Law Assignment
Content
BUSINESS LAW
Assignment No. 1
Date: 23rd June 2011.
Submitted to:
Prof. HARI PARMESHWAR
Submitted By
CHAITANYA ASIF ABOOBACKER SHASHANK SANDEEP RAM PRASAD BIBHU PRASAD
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THE INDIAN CONTRCT ACT, 1872
Introduction:
A Study of mercantile or business law starts with a study of the rules of law governing contracts, since the law of contracts is the basis of all other enactments covered by the term “MERCANTILE LAW OR BUSINESS LAW”. Further, the law of contracts is applicable not only to the mercantile community, but to the others also. We know that today, almost everyone of us enters into a number of contracts weather as businessman or otherwise, and as such, it is necessary for us to familiarize ourselves with the law of contract.
The Indian Contract Act, 1872:
THE INDIAN CONTRACT ACT, 1872, Came into force with effect from 1st September, 1872. It applies to the whole of INDIA except the state of JAMMU & KASHMIR. THE INDIAN CONTRACT ACT, 1872, lays down the law relating to contracts. It enunciates the legal principles governing business transactions in INDIA. The Act recognizes freedom of contracts, and the rights and duties created by a contract can be enforced by courts of law. As pointed out by Sir WILLIAM ANSON, “the parties to contract, in a sense, make the law for themselves.”
The Act Is Not Exhaustive:
Although the Indian Contract Act, by its very title, appears to cover the whole law of contracts, it does not itself process to be a complete code. Well from the phrase “ to define and amend certain parts of the law relating to contracts”, makes it clear that it does not cover all the branches of the law of contracts . Besides, laying down the general principles of law of contracts in section 1 to 75, the act deals with certain special contracts such as Indemnity and Guarantee, Bailment and Pledge and Agency. It does not, however, provide rules of law relating to other branches of contract.
Definition of Contract:
According to Halsbury, “A contract is an agreement between two or more persons which is intended to be enforceable at law and is constituted by the acceptance by one party of an offer made to him by the other party to do or abstain from doing some act.” Section 2(h) of the Indian Contract Act, 1872 defines a contract as follows : “An agreement by law is a contract”.
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In simple words, an contract is an agreement between two or more parties which is intended to have legal consequences. Thus a contract consists of the following two elements: 1) An agreement, and 2) Legal obligation i.e. duty enforceable by law.
(1) Agreement:
“Every promise and every set of promises, forming consideration for each other, is an agreement.” In other words, it means that there must be a proposal or offer by one party and that proposal or offer must be accepted by the other party, Thus an agreement consists of a proposal or offer from a party and its acceptance by the other.
Example: Mr.A makes an offer to sell his car for Rs.1,25,000 to Mr.B . Mr.B accepts the offer. Y and Mr.B.
(2) Legal Obligation:
An agreement to become a contract must give rise to a legal obligation. A legal obligation is a duty enforceable by law. It binds the parties to a contract and imposes the necessity of doing or to abstain from doing a definite act or acts. If an agreement does not create a duty enforceable by law, it is not a contract. Example: A invites B for dinner and the invitation is accepted by B, the obligation of A to prepare the dinner and the obligation of B to come for dinner are social obligations and they do not create a legally enforceable agreement. If any one of them do not perform his part of the social obligation, the other cannot take any action against the former. In case of business agreements, it is usually presumed that the parties intend to create legal obligations.
“THUS ALL CONTRACTS ARE AGREEMENTS BUT ALL AGREEMENTS ARE NOT CONTRACTS. ONLY THOSE AGREEMENTS ARE CONTACTS WHICH GIVE RISE TO LEGAL OBLIGATIONS.”
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BAILMENT
Introduction:
Bailment describes a legal relationship in common law where the physical possession of personal property, or chattel, is transferred from one person (the 'bailor') to another person (the 'bailee') who subsequently has possession of the property. It arises when a person gives property to someone else for safekeeping.
Definition:
“A delivery of goods in trust upon a contract, express or implied, that the trust shall be faithfully executed on the part of the bailee.” ……..As defined by ‘BLACKSTONE.’
Defnition by Section 148 Of The 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 of according to the directions of the person delivering them. The person delivering the goods is called the ‘bailor’. The person to whom they are delivered is called the ‘bailee’.”
Bailment in General:
Bailment is distinguished from a contract of sale or a gift of property, as it only involves the transfer of possession and not its ownership. To create a bailment, the bailee must both intend to possess, and actually physically possess, the bailable chattel. Bailment is a typical common law concept although similar concepts exist in civil law. In addition, unlike a lease or rental, where ownership remains with the lessor but the lessee is allowed to use the property, the bailee is generally not entitled to the use of the property while it is in his possession. Moreover, unlike a security agreement or pawn at a pawnbroker, where the secured party is entitled to the possession and use of the property only on default of payment, a bailor can demand the return of the property at any reasonable time, without prior notice.
EXAMPLE: A common example of bailment is leaving your car with a valet. Leaving your car in a parking garage is typically a license, as the car park's intent to possess your car cannot be
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shown. However, it arises in many other situations, including terminated leases of property, warehousing (including store-it-yourself) or in carriage of goods.
Kinds of Bailment:
Bailment may be classified from the point of view of a) Benefit b) Reward A. Calssification of bailment from ‘benfit’ point of view: 1. For the benefit of the bailor and bailee 2. For the sole benefit of the bailor and 3. For the sole benefit of the bailee. (1) For the benefit of the bailor and bailee : A bailment for the mutual benefit of the parties is created when there is an exchange of performances between the parties (e.g. a bailment for the repair of an item). (2) For the sole benefit of the bailor : A bailor receives the sole benefit from a bailment when a bailee acts gratuitously (e.g. a restaurant, a bailee, provides an attended coatroom free of charge to its customers, the bailors). (3) For the sole benefit of the bailee: A bailment is created for the sole benefit of the bailee when a bailor acts gratuitously (e.g., the loan of a book from a library) B. Calssification of bailment from ‘reward’ point of view: 1. Gratuitous bailment 2. Non-gratuitous bailment or bailment for reward (1) Gratuitous bailment: In case of a gratuitous bailment no compensation passes between the bailer and the bailee, i.e., neither the bailor nor the bailee gets any remuneration. (2) Non- Gratuitous bailment:
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Non-gratuitous bailment is for reward or for valuable consideration. In this case either the bailor or the bailee is entitled to remuneration.
Sub-Bailment:
A sub-bailee is a person to whom the actual possession of goods is transferred by someone who is not himself the owner of the goods, but has a present right to possession of them as a bailee of the owner.
Essentials of Bailment:
The following are the essential features of bailment: (1) Specific movable property: A bailer-bailee realtion can arise only in case of a specific movable property. There cannot be bailment of immovable property. A pledge might be created by delivery of documents of title goods. (2) Delivery of goods for change of possession: In order to constitute a bailment, a change of possession is essential. A person who is in de facto control of property, would normally be treated as the person who is in possession of the property. Thus there can’t be any bailment unless goods are delivered by the bailer and the bailee accepts them. Delivery should involve change of possession in the legal sense of the term. Mere custody doesn’t involve change of possession. One who has custody without possession, like a servant, or a guest using his hosts goods is not a bailee. (3) Delivery should be for some purpose and usually upon a contract: Delivery of goods should be for some purpose. The goods may be lend or hired or deposited for safe custody as security for a debt. Section 148 of the act contemplates delivery based upon a contract. However, the question arises whether there is a need for a contract at all. (4) Obligation to return the goods or deal according to directions: The essence of bailment is the obligation of the bailee to return the goods or to deal with them according to the directions of the bailer. The direction for return or disposal of the goods may be given even after the accomplishment of the purpose of bailment. Even where the contract is silent about the return of goods, there is an implied term in a bailement to return the goods within a reasonable time after the accomplishment of the purpose. It’s not bailment if there is no obligation to return the same subject matter either in its original or in altered form.
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Characteristics of Bailment:
The characteristics of bailment are: 1. Delivery of goods 2. Bailment is based on a contract 3. Return of goods in specie 4. Ownership of a goods
Types of Bailment:
Sir William Jones in 1781;in his work An Essay on “The Law of Bailments”, divided bailments into five sorts, namely:
• • • • •
Deposit. Man datum, or commission without recompense. Commodatum, or loan for use, without pay. Pawn or pledge. Locatum, or hiring, which is always with reward.
Duties of Bailee:
The duties of bailee are as follows: 1. Duty to Take Reasonable Care of the Goods Delivered to Him: Section 151 has laid down a uniform standard care for all kinds of bailment. According to this section, “In all cases of bailment the bailee is bound to take as much care of the goods bailed to him as a man of ordinary prudence would, under similar circumstances, take off his own goods of the same bulk, quality and value as the goods bailed.” 2. Duty not to Deviate from the Terms of the Contract: According to section 153 of the act, “A contract of bailment is voidable at the option of the bailor, if the bailee does any act with regard to the goods bailed, inconsistent with the conditions of the bailment.”
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Thus, any wrongful act committed by the bailee with regards to the goods bailed, will entitle the bailer to avoid the bailer and insist on the return of the goods bailed. 3. Duty not to make Unauthorized Use of the Goods: Section 154 to the act has laid down that, “If the bailee makes any use of the goods bailed, which is not according to the conditions of the bailment, he is liable to make compensation to the bailer for any damage arising to the goods from or during such use of them.” 4. Not to mix the Goods Bailed with his Own Goods: In accordance to the Section 156 of the Act, “If the bailee, without the consent of the bailor, mixes the goods of the bailor with his own goods, and goods can be separated or divided, the property in the goods remains in the parties respectively, but the bailee is bound to bear the expenses of separation or division and damage arising from the mixture.” 5. Duty to Return the Goods: This duty is imposed upon the bailee by Section 160 of the Act which lays down that, “It’s the duty of the bailee to return, or deliver according to the bailors directions, the goods bailed, without demand, as soon as the time which they were bailed has expired, or the purpose for which they were bailed has been accomplished.” If the bailee fails to return the goods bailed at proper time, he becomes liable for any loss or damage to the goods, inspite of the fact that he exercise reasonable care. 6. Duty to Return Increase or Profit from Goods Bailed: It’s also the duty of the bailee to return to the bailor, any increase or profit from the goods bailed in accordance with the provisions of Section 163 of the Act. 7. Not to Setup an Adverse Title: According to Section 117 of The Indian Evidence Act, the bailee is estopped from denying the bailors authority to make the bailment and receive the goods back as such the bailee cannot say that the bailor had no right to make the bailment, and setup an adverse title against the bailor and in favour of a third party.
