Paper 2 Business Laws Subjective

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ii
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BEFORE WE BEGIN
The contents of the study material for Foundation have been designed and developed by the
Board of Studies (Academic), ICAI with an objective to synchronize the syllabus with the
International Education Standards (IESs) of IFAC (International Federation of Accountants) to
instill and enhance the necessary pre-requisites for becoming a well-rounded, competent and
globally competitive Accounting Professional.
The requirements of “IES 1 Entry Level Requirements” have been kept in mind while
developing the different chapters of study material.
This study material also lays emphasis on National Education Policy 2020 (NEP 2020) initiatives
like conceptual clarity rather than rote learning and new pedagogical and curriculum
restructuring based on the use of technology while teaching.
Laws in general, regulate the relationship of business and profession with the society. As
Business forms an integral part of the society, so, law is essential for regulating the rules by
which people and businesses connect with each other. Law affects almost every function and
area of business. In order to resolve the conflicts between social groups and commercial
establishments, Law has to be in place. Study of Law is also important because it gives a legal
framework which is ultimately accepted in society.
This paper on Business Laws intends to make the students aware of legal background relating
to business laws. As a student aspiring to become a Chartered Accountant, he should have
knowledge of those legal frameworks, which influences the business transactions. The syllabus
of Business Laws has been segregated into seven chapters covering the following:
Chapter 1, Indian Regulatory Framework: In this chapter, the students will be familiarised
with some of the major Regulators and the laws which are enforced by them.
Chapter 2, The Indian Contract Act, 1872: This Act basically identifies the ingredients of a
legally enforceable valid contract in addition to dealing with certain special type of contractual
relationships like indemnity, guarantee, bailment, pledge, quasi contracts, contingent
contracts, etc.
Chapter 3, The Sale of Goods Act, 1930: This is one of the specific forms of contracts
recognized and regulated by law in India. Sale is a typical bargain between the buyer and the
seller. The provisions of the Act are applicable to the contracts related to the sale of goods
which means movable properties.

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Chapter 4, The Indian Partnership Act, 1932: This Act provides Rules and Regulations for a
general form of Partnership when two or more people come together as partners.
Chapter 5, The Limited Liability Partnership Act, 2008: This Act provides Rules and
Regulations which contains elements of both ‘corporate structure’ as well as ‘partnership firm
structure’. In order to acquaint the students with this significant Act, only introduction is
covered at this level so they can easily understand its application at Intermediate level.
Chapter 6, The Companies Act, 2013: The Act regulates the functioning of Companies in
India. This is the most important piece of legislation that empowers the Central Government
to regulate the formation, financing, functioning and winding up of companies. In order to
apprise the students with this prominent Act, only introduction is covered at this level so they
can easily understand it and apply the same for practical scenarios at further levels.
Chapter 7, The Negotiable Instruments Act, 1881: The Law in India relating to negotiable
instruments is contained in the Negotiable Instruments Act, 1881. This is an Act to define and
enforce the law relating to promissory notes, bills of exchange and cheques.
We hope that the introduction to Business Laws will set a good foundation for students to
understand significant provisions of select business laws and acquire the ability to address
basic application- oriented issues.
Also, for the benefit of the students, the chapters are inclusive of following:
♦ Learning outcomes and chapter overview at the beginning of each chapter for better
understanding
♦ Step by step approach is followed in each chapter
♦ Appropriate explanation of the text through examples
♦ Summary
♦ Questions along with their answers
We hope that students will find this study material user friendly and in case of any queries
that they may have while reading the material, they are welcome to write at bosnoida@icai.in
Happy Reading and Best Wishes!

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SYLLABUS
PAPER – 2: BUSINESS LAWS (100 MARKS)
Objective:
To develop general legal knowledge of the law of Contracts, Sales and understanding of
various forms of businesses and their functioning to regulate business environment and to
acquire the ability to address basic application-oriented issues.
Contents:
1. Indian Regulatory Framework- Major Regulatory Bodies such as Ministry of Finance,

Ministry of Corporate Affairs, SEBI, RBI, IBBI, Ministry of Law and Justice etc.
2. The Indian Contract Act, 1872: General nature of contract, Consideration, Other
essential elements of a valid contract, Performance of contract, Breach of contract,
Contingent and Quasi Contract, Contract of Indemnity and Guarantee, Contract of
Bailment and Pledge, Contract of Agency.
3. The Sale of Goods Act, 1930: Formation of the contract of sale, Conditions and
Warranties, Transfer of ownership and Delivery of goods, Unpaid seller and his rights.
4. The Indian Partnership Act, 1932: General Nature of Partnership, Rights and Duties
of partners, Reconstitution of firms, Registration and Dissolution of a firm.
5. The Limited Liability Partnership Act, 2008: Introduction-covering nature and scope,
Essential features, Characteristics of LLP, Incorporation and Differences with other
forms of organizations.
6. The Companies Act, 2013: Essential features of company, Corporate veil theory, Classes
of companies, Types of share capital, Incorporation of company, Memorandum of
Association, Articles of Association, Doctrine of Indoor Management.
7. The Negotiable Instruments Act, 1881: Meaning of Negotiable Instruments,
Characteristics, Classification of Instruments, Different provisions relating to
Negotiation, Presentment of Instruments, Rules of Compensation.
Note: If new legislations are enacted in place of the existing legislations, the syllabus
would include the corresponding provisions of such new legislations with effect from
dates notified by the Institute.
The specific inclusions/ exclusions in the various topics covered in the syllabus will be
effected every year by way of Study Guidelines, if required.

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CONTENTS
CHAPTER – 1: INDIAN REGULATORY FRAMEWORK .......................................................1.1
Chapter Overview ........................................................................................................................... 1.2
1. Introduction ..................................................................................................................................... 1.2
2. What Is Law? .................................................................................................................................... 1.3
3. Sources of Law ............................................................................................................................... 1.3
4. The Process of Making A Law ..................................................................................................... 1.4
5. Enforcing The Law ......................................................................................................................... 1.6
6. Structure of The Indian Judicial System ................................................................................. 1.11
Test Your Knowledge .................................................................................................................. 1.12
CHAPTER – 2: THE INDIAN CONTRACT ACT 1872 ...........................................................2.1
Unit– I: Nature of Contracts .............................................................................................2.1
Unit Overview .................................................................................................................................. 2.2
1.1 What is Contract ? .......................................................................................................................... 2.4
1.2 Essentials of Valid Contract ......................................................................................................... 2.5
1.3 Types of Contracts ......................................................................................................................... 2.9
1.4 Proposal/Offer [Section 2(a) of the Indian Contract Act, 1872] ...................................... 2.15
1.5 Acceptance ..................................................................................................................................... 2.22
1.6 Communication of Offer and Acceptance ............................................................................. 2.26
1.7 Communication of Performance .............................................................................................. 2.30
1.8 Revocation of Offer and Acceptance ...................................................................................... 2.31
Summary ......................................................................................................................................... 2.33

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Unit– 2:Consideration .................................................................................................... 2.46
Unit Overview ................................................................................................................................ 2.46
2.1 What is Consideration? ............................................................................................................... 2.47
2.2 Legal Rules Regarding Consideration .................................................................................... 2.48
2.3 Suit by a Third Party to a Contract .......................................................................................... 2.50
2.4 Validity of an Agreement without Consideration................................................................ 2.52
Summary ......................................................................................................................................... 2.54
Unit– 3:Other Essential Elements of a Contract ............................................................ 2.58
Unit Overview ................................................................................................................................ 2.58
3.1 Capacity to Contract.................................................................................................................... 2.59
3.2 Free Consent.................................................................................................................................. 2.64
3.3 Elements Vitiating Free Consent .............................................................................................. 2.65
3.4 Legality of Object and Consideration ..................................................................................... 2.73
3.5 Void Agreements.......................................................................................................................... 2.77
Summary ......................................................................................................................................... 2.82
Unit– 4:Performance of Contract .................................................................................. 2.95
Unit Overview ................................................................................................................................ 2.95
4.1 Performance of Contract ............................................................................................................ 2.96
4.2 Conditions to Be Satisfied for A Valid Tender or Attempted Performance ................ 2.96
4.3 By Whom a Contract May Be Performed (Section 40, 41 And 42) ................................. 2.97
4.4 Distinction Between Succession and Assignment ............................................................... 2.98
4.5 Liability of Joint Promisor & Promisee .................................................................................. 2.99
4.6 Time and Place for Performance of the Promise ...............................................................2.101
4.7 Performance of Reciprocal Promise ......................................................................................2.102

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4.8 Appropriation of Payments .....................................................................................................2.106
4.9 Contracts, Which Need not be Performed – with the consent of both the parties .......2.107
4.10 Discharge of a Contract ............................................................................................................2.110
Summary .......................................................................................................................................2.113
Test Your Knowledge ................................................................................................................2.115
Unit– 5:Breach of Contract and its Remedies ............................................................. 2.122
Unit Overview ..............................................................................................................................2.122
5.1 Anticipatory Breach of Contract .............................................................................................2.123
5.2 Actual Breach of Contract ........................................................................................................2.124
5.3 Suit for Damages ........................................................................................................................2.125
5.4 Penalty and Liquidated Damages (Section 74) ..................................................................2.127
Summary .......................................................................................................................................2.131
Unit– 6: Contingent and Quasi Contracts ................................................................... 2.137
Unit Overview ..............................................................................................................................2.137
6.1 Contingent Contracts ................................................................................................................2.137
6.2 Rules Relating to Enforcement ...............................................................................................2.139
6.3 Quasi Contracts ..........................................................................................................................2.142
Summary .......................................................................................................................................2.146
Unit– 7: Contract of Indemnity and Guarantee ......................................................... 2.152
Unit Overview ..............................................................................................................................2.152
7.1 Contract of Indemnity ..............................................................................................................2.153
7.2 Contract of Guarantee .............................................................................................................2.155
7.3 Types of Guarantees .................................................................................................................2.157
7.4 Distinction Between a Contract of Indemnity and A Contract of Guarantee ...........2.158

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7.5 Nature and Extent of Surety’s Liability [Section 128] ......................................................2.159
7.6 Liability of Two Persons, Primarily Liable, Not Affected by Arrangement

Between Them That One Shall Be Surety on other’s Default ........................................2.160
7.7 Discharge of A Surety ..............................................................................................................2.160
7.8 Rights of A Surety ......................................................................................................................2.164
Summary .......................................................................................................................................2.167
Unit– 8: Bailment and Pledge ..................................................................................... 2.176
Unit Overview ..............................................................................................................................2.176
8.1 What Is Bailment? .....................................................................................................................2.176
8.2 Duties of A Bailor .......................................................................................................................2.178
8.3 Duties of A Bailee .......................................................................................................................2.180
8.4 Rights of A Bailor ......................................................................................................................2.183
8.5 Rights of A Bailee ......................................................................................................................2.184
8.6 Rights of Bailor and Bailee Against Any Wrong Doer (Third Party) ............................2.185
8.7 Termination of Bailment .........................................................................................................2.185
8.8 Finder of Lost Goods ................................................................................................................2.186
8.9 Right of Lien ...............................................................................................................................2.186
8.10 Pledge ..........................................................................................................................................2.188
8.11 Pledge by Non-Owner .............................................................................................................2.191
8.12 Distinction Between Bailment and Pledge .........................................................................2.192
Summary .......................................................................................................................................2.193
Unit– 9: Agency ........................................................................................................... 2.201
Unit Overview ..............................................................................................................................2.201
9.1 What is Agency ? .......................................................................................................................2.202

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9.2 Appointment and Authority of Agents ...............................................................................2.203
9.3 Creation of Agency ...................................................................................................................2.203
9.4 Extent of Agent’s Authority ....................................................................................................2.207
9.5 Sub-Agents .................................................................................................................................2.208
9.6 Substituted Agent ......................................................................................................................2.209
9.7 Difference Between a Sub-Agent and A Substituted Agent .........................................2.210
9.8 Duties and Obligations of An Agent ...................................................................................2.211
9.9 Rights of An Agents ...................................................................................................................2.213
9.10 Principal’s Liability to Third Parties ......................................................................................2.216
9.11 Personal Liability of Agent to Third Parties .......................................................................2.218
9.12 Revocation of Authority ..........................................................................................................2.220
Summary .......................................................................................................................................2.223
CHAPTER – 3: THE SALE OF GOODS ACT, 1930 ..............................................................3.1
Unit -1: Formation of the Contract of Sale .....................................................................3.1
Unit overview................................................................................................................................... 3.2
Introduction ..................................................................................................................................... 3.2
1.1 Scope of the Act ............................................................................................................................. 3.2
1.2 Definitions ........................................................................................................................................ 3.3
1.3 Sale and Agreement to Sell (Section 4) .................................................................................. 3.8
1.4 Distinction Between Sale and an Agreement to Sell .......................................................... 3.10
1.5 Sale Distinguished from Other Similar Contracts................................................................ 3.11
1.6 Contract of Sale How Made (Section 5) ................................................................................. 3.13
1.7 Subject Matter of Contract of Sale .......................................................................................... 3.14

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1.8 Ascertainment of Price (Section 9 & 10) .............................................................................. 3.15
Summary ......................................................................................................................................... 3.16
Unit– 2: Conditions & Warranties ................................................................................ 3.26
Unit Overview ................................................................................................................................ 3.26
2.1 Stipulation as To Time (Section 11) ....................................................................................... 3.26
2.2 Introduction - Conditions and Warranties ............................................................................ 3.27
2.3 When Condition is to Be Treated as Warranty (Section 13) ............................................ 3.28
2.4 Express and Implied Conditions and Warranties (Section 14-17) ................................. 3.29
2.5 Caveat Emptor ............................................................................................................................. 3.35
Summary ......................................................................................................................................... 3.38
Test Your Knowledge ................................................................................................................. 3.40
Unit– 3: Transfer of Ownership and Delivery of Goods ............................................... 3.47
Unit Overview ................................................................................................................................ 3.47
Introduction ................................................................................................................................... 3.48
3.1 Passing of Property (Sections 18 – 26) .................................................................................. 3.48
3.2 Risk Prima Facie Passes with Property (Section 26) ............................................................ 3.54
3.3 Transfer of Title by Non-Owners (Sections 27 – 30) ......................................................... 3.55
3.4 Performance of The Contract of Sale (Sections 31 – 44) ................................................. 3.58
Summary ......................................................................................................................................... 3.62
Unit– 4: Unpaid Seller ................................................................................................... 3.73
Unit Overview ................................................................................................................................ 3.73
4.1 Unpaid Seller ................................................................................................................................. 3.74
4.2 Rights of An Unpaid Seller ....................................................................................................... 3.74
4.3 Right of Unpaid Seller Against the Goods ........................................................................... 3.75

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4.4 Rights of Unpaid Seller Against the Buyer (Sections 55-61) ............................................ 3.81
4.5 Remedies of Buyer Against the Seller .................................................................................... 3.82
4.6 Auction Sale (Section 64) .......................................................................................................... 3.84
4.7 Inclusion of Increased or Decreased Taxes in Contract of Sale (Section 64A) ............ 3.85
Summary ......................................................................................................................................... 3.86
CHAPTER – 4 : THE INDIAN PARTNERSHIP ACT, 1932 ...................................................4.1
Unit -1: General Nature of Partnership ..........................................................................4.1
Unit Overview .................................................................................................................................. 4.1
1.1 Definition of ‘Partnership’, ‘Partner’, ‘Firm’ And ‘Firm Name’ (Section 4) ...................... 4.2
1.2 Elements of Partnership ............................................................................................................... 4.2
1.3 True Test of Partnership ............................................................................................................... 4.4
1.4 Partnership Distinguished from Other Forms of Organisation ......................................... 4.7
1.5 Kinds of Partnerships .................................................................................................................. 4.12
1.6 Types of Partners .......................................................................................................................... 4.14
Summary ......................................................................................................................................... 4.17
Unit– 2: Relations of Partners ....................................................................................... 4.23
Unit Overview ................................................................................................................................ 4.23
2.1 Relation of Partners To one Another ...................................................................................... 4.24
2.2 Partnership Property (Section 14) .......................................................................................... 4.28
2.3 Personal Profit Earned by Partners (Section 16) .................................................................. 4.29
2.4 Rights and Duties of Partners After a Change in The Firm (Section 17) ....................... 4.30
2.5 Relation of Partners to Third Parties ....................................................................................... 4.31
2.6 Effect of Admissions by A Partner (Section 23) ................................................................... 4.34
2.7 Effect of Notice to Acting Partner (Section 24) ................................................................... 4.34

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2.8 Liability to Third Parties (Section 25 To 27) .......................................................................... 4.35
2.9 Rights of Transferee of a Partner’s Interest (Section 29) .................................................. 4.36
2.10 Minors Admitted to The Benefits of Partnership (Section 30) ......................................... 4.37
2.11 Legal Consequences of Partner Coming in And Going Out (Section 31 – 35) ............ 4.39
2.12 Rights of Outgoing Partner to Carry on Competing Business (Section 36) ................. 4.43
2.13 Right of Outgoing Partner in Certain Cases to Share

Subsequent Profits (Section 37) ............................................................................................... 4.43
2.14 Revocation of Continuing Guarantee by Change In Firm (Section 38) ........................ 4.44
Summary ......................................................................................................................................... 4.44
Unit– 3: Registration and Dissolution of a Firm .......................................................... 4.56
Unit Overview ................................................................................................................................ 4.56
3.1 Registration of Firms ................................................................................................................... 4.57
3.2 Consequences of Non-Registration (Section 69) ................................................................ 4.58
3.3 Dissolution of Firm (Sections 39 - 47) .................................................................................... 4.59
3.4 Consequences of Dissolution (Sections 45 - 55) ................................................................. 4.64
Summary ......................................................................................................................................... 4.66
CHAPTER – 5 : THE LIMITED LIABILITY PARTNERSHIP ACT, 2008 .................................5.1
Introduction ..................................................................................................................................... 5.2
1. Limited Liability Partnership- Meaning and Concept .......................................................... 5.3
2. Characteristic of LLP ...................................................................................................................... 5.6
3. Incorporation of LLP ...................................................................................................................... 5.9

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4. Differences With other Forms of Organisation .................................................................... 5.13
Summary ......................................................................................................................................... 5.16
CHAPTER – 6 : THE COMPANIES ACT, 2013 ....................................................................6.1
Introduction ..................................................................................................................................... 6.3
1. Company Meanings & its Features ........................................................................................... 6.3
2. Corporate Veil Theory ................................................................................................................... 6.7
3. Classes of Companies Under the Act .................................................................................... 6.10
4. Mode of Registration/Incorporation of Company ............................................................. 6.22
5. Classification of Capital .............................................................................................................. 6.26
6. Shares .............................................................................................................................................. 6.27
7. Memorandum of Association ................................................................................................... 6.29
8. Doctrine of Ultra Vires ................................................................................................................ 6.33
9. Articles of Association ................................................................................................................ 6.34
10. Doctrine of Indoor Management ............................................................................................. 6.36
Summary ......................................................................................................................................... 6.39
CHAPTER – 7 : THE NEGOTIABLE INSTRUMENTS ACT, 1881 ..........................................7.1
Introduction ..................................................................................................................................... 7.2
1. Meaning of Negotiable Instruments ......................................................................................... 7.3
2. Promissory Note ............................................................................................................................ 7.4
3. Bills of Exchange ............................................................................................................................. 7.7
4. Cheque ............................................................................................................................................ 7.10

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5. Classification Of Negotiable Instruments .............................................................................. 7.12
6. Negotiation (Transfer) Of Negotiable Instruments............................................................. 7.15
7. Dishonour of Cheques for Insufficiency of funds in the

accounts(Section 138 to 142) ................................................................................................... 7.18
8. Presentment of Instruments ...................................................................................................... 7.20
9. Rules of Compensation .............................................................................................................. 7.23
Summary ......................................................................................................................................... 7.24

CHAPTER
1
INDIAN REGULATORY
FRAMEWORK
LEARNING OUTCOMES
After studying this Chapter, you will be able to understand:

♦ Meaning of Law and its sources
♦ Types of laws in the Indian Legal System
♦ Enforcement of Law
♦ Introduction of Major Regulatory Bodies such as Ministry of
Finance, MCA, SEBI, RBI, IBBI and Ministry of Law and Justice.

1.2 BUSINESS LAWS
CHAPTER OVERVIEW
Sources of Law
Criminal Law
Process of
What is Law?
making a Law
Civil Law
Enforcement of
Types of Law
Law
Common Law
Ministry of
Finance
Principles of
Indian
Natural Justice
Regulatory
Framework MCA
SEBI
Major Regulatory
Bodies
RBI
Structure of
Indian Judicial
System
IBBI
Ministry of Law
and Justice
1. INTRODUCTION
Have you ever wondered why you are studying this subject called law? Is it only because it
has been prescribed in the syllabus or is it because you will need this knowledge as a
member of the Institute of Chartered Accountants of India?
Awareness of law is essential to become a full-fledged Chartered Accountant. This is

because a Chartered Accountant is the first level of contact on many legal matters. So, we
should possess knowledge of law so that we can advise our management and clients on
legal matters at a basic or threshold level.
Some of you may later wish to specialise in a subject called taxation. Remember tax laws are
also laws. In order to become an expert in taxation you should possess a basic awareness of
the legal and regulatory framework of our country. The purpose of a regulatory framework is

INDIAN REGULATORY FRAMEWORK 1.3
to provide a set of uniform rules and regulations that will govern the conduct of people
interacting with each other in personal as well as business relationships.
Down the ages, mankind has evolved from a hunter- gatherer society through agriculture
and industrial revolution to a complex social framework. Throughout this journey, we have
always needed laws and regulations to guide us on the right course of conduct as well as to
identify violations and punish them.
If we talk about ancient law, on the basis of information available from different sources
“Code of Hammurabi” is known for oldest law in written form. King Hammurabi ruled
Babylon for the period from 1792 BC to 1758 BC. He carved the code on bulky stone slabs
and ordered to place those stones on different places all over the city so that the public may
have the knowledge of codes. He also appointed judges to check whether public is following
the laws or not.
In 450 BC, a set of laws was engraved on 12 bronze tablets in Rome which is considered as
first most detailed code of any of the civilisations and called Twelve Tables. The purpose of
these tables was to protect the rights of public and to provide remedy for wrongs. All the
citizens of Rome were supposed to have the knowledge of these tables. Over the time, many
amendments were done in these laws as per the requirements.
In this subject, you will be introduced to many laws. Therefore, in this chapter we will first
understand how these laws are made and how they are implemented.
2. WHAT IS LAW?
Law is a set of obligations and duties imposed by the government for securing welfare and
providing justice to society. India’s legal framework reflects the social, political, economic,
and cultural aspects of our vast and diversified country.
3. SOURCES OF LAW
The main sources of law in India are the Constitution, the statutes or laws made by
Parliament and State Assemblies, Precedents or the Judicial Decisions of various Courts and
in some cases, established Customs and Usages.
You must be aware that India is a parliamentary democracy. We have a constitution which is
the basis and source for all laws. We elect our representatives to the parliament as well as to
the legislative assemblies of various States. These representatives of the people make laws
in parliament or in their state assemblies as the case may be. So, Parliament is the ultimate

1.4 BUSINESS LAWS
law-making body. The laws passed by parliament may apply throughout all or a portion of
India, whereas the laws passed by state legislatures apply only within the borders of the
states concerned.
The Government of India Act, 1935, passed by the Parliament of the United Kingdom is the
precursor for the Constitution of India. It defined the characteristics of the Government from
“unitary” to “federal”. Powers were distributed between Centre and State to avoid any
disputes. In 1937, Federal Court was established and had the jurisdiction of appellate,
original and advisory. The powers of Appellate Jurisdiction extended to civil and criminal
cases whereas the Advisory Jurisdiction was extended with the powers to Federal Court to
advise Governor-General in matters of public opinion. The Federal Court operated for 12
years and heard roughly 151 cases. The Federal Court was supplanted by India’s current
Apex Court, the Supreme Court of India.
The Constitution of India, 1950 is the foremost law that deals with the framework within
which our democratic system works, and our laws are made for the people, by the people.
The Constitution also provides for and protects certain Fundamental rights of citizens. It also
lays down Fundamental duties as well as the powers and duties of Governments, both
Central and State. The laws in India are interconnected with each other forming a hybrid
legal system.
The people who wrote the Constitution decided to divide the law-making power between
the Central Government and the various State Governments. So, the Indian Constitution has
three lists Viz., Central List, State List and Joint List.
Depending on the list in which it figures a matter would become the subject for Central law
or a State law. For example, Income Tax is a Central subject. So, throughout India we have
only one law for Income Tax which is implemented by the Central Government through the
Ministry of Finance. We also have matters for which both Central as well as State
Governments can pass laws. Levy of stamp duty is such an example. Both Central
Government and State Government have laws governing Levy of stamp duty.
4. THE PROCESS OF MAKING A LAW

When a law is proposed in parliament it is called a Bill. After discussion and debate, the law
is passed in Lok Sabha. Thereafter, it has to be passed in Rajya Sabha. It then has to obtain
the assent of the President of India. Finally, the law will be notified by the Government in the
publication called the Official Gazette of India. The law will become applicable from the date
mentioned in the notification as the effective date. Once it is notified and effective, it is
called an Act of Parliament.

Types of laws in the Indian Legal System

The laws in the Indian legal system could be broadly classified as follows:
Types of laws
Principles of
Criminal Law Civil Law Common Law
Natural Justice
Criminal Law
Criminal law is concerned with laws pertaining to violations of the rule of law or public
wrongs and punishment of the same. Criminal Law is governed under the Indian Penal Code,
1860, and the Code of Criminal Procedure, 1973 (Crpc). The Indian Penal Code, 1860, defines
the crime, its nature, and punishments whereas the Criminal Procedure Code, 1973, defines
exhaustive procedure for executing the punishments of the crimes.
Murder, rape, theft, fraud, cheating and assault are some examples of criminal offences
under the law.
Civil Law
Matters of disputes between individuals or organisations are dealt with under Civil Law. Civil
courts enforce the violation of certain rights and obligations through the institution of a civil
suit. Civil law primarily focuses on dispute resolution rather than punishment. The act of
process and the administration of civil law are governed by the Code of Civil Procedure,
1908 (CPC). Civil law can be further classified into Law of Contract, Family Law, Property Law,
and Law of Tort.
Some examples of civil offences are breach of contract, non-delivery of goods, non-payment
of dues to lender or seller defamation, breach of contract, and disputes between landlord
and tenant.
Common Law
A judicial precedent or a case law is common law. A judgment delivered by the Supreme
Court will be binding upon the courts within the territory of India under Article 141 of the
Indian Constitution. The doctrine of Stare Decisis is the principle supporting common law. It
is a Latin phrase that means “to stand by that which is decided.” The doctrine of Stare
Decisis reinforces the obligation of courts to follow the same principle or judgement
established by previous decisions while ruling a case where the facts are similar or “on all
four legs” with the earlier decision.

1.6 BUSINESS LAWS
Principles of Natural Justice

Natural justice, often known as Jus Natural deals with certain fundamental principles of
justice going beyond written law. Nemo judex in causa sua (Literally meaning “No one
should be made a judge in his own cause, and it’s a Rule against Prejudice), audi alteram
partem (Literally meaning “hear the other party or give the other party a fair hearing), and
reasoned decision are the rules of Natural Justice. A judgement can override or alter a
common law, but it cannot override or change the statute.
5. ENFORCING THE LAW

After a law is passed in parliament it has to be enforced. Somebody should monitor whether
the law is being followed. This is the job of the executive. Depending on whether a law is a
Central law or a State law the Central or State Government will be the enforcing authority.
For this purpose government functions are distributed to various ministries. Some of the
popular Ministries are the Ministry of Finance, the Ministry of Corporate Affairs, the Ministry
of Home Affairs, the Ministry of Law and Justice and so on. These Ministries are headed by a
minister and run by officers of the Indian administrative and other services.
The Government of India exercises its executive authority through a number of Government
Ministries or Departments of State. A Ministry is composed of employed officials, known as
civil servants, and is politically accountable through a minister. Most major Ministries are
headed by a Cabinet Minister, who sits in the Union Council of Ministers, and is typically
supported by a team of junior ministers called the Ministers of State.
For example, the Income Tax Act is implemented and enforced by the Ministry of Finance
through the Central Board for Direct Taxes coming under the Department of Revenue and is
administered by the officers of the Indian Revenue Service. We will see some of the major
Ministries and the laws which are enforced by them:
(1) The Ministry of Finance
The Ministry of Finance (Vitta Mantralaya) is a Ministry within the Government of India
concerned with the economy of India, serving as the Treasury of India. In particular, it
concerns itself with taxation, financial legislation, financial institutions, capital markets,
centre and state finances, and the Union Budget. As a Chartered Accountant, many of your
day-to-day work life will be impacted by this ministry and its proclamations. This Ministry is
so important that many ministers have preferred to hold the portfolio of Finance Minister
also. One of the important functions of the Finance Ministry is the presentation of the Union
Budget. This annual event is eagerly awaited by professionals and the common man as it
provides for the rates of taxes and budget allocations for the ensuing year.

Who presented the Maximum number of Union Budgets as Finance Minister?

Shri. Morarji Desai during his stint as Finance Minister between 1962 and 1969 has
presented 10 Union Budgets making it the highest. The next on the list is Shri. P
Chidambaram at 9, followed by Shri. Pranab Mukherjee at 8. Shri. Yashwant Sinha and
Dr. Manmohan Singh have presented 8 and 6 budgets respectively.
Constitution of the Ministry of Finance-

Ministry of Finance
• is the apex controlling authority

• of four Central Civil Services, namely:
• Indian Revenue Service
• Indian Audit and Accounts Service
• Indian Economic Service and
• Indian Civil Accounts Service.
• Also the apex controlling authority of one of the central commerce services namely
• Indian Cost and Management Accounts Service.
Departments under the Ministry of Finance-

Departments of Ministry of Finance
Department
of Economic Department
Affairs of
Expenditure
Department
Department
of Revenue Department
of Financial
of
Services
Investment Department
and Public of Public
Asset Enterprises
Management

1.8 BUSINESS LAWS
(i) Ministry of Corporate Affairs (MCA)
Ministry of Corporate Affairs
• is an Indian Government Ministry.

• primarily concerned with administration of the Companies Act
2013, the Companies Act 1956, the Limited Liability Partnership
Act, 2008, and the Insolvency and Bankruptcy Code, 2016.
• responsible mainly for the regulation of Indian enterprises in the
industrial and services sector.
• The Ministry is mostly run by civil servants of the ICLS cadre.
• These officers are elected through the Civil Services
Examination conducted by Union Public Service Commission.
• The highest post, Director General of Corporate Affairs (DGCoA),
is fixed at Apex Scale for the ICLS.
Ministry of Home Affairs (Gṛha Mantralaya)
• is a ministry of the Government of India.

• As an interior ministry of India, it is mainly responsible for the
maintenance of internal security and domestic policy.
• The Home Ministry is headed by Union Minister of Home
Affairs.
Departments of Ministry of Home Affairs
Department Department of Department of

Department
of Border Internal Official Language
of States
Management Security
Department of Home
Department of Jammu, Kashmir and

Ladakh Affairs

Department of Official Language
Central Translation Central Hindi Training Directorate of

Bureau Institute Census Operations
Ministry of Law and Justice

Ministry of Law and Justice
•in the Government of India is a Cabinet Ministry

•deals with the
➢management of the legal affairs, through the Legislative Department
➢legislative activities through the Department of Legal Affairs
➢administration of justice in India through the Department of Justice
•The Department of Legal Affairs is concerned with advising the various
Ministries of the Central Government while the Legislative Department is
concerned with drafting of principal legislation for the Central Government.
Departments of Ministry of Law and Justice
Department of Legal Legislative Department of

Affairs Department Justice
(ii) The Securities and Exchange Board of India (SEBI)
The Securities and Exchange Board of India (SEBI)
•is the regulatory body

• for securities and commodity market in India
• under the ownership of Ministry of Finance within the Government of India.
• It was established on 12 April, 1988 as an executive body and was given
statutory powers on 30 January, 1992 through the SEBI Act, 1992.

1.10 BUSINESS LAWS
(iii) Reserve Bank of India (RBI)
Reserve Bank of India-
• is India's Central Bank and regulatory body responsible for regulation of the
Indian banking system.
• It is under the ownership of Ministry of Finance, Government of India.
• It is responsible for the control, issue and maintaining supply of the Indian
rupee.
• It also manages the country's main payment systems and works to promote
its economic development.
• Bharatiya Reserve Bank Note Mudran (BRBNM) is a specialised division of
RBI through which it prints and mints Indian currency notes (INR) in two of its
currency printing presses located in Nashik (Western India) and Dewas
(Central India).
• RBI established the National Payments Corporation of India as one of its
specialised division to regulate the payment and settlement systems in India.
• Deposit Insurance and Credit Guarantee Corporation was established by RBI
as one of its specialised division for the purpose of providing insurance of
deposits and guaranteeing of credit facilities to all Indian banks.
(iv) Insolvency and Bankruptcy Board of India (IBBI)-
Insolvency and Bankruptcy Board of India (IBBI)-
•is the regulator for overseeing insolvency proceedings and entities

like Insolvency Professional Agencies (IPA), Insolvency Professionals
(IP) and Information Utilities (IU) in India.
•It was established on 1 October 2016 and given statutory powers
through the Insolvency and Bankruptcy Code, which was passed
by Lok Sabha on 5th May 2016.
•It covers Individuals, Companies, Limited Liability,
Partnerships and Partnership firms. The new code will speed up the
resolution process for stressed assets in the country.
•It attempts to simplify the process of insolvency and bankruptcy
proceedings.
•It handles the cases using two tribunals like NCLT (National
company law tribunal) and Debt recovery tribunal.

6. STRUCTURE OF THE INDIAN JUDICIAL SYSTEM

When there is a dispute between citizens or between citizens and the Government, these
disputes are resolved by the judiciary.
The functions of judiciary system of India are:
♦ Regulation of the interpretation of the Acts and Codes,
♦ Dispute Resolution,
♦ Promotion of fairness among the citizens of the land.
In the hierarchy of courts, the Supreme Court is at the top, followed by the High Courts
and District Courts. Decisions of a High Court are binding in the respective state but are only
persuasive in other states. Decisions of the Supreme Court are binding on all High Courts
under Article 141 of the Indian Constitution. In fact, a Supreme Court decision is the final
word on the matter.
(i) Supreme Court

The Supreme Court is the apex body of the judiciary. It was established on 26th January,
1950. The Chief Justice of India is the highest authority appointed under Article 126. The
principal bench of the Supreme Court consists of seven members including the Chief Justice
of India. Presently, the number has increased to 34 including the Chief Justice of India due
to the rise in the number of cases and workload. An individual can seek relief in the
Supreme Court by filing a writ petition under Article 32.
(ii) High Court

The highest court of appeal in each state and union territory is the High Court. Article 214 of
the Indian Constitution states that there must be a High Court in each state. The High Court
has appellant, original jurisdiction, and Supervisory jurisdiction. However, Article 227 of the
Indian Constitution limits a High Court’s supervisory power. In India, there are twenty-five
High Courts, one for each state and union territory, and one for each state and union
territory. Six states share a single High Court. An individual can seek remedies against
violation of fundamental rights in High Court by filing a writ under Article 226.
Which is the oldest High Court in India?
The oldest high court in the country is the Calcutta High Court, established on 2nd July,
1862.

1.12 BUSINESS LAWS
(iii) District Court

Below the High Courts are the District Courts. The Courts of District Judge deal with Civil law
matters i.e. contractual disputes and claims for damages etc., The Courts of Sessions deals
with Criminal matters.
Under pecuniary jurisdiction, a civil judge can try suits valuing not more than Rupees two
crore.
Jurisdiction means the power to control. Courts get territorial Jurisdiction based on the
areas covered by them. Cases are decided based on the local limits within which the parties
reside or the property under dispute is situated.
(iv) Metropolitan courts

Metropolitan courts are established in metropolitan cities in consultation with the High
Court where the population is ten lakh or more. Chief Metropolitan Magistrate has powers
as Chief Judicial Magistrate and Metropolitan Magistrate has powers as the Court of a
Magistrate of the first class.
TEST YOUR KNOWLEDGE

Multiple Choice Questions
1. A Chartered Accountant should be aware of law because
(a) He has to be an expert in law
(b) He has to argue in High court and Supreme court

(c) He has to advice management and clients on legal matters at a basic or
threshold level.
(d) None of the above.
2. Which of the following is not a MAIN source of law in India?
(a) Legal text books
(b) The Parliament

(c) State Assemblies
(d) The Constitution

3. In India we follow the federal system of Government. This means that

(a) All the power is with the President of India
(b) Powers are distributed between Centre and States
(c) All the power is with the Centre
(d) There are no restrictions on the power of States.

4. The Constitution of India was adopted in
(a) 1947
(b) 1949
(c) 1950
(d) 1951
5. Income Tax Act, 1961 is a part of the
(a) Central list
(b) State list
(c) Joint list
(d) None of the above
6. The law concerned with violation of the rule of law and punishment of the same is
called -
(a) Family law
(b) Criminal law
(c) Civil law

(d) Property law
7. Which of the following is NOT an example of Civil law?
(a) Breach of contract

(b) Non-delivery of goods
(c) Traffic offenses
(d) Non-payment of dues

1.14 BUSINESS LAWS
8. When a law is proposed in Parliament it is called

(a) Act
(b) Statute
(c) Bill
(d) Notification
9. Which of the following is NOT a department of the Ministry of Finance?
(a) Department of Economic Affairs
(b) Department of Expenditure
(c) Department of States
(d) Department of Revenue
10. Courts get territorial limits based on
(a) The local limits within which the party resides
(b) The local limits within which the property under dispute is located
(c) either a or b
ANSWERS
1. (c) 2 (a) 3 (b) 4. (c) 5. (a) 6. (b)
7. (c) 8. (c) 9. (c) 10. (c)

1.2

CHAPTER 2
INDIAN CONTRACT
ACT, 1872
UNIT – 1: NATURE OF CONTRACTS
LEARNING OUTCOMES
♦ The meaning of the terms ‘agreement’ and ‘contract’ and note the
distinction between the two.
♦ The essential elements of a contract.
♦ About various types of contract.
♦ The concept of offer and acceptance and rules of communication
and revocation thereof.
UNIT OVERVIEW

2.2 BUSINESS LAWS
UNIT OVERVIEW
Contract
Elements of Essentials of a Types of

Contract valid Contract Contracts
Agreement Enforceability
Offer Acceptance
Legal
Essentials Commun Legal Rules Communica
Rules of Kinds of
of a ication of of a valid tion of
a valid offer
proposal offer acceptance acceptance
offer
Contract Law before Indian Contract Act, 1872

To understand the Contract Law before the Indian Contract Act, 1872, we should understand
the journey of contract law during different time periods. In the ancient and medieval time,
there was no specific law for contracts. For this purpose, generally, different sources of Hindu
law like; Vedas, Dharam shastras, Smritis, Shrutis etc. were referred which gave a vivid
description of the law similar to contracts in those times. During the period of Mauryas,
contracts were in the form of "bilateral transactions" which were based on free consent on all
the terms and conditions involved.
During the Mughal rule in India, contracts were governed by Mohammedan Law of Contract.
In this law, the Arabic word ‘Aqd’ is known for contract which means a conjunction. In the
same way, word ‘Ijab’ was used for proposal and ‘Qabul’ was used for acceptance. The
formation of a contract according to Islamic law does not require any kind of formality; the
only requirement is the express consent of both parties on the same thing in the same sense.
Hindu law is basically different from that of English law. Hindu law is actually the compilation
of numerous customs and works of Smritikaras, who interpreted and analysed Vedas to
develop the various aspect of Hindu law. According to Hindu law, minor, intoxicated person,
old man or handicapped cannot enter into a valid contract. According to Narada smriti,
someone of age upto 8 years is considered as an infant. Age from 8 years to 16 years is
considered as boyhood and after 16 years the person is competent to enter into a contract.

THE INDIAN CONTRACT ACT, 1872 2.3
During British period; before the advent of the Indian Contract Act, the English Law was
applied in the Presidency Towns of Madras, Bombay and Calcutta under the Charter of 1726
issued by king George to the East India Company. If one of the parties of contract is from
either of the religion and other is from other religion then the law of the defendant is to be
used. This was followed in the presidency towns, but in cities outside the presidency towns,
the matters were solved on the basis of justice, equity and good conscience. This procedure
was followed till the Indian Contract Act was implemented in India.
The Law of contract: Introduction
The Law of Contract constitutes the most important branch of mercantile or commercial law.
It affects everybody, more so, trade, commerce and industry. It may be said that the contract
is the foundation of the civilized world. The law relating to contract is governed by the Indian
Contract Act, 1872. It was formed on April 25, 1872 and came into force on September 01,
1872. The preamble to the Act says that it is an Act "to define and amend certain parts of the
law relating to contract". It extends to the whole of India including the state of Jammu and
Kashmir after removal of Article – 370 of Indian Constitution.
The Act mostly deals with the general principles and rules governing contracts. The Act is
divisible into two parts. The first part (Section 1-75) deals with the general principles of the
law of contract, and therefore applies to all contracts irrespective of their nature. The second
part (Sections 124-238) deals with certain special kinds of contracts, e.g., Indemnity and
guarantee, bailment, pledge, and agency.
As a result of increasing complexities of business environment,
innumerable contracts are entered into by the parties in the usual
course of carrying on their business. ‘Contract’ is the most usual
method of defining the rights and duties in a business
transaction. This branch of law is different from other branches
of law in a very important aspect. It does not prescribe so many rights and duties, which the
law will protect or enforce; instead it contains a number of limiting principles subject to which
the parties may create rights and duties for themselves. The Indian Contract Act, 1872 codifies
the legal principles that govern ‘contracts’. The Act basically identifies the ingredients of a
legally enforceable valid contract in addition to dealing with certain special type of contractual
relationships like indemnity, guarantee, bailment, pledge, quasi contracts, contingent
contracts etc. It basically defines the circumstances in which promises made by the parties to
a contract shall be legally binding on them.
This unit refers to the essentials of a legally enforceable agreement or contract. It sets out
rules for the offer and acceptance and revocation thereof. It states the circumstances when an
agreement is voidable or enforceable by one party only, and when the agreements are void,
i.e. not enforceable at all.

2.4 BUSINESS LAWS
1.1 WHAT IS A CONTRACT?

The term contract is defined under section 2(h) of the Indian Contract Act, 1872 as-
“an agreement enforceable by law”.
The contract consists of two essential elements:
(i) an agreement, and
(ii) its enforceability by law.
(i) Agreement - The term ‘agreement’ given in Section 2(e) of the Act is defined
as- “every promise and every set of promises, forming the consideration for
each other”.
To have an insight into the definition of agreement, we need to understand
promise.
Section 2 (b) defines promise as- “when the person to whom the proposal is
made signifies his assent there to, the proposal is said to be accepted. Proposal
when accepted, becomes a promise”.
The following points emerge from the above definition:
1. when the person to whom the proposal is made
2. signifies his assent on that proposal which is made to him
3. the proposal becomes accepted
4. accepted proposal becomes promise
Thus, we say that an agreement is the result of the proposal made by one party
to the other party and that other party gives his acceptance thereto of course
for mutual consideration.
Agreement = Offer/Proposal + Acceptance + Consideration

(ii) Enforceability by law – An agreement to become a contract must give rise to
a legal obligation which means a duly enforceable by law.
Thus, from above definitions it can be concluded that –

Contract = Agreement + Enforceability by law
On elaborating the above two concepts, it is obvious that contract comprises of an agreement
which is a promise or a set of reciprocal promises, that a promise is the acceptance of a
proposal giving rise to a binding contract. Further, section 2(h) requires an agreement capable
of being enforceable by law before it is called ‘contract’. Where parties have made a binding
contract, they created rights and obligations between themselves.

Example 1: A agrees with B to sell car for ` 2 lacs to B. Here A is under an obligation to give
car to B and B has the right to receive the car on payment of ` 2 lacs and also B is under an
obligation to pay ` 2 lacs to A and A has a right to receive ` 2 lacs.
Example 2: Father promises his son to pay him pocket allowance of Rs. 500 every month. But
he refuses to pay later. The son cannot recover the same in court of law as this is a social
agreement. This is not created with an intention to create legal relationship and hence it is
not a contract.
So, Law of Contract deals with only such legal obligations which has resulted from
agreements. Such obligation must be contractual in nature. However, some obligations are
outside the purview of the law of contract.
Example 3: An obligation to maintain wife and children, an order of the court of law etc. These
are status obligations and so out of the scope of the Contract Act.
Difference between Agreement and Contract
Basis of differences Agreement Contract
Meaning Every promise and every set Agreement enforceable by law.
of promises, forming the (Agreement + Legal enforceability)
consideration for each other.
(Promise + Consideration)
Scope It’s a wider term including It is used in a narrow sense with the
both legal and social specification that contract is only
agreement. legally enforceable agreement.
Legal obligation It may not create legal Necessarily creates a legal
obligation. An agreement obligation. A contract always
does not always grant rights grants certain rights to every party.
to the parties
Nature All agreement are not All contracts are agreements.
contracts.
1.2 ESSENTIALS OF A VALID CONTRACT

Essentials of a valid contract
As given by Section 10 of Indian Not given by Section 10 but are also

Contract Act, 1872 considered essential
1 Agreement 1 Two parties
2 Free consent 2 Intention to create legal relationship

2.6 BUSINESS LAWS
3 Competency of the parties 3 Fulfilments of legal formalities

4 Lawful consideration 4 Certainty of meaning
5 Legal object 5 Possibility of performance
6 Not expressly declared to be void [as per 6 -
Section 24 to 30 and 56]
In terms of Section 10 of the Act, “all agreements are contracts if they are made by the
free consent of the parties competent to contract, for a lawful consideration and with a
lawful object and are not expressly declared to be void”.
Since section 10 is not complete and exhaustive, so there are certain other sections which also
contains requirements for an agreement to be enforceable. Thus, in order to create a valid
contract, the following elements should be present:
1. Two Parties: One cannot contract with himself. A contract involves at least two parties-
one party making the offer and the other party accepting it. A contract may be made
by natural persons and by other persons having legal existence e.g. companies,
universities etc. It is necessary to remember that identity of the parties be
ascertainable.
Example 4: To constitute a contract of sale, there must be two parties- seller and
buyer. The seller and buyer must be two different persons, because a person cannot
buy his own goods.
In State of Gujarat vs. Ramanlal S & Co. when on dissolution of a partnership, the
assets of the firm were divided among the partners, the sales tax officer wanted to tax
this transaction. It was held that it was not a sale. The partners being joint owner of
those assets cannot be both buyer and seller.
2. Parties must intend to create legal obligations: There must be an intention on the
part of the parties to create legal relationship between them. Social or domestic type
of agreements are not enforceable in court of law and hence they do not result into
contracts.
Example 5: A husband agreed to pay to his wife certain amount as maintenance every
month while he was abroad. Husband failed to pay the promised amount. Wife sued
him for the recovery of the amount. Here, in this case, wife could not recover as it was
a social agreement and the parties did not intend to create any legal relations. (Balfour
v. Balfour)
Example 6: Mr. Lekhpal promises to pay ` 5 lakhs to his son if the son passes the CA
exams. On passing the exams, the son claims the money. Here, the son could not
recover as it was a social agreement.

Example 7: A sold goods to B on a condition that he must pay for the amount of goods
within 30 days. Here A intended to create legal relationship with B. Hence the same is
contract. On failure by B for making a payment on due date, A can sue him in the court
of law.
3. Other Formalities to be complied with in certain cases: A contract may be written
or spoken. As to legal effects, there is no difference between a written contract and
contract made by word of mouth. But in the interest of the parties the contract must
be written. In case of certain contracts some other formalities have to be complied with
to make an agreement legally enforceable.
For e.g. Contract of Insurance is not valid except as a written contract. Further, in case
of certain contracts, registration of contract under the laws which is in force at the
time, is essential for it to be valid, e.g. in the case of immovable property.
Thus, where there is any statutory requirement that any contract is to be made in
writing or in the presence of witness, or any law relating to the registration of
documents must be complied with.
4. Certainty of meaning: The agreement must be certain and not vague or indefinite.
Example 8: A agrees to sell to B a hundred tons of oil. There is nothing certain in order
to show what kind of oil was intended for.
Example 9: XYZ Ltd. agreed to lease the land to Mr. A for indefinite years. The contract
is not valid as the period of lease is not mentioned.
5. Possibility of performance of an agreement: The terms of agreement should be
capable of performance. An agreement to do an act impossible in itself cannot be
enforced.
Example 10: A agrees with B to discover treasure by magic. The agreement cannot be
enforced as it is not possible to be performed
Now, according to Section 10 of the Indian Contract Act, 1872, the following are the essential
elements of a Valid Contract:
I. Offer and Acceptance or an agreement: An agreement is the first essential element
of a valid contract. According to Section 2(e) of the Indian Contract Act, 1872, “Every
promise and every set of promises, forming consideration for each other, is an
agreement” and according to Section 2(b) “A proposal when accepted, becomes a
promise”. An agreement is an outcome of offer and acceptance for consideration.
II. Free Consent: Two or more persons are said to consent when they agree upon the
same thing in the same sense. This can also be understood as identity of minds in
understanding the terms viz consensus ad idem. Further such consent must be free.

2.8 BUSINESS LAWS
Consent would be considered as free consent if it is not caused by coercion, undue

influence, fraud, misrepresentation or mistake.
Example 11: A, who owns two cars is selling red car to B. B thinks he is purchasing the
black car. There is no consensus ad idem and hence no contract.
To determine consensus ad idem the language of the contract should be clearly drafted.
Thus, if A says B “Will you buy my red car for ` 3,00,000?“. B says “yes” to it. There is
said to be consensus ad idem i.e. the meaning is taken in same sense by both the
parties.
Example 12: A threatened to shoot B if he (B) does not lend him ` 2,00,000 and B
agreed to it. Here the agreement is entered into under coercion and hence not a valid
contract.
(Students may note that the terms coercion, undue influence, fraud, misrepresentation,
mistake are explained in the Unit-3)
III. Capacity of the parties: Capacity to contract means the legal ability of a person to
enter into a valid contract. Section 11 of the Indian Contract Act specifies that every
person is competent to contract who
(a) is of the age of majority according to the law to which he is subject and
(b) is of sound mind and
(c) is not otherwise disqualified from contracting by any law to which he is subject.
A person for being competent to contract must fulfil all the above three qualifications.
Qualification (a) refers to the age of the contracting person i.e. the person entering
into contract must be of 18 years of age. Persons below 18 years of age are considered
minor, therefore, incompetent to contract.
Qualification (b) requires a person to be of sound mind i.e. he should be in his senses
so that he understands the implications of the contract at the time of entering into a
contract. A lunatic, an idiot, a drunken person or under the influence of some
intoxicant is not supposed to be a person of sound mind.
Qualification (c) requires that a person entering into a contract should not be
disqualified by his status, in entering into such contracts. Such persons are an alien
enemy, foreign sovereigns, convicts etc. They are disqualified unless they fulfil certain
formalities required by law.
Contracts entered by persons not competent to contract are not valid.
IV. Consideration: It is referred to as ‘quid pro quo’ i.e. ‘something in return’. A valuable
consideration in the sense of law may consist either in some right, interest, profit or
benefit accruing to one party, or some forbearance, detriment, loss or responsibility
given, suffered or undertaken by the other.

Example 13: A agrees to sell his books to B for ` 100.

B’s promise to pay ` 100 is the consideration for A’s promise to sell his books.
A’s promise to sell the books is the consideration for B’s promise to pay ` 100.
V. Lawful Consideration and Object: The consideration and object of the agreement
must be lawful.
Section 23 states that consideration or object is not lawful if it is prohibited by law, or
it is such as would defeat the provisions of law, if it is fraudulent or involves injury to
the person or property of another or court regards it as immoral or opposed to public
policy.
Example 14: ‘A’ promises to drop prosecution instituted against ‘B’ for robbery and
‘B’ promises to restore the value of the things taken. The agreement is void, as its
object is unlawful.
Example 15: A agrees to sell his house to B against 100 kgs of cocaine (drugs). Such
agreement is illegal as the consideration is unlawful.
VI. Not expressly declared to be void: The agreement entered into must not be which the
law declares to be either illegal or void. An illegal agreement is an agreement expressly
or impliedly prohibited by law. A void agreement is one without any legal effects.
Example 16: Threat to commit murder or making/publishing defamatory statements
or entering into agreements which are opposed to public policy are illegal in nature.
Similarly, any agreement in restraint of trade, marriage, legal proceedings, etc. are
classic examples of void agreements.
1.3 TYPES OF CONTRACTS

Now let us discuss various types of contracts.
Type of Contract on the basis of
Validity or Formation Performance

enforceability
Express contract
Valid contracts Executed contract
Implied contract
Void contracts Executory contract
Quasi-contract
Voidable contracts Unilateral Bilateral
E-contracts contract contract
Illegal agreements
Unenforceable contracts

2.10 BUSINESS LAWS
I. On the basis of the validity

1. Valid Contract: An agreement which is binding and enforceable is a valid
contract. It contains all the essential elements of a valid contract.
Example 17: A ask B if he wants to buy his bike for ` 50,000. B agrees to buy
bike. It is agreement which is enforceable by law. Hence, it is a valid contract.
2. Void Contract: Section 2 (j) states as follows: “A contract which ceases to be
enforceable by law becomes void when it ceases to be enforceable”. Thus, a void
contract is one which cannot be enforced by a court of law.
Example 18: Mr. X agrees to write a book with a publisher. Such contract is
valid. But after few days, X dies in an accident. Here the contract becomes void
due to the impossibility of performance of the contract. Thus, a valid contract
when cannot be performed because of some uncalled happening becomes
void.
Example 19: A contracts with B (owner of the factory) for the supply of 10 tons
of sugar, but before the supply is effected, the fire caught in the factory and
everything was destroyed. Here the contract becomes void.
It may be added by way of clarification here that when a contract is void, it is
not a contract at all but for the purpose of identifying it, it has to be called a
[void] contract.
3. Voidable Contract: Section 2(i) defines that “an agreement which is
enforceable by law at the option of one or more parties thereto, but not
at the option of the other or others is a voidable contract”.
This in fact means where one of the parties to the agreement is in a position or
is legally entitled or authorized to avoid performing his part, then the
agreement is treated and becomes voidable.
Following are the situations where a contract is voidable:
(i) When the consent of party is not free is caused by coercion, undue
influence, misrepresentation or fraud.
Example 20: X promise to sell his scooter to Y for ` 1 Lac. However,
the consent of X has been procured by Y at a gun point. X is an
aggrieved party, and the contract is voidable at his option but not on
the option of Y. It means if X accepts the contract, the contract
becomes a valid contract then Y has no option of rescinding the
contract.

(ii) When a person promises to do something for another person, but the
other person prevents him from performing his promise, the contract
becomes voidable at the option of first person.
Example 21: There is a contact between A and B to sell car of A to B
for ` 2,00,000. On due date of performance, A asks B that he does not
want to sell his car. Here contract is voidable at the option of B.
(iii) When a party to a contract promise to perform a work within a
specified time, could not perform with in that time, the contract is
voidable at the option of promisee.
Example 22: A agrees to construct a house for B upto 31-3-2022 but
A could not complete the house on that date. Here contract is voidable
at the option of B.
At this juncture it would be desirable to know the distinction between
a Void Contract and a Voidable Contract. These are elaborated
hereunder:
S. Basis Void Contract Voidable Contract

No.
1 Meaning A Contract An agreement which is
ceases to be enforceable by law at the
enforceable by option of one or more of the
law becomes parties thereto, but not at the
void when it option of the other or others,
ceases to be is a voidable contract.
enforceable.
2 Enforceability A void contract It is enforceable only at the
cannot be option of aggrieved party
enforced at all. and not at the option of
other party.
3 Cause A contract A contract becomes a
becomes void voidable contract if the
due to change in consent of a party was not
law or change in free.
circumstances
beyond the
contemplation
of parties.

2.12 BUSINESS LAWS
4 Performance A void contract If the aggrieved party does

of contract cannot be not, within reasonable time,
performed. exercise his right to avoid the
contract, any party can sue
the other for claiming the
performance of the contract.
5 Rights A void contract The party whose consent
does not grant was not free has the right to
any legal remedy rescind the contract within a
to any party. reasonable time. If so
rescinded, it becomes a void
contract. If it is not rescinded
it becomes a valid contract.
4. Illegal Contract: It is a contract which the law forbids to be made. The court
will not enforce such a contract but also the connected contracts. All illegal
agreements are void but all void agreements are not necessarily illegal. Despite
this, there is similarity between them is that in both cases they are void ab initio
and cannot be enforced by law.
Example 23: Contract that is immoral or opposed to public policy are illegal in
nature. Similarly, if R agrees with S, to purchase brown sugar, it is an illegal
agreement.
According to Section 2(g) of the Indian Contract Act, “an agreement not
enforceable by law is void”. The Act has specified various factors due to which
an agreement may be considered as void agreement. One of these factors is
unlawfulness of object and consideration of the contract i.e. illegality of the
contract which makes it void. The illegal and void agreement differ from each
other in the following respects:
Basis of Void agreement Illegal agreement

difference
Scope A void agreement is not An illegal agreement is

necessarily illegal. always void.
Nature Not forbidden under law. Are forbidden under law.
Punishment Parties are not liable for any Parties to illegal

punishment under the law. agreements are liable for
punishment.

Collateral It’s not necessary that Agreements collateral to

Agreement agreements collateral to illegal agreements are
void agreements may also always void.
be void. It may be valid also.
5. Unenforceable Contract: Where a contract is good in substance but because

of some technical defect i.e. absence in writing, barred by limitation etc. one or
both the parties cannot sue upon it, it is described as an unenforceable contract.
Example 24: A bought goods from B in 2018. But no payment was made till
2022. B cannot sue A for the payment in 2022 as it has crossed three years and
barred by Limitation Act. A good debt becomes unenforceable after the period
of three years as barred by Limitation Act.
Similarly, an agreement for transfer of immovable property should be written
for being enforceable.
II. On the basis of the formation of contract

1. Express Contracts: A contract would be an express contract if the terms are
expressed by words or in writing. Section 9 of the Act provides that if a proposal
or acceptance of any promise is made in words, the promise is said to be
express.
Example 25: A tells B on telephone that he offers to sell his house for ` 20 lacs
and B in reply informs A that he accepts the offer, this is an express contract.
2. Implied Contracts: Implied contracts in contrast come into existence by
implication. Most often the implication is by action or conduct of parties or
course of dealings between them. Section 9 of the Act contemplates such
implied contracts when it lays down that in so far as such proposal or
acceptance is made otherwise than in words, the promise is said to be implied.
Example 26: Where a coolie in uniform picks up the luggage of A to be carried
out of the railway station without being asked by A and A allows him to do so,
it is an implied contract and A must pay for the services of the coolie detailed
by him.
Example 27: A drinks a coffee in restaurant. There is an implied contract that
he should pay for the price of coffee.
Tacit Contracts: The word Tacit means silent. Tacit contracts are those that are
inferred through the conduct of parties without any words spoken or written. A
classic example of tacit contract would be when cash is withdrawn by a

2.14 BUSINESS LAWS
customer of a bank from the automatic teller machine [ATM]. Another example
of tacit contract is where a contract is assumed to have been entered when a
sale is given effect to at the fall of hammer in an auction sale. It is not a separate
form of contract but falls within the scope of implied contracts.
3. Quasi-Contract: A quasi-contract is not an actual contract, but it resembles a
contract. It is created by law under certain circumstances. The law creates and
enforces legal rights and obligations when no real contract exists. Such
obligations are known as quasi-contracts. In other words, it is a contract in
which there is no intention on part of either party to make a contract but law
imposes a contract upon the parties.
Example 28: Obligation of finder of lost goods to return them to the true owner
or liability of person to whom money is paid under mistake to repay it back
cannot be said to arise out of a contract even in its remotest sense, as there is
neither offer and acceptance nor consent. These are said to be quasi-contracts.
Example 29: T, a tradesman, leaves goods at C’s house by mistake. C treats the
goods as his own. C is bound to pay for the goods.
4. E-Contracts: When a contract is entered into by two or more parties using
electronics means, such as e-mails is known as e-commerce contracts. In
electronic commerce, different parties/persons create networks which are
linked to other networks through ED1 - Electronic Data Inter change. This helps
in doing business transactions using electronic mode. These are known as EDI
contracts or Cyber contracts or mouse click contracts.
III. On the basis of the performance of the contract

1. Executed Contract: The consideration in a given contract could be an act or
forbearance. When the act is done or executed or the forbearance is brought
on record, then the contract is an executed contract.
Example 30: When a grocer sells a sugar on cash payment it is an executed
contract because both the parties have done what they were to do under the
contract.
2. Executory Contract: In an executory contract the consideration is reciprocal
promise or obligation. Such consideration is to be performed in future only and
therefore these contracts are described as executory contracts.
Example 31: Where G agrees to take the tuition of H, a pre-engineering
student, from the next month and H in consideration promises to pay G
` 1,000 per month, the contract is executory because it is yet to be carried out.

Unilateral or Bilateral are kinds of Executory Contracts and are not separate
kinds.
(a) Unilateral Contract: Unilateral contract is a one sided contract in

which one party has performed his duty or obligation and the other
party’s obligation is outstanding.
Example 32: M advertises payment of award of ` 50,000 to any one
who finds his missing boy and brings him. As soon as B traces the boy,
there comes into existence an executed contract because B has
performed his share of obligation and it remains for M to pay the
amount of reward to B. This type of Executory contract is also called
unilateral contract.
(b) Bilateral Contract: A Bilateral contract is one where the obligation or
promise is outstanding on the part of both the parties.
Example 33: A promises to sell his plot to B for `10 lacs cash down,
but B pays only ` 2,50,000 as earnest money and promises to pay the
balance on next Sunday. On the other hand, A gives the possession of
plot to B and promises to execute a sale deed on the receipt of the
whole amount. The contract between the A and B is executory because
there remains something to be done on both sides. Such Executory
contracts are also known as Bilateral contracts.
1.4 PROPOSAL / OFFER [SECTION 2(a) OF THE INDIAN

CONTRACT ACT, 1872]
Definition of Offer/Proposal:
According to Section 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 the
assent of that other to such act or abstinence, he is said to make a proposal”.
Essentials of a proposal/offer are-
1. The person making the proposal or offer is called the ‘promisor’ or ‘offeror’: The
person to whom the offer is made is called the ‘offeree’ and the person accepting the
offer is called the ‘promisee’ or ‘acceptor’.
2. For a valid offer, the party making it must express his willingness ‘to do’ or ‘not
to do’ something: There must be an expression of willingness to do or not to do
some act by the offeror.

2.16 BUSINESS LAWS
Example 34: A willing to sell his good at certain price to B.

Example 35: A is willing to not to dance in a competition if B pays him certain sum of
money.
3. The willingness must be expressed with a view to obtain the assent of the other
party to whom the offer is made.
Example 36: Where ‘A’ tells ‘B’ that he desires to marry by the end of 2022, it does not
constitute an offer of marriage by ‘A’ to ‘B’. Therefore, to constitute a valid offer
expression of willingness must be made to obtain the assent (acceptance) of the other.
Thus, if in the above example, ‘A’ further adds, ‘Will you marry me’, it will constitute
an offer.
4. An offer can be positive as well as negative: Thus “doing” is a positive act and “not
doing”, or “abstinence” is a negative act; nonetheless both these acts have the same
effect in the eyes of law.
Example 37: A offers to sell his car to B for ` 3 lacs is an act of doing. So in this case,
A is making an offer to B.
Example 38: When A ask B after his car meets with an accident with B’s scooter not
to go to Court and he will pay the repair charges to B for the damage to B’s scooter; it
is an act of not doing or abstinence.
Kinds of Offer
How made To whom made
Express offer Implied offer General offer Specific offer
Classification of offer
An offer can be classified as general offer, special/specific offer, cross offer, counter offer,
standing/ open/ continuing offer.
General Special Counter Standing

Cross Offer
Offer Offer Offer Offer

Now let us examine each one of them.

(a) General offer: It is an offer made to public at large and hence anyone can accept and
do the desired act (Carlill Vs. Carbolic Smoke Ball Co.). In terms of Section 8 of the
Act, anyone performing the conditions of the offer can be considered to have accepted
the offer. Until the general offer is retracted or withdrawn, it can be accepted by anyone
at any time as it is a continuing offer.
Case Law: Carlill Vs. Carbolic Smoke Ball Co. (1893)
Facts: In this famous case, Carbolic smoke Ball Co. advertised in several newspapers
that a reward of £100 would be given to any person who contracted influenza after
using the smoke balls produced by the Carbolic Smoke Ball Co. according to printed
directions. One lady, Mrs. Carlill, used the smoke balls as per the directions of company
and even then, suffered from influenza. Held, she could recover the amount as by using
the smoke balls she had accepted the offer.
(b) Special/specific offer: When the offer is made to a specific or an ascertained person,
it is known as a specific offer. Specific offer can be accepted only by that specified
person to whom the offer has been made. [Boulton Vs. Jones]
Example 39: ‘A’ offers to sell his car to ‘B’ at a certain cost. This is a specific offer.
(c) Cross offer: When two parties exchange identical offers in ignorance at the time of
each other’s offer, the offers are called cross offers. There is no binding contract in
such a case because offer made by a person cannot be construed as acceptance of the
another’s offer.
Example 40: If A makes a proposal to B to sell his car for ` 2 lacs and B, without
knowing the proposal of A, makes an offer to purchase the same car at ` 2 lacs from
A, it is not an acceptance, as B was not aware of proposal made by A. It is only cross
proposal (cross offer). And when two persons make offer to each other, it cannot be
treated as mutual acceptance. There is no binding contract in such a case.
(d) Counter offer: When the offeree offers to qualified acceptance of the offer subject to
modifications and variations in the terms of original offer, he is said to have made a
counter offer. Counter-offer amounts to rejection of the original offer. It is also called
as Conditional Acceptance.
Example 41: ‘A’ offers to sell his plot to ‘B’ for `10 lakhs. ’B’ agrees to buy it for ` 8
lakhs. It amounts to counter offer. It will result in the termination of the offer of ’A’. If
later on ‘B’ agrees to buy the plot for ` 10 lakhs, ’A’ may refuse.

