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Business Law Assignment 2

Business Law
Assignment # 2 Eerab Akhlaque Student No. 13263

WHAT IS BAILMENT
A legal relationship created when a person gives property to someone else for safekeeping. To create a bailment the other party must knowingly have exclusive control over the property. The receiver must use reasonable care to protect the property. Examples: 1. Vehicles parked in a monitored parking garage 2. securities or bonds left with a bank 3. animals lodged at kennels 4. Goods left at a storage facility under the control of the bailee.

Elements of Bailment
Contract A bailment is created by an agreement between the Bailor and bailee. Such agreement may be express or implied by the conduct of the parties. Again it may be implied by laws in the case of a finder of goods. Delivery of Goods A bailment necessary involves delivery of goods by bailor to bailee. The bailment involves change of possession and contract. Mere custody of goods without possession does not create relation of a bailor and bailee e.g. a servant in possession of his masters goods or a guest using his hosts goods is not a bailee. Delivery may be actual or constructive. Actual delivery may be made by handing over the goods to the bailee. Constructive delivery or symbolic delivery may be made by doing something which has the effect of putting the goods in the possession of the intended bailee or of any person authorized to hold them on his behalf. Delivery for Specific Purpose The delivery of goods by the bailor to bailee must be for a specific purpose. Delivery inany other manners do not create bailment. Return of the same goods

The delivery is on the condition that as soon as the purpose is achieved the goods shall be returned in specie either in their original form or in an altered from or in an improved from. Alternatively they shall be disposed of according to the directions of the bailor. Bailment must be of Goods Goods mean every kind of movable property other than money and actionable claim. In a bailment it is only the possession that passes from the owner to the other person and not the ownership. Thus where goods are transferred by the owner to another for a price, it is a sale and not a bailment. Likewise, where money is deposited with a bank, there is no bailment but a relationship of debtor and creditor is created. Classification of Bailment Bailment may be of following types For exclusive benefit of bailor i.e. delivery of goods by owner to another for safe custody without charge. 2

Business Law
Assignment # 2 Eerab Akhlaque Student No. 13263

Business Law
Assignment # 2 Eerab Akhlaque Student No. 13263

Business Law
Assignment # 2 Eerab Akhlaque Student No. 13263

Business Law
Assignment # 2 Eerab Akhlaque Student No. 13263 For exclusive benefit of bailee i.e. lending a book to a friend for purpose of examination study, without charge. For mutual benefit of bailor and bailee e.g. giving a piece of cloth for stitching into a suit, or hiring of furniture for consideration. Gratuitous bailment is one where no consideration passes between the bailor and bailee. Non-gratuitous bailment or bailment for reward is a bailment where consideration passes between bailor and bailee.

Duties of Bailor
The duties of bailor are

1. Disclose know faults The bailor is bound to disclose to the bailee the defects in the good bailed of which he is aware. If he fails to do so, he (bailor) is liable to bailee for damages. Example:-Ali lends his horse to Zain for riding. Ali knows that the horse is vicious which fact he does not disclose to Zain. The horse runs away and injures Zain. Ali is responsible for the injury. 2. Bear extraordinary expenses This is to be considered whether the bailment is gratuitous or for reward. Gratuitous: Where, in case of gratuitous bailment the goods are to be kept, or to be carried, or to have work done upon them by the bailee for the bailor, the bailor shall repay to the bailee the necessary expenses incurred by him for the purpose of bailment. Bailment for reward: All extraordinary expenses of bailment are to be borne by the bailor. However, all ordinary and reasonable expenses shall be borne by the bailee.

Business Law
Assignment # 2 Eerab Akhlaque Student No. 13263 3. Indemnify bailor for the loss The bailor is bound to indemnify the bailee, in case of immature termination of gratuitous bailment, so much of the loss suffered by him (bailee) as exceeds the benefit derived by the bailee. 4. Receive back the goods The bailor should receive back the goods when the purpose for which bailment was created has been accomplished or the term of bailment has expired. In case of default by bailor, the bailee is entitled to recover expenses for keeping and safeguarding the goods. 5. Indemnify bailee for defective title The bailor is bound to compensate the bailee any loss which he may sustain by reason that the bailor was not entitled to make the bailment, or to receive back the goods or to give directions in respect thereof.

