Contract Lecture

Date: November 10, 2021

Sections for Void Agreements - S. 24,25,26,27

S. 27 every trade, transaction, or business is considered to be fully or partially traded.

(open to interpretation, subjective)

Eg: Land to be let-out - commercial purpose - not a business or profession, just a transaction; in
the case of a priest - services to be considered as a professional service provided.
Thus, every case of being looked at individually as the interpretations are quite subjective in
nature.

*MRTP Act or Competition Act - enhance competition and reduce monopolies in the market.
Point to look out: Whether a particular contract is leading to restraining the trade within itself or
not.

Exceptions to S. 27:
1. Trademark - a logo of a company - emblem, words, pictures.
Some company cannot use other’s logos or trademarks; restricting usage for others.
Patent arises when someone is discovered and registered under someone’s name.
Copyright
Trade Secrets - like ingredients, quantities, or recipes of food products

2. Sale of Goodwill - goodwill - a reputation of a company/person/corporation/group that

attracts customers - not defined anywhere - intangible - abstract property - can be sold.
When goodwill is sold, it refrains carrying out of the business of similar interests by the
seller in the same area.
While the person is selling goodwill, reasonable restrictions are to be mentioned, like
geographical restrictions of conducting business.

3. Partnership Act - partnership - group of people coming together - main motive - to earn
profits - if a partner leaves, the firm is dissolved and recreated with either same or new
partners in the picture - partners are agents - S.11 of Partnership Act (restrictive clause
for S. 27 of Indian Contract Act, but forms an exception)
Eg: Dominos - a person working in one of the branches - left the branch - opened a
business of making pizza - named it with a similar name - Rominoz.
No restriction on the parties for legal proceedings. Might opt for any method of dispute
resolution

S. 28 Renders two forms of Void Agreements

1. An agreement by which a party is restricted absolutely from enforcing his legal rights
arising under a contract, by the usual legal proceedings in the ordinary tribunals.
2. An agreement that limits the time within which the contract rights may be enforced.

Vager - gherulal parakh v. mahadeodas 1959

Date: November 13, 2021

Difference between unlawful agreement and void agreements

Unlawful/illegal agreements are not always void always, but void agreements are unlawful.
Section 23 (reference)

Similarities in both types of agreements:

1. Unenforceable - Primary Agreement is unenforceable, in both cases.
2. Recovery - Not possible in both cases. For example - overloaded truck used for
transportation - if causes damage to someone else or the truck itself, no recovery cannot
take place/claimed.
3. Protection of rights - The guilty party cannot exercise rights/seek protection of rights in
any case. For example, in the case of religious activities against the community - hiring
of premises is allowed but the establishment of any sort of rights is not allowed as the
motive was to injure someone.

Exceptions/ Differences:
1. Where the contract is still executory - (still executory: not fully completed; still in
process). Where the illegal purpose has not been executed yet or can be still stopped,
goods/investments/money can be still recovered.
If the person still waits for an illegal transaction to be executed, the action of recovery
will not be maintainable.
2. Parties not in pari delicto - (parties in equal fault/equally guilty; contributory negligence
in torts). Party, less guilty, can recover the loss of goods/investments - lesser guilt can be
proved by the ways of establishing fraud.
3. Where recovery is possible without relying on an illegal contract - agreement has various
transactions - illegal agreement - if some transactions attached to the illegal activities are
separated from the illegal motive, and the individuality of those transactions can be
proved, they can be recovered.
4. Collateral transactions -
5. Severance

1. tender of performance must be unconditional

2. the tender of performance must be made at proper time and place, and under such
circumstances that the person to whom it is made may have a reasonable opportunity of
ascertaining that the person by whom it is made is able and willing there and then to do
the whole of what he bound by his promise to do.

3. if the offer is an offer to deliver anything to the promisee, the promisee must have a
reasonable opportunity of seeing that the thing offered is the thing which the promisor is
bound by his promise to deliver.

Sec 39 of the Indian Contract Act - Effect of refusal of a party to perform promise
wholly.—When a party to a contract has refused to perform or disabled himself from
performing, his promise in its entirety, the promisee may put an end to the contract,
unless he has signified, by words or conduct, his acquiescence in its continuance. —
When a party to a contract has refused to perform or disabled himself from performing,
his promise in its entirety, the promisee may put an end to the contract, unless he has
signified, by words or conduct, his acquiescence in its continuance

Date: Nov 18, 2021

1. How and by whom the performance can be claimed and asked for.

Concept of Promisor and Promisee - Sec 40 and 41

Liability of joint promisor and promisee - liability is joint and several, ie. liability
generates on them individually as well as jointly.
 Sec. 43: 3 ways to understand the liability
1. A, B, and C are joint promisers and D is promisee. A, B, and C promised to pay
Rs. 3000 to D. D can compel either of three to pay, liability arises on any of them.
D is concerned with money and not with where the money comes from
= Anyone can be compelled to perform.
2. Right of contribution - ABC owes 3000 rs to D. A paid on behalf of all three and
now he has the right to recover the money from B and C.
3. Sharing of Deficiency - ABC supposed to pay 3000 to D. C is unable to pay and
is deficient in amount. A and B will make the payment for C - joint liability. A
and B can recover the amount later.

Sec. 45
Joint Promisee - A made a promise to B and C, here B and C will be collectively called
promisees, jointly. They jointly have the right to claim performance.
If A has to pay Rs. 500 to both B and C, they will jointly have to claim it from him and force it
out of him. They cannot do it individually.
If one of them dies, or both of them die, their legal representatives will have to join hands with
the other person to claim the performance jointly.

