COURSE NAME- Legal Aspects Of Business

Session No.-

By- Asst.Prof. Niji Shajan

 Unit 1 -The Contract Act, 1872

Table of Content

• Essential Elements of Valid Contract

• Types of Contracts
• Contracts of Indemnity & Guarantee
• Contingent Contract
• Quasi Contract
• Discharge of contract
• Breach of contract-Meaning & remedies
• Agency - Creation of Agency
• Agent and Principal (Relationship/rights)
• Types of Agency
 Unit -1 The Contract Act, 1872

Learning Objectives-:
• To acquaint students with general business law issues to help become
more informed, sensitive and effective business leaders.
• To provide the students with an understanding of fundamental legal
issues pertaining to the business world to enhance their ability to
manage businesses effectively.
 Contract Of Indemnity
Contract of indemnity meaning is a special kind of contract.
The term ‘indemnity’ literally means “security or protection against a loss” or compensation. According to
Section 124 of the Indian Contract Act, 1872 “A contract by which one party promises to save the other
from loss caused to him by the conduct of the promisor himself, or by the conduct of any other person, is
called a contract of indemnity.”
OBJECTIVE OF CONTRACT OF INDEMNITY

The objective of entering into a contract of indemnity is to protect the promisee against
unanticipated losses
PARTIES TO THE CONTRACT OF INDEMNITY
A contract of indemnity has two parties.
The promisor or indemnifier
The promisee or the indemnified or indemnity-holder
The promisor or indemnifier: He is the person who promises to bear the loss.
The promisee or the indemnified or indemnity-holder: He is the person whose loss is covered or
who are compensated.
ESSENTIALS OF CONTRACT OF INDEMNITY

PARTIES TO A CONTRACT: There must be two parties, namely, promisor or indemnifier and the
promisee or indemnified or indemnity-holder.
PROTECTION OF LOSS: A contract of indemnity is entered into for the purpose of protecting the
promisee from the loss. The loss may be caused due to the conduct of the promisor or any other
person.
EXPRESS OR IMPLIED: The contract of indemnity may be express (i.e. made by words spoken or
written) or implied (i.e. inferred from the conduct of the parties or circumstances of the particular
case).
ESSENTIALS OF A VALID CONTRACT: A contract of indemnity is a special kind of contract. The
principles of the general law of contract contained in Section 1 to 75 of the Indian Contract Act, 1872
are applicable to them. Therefore, it must possess all the essentials of a valid contract.
NUMBER OF CONTRACTS: In a contract of Indemnity, there is only one contract that is between
the Indemnifier and the Indemnified.
RIGHTS OF PROMISEE/ THE INDEMNIFIED/ INDEMNITY HOLDER
As per Section 125 of the Indian Contract Act, 1872 the following rights are available to the
promisee/ the indemnified/ indemnity-holder against the promisor/ indemnifier, provided he has
acted within the scope of his authority.
RIGHT TO RECOVER DAMAGES PAID IN A SUIT [SECTION 125(1)]: An indemnity-holder has
the right to recover from the indemnifier all damages which he may be compelled to pay in any suit in
respect of any matter to which the contract of indemnity applies.
RIGHT TO RECOVER COSTS INCURRED IN DEFENDING A SUIT [SECTION 125(2)]: An
indemnity-holder has the right to recover from the indemnifier all costs which he may be compelled to
pay in any such suit if, in bringing or defending it, he did not contravene the orders of the promisor, and
acted as it would have been prudent for him to act in the absence of any contract of indemnity, or if the
promisor authorized him to bring or defend the suit
.
RIGHT TO RECOVER SUMS PAID UNDER COMPROMISE [SECTION 125(3)]: An indemnity-holder also has
the right to recover from the indemnifier all sums which he may have paid under the terms of any compromise of
any such suit, if the compromise was not contrary to the orders of the promisor, and was one which it would have
been prudent for the promise to make in the absence of any contract of indemnity, or if the promisor authorized him
to compromise the suit.
COMMENCEMENT OF LIABILITY OF PROMISOR/ INDEMNIFIER
Indian Contract Act, 1872 does not provide the time of the commencement of the indemnifier’s liability under the
contract of indemnity. But different High Courts in India have held the following rules in this regard:
Indemnifier is not liable until the indemnified has suffered the loss.
Indemnified can compel the indemnifier to make good his loss although he has not discharged his liability.
Rights of Indemnifier:
After compensating the indemnity holder, indemnifier is entitled to all the ways and means
by which the indemnifier might have protected himself from the loss.

