Business and Labour Laws - MGT 611 Past Paper PDF (VU)

Business and Labour Laws - MGT 611 VU If section exhaustive for relief which indemnity holder may get: ---Section 125 is not exhaustive and does not set out all the reliefs which an indemnity holder who has been sued may get. It leaves untouched certain equitable reliefs which he may get. Indemnity holder---When may sue for protection from claim by third party: ---The stage at which the loss or injury may be deemed to be imminent must depend upon the particular facts of each case and no fixed rule can be laid down in this respect, it is not correct to say that the loss or injury can be said to be imminent only when a decree had been passed against the indemnity holder and not otherwise. Therefore, when the injury becomes imminent the indemnity holder can come to Court and ask that he be protected and the Court must decide whether or not the claim of the third party against the indemnity holder in respect of which protection is sought is well-founded; if it so decides it must grant relief to him and not postpone the indemnity holder until a decree has been passed against him. 'A' who was not only an indemnity holder but also a trustee held the shares in a company standing in his name in trust for B. The shares were not fully paid up and the Company brought a suit against A for the balance of the amount payable for the shares. Thereupon, A brought a suit against B for a declaration that he was entitled to be indemnified by the defendant B against all calls and liabilities in respect of the said shares and for being relieved forthwith from all such liabilities to the said company, which was the subject- matter of the suit filed by the company against him. In the alternative he prayed that B should be directed to set aside or deposit, with the Registrar of High Court a sum sufficient to meet the costs and claim of the company in the suit filed by it against him to be available to meet the decree that may be passed in that suit. Held; that the suit for indemnity by A was not premature and was maintainable, and that he was entitled to the reliefs prayed for as the suit filed by the company against A was a good one and bound to succeed. Rights of Indemnifier A Settled principle of law is that after compensating the loss to indemnity holder, indemnifier is entitled to all the ways and means by which person indemnified might have protected himself for the loss. Time of Commencement of Indemnifiers Liability It is the time when indemnity holder incurs an absolute liability though not actual loss. Contract of Guarantee Contract of Guarantee has been defined in section 126 of a Contract Act which is reproduced below: A contract of guarantee is a contract to perform the promise or discharge the liability of a third person in case of his default. The person who gives the guarantee is called the surety; the person in respect of whose default the guarantee is given is called the principal debtor, and the person to whom the guarantee is given is called the creditor. A guarantee may be either oral or written. © Copyright Virtual University of Pakistan 98 Business and Labour Laws - MGT 611 VU Lesson 19 CONTRACT OF GUARANTEE & INDEMNITY Contract of Guarantee We have already gone through the definition of the guarantee as contained in section 126 of the Contract Act. Same is reproduced hereunder for reference. A contract of guarantee is a contract to perform the promise or discharge the liability of a third person in case of his default. The person who gives the guarantee is called the surety; the person in respect of whose default the guarantee is given is called the principal debtor, and the person to whom the guarantee is given is called the creditor. A guarantee may be either oral or written. Objects of a contract of guarantee: There may be many objects for which a guarantee is required to be furnished; some of these are enumerated below: 1. To avail loan 2. To make credit purchases 3. To get employment To avail loan Mr. Aslam availed a loan of Rs 1 million from XYZ Bank. The said bank asked the loanee, Mr. Aslam to furnish a guarantee from a credit worthy party. Mr. Aslam requested Mr. Akram to furnish guarantee for the said loan in favor of XYZ bank. Mr. Akram furnished the guarantee as desired by the bank. In case of default by the loanee (Mr. Aslam), the guarantor/ surety (Mr. Akram) shall be liable to pay the amount in default. To make credit purchases AQ brothers make credit supplies to Hilton enterprises. Under the agreement, Hilton enterprises furnished guarantee of Mr. Suhail. Mr. Suhail shall be liable to make payments to M/S AQ brothers in case of default by Hilton enterprises. To get employment M/S XYZ bank hired the services of Mr. Salman as cashier and asked him to furnishing a guarantee to the employer Rs. 100,000. Parties in a contract of guarantee are enumerated below: Surety / Guarantor The person who gives guarantee Creditor The person in whose favor guarantee is given Principal Debtor The person who primarily incurs liability / debt Nature of Contracts in a contract of guarantee: Primary Contract There is a Primary contract between Principal Debtor and Creditor. © Copyright Virtual University of Pakistan 99 Business and Labour Laws - MGT 611 VU Secondary Contracts: The Contract between surety and creditor and Contract between surety and principal debtor Essentials of a Contract of Guarantee Consideration No misrepresentation Writing not necessary Illustration: M/S XYZ bank hired the services of Mr. Salman as cashier and asked him to furnish a guarantee of third party amounting Rs. 100,000 so as to recover the loss, if any suffered by the employer due to an act of the employee. Mr. Salman furnish the guarantee of Mr. Asad, this is a contract of a guarantee. Guarantee may be in following forms: Oral; or Written Comments There can be no contract of guarantee unless there is a principal debtor; the suretys obligation must be substantially dependent on a third person's default. A promise to be primarily and independently liable is not a guarantee, though it may be an indemnity. The surety undertakes his obligation at the request express or implied of the principal debtor;".on the true construction of S. 141 as well as s. 126. Accordingly, if A enters into a contract with B and C, without any communication with B, undertakes for a consideration moving from A to indemnify A against any damage that may arise from a breach of B's obligation, this will not make C a surety for B, or give him a right of action in his own name against B in the event of B's default. The mere transfer by a debtor of his property to a trustee for the benefit of his creditors, the trustee not undertaking any personal liability to the creditors, does not Constitute the relation of principal and surety as between the debtor and the trustee. A person may become a surety without the knowledge and consent of the principal debtor, but the only rights which he acquires in the case are those given by Ss. 140 and 141, and not those given by S. 145. "Liability": ---By the word "liability" in this section is intended a liability which is enforceable at law, and if that liability does not exist, there cannot be a contract of guarantee. A surety, therefore, is not liable on a guarantee for the payment of a debt which is barred by the law of limitation. Pakistan Penal Code (XLV of 1860), Ss. 30 & 405: Document of guarantee a valuable security and property with involvement of criminal liability wherefore essential ingredient being the manner of transfer in violation of a legal contract express or implied. Time for repayment of loan extended within stipulation contained in agreement---Surety, held, could not take plea that lime for repayment of loan was extended without his knowledge and consent. Deed of guarantee, executed, jointly---Letter of guarantee indicated that defendants had jointly and severally guaranteed due repayment of loan and money due from borrower defendant exclusive of interest and charges---Guarantee being always by a third person and not by borrower himself, person signing as © Copyright Virtual University of Pakistan 100 Business and Labour Laws - MGT 611 VU guarantor, held, would be deemed to be guarantor far all intent and purposes---Plea of guarantor that he had signed document of guarantee not in personal capacity but in official capacity would be of no effect where such guarantor did not testify before Court that he had not executed letter of guarantee in his personal capacity. Surety---Liabilities of sureties and principal debtor held, distinct---Liability of surety arise immediately on failure of principal debtor and unless otherwise provided in contract creditor cannot be compelled to first exhaust his remedy against principal debtor before initiating action against surety---Even in cases where liabilities of both parties arise from same transaction or same document liabilities are distinct. Remedy against guarantor---Contract of guarantee to be strictly construed as to point of time when liability of guarantor arises---Question, held, depends on terms of contract of guarantee by which guarantor bound himself for repayment of loan advanced to principal borrower. Guarantee for performance of definite engagement---Held: Guarantee when given for performance of definite engagement not contingent in nature and consideration for which not to vary as result of future dealings between parties, contract, not to be that of continuing guarantee. No principal debtor in existence---Loans granted to fictious persons--- Guarantor cannot be used for recovery of debt.---If there never was any other person who can be properly described as the principal debtor, there cannot be said to have been any guarantee either in its technical or ordinary meaning. Where overdraft which was guaranteed by joint guarantors arose out of transactions which were fictitious, it was held that no debt had been incurred and the guarantors could not be successfully sued in respect of the alleged debt which was not a debt at all. Kinds of Guarantee: Specific Guarantee or (Ordinary Guarantee): This guarantee is restricted to a specific transaction on engagement, for example, availing a loan from a bank. Continuing Guarantee: Such guarantee covers a series of transactions. For example guarantee furnished to a supplier for making supplies to a particular person/ business during a specified period, say one year. Illustrations (a) A in consideration that B will employ C in collecting the rent of B's 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. (b) A 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 above the value of Rs. 100, and C pays B for it. Afterwards B supplies C with tea to the value of Rs. 200. C fails to pay. The guarantee given by A was a continuing guarantee, and he is accordingly liable to B to the extent of Rs. 100. (c) A guarantees payment to B of the price of five sacks of flour to be delivered by B to C and to be paid for in a month. B delivers five sacks to C. C pays for them. Afterwards B delivers four sacks to C which C does not pay for. The guarantee given by A was not a continuing guarantee, and accordingly he is not liable for the price of the four sacks. Comments Continuing guarantee: ---Whether in a particular case a guarantee is continuing or not is a question of the intention of the parties, as expressed by the language they have employed, under-standing if fairly in the sense in which it is used; and this intention is best ascertained by looking to the relative position of the © Copyright Virtual