Duties of Bailor:
Duty to disclose faults in the goods bailed. Duty to repay necessary expenses if the bailee is to receive no remuneration.
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Duty to bear extra ordinary expenses in case of gratuitous as well as non gratuitous bailment. Duty to indemnify the bailee Duty to receive back the goods.
Bailee’s Lien:
Lien is the right of a person to retain the property or goods which is rightfully and continuously in his possession belonging to another until the present and accrued claims of the person in possession are satisfied. It arises when the bailee has a right of continuing possession of the goods. The right of lien is lost when possession is lost. Therefore, bailee’s lien is known as ‘possessory lien’. A lien is of two types: 1. Particular Lien 2. General Lien
1. Particuar Lien:
According to Section 170, “Where the bailee has, inaccordance with the purpose of bailment, rendered any service involving the excersise of labour or skill in respect of goods bailed, he has, in the absence of a contact to the contrary, a right to retain such goods until he receives due remuneration for the services he has rendered in respect of them.”
2. General Lien:
According to the Section 171 of the Act, “Bankers, Factors, Wharfingers, Attorneys of high court and policy brokers may, in the absence of a contract in the contrary retain as a security for a general balance of account, any goods bailed to them; but no other persons have a right to retain, as a security for such balance goods bailed to them, unless there is an express contract to that effect.”
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Rights and Liabilities:
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The bailment contract embodying general principles of the law of bailments governs the rights and duties of the bailor and bailee. The duty of care that must be exercised by a bailee varies, depending on the type of bailment.
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In a bailment for mutual benefit, the bailee must take reasonable care of the bailed property. A bailee who fails to do so may be held liable for any damages incurred from his or her negligence. When a bailor receives the sole benefit from the bailment, the bailee has a lesser duty to care for the property and is financially responsible only if he or she has been grossly negligent or has acted in bad faith in taking care of the property. In contrast, a bailee for whose sole benefit property has been bailed must exercise extraordinary care for the property. The bailee can use the property only in the manner authorized by the terms of the bailment. The bailee is liable for any injuries to the property from failure to properly care for or use it.
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Once the purpose of the bailment has been completed, the bailee usually must return the property to the bailor, or account for it, depending upon the terms of the contract. If, through no fault of his or her own, the return of the property is delayed or becomes impossible — for example, when it is lost during the course of the bailment — the bailee will not be held liable for nondelivery on demand. In all other situations, however, the bailee will be responsible for the tort of conversion for unjustifiable failure to redeliver the property as well as its unauthorized use.
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The provisions of the bailment contract may restrict the liability of a bailee for negligent care or unauthorized use of the property. Such terms may not, however, absolve the bailee from all liability for the consequences of his or her own fraud or negligence. The bailor must have notice of all such limitations on liability. The restrictions will be enforced in any action brought for damages as long as the contract does not violate the law or public policy. Similarly, a bailee may extend his or her liability to the bailor by contract provision.
Termination of Bailment:
A bailment is ended when its purpose has been achieved, when the parties agree that it is terminated, or when the bailed property is destroyed. A bailment created for an indefinite period is terminable at will by either party, as long as the other party receives due notice of the intended termination. Once a bailment ends, the bailee must return the property to the bailor or possibly be liable for conversion.
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Finder of Retain Goods:
Finding of goods is not owning, finder of lost goods will be known as bailee and is charged with the responsibility of a bailee, besides the responsibility of exercising reasonable efforts in finding the real owner and he enjoys certain rights also, these rights are hereunder 1. Right to retain the goods (sec168) 2. Right to sell (sec169)
PLEDGE OR PAWN
Introduction:
Pledge is special kind of bailment, where delivery of goods is for purpose of security for payment of a debt or performance of a promise. Pledge is bailment for security. Common example is keeping gold with bank/money lender to obtain loan. Since pledge is bailment, all provisions applicable to bailment apply to pledge also. In addition, some specific provisions apply to pledge. The bailment of goods as security for payment of a debt or performance of a promise is called “pledge”. The bailor is in this case called the “pawnor”. The bailee is called the “pawnee”. [section 172].
Definition:
“The bailment of goods as security of payment of a debt or performance of a profit is called Pledge” …………… According to Section 172 of the Act.
ESSENTIAL INGREDIENTS OF PLEDGE:
1. Delivery of Possession :
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As in bailment, the delivery of possession is essential in a pledge. Thus, in Revenue Authority vs Sudarsanam Pictures, AIR 1968, a film producer borrowed a sum of money from a financier and agreed to deliver the final prints of the film when ready. This was held not to be a pledge because there was no delivery of possession at the time of the agreement. It is possible to do delivery by atonement in which case a third person who has the possession of the property agrees to hold it on behalf of the pledgee upon direction of the pledger. Hypothecation: It is also possible to let the pawner keep the physical goods even though the legal possession is transfered to the pawner. Thus, in Bank of Chittor vs Narsimbulu AIR 1966, a cinema hall equipment was pledged to the bank but the bank allowed the hall owner to keep the equipment to show the movies. The hall owner then sold the equipment to another party. It was held that the sale was subject to the pledge. In Bank of India vs Binod Steel AIR 1977, MP HC held that in such cases where goods are hypothecated, other creditors cannot claim right on them until the claim of the pledgee is satisfied.
2. In Return of A Loan or A Promise : The delivery must be in return of a loan or of acceptance of a promise to perform something. Thus, if A gives his bicycle to B in friendship, it is not a pledge but a simple bailment. However, if A gives his bicycle to B as a security for a debt of 100Rs it will be a pledge. 3. In Pursuance of A Contract : The delivery must be done under a contract though it is not necessary that the delivery and the payment of loan be at the same time. Delivery can be made even after the loan is received.
RIGHTS OF A PAWNEE:
1. Right of Retainer (Section 173- 174):
As per section 173, the pawnee may retain the goods pledged, not only for a payment of a debt or the performance of the promise, but also for the interest of the debt, and all necessary expenses incurred by him in respect of the possession or for the preservation of the goods pledged. Further, as per section 174, in absence of any contract to the contrary, the pawner shall not retain the goods pledged for debt or promise other than the debt or promise for which they have been pledged. However, such contract shall be presumed in absence of any contract to the contrary with respect to any subsequent advances made by the pawnee.
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This means that if A pledges his gold watch with B for 1000 Rs and later on he promises to teach B's son for a month and takes for 500Rs for this promise , and if he does not teach B's son, B cannot retain A's gold watch after A pays 1000Rs. Thus, the right of retainer is a sort of particular lien. The difference was pointed out in Bank of Bihar vs State of Bihar 1972 by SC. It observed that a Pawnee obtains a special interest in the pledged goods in the sense that he can transfer or pledge that special interest to somebody else. The lien only gives the right to detain the goods but not transfer. Thus, a pledgee get the first right to claim the goods before any other creditor can get them. The pledgee's loan is secured by the goods.
2. Right to Extra Ordinary Expenses (Section 175):
As per section 175, the Pawnee is entitled to receive from the pawner extra ordinary expenses incurred by him for the preservation of the goods pledged. For such expenses, however, he does not have right to detain the goods. Section 175 says that the Pawnee is entitled to receive from the pawner extraordinary expenses incurred by him for the preservation of the goods pledged.
3. Right of Sale (Section 176):
As per section 176 (Pawnee's right where pawnor makes default) - If the pawnor makes default in payment of the debt or performance at the stipulated time, of the promise, in respect of which the goods were pledged, the pawnee may bring a suit against the pawnor upon the debt or the promise and retain the goods pledged as a collateral security; or he may sell the thing pledged, on giving the pawnor reasonable notice of the sale. This right secures the debt for the pawnee up to the value of the goods pledged because it allows the pawnee to either sue the pawnor for recovering the debt or perform the promise or sell the goods pledged. If the value received after selling the goods, the pawner is still liable for the difference and if the value of the sale is more than the amount of debt, the pawnee is supposed to give the difference to the pawnor. However, if the pawnee has sold the goods, he cannot sue for the debt. In Lallan Prasad vs Rahmat Ali AIR 1967the defendant borrowed 20000Rs from the plaintiff on a promissory note and gave him aero scrapes worth about 35000Rs, as a security for the loan. The plaintiff sued for repayment of the loan but was unable to produce the security, having sold it. SC rejected his action. It held that pledgee cannot maintain a suit for recovery of debt as well as retain the pledged property. The pawner is required to give a reasonable notice to the pawnee about the sale. The notice is not a mere notice but reasonable notice. In Prabhat Bank vs Babu Ram AIR 1966, the terms of an agreement of a loan enabled the bank to sell the securities upon default without notice. The pawnor defaulted in payment. The bank sent a reminder upon which the pawnor asked for more time. The bank sold the securities. SC held that this was bad in law. The bank is required to give a clear and specific notice of the impending sale. Pawner's request for more time cannot be interpreted as a notice of sale. When the goods are lost due to pawnee's negligence, the
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liability
of
the
pawnor
is
reduced
to
the
extent
of
value
of
the
goods.
Pawnor's Right to Redeem (Section 177):
Section 177 provides a very important right to the pawnor. It allows the pawnor to redeem his property even if he has defaulted. It says that if a time is stipulated for the payment of a debt or performance of the promise for which the pledge is made, and the pawnor make default in payment of the debt or performance of the promise at the stipulated time, he may redeem the goods pledged at any subsequent time before the actual sale of them; but he must, in that case, pay, in addition, any expense which have arisen from his default. J Shelat in Lallan Prasad vs Rahmat Ali AIR 1967, observed that the pawnor has as absolute right to redeem his property upon satisfaction or the debt or the promise. This right is not extinguished by the expiry of the stipulated time for repayment of debt or performance of the promise but only by the actual sale of the goods. If the pawnor redeems his goods after the expiry of the stipulated time, he is bound to pay the expenses as have arisen on account of his default. The pawnor also has a right to take back any increase in the property. In M R Dhawan vs Madan Mohan AIR 1969, certain shares of a company were pledged. During the period of the pledge, the company issued bonus and rights shares. Delhi HC held that the pawnor was entitled to those at the time of redemption.
