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Monday, May 28, 2001



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Ordinary and special damages

Akshay Kumar

HOW ARE `ordinary damages' distinguished from `special damages'? Damages implies monetary compensation for the loss suffered by an aggrieved party as a result of breach by another party. Ordinary damages, which are reasonably foreseeable consequences of breach, are estimated on the basis of circumstances prevailing at the date of breach. In the case of the sale of goods, the ordinary damages are the difference between the contracted price and the market price prevailing at the time of sale when the time is fixed. Special damages are the damages resulting from a breach of contract under special circumstances known to both the parties. These damages are not recoverable unless the possibility of special loss is contemplated by both parties at the time of the formation of the contract.

Are there exceptions to the doctrine that a stranger to a contract cannot maintain a suit? The doctrine of privity of contract lays down that only a person who is party to a contract can sue on it. However, it is subject to the following exceptions:

i) In the case of a trust: a beneficiary can enforce his right under the trust though he was not a party to the contract between the settler and the trustee (Khwaja Mohd. Khan vs. Husaini Begum.).

ii) In the case of a family settlement: If the terms of the settlement are reduced into writing, the members of the family who originally had not been parties to the settlement, may enforce the agreement.

iii) In the case of certain marriage contracts: A female member can enforce a provision for marriage expenses made on the partition of the Hindu undivided family.

iv) In the case of assignment of a contract: When the benefit under a contract has been assigned, the assignee can enforce the contract.

v) In the case of an estoppel by acknowledgement of liability or by part performance thereof: The third party can maintain a suit.

vi) Where a person makes a promise to an individual for the benefit of a third party and creates a charge on certain immovable property for the purpose: The third party can enforce the promise.

vii) Contracts entered into by the agent on behalf of the principal: Can be enforced by the principal even though he is not a party to the contract.

viii) Where the buyer purchases land with the notice that the owner is bound by certain covenants affecting land or agreement: Such a buyer shall be bound by them although he is not a party to the agreement.

B requests A to sell and deliver certain goods on credit. A agrees to do so provided C guarantees the payment of the price of the goods. C promises to guarantee the payment in consideration of A's promise to deliver the goods. Is this sufficient consider ation for C's promise? Yes, the legal detriment incurred by the promisee at the promisor's request is sufficient to constitute consideration. Anything done or any promise made, for the benefit of the principal debtor, may be sufficient consideration for giving the guarantee.

True or false

All the agreements in restraint of trade are void: True. Section 27 provides that every agreement by which anyone is restrained from exercising a lawful profession or business of any kind is, to that extent, void.

An illegal agreement is void ab initio: True. An illegal agreement being against the law or in violation of the law is not enforceable. Section 23 specifically provides that every agreement of which the object or consideration is unlawful is void.

A body corporate can be appointed director of any company: False. No body corporate, association or firm can be appointed as director of any company and only an individual can be so appointed (Section 253).

Notice of dishonour of a negotiable instrument may be oral or in writing but it must be given within a reasonable time of dishonour: True. Section 94 provides that notice of dishonour may be oral or written but the notice must be given within a reasonabl e time after dishonour at the place of business or at the residence (if there is no place of business) of the person to whom it is sent.

A condition will sink to the level of a warranty where the buyer treats the breach of condition as a breach of warranty: True. Where a contract of sale is subject to any condition to be fulfilled by a seller, the buyer may accept the goods treating the b reach of condition as a breach of warranty and may sue the seller for damages for breach of warranty.

Short notes

Contingent contract: Section 31 provides that a contingent contract is a contract to do or not to do something if some event, contingent to such contract, does or does not happen. The condition which is collateral to the performance of a contract can be a condition precedent (to be satisfied first and then performance demanded) or a condition subsequent (to be satisfied after the formation of the contract). The essentials of a contingent contract are: There must be a valid contract; the performance of t he contract must depend on the happening or non-happening of some future event; the event must be uncertain; the event must be collateral to the main contract; and the event should not be at the discretion of the promisor. Sections 32-36 contain the rule s regarding enforcement of contingent contracts.

