business law-module no.5
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When you put a limit on what you wil l do,
you have put a limit on what you can do.
Charles Schwab
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Legal Remedies for Breach of Contract
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Breach of contract
A breach of contract occurs when a party to the
contract renounces his liability under the
contract, or by his own act, makes it impossiblethat he should perform his obligations under it,
or totally or partially fails to perform such
contractual obligations.
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Hochester v. De La Tour (1853) UK
Frost v. Knight (1872) UK
Ms. Sakshi Tripathi v. Mr. Ronnie Banerjee
(2011) Karnataka
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Anticipatory Breach of contract :
An anticipatory breach of contract occurs, when,
prior to (before) the promised date of performance
has arrived, the promisor absolutely repudiates the
contract. It is an announcement by a contracting
party of his intention not to fulfill the contract.
Effect of anticipatory breach :
Sec. 39 Contract Act :
When a party to a contract has refused to perform, or
disabled himself from performing, his promise in i ts
enti rety, the promisee may put an end to the contract,
unless he has signi f ied, by words or conduct, his
acquiescence in its continuance.
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Breach of contract : The legal remedies
The legal solutions if you suffer breach of contract
(1)Suit for damages;
(2)Suit for specific performance;
(3)Suit for injunction; &
(4)Suit for quantum meruit.
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Suit for damages
What is the meaning and the difference between
the terms: damage and damages ?
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Damages means : compensation in money terms
(monetary compensation) for the loss suffered bythe injured party / plaintiff in the contract, as a
result of breach committed by the defendant.
Every suit for damages involves these two
following main issues =
(a)Remoteness of damage ; &
(b)Measure of damages.
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(a)Remoteness of damage :
Ram Kumar v. Lakshmi Narayan (1951) Calcutta
Ms. Sakshi Tripathi v. Mr. Ronnie Banerjee
(2011) Karnataka
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Sec. 73 of the Contract Act :When a contract has been broken, the party who suffers by
such breach is enti tled to receive, from the party who has
broken the contract, compensation for any loss or damage
caused to him thereby, (1)which naturally arose in the usual
course of things from such breach, or (2) which the parties
knew, when they made the contract, to be likely to resul t from
the breach of it.
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(1)General damages:
General damages are those which arise naturally,
in the usual course of things from the breach itself,
i.e., the defendant will be liable for all the loss
which naturally happened in the usual course of
things as a result of the breach.
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(2)Special damages :
Special damages are those which arise on account
of unusual circumstances aff ecting the plainti f f.
A court will award special damages only if these
special circumstances were brought to the
knowledge of the defendant at the time of entering /
making the contract, so that the possibility of the
special loss, was in the contemplation of both the
parties at the time of entering contract.
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What are these special circumstances ? :
Heron II, The Koufos v. C. Czarnikow Ltd. (1969) UK
Ms. Sakshi Tripathi v. Mr. Ronnie Banerjee
(2011) Karnataka
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special cir cumstance :
The bonus clause ; The incentive clause
a tool for efficiency in commerce ;
the new face of business
Let us always be aware about the legal rules /
terms of our contracts
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(3)Nominal / Notional damages :
Where the plaintiff has suffered no actual loss as a
result of the breach, but if such breach results in
the violation / infringement of some legal right of
the plaintiff, then the court would award nominal or
notional damages. As the term suggests, the
amount awarded by the court would be small.
Ashby v. White (1703) UK
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(4)Exemplary damages :
Exemplary damages differ from ordinary damages.They are punitive in nature, and while awarding
such damages, the aim is also to punish the person
for the wrongful act, and are intended to make an
example of the defendant. Purpose being so, the
quantum awarded is usually on the higher side.However, it is a principle of law that exemplary
damages should not be awarded / should only be
rarely awarded in contract matters, except in cases
of breach of contract to marry.
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According to the AmericanRestatement, exemplary
damages may be allowed where the breach was
wanton or reckless and / or caused bodily harm.
Prema v. Mustak Ahmed (1987) Gujarat HC
Jit Ram Shiv Kumar v. National Insurance Co. Ltd.(2001) SC
Diesen v. Samson (1971) US
Joseph v. Dr. George Moonjel (1994) Kerala
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(5)Liquidated damages / Penalty :
The parties to contract, may beforehand decide
among themselves, the amount of compensation
that shall become payable in the event of breach.