2. When and where the performance can be claimed?

Every contract has a time and places decided for performance to be made. If not decided, then
the rule of reasonability works. However, the reasonable time ad place has not to be defined
anywhere, for which we look into the facts of the case.

Sec. 46-50 - Where, when and manner of performance

Sec. 46: when the promisor doesn’t have a fixed/reasonable time where he has to perform, then
the reasonable time has to be taken care of.
Sec. 47: Situation 1 - Time is specified - No application (Special permission from Promisee)
required
As soon as the time comes, the promisor can perform without seeking permission from the
promisee.
Sec. 48: Situation 2 - Time is specified - the place is specified - application not required
If not performed in the specified time, application to be made for specification of time for
performance, within usual business hours.
Sec. 49: Situation 3 - Place is not specified - Application has not been made
The promisor has to apply upon promisee to fix a place for performance.
**36-38 how
40-45 promisor and promisee
46-50 when, where, and manner

1. where the parties have expressly agreed to treat time as the essence of the contract.
2. where delay operates as injury
3. where nature and necessity of the contract require it to be so construed.
1. business matters
Mahabir prasad rungta v. Durga Dutt 1961
colliery owner
2. construction contracts
3. sale transactions
china cotton exporters v. Behari Lal Ramcharan cotton mills ltd. 1961
4. land and property dealings
r.k. Saxena v. DDA 2001

Section 55 - consequences of failure

1. no intention of time to be essence - contract not voidable - can sue for loss because of delay
2. intention to make time of essence - contract voidable and performance can be rejected - sue for breach

Date: 06 December 2021

The Doctrine of Frustration/Impossibility to Perform

Based out of English concept - not applied under Indian Law - Sec. 56 is considered to be a positive law
in India - we look at a greater good (intent and justice)
Not to intervene in the intent of parties but to deliver justice

Theory of implied term

Not everything can be said and identified, but some should be understood from the contract.

Theory of Just and reasonable solution

effects of frustration
1. frustration should not be self-induced
2. frustration operates automatically
sec 56 - true to be a positive law and does not depend on the intention of the parties
3. adjustment of rights

Sec 59, 60 and 61

Debtor and Creditor
Appropriation - allocation of funds/payment
A situation where the debtor owes multiple loans/debts to the creditor - A is the debtor and B is the
creditor - A owes 3 debts to the creditor of amount 1k, 10k, and 40k -

Sec 59 - Appropriation of payment by the debtor

The debtor has the right to appropriate funds in case of multiple debts.
1. Several distinct debts
2. The purpose is to discharge a debt
3. Express intimation or circumstances imply

Sec 60 - Appropriation of payment by the creditor

When the debtor is silent, the creditor has the right to appropriate it to a specific debt that has to be wiped
out or any other.

Sec 61 - Appropriation of payment by the law

When both the parties, debtor and creditor have not allocated specific funds to the debts, then the law will
intervene with an intent to wipe out debts, according to the time bar.

Date: December 07, 2021

Discharge by agreement
Sec. 62 - Novation
Nova - Novel Agreement (new) - change of parties - change of the contract
Applicable in partnership - where partners come together to earn profits - a contract formed will be
discharged or dissolved every time a partner leaves the partnership
Eg: Scarf v. Jardine 1882 - meaning and effect of Novation

Types of Novation
1. Involving change of parties: A and B enter an agreement to sell 100 kg of apples to B. Instead of
B, now C is the party, the existing contract shall be dissolved to form a new contract.

2. Substitution of a new contract in place of an old contract : when parties to a contract agree to
substitute a new contract, the old contract stands discharged. Thus, creating no obligation to
perform the old contract - no breach of the old contract - if there is a breach, before the execution
of the new contract, the new contract stands void as broken contracts cannot be substituted.
Eg, Lata Constructions v. Ram Chandra Ramniklal 2000
Justice Sagir Ahmed - a complete substitution is required, and thus old contract no longer
requires performance.
Eg. Manohar Koyal v. Thakur Das Naskar 1887

Recession - rescinding - ending the contract

Date: December 08, 2021

Sec. 63: Remission of performance - dispense performance -
(1) remit or dispense the contract either wholly or in part . - Kapurchand Godha v. Mir Nawab
Himayatalikhan Azamjah 1963 - liability of above Rs. 26 lakhs - disputes arose - a committee set to
resolve disputes - instead of Rs. 27 lakhs, OTS of Rs. 20 lakhs was done - sec 41
Waiving off the amounts

(2) Extend the time of performance -

(3) Accept any other satisfaction other than performance

Material Alteration - there should be consent btw both parties to make any alteration in the contract. If
any one of them makes an alteration, the contract stands canceled or void.

Date: December 13, 2021

Discharge by Breach

A breach is a failure to perform a promise and discharge the contract made. It can be of two types.
Breach of contract can either take place before the performance is expected (anticipatory) or when the
performance is expected (actual).

Options available to injured party:

1. Immediately repudiate the contract
2. Waiting for the performance by the aggrieved party: he is keeping the contract alive along with
the liabilities, rights, and obligations of the contract.