Rights of Bailor
The rights of bailor are

1. Enforcement of rights The bailor is entitled to enforce, through the court, all the duties of the bailee, as his rights. 2. Avoid contract The bailor can avoid the contract of bailment, if the bailee does any act with regard to the goods bailed, which is inconsistent with the conditions of bailment. 3. Return goods lent gratuitously When the goods are lent gratuitously, the bailor can demand their return whenever he decides even though he lent them for a specific period or purpose. 4. Compensation from wrong-doer If a third person wrongly deprives the bailee of the use or possession of the goods bailed, or does them any injury the bailor (or bailee) may bring a suit against such third person for such deprivation or injury.

Business Law
Assignment # 2 Eerab Akhlaque Student No. 13263

Business Law
Assignment # 2 Eerab Akhlaque Student No. 13263

Business Law
Assignment # 2 Eerab Akhlaque Student No. 13263

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Business Law
Assignment # 2 Eerab Akhlaque Student No. 13263

Duties (or Liabilities) of Bailee


The duties of bailee are 1. Take reasonable care of goods bailed The bailee is bound to take as much care of the goods bailed to him as a man of ordinary prudence would, under similar circumstances, take of his own goods of the same bulk, quality and value as the goods bailed. He is not responsible for the loss, destruction or deterioration of the goods bailed, if he has taken aforesaid amount of care. 2. Not to make any unauthorized use of goods If the bailee uses the goods bailed in a way which is inconsistent with the conditions of bailment, he shall be liable for any loss arising from such use. 3. Not to mix goods bailed with his own goods The bailee must keep the goods of the bailor separate from his own goods. If he mixes the rule is different depending upon the consent of the bailor and the separability of mixture. When the bailee mixes the goods bailed with his own goods with the consent of the bailor both bailor and bailee have common interest in the mixture in proportion to their respective share. For mixture without bailors consent, the law depend s upon whether the mixture is separable or not. Where the mixture is made without the consent of the bailor and the goods so mixed are separable (or divisible), the bailee shall bear the expenses of separation and also damage arising from the mixture. If the bailee, without bailors consent, mixes the goods of bailor with is own goods and such goods cannot be separated, the bailor is entitled to be compensated by the bailee for the loss of goods. 4. Return accretion to goods The bailee is bound to deliver to the bailor, or according to his directions, any increase or profit which may have accrued from the goods bailed. 5. Return the goods It is the duty of the bailee to return the goods bailed, without demand, on the expiry of time fixed or on accomplishment of purpose. In case of any default he becomes liable for any loss, destruction or deterioration of goods notwithstanding he exercised reasonable care.

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Business Law
Assignment # 2 Eerab Akhlaque Student No. 13263

Rights of Bailee
The rights of bailee are 1. Deliver goods to one of joint bailor

If several joint owners of goods bailed them, the bailee may deliver them back to, or according to the directions of, any one of joint owners without the consent of all. 2. Deliver goods to bailor without title If the bailor has no title to the goods, and the bailee, in good faith, delivers them back to, or according to the directions of, the bailor, the bailee is not responsible to the owner in respect of such delivery. 3. Rights when third person claims goods If a person other than the bailor claims goods bailed, he may apply to the court to stop the delivery of the goods to the bailor, and to decide the title to the goods. 4. Bailees Lien The bailee has a particular lien in respect of his lawful charges in respect of the goods bailed. Lien means the right of the person to retain possession of some goods belonging to another until the debt or a claim of the person in possession is satisfied. Possession of certain goods is necessary for exercising a right of lien. Such possession must be rightful, not for a particular purpose and must be continuous. 5. Rights against wrong-doer A third person may wrongfully deprive the bailee of the use or possession of the goods bailed, or does them any injury. In such a case, the bailee is entitled to use such remedies as the owner might have used in the like case if no bailment had been made. So either the bailee or bailee may bring a suit against the third person for such deprivation or injury. Whatever is obtained by way of relief or compensation in any suit shall, as between the bailor and bailee, be dealt with according to their respective interests.

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Assignment # 2 Eerab Akhlaque Student No. 13263 Termination of Bailment The contract of bailment may be terminated in any of the following manner. As soon as the period of bailment expires, the bailment comes to an end. When bailment is for a specific purpose, it terminates as soon as the object of bailment is achieved. Where the bailee does any act inconsistent with the terms of contract the bailment terminates. When the subject-matter of bailment is destroyed or due to change in its nature becomes incapable of use, the bailment is terminated. A gratuitous bailment is terminated by the bailor at any time subject to conditions. A gratuitous bailment is terminated by the death of the bailor or bailee.

