KENYATTA UNIVERSITY

BBA 302 BUSINESS LAW 2

LECTURE NOTES

LESSON ONE

1. LAW OF PERSONS

1.1 Introduction
In law there are two types of "persons", "natural-person" and "artificial Person / Legal person

i) Natural person
Natural-person is defined as "A human being who has the capacity or rights to do something

ii) Artificial person/Legal person

An artificial person/legal person is defined as "A legal entity which is not a human being but
recognized as a person in law. Legal persons can sue and be sued, own property, and enter into
contracts. However the legal persons cannot vote, marry, or hold public office. (Example of legal
person is Corporations/Companies)

Legal or Artificial Person has Legal Personality (Legal right or capacity to act as human being).
To have legal personality means to be capable of holding legal rights and obligations within a
certain legal system, such as entering into contracts, suing, and being sued.

1.2 Artificial Person/Legal Person (Corporations/Companies)

Corporations/Companies
1.2.1 Definition of a Company

A company is artificial or legal person that has a separate legal existence from its owners. The
owners of the company are known as members or shareholders. Its legal status gives a company
the same rights as a natural person which means that a company can incur debt, sue and be sued.
Companies are managed by company officers who are called directors and company secretaries.

1.2.2 Characteristics of a Company

A company as an entity has many distinct features which together make it a unique organization.
The essential characteristics of a company are following:

i. Separate Legal Entity

The company is distinct and different from its members in law. It has its own seal and its own
name, its assets and liabilities are separate and distinct from those of its members. It is capable of
owning property, incurring debt, and borrowing money, employing people, having a bank
account, entering into contracts and suing and being sued separately.

ii. Limited Liability

The liability of the members of the company is limited to contribution to the assets of the
company up to the face value of shares held by him. A member is liable to pay only the uncalled
money (shares money which are not paid) due on shares held by him. If the assets of the firm are
not sufficient to pay the liabilities of the firm, the creditors can force the partners to make good
the deficit from their personal assets.

iii. Perpetual Succession (Not affected by change, death or bankrupt of its members)

A company does not cease to exist unless it is specifically wound up or the task for which it was
formed has been completed. Membership of a company may keep on changing from time to time
but that does not affect life of the company. Insolvency or Death of member does not affect the
existence of the company.

iv. Separate Property

A company is a distinct legal entity. The company's property is its own. A member cannot claim
to be owner of the company's property during the existence of the company.

v. Transferability of Shares

Shares in a company are freely transferable, subject to certain conditions, such that no share-
holder is permanently or necessarily wedded to a company. When a member transfers his shares
to another person, the transferee steps into the shoes of the transferor and acquires all the rights
of the transferor in respect of those shares. But this is not the same in private companies.
vi. Common Seal

A company is an artificial person and does not have a physical presence. Thus, it acts through its
Board of Directors for carrying out its activities and entering into various agreements. Such
contracts must be under the seal of the company. The common seal is the official signature of the
company. The name of the company must be engraved on the common seal. Any document not
bearing the seal of the company may not be accepted as authentic and may not have any legal
force.

vii. Capacity to sue and being sued

A company can sue or be sued in its own name as distinct from its members.

viii. Separate Management

A company is administered and managed by its managerial personnel i.e. the Board of Directors.
The shareholders are simply the holders of the shares in the company and need not be necessarily
the managers of the company.

ix. One Share-One Vote

The principle of voting in a company is one share-one vote i.e. if a person has 10 shares, he has
10 votes in the company. This is in direct distinction to the voting principle of a co-operative
society where the "One Member - One Vote" principle applies i.e. irrespective of the number of
shares held, one member has only one vote.

1.2.3 Classification of Companies

Section 389 of the companies Act provides that “no company, association or partnerships
consisting of more than 20 persons shall be formed unless it is registered as a company under
this Act”.

There are three types of companies provided for under this section: -

i. Chartered companies
 ii. Statutory companies
iii. Registered companies
(i)   Chartered Companies
The British government had power to create a corporation by granting charter to a person or
corporation. No such companies can be formed in Kenya after independence and section 389
only serve as a reminder of English origin of our companies Act.

(ii)    Statutory companies
A company may be incorporated by means of a special Act of parliament. A statutory company
has no shareholders and its initial capital is provided by the treasury. It is expected to operate
according to commercial principles and to make profit. If it makes losses and becomes unable to
pay its debts, its property can be attached by its creditors but it cannot be wound up on
application of any creditor. However, the government will come to its aid if it has no cash or
other assets to pay its creditors. Examples include- Kengen, KP&L.Co, Kenya Pipeline, Kenya
Railways, KTDA etc.

(iii)   Registered companies
A registered company is formed by registration under the Companies Act Cap 286. Section 2 of
the Companies Act defines a company as “a company formed and registered under this Act.”

Registered companies are classifies into TWO

(a)    Public company – A company formed by any seven or more persons.

(b)    Private company – A company formed by any two or more persons (maximum 50).

1.2.4 Private and Public Companies

1. Private Company

According to section 30(1) of the Act, a private company means a company which by its articles

(a)    Restricts the right to transfer its shares.

(b)    Limits the number of its members to 50 not including persons who are in employment of the
company.
 (c)  Prohibits any invitation to the public to subscribe for any shares or debentures of the company.
Section 30(2) provides that where two or more persons hold one or more shares in a company
jointly, they shall, for the purpose of this section, be treated as a single member.

a) Privileges of a Private Company

(i) A private company may consist of a minimum of 2 members.

(ii) A private company is entitled to commence business immediately on incorporation.

(iii) A private company may allot shares without issuing a prospectus or delivering to a
registrar a statement in lieu of prospectus (Section 30 (1) (allot share- issue shares)

A prospectus is a legal document issued by companies that are offering securities for sale.

(vi) A private company is not required to hold a statutory meeting or file a statutory report with the
registrar. Statutory meeting a meeting that must, by law, be held between one and three months
after a company starts doing business,

(v) A private company need not have more than two directors.

(vi) Copies of balance sheet and profit and loss account filed with the registrar cannot be
inspected by the public.

Advantages of Private Company

i. Limited Liability: It means that if the company experience financial distress because of
normal business activity, the personal assets of shareholders will not be at risk of being
seized by creditors.
ii. Continuity of existence: business not affected by the status of the owner.
iii. Minimum number of shareholders need to start the business are only 2.
iv. More capital can be raised as the maximum number of shareholders allowed is 50.
v. Scope of expansion is higher because easy to raise capital from financial institutions.

 Disadvantages of Private Company

i. Growth may be limited because maximum shareholders allowed are only 50.
 ii. The shares in a private limited company cannot be sold or transferred to anyone else
without the agreement of other shareholders.

2. Public Limited Company

A public limited company is a company that has permission to offer its registered securities for
sale to the general public, typically through a stock exchange, or occasionally a company whose
stock is traded over the counter (OTC) via market makers who use non-exchange quotation
services. Stock exchange or share exchange or equity) securities are unit of finance as shares or
bonds or debentures

Characteristics of Public Limited Companies

i. It must have at least seven shareholders.

ii. A public company is not authorized to begin business upon the grant of the certificate of
incorporation (license certificate). In order to be eligible to start business as a
corporation, it should obtain another document called "trading certificate".
iii. It should publish a prospectus or file a statement in instead of a prospectus before it can
start transacting business.
iv. A public company is needed to have at least three directors.
v. It should hold statutory meetings and obtain government approval for the appointment of
the management.

Advantages of a Public Limited Company

i. The shareholders have limited liability.

ii. A company can raise additional capital by issuing more shares or debentures.
iii. Greater borrowing power.
iv. A board of directors with experience/ expertise can be appointed.
v. Shareholders can sell/transfer their shares freely.
Disadvantages of a Public Limited Company

i. There is a loss of overall ownership.

ii. There is a loss of control of the business.
iii. Decisions take longer and there may be disagreement.
iv. The personal touch may be lost.
v. When setting up a company, significant expenses are incurred.
vi. There are more statutory regulations to conform.
vii. Profits are shared amongst a far greater number of people.
viii. Public disclosure of the financial affairs is necessary.

Distinction between a Public company and a Private company

1. Minimum number of members:

For public company is seven whereas private company is two.

2.   Maximum number of members:

There is no limit on the maximum number in case of public company, but a private company
cannot have more than 50 members.

3. Commencement of business:-

A private company can commence business as soon as it is given certificate of incorporation

whereas a public company shall not commence its business immediately unless it has been
granted the trading certificate.

4.   Invitation to public:-

A public company by issuing a prospectus may invite public to subscribe to its shares whereas a
private company cannot extend such invitation to the public.

5. Transferability of shares:-

There is no restriction on the transfer of shares in case of a public company whereas private
company by its articles must restrict the right of members of transferring the shares.
6.  Number of directors:-

A public company must have at least three directors whereas private company may have two
directors.

7. Statutory meeting:-

A public company must hold a statutory meeting and file with the registrar a statutory report, but
in case of a private company there are no such obligations.

8. Name:-

The name of a private company must include the words “private ltd” at the end of its name, but a
public company has to use the words “ltd” at the end of its name.

Winding up of the Companies

The Companies Act Cap. 486 does not define the term winding up or liquidation, however it uses
them interchangeable, hence we assume them as synonymous. Winding up, means a process of
putting an end to the life of a company.  It is a proceeding by means of which a company is
dissolved and in the course of such dissolution its assets are collected and its debts are paid off
out of the assets of the company or from contributions by its members, if necessary.  If any
surplus is left, it is distributed among the members in accordance with their rights.

Winding up or liquidation is the process by which the management of the company’s affairs is
taken out of its directors’ hands, its assets are realized by the liquidator and its debts are paid out
of the proceeds of realization.

Modes of Winding Up

There are three modes:

i) Compulsory winding up by the court.

ii) Voluntary winding up:

(a)    Members’ voluntary winding up.

 (b)   Creditors’ voluntary winding up

(iii)   Winding up under the supervision of the court.

1.2.5 Incorporation
Definition of Incorporation'

Incorporation is the legal process used to form a corporate entity or company. Incorporation
involves drafting legal documents called "Articles of Incorporation" that list the primary purpose
of the business, its name and its location, and the number of shares and class of stock being
issued, if any. Incorporation also involves jurisdiction-specific registration information and fees.

Importance of incorporation
1. Shield yourself from liability

The most important reason to incorporate your business is to protect yourself from business
liabilities. If you are operating an unincorporated business, its creditors may be able to reach
your personal assets. Assets such as your personal residence and personal bank account can be
used to pay business debts or to satisfy a lawsuit against your business. If you incorporate,
business creditors cannot reach your personal assets, as an incorporated business and its owners
are separate entities.

2. Establish perpetual existence and transfer of ownership

Perpetual existence is an advantageous aspect of an incorporated business. Perpetual existence

means that the life and continuation of the business will not be affected by the withdrawal or
death of one of the owners. An unincorporated business's existence, as well as its operation, is
generally disrupted by the withdrawal or death of one of the owners. Subtract this risk from your
business by incorporating.

3. Gain tax advantages

If you incorporate your business, there are tax deductions for a wide variety of operating costs
which will substantially cut back your company's overall tax liability. These deductions may
include the cost of materials/production, employee wages, the cost of insurance, the cost of
retirement plans, as well as business travel and entertainment expenses.

4. Enhance the company's image

Another essential reason to incorporate your business is that it adds credibility to its operation.
The perception of a business is improved by its incorporation and use of "Inc.," "Co.," or "LLC"
following the name of the business. Customers are more likely to trust and deal with a business
that has this positive image. More importantly, the business will be more attractive to banks and
investors if and when the business seeks outside financing.

5. Improve ability to manage

The decision-making authority of an incorporated business is centralized, which usually means

that the shareholders have vested the authority in a Board of Directors. The Board of Directors
can delegate this authority to the company's officers. In an unincorporated business, the power
structure and decision-making authority may not be defined and may be subject to manipulation
by a co-owner or employee.

1.2.6 Unincorporated Associations

Unincorporated associations are the simplest form that a non-profit organization ,they are
sometimes called a voluntary association. Unincorporated associations are usually small or
informal community organizations. Any group of people who agree to act together, usually
because of a shared interest or purpose, might be called an unincorporated association. An
unincorporated association has no separate legal identity from that of its members. It is simply a
group of people who associate for a particular purpose, for example, a group of people who wish
to play football or lobby for or against a particular development and have verbally agreed to
carry out certain functions. Usually it operates according to a constitution or rules. An
unincorporated association cannot sue or be sued, its assets must be held by trustees on its behalf,
contracts must be made for the association by the committee members and the liability of the
members (especially the committee members entering into those contracts) is generally personal
and not limited to the assets of the association.
 Unincorporated associations are easy and free to establish and have very few of the same
administrative or legal requirements of incorporated associations. Members must abide by the
rules of the organization’s constitution, if it has one. The constitution might be formal like that of
other organizations or informal and not written down but agreed on by members. Unincorporated
associations do not have a legal identity: they cannot hold assets in their name or the legal
protections for members that come with incorporation

1.3 Natural Person (Partnership and Co- partnership)

A) Partnership

1.3.1 Introduction

Definition of Partnership

According to Kent, partnership is a contract of two or more competent persons to place their
money, labour and skill to divide the profits and bear the loss in certain proportions

According to Sir Fredrick Pollock, partnership is relation which exists between persons who
have agreed to share the profit or liabilities of a business carried on by all or any of them on
behalf of all.