Anticipatory Breach: Rights of both parties will be affected. In a case of a contract btw A and B, A (to
make cycles and supply to B) makes a breach and B (to make payment for the cycles supplied by A) is the
innocent party, thus in case of the breach committed by A, where he refuses to supply cycles), B is
excused from his part of the performance, which is to make the payment. The entire contract comes to an
end and legal remedy takes over.
1. Operation of Law - to pay and receive the damages - Legal Remedies - compensation.
2. Immediate right of action: if A, who promised to marry B, marries C before the marriage with
B takes place, B can sue A for damages immediately.
Hoechester v. De la tour 1853 - defendant changed his mind a month before the tour to not go
anymore - court, Lord Campbell, held that there can be no breach unless we reach the date of
performance

Actual Breach:

Breach of Promise v. Breach of contract

Contingent Contract:
Frost v Knight
rash behary shaha v. nirttya Gopal nundy 1928 -

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Semester 4
Law of Contract II

Date - February 15, 2022

*For the Course - Sales of Good Act
Specific Contracts
Partnership Act
Avtar Singh - Reference for Specific Contracts

CIA 1 - Case Presentation and Case Report

2 students - one for the plaintiff and the other for the defendant. Cases from Unit 1-3.

Date - 16th feb, 22

Contract of Indemnity - Sec 124

Meaning: Loss by the conduct of the promisor himself or any other person, the other person to the
contract, or a third party suffers a loss.
Indemnify - to make good or compensate - as there is a loss
*reimbursing or compensating the loss.

Under English Law

The indemnity under English Law - means a promise, to save a person harmless from the consequences
of an act; it can be either expressed or implied depending on the circumstances of the case, however, the
consequences shall not affect the other party.
The cause of indemnity shall arise from the act of human agency and situations like fire or perils of sea
that restrict the performance of a contract, subsequently causing loss to other parties, are not included
under the scope of indemnity.
Every contract of insurance except life insurance is a contract of indemnity.
Adamson v. Jarvis 1827. - plaintiff was an auctioneer, who sold some cattle at the request of the
defendant. Subsequently, it was found out that the cattle never belonged to the defendant but someone
else. The owner of the cattle has now held the auctioneer liable and who sued the defendant for indemnity
for acting on his instruction.
Here the auctioneer has faced losses and damages while fighting the case against the plaintiff, due to the
act of the defendant.
Case of Expressed Indemnity.
Sheffield Corporation v. Barclay 1905 - corp. had a stock, transferred the stock on request of a banker,
and the transaction was later found to be a forged one, leading to indemnity of loss. Corporation faced
loss due to the act of a banker and has the right to recover the damages through the way of indemnity.

Under Indian Law

A concept of a narrower scope under the Indian Contract Act
Only occurs where the loss is incurred by the consequences of the promisor - there has to be a promisor
and a promisee, where loss is incurred by the act of promisor or third party, indemnity could be granted.
Indian Law doesn't cover the situations causing losses but only on the acts of human agency.
Insurance Contracts are Contingent Contracts.
13th Law Commission Report -shall change the scope of indemnity under S. 124 of ICA and consider
cases of situational damages.
Secy for the State of India in Council v. Bank of India Ltd. 1937 - a forged endorsement in form of
note was given by person A to a bank, which he received in good faith - sent to public debt officer for
renewal in their name - true owner sues bank for recovery of loss - bank sues the person A for indemnity.
Case of implied Indemnity.

Relevance
Indemnity clause within the contract of sale/transfer of property
Commercial Contract - Standard Form Contract - What all I do, I shall be insured.
Costs of lawsuits, liability, etc. can be indemnified.

In the case of International Transactions

A large amount of complexity - due to foreign exchange, foreign exchange controllers
A more liberal regime is adopted - you formulate the regulations to permit indemnity arrangements - by
escrow accounts
*Escrow Accounts - where a certain amount of money is kept in a trust account for parties to complete
transactions - thus if a case of indemnity arises, the fund money shall be used.

Section 125 - Extent of Liability

Indemnifier or promisor would be held liable for any losses.
Rights in the nature of losses - are divided into three categories.
1. Sec. 125(1) Damages - any damages that a party suffers due to the conduct of someone else
(promisor or third party).
A transferred property to B, and promises if any issues occur, he shall pay damages to B as
indemnity. Damages are a remedy for wrong or legal injury.
*National Overseas v. Export Credit Guarantor Corporation of India Ltd. 2008 - damages
were not paid as the exporter shipped the articles at his own risk and not according to the policies.
2. Sec. 125 (2) Cost - If a party sues another, certain costs arise in terms of court fees, lawyer fees,
etc. which could be indemnified by the sufferer.
*Gopal Singh v. Bhawani Prasad ILR (1888-90) 10 All 531
 3. Sec. 125 (3) Sums - Settlement of a case by payment of an amount - a loss for indemnity holder -
compromise happening should not be contrary to the order of the indemnifier and his
understanding of compromise.
*Bishal Chand Jain v. Chattur Sen 1967 - seller promised the promisee to indemnify the dues.
However, it only exists retrospectively. No dues occurring subsequently will not be taken care of
by the seller.
Commencement of Liability - When will a liability arise or when will the indemnifier pay? +
According to English Rule - As soon as there is an actual loss,
*Roses in December - Justice Chaggla

*Gajanana Moreshwar Parelkar v. Moreshwar Madan Mantri 1942 - as per English law, no action
can be maintained unless actual loss has taken place. - burden on indemnity holders subsequently
increases in such cases and the Court of Equity stepped in, and talked about the role of the indemnifier to
pay the damages, in case of absolute damage.
This principle was expounded (practiced and thought about) in the case of Richardson Re. The
indemnity shall not be always a repayment, but can be concluded in a single initial payment.