DISCHARGE OF CONTRACTS
Discharge of a valid contract involves the process under which the primary (performance) obligations come to an end. Discharge by breach will generally give rise to secondary obligations to pay damages. Discharge by performance will not give rise to secondary obligations, as the contract will have been successfully completed. Discharge by frustration does not give rise to secondary obligations but rights to restitution under statute. Contract may be discharged by: I. Performance

The general rule is that the parties must perform precisely all the terms of the contract in order to discharge their obligations. 1. An executed contract is one in which nothing remains to be done by either party. The phrase is, to a certain extent, a misnomer because the completion of performances by the parties signifies that a contract no longer exists. 2. An executory contract is one in which some future act or obligation remains to be performed according to its terms. II. Agreement A contract may be discharged by agreement when both parties agree to bring the contract to an end and release each other from their contractual obligations. For a contract to be discharged through agreement there must be Accord & Satisfaction. Both parties must also provide consideration. If both parties have continuing obligations then generally the consideration will be simply each of them giving up their rights under the contract. The only time consideration becomes an issue is where one party has fully performed their part of the contract when the other has not. The non-performing party must then provide consideration to make the agreement binding. Also if the agreement is made by deed there is no requirement to provide consideration. There is in effect a contract to end a contract.

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Assignment # 2 Eerab Akhlaque Student No. 13263 1. The parties may enter a new contract to end the old one. This is called novation. Obviously the new contract must satisfy all the usual rules for contractual formation. III. Breach An unjustifiable failure to perform all or some part of a contractual duty constitutes a breach of contract. It ensues when a party who has a duty of immediate performance fails to perform, or when one party hinders or prevents the performance of the other party. A failure to perform the terms of a contract constitutes a breach. A breach which is serious enough to give the innocent party this option of treating the contract as discharged can occur in one of two ways: 1. either one party may show by express words or by implications from his conduct at some time before performance is due that he does not intend to observe his obligations under the contract (anticipatory breach); or 2. He may in fact break a condition or otherwise break the contract in such a way that it amounts to a substantial failure of consideration. IV. Frustration The doctrine of frustration operates in situations where it is established that due to subsequent change in circumstances, the contract is rendered impossible to perform, or it has become deprived of its commercial purpose by an event not due to the act or default of either party. Conditions of Frustration: 1. Destruction of The Specific Object: The destruction of the specific object essential for performance of the contract will frustrate it. 2. Personal incapacity: where the personality of one of the parties is significant may frustrate the contract. 3. The Non-Occurrence of a Specified Event: The non-occurrence of a specified event may frustrate the contract. 4. Interference by The Government: Interference by the government may frustrate a contract. 5. Supervening Illegality: A contract may become frustrated if it later becomes illegal.

FINDER OF GOODS
Where a person sees an article dropped on a road he is not obliged to pick it up and keep in his custody and charge. But if he picks it he becomes a bailee. In this respect, a person who finds goods belonging to another and takes them into his custody is subject to the responsibilities of a bailee.

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Assignment # 2 Eerab Akhlaque Student No. 13263

Rights of Finder of Goods


Lien of goods The finder of the goods can retain the goods against the owner, until he receives compensation for trouble and expenses incurred by him in preserving goods and finding the owner. Sue for reward Where the owner has offered a specific reward for the return of goods lost the finder may sue for such reward and may retain the goods until he receives the reward. Right of sale The finder of the goods can sell the goods found. If the owner cannot with reasonable diligence he found. If found he refuses to pay the lawful charges of the finder. If the goods are in danger of perishing or of losing greater part of their value. If lawful charges of the finder, in respect of the goods found, amount two-third of their value.