2.18 BUSINESS LAWS
(e) Standing or continuing or open offer: An offer which is allowed to remain open for
acceptance over a period of time is known as standing or continuing or open offer.
Tenders that are invited for supply of goods is a kind of standing offer.
Essential of a valid offer
1. It must be capable of creating legal relations: Offer must be such as in law is capable
of being accepted and giving rise to legal relationship. If the offer does not intend to
give rise to legal consequences and creating legal relations, it is not considered as a
valid offer in the eye of law. A social invitation, even if it is accepted, does not create
legal relations because it is not so intended.
Example 42: A invited B on his birthday party. B accepted the proposal but when B
reached the venue, he (B) found that A was not there. He filed the suit against A for
recovery of travelling expenses incurred by him to join the birthday party. Held, such
an invitation did not create a legal relationship. It is a social activity. Hence, B could
not succeed.
2. It must be certain, definite and not vague: If the terms of an offer are vague or
indefinite, its acceptance cannot create any contractual relationship.
Example 43: A offers to sell B 100 quintals of oil, there is nothing whatever to show
what kind of oil was intended. The offer is not capable of being accepted for want of
certainty.
If in the above example, A is a dealer in mustard oil only, it shall constitute a valid offer.
3. It must be communicated to the offeree: An offer, to be complete, must be
communicated to the person to whom it is made, otherwise there can be no acceptance
of it. Unless an offer is communicated, there can be no acceptance by it. An acceptance
of an offer, in ignorance of the offer, is not acceptance and does not confer any right
on the acceptor.
This can be illustrated by the landmark case of Lalman Shukla v. GauriDutt
Facts: G (Gauridutt) sent his servant L (Lalman) to trace his missing nephew. He then
announced that anybody who traced his nephew would be entitled to a certain reward.
L traced the boy in ignorance of this announcement. Subsequently when he came to
know of the reward, he claimed it. Held, he was not entitled to the reward, as he did
not know the offer.
4. It must be made with a view to obtaining the assent of the other party: Offer must
be made with a view to obtaining the assent of the other party addressed and not
merely with a view to disclosing the intention of making an offer.

5. It may be conditional: An offer can be made subject to any terms and conditions by
the offeror.
Example 44: Offeror may ask for payment by RTGS, NEFT etc. The offeree will have to
accept all the terms of the offer otherwise the contract will be treated as invalid.
6. Offer should not contain a term the non-compliance of which would amount to
acceptance: Thus, one cannot say that if acceptance is not communicated by a certain
time the offer would be considered as accepted.
Example 45: A proposes B to purchase his android mobile for `5000 and if no reply
by him in a week, it would be assumed that B had accepted the proposal. This would
not result into contract.
7. The offer may be either specific or general: Any offer can be made to either public
at large or to the any specific person. (Already explained in the heading-types of the
offer)
8. The offer may be express or implied: An offer may be made either by words or by
conduct.
Example 46: A boy starts cleaning the car as it stops on the traffic signal without being
asked to do so, in such circumstances any reasonable man could guess that he expects
to be paid for this, here boy makes an implied offer.
9. Offer is Different from a mere statement of intention, an invitation to offer, a
mere communication of information, A prospectus and Advertisement.
(i) A statement of intention and announcement.
Example 47: A father wrote his son about his wish of making him the owner of
all his property is mere a statement of intention.
Example 48: An announcement to give scholarships to children scoring more
than 95% in 12th board is not an offer.
(ii) Offer must be distinguished from an answer to a question.
Case Law: Harvey vs. Facie [1893] AC 552

In this case, Privy Council succinctly explained the distinction between an offer
and an invitation to offer. In the given case, the plaintiffs through a telegram
asked the defendants two questions namely,
(i) Will you sell us Bumper Hall Pen? and
(ii) Telegraph lowest cash price.

2.20 BUSINESS LAWS
The defendants replied through telegram that the “lowest price for Bumper Hall
Pen is £ 900”. The plaintiffs sent another telegram stating “we agree to buy
Bumper Hall Pen at £ 900”. However, the defendants refused to sell the property
at the price.
The plaintiffs sued the defendants contending that they had made an offer to
sell the property at £ 900 and therefore they are bound by the offer.
However, the Privy Council did not agree with the plaintiffs on the ground that
while plaintiffs had asked two questions, the defendant replied only to the
second question by quoting the price but reserved their answer with regard to
their willingness to sell. Thus, they made no offer at all. Their Lordships held
that the mere statement of the lowest price at which the vendor would sell
contained no implied contract to sell to the person who had enquired about
the price.
The above decision was followed in Mac Pherson vs Appanna [1951] A.S.C.
184 where the owner of the property had said that he would not accept less
than £ 6000/- for it. This statement did not indicate any offer but indicated only
an invitation to offer.
(iii) A statement of price is not an offer: Quoting the price of a product does not
constitute it as offer. (refer case of Harvey Vs. Facie as discussed above)
Example 49: The price list of goods does not constitute an offer for sale of
certain goods on the listed prices. It is an invitation to offer.
(iv) An invitation to make an offer or do business. In case of “an invitation to make
an offer”, the person making the invitation does not make an offer rather invites
the other party to make an offer. His objective is to send out the invitation that he
is willing to deal with any person who, on the basis of such invitation, is ready to
enter into contract with him subject to final terms and conditions.
Example 50: An advertisement for sale of goods by auction is an invitation to
the offer. It merely invites offers/bids made at the auction.
When goods are sold through auction, the auctioneer does not contract with
anyone who attends the sale. The auction is only an advertisement to sell but
the items are not put for sale though persons who have come to the auction
may have the intention to purchase. Similar decision was given in the case of
Harris vs. Nickerson (1873).
Similarly, Prospectus issued by a company, is only an invitation to the public to
make an offer to subscribe to the securities of the company.

10. A statement of price is not an offer

What is invitation to offer?
An offer should be distinguished from an invitation to offer. An offer is definite
and capable of converting an intention into a contract. Whereas an invitation to an
offer is only a circulation of an offer, it is an attempt to induce offers and precedes a
definite offer. An invitation to offer is an act precedent to making an offer. Acceptance
of an invitation to an offer does not result in the contract and only an offer emerges
in the process of negotiation.
When a person advertises that he has stock of books to sell or houses to let, there is
no offer to be bound by any contract. Such advertisements are offers to negotiate-
offers to receive offers. In order to ascertain whether a particular statement amounts
to an ‘offer’ or an ‘invitation to offer’, the test would be intention with which such
statement is made. Does the person who made the statement intend to be bound by
it as soon as it is accepted by the other or he intends to do some further act, before
he becomes bound by it. In the former case, it amounts to an offer and in the latter
case, it is an invitation to offer.
Difference between offer and invitation to make an offer:
In terms of Section 2(a) of the Act, an offer is the final expression of willingness by the
offeror to be bound by the offer should the other party chooses to accept it. On the
other hand, offers made with the intention to negotiate or offers to receive offers are
known as invitation to offer. Thus, where a party without expressing his final willingness
proposes certain terms on which he is willing to negotiate he does not make an offer,
but only invites the other party to make an offer on those terms. Hence the only thing
that is required is the willingness of the offeree to abide by the terms of offer.
In order to ascertain whether a particular statement amounts to an offer or an
invitation to offer, the test would be intention with which such statement is made. The
mere statement of the lowest price which the vendor would sell contains no implied
contract to sell at that price to the person making the inquiry.
If a person who makes the statement has the intention to be bound by it as soon as
the other accepts, he is making an offer. Thus, the intention to be bound is important
factor to be considered in deciding whether a statement is an ‘offer’ or ‘invitation to
offer.’
Following are instances of invitation to offer to buy or sell:
(i) A Prospectus by a company to the public to subscribe for its shares.
(ii) Display of goods for sale in shop windows.

2.22 BUSINESS LAWS
(iii) Advertising auction sales and

(iv) Quotation of prices sent in reply to a query regarding price.
Basis Offer Invitation to offer

Meaning Section 2(a) of the Act, an Where a party without expressing his
offer is the final expression of final willingness proposes certain
willingness by the offeror to terms on which he is willing to
be bound by the offer should negotiate he does not make an offer,
the other party chooses to but only invites the other party to
accept it. make an offer on those terms.
Intention of the If a person who makes the If a person has the intention of
parties statement has the intention to negotiating on terms it is called
be bound by it as soon as the invitation to offer.
other accepts, he is making an
offer.
Sequence An offer cannot be an act An invitation to offer is always an act
precedent to invitation to precedent to offer.
offer.
Words Written
Act
Offer can be
Conduct Oral
made by
Abstinence
1.5 ACCEPTANCE
Definition of Acceptance: In terms of Section 2(b) of the Act, ‘the term acceptance’ is defined
as follows:
“When the person to whom the proposal is made signifies his assent thereto, proposal
is said to be accepted. The proposal, when accepted, becomes a promise”.
Analysis of the above definition
1. When the person to whom proposal is made - for example if A offers to sell his car to
B for ` 2,00,000. Here, proposal is made to B.
2. The person to whom proposal is made i.e. B in the above example and if B signifies his
consent on that proposal, then we can say that B has signified his consent on the
proposal made by A.

3. When B has signified his consent on that proposal, we can say that the proposal has
been accepted.
4. Accepted proposal becomes promise.

Relationship between offer and acceptance: According to Sir William Anson “Acceptance
is to offer what a lighted match is to a train of gun powder”. The effect of this observation
is that what acceptance triggers cannot be recalled or undone. But there is a choice to the
person who had the train to remove it before the match is applied. It in effect means that the
offer can be withdrawn just before it is accepted. Acceptance converts the offer into a promise
and then it is too late to revoke it. This means as soon as the train of gun powder is lighted it
would explode. Train of Gun powder [offer] in itself is inert, but it is the lighted match [the
acceptance] which causes the gun powder to explode. The significance of this is an offer in
itself cannot create any legal relationship but it is the acceptance by the offeree which creates
a legal relationship. Once an offer is accepted it becomes a promise and cannot be withdrawn
or revoked. An offer remains an offer so long as it is not accepted but becomes a contract as
soon as it is accepted.
Legal Rules regarding a valid acceptance
(1) Acceptance can be given only by the person to whom offer is made: In case of a
specific offer, it can be accepted only by the person to whom it is made. [Boulton vs.
Jones (1857)]
Case Law: Boulton vs. Jones (1857)
Facts: Boulton bought a business from Brocklehurst. Jones, who was Broklehurst’s
creditor, placed an order with Brocklehurst for the supply of certain goods. Boulton
supplied the goods even though the order was not in his name. Jones refused to pay
Boultan for the goods because by entering into the contract with Blocklehurst, he
intended to set off his debt against Brocklehurst. Held, as the offer was not made to
Boulton, therefore, there was no contract between Boulton and Jones.
In case of a general offer, it can be accepted by any person who has the knowledge of
the offer. [Carlill vs. Carbolic Smoke Ball Co. (1893)]
(2) Acceptance must be absolute and unqualified: As per section 7 of the Act,
acceptance is valid only when it is absolute and unqualified and is also expressed in
some usual and reasonable manner unless the proposal prescribes the manner in which
it must be accepted. If the proposal prescribes the manner in which it must be
accepted, then it must be accepted accordingly.

2.24 BUSINESS LAWS
M offered to sell his land to N for £280. N replied purporting to accept the offer but
enclosed a cheque for £ 80 only. He promised to pay the balance of £ 200 by monthly
instalments of £ 50 each. It was held that N could not enforce his acceptance because it
was not an unqualified one. [Neale vs. Merret [1930] W. N. 189].
A offers to sell his house to B for ` 30,00,000/-. B replied that, “I can pay ` 24,00,000
for it. The offer of ‘A’ is rejected by ‘B’ as the acceptance is not unqualified. B however
changes his mind and is prepared to pay ` 30,00,000/-. This is also treated as counter
offer and it is upto A whether to accept it or not. [Union of India v. Bahulal AIR
1968 Bombay 294].
Example 51: ‘A’ enquires from ‘B’, “Will you purchase my car for ` 2 lakhs?” If ‘B’ replies
“I shall purchase your car for ` 2 lakhs, if you buy my motorcycle for
` 50,000/-, here ‘B’ cannot be considered to have accepted the proposal. If on the other
hand ‘B’ agrees to purchase the car from ‘A’ as per his proposal subject to availability
of valid Registration Certificate / book for the car, then the acceptance is in place
though the offer contained no mention of R.C. book. This is because expecting a valid
title for the car is not a condition. Therefore, the acceptance in this case is
unconditional.
(3) The acceptance must be communicated: To conclude a contract between the parties,
the acceptance must be communicated in some perceptible form. Any conditional
acceptance or acceptance with varying or too deviant conditions is no acceptance.
Such conditional acceptance is a counter proposal and has to be accepted by the
proposer, if the original proposal has to materialize into a contract. Further when a
proposal is accepted, the offeree must have the knowledge of the offer made to him.
If he does not have the knowledge, there can be no acceptance. The acceptance must
relate specifically to the offer made. Then only it can materialize into a contract. The
above points will be clearer from the following examples:
Brogden vs. Metropolitan Railway Co. (1877)
Facts: B a supplier, sent a draft agreement relating to the supply of coal to the manager
of railway Co. viz, Metropolitian railway for his acceptance. The manager wrote the
word “Approved” on the same and put the draft agreement in the drawer of the table
intending to send it to the company’s solicitors for a formal contract to be drawn up.
By an over sight the draft agreement remained in drawer. Held, that there was no
contract as the manager had not communicated his acceptance to the supplier, B.
Where an offer made by the intended offeree without the knowledge that an offer has
been made to him cannot be deemed as an acceptance thereto. (Bhagwandas v.
Girdharilal)

A mere variation in the language not involving any difference in substance would not
make the acceptance ineffective. [Heyworth vs. Knight [1864] 144 ER 120].
Example 52: A proposed B to marry him. B informed A’s sister that she is ready to
marry him. But his sister didn’t inform A about the acceptance of proposal. There is no
contract as acceptance was not communicated to A.
(4) Acceptance must be in the prescribed mode: Where the mode of acceptance is
prescribed in the proposal, it must be accepted in that manner. But if the proposer
does not insist on the proposal being accepted in the manner prescribed after it has
been accepted otherwise, i.e., not in the prescribed manner, the proposer is presumed
to have consented to the acceptance.
Example 53: If the offeror prescribes acceptance through messenger and offeree
sends acceptance by email, there is no acceptance of the offer if the offeror informs
the offeree that the acceptance is not according to the mode prescribed. But if the
offeror fails to do so, it will be presumed that he has accepted the acceptance and a
valid contract will arise.
(5) Time: Acceptance must be given within the specified time limit, if any, and if no time
is stipulated, acceptance must be given within the reasonable time and before the offer
lapses. What is reasonable time is nowhere defined in the law and thus would depend
on facts and circumstances of the particular case.
Example 54: A offered to sell B 50 kgs of bananas at Rs. 500. B communicated the
acceptance after four days. Such is not a valid contract as bananas being perishable
items could not stay for a period of week. Four days is not a reasonable time in this
case.
Example 55: A offers B to sell his house at Rs. 20,00,000. B accepted the offer and
communicated to A after 4 days. Held the contract is valid as four days can be
considered as reasonable time in case of sell of house.
(6) Mere silence is not acceptance: The acceptance of an offer cannot be implied from
the silence of the offeree or his failure to answer, unless the offeree has in any previous
conduct indicated that his silence is the evidence of acceptance.
Case Law: Felthouse vs. Bindley (1862)
Facts: F (Uncle) offered to buy his nephew’s horse for £30 saying “If I hear no more
about it I shall consider the horse mine at £30.” The nephew did not reply to F at all.
He told his auctioneer, B to keep the particular horse out of sale of his farm stock as
he intended to reserve it for his uncle. By mistake the auctioneer sold the horse. F sued

2.26 BUSINESS LAWS
him for conversion of his property. Held, F could not succeed as his nephew had not
communicated the acceptance to him.
Example 56: ’A’ subscribed for the weekly magazine for one year. Even after expiry of
his subscription, the magazine company continued to send him magazine for five
years. And also ‘A’ continued to use the magazine but denied to pay the bills sent to
him. ’A’ would be liable to pay as his continued use of the magazine was his acceptance
of the offer.
(7) Acceptance by conduct/Implied Acceptance: Section 8 of the Act lays down that “the
performance of the conditions of a proposal, or the acceptance of any consideration
for a reciprocal promise which may be offered with a proposal, constitutes an
acceptance of the proposal. This section provides the acceptance of the proposal by
conduct as against other modes of acceptance i.e. verbal or written communication.
Therefore, when a person performs the act intended by the proposer as the
consideration for the promise offered by him, the performance of the act constitutes
acceptance.
Example 57: when a tradesman receives an order from a customer and executes the
order by sending the goods, the customer’s order for goods constitutes the offer,
which has been accepted by the trades man subsequently by sending the goods. It is
a case of acceptance by conduct.
1.6 COMMUNICATION OF OFFER AND ACCEPTANCE

The importance of ‘offer’ and ‘acceptance’ in giving effect to a valid contract was explained in
the previous paragraphs. One important common requirement for both ‘offer’ and
‘acceptance’ is their effective communication. Effective and proper communication prevents
avoidable revocation and misunderstanding between parties.
When the contracting parties are face-to-face, there is no problem of communication because
there is instantaneous communication of offer and acceptance. In such a case the question of
revocation does not arise since the offer and its acceptance are made instantly.
The difficulty arises when the contracting parties are at a distance from one another and they
utilise the services of the post office or telephone or email (internet). In such cases, it is very
much relevant for us to know the exact time when the offer or acceptance is made or
complete.
The Indian Contract Act, 1872 gives a lot of importance to “time” element in deciding when
the offer and acceptance is complete.

Communication of offer: In terms of Section 4 of the Act, “the communication of offer is

complete when it comes to the knowledge of the person to whom it is made”.
Example 58: Where ‘A’ makes a proposal to ‘B’ by post to sell his house for ` 5 lakhs and if
the letter containing the offer is posted on 10th March and if that letter reaches ‘B’ on 12th
March the offer is said to have been communicated on 12th March when B received the letter.
Thus, it can be summed up that when a proposal is made by post, its communication will be
complete when the letter containing the proposal reaches the person to whom it is made.
Mere receiving of the letter is not sufficient, he must receive or read the message contained
in the letter.
He receives the letter on 12th March, but he reads it on 15th of March. In this case offer is
communicated on 15th of March, and not 12th of March.
Communication of acceptance: There are two issues for discussion and understanding. They
are: The modes of acceptance and when is acceptance complete?
Let us, first consider the modes of acceptance. Section 3 of the Act prescribes in general
terms two modes of communication namely, (a) by any act and (b) by omission, intending
thereby, to communicate to the other or which has the effect of communicating it to the other.
Communication by act would include any expression of words whether written or oral.
Written words will include letters, telegrams, faxes, emails and even advertisements. Oral
words will include telephone messages. Again communication would include any conduct
intended to communicate like positive acts or signs so that the other person understands
what the person ‘acting ‘ or ‘making signs’ means to say or convey.
Communication of acceptance by ‘omission’ to do something. Such omission is conveyed
by a conduct or by forbearance on the part of one person to convey his willingness or assent.
However, silence would not be treated as communication by ‘omission’.
Example 59: A offers ` 50,000 to B if he does not arrive before the court of law as an evidence
to the case. B does not arrive on the date of hearing to the court. Here omission of doing an
act amounts to acceptance.
Communication of acceptance by conduct. For instance, delivery of goods at a price by a
seller to a willing buyer will be understood as a communication by conduct to convey
acceptance. Similarly, one need not explain why one boards a public bus or drop a coin in a
weighing machine. The first act is a conduct of acceptance against its communication to the
offer by the public transport authority to carry any passenger. The second act is again a
conduct conveying acceptance to use the weighing machine kept by the vending company as
an offer to render that service for a consideration.

2.28 BUSINESS LAWS
The other issue in communication of acceptance is about the effect of act or omission or
conduct. These indirect efforts must result in effectively communicating its acceptance or non
acceptance. If it has no such effect, there is no communication regardless of which the
acceptor thinks about the offer within himself. Thus, a mere mental unilateral assent in one’s
own mind would not amount to communication. Where a resolution passed by a bank to sell
land to ‘A’ remained uncommunicated to ‘A’, it was held that there was no communication
and hence no contract. [Central Bank Yeotmal vs Vyankatesh (1949) A. Nag. 286].
Let us now come to the issue of when communication of acceptance is complete. In terms of
Section 4 of the Act, it is complete,
(i) As against the proposer, when it is put in the course of transmission to him so as to
be out of the power of the acceptor to withdraw the same;
(ii) As against the acceptor, when it comes to the knowledge of the proposer.
Where a proposal is accepted by a letter sent by the post, the communication of
acceptance will be complete as against the proposer when the letter of acceptance is posted
and as against the acceptor when the letter reaches the proposer.
For instance in the above example, if ‘B’ accepts, A’s proposal and sends his acceptance by
post on 14th, the communication of acceptance as against ‘A’ is complete on 14th, i.e. when
the letter is posted. As against ‘B’ acceptance will be complete, when the letter reaches ‘A’.
Here ‘A’ the proposer will be bound by B’s acceptance, even if the letter of acceptance is delayed
in post or lost in transit. The golden rule is proposer becomes bound by the contract, the moment
acceptor has posted the letter of acceptance. But it is necessary that the letter is correctly
addressed, adequately stamped and duly posted. In such an event the loss of letter in transit,
wrong delivery, non delivery etc., will not affect the validity of the contract.
However, from the view point of acceptor, he will be bound by his acceptance only when the
letter of acceptance has reached the proposer. So, it is crucial in this case that the letter
reaches the proposer. If there is no delivery of the letter, the acceptance could be treated as
having been completed from the viewpoint of proposer but not from the viewpoint of
acceptor. Of course this will give rise to an awkward situation of only one party to the contract,
being treated as bound by the contract though no one would be sure as to where the letter
of acceptance had gone.
Acceptance over telephone or telex or fax: When an offer is made of instantaneous
communication like telex, telephone, fax or through e-mail, the contract is only complete
when the acceptance is received by the offeree, and the contract is made at the place where
the acceptance is received (Entores Ltd. v. Miles Far East Corporation). However, in case of
a call drops and disturbances in the line, there may not be a valid contract.

Communication of special conditions: Sometimes there are situations where there are
contracts with special conditions. These special conditions are conveyed tacitly and the
acceptance of these conditions are also conveyed by the offeree again tacitly or without him
even realizing it.
Example 60: Where a passenger undertakes a travel, the conditions of travel are printed at
the back of the tickets, sometimes these special conditions are brought to the notice of the
passenger, sometimes not. In any event, the passenger is treated as having accepted the
special condition the moment he bought his ticket.
When someone travels from one place to another by air, it could be seen that special
conditions are printed at the back of the air ticket in small letters [in a non-computerized train
ticket even these are not printed] Sometimes these conditions are found to have been
displayed at the notice board of the Airlines office, which passengers may not have cared to
read. The question here is whether these conditions can be considered to have been
communicated to the passengers of the Airlines and can the passengers be treated as having
accepted the conditions. The answer to the question is in the affirmative and was so held in
Mukul Datta vs. Indian Airlines [1962] AIR cal. 314 where the plaintiff had travelled from
Delhi to Kolkata by air and the ticket bore conditions in fine print. But such terms and
condition should be reasonable.
Example 61: Where a launderer gives his customer a receipt for clothes received for washing. The
receipt carries special conditions and are to be treated as having been duly communicated to the
customer and therein a tacit acceptance of these conditions is implied by the customer’s
acceptance of the receipt [Lily White vs. R. Mannuswamy [1966] A. Mad. 13].
CASE LAW: Lilly White vs. Mannuswamy (1970)
Facts: P delivered some clothes to drycleaner for which she received a laundry receipt
containing a condition that in case of loss, customer would be entitled to claim 15% of the
market price of value of the article, P lost her new saree. Held, the terms were unreasonable
and P was entitled to recover full value of the saree from the drycleaner.
In the cases referred above, the respective documents have been accepted without a protest
and hence amounted to tacit acceptance.
Standard forms of contracts: It is well established that a standard form of contract may be
enforced on another who is subjectively unaware of the contents of the document, provided
the party wanting to enforce the contract has given notice which, in the circumstances of a
case, is sufficiently reasonable. But the acceptor will not incur any contractual obligation, if
the document is so printed and delivered to him in such a state that it does not give
reasonable notice on its face that it contains certain special conditions. In this connection, let
us consider a converse situation. A transport carrier accepted the goods for transport without

2.30 BUSINESS LAWS
any conditions. Subsequently, he issued a circular to the owners of goods limiting his liability
for the goods. In such a case, since the special conditions were not communicated prior to
the date of contract for transport, these were not binding on the owners of goods [Raipur
transport Co. vs. Ghanshyam [1956] A. Nag.145].
1.7 COMMUNICATION OF PERFORMANCE

We have already discussed that in terms of Section 4 of the Act, communication of a proposal
is complete when it comes to the knowledge of the person to whom it is meant. As regards
acceptance of the proposal, the same would be viewed from two angles. These are:
(i) from the viewpoint of proposer and
(ii) the other from the viewpoint of acceptor himself

From the viewpoint of proposer, when the acceptance is put into a course of transmission,
when it would be out of the power of acceptor. From the viewpoint of acceptor, it would be
complete when it comes to the knowledge of the proposer.
At times the offeree may be required to communicate the performance (or act) by way of
acceptance. In this case, it is not enough if the offeree merely performs the act but he should
also communicate his performance unless the offer includes a term that a mere performance
will constitute acceptance. The position was clearly explained in the famous case of Carlill
Vs Carbolic & Smokeball Co. In this case the defendant a sole proprietary concern
manufacturing a medicine which was a carbolic ball whose smoke could be inhaled through
the nose to cure influenza, cold and other connected ailments issued an advertisement for
sale of this medicine. The advertisement also included a reward of $100 to any person who
contracted influenza, after using the medicine (which was described as ‘carbolic smoke ball’).
Mrs. Carlill bought these smoke balls and used them as directed but contracted influenza. It
was held that Mrs. Carlill was entitled to a reward of $100 as she had performed the condition
for acceptance. Further as the advertisement did not require any communication of
compliance of the condition, it was not necessary to communicate the same. The court thus
in the process laid down the following three important principles:
(i) an offer, to be capable of acceptance, must contain a definite promise by the offeror
that he would be bound provided the terms specified by him are accepted;
(ii) an offer may be made either to a particular person or to the public at large, and
(iii) if an offer is made in the form of a promise in return for an act, the performance of
that act, even without any communication thereof, is to be treated as an acceptance
of the offer.

1.8 REVOCATION OF OFFER AND ACCEPTANCE

If there are specific requirements governing the making of an offer and the acceptance of that
offer, we also have specific law governing their revocation.
In term of Section 4, communication of revocation (of the proposal or its acceptance) is

complete.
(i) as against the person who makes it when it is put into a course of transmission to
the person to whom it is made so as to be out of the power of the person who makes
it, and
(ii) as against the person to whom it is made, when it comes to his knowledge.
The above law can be illustrated as follows: If you revoke your proposal made to me by a
telegram, the revocation will be complete, as far as you are concerned when you have
dispatched the telegram. But as far as I am concerned, it will be complete only when I receive
the telegram.
As regards revocation of acceptance, if you go by the above example, I can revoke my
acceptance (of your offer) by a telegram. This revocation of acceptance by me will be complete
when I dispatch the telegram and against you, it will be complete when it reaches you.
But the important question for consideration is when a proposal can be revoked? And when
can an acceptance be revoked? These questions are more important than the question when
the revocation (of proposal and acceptance) is complete.
Ordinarily, the offeror can revoke his offer before it is accepted. If he does so, the offeree
cannot create a contract by accepting the revoked offer.
Example 62: the bidder at an auction sale may withdraw (revoke) his bid (offer) before it is
accepted by the auctioneer by fall of hammer.
An offer may be revoked by the offeror before its acceptance, even though he had originally
agreed to hold it open for a definite period of time. So long as it is a mere offer, it can be
withdrawn whenever the offeror desires.
Example 63: X offered to sell 50 bales of cotton at a certain price and promised to keep it
open for acceptance by Y till 6 pm of that day. Before that time X sold them to Z. Y accepted
before 6 p.m., but after the revocation by X. In this case it was held that the offer was already
revoked.
In terms of Section 5 of the Act a proposal can be revoked at any time before the
communication of its acceptance is complete as against the proposer. An acceptance may be
revoked at any time before the communication of acceptance is complete as against the
acceptor.

2.32 BUSINESS LAWS
Example 64: A proposes, by a letter sent by post, to sell his house to B. B accepts the proposal
by a letter sent by post. A may revoke his proposal at any time before or at the moment when
B posts his letter of acceptance, but not afterwards. Whereas B may revoke his acceptance at
any time before or at the moment when the letter communicating it reaches A, but not
afterwards.
An acceptance to an offer must be made before that offer lapses or is revoked.

The law relating to the revocation of offer is the same in India as in England, but the law
relating to the revocation of acceptance is different.
In English law, the moment a person expresses his acceptance of an offer, that moment the
contract is concluded, and such an acceptance becomes irrevocable, whether it is made orally
or through the post. In Indian law, the position is different as regards contract through post.
Contract through post- As acceptance, in English law, cannot be revoked, so that once the
letter of acceptance is properly posted the contract is concluded. In Indian law, the acceptor
or can revoke his acceptance any time before the letter of acceptance reaches the offeror, if
the revocation telegram arrives before or at the same time with the letter of acceptance, the
revocation is absolute.
Contract over Telephone- A contract can be made over telephone. The rules regarding offer
and acceptance as well as their communication by telephone or telex are the same as for the
contract made by the mutual meeting of the parties. The contract is formed as soon as the
offer is accepted but the offeree must make it sure that his acceptance is received by the
offeror, otherwise there will be no contract, as communication of acceptance is not complete.
If telephone unexpectedly goes dead during conversation, the acceptor must confirm again
that the words of acceptance were duly heard by the offeror.
Revocation of proposal otherwise than by communication: When a proposal is made, the

proposer may not wait indefinitely for its acceptance. The offer can be revoked otherwise than
by communication or sometimes by lapse.
Modes of revocation of offer

(i) By notice of revocation:
Example 65: A offered B to sell goods at Rs. 5,000 through a post but before B could
accept the offer A received highest bid for the goods from C. So, A revoked the offer
to B by informing B over the telephone and sold goods to C.
(ii) By lapse of time: The time for acceptance can lapse if the acceptance is not given
within the specified time and where no time is specified, then within a reasonable time.
This is for the reason that proposer should not be made to wait indefinitely. It was held
in Ramsgate Victoria Hotel Co. Vs Montefiore (1866 L.R.Z. Ex 109), that a person

who applied for shares in June was not bound by an allotment made in November.
This decision was also followed in India Cooperative Navigation and Trading Co.
Ltd. Vs Padamsey Prem Ji. However, these decisions now will have no relevance in
the context of allotment of shares since the Companies Act, 2013 has several provisions
specifically covering these issues.
(iii) By non-fulfilment of condition precedent: Where the acceptor fails to fulfill a
condition precedent to acceptance the proposal gets revoked. This principle is laid
down in Section 6 of the Act. The offeror for instance may impose certain conditions
such as executing a certain document or depositing certain amount as earnest money.
Failure to satisfy any condition will result in lapse of the proposal. As stated earlier
‘condition precedent’ to acceptance prevents an obligation from coming into existence
until the condition is satisfied. Suppose where ‘A’ proposes to sell his house to be ‘B’
for ` 5 lakhs provided ‘B’ leases his land to ‘A’. If ‘B’ refuses to lease the land, the offer
of ‘A’ is revoked automatically.
(iv) By death or insanity: Death or insanity of the proposer would result in automatic
revocation of the proposal but only if the fact of death or insanity comes to the
knowledge of the acceptor.
(v) By counter offer
(vi) By the non-acceptance of the offer according to the prescribed or usual mode
(vii) By subsequent illegality.
SUMMARY
Contract: A Contract is an agreement enforceable by law [Section 2(h)]. An agreement is
enforceable by law, if it is made by the free consent of the parties who are competent to contract
and the agreement is made with a lawful object and is for a lawful consideration and is not
hereby expressly declared to be void [Section 10]. All contracts are agreements, but all
agreements are not contracts. Agreements lacking any of the above said characteristics are not
contracts. A contract that ceases to be enforceable by law is called ‘void contract’, [Section 2(i)],
but an agreement which is enforceable by law at the option of one party thereto, but not at the
option of the other is called ‘voidable contract’ [(Section 2(i)].
Offer and Acceptance: Offeror undertakes to do or to abstain from doing a certain act if the offer
is properly accepted by the offeree. Offer may be expressly made or may even be implied by the
conduct of the offeror, but it must have intention and be capable of creating legal relations. The
terms of offer must be certain or at least be capable of being made certain.

2.34 BUSINESS LAWS
Acceptance of offer must be absolute and unqualified and must be according to the
prescribed or usual mode. If the offer has been made to a specific person, it must be accepted
by that person only, but a general offer may be accepted by any person.
Communication of offer and acceptance, and revocation thereof-
(a) Communication of an offer is complete when it comes to the knowledge of the offeree.
(b) Communication of an acceptance is complete: As against the offeror when it is put in

the course of transmission to him and as against the acceptor, when it comes to the
knowledge of the offeror.
(c) Communication of revocation of an offer or acceptance is complete: It is complete as

against the person making it, when it is put into a course of transmission so as to be
out of power of the person making it and as against the person to whom it is made,
when it comes to his knowledge.
Meaning of certain terms
Proposal [(i.e., offer) Section 2(a)] ♦ When one person signifies to another
♦ his willingness
♦ to do or to abstain from doing anything
♦ with a view to obtaining the assent of
that either to-
• such act; or
• abstinence,
♦ he is said to make a proposal (i.e. offer).
Promise [Section 2 (b)] ♦ When the person to whom the proposal
is made,
♦ signifies his assent thereto,
♦ the proposal is said to be accepted.
♦ A proposal, when accepted, becomes a
promise.
Agreement [Section 2(e)] ♦ Every promise and every set of
promises,
♦ forming consideration for each other,
♦ is an agreement.
Contract [Section 2(h)] ♦ An agreement enforceable by law is a
contract.

Promisor and Promisee [Section 2(c)] When the proposal is accepted-

♦ the person making the proposal is
called as ‘promisor’; and
♦ the person accepting the proposal is
called as ‘promisee’.
Consideration [Section 2(d)] When, at the desire of the promisor, the
promisee
♦ has done or abstained from doing
something; or
♦ does or abstains from doing something;
or any other person
♦ promises to do or abstain from doing
something,
Such act, abstinence or promise is called a
consideration for the promise.
Void agreement [Section 2(g)] An agreement not enforceable by law is said to
be void.
A void agreement is not enforceable from the
very beginning, i.e. it is void ab initio.
Voidable Contract [Section 2(i)] An agreement is a voidable contract if-
♦ it is enforceable by law at the option of
one or more of the parties thereto,
♦ it is not enforceable by law at the option
of the other or others.
Void contract [Section 2 (j)] ♦ A contract
♦ which ceases to be enforceable by law
♦ becomes void when it ceases to be
enforceable.
Indian Contract Act, 1872 (1st September 1872)
Promise [Sec.2(b)] Agreement [Sec.2(e)] Contract [Sec. 2(h)]
Offer (Proposal) + Agreement

Promise + Consideration
Acceptance +Enforceability by law
Note: Agreement may be social or legal. Social Agreement is not enforceable by law.

2.36 BUSINESS LAWS
ESSENTIALS OF VALID CONTRACT
As given by Not given by Section

Section 10 10 but essential
Offer & Free Capacity Lawful Lawful Agreement not

Acceptance consent of parties consideration Object declared void
Two Intention to Legal Certainty of Possibility of

Parties create legal Formalities meaning Performance
Relationship
CLASSIFICATION OF CONTRACTS
On the Basis of Validity or On the Basis of On the Basis of Performance

Formation 1. Executed Contracts: Both
Enforceability
1. Express Contract: By the parties have performed
1. Valid Contract: Contains all the
words spoken or written their respective obligations.
essential elements of valid contract.
2. Implied Contract or 2. Executory Contract: Both
2. Void Contract: Sec. 2(j): A contract,
tacit contract: Where the the parties have yet to perform
which ceases to be enforceable by law.
proposal or acceptance is their obligations.
3. Voidable Contract: Sec.2(i): An otherwise than in words. a. Unilateral or one-sided
agreement which is enforceable by law
3. Quasi Contract: The contract: Only one party has
at the option of one or more of the
law creates and enforces fulfilled his obligation
parties thereto, but not at the option of
legal rights and
other or others. b. Bilateral contract:
obligations when no real
4. Illegal Contracts: A contract which is contract exists. Both the parties have to
forbidden by law. perform
4. E-Contracts: A contract
5. Unenforceable Contract: Contract is entered into by two or
is good in substance but having more parties using
technical defect electronics means.

PROPOSAL OR OFFER Sec.2(a)
“When one person signifies to another his willingness to do or to abstain from doing anything with a
view to obtaining the assent of that other to such act or abstinence, he is said to make a proposal”.
Classification of Offer
Essentials of A Valid Offer
(a) General Offer: Offer to the
world at large. 1. Must be with intent to create legal relationship
(b) Specific Offer: Offer made to
2. Terms of the offer must be certain, definite & unambiguous.
a definite person
3. Must be communicated to the offeree.
(c) Cross Offer: When two parties
make identical offers to each 4. Must be made with a view to obtaining the assent of the
other
other party.
(d) Counter Offer: When offeree
5. May be conditional.
imposes conditions which have
the effect of modifying or varying 6. Must not contain a term the non-compliance of which
the offer.
amount acceptance.
(e) Standing or continue or
7. May be general or specific or express or implied.
open offer: Offer to public at
large for acceptance for certain 8. An offer must be distinguished from an invitation to offer.
period of time
ACCEPTANCE Sec 2(b)
“When the person to whom the proposal is made signifies his assent thereto, proposal is said to
be accepted. The proposal when accepted, becomes a promise”.
Legal Rules COMMUNICATION OF OFFER AND ACCEPTANCE

1. Given only by the person to Mode of Communication: By Act, By Omission, By Conduct
whom offer is made.
Communication of Offer: (Sec.4)
2. Must be absolute and
The communication of offer is completed when it comes to
unqualified.
the knowledge of person to whom it is made.
3. Must be communicated.
Communication of Acceptance: (Sec.4)
4. Must be in the prescribed
The communication of acceptance is complete-
mode.
- as against the proposer when it is put into a course of
5. Mere silence is not
transmission to him, so as to be out of the power of
acceptance.
acceptor to withdraw the same.
6. May be by conduct/implied - as against the acceptor when it comes to the
Acceptance knowledge of proposer.

2.38 BUSINESS LAWS
REVOCATION OF OFFER AND ACCEPTANCE
Mode of Revocation
Time for revocation 1. By communication of notice.
Proposal: Before the 2. By lapse of time it is not accepted within the
communication of its prescribed time.
acceptance is complete as
against the proposer. 3. By non-fulfillment by the offeree of a
condition precedent to acceptance.
Acceptance: Before
communication of the 4. By death or insanity of the offer or provided
acceptance is complete as the offeree comes to know of it before
against the acceptor acceptance.
5. If a counter-offer is made to it.
TEST YOUR KNOWLEDGE

1. An agreement enforceable by law is a
(a) Promise
(b) Contract
(c) Obligation
(d) Lawful promise

2. A void agreement is one which is -
(a) Valid but not enforceable
(b) Enforceable at the option of both the parties

(c) Enforceable at the option of one party
(d) Not enforceable in a court of law.
3. An agreement which is enforceable by law at the option of one or more of the parties
thereon but not at the option of the other or others is a
(a) Valid Contract
(b) Void contract

(c) Voidable contract

(d) Illegal contract
4. When the consent of a party is not free, the contract is
(a) Void
(b) Voidable
(c) Valid
(d) Illegal
5. In case of illegal agreements, the collateral agreements are:
(a) Valid
(b) Void
(c) Voidable
(d) None of these
6. An offer may lapse by:
(a) Revocation
(b) Counter Offer
(c) Rejection of offer by offeree
(d) All of these
7. A proposal when accepted becomes a

(a) Promise
(b) Contract
(c) Offer
(d) Acceptance
8. If A says to B “I offer to sell my house to you for ` 40,00,000” and B accepts the offer by
saying clearly “I accept your offer”, it is a/an
(a) Implied offer
(b) Express offer
(c) General offer


2.40 BUSINESS LAWS
9. ‘A’ offered a reward of ` 1,00,000 for recovery of some valuable missing articles. ‘B’ who
did not know of this offer, found the missing articles. Which one of the following is the
correct solution to this problem?
(a) Giving delivery of articles to ‘A’ amounts to an acceptance and hence ‘B’ is entitled
to get the reward of ` 1,00,000
(b) Giving delivery of articles to ‘A’ amounts to performance of a condition precedent
to an offer and hence there is valid acceptance. So ‘B’ must get the reward of `
1,00,000
(c) As there is no acceptance of an offer due to want of Knowledge, ‘B’, is not entitled
to get the reward of ` 1,00,000
(d) In the absence of any legal obligation on ‘A’, no claim for reward of ` 1,00,000 is
maintainable by ‘B’.
10. Arun has two cars- one of white colour and another of red colour. He offers to sell one
of the cars to Basu thinking that he is selling the car which has white colour. Basu agrees
to buy the car thinking that Arun is selling the car which has red colour. Will this
agreement become a valid contract?
(a) Yes
(b) No
(c) Insufficient information
11. A dress is displayed in the showroom with a price tag attached to the dress. A buyer
interested in the dress and ready to pay the price mentioned in the tag approached the
shopkeeper for purchasing the dress.
(a) The shopkeeper can refuse to sell the dress as display of dress is just an invitation
to offer.
(b) The shopkeeper cannot refuse to sell the dress as the buyer has accepted the offer
(c) In case of refusal, the shopkeeper will be liable for breach of contract
(d) The shopkeeper cannot refuse to sell the dress but may charge higher price
12. A agrees to pay ` 1,000 to B if a certain ship returns within a year. However, the ship
sinks within the year. In this case, the contract becomes
(a) Valid
(b) Void

(c) Voidable
(d) Illegal
13. A notice in the newspaper inviting tenders is
(a) a proposal
(b) An invitation to proposal
(c) A promise
(d) An invitation for negotiation
14. A telephonic acceptance is complete when the offer is
(a) spoken into the telephone
(b) heard but not understood by the offeror
(c) heard and understood by the offeror
(d) is received, heard and understood by some person in the offeror’s house
15. A and B agree to deal in smuggled goods and share the profits. A refuses to give B’s share
of profit. In this case:
(a) B can enforce the agreement in the court
(b) B can only claim damages
(c) B has no remedy as the contract is illegal
(d) B can enforce the contract and claim damages
16. Which one of the following statements is correct?
(a) Void agreements are always illegal
(b) Illegal agreements are voidable

(c) Illegal agreement can be ratified by the parties
(d) Illegal agreements are always void
17. A voidable contract is one which

(a) Can be enforced at the option of aggrieved party
(b) Can be enforced at the option of both the parties
(c) Cannot be enforced in a court of law
(d) Courts prohibit

2.42 BUSINESS LAWS
18. When offer is made to a definite person, it is known as

(a) General Offer
(b) Cross Offer
(c) Counter offer
(d) Special offer
19. On the face of a ticket, it is mentioned that to look for the terms and conditions look
behind. Mr. A bought the ticket but didn’t read the terms and conditions. He:
(a) is not bound by the terms and condition
(b) may decide to bound by certain terms and ignore others
(c) is bound by all the terms and conditions whether he read it or not
(d) none of the above
20. It does not effect the free consent of the parties,
(a) Fraud
(b) Coercion
(c) Incompetency of parties
(d) Undue Influence
21. __________ contract is made without intention of parties.
(a) Express
(b) Implied
(c) Quasi
(d) Executory
22. A offers B to supply Books at Rs. 500 each. B accepts the same with condition of 30%
discount. It is _______
(a) Counter Offer
(b) Cross Offer

(c) Specific Offer
(d) General Offer

Descriptive Questions
1. “All contracts are agreements, but all agreements are not contracts”. Comment.
2. A sends an offer to B to sell his second-car for ` 1,40,000 with a condition that if B does
not reply within a week, he (A) shall treat the offer as accepted. Is A correct in his
proposition?
3. Explain the type of contracts in the following agreements under the Indian Contract Act, 1872:
(i) A coolie in uniform picks up the luggage of A to be carried out of the railway
station without being asked by A and A allows him to do so.
(ii) Obligation of finder of lost goods to return them to the true owner.
(iii) A contracts with B (owner of the factory) for the supply of 10 tons of sugar, but before
the supply is effected, the fire caught in the factory and everything was destroyed.
4. Shambhu Dayal started “self service” system in his shop. Smt. Prakash entered the shop,
took a basket and after taking articles of her choice into the basket reached the cashier
for payments. The cashier refuses to accept the price. Can Shambhu Dayal be compelled
to sell the said articles to Smt. Prakash? Decide as per the provisions of the Indian
Contract Act, 1872.
5. State whether there is any contract in following cases:
(a) A engages B to do certain work and remuneration to be paid as fixed by C.
(b) A and B promise to pay for the studies of their maid’s son
(c) A takes a seat in public bus.
(d) A, a chartered accountant promises to help his friend to file his return.
6. Miss Shakuntala puts an application to be a teacher in the school. She was appointed by
the trust of the school. Her friend who works in the same school informs her about her
appointment informally. But later due to some internal reasons her appointment was
cancelled. Can Miss Shakuntala claim for damages?

2.44 BUSINESS LAWS
ANSWER/HINTS
Answers to MCQs
1. (b) 2. (d) 3. (c) 4. (b) 5. (b) 6. (d)
7. (a) 8. (b) 9. (c) 10. (b) 11. (a) 12. (b)
13. (b) 14. (c) 15. (c) 16. (d) 17. (a) 18. (d)
19. (c) 20 (c) 21 (c) 22 (a)
Answers to the Descriptive Questions

1. An agreement comes into existence when one party makes a proposal or offer to the
other party and that other party gives his acceptance to it. A contract is an agreement
enforceable by law. It means that to become a contract an agreement must give rise
to a legal obligation i.e. duty enforceable by law. If an agreement is incapable of
creating a duty enforceable by law, it is not a contract. There can be agreements which
are not enforceable by law, such as social, moral or religious agreements. The
agreement is a wider term than the contract. All agreements need not necessarily
become contracts but all contracts shall always be agreements.
All agreements are not contracts: When there is an agreement between the parties and
they do not intend to create a legal relationship, it is not a contract.
All contracts are agreements: For a contract there must be two things (a) an agreement
and (b) enforceability by law. Thus, existence of an agreement is a pre-requisite
existence of a contract. Therefore, it is true to say that all contracts are agreements.
Thus, we can say that there can be an agreement without it becoming a contract, but
we can’t have a contract without an agreement.
2. Acceptance to an offer cannot be implied merely from the silence of the offeree, even
if it is expressly stated in the offer itself. Unless the offeree has by his previous conduct
indicated that his silence amount to acceptance, it cannot be taken as valid acceptance.
So, in the given problem, if B remains silent, it does not amount to acceptance.
The acceptance must be made within the time limit prescribed by the offer. The
acceptance of an offer after the time prescribed by the offeror has elapsed will not
avail to turn the offer into a contract.
3. (i) It is an implied contract and A must pay for the services of the coolie detailed
by him.
Implied Contracts: Implied contracts come into existence by implication. Most
often the implication is by law and or by action. Section 9 of the Act

contemplates such implied contracts when it lays down that in so far as such
proposal or acceptance is made otherwise than in words, the promise is said to
be implied.
(ii) Obligation of finder of lost goods to return them to the true owner cannot be
said to arise out of a contract even in its remotest sense, as there is neither offer
and acceptance nor consent. These are said to be quasi-contracts.
Quasi-Contract: A quasi-contract is not an actual contract but it resembles a
contract. It is created by law under certain circumstances. The law creates and
enforces legal rights and obligations when no real contract exists. Such
obligations are known as quasi-contracts. In other words, it is a contract in
which there is no intention on part of either party to make a contract but law
imposes a contract upon the parties.
(iii) The above contract is a void contract.
Void Contract: Section 2 (j) states as follows: “A contract which ceases to be
enforceable by law becomes void when it ceases to be enforceable”. Thus, a
void contract is one which cannot be enforced by a court of law.
4. Invitation to offer: The offer should be distinguished from an invitation to offer. An
offer is the final expression of willingness by the offeror to be bound by his offer should
the party chooses to accept it. Where a party, without expressing his final willingness,
proposes certain terms on which he is willing to negotiate, he does not make an offer,
but invites only the other party to make an offer on those terms. This is the basic
distinction between offer and invitation to offer.
The display of articles with a price in it in a self-service shop is merely an invitation to
offer. It is in no sense an offer for sale, the acceptance of which constitutes a contract.
In this case, Smt. Prakash by selecting some articles and approaching the cashier for
payment simply made an offer to buy the articles selected by her. If the cashier does
not accept the price, the interested buyer cannot compel him to sell.
5. (a) It is a valid express contract
(b) It is not a contract as it is a social agreement
(c) It is an implied contract. A is bound to pay for the bus fare.
(d) It is a social agreement without any intention to create a legal relationship.
6. No, Miss Shakuntala cannot claim damages. As per Section 4, communication of
acceptance is complete as against proposer when it is put in the course of transmission
to him.
In the present case, school authorities have not put any offer letter in transmission. Her
information from a third person will not form part of contract.

2.46 BUSINESS LAWS
UNIT-2: CONSIDERATION
LEARNING OUTCOMES
♦ The concept of consideration, its importance for a contract and its
double aspect.
♦ How consideration may move from a third party and how this
makes the contract valid.
♦ The peculiar circumstances when a contract is valid even without
consideration.
♦ The rule ‘A stranger to a contract cannot sue’ and exceptions
thereof.
UNIT OVERVIEW
Consideration
Legal Rules Rule of "No Doctrine of Privity

Meaning &
regarding valid consideration, no of Contract with
definition
consideration contract" exception
Consideration is an essential element of a valid contract without which no single promise

will be enforceable. It is a term used in the sense of quid pro quo, i.e., ’something in return’.
Having a double aspect of a benefit to the promisor and a detriment to the promisee, it has
to be really understood in the sense of some detriment as envisaged by English Law. In this
Unit, we shall try to understand the concept of consideration and also the legal
requirements regarding consideration.

2.1 WHAT IS CONSIDERATION?

Consideration is the price agreed to be paid by the promisee for the obligation of the
promisor. The word consideration was described in a very popular English case of Misa v.
Currie as:
“A valuable consideration in the sense of law may consist either in some right, interest, profit
or benefit accruing to one party (i.e. promisor) or forbearance, detriment, loss or
responsibility given, suffered or undertaken by the other (i.e. the promisee).”
Section 2(d) defines consideration as follows:

“When at the desire of the promisor, the promisee or any other person has done or
abstained from doing, or does or abstains from doing or promises to do or abstain
from doing something, such an act or abstinence or promise is called consideration for
the promise”.
(1) Consideration is an act- doing something.
Example 1: Ajay guarantees Bhuvan for payment of price of the goods which Bhuvan
wanted to sell on one month credit to Chaitanya. Here selling of goods on credit by
Bhuvan to Chaitanya is consideration for A’s promise.
Example 2: A college promises students, who will score above 95% for the job in
MNC. Consideration need not to be monetary. Here the promise for recruitment of
candidate will be considered as consideration for the act of students scoring above
95%.
(2) Consideration is abstinence- abstain from doing something.
Example 3: Abhishek promises Bharti not to file a suit against him if she (Bharti)
would pay him (Abhishek) ` 1,00,000. Here abstinence on the part of Abhishek would
constitute consideration against Bharti’s payment of ` 1,00,000 in favor of Abhishek.
Example 4: ABC has a shop of electric items. XYZ wishes to open another electric
shop next to his shop. ABC offers Rs 2,00,000 to XYZ for shifting the same away from
1 km of ABC’s shop. Here, consideration is given for abstaining XYZ from opening his
shop nearby.
(3) Consideration must be at the desire of the promisor.
(4) Consideration may move from promisee or any other person.
(5) Consideration may be past, present or future.

2.48 BUSINESS LAWS
Thus, from above it can be concluded that:

Consideration = Promise / Performance that parties exchange with each other.
Form of consideration = Some benefit, right or profit to one party / some detriment, loss, or
forbearance to the other.
2.2 LEGAL RULES REGARDING CONSIDERATION

(i) Consideration must move at the desire of the promisor: Consideration must be
offered by the promisee or the third party at the desire or request of the promisor.
This implies “return” element of consideration. Contract of marriage in consideration
of promise of settlement is enforceable.
An act done at the desire of a third party is not a consideration.
In Durga Prasad v. Baldeo, D (defendant) promised to pay to P (plaintiff) a certain
commission on articles which would be sold through their agency in a market.
Market was constructed by P at the desire of the C (Collector), and not at the desire
of the D. D was not bound to pay as it was without consideration and hence void.
Example 5: R saves S’s goods from fire without being asked to do so. R cannot
demand any reward for his services, as the act being done voluntary.
(ii) Consideration may move from promisee or any other person: In India,
consideration may proceed from the promisee or any other person who is not a party
to the contract. The definition of consideration as given in Section 2(d) makes that
proposition clear. According to the definition, when at the desire of the promisor, the
promisee or any other person does something such an act is consideration. In other
words, there can be a stranger to a consideration but not stranger to a contract.
Example 6: An old lady made a gift of her property to her daughter with a direction
to pay a certain sum of money to the maternal uncle by way of annuity. On the same
day, the daughter executed a writing in favour of the brother agreeing to pay
annuity. The daughter did not, however, pay the annuity and the uncle sued to
recover it. It was held that there was sufficient consideration for the uncle to recover
the money from the daughter. [Chinnayya vs. Ramayya (1882)]
(iii) Executed and executory consideration: A consideration which consists in the
performance of an act is said to be executed. When it consists in a promise, it is said
to be executory. The promise by one party may be the consideration for an act by
some other party, and vice versa.
Example 7: A pays ` 5,000 to B and B promises to deliver to him a certain quantity of
wheat within a month. In this case, A pays the amount, whereas B merely makes a

promise. Therefore, the consideration paid by A is executed, whereas the

consideration promised by B is executory.
(iv) Consideration may be past, present or future: The words “has done or abstained
from doing” [as contained in Section 2(d)] are a recognition of the doctrine of past
consideration. In order to support a promise, a past consideration must move by a
previous request. It is a general principle that consideration is given and accepted in
exchange for the promise. The consideration, if past, may be the motive but cannot
be the real consideration of a subsequent promise. But in the event of the services
being rendered in the past at the request or the desire of the promisor, the
subsequent promise is regarded as an admission that the past consideration was not
gratuitous.
Example 8: ’A’ performed some services to ‘B’ at his desire. After a week, ‘B’
promises to compensate ‘A’ for the work done by him. It is said to be past
consideration and A can sue B for recovering the promised money.
Example 9: A cash sale of goods is an example of present consideration. The
consideration is immediately made against delivery of goods.
(v) Consideration need not be adequate: Consideration need not to be of any
particular value. It need not be approximately of equal value with the promise for
which it is exchanged but it must be something which the law would regard as
having some value. Something in return need not be equal to something given. It can
be considered a bad bargain of the party.
It may be noted in this context that Explanation 2 to Section 25 states that an
agreement to which the consent of the promisor is freely given is not void merely
because the consideration is inadequate.
But as an exception if it is shockingly less and the other party alleges that his consent
was not free than this inadequate consideration can be taken as an evidence in
support of this allegation.
Example 10: X promises to sell a house worth `60 lacs for `10 lacs only, the
adequacy of the price in itself shall not render the transaction void, unless the party
pleads that transaction takes place under coercion, undue influence or fraud.
(vi) Performance of what one is legally bound to perform: The performance of an act
by a person who is legally bound to perform the same cannot be consideration for a
contract. Hence, a promise to pay money to a witness is void, for it is without
consideration. Hence, such a contract is void for want of consideration. Similarly, an
agreement by a client to pay to his counsel after the latter has been engaged, a

2.50 BUSINESS LAWS
certain sum over and above the fee, in the event of success of the case would be
void, since it is without consideration.
Example 11: A promise to pay ` 2,000 to a doctor over the fees is invalid as it is the
duty of a doctor to give a treatment for his normal fees.
But where a person promises to do more that he is legally bound to do or such a
promise provided it is not opposed to public policy, is a good consideration. It
should not be vague or uncertain.
(vii) Consideration must be real and not illusory: Consideration must be real and must
not be illusory. It must be something to which the law attaches some value. If it is
legally or physically impossible it is not considered valid consideration.
Examples 12: A man promises to discover treasure by magic, bringing the dead
person to live again. This transaction can be said to be void as it is illusory.
(viii) Consideration must not be unlawful, immoral, or opposed to public policy. Only
presence of consideration is not sufficient it must be lawful. Anything which is
immoral or opposed to public policy also cannot be valued as valid consideration.
Example 13: ABC Ltd. promises to give job to Mr. X in a Government bank against
payment of ` 50,000 is void as the promise is opposed to public policy.
2.3 SUIT BY A THIRD PARTY TO A CONTRACT

Though under the Indian Contract Act, 1872, the consideration for an agreement may
proceed from a third party, the third party cannot sue on contract. Only a person who is
party to a contract can sue on it.
Thus, the concept of stranger to consideration is a valid and is different from stranger to a
contract.
Example 14: P who is indebted to Q, sells his property to R and R promises to pay off the
debt amount to Q. If R fails to pay, then in such situation Q has no right to sue, as R is a
stranger to contract.
The aforesaid rule, that stranger to a contract cannot sue is known as a “doctrine of
privity of contract”, is however, subject to certain exceptions. In other words, even a
stranger to a contract may enforce a claim in the following cases:
(1) In the case of trust, a beneficiary can enforce his right under the trust, though he
was not a party to the contract between the settler and the trustee.

(2) In the case of a family settlement, if the terms of the settlement are reduced into
writing, the members of family who originally had not been parties to the settlement
may enforce the agreement.
Example 15: Two brothers X and Y agreed to pay an allowance of ` 20,000 to mother
on partition of joint properties. But later they denied to abide by it. Held their mother
although stranger to contract can require their sons for such allowance in the court
of law.
(3) In the case of certain marriage contracts/arrangements, a provision may be made
for the benefit of a person, he may file the suit though he is not a party to the
agreement.
Example 16: Mr. X’s wife deserted him for ill-treating her. Mr. X promised his wife’s
father Mr. Puri that he will treat her properly or else pay her monthly allowance. But
she was again ill-treated by her husband. Held, she has all right to sue Mr. X against
the contract made between Mr. X and Mr. Puri even though she was stranger to
contract.
(4) In the case of assignment of a contract, when the benefit under a contract has
been assigned, the assignee can enforce the contract but such assignment should
not involve any personal skill.
Example 17: Mr. Ankit Sharma has assigned his insurance policy to his son. Now son
can claim even if he was not a party to contract.
(5) Acknowledgement or estoppel – where the promisor by his conduct acknowledges
himself as an agent of the third party, it would result into a binding obligation
towards third party.
Example 18: If L gives to M `20,000 to be given to N, and M informs N that he is
holding the money for him, but afterwards M refuses to pay the money. N will be
entitled to recover the same from the former i.e. M.
(6) In the case of covenant running with the land, the person who purchases land
with notice that the owner of land is bound by certain duties affecting land, the
covenant affecting the land may be enforced by the successor of the seller.
Example 19: One owner of the land having two land adjacent to each other. One was
agricultural land. He sold the other land containing a condition that it can never be
used for Industrial purpose so as to protect the other agricultural land from
pollution. Such condition is attached with the land so who so ever is the successor of
land has to abide by it. Such are called restrictive covenants and all successor are
bind to it.

2.52 BUSINESS LAWS
(7) Contracts entered into through an agent: The principal can enforce the contracts
entered by his agent where the agent has acted within the scope of his authority and
in the name of the principal.
Example 20: Prashant appoints Abhinav as his agent to sell his house. Abhinav sells
house to Tarun. Now Prashant has right to recover the price from Tarun.
2.4 VALIDITY OF AN AGREEMENT WITHOUT

CONSIDERATION
The general rule is that an agreement made without consideration is void (Section 25). In
every valid contract, consideration is very important. A contract may only be enforceable
when consideration is there. However, the Indian Contract Act contains certain exceptions to
this rule. In the following cases, the agreement though made without consideration, will be
valid and enforceable.
1. Natural Love and Affection: Conditions to be fulfilled under section 25(1)
(i) It must be made out of natural love and affection between the parties.
(ii) Parties must stand in near relationship to each other.
(iii) It must be in writing.
(iv) It must also be registered under the law.

A written and registered agreement based on natural love and affection between the
parties standing in near relation (e.g., husband and wife) to each other is enforceable
even without consideration.
Example 21: A husband, by a registered agreement promised to pay his earnings to
his wife. Held the agreement though without consideration, was valid.
Example 22: A out of natural love and affection promises to give his newly wedded
daughter- in -law a golden necklace worth ` 5,00,000. ‘A’ made the promise in
writing and signed it and registered. The agreement is valid.
2. Compensation for past voluntary services: A promise to compensate, wholly or in

part, a person who has already voluntarily done something for the promisor, is
enforceable under Section 25(2). In order that a promise to pay for the past voluntary
services be binding, the following essential factors must exist:
(i) The services should have been rendered voluntarily.
(ii) The services must have been rendered for the promisor.
(iii) The promisor must be in existence at the time when services were rendered.

(iv) The promisor must have intended to compensate the promisee.

Example 23: P finds R’s wallet and gives it to him. R promises to give P `10,000. This
is a valid contract.
Example 24: Mr. X had helped his nephew Mr. Y to fight a case in the court of law
using his knowledge and intellect. After Mr. Y won the case, he promised Mr. X to pay
Rs. 10,000. Held, this is a valid contract as it is compensation to past services.
3. Promise to pay time barred debt: Where a promise in writing signed by the person
making it or by his authorised agent, is made to pay a debt barred by limitation it is
valid without consideration [Section 25(3)].
Example 25: A is indebted to C for `60,000 but the debt is barred by the Limitation
Act. A sign a written promise now to pay `50,000 in final settlement of the debt. This
is a contract without consideration, but enforceable for `50,000 only.
4. Agency: According to Section 185 of the Indian Contract Act, 1872, no consideration
is necessary to create an agency.
5. Completed gift: In case of completed gifts, the rule no consideration no contract
does not apply. Explanation (1) to Section 25 states “nothing in this section shall
affect the validity as between the donor and donee, of any gift actually made.” Thus,
gifts do not require any consideration.
6. Bailment: No consideration is required to affect the contract of bailment. Section
148 of the Indian Contract Act, 1872, defines bailment as the delivery of goods from
one person to another for some purpose. This delivery is made upon a contract that
post accomplishment of the purpose, the goods will either be returned or disposed
of, according to the directions of the person delivering them. No consideration is
required to affect a contract of bailment.
Example 26: Mr. A hand over the keys of his godown to Mr. Y as Mr. Y had deposited
his goods in the same. Mr. Y gets possession of godown but not the ownership. As
soon as Mr. Y lifts his goods from godown he is liable to hand over the keys back to
Mr. A.
7. Charity: If a promisee undertakes the liability on the promise of the person to
contribute to charity, there the contract shall be valid. (Kadarnath v. Gorie
Mohammad)
Example 27: Mr. G promised Mr. K, the secretary of committee of temple to donate
` 1,00,000 for renovation of that temple. On the faith of his promise, secretary has
incurred some cost for renovation. Now secretary can claim from Mr. G even the
contract was without consideration.

2.54 BUSINESS LAWS
SUMMARY
The students may note that:
(a) Consideration is a price for the promise of the other party and it may either be in the
form of ‘benefit’ or some ‘detriment’ to the parties.
(b) Consideration must move at the desire of the promisor.
(c) It may be executed or executory.
(d) Past consideration is valid provided it moved at the previous request of the promisor.
(e) It must not be something which the promisor is already legally bound to do.
(f) It may move from the promisee or any third party.
(g) Inadequacy of consideration is not relevant.
(h) Consideration must be legal.
(i) The general rule of law is “No Consideration, No Contract” but there are a few
exceptional cases where a contract, even though without consideration is valid.
(j) “Stranger to a contract can’t sue but in some exceptional cases the contract may be
enforced by a person who is not a party to the contract.
CONSIDERATION Sec.2(d)
“When at the desire of the promisor, the promise or any other person has done or abstained from
doing, something, such act or abstinence or promise is called a consideration for the promise.”
Legal Rules Suit by a Third Contract is Valid even

(i) move at the desire of the Party to any without Consideration in
promisor. Agreement following situations:
(ii) move from the promise or (i) A written and registered
(i) Trust
any other person. agreement based on
(ii) Family
(iii) may be executed and natural love and
Settlement
executor. affection between near
(iii) Marriage
(iv) May be past, present or relatives
contracts
future. (ii) A promise to pay for a
(iv) Assignment of
(v) need not be adequate. past voluntary service is
contract
(vi) must be something which the binding
(v) Acknowledgeme
promisor is not already (iii)A written promise to pay
nt or estoppel
bound to do. time-time barred debt.
(vi) Covenants
(vii) must be real, not illusory. (iv)Agency.
running with
(viii) must not be unlawful, (v) Completed gifts
land
immoral or opposed to public (vi)Bailment(sec.148).
(viii) Agency
policy. (vii)Charity

TEST YOUR KNOWLEDGE

1. Which of the following statement is false? Consideration:
(a) Must move at the desire of the promisor.
(b) May move from any person
(c) Must be illusory

(d) Must be of some value
2. Consideration must move at the desire of
(a) Promisor
(b) Promisee
(c) Any other person
(d) Any of these
3. Consideration may be
(a) Past
(b) Present
(c) Future
(d) All of the above
4. Consideration in simple term means:
(a) Anything in return
(b) Something in return
(c) Everything in return
(d) Nothing in return
5. Which of the following is not an exception to the rule - No consideration, No Contract
(a) Compensation for involuntary services

(b) Love & Affection
(c) Contract of Agency
(d) Gift

2.56 BUSINESS LAWS
6. Past consideration means

(a) Consideration and promise should move together
(b) Executed consideration
(c) Consideration is provided prior to the making of the contract
(d) Invalid consideration
7. A contract without consideration under Section 25 is:
(a) void
(b) voidable
(c) valid
(d) illegal
1. “To form a valid contract, consideration must be adequate”. Comment.
2. Mr. Sohanlal sold 10 acres of his agricultural land to Mr. Mohanlal on 25th September
2022 for ` 25 Lakhs. The Property papers mentioned a condition, amongst other
details, that whosoever purchases the land is free to use 9 acres as per his choice but
the remaining 1 acre has to be allowed to be used by Mr. Chotelal, son of the seller for
carrying out farming or other activity of his choice. On 12th October, 2022, Mr.
Sohanlal died leaving behind his son and life. On 15th October, 2022 purchaser started
construction of an auditorium on the whole 10 acres of land and denied any land to
the son.
Now Mr. Chotelal wants to file a case against the purchaser and get a suitable
redressal. Discuss the above in light of provisions of Indian Contract Act, 1872 and
decide upon Mr. Chotelal’s plan of action?
ANSWER/HINTS
Answers to MCQs
1. (c) 2. (a) 3. (d) 4. (b) 5. (a) 6. (c)
7. (c)


1. The law provides that a contract should be supported by consideration. So long as
consideration exists, the Courts are not concerned to its adequacy, provided it is of
some value. The adequacy of the consideration is for the parties to consider at the
time of making the agreement, not for the Court when it is sought to be enforced
(Bolton v. Modden). Consideration must however, be something to which the law
attaches value though it need not be equivalent in value to the promise made.
According to Explanation 2 to Section 25 of the Indian Contract Act, 1872, an
agreement to which the consent of the promisor is freely given is not void merely
because the consideration is inadequate but the inadequacy of the consideration
may be taken into account by the Court in determining the question whether the
consent of the promisor was freely given.
2. Problem as asked in the question is based on the provisions of the Indian Contract Act,
1872 as contained in section 2(d) and on the principle ‘privity of consideration’.
Consideration is one of the essential elements to make a contract valid and it can flow
from the promisee or any other person. In view of the clear language used in definition
of ‘consideration’ in Section 2(d), it is not necessary that consideration should be
furnished by the promisee only. A promise is enforceable if there is some consideration
for it and it is quite immaterial whether it moves from the promisee or any other person.
The leading authority in the decision of the Chinnaya Vs. Ramayya, held that the
consideration can legitimately move from a third party and it is an accepted principle
of law in India.
In the given problem, Mr. Sohanlal has entered into a contract with Mr. Mohanlal, but
Mr. Chotelal has not given any consideration to Mr. Mohanlal but the consideration
did flow from Mr. Sohanlal to Mr. Mohanlal on the behalf of Mr. Chotelal and such
consideration from third party is sufficient to enforce the promise of Mr. Mohanlal to
allow Mr. Chotelal to use 1 acre of land. Further the deed of sale and the promise
made by Mr. Mohanlal to Mr. Chotelal to allow the use of 1 acre of land were
executed simultaneously and therefore they should be regarded as one transaction
and there was sufficient consideration for it.
Moreover, it is provided in the law that “in case covenant running with the land,
where a person purchases land with notice that the owner of the land is bound by
certain duties affecting land, the covenant affecting the land may be enforced by the
successor of the seller.”
In such a case, third party to a contract can file the suit although it has not moved
the consideration.
Hence, Mr. Chotelal is entitled to file a petition against Mr. Mohanlal for execution of
contract.