*Praful Kumar Mohanti v. Oriental Insurance Company Ltd. 1997 - Motor vehicle was insured and
was lost by the way of theft. However, the insurance requirements said that any criminal act shall be
reported immediately. The person registered an FIR very day and report the same to the company a month
later. Here FIR showed bonafide evidence for his prompt behavior and compensation cannot be denied.

Date - Feb 21, 2022

Sec. 126 Contract of Guarantee

Definition of Guarantee - discharge of liability or performance of a promise

Parties - Principal Debtor, Surety, Creditor
Contract of Guarantee - to perform a promise or discharge a liability of a third person in case of default.
Parts - 1. Promise or Liability, 2. Default (of not performing the promise or liability)
Contract of Guarantee could be considered as collateral understanding, like a conditional promise on the
condition of default.

*Birkmyr v. Darnell - what is a contract a guarantee. if one buys sth on credit from a shop and promises
the seller to pay later, and a third party intervenes to assure the payment, it forms a contract of guarantee.
* only the dependent liability shall be covered in the case of guarantee. No independent liability will be
discharged by the Surety.
*Taylor v. Lee - what is not a contract of guarantee. the difference between original promise and
dependent liability.

*Indian Overseas Bank v. SNG Castorete Pvt. Ltd. 2002 - assurance was given by the means of a letter
for repayment of the loan amount, by the loanee. The court considered it not suitable enough to be a deed
of guarantee. The guarantee shall be provided by a third party. It has to be a tri-party contract for an
understanding of rights and liabilities.
When a bank is a surety, it is called a bank guarantee. They can be sought independently as well and
could be used as an instrument. A Bank guarantee is independent and has to be paid when demanded. It is
not dependent on the relationship of the parties but on the demand. As banks are professional guarantors
and this acts as a service rendered by bank companies, insurance companies, etc.

*Maharastra State Electricity Board v. Official Liquidator 1982 - the bank gave a guarantee to the
SEB of an amount no exceeding 50,000 rs. within 48 hours of demand. Supplier, here principal debtor,
went into liquidation. The supplier kept some securities with the bank. The liquidator wanted to prevent
the execution of the guarantee. According to the rule of bank guarantee, he is not concerned with anything
else but the demand, and the bank had the right to reimburse the amount payable from the security kept
by the supplier.

Essential Features of Guarantee

1. Principal Debt - Principal Debtor has to be made liable for a debt recoverable if no liability arises.
No principal debt, no valid guarantee.
*Swan v. Bank of Scotland 1836 - (overdraft - using more than what we actually have in our
bank, like credit, given on current account, depends on goodwill) surety’s liability did not arise as
there was no debt on the overdraft. The act of overdraft was against a statute, which arose the
suing surety but since there was no debt was recoverable over the overdraft, the surety couldn't be
made liable.
Exceptions:
1. Prevalence of a specific act - specific law will always prevail over the generic law
*Yorkshire Railway Wagon Co. v. Maclure 1881 - directors (agents) of this company took a
loan but it was found to be ultra vires (outside the scope of the company as it was not decided by
articles of association (powers of directors) - as per company law and makes it somewhat void); it
made the directors liable as surety as a consequence of surety arising out of ultra vires (under
company laws) is different from the consequences of surety under contract laws.
*Kashiba Bin Narsapa Nikade v. Narshiv Shripat 1895
2. Guarantee of a Minor’s debt
Coutts and Company v. Brownelecky 1947 - Loan was given as a way of overdraft, which is
controversial to a law - Guarantee will be held liable if he knows about the infancy, if not he
won't be held liable.
Minor’s debt is void -

1. If the debt is recoverable, only then liability can be exercised

2. If a certain act prevails in a matter, the provisions of the said act would be followed
above the general act/rule.
 2. Consideration for Guarantee (Sec. 127) - def. under Sec. 2(d), could be an act or payment; an
assurance was given by the surety, of performance of promise or discharge of debt by the
principal debtor shall also be considered as consideration. - for the benefit of the principal debtor.
*Essentials - 1. Debt 2. Guarantee

Three ways to look at it:

1. All 3 parties come together to form a contract
2. Creditor and Debtor recognize the surety’s liability to be a secondary one and the principal
debtor’s liability to be primary
3. A contract between creditor and surety.
*PD can never deny the consideration, as it is for his benefit.

The guarantee without consideration is void.

*Madanlal Sobe v Rajashtan State Industrial Development and Investment Corporation
Ltd. 2006 - once the payment was due, the creditor

Whether guarantee for past debt is valid? - yes it is, according to the words of Sec. 127 - anything
done for the benefit of the debtor.
*M.Ghulam Hussain Khan v. M.Faiyas Ali Khan 1940 - In the past, the lessee agreed to pay the due
sum in installments. At present, he says to execute a surety bond. The question of the validity of
guarantee for past debt arose. The court took it in a positive sense and considered it valid but in present
times it still is a conflicting view.
*Sicom Ltd. v. Padmashree Mahipatrai Shah 2005 - a guarantee was executed after the financial
assistance was provided to a person.

In the case of past as well as future debt - some installments are paid (past debt) and some will be paid
in the future (future debt) - Requirements: 1. it would only be enforceable if there is a future debt; 2. clear
undertaking indicating liability for both debts.