WHAT IS PLEDGE?
Pledge is a solemn promise or agreement to door refrain from doing something. Pledge is a special type of bailment where you promise to pay the money a money lender gives in exchange for your valuable goods that act as a security. Bailment for security can be termed as a pledge. Example: if a person keeps his gold or other valuable items in a bank locker or with a money lender in exchange for a loan, he is making a pledge to the money lender or the bank that he will return the money and get back his valuables. Example: John asks to borrow $500 from Mary. Mary decides first that John will have to pledge his stereo as security that he will repay the debt by a specific time. In law John is called the pledgor, and Mary the pledgee. John gives the stereo to Mary, but he still legally owns it. If John repays the debt under the contractual agreement, Mary must return the stereo. But if he fails to pay, she can sell it to satisfy his debt. Pledge of Pawn Pledge is the bailment of goods as security for payment of a debt or performance of a promise. Pledge is a special kind of mutual benefit bailment by which one person transfers possession of some goods to another to secure the payment of a debt or performance of a promise. The essential of a valid pledge is the actual or constructive delivery of goods pledged. There can be no valid pledge of goods unless its delivery takes place. Transfer of possession must be judicial. Mere physical possession is not sufficient. Pledge can be made of movables only. Again, the bailee under the contract of pledge does not become owner; he only acquires a special property. When a person pledges goods in which he has only a limited interest, the pledge is valid to the extent of that interest.

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Assignment # 2 Eerab Akhlaque Student No. 13263 Any kind of movable property may be pledged e.g. goods, valuables, documents. Even a savings bank Pass Book may be pledged. The bailor is called pledgor or pawnor and the bailee is called pledge or pawnee.

RIGHTS OF PAWNOR
Rights to get back goods pledged The pawnor on payment of loan and interest or the performance of the promise is entitled to get back the goods pledged. Rights to redeem debt The pawnor is entitled to redeem the goods pledged at any subsequent time before the actual sale of such goods when he (pawnor) has made default in payment or performance of promise. Preservation and maintenance of goods The pawnor has a right that the goods which he has pledged should be properly preserved and reasonable maintained as a bailee. Right as ordinary debtor The pawnor has all such rights of an ordinary debtor which are conferred on him by various statutes. Rights of suit If the pawnee (i.e. pledgee) make an unauthorized sale of goods pledged i.e. without giving notice to pawnor as required, the pawnor has the following rights. File a suit for redemption of goods. Ask for damages on the ground of omission to give notice.

RIGHTS OF PAWNEE
1. Rights to retain goods The pawnee may retain the goods pledged until his dues are paid. He may retain them. For the payment of debt or performance of promise. For the interest due on the debt. For all necessary expenses incurred by him for the possession and preservation of goods pledged. 2. Rights to retention of subsequent advances The pawnee can retain the goods pledged for all subsequent advances made by him to the pawnor after the date of pledge. 3. Rights to extraordinary expenses The pawnee is entitled to receive from the pawnor extraordinary expenses incurred by him for preservation of the goods pledged. In case of non-payment pawnee can file a suit but cannot retain the goods. 20

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Assignment # 2 Eerab Akhlaque Student No. 13263 4. Rights against true owner when pawnors title defective Where the goods pledged were acquired by the pawnor under a voidable contract and such contract was not rescinded at the time of pledge, pawnee acquires a good title to the goods. Pawnee right where pawnor makes default Where the pawnor fails to redeem his pledge the pawnee acquires the following rights: He may file a suit against the pawnor upon the debt or promise and may also retain the goods pledged as a collateral security. He may sell the goods pledged after giving the pawnor a reasonable notice of sale. He can recover from the pawnor any deficiency arising on the sale of goods by him.

PLEDGE BY NON OWNERS


A mercantile agent who is, with the consent of ht owner, in possession of goods or document of title to goods may, in the ordinary course of his business as a mercantile agent, pledge the goods and such a pledge will bind the owner. It will also be a valid pledge when mercantile agent made a pledge without authority of the owner if the pawnee has acted in good faith and did not know the absence of pawnors authority to pledge. Pledge by seller in possession after sale A seller left in possession of goods after sale can create a valid pledge, if the pawnee acted in good faith and had no notice of previous sale of such goods. Pledge by buyer in possession Where a buyer obtains possession of goods with the sellers consent, before the payment of price, pledges such goods and the pawnee takes them in good faith and without notice of sellers lien or any other tight the pledge is valid. Pledge when pawnor has limited interest Where a buyer obtains possession of goods in which he has only a limited interest, the pledge is valid to the extent of that interest. So a mortgagee or a person having a lien or finder of goods can pledge such goods to the extent of his interest. Pledge by co-owner in possession Where one of the joint-owners of a thing is, with the consent of other co-owners in possession of such goods, he can make a valid pledge. Pledge by person in possession under voidable contract Where a person obtains possession of goods under a voidable contract, he can make a valid pledge if the following conditions are fulfilled: Contract has not been rescinded before the pledge. Pawnee acts in good faith and without notice of pawnors defect of title.