Damages are said to be liquidated, when they are
fixed and agreed upon by the parties. If the sum
represents a genuine pre-estimate of the probable
loss, then they can be recovered and the court will
award the whole liquidated sum, and not more.
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Dunlop Pneumatic Tyre Co. v. New Garage & Motor
Co. Ltd. (1915) UK
Sec. 74 of the Indian Contract Act :
When a contract has been broken, if a sum is named in the
contract as the amount to be paid in case of such breach, or
if the contr act contains any other stipulation by way of
penalty, the party complaining of the breach is entitled, ..
to receive from the party who has broken the contract,
reasonable compensation not exceeding the amount so
named or, as the case may be, the penalty stipulated for.
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The utility of provision for liquidated damages
(i)it facilitates the calculation of risk;(ii)it removes difficulty of proving actual damage;
(iii)it voids difficulty in assessment, even where
damages are ascertainable;
(iv)It gives the promisee, an assurance;(v)It enables parties to make special provision for
different sums for specified breaches.
United Breweries Ltd. v. State of AP (1997) SC
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(6)Statutory damages :
Certain Acts such as the Railways Act, 1989, the
Motor Vehicles Act, 1939, the Carriage of Goods by
Sea Act, 1925, etc., provide for compensation in
cases of lossof life, injury to limb / body, and
damage or loss of goods in transit. The quantum of
such compensation is usually provided in specific
provisions of the Act, or by specific provisions
supplemented in Schedules appended to the Act.
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(b )Measure of damages :
Once the extent of recoverable loss is determined,it is to be
evaluated in terms of money. This is theaspect of measureof damages, and whilecomputing the same, the court will be
guided by thefollowing principles :
(i)Plaintiffs Plaint Claim & Court Fees payable / paid thereon
(ii)Damages are compensatory, and not penal ;
(iii)In matters of contract, damages for mental painand suffering, will generally be excluded.
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(ii)Damages are compensatory, and not penal ;
The primary aim or principle of the law of damages for abreach of contract, is to place the plainti f f in the same
position he would be in i f the contract had been ful f i l led,
or to place the plainti f f in the position he would have
occupied had the breach of contract not occur red. When
this is accompli shed, the primary aim or principle of the
law of damages has been fulfilled.
Shepherd & Well ington,
Contract & Contract Remedies, 1957, p.912
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Duty of M itigation of damage
Explanationto Sec. 73 Contract Act :I n estimating the loss or damage arising f rom a breach of
contract, the means which existed of remedying the
inconvenience caused by non-performance of the contract
must be taken into account.
Injured party has to make reasonable efforts to
avoid losses resulting from breach, so as to keep
his loss to the minimum.
Bismi Abdullah & Sons v. FCI (1987) Kerala
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Suit for specific performance :
A suit for specific performance can be filed when(a)compensation in money (damages) would not be
adequate relief (remedy) for non-performance; or
(b )There is no standard for ascertaining the actual
damage caused by non-performance. However,relief of specific performance is discretionary, and
subject to the provisions of the Specific Relief Act,
1963. In simple terms: the remedy of specific
performance, calls upon the defendant = to performhis part of the contr act.
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Prithvi Raj Singh v. Dalip Kulkarni
(1999) Rajasthan HC
Order of specific performance to dischargeliabilities of a company
Jabalpur Cable Network Pvt. Ltd v. ESPN SoftwareIndia Pvt. Ltd (1999) MP HC
Order of specific performance to continue sendingmessages & signals
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Why is a suit for injunction = a very important and
a much-sought-after legal remedy ?
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Suit for quantum meruit :
A suit for quantum meruit is based on Sec. 65
Contract Act, which states
When an agreement is discovered to be void, any personwho has received any advantage under such agreement or
contract, is bound to restore it, or to make compensation
for it, to the person f rom whom he received it.
