Unit II MBA LEGAL ASPECTS OF BUSINESS

INTRODUCTION TO INDIAN CONTRACT ACT, 1872

Background:

The Indian Contract Act, 1872 (hereinafter "the Act"), lays the foundation for the legal principles
governing contracts in India. The Act, which came into effect on 1st September 1872, covers the
essential aspects of a contract from its formation to its enforceability. The Indian Contract Act,
1872, marks one of the earliest and foundational legislative efforts by the British Indian
government to codify and systematize a vast body of customary mercantile and personal law
practices that had evolved over centuries. It came into force on September 1, 1872, and is
applicable across the whole of India except Jammu and Kashmir.

1. Definition of Contract:

As per the Act, a contract is an agreement enforceable by law. For an agreement to qualify as a
contract, it must satisfy the following:

 Consensus between parties

 Intention to create legal relations
 Lawful consideration and lawful object

2. Essential Elements of a Valid Contract:

a) Offer and Acceptance: One party makes an offer, and the other accepts it.

b) Lawful Consideration: Something of value promised to the other party. This could be in the
form of money, services, or goods.

c) Capacity to Contract: Parties must be competent, i.e., they should be of legal age (major), of
sound mind, and not disqualified by any law.

d) Free Consent: Consent should be given willingly and not under coercion, undue influence,
misrepresentation, fraud, or mistake.

e) Lawful Object: The purpose of the contract must be legal.

f) Possibility of Performance: The contract must be capable of being performed.

g) Not Expressly Declared Void: The contract must not be one that is expressly declared void by
law.

3. Types of Contracts:

a) Express and Implied Contracts: An express contract is explicitly agreed upon, whereas an
implied contract is inferred from the conduct of the parties or circumstances.

b) Unilateral and Bilateral Contracts: In unilateral contracts, only one party makes a promise
(e.g., reward offers). In bilateral contracts, both parties make promises.
Unit II MBA LEGAL ASPECTS OF BUSINESS

c) Void and Voidable Contracts: Void contracts are unenforceable from the outset, whereas
voidable contracts are valid unless one of the parties chooses to void it.

d) Executed and Executory Contracts: In executed contracts, both parties have fulfilled their
obligations. In executory contracts, one or both parties have obligations pending.

4. Performance of Contract:

The parties should perform their respective promises. A contract may be:

a) Discharged by Performance: When parties fulfill their obligations.

b) Discharged by Mutual Agreement: Parties can modify or end the contract by mutual consent.

c) Discharged by Impossibility: If performing the contract becomes impossible due to unforeseen

events.

d) Discharged by Lapse of Time: If not performed within the time specified or a reasonable time.

e) Discharged by Operation of Law: Through the death of a party, merger, or by becoming

illegal.

5. Remedies for Breach of Contract:

When a party fails to perform its promise, the other party can seek:

a) Damages: Compensation for the loss.

b) Specific Performance: A court order directing the defaulting party to perform the contract.

c) Injunction: A court order preventing a party from doing something.

d) Quantum Meruit: Compensation for work done or services rendered.

6. Special Contracts:

The Act also deals with certain special contracts:

a) Indemnity: One party promises to save the other from loss caused either by the conduct of the
promisor or a third party.

b) Guarantee: A promise to discharge the liability of a third person in case of their default.

c) Bailment: Delivering goods from one person to another for some purpose upon a contract that
they shall be returned or disposed of accordingly.

d) Pledge: Bailment of goods as security for payment of a debt or performance of a promise.

Unit II MBA LEGAL ASPECTS OF BUSINESS

e) Agency: One person appoints another to act on their behalf.

7. Contractual Capacity:

Not everyone can enter into a contract. The Act states:

a) Minors: Those below 18 (or 21 if a guardian is appointed) cannot contract. Any contract with
a minor is void.

b) Persons of Unsound Mind: A person who cannot understand the contract or cannot form a
rational judgement cannot contract.

c) Disqualified Persons: Those disqualified by any law from contracting.

8. Free Consent:

Consent isn't free if:

a) Coercion: Committing or threatening to commit any act forbidden by law or detaining

property unlawfully.

b) Undue Influence: Dominating the will of another to obtain an unfair advantage.

c) Fraud: Misrepresentation with an intention to deceive.

d) Misrepresentation: False statement made innocently without intent to deceive.

e) Mistake: Both parties are under the same misconception about a fundamental matter.

9. Quasi-Contracts:

Even without a contract, certain obligations resemble those created by contract. These arise not
from any agreement but from equity, justice, and good conscience.

10. Key Takeaways:

 A contract is an agreement with the intention of legal obligations and lawful

consideration.
 Essential elements like offer, acceptance, and free consent are pivotal.
 There are remedies available for breaches.
 Special contracts and quasi-contracts cover other kinds of obligations.

OBJECTIVES OF INDIAN CONTRACT ACT, 1872

The Indian Contract Act, 1872, came into force on September 1, 1872, and is applicable across
the whole of India except Jammu and Kashmir. Here's an overview of the Act's primary
objectives.
Unit II MBA LEGAL ASPECTS OF BUSINESS

1. Codification of Existing Mercantile Law

Prior to the enactment of this law, contractual dealings in India were based on customs and usage
which varied from place to place and community to community. The Indian Contract Act
brought uniformity by:

 Codifying Practices: By consolidating various customary practices, the Act provided

clarity and predictability for individuals and businesses.