Pledge Made by Non-Owner of the Goods:
Ordinarily goods may be pledged by the owner or by any person with the consent of the owner. A pledge made by any other person is not valid. Thus, in Biddomoy Dabee vs Sittaram, it was held that a pledge made by the servant who was holding the goods of his master was not valid. Similarly, in Purushottam Das vs Union of India AIR 1967, a railway company delivered goods on a forged railway receipt. The goods were then pledged with the defendants. In a suit by the railways to recover the goods it was held that the pledge was invalid. This is important to protect the interests of the owners. However, in many situations it is equally important to allow trade and commerces and so there are some situations where a person having the possession of the goods by owner's consent, is entitled to pledge those goods even without owner's consent for the pledge. These situations are discussed below -
1. Pledge by Mercantile Agent (Section 178):
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When a mercantile agent is in possession of the goods with consent of the owner, any pledge made by him in ordinary course of business will be valid, provided that the pawnee acts in good faith and that he has no notice of the fact that the pawnor is not authorized to pawn the goods. The essential conditions of this rule are - he must be a mercantile agent, he must have possession of the goods by consent of the owner, and it must be done in ordinary course of business. Further, the pawnee should act in good faith and he must not have notice that the pawnor has no authority to pledge.
2. Pledge by A Person in Possession under Voidable Contract (Section 178 A):
When the goods are obtained by a person under a contract that is voidable under section 19 or 19 A, he can pledge the goods if the contract is not avoided at the time of the pledge. Thus, in Phillips vs Brooks Ltd 1919, a fraudulent person pretending to be a man of credit induced the plaintiff to give him a valuable ring in return for his cheque which proved worthless. Before the fraud could be discovered, he pledged the ring with the defendants. The pledge was held to be valid.
3. Pledge by Person with Limited Interest (Section 179):
Section 179 says that where a person pledges goods in which he has only a limited interest, the pledge is valid to the extent of that interest. Thus, when a car worth 100,000Rs is owned jointly by A and B both having 50% interest in the car, and if A pledges the car for 60000Rs, the value of the pledge that the pledgee can receive upon default is only 50% of the value received by sale. Thus, if a pledgee further pledges the goods, his interest is only the amount for which the first pledger pledged the goods. For example, if A pledged his car worth 100000Rs for 20000Rs to B. B's interest in the car is only 20000 Rs. He can further pledge it but if he pledges it for more than 20000Rs, A will be liable only for 20000Rs.
4. Pledge by a Co-Owner:
Where there are several joint owners of goods and one of them is in possession of goods with the consent of the others, he can make the valid pledge of the same.
5. Pledge by a Seller in Possession after Sale:
Where a seller, having sold the goods continues to be in possession of the same, not being the owner of goods any longer, cannot make a valid pledge
6. Pledge by a Buyer in a Possession before Sale:
According to section 30(2) of the sale of Goods Act, where a person, having agreed to buy goods, obtains with the consent of the seller, possession of goods or documents of title to the goods, before property in the goods is transferred to him, pledges the goods or documents of the
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title to the goods, the pledge will be valid provided the pledge acted in good faith and had no notice of pledger’s defect in the title to the goods pledged.
Difference between Bailment and Pledge:
Pledge is a special kind of Bailment. Thus, all Pledges are Bailments but the reverse is not true. BAILMENT Bailment can be for many reasons ranging for reward to gratuitous. The bailee does not get a right to sell the goods. The bailee only gets a right of lien over the goods. The bailee can use the goods bailed. PLEDGE A pledge is bailment done for a specific type of purpose, which is to secure a loan or performance of a promise. A pawnee has a right to sell the goods in case of default. A pawnee gets a right of retainer and a special interest in the goods, which is more that just the lien. The pawnee has no right to use the goods.
The bailee is not responsible for the loss, The pawnee is absolutely liable for the upkeep destruction, or deterioration if he uses the goods of the goods. with reasonable care.
AGENCY
Introduction:
The law of agency is an area of commercial law dealing with a contractual or non-contractual set of relationships when a person, called the agent, is authorized to act on behalf of another (called the principal) to create a legal relationship with a third party. The agent is, thus, required to negotiate on behalf of the principal or bring him and third parties into contractual relationship. This branch of law separates and regulates the relationships between:
• • •
Agents and principals; Agents and the third parties with whom they deal on their principals' behalf; and Principals and the third parties when the agents purport to deal on their behalf.
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In India, section 182 of the Contract Act 1872 defines Agent as “a person employed to do any act for another or to represent another in dealings with third persons.
The Concepts:
The reciprocal rights and liabilities between a principal and an agent reflect commercial and legal realities. A business owner often relies on an employee or another person to conduct a business. In the case of a corporation, since a corporation is a fictitious legal person, it can only act through human agents. The principal is bound by the contract entered into by the agent, so long as the agent performs within the scope of the agency. A third party may rely in good faith on the representation by a person who identifies himself as an agent for another. It is not always cost effective to check whether someone who is represented as having the authority to act for another actually has such authority. If it is subsequently found that the alleged agent was acting without necessary authority, the agent will generally be held liable.
Brief statement of legal principles:
There are three broad classes of agent:
1. Universal agents hold broad authority to act on behalf of the principal, e.g. they may hold
a power of attorney (also known as a mandate in civil law jurisdictions) or have a professional relationship, say, as lawyer and client. 2. General agents hold a more limited authority to conduct a series of transactions over a continuous period of time; and 3. Special agents are authorized to conduct either only a single transaction or a specified series of transactions over a limited period of time.
Authority:
An agent who acts within the scope of authority conferred by her principal binds the principal in the obligations she creates against third parties. There are essentially two kinds of authority recognized in the law: actual authority (whether express or implied) and apparent authority.
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Actual Authority:
Actual authority can be of two kinds. Either the principal may have expressly conferred authority on the agent, or authority may be implied. Authority arises by consensual agreement, and whether it exists is a question of fact. An agent, as a general rule, is only entitled to indemnity from the principal if she has acted within the scope of her actual authority, and may be in breach of contract, and liable to a third party for breach of the implied warranty of authority.
Express Actual Authority (Sec187):
Express actual authority means an agent has been expressly told she may act on behalf of a principal
Implied Actual Authority (Sec187):
Implied actual authority, also called "usual authority", is authority an agent has by virtue of being reasonably necessary to carry out his express authority. As such, it can be inferred by virtue of a position held by an agent. For example, partners have authority to bind the other partners in the firm, their liability being joint and several, and in a corporation, all executives and senior employees with decision-making authority by virtue of their position have authority to bind the corporation.
Apparent and Estoppel Authority (Sec237):
Apparent authority (also called "ostensible authority") exists where the principal's words or conduct would lead a reasonable person in the third party's position to believe that the agent was authorized to act, even if the principal and the purported agent had never discussed such a relationship. For example, where one person appoints a person to a position which carries with it agency-like powers, those who know of the appointment are entitled to assume that there is apparent authority to do the things ordinarily entrusted to one occupying such a position. If a principal creates the impression that an agent is authorized but there is no actual authority, third parties are protected so long as they have acted reasonably. This is sometimes termed "agency by estoppel" or the "doctrine of holding out", where the principal will be estopped from denying the grant of authority if third parties have changed their positions to their detriment in reliance on the representations made. • Rama Corporation Ltd v Proved Tin and General Investments Ltd [1952] 2 QB 147, Slade J, "Ostensible or apparent authority... is merely a form of estoppel, indeed, it has been termed agency by estoppel and you cannot call in aid an estoppel unless you have three ingredients: (i) a representation, (ii) reliance on the representation, and (iii) an alteration of your position resulting from such reliance." • Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480
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The Raffaella or Egyptian International Foreign Trade Co v Soplex Wholesale Supplies Ltd and PS Refson & Co Ltd [1985] 2 Lloyd's Rep 36
Agency of Necessity (Sec189):
This arises where there is no express or implied appointment of a person as agent for another but he is forced to act on behalf of a particular person.
Agency of Ratification (Sec196-200):
Where an agent does an act for his principal but without knowledge of authority and where he exceeds the given authority, the principal is not held bound by the transaction.
Watteau v Fenwick
In the case of Watteau v Fenwick, Lord Coleridge CJ on the Queen's Bench concurred with an opinion by Wills J that a third party could hold personally liable a principal who he did know about when he sold cigars to an agent that was acting outside of its authority. Wills J held that "the principal is liable for all the acts of the agent which are within the authority usually confided to an agent of that character, notwithstanding limitations, as between the principal and the agent, put upon that authority." This decision is heavily criticized and doubted, though not entirely overruled in the UK. It is sometimes referred to as "usual authority" (though not in the sense used by Lord Denning MR in Hely-Hutchinson, where it is synonymous with "implied actual authority"). It has been explained as a form of apparent authority, or "inherent agency power.
•
Authority by virtue of a position held to deter:
Fraud and other harms that may befall individuals dealing with agents, there is a concept of Inherent Agency power, which is power derived solely by virtue of the agency relation. For example, partners have apparent authority to bind the other partners in the firm, their liability being joint and several (see below), and in a corporation, all executives and senior employees with decision-making authority by virtue of their declared position have apparent authority to bind the corporation.
Even if the agent does act without authority, the principal may ratify the transaction and accept liability on the transactions as negotiated. This may be express or implied from the principal's behavior, e.g. if the agent has purported to act in a number of situations and the principal has knowingly acquiesced, the failure to notify all concerned of the agent's lack of authority is an implied ratification to those transactions and an implied grant of authority for future transactions of a similar nature.
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Classification of Agents:
1. Special and general agents 2. Mercantile commercial agents 3. Non-mercantile or non-commercial agents 4. Sub-agents and substituted agents
Liability of Agent to Third Party:
If the agent has actual or apparent authority, the agent will not be liable for acts performed within the scope of such authority, so long as the relationship of the agency and the identity of the principal have been disclosed. When the agency is undisclosed or partially disclosed, however, both the agent and the principal are liable. Where the principal is not bound because the agent has no actual or apparent authority, the purported agent is liable to the third party for breach of the implied warranty of authority.
Liability of Agent to Principal:
If the agent has acted without actual authority, but the principal is nevertheless bound because the agent had apparent authority, the agent is liable to indemnify the principal for any resulting loss or damage.
Liability of Principal to Agent:
If the agent has acted within the scope of the actual authority given, the principal must indemnify the agent for payments made during the course of the relationship whether the expenditure was expressly authorized or merely necessary in promoting the principal's business.
Duties:
An agent owes the principal a number of duties. These include:
•
A duty to undertake the task or tasks specified by the terms of the agency (that is, the agent must not do things that he has not been authorized by the principal to do); A duty to discharge his duties with care and due diligence; and A duty to avoid conflict of interest between the interests of the principal and his own (that is, the agent cannot engage in conduct where stands to gain a benefit for himself to the detriment of the principal).