Even if the principal debtor doesn't ask for a surety, it is a good enough consideration for surety.
*Dunken Fox and Company v. Norta and South Wales Bank 1880 - various possibilities to look at a
contract of guarantee

3. Misrepresentation and Concealment (S. 142 and 143) - any guarantee obtained by means of
misrepresentation, or is hiding any material facts that are material to contract, is invalid. This
imposes a duty on the creditor to make the surety aware of all the facts that might affect his acts
and degree of responsibility.
*Invalid - surety goes on his own risk to go ahead or not, on getting to know about such facts.
*Srinivas Shankar Portnis v. Raghukul Sehkari Grihrachna Sanstha Maryadit Ltd. 2010 - a
fact of the society in question was under the process of litigation, was not told to the surety prior
to the contract and his consent was obtained by misrepresentation and concealment, thus the court
held that the surety shall deny the liability as it is invalid.
*London General Omnibus Company v. Holloway 1912 -
 Illustrations: 1. A tells B to give him security as B failed to pay him the money earlier. C gives a
guarantee for B’s duly accounting. A doesn’t tell C about B’s earlier conduct that he has already
made a fault. Such a guarantee will be invalid as C wasn’t told of B’s previous conduct.
2. C has to supply iron to B and A guarantees the payment for an amount of up to 2000 tons. Now
C had a previous debt and was asked to pay an extra amount on market price as to fill in for the
debt. Here the surety will not be held liable.

4. Writing is not necessary - according to English Law, writing down of such a contract is necessary
but the same principle isn't followed in India.

S. 126 Counter Guarantee - to protect the original guarantor, a counter-guarantee is made. In case of a
default, the principal guarantor would pay as a surety but for his protection, the counter guarantor, other
banks would stand up.
This is a standby for the protection of a surety where another guarantor is made and takes solace in
international transactions.

S.128 Liability of Surety: (extent of liability)

1. Co-extensive - both the principal debtor and the surety will be liable to the same extent. It is
presumed to be equal.
*Indian Overseas Bank v. G. Ramulu 1999 - liabilities of surety are similar to principal

When can creditors approach surety for dues?

Bank of Bihar v. Damodar Prasad 1969 - defendant was the surety and guaranteed a bank loan. Default
happened. The creditor sued the defendant. 1. In the trial court, it was held that the bank shall hold the
surety liable only after remedies against the principal debtor are exhausted, and the favored guarantor. 2.
A similar opinion was carried out in the high court. 3. Supreme Court overruled the previous judgments
by stating that there was no condition posed in the contract, which cannot be later posed by the court or
anyone other than the parties. It is not the task of the creditor to establish the line of liability.

Principal debtor and surety can be sued individually and together as well
*Barkley’s Bank v. O’Brien 1994 - Wife was a surety to a husband’s loan. Circumstances posed an
urgency to free the wife from the contract and the court held that such a surety of trusted relationships put
the surety in a position of vulnerability and could be a case of misrepresentation or undue influence.

2. Conditional - liability can be limited - it is restricted in the sense that it will not be as much as that
of the principal debtor. It could be either precedent or subsequent.
*Subsequent Condition - Amal Krishna Ray v. Bank of Baroda 2014 - surety has given
guarantee to a bank - gives the notice for three months to withdraw the guarantee after the period
of three months - post three months, the guarantor will no longer be liable.
*Precedent Condition - if the condition is fulfilled, the guarantor will be liable; if not, the guarantor
can be held liable.
*James Graham & Co. Timber Ltd. v. Southgate Sands 1986 - the signature of surety was forged.
S. 256 Impossibility of the main contract (liability of surety continues)- contract becomes void. In
case of subsequent liabilities arising out of such a contract, the principal debtor’s liability will end but not
of the surety.
*Florence Mabel RJ v. State of Kerela 2001 - a loan is taken for the development of bee culture and
was guaranteed. Bees died due to a viral infection and the business failed. The subject matter has
destructed. It is impossible to perform. However, the surety cannot escape his liability to pay the
installments on a subsequent failure of the debtor to do so.
Novation (liability of surety doesn't continue) - Surety gave his guarantee for the original contract, but
the contract ends and a new contract is made under novation. Thus, the surety’s liability will end with the
end of the original contract and he will not be liable for the new contract made.

S. 129 Continuing Guarantee - exists for all the transactions in a series, spread over a period of time.
For eg., the first transaction was due on the 1st of March, and the second one on the 1st of April. A
normal guarantee will end once the first transaction is over, but a continuing transaction will continue for
the second transaction as well.
● A zamindar, d employed person C to collect zamindari from his properties, at the request of
person A. For the employment of C, A gave surety. Thus A acts as a surety for every time C
collects zamindari from D’s properties, and this will be counted as a continuing guarantee for
every collection of rent. If C fails to collect the rent for the third month, let's say, A will be liable
to pay an amount equivalent to the rent to D.

*Kay v. Groves 1829 -

*Maharastra State Electricity Board v. Official Liquidator 1982 - the bank gave a guarantee to the
SEB of an amount no exceeding 50,000 rs. within 48 hours of demand. Supplier, here principal debtor,
went into liquidation. The supplier kept some securities with the bank. The liquidator wanted to prevent
the execution of the guarantee. According to the rule of bank guarantee, he is not concerned with anything
else but the demand, and the bank had the right to reimburse the amount payable from the security kept
by the supplier.

Bank Guarantee - independent between parties and distinct contract btw bank and the beneficiary. It is
not qualified by the underlined transaction between the parties.
*Hindustan Steelworks construction ltd. v. Tarapore -what is a bank guarantee? In case it is an
unconditional bank guarantee, the obligation of the bank is absolute. The commitment by the bank to give
money as and when demanded should be respected and not interfered with.

