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Indemnity and Guarantee

Indemnity and Guarantee

Meaning of contract of indemnity
Rights and duties of indemnifier and indemnity holder
Meaning of contract of guarantee
Types of guarantee
Differences between indemnity and guarantee
Rights, duties and liabilities of surety
Discharge of surety from liability

Meaning and definition of contract of indemnity
Literally, indemnity means where a person is victim of loss, compensation to him is to be provided or to save him from the loss caused by different causes. To indemnify means to compensate or to make good of the loss. The contract of indemnity means a promise or statement of liability to pay compensation for a loss or for wrong in a transaction.
In the law of contract, indemnity is the obligation, undertaken by one party to cover the loss or debt incurred by another. It is similar to a contingent contract, a part of general contract and is of special nature.
According to the Sec. 22 of NCA- ‘where any person has concluded a contract relating to indemnity with the provision to pay to any party to a contract or a third person for any loss or damage that may result from his actions, he may realize as compensation.’
According to the Sec. 124 of ICA- A contract by which one party promises to save the other from loss, caused to him by the contract of the promisor himself or by the conduct of any other person, is called a contract of indemnity. The definition of ‘contract of indemnity’ as given in the Indian Contract Act is not exhaustive. It includes:
express promises to indemnify, and
cases where the loss is caused by the conduct of the promisor himself or by the conduct of any other person.
It does not include:
implied promises to indemnify, and
cases where loss arises from accidents and events not depending on the conduct of the promisor or any other person.
In English law, it is defined in a wider sense than the above laws as: ‘A promise to save another party from a loss caused as a result of transaction entered into at the instance of the promisor.’ It covers all types of losses caused by events or accidents (personal or natural).
According to the Dictionary of Garner on modern legal usages- ‘Indemnity is a security or protection against a contingent hurt, damage or loss.’
According to the Black’s law Dictionary- ‘Indemnity is an undertaking whereby one agrees to indemnify another, upon the occurrence of the anticipated loss.’
Thus, a contract of indemnity is really a part of the general class of contingent contracts. It is entered into with the object of protecting the promisee against anticipated loss. The contingency upon which the whole contract of indemnity depends is the happening of loss. The person who promises to make good the loss is called the indemnifier (promisor) and the person whose loss is to be made good is called the indemnified or indemnity-holder. A contract of indemnity is a species of the general contract. As such it must have all the essential elements of a valid contract.
Example: A contracts to indemnify B against the consequences of any proceedings which C may take against B in respect of a certain sum of Rs. 200/-. This is a contract of indemnity.
Example: A and B go into a shop. B says to shopkeeper, ‘Let him (A) have the goods. I will see you paid.’ The contract is one of indemnity. [Goulston Discount Co. Ltd. V. Clark (1967)2 Q.B. 493]
A contract of indemnity differs from indemnity for the breach of contract. The first is related to the contract to bear the anticipated loss by one party (Sec. 22 of NCA) and the latter one is related to the damage for the breach of contract by the breaching party (Sec. 83 of NCA)

Distinctions between contract of indemnity and indemnity for breach

SN
Basis
Contract of indemnity
Indemnity for breach
1.
Time of agreement
It is agreed at the time of making a contract on any transaction.
Whereas, it is obligatory after a loss.
2.
Anticipation of loss
It is meant for the compensation for an anticipated loss.
But, indemnity for the breach of a contract and law is the damage after the loss to the injured party occurs.
3.
Relation between the parties
It is meant for the remedy based on the good relationship (good faith and prudence) between the parties.
But, it is based on the dispute, created by the misunderstanding between the parties.
4.
Nature
It is preventive in nature
It is curative in nature

Essentials or features of a contract of indemnity
A valid contract of indemnity should fulfill the following conditions:
i. Anticipated loss: A contract of indemnity is a security for an anticipated loss.
ii. Requirements of valid contract: Contract of indemnity being a species of contract must have all essentials of a valid contract like free consent, competence of the parties, consideration, etc.
iii. To save other party: There must be a promise to save the other party from some loss.
iv. Covers only the actual loss: It covers only the actual loss may be due to the promisor himself or any other person and it covers only the loss caused by an event mentioned in the contract. The event mentioned in the contract must happen.
v. May be express or implied: The contract of indemnity may be express or implied. An express promise is one where a person promises to compensate the other party in express term. Implied promise is one where the conduct of the promisor shows his intention to indemnify the other party from loss.
vi. Depend on good faith: This contract depends on good faith.

Kinds of contract of indemnity
A contract of indemnity can be classified into two categories on the basis of expression of the parties at time of its formulation as express and implied.
i. Express contract of indemnity: When the parties to contract expressly enter into a contract of indemnity. A party expressly promises to indemnify the other party from loss.
Example: A promise to compensate B if B’s goods are damaged due to the conduct of C.
ii. Implied contract of indemnity: When the contract of indemnity deemed to have concluded by the conduct of the parties or from the circumstances of the particular case, it is known as implied contract of indemnity.
Example: A hires a motorcycle from the B’s shop to use for one day. The motorcycle gets damaged due to the accident. Here, A has to compensate for damage to B, although he has not agreed expressly to do so.

Rights and duties of indemnity-holder

Rights of indemnity-holder [Sec. 22(1) of NCA]
A person whose loss is to be made good is called the indemnity-holder. He has some rights against the indemnifier in accordance with the legal provisions incorporated under the Nepalese and Indian Contract Acts. But, the duties of the indemnity-holder have not been mentioned under the Acts. The indemnity-holder is entitled to recover any or all of the amounts of compensation under the contract. They are as follows:
i. All the indemnity amount (damage) prescribed in the contract.
ii. All the damages he may be compelled to pay a third party for the loss.
iii. All the costs spent on the case filed or defended by him in connection with the contract relating to indemnity.
iv. All the costs of legal actions, if it becomes necessary to initiate such an action for a failure to pay the amount mentioned in all the above clauses.

Duties of indemnity-holder
Except otherwise is mentioned in the contract, the indemnifier will not liable for the loss in the following circumstances. They are called duties of indemnity-holder too.
i. Duty to work prudently: Except otherwise is mentioned in the contract, the indemnifier will not liable for the loss caused by the negligence work of the indemnity-holder. In other words, it is the duty of indemnity-holder to work prudently.
ii. Duty not to act to cause harm or loss: If the indemnity-holder acting with the intention of causing any loss or damage, the indemnifier will not liable for such loss. In other words, it is the duty of indemnity-holder not to act to cause harm or loss.
iii. Duty to comply with the intention of promisor: If the indemnity-holder acting against the instruction of the other party or promisor, the indemnifier will not liable for the loss caused by such against act to his instruction. In other words, it is the duty of indemnity-holder to comply with the intention of promisor.

Rights and duties of indemnifier

Rights of the indemnifier:
The rights of the indemnity-holder are the duties of indemnifier, and duties of the indemnity-holder are the rights of the indemnifier. There are not prescribed any specific rights of the indemnifier either in Nepalese law or in Indian law. However, he is not liable for indemnity.
i. If indemnity-holder acts negligently.
ii. If indemnity-holder is acting with the intention of causing any loss or damage.
iii. If he is acting against the instructions of the other party (promisor).

Duties of indemnifier:
The duties of an indemnifier arise in the following circumstances:
i. There must be a loss in accordance with the contract to make the indemnifier liable.
ii. There must be an occurrence of the anticipated event. Without any occurrence of the prescribed event, there is no indemnity by the indemnifier.
iii. Where the right of indemnity is used by the indemnity-holder prudently and the instruction of the indemnifier is not contravened or when there is no breach of contract.
iv. If the costs demanded by the indemnifier are not caused by negligence, haphazard behaviour.
Contract of Guarantee
Meaning and definition
A guarantee means a contract of a promise to be responsible for something, to perform the promise or to discharge the liability of a third person, in case of his default. Such a contract involves three parties. They are:
i. Creditor: the person to whom the guarantee is given;
ii. Surety: the person who gives the guarantee.
iii. Principal debtor: the person, in respect of whose default, the guarantee is given.
Section 15(1) of NCA, 'A contract relating to a guarantee shall be deemed to have been concluded if it provides that, if any person in the repayment of loan obtained by him or fulfillment of the obligation accepted by him, it will be repaid or fulfilled by a third person.'
Section 126 of ICA, A contract of guarantee is a contract to perform the promise to discharge the liability of a third person in case of his default.
A clear definition was made regarding a guarantee by English Court in the case of Bricknyrs v. Darmell (1704), 'A contract of guarantee is a contract by one person to discharge the debt, fault or miscarriage of another.'
A contract of guarantee is entered into with the object of enabling a person to get a loan or goods on credit or an employment.
Example: If 'A' advances a loan of Rs. 5000/- to 'B' and 'C' promises to 'A' that if 'B' does not repay the loan, 'C' will do so. Here, this is a contract of guarantee.
It will be noticed that in a contract of guarantee there are three separate contracts, i.e.- i. between the principal debtor and creditor, ii. between the creditor and surety, and iii. between the surety and principal debtor, wherein the principal debtor requests the surety to act as surety and impliedly to indemnify the surety in case the surety incurs liability. Thus, the contract of guarantee is of tripartite nature. The primary liability is of the principal debtor. The secondary liability is of the surety which arises only when the principal debtor defaults. The surety must have to know all the facts regarding the contract. If any alteration regarding the terms of the contract are made without the consent of the surety, it terminates automatically.
Sec. 15(3) of NCA states that such a contract must be made in written form. The English law also accepts this rule but the Indian law accepts both written and oral contract of guarantee.
The Muluki Ain, 1963, Chapter on 'Jamani garneko', Chapter on 'Court Management', Chapter on 'Punishment' and Government Contract Arrangement Act, have made some legal provisions in this regard.

Characteristics or essentials of contract of guarantee
Following are the characteristics or essentials of contract of guarantee:
i. Tripartite agreement: In a contract of guarantee, there are three parties namely: principal creditor, creditor and surety. Under this contract, three separate contracts are made among them and consent of all the three parties is necessary. The contracts connecting each-other as contract between:
a. the principal debtor and creditor,
b. the creditor and surety, and
c. the surety and principal debtor,
ii. Liability: Under such contract the primary liability is of the principal debtor and only secondary liability is of the surety. As a conditional contract, liability of the surety arises only when the principal debtor (primarily liable) defaults.
iii. Essentials of valid contract: It is also as same as other general contract in respect of essentials. All the requirements for valid contract, i.e. free consent, consideration, lawful object, competency of the parties etc. are necessary to form this kind of contract. But, in respect of consideration, no direct consideration in the contract between the surety and creditor. Consideration of principal debtor is considered to be adequate for the surety.
iv. Written form: A contract relating to guarantee must be concluded in writing in Nepal and England. But, the Indian legal framework does not compel to form such contract in written form. Both written and oral is valid in India.

Distinctions between a contract of indemnity and contract of guarantee
Although the indemnity and guarantee have a common feature that both are devices for protection against a probable loss but there are some differences. The dictions between a contract of indemnity and contract of guarantee are given below:
SN
Basis
Contract of indemnity
Contract of guarantee
1.
Number of parties
There are two parties to the contract, viz., indemnifier and indemnified.
There are three parties to the contract, viz., the principal debtor, the creditor and the surety.
2.
Number of contract
Under this, only one contract between the indemnifier and indemnified.
Under this, there are three separate contracts between the principal debtor, creditor and surety.
3.
Purpose of contract
Purpose of this contract is to save the indemnity-holder from any contingent loss.
Purpose of this contract is to provide necessary security to the creditor.
4.
Nature of contract
It is a contract of contingent nature.
It is a contract of general nature.
5.
Nature of promise
Under this contract, the indemnifier is the only one promisor for the loss of the indemnified party.
Under this contract, the surety and principal debtor are the two promisor for the debt of the creditor.
6.
Scope
Limited in comparison to the contract of guarantee.
Wider in comparison to the contract of indemnity.
7.
Request
It is not necessary for the indemnifier to act at the request of the indemnified.
It is necessary that the surety should give the guarantee at the request of the debtor.
8.
Commencement of liability
The liability of the indemnifier arises only on the happening of a contingency.
There is usually an existing debt or duty, the performance of which is guaranteed by the surety.
9.
Discharge from liability
Under this contract, the indemnifier discharges from the liability after paying indemnity to the indemnified party.
Under this contract, the surety discharges from the liability when the principal debtor discharges or fulfills his liability.
10.
Nature of liability
The liability of the indemnifier to the indemnified is primary and independent.
The liability of the surety to the creditor is collateral or secondary, the primary liability being that of the principal debtor.
11
Right to reimbursement
In this contract, the indemnifier has no right of reimbursement of the amount paid to the indemnity-holder.
In this contract, the surety has right of reimbursement of the amount from the principal debtor, which is paid to the creditor.
12.
Consideration
Under this contract, the indemnifier gets consideration for his promise made to the indemnity-holder.
Under this contract, surety does not get any consideration for his promise made to the creditor.

Types of guarantee

From the viewpoint of nature, objective and the act the guarantee may be classified as follows:
i. Absolute and conditional guarantee: An absolute guarantee is one by which the guarantor unconditionally promises to pay the debt, on the default of the principal. But if some contingency other than the default of the principal debtor arises there is a conditional guarantee.
ii. General and specific guarantee: The guarantee that can be accepted by the general public is a general guarantee and the one that can be accepted only by the particular person is a special guarantee.
iii. Limited and unlimited guarantee: When a guarantee is limited there is a liability by time and amount that is limited, whereas if a guarantee is not limited there is a liability for the surety by time, amount and transaction. There is an unlimited guarantee.
iv. Prospective and retrospective guarantee: A guarantee that is given for future transactions that may be one or more transaction is a prospective guarantee, and if it is given for the past or existing transaction it is called a retrospective guarantee.
v. Specific and continuing guarantee: When a guarantee is extended to a single transaction or debt, it is called a specific guarantee. Such a guarantee comes to an end when the transaction stops or is duly discharged or the promise is duly performed. But, if a guarantee extends to a series of transactions continuously, it is a continuing guarantee.
There is no water-tight demarcation of the continuing guarantee with specific guarantee. However, it is determined by the intention of the parties and /or terms and conditions, and/or subject-matter and/or the circumstances of the transactions. A continuing guarantee may be given for a fixed amount. It only speaks of continuing transactions and not of the period of such transaction [Eastern Bank Ltd. V. Parts Services of India Ltd. AIR (1986)]. Because of the uncertain nature of time, a continuing guarantee will be continued until the revocation of the surety.

Features of the continuing guarantee
Following are the features of the continuing guarantee:
- The continuing guarantor is not exhausted by the first advance.
- It can always be revoked by a notice to the creditor.
- A revocation of the guarantee is possible for future transactions.
- Death of the surety terminates the contract.

Revocation of continuing guarantee
On basis of following way a continuing guarantee as to future transactions may be revoked.
i. By the notice of revocation to the creditor: A guarantor (surety) may revoke a continuing guarantee at any time by a notice, as to the future transactions. But, he is liable for the transactions until the date of revocation.
ii. By the death of surety: The death of surety automatically terminates the contract of guarantee so far as regards future transactions unless there is a contract to the contrary. It is not necessary that the creditor must have notice of the death. The state of surety is free after death, although the creditor might have entered into a transaction without knowledge of the death of surety.
iii. By the other modes: When the surety is free from his liability, the continuing guarantee as to future transactions is also revoked. In some circumstances the surety discharges from his liability, they are as follows:
By variance or alteration in terms of contract;
By novation of the contract;
By release or discharge of principal debtor;
By a loss of security;
By arrangement with principal debtor;
By the creditor’s act impairing the surety’s eventual remedy.
Rights, duties and liabilities of surety

Under the contract of guarantee, the surety denotes the person who gives guarantee. He enters into two separate contracts, for giving guarantee, with the principal debtor and with the creditor. As being a party of contract of guarantee, he has some rights, duties and liabilities. They are discussed as underneath:

Rights of surety
A surety has certain rights against the creditor, principal debtor and co-sureties. These are given below:
A. Surety’s rights against creditor: The surety can enjoy following rights against the creditor:
i. Right to benefit of creditor’s security: The surety is entitled to demand from the creditor, at the time of payment, all the securities which the creditor has against the principal debtor at the time when the contract of guarantee is entered into or subsequently acquired. Whether the surety knows of the existence of such security or not is immaterial. If by negligence the creditor losses or without the consent of surety, parts with such security as acquired at the time of contract, the surety is discharged to the extent of the value of security. But, if the security is lost due to an act of nature or enemies of the state or unavoidable accident, the surety would not be discharged. [Krishna Talwar v. Hindustan Commercial Bank, AIR (1957) Punj. 310]. Similarly, if the subsequently acquired securities are parted with, the liability of surety would not be reduced. [Bhushayya v. Suryanarayan, AIR (1944) Mad. 340]. Surety cannot claim the benefit of a part of the securities merely because ha has paid the part of the debt. [Goverdhandas v. Bank of Bengal, AIR (1891) Bom. 45].
ii. Right claim set off, if any: Set-off implies a counter claim or deduction from the amount of loan. The surety is also entitled to the benefit of any set-off or counter claim, which the principal debtor might possess against the creditor in respect of the same transaction. The surety has the right of set-off on the failure to make payment of the debt. If the creditor loses or parts with (or without surety’s consent) destroys the security in his possession, got from the principal debtor, the surety is discharged to the extent of the value of the security.
B. Surety’s rights against the principal debtor: The surety enjoys following rights against the principal debtor:
i. Right of subrogation: Subrogation means to be placed in the seat of the creditor. When the surety pays off the debt on default of the principal debtor, he is invested with all the rights which the creditor had against the principal debtor. The surety steps into the shoes of the creditor and is entitled to all the remedies which the creditor could have enforced against the principal debtor. The surety may, therefore, claim the securities, if any, held by creditor and sue the principal debtor, or may claim dividend in insolvency of the debtor.
ii. Right to claim indemnity: In every contract of guarantee there is an implied promise by the principal debtor to indemnify the surety, and the surety is entitled to recover from the principal debtor whatever sum he has rightfully paid under the guarantee, but no sums which he had paid wrongfully. Thus, a surety is entitled to be indemnified by the principal debtor for whatever sum he has ‘rightfully paid’ means a just and equitable payment.
The following two must also be noted in connection with this right to indemnity:
The surety cannot claim more than what he has actually paid to the creditor. Thus, if he discharges the debt by compromise at less than its full amount, he can get from the principal debtor only the amount in actually paid.
Actual payment either in cash or transfer of property is essential for asking the principal debtor to pay. A promissory note given by the surety will not be sufficient to claim indemnity.
C. Surety’s rights against the co-sureties: Where a debt is guaranteed by more than one surety, they are called co-sureties. In such a case all the so-sureties are liable to contribute towards the payment of the guaranteed debt as per agreement among them. But in the absence of any such agreement, if one of the co-sureties is compelled to pay the entire debt, he has a right of contribution from others. The rules of contributions are as follows:
Where there are sureties for the same debt for similar amount i.e. for one and the same amount: The co-sureties are liable to contribute equally, and are entitled to share the benefit of securities, if any, held by any one of the so-sureties, equally. To sum up, the principle it may be said ‘As between co-sureties there is equality of burden and benefit.’ Further, for the application of the principle it is immaterial whether the sureties are liable jointly under one contract or severally under several contracts, and whether with or without the knowledge of each other. There is, however, no right of contribution between persons who become sureties not for the same debt but for different debts. If one is compelled to pay all the sums, he can recover the extra contribution from others.
Where there are sureties for the same debt for different sums: The rule is that ‘Subject to the limit fixed by his guarantee, each surety is to contribute equally (and not proportionately to the liability under taken). Where co-sureties are bound for different sums, they are compelled to pay their respective liabilities. If such a type of unequal liability is divided on the basis of equal benefit and equal burden the loss liable person will be injured. Such an injured co-surety has the right to the other co-sureties to recover his extra cost paid.