2.58 BUSINESS LAWS
UNIT-3: OTHER ESSENTIAL ELEMENTS OF A

CONTRACT
LEARNING OUTCOMES
♦ The various ingredients of incapacity to contract.
♦ The legal consequence of contracting with a minor.
♦ The concept of ‘consensus ad idem’ i.e. parties agreeing upon the
same thing in the same sense.
♦ The characteristics of different elements vitiating free consent and
particularly to distinguish amongst fraud, misrepresentation and
mistake.
♦ The circumstances when object and consideration become
unlawful.
♦ Agreements opposed to public policy.
UNIT OVERVIEW
Essential Elements of a Valid
Contract
Capacity to Lawful Not

Free
Contract Consideration Expressly
Consent
& Object declared
Void
Sound Not
Major
Mind Disqualified Not Caused by
Coercion Undue Misrepresentation

Fraud Mistake
Influence

It has already been discussed that an agreement results from a proposal by one party and its
acceptance by the other party. We have already discussed offer, acceptance and
consideration in detail. We shall now discuss in detail the elements which constitute a valid
contract enforceable in law.
Section 10 of the Indian Contract Act, 1872 provides that an agreement in order to be a
contract, must satisfy the following conditions:
(1) the parties must be competent to contract;
(2) it must be made by the free consent of the parties;
(3) it must be made for a lawful consideration and with a lawful object;
(4) it should not have been expressly declared as void by law.
3.1 CAPACITY TO CONTRACT

Meaning: Capacity refers to the competence of the parties to make a contract. It is one of
the essential elements to form a valid contract.
Who is competent to contract (Section 11)
Every person is competent to contract who-
(A) has attained the age of majority,
(B) is of sound mind and
(C) is not disqualified from contracting by any law to which he is subject.
(A) Age of Majority: In India, the age of majority is regulated by the Indian Majority
Act, 1875.
Every person domiciled in India shall attain the age of majority on the completion of
18 years of age and not before. The age of majority being 18 years, a person less
than that age even by a day would be minor for the purpose of contracting.
Law relating to Minor’s agreement/Position of Minor
1. A contract made with or by a minor is void ab-initio: A minor is not

competent to contract and any agreement with or by a minor is void from the
very beginning.
In the leading case of Mohori Bibi vs. Dharmo Das Ghose (1903), ““Mr. D a
minor, mortgaged his house for Rs. 20,000 to money lender, but the
mortgagee i.e. money lender has paid him Rs. 8,000. Subsequently the minor

2.60 BUSINESS LAWS
had filed a suit for cancellation of contract. Held the contract is void as Mr. D
is minor and therefore he is not liable to pay anything to lender.”
2. No ratification after attaining majority: A minor cannot ratify the

agreement on attaining majority as the original agreement is void ab initio
and a void agreement can never be ratified.
Example 1: X, a minor makes a promissory note in favour of Y. On attaining
majority, he cannot ratify it and if he makes a new promissory note in place of
old one, here the new promissory note which he executed after attaining
majority is also void being without consideration.
3. Minor can be a beneficiary or can take benefit out of a contract: Though a
minor is not competent to contract, nothing in the Contract Act prevents the
minor from making the other party bound to him. Thus, a promissory note
duly executed in favour of a minor is not void and can be sued upon by him,
because he though incompetent to contract, may yet accept a benefit.
A minor cannot become partner in a partnership firm. However, he may with

the consent of all the partners, be admitted to the benefits of partnership
(Section 30 of the Indian Partnership Act, 1932).
Example 2: A mortgage was executed in favour of a minor. Held, he can get a
decree for the enforcement of the mortgage.
4. A minor can always plead minority: A minor can always plead minority and
is not stopped to do so even where he has taken any loan or entered into any
contract by falsely representing that he was major. Rule of estoppel cannot be
applied against a minor. It means he can be allowed to plea his minority in
defence.
Example 3: A, a minor has falsely induced himself as major and contracted
with Mr. X for loan of ` 20,000. When Mr. X asked for the repayment A denied
to pay. He pleaded that he was a minor so cannot enter into any contract.
Held, A cannot be held liable for repayment of amount. However, if he has not
spent the same, he may be asked to repay it but the minor shall not be liable
for any amount which he has already spent even though he received the same
by fraud. Thus, a minor can always plead minority and is not estopped from
doing so even where he had produced a loan or entered into some other
contract by falsely representing that he was of full age, when in reality he was
a minor.
5. Liability for necessaries: The case of necessaries supplied to a minor or to
any other person whom such minor is legally bound to support is governed by

section 68 of the Indian Contract Act. A claim for necessaries supplied to a

minor is enforceable by law. But a minor is not liable for any price that he may
promise and never for more than the value of the necessaries. There is no
personal liability of the minor, but only his property is liable.
To render minor’s estate liable for necessaries two conditions must be
satisfied.
(i) The contract must be for the goods reasonably necessary for his
support in the station in life.
(ii) The minor must not have already a sufficient supply of these
necessaries.
Necessaries mean those things that are essentially needed by a minor. They
cannot include luxuries or costly or unnecessary articles. Necessaries extend
to all such things as reasonable persons would supply to an infant in that class
of society to which the infant belongs. Expenses on minor’s education, on
funeral ceremonies come within the scope of the word ‘necessaries’.
The whole question turns upon the minor’s status in life. Utility rather than
ornament is the criterion.
Example 4: Shruti being a minor purchased a laptop for her online classes of
` 70,000 on credit from a shop. But her assets could pay only ` 20,000. The
shop keeper could not hold Shruti personally liable and could recover only
amount recoverable through her assets i.e. upto ` 20,000.
6. Contract by guardian - how far enforceable: Though a minor’s agreement is
void, his guardian can, under certain circumstances enter into a valid contract
on minor’s behalf. Where the guardian makes a contract for the minor, which
is within his competence and which is for the benefit of the minor, there will
be valid contract which the minor can enforce.
But all contracts made by guardian on behalf of a minor are not valid. For
instance, the guardian of a minor has no power to bind the minor by a contact
for the purchase of immovable Property. But a contract entered into by a
certified guardian (appointed by the Court) of a minor, with the sanction of
the court for the sale of the minor’s property, may be enforced by either party
to the contract.
7. No specific performance: A minor’s agreement being absolutely void, there

can be no question of the specific performance of such an agreement.

2.62 BUSINESS LAWS
8. No insolvency: A minor cannot be declared insolvent as he is incapable of

contracting debts and dues are payable from the personal properties of minor
and he shall never be held personally liable.
9. Partnership: A minor being incompetent to contract cannot be a partner in a
partnership firm, but under Section 30 of the Indian Partnership Act, he can be
admitted to the benefits of partnership.
10. Minor can be an agent: A minor can act as an agent. But he will not be liable
to his principal for his acts. A minor can draw, deliver and endorse negotiable
instruments without himself being liable.
Example 5: A minor can have an account in the bank. He can draw a cheque
for his purchases. But he shall not be liable for cheque bounces nor can he be
sued under court of law for any fraud done from his account.
11. Minor cannot bind parent or guardian: In the absence of authority, express
or implied, an infant is not capable of binding his parent or guardian, even for
necessaries. The parents will be held liable only when the child is acting as an
agent for parents.
Example 6: Richa a minor entered into contract of buying a scooty from the
dealer and mentioned that her parents will be liable for the payment of
scooty. The dealer sent a letter to her parents for money. The parents will not
be liable for such payment as the contract was entered by a minor in their
absence and out of their knowledge.
12. Joint contract by minor and adult: In such a case, the adult will be liable on
the contract and not the minor. In Sain Das vs. Ram Chand, where there was
a joint purchase by two purchasers, one of them was a minor, it was held that
the vendor could enforce the contract against the major purchaser and not
the minor.
13. Surety (Guarantor) for a minor: In a contract of guarantee when an adult

stands surety for a minor then he (adult) is liable to third party as there is
direct contract between the surety and the third party.
Example 7: Mr. X guaranteed for the purchase of a mobile phone by Krish, a
minor. In case of failure for payment by Krish, Mr. X will be liable to make the
payment.
14. Minor as Shareholder: A minor, being incompetent to contract cannot be a

shareholder of the company. If by mistake he becomes a member, the
company can rescind the transaction and remove his name from register. But,

a minor may, acting though his lawful guardian become a shareholder by

transfer or transmission of fully paid shares to him.
15. Liability for torts: A tort is a civil wrong. A minor is liable in tort unless the
tort in reality is a breach of contract. Thus, where a minor borrowed a horse
for riding only, he was held liable when he lent the horse to one of his friends
who jumped and killed the horse. Similarly, a minor was held liable for his
failure to return certain instruments which he had hired and then passed on to
a friend.
(B) Person of sound mind: According to Section 12 of Indian Contract Act, “a person is
said to be of sound mind for the purposes of making a contract if, at the time when
he makes it is capable of understanding it and of forming a rational judgement as to
its effect upon his interests.”
A person who is usually of unsound mind, but occasionally of sound mind, may make
a contract when he is of sound mind.
A person who is usually of sound mind, but occasionally of unsound mind, may not
make a contract when he is of unsound mind.
Example 8: A patient in a lunatic asylum, who is at intervals, of sound mind, may
contract during those intervals.
Example 9: A sane man, who is delirious from fever, or who is so drunk that he
cannot understand the terms of a contract, or form a rational judgement as to its
effect on his interests, cannot contract whilst such delirium or drunkenness lasts.
Position of unsound mind person making a contract: A contract by a person who
is not of sound mind is void.
(C) Contract by disqualified persons: Besides minors and persons of unsound mind,
there are also other persons who are disqualified from contracting, partially or
wholly, so that the contracts by such person are void. Incompetency to contract may
arise from political status, corporate status, legal status, etc. The following persons
fall in this category: Foreign Sovereigns and Ambassadors, Alien enemy,
Corporations, Convicts, Insolvent etc.

2.64 BUSINESS LAWS
3.2 FREE CONSENT
Consent is not free when it is
Coercion Undue influence Fraud Misrepresentation Mistake
Contract is Void
Contract is Voidable
Unilateral Mistake
Bilateral Mistake
As to subject matter Possibility of performance
Nature of Contract As to identity of person
Definition of Consent according to Section 13:
“two or more persons are said to consent when they agree upon the same
thing in the same sense.”
Parties are said to have consented when they not only agreed upon the same thing but also
agreed upon that thing in the same sense. ‘Same thing’ must be understood as the whole
content of the agreement. Consequently, when parties to a contract make some
fundamental error as to the nature of the transaction, or as to the person dealt with or as to
the subject-matter of the agreement, it cannot be said that they have agreed upon the same
thing in the same sense. And if they do not agree in the same sense, there cannot be
consent. A contract cannot arise in the absence of consent.
If two persons enter into an apparent contract concerning a particular person or ship, and it
turns out that each of them, misled by similarity of name, had a different person or ship in
his mind, no contract would exist between them as they were not ad idem, i.e., of the same
mind. Again, ambiguity in the terms of an agreement, or an error as to the nature of any
transaction or as to the subject-matter of any agreement may prevent the formation of any
contract on the ground of absence of consent. In the case of fundamental error, there is
really no consent whereas, in the case of mistake, there is no real consent.

As has been said already, one of the essential elements of a contract is consent and there
cannot be a contract without consent. Consent may be free or not free. Only free consent is
necessary for the validity of a contract.
Definition of ‘Free Consent’ (Section 14)

Consent is said to be free when it is not caused by:
1. Coercion, as defined in Section 15; or
2. Undue Influence, as defined in Section 16; or
3. Fraud, as defined in Section 17; or
4. Misrepresentation, as defined in Section 18 or
5. Mistake, subject to the provisions of Sections 20, 21, and 22.
When consent to an agreement is caused by coercion, fraud, misrepresentation, or undue
influence, the agreement is a contract voidable at the option of the party whose consent was
so caused. When the consent is vitiated by mistake, the contract becomes void.
3.3 ELEMENTS VITIATING FREE CONSENT

We shall now explain these elements one by one.
I Coercion (Section 15)
“Coercion’ is the committing, or threatening to commit, any act forbidden by the Indian Penal
Code or the unlawful detaining, or threatening to detain any property, to the prejudice of any
person whatever, with the intention of causing any person to enter into an agreement.”
It is to be noted that the section does not require that coercion must proceed from a party
to the contract; nor is it necessary that subject of the coercion must be the other contracting
party, it may be directed against any third person whatever.
Effects of coercion under section 19 of Indian Contract Act, 1872

(i) Contract induced by coercion is voidable at the option of the party whose consent
was so obtained.
(ii) A person to whom money has been paid or anything delivered under coercion must
repay or return it. (Section 72)
Threat to commit suicide – Whether is it coercion?

Suicide though forbidden by Indian Penal Code is not punishable, as a dead man cannot be
punished. But Section 15 declares that committing or threatening to commit any act

2.66 BUSINESS LAWS
forbidden by Indian Penal Code is coercion. Hence, a threat to commit suicide will be
regarded as coercion.
Example 10: Where husband obtained a release deed from his wife and son under a threat
of committing suicide, the transaction was set aside on the ground of coercion, suicide
being forbidden by the Indian Penal Code.
Example 11: An agent refused to give books of accounts to the principal unless he frees
him from all his liabilities. The principal had to give the release deed. Held, the contract was
under coercion by unlawful detaining of the principal’s property.
II Undue influence (Section 16)

According to section 16 of the Indian Contract Act, 1872, “A contract is said to be induced
by ‘undue influence’ where the relations subsisting between the parties are such that one of
the parties is in a position to dominate the will of the other and he uses that position to
obtain an unfair advantage over the other”.
Example 12: A having advanced money to his son, B, during his minority, upon B’s coming
of age obtains, by misuse of parental influence, a bond from B for a greater amount than the
sum due in respect of the advance. A employs undue influence.
The essential ingredients under this provision are:
(1) Relation between the parties: A person can be influenced by the other when a near
relation between the two exists.
(2) Position to dominate the will: Relation between the parties exist in such a manner
that one of them is in a position to dominate the will of the other. A person is
deemed to be in such position in the following circumstances:
(a) Real and apparent authority: Where a person holds a real authority over the
other as in the case of master and servant, doctor and patient and etc.
Example 13: A father, by reason of his authority over the son can dominate
the will of the son.
(b) Fiduciary relationship: Where relation of trust and confidence exists between
the parties to a contract. Such type of relationship exists between father and
son, solicitor and client, husband and wife, creditor and debtor, etc.
Example 14: By reason of fiduciary relationship, a solicitor can dominate the
will of his client and a trustee can dominate the will of the beneficiary.
Example 15: A spiritual guru induced his devotee to gift to him the whole of
his property in return of a promise of salvation of the devotee. Held, the
consent of the devotee was given under undue influence. Here, the

relationship was fiduciary relationship between Guru and devotee and Guru
was in a position to dominate the will of devotee.
(c) Mental distress: An undue influence can be used against a person to get his
consent on a contract where the mental capacity of the person is temporarily
or permanently affected by the reason of mental or bodily distress, illness or
of old age.
Example 16: A doctor is deemed to be in a position to dominate the will of
his patient enfeebled by protracted illness.
(d) Unconscionable bargains: Where one of the parties to a contract is in a

position to dominate the will of the other and the contract is apparently
unconscionable i.e., unfair, it is presumed by law that consent must have been
obtained by undue influence. Unconscionable bargains are witnessed mostly
in money-lending transactions and in gifts.
Example 17: A, being in debt to B, the money-lender of his village, contracts a
fresh loan on terms which appear to be unconscionable. It lies on B to prove
that the contract was not induced by undue influence.
Example 18: A applies to a banker for a loan at a time when there is a
stringency in money market. The banker declines to make the loan except at
an unusually high rate of interest. A accepts the loan on these terms. This is a
transaction in the ordinary course of business, and the contract is not induced
by undue influence.
(3) The object must be to take undue advantage: Where the person is in a position to
influence the will of the other in getting consent, must have the object to take
advantage of the other.
Example 19: A teacher asks her daughter to get marry to one of his brilliant
students. Both the girl and boy were smart, settled and intelligent. Here the teacher
had a relation which can have influence on both of them. But as no undue advantage
of such influence was taken such contract of marriage is said to be made by free
consent.
(4) Burden of proof: When a party to contract decides to avoid the contract on the
ground of undue influence, he has to prove that-
(a) The other party is in position to dominate his will,
(b) the other party actually used his position to obtain his consent,
(c) transaction is unfair or unconscionable.

2.68 BUSINESS LAWS
Effect of undue influence- (Section 19A)

(i) When consent to an agreement is caused by undue influence, the agreement is a
contract voidable at the option of the party whose consent was so caused.
(ii) Any such contract may be set aside either absolutely or, if the party who was entitled
to avoid it has received any benefit thereunder, upon such terms and conditions as to
the Court may seem just.
Example 20: A, a money lender advances ` 1,00,000 to B, an agriculturist, and by undue
influence induces B to execute a bond for ` 2,00,000 with interest at 6 percent per month.
The court may set aside the bond, ordering B to repay ` 1,00,000 with such interest as may
seem just.
III Fraud (Section 17)
Definition of Fraud under Section 17: ‘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 an 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 a 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.
The following are the essential elements of the fraud:
(1) There must be a representation or assertion and it must be false. However, silence
may amount to fraud or an active concealment may amount to fraud.
Whether Silence is fraud or not?
As per explanation of section 17, silence is fraud in following situations:

(a) There is duty to speak.
Example 21: A sell, by auction, to B, a horse which A knows to be unsound, A
says nothing to B about the unsoundness of the horse. This is not fraud by A.
Example 22: In the above example, B is A’s daughter. Here, the relation
between the parties would make it A’s duty to tell B if the horse is unsound.
(b) When silence is equal to speech.

Example 23: B says to A –“If you do not deny it, I shall assume that the horse is
sound”. A says nothing. Here A’s silence is equivalent to speech.
(2) The representation must be related to a fact.

Example 24: ‘A’ who is about to sell goods says that goods cost him Rs. 50,000. This
is statement of fact. But if he says the goods are worth Rs. 50,000, it is a statement of
opinion.
(3) The representation should be made before the conclusion of the contract with the
intention to induce the other party to act upon it.
(4) The representation or statement should be made with a knowledge of its falsity or
without belief in its truth or recklessly not caring whether it is true or false.
(5) The other party must have been induced to act upon the representation or assertion.
Example 25: ‘A’ bought shares in a company on the faith of a prospectus which
contained an untrue statement that ‘B’ was a director of the company. ‘A’ had never
heard of ‘B’ and, therefore, the statement was immaterial from his point of view. A’s
claim for damages in this case was dismissed because the untrue statement had not
induced ‘A’ to buy the shares.
(6) The other party must have relied upon the representation and must have been
deceived.
(7) The other party acting on the representation must have consequently suffered a loss.
Effect of Fraud upon validity of a contract: When the consent to an agreement in caused
by the fraud, the contract is voidable at option of the party defrauded and he has the
following remedies:
(1) He can rescind the contract within a reasonable time.
(2) He can sue for damages.

(3) He can insist on the performance of the contract on the condition that he shall be
put in the position in which he would have been had the representation made been
true.
Exception: In the following cases, contract is not voidable:
(i) If the party whose consent was caused by silence which amounting to fraud, had the
means of discovering the truth with ordinary diligence.
(ii) A fraud which did not cause the consent of the party to agreement.

2.70 BUSINESS LAWS
IV Misrepresentation (Section 18)

According to Section 18, there is misrepresentation:
(1) Statement of fact, which of false, would constitute misrepresentation if the maker
believes it to be true but which is not justified by the information he possesses;
(2) When there is a breach of duty by a person without any intention to deceive which
brings an advantage to him;
(3) When a party causes, even though done innocently, the other party to the agreement
to make a mistake as to the subject matter.
Example 26: A makes a positive statement to B that C will be made the director of a
company. A makes the statement on information derived, not directly from C but
from M. B applies for shares on the faith of the statement which turns out to be false.
The statement amounts to misrepresentation, because the information received
second-hand did not warrant A to make the positive statement to B.
Example 27: ‘A’ believed the engine of his motor cycle to be in an excellent
condition. ‘A’ without getting it checked in a workshop, told to ‘B’ that the motor
cycle was in excellent condition. On this statement, ‘B’ bought the motor cycle, whose
engine proved to be defective. Here, ‘A’s statement is misrepresentation as the
statement turns out to be false.
Example 28: A while selling his mare to B, tells him that the mare is thoroughly
sound. A genuinely believes the mare to be sound although he has no sufficient
ground for the belief. Later on, B finds the mare to be unsound. The representation
made by A is a misrepresentation.
Example 29: A buy an article thinking that it is worth ` 1000 when in fact it is worth
only ` 500. There has been no misrepresentation on the part of the seller. The
contract is valid.
Difference between Coercion and Undue influence:

Basis of difference Coercion Undue Influence
Nature of action It involves the physical force It involves moral or mental
or threat. The aggrieved pressure.
party is compelled to make
the contract against its will.
Involvement of criminal It involves committing or No such illegal act is
action threatening to commit and committed or a threat is given.
act forbidden by Indian Penal
Code or detaining or

threatening to detain
property unlawfully.
Relationship between It is not necessary that there Some sort of relationship
parties must be some sort of between the parties is
relationship between the absolutely necessary.
parties.
Exercised by whom Coercion need not proceed Undue influence is always
from the promisor nor need exercised between parties to
it be the directed against the the contract.
promisor. It can be used even
by a stranger to the contract.
Enforceability The contract is voidable at Where the consent is induced
the option of the party by undue influence, the
whose consent has been contract is either voidable or
obtained by the coercion. the court may set it aside or
enforce it in a modified form.
Position of benefits In case of coercion where the The court has the discretion to
received contract is rescinded by the direct the aggrieved party to
aggrieved party, as per return the benefit in whole or in
Section 64, any benefit part or not to give any such
received has to be restored directions.
back to the other party.
Distinction between fraud and misrepresentation:
Basis of difference Fraud Misrepresentation

Intention To deceive the other party by There is no such intention to
hiding the truth. deceive the other party.
Knowledge of truth The person making the The person making the
suggestion believes that the statement believes it to be
statement as untrue. true, although it is not true.
Rescission of the The injured party can repudiate The injured party is entitled
contract and claim the contract and claim damages. to repudiate the contract or
for damages sue for restitution but
cannot claim the damages.
Means to discover The party using the fraudulent act Party can always plead that
the truth cannot secure or protect himself the injured party had the
by saying that the injured party means to discover the truth.
had means to discover the truth.

2.72 BUSINESS LAWS
Mistake of Indian Law

Mistake of Law
Mistake of Foreign Law
Quality
existence
Mistake
Identity
Mistake as to
subject matter
Title
Price
Bilateral
Quantity
Mistake as to Legal
Mistake of Fact possibility of
performance Physical
Identity of person
Unilateral
Character of
written document
Mistake: Mistake may be defined as innocent or erroneous belief which leads the party to
misunderstand the others. Mistake may be either mistake of law or mistake of fact.
Mistake of Law: Mistake of law is further classified as mistake of Indian law or mistake of
foreign law.
(i) Mistake of Indian Law: A person cannot be allowed to get any relief on the ground
that it had done a particular act in ignorance of law.
Example 30: A and B enter into a contract on the erroneous belief that a particular debt is
barred by the Indian Law of Limitation. This contract is not voidable.
(ii) Mistake of foreign law: Such a mistake is treated as mistake of fact and the
agreement in such a case is void.

Mistake of fact: Mistake of fact are of two types – (i) Bilateral Mistake, (ii) Unilateral Mistake
(i) Bilateral mistake: Where both the parties to an agreement are under a mistake as to
a matter of fact essential to the agreement, there is a bilateral mistake. In such a case, the
agreement is void (Section 20).
Cases of Bilateral Mistakes
(i) Mistake as to the quality of the subject-matter.

(ii) Mistake as to the existence of the subject-matter.
(iii) Mistake as to the identity of the subject-matter.
(iv) Mistake as to the title of the subject-matter.

(v) Mistake as to the price of the subject-matter.
(vi) Mistake as to the quantity of the subject-matter.
(ii) Unilateral Mistake: According to Section 22, a contract is not voidable merely
because it was caused by one of the parties to it being under a mistake as to a matter of
fact.
3.4 LEGALITY OF OBJECT AND CONSIDERATION

Which considerations and objects are lawful, and those which are not (Section 23):
Under Section 23 of the Indian Contract Act, in each of the following cases the consideration
or object of an agreement is said to be unlawful:
(i) When consideration or object is forbidden by law: Acts forbidden by law are those
which are punishable under any statute as well as those prohibited by regulations or
orders made in exercise of the authority conferred by the legislature.
Example 31: A father had arranged for marriage of his 17 years boy and took dowry
from the girl’s parents. Such marriage contract cannot take place as in India the
minimum age for boy marriage is 21 years and dowry is not permissible in Indian law.
Such is not a valid contract as the consideration and object both are forbidden by
law.
(ii) When consideration or object are of such a nature that if permitted it would
defeats the provisions of law:
If the consideration or the object of an agreement is of such a nature that not directly
but indirectly, it would defeat the provisions of the law, the agreement is void.

2.74 BUSINESS LAWS
Example 32: A’s estate is sold for arrears of revenue under the provisions of an Act
of the Legislature, by which the defaulter is prohibited from purchasing the estate. B,
upon an understanding with A, becomes the purchaser, and agrees to convey the
estate to A upon receiving from him the price which B has paid. The agreement is
void, as it renders the transaction, in effect, a purchase by the defaulter, and would
so defeat the object of the law.
(iii) When it is fraudulent: Agreements which are entered into to promote fraud are
void.
Example 33: A, B and C enter into an agreement for the division among them of
gains acquired, or to be acquired, by them by fraud. The agreement is void, as its
object, viz., acquisition of gains by fraud is unlawful.
(iv) The general term “injury” means criminal or wrongful harm. In the following
examples, the object or consideration is unlawful as it involves injury to the person or
property of another.
Example 34: An agreement to print a book in violation of another’s copyright is void,
as the object is to cause injury to the property of another. It is also void as the object
of the agreement is forbidden by the law relating to copyright.
Example 35: A promises to repay his debt by doing manual labour daily for a special
period and agrees to pay interest at an exorbitant rate in case of default. Here A’s
promise to repay by manual labour is the consideration for the loan, and this
consideration is illegal as it imposes what, in substance, amounts to slavery on the
part of A. In other words, as the consideration involves injury to the person A, the
consideration is illegal. Here, the object too is illegal, as it seeks to impose slavery
which is opposed to public policy. Hence, the agreement is void.
(v) When consideration is immoral: The following are the examples of agreements
where the object or consideration is unlawful, being immoral.
Example 36: Where P had advanced money to D, a married woman to enable her to
obtain a divorce from her husband and D had agreed to marry him as soon as she
could obtain the divorce, it was held that P was not entitled to recover the amount,
since the agreement had for its object the divorce of D from her husband and the
promise of marriage given under these circumstances was against good morals.
Example 37: A asks B, “If you arrange a girl for marriage with me, I will give Rs.
50,000.” Here contract is void as it is immoral.
(vi) When consideration is opposed to public policy: The expression ‘public policy’ can
be interpreted either in a wide or in a narrow sense. The freedom to contract may

become illusory, unless the scope of ‘public policy’ is restricted. In the name of public
policy, freedom of contract is restricted by law only for the good for the community.
Some of the agreements which are held to be opposed to public policy

are-
(1) Trading with enemy: Any trade with person owing allegiance to a Government at
war with India without the licence of the Government of India is void, as the object is
opposed to public policy. Here, the agreement to trade offends against the public
policy by tending to prejudice the interest of the State in times of war.
Example 38: India entered in war like situation with China. Mr. A from India entered
into contract with China for import of toys. Such contract is void as China is alien
enemy of India. The contract if made before such war like situation may be
suspended or dissolved. Like India felt apps like tik tok and PUBG will provide some
internal information of the country, hence such apps were banned and any contract
with them were dissolved.
(2) Stifling Prosecution: An agreement to stifle prosecution i.e. “an agreement to
present proceedings already instituted from running their normal course using force”
tends to be a perversion or an abuse of justice; therefore, such an agreement is void.
The principle is that one should not make a trade of felony. The compromise of any
public offence is generally illegal.
Under the Indian Criminal Procedure Code, there is, however, a statutory list of
compoundable offences and an agreement to drop proceeding relating to such
offences with or without the permission of the Court, as the case may be, in
consideration the accused promising to do something for the complainant, is not
opposed to public policy. Thus, where A agrees to sell certain land to B in
consideration of B abstaining from taking criminal proceeding against A with respect
to an offence which is compoundable, the agreement is not opposed to public policy.
But, it is otherwise, if the offence is uncompoundable.
(3) Maintenance and Champerty: Maintenance is an agreement in which a person
promises to maintain suit in which he has no interest.
Example 39: A offer B ` 2000, if he sues C for a case which they could have settled
mutually under provisions of law, just to annoy C. Such agreement is maintenance
agreement.
Champerty is an agreement in which a person agrees to assist another in litigation in-
exchange of a promise to hand over a portion of the proceeds of the action.

2.76 BUSINESS LAWS
Example 40: A agrees to pay expenses to B if he sues C and B agrees to pay half of
the amount received from result of such suit. This is an agreement of champerty. The
agreement for supplying funds by way of Maintenance or Champerty is valid unless
(a) It is unreasonable so as to be unjust to other party or
(b) It is made by a malicious motive like that of gambling in litigation or
oppressing other party by encouraging unrighteous suits and not with the
bonafide object of assisting a claim believed to be just.
(4) Trafficking relating to Public Offices and titles: An agreement to trafficking in
public office is opposed to public policy, as it interferes with the appointment of a
person best qualified for the service of the public. Public policy requires that there
should be no money consideration for the appointment to an office in which the
public is interested. The following are the examples of agreements that are void;
since they are tantamount to sale of public offices.
(1) An agreement to pay money to a public servant in order to induce him to
retire from his office so that another person may secure the appointment is
void.
(2) An agreement to procure a public recognition like Padma Vibhushan for
reward is void.
Example 41: Harish paid ` 15000 to the officer to give his son the job in the Forest
department of India. On failure by officer he couldn’t recover the amount as such
contract amounts to trafficking in public office which is opposed to public policy.
(5) Agreements tending to create monopolies: Agreements having for their object the
establishment of monopolies are opposed to public policy and therefore void.
Example 42: XYZ and ABC were only the manufactures of oxygen cylinders in West
Bengal. They both entered into contract of supplying the same at very high rates and
enjoy the monopoly rates during the covid period in the country. Such contract is
opposed to public policy as they intended to create monopolies.
(6) Marriage brokerage agreements: An agreement to negotiate marriage for reward,
which is known as a marriage brokerage contract, is void, as it is opposed to public
policy. For instance, an agreement to pay money to a person hired to procure a wife
is opposed to public policy and therefore void.
Note: Marriage bureau only provides information and doesn’t negotiate marriage for
reward, therefore, it is not covered under this point.
(7) Interference with the course of justice: An agreement whose object is to induce
any judicial officer of the State to act partially or corruptly is void, as it is opposed to

public policy; so also is an agreement by A to reward B, who is an intended witness in

a suit against A in consideration of B’s absenting himself from the trial. For the same
reasons, an agreement which contemplates the use of under-hand means to
influence legislation is void.
(8) Interest against obligation: The following are examples of agreement that are void
as they tend to create an interest against obligation. The object of such agreements
is opposed to public policy.
(1) An agreement by an agent to receive without his principal’s consent
compensation from another for the performance of his agency is invalid.
(2) A, who is the manager of a firm, agrees to pass a contract to X if X pays to A `
200,000 privately; the agreement is void.
(9) Consideration Unlawful in Part: By virtue of Section 24, if any part of a single
consideration for one or more objects, or any one or any part of any one of several
considerations for a single object, is unlawful, the agreement is void.”
This section is an obvious consequence of the general principle of Section 23. There
is no promise for a lawful consideration if there is anything illegal in a consideration
which must be taken as a whole. The general rule is that where the legal part of a
contract can be severed from the illegal part, the bad part may be rejected and the
good one can be retained. But where the illegal part cannot be severed, the contract
is altogether void.
3.5 VOID AGREEMENTS

Expressly declared Void Agreements
1. Made by incompetent parties 6. Agreement in restraint of marriage
(Section 11) (Section 26)
2. Agreements made under Bilateral 7. Agreements in restraint of trade
mistake of fact (Section 20) (Section 27)
3. Agreements the consideration or 8. Agreement in restraint of legal
object of which is unlawful (Section proceedings (Section 28)
23)
4. Agreement the consideration or 9. Agreement the meaning of which is
object of which is unlawful in parts uncertain (Section 29)
(Section 24)

2.78 BUSINESS LAWS
5. Agreements made without 10. Wagering Agreement (Section 30)

consideration (Section 25)
[Refer Unit 2] 11. Agreements to do impossible Acts
(Section 56)
(1) Agreement in restraint of marriage (Section 26): Every agreement in restraint of

marriage of any person other than a minor, is void. So, if a person, being a major,
agrees for good consideration not to marry, the promise is not binding and
considered as void agreement.
(2) Agreement in restraint of trade (Section 27): An agreement by which any person is
restrained from exercising a lawful profession, trade or business of any kind, is to that
extent void. But this rule is subject to the following exceptions, namely, where a
person sells the goodwill of a business and agrees with the buyer to refrain from
carrying on a similar business, within specified local limits, so long as the buyer or his
successor in interest carries on a like business therein, such an agreement is valid
(goodwill is the advantage enjoyed by a business on account of public patronage and
encouragement from habitual customers). The local limits within which the seller of
the goodwill agrees not to carry on similar business must be reasonable. Under
Section 36 of the Indian Partnership Act, 1932 if an outgoing partner makes an
agreement with the continuing partners that he will not carry on any business similar
to that of the firm within a specified period or within specified local limits, such an
agreement, thought in restraint of trade, will be valid, if the restrictions imposed are
reasonable. Similarly, under Section 11 of that Act an agreement between partners
not to carry on competing business during the continuance of partnership is valid.
But an agreement of service by which an employee binds himself, during the term of
his agreement, not to compete with his employer is not in restraint of trade.
Example 43: B, a physician and surgeon, employs A as an assistant for a term of
three years and A agrees not to practice as a surgeon and physician during these
three years. The agreement is valid and A can be restrained by an injunction if he
starts independent practice during this period.
Example 44: An agreement by a manufacturer to sell during a certain period his
entire production to a wholesale merchant is not in restraint of trade.
Example 45: Agreement among the sellers of a particular commodity not to sell the
commodity for less than a fixed price to maintain the quality of the product, is not an
agreement in restraint of trade.
(3) Agreement in restraint of legal proceedings (Section 28): An agreement in

restraint of legal proceeding is the one by which any party thereto is restricted

absolutely from enforcing his rights under a contract through a Court or which
abridges the usual period for starting legal proceedings. A contract of this nature is
void.
However, there are certain exceptions to the above rule:
(i) A contract by which the parties agree that any dispute between them in
respect of any subject shall be referred to arbitration and that only the
amount awarded in such arbitration shall be recoverable is a valid contract.
(ii) Similarly, a contract by which the parties agree to refer to arbitration any
question between them which has already arisen or which may arise in future,
is valid; but such a contract must be in writing.
(4) Agreement - the meaning of which is uncertain (Section 29): An agreement, the
meaning of which is not certain, is void, but where the meaning thereof is capable of
being made certain, the agreement is valid.
Example 46: A agrees to sell B “a hundred tons of oil”. There is nothing whatever to
show what kind of oil was intended. The agreement is void for uncertainty. But the
agreement would be valid if A was dealer only in coconut oil; because in such a case
its meaning would be capable of being made certain.
(5) Wagering agreement (Section 30): An agreement by way of a wager is void. It is an
agreement involving payment of a sum of money upon the determination of an
uncertain event. The essence of a wager is that each side should stand to win or lose,
depending on the way an uncertain event takes place in reference to which the chance
is taken and in the occurrence of which neither of the parties has legitimate interest.
Example 47: A agrees to pay ` 50,000 to B if it rains, and B promises to pay a like
amount to A if it does not rain, the agreement will be by way of wager. But if one of
the parties has control over the event, agreement is not a wager.
Essentials of a Wager
1. There must be a promise to pay money or money’s worth.

2. Promise must be conditional on an event happening or not happening.
3. There must be uncertainty of event.
4. There must be two parties, each party must stand to win or lose.
5. There must be common intention to bet at the timing of making such
agreement.
6. Parties should have no interest in the event except for stake.

2.80 BUSINESS LAWS
Transactions similar to Wager (Gambling)

(i) Lottery transactions: A lottery is a game of chance and not of skill or knowledge.
Where the prime motive of participant is gambling, the transaction amounts to a
wager. Even if the lottery is sanctioned by the Government of India it is a wagering
transaction. The only effect of such sanction is that the person responsible for
running the lottery will not be punished under the Indian Penal Code. Lotteries are
illegal and even collateral transactions to it are tainted with illegality (Section 294A of
Indian Penal Code).
(ii) Crossword Puzzles and Competitions: Crossword puzzles in which prizes depend
upon the correspondence of the competitor’s solution with a previously prepared
solution kept with the editor of a newspaper is a lottery and therefore, a wagering
transaction.
Case Law: State of Bombay vs. R.M.D. Chamarbangwala AIR (1957)
Facts: A crossword puzzle was given in magazine. Abovementioned clause was stated
in the magazine. A solved his crossword puzzle and his solution corresponded with
previously prepared solution kept with the editor. Held, this was a game of chance
and therefore a lottery (wagering transaction).
Crossword puzzles, picture competitions and athletic competitions where prizes are
awarded on the basis of skill and intelligence are the games of skill and hence such
competitions are valid. According to the Prize Competition Act, 1955 prize
competitions in games of skill are not wagers provided the prize money does not
exceed ` 1,000.
(iii) Speculative transactions: an agreement or a share market transaction where the
parties intend to settle the difference between the contract price and the market
price of certain goods or shares on a specified day, is a gambling and hence void.
(iv) Horse Race Transactions: A horse race competition where prize payable to the bet
winner is less than ` 500, is a wager.
Example 48: A and B enter into an agreement in which A promises to pay ` 2,00,000
provided ‘Chetak’ wins the horse race competition. This is not a wagering transaction.
However, Section 30 is not applicable in an agreement to contribute toward plate,
prize or sum of money of the value of ` 500 or above to be awarded to the winner of
a horse race.

Transactions resembling with wagering transaction but are not void

(i) Chit fund: Chit fund does not come within the scope of wager (Section 30). In case
of a chit fund, a certain number of persons decide to contribute a fixed sum for a
specified period and at the end of a month, the amount so contributed is paid to the
lucky winner of the lucky draw.
(ii) Commercial transactions or share market transactions: In these transactions in
which delivery of goods or shares is intended to be given or taken, do not amount to
wagers.
(iii) Games of skill and Athletic Competition: Crossword puzzles, picture competitions
and athletic competitions where prizes are awarded on the basis of skill and
intelligence are the games of skill and hence such competition are valid. According to
the Prize Competition Act, 1955 prize competition in games of skill are not wagers
provided the prize money does not exceed ` 1,000.
(iv) A contract of insurance: A contract of insurance is a type of contingent contract and
is valid under law and these contracts are different from wagering agreements.
Distinction between Contract of Insurance and Wagering Agreement
Basis Contracts of Insurance Wagering Agreement

1. Meaning It is a contract to It is a promise to pay money or
indemnify the loss. money’s worth on the
happening or non- happening
of an uncertain event.
2. Consideration The crux of insurance There is no consideration
contract is the mutual between the two parties. There
consideration (premium is just gambling for money.
and compensation
amount).
3. Insurable Insured party has There is no property in case of
Interest insurable interest in the wagering agreement.
life or property sought to There is betting on other’s life
be insured. and properties.
4. Contract of Except life insurance, the Loser has to pay the fixed
Indemnity contract of insurance amount on the happening of
indemnifies the insured uncertain event.
person against loss.
5. Enforceability It is valid and It is void and unenforceable
enforceable agreement.

2.82 BUSINESS LAWS
6. Premium Calculation of premium No such logical calculations are

is based on scientific and required in case of wagering
actuarial calculation of agreement.
risks.
7. Public Welfare They are beneficial to the They have been regarded as
society. against the public welfare.
SUMMARY
The following persons are incompetent to contract: (a) minor, (b) persons of unsound mind,
(c) other disqualified persons.
(a) Minor: Agreement with a minor is altogether void but his property is liable for
necessaries supplied to him. He cannot be a partner but can be admitted to benefits
of partnership with the consent of all partners. He can always plead minority and
cannot be asked to compensate for any benefit received under a void agreement.
Under certain circumstances, a guardian can enter into valid contract on behalf of
minor. Minor cannot ratify a contract on attaining majority.
(b) Persons of unsound mind: Persons of unsound mind such as idiots, lunatics and
drunker cannot enter into a contract, but a lunatic can enter into a valid contract
when he is in a sound state of mind. The liability for necessities of life supplied to
persons of unsound mind is the same as in case of minors. (Section 68).
(c) Certain other persons are disqualified due to their status.
Free Consent
Two or more persons are said to consent when they agree upon the same thing in the same
sense (Section 13). Consent is free when it is not caused by mistake, misrepresentation, undue
influence, fraud or coercion. When consent is caused by any of above said elements, the
contract is voidable at the option of the party whose consent was so caused (Sections 19 and
19A)
(a) Coercion: Coercion is the committing or threatening to commit any act, forbidden by
the Indian Penal Code or the unlawful detaining or threatening to detain, any
property, to the prejudice of any person with the intention of causing any person to
enter into an agreement (Section 15). A contract induced by coercion is voidable at
the option of the aggrieved party.
(b) Undue influence: When one party to a contract is able to dominate the will of the
other and uses the position to obtain an unfair advantage, the contract is said to be
induced by undue influence. (Section 16). Such contract is voidable, not void.

(c) Fraud: Fraud exists when a false representation has been made knowingly with an
intention to deceive the other party, or to induce him to enter a contract (Section 17).
Contract in the case is voidable.
(d) Misrepresentation: Means a misstatement of a material fact made believing it to be
true, without an intent to deceive the other party (Section 18). Contract will be
voidable in this case.
(e) Mistake: When both the parties are at a mistake to a matter of fact to the
agreement, the agreement is altogether void.
Lawful Object and Consideration

An agreement where the object or the consideration is unlawful, is void. Object or
consideration is unlawful if it is forbidden by law, it defeats the provisions of law; or is
fraudulent, or involves injury to the person or property of another; or is immoral; or is
opposed to public policy.
Besides the above said agreements, certain agreements have been expressly declared to be
void by the Contract Act such as - wagering agreements, agreement with uncertain
meaning, agreements where consideration is unlawful in part etc.
Minor: Sec.3 Indian Majority Act, 1875: Minor who is 1. Contract with person
under 18 years. of unsound mind is
void.
Position of a contract with Minor
2. Person usually
1.Agreement with or by minor is 10. Minor can be an agent Unsound. sometimes
void-ab-initio agreement without incurring any sound - can contract
2. Cannot be ratified on attaining personal liability. when sound.
majority. 11. Parents/guardians are 3. Person usually sound.
3.Minor can be a beneficiary or can not liable for the contract sometimes unsound -
take benefit out of a contract. entered into by him. cannot contract when
12. In case of joint contract unsound.
4.Minor can always plead minority.
5.Minor's estate is liable for by adult and minor, only
necessaries. adult is liable.
6.Minor is personally liable for 13. If adult is surety for
Disqualified by Law
contracts for his benefit or supply of minor, adult is liable as
1. Foreign sovereigns
necessaries entered by guardian direct contract between
(Rulers)
within scope of authority. adult and third party.
2. Alien Enemy
7. No specific performance can be 14. Shares cannot be
allotted to minor but minor 3. Corporations
claimed.
can become a shareholder 4. Convicts.
8. Minor cannot be adjusted
by transfer or transmission
insolvent.
of fully paid shares to him.
9.Minor cannot enter into partnership.
15. Minor is Liable for torts.

2.84 BUSINESS LAWS
CONSENT & FREE CONSENT
Consent: “Two or more persons are said to consent when they agree upon the same
thing in the same sense.” (Consensus-ad-idem). When there is no consent, there is no
contract.
Free Consent(Sec.14): Consent is said to be free when it is not caused by
Coercion Undue Influence Fraud (Sec. 17) Mis- Mistake (Sec.

(Sec. 15) (Sec. 16) (i) Knowingly make a false representation 20 to Sec.22)
(i) Committing One party is in the suggestion. (Sec. 18) Mistake of
or threatening position to (ii) Active concealment of a (i) False Law
to commit any dominate the will fact statement but (i) Mistake of
act forbidden of other and it (iii) Promise without any maker believes it law of the
by IPC takes unfair intention of performance. to be true. country-
(ii) Unlawful advantages of (ii) Breach of Contract is
(iv) Any other act fitted to
detaining or relation. duty without not voidable.
deceive.
threatening to Consequences any intention to (ii) Mistake of
(v) Act or omission
detain any (i) Voidable at the deceive. law of a
declared by law as fraud.
property. option of party (iii) Mis- foreign
Essentials
Consequences whose consent representation country-
was so caused. (i) The representation must
(i) Voidable at even made Contract is
be false.
the option of (ii) Such contract innocently, the void.
party whose may be set aside (ii) Misrepresentation must other party has Mistake of
consent was either absolutely be made willfully. actually acted. Fact
so caused. or if the party (iii) Misrepresentation must Consequences (i) Bilateral
(ii) Person to who is entitled to be made with intention to
Party can Mistake-
whom money avoid it has deceive the other party.
• rescind the Contract is
is paid or received any (iv) The other party is
contract. void if-
thing benefit actually deceived.
thereunder, upon • insist for mistakes
delivered (v) The other party has
such terms and genuine relates to
under suffered a loss.
conditions as to performance. material fact;
coercion must Note. Silence amounts to
repay or the court may both parties
fraud where:
return it. seem just and are under
(i)There is a duty to speak. mistake.
Burden of equitable.
(ii) His silence is speech. (ii) Unilateral
Proof
Consequences Mistake-
Lies on the Burden of Proof
Party can Contract is
aggrieved Firstly, Lies on the
• rescind the contract. neither void
party aggrieved party
• insist for genuine nor voidable
Note: Threat after that other
to commit party has to prove performance.
suicide is that no undue • sue for damages.
coercion influence. Note: ·If party takes any
benefit, contract is not
voidable.

UNLAWFUL OBJECT AND CONSIDERATION (Sec.23)
If When When it is When When When

consideration consideration fraudulent consideration consideration consideration
or object or object is involves is immoral is opposed
forbidden by of such a injury to to public
law nature that if person or policy
permitted it property of
would another
defeats
provisions of
law
Agreements of trading with Trafficking relating to Public Interference with the course
enemy Offices & titles. of justice
Agreement of stifling Agreements tending to Interest against obligation

prosecution create monopolies
Maintenance & champerty Marriage brokerage Consideration unlawful in

agreements part
VOID AGREEMENTS
Made by Incompetent Parties(S.11) Without consideration (S.25) With uncertain meaning

(S.29)
Under a mutual mistake of fact In restraint of marriage (S.26) Wagering Agreements (S.30)
(S.20)
Unlawful consideration or object In restraint of trade (S.27) To do impossible act (S.56)
(S.23)
Unlawful consideration or object in In restraint of legal
part(S.24) proceedings (S.28)

2.86 BUSINESS LAWS
WAGERING AGREEMENT (SEC. 30)
Meaning: Agreement Essentials Transactions are not Wager

between two parties by
(i) Promises to pay money (i) Chit Fund
which one promises to
pay money or money’s (ii) Uncertain event (ii) Share market transactions in
worth on the happening which delivery of stocks and

(iii)Mutual Chances of win or lose.
of same uncertain event shares in intended to be given
(iv) No control over the event & taken.
in consideration of the
other party’s promises to (v) No other interest in the event. (iii)Game of skill, crossword, etc.
pay if the event does not Effects (iv)a contribution toward any prize
happen.
(i) Agreement is void value of Rs. 500 or above to
the awarded to the winner or
(ii) No suit to recover amount won.
winners of a horse race.
(v) A contract of insurance.
TEST YOUR KNOWLEDGE

1. Ordinarily, a minor’s agreement is
(a) Void ab initio
(b) Voidable
(c) Valid
(d) Unlawful
2. Consent is not said to be free when it is caused by
(a) Coercion
(b) Undue influence
(c) Fraud
(d) All of these

3. When the consent of a party is obtained by fraud, the contract is;

(a) Void
(b) Voidable
(c) Valid
(d) Illegal
4. The threat to commit suicide amounts to
(a) Coercion
(b) Undue influence
(c) Misrepresentation
(d) Fraud
5. Moral pressure is involved in the case of
(a) Coercion
(b) Undue Influence
(d) Fraud
6. A wrong representation when made without any intention to deceive the other party
amounts to
(a) Coercion
(b) Undue influence
(d) Fraud
7. Which of the following statement is true?
(a) A threat to commit suicide does not amount to coercion
(b) Undue influence involves use of physical pressure

(c) Ignorance of law is no excuse
(d) Silence always amounts to fraud
8. In case of illegal agreement, the collateral agreements are:
(a) Valid
(b) Void

2.88 BUSINESS LAWS
(c) Voidable
(d) Any of these
9. An agreement the object or consideration of which is unlawful, is
(a) Void
(b) Valid
(c) Voidable
(d) Contingent
10. An agreement is void if it is opposed to public policy. Which of the following is not
covered by heads of public policy?
(a) Trading with an enemy
(b) Trafficking in public offices
(c) Marriage brokerage contracts

(d) Contracts to do impossible acts.
11. A paid ` 5000 to a Government servant to get him a contract for the canteen. The
Government servant could not get the contract. Can A recover ` 5000 paid by him to
the Government servant?
(a) Yes, the agreement is opposed to public policy
(b) No, the agreement is opposed to public policy
(c) No, the agreements are a voidable agreement and can be avoided by A
(d) No, the agreement falls under section 23 and hence illegal
12. With regard to the contractual capacity of a person of unsound mind, which one of the
following statements is most appropriate?
(a) A person of unsound mind can never enter into a contract
(b) A person of unsound mind can enter into a contract
(c) A person who is usually of unsound mind can contract when he is, at the time of
entering into a contract, of sound mind
(d) A person who is occasionally of unsound mind can contract although at the
time of making the contract, he is of unsound mind

13. An agreement made under mistake of fact, by both the parties, forming the essential
subject matter of the agreement is:
(a) Void
(b) Voidable
(c) Valid
(d) Unenforceable
14. A is in dire need of ` 1,00,000 but was unable to get any loan from banks as he had no
security to offer. A approached his friend B who knowing the helpless position of A lent
money at a very high rate of interest, saying that he had himself borrowed money from
C. The contract is:
(a) Vitiated by undue influence that B had exercised over A due to his close
friendship.
(b) Void as the rate of interest being very high was unconscionable.
(c) Not valid as B had wrongly misled A that he had borrowed money from C.
(d) Valid as a friend could not be supposed to have wielded undue influence only
because the money lent carried higher rate of interest.
15. Which of the following is not an exception to the rule that the agreement in restraint of
trade is void:
(a) A partner can be prevented for carrying on similar business
(b) An outgoing partner can be restrained on carrying similar business
(c) On dissolution of firm, partners may agree not to carry on similar business
(d) The seller of goodwill of business can be prevented for carrying any kind of
business at any place.
16. An agreement to pay money or money’s worth on the happening or non-happening of

a specified uncertain event, is a
(a) Wagering agreement
(b) Contingent contract

(c) Quasi contract
(d) Uncertain agreement

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17. A wagering agreement in India is declared by the Contract Act as

(a) Illegal and void
(b) Void but not illegal
(c) Voidable at the option of the aggrieved party
(d) Immoral
18. An agreement, the object of which is to procure a public post, is
(a) Void
(b) Voidable
(c) Valid
(d) Defective
19. While obtaining the consent of the promise, keeping silence by the promisor when he
has a duty to speak about the material facts, amounts to consent obtained by:
(a) Coercion
(b) Misrepresentation
(c) Mistake
(d) Fraud
20. A enters into an agreement with B who has robbed A of ` 10,000 to drop prosecution
against him in consideration of B’s returning ` 8,000. Afterwards B refused to pay. A
can get from B
(a) ` 8,000
(b) ` 100
(c) Nothing
(d) ` 10,000 plus damages
21. On attaining the age of majority, a minor’s agreement:
(a) cannot be ratified by him
(b) becomes valid
(c) can be ratified by him

(d) becomes void

22. A threat to kidnap one’s son in consideration of ` 5,00,000 is void because of:
(a) inadequacy of consideration
(b) incompetence of parties
(c) absence of free consent
(d) all of the above
23. In which of the following case, aggrieved part can sue for damages:
(a) Fraud
(b) mistake
(c) undue influence
(d) misrepresentation
24. A mere attempt to deceive a party to a contract:
(a) is fraud even though the party is not deceived
(b) is not fraud unless the party is actually deceived
(c) amounts to coercion
(d) amounts to misrepresentation
1. “An agreement, the meaning of which is not certain, is void”. Discuss.
2. “Though a minor is not competent to contract, nothing in the Contract Act prevents
him from making the other party bound to the minor”. Discuss.
3. A student was induced by his teacher to sell his brand new car to the later at less than
the purchase price to secure more marks in the examination. Accordingly, the car was
sold. However, the father of the student persuaded him to sue his teacher. State
whether the student can sue the teacher?
4. Explain the concept of ‘misrepresentation’ in matters of contract. Sohan induced Suraj
to buy his motorcycle saying that it was in a very good condition. After taking the
motorcycle, Suraj complained that there were many defects in the motorcycle. Sohan
proposed to get it repaired and promised to pay 40% cost of repairs. After few days, the
motorcycle did not work at all. Now Suraj wants to rescind the contract. Decide giving
reasons whether Suraj can rescind the contract?
5. Mr. SAMANT owned a motor car. He approached Mr. CHHOTU and offered to sell his
motor car for ` 3,00,000. Mr. SAMANT told Mr. CHHOTU that the motor car is running

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at the rate of 30 KMs per litre of petrol. Both the fuel meter and the speed meter of the
car were working perfectly. Mr. CHHOTU agreed with the proposal of Mr. SAMANT and
took delivery of the car by paying ` 3,00,000/- to Mr. SAMANT. After 10 days, Mr.
CHHOTU came back with the car and stated that the claim made by Mr. SAMANT
regarding fuel efficiency was not correct and therefore there was a case of
misrepresentation. Referring to the provisions of the Indian Contract Act, 1872, decide
and write whether Mr. CHHOTU can rescind the contract in the above ground.
6. Ishaan, aged 16 years, was studying in an engineering college. On 1st March, 2018 he
took a loan of ` 2 lakhs from Vishal for the payment of his college fee and agreed to
pay by 30th May, 2019. Ishaan possesses assets worth ` 15 lakhs. On due date Ishaan
fails to pay back the loan to Vishal. Vishal now wants to recover the loan from Ishaan
out of his assets. Decide whether Vishal would succeed referring to the provisions of the
Indian Contract Act, 1872.
ANSWER/HINTS
Answers to MCQs
1. (a) 2. (d) 3. (b) 4. (a) 5. (b) 6. (c)
7. (c) 8. (b) 9. (a) 10. (d) 11. (d) 12. (c)
13. (a) 14. (d) 15. (d) 16. (a) 17. (b) 18. (a)
19. (d) 20. (c) 21. (a) 22. (c) 23. (a) 24. (b)

1. Agreement - the meaning of which is uncertain (Section 29): An agreement, the
meaning of which is not certain, is void, but where the meaning thereof is capable of
being made certain, the agreement is valid. For example, A agrees to sell B “a
hundred tons of oil”. There is nothing whatever to show what kind of oil was
intended. The agreement is void for uncertainty. But the agreement would be valid if
A was dealer only in coconut oil; because in such a case its meaning would be
capable of being made certain.
2. Minor can be a beneficiary or can take benefit out of a contract: Though a minor
is not competent to contract, nothing in the Contract Act prevents him from making
the other party bound to the minor. Thus, a promissory note duly executed in favour

of a minor is not void and can be sued upon by him, because he though incompetent
to contract, may yet accept a benefit.
A minor cannot become partner in a partnership firm. However, he may with the
consent of all the partners, be admitted to the benefits of partnership (Section 30 of
the Indian Partnership Act, 1932).
Example: A mortgage was executed in favour of a minor. Held, he can get a decree
for the enforcement of the mortgage.
3. Yes, A can sue his teacher on the ground of undue influence under the provisions of
Indian Contract Act, 1872.
According to section 16 of the Indian Contract Act, 1872, “A contract is said to be
induced by ‘undue influence’ where the relations subsisting between the parties are
such that one of the parties is in a position to dominate the will of the other and he
uses that position to obtain an unfair advantage over the other”.
A person is deemed to be in position to dominate the will of another:
(a) Where he holds a real or apparent authority over the other; or
(b) Where he stands in a fiduciary relationship to the other; or
(c) Where 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 for example, an old illiterate person.
A contract brought as a result of coercion, undue influence, fraud or
misrepresentation would be voidable at the option of the person whose consent was
caused.
4. Misrepresentation: According to Section 18 of the Indian Contract Act, 1872,
misrepresentation is:
1. When a person positively asserts that a fact is true when his information does
not warrant it to be so, though he believes it to be true.
2. When there is any breach of duty by a person, which brings an advantage to

the person committing it by misleading another to his prejudice.
3. When a party causes, however, innocently, the other party to the agreement
to make a mistake as to the substance of the thing which is the subject of the
agreement.
The aggrieved party, in case of misrepresentation by the other party, can avoid or
rescind the contract [Section 19, Indian Contract Act, 1872]. The aggrieved party

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loses the right to rescind the contract if he, after becoming aware of the
misrepresentation, takes a benefit under the contract or in some way affirms it.
Accordingly, in the given case, Suraj could not rescind the contract, as his acceptance
to the offer of Sohan to bear 40% of the cost of repairs impliedly amount to final
acceptance of the sale.
5. As per the provisions of Section 19 of the Indian Contract Act, 1872, when consent to
an agreement is caused by coercion, fraud or misrepresentation, the agreement is a
contract voidable at the option of the party whose consent was so caused.
A party to contract, whose consent was caused by fraud or misrepresentation, may, if
he thinks fit, insist that the contract shall be performed, and that he shall be put in
the position in which he would have been if the representations made had been true.
Exception: If such consent was caused by misrepresentation or by silence, fraudulent

within the meaning of section 17, the contract, nevertheless, is not voidable if the
party whose consent was so caused had the means of discovering the truth with
ordinary diligence.
In the situation given in the question, both the fuel meter and the speed meter of the
car were working perfectly, Mr. CHHOTU had the means of discovering the truth with
ordinary diligence. Therefore, the contract is not voidable. Hence, Mr. CHHOTU
cannot rescind the contract in the above ground.
6. According to Section 11 of the Indian Contract Act, 1872, 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.
A person who has completed the age of 18 years is a major and otherwise he will be
treated as minor. Thus, Ishaan who is a minor is incompetent to contract and any
agreement with him is void [Mohori Bibi Vs Dharmo Das Ghose 1903].
Section 68 of the Indian Contract Act, 1872 however, prescribes the liability of a
minor for the supply of the things which are the necessaries of life to him. It says
that though minor is not personally liable to pay the price of necessaries supplied to
him or money lent for the purpose, the supplier or lender will be entitled to claim the
money/price of goods or services which are necessaries suited to his condition of life
provided that the minor has a property. The liability of minor is only to the extent of
the minor’s property. Thus, according to the above provision, Vishal will be entitled
to recover the amount of loan given to Ishaan for payment of the college fees from
the property of the minor.

UNIT–4: PERFORMANCE OF CONTRACT
LEARNING OUTCOMES

♦ How obligations under a contract must be carried out by the
parties.
♦ Various modes of performance.
♦ Consequence of refusal of performance or refusal to accept
performance, by either of the parties.
♦ Rights of joint promisees, liabilities of joint promisors, and rules
regarding appropriation of payments.
UNIT OVERVIEW
Performance of Contract
Liability of Contracts
Time &
Joint Performance which Discharge
Place of Appropriation
By whom Promisor of Reciprocal need not of a
Performance of Payments
& promises be Contract
of Promise
Promisee Performed
Agreement
Rights of
to do
Joint
Impossible
Promisees
Acts
This unit explains who must perform his obligation, what should be the mode of
performance, and what shall be the consequences of non- performance.

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4.1 PERFORMANCE OF CONTRACT

Meaning: “Performance of Contract” means fulfilment of obligations to the contract.
According to Section 37, the parties to a contract must either perform, or offer to perform,
their respective promises unless such performance is dispensed with or excused under the
provisions of the Contract Act or of any other law.
Types: On the basis of Section 37, “Performance of Contract” may be actual or attempted.
(a) Actual Performance: Where a party to a contract has done what he had undertaken
to do or either of the parties has fulfilled their obligations under the contract within
the time and in the manner prescribed.
Example 1: X borrows ` 5,00,000 from Y with a promise to be paid after 1 month. X
repays the amount on the due date. This is actual performance.
(b) Offer to perform or attempted performance or tender of performance: It may
happen sometimes, when the performance becomes due, the promisor offers to
perform his obligation but the promisee refuses to accept the performance.
Example 2: A promises to deliver certain goods to B. A takes the goods to the
appointed place during business hours but B refuses to take the delivery of goods.
This is an attempted performance as A the promisor has done what he was required
to do under the contract.
4.2 CONDITIONS TO BE SATISFIED FOR A VALID

TENDER OR ATTEMPTED PERFORMANCE
(i) It must be unconditional.
Example 3: A offers to B to repay only the principal amount of the loan. This is not a
valid tender since the whole amount of principal and interest is not offered.
(ii) It must be made at proper time and place.

Example 4: If the promisor wants to deliver the goods at 2 a.m., this is not a valid
tender unless it was so agreed.
(iii) Reasonable opportunity to examine goods.
Example 5: A contract’s to deliver B at his warehouse 1000 Kgs of wheat on certain
date. A must bring the wheat to B’s warehouse on the appointed day, under such
circumstances that B may have reasonable opportunity of satisfying himself that the
thing offered is wheat of the quality contracted for, and that there are 1000 Kgs.

(iv) It must be for whole obligation.

Example 6: X, a singer enters into a contract with Y, the manager of a theatre to sing
at his theatres two nights in every week during the next two months, and Y engaged
to pay her ` 10,000 for each night’s performance. On the sixth night, X willfully
absents herself from the theatre. Y is at liberty to put an end to the contract.
Example 7: A promises to deliver 100 bales of cotton on a certain day. On the

agreed day and place ‘A’ offers to deliver 80 bales only. This is not a valid tender.
4.3 BY WHOM A CONTRACT MAY BE PERFORMED

(SECTION 40, 41 AND 42)
The promise under a contract may be performed, as the circumstances may permit, by the
promisor himself, or by his agent or his legal representative.
1. Promisor himself: If there is something in the contract to show that it was the
intention of the parties that the promise should be performed by the promisor
himself, such promise must be performed by the promisor. This means contracts
which involve the exercise of personal skill or diligence, or which are founded on
personal confidence between the parties must be performed by the promisor himself.
Example 8: A promises to paint a picture for B and this must be performed by the
promisor himself.
2. Agent: Where personal consideration is not the foundation of a contract, the
promisor or his representative may employ a competent person to perform it.
3. Legal Representatives: A contract which involves the use of personal skill or is
founded on personal consideration comes to an end on the death of the promisor.
As regards any other contract the legal representatives of the deceased promisor are
bound to perform it unless a contrary intention appears from the contract (Section
37, para 2). But their liability under a contract is limited to the value of the property
they inherit from the deceased.
Example 9: A promises to B to pay ` 100,000 on delivery of certain goods. A may
perform this promise either himself or causing someone else to pay the money to B.
If A dies before the time appointed for payment, his representative must pay the
money or employ some other person to pay the money. If B dies before the time
appointed for the delivery of goods, B’s representative shall be bound to deliver the
goods to A and A is bound to pay `100,000 to B’s representative.

