B.Com Degree Business Law notes for reference

2. Syllabus
UNIT-I
Commercial Law - Introduction- Meaning- Objectives - Sources- origin - (custom-law of England - Equity precedents
nature of law.) Indian Contract Act,1872 – Contract- Definition- Obligation- Nature and Kinds of Contract - Elements
of a Valid Contract -Formation of Contract.
UNIT-II
Agreement -Contingent Contract, Quasi Contract - Types of contingent contract-Performance of a Contract –
Discharge of a Contract - by performance mutual consent, by impossibility, by contract, by breach Remedies for
breach of Contract.
UNIT-III
Contract of Indemnity- Introduction- Rights of indemnity holder and indemnifier- Guarantee - Definition, features,
types, Revocation -Bailment - pledge. Hypothecation- charge - mortgage-Meaning and definitions.

3. UNIT - IV
Agency - creation of Agency - Kinds of Agent - Rights and Duties of Principal and Agent -
Relation of Principal and third parties - Termination of Agency.
UN1T-V
Sale of goods Act 1930- Definition of Sale and Agreement to sell - Condition and Warranties -
Transfer of property - Transfer of title - performance - Remedies for breach- Unpaid Seller -
Rights of unpaid seller - Auction sale - Rules relating delivery of goods.

4. The term ‘indemnity’ literally means “security or protection against a loss” or
compensation.
According to Section 124 of the Indian Contract Act, 1872 “A contract by which one
party promises to save the other from loss caused to him by the conduct of the promisor
himself, or by the conduct of any other person, is called a contract of indemnity.”
UNIT-III
Contract of Indemnity
Example: A contracts to indemnify B against the consequences of any proceedings which C may
take against B in respect of a sure sum of money. This is a contract of indemnity, here A is the
indemnifier, and B is the indemnified

5. A contract of indemnity has two parties.
1.The promisor or indemnifier - the person who promises to protect another.
2.The promisee or the indemnified or indemnity-holder - the person who is so protected is
In the above-stated example,
•A is the indemnifier or promisor as he promises to bear the loss
•B is the promisee or the indemnified or indemnity-holder
PARTIES TO THE CONTRACT OF INDEMNITY

6.  Essentials of a Valid Contract.
 It is contract between two parties one person promises to save the other from any loss
which he may suffer.
 The loss may be caused by the conduct of the promisor himself or any other person.
 The contract of indemnity may be express or implied.
Essentials of Contracts of Indemnity

7. RIGHTS OF PROMISEE/ THE INDEMNIFIED/ INDEMNITY HOLDER
 Claim for damages - right to recover from the indemnifier all damages which he may be
compelled to pay in any suit in respect of any matter to which the contract of indemnity
applies.
 Claim for cost of suit - right to recover from the indemnifier all costs which he may be
compelled to pay in any such suit.
 Recovery of sums paid under conditions of compromise - right to recover from the
indemnifier all sums which he may have paid under the terms of any compromise of any
such suit.

8. Contract of Guarantee
A “contract of guarantee ” is a contract to perform the promise, or discharge the
liability, of a third person in case of his default
The person who gives the guarantee is called the ” Surety”
The person to whom the guarantee is given is called the ” Creditor “
The person for whom the guarantee is given is called the ” Principal debtor “

9.  A” takes a loan from “B”, and “C” promises to pay back the amount if
“A” fails to pay it on time.
 “C” is said to be a surety.
 “A” is said to be the principal debtor.
 “B” is said to be the creditor.

10.  Example: A advances a loan of Rs.10,000 to B, and C promises A that if
B does not repay the loan, I will repay it. This is a contract of guarantee.
 Example: A supplies goods to B on C’s guaranteeing payment by B to A.
This means that if B does not pay, C would be liable to pay. This is a
“Contract of Guarantee”.
 Here B is the principal debtor, C is the surety and A is the creditor.

11.  A guarantee may be either “oral” or “written“. Just like any other
contract, it should also fulfill all the essentials of a valid contract. As
stated already, three parties are involved in a contract of guarantee. At
the same time, there are three collateral contracts also namely,
 1. As between A and B [A supplies goods to B on credit who promises
that he would pay].
 2. As between A and C [C gives guarantee the price of goods, I will
pay].
 3. As between C and B [B indemnifies C in case of B’s default in paying
the amount to A).

