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Business Law
Unit 1: Contract – Definition – Classification – Essentials of a contract (offer & acceptance –
consideration – contract capacity – free consent – legality of object) – Right & Obligation of parties to
Contract – Not enforceable Assignment – Performance, Discharge & Breach of Contract – Quasi
contract.

Unit 2 : Law of agency – Nature appointment - Modes creation of agency – Rights, duties & liabilities
– Types of agents - Sub agent and Substituted agency – Termination of agency.

Unit 3: Partnership – Definition, Essentials of partnership – Types, rights, duties and liabilities of
partners – Types of partnership – Dissolution of partnership.

Unit 4: Sale of goods Act – Definition – Price – Conditions & Warranties – Transfer of property –
Performance of Contract of Sale – Unpaid Seller – Stoppage in transit.

Unit 5: Introduction to Insurance – Definition, Difference between Life Insurance & General
Insurance, Kinds of Life Insurance policy – Fire Insurance – Definition, Types, Claim – Marine
Insurance – Definition, Characteristics, Kinds of Marine policies, Warranties.

Unit 1

* Definition of law

* Definition of business law

* Definition of contract

* Essential elements of a valid contract

* Kinds of contract

Definition of law

The term ‘law’ denotes rules and principles either enforced by an authority or self – import by
the members of a society to control and regulate people’s behaviors with a view to securing justice,
peaceful living and social security.

Definition of business law (mercantile law)

Mercantile law is a body of law that deals with customs and practices of local and international
commerce. It deals with all business transactions and covers agreements, contracts, copyrights,
franchising, insurance, licensing, patents, shipping and transport, trademarks.

Definition of contract

Acc to section 2(h) of the Indian contract act, ‘’ an agreement enforceable by law is a contract ‘’
(i) Agreement – promise is an agreement.
(ii) Enforceable by law – legal obligation.
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Kinds /Classification /Types of contracts

Classification of
Contracts

On the basis of On the basis of On the basis of On the basis of

Enforceability Formation Performance Obligation

Valid contract Express contract Executed contract Unilateral contract

Void contract Implied contract Executory contract Bilateral contract
Voidable contract Quasi contract
Illegal contract
Unenforceable
On the basis of Enforceability:

1) Valid contract- Sec 10: A valid contract is an agreement enforceable by law. An agreement
becomes enforceable by law, when all the essentials elements of a valid contract is enumerated.

2) Void contract- Sec 2 (j): Void means “not binding in law ’’ void contract implies a useless contract
which has no legal effect at all.
Eg: Where both parties to an agreement are under a mistake of fact, when the consideration or object
of an agreement is unlawful, an agreement made without consideration.

3) Voidable contract- Sec 2 (i): A voidable contract is one which is enforceable by law at the option of
one or more of the parties, until it is avoided by the party entitled to do.
Eg: A contract brought about as a result of Coercion, Undue influence, Fraud or Misrepresentation.

4) Illegal contract: Agreement resulting in criminal offences and is forbidden by law. All illegal
agreements are void but all void agreement is not necessarily illegal.
Eg: Contract to commit crime, contract that is immoral or opposed to public policy are illegal in
nature.

5) Unenforceable contract: All unenforceable contracts is one which is valid in itself, but is not
capable of being enforced in a court of law because of some technical defect such as absence in writing,
registration, requisite stamp, etc.
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On the basis of Formation:

1) Express Contract: When the contract has taken place in an express manner by use of words, spoken
or written.
Eg: X say to Y “Will you buy my car for Rs.100000?” Y says to X “I am ready to buy your car for
Rs.100000.” It is an express contract made orally.
Eg: X writes a letter to Y “Will you buy my car for Rs.100000?” Y send a letter to X “I am ready to
buy your car for Rs.100000.” It is an express contract made in writing.

2) Implied Contract: Where the offer and acceptance are made not by use of words but by conduct
only and are therefore implied from the circumstances.
Eg: If a person enters a bus, there is an implied promise that he will pay the bus fare.

3) Quasi Contract: A contract created by the court in the absence of an official agreement between the
parties at the time of disputes over payments for goods or services. The term Quasi contract would
literally mean ‘semi-contract’. The core principle behind a Quasi Contract is justice, equity and good
conscience. It is based on the maxim: “No man must grow rich out of another persons’ loss.”
Eg: Peter and Oliver enter a contract under which Peter agrees to deliver a basket of fruits at Oliver’s
residence and Oliver promises to pay Rs.1500 after consuming all the fruits. However, Peter erroneously
delivers a basket of fruits at John’s residence instead of Oliver’s. When John gets home he assumes that
the fruit basket is a birthday gift and consumes them.
Although there is no contract between Peter and John, the Court treats this as a Quasi-contract and
orders John to either return the basket of fruits or pay Peter.

On the basis of Performance:

1) Executed Contract: Where both the parties have done their respective work.
Eg: Ram purchased a pen from shopkeeper Shyam for Rs.70. Ram paid the price in full and Shyam gave
him the pen. Here nothing has remained to be performed.

2) Executory Contract: It is a contract where one or both the parties to the contract have still to perform
their obligations in the future.
Eg: Leasing an apartment.

On the basis of Obligation:

1) Unilateral Contract: It is a one-sided contract in which only one party has to perform his promise or
obligation to do.

2) Bilateral Contract: Where the obligation or promise in a contract is outstanding on the part of both the
parties.
Essential elements of a valid contract

(i) Offer and acceptance

(ii) Consideration
(iii) Capacity of parties
(iv) Free consent
(v) Lawful object.
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Offer- Sec 2(a)

* Meaning
* Legal rules regarding a valid offer.
* Lapse and revocation of offer.

Meaning

‘Offer’ and ‘proposal’ are synonymous and are used interchangeably. It must be an expression
of willingness to do something or to refrain from doing something.
Eg: R tells S, “I am willing to sell my machine for Rs.9000; are you ready to buy?” This is a clear offer
from R to S.
Eg: A offers not to file a suit against B, if B pays A the amount of Rs.5000 outstanding. Here the act of
A is a negative one, i.e., he is offering to abstain from filing a suit.

According to Sec 2(c):

- The person who makes the promise / offer is called as the ‘promisor’ or ‘offeror’ .
- The person to whom the promise / offer is made is called the ‘promisee’ or ‘offeree’

Classification/ Types/ Kinds of offer:

(1) Express offer: An offer may be made either by words, spoken or written.
Eg: ‘X’ writes to ‘Y’ that he offers to sell his house to him for Rs, 80,000. There is an express
offer.

(2) Implied offer: One which is inferred from the conduct of a person or the circumstance of the
case is called an implied offer.
Eg: The Delhi transport corporation runs omnibuses on different routes to carry passenger at the
scheduled fares. This is an implied offer by the D.T.C.

(3) Specific offer: An offer is said to be specific when it is made to a definite person or a specific
group of persons.
Eg: Where ‘M’ makes an offer to ‘N’ to sell his bicycle for Rs.200, there is a specific offer and
‘N ‘alone can accept it.

(4) General offer: General offer is one which is made to the world at large or public in general and
may be accepted by any person.

(5) Standing, Open or Continuing Offer: An offer which is allowed to remain open for
acceptance over a period of time.
Eg: Tender for supply of goods.
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Essentials/ Legal rules regarding a valid offer:

1) An offer must be communicated to the offeree. Unless an offer is communicated, there can be no
acceptance by it.

2) The terms of the offer must be certain and not loose or vague.
3) An invitation to offer is not an offer.

4) An offer must be expressed or implied.

5) Offer may be conditional.

Lapse and revocation of offer

(1) An offer lapses after a stipulated or reasonable time

An offer lapses if acceptance is not communicated with in the time prescribed in the offer, or
within a reasonable time if no time is prescribed.

(2) An offer lapses by rejection of offer by offeree.

(3) An offer lapses by the death or insanity of the offeror.

(4) An offer lapses by revocation

An offer is revoked when it is retracted back by the offeror. An offer may be revoked, at any
time before acceptance .

(5) Revocation by non – fulfillment of a condition precedent to acceptance.

(6) An offer lapses by subsequent illegality

An offer lapses if it becomes illegal after it is made, and before it is accepted.

Acceptance- Sec 2(b)

*Meaning
* Legal rules regarding a valid acceptance.

Meaning :

An acceptance is the consent given to offer. A proposal when accepted becomes a promise.
Offer + Acceptance = Agreement.

Essentials/ Legal rules regarding a valid acceptance:

(1) Acceptance must be given only by the persons to whom the offer is made.
(2) Acceptance must be absolute and unqualified which means that an offer must be accepted as
it is without any reservation, variation or condition.
(3) Acceptance must be expressed in some usual and reasonable manner.
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(4) Acceptance must be given within a reasonable time and before the offer lapses and /or is
revoked.
(5) An acceptance must be communicated.
(6) Offer once rejected cannot be accepted.
(7) Rejected offer can be accepted only if renewed by the offeror.

Consideration- Sec 2(d)

*Meaning

* Essentials of valid consideration

* No consideration necessary

* Types of consideration.

Meaning

Consideration is the value given in return for a promise. “Consideration is the price for which
the promise of the other is bought and the promise thus given for value is enforceable”.

Essentials of valid consideration

(1) Consideration must move at the desire of the promisor

In order to constitute legal consideration, the act or abstinence forming the
Consideration for the promise must be done at the desire or request of the promisor.
(2) Consideration may move from the promisee or any other person
Consideration need not move from the promisee alone but may proceed from a third
person.
(3) Consideration may be past, present or future
Consideration may consist of either something done /not done in the past / not done in
the present /promised to be done / not done in the future. To put it briefly, consideration may be
past, present or future.
(4) Consideration need not be adequate
Consideration need not necessarily be equal in value to something given. The
consideration need not be adequate to the promise.

(5) Consideration must be real and not illusory

Although consideration need not be adequate, it must be real, competent & of some
value in the eyes of the law.
(6) Consideration must not be Illegal, Immoral or Opposed to Public Policy
The consideration given for an agreement must be lawful.
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No consideration necessary

(1) Agreement made on account of natural love and affection- Sec 25(1)
(2) Agreement to compensate for past voluntary service- Sec 25(2)
(3) Agreement to pay a time – barred debt- Sec 25(3)
(4) Completed gift- Sec 25
(5) Contribution to charity.
(6) Contract of agency- Sec 185- no consideration is necessary to create agency.