According to partnership Act section 3, partnership is the relation which exists between
persons carrying on a business in common with a view of making profit.

In general a partnership is a single business where two or more people share ownership; each
partner contributes to all aspects of the business, including money, property, labor or skill. In
return, each partner shares in the profits and losses of the business.

1.3.2 Types of Partnerships        

There are three types of partnership arrangements:

i. General Partnerships 
General Partnerships assume that profits, liability and management duties are divided equally
among partners. If you opt for an unequal distribution, the percentages assigned to each partner
must be documented in the partnership agreement.

ii. Limited Partnerships 

Limited Partnerships (also known as a partnership with limited liability) are more complex than
general partnerships. Limited partnerships allow partners to have limited liability as well as
limited input with management decisions. These limits depend on the extent of each partner’s
investment percentage. Limited partnerships are attractive to investors of short-term projects.

iii. Joint Ventures 

A joint venture occurs when two or more persons come together to form a temporary partnership
for the purpose of carrying out a particular project. Joint Ventures act as general partnership, but
for only a limited period of time for a single project. Partners in a joint venture can be recognized
as an ongoing partnership if they continue the venture, but they must file as such.

1.3.3 Different Types of Partners

1. Active or managing partner

A person who takes active interest in the conduct and management of the business of the firm is
known as active or managing partner. He carries on business on behalf of the other partners. If he
wants to retire, he has to give a public notice of his retirement; otherwise he will continue to be
liable for the acts of the firm.

2. Sleeping or dormant partner:

A sleeping partner is a partner who ‘sleeps’, that is, he does not take active part in the
management of the business. Such a partner only contributes to the share capital of the firm, is
bound by the activities of other partners, and shares the profits and losses of the business. A
sleeping partner, unlike an active partner, is not required to give a public notice of his retirement.
As such, he will not be liable to third parties for the acts done after his retirement.
3. Nominal or ostensible partner

A nominal partner is Person who has an interest in the success of a partnership firm but, legally,
is not partner because he or she neither owns a part of the firm nor actively participates in its
affairs. A nominal partner lends his name to the firm, without any capital contributions, and
doesn’t share the profits of the business. He also does not usually have a voice in the
management of the business of the firm. Often a nominal partner is a well known, well connected
individual whose name lends credibility and recognition to the firm, and is paid a fee for usage of
his name. Also called limited partner or ostensible partner, outsiders perceive him as an actual
partner

Sleeping vs. Nominal Partners

It may be clarified that a nominal partner is not the same as a sleeping partner. A sleeping partner
contributes capital shares profits and losses, but is not known to the outsiders. A nominal partner,
on the contrary, is admitted with the purpose of taking advantage of his name or reputation. As
such, he is known to the outsiders, although he does not share the profits of the firm nor does he
take part in its management but gets certain fees for use of his name and reputation.

4. Partner by estoppel or holding out partner

If a person, by his words or conduct, holds out to another that he is a partner, he will be stopped
from denying that he is not a partner. The person who thus becomes liable to third parties to pay
the debts of the firm is known as a holding out partner. There are two essential conditions for the
principle of holding out: (a) the person to be held out must have made the representation, by
words written or spoken or by conduct, that he was a partner ; (b) and the other party must prove
that he had knowledge of the representation and acted on it, for instance, gave the credit.

5. Partner in profits only

When a partner agrees with the others that he would only share the profits of the firm and would
not be liable for its losses, he is in own as partner in profits only.
6. Minor as a partner
According to the Kenya partnership act., Cap 29 section 12 & 13, a person who is under the age
of majority (18 years) cannot be made personally liable for any obligation of the firm; but the
share of the minor in the property of the firm is liable for the obligations of the firm. A person
who has been admitted to the partnership before the age of majority will be liable for all
obligations after he or she acquire the age of majority.

Rights of a Minor

1. A person who is a minor may not be a partner in a firm, but, with the consent of all the
partners for the time being, he may be admitted to the benefits of partnership.

2. Such minor has a right to such share of the property and of the profits of the firm as may
be agreed upon, and he may have access to and inspect and of the accounts of the firm.

3. Such minor shares are liable for the acts of the firm, but the minor personally is not liable
for any act.

4. Such minor may not sue the partners for an account or payment of his share of the
property or profits of the firm

5. At any time within six months of his attaining age of majority, may give public notice
that he has elected to become a partner in the firm

7. Other partners

In partnership firms, several other types of partners are also found, namely,

i) Secret Partner who does not want to disclose his relationship with the firm to the general
public. However, the moment public comes to know about secret partner, he becomes liable to
meeting debts of the firm.

ii) Outgoing Partner, who retires voluntarily without causing dissolution of the firm. Usually, an
outgoing partner is liable for all debts and obligations as are incurred before his retirement.
iii) Limited Partner who is liable only up to the value of his capital contributions in the firm, and
the like. A limited partner is found in limited partnership only and not in general partnership.

1.3.4 Forming a Partnership                  

i) To form a partnership, an individual must register his/her business with the state.

ii) Need also to establish business name, for partnerships, the legal name is the name given in the
partnership agreement or the last names of the partners.

iii) Once the business is registered, one needs to obtain business licenses and permits.
Regulations vary by industry, state and locality.

1.3.5 A partnership deed/Agreement

A partnership deed, also known as a partnership agreement, is a document that outlines in details
the rights and responsibilities of all parties to a business operation. It has the force of law and is
designed to guide the partners in the conduct of the business. It is helpful in preventing disputes
and disagreements over the role of each partner in the business and the benefits which are due to
them. The partnership deed normally carries the name of the business, the address of its
principal, place of business and a short summary of how the partners intend to operate.

Contents of Partnership Deeds

i) Partnership Investment Information

The deed gives important financial details of the partnership, such as the amount of capital to be
invested by each partner, the ownership shares that each partner is entitled to through this
investment, the salaries to be paid to each partner and the method of distributing the business
income. The partnership deed also documents the accepted method of raising additional capital,
if necessary.
ii) Accounting Information

The partnership deed provides for the accepted method of accounting for the cash flow, profit
and loss, and assets and liabilities of the business; it also defines the fiscal year to be used in
accounting statements and how these statements will be distributed among the partners and other
shareholders.

iii) Withdrawals

The document must also provide for actions to be taken in case of the voluntary withdrawal or
death of a partner. In this case, an accounting issue will arise in which the assets, liabilities and
shares assigned to each partner must be revalued.

vi) Expulsion

If a partner is proving to be a hindrance or detriment to the business, or loses legal rights in a

bankruptcy or other court action, the other partners must have a proper method of expelling him,
taking care of his or her right.

v) Dissolution

The partnership deed should also describe the methods by which the partnership and business
will be dissolved, if desired, and how the accounts among the partners would be settled at the
termination of the business.

vi) Arbitration

As in all business contracts, a partnership deed must provide for the means of arbitration of
disputes. The main goal of the deed is to avoid expensive litigation over details that have not
been fully worked out in the signed agreement.

1.3.6 Right of a Partner:

(i) Every partner has a right to take part in the conduct and management of the business.
(ii) Every partner has a right to be consulted before taking important decisions. The decisions
should be taken by mutual consent. If the decisions are unimportant, then they can be enforced
by majority, but consensus of all partners is necessary for taking important decisions.

(iii) The partners have a right to inspect books of accounts.

(iv) Every partner will have an equal share in profits, unless otherwise mentioned, in partnership
deed.

(v) No new partner can be admitted into partnership without the consent of all partners.

(vi) Every partner has a right to receive interest at a certain rate per annum on the excess money
supplied over his capital.

(vii) Every partner has a right to be indemnified (compensated) by the firm in respect of
expenses incurred or losses suffered for the normal conduct of the business.

(viii) A partner has a right to get the firm dissolved under appropriate circumstances.

1.3.7 Duties/Obligations of a Partner

(i) Every partner should carry on the business to the greatest common advantage. He must
perform his duties honestly and diligently.

(ii) A partner is not entitled to get remuneration for the conduct of business, unless otherwise
stated in the partnership deed.

(iii) A partner must indemnify the firm for loss suffered because of his fraudulent conduct or
willful neglect.

(iv) A partner is bound to keep and render true and correct accounts of the business.

(v) A partner cannot carry on a competing business. If he carries on such business he shall
account for and pay to the firm all profits made by him in that business.
(vi) A partner is bound to act within the scope of his authority.

(vii) No partner can make a secret profit of the partnership business by way of commission, etc.
If he does so, he must return the money to the firm.

1.3.8 Characteristics of partnership

1. Existence of an agreement

Partnership is the outcome of an agreement between two or more persons to carry on business.
This agreement may be oral or in writing. The Partnership Act, 29 clearly states that “the relation
of partnership arises from contract and not from status.”

2. Existence of business

Partnership is formed to carry on a business. “Business” includes every trade, occupation, and
profession. Business, of course, must be lawful.

3. Sharing of profits

The purpose of partnership should be to earn profits and to share it. In the absence of any
agreement, the partner should share profits (and losses as well) in equal proportions. In a
business sharing of profits is as essential condition, but not a conclusive proof, of the existence
of partnership between partners.

4. Agency relationship

The partnership business may be carried on by all or any of them acting for all. Thus, the law of
partnership is a branch of the law of Agency. To the outside public, each partner is a principal,
while to the other partners he is an agent. It must, however, be noted that a partner must function
within the limits of authority conferred on him.

5. Membership

The minimum number of persons required to constitute a partnership is two while the maximum
is 20 and 10 in banking.
6. Nature of liability

The nature of liability of partners is the same as in case of sole proprietorship. The liability of
partners is both individual and collective. The creditors have a right to recover the firm’s debts
from the private property of one or all partners, where firm’s assets are insufficient.

7. Fusion of ownership and control

In the eyes of law, the identity of partners is not different from the identity of partnership firm.
As such, the right of management and control vests with the owners (i.e., partners).

8. Non-transferability of interest

No partner can assign or transfer his partnership share to any other person so as to make him a
partner in the business without the consent of all other partners.

9. Registration of firm

Registration of a partnership firm is not compulsory under the Act. The only document or even
an oral agreement among partners required is the ‘partnership deed’ to bring the partnership into
existence.

1.3.9 Advantages and disadvantages of a Partnership

Advantages of a Partnership

 Easy and Inexpensive. Partnerships are generally an inexpensive and easily formed

business structure. The majority of time spent starting a partnership often focuses on
developing the partnership agreement.
 Shared Financial Commitment. In a partnership, each partner is equally invested in the
success of the business. Partnerships have the advantage of pooling resources to obtain
capital. This could be beneficial in terms of securing credit, or by simply doubling your
seed money.
 Complementary Skills. A good partnership should reap the benefits of being able to
utilize the strengths, resources and expertise of each partner.
  Partnership Incentives for Employees. Partnerships have an employment advantage
over other entities, if they offer employees the opportunity to work in their partnership
business they also become partners. Partnership incentives often attract highly motivated
and qualified employees.

Disadvantages of a Partnership         

 Joint and Individual Liability. Similar to sole proprietorships, partnerships retain full,

shared liability among the owners. Partners are not only liable for their own actions, but
also for the business debts and decisions made by other partners. In addition, the personal
assets of all partners can be used to satisfy the partnership’s debt.
 Disagreements Among Partners. With multiple partners, there are bound to be
disagreements Partners should consult each other on all decisions, make compromises,
and resolve disputes as amicably as possible.
 Shared Profits. Because partnerships are jointly owned, each partner must share the
successes and profits of their business with the other partners. An unequal contribution of
time, effort, or resources can cause discord among partners.

1.3.10 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.

Causes of general dissolution of partnership

The general dissolution of a partnership will usually be instigated as a result one of the following
events:

1. Dissolution by expiration or notice

(a) If entered into for a fixed term, by the expiration of that term;
(b) If entered into for a single adventure or undertaking, by the termination of that adventure or
undertaking;
(c) If entered into for an undefined time, by any partner giving notice to the other or others of his
intention to dissolve the partnership.

