Section 11 of the Indian Contract Act, 1872 contains provisions relating to persons incompetent to contract. (Refer study material.)

The term `damages' implies the monetary compensation for the loss suffered by the aggrieved party as a result of breach by the other party. The decision in Hadley vs Baxendale laid down two rules: i) general damages for loss which arises naturally in the usual course of things from such breach; and ii) special damages for loss which arises on account of the unusual circumstances affecting the plaintiff. Thus, damages could be ordinary, special, exemplary or nominal. (Refer study material for details.)

Section 13 of the Sale of Goods Act provides circumstances under which a contract is not avoided even on account of breach of a condition:

i) Where a contract of sale is subject to any condition to be fulfilled by the seller, the buyer may waive the condition;

ii) Where the buyer elects to treat the breach of the condition as breach of warranty;

iii) Where the contract of sale is not severable and the buyer has accepted goods or part thereof; and

iv) Where the fulfilment of any condition or warranty is excused by law owing to impossibility or otherwise.

Explanation 1 of Section 6 of the Indian Partnership Act provides that sharing of profits or gross returns arising from property by persons holding a joint or common interest in that property does not of itself make such persons partners. The sharing of profits is a, prima facie, evidence of partnership.

The true test in determining whether a partnership exists or not is to see whether the relationship of principal and agent exists between the parties. There must be mutual agency relationship between the partners (Cox vs Hickman). It implies that every partner is the agent of all others and all others are his agents as far as the business of the firm is concerned. Every partner is bound by acts of others and all others are bound by his acts (Section 18).

Agreements void

BRIEFLY state the various agreements that are expressly declared to be void under the Indian Contract Act.

The following agreements are expressly declared to be void under the Indian Contract Act, 1872: i) by incompetent parties (Section 11); ii) under mutual mistake of fact material to the agreement (Section 20); iii) with unlawful consideration or object (Section 23); iv) the consideration of which is unlawful in part (Section 24); v) without consideration subject to exceptions (Section 25); vi) in restraint of marriage (Section 26); vii) in restraint of trade subject to exceptions in the Indian Contract Act and the Indian Partnership Act (Section 27); viii) in restraint of legal proceedings (Section 28); ix) the meaning of which is uncertain (Section 29); x) ones that are wagering (Section 30); and xi) to do impossible acts (Section 56).

The candidates may write short (2-3 lines) explanatory statements in respect of each such agreement.

Contract performance

WHAT is meant by performance of a contract? By whom can the contract be performed?

When both the parties have performed their legal obligations arising out of the contract, the contract is said to be discharged by performance. Section 37 provides that the parties to a contract must either perform or offer to perform their respective promises. It means the performance may be actual or attempted performance (tender of performance).

A party is said to have actually performed his promise when he has fulfilled all his obligations under the contract. But when the parties offer to perform their respective promises, it is called tender or attempted performance.

It is the nature of the contract that determines the person by whom it has to be performed.

The promisor: If it was the intention of the parties to any contract that any promise contained therein should be performed by the promisor himself, such promise must be performed by the promisor (Section 40).

The agent: The promisor or his representatives may employ any competent person to perform the promise (Section 40).

Representative: Unless a contrary intention appears from the contract, promises bind the representatives of the promisors in case of death of the promisors before performance (Section 37).

Third parties: When a promisee accepts the performance from a third person, he cannot afterwards enforce it against the promisor (Section 41).

In case of a joint promise, the joint promisors or their representatives must jointly perform the promise (Section 42).

Surety versus principal debtor

WHAT are the rights of a surety against the principal debtor and against co-sureties?

A surety has two rights against the principal debtor:

i) Right to be subrogated (Section 140): Subrogation implies the substitution of one person for another. On the discharge of obligations of the principal debtor, the surety steps into the shoes of the creditor. The surety gets subrogated to the rights of the creditor even though such rights against the principal debtor may not be of much use (where the principal debtor becomes insolvent).

In some circumstances, the surety may get certain rights even before payment. In Mamta Ghosh vs United Industrial Bank, where the principal debtor, after finding that the debt became due, started disposing of his properties to prevent seizure by the surety, the court granted an injunction to the surety restraining the principal debtor from doing so.

ii) Right to indemnify (Section 145): In every contract of guarantee, there is an implied promise by the principal debtor to indemnify the surety.

The rights of surety against co-sureties include i) the right of contribution as the co-sureties are liable to contribute equally whether they are co-sureties jointly or severally; ii) where at the time of guarantee, one of the co-sureties receives a security from the principal debtor or, on payment of the debt, he receives surety from the creditor, the co-sureties are entitled to share the benefits of security; iii) where there are co-sureties, a release by the creditor of one of them does not discharge the others neither does it free the surety so released from his responsibilities to other sureties (Section 138).

Short notes

LIABILITIES of joint-promisors: Sections 42-44 contain provisions relating to liabilities of joint promises. Until a contrary intention appears from the contract, all joint promisors, and after the death of any one of them, his representative jointly with survivors must fulfil the promise (Section 42).

When a joint promise is made, the promisee may, in the absence of any express agreement to the contrary, compel any one or more of the joint promisors to perform the whole of the promise. Each of the joint promisors may compel other joint promisors to contribute equally with him to the promise. And if any one of two or more promisors defaults in contribution to the joint promise, the remaining joint promisors should bear the loss arising from such default in equal shares. However, the contribution rule does not apply to principal debtor and surety (Section 43).

The promisee may release any one joint promisors. The release of one of the joint promisors does not release the other joint promisors nor does it free the released promisor from contribution with other promisors (Section 44).

(To be concluded)

(Suggested answers to the May 2003 ICAI (Foundation) paper on mercantile law.)

Article E-Mail :: Comment :: Syndication