BUSINESS LAW – SUBJECT CODE - 3AC

Agreement means a promise and a reciprocal set of promises forming

consideration for each other—Section 2(e). All contracts are agreements but

all agreements are not contracts. CONTRACT = Agreement + Enforceable

by law.

A mutual understanding between two or more legally competent individuals

or entities about their rights and duties regarding their past or future

performances and consideration.

Types of Agreement

1) Express agreement or Express contract

An express contract is a legally binding agreement, the terms of which are

all clearly stated either orally or in writing. For an express contract to come

together there must be an offer made by one of the parties, and acceptance of

that offer by the other party.

Examples: Include the sale of real estate, employment contracts and even

a contract to perform a service.

2) Partnership agreement

A partnership agreement is a contract between partners in a partnership

which sets out the terms and conditions of the relationship between the

partners, including: Percentages of ownership and distribution of profits and

losses. Description of management powers and duties of each partner.

3) Indemnity agreement.

An indemnity agreement is a contract that 'holds a business or company

harmless' for any burden, loss, or damage. An indemnity agreement also

ensures proper compensation is available for such loss or damage.

4) Non-disclosure agreement

A non-disclosure agreement, also known as a confidentiality agreement,

confidential disclosure agreement, proprietary information agreement or

secrecy agreement, is a legal contract between at least.

5) Purchase order

A purchase order is a commercial document and first official offer issued by

a buyer to a seller indicating types, quantities, and agreed prices for products

or services. It is used to control the purchasing of products and services from

external suppliers.

6) Property and/or equipment lease

An equipment lease agreement is a contractual agreement where the lessor,

who is the owner of the equipment, allows the lessee to use the equipment

for a specified period in exchange for periodic payments. The subject of the

lease may be vehicles, factory machines, or any other equipment. Once the

lessor and lessee agree to the terms of the lease, the lessee gets the right to

use the equipment and, in return, makes periodic payments during the

duration of the lease. However, the lessor retains ownership of the equipment

and has the right to cancel the equipment lease agreement if the lessee

contravenes the terms of the agreement or engages in an illegal activity using

the equipment.

Components of an Equipment Lease Agreement

1. Capital Lease

2. Operating Lease

3. Lease duration

4. Financial terms

5. Payment due to the lessor

6. Market value of equipment

7. Tax responsibility

8. Cancellation provisions

9. Lessee renewal options

7) Bill of sale

A bill of sale is a document that transfers ownership of goods from one person

to another. It is used in situations where the former owner transfers

possession of the goods to a new owner.

8) General employment contract

An employment contract is a legally binding document that sets out the

expectations, rights, and obligations that will govern the relationship between

an employer and employee.

Fraud mistake and misrepresentation in business law

According to section 17 of the Indian Contract Act, 1872 “FRAUD” means

and includes any of the following acts committed by a party to a contract, or

by his agent, with intent to deceive another party there to or his agent,

Fraud is any intentional misrepresentation of a material fact, made knowingly

and made with the intent that the other person will rely on the fact. Contract

fraud is a type of fraud where the intentional misrepresentation of a material

fact is made in the formation of the contract.

Difference between Fraud and Misrepresentation

Fraud Mistake

Positive assertion, i.e. an explicit statement of fact by a person of that which

is not true, though he believes it to be true amounts to misrepresentation.

MISREPRESENTATION.

Basis Fraud Misrepresentation

1. Believes false statement to be true NO YES

2. Wrongful intention YES NO

3. Claim damages under law of tort YES NO

What is the difference between mistake and misrepresentation?

Misrepresentation occurs when a person makes an untrue assertion of fact (or

in some cases an omission of fact). It is based on someone's actions. Mistake

is where someone believes that a fact was true when in fact it was not. It is

based on someone's belief.

Free Consent

In the Indian Contract Act, the definition of Consent is given in Section 13,

which states that “it is when two or more persons agree upon the same thing

and in the same sense”. So the two people must agree to something in the

same sense as well. Let’s say for example A agrees to sell his car to B. A

owns three cars and wants to sell the Maruti. B thinks he is buying his Honda.

Here A and B have not agreed upon the same thing in the same sense. Hence

there is no consent and subsequently no contract.

Now Free Consent has been defined in Section 14 of the Act. The section

says that consent is considered free consent when it is not caused or affected

by the following,

1. Coercion

2. Undue Influence

3. Fraud

4. Misrepresentation

5. Mistake

6. Law of agency

7. The law of agency is defined as the ability to act through another. In

most cases, this applies to commercial relationships or contractual

agreements. The most common example of this is in the employer-

employee relationship. The employer is authorizing the employee to

complete work on their behalf.

8. What are the 5 types of agency?

9. The five types of agents include: general agent, special agent, and

subagent, agency coupled with an interest, and servant (or employee).

10. Contract of Agency Meaning

11. Agency is an agreement by which a relation based upon an

expressed or implied. There is one person the agent, who is authorized

to act under the control of and for another, principal in negotiating and

making contract with third person. According to Indian Contract Act,

1872 “Contract of agency is a contract by which a person employs

another person to do any act for himself or to represent him dealing with

third person” In Nepal there is Contract Act 2056 and In India there is

Contract Act 1872 A.D

12. An Agent is defined as a relationship between two parties called

PRINCIPAL and AGENT, whereby, the function of the agent is to

create a contract/s between the principal and third parties( or to act as

the representative of the principal in other ways

13. Agency is the relationship that subsists between the principal and

the agent, who has been authorized to act for him or represent him in

dealing with others. Thus, in an agency, there is in effect two contracts

i.e.

14. a) Made between the principal and the agent from which the agent

derives his authority to act for and on behalf of the principal; and

15. b) Made between the principal and the third party through the

work of the agent.

16. Termination of Agency 17. Mutual Agreement. The agency may be terminated at any time

and at any stage by the mutual agreement between the principal and

his agent. Therefore, the authority of an agent terminates, when the

principal and the agent agree to terminate it.

18. What terminates an agency agreement?

19. Certain events: An agency relationship will

automatically terminate upon the occurrence of certain events. Such

events include death, insanity, or bankruptcy of either the principal

or agent. A court of law will usually step in

and terminate the agency relationship if one of the parties refuses to

do so

20.

21. Sections 154 to 163 of the Contracts Acts states the various ways

an agent’s authority may be terminated.

22. By act of the party

23. a) By mutual consent (both party agree)

24. b) By revocation by Principal

25. c) By renunciation by Agent

26. All the above can be done by giving notice (reasonable notice in

the case of revocation and renunciation)

27. d) By the performance of the contract of agency. This happens

when agency is created for single specific transaction. (sc 154 CA)

28. e) By the expiration of the period fixed/implied in the contract

29. By operation of law

30. By the death of either principal or agent. Because relationship

between principal and agent is confidential and personal. (Sec 161

Illust. CA). Section 162 CA states when the principal dies, the agent

must take all reasonable steps to protect and preserve the interests

entrusted to him.

31. By the subsequent insanity of either principal or agent. A person

of unsound mind cannot enter into contract to appoint an agent or to act

as an agent.

32. By the bankruptcy/insolvency of principal.

33. By the happening of an event which renders the agency unlawful.

This is an application of the doctrine of frustration to contracts. For

agency contracts, there are examples of termination when the principal

becomes an enemy alien because of war or where the subject matter is

lost/destroyed.

34.

35.

36. Negotiable instrument Act material alteration

37. Alteration made to an instrument that adds or deletes any

provision or changes the rights and obligations of any party under it.

38. Any material alteration of a negotiable instrument renders the

same void as against anyone who is a party thereto at the time of making

such alteration and does not consent thereto, unless it was made in order

to carry out the common intention of the original parties; Alteration by

indorsee.

39. What are the effects of material alteration in cheque? 40. Material alteration means to make alter or change some

material parts of the instrument and try to make it a valid created with

the purpose of the nature of that instrument. Due to the effects of

Material Alteration, the said instrument becomes a void. But one thing

we should know that a material alteration is different from filling up a

blank cheque by the payee or holder of the cheque.

41.

42. As per the provision under section 87 of the negotiable instrument

act 1881, it’s clearly defined that any material alteration of a negotiable

instrument renders the same void which makes such alteration without

consent of first parties.

What is negotiable?

Negotiable is used to describe the price of a good or security that is not firmly

established. It is also used to describe a good or security, such as cash, whose

ownership is easily transferable from one party to another. Other words used

to describe negotiable are marketable, transferable or unregistered.

Negotiable Instrument Act, 1881

The Negotiable Instrument Act, 1881 (“the NI Act”) came into being as

an Act to define and amend the law relating to promissory note, bill of

exchange and cheques. The NI Act has been amended time and again to

ensure and enhance the trust in negotiable instruments.

A negotiable instrument is a signed document that promises a sum of

payment to a specified person or the assignee. In other words, it is a

formalized type of IOU: A transferable, signed document that promises to

pay the bearer a sum of money at a future date or on-demand.

What are the four types of negotiable instruments?

There are many types of negotiable instruments. The common ones include

personal checks, traveller’s checks, promissory notes, certificates of deposit,

and money orders.

Who are the parties to a negotiable instrument?

Maker/drawer: the person who makes or executes the note promising to pay

the amount stated therein.

Drawee: The person directed to pay the money by the drawer.

Payee: Payee is the person whose name is written on the promissory note or

bill of exchange or cheque.

Parties’ negotiable instrument

Maker/drawer: the person who makes or executes the note promising to pay

the amount stated therein.

Drawee: The person directed to pay the money by the drawer.

Payee: Payee is the person whose name is written on the promissory note or

bill of exchange or cheque.

What are the four types of negotiable instruments?

There are many types of negotiable instruments. The common ones include

personal checks, traveller’s checks, promissory notes, certificates of deposit,

and money orders.

Material alteration

Any material alteration of a negotiable instrument renders the same void as

against anyone who is a party thereto at the time of making

such alteration and does not consent thereto, unless it was made in order to

carry out the common intention of the original parties; Alteration by

indorsee.

Legal Definition of material alteration

Alteration made to an instrument that adds or deletes any provision or

changes the rights and obligations of any party under it.

QUASI CONTRACT

A quasi-contract is a fictional contract recognised by a court. The notion of a

quasi-contract can be traced to Roman law and is still a concept used in some

modern legal systems.

A quasi contract is a contract that exists by order of a court, not by agreement

of the parties. Courts create quasi contracts to avoid the unjust enrichment of

a party in a dispute over payment for a good or service. In some cases a party

who has suffered a loss in a business relationship may not be able to recover

for the loss without evidence of a contract or some legally recognized

agreement.

A quasi contract is a contract that is created by a court order, not by an

agreement made by the parties to the contract. For example, quasi contracts

are created by the court when no official agreement exists between the

parties, in disputes over payments for goods or services.

Breach of Contract

A breach of contract occurs when one party in a binding agreement fails to deliver according to the terms of the agreement. A breach of

contract can happen in both a written and an oral contract. ... There

are different types of contract breaches, including a minor or material

breach and an actual or anticipatory breach.