Responsibilities of principal to third parties in a contract of agency: The liabilities of a principal to third parties in a contract of agency depend on whether the agent contracts as an agent for a named principal, whether the agent contracts for an un named principal, and whether the agent contracts for an undisclosed principal. In cases where the agent contracts for a named principal and within his authority, Section 226 provides that agent's acts will have the same legal effect as if they had been d one by the principal in person. In cases where the agent exceeds his authority, only so much of it as is within his authority is binding as between him and his principal but where the act within authority is not severable from the act beyond authority, t he principal is not bound by the transaction. If a principal by his words or conduct induces a belief in the third party that the act of the agent was within the scope of his authority, the principal is bound by such acts. The principal is also liable fo r the fraud of his agent acting within the scope of his authority where the fraud is committed for the benefit of the principal or that of the agent. Where an agent discloses the fact that he is an agent but does not disclose the name of the principal, t he principal is bound by the contracts made on his behalf but the unnamed principal should be in existence at the time of the contract. Where the agent does not disclose the existence of his principal, he is personally liable on the contract.

Legal position of a promoter of a company: A promoter is neither an agent nor a trustee for the company he promotes because the company is still not in existence. He stands in a fiduciary relationship to the company he promotes. He is thus required to di sclose to the company all the relevant facts. He cannot make any profit at the expense of the company he promotes without the knowledge and consent of the company. The company can compel him to account for and surrender the secret profits, if any, made b y him. If full disclosure is made of the material facts, the profit is permissible. The disclosure is required to be made either to an independent Board of Directors or to the shareholders.

An unpaid seller's right of stoppage of goods in transit: The right may be exercised when the seller is unpaid, the buyer is insolvent and the seller must have parted with the possession of goods but the buyer must not have acquired them. The goods are d eemed to be in transit: When they are delivered to a carrier or other bailee for the purpose of transmission to the buyer; where the goods are rejected by the buyer and the carrier or another bailee continues in possession of them; where the seller knows that he is delivering the goods to someone as a carrier; or, when part delivery has been made, the remainder of the goods may be stopped in transit unless delivery of part of the goods shows an intention to give up the possession on the whole of the goo ds. An unpaid seller can exercise the right of stoppage of goods in transit either by taking actual possession of the goods or by giving the notice of his claim to the carrier or other bailee in whose possession the goods are. Such notice may be given ei ther to the person in actual possession of their goods or his principal.


``The fundamental attribute of corporate personality is that a company is a legal entity distinct from its members.'' This means that the moment a company is incorporated under the law relating to companies, it becomes a corporate personality independent or distinct from its members. It was conclusively laid down in Salomon vs. Salomon that when the memorandum is duly signed and registered, the subscribers are a body corporate capable forthwith of exercising all the functions of an incorporated individu al. The company at law becomes a different person altogether from the subscribers of the memorandum.

Partnership by holding out: Section 28(1) provides that anyone who by written or spoken words or conduct represents himself or knowingly permits himself to be represented, to be a partner in a firm, is liable as a partner in that firm, to anyone who has on the faith of any such representation given credit to the firm, whether the person representing himself or represented to be a partner does or does not know that the representation has reached the person so giving credit. Thus partnership by holding ou t arises where representation is made by a person that he is a partner in the firm; the person who wants to hold a person liable by holding out must show that by acting on the faith on such representations, he gave credit to the firm which he would not h ave given had he known that the person representing was not a partner in the firm. The liability by holding out is an application on the principal of estoppel.

Non-registration of a partnership firm:

Registration of partnership firm is not mandatory under the Act. However, an unregistered firm and its partners suffer from certain disabilities as indicated in Section 69:

i) No suit to enforce a right arising from a contract or conferred by the Act shall be instituted in any court by or on behalf of any person suing as a partner in a firm against the firm or any person alleged to be or to have been a partner in the firm;

ii) An unregistered firm cannot file a suit against any third party for the enforcement of any right arising from any contract;

iii) The unregistered partnership firm cannot claim any set off owing by the other person to it. However, the non-registration of a firm does not affect the rights of a third party to sue the firm or its partners. The partners of a unregistered firm can sue for dissolution of the firm or for accounts of the dissolved firm or to realise the property of the dissolved firm. An official receiver or assignee or court acting for an insolvent partner can bring an action for realising the property of an insolve nt partner. Non-registration does not affect the rights of a firm arising out of statutory and non-contractual rights. An unregistered firm or its partners may sue or claim a set off not exceeding Rs 100 in value.