12. Essentials of a Contract of Guarantee
1. Concurrence of All the Parties
All the three parties namely, the principal debtor, the creditor and the
surety must agree to make such a contract.
2. Liability
Liability of the surety is secondary i.e., the creditor must first proceed
against the debtor and if the latter does not perform his promise, then
only he can proceed against the surety.
3. Existence of a Debt
A contract of guarantee pre-supposes the existence of a liability, which is
enforceable at law.

13. 4. Consideration
 There must be consideration between the creditor and the surety so as to
make the contract enforceable.
 Anything done, or any promise made, for the benefit of the principal debtor may be
sufficient consideration to the surety for giving the guarantee.
5. Writing not Necessary
 A contract of guarantee may either be oral or written. It may be express or
implied from the conduct of parties.
6. Essentials of a Valid Contract
 It must have all the essentials of a valid contract such as offer and
acceptance, intention to create a legal relationship, capacity to contract,
genuine and free consent, lawful object, lawful consideration, certainty and
possibility of performance and legal formalities.

14. 7. No Concealment of Facts
 The creditor should disclose to the surety the facts that are likely to
affect the surety’s liability.
8. No Misrepresentation
 The guarantee should not be obtained by misrepresenting the facts to
the surety.
 But the facts, that are likely to affect the extent of surety’s responsibility,
must be truly represented

15. KINDS OF GUARANTEE
 Contracts of guarantees may be classified into two types:
1. Specific or simple guarantee
When a guarantee is given in respect of a single debt or specific transaction and
is to come to an end when the guaranteed debt is paid or the promise is duly
performed.
2. A continuing guarantee
It is a type of guarantee which applies to a series of transactions. It applies to all
the transactions entered into by the principal debtor until it is revoked by the
surety.

16.  KINDS OF GUARANTEE
 1.) ABSOLUTE GUARANTEE (Unconditional guarantee by surety)
 2.) CONDITIONAL GUARANTEE (Enforceable when contingency along with default happens)
 3.) RETROSPECTIVE GUARANTEE (Given for existing debt)
 4.) PROSPECTIVE GUARANTEE (Given for future debt)
 5.) LIMITED GUARANTEE (For a single transaction)
 6.) UNLIMITED GUARANTEE (Unlimited as to time or amount)
 7.) GENERAL GUARANTEE (For acceptance by the public generally)
 8.) SPECIAL GUARANTEE (For acceptance by the particular person)
 9.) CONTINUING GUARANTEE (Extends to series of transactions)

17. REVOCATION OF CONTINUING GUARANTEE
By notice of revocation by the surety
By the death of the surety
By variation in contract
Creditor’s act of omission
Novation
Creditor discharges principal debtor
Creditor loses security under the contract

18. Rights of Surety
 A surety also has certain rights against the principal debtor, the creditor
and the co-sureties. Each of these is explained below:
 Rights Against the Principal Debtor
Right of subrogation : When a surety makes a payment to a creditor
on behalf of the principal debtor in case of a default, he acquires the
rights of a creditor against the principal debtor. He can recover the
entire amount that he has paid to the creditor. This is called the right of
subrogation.
Right to indemnity: When a contract of guarantee is entered into there
is an implied promise that the principal debtor will indemnify the
surety for all the payments rightfully made by him.

19.  Example: 1
 Rahul has to pay Rs. 2,00,000 to Mahesh. Venkat is the surety for the
debt. Mahesh demands the payment from Rahul on the due date. Rahul
fails to pay the amount. Venkat who is the surety is compelled to make
the payment on behalf of Rahul. Venkat has the right to recover the
amount from Rahul with all the benefits promised to Mahesh as he has
now acquired the right of a creditor.

20.  Rights Against the Creditor
 Right to Claim Securities: According to section 141 of the Act, the
surety has the right of subrogation after performing his duty or making
a payment to the creditor. All the rights of the creditor are passed on to
the surety.
 Right of Set off: If the creditor sues the surety, he can claim set-off or
counter claim, which the debtor had against the creditor.
 Right to Share Reduction: If the surety has paid the amount to the
creditor on behalf of the principal debtor and the debtor becomes
insolvent the amount has to be recovered from him, then the surety can
claim from the creditor a reduction in his liability to the extent of the
amount of dividend that is claimed by the creditor from the official
receiver of the debtor.