Breach of contract: it’s a risk faced by anyone who enters a legal agreement.

If you deal with volumes of agreements (and volumes of types of agreements,

from employment contracts to vendor and customer deals), chances are good

that eventually you will run into a contract that doesn’t deliver on the terms

agreed to by all parties.

1. Material Breach of Contract

A material breach occurs when one party receives significantly less benefit

or a significantly different result than what was specified in a contract.

Material breaches can include a failure to perform the obligations laid out

within a contract or a failure to perform contracted obligations on time.

Minor Breach of Contract

Minor Breach of Contract refers to situations where the deliverable of the

contract was ultimately received by the other party, but the party in breach

failed to fulfill some part of their obligation. In such cases, the party that

suffered the breach may only be able to pursue a legal remedy if they can

prove that the breach resulted in financial losses.

Anticipatory Breach of Contract

A breach need not actually occur for the responsible party to be liable. In the

case of an Anticipatory Breach, an actual breach has not yet occurred, but

one of the parties has indicated that they will not fulfill their obligations under

the contract.

Actual Breach of Contract

An Actual Breach of Contract refers to a breach that has already occurred,

meaning the breaching party has either refused to fulfill their obligations by

the due date or they have performed their duties incompletely or improperly.

How to Reduce Your Risk One way you can reduce your risk of contract breaches is by drafting the best

possible agreements – and businesses have a helpful, but sometimes

forgotten tool that can help: legacy and archived contracts.

Sub agent and substituted agent

1. Control: A sub-agent is the agent of the original agent as he works under

the control of the agent whereas; a substituted agent is the agent of the

principal because he works under the control of the principal. 2.

What is the meaning of sub agent?

Sub-agent (Sub-agency) is a real estate term in the United States and Canada

describing the relationship which a real estate broker and his/her agents have

with a buyer of a business, home, or property.

Meaning of Sub Agent [S.191]- According to S. 191- A "Sub-agent" is a

person employed by, and acting under the control of, the original agent in the

business of the agency. Thus Sub Agent is appointed by original agent and

works under control of original agent. In following exceptional circumstance

the sub agent can be appointed by original Agent. (i) Nature of work (ii)

Custom of trade (iii) Ministerial work (iv) Unforeseen emergencies (v)

Authorised by principal

Distinction between Subagent and Substituted Agent Sub-Agent has been

defined u/s 191 where as substituted agent has been defined u/s S.194.

Distinction between Sub-Agent and Substituted Agent are as follows:

1- Relating to Central- Sub-agent works under original agent whereas

substituted agent works under direct control of the Principal.

2- Relating to liability of Sub agent –Sub agent is liable to the original

agent and not to the Principal, where as substituted agent is liable to the

Principal alone

3- Relating to liability of original Agent:- For the acts of the sub-agent the

original agent is liable to the Principal where as for the acts of the

substituted agent the original agent is not liable to the principal.

What is agent and agency?

Agent in the sense "A person or company that provides a particular service"

chiefly denotes a person; it denotes a company only by extension. By

contrast, agency in the sense "A business or organization providing a

particular service on behalf of another business, person, or group" never

denotes an individual.

The Sale of Goods Act 1930

Contracts or agreements related to the sale of goods are governed under the

Sale of Goods Act 1930. This act came into effect on the 1st of July 1930 in

the whole of India except the state of Jammu and Kashmir.

Definitions of Important Terms

Sale of commodities constitutes one of the important types of contracts under

the law in India. India is one of the largest economies and also a great country

where and thus has adequate checks and measures to ensure the safety and

prosperity of its business and commerce community. Here we shall explain

The Sale of Goods Act, 1930 which defines and states terms related to the sale

of goods and exchange of commodities.

What is meant by sale of goods?

A contract by which a seller transfers or agrees to transfer the ownership

of goods to a buyer in exchange for a money price. Much of the law

governing the sale of goods is codified in the Sale of Goods Act 1979, as

amended by the Sale and Supply of Goods to Consumers Regulations 2002.

Indian Sale of Goods Act 1930

The Indian Sale of Goods Act, 1930 is a Mercantile Law, which came into

existence on 1 July 1930, during the British Raj, borrowing heavily from the

Sale of Goods Act 1893.

I. Buyer and Seller

As per the sec 2(1) of the Act, a buyer is someone who buys or has agreed to

buy goods. Since a sale constitutes a contract between two parties, a buyer is

one of the parties to the contract.

2. Goods

One of the most crucial terms to define is the goods that are to be included in

the contract for sale. The Act defines the term “Goods” in its sec 2(7) as all

types of movable property.

1. Existing Goods

2. Ascertained Goods

3. Unascertained Goods:

4. Future Goods

5. Contingent Goods

Unlawful and illegal Agreement

There is a difference between illegal and unlawful agreements. Illegal

agreements are those considerations or object of which is not legal as well as

punishable in nature for example, agreement to murder someone hence,

every illegal agreement is unlawful but every unlawful agreement is

not illegal.

What is difference between unlawful and illegal?

Illegal means that it is forbidden by a law that has been

passed. Unlawful means that it is not authorised by law because no such law

has been passed.

What is an Illegal Contract?

An illegal contract prevents claims based on a contract when a party

seeks to enforce an agreement which the law prohibits. The illegality

operates primarily as a defence to legal claims.

Types of Illegality in Contracts

The sort of illegality (see above) which makes a contract illegal can arise

through:

statutory illegality: Contracts illegal by statute include primary

legislation and those that offend delegated legislation, by doing

something outlawed by the statute

Common law / public policy: It’s in the interests of society as a

whole that certain types of contracts aren’t enforced. They include for

example, contracts which involve:

*criminal conduct: such as to conceal a crime, criminal conspiracies,

misbehaviour in public office and receiving compensation for a crime

over and above the loss or injury suffered as a result of it

*Moral turpitude: That’s serious immorality.

For example, contracts to commit a fraud are illegal, such as:

*Fraud over shareholders of a company or business bribery in all of its

forms

*Intention to commit a tort

*Use of land or other property for an unlawful *Purpose *Restraints of trade, which are restrictive covenants which go too far.

For example attempts to: restrict on free movement of employees,

workforces and sellers of businesses prevent or obstruct competition in

industries, including offences which attract a fine or penalty

*penalty clauses, which seek to impose an obligation to pay a level of

damages in excess any commercial justification

*interference with the administration of justice: including restraints and

interference with evidence witnesses may give to a court

Contracts that contravene:

1. a statute is illegal for a simple reason: the legislature said that the

type of contract is not permitted

2. public policy are illegal because the public interest overrides private

contractual rights.

Definition of wagering contract

A contract by which a promisor agrees that upon the occurrence of an

uncertain event or condition he or she will render a performance for which

there is no agreed consideration exchanged, and under which the promisee

or the beneficiary of the contract is not made whole for any loss caused by

such occurrence (as in options, insurance contracts, trading in futures, or

betting contracts)

a wagering agreement is an agreement under which money or money worth

is payable, by one person to another on the happening or non happening of

some future uncertain event may take many forms in real life but the common

features of a bet would be found in each form.

What is consideration in the law of contract?

Thus, consideration is a promise of something of value given by a promissor

in exchange for something of value given by a promisee; and typically the

thing of value is goods, money, or an act.

Something of value (eithera promise, an act or an object) that a promisor

receives from a promisee in return for his promise. Bilateral Contract: A

contract where the parties exchange a promise for a promise.

Enforcing any legal contract requires it to have an element of consideration

included in it. In simple words, it is nothing but a price that the promisee

agrees to pay to the promisor. Now, this price can be paid as a benefit to the

promisor and/or a loss or detriment to the promisee.

Types of Consideration

Money.

Services.

Personal property.

Real property.

Promise to act.

Promise to refrain from acting.

What are the elements of consideration?

Elements of consideration in business law include items of value offered by

each party of a contract to the other. Consideration can be currency or

property, but it can also be a promise to either do or refrain from doing a legal

act.

What is the function of consideration?

In addition to providing evidence that a contract exists, consideration also has

the cautionary function of guarding the promisor against ill-considered

action; the deterrent function of discouraging transactions of questionable

utility; and a channelling function of enabling interested persons to

distinguish.

What is Mistake of Law?

Effect of mistakes as to law A contract is not voidable because it was caused

by a mistake as to any law in force in India, but a mistake as to a law not in

force in has the same effect as a mistake of fact.

A contract is not voidable because it was caused by a mistake as to any law

in force in 1India, but a mistake as to a law not in force in 1[India] has the

same effect as a mistake of fact."

Exceptions to Mistake of Law

1) Mistake vis-a-vis a Foreign Law

A mistake in understanding a foreign law is to be treated exactly like a

mistake of fact under the provisions of Section 21 of the Act. The thought

process behind this provision is that the parties in a contract cannot be

expected to know all of the provisions of any foreign law and what the foreign

law means. The law of a foreign land is not known by everyone, hence if in

case the parties in a contract make a mistake of the foreign law, the contract

is to be considered void in nature.

2) Mistake vis-a-vis Private Rights

The private rights possessed by an individual depend on the rules of law as a

matter of fact since any reasonable man cannot be expected to know the full

private rights of another. Therefore, even for parties in a contract, it is not

possible for them to know all the private rights possessed by the other party.

What is Mistake of Fact?

A mistake of Fact under Contract Law can be classified into 2 kinds-

1) Bilateral Mistake covered under Section 20

Section 20 of the Act talks about Bilateral Mistake. Section 20 is only

applicable when the following three conditions are fulfilled in a situation:

1. The mistake of fact must be committed by both the parties. Therefore,

the mistake must be mutual.

2. The mistake has to mandatorily be with regards to some fact.

3. The mistake committed by both the parties must be with regards to such

a fact which is essential to the contract.

There are different Types of Bilateral Mistakes:

1) Mistake with regards to the fact of the existence of the subject matter

2) Mistake with regards to fact of the quality of the subject matter

3) Mistake with regards to the fact of the quantity of the subject matter

4) Mistake with regards to the fact of the title of the subject matter

CAPACITY TO BUY & SELL ARTICLE

All persons who are authorized in this Code to obligate themselves, may enter into a contract

of sale, saving the modifications contained in the following articles. Where necessaries are

those sold and delivered to a minor or other person without capacity to act, he must pay a

reasonable price therefor. Necessaries are those referred to in article 290. (1457a) Persons

Who May Enter Into a Contract of Sale As a general rule, all persons, whether natural or

juridical, who can bind themselves, have the legal capacity to buy and sell. Kinds of

Incapacity Absolute Incapacity Relative Incapacity

Absolute Incapacity – pertains to persons who cannot bind themselves (a) Minor (b)

Insane or demented persons (c) Deaf-mutes who do not know how to read and write

Contracts entered into by a minor and other incapacitated persons are voidable.

However, where the

***necessaries are sold and delivered to him without the intervention of the parent or

guardian, he must pay a reasonable price therefor. The contract is therefore valid, but

the minor has the right to recover any excess above a reasonable value paid by him.