University of Pakistan 101 Business and Labour Laws - MGT 611 VU parties at the time the instrument is written. Surrounding circumstances must be looked to see what was the subject-matter which the parties had in their contemplation when the guarantee was given? In construing the language of the parties the whole of their expressions must be looked to, not merely the operative words. Thus the followings words were held to show that a guarantee, which otherwise might have been confined to a single transaction, was intended to be continuing: "Having every confidence in him, he has but to call upon us for a cheque and have it with pleasure for any account he may have with you; and when to the contrary we will write you." A guarantee of the fidelity of a person appointed to a place of trust in a bank is not continuing guarantee. Nor is a guarantee for the payment by installments of a sum certain within a definite time. Continuing guarantee--, what is---Guarantee relating to one transaction---Not a continuing guarantee: ---In law a guarantee in order to be continuing guarantee must refer to a Series of transactions, of which when the guarantee was given, some are unknown and not certain to come into existence. The question whether or not a particular transaction is a continuing guarantee, depends on the terms of the instrument. Where the guarantee related to a single transaction, the view that it is a continuing guarantee cannot be upheld and must be repelled. Revocation of continuing guarantee: Sec. 130 A continuing guarantee may at any time be revoked by the surety, as to future transactions, by notice to the creditor. Illustrations (a) A, in consideration of B's discounting at A's request, bills of exchange for C, guarantees to B, for twelve months, the due payment of all such bills to the extent of 5,000 rupees. B discounts bills for C to the extent of 2,000 rupees. Afterwards, at the end of three months. A revokes the guarantee. This revocation discharges A three months. A revokes the guarantee. This revocation discharges A to B for the 2,000 rupees on default of C. (b) A guarantees to B to the extent of 10,000 rupees, that C shall pay all the bills that B shall draw upon him. B draws upon C. C accepts the bill. A gives notice of revocation. C dishonours the bill at maturity. A is liable upon his guarantee. Comments Future transactions: ---The words "future transactions" must be taken to imply that the operation of this section is confined to cases where a series of distinct and separate transactions is contemplated. It is otherwise in the case of an entire consideration. "Where a continuing relationship is constituted on the faith of a guarantee the guarantee cannot be annulled during the continuance of that relationship"; and as the surety could not determine it himself by notice, so his death does not relieve his estate from liability; the nature of the transaction implies a contract to the contrary under S. 131. Notice: ---The mere denial of liability by the surety in a previous suite instituted by the creditor against him and the principal does not operate as a notice under this section. © Copyright Virtual University of Pakistan 102 Business and Labour Laws - MGT 611 VU Lesson 20 CONTRACTS OF BAILMENT, PLEDGE & AGENCY Bailment The definition of bailment as contained in section 148 is given here under: A bailment is the delivery of goods by one person to another for some purpose, upon a contract that they shall, when the purpose is accomplished, be returned or otherwise disposed of according to the directions of the person delivering them. The person delivering the goods is called the bailor. The person to whom they are delivered is called the bailee Explanation.---If a person already in possession of the goods of another contracts to hold them as a bailee, he thereby becomes the bailee, and the owner becomes the bailor, of such goods although they may not have been delivered by way of bailment. Essentials of Bailment: Contract There is an underlying contract between the bailor and bailee, there may be an explicit contract or it may be an implied contract. Specific purpose The bailment of goods is always for some specific purpose. Delivery of goods There must be delivery of movable goods in a contract of bailment. No change of ownership In a contract of bailment, only the possession of goods is transferred from bailor to the bailee, whereas the bailor has all ownership rights over the goods delivered. Return of the goods delivered on accomplishment of purpose. When the purpose for which the goods are delivered is completed, the goods must be returned in the original form or modified form as per instructions of the bailor. For the benefit of the bailor-- Mr. Yasir, while going out of city handed over some precious household articles to Mr. Usman for safe custody, without any obligation to pay any fee/ charges. It is a bailment for the benefit of the bailor. For the benefit of the baileeMr. Umer handed over his car to Mr. Ahsan, as he was in need of conveyance for few days. Mr. Umer handed over this car without any obligation on the part of Mr. Ahsan to pay any rent / charges for the use of this car. This bailment is exclusively for the benefit of the Mr. Ahsan, the bailee. For the benefit of bailor and baileeMr. Ahmad availed locker facilities from M/S XYZ bank ltd. Under the terms and conditions of the contract Mr. Ahmad was required to pay Rs.1000/ annual fee on account of availing this facility. This contract is for the benefit of parties, the bailor and the bailee. © Copyright Virtual University of Pakistan 103 Business and Labour Laws - MGT 611 VU Explanation: Scope of bailment and its essentials are explained in detail in the following paragraphs. Nature of the transaction: ---"Bailment" is a technical term of the Law, It involves change of possession. One who has custody without possession, like a servant, or a guest using his host's goods, is not a bailee. But constructive delivery will create the relation of bailor and bailee as well as actual, as stated in the Explanation. The bailee's duly to deal with the goods according to the bailor's orders is incidental to the contract of bailment, and arises on the delivery of the goods, although those orders may have already been given and accepted in such a manner as to constitute a prior special contract. As a matter of pleading this is no longer material in this country, but it might still be material with regard to the period of limitation. Bailment is necessarily dealt with by the Contract Act only so far as it is a kind of contract. It is not to be assumed that without an enforceable contract there cannot in any case be a bailment. The words "otherwise disposed of" in the present section express the common law as now understood. "It seems clear that a bailee is not the less a bailee because he is clothed with authority to sell the thing which is bailed to him," e.g., a factor for sale. On the whole a bailment may be described as a delivery on condition, to which the law usually attaches an obligation to redeliver the goods, or otherwise deal with them as directed, when the condition is satisfied; but there may be, in particular cases, a bailment without an enforceable obligation. Rights and duties of bailee To take care of goods delivered by bailor Section 151: in all cases of bailment 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. Section 152: the bailee, in the absence of any special contract, is not responsible for the loss, destruction or deterioration of the thing bailed, if he has taken the amount of care of it described in section 151. Effects of mixture, without bailors consent when the goods can be separated Section 156: if the bailee, without the consent of the bailor, mixes the goods of the bailor with his own goods, and the goods can be separated or divided, the property in the goods remains in the parties respectively; but the bailee is bound to bear the expense of separation or division, and any damage arising from the mixture. Effect of mixture, without bailors consent, when the goods cannot be separated Section 157: if the bailee, without the consent of the bailor, mixes the goods of the bailor with his own goods, in such a manner that it is impossible to separate the goods bailed from the other goods and deliver them back, the bailor is entitled to be compensated by the bailee for the loss of the goods. Bailee not to make un-authorized use of the goods delivered to him(section 154) Bailee to return the goods delivered to him for some purpose. (Section160) Bailee to return an increase or profit in lieu of goods delivered. (Section163) Explanation: The duties of the bailee are explained in greater detail in the following paragraphs: The bailee has no right to dispose of or sell the property unless specifically authorised to do so. He has only a right to retain the goods bailed with him until he receives due remuneration for the service rendered in © Copyright Virtual University of Pakistan 104 Business and Labour Laws - MGT 611 VU respect of the goods. He is responsible for the safe delivery of the goods bailed with him and in default is responsible to the bailor for any loss of the goods. Goods given to a person by bank on trust receipt---Person becomes a bailee---Liable for criminal breach of trust in case of non-accounting of goods. The execution of a trust receipt is a recognised mode of making a person bailee of the goods and in such circumstances the Bank must be deemed to be in possession or control of the goods. The validity and efficacy of such instruments of trust are now generally acknowledged. If a person, who has signed such a trust receipt, fails to hand over to the Bank the sale- proceeds of the goods sold, the former would be liable for criminal breach of trust. Intentional wrong delivery by carrier---Carrier liable for damages---Where the carrier has made intentional wrongful delivery of goods, he cannot escape liability to indemnify the plaintiff for the loss caused to him by wrongful deliveries of the consignments. Care to be taken by bailee (section 151) In all cases of bailment 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 Contract by bailee exempting himself from liability for negligence---The learned authors considered that a contract by a bailee purporting to exempt himself wholly from liability for negligence was not valid. This opinion is based on the express provisions for contracting out in S. 152, and in fact throughout the Chapter on Bailments wherever a rule of law is to operate only in the absence of a contract to the contrary, it is expressly so stated in the section (refer sections 163, 165, 170, 171, and 174). Care to be taken by bailee: Theft of goods pledged with Bank---Document of pledge containing condition that during the continuance of pledge agreement the borrowers shall be responsible for all loss, damage, or deterioration of security caused by theft, fire, rain or any other cause whatsoever---There being. no discrepancy between provisions of S. 151, Contract Act, 1872 and condition of document of pledge, if loss had been caused by theft, fire, rain or any other cause, it would be the duty of the bailee to explain that he had taken care of the goods as a man of ordinary prudence would under similar circumstances take of his own goods and if in spite of that the goods pledged were lost in manner as recorded in the condition of document of pledge, liability of borrower could not be legally or equitably denied. Injury to goods in transit by Railway---Onus of proof as to negligence by carrier---How burden