 Incorporating British Contract Law Principles: Drawing from the British legal system, the
Act incorporates certain tested principles to offer a structured framework.

2. Define the Elements of a Valid Contract

To eliminate ambiguity and vagueness, one of the main objectives of the Act was to lay down
clear parameters that constitute a valid contract:-

 Agreement and Enforceability: The Act emphasizes that for a contract to be valid, there
should be an agreement between parties and it should be enforceable by law.
 Free Consent: Parties should enter contracts out of their free will without any coercion,
misrepresentation, or undue influence.
 Competence: Only those who are competent, meaning they are of legal age, of sound
mind, and not disqualified by any other law, can enter into a contract.
 Lawful Consideration and Object: Every contract should have a lawful consideration and
a lawful objective.
 Not Expressly Declared Void: The Act lists down certain agreements that are expressly
declared as void, e.g., agreements in restraint of trade.

3. Classify Different Types of Contracts

The Act categorizes contracts based on their enforceability, mode of creation, and the extent of
their execution:-

 Based on Enforceability: Voidable, valid, void, and unenforceable contracts.

 Mode of Creation: Express or implied contracts.
 Extent of Execution: Executed or executory contracts.

This classification aids in understanding and interpretation, ensuring clarity in case of disputes.

4. Provide Remedies for Breach of Contract

An essential component of the Contract Act is to delineate remedies available to an aggrieved

party in the case of a breach:-

 Rescission: Allows the aggrieved party to cancel the contract.

 Suit for Damages: A party can sue the other for damages caused due to the breach.
Unit II MBA LEGAL ASPECTS OF BUSINESS

 Specific Performance: Court may order the defaulting party to perform the contract.
 Injunction: Prevention of the defaulting party from doing something against the terms of
the contract.

These remedies ensure justice and fair treatment in the eyes of the law.

5. Discuss Special Types of Contracts

The Act goes beyond simple contracts to define and discuss special types of contracts,
including:-

 Quasi Contracts: These are obligations imposed by the law where there is no explicit
contract but where one party benefits at the expense of the other.
 Contracts of Indemnity and Guarantee: Protects one party from loss caused by the
conduct of a third party or by the conduct of the principal debtor respectively.
 Bailment: Concerns the delivery of goods from one person to another for some purpose
and their return or disposal.
 Agency: Deals with the principal-agent relationship.

By discussing these, the Act offers an expansive overview of various contractual situations that
could arise in real life.

6. Set Rules for Contingent Contracts

Contingent contracts are dependent on the happening or non-happening of an uncertain future

event. The Act:-

 Distinguishes between contingent and wagering contracts.

 Lays down rules about the enforceability of such contracts.

This ensures that such contracts are made and executed under legal guidelines.

7. Offer a Framework for Contract Interpretation

The Act provides principles for interpreting ambiguous terms, promises, and other elements of a
contract. This ensures that contracts, even if they have certain vague terms, can be deciphered in
the light of the law.

The Indian Contract Act, 1872, remains a seminal piece of legislation that stands at the
intersection of commerce, societal interaction, and legal jurisprudence. Its objectives are
multifaceted: from codifying existing practices to offering remedies for breaches and from
defining the elements of a valid contract to addressing special types of contracts. The Act, over a
century old, still serves as a guidepost for contractual dealings in modern India. As students, a
clear grasp of its objectives helps in understanding its continued relevance and foundational role
in the Indian legal system.
Unit II MBA LEGAL ASPECTS OF BUSINESS

DEFINITION AND ESSENTIALS OF A VALID CONTRACT

A contract is a legally binding agreement between two or more parties to either do or abstain
from doing a specific act. The Indian Contract Act, 1872, governs the formation and
performance of contracts in India. A valid contract is crucial as it is enforceable by law. In order
to be termed as valid, a contract must fulfill certain essentials. Here below it outlines these
essentials and the key definitions relevant to a valid contract.

1. Definitions:

Contract (Section 2(h)): An agreement enforceable by law is a contract.

Agreement (Section 2(e)): Every promise or set of promises forming the consideration for each
other.
Promise (Section 2(b)): A proposal, when accepted, becomes a promise.

2. Essentials of a Valid Contract:

A. Offer and Acceptance: For a contract to come into existence, there must be a valid offer by
one party, and it must be accepted by the other.

 Offer (Section 2(a)): A person signifies his willingness to another person to do or to

abstain from doing anything.
 Acceptance (Section 2(b)): It is the assent to the proposal.

B. Lawful Consideration: Every contract must have some consideration, which can be in the
form of goods, services, money, etc.

 Consideration (Section 2(d)): When at the desire of the promisor, the promisee has done
or abstained from doing something, such act or abstinence is called consideration.

C. Capacity to Contract: Parties entering into a contract must have the legal capacity to do so.
Minors, persons of unsound mind, and individuals disqualified by law cannot enter into a valid
contract.