*** Necessaries—those things which are needed for sustenance, dwelling, clothing

and medical attendance, in keeping with the financial capacity of the family of the

incapacitated person. Sale of real property by minors who have already passed the

ages of puberty and adolescence and are now in the adult age, when they pretended

to have already reached their majority, while in fact they have not, is valid, and they

cannot be permitted afterwards to excuse themselves from compliance with the

obligations assumed by them or to seek their annulment. This is in accord with the

doctrine of estoppels. 2. Relative Incapacity – where it exists only with reference to

certain persons or class of property (Art. 1490-1491). The prohibition extends to

sales by virtue of legal redemption, compromises, and renunciations.

ARTICLE 1490. The husband and the wife cannot sell property to each other, except:

(1) When a separation of property was agreed upon in the marriage settlements; or (2)

When there has been a judicial separation of property under article 191. (1458a) The

Court decided that sale between common law spouses is null and void because Art.

1490 prohibits sales between spouses to prevent the exercise of undue influence by

one spouse over the other, as well as to protect the institution of marriage. The

prohibition applies to a couple living as husband and wife without the benefit of

marriage, otherwise, the condition of those incurred guilt would turn out to be better

than those in legal union. REASON FOR THE RULE To prevent commission of fraud

or prejudice to third persons To prevent one from unduly influencing the other To

avoid indirect donations ARTICLE 1491. The following persons cannot acquire by

purchase, even at a public or judicial auction, either in person or through the

mediation of another:

(1) The guardian, the property of the person or persons who may be under his

guardianship; (2) Agents, the property whose administration or sale may have

been intrusted to them, unless the consent of the principal has been given;

(3) Executors and administrators, the property of the estate under administration; (4) Public officers and employees, the property of the State or of any subdivision

thereof, or of any government-owned or controlled corporation, or institution, the

administration of which has been intrusted to them; this provision shall apply to

judges and government experts who, in any manner whatsoever, take part in the

sale;

(5) Justices, judges, prosecuting attorneys, clerks of superior and inferior courts,

and other officers and employees connected with the administration of justice, the

property and rights in litigation or levied upon an execution before the court within

whose jurisdiction or territory they exercise their respective functions; this

prohibition includes the act of acquiring by assignment and shall apply to lawyers,

with respect to the property and rights which may be the object of any litigation in

which they may take part by virtue of their profession;

(6) Any others specially disqualified by law. (1459a) (a) Guardian – as to the property

of his ward (b) Agents – as to the property whose administration or sale has been

entrusted to them, unless consent of the principal is given (c) Executors or

administrators – as to the state under their administration (d) Public officers and

employees – as to the property of the State or any subdivision thereof, or of the

government-owned or controlled corporations, the administration of which is

entrusted to them Judges and government experts who take part in the sale of the

property and rights under litigation The prohibition is based on the fiduciary

relationship (based on trust), to prevent fraud and undue and improper influence.

With respect to (b) to (d), the sale shall only be voidable because in such cases only

private interests are affected. The defect can be cured by ratification by the seller.

With respect to (e) and (f), the sale shall be null and void, public interests being

involved therein. (e) Aliens who are disqualified to purchase private agricultural lands

under Art. XII, Secs. 3 and 7 of the Constitution (f) Unpaid seller having a right of lien

or having stopped the goods in transit (g) Officer holding the execution or his deputy

Subject Matter of Contract of Sale

The subject matter of contract of sale is always the goods. This is enshrined in the Sale of

Goods Act, 1930 under Sections 6, 7 and 8. Thus every type of movable property falls

with in the definition f the ”goods” given under Section 2 (7) of the Sales of Goods Act,

1930. Goodwill, patents, trademark, copyrights etc. are considered as

movable properties. Though actionable claims and money have been excluded. Money

here means current money, but not the rare or old coins which

may be treated as goods bought and sold as such.

(a) The Section 6 of the Act lays down following provisions –

(1) The subject matter of contract

must always be goods. The goods may be existing or future goods.

(2) Like an ordinary contract, a contract of sale of goods can

also be made with regard to the goods, the acquisition of which by

seller depends upon a contingency, which may or may not happen.

Thus, a contract for sale of certain cloth to be manufactured by a

certain mill is a valid contract. Such contacts are called contingent

contracts.

(3) When the seller purports by his contract of sale to effect a sale

of future goods, the contract will operate only as

an agreement to sell the goods and not as sale.

(b) Destruction of subject matter of a contract (Sections 7 & 8)

(i) Goods not existing at the time of contract: If at the time a

contract of sale is entered into, the subject-matter of a contract being

speciic goods, which without the knowledge of the seller have been

destroyed or so damaged as not to answer to the description in the

contract, and then the contract is void ab initio. The

Section is

founded on the rule that where both the parties to a contract

are under a mistake as to a matter of fact essential to a contract, the

contract is void.

(ii) Goods perishing after the contract is made: Where there is an

agreement to sell speciic goods and the goods, subsequently without

any fault of the seller or the buyer perish or suffer such

damages as not to answer to the description in the agreement before the risk passes to the buyer, the agreement becomes v

oid (Section 8). It may be noted that this would apply only if the risk had not

passed to the buyer. Generally, risk passes with property i.e.,

when the property in the goods sold has passed to the buyer bears the risk of

subsequent destruction of, or damage to the goods.

Effect of destruction of goods!

In case of contract of sale, the effect of destruction can result in thecontract becoming void if

the contract is impossible to be performed.!In the case of an agreement to sell, the agreement

becomes void ifspecific goods are agreed upon, if there is no fault of the buyer or theseller, and

the goods have not passed to the buyer.There are different ways of determining the price of

goodsThe price may be fixed by contract(i)It may be left to be fixed in an agreed manner(ii)It

may be determined during the course of dealings between the two parties.State which of the

following is true or false, giving reasons.

355•A contract of sale can be absolute or conditional•A person can buy the goods from

himself•The object of a contract of sale must be the transfer of ownership of oods fromone

party to another.•A contract of sale is different from any other contract.•A contract of sale has

to be in writing.•In a sale, the transfer of risk of loss of goods passes to the buyer as soon as

thesale is made.•A sale of goods contract is not an executed contract.•The higher purchase

agreements are governed by the sale of goods act.•Sales tax is not levied in the case of higher

purchase agreement.•Old rare coins, shares and goodwill are examples of goods.Answers: 1.T;

2.F; 3.T; 4.F; 5.F; 6.T; 7.F; 8.F; 9.T; 10.T.

Questions•When does an agreement to sell become a sale? What are the essentialelements of a

valid contract of sale?•Distinguish between a sale and an agreement to sell. Give

examples.•What are the differences between sale and higher purchase agreement?•‘A contract

for work and labour can never be a sale’. Explain.•Goods can mean both existing and future

goods in a contract of sale. Explain.•Discuss and explain the effect of destruction of goods in a

contract of sale.•Define the term price. What are the different ways of price fixation?Practical

Problems•Amita agrees to buy ten leather bags from Bhavna’s shop. Bhavna has manyshops

ofleather bags and many bags in each shop. Is this a sale or anagreement to sell?Answer: This

is an agreement to sell because the exact goods have not beenidentified or ascertained.

ConceptofConditionandWarranty All of us who have bought electronic items or similar devices, ask about the warranty periods. In

some cases, you may have seen that even the warranty is sold separately as a commodity. But does

the law say about it? Here in this section on the concepts of condition and warranty, we will see

the manner in which we can define these terms and also the manner in which they derive their

legality in the light of The Sale Of Goods Act, 1930.

Warranty And Conditions In a contract of sale, parties may make certain statements about the stipulation or the course of

trade. These stipulations in the contract of sale are made with reference to the subject matter of

the sale. These stipulations may either be a condition or in the form of a warranty.

The provisions of the conditions and warranty are provided in the sections 11 to 17 of the Act.

The stipulations are the essence of the contract of sale and a breach of these stipulations provides

a remedy to the grievedparty.

What are Express and Implied Warranties?

Stipulations As To Time – Sec 11

To understand the concept of warranty and conditions, we need to learn about the stipulation as

to time. The stipulation as to time may be with regards to the delivery of goods or it may be with

regards to the payment of theprice.

However, it may be noted that stipulations as to the time of delivery of the goods are usually the

essence of the contract. In Section 11 of the Act, the topic of the stipulation as to time has been

discussed. The Sec 11 states the follows:

Stipulations as to time: Unless a different intention can be ascertained from the contract,

stipulations as to the time of payment are not considered to be of the essence of a contract of sale.

Whether any other stipulation as to time is of the essence of the contract or not will ultimately

depend on the terms of the contract.

This means that whether the stipulations as to the time of payment of the price is of the essence

of the contract or not depends on the terms of the contract. Unless the terms of the contract specify

something different than this.

Conditions A condition is a stipulation essential to the main purpose of the contract, the breach of which gives

the right to repudiate the contract and to claim damages. (Sec 12 (2)). We can understand this

with the help of the following example:

Say ‘X’ wants to purchase a car from ‘Y’, which can have a mileage of 20 km/lt. ‘Y’ pointing at

a particular vehicle says “This car will suit you.” Later ‘X’ buys the car but finds out later on that

this car only has a top mileage of 15 km/ liter. This amounts to a breach of condition because the

seller made the stipulation which forms the essence of the contract. In this case, the mileage was

a stipulation that was essential to the main purpose of the contract and hence its breach is a breach

of condition.

Express and Implied Conditions

Warranty

A warranty is a stipulation collateral to the main purpose of the said contract. The breach of

warranty gives rise to a claim for damages. However, it does give a right to reject the goods or

treat the contract as repudiated. (Sec 12(3)). Let us understand this with the help of an example

below.

A man buys a particular car, which is warranted to be quite to drive and very comfortable. It turns

out that after some days the car starts to make a very unpleasant noise every time it is operated.

Also sitting inside it is also not very comfortable.

Thus the buyer’s only remedy is to claim damages. This is not a breach of the condition but

rather a breach of warranty, because the stipulation made by the seller was only a collateral one.

Identification of a Stipulation as a Condition or Warranty

Whether a stipulation is a condition or a warranty is a very important aspect to have the

knowledge about. A stipulation in a contract of sale is either a condition or is a warranty

depending in either case on the construction of the contract. A stipulation may be a condition,

though called a warranty in the contract.

Doctrine of Caveat Emptor “Caveat Emptor” is a Latin phrase that translates to “let the buyer beware”. What exactly does this mean? Does the seller have no responsibilities? The answers lie in the Doctrine of Caveat Emptor. Let us learn more about it along with its exceptions.

The Doctrine of Caveat Emptor

The doctrine of Caveat Emptor is an integral part of the Sale of Goods Act. It translates to “let the buyer beware”. This means it lays the responsibility of their choice on the buyer themselves.