Duties and liabilities of surety
The liability of a surety arises from the creation of a contract. But it comes into execution only when the principal debtor fails to perform his obligation. The liabilities are already founded in the name of contract and provided in the Sec. 16 of NCA. But a surety may place a limit upon his liability in the contract. The nature of liability of a surety according to the contract of guarantee is given below:
i. Co-extensive nature of liability: The liability of the surety is secondary and co-extensive with that of the principal debtor, unless it is otherwise provided by the contract. In general terms the quantum of obligation of a surety will neither be more nor less than that of principal debtor. Sec. 16(b) of NCA, states that the surety will be responsible until the principal debtor becomes free from his liability.
ii. Secondary and contingent nature of liability: The surety is liable only when the principal debtor fails to fulfill promise made to the creditor. [Sec. 16(c)]
iii. Limited nature of liability: When a security and guarantee both are given as a consideration for the debt or liability, the surety will not be liable to the extent of the security. [Sec. 16(d)]
Sometimes, a discharge of the principal debtor by the operation of law (death or insolvency) does not discharge the surety from his liability. [Sec. 16(e)]
- The surety will be liable for the remaining part of the debt from the sale of the security of the principal debtor.
- The surety will not be liable if any alterations are made by the principal debtor and creditor without the consent of the surety.
- The surety will not be liable to the extent of loss or destruction of the security in possession of the creditor.
- The surety will be liable for the entire debt if,
- the principal debtor is minor;
- the principal debtor becomes insolvent; and
- the death of the principal debtor.
- If a contract of guarantee is not made in a written form, the surety is not liable.
The surety is sometimes called a ‘fvoured debtor’ because his liability is of secondary nature. The extent of liability of surety depends on the contract of guarantee. The surety may declare his guarantee to be limited to a fixed amount and time. Thus, a surety may place a limit upon his duty and liability at the time of entering into the contract of guarantee.

Discharge of surety from liability

A surety is said to be discharged from liability when his liability comes to an end. A surety is freed from his obligation under a contract of guarantee in various ways. Any one of the following way or circumstances, a surety is discharged from his liability:


Discharge of surety
By performance
By conduct of creditor
By expiry of time
By revocation
By invalidation of contract
By lacking of essentials of valid contract
By concealment or misrepresentation

By failure of co-surety to join
By death
By notice
By novation
Arrangement by creditor with principal debtor
By release or discharge of principal debtor
By damaging surety's rights
By variation
By loss of security























i. By performance: A surety is discharged from his liability by performance of contract by principal debtor. It is the expected and general dome of termination of contract of guarantee. After the performance, there is no liability remains upon the surety. But, this does not apply in the case of continuing guarantee.
ii. By revocation: Following ways are included under this category:
a. By notice of revocation: An ‘ordinary guarantee’ for a single specific debt or transaction cannot be revoked once it is acted upon. But a ‘continuing guarantee’ may, at any time, be revoked by the surety as to future transactions by giving notice of it to the creditor. Thus, in such a case, the liability of the surety comes to an end in respect of future transactions which may be entered into by the principal debtor after the surety has served the notice of revocation. The surety shall, however, continue to remain liable for transactions entered into the notice.
b. By death of surety: In the case of continuing guarantee the death of surety also discharges him from liability as regards transactions after his death, unless there is a contract to the contrary. The deceased surety’s estate will not be liable for any transactions entered into after the death, even if the creditor has no notice of the death. Bur such a discharge does not after the previous transaction made before the death of the surety.
c. By novation: If new contract is made between the same parties or other parties, the contract of guarantee is terminated and the surety is discharged from his liability.
iii. By conduct of creditor: Following circumstances of are concerning to discharge the liability of the surety in contract of guarantee as conduct or creditor:
Variance of the terms of contract: Any variance made without the surety’s consent, in the terms of the contract between the principal debtor and creditor, discharges the surety as to transactions subsequent to the variance. Although the words ‘as to transactions subsequent to the variance are more pertinent in the case of continuing guarantee’, but the principle as lay down in the law is equally applicable in specific guarantee as well, no matter whether the variance is beneficial to the surety or is made innocently or does not material affect to the surety. Because a surety is liable only for what he has undertaken in the contract. It is important to note that mere knowledge and silence of the surety does not amount to an implied consent [Polak v. Everett]. Again, accepting further security for the same debt is not treated as variance in the terms of contract.
By release or discharge of principal debtor: Release or discharge of principal debtor provides for the following ways of discharge of surety from liability:
- The surety is discharged by any contract between the principal debtor and creditor, by which the principal debtor is released. Any release of the principal debtor is release of surety also.
- The surety is also discharged by any act or omission of the creditor, the legal consequence of which is the discharge of the principal debtor.
But insolvency and death are exceptions to this rule.
Arrangement by creditor with principal debtor: Where the creditor, without the consent of surety, makes an arrangement with the principal debtor for composition, or promise to give him time or not sue him, the surety will be discharged.
But in the following cases, a surety is not discharged:
- Where a contract to give time to the principal debtor is made by the creditor with a third person and not with principal debtor the surety is not discharged.
- Mere forbearance on the part of the creditor to sue the principal debtor or to enforce any other remedy against him does not discharge the surety, unless otherwise agreed.
- Where there are co-sureties, a release by the creditor of one of them does not discharge the other; neither does it free the surety so released from his responsibility to the sureties.
By damaging or impairing surety's eventual remedy: It is the duty of the creditor to do every act necessary for the protection of the rights of the surety and if he fails in this duty, the surety is discharged. Thus, where the integrity of cashier is guaranteed, it is the duty of the employer to give information to the surety if any dishonest act is done by the employee. If the employer continues to employ him after an act of dishonesty (which is proved), the surety is discharged, if he is not informed within a reasonable time, because then the surety's right (eventual remedy) to inform police for necessary recovery action is lost or damaged.
By loss of security: If the creditor loses or without the consent of the surety, parts with any security given to him, at the time of the contract of guarantee, the surety is discharged from liability to the extent of value of security. Here, the word 'loss' means loss because of carelessness or negligence and does not cover the event or act of God or nature, or enemies of the state or unavoidable accident. Again, if the securities lost or parted with, were obtained afterwards as a further security, the surety would not be discharged. [Bhushayya v. Suryanarayan (1944) Mad. 540].
iv. By invalidation of contract: A surety is also discharged from liability when the contract of guarantee (in between the creditor and surety). A contract of guarantee is invalid in any of the following cases:
By obtaining guarantee by concealment or misrepresentation: Where the guarantee has been obtained by means of concealment or misrepresentation or keeping silence as to material parts of the transaction, by the creditor or with creditor's knowledge and consent. But, it remains valid if the misrepresentation or concealment is done by the debtor without the concurrence of the creditor.
By lacking of essentials of valid contract: Where it lacks one or more essential elements of a valid contract, e.g. surety is incompetent to contract or the object of contract is illegal.
By failure of co-surety to join: Where a person gives guarantee to the creditor on a condition that the creditor shall take guarantee from another person too for the same subject-matter, the contract becomes invalid if that third person does not join as a co-surety within the time mentioned by surety.
v. By expiry of time: When the time specified in the contract, the principal debtor fails to repay the debt and even the surety fails to do so, the creditor must sue within the limitations prescribed by the law for covering debt. In this case, if the creditor cannot file a suit, the principal debtor becomes free from liability to pay the debt due to the expiry of time limitation. Here, the surety is also freed from his liability with the principal debtor.

Legal provisions under Chapter on Guarantee in Muluki Ain, 2020
(Jamani Garneko Mahal)

The legal provisions on contract of guarantee have been laid down under the Chapter on 'Jamani Garneko' in Muluki Ain, 2020. These provisions are provided for official arrangements and not for the business transactions. It has made some provisions about the nature and prerequisites of the surety, and official actions against the surety. It has the following provisions.
i. Procedures of guarantee: The office that is going to accept the guarantee should be aware of whether the proposed guarantor is capable or not or is disqualified by any law. if the proposed person is not a proper person for the guarantee, there should be an endorsement on the back of the application for necessary matters. The officer will be responsible if it is not performed as per the rules. That's why the proposed person who has sufficient property and competent to contract is capable for making the guarantee.
ii. Written guarantee: The names of the surety and principal debtor and the liability related conditions matters should be written clearly in the contract paper.
iii. Eligible age of surety: Surety should have attained 16 years of age and be capable to pay the guaranteed liability.
iv. Provisions of co-surety: Where two or more persons are involved in the guarantee, it should be written clearly whether there is equal or different burden or less or more burden for the co-sureties. If it is not provided in the contract paper they are equally liable for it.
v. Liability of surety: If the principal debtor does not fulfill his promise, his liability should be fulfilled by the guarantor (surety) after the default by the principal debtor. If it is insufficient from the sale of property of the debtor, the surety will be liable for the rest of the debt. Where the guarantee is made for the attendance and the debtor is liable for the imprisonment, the wealth -related liability or damages relating to the matter should be fulfilled by the guarantor. If the debtor comes within 3 years, the paid debt can be returned to the guarantor.

Kinds of Guarantee (Jamani)
There are three types of guarantees provided in the Chapter on 'Jamini garneko' in Muluki Ain, 2020. There are as follows:
i. Guarantee of Attendance: If a person is guaranteed by another of his attendance on a certain date and time in the Government office, it is called the guarantee of attendance.
This kind of guarantee assures the officer that the culprit will not be absconded. The main liability or duty of surety in such type of guarantee is to make the culprit attend at the prescribed date and time. If the surety fails to perform his duty he will be liable for all the liability of the culprit, but the legal representatives will not be liable in case of death of the surety. The surety may be kept in prison for not more than 6 years in the case of punishment and Government liability. The surety has a right to be discharged from his liability after the death of the culprit.
ii. Guarantee of Wealth or money: If a person promises to the office or a person to pay some cash or valuables on the default of the debtor, it is the guarantee of wealth. The person who makes the promise is called a surety. The surety must be able to fulfill the promise. The main duty of the surety is to pay rest of the debt on the partial default of debtor. The surety will be liable for the rest of the debt which remains unpaid even after the sale of the whole property of the culprit or debtor. The surety will be liable even in the case of death of the debtor. In the case of guarantee of wealth, the surety has the right to refund the money collected as a guarantee within three years of the concealing criminal pays the amount.
iii. Guarantee of Property: If a person gives the guarantee of his property as security for the payment of another's debt, it is called the guarantee of property. This kind of provision is contained in the 118 No. of Chapter on 'Court Management' and Revenue Judicial Tribunal Act, 2031, Sec. 31. In such guarantee the surety has to pay the debt. He has to expose if there is any defect in the security. He cannot sell or bail it. He can return the security after the payment of debt.

My CV tells about me

Curriculum Vitae

Name: - Dilli Ram Shrestha
Permanent Address: - Sankhuwa -Sava, Khandbari-3, Manebhanjyang
Temporary Address: - Koteshwor, Kathmandu.
Mailing Address: - Post Box no.8368, Kathmandu.
[Email: dilliramshrestha@yahoo.com, dilli.shrestha@rbb.com.np
Telephone: - 9851092775, 4252595 (Ext. 2820)
Nationality: - Nepali
Date of Birth :- 2032/8/17/ or 1975-11-29 A.D.
Marital Status :- Married

Educational Qualification :-
1. Passed S.LC. From Shree Himalaya Secondary School, 2nd division.
2. Passed Intermediate in Law (I.L.) 2nd division from Nepal Law Campus (T.U.) Kathmandu.
3. Passed Bachelor in Law (B.L.) from Nepal Law Campus (T.U.) Kathmandu securing highest mark. (55.05%)
4. Passed LL.M. securing 66.5%.
Working Experiences :-
1. Legal Officer (Permanent), at Rastriya Banijya Bank Ltd., Credit Department, Head Office, Singha Durbar, Kathmandu.
2. Worked as a Legal Officer at Civil Groups (Civil Savings & Credit Co operative, Civil Homes Pvt. Ltd., Civil Business Complex Pvt. Ltd., Civil Trading Company Pvt. Ltd. Civil Merchant Bittiya sanstha Ltd., etc.)
3. Worked as a Legal Officer in Freedom Forum, Thapathali Kathmandu.
4. Worked as a Program Coordinator in Nepal Children's Organization (Balmandir) Naxal, Kathmandu.
5. Worked as a Research Officer in Saugat Legal Researcy and Consultancy, Naxal, Kathmandu
6. Worked as a legal consultant in Kavre Public Private Partnership Pilot, Soaltee Group, Kathmandu.
7. Election officer in United Finance Company Ltd. on 8th Annual General Meeting-2060. Legal Advisor com.
8. Company Secretary in Suvidha Sewa Pvt. Ltd. for Two years.
9. Practicing lawyer for 7 years.
10. Two years working as a Motivator in Center for Self Help Development (C.S.D.) Self Help Banking Programs (S.B.P.)
11. Two years teaching experience in Prabhat English Boarding School Sankhuwa Sava.
Training: -
1. Pre-service training (6 months) from C.S.D. about accounting, office management, identify local situation, problem, needs, and prospects and potentials by base line survey, loan disbursement, collection of loan installment etc.
2. Participatory Rural Appraisal (P.R.A.) training from C.S.D. field areas Siraha Saptari, Udayapur, Dhanusa and Mahottary.
3 Health System Research Methodology training organized by Nepal Health Research Council (NHRC) and WHO (6th Sep –12th Sep 1998)
4. Computer training (Ms World, excel, office etc.)
5. Insurance Agent training by National Insurance Committee Kathmandu.-2058.
6. Proposal Writing Training, Organized by Wildlife Conservation Nepal (WCN), Kathmandu.
7. Orientation training on Public Private Partnership in Judiciary, Organized by National Judicial Academy.
Research Activities :
1. Seminar paper presented to the Tribhuvan University, Central Department of Law, Nepal Law Campus on ' Conceptual Analysis of Marital Rape in Nepal;
2. Research Proposal submitted to the Tribhuvan University, Central Department of Law, Nepal Law Campus on ' A Study on voluntary and Organised Prostitution in Nepal'.
3. Analysis of Supreme Court's decision on Murder (2047-2058) CeLRRd, Danida.
.
Published Articles:
1. "The Supreme Court’s decisions on the crime of homicide: a brief analysis", Kanoon, Vol. 51, p.46.
2. "Attempted Murder in the changing context: a discussion," Kanoon, Vol. 54, p.25.
3. The Act for Maintaining Gender Justice, 2063, in the Eye of Criminal Law, A Discussion. Kanoon.
.
4. Changing Context of Marital Rape in Nepal, Nepal Law Review, Nepal Law Campus.
5. Offence relating to unnatural sex in Nepal and Decision of Supreme Court : a Critical note, Kanoon, Vol. 66 p. 35.
6. Role of Codification in Development of Criminal law of Nepal: A Discussion, Kanoon, Vol 67, p. 37.
7. Rape Victim in the Crimina Justice System in Nepal : A critical observation, Nepal Bar Council Journal, 2007, Nepal Bar Council.
8. Prospective Changes in the Sexual violence law of Nepal, Kanoon, Vol. 71, p. 59
9. Nyayabikasini in the eye of modern Criminal law: a discussion, Kanoon, Vol. 73.
And other dozens of articles published in different legal journal of Nepal
Skills :- Computer literate: Martial arts: Clean driving license.
Language :-
English
Nepali
Hindi
Maithili

Lecture notes Business Law Part II

Bailment and Pledge Contract
1. Meaning of Bailment
The term "bailment" is derived from a French word ' Baillier" which means to deliver or handing over.
Bailment means delivery or hand over of goods for a certain period of time or purpose.
Bailor- who deliver goods
Bailee- To whom the goods is delivered.
A bailment arises when one person ( the bailor) transfers possession of goods to another person (the bailee) on condition that the bailee will restore them to the bailor after the purpose for which they were delivered is accomplished.
Section 25 of the Nepalese Contract Act defines bailment contract as ' A contract relating to bailment shall be deemed to have been concluded in case any person delivers any property to another person on a returnable basis or for handing it over to any other person or selling it as ordered by him'
According to Section 148 of the Indian Contract Act, " 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 off according to the direction of the person delivering them"
From the above definition the bailment contract has following features:
1. There must be actual or constructive delivery.
2. The goods not immovable property
3. by the owner called bailor
4. to another person called bailee
5. for a specific purpose
6. on condition that the goods shall be returned either in their original or in an altered from or shall be disposed according to the direction of the bailor.
7. The delivery of possession from a bailor to a bailee
8. Possession without ownership.
Thus bailment is a process where one person delivers movable goods to another person for some specific purpose or a specific period of time and after completion of the purpose or after expiry of the time, changed goods bailed should be returned or disposed or sold according to the instruction of the bailor.
Some examples of Bailment
- A deposits goods in a cloakroom at railway station
- A is going out of house delivers a cow to B for care
- A lends B a horse for his riding
- A delivers animal to a doctor
- A delivers gold to goldsmith
Rights and Duties of Bailor and Bailee
Rights of Bailor
a. Right to demand return of goods
b. Right to claim damages in case of negligence
c. Right to claim compensation in case of unauthorized use
d. Right to claim compensation in case of unauthorized mixture of goods which can not be separated
e. Right to claim compensation in case of unauthorized retention of goods
f. Right to claim the separation of goods in case of unauthorized mixture.
g. Right to demand accretion of goods.
h. Right to termination of bailment if the bailee uses the goods wrongfully.
i. Right to return of goods at any time incase of gratuitous bailment.