D. Free Consent: Consent must be free from coercion, undue influence, fraud,
misrepresentation, or mistake.

 Coercion (Section 15): Committing or threatening to commit any act forbidden by law, or
unlawfully detaining property.
 Undue Influence (Section 16): Where a person, being in a position to dominate the will of
another, uses that position to obtain an unfair advantage.
 Fraud (Section 17): Active concealment of a fact, a promise made without the intention
of performing it, or any other act meant to deceive.
 Misrepresentation (Section 18): Making a false statement innocently, without the
intention to deceive.
 Mistake (Section 20-22): If both parties are under a mistake as to a matter of fact
essential to the agreement, it is void.
Unit II MBA LEGAL ASPECTS OF BUSINESS

E. Lawful Object: The object for which the contract is entered into must be legal and not
opposed to public policy.
F. Agreement not Declared Void: The agreement, although fulfilling other conditions, shouldn‟t
be one which the law declares as void. For example, an agreement in restraint of trade is void
unless it is reasonable.

G. Possibility of Performance: The terms of the contract should be such that it can be
performed. An agreement to do something impossible is void.

H. Intention to Create Legal Relations: Parties must intend to create a legal relationship and not
merely a social or domestic agreement.

I. Certainty of Meaning: Terms of the contract must be clear and not vague. An agreement with
uncertain terms is void.

J. Legal Formalities: Contracts can be oral or written, but some contracts, like contracts for the
sale of immovable property, must be in writing, registered, and attested by witnesses.

Understanding the essentials of a valid contract is crucial for any legal, business, or personal
transaction. In the eyes of the law, a contract without these essentials is either void, voidable, or
unenforceable.
When entering into any agreement:

 Ensure that the terms are clear and specific.

 Ensure that all parties are capable of entering the contract and are doing so with their free
will.
 Confirm that there are no illegal or unethical elements involved.
 Always consult legal counsel if unsure about the validity or the terms of a contract.

A valid contract is the foundation of a successful legal transaction, and understanding the Indian
Contract Act, 1872, will aid you in navigating the intricacies of contract law in India.

OFFER AND ACCEPTANCE

'Offer and Acceptance' are the foundational stones of a contract. A valid agreement under the
Indian Contract Act, 1872 (hereinafter referred to as 'the Act') emerges from an offer followed by
its acceptance. This handout delves into the concepts and principles governing 'Offer and
Acceptance' under the Act.
1. Offer (or Proposal) [Section 2(a)]
An offer or a proposal is when one person signifies to another his willingness to do or abstain
from doing something with a view to obtaining the assent of that other to such an act or
abstinence.
Characteristics of a Valid Offer:

 Definiteness: An offer must be clear and not vague.

Unit II MBA LEGAL ASPECTS OF BUSINESS

 Intention: The offeror should have a serious intention to enter into a legal relationship.
Casual remarks do not constitute an offer.
 Communicated: The offer must be communicated to the offeree.

2. Types of Offers:

Specific Offer: Made to a specific person or group. Only the specified party can accept.
General Offer: Open to the world at large. Any person who knows about the offer and fulfills the
terms can accept.
Implied Offer: Not stated explicitly but inferred from conduct.

3. Acceptance [Section 2(b)]

When the person to whom the proposal is made signifies his assent, the offer is said to be
accepted. An offer, when accepted, becomes a promise.

Characteristics of a Valid Acceptance:

 Absolute and Unqualified: Acceptance must be in total agreement with the terms of the
offer.
 Communicated: It should be conveyed to the offeror.
 Mode of Acceptance: The acceptance should be according to the prescribed or usual
mode.

4. Legal Rules for a Valid Acceptance:

 In Response to an Offer: Acceptance should be given only in response to an offer.

 Must be Unqualified: No alterations or additions to the original terms.
 Within Time: If a specific time is set for acceptance, it must be within that time.
 Communication: Acceptance isn't effective until communicated to the offeror.
 Mental Acceptance not Enough: Mere mental resolve isn't acceptance unless
communicated.

5. Communication of Offer, Acceptance, and Revocation [Sections 4 and 5]

 Communication of Offer: An offer is complete when communicated to the offeree.

 Communication of Acceptance: Acceptance is complete:
 As against the proposer, when it's put in a course of transmission to him.
 As against the acceptor, when it reaches the proposer.
 Revocation of Offer and Acceptance: Either can be revoked anytime before the other
party communicates their acceptance or offer respectively.

6. Special Provisions related to Electronic Contracts:

With the advent of technology, electronic contracts have become prevalent. The Information
Technology Act, 2000 provides that contracts formed through electronic means are valid, and the
communication of proposals, acceptance, and revocation can be made electronically.
Unit II MBA LEGAL ASPECTS OF BUSINESS

7. Conclusion:

A clear understanding of 'Offer and Acceptance' is essential to grasp the formation of contracts
under the Indian Contract Act, 1872. The principles underscore the importance of
communication, intention, and mutual assent in contract formation.

CAPACITY TO CONTRACT
The concept of 'Capacity to Contract' is fundamental in the realm of contractual law. The Indian
Contract Act, 1872, stipulates who can and cannot enter into a contract. For a contract to be
valid, both parties must have the legal capacity to enter into it. The Act highlights three primary
categories of persons who are incapacitated from contracting.

1. Essential Elements for Capacity

A person is considered to possess the capacity to contract if:

 They are of the age of majority.