Types of consideration

❖ Past consideration
❖ Present consideration
❖ Future consideration

Past consideration

When something is done or suffered before the date of the agreement, at the desire of the
promisor, it is called past consideration .

Eg: A teaches the son of B at B’s request in the month of January and February. B promises to pay A a
sum of Rs.200 for his services. The services of ‘A’ will be past consideration.

Present consideration

Consideration which moves simultaneously with the promise is called present consideration.

Eg: Where ‘’X’’ sells a book to ‘’Y’’ and ‘’Y’’ pays its price immediately.

Future consideration

When the consideration on both sides is to move at a future date, it is called future
consideration.

Eg: ‘’X’’ promises to sell and deliver two bags of wheat to ‘’Y’’ for Rs.6500 after a week, upon ‘’Y’’s
promise to pay the agreed price at the time of delivery.

Contractual capacity of the parties- Sec 11

*Meaning
*Incompetent to contract
*Minor
*Persons of unsound mind
*Disqualified persons
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Who is Competent to Contract?

Every person is competent to contract,

1) who is of the age of majority according to the law to which he is subject,

2) who is of sound mind, and

3) is not disqualified from contracting by any law to which he is subject.

Incompetent to contract

(1) Minor
(2) Unsound mind
(3) Disqualified

(1) Minor
According to Sec 3 of the Indian Majority Act 1875, a person, domiciled in India, who is
under 18 years of age is a minor.

Position of Minor’s agreement:

(i) An agreement by a minor is absolutely void

Law acts as the guardian of minors and protects their rights; because their mental facilities are
not mature they don’t possess the capacity to judge what is good and what is bad for them.

(ii)Beneficial agreements are valid contract

As observed the court protects the rights of minors accordingly, any agreement which is of
some benefit to the minor and under which he is required to bear no obligation, is valid. (Ie) A minor
can be a beneficiary.

(iii)No ratification on attaining the age of majority- Sec 68

The consideration which passed under the earlier contract cannot be implied into the contract
into which the minor enters on attaining majority.

Eg: A minor borrows money and executes a promissory note. On attaining majority, he executes a fresh
promissory note in substitution of the one executed as a minor. The second promissory note is also void
being without consideration.

(iv)Minors’ liability for necessaries- Sec 68

Any person would be entitled to reimbursement out of the minor’s estate, for necessaries
supplied to him or to his family.

Eg: (B is a minor) A supplies B, with necessaries suitable to his condition in life. A is entitled to be
reimbursed from B’s property.
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(v)Minor partner- Sec 30

A minor being incompetent to contract cannot be a partner in a partnership firm. He can be

admitted to the ‘benefits of partnership’ with the consent of all the partners by an agreement executed
through his lawful guardian with the other partners.

(vi)Position of minors parents

The partners of a minor are not liable for agreements made by a minor, whether the agreement
is for the purchase of necessaries or not the parents can be held liable only when the child is contracting
as an agent for the parents.

(2) Persons of unsound mind

Unsoundness of mind may arise from

(i) Idiocy: It is god given and permanent, with no intervals of saneness.

(ii) Lunacy : Mental strain or disease (disease of the brain)
(iii) Drunkenness: it produces temporary incapacity.
(iv) Mental decay: On account of old age, etc.
(v) Hypnotism: Artificially induced sleep and is temporary.

(3) Disqualified persons

(i) Alien enemies (A citizen of foreign country living in India can enter into contracts with
Indian citizen during peace time only)
(ii) Foreign sovereigns and Ambassadors (Eg: Trump – US)
(iii) Convict (A person who is imprisoned)
(iv) Pardanashin women
(v) Insolvent.

Free consent- Sec 14

*Meaning

*Causes of the consent.

Definition of Consent- Sec 13

Two or more persons are said to have consented when they agree upon the same thing in the
same sense.

Definition of Free Consent

Sec 14 lays down that “consent is said to be free when it is not caused by,

(i) Coercion
(ii) Undue influence
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(iii) Misrepresentation
(iv) Fraud
(v) Mistake

(i) Coercion- Sec 15

Coercion implies,
(a) Committing or threatening to commit any act forbidden by the Indian penal code. (or)
(b) Unlawful detaining or threatening to detain any property, with the intention of causing
any person to enter into an agreement.

Eg: A threatens to shoot B if he does not sell his car to A. B agrees to sell the car.

(ii) Undue influence- Sec 16(1)

The relations subsisting between the parties are such that one of the parties is in a position to
dominate the will of the other, and he uses the position to obtain an unfair advantage over the other.

*in the following cases undue influence is presumed

(1) Religious guru and chela

(2) Doctor and patient.

(3) Parent and child

(4) Trustee and Beneficiary.

*in the following cases undue influence is not presumed

(1) Landlord and Tenant

(2) Creditor and debtor

(3) Husband and wife.

* Difference between coercion and undue influence

Coercion Undue influence

● It defined in sec 15 ● It defined in sec 16

● Compelling a person to enter into a ● Inducing a person to enter into an
contract by committing or threatening agreement by mental threat.
● No special relationship b/w the parties ● Special relationship must be there. (eg)
are necessary. Master & servant, doctor and patient, etc…

(iii) Misrepresentation- Sec 18

Misrepresentation is a wrong statement of fact made innocently (i.e.,) without any intention to
deceive the other party. A party makes a statement which is not correct but the party making the
statement does not know that it is wrong or if honestly believes that is correct.
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Eg: ‘A’ while selling his watch, tells ‘B’ that his watch is made in Switzerland. ‘A’ honestly believes
that his watch is made in Switzerland. ‘B’ purchased the watch. However, it is found later on that the
watch is made in India. ‘A’ is guilty of misrepresentation.

*Essentials of misrepresentation

(1) There must be a representation or omission of a material fact.

(2) The representation or omission of duty must be made with a view to inducing the other party to
enter into a contract.

(3) The representation or omission of duty must have induced the party to enter into contract.

(iv) Fraud- Sec 17

Fraud is a misrepresentation made with an intention to deceive or cheat.

Eg: ‘A’ fully well knows that his watch is made in India. In order to sell his watch, he tells ‘B’ that it is
made in Switzerland; ‘B’ buys the watch. ‘A’ is guilty.

*Essentials of fraud

(1) There must be a false representation of fact.

(2) The representation must have been made knowingly that it is false or carelessly without ascertaining
its truth.

(3) The representation must have been made by the party himself or with his knowledge or by his
agent.

(4) The representation must have been made with an intention to deceive.

(5) The party complaining of fraud must have suffered damages due to fraud.

(v) Mistake- Sec 20

Mistake means erroneous belief concerning some fact. Parties entering into contract must not be
under any error and they should agree on the same thing in the same sense.

(eg) ‘A’ has two cars – an ‘ambassador’ and a ‘Fiat’. He agrees to sell one of them to ‘B’. It is not clear
as to which of the two cars he is selling. ‘A’ might be thinking to buy the Fiat car.

Hence, there is no identity of mind on the subject matter of the agreement. Therefore, there is no
sale in this case.

*mistake may be of two types

(1) Mistake of law

(2) Mistake of fact.

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(1) Mistake of law

(i) Mistake of Indian law- Everyone are deemed to be conversant with the law of our country &
hence the maxim “ignorance of law is no excuse”.

(ii) Mistake of foreign law- A mistake of foreign law is treated as mistake of fact, i.e., the
contract is void if both the parties are under a mistake as to a foreign law, because one cannot be
expected to know the law of other country.

(2) Mistake of fact

(i) Bilateral mistake – mistake is mutual (committed by both the parties)

(ii) Unilateral mistake – (one of the parties to the contract is under a mistake)

Legality of object

*Object is unlawful
*Effect of illegality

*Legality of object

A contract must be made for lawful object; otherwise it will be void and unenforceable.

*Object is unlawful- Sec 23

(1) If it is forbidden by law (it is prohibited by any law)

(2) If it would defect the provisions of any other law.

(3) If it is fraudulent.

(4) If it implies injury to the person or property to another.

(5) If the court regards it as immoral.

*Effect of illegality

- An illegal agreement is void.

- Illegal transactions are also void.

- Law does not help any illegal party.

- In case of fraud, coercion, etc., money or property transferred can be recovered.

- Reciprocal promises, legal or illegal.

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Rights & Obligations of parties to contract:

Rights: Rights of parties to contract are the rights that are guaranteed through a legally valid contract to
the parties that have made the agreement. Such rights can be written & implied.

Typical kinds of contract rights include:

1) The right to buy a specific service or product.

2) The right to sell a service or product

3) The right to transfer ownership rights.

4) The right to be the exclusive purchaser or seller.

5) The right to repairs, refunds or exchanges.

Obligations: Contract obligations are those duties that each party is legally responsible for in a contract
agreement.

Typical kinds of contract obligations include:

1) Payment – Eg: One party (the buyer) is usually legally bound to provide payment for the sale of
goods or services.

2) Delivery – Eg: The seller is usually bound to provide delivery of the goods or services.

3) Quality of goods – Eg: The seller may also be bound to provide goods of a certain quality.

Assignment of Contract: An assignment of contract occurs when one party to an existing contract (the
assignor) hands off the contract’s obligations and benefits to another party (the assignee).

Not enforceable Assignment: An assignment of a contract will not be enforced in the following
situations:
1) The contract prohibits assignment: Contract language, typically referred to as an anti-assignment
clause, can prohibit (and "void") any assignments.
2) The assignment materially alters what's expected under the contract: If the assignment affects
the performance due under the contract, decreases the value or return anticipated, or increases the risks
for the other party to the contract (the party who is not assigning contractual rights), courts are unlikely
to enforce the arrangement. For instance, if Tom's local, organic dairy assigned the contract to a factory
farm dairy, this would be considered a material alteration.
3) The assignment violates the law or public policy: Some laws limit or prohibit assignments. For
example, many states prohibit the assignment of future wages by an employee, and the federal
government prohibits the assignment of certain claims against the government. Other assignments,
though not prohibited by a statute, may violate public policy. For example, personal injury claims
cannot be assigned because doing so may encourage litigation.
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*Performance of contracts - Sec 37

*Meaning
*Who can demand performance?
*By whom contracts must be performed?
*Time and place of performance
* Assignment of contracts.