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Assignment # 2 Eerab Akhlaque Student No. 13263

BAILMENT AND PLEDGE DISTINGUISHED


Purpose Bailment is the delivery of goods for a particular purpose which are to be returned after the accomplishment of such purpose. Pledge is a bailment of goods as a security for a loan or performance of a promise. Non-payment In a bailment, in case of default, the bailee can either retain the goods or sue for his charges. In a pledge, in case of default, the pawnor can, after giving reasonable notice to pawnor, sell the goods pledged. Use of goods In case of bailment, the bailee can use the goods according ot the terms of contract. In case of pledge, the pawnee has no right to use the goods pledged with him.

WHAT IS INDEMNITY?
Definition: Recompense for loss, damage, or injuries; restitution or reimbursement. An indemnity contract arises when one individual takes on the obligation to pay for any loss or damage that has been or might be incurred by another individual. The right to indemnity and the duty to indemnify ordinarily stem from a contractual agreement, which generally protects against liability, loss, or damage. Indemnity can also be said the act of making someone "whole" (give equal to what they have lost) or protected from (insured against) any losses which have occurred or will occur. Contract Act defines a contract of indemnity as a contract by which one party promises to save the other party from loss caused to him by the conduct of the promisor himself, or by the conduct of any other person. Example: P contracts to indemnify Q against the consequences of any proceeding which R may. Take against Q in respect of a certain sum of Rs. 200. This is a Contract of Indemnity where P is called the indemnifier and Q the Indemnity-holder. Compensation for loss, in a property and casualty contract, the objective is to restore an insured to the same financial position after the loss that he or she was in prior to the loss. But the insured should not be able to profit by damage or destruction of property, nor should the insured be in a worse financial position after a loss.

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Assignment # 2 Eerab Akhlaque Student No. 13263

CHARACTERISTICS
Characteristics (or the requisites) of a Contract of indemnity are as follows: 1. A contract of guarantee must satisfy all the essential elements of a contract. For example, the object must be lawful, there must be free consent etc. 2. The Contract may be express or implied. An express contract is by word or by writing. An implied contract of indemnity comes from the circumstances of the case or the relationship between the parties.

Rights of the Indemnity-holder


Contract Act lays down that the indemnity-holder is entitled to get from the indemnifier: 3. All damages which he may be compelled to pay in any suit in respect of any matter to which the promise to indemnify applies 4. All costs which he may be compelled to pay in such suits (provided he acted prudently or with the authority of the indemnifier) 5. All sums which he may have paid upon compromise of such suit (provided the compromise was prudent or was authorized by the indemnifier).

WHAT IS GUARANTEE?
Definition: The assumption of responsibility for payment of a debt or performance of some obligation if the liable party fails to perform to expectations. A guarantee is a contract between the guarantor (the person that gives the guarantee) and the creditor (typically the creditor that makes the loan). As a contract, it must meet the essential conditions required to form a valid and enforceable contract. There must be certainty of the terms of the guarantee: what is the extent of the guarantee, when can the creditor call for performance under the guarantee, and how can it be revoked. The guarantee is normally in written and signed by the guarantor. But a guarantee can be enforceable even if it is not in writing; the guarantee could be implied from the conduct of the parties such as a partial payment after a promise relied upon by the creditor to provide credit to the debtor. By giving the guarantee, the guarantor promises to carry out the obligations of the third party (the debtor) if the debtor fails to do so. Example: If you guarantee a loan made to the black sheep of the family, then you agree that when the loan is not paid by the black sheep, you will make payment. The guarantee is usually of a loan. But, you can guarantee any type of obligation. In case of reference the person is not under any obligation to make good the losses of the other party.