 They are of sound mind while making the contract.
 They are not disqualified from contracting by any law to which they are subject.

2. Specific Cases of Incapacity

(i) Minors

 Definition: A minor is a person who hasn‟t attained the age of 18 years. If a guardian has
been appointed for a person, the age of majority is 21.

 Contract with Minors: Any contract with a minor is void-ab-initio, meaning it‟s null
from the beginning. A minor cannot be asked to compensate for any benefit received
under a contract.
 Liability for Necessaries: If a minor obtains goods which are necessaries according to his
condition in life and actual requirements at the time of sale and delivery, the person who
has furnished such goods is entitled to be reimbursed from the minor's property.
(ii) Persons of Unsound Mind
 Definition: A person is said to be of unsound mind if, at the time of making the contract,
they are incapable of understanding it or forming a rational judgment about its effect on
their interests.

 Contract with Unsound Persons: A contract entered into by a person of unsound mind is
void, unless the other party had no reason to believe the person was of unsound mind.
(iii) Persons Disqualified by Law

Certain individuals or entities might be disqualified from contracting by specific laws in India.
Examples include insolvents, foreign aliens, corporations with restricted contracting powers, etc.
Unit II MBA LEGAL ASPECTS OF BUSINESS

3. Consequences of Incapacity

 Restitution: In cases where one party is incapacitated, the other party can't enforce the
contract but may be entitled to restitution to prevent unjust enrichment of the
incapacitated party.

 No Ratification: A contract made by a person without the capacity to contract cannot be

ratified by that person upon acquiring capacity.

 Beneficial Contracts for Minors: If a contract, though void, is of some benefit to a minor
(like a scholarship or partnership agreement where the minor‟s liability is limited), it may
be enforceable.

4. Important Points to Remember

 Burden of Proof: The onus of proving lack of capacity usually lies with the person who
asserts it.

 Fluctuating Capacity: Some individuals might have fluctuating capacity (like

intermittent unsoundness of mind). The validity of a contract in such cases would depend
upon the state of mind at the exact time of contract-making.

 Minor’s Promissory Estoppel: Though a minor‟s contract is void, if a minor fraudulently

represents themselves as a major and induces another party to provide benefits, the minor
cannot be allowed to enjoy the benefits without restitution.

Understanding the 'Capacity to Contract' is crucial as it forms the foundation for the
enforceability of contracts. Before entering into any agreement, it's vital to ensure that both
parties possess the legal capacity to contract, thereby avoiding potential legal disputes and
complications.

CONSENT
The Indian Contract Act, 1872 (ICA) lays the foundation for contracts in India. A vital
component for the validity of any contract is 'Consent'. Understanding consent is crucial for
determining the enforceability of a contract.

1. Definition of Consent (Section 13):

Consent is defined as “two or more persons are said to consent when they agree upon the same
thing in the same sense”. This encapsulates the concept of „consensus ad idem‟, meaning a
meeting of minds. In essence, for a contract to be valid, parties must be on the same page
regarding the subject matter.

2. Free Consent (Section 14):

For consent to be considered 'free', it should not be caused by:-

Unit II MBA LEGAL ASPECTS OF BUSINESS

 Coercion (Section 15): Committing or threatening to commit any act forbidden by the
Indian Penal Code (IPC), or unlawfully detaining or threatening to detain any property.
 Undue Influence (Section 16): Where one party, being in a position of power over the
other, employs this dominance to obtain an unfair advantage.
 Fraud (Section 17): Deception or misrepresentation that causes the other party to enter
into a contract.
 Misrepresentation (Section 18): A false statement made innocently without an intent to
deceive.
 Mistake (Section 20, 21, 22): Both parties or one party can be under a mistake regarding
the matter of the contract.

3. Consequences of Absence of Free Consent:

If consent is not free, the contract may be declared voidable at the option of the party whose
consent was not free. However, if both parties are under a mutual mistake concerning a material
fact, the contract is void.

Consent, especially its freedom, is fundamental to the validity of contracts under the ICA, 1872.
Contracts entered without free consent can be challenged and might be declared void or
voidable, depending on the circumstances. For lawful contractual relationships, parties should
ensure that they enter agreements with complete knowledge and free will.

KINDS OF GURANTEE
The Indian Contract Act of 1872 establishes the fundamental principles relating to contracts in
India. One of the important elements covered under the Act pertains to the concept of
'Guarantee'. A contract of guarantee involves three parties – the Principal Debtor, the Creditor,
and the Surety or Guarantor. The purpose of such a contract is to ensure that if the principal
debtor fails to fulfill an obligation, the responsibility to do so will fall upon the guarantor.

To understand this concept in detail, it's essential to delve into the different types of guarantees
that exist under the Indian Contract Act:-

1. Simple Guarantee: In a simple guarantee, the surety guarantees to the creditor that the
principal debtor will perform the promise or discharge the liability. It is activated only
when the principal debtor defaults. The liability of the surety is co-extensive with that of
the principal debtor, but he cannot be compelled to perform unless the debtor defaults.

2. Compound Guarantee: This kind of guarantee involves more than one transaction or
debt. Here, the surety undertakes the responsibility for multiple transactions or debts of
the principal debtor. For instance, if a surety guarantees repayment of all amounts that a
principal debtor might borrow from the creditor over a year, it will be a compound
guarantee.

