Legal Aspects of Business

Submitted To Mr. Abhimanyu Verma

Submitted By Khushi Singharia (20101)

Assignment Max. Marks: 20

Question 1. (a) “If a contract is breached, the law will endeavour, so far as money can do
it, place the injured party in the same position as if the contract has been performed.”
Discuss the statement indicating the rules which guide the court in the assessment of
damages. (5)

Answer 1. (a) Following are the statements indicating the rules which guide the court in the
assessment of damanges:-

1. The damages are awarded by way of compensation for the loss suffered by the aggrieved
party and not for the purpose of punishing the guilty party for the breach.

2. The injured party is to be placed in the same position, so far as money can do, as if the
contract had been performed.

3. The aggrieved party can recover by way of compensation only the actual loss suffered by
him, arising naturally in the usual course of things from the breach itself.

4. Special or remote damages, i.e., damages which are not the natural and probable
consequence of the breach are usually not allowed until they are in the knowledge of both the
parties at the time of entering into the contract. 5. The fact that damages are difficult to assess
does not prevent the injured party from recovering them.

6. When no real loss arises from the breach of contract, only nominal damages are awarded

7. If the parties fix up in advance the sum payable as damages in case of breach of contract, the
court will allow only reasonable compensation so as to cover the actual loss sustained, not
exceeding the amount so named in the contract.

8. Exemplary damages cannot be awarded for breach of contract except in case of breach of
contract of marriage or wrongful refusal by the bank to honour the customer's cheque.

9. It is the duty of the injured party to minimise the damage suffered

10. The injured party is entitled to get the costs of getting the decree for damages from the
defaulter party.

Question 1. (b) Explain the terms “penalty” and “liquidated damages.” If the parties to a
contract have agreed on the amount of damages payable in the event of its breach, can
the court enhance or reduce that amount? (5)

Answer 1. (b) Penalty

It means a sum fixed up in advance, which is extravagant and unconscionable in amount in
comparison with the greatest loss that could conceivably be proved to have followed from the
breach. Thus the essence of a penalty is a payment of money stipulated as in terrorem of the
offending party. Penalty in other words is therefore damages which are additional to the
liquidated damages. The expression ‘penalty’ is an elastic term with many different shades, but
it always involves an idea of punishment. The Purpose of a Penalty clause is not to ensure
compensation in case of a breach but the performance of a contract.

Liquidated damages
Where the contracting parties agree in advance the amount payable in the event of a breach,
the monetary compensation payable is called liquidated damages. The essence of liquidated
damages is a genuine covenanted pre-estimate of the damages. If a contract includes a
provision that, on a breach of contract, damages of a certain amount or calculable at a certain
rate will be payable to the aggrieved party, the court will normally accept the relevant figure as a
measure of damages. In case, the court finds the stipulated damages as unreasonable, then
court may decide the reasonable damages itself to be paid as penalty for breach of contract

For example, Section 75 of the Indian Contract Act, 1872

According to this section, if a party rightfully rescinds a contract, then he can claim
compensation for any losses or damages sustained due to non-performance of the contract. For
Example: Aman is a drummer and enters into a contract with Bhushan, a nightclub owner.
According to the contract, Aman agrees to play at Bhushan’s club every Friday and Saturday
night. The agreement is for the next two months against a payment of Rs 5,000 per night. On
the fourth night, Aman wilfully absents himself from the club and Bhushan rescinds the contract.
Since he does so rightfully, Bhushan can claim compensation for the damages sustained due to
Aman’s non-fulfillment of his promise.

Question 2. (a) State the rights of a surety against: (i) the creditor (ii) the principal debtor
and (iii) co-sureties. Illustrate your answer with example. (5)

Answer 2. (a) Rights of Surety against Creditor

Section 141 of the Act provides that a surety is entitled to the benefit of every security which the
creditor has against the principal debtor at the time when the contract of suretyship is entered
into, whether the surety knows of the existence of such security or not; and if the creditor loses,
or, without the consent of the surety, parts with such security, the surety is discharged to the
extent of the value of the security.

For examples,

1. ‘C’, advances to ‘B’, his tenant, Rs. 2,000 the guarantee of ‘A’. ‘C’ has also a
further security for Rs. 2,000 by a mortgage of B’s furniture. ‘C’ cancels the
mortgage. ‘B’ becomes insolvent and ‘C’ sues ‘A’ on his guarantee. ‘A’ is
discharged from liability to the amount of the value of the furniture.
 2. ‘A’, as surety for ‘B’, makes a bond jointly with ‘B’ to ‘C’, to secure a loan from ‘C’
to ‘B’. Afterwards, ‘C’ obtains from ‘B’ a further security for the same debt.
Subsequently, ‘C’ gives up the further security. ‘A’ is not discharged.

