CONTRACTS-II 1

2 VIJAY LAW SERIES

Contents
I. INDEX i-ii
II SHORT NOTES INDEX iii-iv
III ESSAY QUESTIONS AND ANSWERS 1-81
IV. SHORT NOTES 82-94
III. DICTIONARY OF CONTRACTS-II 95-100
IV. IMPORTANT QUESTIONS 101

Indemnity and Guarantee 1

1 Contract of Indemnity 1
2 Contract of Guarantee 3
3 Contract of Indemnity and Contract of Guarantee 4
4 Liability of Surety 5
5 Continuing Guarantee 7
6 Discharge of Surety 9
7 Rights of Surety 11
Bailment 12
8 Bailment 12
9 Rights and Duties of Bailor 15
10 Finder of lost goods 17
Pledge 19
11 Pledge 19
12 Agency 23
13 Delegatus non potest delegare 26
14 Creation of agency 30
15 Ratification 32
16 Termination of agency 33
The Sale of Goods Act, 1930 35
17 Sale or Contract of sale 35
18 Distinction between Sale and Agreement to Sell 36
19 Goods 38
CONTRACTS-II 3

20 Conditions and Warranties 39

21 Implied Conditions and Warranties 42
22 Caveat emptor 45
23 Transfer of property or Passing of Ownership 47
24 Nemo dat quod non habet or Transfer of Title 49
25 Rights and Duties of the Seller and Buyer 50
26 Unpaid Seller 52
27 Auction Sale 54
The Indian Partnership Act, 1932 56
28 Partnership and Its Essential elements 56
29. Distinction between Partnership firm and Joint
Hindu Family Firm 57
30 Kinds of Partnership 58
31 Law of Partnership is an extension of Law of Agency 59
32 Mode of Determining the existence of Partnership 60
33 Registration of Partnership Firm 62
34 Rights and Duties of Partners 63
35 Relations of Partners to Third Parties 64
36 Minor partner 65
37 Rights and liabilities of Incoming and Outgoing Partners 67
38 Dissolution of Partnership and Firm 68
The Negotiable Instrument Act, 1981 71
39 Negotiable Instrument and its Special
characteristics 71
40 Promissory note 72
41 Bill of Exchange 74
42 Cheque 75
43 Crossing of Cheque 77
44 Holder in Due Course 79
45 Dishonour of a Cheque 80
4 VIJAY LAW SERIES

CONTRACT OF INDEMNITY
Section-124

CONTRACT OF INDEMNITY: Indemnity means ‘to compensate’ or ‘to make

good the loss’. Indemnifier is a promisor and Indemnity-holder is a prom-
isee. According to Section 124 Contract of Indemnity is ‘A contract by
which one party promises to save the other party from loss caused to
him by the conduct of the promisor himself, or by the conduct of any
other person’. Illustration: A contracts to indemnify B against the conse-
quences of any proceedings, which C may take against B in respect of a
certain sum of 200 rupees. This is a contract of indemnity.
A person who promises to indemnify is called ‘indemnifier’ and the person
to whom the promise of indemnity is made is called ‘indemnity-holder’ or
‘indemnified’. It is a protection against loss. This section applies only when
the loss is caused by human agency. Hence, a contract of insurance in
which insurer promises to pay compensation in the even of loss by fire is not
covered by the definition of Section 124, but they are valid contracts under
Section 31. Promise to indemnify may be express or implied under English
law. Illustration: B says to the shopkeeper-‘let A have the goods, I will
see you paid’. This is a contract of indemnity.
Essentials:
1. There must be two parties
2. There must be a promise to save the other party from loss
3. The loss may be due to promisor himself or any other person.
4. The contract must fulfil all the essentials of a valid contract.
Rights of Indemnity Holder (Promisee): Section 125
1. Right to recover damages
2. Right to recover costs
3. Right to recover sums paid under compromise
CONTRACTS-II 5