3. Continuing Guarantee (Section 129): A continuing guarantee covers a series of

transactions over an unspecified period. It continues in force until it's revoked. An
example could be a bank providing overdraft facilities to its customer based on a
Unit II MBA LEGAL ASPECTS OF BUSINESS

guarantee. Each transaction under this overdraft is covered by the guarantee until the
guarantor revokes it. The important thing to remember is that it can be revoked
concerning future transactions, but not for those already undertaken.

4. Specific Guarantee: This is a guarantee that's limited to a single transaction or specific

debt. Once the specific debt or transaction is fulfilled, the guarantee becomes void. For
example, if a person guarantees that they will repay a single loan taken by their friend, it's
a specific guarantee.

5. Joint and Several Guarantees: When two or more people act as guarantors for the same
debt or duty, and each of them individually guarantees the entire amount, they are
considered to give joint and several guarantees. In this case, the creditor has the right to
claim the whole amount from any one of them or from each according to portions.
6. Particular Guarantee: This pertains to a guarantee which is given for a particular
transaction within a continuing relationship. For example, in a continuous supply
scenario between a wholesaler and retailer, a guarantee given for a specific supply of
goods in the month of December is a particular guarantee.
7. Guarantee obtained by Misrepresentation (Section 142): If a guarantee is obtained by
the creditor by misrepresenting facts or by concealing information, such a guarantee is
not valid. The Act protects the surety from any deceitful measures taken by the creditor.
8. Guarantee obtained by Concealment (Section 143): A guarantee which is obtained by
keeping silent about a fact essential to the guarantor is considered invalid.
Understanding the types of guarantees is crucial because each kind carries distinct implications
for the parties involved. It‟s also significant in determining the rights, duties, and obligations of
the parties. The Indian Contract Act, 1872, not only classifies these guarantees but also provides
specific provisions to ensure fairness and to protect the interests of the involved parties.

It's imperative for anyone engaging in business or financial transactions in India to be familiar
with these concepts, as they often form the bedrock of many commercial and financial contracts.

CREDITOR
The Indian Contract Act, 1872, is a foundational legal text that governs contractual relationships
in India. Although the term 'Creditor' is not explicitly defined in this act, it is essential to
understand its context, implications, and interplay with the other terms and provisions of the act.

1. Contextual Understanding:
In general parlance, a 'Creditor' is a person or entity to whom money or its equivalent is owed by
another, known as the 'Debtor'. In the backdrop of contractual relationships, a creditor is often
the party who has provided goods, services, or extended financial credit to another based on the
promise or expectation of future repayment.

2. Obligations under the Act:

The obligations arising from contracts can be both express and implied. When a party to a
contract fails to perform or breaches their obligations, the aggrieved party becomes a creditor,
Unit II MBA LEGAL ASPECTS OF BUSINESS

having a claim against the defaulting party or debtor. The Contract Act lays down provisions to
ensure that the rights of such aggrieved parties (creditors) are safeguarded.

3. Remedies for the Creditor:

If a debtor defaults, the Contract Act provides remedies to the creditor, which include:

 Suit for specific performance: Obliging the debtor to fulfill the contract's terms.
 Suit for an injunction: Preventing the debtor from committing a breach.
 Suit for damages: Compensating the creditor for losses due to breach.
 Quantum Meruit: Allowing the creditor to claim a reasonable sum for services rendered.

4. Interplay with the Law of Limitation:

It's crucial for creditors to be aware of the limitation periods, as prescribed under the Limitation
Act, 1963. Typically, the creditor has three years from the date the contract is breached to initiate
legal proceedings against the debtor.

While the term 'Creditor' isn't explicitly detailed in the Indian Contract Act, 1872, its significance
is woven throughout its provisions. It serves to provide remedies and protection to those who are
owed obligations under the vast realm of contractual dealings in India.

SURETY
'Surety' in the context of the Indian Contract Act, 1872, refers to a person who undertakes the
responsibility of ensuring that the principal debtor will fulfill an obligation or repay a loan. In the
event that the principal debtor defaults, the surety is bound to pay or perform the promise. This is
commonly seen in contracts of guarantee.

Nature of Contract of Guarantee:

1. Tripartite Agreement: A contract of guarantee involves three parties - the creditor (to
whom the promise is made), the principal debtor (who owes the obligation), and the
surety (who assures the obligation's fulfillment).

2. Secondary Liability: The surety's liability is secondary. If the principal debtor fails to
perform, only then does the surety's obligation come into effect. The primary
responsibility remains with the principal debtor.

3. Consideration: For a guarantee to be valid, some consideration must be extended.

However, the surety need not receive it directly. A consideration to the principal debtor
suffices.

Rights of a Surety:

Rights against the Creditor: After fulfilling the guaranteed obligation, the surety can step into the
shoes of the creditor and claim all rights the creditor had against the principal debtor.
Unit II MBA LEGAL ASPECTS OF BUSINESS

1. Right of Subrogation: Upon paying the creditor, the surety gets all the rights which the
creditor had against the debtor, enabling the surety to recover the amount from the
principal debtor.