21.  Right to ask the Creditor to Terminate the Debtor’s Services: When a
person gives a guarantee for the honest performance of another
employee and the employee defaults, the surety has a right to demand
that the employee be dismissed. Such dismissals are usually in the case
of fidelity contracts, for example contracts relating to insurance.
 Rights Against Co-sureties
 When there is more than one surety to guarantee a debt they are called
co-sureties. In case of default all the sureties become liable towards the
contribution of the guarantee amount.


22.  Right to Contribution: Under Section 146 of the Indian Contract Act
wherever there are co-sureties for the same amount, they are liable to
share an equal amount of the debt which remains unpaid by the
principal debtor. If a surety pays more than his share he has the right to
ask the other sureties to participate in contributing an equal amount
towards the debt.
 Bound in Different Sums: If co-sureties are bound in different sums
their liability will be shared equally, subject to the maximum amount
guaranteed by each of them.

23.  Surety’s Liabilities
The surety has several liabilities since he has guaranteed the debt. These
are discussed below:
Co-extensive: The nature and extent of a surety’s liability is co-extensive
with that of the principal debtor according to section 128 of the Indian
Contract Act. “This means that the surety has the same liability as the
principal debtor. If the principal debtor does not pay on time, the surety
will be required to pay to the creditor”.

24.  Reduction in Liability: When the principal debtor’s liability is reduced,
the liability of the surety will also be reduced.
 Secondary Liability: A surety’s liability is secondary and comes into
force only when the principal debtor defaults in his payment. If the
surety himself becomes insolvent before the principal debtor defaults
on his payment he will not be liable to pay any amount guaranteed by
him.
 Liability Restricted to Valid Contract: If a contract of guarantee is valid
the surety will be liable. If the creditor makes a contract with
representation or fraud, then the surety has the right to treat it as a
voidable contract at his option.

25.  Liability for Default by Principal Debtor: The surety becomes liable
immediately on default by the principal debtor. Before the default the
surety does not have to pay as his liability only begins if the principal
debtor does not pay.


26.  DISCHARGE OF SURETY
 Revocation by notice.
 Revocation by death.
 Discharge of surety by variance in terms of contract.
 Discharge of surety by release or discharge of principal debtor.
 Discharge of surety when creditor compounds with, gives time to, or agrees not to
sue, principal debtor.
 Creditor's forbearance to sue does not discharge surety.
 Release of one co-surety does not discharge other.
 Discharge of surety by creditor's act or omission impairing surety's eventual remedy.
 By the creditor losing his security.
 By concealment or misrepresentation.

27.  Distinction between Contracts of Indemnity & Contracts of Guarantee
 Parties to the Contract: Contracts of indemnity comprise two parties. These
are the indemnifier and the indemnity holder. Contracts of guarantee are
made with three parties. These are the principal debtor, the creditor and the
surety.
 Number of Contracts: Contracts of indemnity are between the indemnifier
and the indemnity holder. Only one contract is made between them.
However, contracts of guarantee are made out of free contracts. One contract
is between the principal debtor and creditor. The second contract is between
the surety and the creditor and the third is between the surety and the
principal debtor.

28.  Nature of Liability: The indemnifier is independent and has primary liability
in contracts of indemnity, but in contracts of guarantee the surety has
collateral or secondary liability whereas the primary liability is of the
principal debtor.
 Purpose of Contract: Contracts of indemnity provide security against losses
whereas contracts of guarantee provide security to creditors against default of
the principal debtors.
 Request: In an indemnity contract the indemnifier does not have to act at the
request of the indemnity holder. In contracts of guarantee the surety can act
only when the principal debtor requests him to do so.

29.  Occurrence of Liability: In contracts of indemnity liability will arise on
the happening of the contingency but in contracts of guarantee liability
will arise when an existing promise of payment of a debt is not
performed.
 Interest in the Contract: In indemnity contracts the promisor usually
has his own a interest in the contract, but in contract of gurantee the
surety does not have any interest in the transaction.
 Right to Sue Third Parties: The indemnifier does not have any right to
sue a third party in his own name because he does not have any privity
of contract. In contracts of guarantee the surety has the right to sue the
principal debtor in his own name after he discharges his debt.

30. Bailment
Introduction:
Contracts of Bailment and Pledge are special contracts, which are dealt with in chapter IX
(section 148 to section 181) of the Indian Contract Act 1872.
Sometimes a property, whose ownership belongs to a certain person temporarily, goes into the
possession of another person. Such a relationship between two persons is called bailment.