2. Dissolution by bankruptcy or death

(1) Subject to any agreement between the partners, every partnership is dissolved as regards all
the partners by the death or bankruptcy of any partner.

3. Dissolution by illegality of partnership

A partnership is in every case dissolved by the happening of any event which makes it unlawful
for the business of the firm to be carried on or for the members of the firm to carry it on in
partnership.

4. Dissolution by the court

On application by a partner, the court may decree dissolution of the partnership in any of the
following cases-
(a) When a partner becomes lunatic, or permanently unsound mind.
(b) When a partner, becomes permanently incapable of performing his part duties.
(c) When a partner, other than the partner suing, operates a similar business
(d) when a partner, persistently commits a breach of the partnership agreement.
(e) When the business of the partnership can only be carried on at a loss;

5. Partner may notify dissolution

On the dissolution of a partnership or retirement of a partner, any partner may publicly notify the
same and may require the other partner or partners to concur for that purpose in all necessary or
proper acts, if any, which cannot be done without his or their concurrence.

6. The mutual agreement of the partners – which may be an ad hoc agreement, or an

agreement enshrined in the partnership agreement (where, for example, it was agreed that the
partnership would be dissolved after a particular date or after a certain event).  Such an
agreement may be implied rather than actual

7. The exercise of a specific power in the partnership agreement – where, for example, the
partnership agreement allowed a majority of the partners to seek dissolution. 

B. Co-Ownership

Co-Ownership exists where there are two or more people who simultaneously enjoy the rights
and responsibilities of ownership over a piece of land (either a freehold or leasehold).

Types of Co-Ownership

1. The Joint tenancy

2. The Tenancy in Common

1. The Joint Tenancy

Under a Joint tenancy the co-owners are regarded as a single entity owning the whole estate. In
the eyes of the law the two or more owners of the property will be regarded as one person.

2. Tenancy in Common

For a tenancy in common to exist, only possession is required. Each tenant in common has a
separate share of the property (for example a half or a quarter of the property) which they can
dispose of during their lifetime or when they die, But this is an undivided share, basically the
separate share is not physically separated or outlined, just the percentage of the land is
determined. 

Because the share is undivided, each tenant has the right to occupy all of the land. One tenant in
common cannot exclude another from a certain part of the land or restrict the use of any part of
the land even if one tenant in common may have a larger share than the others.  
Distinction between Co-ownership and Partnership

1. Profit Sharing

a) Partnership : In the partnership profit sharing the basic object of the partnership formation.
It is the relation between persons who have agreed to share the profit of a business.
Example :- Two or more persons purchase a Bus with the intention of giving it on hire and
distributing its income among the partners, is the case of partnership.

b) Co-Ownership : In the Co-ownership there is no concept of profit and loss sharing.

In the co-ownership property is owned jointly without any intention to carry on business.
Example : Two or more persons purchase a car without any idea of giving it on hire, it is co-
ownership.

2. Creation agreement

a) Partnership : Agreement or contract is essential for partnership.

b) Co-Ownership : Agreement is not essential for co-ownership.

3. Agent relationship

a) Partnership- Every partner is an agent of other partner in the partnership.

b) Co-Ownership : One co-owner is not the agent of other co-owner.

4. Limit for Members

a) Partnership : In the partnership there is restriction for the maximum number of partners.
b) Co-Ownership : In the co-ownership there is no restriction for the maximum number of co-
owners.

5. Transfer of Rights

a) Partnership : In the partnership a partner cannot transfer his rights to another person without
consulting the other partners.
b) Co-Ownership : In a co-ownership a co-owner can transfer his rights to any one without
consultation.

6. Legal Claim

a) Partnership : In a partnership a partner has legal claim on the property of partnership.

b) Co-Ownership : In a co-ownership a co-owner has a legal claim on the joint property.

7. Division of Property

a) Partnership : In a partnership a partner has no right to demand the separation of property. He

can only demand the share of profit.

b) Co-Ownership : In a co-ownership a co-owner can demand the separation of property.

8. Dissolution Risk

a) Partnership : Partnership is affected by the death, insolvency or retirement of any partner.

b) Co-Ownership : Co-ownership cannot be dissolved due death, insolvency or retirement.

9. Minor Case

a) Partnership : In a partnership a minor cannot become a regular partner.

b) Co-Ownership : In a co-ownership a minor can become a regular co-owner.

1.6 Difference or Distinction between company and Partnership

1. A partnership is an agreement between two or more persons who come together to carry
out a business, and share profit & losses mutually. A company is an incorporated
association, also called an artificial person having separate identity, common seal and
perpetual succession.
2. The registration of the partnership firm is not compulsory whereas to form a company; it
needs to be registered.
3. For the creation of a partnership, there must be at least two partners. For the formation of
a company, there must be at least 2 members in case of private companies and 7 in regard
to public companies.
4. The limit for the maximum number of partners in a partnership firm is 20. On the other
hand, the maximum number of partners in case of a public company is unlimited and in
the case of a private company that limit is 50.
5. A partnership firm can be dissolved by any one of the partners. In contrast to this, the
company cannot be wound up, by any one of the members.
6. A partnership firm is not bound to use the word limited or private limited at the end of its
name while a company has to add the word ‘limited’ if it is a public company and
‘private limited’ if it is a private company.
7. The liability of the partners is unlimited whereas the liability of the company is limited to
the extent of shares held by every member or guarantee given by them.
8. As a company is an artificial person so that it can enter into contracts in its own name, the
members are not held liable for the acts of the company. But in the case of a partnership
firm, a partner can enter into a contract in their own name with the mutual consent of the
other partners, and they can also be sued for the acts done by the firm.
LESSON TWO

2. SALES OF GOODS

Definition of “goods”

‘Goods’ is defined as “Every kind of movable property other than actionable claims and money;
and includes stock and shares, crops, grass, and things attached to or forming part of the land
which are agreed to be severed before sale or under the contract of sale.”

Classified of Goods
1.        Existing goods;
2.        Future goods; and
3.        Contingent goods

1.  Existing goods:

At the time of sales if the goods are physically in existence and are in possession of the seller the
goods are called ‘Existing Goods’.
Existing goods can be classified into ‘specific or unascertained.’

(a)  Specific goods. (Goods separated and identified at the time of the contract)

Goods identified and agreed upon at the time of the making of the contract of sale are called
‘specific goods’ [Sec. 2(14)]. It may be noted that in actual practice the term ‘ascertained goods’
is used in the same sense as ‘specific goods,’ For example, where A agrees to sell to B a
particular radio bearing a distinctive number, there is a contract of sale of specific or ascertained
goods.

(b) Unascertained goods. (Goods not separated at the time of the contract)

The goods, which are not separately identified or ascertained at the time of the making of the
contract, are known as ‘unascertained goods.’ They are indicated or defined only by description. For
example, if A agrees to sell to B one bag of sugar out of the lot of one hundred bags lying in his
godown; it is a sale of unascertained goods because it is not known which bag is to be delivered. As
soon as a particular bag is separated from the lot for delivery, it becomes ascertained or specific
goods. The distinction between ‘specific’ or ‘ascertained’ and ‘unascertained’ goods is important in
connection with the rules regarding ‘transfer of property’ from the seller to the buyer.

2.  Future goods:

Future goods are goods to be manufactured or produced or yet to be acquired by seller. There
cannot be present sale in respect future goods because the property cannot pass.

Example

(a)    A agrees to sell to B all the milk that his cow may yield during the coming year. This is a
contract for the sale of future goods.

(b)X agrees to sell to Y all the mangoes, which will be produced in his garden next year. It is
contract of sale of future goods, amounting to ‘an agreement to sell.’

3. Contingent Goods:
Though a type of future goods, these are the goods in which their acquisition depends upon a
contingency (possibility), which may or may not happen.

Example; A agrees to sell specific goods in a particular ship to B to be delivered on the arrival
of the ship. If the ship arrives but with no such goods on board, the seller is not liable, for the
contract is to deliver the goods should they arrive.

2.1 Contract of Sale

A ‘Contract of Sale’ is a type of contract whereby one party (seller) either transfers or agrees to
transfer the ownership of goods for money to the other party (buyer). A contract of sale can be a
sale or an agreement to sell. In a contract of sale, when there is an actual sale of goods, it is
known as Sale whereas if there is an intention to sell the goods, it is called an Agreement to sell.

2.1.1 A Sale

A sale is a type of contract in which the seller transfers the ownership of goods to the buyer for a
money consideration. Here the relationship amidst the seller and buyer is of creditor and debtor.
It is the result of an agreement to sell when the conditions are fulfilled and the specified time is
over. There must be at least two parties; one is the buyer, and other is the seller.

Essential conditions regarding Sale:

1. There must be good or property to be sold, business of exchanging money with other money
is not a sale
2. There must be consideration in terms of money known as price.
3. There must be transferable of goods or property from seller to buyer.
4. All the necessary conditions of a valid contract should be present like free consent, a lawful
object, capacity of parties, etc.

If the goods are being sold and the property is transferred to the buyer, but the seller is not paid.
Then, the seller can go to the court and file a suit against the buyer for the damages and the price
too. On the other hand, if the goods are not delivered to the buyer then he can also sue the seller
for damages.

2.1.2 Agreement to Sell

An agreement to sell is also a contract of sale of goods, in which the seller agrees to transfer
goods to the buyer for a price at a later date or after the fulfillment of a condition. When there is
willingness of the both the parties to constitute a sale i.e. the buyer agrees to buy, and the seller is
ready to sell the goods for monetary value. In an agreement to sell the performance of the
contract is done at a future date, i.e. when the time elapses or when the necessary conditions are
satisfied. After the contract is executed, it becomes a valid sale. All the necessary conditions
required at the time of sale should exist in the case of an agreement to sell too. If the seller
cancels the contract, then the buyer can claim damages for the breach of contract. On the other
hand, the unpaid seller can also sue the buyer for damages.

2.1.3 Distinction between Sale and Agreement to Sell

1. When the vendor sells goods to the customer for a price, and the transfer of goods from
the vendor to the customer takes place at the same time, then it is known as Sale. When
 the seller agrees to sell the goods to the buyer at a future specified date or after the
necessary conditions are fulfilled then it is known as Agreement to sell.
2. The nature of sale is absolute while an agreement to sell is conditional.
3. A Sale is an example of Executed Contract whereas the Agreement to Sell is an example
of Executory Contract.
4. Risk and rewards are transferred with the transfer of goods to the buyer in Sale. On the
other hand, risk and rewards are not transferred as the goods are still in possession of the
seller.
5. If the goods are lost or damaged subsequently, then in the case of sale it is the liability of
the buyer, but if we talk about an agreement to sell, it is the liability of the seller.
6. Tax is imposed at the time of sale, not at the time of agreement to sell.
7. In the case of a sale, the right to sell the goods is in the hands of the buyer. Conversely, in
agreement to sell, the seller has the right to sell the goods.

2.1.4 Comparison Chart between sale and agreement

Basis for Comparison Sale Agreement to sell

When in a contract of sale, the When in a contract of sale the parties to

exchange of goods for money contract agree to exchange the goods for a
Meaning
consideration takes place price at a future specified date is known as
immediately, it is known as Sale. an Agreement to Sell.

Nature Absolute Conditional

Type of Contract Executed Contract Executory Contract

Transfer of risk Yes No

In an agreement to sell, the title of goods

In sale, the title of goods transfers to
Title remains with the seller as there is no
the buyer with the transfer of goods.
transfer of goods.

Right to sell Buyer Seller

Consequences of
subsequent loss or Responsibility of buyer Responsibility of seller
damage to the goods

Tax VAT is charged at the time of sale. No tax is levied.

Basis for Comparison Sale Agreement to sell

The buyer can claim damages from

Suit for breach of the seller and proprietary remedy Here the buyer has the right to claim
contract by the seller from the party to whom the goods are damages only.
sold.

Right of unpaid seller Right to sue for the price. Right to sue for damages.

2.2 Hire-Purchase

Under hire purchase agreement, the goods are delivered to the hire purchaser for his use at the
time of the agreement but the owner of the goods agrees to transfer the property in the goods to
the hire purchaser only when a certain fixed number of installments of price are paid by the hirer.
Till that time, the hirer remains the bailee and the installments paid by him are regarded as the
hire-charges for the use of the goods. If there is a default by the hire purchaser in paying an
installment, the owner has a right to resume the possession of the goods immediately without
refunding the amount received till then, because the ownership still rests with him. It may be
noted that mere payment of price by installments under an agreement does not necessarily make
it a hire-purchase, but it may be a sale. For example, in the case, of "Installment Purchase
Method," there is a sale, because in this case the buyer is bound to buy with no option to return
and the property in goods passes to the buyer at once.