4. Right to sue for specific performance of the contract.

Letter of credit: A letter of credit deals with bargain between the banker
and the vendor of the goods which imposes on the banker an absolute obli-
gation to pay. An obligation under an irrevocable letter of credit to pay, his
buyer-customer cannot instruct him not to pay. A letter of credit sometimes
looks like and is analogous to a contract of guarantee.
Liability of Indemnifier: Under English Law no action can be taken
against the indemnifier until the indemnity-holder had suffered actual loss.
Under Indian law, a person must be indemnified before he can be indem-
nified.
Gajanan Moreshwar v. Moreshwar Madan AIR 1942 Bom 302 at 304
the Bombay High Court held that if the indemnified has incurred a liability
and that liability is absolute, he is entitled to call upon the indemnifier to
save him from that liability and to pay it off. This judgement was also
recommended by the Law Commission in its 13th report on Indian Con-
tract Act, 1872
Oriental Insurance Co. Ltd v. Meena Variayal and Others 2007 (3)
ALD 99 (SC) a regional manager of a company died in an accident when he
was using the car given to him by the company. The Court held that in the
absence of any special contract relating to indemnity, the insurance com-
pany is not liable to indemnify

CONTRACT OF GUARANTEE
CONTRACT OF GUARANTEE: Guarantee means assurance or promise. Ac-
cording to Section 126 Contract of Guarantee is: “A contract of guaran-
tee’ is a contract to perform the promise, or discharge the liability, of a third
person in case of his default.” Con ract of guarantee is also known as
‘contract of surety-ship’.
The person who gives the guarantee is called the ‘surety’, the person in
respect of whose default the guarantee is given is called ‘principal debtor’,
and the person to whom the guarantee is given is called the ‘creditor’. A
guarantee may be either oral or written. (S126) It may be expressed or
even be implied. A contract of guarantee must be supported by considera-
tion. e.g. A gives a loan of Rs 10000 to B and C promises to A that if B
does not repay loan, he (C) will pay. This is a contract of guarantee. Here
6 VIJAY LAW SERIES

B is the principal debtor, C is the surety, and A is the creditor.

Essentials of Guarantee
1. There must be an existing recoverable principal debt or
2. There must be duty to perform an obligation
3. Primary liability in some person
4. There must be tripartite agreement
5. Concurrence of all the three parties
6. Essentials of a valid contract must be fulfilled
7. There must be consideration (Section 127)
8. Writing is not necessary but in England it must be in writing
A guarantee for the past and future debt is invalid but it is enforceable only
when some further debt is incurred after the guarantee. All the three parties
to the contract of guarantee must accept the terms of contract. There must
be a primary liability in some person other than the surety. There is no
contract of guarantee without an element of ‘liability’. Minor is an excep-
tion to such rule. The liability of the principal debtor is primary and the
liability of the surety is secondary. The principle debtor is liable only when
there is a default. On failure of principal debtor, the money is claimed from
the surety and the surety executes promissory note, he becomes a principal
debtor.
Banks and Contract of guarantee: Sometimes, banks on behalf of a
party in a contract may give ‘performance guarantee’ which is otherwise
known as ‘performance bond’. Banks are bound by such undertaking.
BSES Ltd. v. Fenner India Ltd. and another 2006 SCC 728 The Su-
preme Court held that the bank is bound to pay according to the tender of its
guarantee. The relation between the supplier and the customer is immate-
rial.
Consideration for Guarantee: Section 127: According to Section 127
anything done, or any promise made, for the benefit of the principal debtor,
may be a sufficient consideration to the surety for giving the guarantee.
Like every other contract, a contract of guarantee should also be sup-
ported by some consideration. Thus, where a loan is given or goods sold
on credit on the basis of a guarantee that is sufficient consideration. A
guarantee without consideration is void.
CONTRACTS-II 7

