Unit 2

Contracts II

Indemnity Contract : As per Section 124 of the Indian Contract Act, an agreement by which
one party promises to save the other from loss caused to him by the conduct of the
promisor himself or by the lead of someone else is classified as “Contract of Indemnity”.

The term (Indemnity) means to make good the loss or to compensate for the losses. To
protect the promisee from unanticipated losses, parties enter into the contract of
Indemnity.

It is a promise to save a person without any harm from the consequences of an act.

There are two parties involved in the Contract of Indemnity. The two parties are:

1. Indemnifier: Someone who protects against or compensates for the loss of the
damage received.
2. Indemnified/Indemnity-holder: The other party who is compensated against the
loss suffered.
Example- A contracts to indemnify B against the consequences of any proceedings which C
may take against B in respect of a certain sum of 200 rupees. This is a contract of indemnity.

Contract of Guarantee: Section 126 of the Indian contract act defines a contract of
guarantee as a contract to perform the promise or discharge the liability of the defaulting
party in case he fails to fulfill his promise.

we can infer that there the 3 parties to the contract:

Principal Debtor – The one who borrows or is liable to pay and on whose default the
guarantee is given

Creditor – The party who has given something of value to borrow and stands to receive the
payment for such a thing and to whom the guarantee is given

Surety/Guarantor – The person who gives the guarantee to pay in case of default of the
principal debtor

Also, we can understand that a contract of guarantee is a secondary contract that emerges
from a primary contract between the creditor and the principal debtor.

Example:Ankita advances a loan of INR 70000 to Pallav. Srishti who is the boss of Pallav
promises that in case Pallav fails to repay the loan, then she will repay the same. In this case
of a contract of guarantee, Ankita is the Creditor, Pallav the principal debtor and Srishti is
the Surety.

A contract of guarantee may either be oral or written. It may be express or implied from the
conduct of parties.

Contract of Agency: Agency is a relationship which exists where one person (the principal)
authorizes another (the agent) to act on his behalf, and the agent agrees to do so.” The
contract of agency has been very diligently explained under chapter 10 (section 182-238) of
the Indian Contract act, 1872.

A contract of agency, in its essence, is nothing but a fiduciary relationship between two
parties where one party (the principal) contracts-with and authorizes (implicitly or explicitly)
another person (the agent) to act on his behalf and provides him with the capacity to create
legal relationships between the principal and third parties.

Principal and Agent

The terms Principal and agent have been defined under Sec. 182 of the Indian Contract Act,
1872. The act defines an agent as an individual who has been employed by another to
act/deal on behalf of him and the person who employs the agent, i.e., the person whom the
agent represents is called the principal.

An agent in its essence is an individual who, acting at his discretion and judgment, has the
ability to make the principal directly liable to third parties, i.e., enable the principal to sue or
be sued by any third party directly.

The agent may or may not always be directly employed by the principal himself, i.e., the
relationship between the principal and the agent may not always arise out of a contractual
relationship, there might be different situations that give rise to the contract of agency,
situations like a necessity, through an obligation attributed upon a person by law or
otherwise.

Sale of Goods Act: The sale or purchase of goods is the most recurring transaction in almost
every kind of business. Every now and then, businessmen get involved in the sale &
purchase of goods and enter into the contract of sale. These contracts are governed by the
Sale of Goods Act,1930. It is important for every individual, be it a legal professional or a
common man who deals in the transaction of sales on a regular basis, to have an
understanding of the important terms in the Sale of Goods Act,1930.

Important Terms: Sale of Goods Act, 1930

Buyer and Seller

 Buyer [Section 2(1)]

The definition of the ‘buyer’ is stated under Section 2(1) of the Act. It defines Buyer as a
person who either buys or agrees to buy certain commodities. In the contract of sale, the
Buyer is one of the parties to the contract.

 Seller [Section 2(13)]

On the contrary, the Act defines ‘seller’ as a person who either sells or agrees to sell
particular commodities under Section 2(13). The Seller becomes the other party to the
contract. The existence of both the parties i.e. the Buyer and the Seller must be there to
enter into a contract of sale.

Goods [Section 2(7)]

The dictionary meaning of the term goods is merchandise or possession. The term “Goods”
is one of the crucial clauses in the Contract of Sale.

According to Section 2(7) of the Act, “goods” include-

 Any movable property except actionable claims and money;

 Stock and shares;
 The growing crops, standing timber, grass;

Types of goods

The classification of goods in terms of business law can be quite ticklish to

understand. Section 6 of the Act describes the types of goods. The goods are classified into
existing goods, future goods, and contingent goods. Let’s study all three briefly.