2. Right of Indemnity: The principal debtor must indemnify the surety for all payments
made under the guarantee.

Duties/Liabilities:

1. Payment/Performance: In the event of default by the principal debtor, the surety is

obliged to fulfill the promise made to the creditor.

2. Cannot Deny Liability: A surety cannot deny liability unless there's a variance in terms,
misrepresentation, or concealment of material facts.

'Surety' plays a pivotal role in the Indian Contract Act, 1872, ensuring trust in transactions by
standing as a backstop for obligations. However, it's crucial for a surety to understand the
implications and potential liabilities before entering into a contract of guarantee.

BAILMENT
Bailment is derived from the French term "bailer" which means "to deliver." Under the Indian
Contract Act, 1872, bailment is defined in Section 148. It refers to the act of transferring physical
possession of personal goods by one person to another, with the intention that the goods will be
returned or disposed of according to the directions of the person transferring the goods.

Essential elements of Bailment:

Delivery of possession from the bailor to the bailee.

The delivery must be for a specific purpose.
There is an explicit or implicit contract to return or dispose of the goods according to the bailor‟s
directions after the purpose is achieved.

KINDS OF BAILMENT
a. Based on Benefit:

For the sole benefit of the Bailor: Example, when one asks a friend to watch over one's luggage.
For the sole benefit of the Bailee: Example, when one borrows a book.
For the mutual benefit of both: Example, when goods are given for repairs against payment.
b. Based on Duration:

Fixed Term Bailment: Where the duration of bailment is fixed.

Terminable at Will: It can be terminated by either party at any time.
c. Based on Reward:

Gratuitous Bailment: No reward is involved.

Non-gratuitous Bailment: There's a reward, payment, or benefit involved.
Unit II MBA LEGAL ASPECTS OF BUSINESS

BAILOR AND BAILEE

Bailor: The person delivering the goods.

Rights of Bailor:

 To demand due care: The bailor has the right to expect the bailee to take care of the
bailed goods.
 To demand the return of goods: The bailor can ask for the return of the bailed goods once
the purpose of bailment is fulfilled.
 To receive compensation: In case of any unauthorized use of the bailed goods by the
bailee.

Duties of Bailor:

 To disclose faults: If the goods have any faults, it is the duty of the bailor to disclose
them to the bailee.
 To reimburse expenses: The bailor must compensate the bailee for any necessary
expenses incurred regarding the goods.
 Bailee: The person to whom the goods are delivered.

Rights of Bailee:

 To recover due expenses: The bailee can demand compensation for the expenses related
to the bailed goods.
 To claim damages: If any loss occurs due to the undisclosed faults in the bailed goods.
 Right of Lien: In specific scenarios, the bailee has the right to retain the goods until
certain claims are satisfied.

Duties of Bailee:

 To take care of goods: The bailee should take care of the bailed goods as if they were
their own.
 Not to use the goods unauthorizedly: Bailee cannot use the goods for any purpose other
than what's agreed upon.
 To return the goods: Once the purpose is achieved, the bailee must return the goods.

TERMINATION OF BAILMENT
A bailment can be terminated in the following ways:-

 Completion of the Purpose: Once the agreed purpose of bailment is achieved.

 Expiration of Time: If there's a specified time for the bailment, it ends when the time
expires.
 Mutual Agreement: If both parties agree to terminate it.
 Destruction of the Subject Matter: If the bailed goods are destroyed.
Unit II MBA LEGAL ASPECTS OF BUSINESS

 Unauthorized Use: If the bailee uses the goods in a way not agreed upon, the bailor can
terminate the bailment.
 Incapacity: If either the bailor or bailee becomes incapable of performing the contract.

AGENT AND AGENCIES

Definition: An agent is a person employed to do any act for another or represent another in
dealings with third persons. The person for whom such an act is done or represented is called the
"principal."

Creation of Agency: It can be created by:

 Express agreement (either written or spoken)

 Implied appointment (through conduct or situation)
 Necessity (emergency situations)
 Ratification (approving acts done on one‟s behalf without prior consent)
 Estoppel (when the principal, by his conduct, prevents himself from denying agency
status)

Agency by Holding Out: If a person behaves in such a manner as to make others believe that he
has authorized another person to act as his agent and a third person deals with the agent on that
belief, the person is stopped from denying the factum of agency.

KINDS OF AGENCIES
a. Special Agent: Appointed to perform a specific act or to represent the principal in a
specific transaction.

b. General Agent: Authorized to conduct all the transactions in a particular trade or

profession.

c. Sub-Agent: Appointed by the original agent, with the authority of the principal, to
assist in fulfilling the duties of agency. The original agent remains responsible to the
principal for the acts of the sub-agent.

d. Co-agents: When more than one agent is appointed by the principal to act jointly, they
are called co-agents.

e. Del Credere Agent: For an extra commission, he guarantees the solvency of the third
parties with whom he deals on behalf of his principal. If the third party fails to fulfill
its obligation, the del credere agent is liable to compensate the principal.