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Example 10: A promises to paint a picture for B for a certain price. A is bound to
perform the promise himself. He cannot ask some other painter to paint the picture
on his behalf. If A dies before painting the picture, the contract cannot be enforced
either by A’s representative or by B.
4. Third persons: Effect of accepting performance from third person- Section 41:
When a promisee accepts performance of the promise from a third person, he cannot
afterwards enforce it against the promisor. That is, performance by a stranger, if
accepted by the promisee, this results in discharging the promisor, although the
latter has neither authorised not ratified the act of the third party.
Example 11: A received certain goods from B promising to pay ` 100,000/-. Later on,
A expressed his inability to make payment. C, who is known to A, pays ` 60,000/- to B
on behalf of A. However, A was not aware of the payment. Now B is intending to sue
A for the amount of ` 100,000/-. Therefore, in the present instance, B can sue only for
the balance amount i.e., ` 40,000/- and not for the whole amount.
5. Joint promisors (Section 42): When two or more persons have made a joint
promise, then unless a contrary intention appears by the contract, all such persons
must jointly fulfil the promise. If any of them dies, his legal representatives must,
jointly with the surviving promisors, fulfil the promise. If all of them die, the legal
representatives of all of them must fulfil the promise jointly.
Example 12: ‘A’, ‘B’ and ‘C’ jointly promised to pay ` 6,00,000 to ‘D’. Here ‘A’, ‘B’ and
‘C’ must jointly perform the promise. If ‘A’ dies before performance, then his legal
representatives must jointly with ‘B’ and ‘C’ perform the promise, and so on. And if all
the three (i.e. ‘A’, ‘B’ and ‘C’) die before performance, then the legal representatives
of all must jointly perform the promise.
4.4 DISTINCTION BETWEEN SUCCESSION AND

ASSIGNMENT
Distinction between two legal concepts, viz., succession and assignment may be noted carefully.
When the benefits of a contract are succeeded to by process of law, then both burden and
benefits attaching to the contract, may sometimes devolve on the legal heir. Suppose, a son
succeeds to the estate of his father after his death, he will be liable to pay the debts and
liabilities of his father owed during his life-time. But if the debts owed by his father exceed the
value of the estate inherited by the son then he would not be called upon to pay the excess. In
other words, the liability of the son will be limited to the extent of the property inherited by him.

In the matter of assignment, however the benefit of a contract can only be assigned but
not the liabilities thereunder. This is because when liability is assigned, a third party gets
involved therein. Thus, a debtor cannot relieve himself of his liability to creditor by assigning
to someone else his obligation to repay the debt.
On the other hand, if a creditor assigns the benefit of a promise, he thereby entitles the
assignee to realise the debt from the debtor but where the benefit is coupled with a liability
or when a personal consideration has entered into the making of the contract then the
benefit cannot be assigned.
4.5 LIABILITY OF JOINT PROMISOR & PROMISEE

Devolution of joint liabilities (Section 42)
If two or more persons have made a joint promise, ordinarily all of them during their life-
time must jointly fulfil the promise. After death of any one of them, his legal representative
jointly with the survivor or survivors should do so. After the death of the last survivor the
legal representatives of all the original co-promisors must fulfil the promise.
Example 13: X, Y and Z who had jointly borrowed money must, during their life-time jointly
repay the debt. Upon the death of X his representative, say, S along with Y and Z should
jointly repay the debt and so on. If in an accident all the borrowers X, Y and Z dies then their
legal representatives must fulfil the promise and repay the borrowed amount. This rule is
applicable only if the contract reveals no contrary intention.
We have seen that Section 42 deals with voluntary discharge of obligations by joint
promisors. But if they do not discharge their obligation on their own volition, what will
happen? This is what Section 43 resolves.
Any one of joint promisors may be compelled to perform – Section 43

When two or more persons make a joint promise, the promisee may, in the absence of
express agreement to the contrary, compel any one or more of such joint promisors to
perform the whole of the promise.
Each promisor may compel contribution – Each of two or more joint promisors may
compel every other joint promisor to contribute equally with himself to the performance of
the promise, unless a contrary intention appears from the contract.
In other words, if one of the joint promisors is made to perform the whole contract, he can
call for a contribution from others.

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Sharing of loss by default in contribution – If any one of two or more joint promisors
makes default in such contribution, the remaining joint promisors must bear the loss arising
from such default in equal shares.
Explanation to Section 43
Nothing in this section shall prevent a surety from recovering, from his principal, payments
made by the surety on behalf of the principal, or entitle the principal to recover anything
from the surety on account of payment made by the principal.
Example 14: A, B and C jointly promise to pay D ` 3,00,000. D may compel either A or B or C
to pay him ` 3,00,000.
Example 15: A, B and C are under a joint promise to pay D ` 3,00,000. C is unable to pay
anything A is compelled to pay the whole. A is entitled to receive ` 1,50,000 from B.
Example 16: X, Y and Z jointly promise to pay ` 6,000 to A. A may compel either X or Y or Z
to pay the amount. If Z is compelled to pay the whole amount; X is insolvent but his assets
are sufficient to pay one-half of his debts. Z is entitled to receive ` 1,000 from X's estate
and ` 2,500 from Y.
We thus observe that the effect of Section 43 is to make the liability in the event of a joint
contract, both joint & several, in so far as the promisee may, in the absence of a contract to
the contrary, compel anyone or more of the joint promisors to perform the whole of the
promise.
Effect of release of one joint promisor- Section 44

The effect of release of one of the joint promisors is dealt with in Section 44 which is stated
below:
Where two or more persons have made a joint promise, a release of one of such joint
promisors by the promisee does not discharge the other joint promisor or joint promisors,
neither does it free the joint promisors so released from responsibility to the other joint
promisor or promisors.
Example 17: ‘A’, ‘B’ and ‘C’ jointly promised to pay ` 9,00,000 to ‘D’. ‘D’ released ‘A’ from
liability. In this case, the release of ‘A’ does not discharge ‘B’ and ‘C’ from their liability. They
remain liable to pay the entire amount of ` 9,00,000 to ‘D’. And though ‘A’ is not liable to
pay to ‘D’, but he remains liable to pay to ‘B’ and ‘C’ i.e. he is liable to make the contribution
to the other joint promisors.

Rights of Joint Promisees

The law relating to Devolution of joint rights is contained in Section 45 which is reproduced
below:
“When a person has made a promise to two or more persons jointly, then unless a contrary
intention appears from the contract, the right to claim performance rests, as between him
and them, with them during their joint lives, and after the death of any of them, with the
representative of such deceased person jointly with the survivor or survivors, and after the
death of the last survivor, with the representatives of all jointly”.
Example 18: A, in consideration of ` 5,00,000 rupees lent to him by B and C, promises B and
C jointly to repay them that sum with interest on a specified day but B dies. In such a case
right to demand payment shall rest with B’s legal representatives, jointly with C during C’s
life-time, and after the death of C, with the legal representatives of B and C jointly.
4.6 TIME AND PLACE FOR PERFORMANCE OF THE

PROMISE
The law on the subject is contained in Sections 46 to 50 explained below:
(i) Time for performance of promise, where no application is to be made and no
time is specified - Section 46
Where, by the contract, a promisor is to perform his promise without application by
the promisee, and no time for performance is specified, the engagement must be
performed within a reasonable time.
Explanation to Section 46 - The expression reasonable time is to be interpreted
having regard to the facts and circumstances of a particular case.
(ii) Time and place for performance of promise, where time is specified and no
application to be made – Section 47
When a promise is to be performed on a certain day, and the promisor has
undertaken to perform it without application by the promise, the promisor may
perform it at any time during the usual hours of business, on such day and the place
at which the promise ought to be performed.
Example 19: If the delivery of goods is offered say after 8.30 pm, the promisee may
refuse to accept delivery, for the usual business hours are over. Moreover, the
delivery must be made at the usual place of business.

2.102 BUSINESS LAWS
(iii) Application for performance on certain day to be at proper time and place –
Section 48
When a promise is to be performed on a certain day, and the promisor has not
undertaken to perform it without application by the promisee, it is the duty of the
promisee to apply for performance at a proper place and within the usual hours of
business.
Explanation to Section 48 states that the question “what is a proper time and place”
is, in each particular case, a question of fact.
(iv) Place for the performance of promise, where no application to be made and no
place fixed for performance - Section 49
When a promise is to be performed without application by the promisee, and no
place is fixed for the performance of it, it is the duty of the promisor to apply to the
promisee to appoint a reasonable place for the performance of the promise, and to
perform it at such a place.
Example 20: A undertakes to deliver a thousand maunds of jute to B on a fixed day.
A must apply to B to appoint a reasonable place for the purpose of receiving it, and
must deliver it to him at such place.
(v) Performance in manner or at time prescribed or sanctioned by promisee -
Section 50
The performance of any promise may be made in any such manner, or at any time
which the promisee prescribes or sanctions.
4.7 PERFORMANCE OF RECIPROCAL PROMISE

The law on the subject is contained in Sections 51 to 58. The provisions thereof are
summarized below:
(i) Promisor not bound to perform, unless reciprocal promisee ready and willing to
perform- Section 51
When a contract consists of reciprocal promises to be simultaneously performed, no
promisor needs to perform his promise unless the promisee is ready and willing to
perform his reciprocal promise.
Example 21: A and B contract that A shall deliver the goods to B to be paid for by B
on delivery. A need not deliver the goods, unless B is ready and willing to pay for the
goods on delivery.

(ii) Order of performance of reciprocal promises- Section 52

When the order of performance of the reciprocal promises is expressly fixed by the
contract, they shall be performed in that order; and where the order is not expressly
fixed by the contract, they shall be performed in that order which the nature of the
transaction requires.
Example 22: A and B contract that A shall build a house for B at a fixed price. A’s
promise to build the house must be performed before B’s promise to pay for it.
(iii) Liability of party preventing event on which the contract is to take effect –
Section 53
When a contract contains reciprocal promises, and one party to the contract prevents
the other from performing his promise, the contract becomes voidable at the option
of the party so prevented; and he is entitled to compensation from the other party
for any loss he may sustain in consequence of the non- performance of the contract.
Example 23: A and B contract that B shall execute some work for A for a thousand
rupees. B is ready and willing to execute the work accordingly, but A prevents him
from doing so. The contract is voidable at the option of B; and if he elects to rescind
it, he is entitled to recover from A compensation for any loss which he has incurred
by its non-performance.
Example 24: In a contract for the sale of standing timber, the seller is to cut and cord
it, whereupon buyer is to take it away and pay for it. The seller cords only a part of
the timber and neglects to cord the rest. In that event the buyer may avoid the
contract and claim compensation from the seller for any loss which he may have
sustained for the non-performance of the contract.
(iv) Effect of default as to that promise which should be first performed, in contract
consisting of reciprocal promises (Section 54)
Section 54 applies when the promises are reciprocal and dependent. If the promisor
who has to perform his promise before the performance of the other’s promise fails
to perform it, he cannot claim performance of the other’s promise, and is also liable
for compensation for his non- performance.
Example 25: A hires B’s ship to take in and convey, from Kolkata to the Mauritius, a
cargo to be provided by A, B receiving a certain freight for its conveyance. A does
not provide any cargo for the ship. A cannot claim the performance of B’s promise,
and must make compensation to B for the loss which B sustains by the non-
performance of the contract.

2.104 BUSINESS LAWS
Example 26: A hires B to make a shoe rack. A will supply the plywood, fevicol and
other items required for making the shoe rack. B arrived on the appointed day and
time but A could not arrange for the required materials. A cannot claim the
performance of B’s promise, and must make compensation to B for the loss which B
sustains by the non-performance of the contract.
(v) Effects of Failure to Perform at a Time Fixed in a Contract in which Time is

Essential (Section 55)
The law on the subject is contained in Section 55 which is reproduced below:
“When a party to a contract promises to do certain thing at or before the specified

time, and fails to do any such thing at or before the specified time, the contract, or
so much of it as has not been performed, becomes voidable at the option of the
promisee, if the intention of the parties was that time should be of essence of the
contract”.
Effect of such failure when time is not essential
If it was not the intention of the parties that time should be of essence of the
contract, the contract does not become voidable by the failure to do such thing at or
before the specified time; but the promisee is entitled to compensation from the
promisor for any loss occasioned to him by such failure.
Effect of acceptance of performance at time other than agreed upon -
If, in case of a contract voidable on account of the promisor’s failure to perform his
promise at the time agreed, the promisee accepts performance of such promise at
any time other than agreed, the promisee cannot claim compensation for any loss
occasioned by the non-performance of the promise at the time agreed, unless, at the
time of acceptance, he gives notice to the promisor of his intention to do so.
(vi) Agreement to do Impossible Act (Section 56)
The impossibility of performance may be of the two types, namely (a) initial
impossibility, and (b) subsequent impossibility.
(a) Initial Impossibility (Impossibility existing at the time of contract): When
the parties agree upon doing of something which is obviously impossible in
itself the agreement would be void. Impossible in itself means impossible in
the nature of things. The fact of impossibility may be and may not be known
to the parties.

Example 27: ‘A’, a Hindu, who was already married, contracted to marry ‘B’, a
Hindu girl. According to law, ‘A’ being married, could not marry ‘B’. In this
case, ‘A’ must make compensation to ‘B’ for the loss caused to her by the
non-performance of the contract.
(1) If known to the parties: It would be observed that an agreement
constituted, quite unknown to the parties, may be impossible of
being performed and hence void.
Example 28: B promises to pay a sum of ` 5,00,000 if he is able to
swim across the Indian Ocean from Mumbai to Aden within a week. In
this case, there is no real agreement, since both the parties are quite
certain in their mind that the act is impossible of achievement.
Therefore, the agreement, being impossible in itself, is void.
(2) If unknown to the parties: Where both the promisor and the
promisee are ignorant of the impossibility of performance, the
contract is void.
Example 29: A contracted B to sell his brown horse for ` 2,50,000
both unaware that the horse was dead a day before the agreement.
(3) If known to the promisor only: Where at the time of entering into a
contract, the promisor alone knows about the impossibility of
performance, or even if he does not know though he should have
known it with reasonable diligence, the promisee is entitled to claim
compensation for any loss he suffered on account of non-
performance.
(b) Subsequent or Supervening impossibility (Becomes impossible after
entering into contract): When performance of promise become impossible
or illegal by occurrence of an unexpected event or a change of circumstances
beyond the contemplation of parties, the contract becomes void e.g. change
in law etc. In other words, sometimes, the performance of a contract is quite
possible when it is made. But subsequently, some event happens which
renders the performance impossible or unlawful. Such impossibility is called
the subsequent or supervening. It is also called the post-contractual
impossibility. The effect of such impossibility is that it makes the contract
void, and the parties are discharged from further performance of the contract.
Example 30: ‘A’ and ‘B’ contracted to marry each other. Before the time fixed
for the marriage, ‘A’ became mad. In this case, the contract becomes void due
to subsequent impossibility, and thus discharged.

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(vii) Reciprocal promise to do certain things that are legal, and also some other
things that are illegal- Section 57
Where persons reciprocally promise, first to do certain things which are legal and
secondly, under specified circumstances, to do certain other things which are illegal,
the first set of promises is a valid contract, but the second is a void agreement.
Example 31: A and B agree that A will sell a house to B for ` 50,00,000 and also that
if B uses it as a gambling house, he will pay a further sum of ` 75,00,000. The first set
of reciprocal promises, i.e. to sell the house and to pay ` 50,00,000 for it, constitutes
a valid contract. But the object of the second, being unlawful, is void.
(viii) ‘Alternative promise’ one branch being illegal- Section 58
The law on this point is contained in Section 58 which says that “In the case of the
alternative promise, one branch of which is legal and the other illegal, the legal
branch alone can be enforced”.
Example 32: A and B agree that A shall pay B ` 1,00,000, for which B shall afterwards
deliver to A either rice or smuggled opium.
This is a valid contract to deliver rice, and a void agreement as to the opium.
4.8 APPROPRIATION OF PAYMENTS

Sometimes, a debtor owes several debts to the same creditor and makes payment, which is
not sufficient to discharge all the debts. In such cases, the payment is appropriated (i.e.
adjusted against the debts) as per Section 59 to 61 of the Indian Contract Act.
(i) Application of payment where debt to be discharged is indicated (Section 59):
Where a debtor, owing several distinct debts to one person, makes a payment to him
either with express intimation or under circumstances implying that the payment is to
be applied to the discharge of some particular debt, the payment, if accepted, must
be applied accordingly.
(ii) Application of payment where debt to be discharged is not indicated (Section
60): Where the debtor has omitted to intimate and there are no other circumstances
indicating to which debt the payment is to be applied the creditor may apply it at his
discretion to any lawful debt actually due and payable to him from the debtor, where
its recovery is or is not barred by the law in force for the time being as to the
limitation of suits. However, he cannot apply the payment to the disputed debt.

(iii) Application of payment where neither party appropriates (Section 61): Where
neither party makes any appropriation, the payment shall be applied in discharge of
the debts in order of time, whether they are or are not barred by the law in force for
the time being as to the limitation of suits. If the debts are of equal standing, the
payments shall be applied in discharge of each proportionately.
4.9 CONTRACTS, WHICH NEED NOT BE PERFORMED –

WITH THE CONSENT OF BOTH THE PARTIES
Under this heading, we shall discuss the principles of Novation, Rescission and Alteration.
The law is contained in Sections 62 to 67 of the Contract Act.
(i) Effect of novation, rescission, and alteration of contract (Section 62)
“If the parties to a contract agree to substitute a new contract for it, or to rescind or
alter it, the original contract need not be performed”.
Analysis of Section 62
(a) Effect of novation: The parties to a contract may substitute a new contract
for the old. If they do so, it will be a case of novation. On novation, the old
contract is discharged and consequently it need not be performed. Thus, it is
a case where there being a contract in existence some new contract is
substituted for it either between the same parties or between different parties
the consideration mutually being the discharge of old contract. Novation can
take place only by mutual agreement between the parties.
Example 33: A owes B ` 100,000. A, B and C agree that C will pay B and he
will accept ` 100,000 from C in lieu of the sum due from A. A’s liability thereby
shall come to an end, and the old contract between A and B will be
substituted by the new contract between B and C.
(b) Effect of rescission: A contract is also discharged by rescission. When the
parties to a contract agree to rescind it, the contract need not be performed.
In the case of rescission, only the old contract is cancelled and no new
contract comes to exist in its place. It is needless to point out that novation
also involves rescission. Both in novation and in rescission, the contract is
discharged by mutual agreement.
(c) Effect of alteration of contract: As in the case of novation and rescission, so
also in a case where the parties to a contract agree to alter it, the original
contract is rescinded, with the result that it need not be performed. In other

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words, a contract is also discharged by alteration. The terms of contract may

be so altered by mutual agreement that the alteration may have the effect of
substituting a new contract for the old one. In other words, the distinction
between novation and alteration is very slender.
Novation and alteration: The law pertaining to novation and alteration is
contained in Sections 62 to 67 of the Indian Contract Act. In both these cases
the original contract need not be performed. Still there is a difference
between these two.
1. Novation means substitution of an existing contract with a new one.

Novation may be made by changing in the terms of the contract or
there may be a change in the contracting parties. But in case of
alteration the terms of the contract may be altered by mutual
agreement by the contracting parties but the parties to the contract
will remain the same.
2. In case of novation there is altogether a substitution of new contract
in place of the old contract. But in case of alteration it is not essential
to substitute a new contract in place of the old contract. In alteration,
there may be a change in some of the terms and conditions of the
original agreement.
(ii) Promisee may waive or remit performance of promise (Section 63): “Every
promisee may dispense with or remit, wholly or in part, the performance of the
promise made to him, or may extend the time for such performance or may accept
instead of it any satisfaction which he thinks fit”. In other words, a contract may be
discharged by remission.
Example 34: A owes B `5,00,000. A pays to B, and B accepts, in satisfaction of the
whole debt, ` 2,00,000 paid at the time and place at which the ` 5,00,000 were
payable. The whole debt is discharged.
(iii) Restoration of Benefit under a Voidable Contract (Section 64)
The law on the subject is “When a person at whose option a contract is voidable
rescinds it, the other party thereto need not perform any promise therein contained
in which he is the promisor. The party rescinding avoidable contract shall, if he has
received any benefit thereunder from another party to such contract, restore such
benefit, so far as may be, to the person from whom it was received”.

Such a contract can be terminated at the option of the party who is empowered to
do so. If he has received any benefit under the contract, he must restore such benefit
to the person from whom he has received it.
Example 35: An insurance company may rescind a policy on the ground that material
fact has not been disclosed. When it does so, the premium collected by it in respect
of the policy reduced by the amount of expenses incurred by it in this connection
must be repaid to the policy holder.
(iv) Obligations of Person who has Received Advantage under Void Agreement or
contract that becomes void (Section 65)
“When an agreement is discovered to be void or when a contract becomes void, any
person who has received any advantage under such agreement or contract is bound
to restore it, or to make compensation for it to the person from whom he received
it.”
From the language of the Section, it is clear that in such a case either the advantage
received must be restored back or a compensation, sufficient to put the position
prior to contract, should be paid.
Example 36: A pays B ` 1,00,000, in consideration of B’s promising to marry C, A’s
daughter. C is dead at the time of the promise. The agreement is void, but B must
repay A ` 1,00,000.
In a case, the plaintiff hired a godown from the defendant for twelve months and
paid the whole of the rent in advance. After about seven months the godown was
destroyed by fire, without any fault or negligence on the part of the plaintiff and the
plaintiff claimed a refund of a proportionate amount of the rent. Held, the plaintiff
was entitled to recover the rent for the unexpired term, of the contract.
The Act requires that a party must give back whatever he has received under the
contract. The benefit to be restored under this section must be benefit received
under the contract (and not any other amount). A agrees to sell land to B for
` 400,000. B pays to A ` 40,000 as a deposit at the time of the contract, the amount
to be forfeited by A if B does not complete the sale within a specified period. B fails
to complete the sale within the specified period, nor is he ready and willing to
complete the sale within a reasonable time after the expiry of that period. A is
entitled to rescind the contract and to retain the deposit. The deposit is not a benefit

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received under the contract, it is a security that the purchaser would fulfil his contract
and is ancillary to the contract for the sale of the land.
(v) Communication of rescission (Section 66): You have noticed that a contract
voidable at the option of one of the parties can be rescinded; but rescission must be
communicated to the other party in the same manner as a proposal is communicated
under Section 4 of the Contract Act. Similarly, a rescission may be revoked in the
same manner as a proposal is revoked.
(vi) Effects of neglect of promisee to afford promisor reasonable facilities for
performance (Section 67): If any promisee neglects or refuses to afford the
promisor reasonable facilities for the performance of his promise, the promisor is
excused by such neglect or refusal as to any non-performance caused thereby.
Example 37: If an apprentice refuses to learn, the teacher cannot be held liable for
not teaching.
Example 38: A contracts with B to repair B’s house. B neglects or refuses to appoint
out to A the places in which his house requires repair. A is excused for the non-
performance of the contract, if it is caused by such neglect or refusal.
4.10 DISCHARGE OF A CONTRACT

A contract is discharged when the obligations created by it come to an end. A contract may
be discharged in any one of the following ways:
(i) Discharge by performance: It takes place when the parties to the contract fulfil their
obligations arising under the contract within the time and in the manner prescribed.
Discharge by performance may be
(1) Actual performance; or
(2) Attempted performance.
Actual performance is said to have taken place, when each of the parties has done
what he had agreed to do under the agreement. When the promisor offers to
perform his obligation, but the promisee refuses to accept the performance, it
amounts to attempted performance or tender.
Example 39: A contracts to sell his car to B on the agreed price. As soon as the car is
delivered to B and B pays the agreed price for it, the contract comes to an end by
performance.

Example 40: A contracted to supply certain quantity of timber to B. B made the

supply of timber at appointed time and place but A refused to accept the delivery.
This is called as attempted performance.
(ii) Discharge by mutual agreement: Section 62 of the Indian Contract Act provides if
the parties to a contract agree to substitute a new contract for it, or to rescind or
remit or alter it, the original contract need not be performed. The principles of
Novation, Rescission, Alteration and Remission are already discussed.
Example 41: A owes B ` 1,00,000. A enters into an agreement with B and mortgage
his (A’s), estates for ` 50,000 in place of the debt of ` 1,00,000. This is a new contract
and extinguishes the old.
Example 42: A owes B ` 5,00,000. A pays to B ` 3,00,000 who accepts it in full
satisfaction of the debt. The whole is discharged.
(iii) Discharge by impossibility of performance: The impossibility may exist from the
very start. In that case, it would be impossibility ab initio. Alternatively, it may
supervene. Supervening impossibility may take place owing to:
(a) an unforeseen change in law;
(b) the destruction of the subject-matter essential to that performance;
(c) the non-existence or non-occurrence of particular state of things, which was
naturally contemplated for performing the contract, as a result of some
personal incapacity like dangerous malady;
(d) the declaration of a war (Section 56).

Example 43: A agrees with B to discover a treasure by magic. The agreement is void
due to initial impossibility.
Example 44: A and B contract to marry each other. Before the time fixed for the
marriage, A goes mad. The contract becomes void.
Example 45: A contracts to act at a theatre for six months in consideration of a sum
paid in advance by B. On several occasions A is too ill to act. The contract to act on
those occasions becomes void.
Example 46: X agrees to sell his horse to Y for ` 5,000 but the horse died in an
accident. Here, it become impossible to perform the contract due to destruction of
the subject. Thus, a valid contract changes into void contract because of impossibility
of performance.
(iv) Discharge by lapse of time: A contract should be performed within a specified

period as prescribed by the Limitation Act, 1963. If it is not performed and if no

2.112 BUSINESS LAWS
action is taken by the promisee within the specified period of limitation, he is

deprived of remedy at law.
Example 47: If a creditor does not file a suit against the buyer for recovery of the
price within three years, the debt becomes time-barred and hence irrecoverable.
(v) Discharge by operation of law: A contract may be discharged by operation of law
which includes by death of the promisor, by insolvency etc.
(vi) Discharge by breach of contract: Breach of contract may be actual breach of
contract or anticipatory breach of contract. If one party defaults in performing his
part of the contract on the due date, he is said to have committed breach thereof.
When on the other hand, a person repudiates a contract before the stipulated time
for its performance has arrived, he is deemed to have committed anticipatory breach.
If one of the parties to a contract breaks the promise the party injured thereby, has
not only a right of action for damages but he is also discharged from performing his
part of the contract.
Example 48: A contracted with B to supply 100 kgs of rice on 1st June. But A failed to
deliver the same on said date. This is actual breach of contract. If time is not essential
essence of contract B can give him another date for supply of goods and he will not
be liable to claim for any damages if prior notice for the same is not given to A while
giving another date.
(vii) Promisee may waive or remit performance of promise: Every promisee may
dispense with or remit, wholly or in part, the performance of the promise made to
him, or may extend the time for such performance or may accept instead of it any
satisfaction which he thinks fit. In other words, a contract may be discharged by
remission. (Section 63)
Example 49: A owes B ` 5,00,000. C pays to B `1,00,000 and B accepts them, in
satisfaction of his claim on A. This payment is a discharge of the whole claim.
(viii) Effects of neglect of promisee to afford promisor reasonable facilities for
performance: If any promisee neglects or refuses to afford the promisor reasonable
facilities for the performance of his promise, the promisor is excused by such neglect
or refusal as to any non-performance caused thereby. (Section 67)
(ix) Merger of rights: Sometimes, the inferior rights and the superior rights coincide and
meet in one and the same person. In such cases, the inferior rights merge into the
superior rights. On merger, the inferior rights vanish and are not required to be
enforced.

Example 50: A took a land on lease from B. Subsequently, A purchases that very
land. Now, A becomes the owner of the land and the ownership rights being superior
to rights of a lessee, the earlier contract of lease stands terminated.
SUMMARY
1. The promisor or his representative must perform unless the nature of contract shows
that it may be performed by a third person, but the promisee may accept
performance by a third party. (Sections 37, 40 and 41)
2. In case of joint promisors, all must perform, and after the death of any of them, the
survivors and the representatives of the deceased must perform. But their liability is
joint and several. If the promisee requires any one of them perform the whole
promise, he can claim contribution from others. (Sections 42, 43 and 44)
3. Joint promisees have only a joint right to claim performance. (Section 45)
4. The promisor must offer to perform and such offer must be unconditional, and be
made at the proper time and place, allowing the promisee a reasonable opportunity
of inspection of the things to be delivered. (Sections 38, 46, 47, 48, 49 and 50)
5. If the performance consists of payment of money and there are several debts to be
paid, the payment shall be appropriated as per provisions of Sections 59, 60 and 61.
The debtor has, at the time of payment, the right of appropriating the payment. In
default of debtor, the creditor has option of election and in default of either the law
will allow appropriation of debts in order of time.
6. If an offer of performance is not accepted, the promisor is not responsible for non-
performance and does not lose his rights under the contract; so also, if the promisee
fails to afford reasonable facilities. He may sue for specific performance or he may
avoid the contract and claim compensation (Sections 38, 39, 53 and 67).
7. Rescission is communicated and revoked in the same way as a promise. The effect is
to dispense with further performance and to render the party rescinding liable to
restore any benefit he may have received. (Sections 64 and 66)
8. Parties may agree to cancel the contract or to alter it or to substitute a new contract
for it. (Section 62)

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PERFORMANCE OF CONTRACTS (SEC.37)

Meaning: Fulfillment
Condition By Whom Performance of Joint Promises
of obligations to
for a Valid 1. Promisor himself 1. All joint promisors are liable
contract Tender 2. Agent: Where contract jointly and severally. However
Types Performance doesn't involve personal Contract may provide otherwise.
(i) Actual: Party actually
1.Must be skills. 2. In case of death of any joint
fulfills the obligation.
unconditional. 3. Legal Representative: In promisor, legal representative
(ii) Tender Performance
2.At proper case of death of promisor. with surviving joint promisors
(Sec. 38): Promisor
time & Place. However, if contract jointly fulfill the promise.
offers to perform his 3.Reasonable involves personal skill, it 3. One has right of contribution
obligation under the opportunity comes to an end with death from others.
contract at the properto examine of promisor. 4. If one of the joint promisors is
time and place but thegoods. 4. Third persons: When released, he is responsible to the
promisee refuses to 4. For whole promisee accepts other joint promisor or
accept the
obligation. performance from a third promisors.
performance. person, he cannot afterward
enforce it against promisor.
Time place and manner: As decided otherwise during business hours at business place or residence of
promise.
Performance of Reciprocal Promises Appropriation of Contracts which need not

Payment (Adjustment of be performed
1. Mutual and Concurrent- Promises have to
Payment Against Debt)
be simultaneously performed. 1. If the parties mutually
Rule1: Appropriation by agree to substitute the
2. Mutual and Dependent-If the promisor, who
Debtor-if accepted, must original contract by a new
must perform, fails to perform it, he cannot
be applied to that debt. one or to rescind or alter it.
claim the performance of the reciprocal
promise. Rule2: Appropriation by 2. If the promise dispenses
Creditor-Debtor does not with or remits, wholly or in
3. Mutual and Independent- Each party must
intimate, the creditor may part the performance of
perform his promise without waiting for the
apply it at his discretion to the promise made to or
performance or readiness to perform on the
any lawful debt including a extends the time for such
part of the other.
time-barred debt. (But not performance or accepts
Note1: Where contract is not complete in time to a disputed debt) any satisfaction for it.
&:-
Rule3: Where neither 3. If the person, at whose
(a) Time is essential – Contract is voidable. party appropriates – option the contract is
neither party makes any voidable, rescinds it.
(b) Time is not essential – Contract not voidable
appropriation the payment
but compensation is there. 4. If the promisee neglects
is to be applied in
or refuses.
Note2: Contract to do impossible act is void. discharge of the debts in
order of time, including 5. If it is illegal.
Note3: Reciprocal promises to do things legal
time-barred debts. If the
and also other things illegal-first set of promises
debts are equal the
is a contract but second is a void agreement.
payment is to be applied
proportionately.

TEST YOUR KNOWLEDGE

1. On the valid performance of the contractual obligations by the parties, the contract
(a) Is discharged
(b) becomes enforceable
(c) becomes void

(d) None of these
2. Which of the following person can perform the contract?
(a) Promisor alone

(b) Legal representatives of promisor
(c) Agent of the promisor
(d) All of these.
3. A contract is discharged by novation which means the
(a) cancellation of the existing contract
(b) change in one or more terms of the contract
(c) substitution of existing contract for a new one
(d) none of these
4. A contract is discharged by rescission which means the
(a) change in one or more terms of the contract
(b) acceptance of lesser performance
(c) abandonment of rights by a party
(d) cancellation of the existing contract
5. If a person accepts a lesser sum of money than what was contracted for in discharge of
the whole debt, it is known as:
(a) Waiver
(b) Rescission
(c) Alteration
(d) Remission

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6. Novation discharges a contract

(a) No, it means, no new contract comes to existence
(b) No, it means, new contract comes to existence, but old contract is not
discharged
(c) Yes, on novation, old contract is discharged and consequently it need not be
performed
(d) Yes, but only if parties agreed to discharge.
7. Novation and alteration are same
(a) True, both result in discharging old contract.

(b) False, novation discharges old contract, in alteration, the obligation remains.
(c) False, however, both may have the effect of substituting a new contract for the
old one
8. A, B and C jointly promised to pay ` 60,000 to D. before performance of the contract, C
dies. Here, the contract
(a) Becomes void on C’s death
(b) Should be performed by A and B along with C’s legal representatives
(c) Should be performed by A and B alone
(d) Should be renewed between A, B and D.
9. Vivaan lives on rent in a house owned by Swasti. Later he purchases the house from
Swasti. The rent agreement is discharged due to:
(a) Waiver of rights
(b) Novation of contract
(c) Merger of rights

(d) Remission of contract
10. When prior to the due date of performance, the promisor refuses to perform the
contract, it is known as:
(a) Novation of the contract
(b) Anticipatory breach of contract

(c) Actual breach of contract

(d) waiver of contract
11. A owes ` 15000 to B. A die leaving his estate of ` 12000. Legal representatives of A are:
(a) liable to pay ` 12000 to B
(b) liable to pay ` 15000 to B
(c) not liable to pay B

(d) liable to pay ` 3000 to B
12. Rani contracted to teach dance to Shruti. Shruti paid an advance of ` 5000 for the
same. Rani met with an accident and will not be able to dance. She has a daughter as
her legal representative. Shruti can
(a) force her daughter to teach her dance
(b) rescind the contract and ask for refund of money
(c) rescind the contract but cannot ask for refund
(d) can sue Rani for non-performance of contract
1. X, Y and Z jointly borrowed ` 50,000 from A. The whole amount was repaid to A by Y.
Decide in the light of the Indian Contract Act, 1872 whether:
(i) Y can recover the contribution from X and Z,
(ii) Legal representatives of X are liable in case of death of X,
(iii) Y can recover the contribution from the assets, in case Z becomes insolvent.
2. Mr. Rich aspired to get a self-portrait made by an artist. He went to the workshop of
Mr. C an artist and asked whether he could sketch the former’s portrait on oil painting
canvass. Mr. C agreed to the offer and asked for ` 50,000 as full advance payment for
the above creative work. Mr. C clarified that the painting shall be completed in 10
sittings and shall take 3 months.
On reaching to the workshop for the 6th sitting, Mr. Rich was informed that Mr. C
became paralyzed and would not be able to paint for near future. Mr. C had a son Mr.
K who was still pursuing his studies and had not taken up his father’s profession yet?

2.118 BUSINESS LAWS
Discuss in light of the Indian Contract Act, 1872?

(i) Can Mr. Rich ask Mr. K to complete the artistic work in lieu of his father?
(ii) Could Mr. Rich ask Mr. K for refund of money paid in advance to his father?
3. Mr. JHUTH entered into an agreement with Mr. SUCH to purchase his (Mr. SUCH’s)
motor car for ` 5,00,000/- within a period of three months. A security amount of
` 20,000/- was also paid by Mr. JHUTH to Mr. SUCH in terms of the agreement. After
completion of three months of entering into the agreement, Mr. SUCH tried to contract
Mr. JHUTH to purchase the car in terms of the agreement. Even after lapse of another
three month period, Mr. JHUTH neither responded to Mr. SUCH, nor to his phone calls.
After lapse of another period of six months. Mr. JHUTH contracted Mr. SUCH and
denied to purchase the motor car. He also demanded back the security amount of `
20,000/- from Mr. SUCH. Referring to the provisions of the Indian Contract Act, 1872,
state whether Mr. SUCH is required to refund the security amount to Mr. JHUTH.
Also examine the validity of the claim made by Mr. JHUTH, if the motor car would have
destroyed by an accident within the three month’s agreement period.
4. Mr. Murari owes payment of 3 bills to Mr. Girdhari as on 31 st March, 2022.
(i) ` 12,120 which was due in May 2018. (ii) ` 5,650 which was due in August 2020 (iii)
` 9,680 which was due in May 2021. Mr. Murari made payment on 1st April 2022 as
below without any notice of how to appropriate them:
(i) A cheque of ` 9,680
(ii) A cheque of ` 15,000
Advice under the provisions of the Indian Contract Act, 1872.
5. What will be rights with the promisor in following cases? Explain with reasons:
(a) Mr. X promised to bring back Mr. Y to life again.
(b) A agreed to sell 50 kgs of apple to B. The loaded truck left for delivery on 15th
March but due to riots in between reached A on 19th March.
(c) An artist promised to paint on the fixed date for a fixed amount of
remuneration but met with an accident and lost his both hands.
(d) Abhishek entered into contract of import of toys from China. But due to
disturbance in the relation of both the countries, the imports from China were
banned.

ANSWER/HINTS
Answers to MCQs
1. (a) 2. (d) 3. (c) 4. (d) 5. (d) 6. (c)
7. (c) 8. (b) 9. (c) 10. (b) 11. (a) 12. (b)
Answer to the Descriptive Question

1. Section 42 of the Indian Contract Act, 1872 requires that when two or more persons
have made a joint promise, then, unless a contrary intention appears from the
contract, all such persons jointly must fulfill the promise. In the event of the death of
any of them, his representative jointly with the survivors and in case of the death of
all promisors, the representatives of all jointly must fulfill the promise.
Section 43 allows the promisee to seek performance from any of the joint promisors.
The liability of the joint promisors has thus been made not only joint but “joint and
several”. Section 43 provides that in the absence of express agreement to the
contrary, the promisee may compel any one or more of the joint promisors to
perform the whole of the promise.
Section 43 deals with the contribution among joint promisors. The promisors, may
compel every joint promisor to contribute equally to the performance of the promise
(unless a contrary intention appears from the contract). If any one of the joint
promisors makes default in such contribution the remaining joint promisors must
bear the loss arising from such default in equal shares.
As per the provisions of above sections,

(i) Y can recover the contribution from X and Z because X, Y and Z are joint
promisors.
(ii) Legal representative of X are liable to pay the contribution to Y. However, a

legal representative is liable only to the extent of property of the deceased
received by him.
(iii) Y also can recover the contribution from Z’s assets.
2. A contract which involves the use of personal skill or is founded on personal
consideration comes to an end on the death of the promisor. As regards any other
contract the legal representatives of the deceased promisor are bound to perform it
unless a contrary intention appears from the contract (Section 37 of the Indian

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Contract Act, 1872). But their liability under a contract is limited to the value of the
property they inherit from the deceased.
(i) In the instant case, since painting involves the use of personal skill and on
becoming Mr. C paralyzed, Mr. Rich cannot ask Mr. K to complete the artistic
work in lieu of his father Mr. C.
(ii) According to section 65 of the Indian Contract Act, 1872, when an agreement
is discovered to be void or when a contract becomes void, any person who
has received any advantage under such agreement or contract is bound to
restore it, or to make compensation for it to the person from whom he
received it.
Hence, in the instant case, the agreement between Mr. Rich and Mr. C has become
void because of paralysis to Mr. C. So, Mr. Rich can ask Mr. K for refund of money
paid in advance to his father, Mr. C.
3. In terms of the provisions of Section 65 of the Indian Contract Act, 1872, when an
agreement is discovered to be void or when a contract becomes void, any person
who has received any advantage under such agreement or contract is bound to
restore it, or to make compensation for it to the person from whom he received it.
Referring to the above provision, we can analyse the situation as under.
The contract is not a void contract. Mr. SUCH is not responsible for Mr. JHUTH’s
negligence. Therefore, Mr. SUCH can rescind the contract and retain the security
amount since the security is not a benefit received under the contract, it is a security
that the purchaser would fulfil his contract and is ancillary to the contract for the sale
of the Motor Car.
Regarding the second situation given in the question, the agreement becomes void
due to the destruction of the Motor car, which is the subject matter of the agreement
here. Therefore, the security amount received by Mr. SUCH is required to be refunded
back to Mr. JHUTH.
4. If the performance consists of payment of money and there are several debts to be
paid, the payment shall be appropriated as per provisions of Sections 59, 60 and 61.
The debtor has, at the time of payment, the right of appropriating the payment. In
default of debtor, the creditor has option of election and in default of either the law
will allow appropriation of debts in order of time.
In the present case, Mr. Murari had made two payments by way of two cheques. One
cheque was exactly the amount of the bill drawn. It would be understood even
though not specifically appropriated by Mr. Murari that it will be against the bill of

exact amount. Hence cheque of `9,680 will be appropriated against the bill of
` 9,680 which was due in May 2019.
Cheque of ` 15000 can be appropriated against any lawful debt which is due even
though the same is time-barred.
Hence, Mr. Girdhari can appropriate the same against the debt of `12,120 which was
due in 2016 and balance against ` 5650 which was due in August 2018.
5. (a) The contract is void because of its initial impossibility of performance.
(b) Time is essence of this contract. As by the time apples reached B they were
already rotten. The contract is discharged due to destruction of subject matter
of contract.
(c) Such contract is of personal nature and hence cannot be performed due to
occurrence of an event resulting in impossibility of performance of contract.
(d) Such contract is discharged without performance because of subsequent
illegality nature of the contract.

2.122 BUSINESS LAWS
UNIT – 5: BREACH OF CONTRACT AND ITS

REMEDIES
LEARNING OUTCOMES
♦ Concept of breach of contract and various modes thereof.
♦ How the damages are to be measured.
UNIT OVERVIEW
Breach of Contract
Anticipatory Breach of Actual Breach of Remedies for Breach of

Contract Contract Contract
Suit for Rescission of Suit for Specific Suit for Suit upon
Damages contract Performance Injunction Quantum
Meruit
Ordinary Special Vindictive Nominal Prefixed

Damage Damages Damages Damages Damages
Liquidated
Penalty
Damages
We have so far seen how a contract is made, the essential of a

valid contract and also how a contract is to be performed as well
as how a contract may be put an end. We shall now discuss
about the breach of contract and also the mode in which
compensation for breach of contract is estimated.

Breach means failure of a party to perform his or her obligation under a contract. Breach of
contract may arise in two ways:
(1) Actual breach of contract
(2) Anticipatory breach of contract
5.1 ANTICIPATORY BREACH OF CONTRACT

An anticipatory breach of contract is a breach of contract occurring before the time fixed for
performance has arrived. When the promisor refuses altogether to perform his promise and
signifies his unwillingness even before the time for performance has arrived, it is called
Anticipatory Breach.
Anticipatory breach of a contract may take either of the following two ways:
(a) Expressly by words spoken or written, and
(b) Impliedly by the conduct of one of the parties.

Example 1: Where A contracts with B on 15th July, 2022 to supply 10 bales of cotton for a
specified sum on 14th August, 2022 and on 30th July informs B, that he will not be able to
supply the said cotton on 14th August, 2022, there is an express rejection of the contract.
Example 2: Where A agrees to sell his white horse to B for ` 50,000/- on 10th of August,
2022, but he sells this horse to C on 1st of August, 2022, the anticipatory breach has
occurred by the conduct of the promisor.
Section 39 of the Indian Contract Act deals with anticipatory breach of contract and
provides as follows:
“When a party to a contract has refused to perform or disable himself from performing, his
promise in its entirety, the promisee may put an end to the contract, unless he has signified,
but words or conduct, his acquiescence in its continuance.”
Effect of anticipatory breach: The promisee is excused from performance or from further
performance. Further he gets an option:
(1) To either treat the contract as “rescinded and sue the other party for damages from
breach of contract immediately without waiting until the due date of performance;
or
(2) He may elect not to rescind but to treat the contract as still operative and wait for
the time of performance and then hold the other party responsible for the

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consequences of non-performance. But in this case, he will keep the contract alive for
the benefit of the other party as well as his own, and the guilty party, if he so decides
on re-consideration, may still perform his part of the contract and can also take
advantage of any supervening impossibility which may have the effect of discharging
the contract.
5.2 ACTUAL BREACH OF CONTRACT

In contrast to anticipatory breach, it is a case of refusal to perform the promise on the
scheduled date. The parties to a lawful contract are bound to perform their respective
promises. But when one of the parties breaks the contract by refusing to perform his
promise, he is said to have committed a breach. In that case, the other party to the contract
obtains a right of action against the one who has refused to perform his promise.
Actual breach of contract may be committed-
(a) At the time when the performance of the contract is due.
Example 3: A agrees to deliver 100 bags of sugar to B on 1st February 2022. On the
said day, he failed to supply 100 bags of sugar to B. This is actual breach of contract.
The breach has been committed by A at the time when the performance becomes
due.
(b) During the performance of the contract: Actual breach of contract also occurs
when during the performance of the contract, one party fails or refuses to perform
his obligation under it by express or implied act.
Remedies for Breach of Contract
Suit for Damages

Remedies Available
Rescission of Contract
Suit for specific

performance
Suit for Injunction
Suit upon quantum

meruit

5.3 SUIT FOR DAMAGES

The Act in Section 73, has laid down the rules as to how the amount of compensation is to
be determined. On the breach of the contract, the party who suffers from such a breach is
entitled to receive, from the party who has broken the contract, compensation for any loss
or damage caused to him by breach.
Compensation can be claimed for any loss or damage which naturally arises in the usual
course of events.
A compensation can also be claimed for any loss or damage which the party knew when
they entered into the contract, as likely to result from the breach.
That is to say, special damage can be claimed only on a previous notice. But the party
suffering from the breach is bound to take reasonable steps to minimise the loss.
No compensation is payable for any remote or indirect loss.
Damages
Damages for
General/ Vindictive or deterioration Pre-fixed
Special Nominal
Ordinary Exemplary caused by damages
delay
(i) Ordinary damages: When a contract has been broken, the party who suffers by such
breach is entitled to receive, from the party who has broken the contract,
compensation for any loss or damage cause to him thereby, which naturally arose in
the usual course of things from such breach, or which the parties know, when they
made the contract, to be likely to result from the breach of it.
Such compensation is not to be given for any remote and indirect loss or damage
sustained by reasons of the breach. (Section 73 of the Contract Act and the rule in
Hadley vs. Baxendale).
HADLEY vs. BAXENDALE- Facts
The crankshaft of P’s flour mill had broken. He gives it to D, a common carrier who
promised to deliver it to the foundry in 2 days where the new shaft was to be made.
The mill stopped working, D delayed the delivery of the crankshaft so the mill
remained idle for another 5 days. P received the repaired crankshaft 7 days later than
he would have otherwise received. Consequently, P sued D for damages not only for

2.126 BUSINESS LAWS
the delay in the delivering the broken part but also for loss of profits suffered by the
mill for not having been worked. The count held that P was entitled only to ordinary
damages and D was not liable for the loss of profits because the only information
given by P to D was that the article to be carried was the broken shaft of a mill and it
was not made known to them that the delay would result in loss of profits.
Example 4: A agrees to sell to B bags of rice at ` 5,000 per bag, delivery to be given
after two months. On the date of delivery, the price of rice goes up to ` 5,500 per
bag. A refuse to deliver the bags to B. B can claim from A ` 500 as ordinary damages
arising directly from the breach.
(ii) Special damages: Where a party to a contract receives a notice of special
circumstances affecting the contract, he will be liable not only for damages arising
naturally and directly from the breach but also for special damages.
Example 5: ‘A’ delivered a machine to ‘B’, a common carrier, to be conveyed to ‘A’s
mill without delay. ‘A’ also informed ‘B’ that his mill was stopped for want of the
machine. ‘B’ unreasonably delayed the delivery of the machine, and in consequence
‘A’ lost a profitable contract with the Government. In this case, ‘A’ is entitled to
receive from ‘B’, by way of compensation, the average amount of profit, which would
have been made by running the mill during the period of delay. But he cannot
recover the loss sustained due to the loss of the Government contract, as ‘A’s
contract with the Government was not brought to the notice of ‘B’.
(iii) Vindictive or Exemplary damages
These damages may be awarded only in two cases -
(a) for breach of promise to marry because it causes injury to his or her feelings;
and
(b) for wrongful dishonour by a banker of his customer’s cheque because in this
case the injury due to wrongful dishonour to the drawer of cheque is so heavy
that it causes loss of credit and reputation to him. A business man whose
credit has suffered will get exemplary damages even if he has sustained no
pecuniary loss. But a non-trader cannot get heavy damages in the like
circumstances, unless the damages are alleged and proved as special
damages. (Gibbons v West Minister Bank)
(iv) Nominal damages: Nominal damages are awarded where the plaintiff has proved
that there has been a breach of contract but he has not in fact suffered any real
damage. It is awarded just to establish the right to decree for the breach of contract.
The amount may be a rupee or even 10 paise.

(v) Damages for deterioration caused by delay: In the case of deterioration caused to
goods by delay, damages can be recovered from carrier even without notice. The
word ‘deterioration’ not only implies physical damages to the goods but it may also
mean loss of special opportunity for sale.
(vi) Pre-fixed damages: Sometimes, parties to a contract stipulate at the time of its
formation that on a breach of contract by any of them, a certain amount will be
payable as damage. It may amount to either liquidated damages (i.e., a reasonable
estimate of the likely loss in case of breach) or a penalty (i.e., an amount arbitrarily
fixed as the damages payable). Section 74 provides that if a sum is named in a
contract as the amount to be paid in case of a breach, the aggrieved party is entitled
to receive from the party at fault a reasonable compensation not exceeding the
amount so named (Section 74).
Example 6: If the penalty provided by the contract is ` 1,00,000 and the actual loss
because of breach is ` 70,000, only ` 70,000 shall be available as damages, i.e., the
amount of actual loss and not the amount stipulated. But if the loss is, say,
` 1,50,000, then only, ` 1,00,000 shall be recoverable.
Example 7: X promised Y, a priest, to pay ` 10,000 as charity. The priest on X’s

promise incurred certain liabilities towards the repairing of the temple to the extent
of Rs. 7,500. Y, the priest, can recover from X ` 7,500.
5.4 PENALTY AND LIQUIDATED DAMAGES

(SECTION 74)
The parties to a contract may provide before hand, the amount of compensation payable in
case of failure to perform the contract. In such cases, the question arises whether the courts
will accept this figure as the measure of damage.
English Law: According to English law, the sum so fixed in the contract may be interpreted
either as liquidated damages or as a penalty.
If the sum fixed in the contract represents a genuine pre-estimate by the parties of the loss,
which would be caused by a future breach of the contract it is liquidated damages. It is an
assessment of the amount which in the opinion of the parties will compensate for the
breach. Such a clause is effective and the amount is recoverable. But where the sum fixed in
the contract is unreasonable and is used to force the other party to perform the contract; it
is penalty. Such a clause of disregarded and the injured party cannot recover more than the
actual loss.

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Indian Law: Indian law makes no distinction between ‘penalty ‘and liquidated damages’. The
Courts in India award only a reasonable compensation not exceeding the sum so mentioned
in the contract. Section 74 of the Contract Act lays down if the parties have fixed what the
damages will be, the courts will never allow more. But the court may allow less. A decree is
to be passed only for reasonable compensation not exceeding the sum named by the
parties. Thus, Section 74 entitles a person complaining of breach of contract to get
reasonable compensation and does not entitle him to realise anything by way of penalty.
Exception: Where any person gives any bond to the Central or State government for the
performance of any public duty or act in which the public are interested, on breach of the
condition of any such instrument, he shall be liable to pay the whole sum mentioned
therein.
Example 8: A contracts with B, that if A practices as a surgeon in Kolkata, he will pay B `
50,000. A practice as a surgeon at Kolkata, B is entitled to such compensation not exceeding
` 50,000 as the court considers reasonable.
Example 9: A borrows ` 10,000 from B and gives him a bond for ` 20,000 payable by five
yearly instalments of ` 4,000 with a stipulation that in default of payment, the whole shall
become due. This is a stipulation by way of penalty.
Example 10: A undertakes to repay B, a loan of ` 10,000 by five equal monthly instalments with
a stipulation that in default of payment of any instalment, the whole shall become due. This
stipulation is not by way of penalty and the contract may be enforced according to its terms.
Distinction between liquidated damages and penalty
Penalty and liquidated damages have one thing in common that both are payable on the
occurrence of a breach of contract. It is very difficult to draw a clear line of distinction
between the two but certain principles as laid down below may be helpful.
1. If the sum payable is so large as to be far in excess of the probable damage on
breach, it is certainly a penalty.
2. Where a sum is expressed to be payable on a certain date and a further sum in the
event of default being made, the latter sum is a penalty because mere delay in
payment is unlikely to cause damage.
3. The expression used by the parties is not final. The court must find out whether the
sum fixed in the contract is in truth a penalty or liquidated damages. If the sum fixed
is extravagant or exorbitant, the court will regard it is as a penalty even if, it is termed
as liquidated damages in the contract.
4. The essence of a penalty is payment of money stipulated as a terrorem of the
offending party. The essence of liquidated damages is a genuine pre-estimate of the
damage.

5. English law makes a distinction between liquidated damages and penalty, but no
such distinction is followed in India. The courts in India must ascertain the actual loss
and award the same which amount must not, however exceed the sum so fixed in the
contract. The courts have not to bother about the distinction but to award
reasonable compensation not exceeding the sum so fixed.
Besides claiming damages as a remedy for the breach of contract, the following
remedies are also available:
(i) Rescission of contract: When a contract is broken by one party, the other party may
treat the contract as rescinded. In such a case, he is absolved of all his obligations
under the contract and is entitled to compensation for any damages that he might
have suffered.
Example 11: A promises B to deliver 50 bags of cement on a certain day. B agrees to
pay the amount on receipt of the goods. A failed to deliver the cement on the
appointed day. B is discharged from his liability to pay the price.
(ii) Quantum Meruit: Where one person has rendered service to another in
circumstances which indicate an understanding between them that it is to be paid for
although no particular remuneration has been fixed, the law will infer a promise to
pay. Quantum Meruit i.e. as much as the party doing the service has deserved. It
covers a case where the party injured by the breach had at time of breach done part
but not all of the work which he is bound to do under the contract and seeks to be
compensated for the value of the work done. For the application of this doctrine, two
conditions must be fulfilled:
(1) It is only available if the original contract has been discharged.
(2) The claim must be brought by a party not in default.
The object of allowing a claim on quantum meruit is to recompensate the party or
person for value of work which he has done. Damages are compensatory in nature
while quantum merit is restitutory. It is but reasonable compensation awarded on
implication of a contract to remunerate. Where a person orders only 12 bottles of a
whiskey from a wine merchant but also receives 2 bottles of brandy, and the
purchaser accepts them, the purchaser must pay a reasonable price for the brandy.
The claim for quantum meruit arises in the following cases:
(a) When an agreement is discovered to be void or when a contract becomes
void.
(b) When something is done without any intention to do so gratuitously.
(c) Where there is an express or implied contract to render services but there is
no agreement as to remuneration.
(d) When one party abandons or refuses to perform the contract.

2.130 BUSINESS LAWS
(e) Where a contract is divisible and the party not in default has enjoyed the
benefit of part performance.
(f) When an indivisible contract for a lump sum is completely performed but
badly the person who has performed the contract can claim the lump sum,
but the other party can make a deduction for bad work.
Example 12: X wrongfully revoked Y‘s (his agent) authority before Y could complete
his duties. Held, Y could recover, as a quantum meruit, for the work he had done and
the expenses he had incurred in the course of his duties as an agent.
Example 13: A agrees to deliver 100 bales of cottons to B at a price of ` 1000 per
bale. The cotton bales were to be delivered in two instalments of 50 each. A delivered
the first instalment but failed to supply the second. B must pay for 50 bags.
(iii) Suit for specific performance: Where damages are not an adequate remedy in the
case of breach of contract, the court may in its discretion on a suit for specific
performance direct party in breach, to carry out his promise according to the terms
of the contract.
(iv) Suit for injunction: Where a party to a contract is negating the terms of a contract,
the court may by issuing an ‘injunction orders’, restrain him from doing what he
promised not to do.
Example 14: N, a film star, agreed to act exclusively for a particular producer, for one
year. During the year she contracted to act for some other producer. Held, she could
be restrained by an injunction.
Example 15: A, a singer, agreed with B to perform at his theatre for two months, on
a condition that during that period, he would not perform anywhere. In this case, B
could move to the Court for grant of injunction restraining A from performing in
other places.
Party rightfully rescinding contract, entitled to compensation (Section 75)
A person who rightfully rescinds a contract is entitled to compensation for any

damage which he has sustained through non-fulfilment of the contract.
Example 16: A, a singer, contracts with B, the manager of a theatre, to sing at his
theatre for two nights in every week during the next two months, and B engages to
pay her ` 10000 for each night’s performance. On the sixth night, A wilfully absents
herself from the theatre, and B, in consequence, rescinds the contract. B is entitled to
claim compensation for the damage which he has sustained through the non-
fulfilment of the contract.

SUMMARY
1. In case of breach of contract by one party, the other party need not perform his part
of the contract and is entitled to compensation for the loss occurred to him.
2. Damages for breach of contract must be such loss or damage as naturally arise, in the usual
course of things or which had been reasonably supposed to have been in contemplation of
the parties when they made the contract, as the probable result of the breach.
3. Any other damages are said to be remote or indirect damages, hence, cannot be
claimed.
REMEDIES FOR BREACH OF CONTRACT
Suit for Rescission of Suit for Specific Suit for Quantum

Damages Contract Performance Injunction Meruit
Where damages are

not an adequate As much as earned
Monetary Compensation
Kinds of Damages remedy, court may When a person has
1. Ordinary Damages- Equal to actual direct party in breach done some work
loss but not for indirect or remote loss. to carry out his under a contract, and
2. Special Damages- Decided at the
promise according to other party
time of contract entered.
3. Exemplary Damages- Granted only terms of contract. repudiated the
in-case of breach of contract to marry contract, or some
& unjustified dishonor of cheque. event happens which
4. Nominal Damages- When there is Order of the makes the further
no loss
court performance of
5. Damages for deterioration caused
by delay- Can be recovered from Termination contract impossible
Where a party
carrier even without notice. of contract then party who has
does something
6. Liquidated Damages & Penalty-If by promisee performed the work
which he
damages equal to loss then liquidated when can claim
damages. If more that loss then promised not to
promisor remuneration for the
penalty (Note Under ‘English law’ do, the Court may
refuses to work he has already
Liquidated damages are enforceable issue an order,
but penalties cannot be claimed). perform. done.
prohibit him from
doing so.

2.132 BUSINESS LAWS
TEST YOUR KNOWLEDGE

1. When prior to the due date of performance, the promisor absolutely refuses to perform
the contract, it is known as
(a) abandonment of contract
(b) remission of contract
(c) actual breach of contract
(d) anticipatory breach of contract
2. In case of anticipatory breach, the aggrieved party may treat the contract
(a) as discharged and bring an immediate action for damages
(b) as operative and wait till the time for performance arrives
(c) exercise option either (a) or (b)
(d) only option (a) is available
3. In case of breach of contract, which of the following remedy is available to the
aggrieved party?
(a) Suit for rescission
(b) Suit for damages
(c) Suit for specific performance
(d) All of these
4. Sometimes, a party is entitled to claim compensation in proportion to the work done by
him. It is possible by a suit for
(a) damage
(b) injunction
(c) quantum meruit

(d) none of these
5. Generally, the following damages are not recoverable?
(a) Ordinary damages

(b) Special damages

(c) Remote damages

(d) Nominal damages
6. Damages which arise naturally in usual course of things from breach itself are called:
(a) Special damages
(b) Liquidated damages
(c) Nominal damages
(d) General damages
7. A contracted to supply 200 bags of rice to B on 30th December, 2021. After supplying
20 bags of rice. A informed B that he will not supply remaining bags of rice to B. In this
case,
(a) There is anticipatory breach of contract
(b) There is actual breach of contract
(c) Both of the above
8. Where the Court orders the defaulting party to carry out the promise according to the
terms of the contract, it is called
(a) Quantum Meruit
(b) Rescission
(c) Injunction
(d) Specific Performance
9. Quantum Meruit means
(a) a non-gratuitous promise
(b) as gratuitous promise
(c) as much as is earned
(d) as much as is paid
10. Wrongful dishonour of cheque by a banker having sufficient funds in the account of
customer, the court may award:
(a) Mitigation of damages
(b) contemptuous damages
(c) Quantum Meruit
(d) exemplary damages

2.134 BUSINESS LAWS
1. “An anticipatory breach of contract is a breach of contract occurring before the time
fixed for performance has arrived”. Discuss stating also the effect of anticipatory breach
on contracts.
2. “Liquidated damage is a genuine pre-estimate of compensation of damages for certain
anticipated breach of contract whereas Penalty on the other hand is an extravagant
amount stipulated and is clearly unconscionable and has no comparison to the loss
suffered by the parties”. Explain.
3. ‘X’ entered into a contract with ‘Y’ to supply him 1,000 water bottles @ ` 5.00 per water
bottle, to be delivered at a specified time. Thereafter, ‘X’ contracts with ‘Z’ for the
purchase of 1,000 water bottles @ ` 4.50 per water bottle, and at the same time told ‘Z’
that he did so for the purpose of performing his contract entered into with ‘Y’. ‘Z’ failed
to perform his contract in due course and market price of each water bottle on that day
was ` 5.25 per water bottle. Consequently, ‘X’ could not procure any water bottle and
‘Y’ rescinded the contract. Calculate the amount of damages which ‘X’ could claim
from ‘Z’ in the circumstances? What would be your answer if ‘Z’ had not informed
about the ‘Y’s contract? Explain with reference to the provisions of the Indian Contract
Act, 1872.
ANSWER/HINTS
Answers to MCQs
1. (d) 2. (c) 3. (d) 4. (c) 5. (c) 6. (d)
7. (b) 8. (d) 9. (c) 10. (d)
Answer of Descriptive Questions

1. An anticipatory breach of contract is a breach of contract occurring before the time
fixed for performance has arrived. When the promisor refuses altogether to perform
his promise and signifies his unwillingness even before the time for performance has
arrived, it is called Anticipatory Breach. The law in this regard has very well summed
up in Frost v. Knight and Hochster v. DelaTour:
Section 39 of the Indian Contract Act deals with anticipatory breach of contract and
provides as follows: “When a party to a contract has refused to perform or disable
himself from performing, his promise in its entirety, the promisee may put an end to

the contract, unless he has signified, but words or conduct, his acquiescence in its
continuance.”
Effect of anticipatory breach: The promisee is excused from performance or from

further performance. Further he gets an option:
(1) To either treat the contract as “rescinded and sue the other party for damages
from breach of contract immediately without waiting until the due date of
performance; or
(2) He may elect not to rescind but to treat the contract as still operative, and
wait for the time of performance and then hold the other party responsible
for the consequences of non-performance. But in this case, he will keep the
contract alive for the benefit of the other party as well as his own, and the
guilty party, if he so decides on re-consideration, may still perform his part of
the contract and can also take advantage of any supervening impossibility
which may have the effect of discharging the contract.
2. Liquidated damage is a genuine pre-estimate of compensation of damages for
certain anticipated breach of contract. This estimate is agreed to between parties to
avoid at a later date detailed calculation and the necessity to convince outside
parties.
Penalty on the other hand is an extravagant amount stipulated and is clearly
unconscionable and has no comparison to the loss suffered by the parties.
In terms of Section 74 of the Act “where a contract has been broken, if a sum is
named in the contract as the amount to be paid in case of such breach, or if the
contract contains any other stipulation by way of penalty, the party complaining of
the breach is entitled, whether or not actual damages or loss is proved to have been
caused thereby, to receive from the other party who has broken the contract, a
reasonable compensation not exceeding the amount so named, or as the case may
be the penalty stipulated for.
Explanation to Section 74
A stipulation for increased interest from the date of default may be a stipulation by
way of penalty.
In terms of Section 74, courts are empowered to reduce the sum payable on
breach whether it is ‘penalty’ or “liquidated damages” provided the sum
appears to be unreasonably high.
Sri ChunniLal vs. Mehta & Sons Ltd (Supreme Court)

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Supreme Court laid down the ratio that the aggrieved party should not be allowed to
claim a sum greater than what is specific in the written agreement. But even then,
the court has powers to reduce the amount if it considers it reasonable to reduce.
3. Breach of Contract-Damages: Section 73 of the Indian Contract Act, 1872 lays down
that when a contract has been broken, the party who suffers by such breach is
entitled to receive from the party who has broken the contract compensation for any
loss or damage caused to him thereby which naturally arose in the usual course of
things from such breach or which the parties knew when they made the contract to
be likely to result from the breach of it.
The leading case on this point is “Hadley vs. Baxendale” in which it was decided by
the Court that the special circumstances under which the contract was actually made
were communicated by the plaintiff to the defendant, and thus known to both the
parties to the contract, the damages resulting from the breach of such contract which
they would reasonably contemplate, would be the amount of injury which would
ordinarily follow from the breach of contract under these special circumstances so
known and communicated.
The problem asked in this question is based on the provisions of Section 73 of the
Indian Contract Act, 1872. In the instant case ‘X’ had intimated to ‘Z’ that he was
purchasing water bottles from him for the purpose of performing his contract with
‘Y’. Thus, ‘Z’ had the knowledge of the special circumstances. Therefore, ‘X’ is entitled
to claim from ‘Z’ ` 500/- at the rate of 0.50 paise i.e. 1000 water bottles x 0.50 paise
(difference between the procuring price of water bottles and contracted selling price
to ‘Y’) being the amount of profit ‘X’ would have made by the performance of his
contract with ‘Y’.
If ‘X’ had not informed ‘Z’ of ‘Y’s contract, then the amount of damages would have
been the difference between the contract price and the market price on the day of
default. In other words, the amount of damages would be ` 750/- (i.e. 1000 water
bottles x 0.75 paise).