It is specifically defined in Section 16 of the act “there is no implied warranty or condition as to the quality or the fitness for any particular purpose of goods supplied under such a contract of sale“

A seller makes his goods available in the open market. The buyer previews all his options and then accordingly makes his choice. Now let’s assume that the product turns out to be defective or of inferior quality.

This doctrine says that the seller will not be responsible for this. The buyer himself is responsible for the choice he made.

So the doctrine attempts to make the buyer more conscious of his choices. It is the duty of the buyer to check the quality and the usefulness of the product he is purchasing. If the product turns out to be defective or does not live up to its potential the seller will not be responsible for this.

Let us see an example. A bought a horse from B. A wanted to enter the horse in a race. Turns out the horse was not capable of running a race on account of being lame. But A did not inform B of his intentions. So B will not be responsible for the defects of the horse. The Doctrine of Caveat Emptor will apply.

However, the buyer can shift the responsibility to the seller if the three following conditions are fulfilled.

if the buyer shares with the seller his purpose for the purchase

the buyer relies on the knowledge and/or technical expertise of the seller

and the seller sells such goods

Learn more about Sale and Agreement of Sale here in detail

Exceptions to the Doctrine of Caveat Emptor

The doctrine of caveat emptor has certain specific exceptions. Let us take a brief look at these exceptions.

1] Fitness of Product for the Buyer’s Purpose When the buyer informs the seller of his purpose of buying the goods, it is implied that he is relying on the seller’s judgment. It is the duty of the seller then to ensure the goods match their desired usage.

Say for example A goes to B to buy a bicycle. He informs B he wants to use the cycle for mountain trekking. If B sells him an ordinary bicycle that is incapable of fulfilling A’s purpose the seller will be responsible. Another example is the case study of Priest v. Last.

2] Goods Purchased under Brand Name When the buyer buys a product under a trade name or a branded product the seller cannot be held responsible for the usefulness or quality of the product. So there is no implied condition that the goods will be fit for the purpose the buyerintended.

3] Goods sold by Description When the buyer buys the goods based only on the description there will be an exception. If the goods do not match the description then in such a case the seller will be responsible for the goods.

4] Goods of Merchantable Quality Section 16 (2) deals with the exception of merchantable quality. The sections state that the seller who is selling goods by description has a duty of providing goods of merchantable quality, i.e. capable of passing the market standards.

So if the goods are not of marketable quality then the buyer will not be the one who is responsible. It will be the seller’s responsibility. However if the buyer has had a reasonable chance to examine the product, then this exception will not apply.

5] Sale by Sample If the buyer buys his goods after examining a sample then the rule of Doctrine of Caveat Emptor will not apply. If the rest of the goods do not resemble the sample, the buyer cannot be held responsible. In this case, the seller will be the oneresponsible.

For example, A places an order for 50 toy cars with B. He checks one sample where the car is red. The rest of the cars turn out orange. Here the doctrine will not apply and B will be responsible.

6] Sale by Description and Sample If the sale is done via a sample as well as a description of the product, the buyer will not be responsible if the goods do not resemble the sample and/or the description. Then the responsibility will fall squarely on the seller.

7] Usage of Trade There is an implied condition or warranty about the quality or the fitness of goods/products. But if a seller deviated from this then the rules of caveat emptor cease to apply. For example, A bought goods from B in an auction of the contents of a ship. But B did not inform A the contents were sea damaged, and so the rules of the doctrine will not applyhere.

8] Fraud or Misrepresentation by the Seller This is another important exception. If the seller obtains the consent of the buyer by fraud then caveat emptor will not apply. Also if the seller conceals any material defects of the goods which are later discovered on closer examination then again the buyer will not be responsible. In both cases, the seller will be the guilty party.

Solved Question on Doctrine of Caveat Emptor

Q: While selling mangoes to A, the seller B did not mention that these mangoes will not ripen. This meant A could not make ice cream for his restaurant the next day. Is the seller at fault?

Ans: No, the seller is not at fault. A did not mention his reason for buying the mangoes. Here the rule of ‘let the buyer beware’ will apply.

Transfer of Property in Goods

The property in the goods is said, to be transferred from the seller to the buyer when the latter acquires the proprietary rights over the goods and the obligations linked thereto. 'Property in Goods' which means the ownership of goods, is different from ' possession of goods' which means the physical custody or control of the goods.

The transfer of property in the goods from the seller to the buyer is the essence of a contract of sale. Therefore the moment when the property in goods passes from the seller to the buyer is significant for following reasons:

1. Ownership -- The moment the property in goods passes, the seller ceases to

be their owner and the buyer acquires the ownership. The buyer can exercise the proprietary rights over the goods. For example, the buyer may sue the seller for non-delivery of the goods or when the seller has resold the goods, etc.

2. Risk follows ownership -- The general rule is that the risk follows the ownership, irrespective of whether the delivery has been made or not. If the goods are damaged or destroyed, the loss shall be borne by the person who was the owner of the goods at the time of damage or destruction. Thus the risk of loss prima facie is in the person in whom the property is.

3. Action Against Third parties -- When the goods are in any way damaged or destroyed by the action of third parties, it is only the owner of the goods who can take action against them.

4. Suit for Price - The seller can sue the buyer for the price, unless otherwise agreed, only after the gods have become the property of the buyer.

5. Insolvency - In the event of insolvency of either the seller or the buyer, the question whether the goods can be taken over by the Official Receiver or Assignee, will depend on whether the property in goods is with the party who has become insolvent.

Essentials for Transfer of Property -- The two essentials requirements for transfer of property in the goods are:

1. Goods must be ascertained: Unless the goods are ascertained, they (or the property therein) cannot pass from the seller to the buyer. Thus, where there is a contract for the sale of unascertained goods, no property in the goods is transferred to the buyer unless and until the goods are ascertained

2. Intention to PASS Property in Goods must be there: In a sale of specific or ascertained goods the property in them is transferred to the buyer at such time as the parties to the contract intend it to be regard shall be had to the terms of the contract, the conduct of the parties and the circumstances of the case.

SUPPLY ON APPROVAL BASIS

Contents

Sale on approval

Sale on Approval is a business arrangement wherein an individual or company who is interested in purchasing a specific item is allowed to use the item for a given length of time. At the end of that time, if the individual is satisfied with the item, they agree to purchase it. However, if the individual is unsatisfied for any reason, they are allowed to return the item and are not committed to purchasing it.

Supply on approval basis

The GST does provide for supply of goods or services or both. No sale is involved. Title as well as possession both has to be transferred for a transaction to be considered as a supply of goods. In case title is not transferred, the transaction would be treated as supply of service in terms of Schedule II (1) (b). In some cases, possession may be transferred immediately but title may be transferred at a future date like in case of sale on approval basis or hire purchase arrangement. Such transactions will also be termed as supply of goods.

Transitional provisions

Section 142 of the Central Goods and Services Tax Act, 2017 provides for miscellaneous transitional provisions. Section 142(12) provides that where any goods sent on approval basis, not earlier than six months before the appointed day, i.e., 01.07.2017, are rejected or not approved by the buyer and returned to the seller on or after 01.07.2017, no tax shall be payable thereon if such goods are turned within six months from 01.07.2017 (i.e., 31.12.2017). The said period of six months may be extended by the Commissioner for a further period not exceeding two months on sufficient cause.

The tax shall be payable by the person returning the goods if such goods are liable to tax under this Act and are returned after a period specified in this section. Likewise the tax shall be payable by the person who has sent the goods on approval basis are liable to pay tax under this Act and are not returned within a period specified in section 142(12).

Issues in goods sent approval basis

There are various issued involved in goods sent for approval basis. For example the suppliers

of jewellery who registered in one State are to visit to other States and required to carry the goods along with him for the approval of the recipient. In such cases if the jewellery is approved by the buyer, then the supplier will issue a tax invoice only at the time of supply. Since the suppliers are not able to ascertain their actual supplies before hand and while ascertainment of tax liability in advance is a mandatory requirement for registration as a casual taxable person, the supplier is not able to register as a casual taxable person. Besides, such jewelleries may also be carried within the same State for the purpose of supply.

Clarification by CBEC

Vide Circular No. 10/10/2017-GST,dated 18.10.2017 the CBEC considered the various communications received from the stakeholders in respect of the said subject, the clarified the above issue for the purpose of uniformity in the implementation of the Act.

The circular analyzed the provisions of Rule 55. Rule 55(1)(c) of Central Goods and Services Tax Rules, 2017 provides that the supplier shall issue a delivery challan for the initial transportation of goods where such transportation is for reasons other than by way of supply. Rule 55(3) provides that the said delivery challan shall be declared as specified in Rule 138. Rule 55(4) provides that where the goods being transported are for the purpose of supply to the recipient but the tax invoice could not be issued at the time of removal of goods for the purpose of supply, the supplier shall issue a tax invoice after delivery of goods.

The Circular indicates that a combined reading of the above said provisions made it clear that the goods that are taken for supply on approval basis can be moved from the place of business of the registered supplier to another place-

within the same State; or to a place outside the State

on a delivery challan with the e-way bill wherever applicable. The invoice may be issued at the time of delivery of the goods. For this purpose, the person carrying the goods for supply of such goods can carry the invoice book with him so that he can issue the invoice once the supply is fructified.

The Circular further clarified that all such supplies, where the supplier carries goods from State to another and supplies them in a different State, will be inter-State supplies and attract integrated tax in terms of Section 5 of the Integrated Goods and Services Tax Act, 2017.

It is also clarified that this clarification would be applicable to all goods supplied under similar situations

Types of Contracts (With Regard To Delivery Of Goods)

There are various types of contracts from the point of view of the delivery of goods.

1. F.A.S. or F.A.R. Contract - F.A.S. stands for 'Free Alongside Ship' and F.A.R. stands for 'Free Along with Rail'. Under FAS or far contracts, the seller is required to deliver the goods alongside the ship or rail named in the contract and to notify the buyer that the goods have been so delivered. The property in the goods passes to the

buyer when the seller delivers the goods alongside the ship or rail. Thereafter, it is the buyer's duty to arrange for the contract of affreightment and insurance of the goods while the transit.

2. F.O.B. OR F.O.R Contracts -- F.O.B. stands for 'Free on Board' and F.O.R. stands for 'Free on Rail'. In a F.O.B. (or F.O.R.) contract, the seller is required to deliver the goods on board the sip (or on rail), named in the contract. Thus, the seller has to bear all expenses upto and including shipment of goods on behalf of the buyer, who is responsible for their freight, insurance and subsequent expenses.

Thus, as soon as the goods are put on board the ship, the property in them passes to the buyer. This will be so even if the goods are not specific or ascertained. The buyer is liable to pay the price even if the goods are lost in transit. The property in goods shall, however not pass if the seller reserves the right of disposal.