Duties of Bailor
a. To disclose defects in the goods (sec. 27)
b. To take return of goods bailed (sec. 29.2)
c. To repay necessary expenses in case of gratuitous bailment
d. To pay any "extra ordinary" expenses in case of non-gratuitous bailment.
e. To pay indemnity to bailee (sec. 30)
f. To bear the risk of loss of goods
g. To pay indemnity to the bailee in case of premature termination of gratuitous bailment.
Rights and duties of Bailee
Rights of Bailee;
a. Right to claim indemnity
b. Right to claim reimbursement of expenses (vr{sf] ;f]wegf{)
c. Right to claim compensation if the bailor refused to receive back the goods after the term of baiment is over.
d. Right to recover lose in case of defective title (sec 30)
e. Right to receive remuneration (sec. 32.3)
f. Right to deliver goods to one of several joint bailors.
g. Right to deliver goods to bailor
h. Right to lien (a:t'dflysf] clysf/)
Duties of Bailee
a. To take reasonable care of goods delivered to him
b. Not to make unauthorized use of goods entrusted to him.
c. Not to mix goods bailed with his own goods (Sec. 28)
d. To return the goods (Sec 29)
e. To deliver any accretion to the goods
f. Not to set up any adverse title.
Pledge or Pawn Contract
(lwtf] jf w/f}6 ;DaGwL s/f/)
· Generally the term pledge is the goods to be deposited as security to repay the debt (loan) or to perform the promise.
· The word pawn is synonymous with the word pledge.
· The pledge is a special kind of contract. It is also regarded as a branch of bailment.
· The bailor is called the Pawnor and the bailee the pawnee.
· In Nepali it is called Dhito or Dharaut.
· In Nepalese context Pledge is also called Mortgage.
Section 35 (1) defines the term as " a contract by which a person receives some property from another as security for granting a loan or as guarantee for performing a job"
Property denotes all types of property whether movable or immovable
Section 172 of the Indian Contract Act defines the term pledge as" the bailment of goods as security for payment of a debt or performance of a promise is called pledge"
Basic Features of Pledge Contract
a. Two parties
b. Pledge can be given only by real or true owner of the property
c. Pledge can be both movable and immovable types of property
d. In case of joint ownership, only own property can be pledged
e. Property which are pledged can not be used by the pawnee
f. Equal position of all the creditors in case the pawner pledged the goods more than a person one at a time.
g. Return the surplus amount to the debtor after auction.
h. Return the pledge Property.

Distinctions between Bailment and Pledge
Bailment
Pledge
The scope of bailment is wide. All the pledges fall under bailment.
The scope of pledge is limited one. Being a branch of bailment all bailment do not under pledge.
In bailment goods are bailed for different purposes such as safe custody, repair, hire etc.
In Pledge goods are pledged for a specific purpose such as to provide security of loan or promise.
No security is required at the time of bailment
Security is essential at the time of pledge
Goods are bailed either on offer/request of bailor to the bailee or on offer/ request of bailee to the bailor.
Goods are pledged only at request of the pledger to the pledge.
The bailor can use the goods bailed in accordance with the terms and conditions of the contract
Generally the pledgee can not use the goods pledged but can use them if the pledger allows the pledgee to do so.
The bailment may be both either gratuitous or non-gratuitous.
In Pledge contract consideration is available to either party. It means the pledger has to pay interest to pledgee.
Bailment incudes movable goods only
The pledge includes both types of movable and immovable goods.
In bailment no loan transaction exists
In pledge loan transaction may exists.
Bailee is not entitled to sell the goods bailed. He can retain them until he get remuneration.
Pledgee can sell the goods pledged to recover his amount after giving notice to pledger in case of default by the pledger.

Rights and duties of Pawner & Pawnee
Rights of Pawner
1. Right to receive back the goods pledged from the Pawnee (sec. 36.1)
2. Right to receive accretion to the goods pledged. (benefit, achievement and incensement)
3. Right to claim compensation against the pledge for any losses he suffers due to negligently handling, mixture, and unauthorized use of goods etc.
4. Right to receive a notice from the pawnee before sale or auction of the goods pledged.
5. Right to sue the pawnee in the court to recover the goods in case sale or auction took place without notice.
6. Right to have surplus or excess amount obtained by the sale or auction of the goods pledged.
7. Right to redeem the goods pledged before sale or transferred by repaying the debt, interest, fine and other expenses. (37.3)
Duties of Pawner
1. Pawner has the dutiy to disclose all the defects in the goods to be pledged.
2. Pledger or pawnee has the duty to repay his loan, interest, expenses if any within or at the specified time.
3. Pledger has to bear extra-ordinary expences for taking care of goods pldeged or has to bear additional liabilities due to default of repaying loan.
4. Not to pledge the goods which is not belongs to him.
Rights of Pawnee or Pledgee
1. Pledgee has right to retain the goods pledged until the pledger repay his debt, interest and other expenses if any. (37.1)
2. Pledgee has right to sell or auction the goods pledged if pledger is unable to repay within specified a time.
3. Pledgee has right to transfer the goods in his own name if the pledged loan is not recovered by selling or auctioning.
4. Pledgee has right to claim compensation against the pledger for any loss suffered by him due to default in payment of debt in time. (37.3)
5. If loan amount including interest and other expences is not recovered by selling or auctioning the pledged goods the pledgee can recover the due amount for other assets of the pledger. (37.2 and 4)
6. If the pledger pledged the goods obtained by him under viodable contract unknowingly, as soon as he aware about the fact he can rescind the contract. (38.1)
Duties of Pawnee or Pledgee
1. Pledgee has to take reasonable care of the goods pledged.
2. Pledgee should not make any unauthorized use of the goods pledged.
3. Pledgee should not mix the goods pledged with his own without consent of pledger.
4. Pledgee should return the goods pledged to the pledger after the payment of the debt or completion of work.
5. Pledgee has to return the accretion or increase or profit from the pledged goods.
6. Pledgee has to indemnify the pledger for any loss suffered by him if the good is lost, damaged, destroyed etc.
7. Pledgee has to refund the surplus amount to the pledger after selling or auctioning the pledged goods.
Finder of lost goods
Meaning
· Finder of goods means a person who has found goods not belonging to him and keeps them with him.
· Though there is no definition of the term provided in Nepalese Contract Act 2056, Sec. 11 of the Act has made the provision relating to responsibilities of the finder of goods as same as bailee.
· Sec. 11 of the Act reads," when any person keeps any property of another person he has to keep it as bailment"
· According to Sec.71 if the Indian Contract Act, " A person who finds goods belonging to another person and takes them into his custody, he is subject to the same responsibility as bailee"
Rights and Duties of Finder of lost goods
Rights of finder of lost goods
1. The finder of lost goods has right to possess the goods until the true owner of the goods is found. (Sec.31)
2. The finder of lost goods has right to reimburse all the expenses from the true owner. (Sec.31)
3. The finder of lost goods has right to lien. It means he can refuse to return the goods until he is reimbursed all the expenses to preserve the goods. (Sec.31)
4. The finder of the goods can file a suit against the true owner to recover any reward which was offered by the true owner for the return of goods lost.
5. Generally the finder of goods has no right to sell the goods found. However, Sec. 169 of the Indian Contract Act provides that the finder can sell the goods in any of the following cases.
a. Where the owner can not with reasonable diligence be found,
b. Where the owner when found, refuses to pay the expenses incurred by him.
c. Where the goods are of dangerous nature or in danger of losing the greater part of their value and
d. Where the expenses incurred by the finder amount to 2/3 of the value.
Duties of Finder of Goods
1. To take reasonable care of the goods found.
2. Not to use the goods found for personal purpose.
3. Not to mix with his own goods.
4. To inform the police
5. To find out the true owner
6. To return the good.

Pledged by non-owner
· General rule is that only the true owner of the goods can pledge the goods but a non-owner of the goods.
· According to Sec. 38 (1) of the Nepalese Contract Act, " if a person pledge some goods not belonging to him as security for repayment of the loan or for performance of the work and the pledgee does not have knowledge about the fact he can ask the pledger to pledge other goods with him if the pledger is unable to do so the pledgee can rescind such pledge."
· This rule is based on Principle of "no one can give what he has not got."
· Exceptionally, non owner can also entitle to pledge the goods which are not under his ownership.
1. Pledge by Mercantile Agent; Sec. 178 of the ICA provided that the mercantile agent can pledge the goods under following condition.
i. The mercantile agent is in possession of goods or document of title to the goods.
ii. Such possession is with the consent of the owner.
iii. He has pledged such goods during the general course of agency business.
iv. The pledgee must have acted in good faith and
v. The pledge must have no notice of the mercantile agent's defective title.
2. Pledge by a person in possession under viodable contract.
3. Pledge by a person having a limited interest
4. Pledge by seller in possession of goods after sale
5. Pledge by buyer in possession of goods under an agreement to sell
6. Pledge by co-owner in possession
Agency
1. Introduction
· Modern business is becoming complex with the pace of time.
· Due to the vast expansion and globalization of the modern business it is not possible for a person to carry on all the business transaction himself.
· The changing circumstances require a businessman must necessarily depend on other for efficient running of the business.
· In the general course of conducting business, to employ a merchant to distribute the goods, ask the brokers to buy shares and so on are common phenomenon.
· In law;
o Agent: A person who acts on behalf of other is called an agent.
o Principal: The person on whose behalf an agent act is called the Principal.
· The contract which creates relationship between the principal and the agent is called a contract of agency or agency.
· It is special types of Contract.
· The Agency is regulated by :
o In England: Commercial Regulation Act, 1993
o In India : Contract Act, 1872
o In Nepal: Nepal Agency Act, 2014, Nepal Agency Regulation, 2019 and Contract Act 2056.
Meaning
Agency is a legal relationship between two persons whereby a person delegates his authority to do some work on behalf of him to another person.
Section 56 of the Nepalese Contract Act 2056 has defined the term Contract of Agency as " Every person appoints any other person as his representative to do anything on his behalf except the subject matter of his personal skill, or to conduct business or any transaction with a third person on his behalf or to represent himself to such person or to establish legal relations with principal person and a third person and in case the person is appointed in this way, it is deemed to have been concluded the contract of agency."
According to Section 182 of the Indian Contract Act, "A contract of agency is a contract by which a person employs another person to do any act for himself or to represent him in dealings with third person."
· The act of the agent binds his principal to third person. Similarly the act of the agent also gives right to third persons against the principal.
· The Function of the agent is to bring his principal into contractual relationship with the third parties. Therefore, the agent is merely a contracting link between the principal and the third party.
· The agent has the power to make the principal answerable to the third party for his conduct.
There are Two Rules regarding agency;
a. With certain exceptions, whatever a man competent to contract may lawfully do himself he may do by another.
b. The acts of the agent are the acts of the principal. In other words he who acts through an agent is himself acting.
Characteristics of Agency:
a. Appointment of Agent on the wish of principal.
b. Appointment may be either expressed or implied.
c. The Principal delegates his authority to his agent
d. The works of the agent binds the Principal to the third person.
e. No need of consideration, it is internal matter of principal and agent.
f. The Principal must be competent to contract but the agent may be incompetent to contract.
g. Agency is based on good faith. It means the agent has to inform his principal all the information as he know and the agent must not set up adverse title.
Modes of Creation of Agency
· The Contract of agency, like any other contract may be express or implied; but consideration is not an essential element in this contract.
· Agency may also arise by estoppels, holding out, necessity or subsequent ratification by the principal of the act done by the agent.
· The relationship of principal and agent may be created by statute.
· There are numbers of modes of creation of agency;
1. Agency by expressed agreement:
· The contract of agency, normally created by an expressed agreement with certain exception.
· Agreement may be writing and registration and may be made orally or in the writing.
· In fact in a large number of business dealings agencies are created by word of mouth.
· The usual form of a written contract of agency is the Power of Attorney which gives him the authority to act as agency on behalf of the principal in accordance with the terms and conditions mentioned therein.
· In Nepal agency must be created in a written form and it is necessary to register in the prescribed governmental office.
Power of Attorney may be different types;
a. General Power of Attorney: The agent is authorized to do all dealings, i.e. to act generally in the business of agency.
b. Special Power of Attorney: The agent is authorized to do a special transaction only i.e. selling land.
c. Particular power of Attorney: The agent is authorized to do a single act e.g. to present a document before the Registrar of registration.
2. Agency by implied agreement:
· Implied agency arises when there is no express agreement appointing a person as an agent.
· It happens from the conduct, situation or relationship of the parties.
· Partners, wives are usually regarded as agent by implications of their relationship.
· Implied agency would therefore, include agency by estoppels, agency by holding out and agency of necessity.
a. Agency by Estoppel:
· Estoppel is a legal doctrine which prevents a person from denying a fact or circumstance which he has accepted.
· Where a person by his words or conduct has willfully led another to believe that certain set of circumstances or facts exists and that other person has acted on that belief, he is estopped or prevent from denying the truth of such statement.
· A tells B in the presense and within the hearing of C that he "A" is C's agent and C does not contradict this statement and later on B enter into a transaction with A believing that A he is C's agent. C is bound by this transaction and in a suit between himself and B, cannot be permitted to say that A was not his agent.
b. Agency by Holding out:
· It is also a branch of estoppel but is something more than that.
· An agency by holding out requires some affirmative or positive act of conduct by the principal to establish agency.
· A who is domestic servent of B generally purchase goods on credit from C and pays them regularly. C can assume that A is B's implied agent.
c. Agency by necessity :
· In some cases the agency can be created because of the necessity where one may need to work being an agent of another even in the absence of express agreement.
· A person who has been entrusted with another's property, may have to incur unauthorized expenses to preserve it.
· Payment of expenses incurred on lost animals and child etc.
· Following conditions must be fulfilled;
i. It must be impossible to get the principal's instructions.
ii. The course taken only practicable one in the circumstances.
iii. The agent of necessity must act honestly in the interest of all party
iv. There must be real emergency and necessity to act on behalf of principal.
d. Agency by operation of law:
· A partner is the agent of the act of the partner to carry out the business as usual of its partners.

c. Agency by ratification:
· If the agent had no authority to contract on behalf of principal or exceed such authority as he had, afterwards confirms and adopt the contract is known as ratification.
· It is also known as ex post facto agency.
· Contract of agency only be valid if the following conditions are fulfilled.
i. The agent must act on behalf of the principal
ii. The principal must be in existence at the time of conduct.
i. The principal must have contractual capacity
ii. The principal must have full knowledge of material facts or rativication
iii. Whole transaction must be ratified.
iv. Ratification must be done within reasonable time
v. Act to be ratified should not be void or illegal
vi. Ratification must not injure a third party
vii. Act to be ratified must be within power of principal
viii. Ratification may be express or implied and
ix. Ratification must be communicated to the concerned party.
Rights and Duties of Agent
Rights of an Agent
1. Right to receive remuneration and commission
Where the services rendered by the agent were not voluntary or gratuitous, the agent is entitled to receive the agreed remuneration and commission.
2. Right to lien
According to Sec. 221 of the Indian Contract Act, an agent has the right to retain goods, papers and other property whether movable or immovable of the principal received by him until the amount due to himself for commission, disbursement and services in respect of the same has been paid.
3. Right to stoppage goods in transit
An agent has right to stop the goods where they are subscribed by him. This right is acquired by the agent in two cases;
a. Where he has purchased goods for his principal either with his own money or by incurring a personal liability for the price. (he stands towards the principal in the position of an unpaid seller)
b. Where the principal has become insolvent.
4. Right to indemnify against consequence of lawful acts
An agent has right to claim indemnity for any losses suffered by him in spite of all lawful acts done in exercise of his authority. But if the loses suffered by his unlawful and criminal acts are not covered under it.
5. Right to indemnify against the consequences of acts done in good faith
When acting according to the instruction of the principal, any injury to the agent is to be recovered by the principal as a result of such act.
6. Right to reasonable compensation in case of undue removal from the agency
Sec. 62.3 of the Nepalese Contract Act reads that an agent is entitled to reasonable compensation for the loss suffered by him if the principal removes the agent without any reasons before the specific period prescribed or before the completion of the work assigned to him or without prior notice stating reason.
Duties of an Agent
1. To carry out the work undertaken according to instructions and within the scope of authority conferred upon him by the principal.
2. To follow the custom prevailing in the same kind of business if the principal has not given any express instructions.
3. To carry out the works with reasonable care, skill and diligence.
4. To communicate with the principal in case of difficulty and get his instructions.
5. Not to make any profit of his agency other than his agreed or reasonable remuneration.
6. To keep true and correct account of all his transactions and to be always ready to produce them to his principal.
7. Not to deal on his own account and must not become a principal to the transaction against his principal.
8. Not to set up any adverse title.
9. Not to use information obtained in the course of the agency against the principal.
10. Not to delegate authority to another person but perform the work himself.