UNIT – 6: CONTINGENT AND QUASI CONTRACTS
LEARNING OUTCOMES

♦ Basic characteristics of ‘Contingent contract’ and ‘Quasi-contract’
so that you are able to distinguish between a contract of any of
these types and a simple contract.
♦ Rules relating to enforcement of these in order to gain an
understanding of rights and obligations of the parties to the
contract.
UNIT OVERVIEW
Contingent Contracts Quasi-Contracts
Rules Relating to Enforcement Cases deemed as

of Contingent Contracts Quasi-Contracts
Difference between Contingent

& Wagering Contract
6.1 CONTINGENT CONTRACTS

In this unit, we shall briefly examine what is called a ‘contingent contract’, its essentials and
the rules regarding enforcement of this type of contracts. The Contract Act recognises
certain cases in which an obligation is created without a contract. Such obligations arise out
of certain relations which cannot be called as contracts in the strict sense. There is no offer,
no acceptance, no consensus ad idem and in fact neither agreement nor promise and yet the

2.138 BUSINESS LAWS
law imposes an obligation on one party and confers a right in favour of the other. We shall
have a look on these cases of ‘Quasi-contracts’.
A contract may be absolute or a contingent. An Absolute contract is one where the promisor
undertakes to perform the contract in any event without any condition.
Definition of ‘Contingent Contract’ (Section 31)
“A contract to do or not to do something, if some event, collateral to such contract,

does or does not happen”.
Contracts of Insurance, indemnity and guarantee fall under this category.
Example 1: A contracts to pay B ` 10,00,000 if B’s house is burnt. This is a contingent
contract.
Example 2: A makes a contract with B to buy his house for ` 50,00,000 if he is able to secure
to bank loan for that amount. The contract is contingent contract.
Meaning of collateral Event: Pollock and Mulla defined collateral event as “an event
which is neither a performance directly promised as part of the contract, nor the whole of
the consideration for a promise”.
Example 3: A contracts to pay B ` 10,00,000 if B’s house is burnt. This is a contingent
contract. Here the burning of the B’s house is neither a performance promised as part of the
contract nor it is the consideration obtained from B. The liability of A arises only on the
happening of the collateral event.
Example 4: A agrees to transfer his property to B if her wife C dies. This is a contingent
contract because the property can be transferred only when C dies.
Essentials of a contingent contract
(a) The performance of a contingent contract would depend upon the happening or
non-happening of some event or condition. The condition may be precedent or
subsequent.
Example 5: ‘A’ promises to pay ` 50,000 to ‘B’ if it rains on first of the next month.
(b) The event referred to as collateral to the contract. The event is not part of the
contract. The event should be neither performance promised nor a consideration for
a promise.
Thus (i) where A agrees to deliver 100 bags of wheat and B agrees to pay the price
only afterwards, the contract is a conditional contract and not contingent; because
the event on which B’s obligation is made to depend is part of the promise itself and
not a collateral event. (ii) Similarly, where A promises to pay B ` 1,00,000 if he marries

C, it is not a contingent contract. (iii) ‘A’ agreed to construct a swimming pool for ‘B’
for ` 20,00,000. And ‘B’ agreed to make the payment only on the completion of the
swimming pool. It is not a contingent contract as the event (i.e. construction of the
swimming pool) is directly connected with the contract.
(c) The contingent event should not be a mere ‘will’ of the promisor. The event
should be contingent in addition to being the will of the promisor.
Example 6: If A promises to pay B ` 100,000, if he so chooses, it is not a contingent
contract. (In fact, it is not a contract at all). However, where the event is within the
promisor’s will but not merely his will, it may be contingent contract.
Example 7: If A promises to pay B `100,000 if it rains on 1st April and A leave Delhi
for Mumbai on a particular day, it is a contingent contract, because going to Mumbai
is an event no doubt within A’s will, but raining is not merely his will.
(d) The event must be uncertain. Where the event is certain or bound to happen, the
contract is due to be performed, then it is a not contingent contract.
Example 8: ‘A’ agreed to sell his agricultural land to ‘B’ after obtaining the necessary
permission from the collector. As a matter of course, the permission was generally
granted on the fulfilment of certain formalities. It was held that the contract was not
a contingent contract as the grant of permission by the collector was almost a
certainty.
6.2 RULES RELATING TO ENFORCEMENT

The rules relating to enforcement of a contingent contract are laid down in sections 32, 33,
34, 35 and 36 of the Act.
(a) Enforcement of contracts contingent on an event happening:
Section 32 says that “where a contingent contract is made to do or not to do
anything if an uncertain future event happens, it cannot be enforced by law unless
and until that event has happened. If the event becomes impossible, such contracts
become void”.
Example 9: A contracts to pay B a sum of money when B marries C. C dies without
being married to B. The Contract becomes void.
(b) Enforcement of contracts contingent on an event not happening: Section 33 says
that “Where a contingent contract is made to do or not do anything if an uncertain
future event does not happen, it can be enforced only when the happening of that
event becomes impossible and not before”.

2.140 BUSINESS LAWS
Example 10: Where ‘P’ agrees to pay ‘Q’ a sum of money if a particular ship does not
return, the contract becomes enforceable only if the ship sinks so that it cannot
return.
Where A agrees to pay sum of money to B if certain ship does not return however
the ship returns back. Here the contract becomes void.
(c) A contract would cease to be enforceable if it is contingent upon the conduct of
a living person when that living person does something to make the ‘event’ or
‘conduct’ as impossible of happening.
Section 34 says that “if a contract is contingent upon as to how a person will act at
an unspecified time, the event shall be considered to have become impossible when
such person does anything which renders it impossible that he should so act within
any definite time or otherwise than under further contingencies”.
Example 11: Where ‘A’ agrees to pay ‘B’ a sum of money if ‘B’ marries ‘C’. ‘C’ marries
‘D’. This act of ‘C’ has rendered the event of ‘B’ marrying ‘C’ as impossible; it is
though possible if there is divorce between ‘C’ and ‘D’.
In Frost V. Knight, the defendant promised to marry the plaintiff on the death of his
father. While the father was still alive, he married another woman. It was held that it
had become impossible that he should marry the plaintiff and she was entitled to sue
him for the breach of the contract.
(d) Contingent on happening of specified event within the fixed time: Section 35
says that Contingent contracts to do or not to do anything, if a specified uncertain
event happens within a fixed time, becomes void if, at the expiration of time fixed,
such event has not happened, or if, before the time fixed, such event becomes
impossible.
Example 12: A promises to pay B a sum of money if certain ship returns within a
year. The contract may be enforced if the ship returns within the year, and becomes
void if the ship is burnt within the year.
(e) Contingent on specified event not happening within fixed time: Section 35 also
says that - “Contingent contracts to do or not to do anything, if a specified uncertain
event does not happen within a fixed time, may be enforced by law when the time
fixed has expired, and such event has not happened or before the time fixed has
expired, if it becomes certain that such event will not happen”.
Example 13: A promises to pay B a sum of money if a certain ship does not return
within a year. The contract may be enforced if the ship does not return within the
year, or is burnt within the year.

(f) Contingent on an impossible event (Section 36): Contingent agreements to do or

not to do anything, if an impossible event happens are void, whether the
impossibility of the event is known or not to the parties to the agreement at the time
when it is made.
Example 14: ‘A’ agrees to pay ‘B’ `one lakh if sun rises in the west next morning.
This is an impossible event and hence void.
Example 15: X agrees to pay Y `1,00,000 if two straight lines should enclose a space.
The agreement is void.
Difference between a contingent contract and a wagering contract
Basis of difference Contingent contract Wagering contract

Meaning A contingent contract is a A wagering agreement is
contract to do or not to a promise to give money
do something with or money’s worth with
reference to a collateral reference to an uncertain
event happening or not event happening or not
happening. happening.
Reciprocal promises Contingent contract may A wagering agreement
not contain reciprocal consists of reciprocal
promises. promises.
Uncertain event In a contingent contract, In a wagering contract,
the event is collateral. the uncertain event is the
core factor.
Nature of contract Contingent contract may A wagering agreement is
not be wagering in essentially contingent in
nature. nature.
Interest of contracting Contracting parties have The contracting parties
parties interest in the subject have no interest in the
matter in contingent subject matter.
contract.
Doctrine of mutuality of Contingent contract is not A wagering contract is a
lose and gain based on doctrine of game, losing and gaining
mutuality of lose and alone matters.
gain.
Effect of contract Contingent contract is A wagering agreement is
valid. void.

2.142 BUSINESS LAWS
6.3 QUASI CONTRACTS

A valid contract must contain certain essential elements, such as offer and acceptance,
capacity to contract, consideration and free consent. But sometimes the law implies a
promise imposing obligations on one party and conferring right in favour of the other even
when there is no offer, no acceptance, no genuine consent, lawful consideration, etc. and in
fact neither agreement nor promise. Such cases are not contract in the strict sense, but the
Court recognises them as relations resembling those of contracts and enforces them as if
they were contracts. Hence the term Quasi –contracts (i.e. resembling a contract). Even in
the absence of a contract, certain social relationships give rise to certain specific obligations
to be performed by certain persons. These are known as quasi contracts as they create same
obligations as in the case of regular contract.
Quasi contracts are based on principles of equity, justice and good conscience.
A quasi or constructive contract rest upon the maxims, “No man must grow rich out of
another person’s loss”.
Example 16: T, a tradesman, leaves goods at C’s house by mistake. C treats the goods as his
own. C is bound to pay for the goods.
Example 17: A pays some money to B by mistake. It is really due to C. B must refund the
money to A.
Example 18: A fruit parcel is delivered under a mistake to R who consumes the fruits
thinking them as birthday present. R must return the parcel or pay for the fruits. Although
there is no agreement between R and the true owner, yet he is bound to pay as the law
regards it a Quasi-contract.
These relations are called as quasi-contractual obligations. In India it is also called as
‘certain relation resembling those created by contracts.
Salient features of quasi contracts:

(a) In the first place, such a right is always a right to money and generally, though not
always, to a liquidated sum of money.
(b) Secondly, it does not arise from any agreement of the parties concerned, but is
imposed by the law; and
(c) Thirdly, it is a right which is available not against all the world, but against a
particular person or persons only, so that in this respect it resembles a contractual
right.

Cases Deemed as
Quasi - Contracts
Obligation of
Payment
a person Money paid
Claims for by an Responsibili
enjoying by mistake
necessaries interested ty of finder
benefit of or under
supplied person of goods
non coercion
[Section 68] [ Section [Section 71]
gratuitous act [Section 72]
69]
[Section 70]
Under the provisions of the Indian Contract Act, the relationship of quasi contract is deemed
to have come to exist in five different circumstances which we shall presently dilate upon.
But it may be noted that in none of these cases there comes into existence any contract
between the parties in the real sense. Due to peculiar circumstances in which they are
placed, the law imposes in each of these cases the contractual liability.
(a) Claim for necessaries supplied to persons incapable of contracting (Section 68):
If a person, incapable of entering into a contract, or anyone whom he is legally
bound to support, is supplied by another person with necessaries suited to his
condition in life, the person who has furnished such supplies is entitled to be
reimbursed from the property of such incapable person.
Example 19: A supplies B, a lunatic, or a minor, with necessaries suitable to his
condition in life. A is entitled to be reimbursed from B’s property.
To establish his claim, the supplier must prove not only that the goods were supplied
to the person who was minor or a lunatic but also that they were suitable to his
actual requirements at the time of the sale and delivery.
(b) Payment by an interested person (Section 69): A person who is interested in the
payment of money which another is bound by law to pay, and who therefore pays it,
is entitled to be reimbursed by the other.
Example 20: B holds land in Bengal, on a lease granted by A, the zamindar. The
revenue payable by A to the Government being in arrear, his land is advertised for
sale by the Government. Under the revenue law, the consequence of the sale will be
the annulment of B’s lease. B, to prevent the sale and the consequent annulment of
his own lease, pays to the government the sum due from A. A is bound to make
good to B the amount so paid.

2.144 BUSINESS LAWS
(c) Obligation of person enjoying benefits of non-gratuitous act (Section 70): In

term of section 70 of the Act “where a person lawfully does anything for another
person, or delivers anything to him not intending to do so gratuitously and such
other person enjoys the benefit thereof, the latter is bound to pay compensation to
the former in respect of, or to restore, the thing so done or delivered”.
It thus follows that for a suit to succeed, the plaintiff must prove:
(i) that he had done the act or had delivered the thing lawfully;
(ii) that he did not do so gratuitously; and
(iii) that the other person enjoyed the benefit.
The above can be illustrated by a case law where ‘K’ a government servant was
compulsorily retired by the government. He filed a writ petition and obtained an
injunction against the order. He was reinstated and was paid salary but was given no
work and in the meantime government went on appeal. The appeal was decided in
favour of the government and ‘K’ was directed to return the salary paid to him during
the period of reinstatement. [Shyam Lal vs. State of U.P. A.I.R (1968) 130]
Example 21: A, a tradesman, leaves goods at B’s house by mistake. B treats the
goods as his own. He is bound to pay A for them.
(d) Responsibility of finder of goods (Section 71): ‘A person who finds goods
belonging to another and takes them into his custody is subject to same
responsibility as if he were a bailee’.
Thus, a finder of lost goods has:
(i) to take proper care of the property as man of ordinary prudence would take
(ii) no right to appropriate the goods and
(iii) to restore the goods if the owner is found.

In Hollins vs. Howler L. R. & H. L., ‘H’ picked up a diamond on the floor of ‘F’s shop
and handed over the same to ‘F’ to keep till the owner was found. In spite of the best
efforts, the true owner could not be traced. After the lapse of some weeks, ‘H’
tendered to ‘F’ the lawful expenses incurred by him and requested to return the
diamond to him. ‘F’ refused to do so. Held, ‘F’ must return the diamond to ‘H’ as he
was entitled to retain the goods found against everybody except the true owner.
Example 22: ‘P’ a customer in ‘D’s shop puts down a brooch worn on her coat and
forgets to pick it up and one of ‘D’s assistants finds it and puts it in a drawer over the
weekend. On Monday, it was discovered to be missing. ‘D’ was held to be liable in
the absence of ordinary care which a prudent man would have taken.

(e) Money paid by mistake or under coercion (Section 72): “A person to whom
money has been paid or anything delivered by mistake or under coercion, must repay
or return it”.
Every kind of payment of money or delivery of goods for every type of ‘mistake’ is
recoverable. [Shivprasad Vs Sirish Chandra A.I.R. 1949 P.C. 297]
Example 23: A payment of municipal tax made under mistaken belief or because of
mis-understanding of the terms of lease can be recovered from municipal authorities.
The above law was affirmed by Supreme Court in cases of Sales tax officer vs.
Kanhaiyalal A. I. R. 1959 S. C. 835
Similarly, any money paid by coercion is also recoverable. The word coercion is not
necessarily governed by section 15 of the Act. The word is interpreted to mean and
include oppression, extortion, or such other means [Seth Khanjelek vs National
Bank of India].
In a case where ‘T’ was traveling without ticket in a tram car and on checking he was
asked to pay `5/- as penalty to compound transaction. T filed a suit against the
corporation for recovery on the ground that it was extorted from him. The suit was
decreed in his favour. [Trikamdas vs. Bombay Municipal Corporation A. I. R.1954]
In all the above cases the contractual liability arose without any agreement between
the parties.
Difference between quasi contracts and contracts
Basis of distinction Quasi- Contract Contract
Essential for the valid The essentials for the The essentials for the
contract formation of a valid formation of a valid
contract are absent contract are present
Obligation Imposed by law Created by the consent of

the parties

2.146 BUSINESS LAWS
SUMMARY
♦ Contingent Contracts are the contracts, which are conditional on some future event
happening or not happening and are enforceable when the future event or loss
occurs. (Section 31)
RULES FOR ENFORCEMENT

(a) If it is contingent on the happening of a future event, it is enforceable when
the event happens. The contract becomes void if the event becomes
impossible, or the event does not happen till the expiry of time fixed for
happening of the event.
(b) If it is contingent on a future event not happening. It can be enforced when

happening of that event becomes impossible or it does not happen at the
expiry of time fixed for non-happening of the event.
(c) If the future event is the act of a living person, any conduct of that person
which prevents the event happening within a definite time renders the event
impossible.
(d) If the future event is impossible at the time of the contract is made, the
contract is void ab initio.
♦ Wagering Contracts are void.
♦ Quasi Contracts arise where obligations are created without a contract. The
obligations which they give rise to are expressly enacted:
(a) If necessaries are supplied to a person who is incapable of contracting, the
supplier is entitled to claim their price from the property of such a person.
(b) A person who is interested in the payment of money which another is bound
to pay, and who therefore pays it, is entitled to be reimbursed by the other.
(c) A person who enjoys the benefit of a non-gratuitous act is bound to make
compensation.
(d) A person who finds lost property may retain it subject to the responsibility of
a bailee.
(e) If money is paid or goods delivered by mistake or under coercion, the
recipient must repay or make restoration.

CONTINGENT CONTRACT (SEC.31)

A contract to do or not to do something if some event, collateral to such contract,
does or does not happen. E.G. Contracts of insurance, indemnity or guarantee.
Legal Rules
Contingent upon When can it be enforced When it become void?
Happening of an event When event has happened When event becomes
impossible
Non-happening of an event When the happening of the When event has happened.
event becomes impossible
Behavior of a person within Such person acts in When such person does
the specified time specified manner. anything which renders it
impossible
Happening of an event When event has happened When event has not
within the specified time within the specified time. happened within the
specified time OR
Event becomes impossible
before expiry of specified
time.
Non-happening of an event When event has not When event has happened
within the specified time happened within the within the specified time.
specified time OR
Event becomes impossible
before expiry of specified
time.
Happening of an impossible Void, whether the impossibility of the event is known or not
event known to the parties to the agreement at the time when it
is made.
QUASI CONTRACTS
Under certain special circumstances, the law creates and enforces legal rights
and obligations, although the parties have never entered into a contract.
Types of Quasi Contracts
1. Claims for necessities supplied to a person incompetent to contract (but upto
property of incompetent.)
2. Reimbursement to a person paying money due by another in the payment of
which he is interested.
3. Obligation of a person enjoying benefits of non-gratuitous (without any cost)
acts.
4. Responsibility of a finder of lost goods. His responsibility is same as that of a
bailee.
5. Liability of a person to whom money is paid or goods delivered under mistake
or coercion.

2.148 BUSINESS LAWS
TEST YOUR KNOWLEDGE

1. A contract dependent on the happening or non-happening of future uncertain event, is
(a) Uncertain contract
(b) Contingent contract
(c) Void contract

(d) Voidable contract
2. A contingent contract is
(a) Void
(b) Voidable
(c) Valid
(d) Illegal
3. A contingent contract dependent on the happening of future uncertain even can be
enforced when the event
(a) happens
(b) becomes impossible
(c) does not happen
(d) either of these

4. A agrees to pay ` One lakh to B if he brings on earth a star from sky. This is a
contingent contract and
(a) Illegal
(b) Valid
(c) Voidable
(d) Void
5. Which of the following is not a contingent contract:
(a) A promise to pay B if he repairs his scooter.
(b) A promise to pay B ` 10,000 if B’s scooter is stolen.

(c) A promise to pay B ` 10,000 if B’s burnt his hands.

(d) A promise to pay B ` 10,000 if it rains on first of the next month.
6. Which of the following statements regarding Quasi-contracts is incorrect:

(a) It resembles a contract
(b) It is imposed by law
(c) It is based on the doctrine of unjust enrichment

(d) It is voluntarily created
7. For a contingent contract the event must be:
(a) Certain
(b) Uncertain
(c) Independent
(d) Uncertain and collateral

8. Which one of the following is not a characteristic of a contingent contract?
(a) Performance depends upon a future event
(b) The event must be uncertain

(c) The event must be collateral to the contract
(d) There must be reciprocal promises
9. Wagering contracts are:
(a) Void
(b) Voidable
(c) Valid
(d) Illegal
10. A contract of insurance is:
(a) Wagering contract

(b) unilateral contract
(c) Quasi contract
(d) contingent contract

2.150 BUSINESS LAWS
11. Finder of goods should take care of goods as

(a) bailee
(b) owner
(c) insurer
(d) custodian
12. A swiggy man wrongly delivered the food to Mr. Ishaan. Ishaan who took the delivery,
ate the food immediately. The swiggy boy returned soon once he got information about
wrong delivery. Ishaan should make the payment as his case is deemed to be a quasi-
contract under:
(a) Claim for necessaries supplied to persons incapable of contracting
(b) responsibility of finder of goods
(c) Payment by an interest person
(d) obligation of person enjoying benefits under non-gratuitous act
1. Explain the-term ‘Quasi Contracts’ and state their characteristics.
2. X, a minor was studying in M.Com. in a college. On 1st July, 2021 he took a loan of
` 1,00,000 from B for payment of his college fees and to purchase books and agreed to
repay by 31st December, 2021. X possesses assets worth ` 9 lakhs. On due date, X
fails to pay back the loan to B. B now wants to recover the loan from X out of his (X’s)
assets. Referring to the provisions of Indian Contract Act, 1872 decide whether B would
succeed.
3. P left his carriage on D’s premises. Landlord of D seized the carriage against the rent
due from D. P paid the rent and got his carriage released. Can P recover the amount
from D?
ANSWERS/HINTS
Answers to MCQs
1. (b) 2. (c) 3. (a) 4. (d) 5. (a) 6. (d)
7. (d) 8. (d) 9. (a) 10. (d) 11. (a) 12. (d)

Answers to Descriptive Questions

1. Quasi Contracts: Under certain special circumstances, obligation resembling those
created by a contract are imposed by law although the parties have never entered
into a contract. Such obligations imposed by law are referred to as ‘Quasi-contracts’.
Such a contract resembles with a contract so far as result or effect is concerned but it
has little or no affinity with a contract in respect of mode of creation. These contracts
are based on the doctrine that a person shall not be allowed to enrich himself
unjustly at the expense of another. The salient features of a quasi-contract are:
1. It does not arise from any agreement of the parties concerned but is imposed
by law.
2. Duty and not promise is the basis of such contract.

3. The right under it is always a right to money and generally though not always
to a liquidated sum of money.
4. Such a right is available against specific person(s) and not against the whole
world.
5. A suit for its breach may be filed in the same way as in case of a complete
contract.
2. Yes, B can proceed against the assets of X. According to section 68 of Indian
Contract Act, 1872, if a person, incapable of entering into a contract, or any one
whom he is legally bound to support, is supplied by another person with necessaries
suited to his condition in life, the person who has furnished such supplies is entitled
to be reimbursed from the property of such incapable person.
Since the loan given to X is for the necessaries suited to the conditions in life of the
minor, his assets can be sued to reimburse B.
3. Yes, P can recover the amount from D. Section 69 states a person who is interested in
the payment of money which another person is bound by law to pay, and who
therefore pays it, is entitled to get it reimbursed by the other.
In the present case, D was lawfully bound to pay rent. P was interested in making the
payment to D’s landlord as his carriage was seized by him. Hence being an interested
party P made the payment and can recover the same from D.

2.152 BUSINESS LAWS
UNIT – 7: CONTRACT OF INDEMNITY AND

GUARANTEE
LEARNING OUTCOMES

♦ Special type of contracts i.e. Indemnity contracts and Guarantee
contracts and also the nature of obligations and rights of each of
the parties to the contracts.
♦ Distinction between contract of indemnity and contract of
guarantee.
♦ Mode of discharge of contract of guarantee in various
circumstances.
UNIT OVERVIEW
Contract of Indemnity
Contract of Guarantee
Nature of Surety’s Liability

Contract of Indemnity and
Guarantee
Continuing Guarantee
Discharge of Surety
Rights of Surety

Contract of Indemnity and Guarantee are the specific types of contracts provided under
sections 124 to 147 of the Indian Contract Act, 1872. In addition to the specific provisions
(i.e. Section 124 to Section 147 of the Indian Contract Act, 1872), the general principles of
contracts are also applicable to such contracts. Even though both the contracts are modes of
compensation based on similar principles, they differ considerably in several aspects.
In this unit, the law relating to indemnity and guarantee are discussed in detail.
7.1 CONTRACT OF INDEMNITY

The term “Indemnity” literally means “Security against loss” or “to make good the loss” or
“to compensate the party who has suffered some loss”.
The term “Contract of Indemnity” is defined under Section 124 of the Indian Contract Act,
1872. It is “a contract by which one party promises to save the other from loss caused to him
by the conduct of the promisor himself, or by the conduct of any other person.”
Example 1: Mr. X contracts with the Government to return to India after completing his
studies (which were funded by the Government) at University of Cambridge and to serve the
Government for a period of 5 years. If Mr. X fails to return to India, he will have to reimburse
the Government. It is a contract of indemnity.
Parties:
a. The party who promises to indemnify/ save the other party from loss- “indemnifier”,
b. The party who is promised to be saved against the loss- “indemnified” or “indemnity
holder”.
Example 2: A may contract to indemnify B against the consequences of any proceedings which
C may take against B in respect of a sum of ` 5000/- advanced by C to B. In consequence, when
B who is called upon to pay the sum of money to C fails to do so, C would be able to recover
the amount from A as provided in Section 124.
Example 3: X may agree to indemnify Y for any loss or damage that may occur if a tree on Y’s
neighboring property blows over. If the tree then blows over and damages Y’s fence, X will be
liable for the cost of fixing the fence.
However, the above definition of indemnity restricts the scope of contracts of indemnity in
as much as it covers only the loss caused by:
(i) the conduct of the promisor himself, or
(ii) the conduct of any other person.

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Thus, loss occasioned by an accident not caused by any person, or an act of God/ natural
event, is not covered.
In case of Gajanan Moreshwar v/s Moreshwar Madan (1942), decision is taken on the
basis of English Law. As per English Law, Indemnity means promise to save another harmless
from the loss. Here it covers every loss whether due to negligence of promisee or by natural
calamity or by accident.
Mode of contract of indemnity: A contract of indemnity like any other contract may be
express or implied.
a. A contract of indemnity is said to be express when a person expressly promises to
compensate the other from loss.
b. A contract of indemnity is said to be implied when it is to be inferred from the
conduct of the parties or from the circumstances of the case.
A contract of indemnity is like any other contract and must fulfil all the essentials of a valid
contract.
Example 4: A asks B to beat C promising to indemnify him against the consequences. The
promise of A cannot be enforced. Suppose, B beats C and is fined `1000, B cannot claim this
amount from A because the object of the agreement is unlawful.
A contract of Fire Insurance or Marine Insurance is always a contract of indemnity. But there
is no contract of indemnity in case of contract of Life Insurance.
Rights of Indemnity-holder when sued (Section 125): The promisee in a contract of
indemnity, acting within the scope of his authority, is entitled to recover from the
promisor/indemnifier—
(a) all damages which he may be compelled to pay in any suit
(b) all costs which he may have been compelled to pay in bringing/ defending the suit
and
(c) all sums which he may have paid under the terms of any compromise of suit.
When does the liability of an indemnifier commence?

Although the Indian Contract Act, 1872, is silent on the time of commencement of liability of
indemnifier, however, on the basis of judicial pronouncements it can be stated that the
liability of an indemnifier commences as soon as the liability of the indemnity-holder
becomes absolute and certain. This principle has been followed by the courts in several
cases.

Example 5: A promises to compensate X for any loss that he may suffer by filling a suit
against Y. The court orders X to pay Y damages of ` 10000. As the loss has become certain,
X may claim the amount of loss from A and pass it to Y.
7.2 CONTRACT OF GUARANTEE

“Contract of guarantee”, “surety”, “principal debtor” and
“creditor” [Section 126]
Contract of guarantee: A contract of guarantee is a contract to perform the promise made

or discharge the liability, of a third person in case of his default.
Surety- person who gives the guarantee

Three
parties are Principal debtor- person in respect of whose default the
involved in a guarantee is given
contract of
guarantee Creditor- person to whom the gurantee is given
Example 6: When A requests B to lend ` 10,000 to C and guarantees that C will repay the
amount within the agreed time and that on C falling to do so, he (A) will himself pay to B,
there is a contract of guarantee.
Here, B is the creditor, C the principal debtor and A the surety.
Example 7: X and Y go into a car showroom where X says to the dealer to supply latest
model of Wagon R to Y, and agrees that if Y fails to pay he will. In case of Y’s failure to pay,
the car showroom will recover its money from X.
This is a contract of guarantee because X promises to discharge the liability of Y in case of
his defaults.
A contract of guarantee is a tripartite agreement between principal debtor, creditor and
surety. There are, in effect three contracts
(i) A principal contract between the principal debtor and the creditor.
(ii) A secondary contract between the creditor and the surety.
(iii) An implied contract between the surety and the principal debtor whereby principal
debtor is under an obligation to indemnify the surety; if the surety is made to pay or
perform.

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The right of surety is not affected by the fact that the creditor has refused to sue the
principal debtor or that he has not demanded the sum due from him.
Contract of Guarantee
(Tripartite Agreement)
Principal Secondary Implied

Contract Contract Contract
Principal Principal
Creditor Creditor Surety Surety
Debtor Debtor
ESSENTIAL FEATURES OF A GUARANTEE
The following are the requisites of a valid guarantee:-

1. Purpose: The purpose of a guarantee being to secure the payment of a debt, the
existence of recoverable debt is necessary. If there is no principal debt, there can be
no valid guarantee.
2. Consideration: Like every other contract, a contract of guarantee should also be
supported by some consideration. A guarantee without consideration is void, but
there is no need for a direct consideration between the surety and the creditor.
As per Section 127 consideration received by the principal debtor is sufficient
consideration to the surety for giving the guarantee, but past consideration is no
consideration for the contract of guarantee. Even if the principal debtor is
incompetent to contract, the guarantee is valid. But, if surety is incompetent to
contract, the guarantee is void.
Example 8: B requests A to sell and deliver to him goods on credit. A agrees to do so
provided C will guarantee the payment of the price of the goods. C promises to
guarantee the payment in consideration of A ‘s promise to deliver the goods. As per
Section 127, there is a sufficient consideration for C’s promise. Therefore, the
guarantee is valid.
Example 9: A sells and delivers goods to B. C afterwards, without consideration,
agrees to pay for them in default of B. The agreement is void.
3. Existence of a liability: There must be an existing liability or a promise whose
performance is guaranteed. Such liability or promise must be enforceable by law. The
liability must be legally enforceable and not time barred.

4. No misrepresentation or concealment (section 142 and 143): Any guarantee

which has been obtained by the means of misrepresentation made by the creditor, or
with his knowledge and assent, concerning a material part of the transaction, is
invalid (section 142)
Any guarantee which the creditor has obtained by means of keeping silence as to
material circumstances, is invalid (section 143).
Example 10: A engages B as clerk to collect money for him. B fails to account for
some of his receipts, and A in consequence calls upon him to furnish security for his
duly accounting. C gives his guarantee for B’s duly accounting. A does not acquaint
C, with his previous conduct. B afterwards make default. The guarantee is invalid.
Example 11: A guarantees to C payment for iron to be supplied by him to B to the
amount of 2,000 tons. B and C have privately agreed that B should pay rupee five per
ton beyond the market price, such excess to be applied in liquidation of an old debt.
This agreement is concealed from A. A is not liable as a surety.
5. Writing not necessary: Section 126 expressly declares that a guarantee may be
either oral or written.
6. Joining of the other co-sureties (Section 144): Where a person gives a guarantee
upon a contract that the creditor shall not act upon it until another person has joined
in it as co-surety, the guarantee is not valid if that other person does not join. That
implies, the guarantee by a surety is not valid if a condition is imposed by a surety
that some other person must also join as a co-surety, but such other person does not
join as a co-surety.
7.3 TYPES OF GUARANTEES

Guarantee may be classified under two categories:
A. Specific Guarantee- A guarantee which extends to a single debt/ specific transaction
is called a specific guarantee. The surety’s liability comes to an end when the
guaranteed debt is duly discharged or the promise is duly performed.
Example 12: A guarantees payment to B of the price of the five bags of rice to be
delivered by B to C and to be paid for in a month. B delivers five bags to C. C pays for
them. This is a contract for specific guarantee because A intended to guarantee only
for the payment of price of the first five bags of rice to be delivered one time [Kay v
Groves]

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B. Continuing Guarantee [Section 129] - A guarantee which extends to a series of

transaction is called a continuing guarantee. A surety’s liability continues until the
revocation of the guarantee.
The essence of continuing guarantee is that it applies not to a specific number of
transactions but to any number of transactions and makes the surety liable for the
unpaid balance at the end of the guarantee.
Example 13: On A’s recommendation B, a wealthy landlord employs C as his estate
manager. It was the duty of C to collect rent on 1st of every month from the tenant of
B and remit the same to B before 5th of every month. A, guarantee this arrangement
and promises to make good any default made by C. This is a contract of continuing
guarantee.
Example 14: A guarantees payment to B, a tea-dealer, to the amount of

` 10,000, for any tea he may from time-to-time supply to C. B supplies C with tea to
above the value of ` 10,000, and C pays B for it. Afterwards B supplies C with tea to
the value of ` 20,000. C fails to pay. The guarantee given by A was a continuing
guarantee, and he is accordingly liable to B to the extent of ` 10,000.
7.4 DISTINCTION BETWEEN A CONTRACT OF

INDEMNITY AND A CONTRACT OF GUARANTEE
Point of distinction Contract of Indemnity Contract of Guarantee
Number of There are only two There are three parties- creditor,
party/parties to parties namely the principal debtor and surety.
the contract indemnifier [promisor]
and the indemnified
[promisee]
Nature of liability The liability of the The liability of the surety is
indemnifier is primary secondary and conditional as the
and unconditional. primary liability is that of the
principal debtor.
Time of liability The liability of the The liability arises only on the
indemnifier arises only non-performance of an existing
on the happening of a promise or non-payment of an
contingency. existing debt.
Time to Act The indemnifier need The surety acts at the request of
not act at the request of principal debtor.
indemnity holder.

Right to sue third Indemnifier cannot sue Surety can proceed against
party a third party for loss in principal debtor in his own right
his own name as there is because he gets all the right of a
no privity of contract. creditor after discharging the
Such a right would arise debts.
only if there is an
assignment in his
favour.
Purpose Reimbursement of loss For the security of the creditor
Competency to All parties must be In the case of a contract of

contract competent to contract. guarantee, where a minor is a
principal debtor, the contract is
still valid.
7.5 NATURE AND EXTENT OF SURETY’S LIABILITY

[SECTION 128]
(i) The liability of the surety is co-extensive with that of the principal debtor unless it is
otherwise provided by the contract. [Section 128]
(ii) Liability of surety is of secondary nature as he is liable only on default of principal
debtor.
(iii) Where a debtor cannot be held liable on account of any defect in the document, the
liability of the surety also ceases.
(iv) A creditor may choose to proceed against a surety first, unless there is an agreement
to the contrary.
Example 15: A guarantees to B the payment of a bill of exchange by C, the acceptor. The bill
is dishonoured by C. A is liable not only for the amount of the bill but also for any interest
and charges which may have become due on it.

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7.6 LIABILITY OF TWO PERSONS, PRIMARILY

LIABLE, NOT AFFECTED BY ARRANGEMENT
BETWEEN THEM THAT ONE SHALL BE SURETY ON
OTHER’S DEFAULT
Where two persons contract with a third person to undertake a certain liability, and also
contract with each other that one of them shall be liable only on the default of the other,
the third person not being a party to such contract, the liability of each of such two persons
to the third person under the first contract is not affected by the existence of the second
contract, although such third person may have been aware of its existence. (Section 132)
Example 16: A and B make a joint and several promissory note to C. A makes it, in fact, as
surety for B, and C knows this at the time when the note is made. The fact that A, to the
knowledge of C, made the note as surety for B, is no answer to a suit by C against A upon
the note.
7.7 DISCHARGE OF A SURETY

A surety is said to be discharged when his liability as surety comes to an end. The various
modes of discharge of surety are discussed below:
(i) By revocation of the contract of guarantee.
(ii) By the conduct of the creditor, or
(iii) By the invalidation of the contract of guarantee.
Modes of discharge
On Invalidation of
By conduct of the
By revocation Contract of
creditor
Guarantee
By revocation of the Contract of Guarantee

(a) Revocation of continuing guarantee by Notice (Section 130): The continuing
guarantee may at any time be revoked by the surety as to future transactions by
notice to the creditors. Once the guarantee is revoked, the surety is not liable for any
future transaction however he is liable for all the transactions that happened before
the notice was given.

A specific guarantee can be revoked only if liability to principal debtor has not
accrued.
Example 17: Arun promises to pay Rama for all groceries bought by Carol for a
period of 12 months if Carol fails to pay. In the next three months, Carol buys
` 2000/- worth of groceries. After 3 months, Arun revokes the guarantee by giving a
notice to Rama. Carol further purchases ` 1000 of groceries. Carol fails to pay. Arun is
not liable for ` 1000/- of purchase that was made after the notice but he is liable for
` 2000/- of purchase made before the notice.
(b) Revocation of continuing guarantee by surety’s death (Section 131): In the

absence of any contract to the contrary, the death of surety operates as a revocation
of a continuing guarantee as to the future transactions taking place after the death
of surety. However, the surety’s estate remains liable for the past transactions which
have already taken place before the death of the surety.
Example 18: ‘S’ guarantees ‘C’ for the transaction to be done between ‘C’ & ‘P’ for
next month. After 5 days ‘S’ died. Now guarantee is revoked for future transactions
but ‘S’s estate is still liable for transactions done during previous five days.
(c) By novation [Section 62]: The surety under original contract is discharged if a fresh
contract is entered into either between the same parties or between the other
parties, the consideration being the mutual discharge of the old contract.
Example 19: ‘S’ guarantees ‘C’ for the payment of the supply of wheat to be done by
‘C’ & ‘P’ for next month. After 5 days, the contract is changed. Now ‘S’ guarantees ‘C’
for the payment of the supply of rice to be done by ‘C’ & ‘P’ for rest of next month.
Here, guarantee is revoked for supply of wheat. But ‘S’ is still liable for supply of
wheat done during previous five days.
By conduct of the creditor

(a) By variance in terms of contract (Section 133): Where there is any variance in the
terms of contract between the principal debtor and creditor without surety’s consent,
it would discharge the surety in respect of all transactions taking place subsequent to
such variance.
Example 20: A becomes surety to C for B’s conduct as a manager in C’s bank.
Afterwards, B and C contract, without A’s consent, that B’s salary shall be raised, and
that he shall become liable for one-fourth of the losses on overdrafts. B allows a
customer to overdraw, and the bank loses a sum of money. A is discharged from his
suretyship by the variance made without his consent and is not liable to make good
this loss.

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(b) By release or discharge of principal debtor (Section 134): The surety is discharged
if the creditor:
i. enters into a fresh/ new contract with principal debtor; by which the principal
debtor is released, or
ii. does any act or omission, the legal consequence of which is the discharge of
the principal debtor.
Example 21: A contracts with B for a fixed price to build a house for B within a
stipulated time, B supplying the necessary timber. C guarantees A’s performance of
the contract. B omits to supply the timber. C is discharged from his suretyship.
Example 22: A gives a guarantee to C for goods to be delivered to B. Later on, B
contracts with C to assign his property to C in lieu of the debt. B is discharged of his
liability and A is discharged of his liability.
(c) Discharge of surety when creditor compounds with, gives time to, or agrees not
to sue, principal debtor [Sector 135]: A contract between the creditor and the
principal debtor, by which the creditor makes a composition with, or promises to give
time to, or promises not to sue, the principal debtor, discharges the surety, unless the
surety assents to such contract.
i. Composition: If the creditor makes a composition with the principal debtor,

without consulting the surety, the latter is discharged. Composition inevitably
involves variation of the original contract, and, therefore, the surety is
discharged.
ii. Promise to give time: When the time for the payment of the guaranteed debt
comes, the surety has the right to require the principal debtor to pay off the
debt. Accordingly, it is one of the duties of the creditor towards the surety not
to allow the principal debtor more time for payment.
iii. Promise not to sue: If the creditor under an agreement with the principal
debtor promises not to sue him, the surety is discharged. The main reason is
that the surety is entitled at any time to require the creditor to call upon the
principal debtor to pay off the debt when it is due and this right is positively
violated when the creditor promises not to sue the principal debtor.
Cases where surety not discharged

i. Surety not discharged when agreement made with third person to give
time to principal debtor [Section 136]: Where a contract to give time to the
principal debtor is made by the creditor with a third person, and not with the
principal debtor, the surety is not discharged.

Example 23: C, the holder of an overdue bill of exchange drawn by A as

surety for B, and accepted by B, contracts with M to give time to B. A is not
discharged.
ii. Creditor’s forbearance to sue does not discharge surety [Section 137]:
Mere forbearance on the part of the creditor to sue the principal debtor or to
enforce any other remedy against him does not in the absence of any
provision in the guarantee to the contrary, discharge the surety.
Example 24: B owes to C a debt guaranteed by A. The debt becomes payable.
C does not sue B for a year after the debt has become payable. A is not
discharged from his suretyship.
(d) Discharge of surety by creditor’s act or omission impairing surety’s eventual
remedy [Section 139]: If the creditor does any act which is inconsistent with the
rights of the surety or omits to do any act which his duty to the surety requires him
to do, and the eventual remedy of the surety himself against the principal debtor is
thereby impaired, the surety is discharged.
In a case before the Supreme Court of India, “A bank granted a loan on the security
of the stock in the godown. The loan was also guaranteed by the surety. The goods
were lost from the godown on account of the negligence of the bank officials. The
surety was discharged to the extent of the value of the stock so lost.” [State bank of
Saurashtra V Chitranjan Rangnath Raja (1980) 4 SCC 516]
Example 25: A puts M as apprentice to B and gives a guarantee to B for M’s fidelity.
B promises on his part that he will, at least once a month, see that M make up the
cash. B omits to see this done as promised, and M embezzles. A is not liable to B on
his guarantee.
By the invalidation of the contract of guarantee

(a) Guarantee obtained by misrepresentation [Section 142]: Any guarantee which has
been obtained by means of misrepresentation made by the creditor, or with his
knowledge and assent, concerning a material part of the transaction, is invalid.
Example 26: ‘C’ sells AC to ‘P’ on misrepresenting that it is made of copper while it is
made of aluminum. ‘S’ guarantees for the same as surety without the knowledge of
fact that it is made of aluminum. Here, ‘S’ will not be liable.
(b) Guarantee obtained by concealment [Section 143]: Any guarantee which the
creditor has obtained by means of keeping silence as to material circumstances is
invalid.

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Example 27: A engages B as a clerk to collect money for him, B fails to account for
some of his receipts, and A in consequence calls upon him to furnish security for his
duly accounting. C gives his guarantee for B’s duly accounting. A does not acquaint C
with B’s previous conduct. B afterwards makes default. The guarantee is invalid.
Example 28: A guarantees to C payment for iron to be supplied by him to B for the
amount of ` 2,00,000 tons. B and C have privately agreed that B should pay five
rupees per ton beyond the market price, such excess to be applied in liquidation of
an old debt. This agreement is concealed from A. A is not liable as a surety.
(c) Guarantee on contract that creditor shall not act on it until co-surety joins
(Section 144): Where a person gives a guarantee upon a contract that the creditor
shall not act upon it until another person has joined in it as co-surety, the guarantee
is not valid if that other person does not join.
Example 29: ‘S1’ guarantees ‘C’ for payment to be done by ‘P’ to ‘C’ on the condition
that ‘S1’ will be liable only if ‘S2’ joins him for such guarantee. ‘S2’ does not give his
consent. Here, ‘S1’ will not be liable.
7.8 RIGHTS OF A SURETY

The surety enjoys the following rights against the creditor:
(a) Rights against the creditor,
(b) Rights against the principal debtor,

(c) Rights against co-sureties.
Right against the principal debtor

(a) Rights of subrogation [Section 140]: Where, a guaranteed debt has become due,
or default of the principal debtor to perform a guaranteed duty has taken place, the
surety, upon payment or performance of all that he is liable for, is invested with all
the rights which the creditor had against the principal debtor.
This right is known as right of subrogation. It means that on payment of the

guaranteed debt, or performance of the guaranteed duty, the surety steps into the
shoes of the creditor.
Example 30: ‘Raju’ has taken a housing loan from Canara Bank. ‘Pappu’ has given
guarantee for repayment of such loan. Besides, there was a condition that if ‘Raju’
does not repay the loan within time, the bank can auction his property by giving 15
days notice to ‘Raju’. On due date ‘Raju’ does not repay, hence Pappu being a surety

has to repay the loan. Now ‘Pappu’ can take the house from bank and has a right to
auction the house by giving 15 days notice to ‘Raju’.
(b) Implied promise to indemnify surety [Section 145]: In every contract of guarantee
there is an implied promise by the principal debtor to indemnify the surety. The
surety is entitled to recover from the principal debtor whatever sum he has rightfully
paid under the guarantee, but not sums which he paid wrongfully.
Example 31: B is indebted to C and A is surety for the debt. Upon default, C sues A.
A defends the suit on reasonable grounds but is compelled to pay the amount. A is
entitled to recover from B the cost as well as the principal debt.
In the same case above, if A did not have reasonable grounds for defence, A would
still be entitled to recover principal debt from B but not any other costs.
Right against the Creditor

(a) Surety’s right to benefit of creditor’s securities [Section 141]: A surety is entitled
to the benefit of every security which the creditor has against the principal debtor at
the time when the contract of suretyship is entered into, whether the surety knows of
the existence of such security or not; and, if the creditor loses, or, without the
consent of the surety, parts with such security, the surety is discharged to the extent
of the value of the security.
Example 32: C advances to B, his tenant, 2,00,000 rupees on the guarantee of A. C
has also a further security for the 2,00,000 rupees by a mortgage of B’s furniture. C
cancels the mortgage. B becomes insolvent, and C sues A on his guarantee. A is
discharged from liability to the amount of the value of the furniture.
(b) Right to set off: If the creditor sues the surety, for payment of principal debtor’s
liability, the surety may have the benefit of the set off, if any, that the principal
debtor had against the creditor
Example 33: ‘X’ took a loan of ` 50,000 from ‘Y’ which was guaranteed by ‘Z’. There
was one another contract between ‘X’ and ‘Y’ in which ‘Y’ had to pay ` 10,000 to ‘X’.
On default by ‘X’, ‘Y’ filed suit against ‘Z’. Now ‘Z’ is liable to pay ` 40,000 (` 50,000 –
` 10,000).
(c) Right to share reduction: The surety has right to claim proportionate reduction in
his liability if the principal debtor becomes insolvent.
Example 34: ‘X’ took a loan of ` 50,000 from ‘Y’ which was Guaranteed by ‘Z’. ‘X’
became insolvent and only 25% is realised from his property against liabilities. Now
‘Y’ will receive ` 12,500 from ‘X’ and Now ‘Z’ is liable to pay ` 37,500 (` 50,000 – `
12,500).

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Rights against co-sureties
“Co-sureties (meaning)- When the same debt or duty is guaranteed by two

or more persons, such persons are called co-sureties”
(a) Co-sureties liable to contribute equally (Section 146): Unless otherwise agreed,
each surety is liable to contribute equally for discharge of whole debt or part of the
debt remains unpaid by debtor.
Example 35: A, B and C are sureties to D for the sum of 3,00,000 rupees lent to E. E
makes default in payment. A, B and C are liable, as between themselves, to pay
1,00,000 rupees each.
Example 36: A, B and C are sureties to D for the sum of 1,00,000 rupees lent to E,
and there is a contract between A, B and C that A is to be responsible to the extent of
one-quarter, B to the extent of one-quarter, and C to the extent of one- half. E makes
default in payment. As between the sureties, A is liable to pay 25,000 rupees, B
25,000 rupees, and C 50,000 rupees.
(b) Liability of co-sureties bound in different sums (Section 147): The principal of
equal contribution is, however, subject to the maximum limit fixed by a surety to his
liability. Co-sureties who are bound in different sums are liable to pay equally as far
as the limits of their respective obligations permit.
Example 37: A, B and C, as sureties for D, enter into three several bonds, each in a
different penalty, namely, A in the penalty of 1,00,000 rupees, B in that of 2,00,000
rupees, C in that of 4,00,000 rupees, conditioned for D’s duly accounting to E. D
makes default to the extent of 3,00,000 rupees. A, B and C are each liable to pay
1,00,000 rupees.
makes default to the extent of 4,00,000 rupees; A is liable to pay 1,00,000 rupees, and
B and C 1,50,000 rupees each.
makes default to the extent of 7,00,000 rupees. A, B and C have to pay each the full
penalty of his bond.

SUMMARY
♦ A contract of indemnity- A contract where one party promises to indemnify the other from
loss caused to him by the conduct of the promisor or by the conduct of any other person.
♦ A contract of guarantee- A contract of guarantee is a contract to perform the promise or
discharge the liability of a third person in case of his default. The person who gives the
guarantee is called the Surety, the person for whom the guarantee is given is called the
Principal Debtor, and the person to whom the guarantee is given is called the Creditor.
♦ Contract of guarantee must be supported by consideration. The consideration received by
the principal debtor may be sufficient consideration to the surety for giving guarantee.
♦ The liability of surety is co-extensive with that of principle debtor. In certain cases
surety will be liable even though the principal debtor is not liable-(i) Principal debtor is
incompetent to contract. (ii) Principal debtor is adjudged insolvent. (iii) The debts
become time-barred.
♦ The rights of a surety can be divided into 3 heads: (i) Right against the principal
debtor; (ii) Right against the creditor; (iii) Right against the co- sureties.
♦ The surety is discharged from its liability (i) By revocation of the contract of guarantee.
(ii) By the conduct of the creditor, or (iii) By the invalidation of the contract of guarantee.
♦ Specific/simple guarantee: Guarantee for single debt/particular transaction.
♦ Continuing guarantee: Guarantee that extends to a series of transactions.
CONTRACT OF INDEMNITY
‘Indemnify’ meaning: To make good the Parties to Contract of Rights of

loss incurred by another person. Indemnity Indemnity
Holder
Sec.124 covers the losses caused: Indemnifier’- who promises
i) By the conduct of promisor himself or to compensate for the loss, Right to recover
ii) By the conduct of any other person. all damages,
‘Indemnity Holder’ or the 
But as per decision taken in case of Gajanan costs of
‘Indemnified’ - whose loss is 
Moreshwar v/s Moreshwar Madan (1942), suit,
to be made good
losses by conduct of promisee, or accident,  other sums.
or act of God.

2.168 BUSINESS LAWS
CONTRACT OF GUARANTEE
‘Guarantee’ Parties to Contract of Essential Features

meaning: Guarantee
1. Purpose: To secure the payment of a debt.
Contract to
Surety: Who gives the
perform the 2. Consideration: Must be there, may be direct or
guarantee,
promise; or indirect.
discharge Principal Debtor: In
3. Existence of liability: Liability must be legally
the liability, respect of whose default
enforceable, not time barred.
of a third the guarantee is given,
person in 4. No misrepresentation or concealment
Creditor: To whom the
case of his
guarantee is given 5. May be oral or written.
default.
6. Joining of co-sureties must be if provided in
contract.
Types of Guarantee Modes of Discharge of Surety
Specific Continue By By Conduct of On Invalidation of

Guarantee Guarantee Revocation Creditors Contract of
Guarantee
1. Guarantee 1. Guarantee 1. By Notice, 1. By variance in

which extends to a which extends to terms, 1. Guarantee obtained
single debt/ a series of 2. By surety’s
by misrepresentation,
specific transaction, death, 2. By release or
transaction, discharge of PD, 2. Guarantee obtained
2. Surety’s 3. By
by concealment,
2. Surety’s liability liability Novation, 3. Composition with
comes to an end continues until PD, 3. Guarantee on
when guaranteed the revocation contract that creditor
4. Impairing surety’s
debt is duly of the shall not act on it until
remedy,
discharged. guarantee, co-surety joins
Rights of Surety
Against Principal Against Creditor Against Co-Surities

Debtor
1. Right to Security 1. Right to claim contribution
1. Right of equally,
2. Right to Set Off
Subrogation,
2. Right to claim contribution only
3. Right to share
2. Right of Indemnity, agreed sum
reduction

TEST YOUR KNOWLEDGE

1. A contract by which one party promises to save the other from loss caused to him by
the conduct of the promisor himself or by the conduct of any other person is called
(a) Surety contract
(b) Simple contract
(c) Contract of indemnity
(d) None of above
2. X, a shareholder of a company lost his share certificate. He applied for the duplicate.
The company agreed to issue the same on the term that X will compensate the
company against the loss where any holder produces the original certificate. This is
called:
(a) Contract of indemnity
(b) Contract of Guarantee
(c) Quasi Contract
3. Section 124 to 125, of the Contract Act, deals with:
(a) Contracts of indemnity

(b) Contracts of guarantee
(c) Both (a) and (b)
(d) None of above

4. Where ‘A’ obtains housing loan from LIC Housing and if ‘B’ promises to pay LIC
Housing in the event of ‘A’ failing to repay, it is a contract of-
(a) Indemnity
(b) Guarantee
(c) Wagering

2.170 BUSINESS LAWS
5. A guarantees payment to B of the price of five sacks of flour to be delivered by B to C

and to be paid for in a month. B delivers five sacks to C. C pays for them. Afterwards B
delivers four sacks to C, which C does not pay for. Whether-
(a) A is liable for the price of the four sacks.
(b) A is not liable for the price of the four sacks.
(c) A is liable for the price of the two sacks only.

(d) A is liable for the price of the one sack only.
6. X gives guarantee to the extent of ` 50,000 for the loans given from time to time by A
to B. A gave a loan of ` 10,000 to B. Afterwards, X gives notice of revocation. Which is
the correct option?
(a) X is discharged from all liability to A for any loan granted.
(b) X is liable to A for ` 10,000 on default of B.
(c) X is liable to A for ` 50,000 on default of B.
(d) X is liable to A for ` 40,000 on default of B.
7. The guarantee is valid even if ____ is incompetent to contract:

(a) Principal Debtor
(b) Surety
(c) Both a & b
(d) None of these
8. Section 143 of the Contract Act 1872 deals with
(a) Guarantee obtained by free consent
(b) Guarantee obtained by fraud
(c) Guarantee obtained by concealment
(d) None of above
9. A surety has a right of indemnity and right of subrogation against_________
(a) Principal Debtor
(b) Creditor
(c) Co-Sureties
(d) All of these

10. In contract of guarantee for whom guarantee given is called

(a) Surety holder
(b) Principal debtor
(d) None of above
1. What are the rights of the indemnity-holder when sued?
2. Define contract of indemnity and contract of guarantee and state the conditions when
guarantee is considered invalid?
3. Mr. X, is employed as a cashier on a monthly salary of ` 12,000 by ABC bank for a
period of three years. Y gave surety for X’s good conduct. After nine months, the
financial position of the bank deteriorates. Then X agrees to accept a lower salary of
` 10,500/- per month from Bank. Two months later, it was found that X has
misappropriated cash since the time of his appointment. What is the liability of Y?
4. A contracts with B for a fixed price to construct a house for B within a stipulated time.
B would supply the necessary material to be used in the construction. C guarantees A’s
performance of the contract. B does not supply the material as per the agreement. Is
C discharged from his liability.
5. Mr. D was in urgent need of money amounting to ` 5,00,000. He asked Mr. K for the
money. Mr. K lent the money on the sureties of A, B and N without any contract
between them in case of default in repayment of money by D to K. D makes default in
payment. B refused to contribute, examine whether B can escape liability?
6. Mr. Chetan was appointed as Site Manager of ABC Constructions Company on a two
years’ contract at a monthly salary of ` 50,000. Mr. Pawan gave a surety in respect of
Mr. Chetan's conduct. After six months the company was not in position to pay
` 50,000 to Mr. Chetan because of financial constraints. Chetan agreed for a lower
salary of ` 30,000 from the company. This was not communicated to Mr. Pawan. Three
months afterwards it was discovered that Chetan had been doing fraud since the time
of his appointment. What is the liability of Mr. Pawan during the whole duration of
Chetan's appointment.

2.172 BUSINESS LAWS
7. A agrees to sell goods to B on the guarantee of C for the payment of the price of goods
in default of B. Is the agreement of guarantee valid in each of the following alternate
cases:
Case 1. If A is a Minor
Case 2: If B is a Minor
Case 3: If C is a minor.
8. S asks R to beat T and promises to indemnify R against the consequences. R beats T
and is fined ` 50,000. Can R claim ` 50,000 from S.
9. Manoj guarantees for Ranjan, a retail textile merchant, for an amount of ` 1,00,000, for
which Sharma, the supplier may from time to time supply goods on credit basis to
Ranjan during the next 3 months.
After 1 month, Manoj revokes the guarantee, when Sharma had supplied goods on
credit for ` 40,000. Referring to the provisions of the Indian Contract Act, 1872, decide
whether Manoj is discharged from all the liabilities to Sharma for any subsequent
credit supply. What would be your answer in case Ranjan makes default in paying back
Sharma for the goods already supplied on credit i.e. ` 40,000?
10. 'C' advances to 'B', ` 2,00,000 on the guarantee of 'A'. 'C' has also taken a further
security for the same borrowing by mortgage of B's furniture worth ` 2,00,000 without
knowledge of 'A'. C' cancels the mortgage. After 6 months 'B' becomes insolvent and
'C' 'sues ‘A’ his guarantee. Decide the liability of 'A' if the market value of furniture is
worth ` 80,000, under the Indian Contract Act, 1872.
ANSWERS/HINTS
Answers to MCQs
1. (c) 2. (a) 3. (a) 4. (b) 5. (b) 6. (b)
7. (a) 8. (c) 9. (a) 10. (b)

1. Rights of Indemnity- holder when sued (Section 125): The promisee in a contract
of indemnity, acting within the scope of his authority, is entitled to recover from the
promisor—
(a) all damages which he may be compelled to pay in any suit

(b) all costs which he may have been compelled to pay in bringing/ defending the
suit and
(c) all sums which he may have paid under the terms of any compromise of suit.
It may be understood that the rights contemplated under section 125 are not
exhaustive. The indemnity holder/ indemnified has other rights besides those
mentioned above. If he has incurred a liability and that liability is absolute, he is
entitled to call upon his indemnifier to save him from the liability and to pay it off.
2. Section 124 of the Indian Contract Act, 1872 states that “A contract by which one
party promises to save the other from loss caused to him by the conduct of the
promisor himself, or the conduct of any person”, is called a “contract of indemnity”.
Section 126 of the Indian Contract Act, 1872 states that “A contract to perform the
promise made or discharge liability incurred by a third person in case of his default”
is called a “contract of guarantee”.
The conditions under which the guarantee is invalid or void is provided in section
142, 143 and 144 of the Indian Contract Act. These include:
(i) Guarantee obtained by means of misrepresentation.
(ii) Guarantee obtained by means of keeping silence as to material circumstances.
(iii) When contract of guarantee is entered into on the condition that the creditor
shall not act upon it until another person has joined in it as co-surety and that
other party fails to join as such.
3. According to section 133 of the Indian Contract Act, 1872, where there is any
variance in the terms of contract between the principal debtor and creditor without
surety’s consent, it would discharge the surety in respect of all transactions taking
place subsequent to such variance.
In the instant case, the creditor has made variance (i.e. change in terms) without the
consent of surety. Thus, surety is discharged as to the transactions subsequent to the
change.
Hence, Y is liable as a surety for the loss suffered by the bank due to
misappropriation of cash by X during the first nine months but not for
misappropriations committed after the reduction in salary.
4. According to Section 134 of the Indian Contract Act, 1872, the surety is discharged
by any contract between the creditor and the principal debtor by which the principal
debtor is discharged or by any act or omission for the creditor the legal consequence
of which is the discharge of the principal debtor.

2.174 BUSINESS LAWS
In the given case, B omits to supply the necessary construction material. Hence, C is
discharged from his liability.
5. Co-sureties liable to contribute equally (Section 146 of the Indian Contract act,
1872): Equality of burden is the basis of Co-suretyship. This is contained in section
146 which states that “when two or more persons are co-sureties for the same debt,
or duty, either jointly, or severally and whether under the same or different contracts
and whether with or without the knowledge of each other, the co-sureties in the
absence of any contract to the contrary, are liable, as between themselves, to pay
each an equal share of the whole debt, or of that part of it which remains unpaid by
the principal debtor”.
Accordingly, on the default of D in payment, B cannot escape from his liability. All the
three sureties A, B and N are liable to pay equally, in absence of any contract
between them.
6. As per the provisions of Section 133 of the Indian Contract Act, 1872, if the creditor
makes any variance (i.e. change in terms) without the consent of the surety, then
surety is discharged as to the transactions subsequent to the change.
In the instant case, Mr. Pawan is liable as a surety for the loss suffered by ABC
Constructions company due to misappropriation of cash by Mr. Chetan during the
first six months but not for misappropriations committed after the reduction in
salary.
Hence, Mr. Pawan, will be liable as a surety for the act of Mr. Chetan before the
change in the terms of the contract i.e., during the first six months. Variation in the
terms of the contract (as to the reduction of salary) without consent of Mr. Pawan,
will discharge Mr. Pawan from all the liabilities towards the act of the Mr. Chetan
after such variation.
7. Case 1: The agreement of guarantee is void because the creditor is incompetent to
contract.
Case 2: The agreement of guarantee is valid because the capability of the principal
debtor does not affect the validity of the agreement of the guarantee.
Case 3: The agreement of guarantee is void because the surety is incompetent to

contract.
8. R cannot claim ` 50,000 from S because the object of the agreement was unlawful. A
contract of indemnity to be valid must fulfil all the essentials of a valid contract.
9. Discharge of Surety by Revocation: As per section 130 of the Indian Contract Act,
1872, a continuing guarantee may, at any time, be revoked by the surety, as to future

transactions, by notice to the creditor, but the surety remains liable for transactions
already entered into.
As per the above provisions, liability of Manoj is discharged with relation to all
subsequent credit supplies made by Sharma after revocation of guarantee, because it
is a case of continuing guarantee.
However, liability of Manoj for previous transactions (before revocation) i.e. for
` 40,000 remains. He is liable for payment of ` 40,000 to Sharma because the
transaction was already entered into before revocation of guarantee.
10. Surety’s right to benefit of creditor’s securities: According to section 141 of the
Indian Contract Act, 1872, a surety is entitled to the benefit of every security which
the creditor has against the principal debtor at the time when the contract of
suretyship is entered into, whether the surety knows of the existence of such security
or not; and, if the creditor loses, or, without the consent of the surety, parts with such
security, the surety is discharged to the extent of the value of the security.
In the instant case, C advances to B, ` 2,00,000 rupees on the guarantee of A. C has
also taken a further security for ` 2,00,000 by mortgage of B’s furniture without
knowledge of A. C cancels the mortgage. B becomes insolvent, and C sues A on his
guarantee. A is discharged from liability to the amount of the value of the furniture
i.e. ` 80,000 and will remain liable for balance ` 1,20,000.

2.176 BUSINESS LAWS
UNIT–8: BAILMENT AND PLEDGE
LEARNING OUTCOMES
After studying this unit, you would be able to understand:

♦ The general principles underlying contracts of bailment and pledge.
♦ Duties and rights of the parties to the contracts.
UNIT OVERVIEW
Bailment and Pledge
Bailment Pledge
Distinction
between
bailment and
pledge
Duties General lien
Duties
and and Pledge by
and Finder of Pawnee Pawnor
Rights of Rights of particular Mercantile
Goods Rights Rights
Bailor lien Agent
Bailee
8.1 WHAT IS BAILMENT?

The word “Bailment” has been derived from the French word “ballier” which means “to
deliver”. Bailment etymologically means ‘handing over’ or ‘change of possession’.
As per Section 148 of the Act, bailment is the delivery of goods by one person to another for
some purpose, upon a contract, that the goods shall, when the purpose is accomplished, be
returned or otherwise disposed of according to the directions of the person delivering them.

Parties to bailment:
(a) Bailor: The person delivering the goods.
(b) Bailee: The person to whom the goods are delivered.
Example 1: Where ‘X’ delivers his car for repair to ‘Y’, ‘X’ is the bailor and ‘Y’ is the bailee.
Example 2: X delivers a piece of cloth to Y, a tailor, to be stitched into a suit. It is contract
for bailment.
Example 3: Goods given to a friend for his own use, without any charge.
Example 4: X delivers goods to blue dart for carriage.
Essential Elements:
The essential elements of a contract of bailment are—
(a) Contract: Bailment is based upon a contract. The contract may be express or
implied. No consideration is necessary to create a valid contract of bailment.
(b) Delivery of goods: It involves the delivery of goods from one person to another for
some purposes. Bailment is only for moveable goods and never for immovable goods
or money. The delivery of the possession of goods is of the following kinds:
i. Actual Delivery: When goods are physically handed over to the bailee by the
bailor. Eg: delivery of a car for repair to workshop
ii. Constructive Delivery: Where delivery is made by doing anything that has
the effect of putting goods in the possession of the bailee or of any person
authorized to hold them on his behalf. Eg: Delivery of the key of car to a
workshop dealer for repair of the car.
(c) Purpose: The goods are delivered for some purpose. The purpose may be express or
implied.
(d) Possession: In bailment, possession of goods changes. Change of possession can

happen by physical delivery or by any action which has the effect of placing the
goods in the possession of bailee. The change of possession does not lead to change
of ownership. In bailment, bailor continues to be the owner of goods. Where a
person is in custody without possession he does not become a bailee.
For example, servant of a master who is in custody of goods of the master does not
become a bailee.
Similarly, depositing ornaments in a bank locker is not bailment, because ornaments
are kept in a locker whose key are still with the owner and not with the bank. The
ornaments are in possession of the owner though kept in a locker at the bank.