CLASSIFICATION OF AGENCIES
a. Agency Coupled with an Interest: When an agent has an interest in the subject matter
of the agency, it is termed as "agency coupled with an interest." Such an agency
Unit II MBA LEGAL ASPECTS OF BUSINESS

cannot be terminated by the principal without the agent's consent, as long as the
agent's interest subsists.

b. Gratuitous Agency: When an agency is created without consideration, i.e., when an

agent acts without expecting any remuneration for his services.

c. Substituted Agency: When an agent, with the power to do so, appoints another person
to act on behalf of the principal, the newly appointed person is known as a substituted
agent.

DUTIES AND RIGHTS OF AGENTS

Duties of an Agent:

a. Duty to Follow Principal's Directions: The agent must act in accordance with the
principal's instructions unless such directions are illegal or unethical.

b. Duty to Exercise Skill and Diligence: An agent must perform his tasks with due care,
skill, and diligence, and if he fails to do so, he must compensate the principal for any
loss incurred.

c. Duty to Render Proper Accounts: An agent must maintain proper accounts related to
the principal‟s business and provide them to the principal whenever required.

d. Duty to Communicate: An agent should communicate all relevant information,

especially unforeseen circumstances, to the principal.

e. Duty Not to Delegate: "Delegatus non potest delegare" - An agent, unless authorized,
cannot delegate his agency tasks to another.

f. Duty Not to Make Secret Profits: An agent must not make any profit out of his agency,
other than the remuneration agreed upon, without the knowledge and consent of the
principal.

g. Duty to Avoid Conflict of Interest: An agent should avoid any situation where his
personal interest conflicts with his duties towards the principal.

Rights of an Agent:

a. Right to Remuneration: An agent has a right to claim the agreed remuneration for his
services.

b. Right of Retainer: An agent has a right to retain any money received on behalf of the
principal until the amounts due to him (like commission, expenses, etc.) are paid.

c. Right to Indemnification: The principal must indemnify the agent against the
consequences of all lawful acts done by the agent in exercise of the authority conferred
upon him.
Unit II MBA LEGAL ASPECTS OF BUSINESS

d. Right to Compensation: An agent has the right to be compensated for injuries

sustained due to the principal's neglect or want of skill.

e. Right to Stoppage in Transit: In case of buyer's insolvency and if the agent has
personal liability, he can stop the goods in transit as a measure of protecting himself
against loss.

PRINCIPAL’S DUTIES TO THE AGENT AND HIS LIABILITY TO THIRD

PARTIES
The relationship between a principal and an agent is foundational in business transactions,
especially when the principal cannot personally attend to all affairs. The Indian Contract Act,
1872 codifies the responsibilities and duties of both parties.

Principal’s Duties to the Agent:

a. Remuneration: Section 219 of the Act provides that an agent is entitled to receive the
agreed remuneration. If no specific amount is agreed upon, the agent is entitled to receive
a reasonable remuneration (Section 220).

b. Reimbursement: Section 222 states that the principal must compensate the agent for
lawful acts carried out on his behalf. This includes expenses incurred and any losses
suffered in the line of duty.

c. Indemnification: Section 223 mandates that if an agent does an act in good faith,
believing it to be lawful, but which turns out to be unlawful, the principal must indemnify
the agent against consequences and liabilities arising from the act.

d. Non-interference: If the agent's contract contains terms agreed between him and the third
party, the principal must not prevent him from earning his remuneration or completing
the contract (Section 224).

e. Absence of Misrepresentation: The principal should not misrepresent the agent or allow
any other person to do so (Section 225).

f. Payment on Time: An agent's commission becomes due once he has completed his
service or rendered an account for the same.

Principal’s Liability to Third Parties

a. Contractual Obligations: A principal is bound by the contracts made by his agent acting
within the scope of his authority (Section 226).

b. Tortious Acts of Agent: If an agent commits a tort while executing his principal's order,
the principal is liable as if the wrong was done by him, unless the agent acted without
necessary authority or in contravention of orders.
Unit II MBA LEGAL ASPECTS OF BUSINESS

c. Misrepresentation or Fraud by Agent: The principal is liable for any misrepresentation or

fraud by his agent, acting within the scope of his authority (Section 238).

d. Foreign Principal: According to Section 233, if an agent deals on behalf of a principal

residing in a foreign country, the third party may hold the agent personally liable, unless
the principal's existence and identity are disclosed.

Exceptions

a. Undisclosed Principal: When an agent acts without disclosing his principal, the latter can
enforce the contract against the third party. However, the third party can also enforce it
against either the agent or the principal.

b. Unenforceable Contracts: If a contract made by an agent is unenforceable due to some

defect, the principal cannot sue the third party nor can the third party sue the principal
(Section 230).

PERSONAL LIABILITY OF AGENT

Introduction: Agents can sometimes be held personally liable in transactions. The extent of this
liability is largely determined by whether the principal is disclosed, partially disclosed, or
undisclosed.

1. Liability in a Disclosed Principal Scenario:

a. General Rule: When the agent acts for a disclosed principal, the principal is liable, not the
agent. However, if the agent guarantees the performance of the principal, the agent
becomes liable.

b. Foreign Principal: As previously mentioned, if a foreign principal is involved, the agent

might be held liable unless the principal‟s existence and identity are disclosed.

2. Liability in an Undisclosed Principal Scenario:

a. The agent is liable as if he is the principal because the third party is unaware of the
existence of the principal.

b. If the principal's identity is later revealed, the third party has the option to hold either the
agent or principal responsible.