(b) Surety's rights against the principal debtor.

The surety enjoys the following two rights against the principal debtor:

1. Right of subrogation (Section 140). When the surety pays off the debt on default of the
principal debtor, he is invested with all the rights which the creditor had against the principal
debtor. The surety steps into the shoes of thecreditor and is entitled to all the remedies which
the creditor could have enforced against the principal debtor. The surety may therefore, claim
the securities, if any, held by the creditor and sue the principal debtor, or may claim dividend in
insolvency of the debtor

2. Right to claim indemnity (Section 145). "In every contract of guarantee there is an implied
promise by the principal debtor to indemnify the surety, and the surety is entitled to recover from
the principal debtor whatever sum he has nightfully paid under the guarantee, but no sums
which he had paid wrongfully" Thus a surety is entitled to be indemnified by the principal debtor
for whatever sum he has 'rightfully paid' under the guarantee

The expression 'nghtfully paid means just and equitable payment. It covers the principal sum,
interest thereon, noting charges in case of a bill of exchange, and costs of the suit if there are
reasonable grounds to defend the suit. It does not cover unjust payment like the payment made
of a debt which is time barred as against both the principal debtor and surety The following two
points must also be noted in connection with this right to indemnity:

For Example, B is indebted to C, and A is surety for the debt. C demands payment from A, and
on his refusal sues him for the amount. A defends the suit, having reasonable grounds for doing
so (some variation in terms later might be A's plea), but is compelled to pay the amount of the
debt with costs. He can recover from B the amount paid by him for costs, as well as the principal
debt.

(c) Surety's rights against co-sureties.

Where a debt is guaranteed by more than one sureties, they are called co-sureties. In such a
case all the co-sureties are liable to contribute towards the payment of the guaranteed debt as
per agreement among them. But in the absence of any agreement, if one of the co- sureties is
compelled to pay the entire debt, he has a right of contribution from the other co-surety or
co-sureties. The rules of contribution are laid down in Sections 146-147 which are as follows:

1. Where they are sureties for the same debt for similar amount (ie, for one and the same
amount), the co-sureties are liable to contribute equally, and are entitled to share the benefit of
securities, if any, held by any one of the co- sureties, equally. To sum up the principle it may be
said. "As between co- sureties, there is equality of burden and benefit." Further, for the
application of the principle it is immaterial whether the sureties are liable jointly under one
contract or severally under several contracts, and whether with or without the knowledge of
each other. There is, however, no right of contribution between persons who become sureties
not for the same debt but for different debts

For Example, A, B, and Care sureties to D for the sum of 3,000 lent to E. E makes default in
payment. A, B and Care liable. as between themselves, to pay 1.000 each. (If C is insolvent and
could pay only 2500, then A and B will contribute equally to make good his loss.)

2. Where they are sureties for the same debt for different sums, the rule is that "subject to the
limit fixed by his guarantee, each surety is to contribute equally, (and not proportionately to the
liability undertaken)."

For Example,. A, B, and C, as sureties for D, enter into three several bonds each in a different
penalty, namely, A in the penalty of 10,000, B in that of 20,000 and C in that of 40,000,
conditioned for D's duly accounting to E. Then,

(i) if D makes default to the extent of ₹30,000, A, B, and C are each liable to pay 10,000;

(ii) if D makes default to the extent of ₹40.000, A is liable to pay ₹10,000 (his maximum limit of
liability), and B and C15,000 each;

(iii) if D makes default to the extent of ₹60,000, then A is liable to pay

*10,000, B 20,000 and C30,000; and

(iv) if D makes default to the extent of 70,000, then A, B and C have to pay each the full penalty
of his bond.

Question 2 (b) “Nemo Det Quod Non Habet” (No one can give what he has not got).
Comment giving exceptions to this rule. Illustrate your answer with examples. (5)

Answer 2 (b) The literal meaning of the phrase “nemo dat quod non habet” means no one can
give what he does not have. This is a legal rule which states that purchasing a property from
someone who doesn’t have a title denies the purchaser of the property of an ownership title
also. In simple words, if someone gets something because it was transferred to him- as a
bequest, sale, gift, etc., he will only have that title which the previous owner had and nothing
more. The transferee derives his title from the transferor. This is also known as the derivative
principle. The legal rule is also connected to the principle of “first in time is first in right.”