2.2.1 Distinction between Sale and Hire-Purchase

1. In a sale, property in the goods is transferred to the buyer immediately at the time of contract,
whereas in hire-purchase, the property in the goods passes to the hirer upon payment of the last
installment.

2. In a sale, the position of the buyer is that of the owner of the goods but in hire purchase, the
position of the hirer is that of a bailee till he pays the last installment.

3. In the case of a sale, the buyer cannot terminate the contract and is bound to pay the price of
the goods. On the other hand, in the case of hire-purchase, the hirer may, if he so likes, terminate
the contract by returning the goods to its owner without any liability to pay the remaining
installments.

4. In the case of a sale, the buyer can pass a good title to a bonafide purchaser from him but in a
hire-purchase, the hirer cannot pass any title even to a bonafide purchaser.

5. In a sale, sales tax is levied at the time of the contract whereas in a hire-purchase, sales tax is
not leviable until it eventually ripens into a sale (K.L. Johar & Co. vs. Dy. Commercial Tax
Officer).

2.3 Bailment

Essentially, in a bailment contract, the bailor gives the goods, assets or property to the bailee for
a specific amount of time. However, the goods, assets or property still belongs to the bailor.

2.3.1 Types of Bailment

Bailment may broadly be classified into two categories, namely,

1. Gratuitous bailment
2. Non-gratuitous bailment.

1. Gratuitous Bailment

A bailment with no considerations is called a gratuitous bailment. In this kind of bailment neither
the bailor, nor the bailee is entitled to any remuneration or reward. Such a bailment may be for
the exclusive benefit of either party, i.e., the bailor or the bailee.

Bailment for the exclusive benefit of the bailor

In this case the bailor delivers the goods for the exclusive benefits and the bailee does not derive
any benefit out of it. For example, “A” leaves his pets with “B”, his neighbour to be looked after
during A’s physical absence. In this case, A alone is being benefited by the bailment. Or, if you
park your car in your neighbour’s premises to be taken care in your absence, you as a bailor
derive the exclusive benefit from the bailment.
Bailment for the exclusive benefit of the bailee

This is the case where a bailor delivers the goods to the bailee for the exclusive benefits of the
bailee and does not gain anything from the contract himself. For example, you lend your book to
a friend of yours for a week without any charge or favour. In this case the recipient of the book
as a bailee, is the sole beneficiary of this transaction of bailment.

2. Non-Gratuitous Bailment

Contrary to gratuitous bailment, a non-gratuitous bailment or bailment for reward is one that
involve some consideration passing between the bailor and the bailee. Obviously in this case the
delivery of goods takes place for the mutual benefit of both the parties. For example, “A” hires
“B’s” car. Here B is the bailor and receives the hire charges and A is the bailee and enjoys the
use of the car. Similarly, when you give your PC or laptop for repair to some techie, both you
and the computer techie are going to be benefited by this contract – while you get your computer
repaired, he gets his fees or charges.

2.3.2 Distinction between Sale and Bailment

1. Sale and Bailment are two different types of contracts. A contract of sale is a straight forward
contract where a person may buy goods, services or property from a seller in exchange for
remuneration, usually in the form of money. This amount is decided between the buyer and seller
as appropriate for the value of goods, services or property.

2. Bailment, on the other hand is slightly different than sale. The definition of 'Bailment' states
that it is “the contractual transfer of possession of assets or property for a specific objective. In
bailment, the deliverer of the asset is the bailor, and the receiver is the bailee. In a bailment
transaction, ownership is never transfered, and the bailor is generally not entitled to use the
property while it's in possession of the bailee. In these ways, bailment differs from gifting and
leasing.”

3. Investopedia explains 'Bailment' as “Bailment is a legal relationship between two parties,

whereby the owner retains full rights to the assets or property. For example, when a bank holds a
borrower's asset as collateral for a secured loan, this is a form of bailment. In this case, the bank
is the bailee and the borrower is the bailor.”

Essentially, in a bailment contract, the bailor gives the goods, assets or property to the bailee for
a specific amount of time. However, the goods, assets or property still belongs to the bailor. The
bailee just has the possession of the goods for the time being. The bailee may not however use
the asset any way he likes, it must be used as the bailor instructed. The bailor may also give the
assets to the bailee for safekeeping. After the agreed upon time is passed, the bailee must return
the procession of the goods, assets or property back to the bailor.

2.3.3 Detailed comparison between Sale and Bailment

  Sale Bailment
Possession of goods is
Possession Possession of goods is transferred to the bailee.
transferred to the buyer.
Ownership is transferred to the
Ownership Ownership resides with the bailor.
buyer.
The buyer may use the goods in A bailee can use the goods only according to
Usage
any way he likes. the directions of the bailor.
There is no return of goods from
The goods are returned after the specified time
Return the buyer to the seller, unless
or accomplishment of the purpose.
there is breach.
The consideration is an undertaking to return
The consideration is the price in
Consideration the goods after the accomplishment of the
terms of money.
purpose.
The question of any charges to
The bailor has to repay the charges which the
Charges be paid by the seller to buyer or
bailee has incurred in keeping the goods safe.
vise versa does not arise.
Once the sale is transacted, the
Temporary. The bailee has to return the goods
Duration buyer keeps the goods until he
to the bailor once the specified time is passed.
decides to sell them to another.
2.5 Condition and Warranty

2.5.1Condition

Conditions are certain terms, obligations, and provisions that are imposed by the buyer and seller
while entering into a contract of sale, which needs to be satisfied. The conditions are
indispensable to the objective of the contract.

Two types of conditions in a contract of sale

i) Expressed Condition: The conditions which are clearly defined and agreed upon by the
parties while entering into the contract.

ii) Implied Condition: The conditions which are not expressly provided, but as per law, some
conditions are supposed to be present at the time making the contract. However, these conditions
can be waived off through express agreement. Some examples of implied conditions are:

 The condition relating to the title of goods.

 Condition concerning the quality and fitness of the goods.
 Condition as to wholesomeness.
 Sale by sample
 Sale by description.

2.5.2 Warranty

A warranty is a guarantee given by the seller to the buyer about the quality, fitness and
performance of the product. It is an assurance provided by the manufacturer to the customer that
the said facts about the goods are true and at its best. Many times, if the warranty was given,
proves false, and the product does not function as described by the seller then remedies as a
return or exchange are also available to the buyer i.e. as stated in the contract.

A warranty can be for the lifetime or a limited period. It may be either expressed, i.e., which is
specifically defined or implied, which is not explicitly provided, but arises according to the
nature of sale like:
  Warranty related to undisturbed possession of the buyer.
 The warranty that the goods are free of any charge.
 Disclosure of harmful nature of goods.
 Warranty as to quality and fitness

2.5.3 Distinctions between Condition and Warranty

1. A condition is an obligation which requires being fulfilled before another proposition

takes place. A warranty is a surety given by the seller regarding the state of the product.
2. The term condition is defined in section 12 (2) of the Indian Sale of Goods, Act 1930
whereas warranty is defined in section 12 (3).
3. The condition is vital to the theme of the contract while Warranty is ancillary.
4. Breach of any condition may result in the termination of the contract while the breach of
warranty may not lead to the cancellation of the contract.
5. Violating a condition means violating a warranty too, but this is not the case with
warranty.
6. In the case of breach of condition, the innocent party has the right to rescind the contract
as well as a claim for damages. On the other hand, in breach of warranty, the aggrieved
party can only sue the other party for damages.

2.5.4 Comparison Chart between Condition and Warranty

Basis for Comparison Condition Warranty

A warranty is an assurance given by the

A requirement or event that should be
seller to the buyer about the state of the
Meaning performed before the completion of
product, that the prescribed facts are
another action, is known as Condition.
genuine.

It is directly associated with the It is a subsidiary provision related to the

What is it?
objective of the contract. object of the contract.

Result of breach Termination of contract. Claim damages for the breach.

Violation of condition can be regarded Violation of warranty does not affect the
Violation
as a violation of the warranty. condition.

Remedy available to Repudiate the contract as well as Claim damages only

the aggrieved party on
Basis for Comparison Condition Warranty

breach claim damages.

2.5.5 Remedy for breach of warranty

1. Where there is a breach of warranty by the seller, the buyer is not entitled to reject the goods;
but he may

Sue the seller for the damages

LESSON THREE

3. TRANSFER OF PROPERTY AND TITLE

Rules regarding Transfer of Property in Contract of Sale

1. When there is a contract for the sale of unascertained goods, no property in the goods is
transferred to the buyer unless and until the goods are ascertained.

2. When there is a contract for the sale of specific or ascertained goods, the property in such
goods passes to the buyer at the time the parties intend it to pass. The terms of the contract and
the circumstances of the case will indicate the intention of the parties.

3. When there is an unconditional contract for the sale of specific goods in a deliverable state, the
property in the goods passes to the buyer when the contract is made. The fact that the time of
payment of the price or the time of delivery of goods has been postponed does not prevent the
property in goods to pass to the buyer.

4. When there is a contract for the sale of specific goods not in a deliverable state, the property in
the goods does not pass until the seller has made it in a deliverable state.
5. When there is a contract for the sale of specific goods in a deliverable state and the seller has
to weigh or measure the goods to determine the price, the property in such goods does not pass
until the price is determined.

3.1 Performance of Contract of Sale

The performance of a contract of sale implies delivery of goods by the seller and acceptance of
the delivery of goods and payment for them by the buyer, in accordance with the contract
agreement

a) Delivery of Goods

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

b) How is Delivery Made?

Delivery of goods sold may be made by doing anything which the parties agree shall be treated
as delivery or which has the effect of putting the goods in the possession of the buyer or any
other person authorized by him.

c) Mode 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. For example,
where the timber is lying in a warehouse, the delivery of key is regarded as symbolic delivery
which has the effect of putting the buyer in possession or actual control of the goods. It should be
noted that the key must give complete access to the goods. If for example, the key of a room in
which the goods are kept is given but the key of the main gate or door is not given, it is not
regarded as a valid 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. For example, where the goods at the time of sale are in possession of a
third person and such third person acknowledges to the buyer that he holds the goods on his
(buyer's) behalf, the delivery is called constructive delivery.

Example:

A sales to B 100 bags of rice lying in C's warehouse. C acknowledges to B that he is holding
these 100 bags on behalf of B. It is constructive delivery by A to B.

Rules Regarding Delivery

1. Delivery, acceptance and payment

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

Unless otherwise agreed, delivery of goods and payment of price are concurrent conditions, i.e.,
at the same time or reciprocally. The seller shall be ready and willing to deliver the goods and
the buyer shall be ready and willing to pay the price in exchange for delivery of the goods.

3. Mode of delivery

This has been discussed in detail in earlier paragraphs. The delivery may be actual, symbolic or
constructive. The parties may agree to any mode of delivery expressly or impliedly.

4. Effect of part delivery

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. However,
delivery of part of the goods, with an intention of separating it from the whole, does not
constitute as a delivery of whole.

Example:

A ship arrived at the port laden with a cargo of wheat. The owner endorsed the bill of lading to
A. The master of the ship reported to the customs that the cargo was for A. Next day, A made
entry of the wheat in his name at the customs house. Thereupon, part of the cargo was delivered
to A. Held, this constituted a delivery of the whole.

5. Delivery to be made on request of the buyer

Apart from any express contract, a seller is not bound to deliver the goods unless and until
requested by the buyer. If the seller fails to deliver the goods on the application of the buyer, the
seller is guilty of breach of contract.

6. Place of delivery

In the absence of any agreement, express or implied, the goods sold are to be delivered at the
place at which they are at the time of sale. The goods agreed to be sold are to be delivered at the
place at which they are at the time of the agreement to sell, or if not then in existence, at the
place at which they are manufactured or produced.

7. Time of delivery:

If any time is specified by the parties, the goods must be delivered by that time. If the seller is
bound to send the goods to the buyer and no time has been fixed by the parties, the goods must
be delivered within a reasonable time. What is reasonable time is a question of fact in each case?

8. Delivery of goods in possession of third persons

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. It should be noted that this rule does not affect the transfer of goods by means of a
document of title of goods, e.g., where goods have been sold by a bill of lading, consent of the
third party is not necessary.
9. Expenses of delivery:

Unless otherwise agreed, the expenses of putting the goods into a deliverable state shall be
beared 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

(i) Lesser quantity delivery

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.

Example:

A ordered B to supply 10 bags of rice. B supplied only 6 bags. A is at liberty to accept 6 bags or
reject them. When he accepts them, he must pay for the 6 bags at the contracted price.

ii) Excess quantity delivery

Where the seller delivers excess quantity than contracted for, the buyer has the option to accept
and pay the required quantity, accept to pay the excess or reject the whole.