Rights and Duties of Principal
Rights:
1. Right to revoke or discharge the agency if the agent commit fraud or uses excess authority or deceives him.
2. Right to instruct the agent in respect of working procedures.
3. Right to claim compensation from agent if he does any work beyond the authority provided by principal or works negligently or carelessly.
4. Right to demand secret profit if the agent earned any profit concealing from principal.
5. Right to receive account of the transaction.
6. Right to reject any transactions done by the agents without having authority from the principal.
Duties:
1. To pay remuneration or commission as mentioned in the contract and if not mentioned in the contract reasonable remuneration or commission should be paid to the agent.
2. To reimburse or repay amount spent by the agent in the course of agency.
3. To provide indemnity to his agent against the consequences of lawful acts and against the consequences of the acts with good faith of the agent.
4. To provide the notice to the agent if any information he got from the third party.
5. Not to terminate the agency wrongfully.
6. To give reasonable compensation in case he removes the agent unduly without prior notice.
7. To be responsible for any loss or damage caused by the agent while executing the agency contract.

Delegation of Authority
· An agency is a delegation of authority of the principal.
· Delegation of authority means to give authority for conduct certain work to another person from a responsible person.
· Generally a delegated power or authority can not be delegated.
· It is based on the Latin Maxim "Delegatus nonpotest delegare" which means a delegate can not further delegate.
· An agent being himself a delegate of his principal can not pass on that delegated authority to someone else.
· Generally this is because of the confidence in a particular person is at the root of the contract of agency. And
· An agent usually selected in reliance upon some personal qualification so it would be unfair if the agent delegate to other and also harm to the principal.
· The main cause behind the birth of this principal is that the principal can trust the agent appointed by him much than the agent appointed by his agent.
· Section 190 of the Indian Contract Act has also adopted this principal. According to it "an agent can not lawfully employ another to perform acts which he has expressly or impliedly undertaken to perform personally."
· Similarly Section 58 of the Nepalese Contract Act 2056 has required to get consent of the principal before delegating power to sub agent by the agent.
· But there are some exceptions of this rule where the agent also can delegate his authority to any other person by appointing sub agent.
Exception of the General Rule:
1. Where the principal has expressly permitted delegation of such power.
2. Where the custom of the trade permits delegation
3. Where the principal knows that the agent intends to delegate his authority
4. Where the nature of the authority is such that a deputy is necessary to complete the business
5. Where the act to be done is purely ministerial and does not involve the exercise of discretion e.g. clerical or routine work.
6. In an unforeseen emergency the agent can always delegate.

Sub-agent and Substituted agent
Meaning of Sub-agent:
· Where an agent under express or implied delegation of authority appoints another person to act in the matter of the agency is called sub-agent. So the agent appointed by the original agent for conducting principal's work is called sub-agent.
· Nepalese Contract has not defined the term sub-agent but has made provision regarding the appointment of sub-agent. According to the Section 58 provides " in case it is necessary to appoint a sub-agent according to the nature of any trade, business or transaction, of in case a sub-agent can be appointed according to the provision contained or practices followed in contracts relating to agency, the agent may, except when otherwise provided for in the contract, appoint a sub-agent with the consent of the principal."
· Section 191 of the Indian Contract Act has defined the term sub-agent as" A sub-agent is a person employed by and acting under the control of, the original agent in the business of agency."
· The relation if the sub-agent to the original agent is as between themselves, that of agent and principal
· Sub-agent acts under the control of the agent and there is no privity of contract between the principal and the sub-agent. Therefore the sub-agent can not use the principal for any money due although he may bind principal as third party.
· If the sub-agent is guilty of fraud or willful wrong the principal has right to proceed both against the agent and the sub-agent.
· In case where the sub-agent is appointed improperly or without authority of the principal the following consequences emerges;
a. The principal is not liable and not bound by the works of sub-agent.
b. The agent is fully responsible for principal, third party and the sub-agent.
c. The sub-agent is not liable with the principal in any including fraud or willful wrong committed by him.
According to the proviso of the Section 58 of the Nepalese Contract Act, it prohibited to appoint sub-agent for the work to which an agent has been appointed or to represent or work personally.

Chapter V
Indemnity and Guarantee
A. Indemnity
· Contract of Indemnity and Guarantee are special types of contract.
· It has very important role in the business community.
· Chapter 4 of the Nepalese Contract Act has tried to regulate the contract of indemnity and guarantee.
· Literally Indemnity means Compensation
· So the contract of indemnity means a compensation to be paid to the person who is victim of loss or any compensation to save him from the loss caused by different cause.
· A contract of Indemnity is a contract by which a person promises to other that he will indemnify that person from contingent loss.
· In the Contract of Indemnity, one party promises to save the other party from damage or loss caused to him by the conduct of the promisor or by the conduct of any third party.
Indemnifier: The person who promises to indemnify the loss.
Indemnified or Indemnity holder: The promise whose loss is indemnified.

Meaning :
Nepalese Contract Act has not defined the term Indemnity but has only some provisions.
It has just recognized as a contract of damage.
Indian Contract Act, 1872 has defined the contract of Indemnity. According to the Section 124 of ICA, "A contract by which one party promises to save the other from the loss caused to him by the conduct of the promisor himself or by the conduct of any person is called a contract of Indemnity"
According to the English Law a contract of indemnity is ' a promise to save another harmless from loss caused as a result of a transaction entered into at the instance of the promisor."
English Law in comparison to the Indian law is wider in relation to the definition of the term.
According to the Indian contract Act;
The loss must be caused either by the conduct of the promisor or any other person and if loss is caused by accident there would not be contract of indemnity.
But the According to English law seems wide than Indian law and also covers the loss caused by accident or natural causes etc.
Features of Contract of Indemnity:
1. The contract is made for protecting the promise against anticipated or contingent loss.
2. The liability of the indemnifier started as soon as the loss is occurred to the indemnified.
3. Indemnification is made for actual loss.
4. The event specified in the contract must be happen.
5. The Indemnified himself responsible for the loss if the loss is caused by his own misconduct.
6. Contract may be implied and expressed.

Rights and Duties of Indemnifier and Indemnity Holder
A. Rights and duties of Indemnity Holder :
A. Rights of and Indemnity holder:
Nepalese Contract Act has some legal provisions regarding rights of the indemnity holder against the indemnifier but not mentioned the duties of indemnifier.
Section 22 (1) of the Act provides incase any person has concluded a contract relating to indemnity with a provision to pay to any party to a contract or a third person for any loss or damage that may result from his actions while working under the direction of that party to the contract, he may realize as compensation all or any of the following amounts subject to that contract.
a. Indemnity Amount : Indemnity amount mentioned in the contract
b. Amount to be paid or borne: In case any loss or damage has been caused to third person, the amount to be paid or borne in consideration thereof.
c. Amount of Expenses : The amount spent on the case filed or defended by him in connection with the contract relating to indemnity.
d. Amount spent in the suit: Due to non-payment of sum payable mentioned above, if the legal actions is to be taken, the amount to be spent in the suit.
But According to the Section 22 (2) of the Contract act in case a person while working under the direction of the other party, works negligently or with the intention of causing any loss or damage to that party or a third person, and in case the concerned party or the third person suffers a loan or damage as a result thereof, he shall himself be responsible for such loss or damage.
Duties of Indemnifier :
The Indian Contract Act and Nepalese Contract Act has no provisions regarding the rights of the Indemnifier.
Generally the Indemnifier has the duty to indemnify the indemnity holder in the following situation:
a. There must be damage or loss
b. Loss or damage must have been caused by an incident as mentioned in the contract.
c. The indemnity holder has to act carefully, prudently and according to the direction or with the authority of the indemnifier.
Contract of Guarantee
Meaning and Definition:
A person who seeks to borrow money or to undertake some obligation may be required to pledge some property with the creditor as security. But the creditor may be willing to lend money to a person if he can get some other person to assume personal liability as security for the payment of the loan or for the performance of the promised acts. In this case the creditor gives a loan to the debtor on the combined financial standing of the debtor and some third person, called surety.
A guarantee means a contract of a promise to be responsible for something to perform the promise or to discharge the liability of a third person, in case of default. Such a contract involves three parties ; the creditor, the surety and the principal debtor.
Creditor : The person to whom the guarantee is given
Surety: The person who gives the guarantee
Principal debtor: The person in respect of whose default, the guarantee is given.
· Contract of guarantee is most prevailing practice in the sector of Banking and financial institutions.
· Commercial Banks, Development Banks, Finance Companies, Co-operatives are mostly relied on the contract of guarantee for the security of their issued loan.
Section 15 (1) of the Nepalese Contract Act has defined contract of Guarantee as " a contract relation to a guarantee shall be deemed to have been concluded if it provides that ,if any person defaults in the repayment of loan obtained by him or fulfillment of the obligation accepted by him it will be repaid or fulfilled by a third person."

Section 126 of the ICA
· A contract of guarantee is a contract to perform the promise to discharge the liability of a third person in case of his default.

· A clear definition of guarantee was made by the English Court in the case of Brickyrs vs. Darmell (1703) - "A contract of guarantee is a contract by one person to discharge the debt, fault or miscarriage or another."

· A contract of guarantee is an agreement with the objective of enabling a person to get a loan or goods on credit or an employment.

· If 'A" advances a loan of Rs. 5000/- to 'B' and 'C' promises to 'A' that if 'B' does not repay the loan, 'C' will do so. This is a contract of Guarantee.

There are triangular relationship between the parties are as follows;
a. Between the creditor and debtor creating loan
b. Between the surety and the creditor creating liability of surety in case of debtor's default and
c. An implied contract between the surety and the debtor that the debtor will indemnify the surety the later has paid the creditor on the debtor's default.
Thus the contract of guarantee is the tripartite nature.

Debtor
Surety Section 15(3) of the NCA requires to be made the contract of guarantee in written form whereas ICA accepts both verbal and written contract.
Creditor
Implied relation of indemnity paid








Features of Contract of Guarantee

a. A tripartite agreement between creditor, surety and principal debtor.
b. No misrepresentation or concealment of the facts regarding the contract.
c. No direct consideration between the surety and the creditor. Consideration of the principal debtor is considered to be adequate for the surety.
d. Primary liability is of the principal debtor and secondary liability is of the surety.
e. The involvement of competent parties is a must along with the other essentials of a valid contract.
f. As a conditional contract, liability of the surety arises only when the principal debtor (primarily liable) defaults.
g. A contract relating to guarantee must be concluded in writing (In Nepal and England)

Distinctions between Indemnity and Guarantee


Indemnity

Guarantee
1
In indemnity a promisor is primarily and independently liable to the promise and therefore there are only two parties.
1
In Guarantee the liability of the surety is only secondary. the primarily principal debtor is liable for the contract hence here the concurrence of three persons is essentials.
2
In the case of contract of indemnity it is not necessary for the indemnifier to act at the request of the debtor.
2
Whereas, in the case of a contract of guarantee it is necessary that the surety should give the guarantee at the request of the debtor.
3
In the case of Indemnity, the possibility or risk of any loss happening is the only contingency against which the indemnifier undertakes to indemnify.
3
In the case of guarantee there is an existing debt or duty, the performance of which is guaranteed by the surety.
4
In the case of indemnity, the indemnifier can not sue third parties in his own name, unless there be assignment. He must bring the suit in the name of indemnifier.
4
In contract of guarantee where the surety discharges the debt payable by the principal debtor to the creditor, the surety, on such payment, is entitled in law to proceed against the principal debtor in his own right.
5
The person giving indemnity has some interest in the transaction apart from his indemnity.
5
While the surety is totally unconnected with the contract except by means of his promise to pay on debtor's default. In fact, surety must not have any financial interest in the contract.
6
Rights of indemnity may arise out of express or implied contract or out of obligation imposed by laws e.g. as between principal and agent or master and servant.
6
The liability of the surety arises only out of contract between him and the creditor. The surety undertakes an obligation at the express or implied request of the principal debtor.


Types of Guarantee

Fro the viewpoint of nature objective and the act, the guarantee may be classified as follows;
1. Absolute and conditional guarantee :
An absolute guarantee is one by which the guarantor unconditionally promises to pay the debt, on the default of the principal debtor. But, if some contingency other than the default of the principal debtor arises then is a conditional guarantee.
2. General and special Guarantee
The guarantee that can be accepted by the general public is a general guarantee and the one that can be accepted only by the particular person is special guarantee.
3. Limited and unlimited guarantee
When a guarantee is limited there is a liability by time and amount that is limited, whereas if a guarantee is not limited there is a liability for the surety by time amount and transaction there is an unlimited guarantee.
4. Prospective and retrospective guarantee
A guarantee that is given for future transactions that ay be one or more transactions is a prospective guarantee and if it is given for the past or existing transactions it is called a retrospective.
5. Specific and continuing guarantee
· When a guarantee is extended to a single transaction or debt, it is called a specific guarantee. Such a guarantee comes to an end when the transaction stops or is duly discharged or the promise is duly performed.
· But if a guarantee extends to a series of transactions continuously it is a continuing guarantee.
· There is no water-tight demarcation of the continuing guarantee with specific guarantee; however it is determined by the intention of the parties and or terms and conditions and or subject matter and or circumstances of the transactions. A continuing guarantee may be given for a fixed amount. It only speaks of continuing transaction and not of the period of such transaction. Because of the uncertain nature of time, a continuing guarantee will be continued until the revocation by the surety.
Features of Continuing Guarantee
· The Continuing Guarantor is not exhausted by the first advance
· It can always be revoked by a notice to the creditor.
· A revocation of the guarantee is possible for future transaction
· Death of the surety terminates the contract.

Revocation of Contract of a Continuing Guarantee

1. By notice of the revocation by surety: A guarantor (surety) may revoke a continuing guarantee at any time by a notice as to the future transactions. But he is liable for the transactions until the date of revocation.
2. By death of surety: The death of surety automatically terminates the contract of guarantee so far as regards future transactions unless there is a contract to the contrary. It is not necessary that the creditor must have notice of the death. The state of the surety is free after death although the creditor might have entered into a transaction with out knowledge of the death of surety.
3. By other modes;
a. By variance in the terms of contract (Alteration)
b. By novation of the contract.
c. By release or discharge of principal debtor
d. By a loss of security
e. By arrangement with principal debtor
f. By the creditor's act impairing the surety's eventual remedy.

Rights Duties and liabilities of Surety
Rights of Surety
1. Rights against the Creditor
a. Right to securities :
The surety is entitled to demand from the creditor, at the time of payment, all the securities which the creditor may have against the principal debtor. Creditor must handover to the surety the securities in the same condition as they formerly stood in his hand. If the creditor loss or without consent of the surety, parts with such security, the surety is discharged to the extent of the value of security.
b. Right to Exoneration (Pity, pardon)
In the case of fidelity guarantee the surety can call upon the creditor or the employer to dismiss the employee whose honesty he has guaranteed in the event of proved dishonesty of the servant. He may also file a suit for a declaration that the principal debtor is the person pay the amount. In such a case the surety is exonerated.
c. Right to Share Reduction
If there are more than one surety exists for the same principal debtor. If any default made by the principal, all the sureties have the rights to divide the default to the extent of their guarantee.
d. Right to set off:
Set off means to counter a claim. The surety is also entitled to the benefit of any set of or counter claim, which the principal debtor might possess against the creditor in respect of the same transaction. For example if the creditor owes the debtor something, or has his hand something belonging to the debtor for which the debtor could have counter claimed , the surety can also put that counter claim.
2. Rights against principal debtor
a. Right to subrogation
When the surety has paid the guaranteed debt on the default of the principal debtor, he become the creditor and will be able to exercise as against the principal debtor all these rights and remedies which could be exercised by the creditor.
b. Right to indemnity
In every contract of guarantee there is an implied promise by the principal debtor to indemnify the surety and the surety is entitled to demand from the principal debtor whatever he has paid under the guarantee.
3. Right against Co sureties
a. Right to contribution
Where a debt is guaranteed by more than one sureties, they are called co-sureties. In such a case all the co-sureties are liable to contribute towards the payment of the guaranteed debt as per the agreement among them. But in the absence of any such agreement if one of the co-securities is compelled to pay entire debt, he has a right to contribution from others.