When does the liability of surety end? What causes the discharge of surety’s liability?
S. 130 Revocation - not possible in ordinary guarantee, only possible in continuing guarantee. It will be
removed by the surety for future transactions to take place.
Requirement - a notice necessarily given to the creditor, to the principal debtor it is not quite necessary.
*Hargopal Agarwal v. SBI 1956 - directors of a company guaranteed the overdrafts of the company, but
subsequently they resigned. Here, post their resignation, they will not be held liable for any failure on the
overdrafts.
S. 131 Death of Surety - (association with family law) termination of surety in case of future transactions
while fulfilling continuing guarantee, after the death of surety. Heirs will be liable only for the guarantee
of transaction for the time the surety was alive. Heirs have no duty to take over the liability of
transactions post the death of surety.
S. 133 Variance - variety in terms. A certain change in the contract and it is not known to the surety then
he is no longer liable for the debt.
*M S Anirudhan v. Thomco's Bank Ltd . 1963 - Loan of rs. 20.000. Defendant (Surety) confirmed the
repayment to the bank. The papers showed the amount to be Rs. 25000. The bank refused. When reduced
to Rs. 20,000, without any intimation to the surety, was given to the bank. The variance is in favor of
surety. PD failed to repay the amount. Surety was sued upon. Here the surety’s liability will not be
discharged as the variance was in favor of the surety.
S. 134 Release or discharge of Principal Debtor - A (Surety) gives a guarantee to B(Creditor) for
goods to be supplied for C (Debtor). C enters into a contract with all the creditors and placed a property to
cover his debts. Here the debtor has discharged himself by placing a property to cover debts. Discharge of
debtor will also cause discharge of surety.
S. 135 Composition, Extention of time, and Promise not to Sue -

Surety’s Rights against the principal debtor (he/she replaces the creditor) - Subrogation and
Indemnity
S. 140 - Subrogation - replacement of debtor.
Surety’s liability is co-extensive with that of PD. Similarly, surety’s rights are the same as creditors'.
Once the liability is discharged by surety instead of PD, the surety can step into the shoes of the creditor
to exercise his rights against PD, like the right to indemnify, right to sue, etc.
Illustration - B (PD) is indebted to C (Creditor) and A is surety for B. C demands payment from A. On
A’s refusal, C sues A. A defends the suit but is compelled to pay and can recover the amount from B, for
the principal debt and damages suffered. It is an implied promise.
Indemnity - To compensate. Implied, as it is the nature of the transaction.

Surety’s rights against the Creditor:

S. 141 - right to security - surety is entitled to every recovery of security.
Right to Reduction
Hobson v. Bass 1871 - right to reduction - J is a surety and has given a guarantee to B. B (Creditor) has
to give goods to another party C (PD). Limit - 250 Pounds. E has given a similar guarantee to B. B
supplied goods to C for 657 pounds. C becomes bankrupt. B proved the whole sum in the insolvency of C
and called upon the guarantors to pay money. Here, all three including both the sureties can seek a shared
reduction with the creditor to settle the account.

Right to Set-off - instead of paying the entire amount, pay me less and once for all to end the contract.

Rights against co-surety

1. S. 138 - Discharge of one surety by the creditor doesn't mean, 1. The other sureties will also be
discharged, 2. The released surety still has a liability to the other sureties.
2. S. 146 Equal Contribution - the liability will be divided equally among all the sureties,
irrespective of the provisions of the contract. This is an obligated duty.
 3. S. 147 Proportional Contribution - the liability will arise as per the limits restricted by the
sureties on them. For eg., a liability of 30k was guaranteed by 3 sureties who limited their
liability to 10k, 20k, and 30k respectively. Thus it will be divided among them as 10k equally and
the third surety will not alone be liable.
*read illustrations of these sections.

Unit 3
Bailment

Difference between bailment and trade - ownership goes in case of trade and not possession.
Difference btw Possession and Ownership - possession is the temporary use of a property, whereas
ownership is complete ownership with complete and absolute rights arising out of that land.

Bailment - a relation btw 2 parties where one party keeps goods with the other for a certain time. It is
about possession, delivery of possession. The duty of returning the possession to the owner is mandatory
once the purpose is fulfilled.
2 parties - Bailor (one who delivers the goods), Bailee (one who gets the possession)

S. 148 definition of Bailment - temporary possession goes to the bailee and has to be returned back.
3 essentials of Bailment:
1. Delivery of possession of goods -
*Ultzen v. Nicols 1894 - A woman goes to a restaurant where her coat is taken without her
permission and hangs on the hook behind. The coat was later gone. The customer didn't tell where the
coat was to be placed and was done at the waiter’s discretion. The restaurant will be held liable as it
enters into the shoes of bailee upon the responsibility and care.
Possession under S.149 is defined to be of two types - actual and constructive.
Actual - physical possession and physical return of goods.
Constructive - where some act implies the possession of goods
*NR Srinivasa Iyer v. New India Assurance Co. Ltd. 1983 - bailor has a car and the car is given to the
possession of an insurance company for repairs, which was to be given to a garage by bailee (sub-bailee).
According to the general rule, it was to hand over to the bailee, the company, whose duty arises to hand it
over to the garage, and it was the garage’s duty to return the possession back to the bailor. But with the
company’s permission, the bailor directly handed over the car to the garage. The car gets lost to a fire in
the garage. Who will be held liable here? Both bailees will be held liable.