Meaning

Performance of contract means fulfilling of their respective legal obligations created under the
contract by both the promisor and the promisee.

Who can demand performance?

1. Promisee
2. Representative
3. Agent
4. Third – person

By whom contracts must be performed?

1. Promisor : (E.g.) ‘A’ promises to paint a picture for ‘B’ ‘A’ must fulfill this promise
personally.
2. Agent : (E.g.) ‘A’ promises to pay ‘B’ a sum of money ‘A’ may fulfill this promise , either
personally paying the money to ‘B’ or by asking it to be paid to ‘B’ by another.
3. Representative : (E.g.) ‘A’ promises to deliver goods to ‘B’ on a certain day on payment of
Rs. 1000. ‘A’ dies before that day. A’s representative are bound to deliver the goods to ‘B’
and ‘B’ is bound to pay the Rs.1000 to ‘A’s representatives.
4. Third person: When a promisee accepts performance of the promise from a third party in
full satisfaction of his claim.

Time and place of performance

⮚ If prescribed in the contract

When the time and place are prescribed in the contract, the performance of the Contract
must be at the specified time and place.

⮚ If not prescribed in the contract

(a) Within a reasonable time: On a working day and reasonable time. It depends either on
special circumstance of each particular case or the usage of trade or the intention of parties at
the time of entering into contract.
(b) At proper place : The promisor must ask the promisee, where he would like the
Contract to be performed, and to perform it at such place.
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Discharge of contract

❖ Meaning
❖ Modes of discharge of a contract.

Meaning

Discharge of contract means termination of the contractual relationship between the parties.

Modes of discharge of a contract

1. Discharge by performance of contract.

2. Discharge by agreement or consent.
3. Discharge by impossibility of performance.
4. Discharge by operation of law.
5. Discharge by breach of contract.

Discharge by performance of contract

This is the most pleasant end of a contract. When a contract is duly performed by both parties and
nothing more remains to be done. The performance may be either actual or attempted performance.

Discharge by agreement or consent

Since a contract is created by means of an agreement, it may also be discharged by another

agreement between the same parties. Sec 62 & 63 deal with their subject and provide for the following
methods of discharging a contract by mutual agreement.

1. Novation: If the parties to a contract agree to substitute a new contract for it, or to rescind or
alter it, the original contract need not be performed.
2. Rescission: When all or some of the terms of the contract are cancelled, rescission may take
place by mutual consent of the parties.
3. Alteration: When one or more of the terms of contract are altered by mutual consent of all the
parties to the contract, it is said that a contract has been altered.
4. Remission: Remission means acceptance of a lesser performance than, what was actually due
under the contract.
5. Merger: When an inferior right of a person under a contract, merges with superior rights under
a new contract, the contract with the inferior rights will come to an end.

Discharge by impossibility of performance

Impossibility existing at the time of formation of contract:

● Known to the parties.

Before making a contract, the parties had known their impossibility.
● Unknown to the parties.
In that time of contract, the parties not had known their impossibility of agreement.
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Discharge by operation of law

A contract may be discharged independently of the wishes of the parties (i.e.) by operation of
law.

Their includes discharge:

1. By death
2. By unauthorized material alteration.
3. By insolvency.

Discharge by breach of contract

Breach of contract means refusal of performance by a party. Where a party to a contract has
refused to perform, or disabled himself from performing his promise entirely. Breach of contract may
be of two kinds.,

(a) Anticipatory breach

(b) Actual breach

Anticipatory breach

It takes place before the date of actual performance the promisor may either inform the promisee
that he will not perform the contract or renders the performance impossible.

Actual breach

When a party fails to perform his obligation upon the date fixed for performance by the contract.

Remedies for breach of contract

Following are the remedies available to the aggrieved party in the event of the breach of a
contract.

1. Rescission of the contract.

2. Suit for damages.
3. Suit upon ‘quantum meruit’
4. Suit for specific performance.
5. Suit for injunction.

1. Rescission of the contract: Where one of the parties to a contract commits breach , the other party
may treat the Contract as rescinded with the result that he is freed from all his obligations under the
contract.

(Example) X promise to deliver two bags of sugar to Y on a certain day and Y promises to pay the
price on delivery of goods. On the appointed day, X does not deliver the bags. Y can rescind the
contract and need not pay the price.
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2. Suit for damages: means monetary compensation payable by the defaulting party to the aggrieved
party in the event of the breach of a contract. The object of providing damages is to put the aggrieved
party in the same position.

Types of damages may be

1. Ordinary damages – These damages constitute the direct loss suffered by the aggrieved party.
2. Special damages – These damages which result from a breach of contract under some special
circumstance. (i.e.,) remote or indirect.
3. Punitive damages – These damages are the exceptions to the rule that damages are not to be in
the nature of punishment.
4. Nominal damages – These damages are quite small in amount. They are awarded simply to
recognize the right of the party to claim damages for the breach of the contract.
5. Damages for loss of reputation – Damages for loss of reputation are not generally recoverable.
6. Damages for inconvenience and discomfort - Damages can be recovered for physical in
convenience and discomfort.

Suit upon ‘quantum meruit’

Quantum meruit means ‘As much as is earned or deserved’. The claim of quantum meruit arises
in the following cases:

1. Breach of contract.
2. When a contract is discovered to be void.
3. When the contract is divisible.

Suit for specific performance

Specific performance means the actual carrying out of the contract as agreed. Specific
performance is a discretionary order which is allowed only in a limited number of cases. Rules
regarding the granting of this relief are contained in the specific relief act. Under the provisions of this
Act, specific performance is granted in the following cases:

⮚ Where monetary compensation is not an adequate remedy for breach of contract.

⮚ When there is no standard for ascertaining an actual damage caused by the non-
performance.

Suit for injunction

Injunction means demanding court’s stay order. Injunction restrains a person from doing
something which amounted to breach of contract. Thus injunction is a mode of securing the specific
performance in negative terms.
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UNIT -2
Who is an agent?
An agent is a person employed to do any act for another, or to represent another in dealing with
third persons. Section 182.
Principal: The person for whom an act is done by the agent or who is represented in dealings with
third persons by the agent, is called the “Principal”. Section 182.
Who can employ / appoint an agent?
Any person who is of the age of majority according to the law to which he is subject and who is of
sound mind, may employ an agent. In simple words a person capable of entering into contract can
employ an agent.
Distinction between agent and servant:
Basic Agent Servant

1.authority to create An agent has an authority to create A servant has no such authority.
contractual relationship contractual relationship between the
principal and a third party.

2.direct control An agent is not subject to the direct A servant acts under the direct
control or supervision of the control and supervision of his
principal .as such he has greater master, and is bound to carry out all
discretion in his actions. A principal reasonable orders given to him in
has the right to direct what the agent the course of his work .
has to do but the master has also the
right to say how it’s to be done.

3.mode of remuneration An agent is paid commission on the A servant is paid by way of salary
basis of work done. or wages.

4.liability A principal is liable for only those A master is liable for the wrongs of
acts which are within the scope of hi servants committed in the course
the authority given to the agent. of the employment

5.work An agent may work for a number of A servant usually serves only one
principals at the same time master.
 19

Classes / Types of Agent

I) On the basis of extent of authority:
a) Special agent: As its name implies, a special agent is appointed to perform a special or particular act
or for a specific purpose or to represent to his principal for a specific transaction, like selling a car or
selling a house. His agency is limited to that particular act and is terminated after the transaction is
over.
b) General agent: A general agent is appointed to do all or general act relating to a particular trade or
business. In such a case, an agent has authority to do all such acts which are with in his scope of his
authority. Eg: A Managing Director of a company.
c) Universal agent: where an agent has unlimited authority he is called a universal agent. His
authority is not limited except where the act is of a personal nature.
II) On the basis of Nature of work:
a) Mercantile or commercial agents:
Mercantile agent is an agent who is in the customary course of business & has authority to sell
goods, or to buy goods, or to raise money on the security of goods.
The following are the types of mercantile agent:
*Broker: A broker is a person who brings two parties together to enter into a contract. He is a
connecting link and acts as an intermediary.
*Factor: A factor is a person who has the possession of Principal’s goods or the documents of title. He
has a right to enter into transaction in his own name, since he has possession of the goods. He has a
right of general lien on the goods belonging to his principal for a general balance of accounts.
*Auctioneer: An auctioneer is an agent appointed to sell goods by public action to the highest bidder.
He is under an obligation to take reasonable steps to minimize the loss of his principal, otherwise he
will be liable for negligence.
*Commission agents: A commission agent is a person who is employed to buy or sell goods. He
charges certain commission for the service he has rendered.
b) Non Mercantile agents:
They are agents who perform works like lawyers doing legal duties, bankers doing financial
duties, engineers or architects doing technical duties, etc.
 20

Distinction between sub agent and substituted agent

Basics Sub-agent - Sec 191 Substituted agent – Sec 194

1.appointment A sub agent is appointed by the agent A substituted agent is only named by
and as such he is under the control of the agent but is under the control of
agent. In simple words, a sub agent is the principal.
the agent of the agent.

2.position A sub agent acts under the agent A substituted agent acts
independently for his principal

3.privity of contract There is no privity of contract b/w the There is contractual relationship b/w
sub agent and the principal the substituted agent and the principal

4.rights to A sub agent can’t ask for his Substituted agent can ask for
remuneration remuneration from the principal. remuneration from the principal

5.rights to hold The principal can’t hold the sub agent The principal can hold the substituted
liable liable, except in case of the fraud. agent liable.

6.liability An agent is liable for the acts of the sub The agent is not liable for the acts of
agent. the substituted agent.