Example:

A ordered B to supply 10 bags of rice. B supplied 15 bags. A has the option to accept 10 bags
and pay for them. He may accept even 15 bags and pay for him. He is entitled to reject the whole
It should be noted that the right to reject the goods in excess of the contract does not apply where
the variation is negligible.

(iii) Delivery of mixed goods

Where the seller delivers to the buyer the goods he contracted to sale 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.

Example:
Certain specific articles of China were ordered. The seller in addition sent some of his articles of
China. Held, the buyer could reject the whole.

11. Delivery by installment

Unless otherwise agreed, the buyer of goods is not bound to accept delivery in installments. He
may, if he so desires, refuse the goods.

Example:

25 tons of pepper October/November shipment was sold. The seller shipped 20 tons in
November and 5 tons in December. Held, the buyer was entitled to reject the whole.

12. Delivery to carrier or wharfinger

(i) Unconditional delivery to carrier or wharfinger means delivery to the buyer

Where in discharge of a contract of sale, the seller is authorized or required to send the goods to
the buyer, delivery of goods to a carrier for the purpose of transmission to the buyer the goods
considered to have delivered to the buyer.

(ii) Seller's duty to conform to the rules save delivery

Where the goods are delivered to a carrier or wharfinger, it is the duty of the seller to reasonably
secure the responsibility of the carrier for the safe delivery of the goods. In case the seller fails to
do so, he will be liable for any loss of good

Example: A, had to deliver three casks of oil to B by railway. A takes three casks of oil directed
to B to the railway station and leaves them there without conforming to the rules which must be
complied with in order to render the railway company liable for their safe carriage. The goods
are lost on the way. There has not been a sufficient delivery to charge B in a suit for the price.

(iii) Seller's duty to inform the buyer to get the goods insured in case the goods involve a
sea transit
Where the goods are sent by the seller to the buyer by a route involving sea transit, the seller is
bound to give such notice to the buyer as may enable him to insure the goods during sea transit.
Failure to do so will mean that the goods are at the seller's risk during the transit and the seller
will have to make good the loss suffered by the buyer.

13. Acceptance of delivery by the buyer:

Buyer's has right to examine the goods before accepting them

Where goods are delivered to the buyer which he has not previously examined, he is not deemed
to have accepted them unless and until he has had a reasonable opportunity of examining them
for the purpose of ascertaining whether they are in conformity with the contract.

3.2 Rights of an unpaid seller

The unpaid seller has following two rights.

 1) Rights against the goods.

2) Rights against buyer personally

1) Rights against the goods.

i) Rights of lien
 ii) Right of stoppage of goods in transit
 iii) Right of resale
 
i) Rights of lien
The right of lien means lawfully right to retain the goods possession until the full price is
received.
An unpaid seller can exercise his right of lien in following cases.
i) Where the goods have been sold on the cash basis.
 ii) Where the goods have been sold on credit basis and the term of credit has expired.
 iii) Where the buyer has become insolvent even if the period of credit has not been expired.

Other rules to satisfy the conditions for this right are:

i) The unpaid seller must be in actual possession of the goods sold.
 ii) It can be exercised even If the documents of title have been delivered to the buyer.
 iii) It can be exercised for the price and not for other expenses
 iv) If the seller delivers some goods, it can be exercised on the remaining.

Right of Lien is terminated in following cases

 i) When he delivers the goods to the carrier or wharfinger for transmission to the buyer
 ii) When the buyer or his agent lawfully obtains the possession of the goods
 iii) When seller waives (surrenders) his right of lien on the goods
  iv) When the buyer further sales the goods and the seller agrees

ii) Right of stoppage of goods in transit 

It means stoppage of goods while they are in transit to take possession until the price is paid.
Unpaid seller can stop the goods in transit in the following cases.
 i) While the buyer becomes insolvent
 ii) While the goods are out of actual possession of seller, but have not reached buyer’s
possession i.e. goods are in transit with career.
 iii) The unpaid seller can stop the goods in transit only for payment of the price of the goods and
not for any other charges.

The unpaid seller cannot stop goods in transit in following cases.

i) When the goods reaches the destination.
 ii) While the buyer or his agent takes possession of delivery even if it is not reached destination.
 iii) In case the carrier is agent of the buyer, the transit comes to an end the instance carrier
receives the goods and seller cannot stop the transition
 iv) Carrier’s wrongful refusal to deliver goods to the buyer.

iii) Right of resale

If a buyer fails to pay or offer the price within a reasonable time, the unpaid seller has the right to
resell the goods.
Circumstances which unpaid seller has right to resell goods
 a) Where the goods are of perishable nature.
 b) Where the unpaid seller has exercised his right of lien or stoppage in transit and gives a notice
to buyer of his intension of resell the goods.
 c) Where the unpaid seller has expressly reserved his right of resale.
 d) Where seller gives notice to the buyer of his intension to resell and the buyer does not pay
within a reasonable time.
Example:
 a) “X” sells vegetable to “Y” on credit, “Y” does not pay, “X” can resell to any other person.
 b) “M” sells 100 blankets to “N” and gives him one week for payment. “N” does not pay. “M”
can resell those to any other person.
2) Rights against buyer personally
 i) Sue for price
 ii) Sue for damages for non-acceptance
 iii. Sue for Specific performance
iii) Sue for special damages and interest

i) Sue for price

Where ownership of the goods has passed to the buyer and the buyer refuses to pay the price
according to the terms of the contract, the seller can sue the buyer for price, irrespective of
delivery of the goods. (Price of a product)

ii) Sue for damages for non-delivery

Where the buyer refuses to accept and pay for the goods, the seller may sue him for damages for
non-acceptance. The seller can recover damages only and not the full price. The damages are
calculated in accordance with the rules contained in Kenya Contract Act, that is, the measure of
damages is the estimated loss arising directly and naturally from the buyer’s breach of contract.

iii. Sue for Specific performance (failure to fulfill promise)

Unpaid seller may also sue buyer for specific performance of contract in case of a breach of
contract and the verdict passed can be unconditional without giving the defendant the option of
retaining the goods on payment of damages. Specific performance means fulfilling a promise
made under a contract as agreed. A suit for specific performance can be filed by any party, in a
court of competent jurisdiction, who has suffered loss due to non-performance of contract on part
of the other party to the contract. Remedy of specific performance which is affected in case of
breach of contracts is provided by the equity courts.

iv) Sue for special damages and interest (damages known before the contract)

The seller can sue the buyer for special damages where the parties are aware of such damages at
the time of contract. The unpaid seller can recover interest at a reasonable rate on the total unpaid
price of goods, from the time it was due until it is paid. Special damages are a specific type of
damages available for breach of contract.  When a contract is breached, special damages may be
awarded to compensate the non-breaching party for damages that result indirectly from, or that
“flow from” the breach.  Special damages awards cover losses besides the contractual losses; this
may include a broad range of losses such as loss of profits or damage to business reputation.

3.3 Buyer’s right against seller

i) Sue for damages for non-delivery (monetary loss incurred)

When the seller wrongfully refuses to deliver the goods to the buyer, the buyer may sue the seller
for damages for non-delivery (damages-monetary loss incurred because of breach of a contract

ii) Sue for specific performance (unique or rare goods)

Where there is a breach of contract for sale of specific goods, the buyer may file a suit for
specific performance. The remedy is granted when subject matter of the contract is rare goods,
say, a picture by a dead painter. Specific performance means fulfilling a promise made under a
contract as agreed. Specific performance is generally allowed where the goods are of special
significance or value e.g. a rare paining, a unique piece of jewellery, etc. (damage is monetary
loss caused by breach of contract)

iii) Sue for damages for breach of warranty

Where there is a breach of warranty, the buyer is entitled to sue for damages if he had paid the
price to the seller. But if he has not paid the price yet, he may ask the seller for a reasonable
reduction in the price. Breach of warranty refers to the failure of a seller to fulfill the terms of a
promise, claim, or representation made concerning the quality or type of the product. The law
assumes that a seller gives certain warranties concerning goods that are sold and that he or she
must stand behind these assertions.

iv) Sue for cancellation and damages for breach of contract 

Where there is a breach of contract by the seller, the buyer may avoid the contract and claim
damages.

v) Sue for recovery of price with interest.

If the buyer has already paid the price to the seller and the seller does not deliver the goods to the
buyer, he can sue the seller for refund of price and interest at a reasonable rate.

3.4 Doctrine of Caveat Emptor (let the buyer beware)

Caveat emptor is a Latin term that means "let the buyer beware." Similar to the phrase "sold as
is," this term means that the buyer assumes the risk that a product may fail to meet expectations
or have defects. In other words, the principle of caveat emptor serves as a warning that buyers
have no obligation with the seller if the product does not meet their expectations.

3.4.1 Exceptions to the Doctrine of Caveat Emptor

1. Implied Condition regarding Quality or Fitness

When the seller is aware of the purpose for which the buyer requires the product and when the
buyer relies on the judgment and skill of the seller, there is an implied condition that the product
purchased serves the purpose for which it was bought.
2. Sale of Goods by Description

A sale of good by description is a sale that is made without the buyer seeing the goods and
having only a description of them from the seller: In sales by description, there is an implied
condition that the goods shall correspond with the description in the catalogue.

3. Usage of Trade (following the acceptable business procedure)

Proof of reasonable usage or custom of trade may also establish an implied condition with regard
to quality or fitness of goods for a particular purpose.

4. Consent by Fraud (misrepresentation)

The doctrine of Caveat Emptor shall not apply to all those purchases, which have been made by a
buyer under a contract where the seller obtained his consent by fraud. A seller, who is guilty of
fraud, shall have no protection of the doctrine of caveat emptor.

5. Sale under a Patent or Trade name

In the case of a contract of sale of specified goods under its patent or trade name, there is an
implied condition that the product is fairly fit for any specific purpose.

6. Sale by Sample

When a buyer, having satisfied with the quality of the sample offered by the seller, purchases in
bulk, the Doctrine of Caveat Emptor will not apply when he finds defects in the bulk or if the
bulk does not correspond with the product sample offered to him. The Doctrine of Caveat
Emptor will not apply if the buyer did not have a chance to verify the bulk with the sample, of if
there is any hidden damaged product.

7. Misrepresentation

Where the seller has made a false representation relating to the goods and the buyer has relied
upon it, the doctrine of Caveat Emptor will not apply. Such a contract being voidable at the
option of the innocent party, the buyer has a right to rescind the contract.
3.5 Nemo dat quod non habet (No one gives what he doesn't have)

Nemo dat quod non habet, literally meaning "no one gives what he doesn't have" is a legal rule,
sometimes called the nemo dat rule, that states that the purchase of a possession from someone
who has no ownership right to it also denies the purchaser any ownership title.

Exceptions of Nemo dat quod non habet

1) Estoppel (owner acted in a such way that buyer believed the seller has right to sale the goods)

The expression estoppels is derived from a French word ‘Estoup’ which means “shut the mouth”.
A person, who does an act in good faith at the words/conduct of another, should not be suffered
or deceived. When the owner of the goods by his act or omission or conduct allows the buyer to
believe that the seller has a right to sell the goods, he (the true owner) cannot deny such sale
subsequently. For example when a person sold his mother’s goods in her presence, she making
no objection, she was not subsequently permitted to deny her son’s authority to sell and the sale
was binding on her. Estoppel arises from a representation that the seller had the authority to sell.
And when that representation is innocently acted up on by the buyer, it becomes too late to deny
the seller’s authority. Representation may arise from words or declarations or it may arise from
an act or omission. An omission to perform one’s duty may create an estoppel.

Estoppel arises from

a. act or omission - but it should be a legal obligation

b. Negligence – not mere negligence but it should be in regard to the person.

Estoppel by act or omission

A firm of merchants pledged certain railway receipts with a bank against a loan. Subsequently
they took back the receipts for clearing the goods and storing them in the bank’s warehouse. But
they fraudulently re-pledged the receipts with another bank for another loan. The second bank
contented that the first bank should not have returned the receipts without impressing up on then
them their stamp of pledge. Their omission to do so enabled the merchants to re-pledge the
receipts and therefore the first bank should be stopped from denying the validity of the second
pledge. But the Privy Council ruled otherwise. The court held that the duty to impress the stamp
of pledge was not a legal duty. It was a duty of commercial origin and its omission did not create
a legal estoppel4.

Estoppel by negligence

Mere carelessness may not create an estoppels, negligence in order to give rise to a defence
under this section must be more than mere carelessness on the part of a person in the conduct of
his own affairs, and must amount to a disregard of his obligations towards the person who is
setting up the defence. In Conventary Shepherd & Co v. Great Eastern Rly.Co5, the defendant
carelessly issued two delivery orders relating to the same consignment of goods, thus enabling
the person to whom they were issued to obtain an advance from the plaintiff and the defendants
were held to be estopped as against him from denying the fact that the goods mentioned in the
order were held on behalf of the assignor someone who puts documents of this nature into
circulation owes a duty to those into whose hands they may come.