is to be discharged Where due to long delay in transit, goods carried by Railway were damaged. Held: Although the burden of establishing want of care on the part of' the Railway lies on the consignor yet it is the duty of the railway to supply the entire material from which the amount of care that is taken is ascertained. The Railway pleaded that the delay was caused due to unavoidable circumstances but no material was supplied in support of this plea; Therefore the presumption of want of due Care would arise against the Railway. Loss to goods by negligence of ship-owner---Claim for damages against ship-owner sustainable: The ship-owner committed a breach of the obligation contained in the bill of lading and as such the consignee was entitled to recover damages. Damage to contents of parcel---Burden of proof is on consignor--Mere damage to containers does not prove damage to contents. © Copyright Virtual University of Pakistan 105 Business and Labour Laws - MGT 611 VU The burden of proof was on the plaintiff to show that the damage to the contents was caused by the negligence of the servants of the Carrier while the Crates were in its custody. No such evidence has been produced by the plaintiff and merely, because some of the wooden crates were externally broken and some card-board cases torn, as stated in the Survey Report, it cannot be inferred, nor is there any evidence to show, that the external damage must have resulted in damage to the contents. Loss of goods in possession of bailee---Onus of proof as to negligence of bailee: Where goods are lost or destroyed while in.possession of bailee the onus of placing all the materials in his possession or knowledge is on the bailee, while the onus of establishing negligence is on the plaintiff. Carriage of goods by sea from foreign port to Pakistan---Damage to goods---Contract Act applies. - --The provisions of the rules to the Carriage of Goods by Sea Act, 1925 do not apply in relation to carriage of goods by sea in a ship carrying goods from a foreign port to a port in Pakistan, as is the present case. Therefore, the rights and liabilities of the parties have to be ascertained by reference to the proper law of the contract which in this case, is the Pakistan law. Buyer rejecting goods---If can sell them to recover ware-house charges for storing them.---The buyer rejected the goods and then disposed them of in order to recover the ware-house charges for having stored them. He contended that he as a bailee had the right to do so. Held: The buyer of the good is having rejected them and thereafter selling them as the goods belonging to him, stands on a different footing than the bailee contemplated under sections 151 and 170 of the Contract Act. The principle on which a bailee is entitled to dispose of the goods or has lien on the goods bailed with him are entirely different and are not applicable to the case of the sale of goods. As discussed above, the buyer of the goods after rejecting them has no lien on the goods in dispute and must place them at the disposal of the seller for dealing with them in any manner he likes. Loss of goods during transit---Railway liable---Absence of brake---Negligence of railway: ---Where goods were lost during transit and it was found that there was no vacuum or brake in the van of the guard so that the train could not be stopped in case of theft in the running train. Held: There ought to be a vacuum in a train in order that in case of theft while it is running it may be stopped. That a vacuum should be there in the brake of the guard is not denied and the failure to keep a vacuum against the rules would be negligence. Therefore the failure to provide brake should be considered a negligent act on the part of the Railway. Held further: That there is no satisfactory evidence from which it could be inferred that they had taken proper care of the consignment as bailer of the goods consigned. Therefore, the railway was liable for the loss of goods. Pledge It has been defined in section 172 of the Contract Act which is given below: "Pledge," "pawnor," and "pawnee" defined. The bailment of goods as security for payment of a debt or performance of a promise is called "pledge". The bailor is in this case called the "pawnor." The bailee is called the "pawnee." The pledgee has actual control of pledged stocks/goods. Pledgee can sell pledged stocks by giving reasonable notice to the borrower. Before disposal pledgee should publish the notice through news papers etc. © Copyright Virtual University of Pakistan 106 Business and Labour Laws - MGT 611 VU Comments The bailee tendering a contract of pledge does not become owner, but, as having possession and right to possess, he is said to have a special property. Any kind of goods, documents, or valuable things of a personal nature may be pledged. Delivery is necessary to complete a pledge; it may be actual or constructive. It is sufficient if the thing pledged is delivered under the contract within a reasonable time of the lender's advance being made. Pledge---Monthly statements of stocks lying in godown showing goods as pledged with defendant-Bank--- All such documents signed by authorised person on behalf of plaintiff---Debit advice vouchers produced by defendants showing conveyance charges paid to Godown Keeper visiting godown, and debited to account of plaintiff---Goods, held, in possession of defendant under pledge and not merely hypothecated. Contract of Agency In general terms, Agency refers to the relationship which exists between two persons, the Principal and the Agent in which the Agent has to perform different duties/ functions as per instructions of the principal and also enters into contract with the third party / parties on behalf of the principal. The relationship of agency plays an important role in business and commercial dealings. This relationship is legal created by virtue of agreement between Principal and Agent. Definition of Agent and Principal: Sec. 182 Agent is a person employed to do any act for another or to represent another in dealing with a third persons. The person for whom such act is done, or who is so represented, is called the Principal. Explanation The legal relation between a merchant in one country and a commission agent in other is that of principal and agent, and not seller and buyer, though this is consistent with the agent and principal, when the agent consigns the goods to the principal, being in a relation like that of seller and buyer for some purposes. A merchant, therefore, in this country who orders goods through a firm of commission agents in Europe cannot hold the firm liable as if they were vendors for failure to deliver the goods. And the result is the same if the goods are ordered through a branch in this country of a firm of commission agents in another country. For the same reason, where a commission agent buys goods for a merchant at a price smaller than the limit specified in the indent, he cannot charge any price higher than that actually paid by him, except in the case of a custom to the contrary. An agent may have, and often has, in fact, a large discretion, but he is bound in law to follow the principal's instructions provided they do not involve anything lawful. To this extent an agent may be considered its a superior kind of servant; and a servant who is entrusted with any dealing with third persons on his master's behalf is to that extent an agent. But a servant may be wholly without authority to do anything as an agent, and agency, in the case of partners, even an extensive agency, may exist without any contract of hiring and service. Agency may be created in the following ways: 1. By consent 2. By operation of law 3. By estoppel 4. By ratification Agency by Consent: Consent may be express or implied. Express Agency: © Copyright Virtual University of Pakistan 107 Business and Labour Laws - MGT 611 VU Such agency is created by words either spoken or written. In business transactions, this relationship is usually established through writing an agreement Implied Agency: An authority is referred to as implied when it is inferred from the conduct of the parties or circumstances of the case. Definitions of express and implied authority as contained in section 187 of the Act are given below: An authority is said to be express when it is given by words spoken or written. An authority is said to be implied when it is to be inferred from the circumstances of the case; and things spoken or written, or the ordinary course of dealing, may be accounted for circumstances of the case. © Copyright Virtual University of Pakistan 108 Business and Labour Laws - MGT 611 VU Lesson 21 CONTRACT OF AGENCY As already discussed, agency may be created in the following ways: 1. By consent 2. By operation of law 3. By estoppel 4. By ratification We have already discussed the creation of an agency by the consent of the parties, remaining ways of creation of agencies are discussed below: Agency by Operation of Law: Agents authority in an emergency (section 189) An agent has authority, in an emergency; to do all such acts for the purpose of protecting his principal from loss as would be done by a person of ordinary prudence, in his own case, under similar circumstances. Illustration: Mr. Aslam, a fruit merchant, shipped fruits by truck from Lahore to DG Khan. The truck on its way to DG Khan met an accident. The truck driver could not establish contact with Mr. Aslam despite best efforts. There was danger that fruits would perish, as such the truck driver decided to sell the fruits at the market rate. The relationship of agency shall be governed under the provision of section 189. Illustrations (a) An agent for sale may have goods repaired if it be necessary. (b) A consigns provisions to B at Karachi with directions to send them immediately to C at Quetta. B may sell the provisions at Karachi if they will not bear the journey to Quetta without spoiling. Comments If goods are perishable and perishing, the agent may deviate from his instructions as to the time or price at which they are to be sol as has been explained through the above illustrations. Agency by Estoppel Agency by estoppel refers to a situation when the words or conduct of the principal creates an impression in the minds of third party that agents authority is greater than the authority actually vested in him. And the third party under this impression enters into an agreement with the agent. Illustration: Due to the conduct of Mr. Aslam (principal), Mr. Salman (third party) believes that Mr. Kaleem is an agent of Mr. Aslam and under this impression Mr. Salman enters into an agreement with Mr. Kaleem. The following situations may emerge from this scenario: Mr. Aslam terminated the agency relationship with Mr. Kaleem, however this was not in the knowledge of Mr. Salman and he continued his commercial dealings with Mr. Kaleem. Under the principle of estoppel, Mr. Aslam cannot claim that Mr. Kaleem is not his agent, as far as these transactions are concerned. Mr. Salman enters into an agreement with Mr. Kaleem. The transaction is in the knowledge of Mr. Aslam. Mr. Aslam does not intimate Mr. Salman that Mr. Kaleem is not his agent. Mr. Aslam under the principle of estoppel cannot claim that Mr. Kaleem is not his agent. © Copyright Virtual University of Pakistan 109 Business and Labour Laws - MGT 611 VU Mr. Salman was entering into business dealings with Mr. Kaleem, treating Mr. Kaleem as an authorized agent of Mr. Aslam. Mr. Kaleem entered into some agreements which were beyond the authority vested in him by the Principal, Mr. Aslam. Mr. Salman