enjoys wide discretionary powers in a relation to the sale of goods. He sells the goods in his own name upon such terms as he think fit.

(b). Commission Agent: A commission agent is a mercantile agent who buys or sells the goods for his principal on the best possible terms in his own name and who receives commission for his labours. He may or may not have possession of goods.

(C) Del Credere Agent: He is one who in consideration of an extra commission, guarantees his principal that the third person with whom he enters into contracts on behalf of the principal shall perform their financial obligations, that is, if the buyer does not pay, he will pay.

(d) Broker: He is one who is employed to make contracts for the purchase and sale of goods. He is not entrusted with the possession of goods. He simply acts as a connecting link and brings the two parties together so as to bargain and if the transaction materialises, he becomes entitled to his commission called brokerage.

2. Non-mercantile Agents: It includes advocate, attorney, insurance agent, wife, etc.

Q.14. Briefly explain the various modes by which an agency may be created.

Ans. Creation of an Agency: An agency may be created in any one of the following ways:

1. Agency by Express Agreement: Normally agency is created by an express agreement specifying the scope of the authority of agent. The agent may, in such a case be appointed either by word of mouth or by an agreement in writing. However, in certain cases, e.g. to execute a deed for sale or purchase of land, the agent must be appointed by executing a formal power of attorney’ on a stamped paper.

2. Agency by Implied Agreement: Implied agency arises when there is no express agreement appointing a person as an agent, but instead the existence of agency is inferred from the circumstances of the case, or from the conduct of the parties on a particular occasion or from the relationship between parties such as agency may take the following forms:

(a) Agency by Estoppel: Such an agency is based on the ‘doctrine of estoppel’ which may briefly be stated thus ‘where a person by his words or conduct has wilfully led another to believe that certain set of circumstances or facts exists and that other person has acted on that belief, he is estopped or precluded from denying the truth of such statements although such a state of things did not in fact exist.

(b) Agency by Necessity: In certain circumstances the law confers an authority on one person to act as agent for another without any regard to the conser called an agency of necessity.

(C) Agency by Holding Out: Such an agency is based on the ‘doctrine of holding out’ which is a part of the law law of estoppel. In this case also the alleged principal is bound by the acts of opposed agent, if he has induced third persons to believe that they are done with his authority. It may be noted that where the agent is ‘held out’ as having only a ‘limited authority’  to do acts, the principal is not bound by an act outside the authority.

3. Agency by Ratification: Ratification means the subsequent adoption and acceptance of an cone without instructions or authority. Thus, where a principal affirms or adopts the Unauthorised act of his agent, he is said to have ratified that act and there comes into existence and agency by ratification retrospectively.

Q.15. Describe briefly the various modes by which an agency may be terminated.

Or Define agency. How is it created and how is it terminated? (2014)

Ans. Agency: Refer to Section-A, Q.11.

Creation of an Agency: Refer to Sec-A, Q.14.

Termination of Agency: An agency may be terminated in any of the following ways:

I. Termination by Act of the Parties

An agency comes to an end by act of the parties in the following cases:

1. Agreement: An agency like any other contract can be terminated at any time by the mutual agreement between the principal and the agent.

2. Revocation by the Principal: Revocation of authority by the principal is however, subject to the following conditions:

(a) In the case of a continuous agency, the principal may revokes it for the future. It cannot be revoked with regard to acts already done in the agency. Again before revoking the authority for the future, reasonable notice of the same should be given to the agent.

(b) Where an agency has been created for a fixed period and the principal revokes the authority of the agent before the expiry of the period, without sufficient cause.

3. Renunciation by the Agent: An agency may also be terminated by an express renunciation by the agent because a person cannot be compelled to continue as agent against his will, but he must give a reasonable notice of renunciation to the principal, otherwise, he will be liable to compensate the principal for any damage resulting thereby.

II. Termination by Operation of Law

An agency comes to an end automatically by operation of law in the following cases:

1. Completion of the Business of Agency: An agency automatically comes to an end when the business of agency is completed.