2) Sale by Mercantile Agent

A buyer of goods from a mercantile agent acquires good title if the conditions laid down in
section 27(2) are satisfied.

a) He should be a mercantile agent

b) In possession as Mercantile agent

c) With owners consent

d) Must sell while acting as mercantile agent

e) Good faith and without notice

a) Mercantile agent

Section 2(9) defines mercantile agent. A mercantile agent having in the customary course of
business as such agent authority wither to sell goods, or to consign goods for the purpose of sale,
or to buy goods or to raise money on the security of goods. In other words mercantile agent is an
agent who is entrusted with the possession of goods or documents. He has an authority to sell the
goods or consign them for sale. Eg. Factor, Broker, Auctioneer etc.

In Folker V. King 6, the plaintiff delivered his car to a mercantile agent to sell it for not less
than 575 pounds. But the mercantile agent sold it to the defendant for pound 140 and
misappropriated the amount. In an action by the plaintiff it was held that the defendant (buyer)
had a good title to the goods.

b) In possession as mercantile agent

The mercantile agent should be in possession of the goods as mercantile agent, if the goods are
entrusted to him in any other capacity, he cannot convey a good title. This was held in Staffs
Motor guarantee Ltd v. British wagon Ltd7. A dealer in secondhand cars sold his lorry to a
company and then immediately took it back from the company under a hire-purchase agreement.
He then resold the lorry to another company, which claimed that it had good title to the lorry
having brought it from a mercantile agent in good faith. But the court refused to sustain this
claim, the lorry had been handed back to the dealer not as an agent but as a hirer and therefore as
its bailee, so the buyer cannot get a good title.

c) With owner’s consent

The goods must be in the possession of the mercantile agent with the consent of the owner. This
requirement is satisfied when it is shown that the true owner did intentionally deposit in the
hands of the mercantile agent the goods in question. In such case it is immaterial whether the
consent is obtained by fraud.

In Pearson v. Rose and Young Ltd 8, a car was left with a mercantile agent and authorized him
only to receive offers and not to sell. The agent obtained the registration book from the owner
with out consent and sold to the defendant. It was held that the sale with out registration book
would not have been a good sale and the registration book was obtained with out consent of the
owner, therefore the buyer did not acquire a good title.

d) Must sell while acting as mercantile agent

The mercantile agent must sell the goods when acting in the ordinary course of business of a
mercantile agent. That is to say within business hours at a proper place of business and in other
respects in the ordinary way in which a mercantile agent would act. In De Gorster v. George
Attenborough & son9 a broker was entrusted with certain diamonds for sale, he did so through a
friend, and the transaction was held invalid as he cannot ask a friend to do the transaction which
he was entrusted with.

e) Good faith and without notice

The buyer must act in good faith and should not have notice that the seller had no authority to
sell.

Section 28 - Sale by one of the joint owners

If one of several joint owners of goods has the sole possession of them by permission of the co-
owners, the property in the goods in transferred to any person how buys them of such joint owner
in good faith and has not at the time of the contract of sale notice that the seller has not authority
to sell.

LESSON FOUR

HIRE PURCHASE LAW

4.1 What is Hire Purchase?

Hire purchase is an arrangement for buying expensive consumer goods on credit, where the
buyer makes an initial deposits or down payment with the balance being paid in installments plus
interest. Hire purchase agreements are a type of credit, most commonly used by people to
purchase goods such as cars, or large household appliances. Under a hire purchase agreement,
the creditor remains the legal owner of the goods until you have repaid the sums due under the
agreement. At the end of the agreement, you as the debtor have the option purchase the goods or
return them to the creditor.

Sometimes, the hire purchase agreements may be challengeable by virtue of the fact that they do
not comply with the strict consumer credit legislation, rendering them unenforceable. However,
what happens if you fall behind on your repayments, and the agreement complies with the
consumer credit legislation?

When you fall behind on your repayments, a creditor will often try to repossess the goods from
you, and normally asks you to consent to returning the goods to them. However, this will not end
your liability under the agreement, as even when the goods have been repossessed and sold, the
creditor will pursue you for any other monies outstanding on the agreement.

4.2 Features of Hire Purchase:

1. The payment is to be made by the hirer (buyer) to the hiree, usually the vendor (seller), in
installments over a specified period of time.

2. The possession of the goods is transferred to the buyer immediately.

3. The property in the goods remains with the vendor (hiree) till the last installment is paid. The
ownership passes to the buyer (hirer) when he pays all installments.

4. The Hiree or the vendor can repossess the goods in case of default and treat the amount
received by way of installments as hire charged for that period.

5. The installments in hire purchase include interest as well as repayments of principal.

6. Usually, the hiree charges interest on flat rate.

4.3 Termination of Hire-Purchase Agreement

The hire-purchase agreement can be terminated in any of the following ways: -

i. In terms of the agreement- The hire-purchase agreement stipulates the circumstances in

which the agreement can be terminated. The agreement is generally terminated by return
of the goods by the hirer, notice of termination by the owner on account of hirers breach
of conditions or notice of termination by the hirer.

ii. By performance- The hire-purchase agreement is terminated by performance on the

exercise of the option to purchase the goods by the hirer.

iii. By renewal - The parties to an agreement may enter into a fresh agreement terminating
the hire-purchase agreement, which has not already been terminated.

iv. Notice by either party- The hire-purchase agreement can be terminated by notice given
by either party.

v. By acceptance of repudiation by other party- An agreement is terminated, when a party to

an agreement renounces his future obligations under the agreement or commits a breach
of the agreement, which indicates that he does not want to remain bound by its
provisions, and the other party accepts the renunciation or breach as discharging the
contract.

vi. By release- Where one party to an agreement releases the other party from the
performance of the obligations by him under the agreement, the agreement comes to an
end.

vii. By frustration- When performance of the agreement becomes impossible by reason of

some act or event occurring subsequent to the formation of the agreement, comes to an
end and the parties will be discharged from further obligations under the agreement e.g.
when the goods are destroyed during the currency of hire-purchase agreement without
negligence on the part of the hirer, the agreement comes to an end.

viii. By efflux of time- When the hirer is given time to exercise option to purchase the goods
within a stated period and he does not exercise the option within the said period, the
agreement comes to an end.

4.4 Advantages and disadvantages of Hire Purchase System

Advantages of Hire Purchase System

(1) Convenience in Payment:

The buyer is greatly benefited as he has to make the payment in installments. This system is
greatly advantageous to the people having limited income.

(2) Increased Volume Of Sales:

This system attracts more customers as the payment is to be made in easy installments. This
leads to increased volume of sales.

(3) Increased Profits:

Large volume of sales ensures increased profits to the seller.

(4) Encourages Savings:

It encourages saving among the buyers who are forced to save some portion of their income for
the payment of the installments. This inculcates the habit to save among the people.

(5) Helpful For Small Traders:

This system is a blessing for the small manufacturers and traders. They can purchase machinery
and other equipment on installment basis and in turn sell to the buyer charging full price.

(6) Earning Of Interest:

The seller gets the installment which includes original price and interest. The interest is
calculated in advance and added in total installments to be paid by the buyer.

(7) Lesser Risk:

From the point of view of seller this system is greatly beneficial as he knows that if the buyer
fails to pay one installment, he can get the article back.
Disadvantages of Hire Purchase System

(1) Higher Price:

A buyer has to pay higher price for the article purchased which includes cost plus interest. The
rate of interest is quite high.

(2) Artificial Demand:

Hire purchase system creates artificial demand for the product. The buyer is tempted to purchase
the products, even if he does not need or afford to buy the product.

(3) Heavy Risk:

The seller runs a heavy risk under such system, though he has the right to take back the articles
from the defaulting customers. The second hand goods fetch little price.

(4) Difficulties in Recovery of Installments:

It has been observed that the sellers do not get the installments from the purchasers on time.
They may choose wrong buyers which may put them in trouble. They have to waste time and
incur extra expenditure for the recovery of the installments. This sometimes led to serious
conflicts between the buyers and the sellers.

(5) Break Up Of Families:

The system puts a great financial burden on the families which cannot afford to buy costly and
luxurious items. Recent studies in western countries have revealed that thousands of happy
homes and families have been broken by hire purchase buying’s.

LESSON FIVE

LAW OF INSURANCE

5.1 What is Insurance?

Insurance is a contract in which one party (the "insured") pays money (called a premium) and the
other party promises to reimburse the first for certain types of losses (illness, property damage,
or death) if they occur.

5.2 Three major categories of Insurance law

1. First, the insurance company will hire lawyers to represent the insured in case she is sued
for something related to her insurance contract. These are known as "insurance defense
lawyers." For example, an automobile insurance company will hire an lawyer to represent an
insured driver when she gets sued for causing another driver's injuries.

2. The second category of insurance law helps insured people determine when an insurance
company must pay a claim.

3. Third, insurance companies typically hire lawyer to make sure the company complies with all
applicable laws and regulations, which can vary by state.

5.3 Four main types of Insurance

1. Life Insurance

The greatest factor in having life insurance is providing for those you leave behind. This is
extremely important if you have a family that is dependent on your salary to pay the bills.
Industry experts suggest a life insurance policy should cover "ten times your yearly income."
This sum would provide enough money to cover existing expenses, funeral expenses and give
your family a financial cushion. That cushion will help them re-group after your death.

2. Health Insurance
The Kenya Health Policy 2012-2030 offers guidelines to ensure momentous improvement in the
status of health in Kenya, in line with the provision of the new constitution of Kenya 2010,
Vision 2030, and other global commitments. The policy exhibits Kenya’s health sector’s
obligation, under the national government supervision, to ensure that Kenya attain the highest
possible standards of health, in response to the needs of its citizens. Health Policy 2012-2030 is
designed to be all-inclusive, balanced, and rational.
3. Long-Term Disability Coverage

This is the one insurance most us think we will never need, as none of us assumes we will
become disabled. Yet, statistics from the Social Security Administration show that three in 10
workers entering the workforce will become disabled, and will be unable to work before they
reach the age of retirement. Of the population, 12% are currently disabled in some form, and
nearly 50% of those workers are in their working years.

4. Auto Insurance

Motor insurance protects the insured against financial loss in the event that the motor vehicle is
involved in an accident, burnt or stolen.

a) Third Party: This policy covers third party bodily injury and property damage arising out of
use of motor vehicle.

b) Third party Fire & Theft cover extends to cover theft, fire, third party bodily injury and
property damage.

c) Comprehensive cover covers third party liability and property damage to the vehicle i.e.
damage arising out of fire, theft and accidental damage to the vehicle.

5.4 Seven Most Important Principles of Insurance

1. Nature of contract:

Nature of contract is a fundamental principle of insurance contract. An insurance contract comes

into existence when one party makes an offer or proposal of a contract and the other party
accepts the proposal.

2. Principal of utmost good faith:

Under this insurance contract both the parties should have faith over each other. As a client it is
the duty of the insured to disclose all the facts to the insurance company. Any fraud or
misrepresentation of facts can result into cancellation of the contract.
3. Principle of Insurable interest:

Under this principle of insurance, the insured must have interest in the subject matter of the
insurance. Absence of insurance makes the contract null and void. If there is no insurable
interest, an insurance company will not issue a policy.

4. Principle of indemnity:

Indemnity means security or compensation against loss or damage. The principle of indemnity is
such principle of insurance stating that an insured may not be compensated by the insurance
company in an amount exceeding the insured’s economic loss. In type of insurance the insured
would be compensation with the amount equivalent to the actual loss and not the amount
exceeding the loss.

5. Principal of subrogation:

The principle of subrogation enables the insurer to claim the amount from the third party
responsible for the loss. It allows the insurer to pursue legal methods to recover the amount of
loss, For example, if you get injured in a road accident, due to reckless driving of a third party,
the insurance company will compensate your loss and will also sue the third party to recover the
money paid as claim. Subrogation is a term describing a legal right held by most insurance
carriers to legally pursue a third party that caused an insurance loss to the insured. This is done in
order to recover the amount of the claim paid by the insurance carrier to the insured for the loss.

6. Double insurance:

Double insurance denotes insurance of same subject matter with two different companies or with
the same company under two different policies. Insurance is possible in case of indemnity
contract like fire, marine and property insurance. Double insurance policy is adopted where the
financial position of the insurer is doubtful. The insured cannot recover more than the actual loss
and cannot claim the whole amount from both the insurers.
7. Principle of proximate cause:
Proximate cause literally means the ‘nearest cause’ or ‘direct cause’. This principle is applicable
when the loss is the result of two or more causes. The proximate cause means; the most dominant
and most effective cause of loss is considered. This principle is applicable when there are series
of causes of damage or loss.