is not aware of this fact. Mr. Aslam (Principal) under the principle of estoppel cannot claim that he cannot own the acts of his agent, Mr. Kaleem which are beyond his (agent) authority. Agency by Ratification: Concept of ratification is contained in Sec. 196 Sec. 196- Right of person as to acts done for him without his authority: where acts are done by one person on behalf of another, but without his knowledge or authority, he may elect to ratify or to disown such acts. If he ratifies them, the same effects will follow as if they had been performed by his authority. Illustration: Mr. Fahad, an agent of Mr. Salman lends Rs 100,000 to Mr. Kaleem. Mr. Kaleem is paying monthly profits to Mr. Fahad, who has rendered accounts in this respect to the principal, Mr. Salman. By accepting the profits, Mr. Salmans conduct implies a ratification of the amount of loan provided by his agent, although without his authority. Conditions of ratification: "On behalf of another Ratification must be by the person for whom the agent professes to act. That an act done for another by a person not assuming to act for himself, but for such other person, though without any precedent authority whatever, becomes the act of the principal; if subsequently ratified by him, is the known and well- established rule of law. In that case the principal is bound by the act, whether it be for his detriment or his advantage, and whether it be founded on a tort or a contract, to the same extent as by, and with all the consequences which follow from, the same act done by his previous authority. But where A does an act as agent for B without any communication with C, C cannot, by afterwards adopting that act, make A his agent and thereby incur any liability, or take any benefit, under the act of A. Ratification in the proper sense of the term, as used with reference to the law of agency, is applicable only to acts done on behalf of the ratifier. And this rule is recognised in S. 196 of the Contract Act. Ratification can be express or implied from conduct. A ratification of the unauthorised contract of an agent can only be effectual when the contract has been made by the agent avowedly for, or on account of, the principal, and not when it has been made on account of the agent himself A man cannot adopt by ratification an act which was not authorised by him at the time and did not purport to be done on behalf of any principal. Since ratification is in law equivalent to a previous authority, a person not competent to authorise an act cannot give it validity by ratifying it. Ratification must be by an existing person on whose behalf the contract might have been made at the time. Thus a newly-formed company cannot ratify an act done in its name before it was incorporated. And where a time is limited for doing an act, and A does it on behalf of B, but without his authority, within that time, B can ratify it only before the time has expired. The person on whose behalf an act purports to be done need not be individually known to the agent; it is enough if he is ascertainable as owner of specified property or the like. A man may affect an insurance on behalf of all persons interested, and any such person may adopt the contract of insurance for his own share by ratification. A bailiff may receive the rent of land on behalf of the unknown heirs of the last owner in possession, and those heirs, when their title is ascertained, can ratify his acts. © Copyright Virtual University of Pakistan 110 Business and Labour Laws - MGT 611 VU "Acts done without knowledge or authority"---An act done by an agent in excess of his authority may also be ratified. But there is a wide distinction between ratifying a particular act which has been done in excess of authority and conferring a general power to do similar acts in future. Therefore the ratification by a company of certain acts done by its directors in excess of the authority given to them by the articles of the company does not extend the authority of the directions so as to authorise them to do similar acts in future. Retrospective effect --Ratification, if effective al all, relates back to the date of the act ratified. If an action is brought in a man's name without his knowledge, he may adopt the proceedings and make them good at any time. The rule goes so far that if A makes an offer to B which Z accepts in B's name without authority, and B afterwards ratifies the acceptance, an attempted revocation of the offer by A in the time between Z's acceptance and B's ratification is inoperative. So long as the professed agent purports to act on behalf of the principal, it is immaterial whether in his own mind he intends the principal's benefit or not, and what his real motive and intention may be; nor does it make any difference if the third party discovers before ratification that the agent meant to keep the contract for himself. In fact, the third party gets by the ratification exactly what he bargained for. But if Z pays money to B as in satisfaction of As debt, and B, afterwards discovering that Z had no authority, returns him the money by agreement between them. A can no longer adopt the payment and rely on it as a discharge. A man is not bound to accept payment of a debt, or satisfaction of any other obligation from a stranger to the contract, though, if B had accepted the payment with knowledge of Z's want of authority, or acquieseed in it after he obtained that knowledge, he would have been estopped from denying Zs authority as against A. If an offer is accepted by an agent subject to ratification no contractual relationship with the principal comes into existence until ratification, and therefore up to that moment the offer can be withdrawn. It has been held that where a partner without authority to do so referred a dispute between a third party and the partnership to arbitration, and the other partners did not ratify the submission to arbitration, the award cannot be enforced even against the partner who so referred the dispute. It is submitted that the liability is joint and several, and the partner submitting the matter to arbitration is bound by the award. What acts cannot be ratified---A transaction which is void ab initio cannot be ratified. This is illustrated by a line of cases in company law marking the distinction between irregularities capable of being made goods if the act is ratified by a general meeting, or the whole body of shareholders, and acts not within the company's objects as defined by its original constitution, and therefore incapable of being made binding on the company by any ordinary means known to the law. A forged signature cannot be ratified; but a person whose signature has been forged may be estopped from denying that a signature is his, if for example, he has by his conduct induced the holder of a bill of cheque to alter his (the holder's) position. Ratification would be effective though it is made subsequently---Ratification validates act already performed---It relates back to time of inception of transaction and carries a complete retrospective efficacy- --Islamic Law as to ratification stated in judgment. Principal---Ratification of acts by---Definite rule of ratification of acts of person by another person on whose behalf the acts laid down in S. 196 of Contract Act---Held: Principle of law enunciated in such section to equally apply to acts of attorney if ratified by principal. Only the civil liability created by act of an agent acting for his principal ratified and not a criminal liability--- Guarantee being a forged document---No ratification therefore permissible this being a criminal liability. Principle of ratification of contract---Scope of---Acts done by one person on behalf of another without such person's knowledge or authority---Principal might ratify or disown acts done by agent on his behalf--- Exception to such ratification was where right or interest of third person was involved---Agent having entered into transaction of exchange in favour of vendee, not having been specifically authorized to do so--- Act of ratification by principal had effect of terminating right of pre-emption vested in pre-emption---Even © Copyright Virtual University of Pakistan 111 Business and Labour Laws - MGT 611 VU if such exchange transaction was validated by principal, no benefit of exchange, held, could be extended to vendee. Agent.---Act of---Ratification of---Person authorised by principal to act as his attorney or agent in respect of particular properly---Scope of such authority described in instrument---Held: Any incidental action to property of such attorney or agent to be binding on principal only when he accepts, acknowledges or undertakes by ratifying same---In absence of ratification of action constituting transgression of authority, principal not to be held responsible for such action of---Even unauthorised action of attorney in suit or proceeding when ratified by principal (also) to be upheld. Agent bidding at auction for his principal without duly executed power of attorney---Principal ratifying act of agent---Auction is valid and effective. Where the agent who made a bid at an auction for his principal did not have a duly executed power of attorney as was required by the rules of auction and the transfer by such auction was therefore challenged. Held: If the principal is named and accepts the action of his agent, even though the same was not covered by a duly executed power of attorney at the time of the auction, the matter would be fully covered by the doctrine of ratification, as embodied in section 196 of the Contract Act, 1872. Overdraft granted unauthorisedly by Manager of Bank---Bank charging interest on amount and suing on hypothecation---Act of agent stands ratified by conduct. Servants, unauthorised acts of---May be ratified by Master.---These sections are not limited to acts of agents but they lay down general principles which are equally applicable to a servant who is generally his master's agent for some purpose, the extent of the agency depending on the duties and position of the servant. Unauthorised act of agent when implied ratification by conduct is presumed---No ratification by conduct where acts are disapproved: To constitute implied ratification by conduct of acts previously unauthorised, the conduct of the principal must be such as to lead to the necessary inference that there was an unqualified and binding adoption of those acts by him. Where the Board categorically declined to approve of the alleged contract despite recommendations by the Managing Director, there can be no implied ratification by conduct of those acts. Effect of Ratification: Sec. 199 Effect of ratifying unauthorized act forming part of a transaction is discussed below: A person ratifying any unauthorized act done on his behalf ratifies the whole of the transaction of which such act formed a part. It is obvious that a man cannot at his own choice ratify part of a transaction and repudiates the rest. The only possible exception is in the case of the part repudiated being wholly for the principal's benefit, which is not likely to occur. The general rule is that, where ratification is established as to a part, it operates as a confirmation of the whole of that particular transaction of the agent. Rights and Obligations of different parties as a result of Ratification: We can conclude that parties to a contract of agency have the following rights and obligations: 1. Principal may sue the third party and third party can also sue the principal. 