2.178 BUSINESS LAWS
(e) Return of goods: Bailee is obliged to return the goods physically to the bailor. The
goods should be returned in the same form as given or may be altered as per bailor’s
direction. It should be noted that exchange of goods should not be allowed. The
bailee cannot deliver some other goods, even not those of higher value.
Deposit of money in a bank is not bailment since the money returned by the bank
would not be identical currency notes.
Types of bailment
1. On the basis of benefit, bailment can be classified into three types:
a. For the exclusive benefit of bailor:
Example 5: The delivery of some valuables to a neighbour for safe custody, without
charge.
b. For the exclusive benefit of bailee:
Example 6: The lending of a bicycle to a friend for his use, without charge.
c. For mutual benefit of bailor and bailee:
Example 7: Giving of a watch for repair.
2. On the basis of reward, bailment can be classified into two types:
a. Gratuitous Bailment: The word gratuitous means free of charge. So, a gratuitous
bailment is one when the provider of service does it gratuitously i.e. free of charge.
Such bailment would be either for the exclusive benefits of bailor or bailee.
b. Non-Gratuitous Bailment: Non gratuitous bailment means where both the parties
get some benefit i.e. bailment for the benefit of both bailor & bailee
8.2 DUTIES OF A BAILOR

Duties of Bailor: The duties of bailor are spelt out in a number of Sections [Section 150,
158, 159, 164]. These are categorized under the following headings:
• Disclose known facts

• Bear necessary expenses
Duties of • Indemnify bailee
Bailor • Bound to accept the goods

These are enumerated hereunder:

(i) Bailor’s duty to disclose faults in goods bailed [Section 150]:
a. In case of gratuitous bailment: The bailor is bound to disclose to the bailee
faults in the goods bailed, of which the bailor is aware, and which materially
interfere with the use of them, or expose the bailee to extraordinary risks; and
if he does not make such disclosure, he is responsible for damage arising to
the bailee directly from such faults.
Example 8: A lends a horse, which he knows to be vicious, to B. He does not
disclose the fact that the horse is vicious. The horse runs away. B is thrown
and injured. A is responsible to B for damage sustained.
b. In case of non- gratuitous bailment: If the goods are bailed for hire, the
bailor is responsible for such damage, whether he was or was not aware of the
existence of such faults in the goods bailed.
Example 9: A hires a carriage of B. The carriage is unsafe, though B is not
aware of it, and A is injured. B is responsible to A for the injury.
In Hyman & Wife v. Nye & Sons (1881), A hired from B a carriage along with a
pair of horses and a driver for a specific journey. During the journey a bolt in
the under-part of the carriage broke away. As a result of this, the carriage
became upset and A was injured. It was held that B was liable to pay damages
to A for the injury sustained by him. The court observed that it was the bailor’s
duty to supply a carriage fit for the purpose for which it was hired.
Sometimes, the goods bailed are of dangerous nature (e.g., explosives). In
such cases it is the duty of the bailor to disclose the nature of goods. [Great
Northern Ry’ case (1932)]
(ii) Duty to pay necessary expenses [Section 158]:
a. In case of Gratuitous bailment: Where, by the conditions of the bailment, the
goods are to be kept or to be carried, or to have work done upon them by the
bailee for the bailor, and the bailee is to receive no remuneration (gratuitous
bailment), the bailor shall repay to the bailee the necessary expenses incurred by
him and any extraordinary expenses incurred by him for the purpose of the
bailment.
b. In case of non-gratuitous bailment the bailor is liable to pay the
extraordinary expenses incurred by the bailee.
Example 10: A hired a taxi from B for the purpose of going to Gurgaon from Noida.
During the journey, a major defect occurred in the engine. A had to pay ` 5000 as

2.180 BUSINESS LAWS
repair charges. These are the extraordinary expenses and it is the bailor’s duty to
bear such expenses. However, the usual and ordinary expenses for petrol, toll tax etc.
are to be borne by the bailee itself.
(iii) Duty to indemnify the Bailee for premature termination [Section 159]: The bailor
must compensate the bailee for the loss or damage suffered by the bailee that is in
excess of the benefit received, where he had lent the goods gratuitously and decides
to terminate the bailment before the expiry of the period of bailment.
(iv) Bailor’s responsibility to bailee [Section 164]: The bailor is responsible to the
bailee for the following:
a. Indemnify for any loss which the bailee may sustain by reason that the bailor
was not entitled to make the bailment, or to receive back the goods or to give
directions, respecting them (defective title in goods).
b. It is the duty of the bailor to receive back the goods when the bailee returns
them after the time of bailment has expired or the purpose of bailment has
been accomplished. If the bailor refuses to take delivery of goods when it is
offered at the proper time the bailee can claim compensation for all necessary
expenses incurred for the safe custody.
Example 11: X delivered his car to S for five days for safe keeping. However, X
did not take back the car for one month. In this case, S can claim the
necessary expenses incurred by him for the custody of the car.
8.3 DUTIES OF A BAILEE
Take To return any

No No mixing of
reasonable Return the extra profit
unauthorized bailor’s goods
care of goods goods accruing from
use of goods with his own
bailed goods bailed.
1. Take reasonable care of the goods (Section 151 & 152): In all cases of bailment,
the bailee is bound to take as much care of the goods bailed to him as a man of
ordinary prudence would, under similar circumstances, take care of his own goods of
the same bulk, quality and value, as the goods bailed.

Example 12: If X bails his ornaments to ‘Y’ and ‘Y’ keeps these ornaments in his own
locker at his house along with his own ornaments and if all the ornaments are
lost/stolen in a riot ‘Y’ will not be responsible for the loss to ‘X’. If on the other hand
‘X’ specifically instructs ‘Y’ to keep them in a bank, but ‘Y’ keeps them at his
residence, then ‘Y’ would be responsible for the loss caused on account of riot.
Example 13: A deposited his goods in B’s warehouse. On account of unprecedented

floods, a part of the goods were damaged. It was held that, B is not liable for the loss
(Shanti Lal V. Takechand).
Exception: Bailee when not liable for loss, etc., of thing bailed [Section 152]: The
bailee, in the absence of any special contract, is not responsible for the loss,
destruction or deterioration of the thing bailed, if he has taken reasonable care as
required under section 151.
2. Not to make inconsistent use of goods (section 153 & 154): As per Section 154, if
the bailee makes any use of the goods bailed, which is not according to the terms
and conditions of the bailment, he is liable to compensate the bailor for any loss or
destruction of goods.
Example 14: A lends a horse to B for his own riding only. B allows C, a member of his
family, to ride the horse. C rides with care, but the horse accidentally falls and is
injured. B is liable to make compensation to A for the injury done to the horse.
Example 15: ‘A’ hires a horse in Kolkata from B expressly to march to Varanasi. ‘A’
rides with due care, but marches to Cuttack instead. The horse accidentally falls and
is injured. ‘A’ is liable to make compensation to B for the injury to the horse.
As per Section 153, a contract of bailment is voidable at the option of the bailor, if
the bailee does not use the goods according to the terms and conditions of bailment.
Example 16: A lends to B, a horse for his own riding. B gives the horse to C for
riding. This contract is voidable at the option of A, bailor.
3. Not to mix the goods (Section 155, 156 and 157):
i. If the Bailee, mixes the goods bailed with his own goods, with the consent of the
bailor, both the parties shall have an interest in proportion to their respective
shares in the mixture thus produced (Section 155).
ii. If the bailee, without the consent of the bailor, mixes the goods bailed with his
own goods and the goods can be separated or divided, the property in the
goods remains in the parties respectively; but the bailee is bound to bear the
expense of separation or division and any damage arising from the mixture
(Section 156).

2.182 BUSINESS LAWS
Example 17: A bails 100 bales of cotton marked with a particular mark to B. B,
without A’s consent, mixes the 100 bales with other bales of his own, bearing
a different mark; A is entitled to have his 100 bales returned, and B is bound
to bear all the expenses incurred in the separation of the bales, and any other
incidental damage.
iii. If the bailee, without the consent of the bailor mixes the goods of the bailor
with his own goods in such a manner that it is impossible to separate the
goods bailed from the other goods and to deliver them back, the bailor is
entitled to be compensated by the bailee for loss of the goods (Section 157).
Example 18: A bails a barrel of Cape flour worth ` 4500 to B. B, without A’s
consent, mixes the flour with country flour of his own, worth only ` 2500 a
barrel. B must compensate A for the loss of his flour.
4. Return the goods (Section 160 & 161): It is the duty of bailee to return, or deliver
according to the bailor’s directions, the goods bailed without demand, as soon as the
time for which they were bailed, has expired, or the purpose for which they were
bailed has been accomplished. [Section 160]
If, by the default of the bailee, the goods are not returned, delivered or tendered at
the proper time, he is responsible to the bailor for any loss, destruction or
deterioration of the goods from that time. [Section 161]
Example 19: X delivered books to Y to be bound. Y promised to return the books
within a reasonable time. X pressed for the return of the book. But Y, failed to deliver
them back even after the expiry of reasonable time. Subsequently the books were
burnt in an accidental fire at the premises of Y. In this case Y was held liable for the
loss.
5. Return an accretion from the Goods [Section 163]: In the absence of any contract
to the contrary, the bailee is bound to deliver to the bailor, or according to his
directions, any increase or profit which may have accrued from the goods bailed.
Example 20: A leaves a cow in the custody of B. The cow gives birth to a calf. B is
bound to deliver the calf along with the cow, to A.
6. Not to setup Adverse Title: Bailee must not set up a title adverse to that of the
bailor. He must hold the goods on behalf of and for the bailor. He cannot deny the
title of the bailor.

8.4 RIGHTS OF A BAILOR

Rights of Bailor: The following are the rights of bailor:-
Right to terminate the bailment
Right to demand back the goods at any time
Right to file a suit against any wrong doer
Right to file a suit for enformcement of duties imposed upon a bailee.
Right to claim compensation
(i) Right to terminate the bailment [Section 153]: A contract of bailment is voidable
at the option of the bailor, if the bailee does any act with regard to the goods bailed,
inconsistent with the conditions of the bailment.
Termination of bailment has been discussed in next pages.
(ii) Right to demand back the goods (Section 159): When the goods are lent
gratuitously, the bailor can demand back the goods at any time even before the
expiry of the time fixed or the achievement of the object.
Example 21: A, while going out of station delivered his ornaments to B for safe
custody for one month. But A returned to station after one week. He may demand
the return of his ornaments even though the time of one month has not expired.
However, due to the premature return of the goods, if the bailee suffers any loss,
which is more than the benefit actually obtained by him from the use of the goods
bailed, the bailor has to compensate the bailee.
(iii) Right to file a suit against a wrong doer [Section 180 and section 181] (discussed
in next pages)
(iv) Right to sue the bailee: The bailor has a right to sue the bailee for enforcing all the
liabilities and duties of him.
(v) Right to compensation: If any damage is caused to the goods bailed because of
the unauthorized use of the goods or unauthorized mixing of the goods, the bailor
has a right to claim compensation for the same.

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8.5 RIGHTS OF A BAILEE

Rights of bailee: The following are the rights of the bailee:-
1. Right to Deliver the Goods to any one of the joint bailors [Section 165]
If several joint owners bailed the goods, the bailee has a right to deliver them to any
one of the joint owners unless there was a contract to the contrary.
Example 22: A, B and C are the joint owners of a harvesting combine. They delivered
it on hire to D for one month. After the expiry of one month, D may return the
“combine” to any one of the joint owners namely, A, B or C.
2. Right to indemnity (Section 166): Bailee is entitled to be indemnified by the bailor
for any loss arising to him by reasons that the bailor was not entitled to make the
bailment or to receive back the goods or to give directions in respect to them. If the
bailor has no title to the goods, and the bailee in good faith, delivers them back to,
or according to the directions of the bailor, the bailee shall not be responsible to the
owner in respect of such delivery. Bailee can also claim all the necessary expenses
incurred by him for the purpose of gratuitous bailment.
3. Right to claim compensation in case of faulty goods (Section 150): A bailee is
entitled to receive compensation from the bailor or any loss caused to him due to
the failure of the bailor to disclose any faults in the goods known to him. If the
bailment is for hire, the bailor will be liable to compensate even though he was not
aware of the existence of such faults.
4. Right to claim necessary expenses (Section 158): In case of gratuitous bailment,
the bailor shall repay to the bailee the necessary expenses incurred by him and any
extraordinary expenses incurred by him for the purpose of the bailment.
5. Right to Apply to Court to Decide the Title to the Goods [Section 167]: If the
goods bailed are claimed by the person other than the bailor, the bailee may apply
to the court to stop its delivery and to decide the title to the goods.
Example 23: A, a dealer in T.V. delivered a T.V. to B for using in summer vacation.
Subsequently, C claimed that the T.V. belonged to him as it was delivered only for
repairs, to A and thus, B should deliver it to him. In this case, B may apply to the Court to
decide the question of ownership of the T.V. so that he may deliver it to the right owner.
6. Right of particular lien for payment of services [Section 170]: (Discussed in next
pages)
7. Right of general lien (Sec. 171): (Discussed in next pages)

8.6 RIGHTS OF BAILOR AND BAILEE AGAINST ANY

WRONG DOER (THIRD PARTY)
Suit by bailor & bailee against wrong doers [Section 180]: If a third person wrongfully
deprives the bailee of the use or possession of the goods bailed, or does them any injury,
the bailee is entitled to use such remedies as the owner might have used in the like case if
no bailment had been made; and either the bailor or the bailee may bring a suit against a
third person for such deprivation or injury.
Apportionment of relief or compensation obtained by such suits [Section 181]:
Whatever is obtained by way of relief or compensation in any such suit shall, as between the
bailor and the bailee, be dealt with according to their respective interests.
8.7 TERMINATION OF BAILMENT

A contract of bailment shall terminate in the following circumstances:
1. On expiry of stipulated period: If the goods were given for a stipulated period, the
contract of bailment shall terminate after the expiry of such period.
Example 24: X gives his motorcycle to Y for a month. The bailment terminates after 1
month.
2. On fulfillment of the purpose: If the goods were delivered for a specific purpose, a
bailment shall terminate on the fulfillment of that purpose.
Example 25: X hires certain tents and crockery on marriage of his daughter. The
bailment terminates after marriage.
3. By Notice:
(a) Where the bailee acts in a manner which is inconsistent with the terms of the
bailment, the bailor can always terminate the contract of bailment by giving a
notice to the bailee.
(b) A gratuitous bailment can be terminated by the bailor at any time by giving a
notice to the bailee. However, the termination should not cause loss to the
bailee in excess of the benefit derived by him. In case the loss exceeds the
benefit derived by the bailee, the bailor must compensate the bailee for such
a loss (Sec. 159).
4. By death: A gratuitous bailment terminates upon the death of either the bailor or the
bailee.

2.186 BUSINESS LAWS
5. Destruction of the subject matter: A bailment is terminated if the subject matter of

the bailment is destroyed or there is a change is in the nature of goods which makes
it impossible to be used for the purpose of bailment.
Example 26: X gives his cycle to Y on hire. Cycle damaged beyond repairs. Bailment
ends.
Destruction/
Expiry of By death Inconsistent modification
Fulfilment of
fixed of bailor use of of the
the purpose
period or bailee goods subject
matter
8.8 FINDER OF LOST GOODS

Right of finder of lost goods- may sue for specific reward offered [Section 168]: A
person who finds some goods which do not belong to him, is called the finder of the goods.
It is the duty of the finder of goods to find the true owner and surrender the goods to him.
However, the finder of goods has no right to sue the owner for compensation for trouble
and expense voluntarily incurred by him in finding the owner and preserving the goods
found. But he has a right to retain the goods against the owner until he receives such
compensation; and, where the owner has offered a specific reward on the lost goods, the
finder may sue the owner for such reward, and may retain the goods until then.
When finder of thing commonly on sale may sell it [Section 169]: When a thing which is
commonly the subject of sale if lost, if the owner cannot with reasonable diligence be found,
or if he refuses, upon demand, to pay the lawful charges of the finder, the finder may sell
it—
(1) when the thing is in danger of perishing or of losing the greater part of its value, or
(2) when the lawful charges of the finder in respect of the thing found amount to two-
thirds of its value.
8.9 RIGHT OF LIEN

RIGHT OF LIEN
Lien is the right of a person
 to retain the goods belonging to another

 until his claim is satisfied or

 some debt due to him is repaid.
Types of Lien: Lien may be of two types:
a. Particular Lien
b. General Lien
Particular Lien: It is a right to retain only the particular goods in respect of which the claim
is due.
Section 170 provides, where the bailee has, in accordance with the purpose of the bailment,
rendered any service involving the exercise of labour or skill in respect of the goods bailed,
he has, in the absence of a contract to the contrary, a right to retain such goods until he
receives due remuneration for the services he has rendered in respect of them.
Example 27: ‘A’ gives cloth to ‘B’, a tailor, to make into a coat. ‘B’ is entitled to retain the
coat until he is paid.
Example 28: If in the above example, ‘B’ takes 15 days time to make the coat, right of lien
will be applicable after 15 days.
Example 29: A delivers a rough diamond to B, a jeweller, to be cut and polished, which is
accordingly done. B is entitled to retain the stone till he is paid for the services he has
rendered.
General Lien: It is a right to retain the goods not only for demands arising out of the goods
retained but for a general balance of account in favour of certain persons (in the absence of
a contract to the contrary). Section 171 provides this right is available to Bankers, factors,
wharfingers, policy brokers and attorneys of law.
Example 30: ‘A’ borrows ` 500/- from the bank without security and subsequently again
borrows another ` 1000/- but with security of say certain jewellery. In this illustration, even
where ‘A’ has returned ` 1000/- being the second loan, the banker can retain the jewellery
given as security to the second loan towards the first loan which is yet to be repaid.
Under the right of general lien the goods cannot be sold but can only be retained for dues.
The right of lien can be waived through a contract.
Difference between Bailee’s General and Particular Lien
General lien Particular lien
Section 171 of the Indian Contract Act, 1872 Section 170 of the Indian Contract Act, 1872
confer on Bailee the right of General Lien. confers on the Bailee, the right of particular
lien.

2.188 BUSINESS LAWS
General lien alludes to the right to keep Particular lien implies a right of the bailee to
possession of goods belonging to other retain specific goods bailed for non-payment of
against general balance of account. amount.
A general lien is not automatic but is It is automatic.

recognized through on agreement. It is
exercised by the bailee only by name.
It can be exercised against goods even It comes into play only when some labor or skill
without involvement of labor or skill. is involved has been expended on the goods,
resulting in an increase in value of goods.
Only such persons as are specified under Bailee, finder of goods, pledgee, unpaid seller,
section 171, e.g., Bankers, factors, agent, partner etc. are entitled to particular
wharfingers, policy brokers etc. are entitled lien.
to general lien.
8.10 PLEDGE
“Pledge”, “pawnor” and “pawnee” defined [Section 172]: The bailment of goods as security
for payment of a debt or performance of a promise is called “pledge”. The bailor is in this case
called the “pawnor”. The bailee is called the “pawnee”.
Section 172 to 182 of the Indian Contract Act, 1872 deal with the contract of pledge.
Example 31: A lends money to B against the security of jewellery deposited by B with him.
This bailment of jewellery is a pledge as security for lending the money. B is a pawnor/
pledger and A is a pawnee/ pledgee.
ESSENTIALS OF CONTRACT OF PLEDGE: Since pledge is a special kind of bailment,

therefore all the essentials of bailment are also the essentials of the pledge. Apart from that,
the other essentials of the pledge are:
There shall be a bailment for

The subject matter of pledge is
security against payment or
goods,
performance of the promise,
Goods pledged for shall be in There shall be the delivery of

existence, goods from pledger to pledgee

RIGHTS OF A PAWNEE/ PLEDGEE: Rights of Pawnee can be classified as under the

following headings:
(a) Right to retain the pledged goods [Section 173]: The pawnee may retain the
goods pledged, not only for payment of the debt or the performance of the promise,
but for the interest, of the debt, and all necessary expenses incurred by him in
respect of the possession or for the preservation of the goods pledged.
Example 32: Where ‘M’ pledges stock of goods for certain loan from a bank, the
bank has a right to retain the stock not only for adjustment of the loan but also for
payment of interest.
(b) Right to retention of subsequent debts [Section 174]: The Pawnee can retain the
goods pledged for any debt or promise other than the debt or promise for which
they are pledged. But he can exercise this right only when there is a contract to this
effect. i.e. a right to retain goods for subsequent debts can be exercised only when it
has been provided for in a contract to this effect.
(c) Pawnee’s right to extraordinary expenses incurred [Section 175]: The pawnee is
entitled to receive from the pawnor extraordinary expenses incurred by him for the
preservation of the goods pledged. For such expenses, however, he does not have
the right to retain the goods, but he can sue the pawnor for such expenses.
(d) Pawnee’s right where pawnor makes default [Section 176]: If the pawnor makes
default in payment of the debt, or performance, at the stipulated time of the
promise, in respect of which the goods were pledged, the pawnee has the following
rights:
i. the pawnee may bring a suit against the pawnor upon the debt or promise,
and retain the goods pledged as a collateral security; or
ii. he may sell the thing pledged on giving the pawnor reasonable notice of the
sale.
If the proceeds of such sale are less than the amount due in respect of the debt or
promise, the pawnor is still liable to pay the balance. If the proceeds of the sale are
greater than the amount so due, the pawnee shall pay over the surplus to the
pawnor.
Rights of a pawnor
As the bailor of goods, pawnor has all the rights of the bailor. Along with that he also has
the right of redemption to the pledged goods which is enumerated under section 177 of the
Act.

2.190 BUSINESS LAWS
Right to redeem [Section 177]: If a time is stipulated for the payment of the debt, or
performance of the promise, for which the pledge is made, and the pawnor makes default in
payment of the debt or performance of the promise at the stipulated time, he may redeem
the goods pledged at any subsequent time before the actual sale of them; but he must, in
that case, pay, in addition, any expenses which have arisen from his default.
Note: Redemption means to recover back the goods by making of the payment of debt or
performance of promise.
Duties of the Pawnee

Pawnee has the following duties:
a. Duty to take reasonable care of the pledged goods.
b. Duty not to make unauthorized use of pledged goods.
c. Duty to return the goods when the debt has been repaid or the promise has been
performed.
d. Duty not to mix his own goods with goods pledged.
e. Duty not to do any act which is inconsistent with the terms of the pledge.
f. Duty to return accretion to the goods, if any.
Duties of a Pawnor
Pawnor has the following duties:
a. The pawnor is liable to pay the debt or perform the promise as the case may be.
b. It is the duty of the pawnor to compensate the pawnee for any extraordinary
expenses incurred by him for preserving the goods pawned.
c. It is the duty of the pawnor to disclose all the faults which may put the pawnee under
extraordinary risks.
d. If loss occurs to the pawnee due to defect in pawnor’s title to the goods, the pawnor
must indemnify the pawnee.
e. If the pawnee sells the good due to default by the pawnor, the pawnor must pay the
deficit.

8.11 PLEDGE BY NON-OWNERS

Ordinarily, it is the owner of the goods, or any person authorized by him in that behalf, who
can pledge the goods. But in order to facilitate mercantile transactions, the law has
recognised certain exceptions. These exceptions are for bonafide pledges made by those
persons who are not the actual owners of the goods, but in whose possession the goods
have been left.
a. Pledge by mercantile agent [Section 178]:
A mercantile agent, who is in the possession of goods or document of title, with the
consent of owner, can pledge them while acting in the ordinary course of business as
a Mercantile Agent.
Such Pledge shall be valid as if were made with the authority of the owner of goods.
Provided, Pawnee acted in good faith and had no notice that Pawnor has no
authority to pledge.
b. Pledge by person in possession under voidable contract [Section 178A]: When
the pawnor has obtained possession of the goods pledged by him under a contract
voidable under section 19 or section 19A (contracts where consent has been
obtained by fraud, coercion, misrepresentation, undue influence), but the contract
has not been rescinded at the time of the pledge, the pawnee acquires a good title
to the goods, provided he acts in good faith and without notice of the pawnor’s
defect of title.
c. Pledge where pawnor has only a limited interest [Section 179]: Where a person
pledges goods in which he has only a limited interest i.e. pawnor is not the absolute
owner of goods, the pledge is valid to the extent of that interest.
Example 33: Mr. X finds a defective mobile phone lying on the road. He picks it up,
gets it repaired for ` 5000. He later pledges the mobile phone for ` 2,000. The true
owner can recover the mobile phone only on paying ` 5,000.
Example 34: ‘A’ pledges his jewellery worth ` 1,00,000 with ‘B’ for a advance of `
70,000. ‘B’ pledges the same for ` 90,000 with ‘C’. Now this pledge is valid upto `
70,000 plus interest due thereon.
d. Pledge by a co-owner in possession: Where the goods are owned by many person
and with the consent of other owners, the goods are left in the possession of one of
the co-owners. Such a co-owner may make a valid pledge of the goods in his
possession.

2.192 BUSINESS LAWS
e. Pledge by seller or buyer in possession: A seller, in whose possession, the goods

have been left after sale or a buyer who with the consent of the seller, obtains
possession of the goods, before sale, can make a valid pledge, provided the pawnee
acts in good faith and he has no knowledge of the defect in title of the pawnor.
Example 35: A buys a cycle from B. But leaves the cycle with the seller. B then
pledges the cycle with C, who does not know of sale to A, and acted in good faith.
This is valid pledge.
8.12 DISTINCTION BETWEEN BAILMENT AND PLEDGE

Basis of Distinction Bailment Pledge
Meaning Transfer of goods by one Transfer of goods from one person
person to another for some to another as security for repayment
specific purpose is known as of debt is known as the pledge.
bailment.
Parties The person delivering the The person who delivers the good as
goods under a contract of security is called the “Pawnor”.
bailment is called as “Bailor”. The person to whom the goods are
The person to whom the goods delivered as security is called the
are delivered under a contract “pawnee”.
of bailment is called as “Bailee”.
Purpose Bailment may be made for any Pledge is made for the purpose of
purpose (as specified in the delivering the goods as security for
contract of bailment, eg: for payment of a debt, or performance
safe custody, for repairs, for of a promise.
processing of goods).
Consideration The bailment may be made for Pledge is always made for a
consideration or without consideration.
consideration.
Right to sell the The bailee has no right to sell the The pawnee has right to sell the
goods goods even if the charges of goods if the pawnor fails to redeem
bailment are not paid to him. The the goods.
bailee’s rights are limited to
suing the bailor for his dues or to
exercise lien on the goods bailed.
Right to use of Bailee can use the goods only Pledgee or Pawnee cannot use the
goods for a purpose specified in the goods pledged.
contract of bailment and not
otherwise.

SUMMARY
♦ Bailment-Delivery of goods by one person to another for some purpose upon a
contract that they shall be returned after the purpose is over or disposed off according
to the directions of the person delivering them.
♦ Bailor- Person who delivers the goods for bailment.
♦ Bailee- Person to whom goods are delivered under the contract of bailment.
♦ Depositing currency notes in a bank- It is not a bailment as currency notes or
moneys are not goods as per the definition of goods given under the Sale of Goods
Act, 1930 and also same currency notes are not returned to the depositor by the bank.
♦ Keeping of ornaments/valuables in a bank locker- It’s not a bailment as there is no
transfer of possession of ornaments or valuables.
♦ Gratuitous bailment- No consideration passes between the bailor and the bailee and
the bailor is not responsible for the damages in respect of the faults which were not
known to him.
♦ Pledge- Bailment of goods as security for payment of a debt/performance of a
promise.
♦ Pawnor- Person who pledges goods as security.
♦ Pawnee- Person who receives the goods as security.
♦ Some non-owners may also create a valid pledge of goods, such as- Mercantile
agents, co-owner, by person having a limited interest, by person having a possession
of goods under voidable contract.
♦ Basic distinction between bailment and pledge- All the pledges are bailments but
all the bailments are not pledges.
BAILMENT (SECTION 148-171)
Meaning: 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, according to the directions of the person delivering them.
Kinds of Bailment
Parties Essentials
Bailor: Who delivers; 1.Agreement,
On the basis of benefit On the basis of consideration
Bailee: Who receives; 2.Delivery of goods,
1. For the benefit of Bailor 1. Gratuitous – No consideration
3.For some purpose,
2. For the benefit of Bailee 2. Non-Gratuitous – For consideration
4. Return of goods
3. For the benefit of both
Gratuitous Bailment : without Consideration, Bailor is liable for known faults Only. All expenses born by Bailor.
Non-Gratuitous Bailment: With Consideration, Bailor is liable for all faults, Extra Ordinary expenses born by Bailor

2.194 BUSINESS LAWS
Duties & Rights
Duties of Bailor Rights of Bailor Duties of Bailee Rights of Bailee
1. Disclose known 1. Terminate bailment, 1. Take care of the goods bailed, 1. Delivery to any of joint bailors,
faults,
2. Demand return of 2. No unauthorized use of goods, 2. Right to compensation,
2. Bear expenses, goods any time,
3. Not mix goods with own 3. Claim necessary expenses,
3. Indemnify Bailee, 3. Claim accretion, goods,
4. Action for wrongful deprivation of
4. Receive back 4. Right against third 4. Return the goods, goods,
goods. party.
5. Return accretions to goods, 5. Right of lien
.
6. Not to set up adverse title
Termination of Bailment Finder of Lost Lien

Goods
1. On expiry of stipulated period, Meaning: To retain the goods belonging to another
Duties: Same until his claim is satisfied or some debt due to him is
2. Accomplishment of Specified purpose,
as of Bailee, repaid,
3. Doing anything inconsistent with conditions,
Rights: Lien, General Lien: Right to retain any goods in respect of
4. Gratuitous Bailment (Any time), Sue for any debt.
5. By Death, Reward, Sale Particular Lien: Right to retain any goods in respect of
of Goods, concerned debt only.
6. Destruction of subject-matter,
PLEDGE (SECTION 171 – 181)
Meaning: Bailment of goods as security for payment of a debt or performance of a promise. Pledge by Non-owner
Parties: Bailor – Pawnor; Bailee – Pawnee
1. Pledge by Mercantile
Duties & Rights Agent,
2. Pledge by Person in
Duties of Pawnor Rights of Duties of Pawnee Rights of Pawnee Possession under
1. Pay Debt, Pawnor 1. Take care of the goods 1. Retain the voidable contract,
2. Indemnify Pawnee, Same as that of bailed, Pledged Goods,
3. Pledge where Pawnor
3. Disclose all the Bailor alongwith 2. No unauthorized use of 2. Retention for
faults, goods, Subsequent Debts, has only a Limited
right of
4. Pay extra ordinary 3. Not mix goods with own Interest,
redemption (to 3. Recover
expenses, recover back the goods, Extraordinary 4. Pledge by co-owner in
5. Pay deficit if goods by 4. Return the goods, Expenses,
possession,
Pawnee sells goods making of the 5. Return accretions to the 4. Right on Default
due to default by payment of goods, by Pawnor 5. Pledge by buyer or
Pawnor 6. Not to set up adverse title seller in possession
debt)

TEST YOUR KNOWLEDGE

1. Bailment means ………..
(a) temporary delivery of goods.
(b) permanent delivery of goods.
(c) partly delivery of goods.
(d) None
2. Which is not essential element of contract of bailment ………..
(a) doing contract.
(b) Purchase of goods.
(c) delivery of goods.
(d) return of goods in specific time.
3. In the contract of bailment the person to whom goods is delivered, called ………..
(a) seller
(b) bailee
(c) bailor
(d) agent
4. Bailee should care the goods as per ………
(a) as a man of ordinary prudence
(b) as owner
(c) as principal
(d) as a servant
5. Lien means ………..
(a) to retain goods in his possession
(b) rights to sell the goods.
(c) right to purchase the goods.
(d) right to destroy the goods.

2.196 BUSINESS LAWS
6. In case there are two or more joint owners of the goods, the Bailee has to deliver them
back to _____ , in the absence of any agreement to the contrary :
(a) Any of the Joint owners.
(b) Such joint owner for which all the joint owners have consented.
(c) All the Joint owners collectively.
(d) None of these.
7. A finder of goods is subject to the same responsibility as that of a ………..
(a) bailee
(b) bailor
(c) surety
(d) purchaser
8. The bailment of goods as security for payment of a debt is called ………..
(a) pledge
(b) bailment
(c) mortgage
(d) none of these
9. What is an essential element of a valid pledge?
(a) Delivery of goods
(b) Delivery of bills
(c) Price
(d) None of these
10. The pledge is a contract of ………..
(a) bailment
(b) agency
(c) guarantee
(d) mortgage
1. State the essential elements of a contract of bailment.
2. Give differences between Bailment and Pledge.

3. Examine whether the following constitute a contract of ‘Bailment’ under the provisions
of the Indian Contract Act, 1872:
(i) V parks his car at a parking lot, locks it, and keeps the keys with himself.
(ii) Seizure of goods by customs authorities.
4. A hires a carriage from B and agrees to pay ` 500 as hire charges. The carriage is
unsafe, though B is unaware of it. A is injured and claims compensation for injuries
suffered by him. B refuses to pay. Discuss the liability of B.
5. A bails his jewellery with B on the condition to safeguard it in a bank’s safe locker.
However, B kept it in safe locker at his residence, where he usually keeps his own
jewellery. After a month all jewellery was lost in a religious riot. A filed a suit against B
for recovery. Referring to provisions of the Indian Contract Act, 1872, state whether A
will succeed.
6. R gives his umbrella to M during raining season to be used for two days during
Examinations. M keeps the umbrella for a week. While going to R’s house to return the
umbrella, M accidently slips and the umbrella is badly damaged. Who bear the loss and
why?
7. Amar bailed 50 kg of high quality sugar to Srijith, who owned a kirana shop, promising
to give ` 200 at the time of taking back the bailed goods. Srijith's employee, unaware of
this, mixed the 50 kg of sugar belonging to Amar with the sugar in the shop and
packaged it for sale when Srijith was away. This came to light only when Amar came
asking for the sugar he had bailed with Srijith, as the price of the specific quality of sugar
had trebled. What is the remedy available to Amar?
8. Mrs. A delivered her old silver jewellery to Mr. Y a Goldsmith, for the purpose of making
new a silver bowl out of it. Every evening she used to receive the unfinished good (silver
bowl) to put it into box kept at Mr. Y’s Shop. She kept the key of that box with herself.
One night, the silver bowl was stolen from that box. Was there a contract of bailment?
Whether the possession of the goods (actual or constructive) delivered, constitute
contract of bailment or not?
9. Srushti acquired valuable diamond at a very low price by a voidable contract under the
provisions of the Indian Contract Act, 1872. The voidable contract was not rescinded.
Srushti pledged the diamond with Mr. VK. Is this a valid pledge under the Indian
Contract Act, 1872?

2.198 BUSINESS LAWS
ANSWERS/HINTS
Answers to MCQs
1. (a) 2. (b) 3. (b) 4. (a) 5. (a) 6. (a)
7. (a) 8. (a) 9. (a) 10. (a)

1. Essential elements of a contract of bailment: Section 148 of the Indian Contract
Act, 1872 defines the term ‘Bailment’. 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 of according to the
directions of the person delivering them. The essential elements of the contract of
the bailment are:
(i) Delivery of goods—The essence of bailment is delivery of goods by one
person to another.
(ii) Bailment is a contract—In bailment, the delivery of goods is upon a contract
that when the purpose is accomplished, the goods shall be returned to the
bailor.
(iii) Return of goods in specific—The goods are delivered for some purpose and it
is agreed that the specific goods shall be returned.
(iv) Ownership of goods—In a bailment, it is only the possession of goods which is
transferred, and the bailor continues to be the owner of the goods.
(v) Property must be movable—Bailment is only for movable goods and never for
immovable goods or money.
2. Distinction between bailment and pledge: The following are the distinction
between bailment and pledge:
(a) As to purpose: Pledge is a variety of bailment. Under pledge goods are
bailed as a security for a loan or a performance of a promise. In regular
bailment the goods are bailed for other purpose than the two referred above.
The bailee takes them for repairs, safe custody etc.
(b) As to right of sale: The pledgee enjoys the right to sell only on default by the
pledgor to repay the debt or perform his promise, that too only after giving
due notice. In bailment the bailee, generally, cannot sell the goods. He can
either retain or sue for non-payment of dues.

(c) As to right of using goods: Pledgee has no right to use goods. A bailee
can, if the terms so provide, use the goods.
(d) Consideration: In pledge there is always a consideration whereas in a
bailment there may or may not be consideration.
(e) Discharge of contract: Pledge is discharged on the payment of debt or
performance of promise whereas bailment is discharged as the purpose is
accomplished or after specified time.
3. As per Section 148 of the Act, bailment is the delivery of goods by one person to
another for some purpose, upon a contract, that the goods shall, when the purpose is
accomplished, be returned or otherwise disposed of according to the directions of
the person delivering them.
For a bailment to exist the bailor must give possession of the bailed property and the
bailee must accept it. There must be a transfer in ownership of the goods.
(i) No. Mere custody of goods does not mean possession. In the given case,
since the keys of the car are with V, Section 148, of the Indian Contract Act,
1872 shall not applicable.
(ii) Yes, the possession of the goods is transferred to the custom authorities.
Therefore, bailment exists and section 148 is applicable.
4. Problem asked in the question is based on the provisions of the Indian Contract Act,
1872 as contained in Section 150. The section provides that if the goods are bailed
for hire, the bailor is responsible for such damage, whether he was or was not aware
of the existence of such faults in the goods bailed. Accordingly, applying the above
provisions in the given case, B is responsible to compensate A for the injuries
sustained even if he was not aware of the defect in the carriage.
5. According to section 152 of the Indian Contract Act, 1872, the bailee, in the absence
of any special contract, is not responsible for the loss, destruction or deterioration of
the thing bailed, if he has taken reasonable care as required under section 151.
Here, A and B agreed to keep the jewellery at the Bank’s safe locker and not at the
latter’s residence (i.e. B’s residence). Thus, B is liable to compensate A for his
negligence to keep jewellery at his (B’s) residence.
6. M shall have to bear the loss since he failed to return the umbrella within the
stipulated time and Section 161 clearly says that where a bailee fails to return the
goods within the agreed time, he shall be responsible to the bailor for any loss,
destruction or deterioration of the goods from that time notwithstanding the
exercise of reasonable care on his part.

2.200 BUSINESS LAWS
7. According to section 157 of the Contract Act, 1872, if the bailee, without the consent
of the bailor, mixes the goods of the bailor with his own goods, in such a manner
that it is impossible to separate the goods bailed from the other goods and deliver
them back, the bailor is entitled to be compensated by the bailee for the loss of the
goods.
In the given question, Srijith’s employee mixed high quality sugar bailed by Amar and
then packaged it for sale. The sugars when mixed cannot be separated. As Srijith’s
employee has mixed the two kinds of sugar, he (Srijith) must compensate Amar for
the loss of his sugar.
8. Section 148 of Indian Contract Act 1872 defines 'Bailment' as 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 of according to the
direction of the person delivering them.
According to Section 149 of the Indian Contract Act, 1872, the delivery to the bailee
may be made by doing anything which has the effect of putting the goods in the
possession of the intended bailee or of any person authorised to hold them on his
behalf. Thus, delivery is necessary to constitute bailment.
Thus, the mere keeping of the box at Y’s shop, when A herself took away the key
cannot amount to delivery as per the meaning of delivery given in the provision in
section 149. Therefore, in this case there is no contract of bailment as Mrs. A did not
deliver the complete possession of the good by keeping the keys with herself.
9. Pledge by person in possession under voidable contract [Section 178A of the Indian
Contract Act, 1872]: When the pawnor has obtained possession of the goods pledged
by him under a contract voidable under section 19 or section 19A, but the contract
has not been rescinded at the time of the pledge, the pawnee acquires a good title
to the goods, provided he acts in good faith and without notice of the pawnor’s
defect of title.
Therefore, the pledge of diamond by Srushti with Mr. VK is valid.

1.201
2.201 BUSINESS LAWS
UNIT–9: AGENCY
LEARNING OUTCOMES
♦ The relationship between agent and principal and the intention behind
adoption of such course of agency.
♦ Rights and obligations of an agent as well as the circumstances under

which the agent is personally liable for the acts done by him on behalf
of the principal and the legal position of the agent, the principal and
the third parties involved.
♦ Terms ‘sub-agent’ and ‘substituted agent’ and to distinguish between

the two.
UNIT OVERVIEW
Appointment
Meaning
Authority
Sub agents
Ratification
Agency
Revocation of Authority
Duties, Obligations and Rights of Agent
Effect of agency on contract with third persons

2.202 BUSINESS LAWS
A relationship of agency is established when one party (agent) is authorized by another

party (principal) to act on his/ her behalf. Such relationships are initiated when one party
desires to extend his/her activities beyond his/her present limits or capacity. In modern life,
it would be impossible for a man to do everything by himself. Thus, he needs agents, to
perform activities. A relationship of agency is commonly visible in all business transactions.
These include hiring employees or retaining the services of other professionals such as an
attorney, design professional, software developer etc. An agent has the potential to form
contracts on behalf of the principal and in doing so, will bind the principal. As a result, the
relationship of agency is one of trust and confidence and an agent must perform his/her
activities in a capable and conscientious manner. The law of agency is contained in sections
182 to 238 of the Indian Contract Act, 1872.
9.1 WHAT IS AGENCY?

The Indian Contract Act, 1872 does not define the word ‘Agency’.
However, section 182 of the Indian Contract Act, 1872 defines Agent
and Principal as:
Agent means a person employed to do any act for another or to
represent another in dealing with the third persons and
The principal means a person for whom such act is done or who is so represented.
Test of Agency
(a) Whether the person has the capacity to bind the principal and make him answerable
to the third party.
(b) Whether he can establish privity of contract between the principal and third parties.
If the answer to these questions is in affirmative (Yes), then there is a relationship of agency.
Thus, ‘Agency’ is a comprehensive word used to describe the relationship between one
person and another, where the first mentioned person brings the second mentioned person
into legal relation with others.
The Rule of Agency is based on the maxim “Qui facit

per alium, facit per se” i.e., he who acts through an
agent is himself acting.

9.2 APPOINTMENT AND AUTHORITY OF AGENTS

Who may employ an agent: According to Section 183, “any person who has attained
majority according to the law to which he is subject, and who is of sound mind, may employ
an agent.” Thus, a minor or a person of unsound mind cannot appoint an agent.
Person qualified to • major

appoint agent must be • sound mind
Who may be an agent:

According to Section 184 of the Act any person may become an agent i.e. even a minor or a
person of unsound mind may become an agent and the principal shall be bound by his acts.
But as a rule of caution, a minor or a person of unsound mind should not be appointed as
an agent because he is incompetent to contract and in case of his misconduct or negligence,
the principal shall not be able to proceed against him.
Example 1: P appoints Q, a minor, to sell his car for not less than ` 2,50,000. Q sells it for
` 2,00,000. P will be held bound by the transaction and further shall have no right against Q
for claiming the compensation for having not obeyed the instructions, since Q is a minor
and a contract with a minor is ‘void-ab-initio’.
Consideration not necessary: According to Section 185, no consideration is necessary to
create an agency. The acceptance of the office of an agent is regarded as a sufficient
consideration for the appointment.
9.3 CREATION OF AGENCY

In the words of Desai J, of the Supreme Court of India “The relation of agency arises whenever
one person called the agent has the authority to act on behalf of another called the principal
and consents to act. The relationship has genesis in a contract”.
The relationship of the principal and the agent may be created in any of the following ways —
The authority may be express or implied: According to Section 186, the authority of an
agent may be express or implied.
1. Definitions of express and implied authority [Section 187]
Express Authority: An authority is said to be express when it is given by words,
spoken or written.

2.204 BUSINESS LAWS
Example 2: A is residing in Delhi and he has a house in Kolkata. A authorizes B under

a power of attorney, as caretaker of his house. Agency is created by express
agreement.
Example 3: If a customer of a bank wishes to transact his banking business through
an agent, the bank will require written evidence of the appointment of the agent and
will normally ask to see the registered power of attorney appointing the agent.
2. Implied Authority: An authority is said to be implied when it is to be inferred from
the circumstances of the case, conduct of the parties and things spoken or written, or
in the ordinary course of dealing, may be accounted from the circumstances of the
case.
If a person realises rent and gives it to the landlord, he impliedly acts for the landlord
as an agent.
Example 5: A owns a shop in Selampur, living himself in Kolkata and visiting the
shop occasionally. The shop is managed by B, and he is in the habit of ordering
goods from C in the name of A for the purposes of the shop, and of paying for them
out of A’s funds with A’s knowledge. B has an implied authority from A to order
goods from C in the name of A for the purposes of the shop.
Implied Agency includes:-

a. Agency by Estoppel [Section 237]: Where the principal by his conduct or
statement willfully induces another person to believe that a certain person is his
agent, he is subsequently prevented or estopped from denying the fact of agency.
According to section 237 of the Contract Act, an agency by estoppel may be created
when following essentials are fulfilled:
1. the principal must have made a representation;
2. the representation may be express or implied;

3. The representation must state that the agent has an authority to do certain
act although really he has no authority;
4. The principal must have induced the third person by such representation; and
5. The third person must have believed the representation and made the
contract on the belief of such representation.
Example 6: A consigns goods to B for sale and gives him instructions not to sell
below a fixed price. C being ignorant of B's instruction enters into a contract with B
to buy the goods at a price lower than the reserved price. A is bound by the contract.
A cannot plead that he had given instructions to B to not sell the goods below
certain price. An agency by estoppel is, consequently, deemed between A and B.

Example 7: If Piyal (the principal) has for several months permitted Sunil to buy
goods on credit from Prasad and has paid for the goods bought by Sunil, Piyal
cannot later refuse to pay Prasad who had supplied goods on credit to Sunil in the
belief that he was Piyal’s agent and was buying the goods on behalf of Piyal. Piyal is
estopped from now asserting that Sunil is not his agent because on earlier occasions
he permitted Prasad to believe that Sunil was his agent and Prasad had acted in that
belief.
b. Agency by Necessity: An agency of necessity arises due to some emergent
circumstances. In emergency a person is authorised to do what he cannot do in
ordinary circumstances. Thus, where an agent is authorised to do certain act, and
while doing such an act, an emergency arises, he acquires an extra-ordinary or
special authority to prevent his principal from loss.
Example 8: Raja has a large farm on which Shyam is the caretaker. When Raja is in
Canada, there is a huge fire on the farm. Shyam becomes an agent of necessity for
Raja so as to save the property from being destroyed by fire. Raja (the principal) will
be liable for any expenses, Shyam (his agent of necessity) incurred to put out the fire
and save the farm from destruction during Raja’s absence from the country.
3. Agency by Operation of Law: When law treats one person as an agent of other. For
example, a partner is the agent of the firm for the purposes of the business of the
firm.
4. Rights of person as to acts done for him without his authority, Effect of
ratification [Section 196]: Where acts are done by one person on behalf of another,
but without his knowledge or authority, he may elect to ratify or to disown such acts.
If he ratifies them, the same effects will follow as if they had been performed by his
authority. In simple words, “Ratification” means approving a previous act or
transaction. Ratification may be express or implied by the conduct of the person on
whose behalf the act was done.
Example 9: X who is Y’s agent has on 10th January 2022 purchases goods from Z on
credit without Y’s permission. After the purchase, on 20th January 2022, Y tells X that
he will accept responsibility to pay for the purchases although at the time of
purchase the agent had no authority to buy on credit. Y’s subsequent statement on
20th January 2022 amounts to a ratification of the agent’s (X’s) purchase of goods on
10th January 2022.

2.206 BUSINESS LAWS
Essentials of a valid Ratification

a. Ratification may be expressed or Implied [Section 197]: Ratification may
be expressed or may be implied in the conduct of the person on whose behalf
the acts are done.
Example 10: A, without authority, buys goods for B. Afterwards B sells them
to C on his own account; B’s conduct implies a ratification of the purchase
made for him by A.
Example 11: A, without B’s authority, lends B’s money to C. Afterwards B
accepts interests on the money from C. B’s conduct implies a ratification of
the loan.
b. Knowledge requisite for valid ratification [Section 198]: No valid
ratification can be made by a person whose knowledge of the facts of the
case is materially defective.
Example 12: A has an authority from P to buy certain goods at the market
rate. He buys at a higher rate but P accepts the purchase. Afterwards P comes
to know that the goods purchased by A for P belonged to A himself. The
ratification is not binding on P.
c. The whole transaction must be ratified [Section 199]: There can be
ratification of an act in entirely or its rejection in entirely. The principal cannot
ratify a part of the transaction which is beneficial to him and reject the rest.
d. Ratification cannot injure third person [Section 200]: When the interest of
third parties is affected, the principle of ratification does not apply.
Ratification cannot relate back to the date of contract if third party has in the
intervening time acquired rights.
Example 13: A, not being authorized thereto by B, demands on behalf of B,
the delivery of a chattel, the property of B, from C, who is in possession of it.
This demand cannot be ratified by B, so as to make C liable for damages for
his refusal to deliver.
Example 14: A holds a lease from B, terminable on three months’ notice. C, an

unauthorized person, gives notice of termination to A. The notice cannot be
ratified by B, so as to be binding on A.
e. Ratification within reasonable time: Ratification must be made within a

reasonable period of time.
f. Communication of Ratification: Ratification must be communicated to the
other party.

g. Act to be ratified must be valid: Act to be ratified should not be void or

illegal, for e.g. payment of dividend out of capital, forgery of signatures, any
other criminal offence, or anything which is not permitted under law.
9.4 EXTENT OF AGENT’S AUTHORITY

The agent’s authority is governed by two principles, namely (a) in normal circumstances and
(b) in emergency.
(a) Agent’s authority in normal circumstances [Section 188]: An agent having an
authority to do an act has authority to do every lawful thing which is necessary in
order to do such act.
An agent having an authority to carry on a business has authority to do every lawful
thing necessary for the purpose, or usually done in the course, of conducting such
business.
Example 15: A is employed by B, residing in London, to recover at Mumbai a debt

due to B. A may adopt any legal process necessary for the purpose of recovering the
debt and may give a valid discharge for the same.
Example 16: A constitutes B as his agent to carry on his business of a shipbuilder. B
may purchase timber and other materials, and hire workmen, for the purposes of
carrying on the business.
(b) Agent’s authority in an emergency [Section 189]: An agent has authority, in an
emergency, to do all such acts for the purpose of protecting his principal from loss as
would be done by a person of ordinary prudence, in his own case, under similar
circumstances.
To constitute a valid agency in an emergency, following conditions must be satisfied.
(i) Agent should not be a in a position or have any opportunity to communicate

with his principal within the time available.
(ii) There should have been actual and definite commercial necessity for the
agent to act promptly.
(iii) the agent should have acted bonafide and for the benefit of the principal.
(iv) the agent should have adopted the most reasonable and practicable course
under the circumstances, and
(v) the agent must have been in possession of the goods belonging to his
principal and which are the subject of contract.

2.208 BUSINESS LAWS
Example 17: An agent who has authority for sale of goods may repair it if necessary.
Example 18: A consigns perishable goods to B at Srinagar, with directions to send them
immediately to C at Tamandu. B may sell the good if they begin to perish before reaching its
destination.
9.5 SUB-AGENTS
When agent cannot delegate [Section 190]: An agent cannot lawfully employ another to
perform acts which he has expressly or impliedly undertaken to perform personally, unless
by the ordinary custom of trade a sub-agent may, or from the nature of the agency, a sub-
agent must, be employed.
“Sub-agent” defined [Section 191]: A “Sub-agent” is a person employed by, and acting
under the control of, the original agent in the business of the agency.
Analysis: Sub agency refers to case where an agent

appoints another agent. The appointment of sub agent is
not lawful, because the agent is a delegatee and a
delegatee cannot further delegate. This is based on the
Latin principle “delegatus non potest delegare”.
•delegates
PRINCIPAL act/ work
•further
AGENT delegates
SUB-
AGENT
A contract of agency is of a fiduciary character. It is based on the confidence reposed by the

principal in the agent and that is why a delegatee cannot further delegate.
Exception where an agent can appoint Sub-agent:

(1) The appointment of a sub agent would be valid if the terms of appointment originally
contemplated it.
(2) Sometimes customs of the trade may provide for appointment of sub agents.
In both these cases the sub agent would be treated as the agent of the principal.

(3) Where in the course of the agent’s employment, unforeseen emergency arise
making it necessary for him to delegate the authority that was given to him by the
principal.
Representation of principal by sub-agent properly appointed [Section 192]: Where a
sub-agent is properly appointed,
(1) Principal is liable to third parties for the acts of the sub-agent.
(2) Agents responsibility for sub agents: The agent is responsible to the principal for
the acts of the sub-agent.
(3) Sub-agents liability to principal: The sub-agent is responsible for his acts to the
agent, but not to the principal, except in case of fraud or willful wrong.
Agent’s responsibility for sub-agent appointed without authority [Section 193]: Where
an agent, without having authority to do so, has appointed a person to act as a sub-agent,
(1) the agent is responsible for his acts both to the principal and to third persons;
(2) the principal is responsible for the acts of the sub agent,
(3) the sub agent is not responsible to the principal at all. He is answerable only to the
agent.
Example 19: A, a carrier, agreed to carry 60 bags of cotton waste from Morvi to
Bhavnagar by a truck. A asked B, another carrier, to carry the goods. The goods were
damaged in transit. Held, A was liable even though it was proved that B was the
carrier.
9.6 SUBSTITUTED AGENT

Substituted Agent is a person appointed by the agent to act for the principal, in the business
of agency, with the knowledge and consent of the principal. Substituted agents are not sub
agents. They are agents of the principal.
Relation between principal and person duly appointed by agent to act in business of
agency [Section 194]: Where an agent, holding an express or implied authority to name
another person to act for the principal in the business of the agency, has named another
person accordingly, such person is not a sub-agent, but an agent of the principal for such
part of the business of the agency as is entrusted to him.
Example 20: A directs B, his solicitor, to sell his estate by auction, and to employ an
auctioneer for the purpose. B names C, an auctioneer, to conduct the sale. C is not a sub-
agent, but is A’s agent for the conduct of the sale.

2.210 BUSINESS LAWS
Example 21: A authorizes B, a merchant in Kolkata, to recover the moneys due to A from C
& Co. B instructs D, a solicitor, to take legal proceedings against C & Co. for the recovery of
the money. D is not a sub-agent, but is a solicitor for A.
Agent’s duty in naming such person [Section 195]: In selecting such agent for his
principal, an agent is bound to exercise the same amount of discretion as a man of ordinary
prudence would exercise in his own case; and, if he does this, he is not responsible to the
principal for the acts or negligence of the agent so selected.
Example 22: A instructs B, a merchant, to buy a ship for him. B employs a ship surveyor of
good reputation to choose a ship for A. The surveyor makes the choice negligently and the
ship turns out to be unseaworthy and is lost. B is not, but the surveyor is, responsible to A.
Example 23: A consigns goods to B, a merchant, for sale. B in due course, employs an
auctioneer in good credit to sell the goods of A, and allows the auctioneer to receive the
proceeds of the sale. The auctioneer afterwards becomes insolvent without having
accounted for the proceeds. B is not responsible to A for the proceeds.
9.7 DIFFERENCE BETWEEN A SUB-AGENT AND A

SUBSTITUTED AGENT
Both a sub-agent and a substituted agent are appointed by the agent. But, however, the
following are the points of distinction between the two.
S.no Sub Agent Substituted Agent

1. A sub-agent does his work under the A substituted agent works under the
control and directions of agent. instructions of the principal.
2. The agent not only appoints a sub- The agent does not delegate any part of his
agent but also delegates to him a task to a substituted agent.
part of his own duties.
3. There is no privity of contract Privity of contract is established between a
between the principal and the sub- principal and a substituted agent.
agent.
4. The sub-agent is responsible to the A substituted agent is responsible to the
agent alone and is not generally principal and not to the original agent who
responsible to the principal. appointed him
5. The agent is responsible to the The agent is not responsible to the principal
principal for the acts of the sub- for the acts of the substituted agent.
agent.

6. The sub-agent has no right of action The substituted agent can sue the principal
against the principal for for remuneration due to him.
remuneration due to him.
7. Sub-agents may be improperly Substituted agents can never be improperly
appointed. appointed.
8. The agent remains liable for the acts The agent's duty ends once he has named
of the sub-agent as long as the sub- the substituted agent.
agency continues.
9.8 DUTIES AND OBLIGATIONS OF AN AGENT

(i) Duty to follow instructions or customs: According to Section 211 an agent is bound
to conduct the business of his principal according to the direction given by the
principal, or, in the absence of any such directions, according to the customs which
prevails in doing business of the same kind at the place where the agent conducts
such business. When the agent acts otherwise and any loss is sustained by the
Principal, he must indemnify him, and, if any profit accrues, he must account for it.
Example 24: A, an agent is engaged for managing the business of B, in which it is a
custom to invest money at hand for interest. If A omits to make such investment he
must indemnify B for the losses i.e. for the interest B would have obtained for such
investment.
Example 25: B, a broker, in whose business it is not the custom to sell on credit, sells
goods of A on credit to C. C, before payment, becomes insolvent. B will have to
indemnify A for the losses.
(ii) Duty of reasonable care and skill: According to section 212, an agent is bound to
conduct the business of the principal with as much skill as is generally possessed by
persons engaged in similar business, unless the principal has notice of his want of
skill.
The agent is always bound to act with reasonable diligence, and to use such skill as
he possesses; and to make compensation to his principal in respect of the direct
consequences of his own neglect, want of skill or misconduct, but not in respect of
loss of damage which are indirectly or remotely caused by such neglect, want of skill
or misconduct.
Example 26: A, a merchant in Kolkata, has an agent, B, in London, to whom a sum of
money is paid on A’s account, with orders to remit. B retains the money for a
considerable time. A, in consequence of not receiving the money, becomes insolvent.

2.212 BUSINESS LAWS
B is liable for the money and interest from the day on which it ought to have been
paid, according to the usual rate, and for any further direct loss- e.g. by variation of
rate of exchange-but not further.
Example 27: A, an agent for the sale of goods, having authority to sell on credit, sells
to B on credit, without making the proper and usual enquiries as to the solvency of B.
B, at the time of such sale is insolvent. A must compensate his principal for the loss
sustained by him.
Example 28: A, an insurance-broker, employed by B to effect an insurance on a ship,
omits to see that the “usual clauses” are inserted in the policy. The ship is afterwards
lost. In consequence of the omission nothing can be recovered from the
underwriters. A is bound to make good the loss to B.
Example 29: A, a merchant in England, directs B, his agent at Mumbai, who accepts
the agency, to send him 100 bales of cotton by a certain ship. B, having it in his
power to send the cotton, omits to do so. The ship arrives safely in England. Soon
after her arrival the price of cotton rises. B is bound to make good to A the profit
which he might have made by the 100 bales of cotton at the time the ship arrived,
but not any profit he might have made by the subsequent rise.
(iii) Duty to render proper accounts [Section 213]: An agent is bound to render proper
accounts to his principal on demand. Rendering accounts does not mean showing
the accounts but the accounts supported by vouchers. (Anandprasad vs. Dwarkanath)
(iv) Agent’s duty to communicate with principal [Section 214]: It is the duty of an
agent, in cases of difficulty, to use all reasonable diligence in communicating with his
principal, and in seeking to obtain his instructions.
(v) Duty not to deal on his own account: Agent should not deal on his own account
without first obtaining the consent of the principal, otherwise the principal may—
(a) repudiate the transaction, (Section 215)
(b) claim from the agent any benefit which may have resulted to him from the
transaction. (Section 216)
Example 30: A directs B to sell A’s estate. B buys the estate for himself in the name
of C. A, on discovering that B has bought the estate for himself, may repudiate the
sale if he can show that B has dishonestly concealed any material fact, or that the
sale has been disadvantageous to him.
Example 31: A directs B to sell A’s estate. B, on looking over the estate before selling
it, finds a mine on the estate which is unknown to A. B informs A that he wishes to
buy the estate for himself, but conceals the discovery of the mine. A allow B to buy,

in ignorance of the existence of the mine. A, on discovering that B knew of the mine
at the time he bought the estate, may either repudiate or accept the sale at his
option.
Example 32: A directs B, his agent, to buy a certain house for him. B tells A it cannot be
bought and buys the house for himself. A may, on discovering that B has bought the
house, compel him to sell it to A at the price he gave for it.
(vi) Duty not to make secret profits: It is the duty of an agent not to make any secret profit
in the business of agency. His relationship with the principal is of fiduciary nature and
this requires absolute good faith in the conduct of agency.
Secret Profit means any advantage obtained by the agent over and above his
agreed remuneration and which he would not have been able to make but for his
position as agent.
(vii) Duty not to delegate: According to section 190, an agent cannot lawfully employ to
perform acts which he has expressly or impliedly undertaken to perform personally,
unless by the ordinary custom of trade a sub-agent may, or, from the nature of
agency, a sub- agent, must be employed.
(viii) Agent’s duty to pay sums received for principal [Section 218]: Subject to such
deductions, the agent is bound to pay to his principal all sums received on his
account.
(ix) Duty not to use any confidential information received in the course of agency
against the principal.
9.9 RIGHTS OF AN AGENT

Right to retain out of
sums received on
principal's account
Right of
indemnification Right to
against acts done remuneration
in good faith Rights of an
Agent
Right of Agent's lien

indemnification on principal's
for lawful acts property

2.214 BUSINESS LAWS
(i) Right of retain out of sums received on principal’s account [Section 217]: This
section empowers the agent to retain, out of any sums received on account of the
principal in the business of the agency for the following payments:
(a) all moneys due to himself in respect of advances made
(b) in respect of expenses properly incurred by him in conducting such business
(c) such remuneration as may be payable to him for acting as agent.
The right can be exercised on any sums received on account of the principal in the
business of agency.
(ii) Right to remuneration [Section 219]: The agent in the normal course is entitled for
remuneration as per the contract. In the absence of any agreed amount of
remuneration, he is entitled for usual remuneration which is customary in the
business. However, an agent who is guilty of misconduct in the business of the
agency is not entitled to any remuneration in respect of that part of the business
which he has misconducted [Section 220].
Example 33: A employs B to recover `1,00,000 from C, and invest it in securities that
give good returns. B recovers the amount and lays out ` 90,000 on good securities
but lays out ` 10,000 on securities which he ought to provide poor returns, whereby
A loses ` 2,000. B is entitled to remuneration for recovering the ` 1,00,000 and for
investing the ` 90,000. He is not entitled to any remuneration for investing the
` 10,000, and he must indemnify A for ` 2000.
Example 34: A employs B to recover ` 1,00,000 from C. Because of B’s misconduct

the money is not recovered. B is entitled to no remuneration for his services and
must make good the loss.
(iii) Agent’s lien on principal’s property [Section 221]: In the absence of any contract
to the contrary, an agent is entitled to retain the 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 or accounted for him.
The conditions of this right are:
a. The agent should be lawfully entitled to receive from the principal a sum of
money by way of commission earned or disbursement made or services
rendered in the proper execution of the business of agency.

b. The property over which the lien is to be exercised should belong to the
principal and it should have been received by the agent in his capacity and
during the course of his ordinary duties as an agent. If the agent obtains
possession of the property by unlawful means, he cannot exercise particular
lien.
The agent’s right to lien is lost in the following cases:
(a) When the possession of the property is lost.
(b) When the agent waives his right. Waiver may arise out of agreement express
or implied.
(c) The agent’s lien is subject to a contract to the contrary.
(iv) Right to indemnity:
a. Right of indemnification for lawful acts [Section 222]: The principal is

bound to indemnify the agent against all consequences of lawful acts done in
exercise of his authority.
Example 35: ‘A’ residing in Delhi appoints ‘B’ from Mumbai as an agent to sell
his merchandise. As a result ‘B’ contracts to deliver the merchandise to various
parties. But A fails to send the merchandise to B and B faces litigations for
non- performance. Here, A is bound to protect B against the litigations and all
costs, expenses arising of that.
b. Right of indemnification against acts done in good faith [Section 223]:
Where the agent acts in good faith on the instruction of principal, agent is
entitled for indemnification of any loss or damage from the principal.
Example 36: Where P appoints A as his agent and directs him to sell certain
goods which in fact turned out to be not those belonging to P and if third
parties sue A for this act, A is entitled for reimbursement and indemnification
for such act done in good faith.
However, the agent cannot claim any reimbursement or indemnification for

any loss etc. arising out of acts done by him in violation of any penal laws of
the country.
c. Non-liability of employer of agent to do a criminal act: According to
section 224, where one person employs another to do an act which is criminal,
the employer is not liable to the agent, either upon an express or an implied
promise, to indemnify him against the consequences of that act.

2.216 BUSINESS LAWS
Example 37: A employs B to beat C and agrees to indemnify him against all
consequences of the act. B thereupon beats C and has to pay damages to C for so
doing. A is not liable to indemnify B for those damages.
Example 38: B, the proprietor of a newspaper, publishes, at A’s request, a
libel upon C in the paper, and A agrees to indemnify B against the
consequences of the publication, and all costs and damages of any action in
respect thereof. B is sued by C and has to pay damages, and also incurs
expenses. A is not liable to indemnify B.
(v) Right to compensation for injury caused by principal’s neglect [Section 225]:
Section 225 provides that the principal must compensate his agent in respect of
injury caused to such agent due to principal’s neglect or want of skill. Thus, every
principal owes to his agent the duty of care, and not to expose him to unreasonable
risks.
Example 39: A employs B as a bricklayer in building a house and puts up the
scaffolding himself. The scaffolding is unskillfully put up, and B is in consequence
hurt. A must compensate B.
9.10 PRINCIPAL’S LIABILITY TO THIRD PARTIES

An agent does all acts on behalf of the principal but incurs no personal liability. The liability
remains that of the principal unless there is a contract to the contrary. This is because there
is no privity of contract and passing of consideration between the agent and third party. An
agent also cannot personally enforce contracts entered into by him on behalf of the
principal.
(i) Principal’s liability for the Acts of the Agent [Section 226]: Principal liable for the
acts of agents which are within the scope of his authority.
Example 40: A buys goods from B, knowing that he is an agent for their sale, but not
knowing who is the principal. B’s principal is the person entitled to claim from A the
price of the goods, and A cannot, in a suit by the principal, set off against that claim
a debt due to himself from B.
Example 41: A, being B’s agent with authority to receive money on his behalf,
receives from C, a sum of money due to B. C is discharged of his· obligation to pay
the sum in question to B.
(ii) Principal’s liability when agent exceeds authority [Section 227]: When an agent
does more than he is authorised to do, and when the part of what he does, which is
within his authority, can be separated from the part which is beyond his authority, so

much only of what he does as is within his authority is binding as between him and
his principal.
Example 42: A, being owner of a ship and cargo, authorizes B to procure an
insurance for ` 4,00,000 on the ship. B procures a policy for ` 4,00,000 on the ship,
and another for the like sum on the cargo. A is bound to pay the premium for the
policy on the ship, but not the premium for the policy on the cargo.
Principal not bound when excess of agent’s authority is not separable [Section
228]: Where an agent does more than he is authorized to do, and what he does
beyond the scope of his authority cannot be separated from what is within it, the
principal is not bound to recognize the transaction.
Example 43: A authorizes B to buy 500 sheep for him. B buys 500 sheep and 200
lambs for one sum of ` 6,00,000. A may repudiate the whole transaction.
Example 44: A authorizes B to draw bills to the extent ` 200 each. B draws bills in the
name of A for ` 1,000 each. A may repudiate the whole transaction.
Exception: Liability of principal inducing belief that agent’s unauthorized acts
were authorized [Section 237]: When an agent has, without authority, done acts or
incurred obligations to third persons on behalf of his principal, the principal is bound
by such acts or obligations, if he has by his words or conduct induced such third
persons to believe that such acts and obligations were within the scope of the
agent’s authority.
Example 45: A consigns goods to B for sale, and gives him instructions not to sell
under a fixed price. C, being ignorant of B’s instructions, enters into a contract with B
to buy the goods at a price lower than the reserved price. A is bound by the contract.
Example 46: A entrusts B with negotiable instruments endorsed in blank. B sells
them to C in violation of private orders from A. The sale is good.
(iii) Consequences of notice given to agent [Section 229]: Any notice given to or
information obtained by the agent, provided it be given or obtained in the course of
the business transacted by him for the principal, shall, as between the principal and
third parties, have the same legal consequence as if it had been given to or obtained
by the principal.
Example 47: A is employed by B to buy from C certain goods of which C is the
apparent owner, and buys them accordingly. In the course of the treaty for the sale, A
learns that the goods really belonged to D, but B is ignorant of that fact. B is not
entitled to set off a debt owing to him from C against the price of the goods. Thus,
the knowledge of the agent is treated as the knowledge of the principal.