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Assignment # 2 Eerab Akhlaque Student No. 13263

Essentials of a Valid Guarantee


1. A contract of guarantee must satisfy all the essential elements of a contract. (For example, the object must be lawful; there must be free consent etc.) But the following points are to be noted. 2. A contract of guarantee may be either oral or written. 3. In a contract of guarantee there are three parties i.e., the creditor, the principal, debtor and the surety. All the parties must join the contract. 4. In a contract of guarantee, the primary liability is that of principal debtor. The liability of surety arises only when there is a default of the principal debtor. Therefore, the liability of the surety is secondary. 5. In a contract of guarantee the principal debtor may be a minor. In this case the surety is liable to pay even though the minor may not be. The contract will be enforced as between the surety and the creditor. 6. Consideration: In a contract of guarantee, the consi-deration received by the principal debtor is taken to be sufficient consideration for the surety. Anything done, or any promise made, for the benefit of the principal debtor may be sufficient consideration to the surety for giving guarantee. Examples: (i) B requests P to sell and deliver to him goods on credit. P agrees to do so, provided C will guarantee the payment of the price of goods. C promises to guarantee the payment in consideration of Ps promise to deliver the goods. This is a sufficient consideration for Cs promise. (ii) P sells and delivers goods to B. C afterwards requests P to forbear to sue B for the debt for a year and promises that if he does so, C will pay for them in default of payment by B; P agrees to forbear as requested. This is a sufficient consideration for Cs promise. (iii) P sells and delivers goods to B. C afterwards, without consideration agrees to pay for them in default of B. The agreement is void.

Differences between Indemnity and Guarantee


1. In a contract of indemnity, there are two parties: the indemnifier and the indemnity holder. In a contract of guarantee there are three parties: the creditor, the principal debtor, and t surety. 2. In a contract of indemnity it is necessary to have only one contract, i.e., between the indemnity-holder and the indemnifier; in a contract of guarantee it is necessary to have three contracts, between the parties, i.e., between the creditors, the principal debtors and the surety. 3. In a contract of indemnity, the liability of the indemnifier is primary; in a contract of guarantee, the liability of the surety is secondary i.e., the surety is liable only if the principal debtor fails to perform his obligations. 4. in a contract of guarantee there is an existing debt or duty, the performance of which is guaranteed by the surety. In a contract f indemnity, the liability of the indemnifier arises only on the happening of a contingency. 28

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Assignment # 2 Eerab Akhlaque Student No. 13263 5. In a contract of indemnity the indemnifier can sue only the indemnity older for his loss, because there is no contract between the indemnified and other parties unless there is an assignment on his favor; in a contract of guarantee the surety can proceed against principal debtor. 6. In a contract of guarantee the surety, after he discharges the debt owing to the creditor, can proceed against the principal debtor; in a contract of indemnity the loss falls on the indemnifier except in certain special cases.

Continuing Guarantee
Definition: A guarantee which extends to a series of transactions is called a Continuing Guarantee. A guarantee covering a single transaction may be called a Simple -Guarantee or Specific Guarantee. Examples: (i) D. in consideration that Q will employ C in collecting the rents/ of Bs zamindari, promises B to be responsible, to the amount of 5,000 rupees, for the due collection and payment by C of those rents. This is a continuing guarantee. (ii) P guarantees payment to B, a tea dealer, to the amount of Rs. 100 for any tea he may from time to time supply to C. B supplies C with tea to the value of Rs. 1000 and C pays B for it. After-ward B supplies C with tea to the value of Rs. 2000. C fails to pay the guarantee given by P was a continuing guarantee, and is accordingly liable to B to the extent of Rs. 1000. (iii) P guarantees payment to B of the price of five sacks of flour of to be delivered by B to C to be paid for in a month. B delivers re sacks to C. C pays for them. Afterwards B delivers four sacks to C. which C does not pay for. The guarantee given by P was, of a continuing guarantee, and accordingly he is not liable for the rice of the four sacks.

Continuing Guarantee Revoked


A continuing guarantee is revoked under the following circumstances: I. By notice of revocation by the surety: The notice operates to revoke the suretys liabilities as regards transaction is entered into after the notice. He continues to be liable for transactions entered into prior to the notice. 2. By the death of the surety: The death of the surety operates, in the absence of a contract to the contrary, as a revocation of a continuing guarantee, so far a regards future transactions. The estate of the surety is liable for all transactions entered into prior to the death of the surety unless there was a contract to the contrary. It is not necessary that the creditor must have notice of the death.

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Assignment # 2 Eerab Akhlaque Student No. 13263 A continuing guarantee is terminated under the same circumstances under which a suretys liability is discharged.