1. C.I.F. Contract -- The words 'C.I.F.' stand for cost, insurance and freight. A

CIF contract is a type of contract wherein the price includes cost, insurance and freight charges. Under a CIF contract the seller is required to insure the goods, deliver them to the shipping company, arrange for their affreightment and send the bill of lading and insurance policy together with the invoice and a certificate of origin to a bank. The documents are usually delivered by the bank against payment of seller since he continues to be the owner of goods until the buyer pays for them and obtains the documents. The property in the goods passes to the buyer on the delivery of documents. The buyer is equally protected as he is called upon to pay only against the documents and the moment he pays, he obtains the documents, which enable him to get delivery of the goods. If in the meantime the goods are lost neither the buyer nor the seller is put to loss, whoever is the owner at the time of the loss can recover it from the insurer.

2. Ex-ship contracts-- Under an 'ex-ship contract the seller has to delivery the goods to the buyer at the port of destination. In such contracts the property in the goods does not pass until actual delivery. The goods are at the seller's risk during the voyage. It is therefore, for the seller to insure the goods to protect his interest. The seller is to pay the freight, or otherwise release the ship owner's lien and to furnish the buyer with a delivery order or an effectual direction to the ship owner to deliver.

Sale by Non-Owner In Business Law

A sale by non-owner in business law occurs when goods are sold by a person who is

not the owner without the owner's permission.3 min read

A sale by non-owner in business law occurs when goods are sold by a person who is not the

owner without the owner's permission. Only the person who owns the title to a piece of

property, whether that is personal property or real estate, can transfer the title to someone else.

Nemo dat quod non habet is a legal term that's often abbreviated to nemo dat. It simply means

no one can transfer what they don't have. As such, a seller can only transfer ownership

to a buyer if he possesses the right to do so. Nemo dat may apply if a seller sells stolen goods

without the rights to them or a buyer purchases stolen goods.

Nemo Dat Exceptions

Nemo dat protects the rightful owner of a piece of property, precluding the innocent purchaser

from maintaining ownership of the title. However, there are several exceptions to the rule. Each

exception is contained in one of the following acts:

The Sale of Goods Act 1979 (SGA)

The Factors Act 1889 (FA)

The Hire Purchase Act 1964 (HPA)

When any of these exceptions are enacted, the rightful owner of the property loses ownership

of the title in favor of the purchaser. In essence, these exceptions protect the innocent purchaser.

Here's an example of a scenario where the transfer of ownership to a non-owner may arise:

Mr. Smith steals a piece of property and sells it to Mr. Jones.

Then, Mr. Smith sells another piece of property to Mr. Murphy but retains

possession of it while wrongfully selling it again to Mr. Napoli.

Mr. Smith then passes the property to Mr. Jones in search of an offer for sale.

Meanwhile, Mr. Jones goes on to sell the property without Mr. Smith's

authority and maintains the proceeds from the sale.

Mr. Smith buys the piece of property on credit and resells it to Mr. Jones, with

no intention of paying for the property.

This situation becomes tricky when you pause to consider why the two innocent parties should

suffer at the hands of one deviant.

Denning LJ in Bishopgate Motor Finance Corporation Ltd. v. Transport

Brakes Ltd. (1949)

These exceptions are illustrated well in Denning LJ in Bishopgate Motor Finance Corporation

Ltd. v. Transport Brakes Ltd. (1949). There were a couple elements at play in this case.

First, the courts were seeking to protect the property. Shouldn't it be true that no one can give

away a title if he doesn't possess it? Second, the courts were seeking to protect commercial

transactions. Shouldn't the person who makes a purchase in good faith receive a fair title?

The first consideration demonstrated by Denning LJ can be seen in the Sale of Goods Act 1979.

Since the implementation of this act, whenever goods are sold by someone who is not the

rightful owner, the buyer does not acquire a valid title.

Estoppel

Estoppel occurs in cases where the owner of the piece of property acts in a manner in which

the seller has the right to sell the piece of property. As such, the rightful owner is prevented

(estopped) from making a claim against the seller. In such a scenario, the purchaser may then

go on to become the rightful owner of the goods.

Two further distinctions of estoppel may arise. They are:

Estoppel by Representation

Estoppel by Negligence

Estoppel by representation occurs when the owner of the piece of property has, either in his

words or conduct, led the buyer to believe that the seller is the true owner of the property, or at

least has the right to sell them. This form of estoppel is also known as estoppel by words or

estoppel by conduct.

Estoppel by negligence occurs when the owner of the property has, through negligence,

allowed the seller to appear before the buyer as the true owner, or as one who possesses the

authority to transfer ownership of the property. For this form of estoppel to take place, it must

be proven that the owner of the property had a responsibility to take care of it, so as not to act

negligently, but did so anyway.

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Right of Lien

Lien is the right of an individual to retain goods and securities in his possession that belongs to another until certain legal debts due to the person retaining the goods are satisfied. Lien does not endorse a power of sale but only to retain the property. This varies from other forms of charges as it does not arise from an implied or express agreement. Whereas, it arises from the dealings between the parties.

Conditions for Exercising Lien There are three important conditions to exercise the right of lien. The are

The goods for which this right is to be executed has to be possessed by the creditor who exercises it.

There has to be a lawful debt due to the person in possession of the goods by the owner.

There should not be any contract to the contract.

Types of Lien

There are three different types of Lien namely

1. Possessory Lien 2. Equitable Lien 3. Maritime Lien

Possessory Lien

A possessory lien can be exercised only by the person in possession of the goods. It is lost by

Loss of possession When money due is paid Substitution of security When a right of lien is waived

The pre-requisite that is required for a possessory lien is that the possession has to be continuous, rightful and not for any special purpose. Further, this can be divided into

1. Particular Lien 2. General Lien

Particular Lien

Particular Lien is that which confers the right to retain a specific commodity for which the particular debt arose. Such debts usually arise from services that are provided or labourer or money that is spent on the goods on which the right it is to be exercised.

The ingredients of a Particular Lien are

A right to retention of goods till debt due is paid off. It does not need any specific agreement. Arises in the ordinary course of business.

The essentials of a Possession Lien are

A possession that is acquired in the ordinary course of business. The owner has a lawful debt of an obligation that has to be discharged.

General Lien

A general lien refers to the right to retain goods and securities of a particular debt but in respect of the general balance that is due by the owner of the goods and securities, to the individual who is in possession of the goods. This may be conferred by an agreement to that effect or by custom and usage or by the provisions of any statue. The right of general lien is particularly given by law to bankers, solicitors, brokers, wharfingers and warehouse-keepers. A banker comprises cash, cheque, bill of exchange and securities that are deposited or any money that is due to him as a banker.

The ingredients of a general lien are given below.

It extends to a general balance of accounts. It is a right of defence, not a right of action. It also extends to prior transactions. It extends to properties/ securities which a banker has come in

possession of in the ordinary course of business such as cheques that are deposited for collection.

Securities/ goods that are held for a special purpose are not subjects of General Lien.

Banker’s Lien

Banker’s Lien is an implied pledged and the banker has the right to sell the property after reasonable notice where the property comes into the hands in the ordinary course of business. Section of the contract act lays down that a banker’s lien can be applied if

The property is in the control of the banker. The instruments of the money or goods of the banker are not for a

particular purpose inconsistent with the lien. The possession of the instruments is obtained lawfully as a banker. There is no implied or expressed agreement contrary to the lien.

The banker only obtains a lien over pledged goods for the recovery of his dues and is liable to sell those goods to reimburse himself. A banker’s general lien will not be extended to securities that are deposited with him for a specific purpose inconsistent with the lien. Therefore, the following situations are not covered by the banker’s lien.

1. It does not extend to securities that do not belong to the customer of the banker. 2. The articles and goods that are deposited by the owner for safe custody. 3. The securities or valuables that are lying in safe deposit locker. 4. The securities that are deposited for sale, the collection of interest, dividend

etc. Although he will not be able to exercise his right of lien on Government promissory notes and shares, he is entitled to do so for any interest that is earned and the dividend is collected.

5. A banker has no lien for fully paid-up shares except for partly-paid shares. 6. A banker has no lien on an insurance policy that is pledged as a

security for a loan post the repayment of debt. 7. A banker has no lien on the current account balance on any bill

discounts made by him. 8. Conveyance of land is not subject to such lien but title deeds that are left

without a memorandum of deposit are subject to such lien. 9. Fixed deposit for the collection of interest from another bank will not come

under the right of lien. 10. The securities that are deposited upon a particular trust. 11. Any security that is left in the banker’s hands to cover a proposed advance

which will be subsequently declined.

12. A banker cannot forfeit share in the satisfaction of a debt due to a shareholder. 13. A bank does not have a lien over the credit balance lying in a customer’s

account. The banker’s right, in this case, is a right of ‘set-off’.

Negative Lien

When an advance is made, the banker sometimes asks a borrower to execute a letter declaring that the assets are free from all charges or encumbrance. The borrower also undertakes the assets that are stated in the declaration will not be encumbered or disposed of without a bank’s written permit. This undertaking is called Negative Lien. The arrangement is normally drafted in the form of an agreement. The banker cannot directly realize hid debts from such assets. However, the interests of the banker are protected to a certain extent.

Equitable Lien

An equitable lien is an equitable right that is conferred by law to a charge on the immovable or movable property of another until the satisfaction of certain specific claims. An equitable lien is created by the operation of law. The instances of the equitable lien are given below.

49. Termination of lien

(1) The unpaid seller of goods loses his lien thereon-

(a) when he delivers the goods to a carrier or other bailee for the purpose of transmission to the buyer without reserving the right of disposal of the goods;

(b) when the buyer or his agent lawfully obtains possession of the goods;

(c) by waiver thereof.

(2) The unpaid seller of goods, having a lien thereon, does not lose his lien by reason only that he has obtained a decree for the price of the goods.

Rights of Unpaid Seller against Buyer

In a contract, there is always a reciprocal promise. Even in a contract of sale, both the buyer and the seller must perform their duties. And if the buyer does not pay the seller his due, the seller becomes an unpaid seller. This means such unpaid seller has some rights against the buyer. Let us see.

Rights of Unpaid Seller Against Buyer

When the buyer of goods does not pay his dues to the seller, the seller becomes an unpaid seller. And now the seller has certain rights against the buyer. Such rights are the seller remedies against the breach of contract by the buyer. Such rights of the unpaid seller are additional to the rights against the goods he sold.

1] Suit for Price Under the contract of sale if the property of the goods is already passed but he refuses to payfor the goods the seller becomes an unpaid seller. In such a case. the seller can sue the buyer for wrongfully refusing to pay him hisdue.

But say the sales contract says that the price will be paid at a later date irrespective of the delivery of goods,. And on such a day the if the buyer refuses to pay, the unpaid seller may sue for the price of these goods. The actual delivery of the goods is not of importance according to the law.

2] Suit for Damages for Non-Acceptance If the buyer wrongfully refuses or neglects to accept and pay the unpaid seller, the seller can sue the buyer for damages caused due to his non-acceptance of goods. Since the buyer refused to buy the goods without any just cause, the seller may face certain damages.