2.218 BUSINESS LAWS
(iv) Principal’s liability for the agent’s fraud, misrepresentation or torts [Section
238]: Misrepresentations made, or frauds committed, by agents acting in the course
of their business for their principals, have the same effect on agreements made by
such agents as if such misrepresentations or frauds had been made, or committed, by
the principals; but misrepresentations made, or frauds committed, by agents, in
matters which do not fall within their authority, do not affect their principals.
Example 48: A, being B’s agent for the sale of goods, induces C to buy them by a
misrepresentation, which he was not authorized by B to make. The contract is
voidable, as between B and C, at the option of C.
Example 49: A, the captain of B’s ship, signs bills of lading without having received
on board the goods mentioned therein. The bills of lading are void as between B and
the pretended consignor.
9.11 PERSONAL LIABILITY OF AGENT TO THIRD

PARTIES
Agent cannot personally enforce, nor be bound by, contracts on behalf of principal
[Section 230]: In the absence of any contract to that effect, an agent cannot personally
enforce contracts entered into by him on behalf of his principal, nor is he personally bound
by them. He can neither sue nor be sued on contracts made by him on his principal’s behalf.
EXCEPTIONS: In the following exceptional cases, the agent is presumed to have agreed to
be personally bound:
(1) Where the contract is made by an agent for the sale or purchase of goods for a
merchant resident abroad/foreign principal: – When an agent has entered into a
contract for the sale or purchase of goods on behalf of a principal resident abroad,
the presumption is that the agent undertakes to be personally liable for the
performances of such contract.
(2) Where the agent does not disclose the name of his principal or undisclosed
principal; (Principal unnamed): when the agent does not disclose the name of the
principal then there arises a presumption that he himself undertakes to be personally
liable.
(3) Non-existent or incompetent principal: Where the principal, though disclosed,

cannot be sued, the agent is presumed to be personally liable.
Example 50: An agent who contracts for a minor, the minor being not liable, the
agent becomes personally liable. This result, may not, however, follow where the
other party already knows that the principal is a minor.

(4) Pretended agent – if the agent pretends but is not an actual agent, and the principal
does not rectify the act but disowns it, the pretended agent will be himself liable
(Section 235).
(5) When agent exceeds authority- When the agent exceeds his authority, misleads the
third person in believing that the agent he has the requisite authority in doing the
act, then the agent can be made liable personally for the breach of warranty of
authority.
RIGHTS OF THIRD PARTIES

i. Rights of parties to a contract made by undisclosed agent [Section 231]: If an
agent makes a contract with a person who neither knows, nor has reason to suspect,
that he is an agent, his principal may require the performance of the contract; but the
other contracting party has, as against the principal, the same right as he would have
had as against the agent if the agent had been the principal.
If the principal discloses himself before the contract is completed, the other
contracting party may refuse to fulfill the contract, if he can show that, if he had
known who was the principal in the contract, or if he had known that the agent was
not a principal, he would not have entered into the contract.
Example 51: SS bought for himself a ticket of IPL match at Wankahde Stadium
through AB because on personal grounds Stadium management would not have
issued the ticket to SS. Stadium management may repudiate the contract and refuse
SS to enter the stadium.
ii. Performance of contract with agent supposed to be principal [Section 232]:

When agent does not disclosed that he is acting as an agent and the principal
requires the performance of the contract then the principal can obtain such
performance subject to the rights and obligations subsisting between the agent and
the other party to the contract.
Example 52: A, who owes 50,000 rupees to B, sells 1,00,000 rupees worth of rice to B.
A is acting as agent for C in the transaction, but B has no knowledge nor reasonable
ground of suspicion that such is the case. C cannot compel B to take the rice without
allowing him to set off A’s debt.
iii. Option to Third Person- sue the Agent or the Principal:

a. Right of person dealing with agent personally liable [Section 233]: In
cases where the agent is personally liable, a person dealing with him may hold
either him or his principal, or both of them, liable.

2.220 BUSINESS LAWS
Example 53: A enters into a contract with B to sell him 100 bales of cotton,
and afterwards discovers that B was acting as agent for C. A may sue either B
or C, or both, for the price of the cotton.
b. Consequence of inducing agent or principal to act on belief that principal
or agent will be held exclusively liable [Section 234]: When a person who
has made a contract with an agent induces the agent to act upon the belief
that the principal only will be held liable, or induces the principal to act upon
the belief that the agent only will be held liable, he cannot afterwards hold
liable the agent or principal respectively.
9.12 REVOCATION OF AUTHORITY

Termination of agency [Section 201]
Termination of agency means putting an end to the legal relationship between principal and
agent. Section 201 provides for the following modes of termination:
Renunciation by Completion of Death of Principal

Revocation
agents business or the agent
Principal or agent
Insolvency of
becoming of Expiry of time
principal
unsound mind
a. Revocation: An agency may be terminated by the principal revoking the authority of

the agent. Principal may revoke the authority given to his agent at any time before
the authority has been exercised so as to bind the principal [Section 203]. However,
the principal cannot revoke the authority given to his agent after the authority has
been partly exercised so far as regards such acts and obligations as arise for acts
already done in the agency. [Section 204]
Example 54: A authorizes B to buy 1,000 bales of cotton on account of A, and to pay
for it out of A’s money remaining in B’s hands. B buys 1,000 bales of cotton in his own
name, so as to make himself personally liable for the price. A cannot revoke B’s
authority so far as regards payment for the cotton.
Example 55: A authorizes B to buy 1,000 bales of cotton on account of A, and to pay
for it out of A’s money remaining in B’s hands. B buys 1,000 bales of cotton in A’s

name, and so as not to render himself personally liable for the price. A can revoke B’s
authority to pay for the cotton.
Compensation for revocation by principal [Section 205]: If there is premature

revocation of agency without sufficient cause, the principal must compensate the
agent, for such revocation.
Notice of revocation [Section 206]: When the principal, having justification to do

so, revokes the authority, he must give reasonable notice of such revocation to the
agent, otherwise, he can be liable to pay compensation for any damage caused to
the agent (Section 206).
Revocation and renunciation may be expressed or implied [Section 207]:
Revocation of agency may be expressed or implied in the conduct of the principal.
Example 56: A empowers B to let A’s house. Afterwards A lets it himself. This is an
implied revocation of B’s authority.
b. Renunciation by agent [Section 206]: An agent may renounce the business of
agency in the same manner in which the principal has the right of revocation. In the
first place, if the agency is for a fixed period, the agent would have to compensate
the principal for any premature renunciation without sufficient cause. [Section 205]
Secondly, a reasonable notice of renunciation is necessary. Length of notice (time
period of notice) is to be determined by the same principles which apply to
revocation by the principal. If the agent renounces without proper notice, he shall
have to make good any damage thereby resulting to the principal. [Section 206]
c. Completion of business: An agency is automatically and by operation of law terminated
when its business is completed. Thus, for example, the authority of an agent appointed
to sell goods ceases to be exercisable when the sale is completed.
d. Death or insanity: An agency is determined automatically on the death or insanity of
the principal or the agent. Winding up of a company or dissolution of partnership
has the same effect. Act done by agent before death would remain binding.
e. Principal’s insolvency: An agency ends on the principal being adjudicated insolvent.
f. On expiry of time: Where an agent has been appointed for a fixed term, the
expiration of the term puts an end to the agency, whether the purpose of agency has
been accomplished or not. An agency comes to an automatic end on expiry of its
term.

2.222 BUSINESS LAWS
When the agency is irrevocable?

When the agent is personally interested in the subject matter of agency the agency becomes
irrevocable. Section 202 states that ”where the agent has himself an interest in the property
which forms the subject matter of the agency, the agency cannot, in the absence of an
express contract, be terminated to the prejudice of such interest.”
Example 57: A gives authority to B to sell A’s land, and to pay himself, out of the proceeds,
the debts due to him from A. A cannot revoke this authority, nor can it be terminated by his
insanity or death.
Example 58: A consigns 1000 bales of cotton to B, who has made advances to him on such
cotton, and desires B to sell the cotton, and to repay himself, out of the price, the amount of
his own advances. A cannot revoke this authority, nor it is terminated by his insanity or
death.
Effects of Termination [Section 208]

When termination of agent’s authority takes effect as to agent, and as to third persons
[Section 208]: The termination of the authority of an agent does not, so far as regards the
agent, take effect before it becomes known to him, or, so far as regards third persons,
before it becomes known to them.
Example 59: A directs B to sell goods for him and agrees to give B five per cent commission on
the price fetched by the goods. A afterwards, by letter, revokes B’s authority. B, after the letter is
sent, but before he receives it sells the goods for ` 1,00,000. The sale is binding on A, and B is
entitled to ` 5,000 as his commission.
Example 60: A, at Chennai, by letter directs B to sell for him some cotton lying in a
warehouse in Mumbai, and afterwards, by letter, revokes his authority to sell, and directs B
to send the cotton to Chennai. B, after receiving the second letter, enters into a contract
with C, who knows of the first letter, but not of the second, for the sale to him of the cotton.
C pays B the money, with which B absconds. C’s payment is good as against A.
Example 61: A directs B, his agent, to pay certain money to C. A dies, and D takes out
probate to his will. B, after A’s death, but before hearing of it, pays the money to C. The
payment is good as against D, the executor.
Agent’s duty on termination of agency by principal’s death or insanity [Section 209]:
When an agency is terminated by the principal dying or becoming of unsound mind, the
agent is bound to take on behalf of the representatives of his late principal, all reasonable
steps for the protection and preservation of the interests entrusted to him.

Termination of sub-agent’s authority [Section 210]

The termination of the authority of an agent causes the termination (subject to the rules
herein contained regarding the termination of an agent’s authority) of the authority of all
sub-agents appointed by him.
SUMMARY
Agency: Relation between an agent and his principal created by an express/ implied
agreement authorising an agent by his principal to create contractual relations with third
parties. Person so appointed to represent the principal is called as agent whereas a person
who appoints an agent to represent him as per his directions and authority is called as
principal.
 Agency can be either expressed or implied.
 Sub-agent: Person appointed by the original agent in the business of agency under
his direction and control and being responsible to the principal for acts of a sub-
agent.
 Substituted agent: Person is named by the agent expressly or impliedly to act for
the principal in the business of agency.
 Ratification: Where acts are done by one person on behalf of another, but without
his knowledge or authority, he may elect to ratify or to disown such acts. If he ratifies
them, the same effects will follow as if they had been performed by his authority.
Ratification may be expressed or may be implied in the conduct of the person on
whose behalf the acts are done.
 Revocation of authority: An Agency is terminated (a) by the principal revoking his
authority; or (b) by the agent renouncing the business of the agency; or (c) by the
business of the agency being completed; or (d) by either the principal or agent dying
or becoming of unsound mind; or (e) by either the principal or agent dying or
becoming of unsound mind.
 Duties and obligations of an Agent: (a) Conduct the business according to
principal’s directions (b) Conduct the business with the skill and diligence (c) Render
proper accounts (d) Communicate with principal in cases of difficulty (e) Repudiation
of the transaction by principal (f) Not to deal on his own account (g) Agent’s duty to
pay sums received for principal.
 Rights of an Agent: (a) Right of retain out of sums received on principal’s account
(b) Right to remuneration (c) Agent’s particular lien on principal’s property (d) Right

2.224 BUSINESS LAWS
of indemnification for lawful acts (e) Right of indemnification against acts done in
good faith.
AGENCY (SECTION 172-238)
Agency: Relation between an agent and his principal created by an express/ implied agreement
authorising an agent by his principal to create contractual relations with third parties.
Agent: Person employed to do any act for Principal: person for whom such act is done
another, or to represent another. or who is so represented.
Who can be Agent: any person including minor, Who can appoint an Agent: Major, Person of
Person of unsound mind sound mind
Modes of creation of Agency
By Express By Implied Agreement By By

Agreement Operation Ratification
a. Agency by Estoppel or holding out, b. By Necessity
of Law
Essentials for Valid

Ratification
a. May be express or implied; b. Full knowledge of facts; c. Whole transaction must be ratified;
d. Ratification not put a third party to damages; e. Within reasonable time; f. Communication;
g. Act to be ratified must be valid
Extent of Agent’s Authority Sub- Agent Substituted Agent
1. An agent, having an A person who is appointed by and acts A person appointed by agent to act for
authority to do an act, has under the control and direction of original principal with knowledge and consent of
authority to do every lawful agent. principal.
thing which is necessary in
Rules of Sub-Agent Rules of Substituted Agent
order to do such act.
1. Work under control and directions of 1. Works under the instructions of the
2. An agent having an
agent. principal.
authority to carry on a
business has authority to do 2. Agent delegates a part of his own duties 2. Agent does not delegate any part of his
to Sub Agent.
every lawful thing necessary task to a substituted agent.
for the purpose, or usually 3. No privity of contract between principal
3. Privity of contract exists between a
done in the course, of and sub-agent.
principal and a substituted agent.
conducting such business. 4. Sub-agent is responsible to the agent
only. 4. Responsible to the principal.
3. In emergency, an agent has
authority to do all such acts 5. Agent is responsible to the principal for 5. Agent is not responsible to the principal
for the purpose of protecting the acts of the sub- agent. for the acts of the substituted agent.
his principal from loss. 6. Sub-agent has no right of action against 6. Substituted agent can sue the principal for
the principal for remuneration due to him.
remuneration due to him.

Duties & Rights of Agent Termination of Agency
Duties of Agent Rights of Agent Personal Liability 1. By Revocation

of Agent
1. To act according to Principal, 1. Right of 2. By Renunciation by
Retainer, 1. Foreign principal, agent
2. Reasonable care,
2. To receive 2. Undisclosed 3. On completion of
3. Present proper accounts,
agreed principal, business.
4. Communicate with principal, remuneration,
3. Principal 4. On death or insanity of
5. Not to deal on his own account, 3. Right of lien, incompetent, Principal or Agent
6. Not to make secret profit, 4. Right of 4. Pretended Agent. 5. Principal’s insolvency
7. Not to delegate authority. indemnification,

5. Acts beyond his 6. On expiry of time
8. Pay sums received, 5. Right of authority

compensation for
9. Not to Mis-use information injuries.
obtained
TEST YOUR KNOWLEDGE

1. A person employed to do any act and represent is called ………..
(a) agent
(b) principal
(c) owner
(d) servant
2. Who can become an agent?
(a) Both Minor & Adult
(b) Minor
(c) Adult person

(d) Dead person
3. To create an agency, which is not required?
(a) Principal
(b) consideration

2.226 BUSINESS LAWS
(c) agent
(d) third party
4. _______ is a person employed by, and acting under the control of original agent in the
business of agency
(a) A substituted agent
(b) A sub agent

(c) A mercantile agent
(d) An universal agent
5. A substituted agent acts on behalf of ______

(a) Principal
(b) Sub-agent
(c) Agent
(d) None of these
6. The power given to agent is ………..
(a) reasonable & unreasonable
(b) expressed & implied
(c) legal & illegal
(d) all above
7. On whose insolvency the agency is terminated?
(a) Sub agent
(b) Agent
(c) Principal
(d) Del credere
8. Under which circumstances agent become personally responsible?

(a) beyond authority
(b) fraudulent transactions
(c) fraud
(d) All of above

9. It is the duty of the agent to protect and preserve the interest on behalf of the
principal’s representative in case of _______
(a) Death of the principal

(b) Insolvency of the principal
(c) Both (a) & (b)
(d) None of these

10. Agent should not to deal on his own account without first obtaining the consent of the
principal, otherwise the principal may—
(a) repudiate the transaction,

(b) claim from the agent any benefit which may have resulted to him from the
transaction,
(c) Either (a) or (b)
(d) Both (a) & (b)
1. A appoints M, a minor, as his agent to sell his watch for cash at a price not less than
` 700. M sells it to D for ` 350. Is the sale valid? Explain the legal position of M and D,
referring to the provisions of the Indian Contract Act, 1872.
2. State with reason whether the following statement is correct or incorrect: Ratification of
agency is valid even if knowledge of the principal is materially defective.
3. Rahul, a transporter was entrusted with the duty of transporting tomatoes from a rural
farm to a city by Aswin. Due to heavy rains, Rahul was stranded for more than two
days. Rahul sold the tomatoes below the market rate in the nearby market where he
was stranded fearing that the tomatoes may perish. Can Aswin recover the loss from
Rahul on the ground that Rahul had acted beyond his authority?
4. Mr. Ahuja of Delhi engaged Mr. Singh as his agent to buy a house in West Extension
area. Mr. Singh bought a house for ` 20 lakhs in the name of a nominee and then
purchased it himself for ` 24 lakhs. He then sold the same house to Mr. Ahuja for ` 26
lakhs. Mr. Ahuja later comes to know the mischief of Mr. Singh and tries to recover the
excess amount paid to Mr. Singh. Is he entitled to recover any amount from Mr. Singh?
If so, how much? Explain.
5. Comment on the statement ‘Principal is not always bound by the acts of a sub-agent’.

2.228 BUSINESS LAWS
6. ABC Ltd. sells its products through some agents and it is not the custom in their
business to sell the products on credit. Mr. Pintu, one of the agents sold goods of ABC
Ltd. to M/s. Parul Pvt. Ltd. (on credit) which was insolvent at the time of such sale. ABC
Ltd. sued Mr. Pintu for compensation towards the loss caused due to sale of products to
M/s. Parul Pvt. Ltd. Will ABC Ltd. succeed in its claim?
7. R is the wife of P. She purchased sarees on credit from Nalli. Nalli demanded the
amount from P. P refused. Nalli filed a suit against P for the said amount. Decide in the
light of provisions of the Indian Contract Act, 1872, whether Nalli would succeed.
8. Bhupendra borrowed a sum of ` 3 lacs from Atul. Bhupendra appointed Atul as his
agent to sell his land and authorized him to appropriate the amount of loan out of the
sale proceeds. Afterward, Bhupendra revoked the agency.
Decide under the provisions of the Indian Contract Act, 1872 whether the revocation of
the said agency by Bhupendra is lawful.
ANSWERS/HINTS
Answers to MCQs
1. (a) 2. (a) 3. (b) 4. (b) 5. (a) 6. (b)
7. (c) 8. (d) 9. (c) 10. (d)

1. According to the provisions of Section 184 of the Indian Contract Act, 1872, as
between the principal and a third person, any person, even a minor may become an
agent. But no person who is not of the age of majority and of sound mind can
become an agent, so as to be responsible to his principal. Thus, if a person who is
not competent to contract is appointed as an agent, the principal is liable to the third
party for the acts of the agent. Thus, in the given case, D gets a good title to the
watch. M is not liable to A for his negligence in the performance of his duties.
2. Incorrect: Section 198 of the Indian Contract Act, 1872 provides that for a valid
ratification, the person who ratifies the already performed act must be without defect
and have clear knowledge of the facts of the case. If the principal’s knowledge is
materially defective, the ratification is not valid and hence no agency.
3. Agent's authority in an emergency (Section 189 of the Indian Contract Act, 1872):
An agent has authority, in an emergency, to do all such acts for the purpose of
protecting his principal from loss as would be done by a person of ordinary prudence, in
his own case, under similar circumstances.

In the instant case, Rahul, the agent, was handling perishable goods like ‘tomatoes’
and can decide the time, date and place of sale, not necessarily as per instructions of
the Aswin, the principal, with the intention of protecting Aswin from losses.
Here, Rahul acts in an emergency as a man of ordinary prudence, so Aswin will not
succeed against him for recovering the loss.
4. The problem in this case, is based on the provisions of the Indian Contract Act, 1872
as contained in Section 215 read with Section 216. The two sections provide that
where an agent without the knowledge of the principal, deals in the business of
agency on his own account, the principal may:
(1) repudiate the transaction, if the case shows, either that the agent has
dishonestly concealed any material fact from him, or that the dealings of the
agent have been disadvantageous to him.
(2) claim from the agent any benefit, which may have resulted to him from the
transaction.
Therefore, based on the above provisions, Mr. Ahuja is entitled to recover ` 6 lakhs
from Mr. Singh being the amount of profit earned by Mr. Singh out of the
transaction.
5. The statement is correct. Normally, a sub-agent is not appointed, since it is a
delegation of power by an agent given to him by his principal. The governing
principle is, a delegate cannot delegate’. (Latin version of this principle is,
“delegates non potest delegare”). However, there are certain circumstances where
an agent can appoint sub-agent.
In case of proper appointment of a sub-agent, by virtue of Section 192 of the Indian
Contract Act, 1872 the principal is bound by and is held responsible for the acts of
the sub-agent. Their relationship is treated to be as if the sub-agent is appointed by
the principal himself.
However, if a sub-agent is not properly appointed, the principal shall not be bound
by the acts of the sub-agent. Under the circumstances the agent appointing the sub-
agent shall be bound by these acts and he (the agent) shall be bound to the principal
for the acts of the sub-agent.
6. To conduct the business of agency according to the principal’s directions
(Section 211 of the Indian Contract Act, 1872): An agent is bound to conduct the
business of his principal according to the direction given by the principal, or, in the
absence of any such directions, according to the custom which prevails in doing
business of the same kind at the place where the agent conducts such business.
When the agent acts otherwise, if any loss be sustained, he must make it good to his
principal, and, if any profit accrues, he must account for it.

2.230 BUSINESS LAWS
In the present case, Mr. Pintu, one of the agents, sold goods of ABC Ltd. to M/s Parul
Pvt. Ltd. (on credit) which was insolvent at the time of such sale. Also, it is not the
custom in ABC Ltd. to sell the products on credit.
Hence, Mr. Pintu must make good the loss to ABC Ltd.
7. The position of husband and wife is special and significant case of implied authority.
According to the Indian Contract Act 1872, where the husband and wife are living
together in a domestic establishment of their own, the wife shall have an implied
authority to pledge the credit of her husband for necessaries. However, the implied
authority can be challenged by the husband only in the following circumstances.
(1) The husband has expressly forbidden the wife from borrowing money or
buying goods on credit.
(2) The articles purchased did not constitute necessities.
(3) Husband had given sufficient funds to the wife for purchasing the articles she
needed to the knowledge of the seller.
(4) The creditor had been expressly told not to give credit to the wife.
Further, where the wife lives apart from husband without any of her fault, she shall
have an implied authority to bind the husband for necessaries, if he does not provide
for her maintenance.
Since, none of the above criteria is being fulfilled; Nalli would be successful in
recovering its money.
8. According to Section 202 of the Indian Contract Act, 1872 an agency becomes
irrevocable where the agent has himself an interest in the property which forms the
subject-matter of the agency, and such an agency cannot, in the absence of an express
provision in the contract, be terminated to the prejudice of such interest.
In the instant case, the rule of agency coupled with interest applies and does not
come to an end even on death, insanity or the insolvency of the principal.
Thus, when Bhupendra appointed Atul as his agent to sell his land and authorized
him to appropriate the amount of loan out of the sale proceeds, interest was created
in favor of Atul and the said agency is not revocable. The revocation of agency by
Bhupendra is not lawful.

1.2

CHAPTER 3
THE SALE OF GOODS

ACT, 1930
UNIT -1: FORMATION OF THE CONTRACT OF SALE
LEARNING OUTCOMES
After studying this unit, you would be able to understand-
♦ Scope of the Act
♦ Definitions of certain terms.
♦ Meaning of contract of sale.
♦ Distinctions of sale from other similar contracts.
♦ Formalities of contract of sale.
♦ Subject matter of contract of sale.
♦ Ascertainment of price for the contract of sale.

3.2 BUSINESS LAWS
UNIT OVERVIEW
Contract of Sale
Agreement Transfer of Goods Price Essentials

Property of valid
Money contract
Buyer Seller Immediate Yet to be Existing Future Contingent consideration
Transfer transferred Goods Goods Goods
(Sale) (Agreement
to sell)
Specific Ascertained Unascertained
Sale of Goods before Sale of Goods Act, 1930

The Sale of Goods Act, 1930 deals with the laws relating to sale of goods in India. This Act is
mainly based on English Sale of Goods Act, 1893. Before the Sale of Goods Act, 1930, all the
provisions relating to sale of goods was covered under the Chapter VII of Indian Contract Act,
1872. A strong need was felt to have an independent Sale of Goods Act and consequently a
new act called the Sale of Goods Act, 1930 was passed. The Act came into force from 1 st July
1930 and extends to whole of India.
INTRODUCTION
Sale of goods is one of the specific forms of contracts recognized and regulated by law in
India. Sale is a typical bargain between the buyer and the seller. The Sale of Goods Act, 1930
allows the parties to modify the provisions of the law by express stipulations. However, in
some cases, this freedom is severely restricted.
Sale of Goods Act, 1930 is an Act to define and amend the law relating to the sale of goods.
1.1 SCOPE OF THE ACT

The provisions of the Act are applicable to the contracts related to the sale of goods which
means movable properties. The Act is not applicable for the sale of immovable properties like
land, fields, shop or house etc. For immovable property, Transfer of Property Act, 1882 is
applicable. Sale of Goods Act, 1930 deals only with movable property.
The general provisions of the Indian Contract Act, 1872 apply to a Contract of Sale of Goods
as far as they are not inconsistent with the express provisions of the Sale of Goods Act.

THE SALE OF GOODS ACT, 1930 3.3
The expressions used but not defined in the Sales of Goods Act, 1930 and defined in the Indian
Contract Act, 1872 have the meanings assigned to them in that Act.
The customs and usages will bind both the parties if these are reasonable and are known to
the parties at the time of entering the contract of sale.
1.2 DEFINITIONS
The Sale of Goods Act, 1930 defines the terms which have been frequently used in the Act,
which are as follows –
(A) Buyer and Seller: ‘Buyer’ means a person who buys or agrees to buy goods [Section
2(1)]. ‘Seller’ means a person who sells or agrees to
sell goods [Section 2(13)]. The two terms, ‘buyer’ and
‘seller’ are complementary and represent the two
parties to a contract of sale of goods. Both the terms
are, however, used in a sense wider than their common
meaning. Not only the person who buys but also the
one who agrees to buy is a buyer. Similarly, a ‘seller’
means not only a person who sells but also a person
who agrees to sell.
(B) Goods and other related terms:
“Goods” means every kind of movable property other than actionable claims and
money; and includes stock and shares, growing crops, grass, and things attached to or
forming part of the land, which are agreed to be severed/ separated from the land
before sale or under the contract of sale. [Section 2(7)]
‘Actionable claims’ are claims, which can be enforced only by an action or suit, e.g.,
debt. A debt is not a movable property or goods. Even the Fixed Deposit Receipts (FDR)
are considered as goods under Section 176 of the Indian Contract Act read with Section
2(7) of the Sales of Goods Act.
“Goods” include both tangible goods and intangible goods like goodwill, copyrights,
patents, trademarks etc. Stock and shares, gas, steam, water, electricity and decree of
the court are also considered to be goods.

3.4 BUSINESS LAWS
Other Also
Goods
Means every than Actionable includes Stock & Shares
kind of claims
movable Growing crops
property Money in
circulation
Grass, and
Things
attached to or
forming part of
land which
agreed to be
severed
Classification of Goods
Goods
Existing Future Contingent

Goods Goods Goods
(i) EXISTING GOODS are such goods which are in existence at the time of the
contract of sale, i.e., those owned or possessed or acquired by the seller at the
time of contract of sale (Section 6).
The existing goods may be of following kinds:
(a) Specific goods mean goods identified and agreed upon at the time
a contract of sale is made [Section 2(14)].
Example 1: Any specified and finally decided goods like a Samsung
Galaxy S7 Edge, Whirlpool washing machine of 7 kg etc.
Example 2: ‘A’ had five cars of different models. He agreed to sell his
‘Santro’ car to ‘B’ and ‘B’ agreed to purchase the same ‘Santro’ car. In
this case, the sale is for specific goods as the car has been identified
and agreed at the time of the contract of sale.

(b) Ascertained Goods are those goods which are identified in

accordance with the agreement after the contract of sale is made. This
term is not defined in the Act but has been judicially interpreted. In
actual practice, the term ‘ascertained goods’ is used in the same sense
as ‘specific goods.’ When out of a lot or out of large quantity of
unascertained goods, the number or quantity contracted for is
identified, such identified goods are called ascertained goods.
Example 3: A wholesaler of cotton has 100 bales in his godown. He
agrees to sell 50 bales and these bales were selected and set aside. On
selection, the goods become ascertained. In this case, the contract is
for the sale of ascertained goods, as the cotton bales to be sold are
identified and agreed after the formation of the contract. It may be
noted that before the ascertainment of the goods, the contract was for
the sale of unascertained goods.
(c) Unascertained goods are the goods which are not specifically
identified or ascertained at the time of making of the contract. They
are indicated or defined only by description or sample.
Example 4: If A agrees to sell to B one packet of salt out of the lot of
one hundred packets lying in his shop, it is a sale of unascertained
goods because it is not known which packet is to be delivered. As soon
as a particular packet is separated from the lot, it becomes ascertained
or specific goods.
Example 5: X has ten horses. He promises to sell one of them but does
not specify which horse he will sell. It is a contract of sale of
unascertained goods.
(ii) FUTURE GOODS means goods to be manufactured or produced or acquired
by the seller after making the contract of sale [Section 2(6)].
A contract for the sale of future goods is always an agreement to sell. It is never
actual sale because a person cannot transfer what is not in existence.
Example 6: 1,000 quintals of potatoes to be grown on A’s field is an example
of agreement to sell.
Example 7: P agrees to sell to Q all the milk that his cow may yield during the
coming year. This is a contract for the sale of future goods.

3.6 BUSINESS LAWS
Example 8: T agrees to sell to S all the oranges which will be produced in his
garden this year. It is contract of sale of future goods, amounting to ‘an
agreement to sell.’
(iii) CONTINGENT GOODS: The acquisition of goods which depends upon an uncertain
contingency (uncertain event) are called ‘contingent goods’ [Section 6(2)].
Contingent goods also operate as ‘an agreement to sell’ and not a ‘sale’ so far
as the question of passing of property to the buyer is concerned. In other words,
like the future goods, in the case of contingent goods also, the property does
not pass to the buyer at the time of making the contract.
Example 9: A agrees to sell to B a Picasso painting provided he is able to
purchase it from its present owner. This is a contract for the sale of contingent
goods.
Example 10: P contracts to sell 50 pieces of particular article provided the ship
which is bringing them reaches the port safely. This is an agreement for the sale
of contingent goods.
(C) Delivery - its forms and derivatives: Delivery means voluntary transfer of possession
from one person to another [Section 2(2)]. As a general rule, delivery of goods may be
made by doing anything, which has the effect of putting the goods in the possession
of the buyer, or any person authorized to hold them on his behalf.
Forms of delivery: Following are the kinds of delivery for transfer of possession:
Delivery of Goods
Voluntary transfer of possession by one person to another
Actual delivery Constructive delivery Symbolic delivery
(i) Actual delivery: When the goods are physically delivered to the buyer. Actual
delivery takes place when the seller transfers the physical possession of the
goods to the buyer or to a third person authorised to hold goods on behalf of
the buyer. This is the most common method of delivery.
(ii) Constructive delivery: When transfer of goods is effected without any change
in the custody or actual possession of the thing as in the case of delivery by
attornment (acknowledgement)
Example 11: Where a warehouseman holding the goods of A agrees to hold
them on behalf of B, at A’s request.

Constructive delivery takes place when a person in possession of the goods

belonging to the seller acknowledges to the buyer that he holds the goods on
buyer’s behalf.
(iii) Symbolic delivery: When there is a delivery of a thing in token of a transfer of
something else, i.e., delivery of goods in the course of transit may be made by
handing over documents of title to goods, like bill of lading or railway receipt
or delivery orders or the key of a warehouse containing the goods is handed
over to buyer. Where actual delivery is not possible, there may be delivery of
the means of getting possession of the goods.
Goods are said to be in a deliverable state when they are in such a condition that
the buyer would, under the contract, be bound to take delivery of them [Section
2(3)].
Example 12: When A contracts to sell timber and make bundles thereof, the goods
will be in a deliverable state after A has put the goods in such a condition.
(D) “Document of title to goods” includes bill of lading, dock-warrant, warehouse
keeper’s certificate, wharfingers’ certificate, railway receipt, multimodal transport
document, warrant or order for the delivery of goods and any other document used in
the ordinary course of business as proof of the possession or control of goods or is for
authorizing or purporting to authorize, either by endorsement or by delivery, the
possessor of the document to transfer or receive goods thereby represented. [Section
2(4)]
Example 13: Bill of lading, dock warrant, warehouse keeper’s certificate, wharfinger’s
certificate, railway receipt, warrant, an order of delivery of goods.
The list is only illustrative and not exhaustive. Any other document which has the above
characteristics also will fall under the same category. Though a bill of lading is a
document of title, a mate’s receipt is not; it is regarded at law as merely an
acknowledgement for the receipt of goods. A document amounts to a document of
title only where it shows an unconditional undertaking to deliver the goods to the
holder of the document.
However, there is a difference between a ‘document showing title’ and ‘document
of title’. A share certificate is a ‘document’ showing title but not a document of title.
It merely shows that the person named in the share certificate is entitled to the share
represented by it, but it does not allow that person to transfer the share mentioned
therein by mere endorsement on the back of the certificate and the delivery of the
certificate.

3.8 BUSINESS LAWS
(E) Mercantile Agent [Section 2(9)]: It means an agent who in the customary course of
business has, as such agent, authority either to sell goods or to consign goods for the
purpose of sale or to buy goods or to raise money on the security of the goods.
Mercantile agent can borrow money by pledging the goods.
Example 14: Such kind of agents are auctioneers or brokers, etc.
(F) Property [Section 2(11)]: ‘Property’ here means ‘ownership’ or general property. In
every contract of sale, the ownership of goods must be transferred by the seller to the
buyer, or there should be an agreement by the seller to transfer the ownership to the
buyer. It means the general property (right of ownership-in-goods) and not merely a
special property.
The property in the goods means the general property i.e., all ownership right of the
goods. Note that the ‘general property’ in goods is to be distinguished from a ‘special
property’. It is quite possible that the general property in a thing may be in one person
and a special property in the same thing may be in another e.g., when an article is
pledged, the special property gets transferred and not the general property. The
general property in a thing may be transferred, subject to the special property
continuing to remain with another person i.e., the pledgee who has a right to retain
the goods pledged till payment of the stipulated dues.
Example 15: If A who owns certain goods pledges them to B, A has general property
in the goods, whereas B has special property or interest in the goods to the extent of
the amount of advance he has made. In case A fails to repay the amount borrowed on
pledging the goods, then B may sell his goods but not otherwise.
(G) Insolvent [Section 2(8)]: A person is said to be insolvent when he ceases to pay his
debts in the ordinary course of business, or cannot pay his debts as they become due,
whether he has committed an act of insolvency or not.
(H) Price [Section 2(10)]: Price means the money consideration for a sale of goods. It is
the value of goods expressed in monetary terms. It is the essential requirement to
make a contract of sale of goods.
(I) Quality of goods includes their state or condition. [Section 2(12)]
1.3 SALE AND AGREEMENT TO SELL (SECTION 4)

According to section 4(1), “A contract of sale of goods is a contract whereby the seller
transfers or agrees to transfer the property in goods to the buyer for a price”. There may be a
contract of sale between one part-owner and another.
A contract of sale may be absolute or conditional. [Section 4(2)]

Where under a contract of sale, the property in the goods is transferred from the seller to the
buyer, the contract is called a sale, but where the transfer of the property in the goods is to
take place at a future time or subject to some condition thereafter to be fulfilled, it is called
an agreement to sell. [Section 4(3)]
An agreement to sell becomes a sale when the time elapses or the conditions are fulfilled
subject to which the property in the goods is to be transferred. [Section 4(4)]
Contract
of sale
Sale
Agreement to
sell
Sale: In Sale, the property in goods is transferred from seller to the buyer immediately. The
term sale is defined in the Section 4(3) of the Sale of Goods Act, 1930 as – “where under a
contract of sale the property in the goods is transferred from the seller to the buyer, the
contract is called a sale.”
Agreement to Sell: In an agreement to sell, the ownership of the goods is not transferred
immediately. It is intending to transfer at a future date upon the completion of certain
conditions thereon. The term is defined in Section 4(3) of the Sale of Goods Act, 1930, as –
“where the transfer of the property in the goods is to take place at a future time or subject to
some condition thereafter to be fulfilled, it is called an agreement to sell.”
Thus, whether a contract of sale of goods is an absolute sale or an agreement to sell, depends
on the fact whether it contemplates immediate transfer from the seller to the buyer or the
transfer is to take place at a future date.
Example 16: X agrees with Y on 10th October, 2022 that he will sell his car to Y on 10th
November, 2022 for a sum of ` 7 lakhs. It is an agreement to sell.
When agreement to sell becomes sale: An agreement to sell becomes a sale when the time
elapses or the conditions are fulfilled subject to which the property in the goods is to be
transferred.
The following elements must co-exist so as to constitute a contract of sale of goods under
the Sale of Goods Act, 1930:

3.10 BUSINESS LAWS
(i) There must be at least two parties, the seller and the buyer and the two must be
different persons. A person cannot be both the seller and the buyer and sell his goods
to himself.
(ii) The subject matter of the contract must necessarily be goods covering only movable
property. It may be either existing goods, owned or possessed by the seller or future
goods.
(iii) A price in money (not in kind) should be paid or promised. But there is nothing to
prevent the consideration from being partly in money and partly in kind.
(iv) A transfer of property in goods from seller to the buyer must take place. The contract
of sale is made by an offer to buy or sell goods for a price by one party and the
acceptance of such offer by other.
(v) A contract of sale may be absolute or conditional.

(vi) All other essential elements of a valid contract must be present in the contract of sale,
e.g. free consent of parties, competency of parties, legality of object and consideration
etc.
1.4 DISTINCTION BETWEEN SALE AND AN

AGREEMENT TO SELL
The differences between the two are as follows:
Basis of difference Sale Agreement to sell

Transfer of property The property in the goods Property in the goods
passes to the buyer passes to the buyer on
immediately. future date or on fulfilment
of some condition.
Nature of contract It is an executed contract i.e. It is an executory contract
contract for which i.e. contract for which
consideration has been paid. consideration is to be paid
at a future date.
Remedies for breach The seller can sue the buyer The aggrieved party can sue
for the price of the goods for damages only and not
because of the passing of for the price, unless the price
the property therein to the was payable at a stated date.
buyer.

Liability of parties A subsequent loss or Such loss or destruction is

destruction of the goods is the liability of the seller.
the liability of the buyer.
Burden of risk Risk of loss is that of buyer Risk of loss is that of seller.
since risk follows ownership.
Nature of rights Creates Jus in rem means Creates Jus in personam
right against the whole means rights against a
world. particular party to the
contract
Right of resale The seller cannot resell the The seller may sell the goods
goods. since ownership is with the
seller.
In case of insolvency of The official assignee will not The official assignee will
seller be able to take over the acquire control over the
goods but will recover the goods but the price will not
price from the buyer. be recoverable.
In case of insolvency of The official assignee will The official assignee will not
buyer have control over the goods. have any control over the
goods.
1.5 SALE DISTINGUISHED FROM OTHER SIMILAR

CONTRACTS
(i) Sale and Hire Purchase: Contract of sale resembles with contracts of hire purchase
very closely, and indeed the real object of a contract of hire purchase is the sale of the
goods ultimately.
Hire purchase agreements are governed by the Hire-purchase Act, 1972. Term “hire-
purchase agreement” means an agreement under which goods are let on hire and
under which the hirer has an option to purchase them in accordance with the terms of
the agreement and includes an agreement under which—
(a) Possession of goods is delivered by the owner thereof to a person on condition

that such person pays the agreed amount in periodical instalments, and
(b) The property in the goods is to pass to such person on the payment of the last
of such instalments, and
(c) Such person has a right to terminate the agreement at any time before the
property so passes;

3.12 BUSINESS LAWS
Nonetheless, a sale has to be distinguished from a hire purchase as their legal incidents
are quite different.
The main points of distinction between the ‘sale’ and ‘hire-purchase’ are as follows:
Basis of difference Sale Hire- Purchase
Time of passing Property in the goods is The property in goods passes

property transferred to the buyer to the hirer upon payment of
immediately at the time of the last instalment.
contract.
Position of the The position of the buyer is The position of the hirer is
party that of the owner of the that of a bailee till he pays the
goods. last instalment.
Termination of The buyer cannot terminate The hirer may, if he so likes,

contract the contract and is bound to terminate the contract by
pay the price of the goods. returning the goods to its
owner without any liability to
pay the remaining
instalments.
Burden of Risk of The seller takes the risk of The owner takes no such risk,
insolvency of the any loss resulting from the for if the hirer fails to pay an
buyer insolvency of the buyer. instalment, the owner has
right to take back the goods.
Transfer of title The buyer can pass a good The hirer cannot pass any title
title to a bona fide even to a bona fide purchaser
purchaser from him. untill he pays the last
instalment.
Resale The buyer in sale can resell The hire purchaser cannot
the goods. resell unless he has paid all
the instalments.
(ii) Sale and Bailment: A ‘bailment’ is the delivery of goods for some specific purpose
under a contract on the condition that the same goods are to be returned when the
purpose is accomplished to the bailor or are to be disposed of according to the

directions of the bailor. Provisions related to bailment are regulated by the Indian
Contract Act, 1872.
The difference between bailment and sale may be clearly understood by studying
the following:
Basis of Sale Bailment

difference
Transfer of The property in goods is There is only transfer of
property transferred from the seller to possession of goods from the
the buyer. So, it is transfer of bailor to the bailee for any of
general property. the reasons like safe custody,
carriage etc. So, it is transfer
of special property.
Return of goods The return of goods in The bailee must return the
contract of sale is not goods to the bailor on the
possible. accomplishment of the
purpose for which the
bailment was made.
Consideration The consideration is the price The consideration may be
in terms of money. gratuitous or non-gratuitous.
(iii) Sale and contract for work and labour: A contract of sale of goods is one in which
some goods are sold or are to be sold for a price. But where no goods are sold, and
there is only the doing or rendering of some work of labour, then the contract is only
of work and labour and not of sale of goods.
Example 17: Where gold is supplied to a goldsmith for preparing an ornament or
when an artist is asked to paint a picture. Here, the basic substance of the contract is
the exercise of skill and labour, therefore it is contract for work and labour.
1.6 CONTRACT OF SALE HOW MADE (SECTION 5)

According to Section 5(1), A contract of sale may be made in any of the following modes:
(i) Contract of sale is made by an offer to buy or sell goods for a price and acceptance of
such offer.
(ii) There may be immediate delivery of the goods; or

(iii) There may be immediate payment of price, but it may be agreed that the delivery is to
be made at some future date; or

3.14 BUSINESS LAWS
(iv) There may be immediate delivery of the goods and an immediate payment of price; or
(v) It may be agreed that the delivery or payment or both are to be made in instalments;
or
(vi) It may be agreed that the delivery or payment or both are to be made at some future
date.
Example 18: R agrees to deliver his old motorcycle valued at ` 55,000 to S in exchange for
a new motorcycle and agrees to pay the difference in cash, it is a Contract of Sale.
1.7 SUBJECT MATTER OF CONTRACT OF SALE

Existing or future goods (section 6):
(1) The goods which form the subject matter of a contract of sale may be either existing
goods that are acquired, owned or possessed by the seller, or future goods.
(2) There may be a contract for the sale of goods, the acquisition of which by the seller
depends upon a contingency which may or may not happen.
Example 19: A contract for sale of certain cloth to be manufactured by a certain mill
is a valid contract. Such contacts are called contingent contracts.
(3) There may be a contract of sale, where the seller purports to effect a present sale of
future goods, such contract operates as an agreement to sell the goods.
Goods perishing before making of contract (Section 7): Where there is a contract for the
sale of specific goods, the contract is void if the goods without the knowledge of the seller
have, at the time when the contract was made, perished or become so damaged that they no
longer answer to their description given in the contract.
Example 20: A agrees to sell B 50 bags of wheat stored in the A’s godown. Due to water
logging, all the goods stored in the godown were destroyed. At the time of agreement, neither
parties were aware of the fact. The agreement is void.
Goods perishing before sale but after agreement to sell (Section 8): Where there is an
agreement to sell specific goods, and subsequently the goods without any fault on the part
of the seller or buyer perish or become so damaged that they no longer answer to their
description in the agreement before the risk passes to the buyer, the agreement is thereby
avoided or becomes void.
Perishing of future goods: If the future goods are specific, the destruction of such goods
will amount to supervening impossibility and the contract shall become void.

Example 21: A agrees to sell B 100 tons of tomatoes grown on his land next year. But the
crop failed due to some disease in plants and A could only deliver 80 tons of tomatoes to B.
It was held A was not liable as the performance of contract became impossible due to
supervening impossibility.
1.8 ASCERTAINMENT OF PRICE (SECTION 9 & 10)

Ascertainment of price (Section 9):
‘Price’ means the monetary consideration for sale of goods [Section 2 (10)]. By virtue of
Section 9, the price in the contract of sale may be-
(1) fixed by the contract, or
(2) agreed to be fixed in a manner provided by the contract, e.g., by a valuer, or
(3) determined by the course of dealings between the parties.
Agreement to sell at valuation (Section 10):
Section 10 provides for the determination of price by a third party.
1. Where there is an agreement to sell goods on the terms that price has to be fixed by
the third party and he either does not or cannot make such valuation, the agreement
will be void.
2. In case the third party is prevented by the default of either party from fixing the price,
the party at fault will be liable to the damages to the other party who is not at fault.
3. However, a buyer who has received and appropriated the goods must pay a reasonable
price for them in any eventuality.
Example 22: P is having two bikes. He agrees to sell both of the bikes to S at a price to be
fixed by the Q. He gives delivery of one bike immediately. Q refuses to fix the price. As such
P ask S to return the bike already delivered while S claims for the delivery of the second bike
too. In the given instance, buyer S shall pay reasonable price to P for the bike already taken.
As regards the Second bike, the contract can be avoided as the third party Q refuses to fix the
price

3.16 BUSINESS LAWS
SUMMARY
In nutshell, contract of sale of goods is a contract where the seller transfers or agrees to
transfer the property in goods to the buyer for a price. Where, however, the transfer of
property in goods is to take place at a future date or subject to some conditions to be fulfilled,
the contract is called ‘agreement to sell’. The subject matter of such contract must always be
goods. Price for goods may be fixed by the contract or may be agreed to be fixed later on in
a specific manner.
FORMATION OF THE CONTRACT OF SALE
Contract Agreement to sell Essentials of Sale Documents of Ascertainment of Price

of Sale title
(Sec.4 (3)) • Two Parties • fixed by contract, or
(Sec.4 (1)) • Price Bill of lading, • agreed to be fixed in a
Transfer of property Dock warrant,
• Transfer of manner provided by the
Transfer of in the goods is to general property Warehouse- contract, e.g., by a
property in take place at a • Essential keeper’s valuer, or
the goods future time or elements of a certificate, • determined by the
from the subject to some valid contract. Railway receipt, course of dealings
seller to the conditions thereafter Delivery order. between the parties
buyer. to be fulfilled.
Goods
Types
Meaning
Every kind of movable
property. Existing Future Contingent
Excludes
Actionable Claims & Money. Owned or To be Acquisition of
Includes possessed by manufactured which by the
Stock & Shares, Growing seller at the or produced or seller depends
Crops, Grass & things time of sale. acquired after upon a
Attached to & forming part of
making of contingency.
land.
contract of sale.
Identified and agreed

Good become ascertained Defined only by description
upon at the time a
subsequent to the formation and may form part of a lot.
contract of sale.
of a contract of sale.

Delivery
Meaning Types
Actual Constructive Symbolic
Goods are When a person in Delivery of a

physically possession of the thing in token
delivered to goods belonging of a transfer of
buyer to the seller something else
acknowledges to
the buyer that he
holds the goods
on buyer's behalf
TEST YOUR KNOWLEDGE

1. A contract for the sale of goods where property would pass to the buyer on payment of
total price would be;
(a) sale
(b) agreement to sell

(c) hire-purchase contract.
(d) sale on approval.
2. The term “goods” under Sale of Goods Act, 1930 does not include
(a) goodwill.
(b) actionable claims.
(c) stocks and shares.

(d) harvested crops.
3. A contract for the sale of “future goods” is
(a) sale
(b) agreement to sell.

3.18 BUSINESS LAWS
(c) void.
(d) hire-purchase contract.
4. The sale of Goods Act, 1930 deals with the
(a) movable goods only.
(b) immovable goods only.
(c) both movable and immovable goods.
(d) all goods except ornaments.
5. Under Sale of Goods Act, 1930 the terms “Goods” means every kind of movable property
and it includes
(a) stock and share.
(b) growing crops, grass
(c) both (a) and (b).

6. The Sale of Goods Act, 1930 deals with
(a) sale
(b) mortgage.
(c) pledge.
(d) all of the above.
7. Which one of the following is true?
(a) the provisions of Sale of Goods were originally with the Indian Contract Act, 1872.
(b) the Sale of Goods Act, 1930 deals with mortgage.

(c) the Sale of Goods Act restricts the parties to modify the provisions of law.
(d) none of the above.
8. Goods which are in existence at the time of the Contract of Sale is known as
(a) present Goods.
(b) existing Goods.
(c) specific Goods.

9. Which of the following is not a form of delivery?

(a) constructive delivery.
(b) structured delivery.
(c) actual delivery.
(d) symbolic delivery.
10. Which one of the following is/are document of title to goods?
(a) railway receipt.
(b) wharfinger’s certificate.
(c) warehouse keeper’s certificate.
(d) all of the above
11. Which one of the following is not true?
(a) document showing title is different from document of title.
(b) bill of lading is a document of title to goods.
(c) specific goods can be identified and agreed upon at the time of the Contract of
Sale.
d) none of the above.
12. Mercantile Agent is having an authority to
(a) sell or consign goods.
(b) raise money on the security of goods.
c) sell or buy goods.
(d) any of the above.

13. Contract of Sale is
(a) executory Contract.
(b) executed Contract.

(c) both of the above.

3.20 BUSINESS LAWS
14. In which form of the contract, the property in the goods passes to the buyer immediately:
(a) agreement to sell.
(b) hire purchase.
(c) sale
(d) instalment to sell.
15. In case of hire purchase the hirer can pass title to a bona fide purchaser.
(a) true.
(b) false.
16. In a contract of sale, the agreement may be expressed or implied from the conduct of the
parties.
(a) true.
(b) false.
17. In a contract of sale, subject matter of contract must always be money.
(a) true.
(b) false.
18. If a seller handed over the keys of a warehouse containing the goods to the buyer results
in
(a) constructive delivery
(b) actual delivery
(c) symbolic delivery

19. If A agrees to deliver 100 kg of sugar to B in exchange of 15 mts of cloth, then it is
(a) Contract of sale.
(b) Agreement to sell.
(c) Sale on Approval.
(d) Barter.

20. In a hire-purchase agreement, the hirer

(a) has an option to buy the goods.
(b) must buy the goods.
(c) must return the goods.
(d) is not given the possession of goods.
21. A agrees to deliver his old car valued at `1, 80,000 to B, a car dealer, in exchange for a
new car, and agrees to pay the difference in cash it is
(b) Agreement to sell.
(c) Exchange.
(d) Barter.
22. Legally, a contract of sale includes
(a) sale.
(b) agreement to Sell.
(c) barter.
(d) both (a) and (b)
23. The Sale of Goods Act, 1930 came into force on
(a) 15th March, 1930.
(b) 1st July, 1930.
(c) 30th July, 1930.
(d) 30th June, 1930.

24. The person who buys or agrees to buy goods is known as
(a) consumer.
(b) buyer.
(c) both (a) and (b)

3.22 BUSINESS LAWS
25. Voluntary transfer of possession by one person to another is popularly known as

(a) transfer.
(b) possession.
(c) delivery.
26. If X commissioned Y, an artist, to paint a portrait of A for 200 dollars & Y uses his own
canvas & paint then it is
(b) Contract of work & materials.
(c) Sale on approval.
(d) Hire-Purchase agreement.
27. The property in the goods means the
(a) possession of goods.
(b) custody of goods.
(c) ownership of goods.
(d) both (a) and (b)
28. The goods are at the risk of a party who has the
(a) Ownership of goods.
(b) Possession of goods.
(c) Custody of goods.
(d) both (b) and (c)

29. In case of sale of standing trees, the property passes to the buyer when trees are
(a) felled and ascertained.
(b) not felled but earmarked.
(c) counted and ascertained.
(d) both (b) and (c)

30. In case the delivery of goods is delayed due to the fault of party, the goods shall be at
the risk of defaulting party even though the ownership is with the other party.
(a) True, if there is a provision to this effect.

(b) False, as it is against the general rule.
31. Which of the following modes of delivery of goods is considered effective for a valid
contract of sale?
(a) Actual delivery.
(b) symbolic delivery.
(c) Constructive delivery.

(d) all of these.
Descriptive questions
1. A agrees to buy a new TV from a shop keeper for ` 30,000 payable partly in cash of
` 20,000 and partly in exchange of old TV set. Is it a valid Contract of Sale of Goods?
Give reasons for your answer.
2. A agrees to sell to B 100 bags of sugar arriving on a ship from Australia to India within
next two months. Unknown to the parties, the ship has already sunk. Does B have any
right against A under the Sale of Goods Act, 1930?
3. X contracted to sell his car to Y. They did not discuss the price of the car at all. X later
refused to sell his car to Y on the ground that the agreement was void being uncertain
about price. Can Y demand the car under the Sale of Goods Act, 1930?
4. Classify the following transactions according to the types of goods they are:
(i) A wholesaler of cotton has 100 bales in his godown. He agrees to sell 50 bales
and these bales were selected and set aside.
(ii) A agrees to sell to B one packet of sugar out of the lot of one hundred packets
lying in his shop.
(iii) T agrees to sell to S all the apples which will be produced in his garden this year.

3.24 BUSINESS LAWS
ANSWERS/HINTS
Answers to MCQs
1. (b) 2. (b) 3. (b) 4. (a) 5. (c) 6. (a)
7. (a) 8. (b) 9. (b) 10. (d) 11. (d) 12. (d)
13. (b) 14. (c) 15. (b) 16. (a) 17. (b) 18. (c)
19. (d) 20. (a) 21. (a) 22. (d) 23. (b) 24. (b)
25. (c) 26. (b) 27. (c) 28. (a) 29. (a) 30. (a)
31. (d)
Answers to Descriptive Questions

1. It is necessary under the Sales of Goods Act, 1930 that the goods should be exchanged
for money. If the goods are exchanged for goods, it will not be called a sale. It will be
considered as barter. However, a contract for transfer of movable property for a
definite price payable partly in goods and partly in cash is held to be a contract of Sale
of Goods.
In the given case, the new TV set is agreed to be sold for ` 30,000 and the price is
payable partly in exchange of old TV set and partly in cash of ` 20,000. So, in this case,
it is a valid contract of sale under the Sales of Goods Act, 1930.
2. In this case, B, the buyer has no right against A the seller. Section 8 of the Sales of
Goods Act, 1930 provides that where there is an agreement to sell specific goods and
the goods without any fault of either party perish, damaged or lost, the agreement is
thereby avoided. This provision is based on the ground of supervening impossibility of
performance which makes a contract void.
So, all the following conditions required to treat it as a void contract are fulfilled in the
above case:
(i) There is an agreement to sell between A and B
(ii) It is related to specific goods
(iii) The goods are lost because of the sinking of ship before the property or risk
passes to the buyer.
(iv) The loss of goods is not due to the fault of either party.

3. Payment of the price by the buyer is an important ingredient of a contract of sale. If

the parties totally ignore the question of price while making the contract, it would not
become an uncertain and invalid agreement. It will rather be a valid contract and the
buyer shall pay a reasonable price.
In the give case, X and Y have entered into a contract for sale of car but they did not
fix the price of the car. X refused to sell the car to Y on this ground. Y can legally
demand the car from X and X can recover a reasonable price of the car from Y.
4. (i) A wholesaler of cotton has 100 bales in his godown. So, the goods are existing
goods. He agrees to sell 50 bales and these bales were selected and set aside.
On selection, the goods becomes ascertained. In this case, the contract is for
the sale of ascertained goods, as the cotton bales to be sold are identified and
agreed after the formation of the contract.
(ii) If A agrees to sell to B one packet of sugar out of the lot of one hundred packets
lying in his shop, it is a sale of existing but unascertained goods because it is
not known which packet is to be delivered.
(iii) T agrees to sell to S all the apples which will be produced in his garden this
year. It is contract of sale of future goods, amounting to 'an agreement to sell.'

3.26 BUSINESS LAWS
UNIT – 2: CONDITIONS & WARRANTIES
LEARNING OUTCOMES
♦ About Stipulation as to time
♦ Conditions and warranties in a contract of Sale
♦ About the implied conditions and warranties.
♦ The doctrine of ‘caveat emptor’.
UNIT OVERVIEW
Stipulation with Reference to Goods
Condition Warranty
Essential to main purpose of Collateral to main purpose of

the contract the contract
Breach-repudiation Breach-claim for damages
2.1 STIPULATION AS TO TIME (SECTION 11)

As regard to time for the payment of price, unless a different intention appears from the terms
of contract, stipulation as regard this, is not deemed to be of the essence of a contract of sale.
But delivery of goods must be made without delay. Whether or not such a stipulation is of the
essence of a contract depends on the terms agreed upon.
Price for goods may be fixed by the contract or may be agreed to be fixed later on in a specific
manner. Stipulation as to time of delivery are usually the essence of the contract.

2.2 INTRODUCTION - CONDITIONS AND WARRANTIES

At the time of selling the goods, a seller usually makes certain statements or representations
with a view to induce the intending buyer to purchase the goods. Such representations are
generally about the nature and quality of goods, and about their fitness for buyer’s purpose.
When these statements or representations do not form a part of the contract of sale, they are
not relevant and have no legal effects on the contract. But when these form part of the
contract of sale and the buyer relies upon them, they are relevant and have legal effects on
the contract of sale.
A representation which forms a part of the contract of sale and affects the contract, is called
a stipulation. However, every stipulation is not of equal importance. Some of these may be
very vital while others may be of somewhat lesser significance. The more significant
stipulations contained in a contract of sale of goods have been called as “Conditions”, while
the less significant stipulation have been given the name “Warranties”.
Condition and warranty (Section 12): A stipulation in a contract of sale with reference to
goods which are the subject thereof may be a condition or a warranty. [Sub-section (1)]
“A condition is a stipulation essential to the main purpose of the contract, the breach of which
gives rise to a right to treat the contract as repudiated”. [Sub-section (2)]
Example 1: P wants to purchase a car from Q, which can have a mileage of 20 km/litre. Q pointing
at a particular vehicle says “This car will suit you.” Later P buys the car but finds out later on that this
car only has a top mileage of 15 km/ litre. This amounts to a breach of condition because the seller
made the stipulation which forms the essence of the contract. In this case, the mileage was a
stipulation that was essential to the main purpose of the contract and hence its breach is a breach
of condition.
“A warranty is a stipulation collateral to the main purpose of the contract, the breach of which gives
rise to a claim for damages but not to a right to reject the goods and treat the contract as
repudiated”. [Sub-section (3)].
Whether a stipulation in a contract of sale is a condition or a warranty depends in each case
on the construction of the contract. A stipulation may be a condition, though called a warranty
in the contract. [Sub-section (4)]
Example 2: Ram consults Shyam, a motor-car dealer for a car suitable for touring purposes
to promote the sale of his product. Shyam suggests ‘Maruti’ and Ram accordingly buys it from
Shyam. The car turns out to be unfit for touring purposes. Here, the term that the ‘car should
be suitable for touring purposes’ is a condition of the contract. It is so vital that its non-
fulfilment defeats the very purpose for which Ram purchases the car. Ram is therefore entitled
to reject the car and have refund of the price.

3.28 BUSINESS LAWS
Let us assume, Ram buys a new Maruti car from the show room and the car is guaranteed
against any manufacturing defect under normal usage for a period of one year from the date
of original purchase and in the event of any manufacturing defect there is a warranty for
replacement of defective part if it cannot be properly repaired. After six months, Ram finds
that the horn of the car is not working, here in this case he cannot terminate the contract. The
manufacturer can either get it repaired or replaced it with a new horn. Ram gets a right to
claim for damages, if any, suffered by him but not the right of repudiation.
Difference between conditions and warranties:
The following are important differences between conditions and warranties.
Point of differences Condition Warranty

Meaning A condition is a stipulation A warranty is a stipulation
essential to the main purpose of collateral to the main purpose
the contract. of the contract.
Right in case of breach The aggrieved party can The aggrieved party can claim
repudiate the contract or claim only damages in case of breach
damages or both in the case of of warranty.
breach of condition.
Conversion of A breach of condition may be A breach of warranty cannot be
stipulations treated as a breach of warranty. treated as a breach of condition.
2.3 WHEN CONDITION IS TO BE TREATED AS

WARRANTY (SECTION 13)
Section 13 specifies cases where a breach of condition be treated as a breach of warranty. As
a result of which the buyer loses his right to rescind the contract and can claim damages only.
In the following cases, a contract is not avoided even on account of a breach of a condition:
(i) Where the buyer altogether waives the performance of the condition. A party may for
his own benefit, waive a stipulation. It should be a voluntary waiver by buyer.
(ii) Where the buyer elects to treat the breach of the conditions, as one of a warranty. That
is to say, he may claim only damages instead of repudiating the contract. Here, the
buyer has not waived the condition but decided to treat it as a warranty.
Example 3: A agrees to supply B 10 bags of first quality sugar @ ` 625 per bag but
supplies only second quality sugar, the price of which is ` 600 per bag. There is a
breach of condition and the buyer can reject the goods. But if the buyer so elects, he

may treat it as a breach of warranty, hence he may accept the second quality sugar
and claim damages @ ` 25 per bag.
(iii) Where the contract is non-severable and the buyer has accepted either the whole
goods or any part thereof. For Eg. If basmati rice and lower quality rice mixed together,
the contract becomes non severable.
(iv) Where the fulfilment of any condition or warranty is excused by law by reason of
impossibility or otherwise.
Waiver of conditions
Voluntary Waiver Compulsory Waiver

▪ Waives performance of contract ▪ Non-severability of contract
▪ Elect to treat condition as ▪ Fulfilment of conditions excused
warranty by law
2.4 EXPRESS AND IMPLIED CONDITIONS AND

WARRANTIES (SECTION 14-17)
Condition and Warranty
▪ Express
May be
either
▪ Implied
‘Conditions’ and ‘Warranties’ may be either express or implied. They are “express” when the
terms of the contract expressly state them. They are implied when, not being expressly
provided for. Implied conditions are incorporated by law in the contract of sale.
Express conditions are those, which are agreed upon between the parties at the time of
contract and are expressly provided in the contract.

3.30 BUSINESS LAWS
Implied conditions, on the other hand, are those, which are presumed by law to be present
in the contract. It should be noted that an implied condition may be negated or waived by an
express agreement.
Following conditions are implied in a contract of sale of goods unless the circumstances of
the contract show a different intention.
Implied Conditions
Condition as to title Condition as to description
Sale by sample
Sale by sample as well as by
description
Condition as to quality
or fitness
Condition as to
Condition as to merchantability
wholesomeness
(i) Condition as to title [Section 14(a)]. In every contract of sale, unless there is an
agreement to the contrary, the first implied condition on the part of the seller is that
(a) in case of a sale, he has a right to sell the goods, and
(b) in the case of an agreement to sell, he will have right to sell the goods at the
time when the property is to pass.
In simple words, the condition implied is that the seller has the right to sell the goods
(means he should be the real owner) at the time when the property is to pass. If the
seller’s title/ownership turns out to be defective, the buyer must return the goods to
the true owner and recover the price from the seller.
Example 4: A purchased a tractor from B who had no title to it. After 2 months, the
true owner spotted the tractor and demanded it from A. Held that A was bound to
hand over the tractor to its true owner and that A could sue B, the seller without title,
for the recovery of the purchase price.
Example 5: If A sells to B tins of condensed milk labelled ‘C.D.F. brand’, and this is
proved to be an infringement of N Company’s trade mark, it will be a breach of implied
condition that A had the right to sell. B in such a case will be entitled to reject the
goods or take off the labels, and claim damages for the reduced value. If the seller has
no title and the buyer has to make over the goods to the true owner, he will be entitled
to refund of the price.