2. No liability shall be incurred by the agent to third party 3. Agent not liable for exceeding his authority 4. Principal is required under law to pay reasonable remuneration to the agent. © Copyright Virtual University of Pakistan 112 Business and Labour Laws - MGT 611 VU Lesson 22 CONTRACT OF AGENCY Contract of Agency We have already discussed some aspects of agency; other areas relating to a contract of agency are discussed in the following paragraphs. Types of Agent: The agents may be classified as under: 1. Public Agents: these are representatives of a State 2. Private Agents: these agents represent individuals or companies 3. General Agents: these agents pertaining to a business, vocation or profession 4. Special Agents: such agents are appointed for a specific transaction. 5. Co-Agents: such Agents act along with Principal. Duties of the Agent: Duties of agent are contained in sections from 211 to 218 of the Contract Act. Some of the important duties are enumerated below: To follow principals instructions To show required skill and diligence Agent to render proper accounts Agent to pass on any benefits derived by him Agents duty in conducting principals business: (section 211) An agent is bound to conduct the business of his principal according to the directions given by the principal, or, in the absence of any such directions, according to the custom which prevails in doing business of the same kind at the place where the agent conducts such business. When the agent acts otherwise, if any loss be sustained, he must make it good to his principal, and, if any profit accrues, he must account for it. Illustrations (a) A, an agent engaged in carrying on for B, a business, in which it is the custom to invest from time to time, at interest, the moneys which may be in hand, omits to make such investments. A must make good to B the interest usually obtained by such investments. (b) B, a broker, in whose business it is not the custom to sell on credit, sells goods of A, on credit to C, whose credit at the time was very high. C before payment, becomes insolvent. B must make good the loss to A. (c) An agent, instructed to warehouse goods at a particular place, warehouse a portion of them at another place, where they are destroyed, without negligence. He is liable to the principal for the value of the goods destroyed. (d) An agent, instructed to insure goods, neglects to do so. He is liable to the principal for their value in the event of their being lost. (e) A broker, entrusted with goods for sale, sells them by auction at an inadequate price, not having made an estimate of the value in accordance with the custom of the particular trade. He must make good the loss. © Copyright Virtual University of Pakistan 113 Business and Labour Laws - MGT 611 VU (f) An auctioneer, contrary to the usual custom, takes a bill of exchange in payment of the price of goods sold. He is liable to the principal for the amount of the bill in the event of its being dishonoured. (g) An agent, bound by his contract to keep proper books of account, omits to scrutinize, examine or check the accounts of his subordinates whom he implicitly trusts. Taking advantage of this, the subordinates commit gross frauds on him and his employers. The frauds and defalcations being due to the agents failure to perform his duty he is liable to make good the loss thereby caused. Explanation It is not an agents duty to obey instructions which are unlawful. If, at a sale by auction without reserve, the auctioneer is instructed not to sell for less than a certain price, he is not liable to the principal for accepting the highest bona fide bid, though it may be lower than that price. "If any loss be sustained."---Where an agent sells his principals goods in breach of his duty below the limit placed upon them by the principal, the measure of damages is the actual loss which the principal has sustained, and not the difference between the price at which they are sold and the limit of the price placed on the goods. Where no loss is suffered, the principal is entitled at least to nominal damages, the sale being wrongful. The measure of damages where an agent, who had been instructed not to part with the possession of certain goods until they are paid for, parted with them without payment, was held to be the value of the goods, the purchaser having failed to pay the price. Bank acting as clearing agent---Responsibility of. In a case where a bank in whose favour the drafts for the value of the goods have been endorsed also acts as a clearing agent, the responsibility of such a bank as a clearing agent is no more than that between a principal and agent under the Contract Act. In such cases, before any damages can be claimed from the agent, it is to be fully established that the agent concerned has acted carelessly and not in accordance with the duties imposed on him as an agent. Skill and diligence required from agent (sec. 212) An agent is bound to conduct the business of the agency with as much skill as is generally possessed by persons engaged in similar business, unless the principal has notice of his want of skill. The agent is always bound to act with reasonable diligence, and to use such skill as he possesses; and to make compensation to his principal in respect of the direct consequence of his own neglect, want of skill or misconduct, but not in respect of loss or damage which are indirectly or remotely caused by such neglect, want of skill or misconduct. Illustrations (a) A, a merchant in Islamabad, has an agent, B, in London to whom a sum of money is paid on A's account, with orders to remit. B retains the money for a considerable time. A, in consequence of not receiving the money, becomes insolvent. B is liable for the money and interest from the day on which it ought to have been paid, according to the usual rate, and for any further direct loss---as e.g., by variation of rate of exchange--but not further. (b) A, an agent for the sale of goods, having authority to sell on credit, sells to B on credit, without making the proper and usual inquiries as to the solvency of B. B, at the time of such sale, is insolvent. A must make compensation to his principal in respect of any loss thereby sustained. (c) A, an insurance broker, employed by B to effect an insurance on a ship, omits to see that the usual clauses are inserted in the policy. The ship is afterwards lost. In consequence of the omission of the clauses nothing can be recovered from the underwriters. A is bound to make good the loss to B. (d) A, a merchant in England, directs B, his agent at Karachi who accepts the agency, to send him 100 bales of cotton by a certain ship. B, having it in his power to send the cotton, omits to do so. The ship arrives safely in England. Soon after her arrival, the price of cotton rises. B is bound to make good to A, the profit which he might have made by the 100 bales of cotton at the time the ship arrived, but not any profit he might have made by the subsequent rise. © Copyright Virtual University of Pakistan 114 Business and Labour Laws - MGT 611 VU Explanation Liability of a Clearing agent: When the clearing agent failed to conduct the work entrusted to him with as much skill as is generally possessed by persons engaged in similar business and he failed to act with reasonable diligence in this connection. He was held liable for the loss incurred by the principal on that ground. Agent's accounts (section 213) An agent is bound to render proper accounts to his principal on demand. Comments Agent's duty to account: ---This duty is elementary, and will be enforced at need by following in the agent's hands property representing money for which he ought to have accounted. It is irrespective of any contract to that effect. It is not discharged by merely delivering to the principal a set of written accounts without attending to explain them and produce the vouchers by which the items of disbursement are supported, but where accounts have been sent by the agent to the principal, and the principal has kept them with him for a length of time, the accounts will be considered stated and settled and will not be reopened unless instances of fraud are proved. If an agent neglects to keep proper accounts, everything consistent with established facts will be presumed against him in the event of his being called upon for an account of the agency. Where an agent mixes up his moneys with the moneys of his principal the onus clearly lies on the agent to prove that in any particular transaction which he claims to be his own he employed his own moneys. "The principle is well established that an agent entrusted with money or goods by a principal to be applied on his principals account cannot dispute the principal's title unless he proves a better title in a third person and that he is defending on behalf of and with the authority of the third person. The same principle controls the relation of bailor and bailee. Possibly the framers of the Contract Act may have passed it over as belonging to the general law of estoppel; in any case it is quite consistent with the Act. Liability of representative of agent to account.---The legal representative of an agent cannot be called upon to render accounts to the principal in the same sense as the agent himself. The remedy of the principal is to sue the representative for any loss he may have suffered by remedy of the negligence or misconduct of his agent. In other words, the suit is not one for accounts strictly so called, but a suit for money payable to the principal out of the estate of the agent. If a suit for accounts is instituted against an agent, but he dies while the suit is pending, it can be proceeded with against the legal representative, and the latter is bound to deliver books of account, papers and vouchers, but cannot be called upon to explain the ad-counts, and the onus shifts to the plaintiff to prove the realisation of items by the deceased. Suit for accounts---When lies---If suit for accounts lies against the legal representative of the agent. A suit for account will lie if the defendant is under an obligation to account and an obligation to account arises only; a) if the person upon whom the obligation is sought to be imposed has received some kind of property not belonging to himself; b) that the person seeking to impose the liability must be the owner or must have some title to that property as would enable him to recover it; c) that the defendant must have received the property in his possession and control and; d) there must be fiduciary relationship between the plaintiff and the defendant. Agent's duty to communicate with principal (section 214) It is the duty of an agent, in cases of difficulty, to use all reasonable diligence in communicating with his principal, and in seeking to obtain his instructions. Agent is under a duty to consult principal in a "difficult" situation so as to save repudiation of his action by principal. Right of principal when agent deals, on his own account, in business of agency without principal's consent: (sec. 215) © Copyright Virtual University of Pakistan 115 Business and Labour Laws - MGT 611 VU If an agent deals on his own account in the business of the agency, without first obtaining the consent of his principal and acquainting him with all material circumstances which have come to his own knowledge on the subject, the principal may repudiate the transaction, if the case shows either that any material fact has been dishonestly concealed from him by the agent, or that the dealings of the agent have been disadvantageous to him. Illustrations (a) A directs B to sell A's estate. B