• •
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An agent must not accept any new obligations that are inconsistent with the duties owed to the principal. An agent can represent the interests of more than one principal, conflicting or potentially conflicting, only after full disclosure and consent of the principal. An agent also must not engage in self-dealing, or otherwise unduly enrich himself from the agency. An agent must not usurp an opportunity from the principal by taking it for himself or passing it on to a third party. In return, the principal must make a full disclosure of all information relevant to the transactions that the agent is authorized to negotiate and pay the agent either a prearranged commission, or a reasonable fee established after the fact.
Termination:
An agent's authority can be terminated at any time. If the trust between the agent and principal has broken down, it is not reasonable to allow the principal to remain at risk in any transactions that the agent might conclude during a period of notice. As per sections 201 to 210 of the Indian Contract Act 1872, an agency may come to an end in a variety of ways: 1. Withdrawal by the agent – however, the principal cannot revoke an agency coupled with interest to the prejudice of such interest. An agency is coupled with interest when the agent himself has an interest in the subject-matter of the agency, e.g., where the goods are consigned by an upcountry constituent to a commission agent for sale, with poor to recoup himself from the sale proceeds, the advances made by him to the principal against the security of the goods; in such a case, the principal cannot revoke the agent’s authority till the goods are actually sold, nor is the agency terminated by death or insanity (illustrations to section 201); 2. By the agent renouncing the business of agency; 3. By the business of agency being completed; 4. By the principal being adjudicated insolvent (section 201). The principal also cannot revoke the agent’s authority after it has been partly exercised, so as to bind the principal (section 204), though he can always do so, before such authority has been so exercised (section 203). Further, as per section 205, if the agency is for a fixed period, the principal cannot terminate the agency before the time expired, except for sufficient cause. If he does, he is liable to compensate the agent for the loss caused to him thereby. The same rules apply where the agent, renounces an agency for a fixed period. Notice in this connection that want of skill, continuous disobedience of lawful orders, and rude or insulting behavior has been held to be sufficient cause for dismissal of an agent. Further, reasonable notice has to be given by one party to the other;
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otherwise, damage resulting from want of such notice, will have to be paid (section 206). As per section 207, the revocation or renunciation of an agency may be made expressly or impliedly by conduct. The termination does not take effect as regards the agent, till it becomes known to him and as regards third party, till the termination is known to them (section 208). When an agent’s authority is terminated, it operates as a termination of subagent also (section 210). This has become a more difficult area as states are not consistent on the nature of a partnership. Some states opt for the partnership as no more than an aggregate of the natural persons who have joined the firm. Others treat the partnership as a business entity and, like a corporation, vest the partnership with a separate legal personality. Hence, for example, in English law, a partner is the agent of the other partners whereas, in Scots law where there is a separate personality, a partner is the agent of the partnership. This form of agency is inherent in the status of a partner and does not arise out of a contract of agency with a principal. The English Partnership Act 1890 provides that a partner who acts within the scope of his actual authority (express or implied) will bind the partnership when he does anything in the ordinary course of carrying on partnership business. Even if that implied authority has been revoked or limited, the partner will have apparent authority unless the third party knows that the authority has been compromised. Hence, if the partnership wishes to limit any partner's authority, it must give express notice of the limitation to the world. However, there would be little substantive difference if English law was amended: partners will bind the partnership rather than their fellow partners individually. For these purposes, the knowledge of the partner acting will be imputed to the other partners or the firm if a separate personality. The other partners or the firm are the principal and third parties are entitled to assume that the principal has been informed of all relevant information. This causes problems when one partner acts fraudulently or negligently and causes loss to clients of the firm. In most states, a distinction is drawn between knowledge of the firm's general business activities and the confidential affairs as they affect one client. Thus, there is no imputation if the partner is acting against the interests of the firm as a fraud. There is more likely to be liability in tort if the partnership benefited by receiving fee income for the work negligently performed, even if only as an aspect of the standard provisions of vicarious liability. Whether the injured party wishes to sue the partnership or the individual partners are usually a matter for the plaintiff since, in most jurisdictions, their liability is joint and several.
Agency Relationships:
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Agency relationships are common in many professional areas.
• •
Employment. Real transactions (real estate brokerage, mortgage brokerage). In real estate brokerage, the buyers or sellers are the principals themselves and the broker or his salesperson who represents each principal is his agent. Financial advice (insurance agency, stock brokerage, accountancy) Contract negotiation and promotion (business management) such as for publishing, fashion model, music, movies, theatre, show business, and sport.
• •
An agent in commercial law (also referred to as a manager) is a person who is authorized to act on behalf of another (called the principal or client) to create a legal relationship with a third party.
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SURETY
Introduction:
A surety bond is a promise to pay one party (the obligee) a certain amount if a second party (the principal) fails to meet some obligation, such as fulfilling the terms of a contract. The surety bond protects the obligee against losses resulting from the principal's failure to meet the obligation. A surety bond is a contract among at least three parties:
• • •
The obligee - the party who is the recipient of an obligation, The principal - the primary party who will be performing the contractual obligation, The surety - who assures the obligee that the principal can perform the task
European surety bonds are issued by banks and are called " Bank Guarantees" in English and "Caution" in French. They pay out cash to the limit of guarantee in the event of default of Principal to uphold his obligations to Obligee, without reference by Obligee to Principal and against obligee's sole verified statement of claim to the bank. Through a surety bond, the surety agrees to uphold — for the benefit of the obligee — the contractual promises (obligations) made by the principal if the principal fails to uphold its promises to the obligee. The contract is formed so as to induce the obligee to contract with the principal, i.e., to demonstrate the credibility of the principal and guarantee performance and completion per the terms of the agreement. The principal will pay a premium (usually annually) in exchange for the bonding company's financial strength to extend surety credit. In the event of a claim, the surety will investigate it. If it turns out to be a valid claim, the surety will pay it and then turn to the principal for reimbursement of the amount paid on the claim and any legal fees incurred. If the principal defaults and the surety turns out to be insolvent, the purpose of the bond is rendered nugatory. Thus, the surety on a bond is usually an insurance company whose solvency is verified by private audit, governmental regulation, or both. A key term in nearly every surety bond is the penal sum. This is a specified amount of money which is the maximum amount that the surety will be required to pay in the event of the principal's default. This allows the surety to assess the risk involved in giving the bond; the premium charged is determined accordingly. Surety bonds are also used in other situations, for example, to secure the proper performance of fiduciary duties by persons in positions of private or public trust.
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Annual US surety bond premiums are approximately $3.5 billion. State insurance commissioners are responsible for regulating corporate surety activities within their jurisdictions. The commissioners also license and regulate brokers or agents who sell the bonds.
History:
Individual Surety Bonds are the original form of surety ship. The earliest known record of a contract of suretyship is a Mesopotamian tablet written around 2750 BC. There is evidence of Individual Surety Bonds in the Code of Hammurabi and in Babylon, Persia, Assyria, Rome, Carthage, the ancient Hebrews and later England. The Code of Hammurabi, written around 1790 BC, was the first time suretyship was addressed in a written legal code. It wasn't until 1837 that the first Corporate Surety was organized, The Guarantee Society of London. In 1865, the Fidelity Insurance Company became the first US Corporate Surety company, but the venture soon failed.
Contract Surety Bonds:
Contract bonds, used heavily in the construction industry, are a guarantee from a Surety to a project's owner (Obligee) that a general contractor (Principal) will adhere to the provisions of a contract. Included in this category are: bid bonds (guarantee that a contractor will enter into a contract if awarded the bid), performance bonds (guarantee that a contractor will perform the work as specified by the contract), payment bonds (guarantee that a contractor will pay for services and materials), and maintenance bonds (guarantee that a contractor will provide facility repair and upkeep for a specified period of time). There are also miscellaneous contract bonds that do not fall within the categories above, the most common of which are subdivision and supply bonds.
Commercial Surety Bonds:
Commercial bonds represent the broad range of bond types that do not fit the classification of contract. They are generally divided into four sub-types: license and permit, court, public official, and miscellaneous.
License and Permit Bonds:
License and permit bonds are required by certain federal, state, or municipal governments as prerequisites to receiving a license or permit to engage in certain business activities. These bonds function as a guarantee from a Surety to a government and its constituents (Obligee) that a
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company (Principal) will comply with an underlying statute, state law, municipal ordinance, or regulation.
Specific Examples Include:
• • • • • • • • •
Contractor’s license bonds, which assure that a contractor (such as a plumber, electrician, or general contractor) complies with local laws relating to his field. Customs bonds, including importer entry bonds, which assure compliance with all relevant laws, as well as payment of import duties and taxes. Tax bonds, which assure that a business owner will comply with laws relating to the remittance of sales or other taxes. Reclamation and environmental protection bonds Broker’s bonds, including Insurance, Mortgage, and Title Agency bonds ERISA (Employee Retirement Income Security Act) bonds Motor vehicle dealer bonds Money transmitter bonds Health spa bonds, which assure that a health spa will comply with local laws relating to their field, as well as refund dues for any prepaid services in the event the spa closes.
Court Bonds:
Court bonds are those bonds prescribed by statue and relate to the courts. They are further broken down into judicial bonds and fiduciary bonds. Judicial bonds arise out of litigation and are posted by parties seeking court remedies or defending against legal actions seeking court remedies. Fiduciary, or probate, bonds are filed in probate courts and courts that exercise equitable jurisdiction; they guarantee that persons whom such courts have entrusted with the care of others’ property will perform their specified duties faithfully. Examples of judicial bonds include appeal bonds, supersedeas bonds, attachment bonds, replevin bonds, injunction bonds, Mechanic's lien bonds, and bail bonds. Examples of fiduciary bonds include administrator, guardian, and trustee bonds.
Public Official Bonds:
Public official bonds guarantee the honesty and faithful performance of those people who are elected or appointed to positions in government. Examples of officials sometimes requiring bonds include: notaries public, treasurers, commissioners, judges, town clerks, and law enforcement officers.
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Miscellaneous Bonds:
Miscellaneous bonds are those that do not fit well under the other commercial surety bond classifications. They often support private relationships and unique business needs. Examples of significant miscellaneous bonds include: lost securities bonds, hazardous waste removal bonds, credit enhancement financial guarantee bonds, self–insured workers compensation guarantee bonds, and wage and welfare/fringe benefit (Union) bonds..
Fidelity Bonds:
Fidelity bonds, also known as employee dishonesty coverage, cover theft of an employer's property by its own employees. Though referred to as bonds, fidelity coverage functions as a traditional insurance policy rather than a surety bond.