Shortnotes Index
Active partner 84 Delegatus non potest delegare 87
Actual delivery 84 Delivery of possession 14
Agency 84 Discharge of surety 87
Agency arising after the event 32 Dishonour of a cheque 87
Agency by estoppel 84 Dissolution 88
Agency by express agreement 30 Dissolution of partnership 68
Agency by holding out 84 Doctrine of Relation Back 88
Agency by implied agreement 31 Dormant partner 88
Agency by necessity 84 Effect of ratification 33
Agency by operation of law 32 Existing goods 38
Agency by ratification 31 Expost facto agency 32
Ascertained goods 38 Factor or Mercantile agent 88
Auction sale 84 Finder of lost goods 88
Bailment 85 Future goods 88
Bailment for Hire 15 General agent 88
Bailment for Reward 15 General crossing 78
Bailment without reward 15 Generic goods 39
Bill of Exchange 85 Goods 88
Broker 85 Goodwill 89
Caveat emptor 85 Gratuitous Bailment 89
Caveat venditor 85 Holder 89
Cheque 85 Holder in due course 89
Classification of agents 23 Implied authority 89
Co-agent 85 Implied bailment 89
Commission agent 86 Implied Conditions 90
Condition 86 Implied warranty 90
Conditions and warranties 86 Incoming partner 67
Constructive delivery 86 Irrevocable agency 34
Contingent goods 39 Letter of credit 90
Continuing guarantee 86 Liability of Co-surety 07
Contract of Guarantee 86 Liability of Indemnifier 02
Contract of indemnity 87 Liability of Surety 90
Contract of sale of goods 87 Lien 90
Crossing 87 Limited partnership 58
Damping 55 Minor partner 90
Del credere agent 87 Mutual Agency 90
8 VIJAY LAW SERIES

Table of Cases
A. Subash Babu v. State of A.P 2011 88
Akbar Sheikh and others v. State of West Bengal 2009 17
Anuradha Kshirasagar v. State of Maharastra 1991 97
Arjuna v. State of Orissa 1969 80
Asharam and Another v. State of U.P. 2007 80
Arvind Kumar & Another v. State of M.P. 2007 33
Attorney General v. Lachma Devi, 1986 10
B N. Srikantiah v. Mysore State 1958 48
Bachan Singh v. State of Punjab, 1980 10
Baladin v. State 1956 40
Baldevji v. State of Gujarat 1979 52
Balkrishna Shetty v. State of Mysore 1966 42
Balwant Singh v. State of Punjab 1995 38
Barendra Kumar Ghosh v. King Emperor 1924 14
(Postmaster’s Murder Case) 1924 14
Basudev v. State of Pepsu 1956 29
Bhalchandra v. State of Maharashtra 1968 57
Bidhuti Bhusan v. Bhuban Ram 1918 43
Byomkesh Battacharya v. L.N. Datta 1978 80
C.V. Govindappa and Others v. State of Karnataka 1988 93
CBI v. Kishore Singh 2011 49
Chahat Khan v. State of Haryana 1972 48
Chaman Lal and Others v. State of Punjab and Another 2009 36
Chirangi v. State 1952 21
Chokkalingam Pillai v. State 1912 71
Dara Singh v. Republic of India 2011 36
Darshan Singh v. State of Punjab and another 2010 32
Deep Chand v. State of Rajasthan 1961 59
Devendra and others v. State of U.P. and another 2009 78
Devi Lal v. State of Rajasthan 2008 54
Dhanonjoy v. Provat Chandra Biswas 1934 82
Dr. Vimla v. Delhi Administration 1963 86
Gabbu v. State of M.P. 2006 65
Ganesh Chandra v. Jiw Raj 1965 30
Ganesh D. Savarkar 1909 37
Ghanshyam Misra v. State 1957 68
CONTRACTS-II 9