Rights and Duties of an Agent

Duties of an agent:
● To conduct principal’s business according to his direction (sec.211)
● To conduct his business with reasonable skill and diligence(sec.212)
● To render proper accounts to his principal and demand(sec.213)
● To communicate and obtain instructions in case of difficulty(sec.214)
● Not to deal on his own account(sec.215)
● Not to make any secret profit (sec.216)
● Liability for misrepresentation or fraud(sec.238)
● Liability for the acts of the sub-agent(sec.192&193)

Rights of an agent:
 21

● Rights of retainer (sec.217)

● Right to receive remuneration (sec.219)
● Right of indemnity (sec.222)
● Right to appoint sub-agent or substituted agent in certain cases
Rights and Duties of Principal:
Duties of Principal:
 To compensate the agent for injury caused (Sec 225)
 To pay remuneration & dues. (Sec 217)
 Principal is liable for misrepresentation or fraud committed by his agent (Sec 238)
 Principal is liable on contracts entered by agent with third persons. (Sec 226)
 Principal is liable on any notice given to agent (Sec 229)
 Principal is liable where he induces third persons to believe that agent’s unauthorized acts
were authorized (Sec 237).
Rights of Principal:
 Right to cancel the contract created by the agent.(Sec 215)
 Right to ratify or disown agent’s acts. Sec 196
 Right to claim loss or profit. Sec 211 & 212
 Right to claim benefit. Sec 216
 Right to revoke agent’s authority Sec 203
 Right to demand accounts Sec 213
 Right to refuse remuneration when agent is guilty of misconduct Sec 220.

Modes of Creating Contract of agency:

1. Express agency: An express agency may be created orally by word of mouth or by an agreement in
writing. Sec 186 & 187.
2. Implied agency: An agency is said to be implied when it is to be inferred from circumstances of the
case. An implied agency does not arise out of a contract, but it is implied from the act of the parties.
Sec 187.
3. Mode of Ratification: Ratification may be express or implied in the conduct of the person on whose
behalf the act are done. Sec 196. (example: A without B’s authority buys goods for him(B). Afterwards,
B sells those goods to C. B’s conduct implies a ratification of the purchases made for him by A.)
Requisites of valid ratification
 22

⮚ The act must have been done on behalf of the named.

⮚ The principal must be in existence at the time of contract.
⮚ The principal must be competent to contract at the time the contract was entered.
⮚ Ratification can be done of lawful contract.
⮚ Act to be ratified must be within the power of the principal.
⮚ Ratification to be valid must be communicated.
⮚ Ratification should not cause damages to a third party.

Termination of agency:
Termination by act of parties: A contract of agency may come to an end by the act of the parties as
follows:
1. By agreement: Sec 201: An agency is generally created by an agreement, so it may also be
terminated by an agreement so far as future transactions are concerned. Transaction that took place
prior to the termination shall continue to bind the principal. However, notice to third party is necessary.
2. Revocation by the principal: Sec.203: Provides that the principal may, (except where the agency is
coupled with interest), revoke the agency at any time before the authority has been exercised so as to
bind the principal.
3. Revocation by the agent: An agent has also a right to revoke the agency by giving a reasonable
notice in the same manner and with same liabilities recording compensation, as discussed above in the
case of revocation by the principal.
4. Termination by operation of law: Sec 201:
⮚ By performance or completion of the act of agency.
⮚ By expiry of time.
⮚ By death or insanity of either the principal or agent.
⮚ By insolvency of the principal.
⮚ By dissolution of a company.
⮚ By the principal or agent becoming alien enemy.

Unit-3
 23

Partnership (Indian Partnership Act 1932)

⮚ Definition of partnership
⮚ Essential elements of partnership
⮚ Types of partnership
⮚ Meaning of partner
⮚ Types of partners
⮚ Rights of partners
⮚ Duties of partners
⮚ Liability of partners
⮚ Dissolution of partnership

Definition of 'Partnership' Sec 4:

A business organization in which two or more individuals manage and operate the business.
Both owners are equally and personally liable for the debts from the business.

Essential elements of partnership

♦ An agreement: Partnership is the result of an agreement. It does not arise from status (as in the case
of Hindu Undivided Family), operation of law (as of co-owners) or inheritance. Agreement may be
express or implied. Again it may be oral or in writing. Partnership deed is example, of an agreement in
writing.

♦ Between two or more persons: There must be at least two persons to form a partnership. The Act
does not mention any thing about the maximum number of persons who can be partners in a partnership
firm, but the companies Act, 1956 (section 11) lays down that a partnership consisting of more than 10
persons for banking business and 20 persons for any other business would be illegal. Hence these
should be regarded as the maximum limits on the number of partners in a partnership firm.

♦ For carrying on a business: For a partnership to exist, it is essential that there should be a business.
Business includes every trade, occupation and profession. It may be for long term business activities or
for a particular venture or for a short duration.

♦ Sharing of profits: There must be sharing of profits. However, partners may agree to share profits in
any proportion. But whenever the partnership firm runs into losses, the partners will share it too, since a
loss represents a negative profit.

♦ Mutual agency: There must exist a mutual agency relationship among the partners. Mutual agency
implies that each partner acts for the other partners. He, thus, is an agent of other partners. Also each
partner is a principal for he is bound by the acts of other partners.

Types of Partnership

1.General partnership:
 24

In a general partnership, the liability of each partner is unlimited. It means that the firm's creditors
can realize their dues in full, from any of the partners by attaching their personal property if the firm's
assets are found to be inadequate to pay off its debts.

2. Limited partnership:

1. There must be at least one partner with unlimited liability. The liability of the remaining partners is
limited to their capitals in the firm. Thus, a limited partnership consists of two types of partners, general
partner and limited partner.
2. The limited partner cannot take part in the management of the firm. He has no implied authority to
represent and bind the firm. However, he is allowed to inspect the books of accounts of the firm.
3. The limited or special partner cannot assign his share to an outsider without the consent of the
general partner.
4. The limited partner cannot withdraw any part of his capital.
5. A limited partnership must be registered.

Advantages

i. It enables people to invest in a business without assuming unlimited risk and without devoting much
time and attention in management of business.
ii. It permits the mobilization of larger financial resources from cautious and conservative investors.
iii. It provides an opportunity to able and experienced persons to manage the business without any
interference from other partners. Complete control and personal supervision help to ensure prompt
decisions and uniform actions.
iv. It is more stable than general partnership because it is not dissolved by the insolvency, retirement,
incapacity or death of limited partner.

Disadvantages

(i) The limited partners are deprived of the right to manage. They remain at the mercy of the general
partner.
(ii) The general partner may misuse his power to exploit the limited partners.
(iii) A limited partnership enjoys little credit standing as the liability of some partners is limited. It has
to be registered.

3.Partnership at will:

It is a partnership formed for an indefinite period. The time period or the purpose of the firm is
not mentioned at the time of its formation. It can continue for any length of time depending upon the
will of the partners. It can be dissolved by any partner by giving a notice to the other partners of his
desire to quit the firm.

4. Particular partnership:
It is a partnership formed for a specific time period or to achieve a specified objective. It is
automatically dissolved on the expiry of the specified period or on the completion of the specific
purpose for which it was formed.
 25

Partner

A partner is a member in a partnership, an entity in which both the profits or losses of a business
or other venture are shared between all members. Corporations favor partnerships because of a taxation
structure that eliminates dividend taxes upon the profits of owners.

Types of Partners

1. Active or working partner:

Such a partner contributes capital and also takes active part in the management of the firm. He
bears an unlimited liability for the firm's debts. He is known to outsiders. He shares profits of the firm.
He is a full-fledged partner.

2. Sleeping or dormant partner:

A sleeping or inactive partner simply contributes capital. He does not take active part in the
management of the firm. He shares in the profits or losses of the firm. His liability for the firm's debts is
unlimited. He is not known to the outside world.

3. Secret partner:
This type of partner contributes capital and takes active part in the management of the firm's
business. He shares in the profits and losses of firm and his liability is unlimited. However, his
connection with the firm is not known to the outside world.

4. Limited partner:
The liability of such a partner is limited to the extent of his share in the capital and profits of the
firm. He is not entitled to take active part in the management of the firm's business. The firm is not
dissolved in the event of his death, lunacy or bankruptcy.

5. Partner in profits only:

He shares in the profits of the firm but not in the losses. But his liability for the firm's debts is
unlimited. He is not allowed to take part in the management of the firm. Such a partner is associated for
his money and goodwill.

6. Minor as a partner:
A minor is a person who has not completed 18 years of age. A minor cannot become a partner
because he is not qualified to enter into a contract. But he may be admitted to the benefits of
partnership with the mutual consent of all the partners.

8. Sub partner:
He is a third person with whom a partner agrees to share his profits desired from the firm. He
does not take part in the management of the firm. He is not liable for the firm's debts.

Rights of Partners

⮚ Right of the partner to take part in the day-to-day management of the firm.
⮚ Right to be consulted and heard while taking any decision regarding the business.
⮚ Right of access to books of accounts and call for the copy of the same.
⮚ Right to share the profits equally or as agreed upon by the partners.
⮚ Right to get interest on capital contributed by the partners to the firm.
 26

⮚ Right to avail interest on advances paid by the partners for business purpose.
⮚ Right to be indemnified in respect of payment made or liabilities incurred or for protecting the
firm from losses.
⮚ Right to the use of partnership property exclusively for partnership business only not himself.
⮚ Right as agent of the firm and implied authority to bind the firm for any act done in carrying the
business.
⮚ Right to prevent admission of new partners/expulsion of existing partners.
⮚ Right to continue unless and otherwise he himself cease to become partner.
⮚ Right to retire with the consent of other partners and according to the terms-and conditions of
deed.
⮚ Right of outgoing partner/legal heirs of deceased partner.

Duties of a Partner

1. To carry on the business to the greatest common advantage:

Every partner is bound to carry on the business of the firm to the greatest common advantage. In other
words, the partner must use his knowledge and skill in the conduct of business to secure maximum
benefits for the firm.

2. To render true accounts:

Every partner must render true and proper accounts I his co-partners. Each and every entry in the books
must be supported by vouchers and di explanations if demanded by other partners.

3. To provide full information:

Every partner must provide full information of £ activities affecting the firm to the other co-partners.
No information should be concealed, kept secret.

4. To attend diligently to his duties:

Every partner is bound to attend diligently to duties in the conduct of the business of the firm.

5. To work without remuneration:

A partner is not entitled to receive any kind remuneration for taking part in the conduct of the business.
But in practice, the working partners are generally paid remuneration as per agreement, so also
commission in some case.