3. Exceeding Authority: If an agent exceeds his authority, he becomes personally liable for the
breach unless the principal ratifies his actions.

4. Misrepresentation: If an agent misrepresents to a third party while contracting, he can be

held personally liable for the misrepresentation.
Unit II MBA LEGAL ASPECTS OF BUSINESS

TERMINATION OF AGENCY
An agency relationship can be terminated through various means, either by the act of parties or
by the operation of law.

1. By Act of the Parties:

a. Mutual Agreement: Both the principal and the agent can agree to terminate the agency
relationship.

b. Revocation by the Principal: While the principal has the right to revoke the agency
(Section 206), if it is done without a valid reason before the completion of the agent‟s
task, the agent may be entitled to compensation.

c. Renunciation by the Agent: The agent can renounce the agency. However, if done
without reasonable cause, he may be liable to compensate the principal (Section 207).

2. By Operation of Law:

a. Completion of Business: Once the task for which the agent was appointed is completed,
the agency ends.

b. Expiry of Time: If the agency was for a fixed period, it terminates once that time expires.
c. Death or Insanity: Death or insanity of either the principal or agent results in the
termination of agency.
d. Principal's Insolvency: The insolvency of the principal leads to the termination of agency,
provided the agent is aware of the insolvency.
e. Destruction of Subject Matter: If the subject matter of the agency is destroyed, the agency
ends.
f. Change of Circumstances: Any change that makes the agency relationship's fulfillment
impossible will terminate the agency.

POWER OF ATTORNEY
A 'Power of Attorney' (POA) is a legal instrument that allows one person, called the principal, to
delegate authority to another person, termed the agent or the attorney-in-fact, to act on the
former's behalf. While the Indian Contract Act, 1872, lays the foundation for contractual
relationships, the specifics of the Power of Attorney are primarily governed by the Power of
Attorney Act, 1882. However, the validity and enforceability of POAs are influenced by the
foundational principles laid down in the Indian Contract Act, 1872.

1. Concept and Types of POA:

General Power of Attorney (GPA): Grants broad powers to the agent to act on behalf of the
principal in various matters, which may include financial transactions, buying real estate,
entering contracts, and settling claims.
Unit II MBA LEGAL ASPECTS OF BUSINESS

Special or Limited Power of Attorney: Restricts the agent‟s power to specific tasks or
transactions, e.g., selling a particular property on a specified date.
2. Formation of POA and the Indian Contract Act:
Free Consent (Section 10): For a POA to be valid, it must be entered into by free consent of the
parties. Consent isn't considered 'free' if it's caused by coercion, undue influence,
misrepresentation, fraud, or mistake.
Competence to Contract (Section 11): The principal must be competent to contract. He/she
should be of the age of majority, of sound mind, and not disqualified by any law.
Lawful Object (Section 23): The tasks or actions that the agent is authorized to perform under the
POA must be lawful. A POA for an illegal act will be void.

3. Rights and Obligations under POA:

Duty to Act in Good Faith (Section 183): An agent is bound to conduct the business of the
agency with as much skill as is generally possessed by persons engaged in similar business. The
agent must also act with due diligence.
Right to Remuneration (Section 219): Unless otherwise agreed, an agent is entitled to
remuneration for his services.

4. Termination of POA:

A Power of Attorney can be revoked either by the act of parties or by operation of law:
By Act of Parties: The principal can revoke the POA at any time, provided that if the agent has
an interest in the property which forms the subject-matter of the agency, the agency cannot be
terminated to the prejudice of such interest (Section 201).
By Operation of Law: Events such as the death or insanity of either the principal or agent,
bankruptcy of the principal, or completion of the act or business for which the agent was
appointed can automatically terminate the POA.

5. Limitations:
A Power of Attorney, though a powerful legal instrument, has its limitations:
No Transfer of Title: A POA does not transfer the title or ownership of any property. It merely
authorizes the agent to act on the principal's behalf.
Cannot Override Law: A POA cannot grant powers that are illegal or against public policy. For
instance, a principal cannot give power to an agent to carry out illegal activities.

6. Notarization and Registration:

While notarization is recommended to increase the authenticity of the document, registration is

mandatory for POAs that relate to the transfer of immovable property. A registered POA
provides it with a legal status and prevents potential disputes related to its authenticity.
Unit II MBA LEGAL ASPECTS OF BUSINESS

7. Admissibility as Evidence:

Under the Indian Evidence Act, 1872, if a POA is executed outside India, it may be authenticated
by a notary public or any court, judge, magistrate, Indian consulate or representative stationed in
that country. Once so authenticated, it is deemed to be duly executed for the purposes of being
used as evidence in Indian courts.

Though the Power of Attorney primarily draws its substance from the Power of Attorney Act,
1882, the Indian Contract Act, 1872 provides the foundational principles upon which the
legitimacy of a POA is based. To ensure that a Power of Attorney is valid, enforceable, and does
not lead to disputes, it's imperative to understand the intricacies of both Acts. It is advisable to
draft and review a POA meticulously, keeping in mind the legal stipulations and requirements, to
ensure that the interests of both the principal and agent are safeguarded.