2. Purpose -
3. Delivery upon contract - Two different views opted in terms of delivery of possession and
contractual obligation
 1. Contractual Obligation between parties:
*Ramgulam v. Govt. of UP 1950 - plaintiff (bailor) reported to the police that his gold ornaments were
stolen and please find them. Police found them and kept them in their own custody. The ornaments get
lost from the police custody. Plaintiff demanded the ornaments back. Will they be liable? no, as there was
no delivery of possession and no contractual obligation (according to the general principle).

2. Non-Contractual Obligation between parties (derived from English Law)

*Lasal Gao Merchants Co-operative Bank Ltd. v. Prabhu Das Hathibai 1966 - The partners (bailor)
of a firm had packs of tobacco with them, which were seized by the ITO and locked in the godown,
whose keys were given to the police (bailee - as the keys of the godown were with them which constructs
an act of possession). There were heavy rains that flooded the godown and damaged the tobacco. Heavy
rains are not considered acts of god as there can be some steps taken to save the goods. Even though there
was no explicit contract between the parties, the police will be held liable for the damage.
= here the ITO will not be considered bailee as he is just an officer doing his job of raiding.
*State of Gujarat v.

S. 150 Balior
Two types of Bailors - 1. Gratuitous Bailor - without reward, in a good gesture. Someone who lends his
articles without any charge or reward.
2. Balior for Reward - someone who lends his articles for a reward or a charge.
Duties S. 150 - 1. To disclose the faults in the goods lent. In the case of a gratuitous bailor {S. 150 (1)},
if the person knows of the fault, he has to disclose it to the bailee, if not then no duty arises on him.
In the case of a bailor for reward {S. 150 (2)}, it doesn't matter if he knows of the fault or not, he has to
find out and disclose it to the bailee.
Eg - A (Bailee) hires (rewards) the carriage of B (Bailor), the carriage is unsafe and B is not aware of it. If
A is injured, B will be liable for any injury caused.

Fault, here, has to be material, that interferes with the working of the good.

2. To disclose the skill required - Bailor also has to let know of the skill required to use the good lent. If
not, then in case any damage arises, the bailor will be liable for the same.

Duties of Bailee
1. S. 151 Duty of reasonable care - expected from a man of ordinary prudence.
According to English Law, liability is absolute. No excuse for bailee to cover the damage. Later a
concession arose through a way of case laws.
*R (royalty) v. Viscount Hertford 1681 - observed the limit to the absolute liability of bailee for the
first time. It was confined only to the carrier bailee.
*Martin v. London Bounty Council 1947 - an unwell plaintiff was taken to a Pvt. Hospital. Hospital
took charge of 2 pieces of jewelry and a gold cigarette case. Subsequently, it was stolen by the thief. The
hospital is a bailee here as the jewelry isn't a payment.
 S. 152 Bailee not liable for loss of thing bailed - when sufficient care has been taken according to
the bailee, like employing a high-security locker and guard for jewelry in custody and still the jewelry is
stolen by the guard himself, then bailee cannot be held liable. The onus of liability is on the guard.
*Central Bank of India v. Mujeeb Khan 1997 - a truck was hypothecated to a bank. The truck is neither
disposed nor taken care and has suffered loss. The value of loss due to deterioration of truck shall be
reduced from the amount of loan.

S. 153 - Following the conditions of the Contract - Bailee has to abide y the conditions of the contract.
If he doesn't, the contract is voidable at the option of the bailor. The bailor has an option to either
continue with or end the contract.

S. 154 Duty to not make unauthorized use - the goods have to be used by the bailee for a specified
purpose only and not anything beyond the specified purpose. Unauthorized use of goods will hold the
bailee liable in case of any damage of goods.

S. 155- 157 Duty to not mix - bailee has to maintain a separate identity of bailor’s goods, from his own
goods and that of others.
S. 155 Proportionate Interest - If the bailor gave consent to mix his goods with that of the bailee -
in such case, the ratio of goods is fixed, such as the interest.
S. 156 If goods are separable - if bailee mixes the goods without the consent of the bailor. The
expenses of separating the goods will be borne by the bailee.
S. 157 If goods are not separable - If the goods are not in a condition of separation, then the bailee
is liable to pay compensation amounting to the loss that occurred to the bailor.

S. 160-161 Duty to return -

S. 160 Directions to return - the bailee is supposed to return the goods to the bailor as per the
instructions given by the bailor. Bailee shall return the goods on the date of expiry of the contract and not
on the demand of the bailor.
S. 161 If not returned - if the bailee doesn't return back the goods post expiry of the contract, he is
keeping them at his own risk and will be liable for any damage that occurred post expiry.

S. 163 Duty to return increase - any profits, charges, etc. that arise on the goods given to the bailee, in
the period of possession, then the increase will also have to be returned back to the bailor.
*Standard Charter Bank v. Custodian 2000 - shares and securities were pledged with the bank. Bank
receives dividends in this respect. Unless the person returns the loan, he cannot redeem the shares and
securities. Once it is redeemed, the increase in shares will be handed over to the party concerned.

S. 165-167 Duty not to set up jus tertii - defense of jus tertii - if bailor has bot authorized, the bailee
cannot give the title to a third party. Bailee is not entitled to set up a third party and has to return the
goods to the bailor only.
S. 167 - the title of the third party

S. 168 Finders of Goods - Right to Sue - no

Right to sell - yes, in case of danger from goods and if of perishable nature.
Rights of Bailee
Difference btw compensation and remuneration - c - for some damages; r - charges for work done.