buys the estate for himself in the name of C. A, on discovering that B has bought the estate for himself, may repudiate the sale, if he can show that B has dishonestly concealed any material fact, or that the sale has been disadvantageous to him. (b) A directs B to sell As estate. B, on looking over the estate before selling it, finds a mine on the estate which is unknown to A. B informs A that he wishes to buy the estate for himself, but conceals the discovery of the mine. A allows B to buy in ignorance of the existence of the mine. A on discovering that B knew of the mine at the time he bought the estate, may either repudiate or adopt the sale at his option. Explanation For like reasons an agent for sale or purchase must not act for the other party at the same time, or take a commission from him unknown to the principal, or settle any claim of his against the principal on exorbitant terms thereby to increase his own profit. An agent must give his principal the free and unbiased use of his own discretion and judgment. A principal who seeks to set aside a transaction on the ground that the provisions of the section has been violated must take proceedings for that purpose within a reasonable time after becoming aware of the circumstances relied on. Principal's right to benefit gained by agent dealing on his own account in business of agency (sec. 216) If an agent, without the knowledge of his principal, deals in the business of the agency on his own account instead of on account of his principal, the principal is entitled to claim from the agent any benefit which may have resulted to him from the transaction. Illustration A directs B his agent, to buy a certain house for him. B tells A, it cannot be bought, and buys the house for himself. A may, on discovering that B has bought the house, compel him to sell it to A at the price he gave for it. Principal's rights to profits: ---If a person, while holding a fiduciary position and acting in that capacity, makes a profit without fully disclosing his interest to those persons towards whom he stands in such a position, he must account to them for that profit; and it is immaterial that in acquiring the profit the agent may have run the risk of loss, and that the principal may have suffered no injury. Accordingly, if an agent for sale receives a share of commission or extra profit from the buyer's agent without the knowledge of his own principal, the principal can recover the sum of money received to his use. The principal can also recover from the agent and from the person who bribed him under the name of commission or otherwise, jointly and severally, damages for any loss sustained by the principal by reason of entering into the contract, e.g., an addition fraudulently made to the price of goods bought through the agent in order to give the agent a secret profit. Recovery of the illicit profit from the agent is no bar to an action for further damages against the third person. The relation which arises in such cases between the agent in default and the principal is that of debtor and creditor, not of trustee and beneficiary. The ordinary law of limitation is applicable, the time running from the principal's discovery of the facts, and the special rules as to following trust money © Copyright Virtual University of Pakistan 116 Business and Labour Laws - MGT 611 VU into its investments do not apply. Interest is recoverable on bribes and on all secret profits received by the agent. Where an agent has in effect bought from his principal, a subsequent purchaser from the agent with knowledge of the agency is in no better position against the principal than the agent himself. Forfeiture of commission: ---An agent who has wrongfully dealt on his own account is obviously not entitled to recover any commission for the transaction, even if the principal adopts it, for the principal could forthwith recover it back from him under this section or the equivalent common law rule. Moreover he had no authority to make a contract with himself, and therefore has earned nothing as agent. The principal's option of ratifying the unauthorised transaction does not give the agent any better right. Knowledge of principal: ---A transaction of this kind may be approved or ratified by the principal, but it must be upon full disclosure. It is not enough for the agent to tell the principal that he has some interest of his own. He must disclose all material facts, and be prepared to show that full information was given and the agreement made with perfect good faith. Notice sufficient to put the principal on inquiry will not do. Thus where an agent employed to buy goods sells his own goods to the principal at a price higher than the prevailing market rate, the principal is entitled to repudiate the transaction, and he is not bound by a ratification made in the absence of knowledge that the agent was selling his own goods and was charging him in excess of the market price. It is open to the principal whose agent has bargained for a secret profit of commission to adopt the transaction, if he thinks fit, for the purpose of suing the third party and recovering for himself the sum promised by him to the agent, or any part of it which the agent has not received. Agreements against agent's duty void.---An agreement between an agent and a third person which comes within the terms of the present section, or in any way puts the agent's interest in conflict with his duty, is not enforceable unless the principal chooses to ratify it. An agreement whereby the defendant agreed to remunerate an executor appointed under her brother's will out of her own pocket for undertaking the duties of executor, which he declined to do without remuneration, does not create such an interest at variance with the duties imposed upon executors as to render the agreement illegal on the ground of public policy. Agent's right of retaining out of sums received on principal's account: (sec. 217) An agent may retain, out of any sums received on account of the principal in the business of the agency, all moneys due to himself in respect of advances made or expenses properly incurred by him in conducting such business, and also such remuneration as may be payable to him for acting as agent. Agent's duty to pay sums received for principal (sec. 218) Subject to such deductions, the agent is bound to pay to his principal all sums received on his account. Rights of the Agent: When agents remuneration becomes due-Sec. 219: In the absence of any special contract, payment for the performance of any act is not due to the agent until the completion of such act; but an agent may detain moneys received by him on account of goods sold, although the whole of the goods consigned to him for sale may not have been sold, or although the sale may not be actually complete. Agent to be indemnified against consequences of lawful acts (sec. 222) The employer of an agent is bound to indemnify him against the consequences of all lawful acts done by such agent in exercise of the authority conferred upon him. Illustrations (a) B, at Singapore, under instructions from A, of Quetta, contracts with C to deliver certain goods to him. A does not send the goods to B and C sues B for breach of contract. B informs A of the suit, and A authorises him to defend the suit. B defends the suit, and is compelled to pay damages and costs and incurs expenses. A is liable to B for such damages, costs, and expenses. © Copyright Virtual University of Pakistan 117 Business and Labour Laws - MGT 611 VU (b) B, a broker at Quetta by the orders of A, a merchant there, contracts with C for the purchase of 10 casks of oil for A. Afterwards A refuses to receive the oil, and C sues B. B informs A, who repudiates the contracts altogether. B defends, but unsuccessfully and has to pay damages and costs, and incurs expenses. A is liable to B for such damages, costs, and expenses. Agent to be indemnified against consequences of acts done in good faith (sec. 223) Where one person employees another to do an act and the agent does the act in good faith, the employer is liable to indemnify the agent against the consequences of that act, though it cause an injury to the rights of third persons. Compensation to agent for injury caused by principal's neglect (sec. 225) The principal must make compensation to his agent in respect of injury caused to such agent by the principal's neglect or want of skill. Illustration A employees B as a bricklayer in building a house, and puts up the scaffolding himself. The scaffolding is unskillfully put up, and B is in consequence hurt. A must make compensation to B. Enforcement and consequences of agent's contracts (sec. 226) Contracts entered into through an agent, and obligations arising from acts done by an agent, may be enforced in the same manner, and will have the same legal consequences as if the contracts had been entered into and the acts done by the principal in person. Illustrations (a) A buys goods from B knowing that he is an agent for their sale, but not knowing who is the principal. B's principal is the person entitled to claim from A the price of the goods, and A cannot, in a suit by the principal, set off against that claim a debt due to himself from B. (b) A being B's agent, with authority to receive money on his behalf, receives from C a sum of money due to B. C is discharged of his obligation to pay the sum in question to B. Principals liability with regard to agreements caused by misrepresentation or fraud by agent under Sec. 238: Misrepresentation made, or frauds committed, by agents acting in the course of their business for their principals, have the same effect on agreements made by such agents as if such misrepresentations or frauds had been made or committed by the principals; but misrepresentations made, or frauds committed, by agents, in matters which do not fall within their authority, do not affect their principals. Illustrations A, being B's agent for the sale of goods, induces C to buy them by a misrepresentation, which he was not authorised by B to make. The contract is voidable as between B and C at the option of C. A, the captain of B's ship, signs bills of lading without having received on board the goods mentioned therein. The bills of lading are void as between B and the pretended consignor. Scope of duties of Principal: © Copyright Virtual University of Pakistan 118 Business and Labour Laws - MGT 611 VU Scope is enumerated below: Payment of remuneration to the agent Not to prevent his agent from performing the duties/ acts assigned to him under the contract and for which remuneration is payable. Any legitimate expenses which have been incurred by the agent in the course of performance of his duties are to be indemnified by the principal. © Copyright Virtual University of Pakistan 119 Business and Labour Laws - MGT 611 VU Lesson 23 LAW OF PARTNERSHIPKINDS & MUTUAL RIGHTS & DUTIES Partnership Act, 1932 Law of partnership is governed by Partnership Act, 1932. Partnership has been defined in section 4 of the Act which is reproduced below: "Partnership" is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. Persons who have entered into partnership with one another called individually "partners" and collectively "a firm" and the name under which their business is carried on is called the "firm name". Explanation: Partnership is defined as a voluntary contract between two or more competent person to place their money, effects, labour and skill, or some or all of them, in lawful commerce or business, with the understanding that there shall be a communion of the profits thereof between them. Halsbury defines a partnership as "the relation which subsists between persons carrying on a business in common with a view of profit". According to case law reported as (PLD-1985 Karachi-85 (90)) partnership has been interpreted as under: Partnership is the relation between individuals who have entered into agreement for the purpose of sharing profits of a business. 