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A suit for quantum meruit has its basis in Sec. 65
Contract Act, and contains the principle of
restitution where, after a benefit has been received,the agreement is later discovered to be void. The
Section aims at preventing unjust enrichment and
to prevent a party from avoiding an agreement and
at the same time, retaining the benefits received
under it. It is effected by an order of restitution (torestore / return) the benefit.
quantum merui t = as much as he deserved
quantum valebat = as much as it was worth
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Uttamchand v. Mohan Das (1964) Rajasthan HC
Man Singh v. Khazan Singh (1961) Rajasthan HC
SVTM Carriers v. State of Kerala (2002) Kerala HC
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Dear studentsof ESIBM 2010-2012 MBA,
Your syllabus portions for Business Law 2010 Module
No.5 end with the previous Slide No.34. The foll owing
Slides from Slide No.36 onwards discuss and instruct on the
ContractLaw, but out-of-syll abus, yet commercially
important Topic: Special Contracts. If you wish to whet
your appeti te for more knowledge in this vibrant subject,
feel free to enjoy these Slides.
Seize and enjoy every moment of good learning !
Sebastian Tharakan
The Businesslawlecturer
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Special Contracts
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Contract of Indemnity
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Contract of indemnity :
Sec. 124 Indian Contract Act :
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 cal led a
contract of indemni ty.
indemnifier = person who gives the indemnity
indemnified = person for whose benefit, it is given
/ indemnity holder
( Test Question : give an example of indemnitycontract )
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Well done!
All insurance contracts except life insurance,
are contracts of indemnity.
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Mr. Shalin Kotia takes a car insurance
policy with The Oriental Insurance Co.Ltd.
Examine the legal implications and legal
obl igations in this car insurance contract
between M r. Shalin and The Oriental
I nsurance Co. L td., which is essentially a
special contract of indemnity.
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Contract of Guarantee
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Contract of guarantee :
Sec. 126 Indian Contract Act :
A contr act of guarantee, is a contract to perform the
promise, or discharge the liabi l i ty of a thi rd person in case
of his defaul t. The person who gives the guarantee is calledthe surety, the person in respect of whose default the
guarantee is given is called the pri ncipal debtor, and the
person to whom the guarantee is given is called the
creditor. A guarantee may be either written or oral.
Sebastian Tharakan, The Businesslawlecturer
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SIBM wishes to purchase 50 computers.
The B-School is approached by Mr. Amardeep Singh,
a dealer in computers and computer peripherals with a
quotation. However, the B-school, does not trust the
credibility of Mr. Amardeep, and therefore asks him toprovide a surety / guarantor. Mr. Amardeeps friend:
Mr. Honble Rajib Ganguly, agrees to come forward as
surety / guarantor for this contract of sale of computers
to SIBM.
Examine the legal nature and legal
obl igations in this contract of guarantee
involving the three persons:
Mr. Amardeep Singh, Mr. Honble RajibGanguly and SIBM.
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Differencesbetween contract of indemnity, and a
contract of guarantee :
(i)indemnity = 2 parties; guarantee = 3 parties
(ii)Indemnity = reimbursement of loss;
guarantee = security for the creditor
(iii)Indemnity = liability of indemnifier is primary andarises when the contingent event occurs;guarantee = liability of surety is secondary, andarises only on the default of the principal debtor
(iv) Indemnity = Indemnifier, after performing his
obligation, has no rights against a third partyguarantee = on discharge of his liability, suretysteps into the shoes of the creditor, and may thensue the principal debtor (Doctr ine of Subrogation)
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Continuing guarantee :
A continuing guarantee is standing guarantee to a
series of transactions that shall take place between
the principal debtor and creditor, in future.
A continuing guarantee may be for a specific period,
and may be renewed from time to time.
Union of India v. T. J. Stephen (1990) Kerala
The essence of a contract of continuing guarantee is that it
appl ies not to a specif ic number of transactions, but to any
number of them, and makes the surety liable for the unpaid
balance to the extent of his undertaking.
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Bank guarantee :
A bank guarantee is a sort of absolute undertakingon the part of the bank, under an arrangement with
its customer, to pay to the creditor, whenever the
guarantee is invoked by the latter (creditor).
Bank guarantee, when invoked = transformation into
a loan to customer.
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Letter of credit :
A letter of credit is analogous to a contract of
guarantee. A letter of credit maybe defined as an
agreement shared by a bank, guaranteeing on
behalf of its customer (buyer), to make payments to
the seller of goods, upon the presentation of
documents specif ied in the credit.