6. To account for personal profits:

If a partner derives any personal profit from partnership transactions or from the use of the property of
the firm or business connection the firm or the firm's name, he must account for such profit and pay it
to the firm.

7. To share losses:
It is the duty of the partners to bear the losses of the firm. ' partners share the losses equally when there
is no agreement or as per their profit share ratio.

8. To act within authority:

Every partner is bound to act within the scope of authority. If he exceeds his authority and the firm
suffers from any loss, he shall have compensate the firm for such loss.
 27

9. Duty to be liable jointly and severally:

Every partner is jointly and individual liable to the third parties for all acts of the firm done while he is
a partner.

10. Duty not to assign his interest:

A partner cannot assign or transfer his partner interest to an outsider so as to make him the partner of
the firm without the consent of other partners. However, he can assign his share of the profit and his
share in the assets the firm where the assignee shall not be entitled to interfere in the conduct of the
business

Liabilities of a Partner

i. Liability of a partner for acts of the firm:

Every partner is jointly and severally liable for all acts of the firm done while he is a partner. Because
of this liability, the creditor of the firm can sue all the partners jointly or individually.

ii. Liability of the firm for wrongful act of a partner:

If any loss or injury is caused to any third party or any penalty is imposed because of wrongful act or
omission of a partner, the firm is liable to the same extent as the partner. However, the partner must act
in the ordinary course of business of the firm or with authority of his partners.

iii. Liability of the firm for mis-utilization by partners:

Where a partner acting within his apparent authority receives money or property from a third party and
misutilises it or a firm receives money or property from a third party in the course of its business and
any of the partners misutilises such money or property, then the firm is liable to make good the loss.

iv. Liability of an incoming partner:

An incoming partner is liable for the debts and acts of the firm from the date of his admission into the
firm. However, the incoming partner may agree to be liable for debts prior to his admission. Such
agreeing will not empower the prior creditor to sue the incoming partner. He will be liable only to the
other co-partners.

v. Liability of a retiring partner:

A retiring partner is liable for the acts of the firm done before his retirement. But a retiring partner may
not be liable for the debts incurred before his retirement if an agreement is reached between the third
parties and the remaining partners of the firm discharging the retiring partner from all liabilities. After
retirement the retiring partner shall be liable unless a public notice of his retirement is given. No such
notice is required in case of retirement of a sleeping or dormant partner.

Dissolution of a Partnership

The dissolution of a partnership is the process during which the affairs of the partnership are
wound up (where the ongoing nature of the partnership relation terminates). This should not be
confused with the term dissolution when applied to a limited company, which is the event that marks
the conclusion of the winding-up.

When can a partnership be dissolved?

Generally a partnership can be dissolved if all partners agree to the decision, or in the following
circumstances:
 28

⮚ It has become illegal (eg: if a partner can no longer legally own a business);
⮚ A partner gives written notice to the other partners;
⮚ A court order requires the partnership to end;
⮚ The life of the partnership has expired; or
⮚ Any partner dies or becomes bankrupt.

Technical dissolution versus general dissolution

So far as regards a partnership, there are two types of dissolution – technical and general.

Technical dissolution
A technical dissolution takes place each time there is a change in the composition of the firm –
i.e., technically, the partnership is dissolved each time one partner leaves (and is replaced by another),
or a new partner joins. In such a case there will usually be no break in the business of the partnership
with the ‘new’ firm generally taking on the assets and liabilities of the ‘old’.

A general dissolution
A general dissolution is the full dissolution of the partnership – following, for example, the
cessation of trade, the bankruptcy or death of a partner or by agreement. The general dissolution
involves the winding-up of the partnership and the taking of and settling of accounts.
 29

UNIT-4
Contract of Sale of Goods

The Law relating to sale of goods is contained in the Sale of Goods Act, 1930

Contract of Sale

Section 4(1) of the Sale of Goods Act defines a contract of sale of goods as – “a contract
whereby the seller transfers or agrees to transfer the property in goods to the buyer for a price”.

Essentials / Features of Contract of Sale:

1. Two Parties: The first essential is that there must be two distinct parties to a contract of sale,
viz.., a buyer and seller.
2. Transfer of Property: ‘Property’ here means ownership. Transfer of property in the goods is
another essential of a contract of sale of goods.
3. Goods: The subject - matter of the contract of sale must be ‘goods’, According to Section 2(7),
“goods means every kind of movable property.
4. Includes both a ‘Sale’ and ‘an agreement to sell:’

(I.) Sale: where under a contract of sale, the property in the goods is immediately
transferred at the time of making the contract from the seller to the buyer; the
contract is called a ‘SALE’.
(II.) An Agreement to sell: Where under a contract of sale, the transfer of property in
the goods is to take place at a future time or subject to some condition thereafter to
be fulfilled, the contract is called ‘an agreement to sell’.
5. The parties to contract must be competent to contract.
6. The consent of the parties must be free.
7. The object of the contract must not be unlawful.

‘Sale’ and ‘Agreement’ to ‘Sell’ Distinguished:

Points of Sale Agreement to Sell

Distinction
1) Transfer of The property in goods passes to the There is no transfer of property to the
Property / buyer immediately at the time of buyer at the time of contract.
Ownership making the contract.
2) Transfer of Risk The property in the goods passes to Since property does not pass to the
the buyer and so as a rule, the risk also buyer, the risk also does not pass to
passes to the buyer. the buyer.
3) Liability A subsequent loss or destruction of the The liability remains with the seller
goods is the liability of the buyer. where the transaction only amounts
to an agreement to sell.
4) Executed or It is an executed contract because It is an executory contract because
Executory Contract nothing remains to be done. something remains to be done.
5) Rights of Seller Seller can sue the buyer for the price Seller can sue the buyer for damages
 30

against the Buyer’s even though the goods are in his even though the goods are in the
Breach possession. possession of the buyer.
6) Rights of Buyer Buyer can sue the seller for damages Buyer can sue the seller for damages
against the Seller’s & can sue the third party who bought only.
Breach those goods.
7) Effect of If the seller is adjudged insolvent, theIf the buyer has already paid the price
Insolvency of seller buyer is entitled to recover the goods and the seller is adjudged insolvent,
having possession from the Official receiver or assignee, the buyer can only claim a ratable
of goods as the property in goods rests eith the dividend & nit the goods because
buyer. property in them still rests with the
seller.
8) Effect of Seller must deliver the goods to the Seller can refuse to deliver the goods
Insolvency of the official receiver or assignee because unless he is paid full price of the
Buyer before the ownership of goods has transferred goods because the ownership has not
paying the price. to the buyer. He can only claim ratable transferred to the buyer.
dividend for the unpaid price.

‘Sale’ and ‘Hire purchase’ Distinguished:

SALE HIRE PURCHASE

1) Property in the goods is transferred to the The property in the goods passes to the hirer
buyer immediately at the time of contract upon payment of the last instalment.

2) The position of the buyer is that of the owner Position of the hirer is that of a bailee till he pays
of the goods. the last instalment.
3) The buyer cannot terminate the contract and is The hirer may, if he so likes, terminate the
bound to pay the price of the goods. contract by returning the goods to its owner
without any liability to pay the remaining
instalments.

4) The seller takes the risk of any loss resulting The owner takes no such risk, for if the hirer fails
from the insolvency of the buyer. to pay an instalment, the owner has the right to
take the goods.

5) The buyer can pass a goods title to a bonafide The hirer cannot pass any title even to a bonafide
purchaser from him. purchaser.

6) Tax is levied at the time of the contract. Tax is not livable until it eventually ripens into a
sale.

Goods: Sec 2(7)

Goods means, every kind of movable property other than actionable claims & money.

Eg: Old rare coins, stock, shares, debentures, goodwill, patents, trademark, copyright, water, gas,
electricity, grass, growing crops, woods, etc.
 31

Type of Goods:

GOODS

Future Goods Existing Goods Contingent Goods

Specific Goods Ascertained Goods Unascertained Goods

Future Goods:

Future goods are goods that are not yet in existence or that do not yet belong to the seller when the
contract of sale is made. This could be goods that are yet to be manufactured or that the seller has not
yet acquired.
For example, a farmer may agree to sell a buyer all of the milk produced by his/her cows in the coming
year. This is called an "agreement to sell." Because the milk does not yet exist at the point of making
the contract, it is an example of future goods.

Contingent Goods
Although contingent goods are a type of future goods, they differ in that they are dependent on a
specific contingency.
For example, a seller may agree to sell a buyer some specific goods that are due to arrive on a particular
ship. If, when the ship arrives, it does not contain those goods, the buyer will still have fulfilled his
agreement, because the sale was contingent on the ship containing those specific goods.

Existing Goods
Existing goods are goods that physically exist and belong to the seller at the time of contract of sale.
Existing can be further divided into two categories:
 Specific Goods: These are goods that are specifically agreed upon between the seller and buyer
at the time of making the contract of the sale.
For example, the seller may agree to sell the buyer a specific item bearing a specific number.
These are sometimes known as "ascertained goods." This distinction becomes important
because of the rules regarding the transfer of property between parties.
 Ascertained Goods: Goods are said to be ascertained when out of a mass of unascertained
goods, the quantity extracted for is identified & set aside for a given contract.
 Unascertained goods: These are goods that are agreed upon at the point of making the contract
of sale but are not specifically identified in the contract.
 32

For example, a seller may agree to sell a buyer one out of a number of items of the same type
(e.g., bags of sugar) without defining which specific item the buyer will receive. As soon as the
specific item is defined, for example when being prepared for delivery, this becomes specific, or
ascertained goods.

The Price - Sec 2 (10)

The money consideration for sale of goods is known as ‘price’. Price is essential in every
contract of sale of goods, that is, no valid sale can take place without a price.

Ascertainment of Price:

1. It may be expressed in the contract itself: This is most usual mode of fixing the price. The
parties are free to fix any price they like and the court will not question the adequacy of price.
But the sum should be definite. Where an alternative price is fixed, the agreement is void.

2. It may be fixed in accordance with an agreed manner provided by the contract: For
example, it may be agreed that the buyer would pay the market price prevailing on a particular
date, or that the price is to be fixed by a third party (i.e., valuer) appointed by the consent of the
parties.