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Assignment No. 1
Date: 23rd June 2011.
Submitted to:
Prof. HARI PARMESHWAR
Submitted By
CHAITANYA ASIF ABOOBACKER SHASHANK SANDEEP RAM PRASAD BIBHU PRASAD
1
THE INDIAN CONTRCT ACT, 1872
Introduction:
A Study of mercantile or business law starts with a study of the rules of law governing contracts, since the law of contracts is the basis of all other enactments covered by the term “MERCANTILE LAW OR BUSINESS LAW”. Further, the law of contracts is applicable not only to the mercantile community, but to the others also. We know that today, almost everyone of us enters into a number of contracts weather as businessman or otherwise, and as such, it is necessary for us to familiarize ourselves with the law of contract.
The Indian Contract Act, 1872:
THE INDIAN CONTRACT ACT, 1872, Came into force with effect from 1st September, 1872. It applies to the whole of INDIA except the state of JAMMU & KASHMIR. THE INDIAN CONTRACT ACT, 1872, lays down the law relating to contracts. It enunciates the legal principles governing business transactions in INDIA. The Act recognizes freedom of contracts, and the rights and duties created by a contract can be enforced by courts of law. As pointed out by Sir WILLIAM ANSON, “the parties to contract, in a sense, make the law for themselves.”
The Act Is Not Exhaustive:
Although the Indian Contract Act, by its very title, appears to cover the whole law of contracts, it does not itself process to be a complete code. Well from the phrase “ to define and amend certain parts of the law relating to contracts”, makes it clear that it does not cover all the branches of the law of contracts . Besides, laying down the general principles of law of contracts in section 1 to 75, the act deals with certain special contracts such as Indemnity and Guarantee, Bailment and Pledge and Agency. It does not, however, provide rules of law relating to other branches of contract.
Definition of Contract:
According to Halsbury, “A contract is an agreement between two or more persons which is intended to be enforceable at law and is constituted by the acceptance by one party of an offer made to him by the other party to do or abstain from doing some act.” Section 2(h) of the Indian Contract Act, 1872 defines a contract as follows : “An agreement by law is a contract”.
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In simple words, an contract is an agreement between two or more parties which is intended to have legal consequences. Thus a contract consists of the following two elements: 1) An agreement, and 2) Legal obligation i.e. duty enforceable by law.
(1) Agreement:
“Every promise and every set of promises, forming consideration for each other, is an agreement.” In other words, it means that there must be a proposal or offer by one party and that proposal or offer must be accepted by the other party, Thus an agreement consists of a proposal or offer from a party and its acceptance by the other.
Example: Mr.A makes an offer to sell his car for Rs.1,25,000 to Mr.B . Mr.B accepts the offer. Y and Mr.B.
(2) Legal Obligation:
An agreement to become a contract must give rise to a legal obligation. A legal obligation is a duty enforceable by law. It binds the parties to a contract and imposes the necessity of doing or to abstain from doing a definite act or acts. If an agreement does not create a duty enforceable by law, it is not a contract. Example: A invites B for dinner and the invitation is accepted by B, the obligation of A to prepare the dinner and the obligation of B to come for dinner are social obligations and they do not create a legally enforceable agreement. If any one of them do not perform his part of the social obligation, the other cannot take any action against the former. In case of business agreements, it is usually presumed that the parties intend to create legal obligations.
“THUS ALL CONTRACTS ARE AGREEMENTS BUT ALL AGREEMENTS ARE NOT CONTRACTS. ONLY THOSE AGREEMENTS ARE CONTACTS WHICH GIVE RISE TO LEGAL OBLIGATIONS.”
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BAILMENT
Introduction:
Bailment describes a legal relationship in common law where the physical possession of personal property, or chattel, is transferred from one person (the 'bailor') to another person (the 'bailee') who subsequently has possession of the property. It arises when a person gives property to someone else for safekeeping.
Definition:
“A delivery of goods in trust upon a contract, express or implied, that the trust shall be faithfully executed on the part of the bailee.” ……..As defined by ‘BLACKSTONE.’
Defnition by Section 148 Of The 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 of according to the directions of the person delivering them. The person delivering the goods is called the ‘bailor’. The person to whom they are delivered is called the ‘bailee’.”
Bailment in General:
Bailment is distinguished from a contract of sale or a gift of property, as it only involves the transfer of possession and not its ownership. To create a bailment, the bailee must both intend to possess, and actually physically possess, the bailable chattel. Bailment is a typical common law concept although similar concepts exist in civil law. In addition, unlike a lease or rental, where ownership remains with the lessor but the lessee is allowed to use the property, the bailee is generally not entitled to the use of the property while it is in his possession. Moreover, unlike a security agreement or pawn at a pawnbroker, where the secured party is entitled to the possession and use of the property only on default of payment, a bailor can demand the return of the property at any reasonable time, without prior notice.
EXAMPLE: A common example of bailment is leaving your car with a valet. Leaving your car in a parking garage is typically a license, as the car park's intent to possess your car cannot be
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shown. However, it arises in many other situations, including terminated leases of property, warehousing (including store-it-yourself) or in carriage of goods.
Kinds of Bailment:
Bailment may be classified from the point of view of a) Benefit b) Reward A. Calssification of bailment from ‘benfit’ point of view: 1. For the benefit of the bailor and bailee 2. For the sole benefit of the bailor and 3. For the sole benefit of the bailee. (1) For the benefit of the bailor and bailee : A bailment for the mutual benefit of the parties is created when there is an exchange of performances between the parties (e.g. a bailment for the repair of an item). (2) For the sole benefit of the bailor : A bailor receives the sole benefit from a bailment when a bailee acts gratuitously (e.g. a restaurant, a bailee, provides an attended coatroom free of charge to its customers, the bailors). (3) For the sole benefit of the bailee: A bailment is created for the sole benefit of the bailee when a bailor acts gratuitously (e.g., the loan of a book from a library) B. Calssification of bailment from ‘reward’ point of view: 1. Gratuitous bailment 2. Non-gratuitous bailment or bailment for reward (1) Gratuitous bailment: In case of a gratuitous bailment no compensation passes between the bailer and the bailee, i.e., neither the bailor nor the bailee gets any remuneration. (2) Non- Gratuitous bailment:
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Non-gratuitous bailment is for reward or for valuable consideration. In this case either the bailor or the bailee is entitled to remuneration.
Sub-Bailment:
A sub-bailee is a person to whom the actual possession of goods is transferred by someone who is not himself the owner of the goods, but has a present right to possession of them as a bailee of the owner.
Essentials of Bailment:
The following are the essential features of bailment: (1) Specific movable property: A bailer-bailee realtion can arise only in case of a specific movable property. There cannot be bailment of immovable property. A pledge might be created by delivery of documents of title goods. (2) Delivery of goods for change of possession: In order to constitute a bailment, a change of possession is essential. A person who is in de facto control of property, would normally be treated as the person who is in possession of the property. Thus there can’t be any bailment unless goods are delivered by the bailer and the bailee accepts them. Delivery should involve change of possession in the legal sense of the term. Mere custody doesn’t involve change of possession. One who has custody without possession, like a servant, or a guest using his hosts goods is not a bailee. (3) Delivery should be for some purpose and usually upon a contract: Delivery of goods should be for some purpose. The goods may be lend or hired or deposited for safe custody as security for a debt. Section 148 of the act contemplates delivery based upon a contract. However, the question arises whether there is a need for a contract at all. (4) Obligation to return the goods or deal according to directions: The essence of bailment is the obligation of the bailee to return the goods or to deal with them according to the directions of the bailer. The direction for return or disposal of the goods may be given even after the accomplishment of the purpose of bailment. Even where the contract is silent about the return of goods, there is an implied term in a bailement to return the goods within a reasonable time after the accomplishment of the purpose. It’s not bailment if there is no obligation to return the same subject matter either in its original or in altered form.
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Characteristics of Bailment:
The characteristics of bailment are: 1. Delivery of goods 2. Bailment is based on a contract 3. Return of goods in specie 4. Ownership of a goods
Types of Bailment:
Sir William Jones in 1781;in his work An Essay on “The Law of Bailments”, divided bailments into five sorts, namely:
• • • • •
Deposit. Man datum, or commission without recompense. Commodatum, or loan for use, without pay. Pawn or pledge. Locatum, or hiring, which is always with reward.
Duties of Bailee:
The duties of bailee are as follows: 1. Duty to Take Reasonable Care of the Goods Delivered to Him: Section 151 has laid down a uniform standard care for all kinds of bailment. According to this section, “In all cases of bailment the bailee is bound to take as much care of the goods bailed to him as a man of ordinary prudence would, under similar circumstances, take off his own goods of the same bulk, quality and value as the goods bailed.” 2. Duty not to Deviate from the Terms of the Contract: According to section 153 of the act, “A contract of bailment is voidable at the option of the bailor, if the bailee does any act with regard to the goods bailed, inconsistent with the conditions of the bailment.”
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Thus, any wrongful act committed by the bailee with regards to the goods bailed, will entitle the bailer to avoid the bailer and insist on the return of the goods bailed. 3. Duty not to make Unauthorized Use of the Goods: Section 154 to the act has laid down that, “If the bailee makes any use of the goods bailed, which is not according to the conditions of the bailment, he is liable to make compensation to the bailer for any damage arising to the goods from or during such use of them.” 4. Not to mix the Goods Bailed with his Own Goods: In accordance to the Section 156 of the Act, “If the bailee, without the consent of the bailor, mixes the goods of the bailor with his own goods, and goods can be separated or divided, the property in the goods remains in the parties respectively, but the bailee is bound to bear the expenses of separation or division and damage arising from the mixture.” 5. Duty to Return the Goods: This duty is imposed upon the bailee by Section 160 of the Act which lays down that, “It’s the duty of the bailee to return, or deliver according to the bailors directions, the goods bailed, without demand, as soon as the time which they were bailed has expired, or the purpose for which they were bailed has been accomplished.” If the bailee fails to return the goods bailed at proper time, he becomes liable for any loss or damage to the goods, inspite of the fact that he exercise reasonable care. 6. Duty to Return Increase or Profit from Goods Bailed: It’s also the duty of the bailee to return to the bailor, any increase or profit from the goods bailed in accordance with the provisions of Section 163 of the Act. 7. Not to Setup an Adverse Title: According to Section 117 of The Indian Evidence Act, the bailee is estopped from denying the bailors authority to make the bailment and receive the goods back as such the bailee cannot say that the bailor had no right to make the bailment, and setup an adverse title against the bailor and in favour of a third party.