For Example, X transfers his property to Y. Then X turns around and transfers the property to Z.
Following the rule of nemo dat quod non habet, Y will get the right from X. Now Y have the
rights and X have none. So X cannot transfer Z the property. The rule of nemo dat has its base
as a chain of transactions. The current owner should be able to trace his rights back in time to
prove his legitimate acquisition.

Exception to the Rule

1. Transfer by Estoppel: When a person through his actions or words leads another person
to believe that some particular state of affairs existed, he would be stopped from denying
later that such state of affairs did not exist. This is known as an estoppel. In some cases,
the doctrine of estoppel stops the owner from denying the seller’s right to sell the goods,
and in such a case the buyer may have a better title to the goods. When the real owner
of the goods, through his words or actions leads the buyer to believe that the seller had
the authority to dispose of the goods, the real owner would be estopped from denying it
later. Section 27 of the Act has the following words “unless the owner of the good is by
his conduct precluded from denying the seller’s authority to sell….”

Estoppel can arise in the following manner:

● Estoppel by act or omission: If there is a legal omission on the part of the real
owner, the doctrine of estoppel will apply.

● Estoppel by negligence: Mere carelessness by the real owner would not constitute
negligence. If a person is to be estopped by negligence, then it should be more than
mere carelessness on his part, i.e. he has to disregard his obligation towards the
opposite party.

2. Sale by Mercantile Agent: If the real owner of the goods has employed a mercantile
agent and the goods are sold by the agent, then the buyer will get a good title because
as a general rule an agent can pass better title. The problem arose when the agent did
not have the authority to dispose of the goods. The following conditions need to be
satisfied is this provision is to be evoked:

● The person is an agent as it has been defined under Section 2 (9) of the Sale of
Goods Act, 1930.
● The agent got the documents and goods with the authority of the principal and in the
capacity of an agent, and not in the personal capacity.

● The agent must be acting in the regular course of business while selling the goods to
the third party.

● The buyer should have acted in good faith without having knowledge of the fact that
the agent did not have the authority to sell the goods.

3. Sale by Joint Owner: Sale by joint owner is governed by Section 28 of the Sale of Goods
Act. This section states that if there is a property to which there are several joint owners
but one of them had the sole possession of the property (with the permission of the other
 co-owners), and he sells the property or transfer the property to a buyer who buys the
property in good faith without having knowledge of the fact that the seller had no
authority to transfer or sell the property, the buyer gets a good title.

4. Sale by a Person in Possession Under Voidable Contract: This exception is governed

not only by Section 29 of the Sale of Goods Act but also by Section 19 and 19A Of the
Indian Contract Act, 1872. Both these sections state that if the consent of the parties has
been obtained by fraud, coercion, undue influence or misrepresentation, then the
contract is voidable at the option of the aggrieved party. Section 29 of the Sale of Goods
Act on the other hand states that if a person comes in possession of some goods under
a contract which is voidable under Section 19 and 19A of the Contract Act and the goods
have been sold by him before the contract was avoided by the aggrieved party then
buyer of the goods will have a good title. The rule wouldn’t apply when the contract is
void. The right would come into force only if the contract were voidable.

5. Sale by a Seller in Possession: If a seller has sold some goods, then he cannot seal with
the same goods. Section 30 (1) however states that if the seller has sold the goods but is
still in possession of the goods or possession of the documents, and such goods or
documents are sold to some other buyer again or is sold by a mercantile agent on behalf
of the seller, then the subsequent buyer will get a good title provided that he was acting
in good faith.

6. Sale by Buyer in Possession: Sale by a buyer is possession is governed by Section 30

(2) of the Sale of Goods Act. The provision states that if a buyer is in possession of
goods or the documents of title, and he has done so with the consent of the seller, and if
such property or goods is transferred to some other person without any notice as
regards any lien or other rights of the original seller in respect of those goods, then the
third party gets a good title.

7. Resale by Unpaid Seller: This section states that, if a seller who hasn’t been paid by the
buyer, exercises the right of lien or stops the goods in transit, he may re-sell the goods to
another buyer, and such a buyer would get a good title as against the original buyer.

8. Sale by Finder of Goods: Section 169 of the Indian Contract Act states that when the
founder of lost goods, cannot find the real owner even after making reasonable diligent
efforts or the owner of the goods refuses to pay the finder the legal charges the finder
can sell the goods and the buyer will get a good title.