Rights of the indemnity holder:

Section 125, defines the rights of an indemnity holder.
These are as follows -
The promisee (Indemnity holder) in a contract of indemnity, acting within the scope of his
authority, is entitled to recover from the promisor (Indemnifier).
These are:
1.Right of recovering Damages -
all damages that he is compelled to pay in a suit in respect of any matter to which the promise of indemnity applies.

2.Right of recovering Costs -

all costs that he is compelled to pay in any such suit if, in
bringing or defending it, he did not contravene the orders of the promisor and has acted as it
would have been prudent for him to act in the absence of the contract of indemnity, or if the
promisor authorized him in bringing or defending the suit.
3. Right of recovering Sums –

All sums which he may have paid under the terms of a compromise in any such suite, if the compromise was not
contrary to the orders of the promisor and was one which would have been prudent for the promisee to make in the
absence of the contract of indemnity, or if the promisor authorized him to compromise the suit.

Some of the important conditions which he ought to follow here are viz; that as per this section,
• the rights of the indemnity holder are not absolute.
• He must act within the authority given to him by the promisor and must not contravene the orders of the
promisor.
• Further, he must act with normal intelligence, caution, and care with which he
would act if there were no contract of indemnity.
Therefore, at the same time, if he has followed all the conditions of the contract, he is entitled to the benefits.
GUARANTEE Section 126
A contract of guarantee is a contract to perform the promise,
or discharge the liability, of a third person in case of his default.

The person who gives the guarantee is called surety, the person in respect of whose default the guarantee
is given is called the ‘principal debtor’ and the person to whom the guarantee is given is called the
‘creditor’.
• Oral or written
• Express or implied

So a contract of guarantee must be two contracts- a principal contract between the principal
debtor and creditor and a secondary contract between the creditor and surety.
Example
S requests C to lend Rs 500 to P and guarantees that if P fails to pay the amount he will pay.
This is a contract of guarantee.
Principal Debtor− P
Creditor − C
Surety −S

Identification of three Collateral contracts

• As between C and P-there is a contract out of which the guaranteed debt arises.

• As between S and C-there is a contract by which S guarantees to pay to C,P’s debt in case of his
default.

• As between S and P, there is a contract that P shall indemnify S in

cases S pays in the event of a default by P. This contract if it is not express it is always implied(the
third contract is like an invisible contract. It is implied)
Essential features of a contract of Guarantee:
1. Concurrence- A contract of guarantee requires the concurrence of all the three parties to it- The PD,
the C and the S
2. Primary Liability in some person-There must be a primary liability in some person other than the
surety.
3. Essentials of a valid contract-
. Types of Guarantee

• Specific Guarantee- A guarantee which attends to a single debt or specific transaction is

called a specific guarantee. The liability of the surety comes to an end when the guaranteed
debt is duly discharged.
• Continuing Guarantee- Sec 129 A guarantee which extends to a series of transactions is called a
continuing guarantee. A continuing guarantee may be given for a part of debt or the entire debt
A guarantees payment to B, a tea- dealer, to the amount of pound 100, for any tea he may from time to time
supply to C. B supplies C with tea to above the value of pound 100, and C pays B for it.
Afterwards B supplies C with tea to the value of pound 200. C fails to pay. The guarantee given by A was a
continuing guarantee, and he is accordingly liable to B to the extent of pound 100.

• Revocation of continuing guarantee

A continuing guarantee may at any time be revoked by the surety, as to future transactions, by notice to the creditor.
Rights of Surety
Rights against the principal Debtor
1. Rights of Subrogation( sec 140 Right of surety against principal debtor)
On payment of guaranteed debt or performance of the guaranteed duty, the surety acquires all rights
which the creditor had against the principal debtor which could be exercised by the creditor earlier
when the payment was due. Sec. 140

2. Rights to indemnity (sec 145)- Surety is entitled to recover from the principal debtor whatever sum he
has rightfully paid under the guarantee, but, no sums which he has paid wrongfully
Rights against the Creditor

1. Right to Securities (Sec 141)- A surety is entitled to the benefit of every security which the
creditor has against the
principal debtor. He is entitled to have the possession of the goods put as security before
the creditor at the time of contract.
2. Right to Claim set off- The surety has the right to claim set off or counter claim, if any,the debtor
has against the creditor
 Video Link
https://www.youtube.com/watch?v=JMUF2xBXcbk
https://www.youtube.com/watch?v=nVln8Yw1mb8&t=28s
https://www.youtube.com/watch?
v=NhsKf0QtUDg&list=RDLVJMUF2xBXcbk&index=2
 References

• Business Law By N. D. Kapoor.

• Business Law Book By Tulsian
• Elements of Business Law By N D Kapoor
• Business Law By M. C. Kuchhal and Vivek Kuchhal.
• Legal aspects of Business- S.D.Geet
THANK YOU