Duties of Bailor:
Duty to disclose faults in the goods bailed. Duty to repay necessary expenses if the bailee is to receive no remuneration.
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Duty to bear extra ordinary expenses in case of gratuitous as well as non gratuitous bailment. Duty to indemnify the bailee Duty to receive back the goods.
Bailee’s Lien:
Lien is the right of a person to retain the property or goods which is rightfully and continuously in his possession belonging to another until the present and accrued claims of the person in possession are satisfied. It arises when the bailee has a right of continuing possession of the goods. The right of lien is lost when possession is lost. Therefore, bailee’s lien is known as ‘possessory lien’. A lien is of two types: 1. Particular Lien 2. General Lien
1. Particuar Lien:
According to Section 170, “Where the bailee has, inaccordance with the purpose of bailment, rendered any service involving the excersise of labour or skill in respect of goods bailed, he has, in the absence of a contact to the contrary, a right to retain such goods until he receives due remuneration for the services he has rendered in respect of them.”
2. General Lien:
According to the Section 171 of the Act, “Bankers, Factors, Wharfingers, Attorneys of high court and policy brokers may, in the absence of a contract in the contrary retain as a security for a general balance of account, any goods bailed to them; but no other persons have a right to retain, as a security for such balance goods bailed to them, unless there is an express contract to that effect.”
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Rights and Liabilities:
•
The bailment contract embodying general principles of the law of bailments governs the rights and duties of the bailor and bailee. The duty of care that must be exercised by a bailee varies, depending on the type of bailment.
•
In a bailment for mutual benefit, the bailee must take reasonable care of the bailed property. A bailee who fails to do so may be held liable for any damages incurred from his or her negligence. When a bailor receives the sole benefit from the bailment, the bailee has a lesser duty to care for the property and is financially responsible only if he or she has been grossly negligent or has acted in bad faith in taking care of the property. In contrast, a bailee for whose sole benefit property has been bailed must exercise extraordinary care for the property. The bailee can use the property only in the manner authorized by the terms of the bailment. The bailee is liable for any injuries to the property from failure to properly care for or use it.
•
Once the purpose of the bailment has been completed, the bailee usually must return the property to the bailor, or account for it, depending upon the terms of the contract. If, through no fault of his or her own, the return of the property is delayed or becomes impossible — for example, when it is lost during the course of the bailment — the bailee will not be held liable for nondelivery on demand. In all other situations, however, the bailee will be responsible for the tort of conversion for unjustifiable failure to redeliver the property as well as its unauthorized use.
•
The provisions of the bailment contract may restrict the liability of a bailee for negligent care or unauthorized use of the property. Such terms may not, however, absolve the bailee from all liability for the consequences of his or her own fraud or negligence. The bailor must have notice of all such limitations on liability. The restrictions will be enforced in any action brought for damages as long as the contract does not violate the law or public policy. Similarly, a bailee may extend his or her liability to the bailor by contract provision.
Termination of Bailment:
A bailment is ended when its purpose has been achieved, when the parties agree that it is terminated, or when the bailed property is destroyed. A bailment created for an indefinite period is terminable at will by either party, as long as the other party receives due notice of the intended termination. Once a bailment ends, the bailee must return the property to the bailor or possibly be liable for conversion.
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Finder of Retain Goods:
Finding of goods is not owning, finder of lost goods will be known as bailee and is charged with the responsibility of a bailee, besides the responsibility of exercising reasonable efforts in finding the real owner and he enjoys certain rights also, these rights are hereunder 1. Right to retain the goods (sec168) 2. Right to sell (sec169)
PLEDGE OR PAWN
Introduction:
Pledge is special kind of bailment, where delivery of goods is for purpose of security for payment of a debt or performance of a promise. Pledge is bailment for security. Common example is keeping gold with bank/money lender to obtain loan. Since pledge is bailment, all provisions applicable to bailment apply to pledge also. In addition, some specific provisions apply to pledge. The bailment of goods as security for payment of a debt or performance of a promise is called “pledge”. The bailor is in this case called the “pawnor”. The bailee is called the “pawnee”. [section 172].
Definition:
“The bailment of goods as security of payment of a debt or performance of a profit is called Pledge” …………… According to Section 172 of the Act.
ESSENTIAL INGREDIENTS OF PLEDGE:
1. Delivery of Possession :
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As in bailment, the delivery of possession is essential in a pledge. Thus, in Revenue Authority vs Sudarsanam Pictures, AIR 1968, a film producer borrowed a sum of money from a financier and agreed to deliver the final prints of the film when ready. This was held not to be a pledge because there was no delivery of possession at the time of the agreement. It is possible to do delivery by atonement in which case a third person who has the possession of the property agrees to hold it on behalf of the pledgee upon direction of the pledger. Hypothecation: It is also possible to let the pawner keep the physical goods even though the legal possession is transfered to the pawner. Thus, in Bank of Chittor vs Narsimbulu AIR 1966, a cinema hall equipment was pledged to the bank but the bank allowed the hall owner to keep the equipment to show the movies. The hall owner then sold the equipment to another party. It was held that the sale was subject to the pledge. In Bank of India vs Binod Steel AIR 1977, MP HC held that in such cases where goods are hypothecated, other creditors cannot claim right on them until the claim of the pledgee is satisfied.
2. In Return of A Loan or A Promise : The delivery must be in return of a loan or of acceptance of a promise to perform something. Thus, if A gives his bicycle to B in friendship, it is not a pledge but a simple bailment. However, if A gives his bicycle to B as a security for a debt of 100Rs it will be a pledge. 3. In Pursuance of A Contract : The delivery must be done under a contract though it is not necessary that the delivery and the payment of loan be at the same time. Delivery can be made even after the loan is received.
RIGHTS OF A PAWNEE:
1. Right of Retainer (Section 173- 174):
As per section 173, the pawnee may retain the goods pledged, not only for a payment of a debt or the performance of the promise, but also for the interest of the debt, and all necessary expenses incurred by him in respect of the possession or for the preservation of the goods pledged. Further, as per section 174, in absence of any contract to the contrary, the pawner shall not retain the goods pledged for debt or promise other than the debt or promise for which they have been pledged. However, such contract shall be presumed in absence of any contract to the contrary with respect to any subsequent advances made by the pawnee.
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This means that if A pledges his gold watch with B for 1000 Rs and later on he promises to teach B's son for a month and takes for 500Rs for this promise , and if he does not teach B's son, B cannot retain A's gold watch after A pays 1000Rs. Thus, the right of retainer is a sort of particular lien. The difference was pointed out in Bank of Bihar vs State of Bihar 1972 by SC. It observed that a Pawnee obtains a special interest in the pledged goods in the sense that he can transfer or pledge that special interest to somebody else. The lien only gives the right to detain the goods but not transfer. Thus, a pledgee get the first right to claim the goods before any other creditor can get them. The pledgee's loan is secured by the goods.
2. Right to Extra Ordinary Expenses (Section 175):
As per section 175, the Pawnee is entitled to receive from the pawner extra ordinary expenses incurred by him for the preservation of the goods pledged. For such expenses, however, he does not have right to detain the goods. Section 175 says that the Pawnee is entitled to receive from the pawner extraordinary expenses incurred by him for the preservation of the goods pledged.
3. Right of Sale (Section 176):
As per section 176 (Pawnee's right where pawnor makes default) - If the pawnor makes default in payment of the debt or performance at the stipulated time, of the promise, in respect of which the goods were pledged, the pawnee may bring a suit against the pawnor upon the debt or the promise and retain the goods pledged as a collateral security; or he may sell the thing pledged, on giving the pawnor reasonable notice of the sale. This right secures the debt for the pawnee up to the value of the goods pledged because it allows the pawnee to either sue the pawnor for recovering the debt or perform the promise or sell the goods pledged. If the value received after selling the goods, the pawner is still liable for the difference and if the value of the sale is more than the amount of debt, the pawnee is supposed to give the difference to the pawnor. However, if the pawnee has sold the goods, he cannot sue for the debt. In Lallan Prasad vs Rahmat Ali AIR 1967the defendant borrowed 20000Rs from the plaintiff on a promissory note and gave him aero scrapes worth about 35000Rs, as a security for the loan. The plaintiff sued for repayment of the loan but was unable to produce the security, having sold it. SC rejected his action. It held that pledgee cannot maintain a suit for recovery of debt as well as retain the pledged property. The pawner is required to give a reasonable notice to the pawnee about the sale. The notice is not a mere notice but reasonable notice. In Prabhat Bank vs Babu Ram AIR 1966, the terms of an agreement of a loan enabled the bank to sell the securities upon default without notice. The pawnor defaulted in payment. The bank sent a reminder upon which the pawnor asked for more time. The bank sold the securities. SC held that this was bad in law. The bank is required to give a clear and specific notice of the impending sale. Pawner's request for more time cannot be interpreted as a notice of sale. When the goods are lost due to pawnee's negligence, the
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liability
of
the
pawnor
is
reduced
to
the
extent
of
value
of
the
goods.
Pawnor's Right to Redeem (Section 177):
Section 177 provides a very important right to the pawnor. It allows the pawnor to redeem his property even if he has defaulted. It says that if a time is stipulated for the payment of a debt or performance of the promise for which the pledge is made, and the pawnor make default in payment of the debt or performance of the promise at the stipulated time, he may redeem the goods pledged at any subsequent time before the actual sale of them; but he must, in that case, pay, in addition, any expense which have arisen from his default. J Shelat in Lallan Prasad vs Rahmat Ali AIR 1967, observed that the pawnor has as absolute right to redeem his property upon satisfaction or the debt or the promise. This right is not extinguished by the expiry of the stipulated time for repayment of debt or performance of the promise but only by the actual sale of the goods. If the pawnor redeems his goods after the expiry of the stipulated time, he is bound to pay the expenses as have arisen on account of his default. The pawnor also has a right to take back any increase in the property. In M R Dhawan vs Madan Mohan AIR 1969, certain shares of a company were pledged. During the period of the pledge, the company issued bonus and rights shares. Delhi HC held that the pawnor was entitled to those at the time of redemption.