3. It may be determined by the dealings between the parties: For example, if the buyer has
been previously paying to a seller the price prevailing on the date of placing the order, the
course of dealings suggest that in subsequent transactions also, the price as on the date of order
will be paid.

4. If the Price is not capable of being determined in accordance with any of the above
modes, the buyer is bound to pay to the seller a ‘reasonable price’. What is a reasonable price is
a question of fact depending on the circumstances of each particular case. Ordinarily, the market
price of the goods prevailing on the date of supply is taken as reasonable price.

Conditions and warranties

Condition - Sec 12(2)

A condition is a stipulation which is essential to the main purpose of the contract, the breach of
which gives rise to treat the contract as repudiated.

A condition is regarded as the very basis or foundation of the contract. If there is a breach of the
condition, the contract will fail and it will entitle the aggrieved party to put an end to the
contract.

Types of Conditions:

1) Express Condition: A condition is said to be an express condition when the terms of the contract
expressly state them.
 33

2) Implied Condition: A condition is said to be implied condition when the terms of the contract are not
being expressly provided for.

Implied Conditions include:

1) Condition as to Title: Sec 14(a): This implied condition emphasizes that when a person seeks to
sell some goods, there is an unspoken assurance from him that he is entitled to sell them & pass the
property to the buyer. It is not the buyer’s duty to make inquiries to confirm the seller’s right to sell.

2) Sale by Description: Sec 15: In a sale by description, there is an implied condition that the goods
shall correspond with the description.

3) Condition as to fitness or quality: Sec 16(1): In contract of sale there is no implied condition or
warranty as to fitness or quality of the goods. But an implied condition is deemed to exist on the part of
the seller that the goods supplied shall be reasonably fit for the purpose for which the buyer wants
them.

4) Condition as to Merchantability: Sec 16(2): The seller should be a dealer in goods of the stated
description.

5) Conditions implied in case of sale by Sample: Sec 17(1): A contract of sale is a contract for sale
by sample where there is a term in the contract, express or implied to that effect. Which means that the
goods have to be of same quality & must be free from any defect as that of the sample given to the
buyer.

6) Conditions as to Wholesomeness: Condition as to wholesomeness means that goods shall be fit for
human consumption.

Warranty - Sec 12(3)

A warranty is a stipulation collateral to the main purpose of the contract. The breach of which
gives rise to a claim for damages but not a right to reject the goods and treat the contract as
repudiated.

Distinction between a condition and a warranty

Basis Condition warranty

Difference as A condition is a stipulation which is A warranty on the other hand is a

to purpose essential to the main purpose of the stipulation which is collateral.
contract.

Difference as A breach of the condition gives rise to The breach of which gives rise to a
to remedy repudiate the contract and, in some claim for damages but not a right to
cases, a right to claim damages as well. repudiate the contract.
 34

Difference as A breach of condition may be treated as A breach of warranty cannot be

to treatment a breach of warranty. treated as a breach of condition.

Transfer of property or ownership:

The main purpose of a contract of sale is to transfer property. The property in the goods means
ownership.

Why is it necessary to know when the property or ownership passes from seller to the buyer?

1. For ascertaining risk or loss: it is cardinal rule of law that risk follow property, (i.e.)
ownership.

2. For ascertaining right of action against the third parties: it is the owner of the goods who
can take action against the third parties, if they cause loss to the goods.

3.For ascertaining right of insolvency of the seller or the buyer: if the ownership has passed
to the buyer, the buyer’s official assignee of receiver can take possession of the goods even if
the goods have not been delivered by the seller. If the ownership has not passed, he cannot.

Performance of contract of sale – Sec 31.

Performance of a contract of sale implies a duty of the seller to deliver the goods, and of the buyer to
accept the delivery of the goods and make payment in accordance with the terms of the contract.

Delivery of goods: – Sec 2(2):

‘Delivery has been defined as voluntary transfer of possession of goods from one person to
another.

The Delivery of Goods may be:

1. Conditional: In case of conditional delivery of goods, ownership does not pass to buyer,
unless condition is fulfilled, e.g. bill is accepted or payment is made.
2. Unconditional: In case of unconditional delivery of goods, the ownership passes from seller
to the buyer

Modes / Types of delivery:

1. Actual delivery: actual delivery means physical transfer of goods by the seller to the buyer.
The delivery may be made by the agent of the seller to the agent of the buyer.
2. Symbolic delivery: where the goods are bulky, it is usual for the seller to give symbolic
delivery.
3. Constructive delivery: in place of actual or symbolic delivery, the goods may be delivered
without any change in their actual or visible custody.
 35

Rules regarding delivery:

1. Delivery by whom and to whom (sec.31): It is the duty of the seller to deliver the goods
and of the buyer to accept and pay for the goods delivered.

2. Delivery and payment are concurrent conditions (sec.32): Unless otherwise agreed,
delivery of goods and payment of price are concurrent conditions. i.e., at the same time or
reciprocally.

3. Mode of delivery (sec.33): This has been discussed in detail in earlier paragraphs. The
delivery may be actual. Symbolic or constrictive. The parties may agree to any mode of
delivery expressly or impliedly.

4. Effect of part delivery (sec.34): A delivery of part of the goods, in the process of the
delivery of the whole, has the same effect, for the purpose of passing the property in such
goods, as a delivery of the whole.
5. Delivery to be made on request of the buyer (sec.35): Apart from any express contract, a
seller is not bound to deliver the goods unless and until requested by the seller.

6. Place of delivery (sec.36 {1}): In the absence of an agreement, express or implied, the
goods sold are to be delivered at the place at which they are at the time.

7. Time of delivery: If any time is specified by the parties, the goods must be delivered by
that time.

8. Delivery of goods in possession of third persons [sec.36 (3)]: Where the goods at the time
of sale are in possession of a third person, there is no delivery by the seller to the buyer
unless such third person acknowledges to the buyer that he holds the goods on his behalf.

9. Expenses of Delivery: Unless otherwise agreed, the expenses of and incidental to putting
the goods into a deliverable state shall be borne by the seller. In case the buyer is compelled
to pay these expenses, he can recover the same from the seller.

10. Effect of Delivery of wrong quantity [Sec. 37]

(i) Short Delivery [Sec. 37(1)]: Where the seller delivers lesser quantity than contracted for
the buyer has the option to accept or reject the whole. Naturally, when he accepts, he must
pay for them at the contract price.
(ii) Delivery of mixed goods [Sec. 37(3)]: Where the seller delivers to the buyer the goods
he contracted to sell mixed with goods of a different description not included in the contract,
the buyer may accept the goods which are in accordance with the contract and reject the rest,
or may reject the whole.
 36

Unpaid Seller: Who is an Unpaid Seller?

A seller of goods is deemed to be unpaid seller in the following cases:

1. When the whole of the price has not been paid or tendered;

2. When a bill of exchange or other negotiable instrument has been received as conditional
payment and it has been dishonored [Sec. 45(1)]
3. Whole of the price has not been paid.
4. The amount is due, i.e., the seller has immediate cause of action, or conditional payment and
the same have been satisfied.
5. A negotiable instrument, i.e., a cheque or a bill was received as conditional payment and the
same has been dishonored.

RIGHTS OF AN UNPAID SELLER:

Rights of unpaid seller

Rights against the goods Rights against the buyer personally

When property
in the goods has
passed to the buyer Suit for Suit for Rescission of Suit for
[Sec. 46(1)] Price damages Contract interest
[Sec. 55] [Sec. 56] [Sec. 60] [Sec. 60 (2)]

Lien Stoppage in transit Re – Sale

[Sec. 47 to 49] [Sec. 50 to 52] [Sec. 54]

(A) Rights of Unpaid Seller against the goods.

When property in the goods has passed to the buyer

(1) Right of Lien [Sec. 47 to 49]: A Lien is a right to retain possession of goods until the buyer
pays the price. The unpaid seller can retain the goods in his possession in the following cases:

(i) The goods have been sold on credit, or

(ii) The goods have sold on credit but the period credit has expired, or

(iii) The buyer has become insolvent [Sec.47 (1)].

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(2) Rights of Stoppage in transit [Sec. 50 to 52]: Right of stoppage in transit is an extension of the
right of lien. It is because of the reason it is remarked that the right of lien is a right to retain possession,
whereas right of stoppage in transit is a right to regain possession. A seller who has lost his right to
retain possession may regain possession of goods if the goods are in transit and the buyer has become
insolvent in the meantime. He may hold the goods until the price is paid or tendered.

(3) Rights of Re-sale [Sec.54]: An unpaid seller has a limited right of re-sale. When the unpaid seller
has exercised his right of lien or stoppage in transit, he can resell the goods coming into his possession.

An unpaid seller has a right to resell the goods in the following cases:

(i). When the goods are of perishable nature.

(ii). In any other case, When he gives notice to the buyer showing his intention to re-sell the
goods and the buyer does not, within a reasonable time, pay or tender the price.
(iii). When the seller expressly reserves a right of re-sale in case the buyer makes a default.

(B) Rights of Unpaid Seller against the buyers personally [Sec. 55 to 61]: So far we have discussed
the rights of an unpaid seller against the goods. Besides, there are certain rights which are available
against the buyer personally. Such rights are in the nature of jus in person am, i.e., rights in person am.
These rights are as follow:

(1)SuitforPrice:
{A}: Where Property has passed [Sec. 55(1)]: Where under a contract of sale, the property in
the goods has passed to the buyer and the buyer wrongfully neglects or refuse to pay for the goods, the
seller may sue him for the price of the goods.

{B}: Where property in the goods has not passes: As a rule, where property in the goods has
not passes, the seller cannot file a suit for price. His remedy is by way of damages. However, Sec. 55(2)
provides that where under the contract of sale, price is payable on a certain day, irrespective of delivery
and the buyer wrongfully neglects or refuse to pay such price, the seller may sue him for the price
although the property in the goods has not passed and the goods have not been appropriated to the
contract.

(2) Suit for damages for non-acceptance [Sec. 56]: Where the buyer wrongfully neglects or refuses to
accept and pay for the goods, the seller may sue him for damages for non-acceptance. The measure of
damages, however, is given in Sec. 73 of the Indian Contract Act.