'Partner', 'Firm', 'Firm's name'.- Individuals bound in relation of partnership are individually called 'Partners' and collectively 'a firm', and the name under which, their business is carried on is called the 'firm name'. Proof of existence of Partnership': Where appellant claimed to be a partner of a partnership firm and one of the alleged partners denied any such partnership, it was incumbent upon the appellant to have proved on record that there was an agreement between the alleged partners for carrying on business in partnership. Registration of firm disclosing that certain persons were its partners was not by itself the proof of execution of any such agreement between the said alleged partners to do business in partnership. Case law reported as (Muhammad Sharif Uppal V Akbar Hussain - PLD 1990 Lah 229). Liability of Partners: The Defendant Establishment is a partnership Firm and other Defendants being Partners of that firm were, therefore, jointly and severally liable for the amount claimed in suit - Case law reported (National Bank of Pakistan V M/s M.M. Agencies and 5 others-1991 CLC 1763) Essential Elements of Partnership: There are four important elements necessary to constitute partnership.- (i) There must be an association of two or more persons to carry on a business. (ii) There must be an agreement entered into by all the persons concerned. (iii) The agreement must be to share the profits of a business. (iv) The business must be carried on by all or any of the persons concerned acting for all. All the above elements must be present before a group of persons can be held to be Partners. Each of these elements are discussed below in their necessary details. © Copyright Virtual University of Pakistan 120 Business and Labour Laws - MGT 611 VU (i) There must be an association of two or more persons to carry on a business. A group of persons with no legal relations inter se, i.e. no mutual rights and liabilities between themselves would not be a partnership. (ii) There must be an agreement entered into by all the persons concerned. This requirement emphasizes the fact that partnership can only arise as a result of an agreement, express or implied, between two or more persons there must be an agreement entered into by all the partners. Partnership is thus created by a contract; it does not arise by the operation of law. Joint ownership may arise by the operation of law, but not partnership. Thus on the death of a person, his children may inherit the family properly jointly together with the family business and may share the profits of the business equally; but they are not, for that reasons, partners. Only lawful Agreement: The contract which is the foundation of partnership, must itself be founded on good faith, and must be for a lawful object and purpose and between competent persons. In short it is subject to the ordinary incidents and attributes of contracts. (iii) The Agreement must be to share the profits of a business.-The object of the agreement or contract is to carry on a business. And the business which the partners carry on must, of course, be legal. Where there is no partnership. The mere fact that several persons own something in common which produces returns and that such person divide those returns according to their respective interests, does not make them partners. For instance A and B are co-owners of a house let to a tenant and A and B divide the net rent between themselves. A and B are not partners, because receiving rent of a house let to a tenant is not a business. (a) Term "Business". defined.- The term business has been defined (in Section. 2) to include every trade, occupation and profession. Business may be temporary or permanent (i.e. indefinite). But it must be in existence. An agreement to carry on business at a future time does no result in present partnership. (b) Sharing of profits. The sharing of profits is an essential element of a partnership agreement. The members of religious or charitable societies and clubs are not partners, as the idea of sharing, or even making of profits is not involved in these societies associations. An agreement to share profit is essential but it should be noted that an agreement to share the losses is not essential. Where nothing is said as to sharing of losses it is implied in a partnership deed. It may, however be agreed that as between the partners any one or more of them shall not be liable for losses. (c) Profits of business.- The term profits refers to net profits that is to say the excess of returns over advances, or in other words, the excess of what is obtained over the cost of obtaining it. The English Partnership Act expressly provides that sharing gross returns will not constitute a partnership. Thus, in one English case, the owner of a theatre allowed a travelling manager and his company to use the building, scenery, appliances, etc., in consideration of receiving half the money obtained from the spectators. In a case law, the Court observed that this did not make the owner answerable as a partner of the travelling manager. (Lyon V Knowles, 1863, 3 B & S. 556) (iv) Carrying of business.- The last element is that business must be carried on by all or by any of the persons concerned acting for all. This shows that the persons or the group who conduct the business do so as agents for all the persons in the group, and are, therefore, liable to account to all. In fact, the relation of principal and agent amongst the partners i.e. mutual agency, is the true test of partnership. A partner is both a principal and an agent. While the relation between partners inter se is that of principals, but in relation to third parties for the business of the firm, they are agents of the firm and also of one another. Thus each partner is regarded as an agent of the other partners, and as such, a partner acting in the course of the business of the firm, can bind his co-partners. But in order to bind his co-partners, it is necessary for the partner acting on behalf of the firm to contract in the firm name or in any other manner expressing or implying an intention to bind his co-partners. A partner contracting in his own name can create only a personal liability and not the collective liability of the firm. The mere fact that money borrowed by partner in his own name on security belonging to him personally, has been used for the purpose of the firm with the knowledge of his partners, does not render them liable. Illustrations: © Copyright Virtual University of Pakistan 121 Business and Labour Laws - MGT 611 VU (1) A and B buy 100 bales of cotton, which they agree to sell on their joint account. A and B are partners in respect of such cotton. (2) A and B buy 100 bales of cotton, agreeing to share the cotton between them. A and B are not partners. (3) A and B agree to work together as carpenters. A is to receive all the profits and pay a salary to B,-A & B are not partners. (4) A and B enter into a "partnership agreement whereby A is to have no share in either the profits or the loss of the business - A and B are not partners. (5) A and B are joint owners of a ship. This, by itself does not make them partners. Kinds of Partnership a) Partnership-at-will (sec. 7) b) Particular partnership (sec. 8) These are discussed in detail in the following paragraphs: Partnership at will: It has been defined in section 7 of the Act which is reproduced below: Where no provision is made by contract between the partners for the duration of their partnership, or for the determination of their partnership, the partnership is "partnership at will". Explanation: According to Sec. 7 the "Partnership at will" is a partnership agreement between the partners where by neither any definite period of partnership nor a provision. for the determination of the partnership has been provided, and its duration is left to the discretion or will of the partners themselves. Particular partnership A particular partnership has been defined in section 8 of the Act which is reproduced below: A person may become a partner with another person in particular adventures or undertakings. Explanation: Particular partnership duration of.- Partnership Deed clearly stating formation of Partnership, to run agency acquired by plaintiff at a particular station from a particular company. Partnership, held formed for a single venture and could continue only as long as agency lasted. Partners if wishing to carry on partnership on expiry of agency for running some other business, could do so only by a fresh agreement. Case law reported (Hussain Bhai V Mohd Iqbal PLD 1976 Quetta 9). General duties of Partners: The general duties of the partners are contained in section 9 of the Act which is given below: Partners are bound to carry on the business of the firm to the greatest common advantage, to be just and faithful to each other, and to render true accounts and full information of all things affecting the firm to any partner or his legal representative. Explanation: Sec. 9 imposes the following two paramount duties and liabilities on a partner.- 1. Duty of good faith and common advantage. © Copyright Virtual University of Pakistan 122 Business and Labour Laws - MGT 611 VU 2. Duty to render true accounts and full information. 3. Duty of good faith and common advantage provides that partners are bound- (a) to carry on the business of the firm to the greatest common advantage; and (b) to be just and faithful to each other. This duty is very widely and generally worded. In practice, it means that all the endeavours of partner must be directed towards securing maximum profit for the firm. Mutual rights and liabilities of partners: These are contained in section 13 of the Act which is reproduced below: Subject to contract between the partners a) a partner is not entitled to receive remuneration for taking part in the conduct of the business; b) the partners are entitled to share equally in the profits earned, and shall contribute equally to the losses sustained by the firm; c) where a partner is entitled to interest on the capital subscribed by him such interest shall be payable only out of profits; d) a partner making, for the purposes of the business, any payment or advance beyond the amount of capital he has agreed to subscribe, is entitled to interest thereon at the rate of six per cent per annum; e) the firm shall indemnify a partner in respect of payments made and liabilities incurred by him- f) in the ordinary and proper conduct of the business, and g) in doing such act, in an emergency, for the purpose of protecting the firm from loss, as would be done by a person of ordinary prudence, in his own case, under similar circumstances; and h) a partner shall indemnify the firm for any loss caused to it by his willful neglect in the conduct of the business of the firm. Rights and duties of Partners: These are contained in section 17 of the Act which is given below: Subject to contract between the partners,- a) where a change occurs in the constitution of a firm, the mutual rights and duties of the partners in the reconstituted firm remain the same as they were immediately before the change as far as may be; b) where a firm constituted for