Pledge Made by Non-Owner of the Goods:
Ordinarily goods may be pledged by the owner or by any person with the consent of the owner. A pledge made by any other person is not valid. Thus, in Biddomoy Dabee vs Sittaram, it was held that a pledge made by the servant who was holding the goods of his master was not valid. Similarly, in Purushottam Das vs Union of India AIR 1967, a railway company delivered goods on a forged railway receipt. The goods were then pledged with the defendants. In a suit by the railways to recover the goods it was held that the pledge was invalid. This is important to protect the interests of the owners. However, in many situations it is equally important to allow trade and commerces and so there are some situations where a person having the possession of the goods by owner's consent, is entitled to pledge those goods even without owner's consent for the pledge. These situations are discussed below -
1. Pledge by Mercantile Agent (Section 178):
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When a mercantile agent is in possession of the goods with consent of the owner, any pledge made by him in ordinary course of business will be valid, provided that the pawnee acts in good faith and that he has no notice of the fact that the pawnor is not authorized to pawn the goods. The essential conditions of this rule are - he must be a mercantile agent, he must have possession of the goods by consent of the owner, and it must be done in ordinary course of business. Further, the pawnee should act in good faith and he must not have notice that the pawnor has no authority to pledge.
2. Pledge by A Person in Possession under Voidable Contract (Section 178 A):
When the goods are obtained by a person under a contract that is voidable under section 19 or 19 A, he can pledge the goods if the contract is not avoided at the time of the pledge. Thus, in Phillips vs Brooks Ltd 1919, a fraudulent person pretending to be a man of credit induced the plaintiff to give him a valuable ring in return for his cheque which proved worthless. Before the fraud could be discovered, he pledged the ring with the defendants. The pledge was held to be valid.
3. Pledge by Person with Limited Interest (Section 179):
Section 179 says that where a person pledges goods in which he has only a limited interest, the pledge is valid to the extent of that interest. Thus, when a car worth 100,000Rs is owned jointly by A and B both having 50% interest in the car, and if A pledges the car for 60000Rs, the value of the pledge that the pledgee can receive upon default is only 50% of the value received by sale. Thus, if a pledgee further pledges the goods, his interest is only the amount for which the first pledger pledged the goods. For example, if A pledged his car worth 100000Rs for 20000Rs to B. B's interest in the car is only 20000 Rs. He can further pledge it but if he pledges it for more than 20000Rs, A will be liable only for 20000Rs.
4. Pledge by a Co-Owner:
Where there are several joint owners of goods and one of them is in possession of goods with the consent of the others, he can make the valid pledge of the same.
5. Pledge by a Seller in Possession after Sale:
Where a seller, having sold the goods continues to be in possession of the same, not being the owner of goods any longer, cannot make a valid pledge
6. Pledge by a Buyer in a Possession before Sale:
According to section 30(2) of the sale of Goods Act, where a person, having agreed to buy goods, obtains with the consent of the seller, possession of goods or documents of title to the goods, before property in the goods is transferred to him, pledges the goods or documents of the
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title to the goods, the pledge will be valid provided the pledge acted in good faith and had no notice of pledger’s defect in the title to the goods pledged.
Difference between Bailment and Pledge:
Pledge is a special kind of Bailment. Thus, all Pledges are Bailments but the reverse is not true. BAILMENT Bailment can be for many reasons ranging for reward to gratuitous. The bailee does not get a right to sell the goods. The bailee only gets a right of lien over the goods. The bailee can use the goods bailed. PLEDGE A pledge is bailment done for a specific type of purpose, which is to secure a loan or performance of a promise. A pawnee has a right to sell the goods in case of default. A pawnee gets a right of retainer and a special interest in the goods, which is more that just the lien. The pawnee has no right to use the goods.
The bailee is not responsible for the loss, The pawnee is absolutely liable for the upkeep destruction, or deterioration if he uses the goods of the goods. with reasonable care.
AGENCY
Introduction:
The law of agency is an area of commercial law dealing with a contractual or non-contractual set of relationships when a person, called the agent, is authorized to act on behalf of another (called the principal) to create a legal relationship with a third party. The agent is, thus, required to negotiate on behalf of the principal or bring him and third parties into contractual relationship. This branch of law separates and regulates the relationships between:
• • •
Agents and principals; Agents and the third parties with whom they deal on their principals' behalf; and Principals and the third parties when the agents purport to deal on their behalf.
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In India, section 182 of the Contract Act 1872 defines Agent as “a person employed to do any act for another or to represent another in dealings with third persons.
The Concepts:
The reciprocal rights and liabilities between a principal and an agent reflect commercial and legal realities. A business owner often relies on an employee or another person to conduct a business. In the case of a corporation, since a corporation is a fictitious legal person, it can only act through human agents. The principal is bound by the contract entered into by the agent, so long as the agent performs within the scope of the agency. A third party may rely in good faith on the representation by a person who identifies himself as an agent for another. It is not always cost effective to check whether someone who is represented as having the authority to act for another actually has such authority. If it is subsequently found that the alleged agent was acting without necessary authority, the agent will generally be held liable.
Brief statement of legal principles:
There are three broad classes of agent:
1. Universal agents hold broad authority to act on behalf of the principal, e.g. they may hold
a power of attorney (also known as a mandate in civil law jurisdictions) or have a professional relationship, say, as lawyer and client. 2. General agents hold a more limited authority to conduct a series of transactions over a continuous period of time; and 3. Special agents are authorized to conduct either only a single transaction or a specified series of transactions over a limited period of time.
Authority:
An agent who acts within the scope of authority conferred by her principal binds the principal in the obligations she creates against third parties. There are essentially two kinds of authority recognized in the law: actual authority (whether express or implied) and apparent authority.
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Actual Authority:
Actual authority can be of two kinds. Either the principal may have expressly conferred authority on the agent, or authority may be implied. Authority arises by consensual agreement, and whether it exists is a question of fact. An agent, as a general rule, is only entitled to indemnity from the principal if she has acted within the scope of her actual authority, and may be in breach of contract, and liable to a third party for breach of the implied warranty of authority.
Express Actual Authority (Sec187):
Express actual authority means an agent has been expressly told she may act on behalf of a principal
Implied Actual Authority (Sec187):
Implied actual authority, also called "usual authority", is authority an agent has by virtue of being reasonably necessary to carry out his express authority. As such, it can be inferred by virtue of a position held by an agent. For example, partners have authority to bind the other partners in the firm, their liability being joint and several, and in a corporation, all executives and senior employees with decision-making authority by virtue of their position have authority to bind the corporation.
Apparent and Estoppel Authority (Sec237):
Apparent authority (also called "ostensible authority") exists where the principal's words or conduct would lead a reasonable person in the third party's position to believe that the agent was authorized to act, even if the principal and the purported agent had never discussed such a relationship. For example, where one person appoints a person to a position which carries with it agency-like powers, those who know of the appointment are entitled to assume that there is apparent authority to do the things ordinarily entrusted to one occupying such a position. If a principal creates the impression that an agent is authorized but there is no actual authority, third parties are protected so long as they have acted reasonably. This is sometimes termed "agency by estoppel" or the "doctrine of holding out", where the principal will be estopped from denying the grant of authority if third parties have changed their positions to their detriment in reliance on the representations made. • Rama Corporation Ltd v Proved Tin and General Investments Ltd [1952] 2 QB 147, Slade J, "Ostensible or apparent authority... is merely a form of estoppel, indeed, it has been termed agency by estoppel and you cannot call in aid an estoppel unless you have three ingredients: (i) a representation, (ii) reliance on the representation, and (iii) an alteration of your position resulting from such reliance." • Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480
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•
The Raffaella or Egyptian International Foreign Trade Co v Soplex Wholesale Supplies Ltd and PS Refson & Co Ltd [1985] 2 Lloyd's Rep 36
Agency of Necessity (Sec189):
This arises where there is no express or implied appointment of a person as agent for another but he is forced to act on behalf of a particular person.
Agency of Ratification (Sec196-200):
Where an agent does an act for his principal but without knowledge of authority and where he exceeds the given authority, the principal is not held bound by the transaction.
Watteau v Fenwick
In the case of Watteau v Fenwick, Lord Coleridge CJ on the Queen's Bench concurred with an opinion by Wills J that a third party could hold personally liable a principal who he did know about when he sold cigars to an agent that was acting outside of its authority. Wills J held that "the principal is liable for all the acts of the agent which are within the authority usually confided to an agent of that character, notwithstanding limitations, as between the principal and the agent, put upon that authority." This decision is heavily criticized and doubted, though not entirely overruled in the UK. It is sometimes referred to as "usual authority" (though not in the sense used by Lord Denning MR in Hely-Hutchinson, where it is synonymous with "implied actual authority"). It has been explained as a form of apparent authority, or "inherent agency power.
•
Authority by virtue of a position held to deter:
Fraud and other harms that may befall individuals dealing with agents, there is a concept of Inherent Agency power, which is power derived solely by virtue of the agency relation. For example, partners have apparent authority to bind the other partners in the firm, their liability being joint and several (see below), and in a corporation, all executives and senior employees with decision-making authority by virtue of their declared position have apparent authority to bind the corporation.
Even if the agent does act without authority, the principal may ratify the transaction and accept liability on the transactions as negotiated. This may be express or implied from the principal's behavior, e.g. if the agent has purported to act in a number of situations and the principal has knowingly acquiesced, the failure to notify all concerned of the agent's lack of authority is an implied ratification to those transactions and an implied grant of authority for future transactions of a similar nature.
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Classification of Agents:
1. Special and general agents 2. Mercantile commercial agents 3. Non-mercantile or non-commercial agents 4. Sub-agents and substituted agents
Liability of Agent to Third Party:
If the agent has actual or apparent authority, the agent will not be liable for acts performed within the scope of such authority, so long as the relationship of the agency and the identity of the principal have been disclosed. When the agency is undisclosed or partially disclosed, however, both the agent and the principal are liable. Where the principal is not bound because the agent has no actual or apparent authority, the purported agent is liable to the third party for breach of the implied warranty of authority.
Liability of Agent to Principal:
If the agent has acted without actual authority, but the principal is nevertheless bound because the agent had apparent authority, the agent is liable to indemnify the principal for any resulting loss or damage.
Liability of Principal to Agent:
If the agent has acted within the scope of the actual authority given, the principal must indemnify the agent for payments made during the course of the relationship whether the expenditure was expressly authorized or merely necessary in promoting the principal's business.
Duties:
An agent owes the principal a number of duties. These include:
•
A duty to undertake the task or tasks specified by the terms of the agency (that is, the agent must not do things that he has not been authorized by the principal to do); A duty to discharge his duties with care and due diligence; and A duty to avoid conflict of interest between the interests of the principal and his own (that is, the agent cannot engage in conduct where stands to gain a benefit for himself to the detriment of the principal).
