Page 174 - DMGT512_FINANCIAL_INSTITUTIONS_AND_SERVICES

Unit 11: Leasing

11.4 Legal Aspect Notes

As such there is no separate law regulating lease agreements, but it being a contract, the provisions
of the Indian Contract Act, 1872 are applicable to all lease contracts. There are certain provisions
of law of contract, which are specifically applicable to leasing transactions. Since lease also
involves motor vehicles, provisions of the Motor Vehicles Act are also applicable to specific
lease agreements. Lease agreements are also subject to Indian Stamp Act.
Let us discuss in short, the Indian Contract Act, 1872 related to leasing.

Contract: A contract is an agreement enforceable by law. The essential elements of a valid
contract are – Legal obligation, lawful consideration, competent parties, free consent and not
expressly declared void.

Discharge of Contracts: A contract me by discharged in following ways – By performance, by
frustration (impossibility of performance), by mutual agreement, by operation of law and by
remission.
Remedies for Breach of Contract: Non-performance of a contract constitutes a breach of contract.
When a party to a contract has refused to perform or is disabled from performing his promise,
the other party may put an end to the contract on account of breach by the other party. The
remedies available to the aggrieved party are – Damages or compensations, specific performance,
suit for injunction (restrain from doing an act), suit for Quantum Meruit (claim for value of the
material used).
Provisions Related to Indemnity and Guarantee: The provisions contained in the Indian Contract
Act, 1872 related to indemnity and guarantee are related to lease agreements. Main provisions
are as under:
1. Indemnity: A contract of indemnity is one whereby a person promises to make good the
loss caused to him by the conduct of the promisor himself or any third person.

Example: A person executes an indemnity bond favoring the lessor thereby agreeing to
indemnify him of the loss of rentals, cost and expenses that the lessor may be called upon to
incur on account of lease of an asset to the lessee.

The person who gives the indemnity is called the 'indemnifier' and the person for whose
protection it is given is called the 'indemnity-holder' or 'indemnified'.
In case of lease agreements, there is an implied contact of indemnity, where lessee will
have to make good any loss caused to the asset by his conduct or by the act of any other
person, during the lease term.
2. Guarantee: A contract of guarantee is a contract, whether oral or written, to perform the
promise or discharge the liability third person in case of his default. A contract of guarantee
involves three persons - 'surety' who gives guarantee, principal debtor and creditor.
A contract of guarantee is a conditional promise by the surety that if the debtor defaults,
he shall be liable to the creditor.

3. Bailment: The provisions of the law of contract relating to bailment are specifically
applicable to leasing contracts. In fact, leasing agreement is primarily a bailment agreement,
as the elements of the two types of transactions are similar.
(a) There are minimum two parties to a bailment i.e. bailor who delivers the goods and
bailee - to whom the goods delivered for use. The lessor and lessee in a lease
contract bailor and bailee respectively.

LOVELY PROFESSIONAL UNIVERSITY 169