a fixed term continues to carry on business after the expiry of that term, the mutual rights and duties of the partners remain the same as they were before the expiry, so far as they may be consistent with the incidents of partnership-at-will; and c) where a firm constituted to carry out one or more adventures or undertakings carries out other adventures or undertakings, the mutual rights and duties of the partners in respect of the other adventures or undertakings are the same as those in respect of the original adventures or undertakings. Relations of partners to third parties: Partner to be agent of firm It is contained in section 18 of the Act which is given below: Subject to the provisions of this Act a partner is the agent of the firm for the purposes of the business of the firm. A Partner Principal as well as an Agent:- This is one of the most important tests of partnership as agency is the essence of the relationship of partnership. Therefore, a partner is both a principal and an agent. While the relation between partners with regard to principals, they are agents of the firm and of one another in relation to third parties for the purposes of the business of the firm. Thus, each partner is © Copyright Virtual University of Pakistan 123 Business and Labour Laws - MGT 611 VU regarded as an agent of the other partners, and as such, a partner, acting in the course of the business of the firm, can bind his co-partners. But, in order to bind his co-partners, it is necessary for the partner acting on behalf of the firm to contract in the firms name or in any other manner expressing or implying an intention to bind his co-partners. A partner contracting in his own name incurs only a personal liability, and not the collective liability of the firm. The mere fact that money borrowed by a partner in his own name on security belonging to him personally has been used for the purpose of the firm with the knowledge of partners, does not render them liable. Implied authority of partner as agent of the firm: The provisions on this subject are contained in section 19 of the Act which is reproduced below: (1) Subject to the provisions of section 22, the act of a partner which is done to carry on, in the usual way, business of the kind carried on by the firm, binds the firm. The authority of a partner to bind the firm conferred by this section is called his "implied authority". (2) In the absence of any usage or custom of trade to the contrary, the implied authority of a partner does not empower him to:- (a) Submit a dispute relating to the business of the firm to arbitration. (b) Open a banking account on behalf of the firm in his own name, (c) Compromise or relinquish any claim or portion of a claim by the firm, (d) Withdraw a suit or proceeding filed on behalf of the firm, (e) Admit any liability in a suit or proceeding against the firm, (f) Acquire immovable property on behalf of the firm, (g) Transfer immovable property belonging to the firm or (h) Enter into partnership on behalf of the firm. Section.19, which is one of the most important sections of the Act, lays down that subject to the provisions of section-22 (which deals with the mode of doing an act to bind the firm) the act of a partner which is done to carry on, in the usual way, business of the kind carried on by the firm, binds the firm. The authority of a partner to bind the firm is called his "implied authority". In order to bind the firm an act of a partner done within the scope of his implied authority, these conditions must exist- 1. The act must be done in the conduct of the business of the kind carried on by the firm. 2. The act must be done in the way which is usual in such business. 3. Finally, the act must be done in the firm name or in any other manner expressing or implying an intention to bind the firm. © Copyright Virtual University of Pakistan 124 Business and Labour Laws - MGT 611 VU Lesson 24 LAW OF PARTNERSHIP We have already discussed the concept of partnership; some more concepts are discussed in the following paragraphs: Relations of partners to third parties Liability of a partner for acts of the firm: It is contained in section 25 of the Act which is reproduced below: Every partner is liable, jointly with all the other partners and also severally, for all acts of the firm done while he is a partner. Sec. 25 of the Act lays down that all the partners of a firm, jointly and severally, share liabilities of the firm therefore, even where a partner has signed in his own name a promissory note for the benefit of the firm, all partners are liable on it as members of the partnership. Holding out: This concept is dealt with in section 28 of the Act which is given below: (1) Any one who by words spoken or written or by conduct represents himself, or knowingly permits himself to be represented, to be a partner in a firm, is liable as a partner in that firm to any one who has on the faith of any such representation given credit to the firm, whether the person representing himself or represented to be a partner does or does not know that the representation has reached the person so giving credit. (2) Where after a partner's death the business is continued in the old firm name, the continued use of that name or of the deceased partner's name as a part thereof shall not of itself make his legal representative or his estate liable for any act of the firm done after his death. Liability by Holding out: Section 28 of the Act deals with what is known as liability by "holding out". Where a person represents himself or knowingly permits himself to be represented as a partner in a firm, he will be liable as a partner in that firm, to any one who, on the faith of any such representation, has given credit to the firm. The person so representing himself, or permitting himself to be so re-presented is known as a partner by holding out or a partner by estoppel. Even want of knowledge on his part of the effects of his acts and conduct would not absolve him from liability. In other words where a man holds himself out as a partner, or a allows others to do it, he is then estopped from denying the character he has assumed upon the faith of which creditors may be presumed to have acted. A man so acting may be rightly held liable as a partner by estoppel. In other words, the doctrine of "holding out" is a part of the principle of estoppel, which lays down that where one person, by words or conduct induces another to believe him and act upon the existence of a particular state or facts, he can not afterwards, as regards that person, deny the existence of such facts. Thus A is in the habit of representing himself to be a partner of a particular firm. B on the strength of such representation, and without giving any notice to A supplies goods on credit to the firm. A would be liable as a partner to B for the price of the goods. Essentials of Section 28.- In order to estop a person from denying that he is a partner on the doctrine of "Holding out", the following two important elements must co-exist. 1. A person must represent himself to be a partner in a firm, or knowingly permit himself to be represented and 2. Another person must have given credit to the firm on the faith of such representation. The following seven additional points may also be noted in connection with the doctrine of holding outs. (i) The representation may be express or implied it need not necessarily be by words spoken or written, it need not be made by the person himself, but may be made by others. (ii) There will be no representation by conduct if the acts relied upon are ambiguous. (iii) A general representation to the, world at large is not sufficient, unless the person who gives credit can satisfy the court that he was aware of, and acted upon it to his prejudice. (iv) To establish liability, it is not essential to show that the party making the representation (or permitting it to be made) has acted fraudulently or negligently. Even want of knowledge on his part, of the effects of his acts and conduct, would not absolve him from liability, if his acts and conduct were such as would induce a reasonable man to believe that he was a partner, and to act upon such belief. The main thing is whether the © Copyright Virtual University of Pakistan 125 Business and Labour Laws - MGT 611 VU representation has caused the person to whom it was made to act on the faith of it so as to alter his position. (v) A former owner does not become a partner by estoppel merely because the firm has continued to use its old name of which his own name forms a component part. The rule of estoppel is binding on a former partner who has retired without giving proper notice of his retirement. (vi) There is no liability in tort on the ground of holding out, because the injured person can not claim that he was led to suffer the injury by his belief in any representation. Thus, B allowed his name to appear on a traction engine. A hired the engine, and through his negligence, injured C sued B on the ground of "holding out". It was hold that B was not liable. (vii) There can be no holding out to a person who is aware of the actual facts e.g. a person who has inspected the register of a firm which has been registered under the Act. Effects of holding out:- If a person holds himself out to be a partner of a firm, he becomes personally liable, he does not thereby become a partner in the firm and he is also not entitled to any rights as against those who are in fact partners in the firm. By holding out to be a partner, he does not become an agent of the firm. He merely makes himself personally liable for the credit given to the firm on the faith of his representation. Introduction of a partner: It is contained in section 31 of the Act which is reproduced below: (1) Subject to contract between the partners and to the provisions of section 30 no person shall be introduced as a partner into a firm without the consent of all the existing partners. (2) Subject to the provisions of section 30 a person who is introduced as a partner into a firm does not thereby become liable for any act of the firm done before he became a partner. Section 30 is about the contracts of wagering, which are void. Explanation: Section.31 provides that no person can be introduced as a partner into a firm without the consent of all the existing partners. Where one of the partners of a firm transfers his share in the firm without the consent of the other partners the transferee does not get the status of a partner in view of S. 31, Partnership Act. He has only limited rights and can claim only a share of the profits to which the transferor partner was entitled. It may be noted that there is nothing to prevent an incoming partner agreeing with his co-partners to make himself liable for the debts incurred by the firm prior to his admission therein. But, even where he has so agreed the agreement does not confer any right on creditors of the old firm to impose the old debts on the new partner. They can acquire such a right only by entering into an agreement between themselves and the new partner, either expressly or by implication. The only way in which a new partner can be made liable to the creditors of the firm in respect; of past debts is by proving:- (1) That the re-constituted firm has assumed the liability to pay the debt, and (2) That the creditor concerned has agreed to accept the re-constituted firm as his debtors, and discharge the old firm from its liability. Revocation of continuing guarantee by change in firm: It is provide

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