1. S. 164 Right to Compensation - in case the bailor did not have an appropriate title for delivering
the possession, in such a case, if the bailee suffers losses and has the right to be compensated by
the bailor.
2. S. 158 Right to Expenses or Remuneration - for the purpose of delivering possession. Payment
for work done.
3. S. 170 - 171 Right of Lien - right to retain the goods. The claim against the goods or property,
usually in bank loans where the creditor claims possession of the collateral.
It is of two kinds - a particular lien (only available in case of pledge; with respect to specific
goods the bailor has asked to work upon) and a general lien (bailee could claim right against all
the goods in possession)
Parties to General Lien:
1. Bankers - in case of loans
*K. Sita v. Corporation Bank 1999 - borrower took a loan against gold ornaments and pays it
back. She took another loan subsequently and the bank kept the gold in its possession till the
satisfaction of the second loan. Bank has the right to retain the loan amount that is still not
satisfied.
2. Factors - agents to sell goods. In case of delay of one payment, it will affect subsequent
payments and the factor has the right to retain goods with himself until the payment is
made.
3. Wharfingers - wharves - a place where ships unload in transition and not store,
Wharfingers - people employed on the wharf.
4. attorneys of the high court - things that could be sold, like worthful documents, funds,
dividends, etc. the attorney can retain those things unless fees are released.
5. Policy Brokers - similar as factors.

4. S. 180 -181 Right to Sue - specifically in terms of a third person.

Unit 4 Pledge/ Pawn

Parties involved - pledger or pledgee; pawnor or pawnee

Purpose - goods are held as security for payment of debt.
S. 172 - definition of pledge -
Essentials of Pledge
1. Delivery of possession -
2. Pursuance of contract -
*Morvi Mercantile Bank Ltd. Union of India 1965 -

Rights of Pawnee/Pledgee
S. 174 Right of Retaining – pledgee has the right to retain goods with him unless the payments are
cleared by pledger.
*Bank of Bihar v. State of Bihar 1972 - ??????

S. 175 Right of Extraordinary Expenses - pledger will have to pay expenses incurred by pledgee while
maintaining the property or reservation of goods under possession, as pledgee has the duty to take care of
the property while in possession.

S. 176 Right to Sell - In a case where the pledger does not pay back the dues, the pledgee has the right to
sell the property or goods under possession to recover the amount.
1. Retain the goods and sue the pledger - pledger doesn’t pay the dues on the due date, in
such a case, the pledgee can retain goods and sue the pledger to keep the case alive and
seek payment.
2. Sell the goods - it is done at a reasonable notice (information of intent to sell the goods
by pledgee to pledger) - statutory obligation under the law - S. 176 - if sold without
reasonable notice, pledgee will be liable to pay back the amount received by selling
goods/property
*Lallan Prasad v. Rehmat Ali 1967 - pledger borrowed Rs. 20,000 from Pledgee against machinery
related to aircraft (aeroscrapes). The machinery was worth Rs. 35,000. Pledger did not pay back and the
pledgee sued the pledger for due payment, but the pledgee had already sold the security. Thus he lost his
right to sue and the claim was rejected by the court.

Right of Pledger
S. 177 Right to redeem - till the time pledgee retains the property, pledger has the right to redeem and
pay the dues. If the pledgee has sold the property, there lies no right to redeem with the pledger. The right
does not end with the expiration of time but with the sale of the property.
*MR Dhawan v. madam Mohan 1969 - Bonus Shares of a company were pledged with a pledgee.
Bonus shares (converted out of the bumper bonus incurred by the company and are given to the existing
shareholders) in this case, the bonus shares belong to the pledger but not the ordinary shares.
*Union of India v. Deep Chand 2007 - certain gold ornaments were pledged with pledgee, B. in an IT
raid gold ornaments of pledgee and pledger were seized by the IT Dept. In such a case pledger can only
claim his ornaments if they are sold and not otherwise.

Who can Pledge?

Originally, pledger only can pledge their goods to the pledgee. Pledge will not be valid if it is not done by
the pledger.
Exceptions to the general rule
S. 178 - Pledge by Mercantile Agent (sale of goods act) - when he has possession of goods or
documents, then any pledge made by him is valid, without any consent or authority from the pledger. For
the ordinary course of transparent and quick business, it is allowed. However, he has to act in good faith
while taking possession, as it is to be done for the benefit of the pledger.
(Essentials for Mercantile Agent - definition, element of consent, course of business, good faith)
S. 178 A - Pledge where possession under voidable contract - 1. If a contract between A and B is
voidable on the grounds of seeking consent through means of fraud, then any pledge of goods made by B
to C, then the pledge between B and C will be valid.
2. If a contract between A and B is void on the grounds of seeking consent through means of mistake of
fact, then any pledge of goods made by B to C, then the pledge between B and C will be void as well.

*Philip v. Brooks ltd. 1919 - a fraudulent person got a valuable ring against a non-valuable cheque from
A under fraud, making the contract voidable. FP further pledged the ring to the defendant. The pledge
made here is valid, as the contract was on an option of being ended but was not ended by A.

S. 179 Pledge by pledgee - *Firm Thakur Das v. Mathura Prasad 1958 -

Question: Co-extensive rights and duties of surety

Liabilities with the principal debtor under S. 128 - presumed
Rights with the creditor under