Lecture notes Business Law Part I

Business Law
Introduction:
Ø Every society has laws.
Ø No society can imagine with out law. The existence of laws depends on the time and society.
Ø Every society creates norms to regulate the behaviours of the people to maintain peace and security by which the normal life can run.
Ø The breaking of such norms is also inevitable. There are also the people in the society who seeks to achieve benefit by breaking such norms which ultimately disturb the society.
Ø Therefore, the society also provided some punishment/ penalty/ compensation/ remedy etc if such norms were violated.
Ø Law regulates the human behaviours.
Ø Law creates the rights and duties.
Ø Laws are made for:
o To grant legal validity of the subjects that is not regulated by existing laws. -krlnt sfg"gsf] cefj ePsf s'g} ljifonfO{ lgoldt ug{ sfg"gL Joj:yfdf :yfg lbg . _
o To reforms the existing laws with the pace of time or ­ -krlnt sfg"gdf ;d;fdlos ;'wf/ u/L ;dfhsf] ult ;'xfpFbf] cfjZos ;+zf]wg ug{_
o To create the news laws to meet the societal needs. -ljBdfg ;dfhdf gofF cfjZostf cg';f/ sfg"gdf Jofks Pj+ cfd'n kl/jt{g ug{_
o To consolidate or codified the existing scattered norms. -a]Unf a]Un} sfg"gdf 5l/P/ /x]sf km'6s/ sfg"gx?nfO{ Pslqt u/L ;+lxtfs/0f ug{_
Ø With the development of the society, it has been divided in to many interests.
Ø Some knowledge of law is necessary for all person because 'ignorance of law is no excuse'
Ø Each member of society must proceed to a large extent in conformity with recognized rules and principles of social conduct.
Ø Division of labour.
Ø Business law is one of them
Ø Just as a game of football or cricket, life in general and the business world in particular could not continue without law to regulate the conduct of people and to protect their property and contractual rights.
Ø To understand business law it is necessary to understand the law.
1. Meaning & Definition of law
Law is those rules and principles that governs and regulates social conduct and the observance of which can be enforced in courts. It operates the actions of persons in respect to one another and in respect to the entire social group or society.
Law is that;
ü Which establishes uniformity of conduct.
ü Seeks to achieve an ethical purpose
ü Law expresses social solidarity
ü Law comprises the rules which protect interest of individual or groups.
Three meaning of law:
1. Law is legal order that is the regime of adjusting relation and ordering conduct by the systematic application of force of organized political society.
2. The whole body of legal principle which obtain a political organized society.
3. It is used to mean all official control in a politically organized society.
Ø In general sense law means an order of the universe, of events, of things or actions.
Ø In its juridical sense it means a body of rules of conduct, action or behaviour of person made and enforced by the state.
Ø Law in its widest sense includes any rules of actions i.e. any standard or pattern to which actions are ought to be confirmed.

Definition of Law:
Law has been defined from different approaches;
Ø By its basis in reason, religion or ethics'
Ø By its sources in custom, precedent or legislation
Ø By its effects on the life of society
Ø By its methods of its formal expression or authoritative application and
Ø By the ends that it seeks to achieve.
· Law is changing concepts. The purpose and function of law has been different in different times.
· A social change in society brings about a change in the definition, scope and function of law.
Ex. What is prohibited behaviour today may become permissible conduct tomorrow and vice versa. Thus the abortion which was considered to be heinous crime because of the immorality involved in it is no longer an offence after the enactment of law legalizing abortion.

Different jurist at different times have made attempts to define the term 'law' but it is very difficult to find out the perfect definition.
· Old definition laid emphasis on religious aspects of life and they are not applicable today.
· To give a definition of law is a more difficult task due to many reasons.
First: The difference between the laws of the two societies and the term 'law' is used for different meanings.
(Ex. Hindu- Dharma, Islamic- Hukum, Roman- Jus, French- Dorit, and in German- Richt. )
Second: different definition of the same thing may be given if it is viewed from different angles and one angle does not take into consideration the views from different angle.
(A definition which does not cover all the aspect would be imperfect definition)
Third; the function and scope of law remains always changing (As we all know, law is social science, it grows and develops with the society. The developments of society in modern times have created new problems. The law is required to cover new fields and to move in new direction.)
Therefore, it is very difficult for a definition of law given at a particular time to remains valid for all times to come.
A definition which is most satisfactory today might prove narrow and incomplete tomorrow.
Blacks Law Dictionary, "The regime that orders human activities and relations through systematic application of the force of politically organized society or through social pressure, backed by in such a society"
" The aggregate of legislation, judicial precedents and accepted legal principles; that the body of authoritative grounds of judicial and administrative action"
Justinian has defined "Law is the standard of what is just or unjust"
Salmond, "Law is the body of principles recognized and applied by the state in the administration of justice"
John Austin, "Law is the aggregate of rules set by men as politically superior or sovereign to men as politically subject."
Holland, "Law is the general rule of external human action enforced by a sovereign political authority"
Savigny, "Law is like language develops with the life of people"
Roscou Pound, " Law is the body of knowledge and experience with the aid of which a large part of social engineering is carried on."

2. Nature of Law
According to Fuller Law should be meet following nature:
a) Generality (b) Publicly Promulgate (c) Prospective in effect (d) Clear and intelligible (e) Consistent (f) Avoidance of contradictory (g) Avoidance of impossible demand (h) Congruence between official action and declare rule.
According to H.L.A Hart;
a) Law permits or restrict the conduct
b) Describe that the compensation should be given to the injured party
c) Defines the process of valid contract grants the rights and duties.
d) Judicial organs which interpret the law and impose sanctions
e) Legislative body to create and repeal laws.
(What is the meaning of the words is not important)
Other Natures;
- Changing nature of laws
- Normative
- Equality before laws and equal protection of laws.
- Ignorance of law is no excuse
- Constitution is the fundamental law of land
In the Middle Ages, law was considered to have been dictated by Divine Will, and revealed to wise men. The most ancient legal precedents and customs were considered to be the best law
In its most general and comprehensive sense, law signifies a rule of action, and is applied indiscriminately to all kinds of action; whether animate or inanimate, rational or irrational. In its more confined sense, law denotes the rule, not of actions in general, but of human action or conduct.Law is generally divided into four principle classes, namely: Natural law; The law of nations; Public law; and, Private or civil law.
When considered in relation to its origin, it is statute law or common law.When examined as to its different systems it is divided into civil law, common law, canon law.When applied to objects, it is civil, criminal or penal.
It is also divided into natural law and positive law. Into written law, lex scripta; and unwritten law, lex non scripta. Into law merchant, martial law, municipal law and foreign law. When considered as to their duration, laws are immutable and arbitrary or positive. When viewed as to their effect, they are prospective and retrospective.



3. Sources of Law

Source is the place from where something origin. The expression 'source of law may mean the origin from which rules of human conduct came into existence and derived legal force or binding character. The different jurists have differently expressed their views regarding the sources of law. According to some jurists, society itself is the source of law while the sovereign is considered as exclusive source for others. Austin says that law originates from sovereign. Savigny traces the origin of law in the general consciousness of people. Theologians say that the law originates form God. The Dharma Sastra, Kuran, Bible etc. are the sources of law as per them.
The expression source of law has three meanings;
Firstly; Formal sources- which confers binding authority as a rule and converts the rule into law. Therefore, state is the formal source of law.
Secondly; Literary source- the place where, if a person wants to get information about law, he goes to look for it i.e. form which actual knowledge of the law may be gained e.g. statutes, decided cases and text books.
Thirdly; Material sources- which supplies the matter on the content of law. Therefore, custom, religion, agreement, opinion of text writers etc. are material source.
To sum up, the custom, precedent, legislation and conventional rules etc. are the main sources of law. If we study the legal system of modern times most of the law is made by legislation. In some countries precedent plays the primary role while custom in other. Similarly, juristic writings, foreign decisions, moral considerations and social values of the time and place some times become sources of law. Generally the law comes from these sources. We can divide these sources in to two broad categories to study the sources of law such as (a) Binding Sources (b) Non-binding or persuasive source. Legislation, precedent and customs are regarded as binding sources and juristic writings, foreign decisions, moral considerations and social values are nonbinding sources.

A. Custom
Custom is a habitual course of conduct observed uniformly and voluntarily by the people. Customs evolve when people find any act to be good and beneficial, which is agreeable to their society; they practice it and frequently followed by approving and accepting in the community for generations. The custom arises when people consciously or unconsciously adopt some definite rules governing common rights and obligations. These types of laws created by people themselves to solve the same problems and consistently recognized.
Holland describes the custom as like as the formation of path across the grass field. One man crosses a grass field accidentally or for his convenience. Other peoples also follow the same path by the similar reason. Eventually a clear foot-path is emerges across the green grass field. In the same way the custom comes into existence. Therefore, a certain rules or practice is followed by some one for the reasons of convenience etc. Others without being to do so follow the same rule and become a habitual course of conduct in that society. In this way imitation plays an important role in the growth of a custom.
It is one of the oldest forms of law making.
i. Kinds of custom
In wider sense, Custom can be divided in to two broad categories.
a) Customs without sanctions and
b) Customs having sanctions.
a) Customs without sanctions; these types of customs are non-obligatory. They are observed due to pressure of the public opinion.
b) Customs having sanctions; these types of customs are enforced by the state which may be divided into two types.
a. Legal customs and
b. Conventional Customs.

a. Legal customs; legal customs are those customs which are recognized by the courts and law become a part of the law of land. (Mohammedan Law) Legal customs are two types
i. Local and
ii. General
i. Local custom; these types of customs are only apply in a defined locality. It also applies in certain sectors, families. Muluki Ain, Sec. 10 a. of the Chapter of incest. 'No punishment shall be imposed on any marriage or sexual relations according to the custom of person.'
j. General Custom; these types of customs prevail throughout the territory of the state. Generally, the customs which are treated to be the part of the law of the land are general customs. Sec. 8,9,10 of the Chapter of Adal (Justice and Equity) of Muluki Ain.

b. Conventional Customs:
Conventional customs are those customs which govern the parties to an agreement. It is an established practice which is binding not because of any legal authority independently possessed by it but because it has been expressly or impliedly incorporated in a contract between the parties concerned. Parties, sometimes expressly and sometimes impliedly agree to them.
A conventional custom is thus an established rule concerning trade, contract or sale of goods etc. The business laws were in the beginning customary in character and later on it recognized or adopted by courts and statutes.

ii. Essentials of a Custom
There are many customs prevailing in the society but they are not custom in the eye of law. In other words there are some certain pre-requisites that the custom must fulfill. These are as follows;
1. Antiquity
2. Continuity
3. Peaceable enjoyment
4. Obligatory force
5. Certainty
6. Consistency
7. Reasonableness
8. Conformity with statutes.
1. Antiquity: A custom must be ancient to have the force of law. It should be practiced from the immemorial times i.e. time so remote that no living man remembers its origin or can give evidence concerning it.
2. Continuity: A custom must have been practiced continuously. If it faced disturbance or interruption in practicing such types of custom can not be considered to have the legal force. Therefore, continuity is another essential of custom.
3. Peaceful enjoyment: The custom must have been enjoyed peacefully. Disputed or the custom which brought violence in the society such custom is not can not be considered as the source of law.
4. Obligatory: The custom must have an obligatory force. It must have been supported by the general public opinion and enjoyed as a right of right. If such practice was maintained by surreptitiousness it cannot be a custom.
5. Certainty: The vague or indefinite custom cannot be recognized as valid custom.
6. Consistency: There must be consistency among the custom. It must not come into conflict with other established custom.
7. Reasonableness: Another requisite of a valid custom is reasonableness. If the custom is unreasonable in the eye of learned personality or in the eye of justice such custom can be declare void. The custom can be held unreasonable if it impose an unusual burden on one person or some person for the benefit of others if it would obviously tend to destroy its legal validity.
8. Conformity with statutes: A custom must be conformed to the existing statute law. In other words, if it is to be valid and to have the fore of law, must not conflict with any statute.
The custom having above pre-requisites is recognized and enforced by the state.



B. Legislation
The term 'Legislation' is derived form the Latin words 'legis' and 'laterm'. 'Legis' means a law and 'laterm' means to make or put or set. Legislation is the process of making or setting law. It is the promulgation of legal rules by an authority which has the power to do so.
Broadly speaking the term legislation can be express to denote three senses.
Firstly; the term legislation covers any sources of law making process including precedent, customs, conventional law etc.
Secondly: It includes every expression of the will of the legislature whether directed to the making of law or not.
Thirdly; in restrict sense, the making of rules and laws to be followed and enforced in the courts of the state. These rules can only made by competent law making organ.
When we use the term legislation as a source of law it denotes the creation of law by an organ of government and excludes other sources.
Legislation is a most important source of law in the present context. In most of the country democratically formed, legislative authority is vested in the parliament and law is generally considered as the will of the parliament.
a. Types of legislation
The legislation can be divided in to two kinds
i) Supreme legislation
ii) Delegated or subordinate legislation
i) Supreme Legislation: law made by the sovereign power of the state which is capable to create, amend, and repeal the law. (Parliamentary laws)
ii) Delegated legislation: law made by the executive under the power delegated to it by the supreme legislative authority. ( Ministerial laws or rules )
Legislation is the sole function of parliament or legislator. The peoples are only subjected to those rules which are made by their representatives. But due to some reasons the supreme legislatures is unable to create all the laws regulating the behaviours of people. These reasons may be; lack of sufficient time, technicality of matters, emergency, flexibility, local matters etc.

C. Precedent

Precedent is a previous instance or case which is or may be taken as an example or rule for subsequent cases. In general sense precedent means some set of pattern guiding the future conduct. In legal sense it is the guidance or authority of past decisions of future cases.
In every legal system has a set of judiciary. The function of the judiciary is to adjudicate the laws made by parliament. In the beginning of the judicial history, courts are guided by customs and principles of justice. As society develops, the legislation become main source of law and the judges decide the cases according to it. Even in the modern time, the judges sometime perform active role. In the case of first impression, in the matter of interpretation, or filling up any lacuna in the law, the judges decide the cases from their own conviction and right reasons. Such types of decisions may be useful on other similar cases therefore it is applicable and become authority.
Precedent is an important source of law in Nepal.
Article 96(2), "Any interpretation given to a law or any legal principle laid down by the Supreme Court in the course of hearing of a suit shall be binding on His Majesty's Government and all offices and courts"
Precedent can be classified in tow types; Authoritative and persuasive.
Authoritative precedent is those types of precedent which is mandatory to follow by the sub-ordinate bodies, persons and the government as declared law. Persuasive precedent is not mandatory but it can be followed if applicable to the similar cases.

D. Conventional Rules
Conventional rules are the rules agreed on by persons for the regulation of their conduct toward one another. It is a law constituted by agreement as having force of special law between the parties. Hence, the conventional rule is also a source of law.

E. Opinion of Experts

Opinion of experts and the text book writers on law sometimes work as a source of law. Although there is not punishment of the state behind them and there is no binding force except a persuasive value, they are consulted by the courts and are sometimes followed by them. Therefore, the opinions of experts become a source of law.

4. Types of law :
Law can be classified differently from different perspective. Different jurists have exposed their views from their own approaches in respect of types of law. There are no universal applications of these divisions. However, broadly speaking law can be classified in to following types.
National Law
International Law
Substantive Law
Procedural Law
Public Law
Private Law
Administrative Law
Criminal Law
Civil Procedural
Criminal Procedural
Law of evidence
Law
Constitutional Law


According to Salmond There are 8 types of law
1. Imperative law : command of sovereign.
2. Physical law/ law of Natural law
3. Moral laws
4. Conventional law
5. Customary law
6. Practical or Technical law
7. International law
8. Civil law (law made by state)

1.3 Concept and Importance of Business law

· Business law is the union of two words Business and law. Business is an act of any human activities for the purpose of earning money and law is a set of rules and principles that has been enforced by the state to regulate human activities. Therefore, it is a set of rules and principles to regulate the business activities.
· Business law is also known as trade law, mercantile law and commercial law etc. It is a branch of civil law. It includes within its scope the contract law, law of sales of goods, law of negotiable instrument, law of agency, banking law, law of insurance, law of indemnity and guarantee, bailment and pledge carriage and transportation etc.
· Business law is designed for conducting business activities in a systematic manner. It is the rules that govern from the establishment of a business to the operation, development or extension and dissolution of it. More over it also regulate the relationship between the business persons and government.
· Before the law relating to business came into existence, business was undertaken on the basis of customs, usages, religion and judicial decisions. In the process of development, merchants themselves operated their business activities by formulating different rules. These rules become insufficient and state began to create the business law.

Meaning of Business law

According to M.C. Sukla, "mercantile law may be defined as that branch of law which deals with the rights and obligation of mercantile persons arising out of mercantile transactions in respect of mercantile property.'
Accroding to M.C. Kuchhal, " the term mercantile law may be defined as that branch of law which comprises laws concerning trade, industry and commerce'.
Accroding to N.D. Kapoor, "mercantile law is also used to denote the aggregate body of those legal rules which are connected with trade, industry and commerce."

Characteristics of business law
· Business law is concerned with the economic activities.
· It regulates trade, industry, commerce and business.
· It also regulates relationship between national and international business persons and government.
· Business law is related to both business and society.
· Business law protects rights and interests of business persons.
· It is formulated for the purpose of fair business environment.

Importance of Business law

Just as a game of football and cricket could not be played satisfactorily without rules to govern the player, so, business world also could not continue without law to regulate the conduct of peoples and to protect their property and contract right. Therefore, its importance can be outlined as follows.
· Business law creates uniformity to establishment, operate and dissolution of business activity.
· It helps to increase and maintain business transactions
· It provide environment to develop capital market.
· It strengthen economic development
· It prepare the foundation for national development
· It help to create employment and remove poverty
· It creates favorable environment for investment.