The measure of such damages is decided by the Section 73 of the Indian Contract Act 1872, which deals with damages and penalties. Take for example the case of seller A. He agrees to sell to B 100 liters of milk for a decided price. On the day, B refuses to accept the goods for no justifiable reason. A is not able to find another buyer and the milk goes bad. In such a case, A can sue B for damages.

3] Repudiation of Contract before Due Date If the buyer repudiates the contract before the delivery date of the goods the seller can still sue for damages. Such a contract is considered as a rescinded contract, and so the seller can sue for breach of contract. This is covered in the Indian Contract Act and is known as Anticipatory Breach of Contract.

4] Suit for Interest If there is a specific agreement between the parties the seller can sue for the interest amount due to him from the buyer. This is when both parties have specifically agreed on the interest rate to be paid to seller from the date on which the payment becomes due.

But if the parties do not have such specific terms, still the court may award the seller with the interest amount due to him at a rate which it sees fit.

Remedies of Buyer Against the Seller

Just as the seller can rescind the contract, then so can the seller. When the seller breaches the contract the buyer also has certain remedies against the seller. Let us take a look at some remedies that the Sales Act prescribes for the buyer.

1] Damages of Non-Delivery If the seller wrongfully or neglectfully refuses to deliver the goods to the buyer, then the buyer can sue for non-delivery of the goods. According to Section 57 of the Sale of Goods Act, if the buyer faces losses due to the wrongful actions of the seller (non-delivery) he can sue for damages caused due to this.

Let’s take for example A whose agrees to sell to B 10 pair of shoes for 1000/- each. B was going to sell the same shoes to C for 1100/- a pair. A neglects to deliver the goods to B. Now, B can sue A for non-delivery. He can sue for the amount of 100/- per pair, i.e. 1000/- (the difference between B’s cost price and sale price)

2] Suit for Specific Performance If the seller commits a breach of contract, the buyer can approach the court to ask the seller for specific performance. The court after deliberation can command the seller for specific performance. One important point to keep in mind is that this remedy is only available if the goods are ascertained or specific.

Example: There was a contract between A and B, that A will sell to B a very expensive painting on a specific date. On the said day A refuses to sell. B can approach the court, who orders A to sell the painting to B at the ascertained price.

3] Suit for Breach of Warranty When the seller breaches the warranty of the goods, the buyer cannot simply reject the goods on such basis. The buyer has two options in such a case,

set up against the buyer the said breach of warranty in the extinction of theprice

or sue the seller for breach of warranty

4] Repudiation of Contract If the seller repudiates the contract, the buyer does not have to wait until the date of the contract. He can treat the contract as rescinded and sue for damages immediately. This will be an anticipatory breach of contract.

5] Sue for Interest The Act specifically states that nothing in the act will affect the right of the seller or the buyer to recover interest or special damages due to him by the contract. And if there is no specific clause in the contract, the court can come to the rescue of the affected party

UNIT - V

(3) Formation of agency

1. Agency by appointment

a. An agency is created by express appointment when the principal appoints the agent by express agreement with the agent. This express agreement may be an oral or written agreement between the principal and the agent.

b. Contract law principles apply to an agency agreement. An agent may

agree to act in consideration for a reward. On the other hand, an agency is gratuitous if the agent agrees to act for no consideration.

c. The general rule is that agency may be created orally and there is no

formality for the creation of agency by express agreement, except for one situation which is discussed below. This general rule applies even to cases of appointing agents for the signing of agreements for sale and purchase of immovable property, whether on behalf of the vendor or the purchaser. The one exception is where an agent is appointed to execute a deed on behalf of the principal. In this case, the agent will have to be appointed by deed, which is called a power of attorney.

2. Agency by estoppel (implied appointment)

a. Agency by estoppel arises when A makes a representation to a third

party, whether by words or conduct, that B is his agent, and subsequently that third party deals with B as A's agent in reliance on such representation. A will not be permitted (is estopped) to deny the existence of the agency if to do so would cause damage (usually financial loss) to that third party.

b. The person who makes such representation ("A" in paragraph (a)

above) is treated as having created an agency relationship between himself as the principal and the other person ("B" in paragraph (a) above) as his agent, although there is in fact no agreement between the two parties ("A" and "B" in paragraph (a) above) as to the creation of the agency relationship. Agency by estoppel is sometimes called implied appointment of agent.

c. In agency by estoppel, the authority of the agent is described as only

apparent or ostensible but not actual, as the principal has, in fact, not granted the agent such authority to act on the principal's behalf.

d. The extent of apparent or ostensible authority of the agent in an

agency by estoppel depends largely upon the contents of the representation made by the principal to the third party who relies and acts on the representation. The principal is said to "hold out" a person as his agent with such authority as the principal may induce the third party to believe and is estopped from denying the existence of agency.

3. Agency by ratification

a. Agency by ratification arises when a person (the principal) ratifies (that is, approves and adopts) an act which has already been done in his name and on his behalf by another person (the agent) who in fact, had no actual authority (whether express or implied) to act on his (the principal's) behalf when the act was done.

b. Ratification by itself only creates an agency relationship between the

principal and the agent in respect of the act ratified by the principal, but not in respect of any other act, whether past or future.

c. The person who ratifies an act of another person must have been

in existence and have the legal capacity to carry out that act himself both at the time when the act was done and at the time of ratification. A person may lack legal capacity on grounds of bankruptcy, infancy or mental incapacity.

4. Agency of necessity

a. Agency of necessity arises when a person ("A") is faced with an

emergency in which the property of another person ("B") is in imminent jeopardy and it becomes necessary, in order to preserve the property for A to act for and on behalf of B. In this case, A acts as an agent of necessity of B.

b. Agency of necessity arises only when it is practically impossible for

the agent to communicate with the principal before the agent acts on behalf of the principal. (This would be difficult to establish with today's advanced communication systems and is the reason why agency of necessity does not often arise.)

c. Authority to act in case of emergencies cannot usually

prevail over express instructions to the contrary given by the principal.

Classification of Agent:

A general classification of agents from the point of view of the extent of authority is as follows:

1. Special agents:

A special is one who is appointed to perform a special act or to represent his

principal in some particular transaction as for example, an agent employed to sell a house or an agent employed .to bid at an auction .such an agent has a limited authority and, as soon as the act is performed, his authority comes to an end. He cannot bind his principal in any matter other than that for which he is employed. The persons who deal with him are bound to ascertain the extent of his authority.

2. General agent:

A general agent is one who has an authority to do all acts connected with a

particular trade, business, or employment. For example, the manager (general agent) of a firm has an implied authority to bind his principal by doing necessary for carrying on the business of the firm which falls within the ordinary scope of the business. Such authority of the agent is continuous until it is put an end to. if the principal by secret instructions, limits the authority of the general agent, and the agent exceeds the authority or violates the orders given to him by the principal ,the principal is bound by the agent’s acts done within the scope of his authority ,unless third parties dealing with the agent have a notice of the authority of the agent

3. Universal agent:

A universal agent is one whose authority to act for the principal is ultimate, he has authority to bind his principal by any act which he does, provided the act (i) is legal, and (ii)is agreeable to the law of the land

Another classification of agents from the point of view of the nature of work

performed by them is as follows:

1. Commercial or mercantile agents :

A ‘mercantile agents ‘ according to section.2(9)of the sale of goods act, 1930 “a mercantile agent having in the customary course of business as such agent, authority either to sell goods, or to consign goods for the purpose of sale , or to buy goods or to raise money on the security of goods .” this definition does not cover all kinds of mercantile agents which are as follows:

(1) Factor :

A factor is mercantile agents entrusted with the possession of goods for

the purpose of selling them .he has every possible discretionary authority to sell the goods. he sell the goods in his own name as an apparent owner upon such trams as he thinks fit .the price and gives a good to the purchaser.

(2) Auctioneer:

An auctioneer is an agent appointed by a seller to sell his goods by auction for a reward generally in the form of a commission. He is primarily the agents of the seller, but after the sale taken place, he becomes the agent of the purchaser also.

He lien on the goods for his charges .he has an authority to receive the price of the goods sold. He can also sue for the price in own name.like other agents, he must be the instructions of his principal.but the principal is liable to the third parties for the acts of the auctioneer if the auctioneer acts within the scope of his apparent authority even though he disobeys instruction privately given to him.

(3) Broker :

A broker is an agent who is employed to buy or sell goods on behalf another. He is employed primarily to bring about a contractual relationship between the principal and the third parties.he is not entrusted with the possession of the goods in which he deals. He cannot act or sue in his own name.and as he has no possession ,he has no right to lien.

(4) Commission agent :

A commission agent belongs to a some what indefinite class of agents he is employed to buy and sell goods or transact business generally for other persons receiving for his labor and troubal a money payment, called commission.

(5) Del credere:

A de credere agent is one who in consideration of an extra commission,

guarantees his principal that the persons with whom he enters into a contract on behalf of the principal shall perform their obligations. He occupies the position of both a guarantor and an agent

(6) Banker:

The relationship between banker and his customer is of debtor and creditor. But in a superadded obligation on the part of the banker of paying the debt when called upon to do so by the draft or order of the customer. To this extent, a banker is the agent of his customer.

The Principal-Agent Relationship

People, especially business owners, routinely hire or designate other people to perform tasks on their behalf. Agency law provides the set of rules governing the way in which this relationship operates. Agency is a legal term of art that refers to the relationship between a principal and an agent.[1]

Creating an Agency Relationship

An agency relationship is a fiduciary relationship, where one person (called the “principal”) allows an agent to act on his or her behalf. The agent is subject to the principal’s control and must consent to her instructions.[2]. Classic examples of agency relationships include employer/employee, lawyer/client, and corporation/officer.[3]

All that is required to create an agency relationship is the manifestation of assent by

both sides. This manifestation can be oral or in writing. Examples of written agency agreements include attorney retainer agreements. Agency relationships can also arise from circumstances even without explicit agreement. Whether an implied agency arose is a question of fact for a jury or judge to determine if the issue comes up a trial.

Types of Authority

An agent can act with two types of authority, actual and apparent.

1. Actual authority exists when the agent takes an action on behalf of the principal and he reasonably believes that the principal wants this action taken.[4] Actual authority includes “express” authority, where the principal tells the agent exactly what to do, and “implied” authority, where the agent takes actions reasonably necessary to accomplish the objective of the agency.[5] Principals can also limit agents’ authorities or revoke them as they choose. For example, a principal who initially tasked an agent with purchasing a piece of real property may amend the instructions to limit the agent’s authority to leasing the property instead.[6]

2. Apparent authority exists when the agent takes actions for the principal

with a third party that the third party reasonably believes the agent has the authority to take.[7] For example, assume that Principal employs Agent to manage his business. Principal tells Agent he can’t buy more than $500 worth of goods from any supplier. Principal tells or implies to a vendor, however, that Agent has unlimited authority to buy from him. Agent buys $1,000 worth of goods from the vendor. Agent has apparent authority to make this purchase because the vendor reasonably believed, based on Principal’s conduct, that Agent had the authority to purchase more than $500 worth on Principal’s behalf.