Suretys Liability
The liability of the surety is co-extensive with that of the principal debtor, unless it is otherwise provided by the contract.- Sec. 128. Example: G guarantees to B the payment of a bill of exchange by C, the acceptor. The bill is dishonored by C. G is liable not only for the amount of the bill but also for any interest and charges which may have become due on it. A creditor is not bound first to proceed against the principal debtor. He can sue the surety without suing the principal debtor 3rd without making the principal debtor a co-defendant. When the principal debtor is a minor, the surety alone is liable to the creditor. Example: A and B made a joint and several promissory notes to C. A makes it, in fact, as surety for B and C knows this at the time when the note is made. The fact that A, to the knowledge of C made the note as surety for B, is no answer to a suit by C against A upon the note. The liability of a surety under a contract of guarantee comes to an end under any one of the following circumstances: 1. Notice of revocation In the case of a continuing guarantee, a notice by the surety to the creditor stating that he will not be responsible; will revoke his liability as regards all future transactions. He will remain liable for all transactions entered into prior to the date of the notice.-Sec. 130. 2. Death of surety In the case of a continuing, guarantee the death of a surety discharges him from all liabilities as regards transactions after his death unless there is a contract to the contrary. 3. Variation of contract Any variance, made without the suretys consent in the terms of the contract between the principal debtor and the creditor, discharges the surety as to transactions subsequent to the variance. Examples: (a) A becomes surety to C for Bs conduct as a manager in Cs bank. Afterwards B and C contract, without As consent, the Bs salary shall be raised and th at he shall become liable for one-fourth of the losses on overdraft. B allows a customer to overdraw, and (b) 32

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Business Law
Assignment # 2 Eerab Akhlaque Student No. 13263 (c) the bank loses a sum of money. :I is discharged from his suretyship by the variance made without his consent, and is not liable to make good this loss. (d) C agrees to appoint B as his clerk to sell goods at a yearly salary, upon, As becoming surety to C for Bs accounting for moneys received by him as such clerk. Afterwards, without As knowledge or consent, C and B agree that B should be paid by a commission on the goods sold by him and not by a fixed salary A is not liable for subsequent misconduct of B. (e) A gives to C a continuing guarantee to the extent of 3,000 rupees for any oil supplied by C to B on credit. Afterwards B becomes embarrassed, and without the knowledge of A. B and C contract that C. shall continue to supply B with oil for ready money and that the payments shall be applied to the then existing debts between B and C. A is not liable on his guarantee for any goods supplied after this new arrangement. (f) C contracts to lend B 5,000 rupees on the 1st March. As a guarantees repayment C pays the 5,000 rupees to B on the 1st January. A is discharged from his liability, as the contract has been varied inasmuch as C might sue B for the money before the 1st March. 4. Release or discharge of principal debtor The surety is discharged by any contract between the creditor and the principal debtor, by which the principal debtor is released, or by any act or omission of the creditor, the legal consequence of which is the discharge of the principal debtor.

Rights of Surety
A surety has the following rights: Against the Principal Debtor 1. Right of Subrogation: Upon payment of performance of all that he is liable for, he is invested with all the rights which the creditor had against the principal debtor.-Sec. 140. 2. Right principal principal which he to Indemnity: in every contract of guarantee there is implied promise by the debtor to indemnify the surety; and the surety is entitled to recover from the debtor whatever sum he has rightfully paid under the guarantee, but no sums has paid wrongfully.-Sec. 145.

Examples: (a) B is indebted to C and A is surety for the debt. C demands payment from A, and on his refusal sues him for the amount. A defends the suit, having reasonable grounds for doing so, but is compelled to pay the amount of the debt with costs. He can recover from B the amount paid by him for costs, as well as the principal debt. (b) C lends 8 a sum of money and A. at the request of B accepts at bill of exchange drawn by B upon A to secure the amount. C, the holder of the bill, demands payment of it from A. and on As refusal him upon the bill. A not having reasonable grounds to pay, sues defends 34

Business Law
Assignment # 2 Eerab Akhlaque Student No. 13263 the suit, and has to pay the amount for so doing. He can recover from B the amount of the bill, but bill and sum paid for costs, as there was no real ground for defending the action. (c)A surety settled with the creditor by paying a sum smaller than the amount guaranteed. Held, he can recover only what he paid.

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