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Circumstances leading to = Discharge of surety :
(i)Revocation by creditor of future transactions, bynotice to the creditor and the principal debtor;
(ii) By death of surety;
(iii)By variance in the terms of the contract;
(iv) By release of principal debtor;(v) By an act or omission of the creditor;
(vi)By arrangement between creditor and debtorwithout consent of surety;
(vii)By impairing suretys remedy;(viii)By concealment or misrepresentation.
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Contract of Bailment
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Well done!
delivering cloth to a tailor to stitch a shirt / salwar ;
delivering a car for repair;
delivering goods for consignment;
receiving books from the Book bank / library;
etc., .
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Ms. Shubhi Joshi purchases a piece of clothand delivers the same to Nehas Fashions, afashion designing / tailoring and boutiqueunit owned by Ms. Bhusari Neha Anand, tostitch a salwar.
Examine = (1)the duty of the bailor ;(2)the duties of the bailee ; &
(3)the r ights of the bailee
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Duty of bailor :
To disclose defects (Sec. 150)
Duties of bailee :(i)to take reasonable care (Ss. 151, 152) ;
(ii)not to make unauthorised use (Ss. 153, 154) ;
(iii)not to mix goods (Ss. 156, 157) ;
(iv)to return goods (Ss. 160, 161) ;
(v) To return increase (Sec. 163) ;
(vi)not to set up adverse title (Sec. 167).
Rights of bailee :
Right to compensation & right of lien for expenses
incurred for purpose of bailment (Ss. 158, 170).
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Mr. Abhinav Mangla approaches Axis Bank for ahire purchase / hypothecation loan to purchasea Maruti car. Axis Bank provides him the
requested hire purchase loan consisting of arepayment schedule of 60 equal monthlyinstallments.
Examine the legal nature of this hi re purchaseagreement between M r. Abhinav Mangla andthe Axis Bank, while also pointing out the legalr ights and obligations that are inherent in every
such hire purchase agreement.
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Finder of lost goods .
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A finder of lost goods
a wonder of legal fiction
Ms. Devina Singh finds a locked leather suitcase.She does not know, nor is she able to find the owner.But, presuming that the contents are precious, and thatshe would soon find the owner, she takes the troubleof renting a bank locker to keep in safe custody, theleather suitcase. Later Ms. Devina comes to know that
Ms. Amruta Narkar is the owner of the suitcase, and thatMs. Amruta now demands possession of the leathersuitcase.
Examine the r ights and liabi l i ties of
a finder of lost goods
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He / she becomes a party to a contract:
Sec. 71 : a finder of lost goods is in the
same position as that of a bailee
Duties of a finder of lost goods :
By law, since he / she becomes a bailee, thesame obligations and duties of a bailee, as
given in the provisions relating to bailment will
also apply to the finder of lost goods.
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Rightsof a f inder of lost goods Ss. 168 & 169 :
(i)to retain the goods:
The right of lien, till payment for expenses
incurred
(ii)to sue the owner, where the owner has offered a
specific reward:
(iii)To sell the goods:
when the owner cannot be found, or on refusal
to pay lawful expenses, right of sale(a) when the goods are perishing ;
(b)when value of expenses = 2/3 rd the value ofgoods.
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Contract of pledge
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Contract of pledge :
Sec. 172 Indian Contract Act :
The bailment of goods as secur ity for payment of a debt or
performance of a promise is called pledge. The bailor is in
this case called the pawnor. The bailee is called pawnee.
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Mr. Amey Sanjay Mulay approaches Mr. TenzinTop-Ten, a money lender, operating under thename of Top-Ten Financ iers, for a loan of
Rs. 20000. Mr. Tenzin demands an equivalentvalue amount of gold as security for the loan.
Mr. Amey Mulay then pledges his wifes goldnecklace with Mr. Top-Ten, to obtain the pledgeloan.
Examine the legal implications, the legal
r ights and duties of these parties to this
special contract of pledge.
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Rights of pawnee Ss. 173 to 176:
(i) right of retainer ;
(ii) right for extraordinary expenses incurred
for preservation of goods ;(iii)right to bring suit ;
(iv) right to sell pledged good .
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