(3) Right to repudiate contract before the due date [Sec. 60]: Where either party to a contract
repudiates the contract before the date of delivery, the other party may either treat the contract as
subsisting and wait till date of delivery. The seller may treat the contract as rescinded and sue for
damages for the breach.

(4) Suit for interest: As a rule, interest is not payable, unless otherwise agreed. As such interest may
be recovered only when there is a specific agreement is this respect. In case there is no such agreement,
the seller may give notice to the buyer of his intention to charge interest on the price when it becomes
payable from the day, as indicated in the above notice.
 38

Unit V: Insurance

The life and property of an individual are surrounded by the risk of death, disability or
destruction. These risks may result in financial losses. Insurance is a prudent way to transfer such risks
to an insurance company.

Definition of Insurance:
Insurance is a contract, represented by a policy, in which an individual or entity receives
financial protection or reimbursement against losses from an insurance company. The company pools
clients' risks to make payments more affordable for the insured.
Insurance policies are used to hedge against the risk of financial losses, both big and small, that
may result from damage to the insured or her property, or from liability for damage or injury caused to
a third party.

Meaning of Insurance?
Insurance is a legal agreement between two parties i.e. the insurance company (insurer) and the
individual (insured). In this, the insurance company promises to make good the losses of the insured on
happening of the insured contingency.
The contingency is the event which causes a loss. It can be the death of the policyholder or
damage/destruction of the property. It’s called a contingency because there’s an uncertainty regarding
happening of the event. The insured pays a premium in return for the promise made by the insurer.

How does insurance work?

The insurer and the insured get a legal contract for the insurance, which is called the insurance
policy. The insurance policy has details about the conditions and circumstances under which the
insurance company will pay out the insurance amount to either the insured person or the nominees.
Insurance is a way of protecting yourself and your family from a financial loss. Generally, the
premium for a big insurance cover is much lesser in terms of money paid. The insurance company takes
this risk of providing a high cover for a small premium because very few insured people actually end
up claiming the insurance. This is why you get insurance for a big amount at a low price.
Any individual or company can seek insurance from an insurance company, but the decision to
provide insurance is at the discretion of the insurance company. The insurance company will evaluate
the claim application to make a decision. Generally, insurance companies refuse to provide insurance to
high-risk applicants.

Types of insurances available in India?

Insurance in India can be broadly divided into following categories:
Life insurance
As the name suggests, life insurance is insurance on your life. You buy life insurance to make sure your
dependents are financially secured in the event of your untimely demise. Life insurance is particularly
important if you are the sole breadwinner for your family or if your family is heavily reliant on your
income. Under life insurance, the policyholder’s family is financially compensated in case the
policyholder expires during the term of the policy.

Health insurance
Health insurance is bought to cover medical costs for expensive treatments. Different types of health
insurance policies cover an array of diseases and ailments. You can buy a generic health insurance
 39

policy as well as policies for specific diseases. The premium paid towards a health insurance policy
usually covers treatment, hospitalization and medication costs.

Vehicle insurance
In today’s world, a vehicle insurance is an important policy for every car/bike owner. This insurance
protects you against any untoward incident like accidents. Some policies also compensate for damages
to the car/bike during natural calamities like floods or earthquakes. It also covers third-party liability
where you have to pay damages to other vehicle owners.

Education Insurance
The child education insurance is akin to a life insurance policy which has been specially designed as a
saving tool. An education insurance can be a great way to provide a lump sum amount of money when
your child reaches the age for higher education and gains entry into college (18 years and above). This
fund can then be used to pay for your child’s higher education expenses. Under this insurance, the child
is the life assured or the recipient of the funds, while the parent/legal guardian is the owner of the
policy.

Home insurance
Home insurance can help with covering loss or damage caused to your home due to accidents like fire
and other natural calamities or perils. Home insurance covers other instances like lightning, earthquakes
etc.

Types of Life Insurance Policies:

1. Term insurance plan

As the name says Term insurance plan are those plan that is purchased for a fixed period of time, say
10, 20 or 30 years. As these policies don’t carry any cash value their policies do not carry any maturity
benefits, hence their policies are cheaper as compared to other policies. This policy turns beneficial
only on the occurrence of the event.
2. Endowment policy
The only difference between the term insurance plan and the endowment policy is that endowment
policy comes with the extra benefit that the policyholder will receive a lump sum amount in case if he
survives until the date of maturity. Rest details of term policy are same and also applicable to an
endowment policy.
3. Unit Linked Insurance Plan
These plans offer policyholder to build wealth in addition to life security. Premium paid into this policy
is bifurcated into two parts, one for the purpose of Life insurance and another for the purpose of
building wealth. This plan offers to partially withdraw the amount.
4. Money Back Policy
This policy is similar to endowment policy, the only difference is that this policy provides many
survival benefits which are allotted proportionately over the period of the policy term.
5. Whole Life Policy
Unlike other policies which expire at the end of a specified period of time, this policy extends up to the
whole life of the insured. This policy also provides the survival benefit to the insured. In this type of
policy, the policyholder has an option to partially withdraw the sum insured. Policyholder also has the
option to borrow sum against the policy.
 40

6. Annuity/ Pension Plan

Under this policy, the amount collected in the form of a premium is accumulated as assets and
distributed to the policyholder in form of income by way of annuity or lump sum depending on the
instruction of insured.

Benefits of Life Insurance:

1. Risk Coverage: Insurance provides risk coverage to the insured family in form of monetary
compensation in lieu of premium paid.
2. Difference plans for different uses: Insurance companies offer a different type of plan to the
insured depending on his need for insurance. More benefits come with the more premium.
3. Cover for Health Expenses: These policies also cover hospitalization expenses and critical illness
treatment.
4. Promotes Savings/ Helps in Wealth creation: Insurance policies also come with the saving plan
i.e. they invest your money in profitable ventures.
5. Guaranteed Income: Insurance policies come with the guaranteed sum assured amount which is
payable on happening of the event.
6. Loan Facility: Insurance companies provide the option to the insured that they can borrow a certain
sum of amount. This option is available on selected policies only.
7. Tax Benefits: Insurance premium is tax deductible under section 80C of the income tax Act, 1961.

Life Insurance Companies in India:

Some of the prominent life insurance companies in India are:
1. LIC – Life insurance corporation of India
2. SBI Life Insurance
3. ICICI Prudential Life Insurance
4. HDFC Standard Life Insurance
5. Bajaj Allianz Life Insurance
6. Max Life Insurance
7. Birla Sun Life Insurance
8. Kotak Life Insurance

What is General Insurance?

General insurance is a contract that covers any risk other than the risk of life. The General
Insurance safeguards our health and our property, such as home, car, and other valuables from fire,
theft, flood, accident, earthquake etc. These are the contract of indemnity, wherein the general insurer
promises to make good, the losses occurred to the insured. These contracts are of short term in nature -
generally one year - and therefore, the policy renewal is required every year.
There are many a type of General Insurance policies and the common ones for an individual is – Medi-
claim Insurance, Motor Insurance, Home Insurance, Travel Insurance and Fire Insurance etc.

Difference between Life Insurance and General Insurance:

S. No LIFE INSURANCE GENERAL INSURANCE

1 Life Insurance is a contract which ensures General Insurance is a contract of
your life risk and also works as in an indemnity which promises to make good
investment avenue. your losses.
 41

2 In Life Insurance, the sum assured along In General Insurance, the amount of
with benefits is paid either on the event of actual loss or claim is reimbursed on the
death of the policy holder or on maturity happening of the certain event against
of the policy. which the policy has been issued.

3 Life Insurance is a long term contract, General Insurance is a short term

some policies even run till such time you contract, generally for one year and needs
are alive. to be renewed every year on expiry.

4 Since Life Insurance is a long term The premium for General Insurance is
contract, the premium needs to be paid payable only in case the policy is
throughout the term of the policy or up to renewed after one year.
the minimum premium paying term.
5 Through certain Life Insurance policies In General Insurance, the amount payable
you can also create wealth in the long is confined to the losses suffered or the
term apart from securing your life. maximum cover amount of the policy. If
there is no claim during a year, the
premiums are not returned to the policy
holder; therefore, there is no savings
component attached to the General
Insurance policy.

6 In case of Life Insurance, the insurable In case of General Insurance, the

interest (i.e. the individual who is taking insurable interest (i.e. the individual who
the policy) must be present at the time of is taking the policy) must be present both
contract. at the time of contract and at the time of
loss.

FIRE INSURANCE CONTRACT - DEFINITION

Fire insurance is a contract where the insurer undertakes to pay the insured in case of damage
caused by fire. To claim fire insurance two conditions need to be met. There must be actual loss due to
fire and the fire must be accidental.
The main elements of a fire insurance contract are:

(i) In fire insurance, the insured must have insurable interest in the subject matter of the insurance.
Without insurable interest the contract of insurance is void. In case of fire insurance, unlike life
insurance insurable interest must be present both at the time of insurance and at the time of loss.
(ii) Similar to the life insurance contract, the contract of fire insurance is a contract of utmost good faith
i.e., uberrimae fidei.
(iii) The contract of fire insurance is a contract of strict indemnity. The insured can, in the event of loss,
recover the actual amount of loss from the insurer. This is subject to the maximum amount for which
the subject matter is insured.
(iv) The insurer is liable to compensate only when fire is the proximate cause of damage or loss.

TYPES OF FIRE INSURANCE POLICIES:

1. Valued Policy: This is a type of policy where the value of the subject matter of Insurance is agreed
upon at the time of making the contract. The insurer has to pay a specified amount or value irrespective
of the amount of loss caused due to fire. Valued policy is taken for those goods whose value becomes
 42

difficult to calculate in case of loss by fire. This type of policy can be taken for art work, paintings, etc
where the value of the damaged articles become difficult to assess/measure.

2. Average Policy: It is a policy which contains an average clause. If the subject matter is not insured
as per the exact market value or undervalued, then the insurer is liable to pay that percentage of the loss
for which it is insured.
E.g. If a policy is taken for Rs 50,000 against the market value of Rs 100,000, the loss incurred due to
fire is Rs 40,000, then the insurance company will pay Rs 20,000 (50% of Rs 40,000).