Existing Goods

If the goods are physically present at the time of contract and are in the legal possession or
owned by the seller during the formulation of the contract of sale is referred to as existing
goods. The existing goods are further classified into:
  Specific Goods [Section 2(14)]: Referring to Section 2(14) of the Act, the goods
that are specifically identified and agreed upon to be transferred at the time of
the formation of the contract are called specific goods.
Illustration- ‘A’ wants to sell his HP Laptop of a particular model number and advertises the
same. ‘B’ agrees to purchase the laptop. Both entered into the contract of sale. Here the
laptop is a specific good.

 Ascertained Goods: The Act does not define the ascertained goods but is
conferred by judicial interpretation. The goods are said to be ascertained wherein
some or whole part of goods is identified and set aside for the purpose of the
contract. Such goods are specifically earmarked for sale.
 Unascertained Goods: The goods that have not been specifically identified to be
sold are known as unascertained goods. For example, from 1000 quintals of
wheat, the seller agreed to sell 500 quintals. Here the goods are not specified.
The seller has the liberty to choose from the bulk.

Future Goods [Section 2(6)]

The goods which are not in existence and to be manufactured or produced or acquired by
the seller after entering into the contract of sales are considered as future goods. It must be
noted that there can only be an agreement to sell contracts as there can be no actual sale in
respect of future goods. This is defined under Section 2(6) of the Sale of Goods Act.

Illustration – Amit is a manufacturer of chairs. Shyam ordered Amit to manufacture 200

units of chairs of specific design and they made an agreement for the same. This is the sale
with respect to future goods.

In the case of Union of India v. K.G. Khosla & Co. Ltd, goods were manufactured according to
the specification mentioned in the contract. Therefore, the goods are “future goods” within
the meaning of Section 2(6) of the Act.

Contingent Goods [Section 6(2)]

According to Section 6(2), the sale of certain goods which depend upon happening or non-
happening of certain events is termed as contingent goods. For instance, ‘A’ has agreed to
sell ‘B’ certain goods at a particular date if the former receives the goods from the
manufacturer before the said date. This agreement is based on contingencies, hence such
goods are called contingent goods.

Delivery [Section 2(2)]

By delivery of goods we mean, the voluntary transfer of the possession of goods from one
person to the other. The transfer of possession is the end result of the whole delivery
process. It is not necessary that the person to whom the goods are delivered is a buyer, he
can be any other person authorized by the buyer. The definition of the term delivery is
defined under Section 2(2) of the Act.

Kinds of Delivery

There are different forms of delivery of goods according to the Sale of Goods Act, 1930:

Actual Delivery

Actual delivery takes place when the goods are physically handed over to the buyer or any
person authorized by him. Say for example A, the seller of furniture handed over the
ordered furniture to B, the case is of actual delivery of the goods.

Constructive Delivery

In the case of constructive delivery, the transfer of goods can be done without a change in
the possession or custody of goods. Acknowledgment and attornment can be called
constructive delivery.

Constructive delivery can be effected in the following ways:

 Wherein the seller agrees to hold the sold goods as a bailee.

 Wherein the buyer who is in the actual possession of goods as a bailee of the
seller holds the goods as his own after the sale.
 Where a third party like transporter or agent, agrees to hold the goods for the
buyer.

Symbolic Delivery

Symbolic delivery is made wherein the goods are heavy and bulky and it is difficult to hand
over the goods to the buyer physically. In this situation, the delivery is made by indicating or
giving a symbol that the goods are under the possession of the buyer. For example, the
delivery of the keys of the warehouse where the goods are kept is considered to be the
symbolic delivery. A document like a bill of lading must be given to the buyer to make him
entitled to hold the delivered goods.
The document of the Title to Goods [Section 2(4)]

As per Section 2(4), we can confer that the Document of the title to goods includes a bill of
lading, dock-warrant, warehouse keeper’s certificate, railway receipt, multimodal transport
document, warrant or order for the delivery of goods. It also includes any other documents
that are used in the usual course of business proving the possession or control of goods or
which proves the authority of the possessor to transfer or receive the goods. The document
is a very imperative document for taking any legal action without which one cannot proceed
with the proceeding in the court.

Fault [Section 2(5)]

Any wrongful act or default committed is considered as “fault” under Section 2(5) of the
Sale of Goods Act, 1930.