Sources of Business law
The sources of business law mean the places of origin from where business law came into existence. As we discussed above that before business law came into existence, business activities was conducted on the basis of customs, usages and judicial decisions. In the process of development or in the course of conducting business, the merchants themselves created rules of their conduct by establishing conventional rules. When these sources of law found insufficient states itself started to regulate the business activities by formulating different kinds of business laws such as Contract Act, Company Act, Banking Act and Arbitration Act etc. Similarly, if such acts are found insufficient to settle dispute arising out between business persons, judicial decisions provide clear path to the business law. Moreover, foreign laws, opinion of experts also plays while creating business laws. Therefore, the sources of business law are the customs, judicial decisions, statutory laws, conventional rules, opinions of experts and foreign laws etc.
Being a state of cultural similarity, neighbour and open border, Nepalese and Indian legal system can be found similar in many respects. Therefore, the sources of business law of India and Nepal is same which are as follows.
1. Custom and Usages
Custom and usages are main sources of business law. Business persons established formulate rules to settling down disputes and to regulate transaction in the business activity. With the pace of time such rules become part and parcel of business and established as custom. State recognizes these customs while creating laws and recognized and applied by the court if it is not contradictory or opposed to the existing law of the country. Large part of the business law is derived form customs usages in any country. For example: law of lending and borrowing money, law of sales goods, law of bailment etc.
2. British mercantile law
British mercantile law is a direct source of business law of India whereas it only is only an indirect source for Nepalese business law. Nepalese legal system has directly and indirectly influenced by Indian legal system in many respects. Its open border, cultural similarity, geographical closeness and many of Nepalese leaders and legal professionals were educated in India, made necessary to adopt Indian business law. Large part of the Indian business laws are based on British mercantile law which are based on statutes and judicial decision. British mercantile law has its sources on common law, law of merchant, equity, and statute law.
3. Judicial decisions:
It is impossible to regulate each and every activity of daily business by the statutory law. By this reason, the courts of the countries are empowered to deliver justice and have power to interpret law. Therefore, courts decisions become mandatory in the absence of clear cut law regulating disputes. These decisions are applicable to the same types of cases if appeared before it. So far as Nepalese business law is concerned, decision made by the Supreme Court is a source of law according to Article 96 (2) of the Constitution of the Kingdom of Nepal.
4. Statutory laws;
Statutory law means the rules enacted by parliament or legislatures. Now a day, legislation is the most efficient and most usual way of creating, changing and repealing laws. Legislature is a place where numbers of business laws are formulated such as Contract Acts and Banking Acts etc. Parliament is supreme in legislation. Major part of business law in the modern society is found in the statutory law. Therefore, it is a primary source of business law.
5. Opinion of Experts;
Opinion of experts and the text book writers on business law sometimes work as a source of law. Although there is not punishment of the state behind them and there is no binding force except a persuasive value, they are consulted by the courts and are sometimes followed by them to settle dispute. Therefore, the opinions of experts become a source of law.
6. Commercial Treaties and Agreements:
Treaties and agreements made between two countries for the purpose of conducting business activities also a sources of law. According to Sec. 9.1 of the Treaty Act, 2047, any treaty made by Nepal shall prevail over the national law. Therefore, it is also a main source of business law of Nepal. (Indo-Nepal trade treaty, 1996).

Chapter 2
Contract
2.1 Introduction
· In broadest sense contract is an exchanges of promises by two or more parties. In strict sense, it is an exchange of promises by two or more parties resulting in an obligation to do or not to do a particular act which obligation is recognized and enforced by law.
· Contract is an agreement between two or more parties creating obligation that are enforceable or otherwise recognizable at lat.
· Law of contract is an oldest branch of business and commercial transaction.
· From the beginning of the human civilization law of contract has been existed in one form or other.
· If criminal law is created for the purpose of safety and security of human being and property in the same way law of contract is created for the security and stability of the business world.
· Business world is based on the enforceability of promise therefore; law of contract is concerned with the enforceability of promises.
· Law of contract is the foundation for the other branches of commercial or business law.
· Law of contract affects every one of us and every one of us enters into contract day by day.
· When some one enters into a contract, the parties of a contract have two alternatives open to them.
· They may rely on another's honour to ensure performance or
· There should be legally enforceable obligation to perform the agreement.
· The first is insufficient protection therefore; legal means of enforcing promises has been developed in civilized society.
· Legally enforceable promises are termed contract.
· The function of the law of contract is to see that as far as possible, expectations created by promise of the parties are fulfilled and obligation proscribed by the agreements f the parties are enforced.
· Therefore, it is said that contract is cement that holds our economic system together.
· Contract gives right to one person and cast a corresponding duty on another person.
· On this account law gives remedy for the breach of promise and recognizes its due performance as duty.
· Hence, it is an agreement creating obligation.
2.2 Meaning & Definitions
Salmond: " A Contract is an agreement creating and defining obligation between the parties"
David Walker, " A contract is an agreement between two or more persons intended to create a legal obligation between them and to be legally enforceable.

Anson, " A contract is an agreement enforceable by law made between two or more persons by which rights are acquired by one or more acts done or forbearance on the part of others"
J. B. Sounders Esce: "Contract is an agreement between competent persons upon a consideration to do or to abstain from doing some acts"
As per the Sec 2 (a) of the Contract Act 2056, "Contract is an agreement between two or more persons to do or not to do something, which can be enforceable by law."

All contracts are agreements but all agreements are not contracts.

2.3 Essentials of a valid contract

1. Two Parties: there are at least two persons to make the contract.
2. Proposal & Acceptance: proposal or offer by one party and acceptance of the proposal or offer by another party resulting in an agreement.
3. Legal relationship: an intention to create legal relationship or an intent to have legal consequences
4. Free consent: genuine consent between the parties (not marred by mistake, undue influence, coercion, fraud or misrepresentation)
5. Competent parties; the parties of the contract are capable of contracting.
6. Lawful objective; the object contracted for is legal and is not opposed to public policy.
7. Consideration; The agreement supported by lawful consideration.
8. Possibility of performance; The agreement is capable of being performed
9. Certainty; the terms of the contract are certain.
10. Verbal or written and registration
11. Not expressly declared void.

2.4 Classification of contract;
1. On the basis of Modes of creation of Contract
a. Express versus Implied Contract
b. Direct Versus Indirect
c. Formal Versus Simple
2. On the basis of Performance of Contract
a. Executed versus executory contract
3. On the basis of origin of liability of the parties
a. General versus contingent contract
4. On the basis of nature of contractual liability
a. Unilateral versus bilateral contract
5. On the basis of the nature of offer
a. Particular versus general
6. On the basis of enforceability of contract
a. Valid, void, voidable and unenforceable contract.

2.5 Distinction between Agreement and Contract.


Agreement

Contract
1
An agreement is a mutual understanding between two or more persons for their future performance.
1
A contract is an agreement between two or more parties creating rights and obligations enforceable by law.
2
All Contracts are agreements
2
But not all agreements are contract
3
Offer and acceptance is not an essential of agreement. In other words agreement can be formed without offer and acceptance.
3
In order to enter in to a contract, there must be the presence of offer by one party and acceptance of the offer by another party.
4
The parties need not have intention to create legal relationship.
4
The parties of the contract must have the intention to create legal relationship.
5
The incompetent parties also can enter in to an agreement.
5
Only the competent party can enter in to a contract.
6
Agreement can be formed without consideration.
6
Whereas, consideration is an essential element of a valid contract.
7
Mere an agreement does not create legal obligation.
7
Contract creates legal obligation.
8
Agreement is not binding to the parties. At any time they can revoke their promises.
8
The terms and conditions of the contract are binding to the parties. If any party breaches it, the victim is eligible to get remedy.
9
All agreements are not legally enforceable.
9
All contracts are legally enforceable.
10
The scope of an agreement is wider and vague.
10
The scope of the contract is limited.


2.6 Distinction between Void and Voidable Contract.


Void Contract

Voidable Contract
1
Void Contract is a contract that has no legal effect so that there is really no contract in the existence at all.
1
Voidable contract is a contract that can be rejected at the option of one party.
2
Void contract is not binding to the parities.
2
Voidable contract is binding to the parties unless the courts declare it to be void.
3
Void contract is not enforceable by law.
3
Voidable contract is enforceable if the affected party does not take action it.
4
Void contract is void from the very beginning.
4
Voidable contract is valid if affected party does not take any action within the time prescribed by law.
5
Void contract is void because it is created for stopping the parties to do legal activities such as not to establish legal business, not to get legal marriage, not to consume public facilities, not to suit in the court and illegal contract etc.
5
Voidable contract can be declared void because it is created against the free will of parties.

2.7 Rules regarding Offer and Acceptance

2.7.1 Rules regarding Offer
a. Meaning and definition :
An offer is an expression of willingness to enter into a contract with the intention that it shall become binding on the offeror immediately when accepted by the offeree. Offer may be in written, verbal or implied.
Offer according to the Sec. 2 (a) of the Indian Contract Act, 1872, " When one person signifies to another his willingness to do or to abstain from doing anything with a view to obtaining assent of the other to such act or abstinence, he is said to make a proposal."
Sec 2 (b) of Nepalese Contract Act, 2056 define offer as, "Offer means a proposal put by a person with a hope to get assent from the other to do or not to do something."
Anson defines the term offer as, "Willingness signified with an intention to obtaining legal validity."
From the above definition of offer, it is clear that;
Ø Offer is an expression of willingness
Ø To do or not to do any thing
Ø Expression put to the another person or persons
Ø The objective of the offer is to get assent
Ø With intention to create legal relationship.

Therefore, an offer is a proposal by one person, whereby he express his willingness to enter into a contractual obligation in return for a promise or act or forbearance.
An offer consists of two parts;
a) A promise by the offeror
b) A request addressed to the offeree for something in return.

The promise that the offeror makes is not binding upon him until the offeree unconditionally accept.

b. Rules regarding Offer:
i. Contractual Intention : An offer must intend to create legal relationship
- A Social invitation does not amount offer:
Ordinary invitation to social affairs are not offer in the eye of law.
Ex. Invitation to dinner.
- An offer made in excitement is not offer:
A person may make a proposal in a jest without any thought or intention of creating a binding obligation. A proposal made in jest or excitement can not be expected reasonable offer.
Ex. Political speech. Etc.
- Invitation to Negotiate is not offer
The first statement made by one to another is not necessarily an offer. In many cases there may be preliminary discussion or an invitation by one party to the other to negotiate or talk business.
Ex. The statement "Do you want to buy this car of mine?"
- Invitation to offer is not offer:
Invitation of tender for sale or purchase does not amount an offer.
An announcement that a person will sell his property at public auction.


ii. Definite offer:
An offer must be definite and certain. If it is indefinite, loose or vague it can not be accepted because the court can not tell what the parties are to do.
A brought a horse form B promising to by another if the first one proves lucky and refuse to buy the second horse.
iii. Communication of the Offer:
An offer must be communicated to the offeree. An offer becomes effective only when it has been communicated to the offeree.

iii. Offer may be express or implied.
iv. Offer may be particular or general
v. Offer must put forwarded to get assent
vi. Offer should not be against the public interest and social value.
vii. Offer must be in request form not in order
viii. No term the non-compliance of which would amount acceptance:
Offer can not put saying that if acceptance is not communicated by a certain period of time, the offer would be considered as accepted.

C. Types of Offer:
1. Express and implied offer
2. Direct and Indirect offer
3. Specific and general offer
4. Counter Offer (Sec. 9 f.)
5. Identical / cross offer.

D. Termination or Revocation of Offer:

An offer continues in existence and capable of acceptance until it is brought to end. Revocation of offer takes place in any of the following ways;

1. Revocation : According to Sec. 8(1) of the Contract Act 2056 the offer may be revoked by the offeror at any time up until it is accepted.
2. Lapse of time: (Offer lapses after stipulated time). An offer does not remain open indefinitely. If an offer is stated to be open for a specific length of time then the offer automatically terminates when that time limit expires. Sec. 9 (a)
3. Expire of reasonable time Sec. 9.b.
4. Death or insanity:
An offer lapses by the death or insanity of the offeror or the offeree before acceptance. Sec. 9 (c)
The effect of the death of the offeror or offeree depands upon the nature of the offer. If it is involved the performance of promise which was personal to the offeree such as writing a book or singing a concert, then offer can not be accepted once news of the death has been communicated to the offeree.
5. Illegality: An offer lapses by subsequent illegality. If the performance of the contract become illegal offer the offer is made it lapses.
6. Non fulfillment of condition: Sec 9 (g) An offer lapses by not being accepted in the mode prescribed or if no mode is prescribed, in some usual and reasonable manner.
7. Rejection of Offeree: An offer lapses by rejection of offer by the offeree.
8. Counter Offer: An offer lapses by counter offer by the offeree Sec. 9 (f)
9. Communication of Offer and withdraw at once: If the offeree received a offer and withdraw notice at once offer lapses.
10. Destruction of subject matter

Acceptance:

Meaning of Acceptance:
Acceptance is the manifestation by the offeree of his assent to the terms of offer.
Mathematically,
Offer + Acceptance = Contract
The acceptance must be absolute and unconditional
It must accept just what is offered
It is an expression of intention to agree the terms and condition offered.

Sec. 2 (c) of the Nepalese Contract Act, 2056,
" Acceptance means an assent given by a person upon the offer in a sense as taken by the offerer."
Sec 2 (b) of the Indian Contract Act, 1872,
" When a person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. A proposal, when accepted, become a promise."

Anson defines " Acceptance of an offer is the expression by words or conduct of assent to the terms of the offer in the manner prescribed or indicated by the offerer."


Rules Regarding Acceptance:

1. Only the offeree can accept the offer; (Boulton vs Jones (1857) 157 ER 232.)
A sold his business to his manager without disclosing the fact to his customers. On the afternoon of the day on which the sale was carried through, a customer (Jones) who had a running account sent an order for some goods addressed to the dealer of the business by name. The new owner of the business executed the order without disclosing that business had changed hands.
It was held that he could not recover the prices as there is no contract.
If the offer is directed not to a specific person individual, any one can accept it.
2. Offer may be accepted either expressly or impliedly
3. Offeree must have the knowledge of the offer before acceptance (Lal Man Shukla Vs Gauri Dutta an Indian Case) 1913 11 All L.j.
Gauri Dutta sent his servent Lalman to trace his nephew. He then announced a reward of Rs. 500/- to anyone who traces his nephew. Lalman traced the boy without the knowledge of reward and brought to home. Subsequently when he came to know of the reward, he claimed it.
It was held that Lalman was not entitled to the reward because he did not know about the reward when he traced the missing boy.
4. Offeree must accept the offer absolutely and unconditionally
5. Offeree must accept the offer as prescribed in the offer
6. Acceptance must be communicated to the offerer.
a. Mental or not communicated acceptance is no acceptance. (Brogden vs Metropolitan Railway Co. ) 1877, A.C. 666
A draft agreement relating to the supply of coal was sent to the manager of the railway company for his acceptance. The manager wrote the word "approved" and put the draft in a drawer intending to send it to the company's solicitors for formal contract being drawn up. By mistake, the document remained in the drawer and was never completed.
It was held that this mental act did not amount to acceptance and so did not complete the contract.
Sec. 7.1. of the Contract Act 2056.
7. Acceptance must be given with in fixed time or reasonable time
8. Once Offer rejected by offeree can be accepted later (Sec. 8. 3. of Contract Act 2056)

Revocation and Termination of Acceptance:

1. Revocation before the offeree communicated. (Sec. 8.2)
2. Death or insanity (9.e)
3. Two notice
Consideration

· Contract result only when one promise is made in exchange for something in return.
· The something in return is what we mean by consideration.
· Mere promise is not enforceable by law.
· A promise must be accepted by a return promise. (Ex. A mere promise to make a gift is not enforceable by law. )
· To be enforceable, a promise must be purchased.
· Consideration provides at least some objective guarantee of deliberation, a certain protection against hasty and ill contract.
· Consideration is an aid in determining that promises are worthy of enforcement.
· Doctrine of consideration is the most important test of enforceability of a contract.
· Therefore, Offer+Acceptance+Consideration = A Contract.

Meaning:
Sir Frederick Pollock has defined consideration as " the price for which a promise of other is brought"

Lush J (in Currie vs. Misa, 1875)
" A valuable consideration in the sense of the law may consist either in some right, interest, profit or benefit accruing[1] to the one party or some forbearance[2] detriment[3], loss or responsibility given suffered or undertaken by the other."

Sec 2(d) of the Indian Contract Act 1872 has defined "When at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstain[4] from doing, or promises to do or to abstain from doing something, such act or abstinence or promise is called a consideration for the promise."

Sec 2 (d) of the Nepalese Contract Act defines consideration as "consideration means a promise made by a person to do or not to do something for the acts done or undone by the other according to that mentioned in the offer."

Kinds of Consideration

A consideration may be classified in to three kinds
a) Executory consideration: future consideration. It is the price promised by one party in return for the other party's promise, e.g. a promise to deliver goods or to render services at a future date.
b) Executed or present consideration means consideration which takes place simultaneously with the promise or completely performed consideration.
C) Past Consideration means a past act or forbearance that is one which took place and is complete before the promise is made.

