MODULE SEVEN: SPECIAL CONTRACTS 3- INSURANCE, BONDING AND BAILMENT Question One Explain what is meant by the right of subrogation. How may subrogation affect not only the . insured but also the person...

Module Seven
1. Subrogation is the lawful principle whereby the remedies or rights of one person are taken over
by any other person. There are two ways by which right of subrogation arises and they are either
by agreement as a part of contract or automatically as a matter of law. Sureties and insurance
are the two main areas where subrogation is significant. It is an equitable remedy and all the
usual restrictions that are applicable to equitable remedies will be applicable on subrogation.
Various kinds of subrogation are Indemnity insurer’s subrogation rights, Surety’s subrogation
rights, Lender’s subrogation rights, Banker’s subrogation rights, Trustee’s subrogation rights,
Subrogation rights of business creditors.
The aim of subrogation is to force the person on whose behalf the payment is made to
compensate the person who discharged the legal obligation of the former person.
In legal terms subrogation means that one party has the right to "step into the shoes" of another
party for the purposes of bringing a claim for damages.
Subrogation affects not only the insured but also the person who has caused the damage or
injury. Insurer Company is supposed to pay the amount on behalf of the insured person and is
eligible and liable to recover the money from the wrongdoer. Suppose a person has got himself
and his car insured against accident, suddenly he met with an accident then in that case the
insurance company will pay off the whole bill amount and will recover the part or full amount
from the wrong doer who is at fault or who has caused injury or damage.
An insurance company may not assert subrogation rights unless its insured is fully compensated
for its loss.
The other means by which the insurance company may keep the damages as low as possible are:
- Contribution
- Mitigation
- Indemnity
- Insurable interest
- Causa Proxima
2. Bonding, surety or surety bond is a promise made by a third party that he or she will pay the
obligee a certain amount if principal fails to meet the obligation.
Difference between bonding and insurance coverage is that bonding protects the suppliers, taxes
liens and general public from the breach of contract by the principal i.e. the person or company
who borrowed some amount from obligee, whereas insurance policy or insurance coverage
limits the amount and obligation which needs to be paid to obligee in case of default.
3. In common law bailment is the process in which physical possession of personal property is
transferred from one person i.e. bailor to another person i.e. bailee. Different ways in which
bailment may be created are:
- For the benefit of bailee or bailor
- For the sole benefit of bailor
- For the sole benefit of bailee.
Duties of the various types of bailees are:
- Duty to take reasonable care
- Duty not to make unauthorized use
- Duty not to mix bailment foods with personal goods
- Duty not to set up jus tertii
- Duty to return any increase from the property
- Duty to return the property after authorized use
Bailee is the person who has the possession of the property and is liable for the damages or loss
caused to that property. Few examples of bailee are warehouse companies, common carriers,
innkeepers etc.
Common carriers are the bailees who have the license to provide the transportation services to
general public. Their liability is absolute regardless of negligence; exceptions are Act of God,
Order of public authority, Nature or goods, Act of public enemy, Act of shipper.
Innkeepers are those who make it their business to entertain travellers with board and lodging for
hire.
Module Eight
4. The basic document of every company is the memorandum of association. It is the charter of a
company and it sets out the limit beyond which company cannot go. Its main purpose is to aware
the creditors, the persons who deal with the company and shareholders know about the basic
information of the company which is relevant for them to know and also the limit of business
activities and i.e. the task for which the company has permission. There are various clauses of
Memorandum of association, main clause out of them are Name clause, situation clause, object
clause, capital clause, liability clause, subscription clause.
Article of association is the document which stipulates the rules and regulations of the company’s
operations. It defines the purpose for which the company is formed and lays out how tasks are to be
accomplished within the organization. It specifies the manner of issue of stock share, manner of
payment of dividends, process of appointment of directors etc. It is a set of rules and is considered
as a user manual for the company simple reason to this is that it outlines the approach for achieving
day to day tasks.
Articles of incorporation or corporate charter or certificate of incorporation is a set of documents
which are to be filed with government body for the simple reason of legally documenting the
creation of corporation. It contains information like address of the firm, type of the stocks, profile
of the company, and name of the person who has ultimate authorization or power.
5. Directors are the person who manages the corporation and its property. It is not possible for the
shareholders and corporates to manage the business effectively and efficiently, therefore
shareholders appoint the directors whose main task is of managing on behalf of the corporation.
Becoming a director brings with it definite responsibilities and duties. Various duties of directors
are:
- Director is obliged to exercise a reasonable degree of care and skill while carrying out the duties.
- Director should act in good faith.
- Director must act bona fide in the interests of the company.
- Director duty is to exercise power for their intended or proper purpose.
- Director should not place himself in the conflict with the company.
- Director’s duty is not to make personal profits.
- Director’s duty is not to fetter but to retain discretion.
- Director’s duty is not to exceed powers.
- Director’s duty is to deal with the different groups of shareholders.
- Director��s duty is not to disclose confidential information
- Duty to not to use power for improper purpose
- Duty to act in the interest of company.
- Duty to not to misuse the position to gain undue advantage.
- Duty to not to misuse the information received to gain undue advantage.
Employees and top management also owes similar duties.
It is expected from the directors that they exercise and discharge their duties with due diligence
and care. Breach of the duty of the director makes the director liable of civil penalties. Offence is
said to be committed only when the breach of duty is done intentionally or recklessly. Offence
may be of any kind, it may be using the information obtained due to the position and using that
information dishonestly for making personal benefit.
Remedies available for breach of duties are:
- Termination of the director's service contract
- Revocation of contract
- Order of injunction
- Compensation and damages
- Restoration of company’s property
6. Shareholder agreement is an agreement which describes how the company should operate and what
are the rights and obligations of shareholders. It is basically to...