Price [Section 2(10)]

According to Section 2(10) of the Act, The consideration for the sale of goods is called price.
Price is the money that is paid or promised to be paid by the buyer or any person authorized
by the buyer to the seller.

Property [Section 2(11)]

According to Section 2(11) of the Act, property generally means title or the ownership rights
of the goods. In the process of a sale, there is a transfer of ownership or we can say the
transfer of property from one party to the other.

Quality of Goods [Section 2(12)]

Section 2(12) of the said Act gives the definition of “quality of goods”. The quality includes
the state or condition in which the goods are expected or promised to be delivered. It is one
of the important clauses to be included in the Contract of Sale. If the quality of the delivered
goods has not complied with the contract then it is considered to be the breach of the
Contract.

Condition Section 11 to 17 of the Sale of Goods Act enlightens the provisions relating to
Conditions and Warranties.
Condition & Warranty :

In the context of the Sale of Goods Act, 1930, a condition is a foundation of the entire
contract and integral part for performing the contract. The breach of the conditions gives
the right to the aggrieved party to treat the contract as repudiated. In other words, if the
seller fails to fulfil a condition, the buyer has the option to repudiate the contract or refuse
to accept the goods. If the buyer has already paid, he can recover the prices and also claim
the damages for the breach of the contract.

For example, Sohan wants to purchase a horse from Ravi, which can run at a speed of 50 km
per hour. Ravi shows a horse and says that this horse is well suited for you. Sohan buys the
horse. Later on, he finds that the horse can run only at a speed of 30 km/hour. This is the
breach of condition as the requirement of the buyer is not fulfilled. The conditions can be
further classified as follows:

Kinds of conditions

Expressed Condition

The dictionary meaning of the term is defined as a statement in a legal agreement that says
something must be done or exist in the contract. The conditions which are imperative to the
functioning of the contract and are inserted into the contract at the will of both the parties
are said to be expressed conditions.

Implied Condition

There are several implied conditions which are assumed by the parties in different kinds of
contracts of sale. Say for example the assumption during sale by description or sale by
sample. Implied conditions are described in Section 14 to 17 of the Sale of Goods Act, 1930.
Unless otherwise agreed, these implied conditions are assumed by the parties as if it is
incorporated in the contract itself. Let’s study these conditions briefly:

Warranty

Warranty is the additional stipulation and a written guarantee that is collateral to the main
purpose of the contract. The effect of a breach of a warranty is that the aggrieved party
cannot repudiate the whole contract however, can claim for the damages. Unlike in the case
of breach of condition, in the breach of warranty, the buyer cannot treat the goods as
repudiated.
Kinds of Warranty

Expressed Warranty

The warranties which are generally agreed by both the parties and are inserted in the
contract, it is said to be expressed warranties.

Implied Warranty

Implied warranties are those warranties which the parties assumed to have been
incorporated in the contract of sale despite the fact that the parties have not specifically
included them in the contract.

Difference between Condition and Warranty

BASIS FOR COMPARISON CONDITION WARRANTY

It is additional stipulation
It is a stipulation which forms
Meaning complementary to the main purpose of
the very basis of the contract.
the contract.

Section 12(2) of the Sale of

Section 12(3) of the Sale of Goods Act,
Provision Goods Act, 1930 defines
1930 defines Condition.
Condition.

Condition is basic for the It is a written guarantee for assuring the

Purpose
formulation of the contract. party.

Result of Breach of The whole contract may be Only damages can be claimed in case of
Contract treated as repudiated. a breach.

Remedies available to Repudiation, as well as

Only damages can be claimed.
the aggrieved party damages, can be claimed.

Performance of Contract of Sale:

The Sale of Goods Act 1930 states under Sec 31 that, “It is the duty of the seller to deliver
the goods and the buyer to accept and pay for them, in accordance with the terms of the
Contract of Sale.”
The performance of a Contract of Sale defines a simple transaction where the seller delivers
the goods in exchange for a payment made by the buyer. Sections 31 to 40 of the Sale of
Goods Act, 1930 state the rules and regulations that govern the Sale of goods and their
delivery.
Under Section 2 (2) of the Sale of Goods Act, 1930, the delivery meaning has been stated
as, “voluntary transfer of possession of goods from one person to another.” The seller must
deliver the goods as per the Contract of Sale. The buyer must accept the goods and make a
payment as per the Contract of Sale.
The payment and delivery of goods are concurrent conditions. The seller of the goods
should be ready to make the delivery of goods in exchange for a payment and the buyer
must be ready to make the payment for the delivery of goods unless agreed otherwise.