3. Specific Policy: In case of a specific policy, the property is insured for a definite sum irrespective of
the market value. If there is a loss, the stated amount will have to be paid to the policy holder. But the
actual value of the subject matter is not considered in this respect.
E.g. A property of value Rs 100,000 is insured for Rs 60,000 and the loss due to fire is Rs 30,000 then
the insurance company will pay Rs 30,000 in full as compensation.

4. Floating Policy: This policy can be taken for those goods which are lying in different localities or
warehouses. Since the quantity of goods lying at different places fluctuate from time - to time, it
becomes difficult for the owner to take specific policy so businessmen and traders take fluctuating
policy. Such a policy is usually taken for one sum and one premium for goods lying at different places.
5. Comprehensive Policy: Comprehensive policy covers all types of risks like fire, burglary, riots,
explosion, strikes, etc. This policy is also called as all-in-one policy. This type of policy is not popular
in India but very popular in the countries like UK, USA, etc.

6. Excess Policy: Excess policy is taken when the value of the stock in the market constantly fluctuates.
In such an instance it is not advisable to take one policy of certain sum, but instead two policies can be
taken.
i. One policy is for a minimum amount below which value of the stock never falls.
ii. Another policy for a difference/excess amount (for a maximum amount of stock) by which price
fluctuates.
Eg: If the value of stock ranges between Rs 100,000 and Rs 130,000, then one policy is taken for Rs
100,000 and another policy for excess amount i.e. Rs 30,000.

7. Reinstatement Policy: This is a type of Fire Insurance Policy where the insurer undertakes to
replace the property or goods lost by fire. In this policy instead of paying compensation for the property
lost by fire, the property is replaced. While paying compensation, the depreciation amount of the
property is not taken into consideration. The rate of premium is higher in Reinstatement Policy.

8. Blanket Policy: Blanket Policy covers all fixed and current assets of the assured in one policy.
Under this policy all the assets lying at different places are covered under one premium and one policy.

Fire Insurance Claim Process

If you happen to encounter an eventuality because of fire, you need to make claims under fire
insurance. To avoid rejection and fasten the claim process, you should be clear of the procedure and the
documents needed.
 Immediately inform the insurance provider either online or by calling on their 24/7 toll-free
number
 Also, contact the fire brigade and the police
 Insurance company will appoint a surveyor for scrutiny of the situation
 Submit the duly filled in claim form and other proofs and photographs
 43

 If approved, the claim can be settled from 15-30 days, as the time duration is different for
the insurance companies

Marine Insurance
What is Marine Insurance?
Marine insurance protects against business losses incurred during water transport operations.

Characteristics / Features of marine insurance policy

PROPOSAL AND ACCEPTANCE

It is based on a general proposal and acceptance concept. Coverage of risk will start from the date of
acceptance of the proposal by the insurance company. Any loss or damage to goods in transit occurring
prior to the date of acceptance of proposal will not be covered under the marine insurance policy.
PAYMENT OF PREMIUM
Coverage of risk will also start from the date of payment of premium. If the payments are made in
cheque, the date of realization of money will be considered for providing the risk coverage.
CONTRACT OF INDEMNITY
Marine insurance is a contract of indemnity. That means, the insurance company is liable to
compensate only till the extent of actual loss suffered. There is no liability lies on the part of the
insurance company if there is no actual loss suffered. For example, let's says an insured has a marine
insurance policy for Rs.25 lacs. In the event of loss, actual loss was estimated as Rs.15 lacs. In this
case, insured will not receive a compensation more than Rs.15 lac even if the coverage is Rs.25 lac.
INSURABLE INTEREST
Marine insurance gets applicable only if the insured has an insurable interest in the subject matter
(insurable property) at the time of loss. Requirement of insurable interest to be present only at the time
of loss makes the marine insurance policy as ‘freely assignable'. Policy can be assigned freely prior to
or after the occurrence of damage or loss unless the terms and condition of the policy restricts it.
UTMOST GOOD FAITH
Marine insurance policies work on the principle of utmost good faith. Owner of the goods or property
to be transported must disclose all the required information accurately to the insurance company at the
time of availing the marine insurance. Non-disclosure, mis-description or misrepresenting of facts and
information by insured makes the marine insurance policy voidable at the time of claim.
PRINCIPLE OF SUBROGATION
Marine insurance policy works on the principle of subrogation. But the right of subrogation arises only
after the payment has been made to the insured. After settling the marine insurance claim, insurer holds
all the right to sue the third party who is responsible for the loss. In this case, insurer can recover the
amount of compensation paid to insured from the third party. The aim of the principle of subrogation is
to ensure that the insured receives the compensation only for actual loss suffered.
PRINCIPLE OF CONTRIBUTION
Principle of contribution applies in case of multiple marine insurance policies. Losses will be paid
proportionately if the insured holds multiple policies for his goods or property. For instance, goods
worth Rs.40 lac is insured with two different insurers. And there is loss of goods in the marine event,
total amount of loss will be compensated to the insured proportionately by both the insurance
companies.
COMES WITH WARRANTY
Marine insurance policies come with warranty which is a legal undertaking between insurance
company and insured. It's basically a legal obligations by the insured. Marine insurance policy stands
cancelled or terminated as soon as there is breach of warranty. Warranty can be express warranty which
 44

are expressly included in the policy or can be an implied warranty which is not included expressly in
the policy but are assumed and understood by both the parties in the contract.

Types of marine insurance:

 Hull Insurance: Hull insurance mainly caters to the torso and hull of the vessel along with all
the articles and pieces of furniture on the ship. This type of marine insurance is mostly taken out
by the owner of the ship to avoid any loss to the vessel in case of any mishaps occurring.
 Machinery Insurance: All the essential machinery are covered under this insurance and in case
of any operational damages, claims can be compensated (post-survey and approval by the
surveyor).
 Protection & Indemnity (P&I) Insurance: This insurance is provided by the P&I club, which
is ship owners mutual insurance covering the liabilities to the third party and risks which are not
covered elsewhere in standard H & M and other policies.
Protection: Risks which are connected with ownership of the vessel. E.g. Crew related claims.
Indemnity: Risks which are related to the hiring of the ship. E.g. Cargo-related claims.
 Liability Insurance: Liability insurance is that type of marine insurance where compensation is
sought to be provided to any liability occurring on account of a ship crashing or colliding and
on account of any other induced attacks.
 Freight, Demurrage and Defense (FD&D) Insurance: Often referred to as “FD&D” or
simply “Defense,” this insurance provides claims for handling assistance and legal costs for a
wide range of disputes which are not covered under H&M or P&I insurance.
 Freight Insurance: Freight insurance offers and provides protection to merchant vessels’
corporations which stand a chance of losing money in the form of freight in case the cargo is
lost due to the ship meeting with an accident. This type of marine insurance solves the problem
of companies losing money because of a few unprecedented events and accidents occurring.
 Marine Cargo Insurance: Cargo insurance caters specifically to the marine cargo carried by
ship and also pertains to the belongings of a ship’s voyages. It protects the cargo owner against
damage or loss of cargo due to ship accident or due to delay in the voyage or unloading. Marine
cargo insurance has third-party liability covering the damage to the port, ship or other transport
forms (rail or truck) resulted from the dangerous cargo carried by them.

Types of Marine Insurance Policies are detailed below:

 Voyage Policy: A voyage policy is that kind of marine insurance policy which is valid for a
particular voyage.
 Time Policy: A marine insurance policy which is valid for a specified time period – generally
valid for a year – is classified as a time policy.
 Mixed Policy: A marine insurance policy which offers a client the benefit of both time and
voyage policy is recognized as a mixed policy.
 Open (or) Unvalued Policy: In this type of marine insurance policy, the value of the cargo and
consignment is not put down in the policy beforehand. Therefore reimbursement is done only
after the loss of the cargo and consignment is inspected and valued.
 Valued Policy: A valued marine insurance policy is the opposite of an open marine insurance
policy. In this type of policy, the value of the cargo and consignment is ascertained and is
mentioned in the policy document beforehand thus making clear about the value of the
reimbursements in case of any loss to the cargo and consignment.
 Port Risk Policy: This kind of marine insurance policy is taken out in order to ensure the safety
of the ship while it is stationed in a port.
 45

 Wager Policy: A wager policy is one where there are no fixed terms for reimbursements
mentioned. If the insurance company finds the damages worth the claim then the reimbursements
are provided, else there is no compensation offered. Also, it has to be noted that a wager policy is
not a written insurance policy and as such is not valid in a court of law.
 Floating Policy: A marine insurance policy where only the amount of claim is specified and all
other details are omitted till the time the ship embarks on its journey, is known as a floating
policy. For clients who undertake frequent trips of cargo transportation through waters, this is the
most ideal and feasible marine insurance policy.
 Single Vessel Policy: This policy is suitable for small ship owner having only one ship or having
one ship in different fleets. It covers the risk of one vessel of the insured.

Warranties in Marine Insurance:

i) Express Warranties
Express warranties are those warranties which are expressly included or incorporated in the policy by
reference.

ii) Implied Warranties

These are not mentioned in the policy at all but are tacitly understood by the parties to the contract and
are as fully binding as express warranties.

Warranties can also be classified as (1) Affirmative, and (2) Promissory.

Affirmative warranty is the promise which insured gives to exist or not to exist certain facts.
Promissory warranty is the promise in which insured promises that he will do or not do a certain thing
up to the period of the policy.

In marine insurance, implied warranties are very important & some of them are:

1) Seaworthiness of Ship
A ship is seaworthy when the ship is suitably constructed, properly equipped, officered and manned,
sufficiently fueled and provisioned, documented and capable of withstanding the ordinary strain and
stress of the voyage.
2) Legality of Venture
This warranty implies that the adventure insured shall be lawful and that so far as the assured can
control the matter, it shall he earned out in the lawful manner of the country.
3) No Change in Voyage
When the destination of the voyage is changed intentionally after the beginning of the risk, this is called
a change in the voyage.
4) No Delay in Voyage
This warranty applies only to voyage policies. There should not be a delay in the starting of voyage and
laziness or delay during the journey. This is implied condition that venture must begin within the
reasonable time.
5) No deviation
The liability of the insurer ends in deviation of a journey. Deviation means removal from the common
route or given path. When the ship deviates from the fixed passage without any legal reason, the insurer
quits his responsibility.