Shortnotes

A
bduction:Abduction Abetment by illegal omission:
means taking away a When a person is bound legally to do
person illegally by force or a thing but deliberately omit doing his
deception. According to section 362 duty, then the person will be liable for
whoever by force compels, or by any abetment by illegal omission.
deceitful means induces, any person Abetment by instigation: It is an
to go from any place is said to ab- offence of abetment to provoke, in-
duct that person. Abduction may be cite, urge or encourage another to do
committed against a person of any age a crime. Mere advice is not an abet-
Abduction is an auxiliary (helping) act.
ment active suggestion or stimulation
Abetment: Abetment means encour- to commit crime amounts to instiga-
aging or instigating to commit a crime. tion. .
A person who helps or encourages
Accident: Accident means an unex-
another to commit a crime is called pected act which results injury to an-
an abettor. Eg: A encourages “B” other. A man is not criminally respon-
to kill “C”. A is an abettor.It is an of- sible for unintended and unknown
fence to encourage or instigate an- consequences of his lawful acts done
other to commit crime. Criminal law
in a lawful manner, by a lawful
punishes all those who support and en-
means, with proper care and caution.
courage the other to commit crime.
Act of public servant: Culpable ho-
Abetment by Aid: Aiding means micide is not a murder if a public ser-
assisting or facilitating the commis-vant or a person helping the public
sion of crime. It is an offence to as-
servant exceeds the power given to
sist or supply a thing which facilitate
him and if the public servant exceeds
the commission of crime by another. the power given to him by law and
Abetment by Conspiracy: It is an causes death by an act, while dis-
offence of abetment to engage with charging the official duties with good
one or more persons in a conspiracy faith, without any ill intention, it is not
to commit an offence. Mere agree- a murder. It is only culpable homi-
ment is not sufficient there must be cide not amounting to murder
an agreement between one or more Actus non facit reuim, nisi mens
persons to do a legal act by illegal sit rea : it means ‘the act itself does
means, or to do an illegal act. not constitute crime unless done with
10
Dictionary
Abandon: leave, forsake
Aberration: mental disorder
Abolish: do away with, annul
Abortion: miscarriage
Absolute: perfect, unconditional
Abusing: misuse
Accessories:partners in crime
Accompany: go with, follow
Accomplice: guilty associate
Accomplishment: completion
Accord: agreement
Accost: speak to someone
Accusation: allegation , blame
Accused: charged with crime
Acquittal: discharge
Addicted: habituated
Administered: given
Admissible: acceptable ,valid
Affidavit: a written statement
Affray: quarrel , fight
Aggravated: make worse
Aiding: help ,assist
Amputation: cutting of limb
Annoy: trouble
Annoyance: vexation , trouble
Apology: begging pardon
Appellants: one who appeals
Apprehension: fear
Appropriate: use for oneself
Arbitrator: umpire
Arrears: balance, still due
Assault: attack
Assent: consent
Atrocities: cruel acts
Attempt: trial, behaviour
Auxiliary: helping
VIJAY LAW SERIES
Averment: assent, affirm
Bad faith: ill will
Bailable: which can released under
security
Barbarous: uncivilized ,rude
Battery: beating
Bigamy: marrying somebody
while being married to somebody else
Blackmail: extortion of money
by threats
Blasphemous: grossly irreligious
Bonafide: good faith
Bonafide belief: faith of goodness
Breach of duty: violation of
responsibility
Breach of trust: violation of belief
Burden of proof: responsibility to
prove
Bystander: spectator
Capital punishment: death
punishment
Cattle: cows, sheep and other
domestic animals
Censure: blame, fault
Cessation of motion: end of
movements
Chastity: sexual purity, sexual
morality
Cheating: deceive ,falsification
Circumstantial evidence: proof
based on inference
Co-conspirators: co-member of
criminal plan
Coercion: compulsion ,force
Cognizable offence: crime falling
under judicial notice
CONTRACTS-II 11

Reference Books

Author Title, Edition, Publisher and Place

Achuthan Pillai P.S Criminal Law (1995) Eastern

Book Co, Lucknow.
Gandhi B.M Indian Penal Code (1996), Eastern
Book Co, Lucknow
Gaur. K.D A Text Book on the Indian Penal
Code (1998), Universal, Delhi.
Gaur. K.D Criminal Law: Cases and Materi-
als (1999), Butterworths, India
Hidayathullaw, M., et.al., Ratanlal and Dhirajlat’s The
Indian Penal Code (1994 reprint),
Wadhwa & Co., Nagpur.
Ratanlan-Dhirajlal Indian Penal Code (1994 reprint)