Duties of Principals and Agents

Agents are required to act up to the following duties and standards:

1. Duty of loyalty: An agent owes his principal a general duty of loyalty. This means that the agent must subordinate his interests to those of the principal if they fall within the agency relationship. An example of a breach of this duty occurred when an employee in charge of determining what to bid on construction projects began working for a different construction company as an independent contractor doing the same type of work. The employee did not tell his current employer and, in fact, submitted bids for both companies on the same jobs. After a bench trial, the trial judge determined that the employee had breached his duty of loyalty.[8]

2. Duty to act in accordance with the express and implied terms of a

contract: For example, if the contract provides that the agent, a marketer, will call 5 large clothing companies on behalf of the principal, then that marketer has a duty to make those 5 phone calls and ONLY those 5 phone calls.[9]

3. Duty of care, competence, and diligence: This requires that the agent

behave with the proper amount of care required by the situation.[10]

4. Duty of good conduct: This requires that the agent act in a way that does not injure the principal’s endeavor. The agent must make a reasonable attempt to provide the principal with relevant facts and information. If the agent has access to the property of the principal, the agent cannot make it appear as if the property is her own and may not commingle the property with anyone else’s. The agent must also keep track of how the principal’s property (money), is being spent.[11]

5. Duty to comply with the principal’s lawful instructions

Principals also owe agents a number of duties:

1. Duty to act in accordance with the express and implied terms of a contract: If the principal breaches this duty, the agent can recover based on a breach of contract claim.[12] In one example, a seller decided to subdivide a large piece of property into separate lots. He hired an agent to plot and map the new development and they agreed to split the profit 50/50. The agent spent time and money starting this new venture, but then the seller changed his mind and terminated the contract. The court held there was a breach of contract and the agent was entitled to whatever benefits he would have received under the agreement.[13]

2. Duty to indemnify the agent: As an example, a landowner hired two

agents to dig a ditch, but did not tell the agents that a phone line ran where the trench was going to be dug. The agents severed the line and the phone company sued them. The principal/landowner was required to indemnify the agents for this liability.[14]

3. Duty to deal fairly and in good faith with the agent: The principal must

refrain from taking actions that could foreseeably result in loss for the agent, when the agent is not at fault.[15]

Principal’s Liability for Agent’s Action in Contract and Tort

A principal is liable for contractual arrangements entered into by the principal with third parties if the agent had express, implied or apparent authority to enter into those agreements.

A principal can also be held directly liable for a tort committed by the agent if the

principal directs the agent to commit a tort. Alternatively, a principal can be held vicariously liable for an agent’s actions if the agent is an employee of the principal and is acting within the scope of his employment.[16] For example, if an agent is hired to make deliveries for a principal and negligently gets into an accident while making a delivery, then the principal can be held liable for any injuries a third party suffered as a result of that accident.[17]

Compensation of Agents

Most agents do not work for free, even though one can become an agent by agreeing to do something gratuitously.[18] When the agent is compensated, the terms of the contract will control how much the agent will be paid for his services. Where the extent of the compensation is not spelled out by the parties, the trial court may determine reasonable compensation.

For example, in Howard v. Gobel, the principal hired an agent to oversee the

construction of the Illinois State Capitol building. A dispute arose as to whether the agent was entitled to a fixed sum determined at the beginning of the project or reasonable compensation determined after the project was completed. The court held that there was no meeting of the minds as to what the parties had contracted for. The agent was entitled to reasonable compensation for his work on the project.[19]

Agency law does not exist in a vacuum and it is impacted by developments in business,

tort, and contract law. Agency is a subset of these areas of law that is used to

describe a special relationship between to people where the agent is authorized to act on behalf of a principal.

Delegation of Authority - Meaning, Importance and its Principles

A manager alone cannot perform all the tasks assigned to him. In order to meet the targets, the

manager should delegate authority. Delegation of Authority means division of authority and

powers downwards to the subordinate. Delegation is about entrusting someone else to do parts

of your job. Delegation of authority can be defined as subdivision and sub-allocation of powers

to the subordinates in order to achieve effective results.

Elements of Delegation

1. Authority - in context of a business organization, authority can be defined as

the power and right of a person to use and allocate the resources efficiently, to

take decisions and to give orders so as to achieve the organizational

objectives. Authority must be well- defined. All people who have the authority

should know what is the scope of their authority is and they shouldn’t misutilize

it. Authority is the right to give commands, orders and get the things done. The

top level management has greatest authority.

Authority always flows from top to bottom. It explains how a superior gets work done

from his subordinate by clearly explaining what is expected of him and how he should

go about it. Authority should be accompanied with an equal amount of responsibility.

Delegating the authority to someone else doesn’t imply escaping from accountability.

Accountability still rest with the person having the utmost authority.

2. Responsibility - is the duty of the person to complete the task assigned to

him. A person who is given the responsibility should ensure that he

accomplishes the tasks assigned to him. If the tasks for which he was held

responsible are not completed, then he should not give explanations or

excuses. Responsibility without adequate authority leads to discontent and

dissatisfaction among the person. Responsibility flows from bottom to top. The

middle level and lower level management holds more responsibility. The

person held responsible for a job is answerable for it. If he performs the tasks

assigned as expected, he is bound for praises. While if he doesn’t accomplish

tasks assigned as expected, then also he is answerable for that.

3. Accountability - means giving explanations for any variance in the actual

performance from the expectations set. Accountability can not be delegated.

For example, if ’A’ is given a task with sufficient authority, and ’A’ delegates

this task to B and asks him to ensure that task is done well, responsibility rest

with ’B’, but accountability still rest with ’A’. The top level management is most

accountable. Being accountable means being innovative as the person will

think beyond his scope of job. Accountability, in short, means being

answerable for the end result. Accountability can’t be escaped. It arises from

responsibility.

For achieving delegation, a manager has to work in a system and has to perform following

steps : -

1. Assignment of tasks and duties

2. Granting of authority

3. Creating responsibility and accountability

Delegation of authority is the base of superior-subordinate relationship, it involves

following steps:-

1. Assignment of Duties - The delegator first tries to define the task and duties

to the subordinate. He also has to define the result expected from the

subordinates. Clarity of duty as well as result expected has to be the first step

in delegation.

2. Granting of authority - Subdivision of authority takes place when a superior

divides and shares his authority with the subordinate. It is for this reason,

every subordinate should be given enough independence to carry the task

given to him by his superiors. The managers at all levels delegate authority

and power which is attached to their job positions. The subdivision of powers

is very important to get effective results.

3. Creating Responsibility and Accountability - The delegation process does

not end once powers are granted to the subordinates. They at the same time

have to be obligatory towards the duties assigned to them. Responsibility is

said to be the factor or obligation of an individual to carry out his duties in best

of his ability as per the directions of superior. Responsibility is very important.

Therefore, it is that which gives effectiveness to authority. At the same time,

responsibility is absolute and cannot be shifted. Accountability, on the others

hand, is the obligation of the individual to carry out his duties as per the

standards of performance. Therefore, it is

said that authority is delegated, responsibility is created and accountability is imposed.

Accountability arises out of responsibility and responsibility arises out of authority.

Therefore, it becomes important that with every authority position an equal and opposite

responsibility should be attached.

Therefore every manager,i.e.,the delegator has to follow a system to finish up the delegation

process. Equally important is the delegatee’s role which means his responsibility and

accountability is attached with the authority over to here.

Relationship between Authority and Responsibility

Authority is the legal right of person or superior to command his subordinates while

accountability is the obligation of individual to carry out his duties as per standards of

performance Authority flows from the superiors to subordinates,in which orders and

instructions are given to subordinates to complete the task. It is only through authority, a

manager exercises control. In a way through exercising the control the superior is demanding

accountability from subordinates. If the marketing manager directs the sales supervisor for 50

units of sale to be undertaken in a month. If the above standards are not accomplished, it is the

marketing manager who will be accountable to the chief executive officer. Therefore, we can

say that authority flows from top to bottom and responsibility flows from bottom to top.

Accountability is a result of responsibility and responsibility is result of authority. Therefore,

for every authority an equal accountability is attached.

Differences between Authority and Responsibility

Authority

Responsibility

It is the legal right of a person or a superior to command his subordinates.

It is the obligation of subordinate to perform the work assigned to him.

Authority is attached to the position of a superior in concern.

Responsibility arises out of superior- subordinate relationship in which subordinate agrees to carry out duty given

1. The principal’s liability in contract

2. The principal’s liability in tort

3. The principal’s criminal liability

4. The agent’s personal liability in tort and contract

5. How agency relationships are terminated

to him.

Authority can be delegated by a superior to a subordinate

Responsibility cannot be shifted and is absolute

It flows from top to bottom.

It flows from bottom to top.

Learn management concepts & skills rapidly with easy to understand, richly illustrated self-paced learning modules & downloadable powerpoint presentations.

Liability of Principal and Agent; Termination of Agency

LE ARN ING OB JEC TI VES

After reading this chapter, you should understand the following:

In we considered the relationships between agent and principal. Now we turn to relationships

between third parties and the principal or agent. When the agent makes a contract for his

principal or commits a tort in the course of his work, is the principal liable? What is the

responsibility of the agent for torts committed and contracts entered into on behalf of his

principal? How may the relationship be terminated so that the principal or agent will no longer

have responsibility toward or liability for the acts of the other? These are the questions

addressed in this chapter.

1. Understand that the principal’s liability depends on whether the agent was

authorized to make the contract.

2. Recognize how the agent’s authority is acquired: expressly, impliedly, or

apparently.

3. Know that the principal may also be liable—even if the agent had no

authority—if the principal ratifies the agent’s contract after the fact.

12.1 Principal’s Contract Liability

LE ARN ING OB JEC TI VES

Principal’s Contract Liability Requires That Agent Had Authority

The key to determining whether a principal is liable for contracts made by his agent is authority:

was the agent authorized to negotiate the agreement and close the deal? Obviously, it would

not be sensible to hold a contractor liable to pay for a whole load of lumber merely because a

stranger wandered into the lumberyard saying, “I’m an agent for ABC Contractors; charge this

to their account.” To be liable, the principal must have authorized the agent in some manner to

act in his behalf, and that authorization must be communicated to the third party by the

principal.

Types of Authority

There are three types of authority: express, implied, and apparent (see Figure 12.1 "Types of

Authority"). We will consider each in turn.

Express Authority

The strongest form of authority is that which is expressly granted, often in written form. The

principal consents to the agent’s actions, and the third party may then rely on the document

attesting to the agent’s authority to deal on behalf of the principal. One common form of

express authority is the standard signature card on file with banks allowing corporate agents to

write checks on the company’s credit. The principal bears the risk of any wrongful action of

his agent, as demonstrated in Allen A. Funt Productions, Inc. v. Chemical

Bank.Allen A. Funt Productions, Inc. v. Chemical Bank, 405 N.Y.S.2d 94 (1978). Allen A. Funt

submitted to his bank through his production company various certificates permitting his

accountant to use the company’s checking accounts.Allen Funt (1914–99) was an American

television producer, director, and writer, best known as the creator and host of Candid Camera

from the 1940s to 1980s, which was broadcast as either a regular show or a series of specials.