Rules Regarding Consideration

a. Contract must be supported by consideration ( A contract without consideration is a gratuity or gift)
b. Consideration must move at the desire of the promisor
The promisor must desire the act or forbearance. The act performed at the desire of third party can not be consideration. It is essential that what is done must have been done at the desire of the promisor and not voluntarily. ( If A notices B's house being on fire and rushes voluntarily to B's help, there is no consideration.)
c. Consideration may move from the promisee or any other person. (In Chinnaya Rau vs. Ramayya , 1881, An Old lady, by a deed of gift, made over certain property to her daughter with a direction that the daughter should pay an annunity to A's brother as had been done by A. The daughter did not pay the annunity as promised. A's brother sued the daughter. It was held that the consideration moved from A though not from her brother. That was sufficient consideration for daughter's promise to A's brother.)
d. Consideration may be past, present or future. ( however in English contract law past consideration is not good consideration)
e. Consideration need not necessarily be adequate
f. Consideration must not be illegal and against the public policy (Sec 13.8 void contract)
g. Consideration must be real but not illusory
h. Parties are autonomous to fix and determine the consideration (Sec 4 of the Contract Act. )

Exceptions of Consideration

The general rule is that no consideration no contract.
But in the following condition contract without consideration is also valid and enforceable by law.
1. Agreement made on account of natural love and affection.
(Sec 25 of the Indian contract Act )
If it is made by a written document.
If it is registered under the law.
If it is made on account of natural love and affection
If the parties to is stand in a close relation to each other.

2. Past voluntary acts or services (Sec 25.2 of I.C.A)
If it is a promise to pay wholly or in part
The person who is to be compensated has done something rendered some services voluntarily.
3. A time barred debt.
If it is a promise to pay the whole or any part of the debt
If it is made in writing
It is signed by the debtor of by his agent authorized
It is related to a debt which could not be enforced by a creditor because of limitation.
4. Charity
5. Gift ( Dan Bakas)
6. Agency
7. Contract under Seal

Contractual Capacity

Introduction;
Ø Contractual capacity is one of the essentials of a valid contract.
Ø Law presumes that every person is competent to enter into contract and if any one claims exemption from liability on the ground of incapacity to contract he must prove such capacity.
Ø The contractual capacity prescribes the qualification of the parties to enter into a contract.
Ø The law of contractual capacity prevents weak persons from being cheated by strong person mentally, physically and legally.
Ø The rationale of law of contractual capacity is to permit the competent parties to make contract and restrict the incompetence from doing so.
Ø Parties who enter into the contract must have the capacity to do so.
Ø An agreement made by incompetent parties is not valid and enforceable.
Ø Such type of contract does not create any rights and obligation between the parties.

Ø Sec. 11 of the Indian Contract Act 1872 provides " every person is competent to contract who is of the age of majority according to the law to which he is subject and who is of sound mind and is not disqualified from contracting by any law to which he is subject."
Ø If we convert in to a negative proposition it will read as ' no person is competent to contract who is not the age of majority, who is of unsound mind and disqualified from contracting by any law. '

Ø Nepalese Contract Act has not defined the term however it has laid down some rules regarding contractual capacity. According to Sec. 3 of the Act " Except person who has not completed 16 years of age or who is of unsound mind any person deemed to have capacity to contract."
Ø Similarly Sec 3(2) reads that a person not declared disqualified under current law is also competent to contract.

From the above discussion the following persons are incompetent to contract.

1. Minors
2. Persons of unsound mind
3. Disqualified person by law.

1. Minors:
Minor is a person who has not reached full legal age; a child or juvenile.
Sec 2 (a) of the Children's Act 1992, "Child means every human being below the age of 16 years"
Sec 3 of the Indian Majority Act 1875, " A person domiciled in India, who is under 18 years of age is a minor"
Sec. 3 (1) of the Contract Act, 2056 expressly provides that a minor is a person who has not completed the age of 16 years.
According to Indian Contract Act, 1872 minor is the age below 18 years
Similarly in English law it is 21 years.
The parties must have sufficient capacity to contract.
If a party is not capable of understanding the nature and reasonably foreseeable consequences of the agreement and if he/she is not capable of understanding the implication of the act and of its reasonably foreseeable consequences at this circumstances the contract may be void.
Agreement should not be considered valid where a party of the agreement is not in a position to decide whether or not to enter into a contract because their knowledge and understanding are impaired by youth.
Therefore law relating to minor is to protect minor against own inexperience.
It generally protects minor, preserves his rights and interest and help.
Law preserves minor's rights and estates, excuse their faults and assist them in their pleadings
The judges are their Counselors
The Jury are their Servants and
Law is their guardian.
Rules Regarding Minors Agreement
1. A contract made by a minor becomes void.
Sec. 13 (j) of the Contract Act 2056.
A minor's contract is altogether void in law and a minor therefore con not bind himself by a contract.
In the case of Mohari Bibi vs Dhar Dharamodas Ghose 1903, the minor had executed a mortgage for the sum of Rs 20000 out of which the lender had paid the minor only about Rs 8000. The minor then filed a suit for setting aside the mortgage. It was contended that as the contract was voidable and the minor was now repudiating it the amount Rs 8000 actually paid to the minor must be refunded under Sec 65 of the Indian Contract Act.
Privy Council pointed out that as the minor's contract was absolutely void no question of refunding money could arise in these circumstances.
2. Contract for the benefit of a minor is valid contract
All those contracts to which a person incompetent to contract is a party are void, as against him, but he can derive benefit under them.
A minor is incapable of making an instrument but not incapable of becoming a payee or endorsee.
Minority is a personal privilege and only the minor can take advantage of it; the other party is bound.
3. Contract of minor by fraudulent concealment may liable of compensation. (on the basis of equity)
Principle of estoppel
Minor has no privilege to cheat other by misusing minority.
4. No ratification on attaining the age of majority
Contract made by a minor can not be ratified by him even after the he attains majority.
5. Minors liability for necessaries supplied to him according to his status in life
Necessaries are supplied or necessary services are rendered to a minor or any person and the like dependent on him the minor is liable to pay out of his property for them.
It must be noted that only the property is liable not the minor himself.
Sec 11 (a) of the Contract Act 2056.
The following have been held as necessaries in India.
Ø Cost incurred in successfully defending a suit on behalf of a minor on which property was in jeopardy.
Ø Costs incurred in defending hid in a prosecution.
Ø A loan to minor to save his property from sale in execution of a decree
Ø Money advanced to a Hindu minor to meet his marriage expenses. Etc.
It is important to note in this connection that necessaries must not be luxury and excessively costly and must have been supplied to the minor for his benefit.
6. Contract can be made on behalf of Minor
Contract Act. 2056, Labour Act 2048, Children's Act 2048, Muluki Ain 2020 Court Management, sec. 24
7. Minor can be a partner of a company.
8. Minor can be employed as an agent.
9. Minor as a shareholder
10. Minor can not be declare as insolvent
11. Where contract made by minor and major jointly, the minor is not liable under the agreement but the major do.

Rules Regarding Person of Unsound Mind

· One of the essential conditions of capacity to contract is a sound mind of the parties to contract.
· Person of unsound mind is also incompetent to enter into a contract.
· Contract made by the unsound mind is void and does not have any legal effect.
Nepal Contract act has not defined the term unsound mind. However the section 3 (b) of the Act provides that a person of unsound mind is incompetent to contract.
Sec. 12 of the Indian Contract Act has clearly defined a person of sound mind.
According to it, " A person is said to be of sound mind for the purpose of making a contract, if at the time when he makes it, is capable to understand the terms of the contract and to form a rational judgment as to its effect on his interest."
This section further states;
i) " A person who is usually of unsound mind but occasionally of sound mind, may make contract when he is of sound mind.
ii) " A person who is usually of sound mind, but occasionally of unsound mind, may not make a contract when he is of unsound mind."
Therefore,
At the time when a person makes a contract if:
ü He is incapable of understand the term and condition of the contract,
ü He is incapable to form a rational judgment and
ü He is incapable to judge the effect of contract on his interest
Are person of unsound mind may make contract;
Ø Occasional sound person may make contract when he is sound.
Ø Occasional unsound person may not make contract when he is unsound.
Unsoundness caused by
· Idiocy______ permanent insanity
· Lunacy or insanity _____ Temporarily sound and temporarily sound
· Drunkenness ________ unsound up to the effect of drinks.
· Hypnotism _________ unsound for certain span of time because of another's tactics
· Mental decay______ incompetent caused by old age or over excitement or other physical effect.

Legal effects:
· Similar to that of Minor
· It is void and not enforceable by law. However contract for the sake of interest or benefit of such person is valid and enforceable by law.
· Guardians may make contract on behalf of such persons. (Sec. 3.3)
· (Sec. 24, 25 and 83 of the Chapter of Court Procedure of Muluki Ain)
· Necessaries supplied to such persons entitled to recover. (Sec. 11 a.)
2. Disqualified Persons;
1. Alien Enemies:
During the continuation of the war and alien enemy can not make contract.
Contract made before the war between an alien enemies either dissolved or suspended for the duration of the war and revived after the war is over.
2. Foreign Sovereigns and Ambassadors.
· Vienna Convention on Diplomatic Relation, 1961
· Vienna Convention on Consular Relation, 1963
Three types of Diplomats
Ambassador, /fhb't
Plenipotentiary ;jf{lwsf/ ;DkGg ljz]if b't
Charge d' Affaires sfo{jfxs b't
Three type of Deplomatic staff
· Diplomatic staffs: head, consultants, consular and assistance of consular, Military Attaché (z}lgs ;xr/L) and assistance, cultural Attaché, First to 3rd secretary etc.
· Administrative and technical Staff
· Helpers
Immunities:
· Inviolability of Person
· Immunity from criminal jurisdictions (only the diplomatic staff are entitled)
· Immunity from civil and administration jurisdiction (only the diplomatic staff are entitled)
· Fiscal Immunities
3. Professional Person
4. Corporation
5. Convicted ( Sec. 10 of the Government Money and company Management Act 2020 provides that person cannot make contract with government if he is convicted in murder, cheating, theft and the like.
6. Married women
7. Insolvent

Free Consent
The Consent is an agreement, approval or permission to make contract, especially given voluntarily by a competent person.
Consent means a consent freely and voluntarily given and consent is not consent if it is not freely and voluntarily given or obtained by force, threat, intimidation, deception and fraudulent means
A person shall not be deemed or presumed to have consented to make a contract if that person agreed to it under coercion, including the use of threat, or physical violence... economic deprivation, abuse of authority, deception, or threat to the welfare or security of a child.
Therefore, a contractual parties are deemed to have dissent if
i) The parties makes contract through force or threats of force.
ii) The makes contract under fear even though there is no actual force.
iii) The person was unconscious due to any cause including drink or drugs.
iv) The consent obtained through fraud.
v) The person is too young/ under the capacity to consent.
vi) The person is mentally incapacitated.
vii) The consent taken by false representation.
Nepalese Contract Act has not defined the term free consent. However Sec. 14 (1) of the Act provides that contract made by coercion or undue influence or fraud or misrepresentation is viodable at the option of the aggravated party.
Sec. 13 of the Indian Contract Act 1872 has defined the consent regarding contract as "Two or more persons are said to consent when they agree upon the same thing in the same sense."
Similarly Sec. 14 of the ICA, states that "consent is said to be free when it is not caused by coercion undue influence, misrepresentation, fraud or Mistake"
From the above discussion Contract made under following situation are not outcome of the free consent and voidable.
a. Coercion
b. Fraud
c. Undue influence
d. Misrepresentation
e. Mistake
A. Coercion
To compel the person to do something against his will.
Sec. 15 of the Indian Contract Act, defines " Coercion is the committing or threatening to commit any act forbidden by Indian penal code, or unlawful detaining or threatening to detain any property to the prejudice or any person whatever with the intention of causing any person to enter into an agreement."
Nepalese Contract Act has almost the same definition of Coercion. As per the Sec. 14 (a) of the Act Coercion means 'detaining or threatening to detain property or to injure or threaten to injure life or reputation or to commit or threat to commit any thing forbidden by law in force in Nepal with the intention of a person to enter into a contract against his will.'
Coercion occurred if a person makes contract with other;
· By withholding of any property of the other person
· by threatening to withhold any property
· By injuring the life and body.
· By threatening to injure life, body and reputation
· By taking action in contravention of law
· By threatening to take action in contravention of law.
Legal effect is viodable under the Sec 14. Sec 84 and 89 (2) (b).
Circumstances for non-coercion
A) Threat to file a suit
B) Threat to commit suicide
C) High price and high rates

B. Fraud
Fraud means a knowing misrepresentation of the truth or concealment of a material fact to induce another to act to his or her detriment.
In fraud person disclose things falsely with a view to deceive another.
So, it is making a person to believe that a things is true which in fact is false.
For example: Selling a copper ornament stating that it is gold.
Selling land by showing fake documents of ownerships.
Sec. 14 (1) (C) of the Contract Act defines, "When, with intent to deceive the other party to the contract or his agent, a party or his agent induces him to believe a thing as true, which is not true, conceals actively any subject matter of the contract and does some such act as existing Nepalese laws specially declare fraudulent, that is said to be fraud."
According to this above definition, any contract falls under the following situation is regarded as fraudulent contract and is voidable at the option of the aggravated party.
ü Intention to deceive the other party or his agent to the contract.
ü By inducing the party to believe false act as true,
ü By Concealing actively any factual matter.
ü By doing any act which has been declared fraud by the existing Nepalese law.
Sec. 17 of the Indian Contract Act defines " Fraud means and includes any of the following acts committed by a party to a contract, or with his connivance or by his agent, with intent to deceive another party thereto or his agent; or to induce him to enter into the contract :-
1) the suggestion, as a fact, of that which is not true by one who does not believe it to be true.
2) The active concealment of the fact by one having knowledge or belief of the fact.
3) A promise made without any intention of performing it
4) Any other act fitted to deceive
5) Any such act or omission as the law specially declares to be fraudulent.
According to the Sec. 17 of the Contract Act, if the contract is made in the following situation is regarded fraud contract and voidable.
a. By a party to a contract or his agent
b. False statement
c. Intentional non performance
d. Deception
e. Fraudulent act or omission
Consequences of Contract
Fraudulent contract is voidable. For this purpose the aggravated party must go to the court within the time limit prescribed by law. If the court declare void he is not liable under such contract. In case he fails to avoid the contract it comes into existence.
To avoid and not to avoid the fraud contract depends upon the decision of the aggravate party.
The aggravated party can enjoy the following rights.
A) avoid the contract
B) Claim compensation for the damages
C) Restitute
To constitute fraud there must be;
a) Intention to deceive the other party
b) The other party must be deceived
c) Self deceiving is no fraud.
d) Mere commendation of one's goods is no fraud.
Silence and Fraud
In the business transactions some of the facts regarding the subject matter must be disclosed and some are not necessary to be disclosed.
If the party disclosed the facts that may be harmful to the other party. In such a situation the aggravated party may charge of fraud. But all silence is not fraud. This is why it is said that silence has double status in the case of fraud.
A) A mere silence is not amount a fraud.
B) Silence is fraud if;
a. Statutory obligation to disclose
b. Contract utmost confidence
c. Changes in circumstances
d. Half truths.
e. Silence equivalent to speech
C. Undue Influence:
When a party enters into a contract under any kind of influence, mental pressure or persuasion which prevents him from exercising a free and independent judgment is said to be under undue influence.
An influence exercised by a contracting party who is in the dominant position for obtaining unfair advantage over the other party and the influence misused is called undue influence.
Sec. 14 (1.b.) of Nepalese Contract Act defines undue influence as " an influence exercised by a person upon another person who is under his influence for personal advantage or interest with an intention to have unfair benefit."
Sec. 16 (1) of the Indian Contract Act defines "A contract is said to be induced by undue influence where the relation subsisting between the parties are such that one of them is in a position to dominate the will of the other, and he uses that position to obtain an unfair advantage over the other."
Sec. 16 (2) further clarifies that a person is deemed to be in a position to dominate the will of another if;
i) he hold a real or apparent authority over the other. ( Relationship between master and servant, principle and temporary teacher, parents and child)
ii) He stands in a fiduciary relation to the other or (; Relationship of mutual trust and confidence; such as trustee and beneficiary, guru and his disciples, lawyer and client, guardian and ward etc.)
iii) He makes a contract with a person whose mental capacity is temporarily or permanently affected by reason of age, illness or mental or bodily distress.
Some presumptions of undue influence;
A contract can be deemed to have made by undue influence if;
i) Consideration is inadequate or
ii) There is a fiduciary relation between the parties
iv) There is inequality between the parties in respect of social status position, post age etc. of the parties.
v) A greater sum is demanded than the actual sum must be obtained.
vi) There is absence of independent advisors for the weaker party.
D. Misrepresentation
According to Anson, misrepresentation means " a false statement which the person making it honestly believes to be true or which at any rate he does not know to be false."
Parties of a contract must present the matter fact truly and factually. If represents the fact wrongly it is called misrepresentation or false representation. In such a situation consent taken to make a contract is not considered as free consent and is voidable. Thus misrepresent is a misstatement or false representation of fact made by a party to the contract to another. It is a representation when wrongly made by a party to the contract to another innocently or without any intention to deceive the other party.
According to Sec. 14 (1.d) of the Nepalese Contract Act the following acts are regarded misrepresentation.
a) False statement made by a party without reasonable ground.
b) Injuriously misleading to the other.
c) Ignorance mistake on the subject matter

Similarly the Sec. 18 of the Indian Contact Act defines the term misrepresentation.
According to it, misrepresentation exists in the case where;
I) Positive assertion (Positively assert fact is true without sufficient information)
II) Breaches of duty
III) Causing mistake innocently.
Consequences of Misrepresentation
I. Innocent party can avoid or withdraw the contract and is not entitled to compensation.
II. The aggrieved party can insist upon performance if he thinks fit.
III. In some circumstances the aggrieved party neither can withdraw the contract not can insist the performance of contract if; (Sec 19 of ICA)
a. He was aware of the misrepresentation.
b. An innocent third party has acquired the rights in the subject matter of the contract.