31. Definition
According to Section 148 of the Contract Act, “A bailment is the delivery of goods
by one person to another for some purpose, upon a contract that they shall, when
the purpose is accomplished, be returned or otherwise disposed of according to
the directions of the person delivering them”.
Some of the examples of bailment are- Cloth given to a tailor for stitching, a
watch given to a shop for repairing, a friend lending his bicycle to another friend
for riding it and jewelry taken on rent for wearing it to party.
The person delivering the goods is called the ‘Bailor’ and the person to whom the goods are
delivered is called the ‘Bailee’

32. The following are the essential features of Bailment:
Movable Goods: Goods in bailment are goods as defined in section 2 (7) of the Sale of Goods
Act, 1930, which means every kind of movable property other than money and actionable claims.
Immovable property like land and buildings are not considered as goods.
Delivery of Goods: Section 149 of the Indian Contract Act, 1872 explains the mode of delivery of
goods. It states that there may be two modes of delivery: Actual delivery and Constructive Delivery.
In actual delivery the bailor hands over physical possession of goods to the bailee and in constructive
delivery the bailor does not hand over physical possession of goods but does something which has
the same effect of putting the goods in possession of the bailee.
 Some Purpose: The delivery of goods from bailor to bailee is done to accomplish some
purpose. If goods are delivered by mistake without any purpose then there is no bailment.
 Return of Goods: After the purpose for which the goods were bailed to the bailee has been
fulfilled the goods have to be returned to the bailor.

33. Kinds of Bailment
Bailment may be classified according to the benefit derived by the parties. These are as follows:
1.For the benefit of the bailor: When the delivery of goods by the bailor to the bailee is done for the
exclusive benefit of the bailor and the bailee gets nothing in return, that is consideration does not pass
between the bailor and the bailee.
2.For the benefit of the bailee: When the delivery of goods by the bailor to the bailee is done for the
exclusive benefit of the bailee and the bailor gets nothing in return. Hence consideration does not pass
between bailor and the bailee.
3.For the mutual benefit of both the bailor and the bailee: When the delivery of goods by the
bailor to the bailee is done for the mutual benefit of both the parties. In this case consideration passes
between the bailor and the bailee.

34. Bailment may also be classified as Gratuitous and Non-Gratuitous Bailment.
1 Gratuitous Bailment: In this case no consideration passes between the bailor and the bailee. The
bailment for the benefit of the bailor and the bailment for the benefit of the bailee mentioned above are
gratuitous bailment.
2. Non-Gratuitous Bailment: In this case consideration passes between the bailor and the bailee.
The bailment for the mutual benefit of the bailor and the bailee is a non-gratuitous bailment.
Rights and Duties of Bailor and Bailee
Duties of a Bailor
(1)To disclose known facts: The bailor should disclose the known faults about the goods, which
he/she has bailed to the bailee. If the bailor does not disclose the defects then he/she is liable for any
damage caused to the bailee due to such defects in the goods.

35. 2) To bear extraordinary expenses of bailment: The bailee is responsible to bear ordinary and
reasonable expenses of the bailment but for any extraordinary expenses it is the bailor who is
responsible.
3) To indemnify bailee for loss in case of premature termination of gratuitous bailment:
If a gratuitous bailment is terminated by the bailor before the specified time then any loss the bailee
incurs due to such termination shall not be born by the bailor. However if the loss suffered by the
bailee exceeds the benefit he/she has derived from bailment then in such a case the bailor shall
indemnify the bailee.
4) To receive back the goods: Once the purpose for which the goods were bailed out has been
fulfilled, it becomes the duty of the bailor to receive back his/her goods from the bailee. He cannot
refuse to take back the goods. However if the bailor refuses to take back the goods then the bailee is
entitled to receive compensation for the expenses he/she incurs in keeping the goods in his/her
custody.
5) To indemnify the bailee: If the title of the good is defective and due to that the bailee suffers a
loss then the bailor is responsible to the bailee for the loss suffered by him/her.