Its most notable run was from 1960 to 1967 on CBS. In fact, for several years the accountant

embezzled money from the company by writing checks to himself and depositing them in his

own account. The company sued its bank, charging it with negligence, apparently for failing to

monitor the amount of money taken by the accountant. But the court dismissed the negligence

complaint, citing a state statute based on the common-law agency principle that a third party is

entitled to rely on the express authorization given to an agent; in this case, the accountant drew

checks on the account within the monetary limits contained in the signature cards on file with

the bank. Letters of introduction and work orders are other types of express authority.

Figure 12.1 Types of Authority

Implied Authority

Not every detail of an agent’s work can be spelled out. It is impossible to delineate step-by-

step the duties of a general agent; at best, a principal can set forth only the general nature of the

duties that the agent is to perform. Even a special agent’s duties are difficult to describe in such

detail as to leave him without discretion. If express authority were the only valid kind, there

would be no efficient way to use an agent, both because the effort to describe the duties would

be too great and because the third party would be reluctant to deal with him.

But the law permits authority to be “implied” by the relationship of the parties, the nature and

customs of the business, the circumstances surrounding the act in question, the wording of the

agency contract, and the knowledge that the agent has of facts relevant to the assignment. The

general rule is that the agent has implied or “incidental” authority to perform acts incidental to

or reasonably necessary to carrying out the transaction. Thus if a principal instructs her agent

to “deposit a check in the bank today,” the agent has authority to drive to the bank unless the

principal specifically prohibits the agent from doing so.

The theory of implied authority is especially important to business in the realm of the business

manager, who may be charged with running the entire business operation or only a small part

of it. In either event, the business manager has a relatively large domain of implied authority.

He can buy goods and services; hire, supervise, and fire employees; sell or junk inventory; take

in receipts and pay debts; and in general, direct the ordinary operations of the business. The

full extent of the manager’s authority depends on the circumstances—what is customary in the

particular industry, in the particular business, and among the individuals directly concerned.

On the other hand, a manager does not have implicit authority to undertake unusual or

extraordinary actions on behalf of his principal. In the absence of express permission, an agent

may not sell part of the business, start a new business, change the nature of the business, incur

debt (unless borrowing is integral to the business, as in banking, for example), or move the

business premises. For example, the owner of a hotel appoints Andy manager; Andy decides

to rename the hotel and commissions an artist to prepare a new logo for the hotel’s stationery.

Andy has no implied authority to change the name or to commission the artist, though he does

have implied authority to engage a printer to replenish the stationery supply—and possibly to

make some design changes in the letterhead.

Even when there is no implied authority, in an emergency the agent may act in ways that would

in the normal course require specific permission from the principal. If unforeseen

circumstances arise and it is impracticable to communicate with the principal to find out what

his wishes would be, the agent may do what is reasonably necessary in order to prevent

substantial loss to his principal. During World War II, Eastern Wine Corporation marketed

champagne in a bottle with a diagonal red stripe that infringed the trademark of a French

producer. The French company had granted licenses to an American importer to market its

champagne in the United States. The contract between producer and importer required the

latter to notify the French company whenever a competitor appeared to be infringing its rights

and to recommend steps by which the company could stop the infringement. The authority to

institute suit was not expressly conferred, and ordinarily the right to do so would not be

inferred. Because France was under German occupation, however, the importer was unable to

communicate with the producer, its principal. The court held that the importer could file suit to

enjoin Eastern Wine from continuing to display the infringing red diagonal stripe, since legal

action was “essential to the preservation of the principal’s property.”G. H. Mumm Champagne

v. Eastern Wine Corp., 52 F.Supp. 167 (S.D.N.Y. 1943).

The rule that a person’s position can carry with it implied authority is fundamental to American

business practice. But outside the United States this rule is not applicable, and the business

executive traveling abroad should be aware that in civil-law countries it is customary to present

proof of authority to transact corporate business—usually in the form of a power of attorney.

This is not always an easy task. Not only must the power of the traveling executive be shown

but the right of the corporate officer back in the United States to delegate authority must also

be proven.

Apparent Authority

In the agency relationship, the agent’s actions in dealing with third parties will affect the legal

rights of the principal. What the third party knows about the agency agreement is irrelevant to

the agent’s legal authority to act. That authority runs from principal to agent. As long as an

agent has authorization, either express or implied, she may bind the principal legally. Thus the

seller of a house may be ignorant of the buyer’s true identity; the person he supposes to be the

prospective purchaser might be the agent of an undisclosed principal. Nevertheless, if the agent

is authorized to make the purchase, the seller’s ignorance is not a ground for either seller or

principal to void the deal.

But if a person has no authority to act as an agent, or an agent has no authority to act in a

particular way, is the principal free from all consequences? The answer depends on whether or

not the agent has apparent authority—that is, on whether or not the third person reasonably

believes from the principal’s words, written or spoken, or from his conduct that he has in fact

consented to the agent’s actions. Apparent authority is a manifestation of authority

communicated to the third person; it runs from principal to third party, not to the agent.

Apparent authority is sometimes said to be based on the principle of estoppel. Estoppel is the

doctrine that a person will not now be allowed to deny a promise or assertion she previously

made where there has been detrimental reliance on that promise or assertion. Estoppel is

commonly used to avoid injustice. It may be a substitute for the requirement of consideration

in contract (making the promise of a gift enforceable where the donee has relied upon the

promise), and it is sometimes available to circumvent the requirement of a writing under the

Statute of Frauds.

Apparent authority can arise from prior business transactions. On July 10, Meggs sold to Buyer

his business, the right to use the trade name Rose City Sheet Metal Works, and a list of suppliers

he had used. Three days later, Buyer began ordering supplies from Central Supply Company,

which was on Meggs’s list but with which Meggs had last dealt four years before. On

September 3, Central received a letter from Meggs notifying it of Meggs’s sale of the business

to Buyer. Buyer failed to pay Central, which sued Meggs. The court held that Rose City Sheet

Metal Works had apparent authority to buy on Meggs’s credit; Meggs was liable for supplies

purchased between July 10 and September 3.Meggs v. Central Supply Co., 307 N.E.2d 288

(Ind. App. 1974). In such cases, and in cases involving the firing of a general manager, actual

notice should be given promptly to all customers. See the discussion of Kanavos v.

Hancock Bank & Trust Company in Section 12.4.1 "Implied Authority".

Ratification

Even if the agent possessed no actual authority and there was no apparent authority on which

the third person could rely, the principal may still be liable if he ratifies or adopts the agent’s

acts before the third person withdraws from the contract. Ratification usually relates back to

the time of the undertaking, creating authority after the fact as though it had been established

initially. Ratification is a voluntary act by the principal. Faced with the results of action

purportedly done on his behalf but without authorization and through no fault of his own, he

may affirm or disavow them as he chooses. To ratify, the principal may tell the parties

concerned or by his conduct manifest that he is willing to accept the results as though the act

were authorized. Or by his silence he may find under certain circumstances that he has ratified.

Note that ratification does not require the usual consideration of contract law. The principal

need be promised nothing extra for his decision to affirm to be binding on him. Nor does

ratification depend on the position of the third party; for example, a loss stemming from his

reliance on the agent’s representations is not required. In most situations, ratification leaves the

parties where they expected to be, correcting the agent’s errors harmlessly and giving each

party what was expected.

TERMINATION OF AGENCY

Introduction -

In a contract of agency, a person appoints another to act on his behalf with the third party

it is called 'Agency'. According to Section 183 of the said Act, Principal must be competent to

contract. Any person may be an agent (Section 184). According to Section 185, in the contract

of agency, consideration is not necessary. See... Essential Elements of Agency.

Termination of agency means putting an end to the legal relationship between principal and

agent. Section 201 to 210 of the Indian Contract Act 1872 lay down the provision relating to

the termination of Agency.

Meaning and Definition of Agency -

Agency is the legal relationship between an agent and principal to bring the principal into

legal relationship with the third party. Section 182 of the Indian Contract Act 1872 defines

agent and principal - " An agent is a person employed to do any act for another or to represent

another in dealing with third persons. The person for whom such act is done or who is so

represented is called the principal" There are Different types of Agents (See... Classification

of Agents ).

Termination of Agency -

As above said termination of agency means putting end to the legal relationship

between principal and agent. Section 201 to 210 of the Indian Contract Act 1872 lay down

the provision relating to the termination of Agency.

Section 201, Indian Contract Act 1872 provides for termination of an agency -

An agency is terminated by the principal revoking his authority, or by the agent

renouncing the business of the agency; or by the business of the agency being completed; or

by either the principal or agent dying or becoming of unsound mind; or by the principal being

adjudicated an insolvent under the provisions of any Act for the time being in force for the

relief of insolvent debtors.

[See also... Distinction / Difference between Sub Agent and Co-Agent/ Substituted agent]

Agency may be terminated two ways -

1) By the Act of the Parties -

2) By Operation of Law -

1) By the act of the parties -

i) By agreement - The Contract of Agency can be terminated at any time by

mutual agreement between the principal and agent

ii) By revocation of the principal - The Principal revoke agency at any time by

givingnotice to the agent

iii) By Renunciation of an agent - Renunciation which means withdrawing from

responsibility as Agent. Like Principal, Agent can also renounce the agency.

According to Section 206 of the Indian Contract Act 1872, the agent must give to

his Principal reasonable

notice of renunciation. Otherwise, he will be liable to make good for the damage

caused to the principal for want of such notice.

2) By operation of law -

Agency can be terminated by operation of law

i) By the completion of agency - Agency can become to an end after the

completion of work for which the agency is created.

ii) By expiry of the time - Agency can also be terminated by the expiry of

time. if the agency is created for the specific period, it is terminated after the

expiry of the time.

iii) Death or insanity of principal or agent - Section 209 of the Indian

Contract Act 1872 imposes an agent, duty to terminate the contract of

agency on the death of the principal. In other words, Agency comes to an

end on the death or insanity of the principal or agent.

iv) Insolvency of principal - According to Section 201 of the Indian

Contract Act 1872, an insolvent or bankrupt is a person who is unable to run

the business due to Excess of liabilities over assets. In this way, if the

principal becomes an insolvent agency can be terminated.

v) Destruction of the subject matter - If this subject matter of the

agency is destroyed agency comes to an end.

For example - Any agency is created for sale of an Airplane if the Airplane

caught fire before the sale the agency comes to an end. In this contract Airplane is

the subject matter.

vi) Principal becoming an alien enemy - If the Principal becomes

an alien enemythe contract of agency comes to an end.

vii) Dissolution of company or firm - A Firm or company may be

regarded as a Principal in the contract of Agency. If the company or firm is

dissolved the agency comes to an end