• •
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An agent must not accept any new obligations that are inconsistent with the duties owed to the principal. An agent can represent the interests of more than one principal, conflicting or potentially conflicting, only after full disclosure and consent of the principal. An agent also must not engage in self-dealing, or otherwise unduly enrich himself from the agency. An agent must not usurp an opportunity from the principal by taking it for himself or passing it on to a third party. In return, the principal must make a full disclosure of all information relevant to the transactions that the agent is authorized to negotiate and pay the agent either a prearranged commission, or a reasonable fee established after the fact.
Termination:
An agent's authority can be terminated at any time. If the trust between the agent and principal has broken down, it is not reasonable to allow the principal to remain at risk in any transactions that the agent might conclude during a period of notice. As per sections 201 to 210 of the Indian Contract Act 1872, an agency may come to an end in a variety of ways: 1. Withdrawal by the agent – however, the principal cannot revoke an agency coupled with interest to the prejudice of such interest. An agency is coupled with interest when the agent himself has an interest in the subject-matter of the agency, e.g., where the goods are consigned by an upcountry constituent to a commission agent for sale, with poor to recoup himself from the sale proceeds, the advances made by him to the principal against the security of the goods; in such a case, the principal cannot revoke the agent’s authority till the goods are actually sold, nor is the agency terminated by death or insanity (illustrations to section 201); 2. By the agent renouncing the business of agency; 3. By the business of agency being completed; 4. By the principal being adjudicated insolvent (section 201). The principal also cannot revoke the agent’s authority after it has been partly exercised, so as to bind the principal (section 204), though he can always do so, before such authority has been so exercised (section 203). Further, as per section 205, if the agency is for a fixed period, the principal cannot terminate the agency before the time expired, except for sufficient cause. If he does, he is liable to compensate the agent for the loss caused to him thereby. The same rules apply where the agent, renounces an agency for a fixed period. Notice in this connection that want of skill, continuous disobedience of lawful orders, and rude or insulting behavior has been held to be sufficient cause for dismissal of an agent. Further, reasonable notice has to be given by one party to the other;
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otherwise, damage resulting from want of such notice, will have to be paid (section 206). As per section 207, the revocation or renunciation of an agency may be made expressly or impliedly by conduct. The termination does not take effect as regards the agent, till it becomes known to him and as regards third party, till the termination is known to them (section 208). When an agent’s authority is terminated, it operates as a termination of subagent also (section 210). This has become a more difficult area as states are not consistent on the nature of a partnership. Some states opt for the partnership as no more than an aggregate of the natural persons who have joined the firm. Others treat the partnership as a business entity and, like a corporation, vest the partnership with a separate legal personality. Hence, for example, in English law, a partner is the agent of the other partners whereas, in Scots law where there is a separate personality, a partner is the agent of the partnership. This form of agency is inherent in the status of a partner and does not arise out of a contract of agency with a principal. The English Partnership Act 1890 provides that a partner who acts within the scope of his actual authority (express or implied) will bind the partnership when he does anything in the ordinary course of carrying on partnership business. Even if that implied authority has been revoked or limited, the partner will have apparent authority unless the third party knows that the authority has been compromised. Hence, if the partnership wishes to limit any partner's authority, it must give express notice of the limitation to the world. However, there would be little substantive difference if English law was amended: partners will bind the partnership rather than their fellow partners individually. For these purposes, the knowledge of the partner acting will be imputed to the other partners or the firm if a separate personality. The other partners or the firm are the principal and third parties are entitled to assume that the principal has been informed of all relevant information. This causes problems when one partner acts fraudulently or negligently and causes loss to clients of the firm. In most states, a distinction is drawn between knowledge of the firm's general business activities and the confidential affairs as they affect one client. Thus, there is no imputation if the partner is acting against the interests of the firm as a fraud. There is more likely to be liability in tort if the partnership benefited by receiving fee income for the work negligently performed, even if only as an aspect of the standard provisions of vicarious liability. Whether the injured party wishes to sue the partnership or the individual partners are usually a matter for the plaintiff since, in most jurisdictions, their liability is joint and several.
Agency Relationships:
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Agency relationships are common in many professional areas.
• •
Employment. Real transactions (real estate brokerage, mortgage brokerage). In real estate brokerage, the buyers or sellers are the principals themselves and the broker or his salesperson who represents each principal is his agent. Financial advice (insurance agency, stock brokerage, accountancy) Contract negotiation and promotion (business management) such as for publishing, fashion model, music, movies, theatre, show business, and sport.
• •
An agent in commercial law (also referred to as a manager) is a person who is authorized to act on behalf of another (called the principal or client) to create a legal relationship with a third party.
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SURETY
Introduction:
A surety bond is a promise to pay one party (the obligee) a certain amount if a second party (the principal) fails to meet some obligation, such as fulfilling the terms of a contract. The surety bond protects the obligee against losses resulting from the principal's failure to meet the obligation. A surety bond is a contract among at least three parties:
• • •
The obligee - the party who is the recipient of an obligation, The principal - the primary party who will be performing the contractual obligation, The surety - who assures the obligee that the principal can perform the task
European surety bonds are issued by banks and are called " Bank Guarantees" in English and "Caution" in French. They pay out cash to the limit of guarantee in the event of default of Principal to uphold his obligations to Obligee, without reference by Obligee to Principal and against obligee's sole verified statement of claim to the bank. Through a surety bond, the surety agrees to uphold — for the benefit of the obligee — the contractual promises (obligations) made by the principal if the principal fails to uphold its promises to the obligee. The contract is formed so as to induce the obligee to contract with the principal, i.e., to demonstrate the credibility of the principal and guarantee performance and completion per the terms of the agreement. The principal will pay a premium (usually annually) in exchange for the bonding company's financial strength to extend surety credit. In the event of a claim, the surety will investigate it. If it turns out to be a valid claim, the surety will pay it and then turn to the principal for reimbursement of the amount paid on the claim and any legal fees incurred. If the principal defaults and the surety turns out to be insolvent, the purpose of the bond is rendered nugatory. Thus, the surety on a bond is usually an insurance company whose solvency is verified by private audit, governmental regulation, or both. A key term in nearly every surety bond is the penal sum. This is a specified amount of money which is the maximum amount that the surety will be required to pay in the event of the principal's default. This allows the surety to assess the risk involved in giving the bond; the premium charged is determined accordingly. Surety bonds are also used in other situations, for example, to secure the proper performance of fiduciary duties by persons in positions of private or public trust.
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Annual US surety bond premiums are approximately $3.5 billion. State insurance commissioners are responsible for regulating corporate surety activities within their jurisdictions. The commissioners also license and regulate brokers or agents who sell the bonds.
History:
Individual Surety Bonds are the original form of surety ship. The earliest known record of a contract of suretyship is a Mesopotamian tablet written around 2750 BC. There is evidence of Individual Surety Bonds in the Code of Hammurabi and in Babylon, Persia, Assyria, Rome, Carthage, the ancient Hebrews and later England. The Code of Hammurabi, written around 1790 BC, was the first time suretyship was addressed in a written legal code. It wasn't until 1837 that the first Corporate Surety was organized, The Guarantee Society of London. In 1865, the Fidelity Insurance Company became the first US Corporate Surety company, but the venture soon failed.
Contract Surety Bonds:
Contract bonds, used heavily in the construction industry, are a guarantee from a Surety to a project's owner (Obligee) that a general contractor (Principal) will adhere to the provisions of a contract. Included in this category are: bid bonds (guarantee that a contractor will enter into a contract if awarded the bid), performance bonds (guarantee that a contractor will perform the work as specified by the contract), payment bonds (guarantee that a contractor will pay for services and materials), and maintenance bonds (guarantee that a contractor will provide facility repair and upkeep for a specified period of time). There are also miscellaneous contract bonds that do not fall within the categories above, the most common of which are subdivision and supply bonds.
Commercial Surety Bonds:
Commercial bonds represent the broad range of bond types that do not fit the classification of contract. They are generally divided into four sub-types: license and permit, court, public official, and miscellaneous.
License and Permit Bonds:
License and permit bonds are required by certain federal, state, or municipal governments as prerequisites to receiving a license or permit to engage in certain business activities. These bonds function as a guarantee from a Surety to a government and its constituents (Obligee) that a
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company (Principal) will comply with an underlying statute, state law, municipal ordinance, or regulation.
Specific Examples Include:
• • • • • • • • •
Contractor’s license bonds, which assure that a contractor (such as a plumber, electrician, or general contractor) complies with local laws relating to his field. Customs bonds, including importer entry bonds, which assure compliance with all relevant laws, as well as payment of import duties and taxes. Tax bonds, which assure that a business owner will comply with laws relating to the remittance of sales or other taxes. Reclamation and environmental protection bonds Broker’s bonds, including Insurance, Mortgage, and Title Agency bonds ERISA (Employee Retirement Income Security Act) bonds Motor vehicle dealer bonds Money transmitter bonds Health spa bonds, which assure that a health spa will comply with local laws relating to their field, as well as refund dues for any prepaid services in the event the spa closes.
Court Bonds:
Court bonds are those bonds prescribed by statue and relate to the courts. They are further broken down into judicial bonds and fiduciary bonds. Judicial bonds arise out of litigation and are posted by parties seeking court remedies or defending against legal actions seeking court remedies. Fiduciary, or probate, bonds are filed in probate courts and courts that exercise equitable jurisdiction; they guarantee that persons whom such courts have entrusted with the care of others’ property will perform their specified duties faithfully. Examples of judicial bonds include appeal bonds, supersedeas bonds, attachment bonds, replevin bonds, injunction bonds, Mechanic's lien bonds, and bail bonds. Examples of fiduciary bonds include administrator, guardian, and trustee bonds.
Public Official Bonds:
Public official bonds guarantee the honesty and faithful performance of those people who are elected or appointed to positions in government. Examples of officials sometimes requiring bonds include: notaries public, treasurers, commissioners, judges, town clerks, and law enforcement officers.
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Miscellaneous Bonds:
Miscellaneous bonds are those that do not fit well under the other commercial surety bond classifications. They often support private relationships and unique business needs. Examples of significant miscellaneous bonds include: lost securities bonds, hazardous waste removal bonds, credit enhancement financial guarantee bonds, self–insured workers compensation guarantee bonds, and wage and welfare/fringe benefit (Union) bonds..
Fidelity Bonds:
Fidelity bonds, also known as employee dishonesty coverage, cover theft of an employer's property by its own employees. Though referred to as bonds, fidelity coverage functions as a traditional insurance policy rather than a surety bond.
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