36. Hypothecation occurs when an asset is pledged as collateral to secure a loan, without giving up title,
possession, or ownership rights, such as income generated by the asset.
Hypothecation means offering an asset as collateral security to the lender. Herein, the ownership lies
with a lender and the borrower enjoys the possession. In the case of default by the borrower, the
lender can exercise his ownership rights to seize the asset.
It is usually done in a case of movable assets, for creating the charge against collateral for the loan
given. Under hypothecation, the possession of the security remains with the borrower itself.
Hence, if the borrower defaults on payments, the lender would have to first take possession of the
security (asset under hypothecation) and then sell the asset to recover dues.
Hypothecation

39. A mortgage is a debt instrument, secured by the collateral of specified real estate property, that the borrower is
obliged to pay back with a predetermined set of payments.
A mortgage is a plan in which a property like land, house or a building is used as a
guarantee to get a money through a loan.
A mortgage is a transfer of a right to stable property for the security purpose of a loan
amount.
A mortgage is used in an agreement between two parties i.e. a debtor one who takes a
loan and the creditor who gives a loan.
If the debtor does not pay the loan amount a creditor take right on the mortgaged
property.
A mortgage is a method which used to create a charge on property by contract.
By using mortgage, one can easily get a property without paying full value.
Mortgage

40. Simple Mortgage
•In a simple mortgage, mortgagor makes a promise to himself to pay the mortgage money and
agree that if he fails to pay a loan amount, a mortgagee will have right to sell the mortgaged
property and cover the loan amount.
Mortgage by conditional sale
•In a mortgage by conditional sale, there is some condition put at the time of the agreement
between the mortgagor and mortgagee.
•A condition may be like if, in case of default of payment of loan amount after a certain date, a sell
become unavoidable or many more conditions.
Usufructuary mortgage
•In a usufructuary mortgage, a mortgagor delivers possession or bind to deliver ownership to the
mortgagee and authorizes to retain ownership of property till the payment fully covered it
includes principal amount, interest amount to the mortgagee.
English mortgagee
In English mortgagee, a mortgagor makes a promise to pay the mortgage amount on a certain date
and transfer ownership to the debtor with a provision that he has to re transfer the ownership
once the payment done by the mortgagor.
The different types of mortgages

41. Anomalous Mortgage
•The anomalous mortgage is the which is not a simple mortgage, a mortgage by conditional sale, a
usufructuary mortgage, an English mortgage or a mortgage by deposit of title deeds within the section 58 is
called an anomalous mortgage.
Equitable mortgage
•In an equitable mortgage, a mortgagor gives original title deed to the bank with an aim to create security there
on.
•An equitable mortgage is created by depositing the original title deeds along with documents.
•This, a mortgage has no need to be registered with sub-registrar.
Registered mortgage
In a registered mortgage, a charge is created on the property with sub- registrar formally.
A written proof is used for the security purpose and in case a borrower fails to pay the amount a lender has
right to take ownership of property and vice versa
Balloon Mortgages
•Balloon mortgages are just for short term and it has fixed rate mortgage.
•In balloon mortgage, a monthly payment is lower because of large payment at the end of a term.
•A balloon payment is for the honest and qualified borrowers who have good credit history.
Reverse mortgage
•A reverse mortgage as the name suggests it works on reveres stream. It is mortgage loan in which a lender
pays monthly installments to the borrower. A reverse mortgage is helpful to the older people in their financial
need.

42. A charge is basically a right which is created by a person or company (borrower) on its assets and
properties, whether present or future, in favor of a bank or financial institution (lender) which lends
financial assistance. It is created to secure the repayment of the debt.
•Charge creates an obstruction on the title of a property when there is a charge on the asset, the asset
cannot be sold or transferred.
•The charge is incurred on the asset by the lender to the borrower’s movable asset.
•So, the main difference between the mortgage and charge is the classification of an asset. The mortgage
is on an immovable property while a charge is on a movable property.
•In charge, the lender doesn't get right to sell the property. If the lender sells the property to recover the
amount it becomes mortgage.

43. BASE CHARGE MORTAGE
Meaning In charge, there is only security purpose to the lender.
In mortgage, the ownership of immovable
property transfer to the lender.
Formation It is created by following law or concerned parties
It is created by both parties like the lender
and the borrower.
Act It doesn’t require registration.
It is registered under the property transfer
act, 1882.
Time limit In this, there is an infinity. There is fixed time limit.
On which property On moveable property. On immovable property
Difference Between Charge and Mortgage

44. Unit III – Test - I
 Unit III
Important Questions
1. Rights of Indemnity holder and Indemnifier
2. Rights and duties of Bailor and Bailee
3. Rights of surety against principal debtor and creditor
4. Revocation of Guarantee.
5. Types of Guarantee
6. Difference between Contract of Indemnity and Guarantee