5.5 Benefits of insurance in Business

i. Prevention and minimization of financial losses

Insurance helps you to reduce financial losses when unfortunate events occur. For instance,
when there is a breakdown of equipment your company might not be able to function properly
and this might lead to a loss of revenue but you can use a business interruption insurance policy
to guide against this such that the insurance company covers for any losses incurred during the
period.

ii. Promotes business continuity

When some companies are hit with sudden unfortunate occurrences, it may lead to the end if not
properly managed but insurance helps to minimize risks so that the business continues to operate
and grow regardless of what happens.

iii. Risk sharing

Insurance also helps in risk or loss sharing in business. Such that when a company makes losses
instead of profits, the insurance company can come to the rescue. Also, when businesses are hit
with misfortunes, they may not be able to solely afford the costs of getting back up and running
again but when the business is insured, the risks are shared between the company and in the
insurance company such that both parties can collectively get the business up and running again.

iv. Protection of business image

When a business goes down, it is not only the business that suffers; the customers, stakeholders,
shareholders and the public are affected too. Therefore, insurance helps to manage bad
occurrences so that customers and every other person attached to the business can be protected.
 v. Protects the business against debtors

Sometimes, debtors also pose risks to the business and insurance can help to protect the business
against defaulters.

vi. Effective use of human resource

Insurance also helps to promote and ensure that human resources are put to the best use. For
instance, health insurance helps to ensure that employees are of perfect health and happy so that
they can put in their best.

vii. Provides assurance to stakeholders and investors

Also, when a company is insured, it provides a kind of assurance to people who may consider
doing business with them. Insuring your company attracts shareholders and customers to your
business.

5.6 Criticism of Insurance

i. Failure to acknowledge, to pay, or deny claims within specified time frames
ii. Failure to cancel policies or non-renew policies in accordance with requirements
iii. Failure to provide required compliant disclosures in underwriting processes
iv. Failure to process total loss claims properly
v. Failure to provide required compliant disclosures in claims processing
vi. Improper documentation of underwriting files
vii. Failure to adhere to producer appointment, termination and/or licensing requirements and
adjuster licensing requirements
viii. Failure to pay correct amount under policy
ix. Improper documentation of claim files

5.7 Important Terms in Insurance

i. Policy: The contract which outlines what the insurance company will pay in case of loss.
ii. Benefit: The money or services an insurance company provides in case of loss.
 iii. Insured: The person who receives the insurance benefit. However, in the case of life
insurance, the "insured" is the person whose life is insured, and the person who receives
the benefit is called the "beneficiary."
iv. Premium: The money the insured pays the insurance company.
v. Claim: A request for benefits when loss occurs.
vi. Coverage: The types of losses which the insurance company will reimburse.
vii. Insurance Agent: A person who is licensed to sell insurance in a particular state.

LESSON SIX

NEGOTIABLE INSTRUMENTS

6.1 What is Negotiable Instrument?

A negotiable instrument is a document guaranteeing the payment of a specific amount of money,
either on demand, or at a set time, with the payer named on the document. More specifically, it is
a document contemplated by or consisting of a contract, which promises the payment of money
without condition, which may be paid either on demand or at a future date. Negotiable
instrument means transferable document which can be used in money transaction.
6.2 Three Major types of Negotiable Instrument

i) Bill of Exchange

ii) Promissory Note

iii) Cheque

i) Bill of Exchange

A Bill of Exchange is a written document which is duly stamped and signed by the drawer
carrying an unconditional order which directs (not commands) a person to pay a specific amount
to a particular person or to the order of the particular person or the holder of the instrument.

ii) Promissory Note

A promissory note is a negotiable instrument, containing a written unconditional promise, duly

stamped and signed by the drawer, to pay a specified sum of money to a particular person or the
order of the particular person. It is made by the debtor to borrow money from the creditor. The
features of a promissory note are as under:

 The note must be in writing carrying written promise to pay money to the creditor.
 Signature of the promisor i.e. drawer of the note must be there.
 The date on which the note is payable should be fixed.
 Both the promisor and promisee needs to be certain.
 The sum of money must be definite.
 The country’s legal currency should be used to discharge the debt.

Promissory Note does not include a currency note or a bank note.

iii) Cheques

Cheques are considered as an important negotiable instrument in international sales. Cheques are
primarily a payment direction and it is not a credit instrument. Cheque plays an important role in
the mechanism of banking. Therefore, cheques are deeply rooted in the relationships of the bank
and the customer.

The nature of the cheque is that when it is presented, the payment is almost immediately made.

i. the cheques can be paid only to the named payee or his endorsee.

ii. The cheque cannot be negotiated to a third party

The crossed cheque must be presented through a bank account for payment; the holder of a
crossed cheque cannot present it in person for cash. The bank does not accept the cheque on
which they are drawn.

The cheque may be considered as a debit instrument. For the payment, the cheque must be
presented to the paying bank i.e. the bank where the drawer keeps his account. The cheque when
it is presented for payment goes through a clearing system where the collecting bank is entrusted
to collect the amount of the cheque on behalf of the customer and later credits it to his own
account. Cheques play a fundamental part in the banking field. Normally, the cheques are not
discounted.

Conditions to be fulfilled in Negotiable Instrument

i. The bill should be properly dated.

ii. It must contain an order, i.e. the drawer of the instrument directs the drawee to pay a
certain sum to the payee.
iii. Must be signed by the maker of the bill.
iv. The drawee must accept Bill.
v. Order to pay money only as well as the amount should be definite.
vi. Delivering the bill to the payee is a must.

The creditor makes Bill of Exchange. It is used in business to settle the debt between the parties.

Characteristics of Negotiable Instrument

1. Property

The possessor of the negotiable instrument is presumed to be the owner of the property contained
therein. A negotiable instrument does not merely give possession of the instrument but right to
property also. The property in a negotiable instrument can be transferred without any formality.
In the case of a bearer instrument, the property passed by mere delivery to the transferee. In the
case of an order instrument, endorsement and delivery are required for the transfer of property.

2. Title

The transferee of a negotiable instrument is known as holder in due course.’ A bonafide

transferee for value is not affected by any defect of title on the part of the transferor or of any of
the previous holders of the instrument. This is the main distinction between a negotiable
instrument and other subjects of ordinary transfer. The general rule of nemo dat quod non habet
does not apply to negotiable instruments.

3. Rights

The transferee of the negotiable instrument can sue in his own name, in case of dishonor.

A negotiable instrument can be transferred any number of times till it is at maturity. The holder
of the instrument need not give notice of transfer to the party liable on the instrument to pay.

4. Presumptions

Certain presumptions apply to all negotiable instruments e.g. a presumption that consideration
has been paid under it.

5. Prompt Payment

A negotiable instrument enables the holder to expect prompt payment because a dishonor means
the ruin of the credit of all persons who are parties to the instrument.
6.3 Key Differences between bill of exchange and Promissory Note

The following are the major differences between bill of exchange and promissory note:

1. Bill of exchange is a financial instrument showing the money owed by the buyer towards
the seller. Promissory Note is a written document in which the debtor promises the
creditor that the amount due will be paid at a future specified date.
2. In a bill of exchange, there are three parties while in the case of a promissory note the
number of parties is 2.
3. Creditor creates Bill of Exchange. On the other hand, Promissory Note is prepared by the
debtor.
4. The liability of the maker of the bill of exchange is secondary and conditional.
Conversely, the liability of the maker of the promissory note is primary and absolute.
5. Bill of Exchange can be made in copies, but Promissory Note cannot be made in sets.
6. In the case of the bill of exchange the drawer and payee can be the same person which is
not possible in case of the Promissory Note.
7. The notice of dishonor of a bill of exchange must be given to all the parties concerned,
however, in the case of promissory note such notice need not be given to the maker.

6.4 Comparison Chart of Bill of exchange and Promissory Note

Basis for
Bill of Exchange Promissory Note
Comparison

A promissory note is a written promise

Bill of Exchange is an instrument in
made by the debtor to pay a certain sum of
Meaning writing showing the indebtedness of a
money to the creditor at a future specified
buyer towards the seller of goods.
date.

Section 5 of Negotiable Instrument Section 4 of Negotiable Instrument Act,

Defined in
Act, 1881. 1881.

Three parties, i.e. drawer, drawee and

Parties Two parties, i.e. drawer and payee.
payee.

Drawn by Creditor Debtor

Liability of Maker Secondary and conditional Secondary and conditional

 Basis for
Bill of Exchange Promissory Note
Comparison

Can maker and payee

Yes No
be the same person?

Copies Bill can be drawn in copies. Promissory Note cannot be drawn in copies.

Notice is necessary to be given to all Notice is not necessary to be given to the

Dishonor
the parties involved. maker.

6.5 Other types of Negotiable Instrument

Treasury Bills

Treasury bill is a kind of negotiable instrument which is used by the government. The
government issues it to raise the short term loans. These bills, usually, mature in less than a year
and the bills do not pay interest before the maturity. Therefore, the bills are used by the bank as a
source of short term funding. To create a positive field of maturity, these bills can be sold at a
discounted rate compared to the present value. These bills are issued every week which are
called as ‘regular weekly treasury bills' with the maturity days like 28 days, 91 days, 182 days
and 364 days. The treasury bills are largely purchased by banks and other financial institution.

Banker's Draft

Banker's draft is a draft in which the funds are directly taken from the financial institution instead
of taking it from individual drawer's account. The draft can be paid at head office or any branch
office of the same bank. This banker's draft is mainly used in commercial transactions to make
payments. The banker's draft cannot be considered as legal cheque because the drawer and the
drawee are the same person. “But the cheques Act, 1957, the protection of bankers paying and
collecting such instruments is as with valid cheques.”
Dividend Warrants

Dividend warrants can be defined as demand drafts which are drawn by a company on a bank
ordering to pay a stock holder or shareholder with a sum of money which represents his profit in
the share of the company. The shareholder will be entitled with a share of the declared dividend.
Such amount can be drawn either in the form of a cheque or a banker's draft.

Share Warrants

The public and the private companies, if authorized by their articles issue in respect of fully paid
shares. A share warrant under a common law which states, that the bearer of the share warrant is
entitled to the share which is specified in it. When a company issues a share warrant, it must
strike out the name of the share holder from the registry of members. A share warrant is also
negotiable, because it passes a title free from defects in the title of previous holders upon mere
delivery. The important feature and advantage of a share warrant is that the owner of the share
warrant cannot be identified by anyone even if they look into the companies' public records.
These warrants are easy to transfer.

Bearer Scrip

This is a type of negotiable instrument which is nothing but a certificate which is been issued
when a payment is deposited. The bearer scrip issued to an existing share holder indicates that,
the shareholder is entitled for the payment of further installments. The bearer scrip is usually,
used by the government and public companies.

Bearer Debenture

Bearer debentures are negotiable instruments which are transferable free from equities upon
mere delivery. There is no need to give the company a notice of transfer. Interests are paid by
attaching the coupon to the debenture. These coupons are the instruction to the companies'
banker which assist to pay the bearer a sum of money which is stated on the coupon after a
certain date. Only by advertisement, the company can communicate with the holders of bearer
debenture. The holders of bearer debenture may exchange them for registered debentures. A
debenture can also be in the form of promissory notes.

Bearer Bonds

It is a kind of negotiable instruments which acts as a security for debt which is issued by a
government or a corporation. These bearer bonds are completely different from other common
type investment securities. This instrument is not registered and there are no records of the owner
of the bond and no clue regarding the transactions involving ownership. The person who
physically holds the paper on which the bond is issued is the owner of the instrument. So, if there
is any loss or destruction of this bearer bond, recovering the value is not possible.

Floating Rate Note

Floating rate notes are the type of bonds which have a variable coupon. These coupons are equal
to a money market reference rate. They also have a rate which remains constant. Most of the
floating rate notes are quarterly coupons. They are called so because they pay back the interest
only after every three months. Initially, every coupon period is calculated by taking into account
the fixing of the reference rate, which is therefore, that day and by adding a rate, which remains
constant. The floating rate notes carry an interest rate risk with them.

