Page 33 - DMGT407Corporate and Business Laws

Corporate and Business Laws

Notes Objectives

After studying this unit, you will be able to:

Describe the connotation of consent and coercion;
Discuss the impression of mistakes;
Recognize the purpose and meaning of guarantee;
Explain the meaning of indemnity.

Introduction

Whenever the parties enter into the contract, it is essential that it should be from free and at the
will of the parties on either side. There should be no undue influence or misrepresentation on
part of both parties while entering into the contract.

When a company needs some money for its business it approaches a bank. The bank requires
that the managing director M promises to repay the loan personally should the company default.
When the directors of the company including M execute the promissory note on behalf of the
company, they sign as company’s officials. M, the managing director signs again as an individual.
The relationship between M and the bank is called a guarantee or suretyship. It is a contractual
relationship resulting from the unconditional promise of M (known as the surety or guarantor)
to repay the loan to the creditor (the bank) for the obligation of the principal debtor (the
company) should it default. If the company fails to repay the loan, the bank can approach M for
the payment.
Sometimes the banks (lenders) ask for more security for the loans in addition to the personal
guarantee of an official of the borrowing company. The company may agree that a particular
machinery in its factory would serve as collateral security for the loan. If the company defaults,
the bank now has three options: to compel the principal debtor to pay, demand payment from
the surety, or obtain a court order to either claim or sell the collateral. The bank need not look
to the collateral first. But if M pays the money to the bank, then the right of the bank on the
collateral gets transferred to him. The bank has yet another alternative for securing its loan to
the company. It could ask that all the three directors (including M) sign the promissory note as
co-sureties. If they do so and the company defaults, the bank may seek payment from any one or
any two of them or all of them. The law relating to the contracts of guarantee is given in the
Indian Contract Act, 1872.

2.1 Consent and Free Consent

2.1.1 Meaning of Consent

While an offer made by one party is accepted by the other party, the consent of the offeree to the
offer by the offeror is necessary. It is essential to the creation of a contract that both parties agree
to the same thing in the same sense. When two or more persons agree upon the same thing in the
same sense they are said to consent.

Example: A agrees to sell his Maruti car deluxe model for ` 1.20 lakhs. B agrees to buy
the same. There is a valid contract since A and B has consented to contract on the same subject
matter.

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