For example: An agency for the sale of a particular property terminates on the completion of the sale.

2. Expiry of Time: If the agent is appointed for a fixed term, the expiration of the term puts an end to the agency, even though the business of the agency may not have been completed

3. Death of the Principal or the Agent: An agency is terminated automatically on the death of the principal or the agent.

4. Insanity of the Principal or the Agent: An agency also stands to be terminated when the principal becomes of an unsound mind. It is interesting to note that a person of unsound mind can initially be appointed as an agent.

5. Insolvency of the Principal: An agency is terminated by the insolvency of the principal whether the insolvency of an agent puts an end to the agency or is not a disputed question.

6. Destruction of the Subject matter: An agency which is created to deal with certain subject matter will be terminated by the destruction of that subject-matter.

For example: Where the agency was created for sale of a house and house is destroyed by fire. in such a case the agency ends.

7. Dissolution of a Company: If the principal or agent is an incorporated company, the agency automatically ceases to exist on dissolution of the company.

8. Principal or Agents Becomes Alien Enemy: If the principal and agent are nationals of two different countries and a war breaks out between the two countries, the contract of agency is terminated.

Q.16. When is the agency irrevocable? Discuss.

Ans. When the authority given to an agent cannot be revoked, it is said to be an irrevocable agency. An agency becomes irrevocable in the following cases:

1. Where the Agency is Coupled with Interest: Where the agent has himself an interest in the subject-matter of agency, the agency is said to be coupled with interest. Such an agency is created with the object of protecting or securing any interest of the agent. So, where a creditor is employed for valuable consideration as an agent to collect rents due to the principal (debtor) for adjusting the amount towards his debt, the principal thereby confers an interest on the agent and the authority cannot be revoked.

2. When Revocation Would Cause the Agent Personal Loss: Where the agent has, in pursuance of his authority contracted a personal liability, the agency becomes irrevocable and the principal cannot revoke the authority unilaterally. This is so because the principal cannot be permitted to defeat rights already established.

3. When the Authority has been Partly Exercised by the Agent: Where the agent has partly exercised his authority, it becomes irrevocable so as far as regards such acts and obligations as arise from acts already done in the agency.

Q.17. What are the rights and duties of a principal?

Or What are the rights and duties of a principal as against his agent? Explain. (2016)

Ans. The rights of the agent are the duties of the principal. These duties are:

1. To Indemnify the Agent Against the Consequences of all Lawful Acts: It is the obligation of the principal to indemnify the agent against the consequences of all lawful acts for which agent has been authorised.

2. To Indemnify the Agent Against the Consequences of Acts Done in Good Faith: It is the principal’s duty to indemnify the agent against the consequences of act.

3. To Indemnify the Agent for Injury: The principal is liable to compensate the agent for injury caused because of neglect or carelessness.

4. To Pay Remuneration and Other Expenses: The principal must pay the agent his remuneration and other expenses that he might incur in his performance under the agency contact.

The principal can enforce all the duties of the agent which indirectly are the rights of the principal. These rights are:

1. To Recover Damages: Principal has the right to recover damages accruing to him from the agent if he defaults in following the directives of principal.

2. To Repudiate Contract: The principal may repudiate the transaction if an agent deals on his own account in the business of the agency without obtaining the consent of his principal.

3.To Claim Benefit: In case, an agent deals in the business of the agency on his own account, the principal is entitled to claim from the agent any benefit that have resulted to him from transaction.

4. To Revoke Agent’s Authority: The principal may revoke the authority given to his agent by ving a reasonable notice of revocation at any time before the authority has been exercised.

5. To Claim Loss or profit: The principal is entitled for compensation over loss sustained by him or to any accrued profits.

6. To refuse Remuneraion When Aent is Guilty of Misconduct: The principal has the right to refuse remuneration to the agent who is guilty of misconduct in the business of the agency.

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