Negotiation and assignment

Negotiation: It can be done by delivery or endorsement. A holder in due course is presumed to have given consideration for the instrument. The onus of proof lies with the opposite party to prove that he had given no consideration. Notice of transfer is n ot necessary in the case of negotiable instruments. And, in due course, the holder of a negotiable instrument takes the instrument free from any defect in the title of the transferor.

Assignment: It can only occur with a written document signed by the transferers. The assignee has to prove he has given the consideration for the assignment. Notice of the assignment must be given by the assignee to the debtor, else the debtor is not bou nd by the assignment. The assignee takes the instrument subject to the defects that may exist in the title of the assignor, even though he takes the instrument in good faith and for value.

The rule nemo dat quod non habet expresses that no one can give what he has not got -- meaning that a seller of goods cannot give a better title to the buyer than he himself possesses. However, the exceptions are:

Sale by a mercantile agent: A buyer will get a good title if he buys in good faith the goods or documents of title to goods with the consent of the owner and who sells the goods in the ordinary course of his business.

Sale by a co-owner: A seller who buys in good faith from one of the several joint owners who is in sole possession of the goods with the permission of his co-owners will get a good title to the goods.

CF303>Sale by a person in possession under a voidable contract: A buyer in good faith from a person in possession of goods under a voidable contract which has not been rescinded at the time of the sale will get a better title from the seller.

Sale by seller in possession after sale: Where a seller, after having sold the goods, continues to be in possession of goods or documents of title to the goods, again sells to a person who buys in good faith and without notice of the previous sale, such a buyer gets a good title to the goods.

Sale by buyer in possession: If a person who has bought goods obtains possession of the goods with the seller's consent, any sale by him to a buyer will give a good title to him irrespective of any lien or other claim of the original seller against the g oods if he takes goods in good faith and without notice.

Sale by an unpaid seller: Where an unpaid seller has exercised his right of lien or stoppage in transit and is in possession of the goods, he may resell them and the buyer will get absolute right to the goods.

Estoppel: If the true owner who stands by and allows an innocent buyer to pay over money to a third party, who professes to have the right to sell an article in the belief that he is becoming the owner of it, the true owner will be estopped from denying the third party's right to sell.

Sale by person under other laws: A pawnee, on default of the pawner to repay, has a right to sell the goods pawned and a buyer gets a good title to the goods.

A hires a carriage of B. The carriage is unsafe though B does not know this and A is injured. Is B liable to A for the

injury? B is liable as he is a bailor for consideration. If the goods are bailed for hire, the bailor is liable for such damage as is due to faults in goods irrespective of whether he was or was not aware of such faults in the goods bailed.


*Wider span of management leads to flat organisation whereas narrow span of management results in a tall organisation structure: The span of management refers to the number of immediate subordinates reporting to a given manager. As the span is broadened, there is a tendency to flatten the structure as the number of levels is reduced. There are less complex structures with a maximum of administrative decentralisation. A narrow span results in a tall organisational structure with many supervisory levels b etween the top and lowest management levels. Whereas a narrow span leads to the dilution of communication and widening of administrative distance between subordinates and superiors, the wider span puts constraints on the manager in terms of time and ener gy. Though there is differences of opinion, several studies have indicated that the optimal span is in the range of five through ten.

*Coordination is a sine qua non of organising an enterprise: Coordination is an orderly arrangement of group effort to provide unity of action in the pursuit of common purpose. It permeates all the managerial functions and is considered the epitome of ma nagement. It is an essential part of organisation and without it the activities represent disjointed pieces placed together. An organisation cannot exit in the absence of coordination, since the materials and financial resources cannot follow a specific direction. By ensuring unity of direction and action, coordination ensures commitment on the part of departments, individuals and groups towards organisational objectives. Integration is brought about by coordination in terms of fusion among differentiat ed work units and authority centres.