Certificate Of Deposit

This negotiable instrument can be explained as a final product which is commonly offered to
consumers by bank and credit unions. The certificate of deposits has specified fixed term and the
terms are valid for a period like three months, 6 months or 1 – 5 years. They also have a fixed
rate of interest. If the certificate of deposit is kept till the maturity date, the money can be with
the drawer including the accrued interest. If the money is kept as a deposit for an agreed term, we
can get a higher rate of interest. The main requirement of a certificate of deposit is a minimum
deposit which may offer higher rate for larger deposits. Interests are paid periodically through
cheque or may be transferred into the savings account according to the wish of the purchaser.
LESSON SEVEN

LAW OF AGENCY

7.1 What is Agency Law?

Agency law refers to the relationship between a person, or “agent,” that acts on behalf of another
person, company, or government, usually called the “master” or “principal.” An agency is
formed when a principal asks an individual to make a delivery or names someone as an agent
through a contract leading to the responsibility of the principal for actions made by the agent
while the agent’s actions are akin to those of the principal. This form of agency can be, and often
is, enforced by written agreements made through a power of attorney.

An agency relationship is generated by the consent of both the agent and the principal. No person
can unwillingly become an agent for another. A written contract is common, but not necessarily
essential when it is clear that both parties intend to act in their respective principal and agent
roles. The intent of the parties can be inferred from their words or implied by their actions.

7.2 Formation of Agency

There are four types of forming agency

1. Agency by appointment

2. Agency by Estoppel (implied appointment)

3. Agency by ratification

4. Agency of necessity

1. Agency by appointment

i) An agency is created by express appointment when the principal appoints the agent by express
agreement with the agent. This express agreement may be an oral or written agreement between
the principal and the agent.

ii) Contract law principles apply to an agency agreement. An agent may agree to act in
consideration for a reward. On the other hand, an agency is gratuitous if the agent agrees to act
for no consideration.

iii) The general rule is that agency may be created orally and there is no formality for the
creation of agency by express agreement, except for one situation which is discussed below. This
general rule applies even to cases of appointing agents for the signing of agreements for sale and
purchase of immovable property, whether on behalf of the vendor or the purchaser.
The one exception is where an agent is appointed to execute a deed on behalf of the principal. In
this case, the agent will have to be appointed by deed, which is called a power of attorney.

2. Agency by Estoppel (implied appointment)

a) Agency by estoppel arises when A makes a representation to a third party, whether by words
or conduct, that B is his agent, and subsequently that third party deals with B as A's agent in
reliance on such representation. A will not be permitted (is estopped) to deny the existence of the
agency if to do so would cause damage (usually financial loss) to that third party.

b) The person who makes such representation ("A" in paragraph (a) above) is treated as having
created an agency relationship between himself as the principal and the other person ("B" in
paragraph (a) above) as his agent, although there is in fact no agreement between the two parties
("A" and "B" in paragraph (a) above) as to the creation of the agency relationship. Agency by
estoppel is sometimes called implied appointment of agent.

c) In agency by estoppel, the authority of the agent is described as only apparent or ostensible but
not actual, as the principal has, in fact, not granted the agent such authority to act on the
principal's behalf.

d) The extent of apparent or ostensible authority of the agent in an agency by estoppel depends
largely upon the contents of the representation made by the principal to the third party who relies
and acts on the representation. The principal is said to "hold out" a person as his agent with such
authority as the principal may induce the third party to believe and is estopped from denying the
existence of agency.

3. Agency by ratification

a) Agency by ratification arises when a person (the principal) ratifies (that is, approves and
adopts) an act which has already been done in his name and on his behalf by another person (the
agent) who in fact, had no actual authority (whether express or implied) to act on his (the
principal's) behalf when the act was done.
b) Ratification by itself only creates an agency relationship between the principal and the agent
in respect of the act ratified by the principal, but not in respect of any other act, whether past or
future.

c) The person who ratifies an act of another person must have been in existence and have the
legal capacity to carry out that act himself both at the time when the act was done and at the time
of ratification. A person may lack legal capacity on grounds of bankruptcy, infancy or mental
incapacity.

4. Agency of necessity

a) Agency of necessity arises when a person ("A") is faced with an emergency in which the
property of another person ("B") is in imminent jeopardy and it becomes necessary, in order to
preserve the property for A to act for and on behalf of B. In this case, A acts as an agent of
necessity of B.

b) Agency of necessity arises only when it is practically impossible for the agent to communicate
with the principal before the agent acts on behalf of the principal. (This would be difficult to
establish with today's advanced communication systems and is the reason why agency of
necessity does not often arise.)

c) Authority to act in case of emergencies cannot usually prevail over express instructions to the
contrary given by the principal.

7.3 Types of Agents

There are six types of agents.

(a) General agent. This is an agent who has the principal’s unlimited authority to carry out
contracts on behalf of the principal without recourse to the principal on each and every point in a
transaction.
(b) Agent of necessity. Here, the agency comes into being as a result of circumstances. There is
no formal appointment, express or otherwise. The agent steps into the agency with a view to
minimise damages or loss to the goods of principal.

(c) Del Credere agent. This agent undertakes to guarantee the goods or indemnify the principal
for any losses arising from the agency transaction. In return for this assurance, the agent receives
an extra remuneration from the principal.

(d) Factor. The basic feature of the agent is that the agent has possession of the goods before
sale. In this case, such an agent can sell in his/her own name and may even pledge the goods as
security to raise money in the name of the principal.

(e) Special Agent. This is an agent who has been appointed to carry out only a designated task.
On completion of the task, the agency terminates. Example, a polling agent.

(f) Broker. This is an agent who does not have possession of the goods at the time of sale. The
transaction concluded by such an agent on behalf of the principal, nevertheless binds the
principal.

7.4 Types of Agency relationship

The most common agency relationships are:

i. Buyer’s Agency
ii. Seller’s Agency
iii. Dual Agency.

i) Buyer’s Agency

In a buyer’s agency relationship, the buyer is considered the client.  A buyer’s agent has to be
loyal, maintain confidentiality, be obedient, provide reasonable care and diligence, and give
accounting for all funds.

ii) Seller’s Agency

A seller’s agency relationship represents the seller in the transaction and the seller is considered
the client.  A seller’s agent is also known as a listing agent.  The seller’s agent possesses the
same fiduciary responsibilities to the seller as the buyer’s agent has to the buyer.  In a seller’s
agency, the client relationship is established through a listing agreement.

iii) Dual Agency

A dual agency, an agent represents both buyer and seller in a single transaction and carries
fiduciary responsibilities to both principals.  The mistake of an agent acting as a dual agent
becomes a mutual mistake of fact by both principals.  This prevents one principal to make the
other principal liable for the mistake of the agent. However, knowledge or notice to a dual agent
is not imputed if the agent acted adversely or fraudulently, dual Agency is only permitted with
the informed and voluntary consent of both the buyer and the seller.

7.5 Relationship between Agent and Principal

Who is a Principal?

Any person who has the legal capacity (meaning that they are not insane, or in certain
circumstances a minor) to perform an act may be a principal and empower an agent to carry out
that act. Persons, corporations, partnerships, not-for-profit organizations, and government
agencies may all be principals and appoint agents.

Who is an Agent?

Any individual capable of comprehending the act to be undertaken is qualified to serve as an

agent.

7.6 What is the purpose of this relationship (called Agency)?

A contract to be made by an agent on behalf of a principal is considered to be the contract of the

principal and not that of the agent. It allows the principal to authorize somebody to carry out her
duties, either for a specific purpose (i.e., purchasing a house) or generally (i.e., to conduct many
transactions). The agency relationship is usually entered into by informal agreement, but also can
occur by formal agreement (in certain cases, the agency relationship must be specified in
writing). The acts must be legal (i.e., principal cannot hire agent to kill the professor).

7.7 What is the basis of the Agency relationship?

Inherent in the Principal-Agent (P-A) relationship is the understanding that the agent will act for
and on behalf of the principal. The agent assumes an obligation of loyalty to the principal that
she will follow the principals instructions and will neither intentionally nor negligently act
improperly in the performance of the act. An agent cannot take personal advantage of the
business opportunities the agency position uncovers. A principal, in turn, reposes trust and
confidence in the agent. These obligations bring forth a fiduciary relationship of trust and
confidence between P and A.

7.8 What are the obligations of the Agent to the Principal?

An agent must obey reasonable instructions given by the P. The A must not do acts that have not
been expressly or impliedly authorized by the P. The A must use reasonable care and skill in
performing the duties. Most importantly, the A must be loyal to the P. The A must refrain from
putting herself in a position that would ordinarily encourage a conflict between the agents own
interests and those of the principal (note: one might reflect on the role of certain Enron
executives on outside limited partnerships that did business with Enron in the early 2000s). The
A must keep the P informed as to all facts that materially affect the agency relationship.

7.9 Rights duties and obligation of agent and principal

An agency is the creation of a contract entered into by mutual consent between a principal and an
agent.  By agency, a principal grants authority to an agent to act on behalf of and under the
control of the principal.  The relation between a principal and an agent is fiduciary and an agent’s
actions bind the principal. The law of agency thus governs the legal relationship in which an
agent deals with a third party for his/her principal.
Principal’s duties

A principal owes certain contractual duties to his/her agent.  Correlative with the duties of an
agent to serve a principal loyally and obediently, a principal’s primary duties to his/her agent
include:

i. To compensate the agent as agreed.

ii. To indemnify and protect the agent against claims, liabilities, and expenses incurred in
discharging the duties assigned by the principal
iii. Act of good faith and fair dealing.
iv. Act in accordance with the express and implied terms of any contract between a principal
and an agent.

When an agent acts within the scope of actual authority, the principal is liable to indemnify the
agent for payments made during the course of the relationship irrespective of whether the
expenditure was expressly authorized or merely necessary in promoting the principal’s business.

Agent’s Rights
Following are the important rights of an agent
1. Right of Remuneration
It is basic right of an agent that he should receive the remuneration of his services.
2. Right of Compensation
In case of injury caused to agent by the negligence of the principal may be compensated by the
principal.
3. Right to Retain Money
In conducting the business if an agent advances or spends some money for the betterment of a
business. He has also right to retain that amount from the total sum received by him on account
of the principal.
4. Right of Lien
An agent has also a right to retain the goods or property of a principal till the payment in due is
received by him.
5. Indemnity Right
An agent has a right to be indemnified against the liabilities falls on him.

Duties of an Agent
Following are the important duties of an agent :
1. Obey the Instruction
It is the basic duty of an agent that he should act upon the lawful instructions of the principal.
2. Conducting Business
It is the duty of an agent that he should conduct the business of a principal. While performing the
services he should keep in view the directions of the principal or prevailing customs in business.
3. Showing of Accounts
It is the duty of an agent that he should maintain the accounts properly and submit it to the
principal on his demand.
4. Return of Undue Profit
If an agent has earned undue profit from the business, he should return it to the principal.
5. Use of Skill and Knowledge
It is the duty of the agent that he should perform his duties with as much skill and knowledge as
is generally shown by an ordinary prudence in similar business.
6. Communication With Principal
It is the duty of the agent that he should give all the information's about the business to the
principal. He should seek instructions from his principal. He should not keep anything secrets
from his principal.
7. Payment of All Sum
It is the duty of an agent to pay his principal all the sums received on his account.
8. Principal Death Case
If principal dies or becomes insane, it is the duty of the agent that he should protect or save the
goods as he was doing in the life of the principal. Now he will protect the interest of the legal
heirs.
9. Separate Account
An agent should not mix his account with the principal. It is the duty that he should keep the
accounts of a principal separate.
10. Performance With Honesty
It is the duty of an agent that he should deal the business honestly. If he conducts the business
dishonestly then he is not entitled to receive the reward of his services.

Personal Liabilities or Grounds on which an Agent can be Sued

1. Where he does not disclose the name of the principal.
2. When the agent receives money by mistake or fraud.
3. When agent performs any act without the authority of the principal but pretends to be an
agent.
4. If an agent has made a contract with the foreigners for the sale and purchase of goods.
5. If agent makes a contract on his own name instead of his principal.
6. If the agent has agreed to accept the liability of the third party.
7. Where the agent has personal dealing with the third party.
8. If an agent signs on the bill of exchange without telling that he is signing on the behalf of the
principal.

Prima facie; based on the first impression; accepted as correct until proved otherwise.

Lien; a right to keep possession of property belonging to another person until a debt owed by
that person is discharged.

Estoppel; A legal principle that bars a party from denying or alleging a certain fact owing to that
party's previous conduct, allegation, or denial.

Property Right; A generic term that refers to any type of right to specific property whether it is
personal or real property, tangible or intangible; e.g., a professional athlete has a valuable
property right in his or her name, photograph, and image, and such right may be saleable by the
athlete.
Litigation……………law action, court case or lawsuit

Arbitration…………..settlement or mediation

Indemnify……………. compensate (someone) for harm or loss.

Caveat Emptor. Latin for "let the buyer beware." A doctrine that often places on buyers the
burden to reasonably examine property before purchase and take responsibility for its condition.
Especially applicable to items that are not covered under a strict warranty.