Mistake
· Mistake is another factor which hampers free consent.
· Parties of the contract must agree upon the same thing in the same sense.
· Mistake is a wrong opinion or misunderstands about something.
· Doctrine of mistake is important part of contract laws.
· Fraud is a intentional misrepresentation to deceive other party whereas no such intention exists in misrepresentation. In the Mistake parties of the contract misunderstood the fact.
· All Mistakes are not voidable. Only that contract by mistake is voidable where fundamental error exists.

Types of Mistake
I. Mistake of law
i. Mistake of National Law
ii. Mistake of International law
II. Mistake of Fact
Mistake of fact is void according to the Indian Contract Act Sec. 20 if;
Both parties to the agreement are under mistake
The mistake is as to the fact essential to the agreement.
Two types of Mistake of Fact
I. Unilateral Mistake : Unilateral mistake is not voidable contract. But mistake of identity of person is voidable)
II. Bilateral Mistake:
a. Both or all the parties must be under a mistake
b. The mistake must be as to some fact and
c. Mistake must relate to the fact i.e. affecting substance of the whole consideration essential to the agreement.
The following cases fall under the bilateral Mistake.
i. Mistake as to the subject matter
ii. Mistake as to the existence of subject matter
iii. Mistake as to the identity of the subject matter.
iv. Mistake as to the quantity of the subject matter
v. Mistake as to the quality of the subject matter
vi. Mistake as to the price of the subject matter
vii. Mistake as to the title of the subject matter
viii. Mistake as to the possibility of performance

Quasi Contract
· A contract to be enforceable must have certain essential elements, namely offer and acceptance, free consent, lawful objectives and consideration and capacity to contract.
· But under certain conditions the law creates and enforces legal rights and obligations when no real contract exists
· These obligations are known as quasi contract.
· It is also known as constructive contract which is based on the equitable principle that ' a person shall not be allowed to be benefited himself unjustly at the losses of another."
· It is not a contract at all. It is an obligation that the law creates.
· In the absence of any agreement between the parties, the acts of the parties or others have placed in the position as contracting parties.
Rules Regarding Quasi Contract
The following types of quasi contracts have been dealt within the Nepalese Contract Act. 2056.
1. Necessary supplied to a person incapable of contracting or on his behalf (Sec. 11 a.)
The person who has supplied to a person incapable if making contract (minors, idiots, lunatics etc) with the necessary of life, is entitled to recover their value. However, the amount is recoverable only from the property of such incapable person.
2. Payment to third party of money which another is bond to pay (Sec. 11 b.)
If the properties of a person get into the hands of third parties who will not release them unless some amount due from another is paid. In such a situation if a person paid the amount on behalf of the second party, then he is bound by law to pay and the former is entitled to return by other.
3. Obligation of a person enjoying benefit of non-gratuitous act (Sec. 11 c.)
If a person lawfully does something for another person, or delivers anything to him without any intention of doing gratuitously and the other person accepts and enjoys the benefit, the later must compensate the former.
4. Obligation of a person possessing the goods (Sec. 11 d.)
If a person lawfully possesses the goods which is not belonging to him and take them into his custody his responsibility is as same as that of a bailee.
5. Obligation of a person paid by mistake (Sec. 11 e.)
If a person pays money to another by mistake, the receiver is bound to return money to the payer.
Contingent contract
· Every person who is bound by an obligation must be ready to perform it at the time when he had promised to perform.
· A contingent contract is a contract to do or not to do something, if some event, collateral to such contract, does or does not happen.
· (A contract to pay Rs. 1 lakh if B's house is burnt)
· Quite a good part of commercial business transactions consists of contingent contract such as insurance; indemnity and guarantee are contingent contract.
· A wager is a contingent agreement is restricted by law.
· A contract in which performance by one party is conditional upon the performance of other is conditional but not contingent.
· If A agrees to deliver 100 bags of wheat and B agrees to pay the price only afterwards, the obligation of B to pay is conditional upon A's delivering the wheat, but is not a contingent contract.
Therefore all the conditional contracts are not contingent contract. The contingent contract has following features.
1. Performance depending on a future event
2. Collateral event
3. Uncertain event
4. Event not depending on the will of promisor.
Rules Regarding Contingent Contract
1. Contract on the happening of future uncertain event is not enforceable until such event happens. (Sec. 21.1)
If the agreement is made to do or not to do something on the happening of some event in future, the liability will not arise until and unless such event happens.
Contingent contract upon the happening of a future uncertain event, can not be enforced by law unless and until that event has happened. If the event becomes impossible, such contract becomes unenforceable.
2. Contract on the non-happening of future uncertain event is enforceable if it is impossible to happen. (Sec. 12.3)
If a contract is to do or not to do something on the non happening of some uncertain event in future, the liability will arise only if the event becomes impossible to happen.
3. When event becomes impossible to happen, the contractual liability will not arise. (Sec. 12.2)
Ex. A agrees to pay B Rs 1 lakhs if B marries to C. But C marries to D. The marries to B to C become impossible now.
4. Contract on the happening of a event within a fixed time become void if at the expiration of time, such event has not happened, before the time fixed such event becomes impossible. (Sec. 12.4)
5. Contract on the non-happening of a event within fixed time may be enforced by law if;
a. When the time fixed has expired
b. Such event has not happened
c. It becomes certain that such event will not happen.
6. An agreement is made for an impossible act is void ab initio.
Ex. Contract to marry with dead person.
Legality of Object and Consideration

Legality of object and consideration is one of the most important elements for forming a valid contract.
A Contract to become a legal and attaining legal status there must be legal objectives and consideration.
If the objective and consideration of a contract is inconformity with the existing laws that contract is not enforceable by law and in some cases it is also punishable.
Object is the purpose or intention of the contract and Consideration is the something in return.
Unlawful and illegal objectives and consideration makes the contract void. (Sec. 13.k.)

When the object and consideration of a contract become illegal and unlawful?
2. If Object and consideration is forbidden by law. (Sec. 13 .e.)
3. If it defeats the existing legal provision.
4. If it is fraudulent
5. If it involves or implies injury to the persons or property of another.
6. If the objects and consideration is immoral (Sec. 13.f.)
7. If the contract is opposed to the Public policy
a. Agreement of trading with alien enemy
b. Agreement interfering parental rights
c. Agreement restraining personal freedom
d. Agreement to obtain or for the sale/transfer of the public titles/offices
e. Agreement in restraint of marriage (Sec. 13.b)
f. Agreement interfering administration of justice
g. Agreement made to defend a criminal
h. Agreement tending to create monopolies
8. If the agreement is void
a. Agreement in restraint profession, occupation and trade (Sec. 13.a)
However, the following contracts are not void.
i. the contract made for purchase and sale of goodwill,
ii. the contract in restraint any trade or occupation among the partners
iii. the contract in restraint of trade and occupation within the fix period and place among the partners after leaving the partnership firm.
iv. The contract in restraint of not accepting any person, firm, company or any entity's service within the fixed period.
b. Agreement in restraint of Marriage. (13.b)
c. Agreement in restraint of enjoying public facilities. (Sec. 13.c)
d. Agreement in restraint legal proceedings and process (Sec 13 d)
e. Agreement made with incompetent parties.
f. Agreement impossible to perform at the time of making the contract.
g. Unclear Agreement.
Assignment of Contract
· Generally assignment means to transfer or handover some acts.
· In Contract law assignment of contract means to handover or transfer one's contractual rights and liabilities to the third person.
· According to Anson, assignment means "Transfer of contractual right and liability by a party to the contract to some other person who is not a party."
· Ordinarily the contractual party cannot assign contractual rights and obligation to the third person which is also known as privity of contract.
· But it is not absolute rule. In some circumstances assignment is necessary and has been recognized by law such as contract relating to trust, insurance and negotiable instruments are the exception of principle of privity of contract.
· All types of contract are not possible to assignment. Those contract which can assign to the third party must assign due process of law.
· After assignment of contract the third party is entitled to receive benefits or rights and has to bear liabilities under the contract.
· The party who assigns is called assigner and who is assigned is called assignee.
A Contract Can be Assign by Two Methods
a. By the act of the parties to contract
b. By operation of law.
Rules Regarding Assignment of Contract
1. Contract involving personal skill and capacity can not be assigned. (Sec. 76)
2. Contract can be assigned only after getting the consent of the concerned party.
3. Liability of the contract can be assigned only after getting the consent of the other party. (Proviso Sec.77)
4. Rights and benefits under a contract can be assigned.
5. After becoming unsound mind or death of any contracting party, rights and liabilities of the contract can be transferred to the legal representatives. (Sec. 76)
6. If any of the contracting party becomes insolvent, rights and duties can be transferred to the liquidator or other official receiver. (After the order of Court)
Performance of Contract

· Possibility of performance of contract is an essential of a valid contract.
· The end of making a contract is performance.
· The term performance means the fulfillment or execution of promises made by the contracting parties.
· The performance of contract implies the fulfillment of the term and condition of the contract without breaching it.
· The parties of contract specify their rights and obligation in the forms of term and condition. When they execute it in the same manner or line of the promise is called performance of contract.
· If parties unable to fulfill their rights and obligations intentionally, that amount breaches of contract and the aggravated party is subjected to get remedy.
Importance of Performance:
1. Both parties satisfy from their contract.
2. Good performance encourages them to future contract.
3. Greater profit and lesser looses to the both parties.
4. Get rid from disputes and court cases.
5. Fulfillment of the objectives.
6. Good relationship.
7. Avoidance of unnecessary expenditures.
Rules Regarding Performance;
Rules regarding performance are an important part of the contract. To understand the rules of performance the following questions need to be answered.
1. Who can demand the performance of contract?
2. Who must perform the contract?
3. When and how to perform the contract?
4. Where to perform the contract?
5. In what conditions a contract need not be performed?

1. Who can demand the performance of Contract?
a. Only the contracting parties can demand the performance. Sec. 78 (1)
b. Third party or beneficiary can demand the performance. (The proviso)
c. Legal representative or heirs of the promise can demand the performance.
d. By persons who jointly promises. (sec. 78. 2.)
2. Who must perform the contract? (Sec. 75,76 and 78)
a. Contracting parties should perform the contract.
b. Legal representative (Sec. 76)
c. The agent of contracting party. (Sec. 77)
d. The third party (Sec 77.2.)
e. By joint contracting parties. (Sec. 77.3)
3. When and how to perform the contract? (Sec. 71.1, 2, and 3)
a. As mentioned in the contract.
b. If the time and mode is not specified in the contract but the performance can be made at some specified time or mode, the contract should be performed at the same time and in the same way.
c. If the time and mode is not mentioned in the contract, which can be perform in reasonable time and mode.
4. Where to perform the contract? (Sec. 72. 1, 2, 3, and 4)
a. As mentioned in the contract.
b. If the delivery place of goods is not mentioned, it should be delivered at the place where it was situated.
c. If the place is not mentioned, but the performance can be made at some specified place, the contract should be performed in the specified place.
d. If the place is not mentioned the parties fix the reasonable place.
5. In what conditions a contract need not be performed? (Sec. 73)
a. Incase of relief by party.
b. Incase of viodable contract.
c. Incase of breaches of contract.
d. Incase of application of any provision by law.
e. If contract becomes impossible to be performed by any reasons specified in Sec. 79.

Termination or Discharge of Contract
· Termination is an end of something.
· Termination or discharge of contract means discontinuation of the contractual relationship between parties.
· Contractual parties are entitled to enjoy and fulfill rights and obligation and they remains liable under contract until and unless it comes to an end.
· The termination of contract may take place either by performance or agreement or operation of law or impossibility or lapse of time or by breaches of time.
· Modes of termination and discharge of contract
1. By performance
When parties fulfill their respective obligations under the contract in the same way what they had promised to do, contract is automatically terminated.
Most of the contracts are terminated by the performance.
2. Termination by agreement or consent. (Sec. 81)
a. Alteration x]/km]/ u/]/
b. Novation gof s/f/ u/]/
c. Rescission / Cancellation vf/]hL
d. Remission kl/Tofu
e. Waiver clwsf/sf] Tofu
f. Accord and satisfaction ;xdlt / ;+t'li6
3. Termination by lapse of time
4. Termination by operation of law
a. Death of the promisor ( Contract based on the personal skill and qualification is terminated as soon as the promisor dies.)
b. Insolvency (When court declares a party to the contract become insolvent the rights and liabilities are transferred to the official receiver and debtor become incapable to repay debt.)
c. Merger (Contract providing inferior right vanishes into or mixed with the contract providing superior rights as a result former contract is terminated.)
d. Unauthorized material alteration (
5. Termination by Breaches of Contract.
6. Supervening impossibility of performance.

Doctrine of Supervening impossibility
· Before 1863 doctrine of absolute contract was prevailed. Parties were liable to fulfill their liabilities in any situation.
· In 1863, the High Court of England in the case of Taylor vs Caldwell propounded the doctrine of frustration.
· In America and India it is called Doctrine of Supervening impossibility.
· This Doctrine says that the law does not compel a man to do the impossible thing. Therefore contract is discharged when performance become impossible.
· In the case of Taylor vs Caldwell, Caldwell lets a music hall to Taylor for a series of concerts for some days. The hall was accidentally burnt down before the date of the first concert. It was held that the contract was discharged.
· Indian and Nepalese Contract Act has also adopted the same rule in the contract law.
· According to Sec. 56 of the Indian Contract Act 1872 "Contract to do or not to do an act which after formation of the contract become impossible or by reason of some event, becomes void, when the act becomes impossible or unlawful.'
· Similarly Sec. 79(1) of the Contract Act provides "where it becomes impossible to execute a contract due to fundamental change in the circumstances prevailing at the time of contract, the parties need not perform the work under the contract."
Circumstances where the doctrine of supervening impossibility or frustration applies;
1. Amendment or change of law (Sec. 79.2.a)
2. Death or permanent incapacity (Sec. 79.2.d.)
3. Natural disaster and outbreak of war (79.2.b)
4. Destruction of subject matter (792.c)
5. Failure of ultimate purpose
Effects of Benefit Received from the contract terminated on the basis Supervening impossibility. (79.4.a and c)
1. Amount to be refunded.
2. Determination of work or amount and recovery of expenses.
Cases Where DOSI does not apply.
1. Difficulty of performance of Contract
2. Commercial impossibility
3. Impossibility due to the default of a third person.
4. Strikes and lockouts.
5. Failure of one objects among other.
6. Additional taxes, fees or other revenue to be paid.

Remedies for Breach of Contract
· What is Breach of Contract?
· It is a refusal of doing any acts promised under the contract.
· It is violation of term and condition of contract.
· It is non fulfillment of obligation under contract.
· Parties are liable to fulfill their respective promises within time, place, and modes specified in the contract. If they intentionally fails to fulfill the obligation and promises that amount a breach of contract.
Sec. 82(1) of the Nepalese Contract Act, 2056 reads " if a party to a contract fails to fulfill his contractual obligation under the contract, or give information to the other party that he will not perform the work as mentioned in the contract, or if his actions and conduct show that he is incapable of performing the work as mentioned in the contract, he is deemed to have broken the contract."
Types of Beach of Contract
1. Anticipatory Breach
2. Actual Breach
1. Anticipatory/ constructive Breach ;
An anticipatory breach of contract is such a breach which takes place before the time fixed for performance. If a party of a contract reject his obligation or gives pre-information to the other party that he will not perform his obligation before the time for performance mentioned in the contract it is said to be an anticipatory breach of contract.
Anticipatory breach may take place either in two ways.
a) By notice
b) By conduct
Effect of anticipatory breach
i) The aggravated party can rescind the contract and immediately take a legal action for breach of contract without waiting until the due date for performance.
ii) He may treat the contract as active and wait till the time the work was to be done and can take legal action for breach of contract if the promise still remains unperformed.
2. Actual Breach:
When a party of contract does not perform his obligation under the contract within the time, modes, and place is called actual breach of contract. Such breach either expressed or implied.

Remedies for Breach of Contract
1. Right to Rescission of the Contract (Sec. 82.2) (s/ff/ /2 ug]{ jf ;dfKt ug]{ clwsf/)
2. Right to Claim damages ( Ifltk"lt{df bfjl ug]{ clwsf/) Sec. 83
a. Compensation for actual loss (Sec. 83.1)
b. Compensation for an amount equal to that mentioned in the contract. (Sec. 83.2)
c. Reasonable compensation if not mentioned in the contract.
3. Right to specific performance
4. Right to injunction
5. Right to Restitution
6. Right to Arbitration
7. Right to claim for Quantum Meruit
Doctrine of Quantum Meruit
· Doctrine of English Contract law.
· Quantum Meruit literally means "as much as earned" or " as much merited"
· If a person has done work for another person, he is entitled to recover from the other a reasonable remuneration for the work actually done, eventhough no particular remuneration of such work has been fixed by the contract.
· Quantum Meruit means the payment in proportion to the amount of the work done.
· If a contract has been breached by a party, the other party has right to claim for Quantum Meruit. It means he can sue for a proportionate remuneration or compensation for the work or goods which the aggrieved party has done already or delivered under the contract.
· The Claim for quantum meruit does not arise unless and until the original contract is terminated.
[1] Ensuring
[2] Tolerance
[3] disadvantage
[4] to decide not to do something