*Communication is all pervasive and influences every function of management: Derived from the Latin word communis which means common, communication stands for the sharing of ideas in common and is an act of influencing and inducing others to interpret an idea in the manner intended by the originator. Being an inter-personal and inter-organisational interchange of integral information, communication is an ever-present activity in an organisation. It establishes a common ground for understanding. It is li ke the artery of an organisation through which the decisions and instructions of the management flow down to the lower rungs. It also conducts upward the pulse of the working force. It is thus an effective means of managerial and in turn organisational e ffectiveness.

Zero base budgeting

Zero base budgeting is aimed at reviewing the current and on-going objectives and operations. It seeks to rejustify the past objectives, projects and to set priorities for the future. Zero base budgeting is thus a process to recalculate all organisationa l activities to see which should be eliminated, funded at a reduced level, funded at the current level or provisions for increased funding. It leads to critical examination of activities and projects to increase cost effectiveness and encourages grass ro ots participation in the process of budgeting. It is applicable to small organisations, and is compatible with managing declining resources.

Performance appraisal

Performance appraisal is the systematic process, using formal procedures, of measuring and evaluating employees with respect to their performance on the jobs and their potential for development. It is done mainly through traits appraisal, the variants of which are ranking method, rating scale method, graphic scale method, check-list method, forced choice method, forced distribution method and critical incident method. The traits appraisal approach is criticised for being subjective and lacking reliabili ty. A sound performance appraisal system must be easily understandable, valid and reliable. It should have built-in controls and be periodically evaluated to ascertain its effectiveness.

Transactional analysis

Dr Eric Berne developed the concept of transactional analysis to study human behaviour. It helps in finding out `why people do as they do' by determining which part of the multiple-natured individuals is being activated in any transaction. The parts of t he multiple nature of an individual which are recorded in the brain and are replayed in the course of a transaction are described as parent, child and adult. The transactional analysis offers an excellent model for improving organisational health. The tr aditional parent-child relationship between the managers and the subordinates can be gradually changed to adult relationship by inculcating listening, thinking, pondering and reflecting actions. It helps improve inter-personal relations.

Manpower planning

Manpower planning is the process by which the management determines how an organisation should move from its current manpower position to its desired manpower position. It is a strategy for the procurement, development, allocation, utilisation and mainte nance of the human resources of an enterprise. It is an integrated part of strategic corporate planning and determines manpower requirements and means for meeting them to carry out the integrated plan of the organisation. Techniques of manpower planning include quantitative (workload analysis and work force analysis), statistical and mathematical (ratios and trend analysis, linear regression, econometric methods), management judgement approach, and qualitative aspects taking into account qualifications, experience and attitude of the employees.

Benefits: It determines future needs of an organisation, assesses the future skill requirements; determines future training and management needs; anticipates redundancies and avoids unnecessary dismissals; controls wage and salary costs; ensures optimum use of human resources currently employed; helps formulate transfer and succession policies; and enables the organisation to cope with changes in competitive forces.

Precautions: In the competitive corporate world, no organisation can afford to live in isolation and has to manage change in a planned manner. It has to recognise the forces demanding change which may be internal or external; diagnose the problem by usin g diagnostic techniques like interviews, questionnaires, personal observations etc; plan the change in terms of changes in organisational structure, jobs, people, technology; implement the change by overcoming resistance and disruptions which are inevita ble. Any change has the probability of altering the existing power among groups and individuals in an organisation and obtain the feedback since any purposeless change may be at the cost of the survival of the organisation. Change could be perceived as d isturbing the equilibrium and a threat to the existing or anticipated level of need satisfaction. Resistance to change can be overcome by an organisation by education and communication, participation and involvement, and facilitation and support.

