MODULE D
Indian Contract Act,1872
General Principle of Contract-II
1. Introduction
2. Meaning of a Contract
3. Key Components to Form a Contract
4. Essentials of a Valid Contract
5. Contract Act and Banking
Contract & Banking
1. All the banking services/procedures/transactions, one way or the
other, are the offshoots of the Contract Act.
2. Banking is a trust based relationship. The relationship
between a banker and customer is the transactional relationship
and depends on the type of transaction, be that acceptance of
deposits from public, lending, investing the money so collected
by way of deposits, other services, etc.
3. When money is deposited in a bank, the relationship that is
constituted between the banker and the customer is one of
debtor and creditor and not one of trustee and beneficiary.
4. The relationship between bank and customer becomes that
of creditor-debtor when customer has borrowed money from
the bank by way of overdraft, cash credit, demand loan, term
loan, bills discounting or any other kind of loan or advance either
on secured or unsecured basis.
5. When a bank accepts securities, valuables, bonds, or other
documents with the bank for safe custody from a person, the bank,
besides becoming trustee, becomes a bailee and the customer is
the bailor.
6. When ancillary services rendered by the bank such as remittance,
collection of cheques, bills, etc. on behalf of the customers, it is
acting as an agent of its customer.
7. In respect of hiring of safe deposit lockers by the bank, the
relationship is that of lessor and lessee, etc.
1. Debtor & Creditor
a. When a ‘customer’ opens an account with a bank, he fills in and
signs the account opening form. By signing the form he enters into
an agreement/contract with the bank.
b. When customer deposits money in his account the bank
becomes a debtor of the customer and customer a creditor.
2. Creditor & Debtor
a. Lending money is the most important activities of a bank. The
resources mobilized by banks are utilized for lending operations.
b. Customer who borrows money from bank owns money to the
bank. In the case of any loan/advances account, the banker is the
creditor and the customer is the debtor.
3. Trustee and Beneficiary
(Bank as a Trustee and Customer as a Beneficiary)
When a person entrusts valuable items with another person with an
intention that such items would be returned on demand to the keeper the
relationship becomes of a trustee and trustier.
Customers keep certain valuables or securities with the bank for
safekeeping or deposits certain money for a specific purpose (Escrow
accounts) the banker in such cases acts as a trustee. Banks charge fee for
safekeeping valuables
4. As a Custodian
A custodian is a person who acts as a caretaker of something.
Banks take legal responsibility for a customer’s securities.
While opening a D-Mat account bank becomes a custodian.
5. Advisor & Client
(Bank- Advisor and Customer- client)
When a customer invests in securities, the banker acts as an advisor.
The advice can be given officially or unofficially. While giving advice
the banker has to take maximum care and caution. Here, the banker
is an Advisor, and the customer is a Client.
6. Bailee and Bailor
(Bank-Bailee and Customer- Bailor)
Banks also keeps articles, valuables, securities etc., of its customers
in Safe Custody and acts as a Bailee. As a bailee the bank is
required to take care of the goods bailed.
7. Lessor and Lessee
(Bank- Lessor and Customer- Lessee)
Banks lease (hire lockers to their customers) their immovable property to
the customer and give them the right to enjoy such property during the
specified period i.e. during the office/ banking hours and charge rentals.
Bank has the right to break-open the locker in case the locker holder
defaults in payment of rent. Banks do not assume any liability or
responsibility in case of any damage to the contents kept in the locker.
8. Agent and Principal
(Bank- Agent and Customer- Principal)
Banks collect cheques, bills, and makes payment to various
authorities’ viz., rent, telephone bills, insurance premium etc., on
behalf of customers.
Banks also abides by the standing instructions given by its
customers. In all such cases bank acts as an agent of its customer,
and charges for these services
9. Indemnity holder and Indemnifier
(Bank-Indemnity holder and Customer-Indemnifier)
In case of banking, the relationship happens in transactions of
issue duplicate demand draft, deceased account payment etc.
In that case indemnifier will compensate any loss arising from the
wrong or excess payment.
In these case banks is Indemnity Holder (Promisee) and customer
is Indemnifier (Promisor).
10. Hypothecator and Hypothecatee
(Bank- Hypothecatee and Customer- Hypothecator)
This happens when the customer hypothecates certain movable or
non-movable property or assets with the banker in order to get a
loan. In this case, the customer became the Hypothecator, and the
Banker became the Hypothecatee.
11. Pledger and Pledgee
(Bank- Pledgee or Pawnee and Customer- Pledger or
Pawnor)
This happens when customer pledges (promises) certain assets or
security with the bank in order to get a loan. In this case, the
customer becomes the Pledger or Pawnor, and the bank becomes
the Pledgee or Pawnee. Under this agreement, the assets or security
will remain with the bank until a customer repays the loan.
12. Mortgagor and Mortgagee
(Bank- Mortgagee and Customer- Mortgagor)
In this case, the customer became the Mortgagor, and the Banker
became the Mortgagee.
13. As a Guarantee
Banks give guarantee on behalf of their customers and enter in to
their shoes. Guarantee is a contingent contract.
As per sec 31,of Indian contract Act guarantee is a “contingent
contract”.
Contingent contract is a contract to do or not to do something, if
some event, collateral to such contract, does or does not happen.
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