Monistic Theory of Motivation and McClelland's Needs Theory of Motivation

It is based on the notion that man is essentially economic and is highly responsive to monetary rewards. It seeks a single cause of behaviour -- monetary aspect of remuneration or reward. People repeat their behaviour if it leads to reward. It postulates that motivation is more effective when based on individual incentives, the incentive is more effective where reward immediately follows efforts, and quantum of effort is directly related to the amount of reward.

It has grouped responses of individuals into three categories each representing an identifiable human motive or need. They are needs for power (managers), affiliation (deriving pleasure from being loved and avoiding pain of being rejected by a social gro up) and achievement (a high achiever tends to become individualistic to surpass others).

Delegation and decentralisation

Delegation simply means pushing authority down to subordinates. It is basically concerned with sharing of either managerial work or operating work between a manager and a subordinate. It can take place on a limited scale even in a centralised organisatio n. It is the process of legitimising and empowering the work of subordinates.

Decentralisation is the fundamental phase of delegation and is much more encompassing in nature. It implies systematic and company-wide delegation on the part of all managers. It is the pushing down of authority and power of decision-making to lower leve ls of the organisation. It results in transferring control to the decentralised unit and represents the philosophy of the organisation.

Formal and informal communication

It is permanent, tangible and verifiable. The main forms are letters, circulars, standing orders, memoranda, etc. It is appropriate when the information is to be sent in an organised manner. There is generally no in-built mechanism for effective feedback . It connotes commitment, credibility, authenticity and seriousness. It is expensive and rigid but has the advantage of being clear and elaborate. It is oral and takes the form of group meetings, individual conversation, face-to-face interactions. It is appropriate where action is to be expeditiously taken. The feedback in informal communication is quick and instantaneous. It involves no commitment from the originator of the information. It is unsuitable where the information is long or highly technical as it is likely to be misunderstood.

Democratic and autocratic leadership

The essence of democratic leadership is consultation -- the leader consults the subordinates before arriving at decisions. It takes into account the wishes and suggestions of the subordinates. All members of the group are seen as important contributors t o the decision.

The subordinates are encouraged to exploit their potential and assume greater and challenging responsibilities. It leads to increased morale and support for the final decision.

However, in authoritarian leadership, the leader assumes full responsibility by deciding on the group's projects by assigning tasks to members and permitting no participation in the decision-making process. The leader centralises decision-making in himse lf and exercises full-fledged control over his subordinates. The leader enforces decisions and the subordinates are compelled to follow the directives of the leader. It is a one-way edict that results in feelings of helplessness and frustration among sub ordinates.


According to Norman Maier, ``effective decision-making is dependent on two factors, namely, the objective quality of the decision and the acceptance of the decision by those who execute it ultimately.'' The principles of decision-making include:

*Marshalling the facts and designing the goals. A good decision attempts to identify and evaluate alternatives in the context of time and resource constraints.

*Delays in relaying decisions makes it difficult for the employees to adjust themselves.

*Abrupt, impersonal and uninformative communication of decision are inherently counter-productive.

*A flexible approach in making a decision and subsequently in its implementation paves the way for yielding better results.

*A well conceived decision may be too expensive or time-consuming yielding place to a satisfactory decision after being tested on the touchstone of reality.

Steps involved in a decision-making process:

*Opportunities and problems being generally not obvious, the first step is to lay particular emphasis on all relevant factors to define the problem properly.

*Gathering of relevant information and discarding irrelevant data by careful evaluation of pros and cons will result in crystallising the problem.

*The step comprising searching for alternatives -- existing and new ones -- helps in focussing adequate attention to the feasible solutions to a given problem.

*By applying the critical factor analysis, comparisons are made on the basis of desirable and undesirable aspects of each alternative.

*According to Peter F. Drucker, picking the best decision involves the evaluation of risk, economy of effort, timing and limitation of resources.

*Implementation and verifying the decision helps highlight deviations and assists in taking corrective actions in time.

(Suggested answers for the Business Laws and Management paper of the Foundation Course of the Institute of Company Secretaries of India examination conducted in December 2000.)

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