(ii) Sale by description [Section 15]: Where there is a contract of sale of goods by
description, there is an implied condition that the goods shall correspond with the
description. This rule is based on the principle that “if you contract to sell peas, you
cannot compel the buyer to take beans.” The buyer is not bound to accept and pay for
the goods which are not in accordance with the description of goods.
Thus, it has to be determined whether the buyer has undertaken to purchase the goods
by their description, i.e., whether the description was essential for identifying the
goods where the buyer had agreed to purchase. If that is required and the goods
tendered do not correspond with the description, it would be breach of condition
entitling the buyer to reject the goods.
It is a condition which goes to the root of the contract and the breach of it entitles the
buyer to reject the goods whether the buyer is able to inspect them or not.
Example 6: A at Kolkata sells to B twelve bags of “waste silk” on its way from
Murshidabad to Kolkata. There is an implied condition that the silk shall be such as is
known in the market as “Waste Silk”. If it not, B is entitled to reject the goods.
Example 7: A ship was contracted to be sold as “copper-fastened vessel” but actually
it was only partly copper-fastened. Held that goods did not correspond to description
and hence could be returned or if buyer took the goods, he could claim damages for
breach.
The Act, however, does not define ‘description’.
(i) where the class or kind to which the goods belong has been specified, e.g.,
‘Egyptian cotton’, “java sugar”, etc., defining the category of good
(ii) where the goods have been described by certain characteristics essential to
their identification, e.g., jute bales of specified shipment, steel of specific
dimension, etc.
It may be noted that the description in these cases assumes that form of a statement
or representation as regards the identity of particular goods by reference to the place
of origin or mode of packing, etc. Whether or not such a statement or representation
is essential to the identity of the goods is a question of fact depending, in each case,
on the construction of the contract.
(iii) Sale by sample [Section 17]: In a contract of sale by sample, there is an implied
condition that
(a) the bulk shall correspond with the sample in quality;
(b) the buyer shall have a reasonable opportunity of comparing the bulk with the
sample,

3.32 BUSINESS LAWS
Example 8: In a case of sale by sample of two parcels of wheat, the seller

allowed the buyer an inspection of the smaller parcel but not of the larger
parcel. In this case, it was held that the buyer was entitled to refuse to take the
parcels of wheat.
(c) the goods shall be free from any defect rendering them un-merchantable,
which would not be apparent on reasonable examination of the sample. This
condition is applicable only with regard to defects, which could not be
discovered by an ordinary examination of the goods. If the defects are latent,
then the buyer can avoid the contract. This simply means that the goods shall
be free from any latent defect i.e. a hidden defect.
Example 9: A company sold certain shoes made of special sole by sample for
the French Army. The shoes were found to contain paper not discoverable by
ordinary inspection. Held, the buyer was entitled to the refund of the price plus
damages.
(iv) Sale by sample as well as by description [Section 15]: Where the goods are sold by
sample as well as by description the implied condition is that the bulk of the goods
supplied shall correspond both with the sample and the description. In case the goods
correspond with the sample but do not tally with description or vice versa or both, the
buyer can repudiate the contract.
Example 10: A agreed with B to sell certain oil described as refined sunflower oil,
warranted only equal to sample. The goods tendered were equal to sample but
contained a mixture of hemp oil along with sunflower oil. Hence, B can reject the goods
because the goods were as per sample but do not correspond to the description.
(v) Condition as to quality or fitness [Section 16(1)]: Ordinarily, there is no implied
condition as to the quality or fitness of the goods sold for any particular purpose.
However, the condition as to the reasonable fitness of goods for a particular purpose
may be implied if the buyer had made known to the seller the purpose of his purchase
and relied upon the skill and judgment of the seller to select the best goods and the
seller has ordinarily been dealing in those goods. This implied condition will not apply
if the goods have been sold under a trademark or a patent name.
There is implied condition of the part of the seller that the goods supplied shall be
reasonably fit for the purpose for which the buyer wants them, provided the following
conditions are fulfilled:
(a) The buyer should have made known to the seller the particular purpose for
which goods are required.

(b) The buyer should rely on the skill and judgement of the seller.
(c) The goods must be of a description dealt in by the seller, whether he be a
manufacturer or not.
In some cases, the purpose may be ascertained from the conduct of the parties or form
the nature of the goods sold. Where the goods can be used for only one purpose, the
buyer need not tell the seller the purpose for which he requires the goods.
Example 11: ‘A’ bought a set of false teeth from ‘B’, a dentist. But the set was not fit
for ‘A’s mouth. ‘A’ rejected the set of teeth and claimed the refund of price. It was held
that ‘A’ was entitled to do so as the only purpose for which he wanted the set of teeth
was not fulfilled.
Example 12: ‘A’ went to ‘B’s shop and asked for a ‘Merrit’ sewing machine. ‘B’ gave ‘A’
the same and ‘A’ paid the price. ‘A’ relied on the trade name of the machine rather
than on the skill and judgement of the seller ‘B’. In this case, there is no implied
condition as to fitness of the machine for buyer’s particular purpose.
As a general rule, it is the duty of the buyer to examine the goods thoroughly before
he buys them in order to satisfy himself that the goods will be suitable for his purpose
for which he is buying them. This is known as rule of caveat emptor which means “Let
the buyer beware”.
(vi) Condition as to Merchantability [Section 16(2)]: Where goods are bought by
description from a seller who deals in goods of that description (whether he is the
manufacturer or producer or not), there is an implied condition that the goods shall
be of merchantable quality.
There are two requirements for this condition to apply:
(a) Goods should be bought by description.

(b) The seller should be a dealer in goods of that description.
Provided that, if the buyer has examined the goods, there shall be no implied condition
as regards defects which such examination ought to have revealed.
The expression “merchantable quality”, though not defined, nevertheless connotes
goods of such a quality and in such a condition a man of ordinary prudence would
accept them as goods of that description. It does not imply any legal right or legal title
to sell.
Example 13: If a person orders motor horns from a manufacturer of horns, and the
horns supplied are scratched and damaged owing to bad packing, he is entitled to
reject them as unmerchantable.

3.34 BUSINESS LAWS
Example 14: A bought a black velvet cloth from C and found it to be damaged by
white ants. Held, the condition as to merchantability was broken.
(vii) Condition as to wholesomeness: In the case of eatables and provisions, in addition

to the implied condition as to merchantability, there is another implied condition that
the goods shall be wholesome.
Example 15: A supplied F with milk. The milk contained typhoid germs. F’s wife
consumed the milk and was infected and died. Held, there was a breach of condition
as to fitness and A was liable to pay damages.
Implied Warranties: It is a warranty which the law implies into the

contract of sale. In other words, it is the stipulation which has not
been included in the contract of sale in express words. But the law
presumes that the parties have incorporated it into their contract. It
will be interesting to know that implied warranties are read into every
contract of sale unless they are expressly excluded by the express agreement of the parties.
These may also be excluded by the course of dealings between the parties or by usage of
trade (Section 62).
Implied Warranties
warranty as to warranty as to quality or

undisturbed fitness by usage of trade
possession
Warranty as to non- disclosure of
existence of dangerous nature
encumbrances of goods
The examination of Sections 14 and 16 of the Sale of Goods Act, 1930 discloses the following
implied warranties:
1. Warranty as to undisturbed possession [Section 14(b)]: An implied warranty that
the buyer shall have and enjoy quiet possession of the goods. That is to say, if the
buyer having got possession of the goods, is later on disturbed in his possession, he
is entitled to sue the seller for the breach of the warranty.
Example 16: X buys a laptop from Y. After the purchase, X spends some money on its
repair and uses it for some time. Unknown to the parties, it turns out that the laptop
was stolen and was taken from X and delivered to its rightful owner. Y shall be held
responsible for a breach and X is entitled to damages of not only the price but also the
cost of repairs.

2. Warranty as to non-existence of encumbrances [Section 14(c)]: An implied

warranty that the goods shall be free from any charge or encumbrance in favour of any
third party not declared or known to the buyer before or at the time the contract is
entered into.
Example 17: A pledges his car with C for a loan of `15,0000 and promises him to give
its possession the next day. A, then sells the car immediately to B, who purchased it on
good faith, without knowing the fact. B, may either ask A to clear the loan or himself
may pay the money and then, file a suit against A for recovery of the money with
interest.
3. Warranty as to quality or fitness by usage of trade [Section 16(3)]: An implied
warranty as to quality or fitness for a particular purpose may be annexed or attached
by the usage of trade.
Regarding implied condition or warranty as to the quality or fitness for any particular
purpose of goods supplied, the rule is ‘let the buyer beware’ i.e., the seller is under no
duty to reveal unflattering truths about the goods sold, but this rule has certain
exceptions.
4. Disclosure of dangerous nature of goods: Where the goods are dangerous in nature
and the buyer is ignorant of the danger, the seller must warn the buyer of the probable
danger. If there is a breach of warranty, the seller may be liable in damages.
2.5 CAVEAT EMPTOR

In case of sale of goods, the doctrine ‘Caveat Emptor’ means ‘let the buyer beware’. When
sellers display their goods in the open market, it is for the buyers to make a proper selection
or choice of the goods. If the goods turn out to be defective, he cannot hold the seller liable.
The seller is in no way responsible for the bad selection of the buyer. The seller is not bound
to disclose the defects in the goods which he is selling.
It is the duty of the buyer to satisfy himself before buying the goods that the goods will serve
the purpose for which they are being bought. If the goods turn out to be defective or do not
serve his purpose or if he depends on his own skill or judgment, the buyer cannot hold the
seller responsible.
The rule of Caveat Emptor is laid down in the Section 16, which states that, “subject to the
provisions of this Act or of any other law for the time being in force, there is no implied
warranty or condition as to the quality or fitness for any particular purpose of goods supplied
under a contract of sale”.

3.36 BUSINESS LAWS
Following are the conditions to be satisfied:

- if the buyer had made known to the seller the purpose of his purchase, and
- the buyer relied on the seller’s skill and judgement, and
- seller’s business to supply goods of that description (Section 16).
Example 18: A sold pigs to B. These pigs being infected, caused typhoid to other healthy pigs
of the buyer. It was held that the seller was not bound to disclose that the pigs were unhealthy.
The rule of the law being “Caveat Emptor”.
Example 19: A purchases a horse from B. A needed the horse for riding but he did not mention
this fact to B. The horse is not suitable for riding but is suitable only for being driven in the
carriage. Caveat emptor rule applies here and so A can neither reject the horse nor can claim
compensation from B.
Exceptions: The doctrine of Caveat Emptor is, however, subject to the following exceptions:
1. Fitness as to quality or use: Where the buyer makes known to the seller the particular
purpose for which the goods are required, so as to show that he relies on the seller’s
skill or judgment and the goods are of a description which is in the course of seller’s
business to supply, it is the duty of the seller to supply such goods as are reasonably
fit for that purpose [Section 16 (1)].
Example 20: An order was placed for some trucks to be used for heavy traffic in a hilly
country. The trucks supplied by the seller were unfit for this purpose and broke down.
There is a breach of condition as to fitness.
In Priest vs. Last, P, a draper, purchased a hot water bottle from a retail chemist, P
asked the chemist if it would stand boiling water. The Chemist told him that the bottle
was meant to hold hot water. The bottle burst when hot water was poured into it and
injured his wife. It was held that the chemist shall be liable to pay damages to P, as he
knew that the bottle was purchased for the purpose of being used as a hot water bottle.
Where the article can be used for only one particular purpose, the buyer need not tell
the seller the purpose for which he required the goods. But where the article can be
used for a number of purposes, the buyer should tell the seller the purpose for which
he requires the goods, if he wants to make the seller responsible.
In Bombay Burma Trading Corporation Ltd. vs. Aga Muhammad, timber was
purchased for the express purpose of using it as railways sleepers and when it was
found to be unfit for the purpose, the Court held that the contract could be avoided.

2. Goods purchased under patent or brand name: In case where the goods are
purchased under its patent name or brand name, there is no implied condition that
the goods shall be fit for any particular purpose [Section 16(1)]. Here, the buyer is
relying on the particular brand name.
3. Goods sold by description: Where the goods are sold by description there is an
implied condition that the goods shall correspond with the description [Section 15]. If
it is not so, then seller is responsible.
4. Goods of Merchantable Quality: Where the goods are bought by description from a
seller who deals in goods of that description there is an implied condition that the
goods shall be of merchantable quality. The rule of Caveat Emptor is not applicable for
latent defects. But where the buyer has examined the goods, this rule shall apply if the
defects were such which ought to have not been revealed by ordinary examination
[Section 16(2)].
5. Sale by sample: Where the goods are bought by sample, this rule of Caveat Emptor
does not apply if the bulk does not correspond with the sample [Section 17].
6. Goods by sample as well as description: Where the goods are bought by sample as
well as description, the rule of Caveat Emptor is not applicable in case the goods do
not correspond with both the sample and description or either of the condition
[Section 15].
7. Trade Usage: An implied warranty or condition as to quality or fitness for a particular
purpose may be annexed by the usage of trade and if the seller deviates from that, this
rule of Caveat Emptor is not applicable [Section 16(3)].
Example 21: In readymade garment business, there is an implied condition by usage
of trade that the garments shall be reasonably fit on the buyer.
8. Seller actively conceals a defect or is guilty of fraud: Where the seller sells the
goods by making some misrepresentation or fraud and the buyer relies on it or when
the seller actively conceals some defect in the goods so that the same could not be
discovered by the buyer on a reasonable examination, then the rule of Caveat Emptor
will not apply. In such a case the buyer has a right to avoid the contract and claim
damages.

3.38 BUSINESS LAWS
SUMMARY
While entering into a contract of sale, certain stipulations are put by both the parties i.e. the
buyer and the seller. These stipulations with reference to goods may be ‘conditions’ or
‘warranties’ depending upon the construction of the contract. A stipulation essential to the
main purpose of the contract is a ‘condition’ whereas collateral stipulations are called
warranties. Breach of a ‘condition’ gives right to repudiate the contract and to claim damages
whereas Breach of a ‘Warranty’ gives right to claim damages only. Every contract of sales have
certain conditions and warranties implied by law. Besides, the parties may provide for
‘conditions’ and ‘warranties’ by an express agreement.
Regarding implied condition or warranty as to the quality of fitness for any particular purpose
of goods supplied, the rule is ‘let the buyer beware’ i.e., the seller is under no duty to reveal
unflattering truths about the goods sold, but this rule has certain exceptions.
Conditions & Warranty
Conditions [Sec. 12(2)] Warranty [Sec. 12(3)]
Meaning: A stipulation which is Meaning: A stipulation which is

essential to the main purpose of the collateral to the main purpose of the
contract. contract.
Implied warranties
1.Warranty of undisturbed
Implied conditions
possession
1. Condition as to title
2. Warranty of freedom from
2. Sale by description & Sample
encumbrances.
3. Condition as to quality or fitness
3. Warranty as to quality or fitness
4. Condition as to merchantability
by usage of trade.
5.Condition as to wholesomeness
4. Warranty to disclose dangerous
nature of goods.
Note: 1. If there is a breach of a condition, the aggrieved party can repudiate the
contract of sale; in case of a breach of a warranty, the aggrieved party can claim damages
only.
2. A breach of a condition may be treated as a breach of a warranty (by voluntary waiver
or by accepting the goods by buyer) but a breach of a warranty, however, cannot be
treated as a breach of a condition.

When Condition treated as Warrnty
As a result of which the buyer loses his right to rescind the contract and can claim damages only
Voluntary Waiver Compulsory Waiver
- Waives performance of contract - Non-severability of contract

- Elect to treat condition as warranty -Fulfillment of conditions excused by
Caveat Emptor
This means "let the buyer beware", i.e. its buyer's duty to examine thoroughly when he buys the goods
Exceptions
Consent
of the
Goods buyer, in
For In case of
Buyer makes purchased Sale by a
merchant condition
known the under its descripti contract
able implied
particular patent name on & or sale, is
quality of by
purpose. or brand Sample. obtained
goods. custom.
name. by the
seller by
fraud.

3.40 BUSINESS LAWS
TEST YOUR KNOWLEDGE

1. A stipulation which is essential to the main purpose of the contract is called-
(a) Warranty
(b) Guarantee
(c) Condition
(d) Indemnity
2. Breach of condition gives the aggrieved party-
(a) Right to sue for damages

(b) Right to repudiate the contract
(d) None of these
3. Condition may be treated as a warranty when there is –
(a) Waiver of condition by the buyer
(b) Buyer elects to treat breach of condition as a breach of warranty
(c) Acceptance of goods by the buyer in case of non-severable of contract of sale
4. The doctrine of Caveat Emptor does not apply, when
(a) the goods are bought by sample.
(b) the goods are bought by sample as well as description.
(c) The exact purpose is known to the seller and is a regular dealer
5. Which of the following is not an implied condition in a contract of sale?
(a) condition as to title.

(b) condition as to description
(c) condition as to free from encumbrance.
(d) condition as to sample.

6. The conditions and warranties may be in the form of

(a) express.
(b) implied.
(c) either (a) or (b).
7. Which one of the following is not an implied warranty
(a) warranty as to undisturbed possession.
(b) warranty as to existence of encumbrance.
(c) disclosure of dangerous nature of goods.
(d) warranty as to quality or fitness by usage of trade.
8. In case of goods sold by sample, the goods should correspond with the sample other wise
(a) buyer can reject the goods.
(b) buyer cannot reject the goods.
(c) contract is automatically terminated.
(d) seller is liable to punishment.
9. M, a shopkeeper, sold a Television set to N, who purchased it in good faith. The set had
some manufacturing defect and it did not work after a few days in spite of repairs. In this
case, the television was not merchantable as it was not fit for ordinary purpose.
(a) the buyer has no right to reject the television.
(b) the buyer has the right to reject the television and to have refund of the price.
(c) both of the above.

(d) none of the above [(a) & (b)]
10. Where the buyer is deprived to goods by their true owner, then the buyer
(a) may recover the price for breach of the condition as to title.
(b) can not recover the price for breach of the condition as to title.
(c) either (a) or (b)

3.42 BUSINESS LAWS
11. Where goods are bought by description from a seller who deals in goods of that
description, what is the implied condition?
(a) That goods shall be of merchantable equality

(b) That the buyer shall have reasonable opportunity of comparing the bulk with the
sample
(c) The goods shall be of excellent quality

(d) The goods shall be free from defects
12. A warranty is stipulation
(a) Essential to the main purpose of the contract

(b) Collateral to the main purpose of the contract
(c) Very important to the seller
(d) Very important to the buyer
13. In a sale by sample and description, there is an implied condition
(a) That bulk of the goods correspond with the sample
(b) That bulk of goods must correspond to the description as well as the sample
thereof
(c) The bulk of goods must correspond either to the description or to the sample
(d) The bulk of goods must correspond to the description only
1. M/s Woodworth & Associates, a firm dealing with the wholesale and retail buying and
selling of various kinds of wooden logs, customized as per the requirement of the
customers. They dealt with Rose wood, Mango wood, Teak wood, Burma wood etc.
Mr. Das, a customer came to the shop and asked for wooden logs measuring 4 inches
broad and 8 feet long as required by the carpenter. Mr. Das specifically mentioned that
he required the wood which would be best suited for the purpose of making wooden
doors and window frames. The Shop owner agreed and arranged the wooden pieces cut
into as per the buyers requirements.
The carpenter visited Mr. Das's house next day, and he found that the seller has supplied
Mango Tree wood which would most unsuitable for the purpose. The carpenter asked Mr.
Das to return the wooden logs as it would not meet his requirements.

The Shop owner refused to accept return of the wooden logs on the plea that logs were
cut to specific requirements of Mr. Das and hence could not be resold.
(i) Explain the duty of the buyer as well as the seller according to the doctrine of
“Caveat Emptor”.
(ii) Whether Mr. Das would be able to get the money back or the right kind of wood
as required serving his purpose?
2. Mrs. Geeta went to the local rice and wheat wholesale shop and asked for 100 kgs of
Basmati rice. The Shopkeeper quoted the price of the same as ` 125 per kg to which she
agreed. Mrs. Geeta insisted that she would like to see the sample of what will be provided
to her by the shopkeeper before she agreed upon such purchase. The shopkeeper showed
her a bowl of rice as sample. The sample exactly corresponded to the entire lot.
The buyer examined the sample casually without noticing the fact that even though the
sample was that of Basmati Rice but it contained a mix of long and short grains. The
cook on opening the bags complained that the dish if prepared with the rice would not
taste the same as the quality of rice was not as per requirement of the dish. Now Mrs.
Geeta wants to file a suit of fraud against the seller alleging him of selling mix of good
and cheap quality rice. Will she be successful?
Decide the fate of the case and options open to the buyer for grievance redressal as per
the provisions of Sale of Goods Act, 1930?
What would be your answer in case Mrs. Geeta specified her exact requirement as to
length of rice?
3. X consults Y, a motor-car dealer for a car suitable for touring purposes to promote the
sale of his product. Y suggests ‘Santro’ and X accordingly buys it from Y. The car turns
out to be unfit for touring purposes. What remedy X is having now under the Sale of
Goods Act, 1930?
4. Mrs. G bought a tweed coat from P. When she used the coat she got rashes on her skin
as her skin was abnormally sensitive. But she did not make this fact known to the seller
i.e. P. Mrs. G filled a case against the seller to recover damages. Can she recover damages
under the Sale of Goods Act, 1930?
5. Certain goods were sold by sample by A to B, who in turn sold the same goods by sample
to C and C by sample sold the goods to D. The goods were not according to the sample.
Therefore, D who found the deviation of the goods from the sample rejected the goods
and gave a notice to C. C sued B and B sued A. Advise B and C under the Sale of Goods
Act, 1930.

3.44 BUSINESS LAWS
6. A person purchased bread from a baker’s shop. The piece of bread contained a stone in
it which broke buyer’s tooth while eating. What are the rights available to the buyer
against the seller under the Sale of Goods Act, 1930?
7. Q asked P, the seller for washing machine which is suitable for washing woollen clothes.
Mr. P showed him a particular machine which Mr. Q liked and paid for it. Later on,
machine delivered and was found unfit for washing woollen clothes. He immediately
informed Mr. P about the delivery of wrong machine. Mr. P refused to exchange the same,
saying that the contract was complete after the delivery of washing machine and
payment of price. With reference to the provisions of Sale of Goods Act,1930 discuss
whether Mr. P is right in refusing to exchange the washing machine?
ANSWERS/HINTS
Answers to MCQs
1. (c) 2. (c) 3. (d) 4. (d) 5. (c) 6. (c)
7. (b) 8. (a) 9. (b) 10. (a) 11. (a) 12. (b)
13. (b)
Answer to Descriptive Questions

1. (i) Duty of the buyer according to the doctrine of “Caveat Emptor”: In case of
sale of goods, the doctrine ‘Caveat Emptor’ means ‘let the buyer beware’. When
sellers display their goods in the open market, it is for the buyers to make a
proper selection or choice of the goods. If the goods turn out to be defective
he cannot hold the seller liable. The seller is in no way responsible for the bad
selection of the buyer. The seller is not bound to disclose the defects in the
goods which he is selling.
Duty of the seller according to the doctrine of “Caveat Emptor”: The
following exceptions to the Caveat Emptor are the duties of the seller:
1. Fitness as to quality or use
2. Goods purchased under patent or brand name
3. Goods sold by description
4. Goods of Merchantable Quality
5. Sale by sample

6. Goods by sample as well as description

7. Trade usage
8. Seller actively conceals a defect or is guilty of fraud
(ii) As Mr. Das has specifically mentioned that he required the wood which would
be best suited for the purpose of making wooden doors and window frames
but the seller supplied Mango tree wood which is most unsuitable for the
purpose. Mr. Das is entitled to get the money back or the right kind of wood as
required serving his purpose. It is the duty of the seller to supply such goods
as are reasonably fit for the purpose mentioned by buyer. [Section 16(1) of the
Sale of Goods Act, 1930]
2. As per the provisions of Sub-Section (2) of Section 17 of the Sale of Goods Act,
1930, in a contract of sale by sample, there is an implied condition that:
(a) the bulk shall correspond with the sample in quality;
(b) the buyer shall have a reasonable opportunity of comparing the bulk with the
sample.
(i) In the instant case, in the light of the provisions of Sub-Clause (b) of
Sub-Section (2) of Section 17 of the Act, Mrs. Geeta will not be
successful as she casually examined the sample of rice (which exactly
corresponded to the entire lot) without noticing the fact that even
though the sample was that of Basmati Rice but it contained a mix of
long and short grains.
(ii) In the instant case, the buyer does not have any option available to her
for grievance redressal.
(iii) In case Mrs. Geeta specified her exact requirement as to length of rice,
then there is an implied condition that the goods shall correspond with
the description. If it is not so, then the seller will be held liable.
3. Condition and warranty (Section 12): A stipulation in a contract of sale with
reference to goods which are the subject thereof may be a condition or a warranty.
[Sub-section (1)]
“A condition is a stipulation essential to the main purpose of the contract, the breach
of which gives rise to a right to treat the contract as repudiated”. [Sub-section (2)]
In the instant case, the term that the ‘car should be suitable for touring purposes’ is a
condition of the contract. It is so vital that its non-fulfilment defeats the very purpose
for which X purchases the car.
X is therefore entitled to reject the car and have refund of the price.

3.46 BUSINESS LAWS
4. According to Section 16(1) of Sales of Goods Act, 1930, normally in a contract of sale
there is no implied condition or warranty as to quality or fitness for any particular
purpose of goods supplied. The general rule is that of “Caveat Emptor” that is “let the
buyer beware”. But where the buyer expressly or impliedly makes known to the seller
the particular purpose for which the goods are required and also relies on the seller’s
skill and judgement and that this is the business of the seller to sell such goods in the
ordinary course of his business, the buyer can make the seller responsible.
In the given case, Mrs. G purchased the tweed coat without informing the seller i.e. P
about the sensitive nature of her skin. Therefore, she cannot make the seller
responsible on the ground that the tweed coat was not suitable for her skin. Mrs. G
cannot treat it as a breach of implied condition as to fitness and quality and has no
right to recover damages from the seller.
5. In the instant case, D who noticed the deviation of goods from the sample can reject
the goods and treat it as a breach of implied condition as to sample which provides
that when the goods are sold by sample the goods must correspond to the sample in
quality and the buyer should be given reasonable time and opportunity of comparing
the bulk with the sample. Whereas C can recover only damages from B and B can
recover damages from A. For C and B it will not be treated as a breach of implied
condition as to sample as they have accepted and sold the goods according to Section
13(2) of the Sales of Goods Act, 1930. Hence, they cannot reject the goods, but claim
the damages.
6. This is a case related to implied condition as to wholesomeness which provides that
the eatables and provisions must be wholesome that is they must be fit for human
consumption. In this case, the piece of bread contained a stone which broke buyer’s
tooth while eating, thereby considered unfit for consumption. Hence, the buyer can
treat it as breach of implied condition as to wholesomeness and can also claim
damages from the seller.
7. According to Section 15 of the Sale of Goods Act, 1930, whenever the goods are sold
as per sample as well as by description, the implied condition is that the goods must
correspond to both sample as well as description. Further under Sale of Goods Act,
1930 when the buyer makes known to the seller the particular purpose for which the
goods are required and he relies on his judgment and skill of the seller, it is the duty
of the seller to supply such goods which are fit for that purpose. Mr. Q has informed
to Mr. P that he wanted the washing machine for washing woollen clothes. However,
the machine which was delivered by Mr. P was unfit for the purpose for which Mr. Q
wanted the machine. Therefore, Mr. Q can either repudiate the contract or claim the
refund of the price paid by him.

UNIT – 3: TRANSFER OF OWNERSHIP AND

DELIVERY OF GOODS
LEARNING OUTCOMES

♦ How and at what point of time the ownership in goods which are the
subject matter of a contract of sale passes to the buyer from the
seller.
♦ About what appropriation of goods is and how it affects the passing
of property in goods.
♦ Distinction between passing of property and passing of title.
♦ The rule of ‘nemo dat quod non habet’ (no one can give what he has
not got) and exceptions thereof.
♦ The rules relating to delivery of goods and acceptance of goods.
UNIT OVERVIEW
A contract of sale of goods involves transfer

of ownership in three stages:
Passing Delivery Passing

of of goods of Risk
property

3.48 BUSINESS LAWS
INTRODUCTION
Sale of goods involves transfer of ownership of property from seller to buyer. It is essential to
determine the time at which the ownership passes from the seller to the buyer.
Importance of the time of transfer

The general rule is that risk prima facie passes with the property. In case where goods are lost
or damaged, the burden of loss will be borne by the person who is the owner at the time when
the goods are lost or damaged. Where the goods are damaged by the act of the third party,
it is the owner who can take action. Suit for price by the seller can be filed only when the
property has passed to the buyer.
3.1 PASSING OF PROPERTY (SECTIONS 18 – 26)

Passing or transfer of property constitutes the most important element and factor to decide
legal rights and liabilities of sellers and buyers. Passing of property implies passing of
ownership. If the property has passed to the buyer, the risk in the goods sold is that of buyer
and not of seller, though the goods may still be in the seller’s possession.
The rules regarding transfer of property in goods from the seller to the buyer depend on two
basic factors:
(a) Identification of Goods: Section 18 provides that where there is a contract of safe for
unascertained goods, the property in goods cannot pass to the buyer unless and until
the goods are ascertained. The buyer can get the ownership right on the goods only
when the goods are specific and ascertained.
(b) Intentions of parties: The property in goods is transferred to the buyer at such time
as the parties to the contract intend it to be transferred. [section 19(1)]
Section 19(2) further provides that for the purpose of ascertaining the intention of the
parties regard shall be:
(i) To the terms of the contract
(ii) To the conduct of the parties and

(iii) To the circumstances of the case

The primary rules determining the passing of property from seller to buyer are as
follows:
♦ Specific or Ascertained Goods

♦ Passing of Unascertained Goods
Passing of
♦ Goods sent on approval or ”on sale or return”
property
♦ Transfer of property in case of reservation of
right to disposal.
A. Property (Specific or ascertained goods) passes when intended to pass (Section 19):
Where there is a contract for the sale of specific or ascertained goods, the property in
them is transferred to the buyer at such time as the parties to the contract intend it to
be transferred. [sub-section (1)]
For the purpose of ascertaining the intention of the parties, regard shall be had to the
terms of the contract, the conduct of the parties and the circumstances of the case.
[sub-section (2)]
Unless a different intention appears, the rules contained in Sections 20 to 24 are rules
for ascertaining the intention of the parties as to the time at which the property in the
goods is to pass to the buyer. [sub-section (3)]
Stages of goods while passing of property
Specific goods in a deliverable state
Specific goods to be put into a deliverable state
Specific goods in a deliverable state when seller has to

ascertain price.
1. Specific goods in a deliverable state (Section 20): Where there is an

unconditional contract for the sale of specific goods in a deliverable state, the
property in the goods passes to the buyer when the contract is made, and it is
immaterial whether the time of payment of the price or the time of delivery of
the goods, or both, is postponed. Here, the condition is goods must be ready
for delivery.

3.50 BUSINESS LAWS
Example 1: X goes into a shop and buys a television and asks the shopkeeper
for its home delivery. The shopkeeper agrees to do it. The television
immediately becomes the property of X.
2. Specific goods to be put into a deliverable state (Section 21): Where there
is a contract for the sale of specific goods and the seller is bound to do
something to the goods for the purpose of putting them into a deliverable
state, the property does not pass until such thing is done and the buyer has
notice thereof.
Example 2: Peter buys a laptop from an electronics store and asks for a home
delivery. The shopkeeper agrees to it. However, the laptop does not have a
Windows operating system installed. The shopkeeper promises to install it and
call Peter before making the delivery. In this case, the property transfers to Peter
only after the shopkeeper has installed the OS making the laptop ready for
delivery and intimated the buyer about it.
3. Specific goods in a deliverable state, when the seller has to do anything
thereto in order to ascertain price (Section 22): Where there is a contract for
the sale of specific goods in a deliverable state, but the seller is bound to weigh,
measure, test or do some other act or thing with reference to the goods for the
purpose of ascertaining the price, the property does not pass until such act or
thing is done and the buyer has notice thereof.
Example 3: A sold carpets to the Company which were required to be laid. The
carpet was delivered to the company’s premises but was stolen before it could
be laid. It was held that the carpet was not in deliverable state as it was not laid,
which was part of the contract and hence, the property had not passed to the
buyer company.
B. Unascertained goods
Where there is a contract for the sale of unascertained goods, no property in the goods
is transferred to the buyer unless and until the goods are ascertained. [Section 18]
Goods of the
Delivery to the
description in
carrier for
deliverable
transmission
state

The rules in respect of passing of property of unascertained goods are as follows:

1. Sale of unascertained goods by description and Appropriation [Section
23(1)]: Appropriation of goods involves selection of goods with the intention
of using them in performance of the contract and with the mutual consent of
the seller and the buyer.
The essentials are:
(a) There is a contract for the sale of unascertained or future goods.
(b) The goods should conform to the description and quality stated in the
contract.
(c) The goods must be in a deliverable state.
(d) The goods must be unconditionally (as distinguished from an intention
to appropriate) appropriated to the contract either by delivery to the
buyer or his agent or the carrier.
(e) The appropriation must be made by:
(i) the seller with the assent of the buyer; or
(ii) the buyer with the assent of the seller.
(f) The assent may be express or implied.
(g) The assent may be given either before or after appropriation.
2. Delivery of the goods to the carrier [Section 23(2)]: Where, in pursuance of
the contract, the seller delivers the goods to the buyer or to a carrier or other
bailee (whether named by the buyer or not) for the purpose of transmission to
the buyer, and does not reserve the right of disposal, he is deemed to have
unconditionally appropriated the goods to the contract.
Example 4: A bill of lading of railway parcel is made out in the name of the
buyer and is sent to him, the ownership in the goods passes from the seller to
the buyer. In case the goods are subjected to accidental loss or by theft, the
seller will not be liable.
Example 5: M places an order for book with a book seller in Mumbai. He asks
him to send the book by courier. Payment of the book was to be made by
cheque. The seller sends the book by courier. The book is lost in the way. The
seller wants the buyer to bear the loss. According to Section 23(2), it is an
unconditional appropriation of goods because of which buyer M has become
the owner of the goods. Therefore, he will bear the risk of loss of the book in
the way.

3.52 BUSINESS LAWS
C. Goods sent on approval or “on sale or return” (Section 24)

When goods are delivered to the buyer on approval or “on sale or return” or other
similar terms, the property therein passes to the buyer-
(a) when he signifies his approval or acceptance to the seller or does any other act
adopting the transaction;
(b) if he does not signify his approval or acceptance to the seller but retains the
goods without giving notice of rejection, then, if a time has been fixed for the
return of the goods, on the expiration of such time, and, if no time has been
fixed, on the expiration of a reasonable time; or
(c) he does something to the good which is equivalent to accepting the goods e.g.
he pledges or sells the goods.
Example 6: P brought a musical instrument from a musical shop on a condition that
he will purchase it, if he likes that instrument. After a week he has informed the shop
owner that he has agreed to purchase the musical instrument. The ownership is
transferred when he has decided to purchase the instrument as his own.
A buyer under a contract on the basis of ‘sale or return’ is deemed to have exercised
his option when he does any act exercising domination over the goods showing an
unequivocal intention to buy, example, if he pledges the goods with a third party.
Failure or inability to return the goods to the seller does not necessarily imply selection
to buy.
Example 7: ‘A’ delivered some jewellery to ‘B’ on sale or return basis. ‘B’ pledged the
jewellery with ‘C’. It was held that the ownership of the jewellery had been transferred
to ‘B’ as he had adopted the transaction by pledging the jewellery with ‘C’. In this case,
‘A’ has no right against ‘C’. He can only recover the price of the jewellery from ‘B’.
Example 8: A sends to B a water motor on approval or return in March, 2020. B to
return it after trial in August, 2020. The water motor has not been returned within a
reasonable time, and therefore, A is not bound to accept it and B must pay the price.
Sale for cash only or Return
It may be noted that where the goods have been delivered by a person on “sale or
return” on the terms that the goods were to remain the property of the seller till they
are paid for, the property therein does not pass to the buyer until the terms are
complied with, i.e., cash is paid for.

Example 9: ‘A’ delivered his jewellery to ‘B’ on sale for cash only or return basis. It was
expressly provided in the contract that the jewellery shall remain ‘A’s property until the
price is paid. Before the payment of the price, ‘B’ pledged the jewellery with ‘C’. It was
held that at the time of pledge, the ownership was not transferred to ‘B’. Thus, the
pledge was not valid and ‘A’ could recover the jewellery from ‘C’.
D. Reservation of right of disposal (Section 25)

This section preserves the right of disposal of goods to secure that the price is paid
before the property in goods passes to the buyer.
Where there is contract of sale of specific goods or where the goods have been
subsequently appropriated to the contract, the seller may, by the terms of the contract
or appropriation, as the case may be, reserve the right to dispose of the goods, until
certain conditions have been fulfilled. In such a case in spite of the fact that the goods
have already been delivered to the buyer or to a carrier or other bailee for the purpose
of transmitting the same to the buyer, the property therein will not pass to the buyer
till the condition imposed, if any, by the seller has been fulfilled. (sub-section1)
Example 10: X sends furniture to a company by a truck and instructs the driver not to
deliver the furniture to the company until the payment is made by company to him.
The property passes only when the payment is made.
Circumstances under which the right to disposal may be reserved: In the following
circumstances, seller is presumed to have reserved the right of disposal:
(1) If the goods are shipped or delivered to a railway administration for carriage
and by the bill of lading or railway receipt, as the case may be, the goods are
deliverable to the order of the seller or his agent, then the seller will be prima
facie deemed to have reserved to the right of disposal. (sub section 2)
(2) Where the seller draws a bill on the buyer for the price and sends to him the
bill of exchange together with the bill of lading or (as the case may be) the
railway receipt to secure acceptance or payment thereof, the buyer must return
the bill of lading, if he does not accept or pay the bill.
And if he wrongfully retains the bill of lading or the railway receipt, the property in the
goods does not pass to him. (sub section 3)
It should be noted that Section 25 deals with “conditional appropriation” as
distinguished from ‘unconditional appropriation’ dealt with under Section 23 (2).

3.54 BUSINESS LAWS
3.2 RISK PRIMA FACIE PASSES WITH PROPERTY

(SECTION 26)
According to section 26, “unless otherwise agreed, the goods remain at the seller’s risk until
the property therein is transferred to the buyer, but when the property therein is transferred
to the buyer, the goods are at the buyer’s risk whether delivery has been made or not”.
However, Section 26 also lays down an exception to the rule that ‘risk follows ownership.’ It
provides that where delivery of the goods has been delayed through the fault of either buyer
or seller, the goods are at the risk of the party in fault as regards any loss which might not
have occurred but for such fault.
Thus, in ordinary circumstances, risk is borne by the buyer only when the property in the
goods passes over to him. However, the parties may by special agreement stipulate that ‘risk’
will pass sometime after or before the ‘property’ has passed.
Risk prima facie passes with ownership: The owner of goods must bear the loss or damage
of goods unless otherwise is agreed to. Under Section 26 of the Sale of Goods Act, unless
otherwise agreed, the goods remain at the seller’s risk until property therein has passed to
the buyer. After that event they are at the buyer’s risk, whether delivery has been made or
not.
Seller’s risk-until Buyer’s risk-after

the property passes the property passes
to the buyer from the seller
Example 11: A bids for an antique painting at a sale by auction. After the bid, when the
auctioneer struck his hammer to signify acceptance of the bid, he hit the antique which gets
damaged. The loss will have to be borne by the seller, because the ownership of goods has
not yet passed from the seller to the buyer.
The aforesaid rule is, however, subject to two qualifications:

(i) If delivery has been delayed by the fault of the seller or the buyer, the goods shall be
at the risk of the party in default, as regards loss which might not have arisen but for
the default.
(ii) The duties and liabilities of the seller or the buyer as bailee of goods for the other
party remain unaffected even when the risk has passed generally.

Example 12: A contracted to sell 100 bales of cotton to B to be delivered in February. B took
the delivery of the part of the cotton but made a default in accepting the remaining bales.
Consequently, the cotton becomes unfit for use. The loss will have to be borne by the buyer.
It should, however, be remembered that the general rule shall not affect the duties or liabilities
of either seller or buyer as a bailee of goods for the other, even when the risk has passed. It
is their duty to take care of the goods as a man of ordinary prudence would have done.
As noted above, the risk (i.e., the liability to bear the loss in case property is destroyed,
damaged or deteriorated) passes with ownership. The parties may, however, agree to the
contrary. For instance, the parties may agree that risk will pass sometime after or before the
property has passed from the seller to the buyer.
3.3 TRANSFER OF TITLE BY NON-OWNERS

(SECTIONS 27 – 30)
Sale by person not the owner (Section 27): In general, the seller can sell only such goods
of which he is the absolute owner. But sometimes a person may sell goods of which he is not
the owner, then the question arises as to what is the position of the buyer who has bought
the goods by paying price. The general rule regarding the transfer of title is that the seller
cannot transfer a better title to the buyer for goods than he himself has. If the seller is not the
owner of goods, then the buyer also will not become the owner i.e. the title of the buyer shall
be the same as that of the seller. This rule is expressed in the Latin maxim “Nemo dat quod
non habet” which means that no one can give what he has not got.
Example 13: If A sells some stolen goods to B, who buys them in good faith, B will get no
title to that and the true owner has a right to get back his goods from B.
Example 14: P, the hirer of vehicle under a hire purchase agreement, sells them to Q. Q,
though a bona fide purchaser, does not acquire the ownership in the vehicle. At the most he
acquires the same right as that of the hirer.
If this rule is enforced rigidly then the innocent buyers may be put to loss in many cases.
Therefore, to protect the interests of innocent buyers, a number of exceptions have been
provided to this rule.
Exceptions: In the following cases, a non-owner can convey better title to the bona fide
purchaser of goods for value.
(1) Sale by a Mercantile Agent: A sale made by a mercantile agent of the goods for
document of title to goods would pass a good title to the buyer in the following
circumstances; namely;

3.56 BUSINESS LAWS
(a) If he was in possession of the goods or documents with the consent of the
owner;
(b) If the sale was made by him when acting in the ordinary course of business as
a mercantile agent; and
(c) If the buyer had acted in good faith and has at the time of the contract of sale, no
notice of the fact that the seller had no authority to sell (Proviso to Section 27).
Mercantile Agent means an agent having in the customary course of business as such
agent authority either to sell goods, or to consign goods for the purposes of sale, or
to buy goods, or to raise money on the security of goods [Section 2(9)].
(2) Sale by one of the joint owners (Section 28): If one of several joint owners of goods
has the sole possession of goods by permission of the co-owners, the property in the
goods is transferred to any person who buys them from such joint owner in good faith
and has not at the time of the contract of sale notice that the seller has no authority
to sell.
Example 15: A, B, and C are three brothers and joint owners of a T.V and VCR and with
the consent of B and C, the VCR and T.V was kept in possession of A. A sells the T.V
and VCR to P who buys it in good faith and without notice that A had no authority to
sell. P gets a good title to VCR and T.V.
(3) Sale by a person in possession under voidable contract: A buyer would acquire a
good title to the goods sold to him by a seller who had obtained possession of the
goods under a contract voidable on the ground of coercion, fraud, misrepresentation
or undue influence provided that the contract had not been rescinded until the time
of the sale (Section 29).
Example 16: X fraudulently obtains a diamond ring from Y. This contract is voidable
at the option of Y. But before the contract could be terminated, X sells the ring to Z,
an innocent purchaser. Z gets the good title and Y cannot recover the ring from Z even
if the contract is subsequently set aside.
(4) Sale by one who has already sold the goods but continues in possession thereof:
If a person has sold goods but continues to be in possession of them or of the
documents of title to them, he may sell them to a third person, and if such person
obtains the delivery thereof in good faith and without notice of the previous sale, he
would have good title to them, although the property in the goods had passed to the
first buyer earlier. A pledge or other disposition of the goods or documents of title by
the seller in possession are equally valid [Section 30(1)].

Example 17: During IPL matches, P buys a TV set from R. R agrees to deliver the same
to P after some days. In meanwhile R sells the same to S, at a higher price, who buys
in good faith and without knowledge about the previous sale. S gets a good title.
(5) Sale by buyer obtaining possession before the property in the goods has vested
in him: Where a buyer with the consent of the seller obtains possession of the goods
before the property in them has passed to him, he may sell, pledge or otherwise
dispose of the goods to a third person, and if such person obtains delivery of the goods
in good faith and without notice of the lien or other right of the original seller in
respect of the goods, he would get a good title to them [Section 30(2)].
Example 18: Furniture was delivered to B under an agreement that price was to be
paid in two instalments, the furniture to become property of B on payment of second
instalment. B sold the furniture before second instalment was paid. It was held that the
buyer acquired a good title. (Lee Vs Butler)
However, a person in possession of goods under a ‘hire-purchase’ agreement which
gives him only an option to buy is not covered within the section unless it amounts to
a sale.
Example 19: A took a car from B on this condition that A would pay a monthly
instalment of ` 5,000 as hire charges with an option to purchase it by payment of
` 1,00,000 in 24 instalments.
After the payment of few instalments, A sold the car to C. B can recover the car from
C since A had neither bought the car, nor had agreed to buy the car. He had only an
option to buy the car.
(6) Effect of Estoppel: Where the owner is estopped by the conduct from denying the
seller’s authority to sell, the transferee will get a good title as against the true owner.
But before a good title by estoppel can be made, it must be shown that the true owner
had actively suffered or held out the other person in question as the true owner or as
a person authorized to sell the goods.
Example 20: ‘A’ said to ‘B’, a buyer, in the presence of ‘C’ that he (A) is the owner of
the horse. But ‘C’ remained silent though the horse belonged to him. ‘B’ bought the
horse from ‘A’. Here the buyer (B) will get a valid title to the horse even though the
seller (A) had no title to the horse. In this case, ‘C’, by his own conduct, is prevented
from denying ‘A’s authority to sell the horse. Here, ‘C’’s silence has induced ‘B’ to
believe that ‘A’ is the owner of the horse.
(7) Sale by an unpaid seller: Where an unpaid seller who had exercised his right of lien
or stoppage in transit resells the goods, the buyer acquires a good title to the goods
as against the original buyer [Section 54 (3)].

3.58 BUSINESS LAWS
(8) Sale under the provisions of other Acts:

(i) Sale by an Official Receiver or Liquidator of the Company will give the purchaser
a valid title.
(ii) Purchase of goods from a finder of goods will get a valid title under
circumstances [Section 169 of the Indian Contract Act, 1872]
(iii) A sale by pawnee can convey a good title to the buyer [Section 176 of the Indian
Contract Act, 1872]
3.4 PERFORMANCE OF THE CONTRACT OF SALE

(SECTIONS 31 – 44)
The performance of a contract of sale implies delivery of goods by the seller and
acceptance of the delivery of goods and payment of price for them by the buyer in
accordance of the terms of the contract.
Definition of Delivery [Section 2(2)]: Delivery means voluntary transfer of possession from
one person to another. For delivery, physical possession is not important. The buyer should
be placed in a position so that he can exercise his right over the goods.
Thus, if the possession is taken through unfair means, there is no delivery of the goods.
Delivery of goods sold may be made by doing anything which the parties agree, shall be
treated as delivery or putting the goods in the possession of the buyer or of any person
authorised to hold them on his behalf.
Delivery of goods is of three types:
(a) Actual Delivery

(b) Symbolic delivery
(c) Constructive Delivery
Duties of seller and buyer (Section 31): It is the duty of the seller to deliver the goods and
of the buyer to accept and pay for them, in accordance with the terms of the contract of sale.
Payment and delivery are concurrent conditions (Section 32): Unless otherwise agreed,
delivery of the goods and payment of the price are concurrent conditions, that is to say, the
seller shall be ready and willing to give possession of the goods to the buyer in exchange for
the price, and the buyer shall be ready and willing to pay the price in exchange for possession
of the goods.
Rules Regarding Delivery of goods (Section 33-41)

The Sale of good Act, 1930 prescribes the following rules of delivery of goods:
Delivery to
Part delivery Instalment deliveries
carrier/wharfinger
Buyer to apply for Delivery of wrong Deterioration during

delivery quantity transit
Buyer's right to
Place of delivery Expenses of delivery
examine the goods
Goods in possession
Time for delivery
of a third party
(i) Delivery (Section 33): Delivery of goods sold may be made by doing anything which
the parties agree shall be treated as delivery or which has the effect of putting the
goods in the possession of the buyer or of any person authorised to hold them on his
behalf.
(ii) Effect of part delivery: A delivery of part of goods, in progress of the delivery of the
whole has the same effect, for the purpose of passing the property in such goods, as
a delivery of the whole; but a delivery of part of the goods, with an intention of severing
it from the whole, does not operate as a delivery of the remainder. (Section 34)
Example 21: Certain goods lying at wharf were sold in a lot. The seller instructed the
wharfinger to deliver them to the buyer who had paid for them and the buyer,
thereafter, accepted them and took away part. Held, there was delivery of the whole.
(iii) Buyer to apply for delivery: Apart from any express contract, the seller of goods is
not bound to deliver them until the buyer applies for delivery. (Section 35)
(iv) Place of delivery: Whether it is for the buyer to take possession of the goods or for
the seller to send them to the buyer is a question depending in each case on the
contract, express or implied, between the parties. Apart from any such contract,
♦ goods sold are to be delivered at the place at which they are at the time of the
sale, and
♦ goods agreed to be sold are to be delivered at the place at which they are at
the time of the agreement to sell or

3.60 BUSINESS LAWS
♦ if goods are not then in existence, at the place at which they are manufactured
or produced. [Section 36(1)]
(v) Time of delivery: Where under the contract of sale, the seller is bound to send the
goods to the buyer, but no time for sending them is fixed, the seller is bound to send
them within a reasonable time. [Section 36(2)]
(vi) Goods in possession of a third party: Where the goods at the time of sale are in
possession of a third person, there is no delivery unless and until such third person
acknowledges to the buyer that he holds the goods on his behalf. Provided that
nothing in this section shall affect the operation of the issue or transfer of any
document of title to goods. [Section 36(3)]
(vii) Time for tender of delivery: Demand or tender of delivery may be treated as
ineffectual unless made at a reasonable hour. What is reasonable hour is a question of
fact. [Section 36(4)].
(viii) Expenses for delivery: The expenses of and incidental to putting the goods into a
deliverable state must be borne by the seller in the absence of a contract to the
contrary. [Section 36(5)].
(ix) Delivery of wrong quantity [Section 37]: Where the seller delivers to the buyer a
quantity of goods less than he contracted to sell, the buyer may reject them, but if the
buyer accepts the goods so delivered he shall pay for them at the contract rate. [Sub-
section (1)]
Where the seller delivers to the buyer a quantity of goods larger than he contracted to
sell, the buyer may accept the goods included in the contract and reject the rest, or he
may reject the whole. If the buyer accepts the whole of the goods so delivered, he shall
pay for them at the contract rate. [Sub-section (2)]
Where the seller delivers to the buyer the goods he contracted to sell mixed with goods
of a different description not included in the contract, the buyer may accept the goods
which are in accordance with the contract and reject, or may reject the whole. [Sub-
section (3)]
The provisions of this section are subject to any usage of trade, special agreement or
course of dealing between the parties. [Sub-section (4)]
Example 22: A agrees to sell 100 quintals of wheat to B at ` 1,000 per quintal. A delivers
1,100 quintals. B may reject the whole lot or accept only 1,000 quintals and reject the
rest or accept the whole lot and pay for them at the contract of sale.

(x) Instalment deliveries: Unless otherwise agreed, the buyer is not bound to accept
delivery in instalments. The rights and liabilities in cases of delivery by instalments and
payments thereon may be determined by the parties of contract. (Section 38)
Example 23: There was sale of 100 tons of paper to be shipped in November. The
seller shipped 80 tons in November and 20 tons in December. The buyer was entitled
to reject the whole 100 tons.
(xi) Delivery to carrier: Subject to the terms of contract, the delivery of the goods to the
carrier for transmission to the buyer, is prima facie deemed to be delivery to the buyer.
[Section 39(1)]
(xii) Deterioration during transit: Where goods are delivered at a distant place, the
liability for deterioration necessarily incidental to the course of transit will fall on the
buyer, though the seller agrees to deliver at his own risk. (Section 40)
Example 24: P sold to Q a certain quantity of iron rods which were to be sent by proper
vessel. It was rusted before it reached the buyer. The rust of the rod was so minimal
and was not effecting the merchantable quality and the deterioration was not
necessarily incidental to its transmission. It was held that Q was bound to accept the
goods.
(xiii) Buyer’s right to examine the goods: Where goods are delivered to the buyer, who
has not previously examined them, he is entitled to a reasonable opportunity of
examining them in order to ascertain whether they are in conformity with the contract.
Unless otherwise agreed, the seller is bound, on request, to afford the buyer a
reasonable opportunity of examining the goods. (Section 41)
Rule related to Acceptance of Delivery of Goods (Section 42):
Acceptance is deemed to take place when the buyer-

(a) intimates to the seller that he had accepted the goods; or
(b) does any act to the goods, which is inconsistent with the ownership of the seller; or
(c) retains the goods after the lapse of a reasonable time, without intimating to the seller
that he has rejected them.
Buyer not bound to return rejected goods (Section 43): Unless otherwise agreed, where
goods are delivered to the buyer and he refuses to accept them, having the right so to do, he
is not bound to return them to the seller, but it is sufficient if he intimates to the seller that
he refuses to accept them.

3.62 BUSINESS LAWS
Liability of buyer for neglecting or refusing delivery of goods (Section 44): When the
seller is ready and willing to deliver the goods and requests the buyer to take delivery, and
the buyer does not within a reasonable time after such request take delivery of the goods, he
is liable to the seller for any loss occasioned by his neglect or refusal to take delivery and also
for a reasonable charge for the care and custody of the goods.
Provided further that nothing in this section shall affect the rights of the seller where the
neglect or refusal of the buyer to take delivery amounts to a repudiation of the contract.
SUMMARY
The property in the goods or beneficial right in the goods passes to the buyer at a point of
time depending upon ascertainment, appropriation and delivery of goods. Risk of loss of
goods prima facie follows the passing of property in goods. Goods remain at the seller’s risk
unless the property therein is transferred to the buyer, but after transfer of property therein
to the buyer the goods are at the buyer’s risk whether delivery has been made or not. An
important rule regarding passing of title in goods is that the purchaser does acquire no better
title to the goods than what the seller had.
This rule again is not applicable under certain circumstances.
Delivery of goods denotes the voluntary transfer of possession, which may be actual or even in
some constructive form and which is again subject to various rules which help in deciding when
the delivery becomes effective.
Transfer of Ownership & Delivery of Goods
Passing of Property Passing of Risk

1. No property in the goods is transferred to the Unless otherwise agreed, risk
buyer unless and until the goods are ascertained. follows ownership whether
2. Where there is a contract for the sale of specific or delivery has been made or not
ascertained goods, the property in them passes to the and whether price has been paid
buyer at the time when the parties intend it to pass. or not.
3. Goods should be in a deliverable state. Thus, the risk of loss as a rule lies
on the owner.

Sale by Non-Owner
“Nemo dat quad non habet i.e. “no one can give that which one has not got”
Exceptions (i.e. Non owner can sale)
Sale by a Sale by a person Sale by buyer in Sale by an

mercantile in possession possession before unpaid
agent under a voidable property passed to seller
contract him.
Sale by one Sale by seller in Other Acts (E.g. finder

of joint possession after Effect of of lost goods, pawner,
owners sale estoppels Official Receiver or
Liquidator).
Delivery of Goods
“Voluntary transfer of Rules as to delivery of goods

possession of goods from
one person to another.”
1. Delivery and payment must be according to the terms of the
contract.
Types
2. Effect of part delivery - same effect for the purpose of passing
1. Actual delivery. the property in such goods.
2. Symbolic delivery. 3. Buyer to apply for delivery.
3. Constructive delivery or 4. Place of delivery - if no contract, place where they were at the
delivery by attornment. time of sale.
5. Time of delivery - if no contract, within a reasonable time.

Acceptance of Delivery 6. Goods in possession of a third party - no delivery until such third
party acknowledges to the buyer that he holds them on his
Acceptance is deemed to
behalf.
take place when buyer:
7. Time for tender of delivery – at a reasonable hour.
intimates that he has
accepted the goods. 8. Cost of delivery - borne by the seller (unless otherwise agreed).
uses the goods in a 9. Delivery of wrong quantity – Buyer may accept or reject the
goods.
manner proper only for
the owner, makes some 10. Installment deliveries - buyer is not bound to accept the goods.
alternation in the goods.
11. Delivery to a carrier - deemed to be a delivery to the buyer.
Retains the goods after 12. Deterioration during transit – liability will fall on buyer.
the lapse of a reasonable
time. 13. Buyer’s right to examine the goods.

3.64 BUSINESS LAWS
TEST YOUR KNOWLEDGE

1. The property in the goods means-
(a) Possession of the goods

(b) Ownership of the goods
(c) Custody of the goods
(d) Both (a) and (c)

2. In case of sale on approval, the ownership is transferred to the buyer when he-
(a) Accepts the goods
(b) Adopts the transaction
(c) Fails to return the goods
(d) In all the above cases
3. If a seller hands over the keys of a ware house containing goods to the buyer, it results
in-
(a) Constructive delivery
(b) Actual delivery
(c) Symbolic delivery
(d) None of these
4. A sell to B 100 bags of wheat lying in C’s warehouse. A orders to C to deliver the wheat
to B. C agrees to hold the 100 bags on behalf of B and makes the necessary entry in his
books. This is a –
(a) Actual delivery

(b) Constructive delivery
(c) Symbolic delivery

5. Selection of goods with the intention of using them in performance of the contract and
with the mutual consent of the seller and the buyer is known as-
(a) distribution
(b) appropriation
(c) amortization
(d) storage
6. In contract of sale of goods, if the seller is not the owner of goods, then the title of the
buyer shall-
(a) Not be same as that of the seller

(b) Be same as that of the seller
(c) Be better than that of the seller

7. Nemo dat quad non habet means-
(a) One cannot give what one does not have
(b) Let the buyer be beware
(c) Whatever is paid, is paid according to the intention or manner of the party paying
(d) None of these
8. The goods are at the risk of the party who has the-
(a) Ownership of the goods
(b) Possession of the goods
(c) Custody of the goods

(d) Both (b) and (c)
9. If the seller delivers to the buyer a quantity less than he contracted to sell, the buyer may
(a) Reject the goods,
(b) Accept the goods
(c) Either ‘a’ or ‘b’
(d) Neither ‘a’ or ‘b’

3.66 BUSINESS LAWS
10. Appropriation of goods means

(a) Separating the goods sold from other goods
(b) Putting the quantity of goods sold in suitable receptacles
(c) Delivering the goods to the carrier or other bailee for the purpose of transmission
to the buyer without reserving the right of disposal
11. Which of the following is true as regards delivery of goods in instalments as provided
under Sale of Goods Act:
(a) The buyer is bound to accept the instalment deliveries only in case of perishable
goods
(b) The buyer is bound to accept the instalment deliveries only in case of sale of
goods by description
(c) The buyer is bound to accept the instalment deliveries only if agreed between the
parties
(d) Delivery of goods can’t be made in instalments
1. “Nemo Dat Quod Non Habet” – “None can give or transfer goods what he does not
himself own.” Explain the rule and state the cases in which the rule does not apply under
the provisions of the Sale of Goods Act, 1930.
2. J the owner of a Fiat car wants to sell his car. For this purpose, he hand over the car to
P, a mercantile agent for sale at a price not less than ` 50,000. The agent sells the car
for ` 40,000 to A, who buys the car in good faith and without notice of any fraud. P
misappropriated the money also. J sues A to recover the Car. Decide giving reasons
whether J would succeed.
3. Mr. S agreed to purchase 100 bales of cotton from V, out of his large stock and sent his
men to take delivery of the goods. They could pack only 60 bales. Later on, there was
an accidental fire and the entire stock was destroyed including 60 bales that were already
packed. Referring to the provisions of the Sale of Goods Act, 1930 explain as to who will
bear the loss and to what extent?
4. Ms. Preeti owned a motor car which she handed over to Mr. Joshi on sale or return basis.
After a week, Mr. Joshi pledged the motor car to Mr. Ganesh. Ms. Preeti now claims back
the motor car from Mr. Ganesh. Will she succeed? Referring to the provisions of the Sale
of Goods Act, 1930, decide and examine what recourse is available to Ms. Preeti.

5. A, B and C were joint owner of a truck and the possession of the said truck was with B. X
purchased the truck from B without knowing that A and C were also owners of the truck.
Decide in the light of provisions of Sales of Goods Act 1930, whether the sale between B
and X is valid or not?
6. X agreed to purchase 300 tons of wheat from Y out of a larger stock. X sent his men with
the sacks and 150 tons of wheat were put into the sacks. Then there was a sudden fire
and the entire stock was gutted. Who will bear the loss and why?
7. The buyer took delivery of 20 tables from the seller on sale or return basis without
examining them. Subsequently, he sold 5 tables to his customers. The customer lodged a
complaint of some defect in the tables. The buyer sought to return tables to the seller.
Was the buyer entitled to return the tables to the seller under the provisions of the Sale
of Goods Act, 1930?
8. A delivered a horse to B on sale and return basis. The agreement provided that B should
try the horse for 8 days and return, if he did not like the horse. On the third day the horse
died without the fault of B. A file a suit against B for the recovery of price. Can he recover
the price?
ANSWER/HINTS
Answer to MCQs
1. (b) 2. (d) 3. (c) 4. (b) 5. (b) 6. (b)
7. (a) 8. (a) 9. (c) 10. (d) 11. (c)
Answers to Descriptive questions

1. Exceptions to the Rule Nemo dat Quod Non Habet: The term means, “none can give
or transfer goods what he does not himself own”. Exceptions to the rule and the cases
in which the Rule does not apply under the provisions of the Sale of Goods Act, 1930
are enumerated below:
(i) Sale by a Mercantile Agent: A sale made by a mercantile agent of the goods
or document of title to goods would pass a good title to the buyer in the
following circumstances, namely;
(a) if he was in possession of the goods or documents with the consent of
the owner;

3.68 BUSINESS LAWS
(b) if the sale was made by him when acting in the ordinary course of
business as a mercantile agent; and
(c) if the buyer had acted in good faith and has at the time of the contract
of sale, no notice of the fact that the seller had no authority to sell.
(Proviso to Section 27).
Mercantile agent means an agent having in the customary course of business
as such agent authority either to sell goods, or to consign goods for the
purposes of sale, or to buy goods, or to raise money on the security of goods.
[section 2(9)]
(ii) Sale by one of the joint owners: If one of the several joint owners of goods
has the sole possession of them with the permission of the others the property
in the goods may be transferred to any person who buys them from such a joint
owner in good faith and does not at the time of the contract of sale have notice
that the seller has no authority to sell. (Section 28)
(iii) Sale by a person in possession under voidable contract: A buyer would
acquire a good title to the goods sold to him by seller who had obtained
possession of the goods under a contract voidable on the ground of coercion,
fraud, misrepresentation or undue influence provided that the contract had not
been rescinded until the time of the sale (Section 29).
(iv) Sale by one who has already sold the goods but continues in possession
thereof: If a person has sold goods but continues to be in possession of them
or of the documents of title to them, he may sell them to a third person, and if
such person obtains the delivery thereof in good faith without notice of the
previous sale, he would have good title to them, although the property in the
goods had passed to the first buyer earlier. A pledge or other deposition of the
goods or documents of title by the seller in possession are equally valid.
[Section 30(1)]
(v) Sale by buyer obtaining possession before the property in the goods has
vested in him: Where a buyer with the consent of seller obtains possession of
the goods before the property in them has passed to him, he may sell, pledge
or otherwise dispose of the goods to a third person, and if such person obtains
delivery of the goods in good faith and without notice of the lien or other right
of the original seller in respect of the goods in good faith and without notice
of the lien or other right of the original seller in respect of the goods, he would
get a good title to them. [Section 30(2)].

(vi) Sale by an unpaid seller: Where on unpaid seller who had exercised his right
of lien or stoppage in transit resells the goods, the buyer acquires a good title
to the goods as against the original buyer [Section 54(3)].
(vii) Sale under the provisions of other Acts:
(i) Sale by an official Receiver or liquidator of the company will give the
purchaser a valid title.
(ii) Purchase of goods from a finder of goods will get a valid title under
circumstances.
(iii) Sale by a pawnee under default of pawnor will give valid title to the
purchaser.
2. The problem in this case is based on the provisions of the Sale of Goods Act, 1930
contained in the proviso to Section 27. The proviso provides that a mercantile agent
is one who in the customary course of his business, has, as such agent, authority either
to sell goods, or to consign goods, for the purpose of sale, or to buy goods, or to raise
money on the security of goods [Section 2(9)]. The buyer of goods from a mercantile
agent, who has no authority from the principal to sell, gets a good title to the goods
if the following conditions are satisfied:
(1) The agent should be in possession of the goods or documents of title to the
goods with the consent of the owner.
(2) The agent should sell the goods while acting in the ordinary course of business
of a mercantile agent.
(3) The buyer should act in good faith.
(4) The buyer should not have at the time of the contract of sale notice that the
agent has no authority to sell.
In the instant case, P, the agent, was in the possession of the car with J’s consent for
the purpose of sale. We assume the agent P acted in the ordinary course of business
and sold the car to buyer A in good faith. Therefore A, the buyer obtained a good title
to the car. Hence, J in this case, cannot recover the car from A.
3. Section 26 of the Sale of Goods Act, 1930 provides that unless otherwise agreed, the
goods remain at the seller’s risk until the property therein is transferred to the buyer,
but when the property therein is transferred to the buyer, the goods are at buyer’s risk
whether delivery has been made or not. Further Section 18 read with Section 23 of the
Act provide that in a contract for the sale of unascertained goods, no property in the
goods is transferred to the buyer, unless and until the goods are ascertained. Also
where there is contract for the sale of unascertained or future goods by description,

3.70 BUSINESS LAWS
the property in the goods thereupon passes to the buyer. when goods of that
description are put in a deliverable state and are unconditionally appropriated to the
contract, either by the seller with the assent of the buyer or by the buyer with the
assent of the seller, Such assent may be express or implied.
Applying the aforesaid law to the facts of the case in hand, it is clear that Mr. S has the
right to select the goods out of the bulk and he has sent his men for the same purpose.
Hence the problem can be answered based on the following two assumptions and the
answer will vary accordingly.
(i) Where the bales have been selected with the consent of the buyer’s
representatives:
In this case, the property in the 60 bales has been transferred to the buyer and
goods have been appropriated to the contract. Thus, loss arising due to fire in
case of 60 bales would be borne by Mr. S. As regards 40 bales, the loss would
be borne by Mr. V, since the goods have not been identified and appropriated.
(ii) Where the bales have not been selected with the consent of buyer’s
representatives:
In this case, the property in the goods has not been transferred at all and hence
the loss of 100 bales would be borne by Mr. V completely.
4. As per the provisions of section 24 of the Sale of Goods Act, 1930, when goods are
delivered to the buyer on approval or “on sale or return" or other similar terms, the
property therein passes to the buyer-
(a) when the buyer signifies his approval or acceptance to the seller or does any
other act adopting the transaction;
(b) if he does not signify his approval or acceptance to the seller but retains the
goods without giving notice of rejection, then, if a time has been fixed for the
return of the goods, on the expiration of such time, and, if no time has been
fixed, on the expiration of a reasonable time; or
(c) he does something to the good which is equivalent to accepting the goods e.g.
he pledges or sells the goods.
Referring to the above provisions, we can analyse the situation given in the question.
Since, Mr. Joshi, who had taken delivery of the Motor car on Sale or Return basis and
pledged the motor car to Mr. Ganesh, has attracted the third condition that he has
done something to the good which is equivalent to accepting the goods e.g. he
pledges or sells the goods. Therefore, the property therein (Motor car) passes to Mr.

Joshi. Now in this situation, Ms. Preeti cannot claim back her Motor Car from Mr.
Ganesh, but she can claim the price of the motor car from Mr. Joshi only.
5. According to Section 28 of the Sales of Goods Act, sale by one of the several joint
owners is valid if the following conditions are satisfied:-
(i) One of the several joint owners has the sole possession of them.
(ii) Possession of the goods is by the permission of the co-owners.

(iii) The buyer buys them in good faith and has not at the time of contract of sale
knowledge that the seller has no authority to sell.
In the above case, A, B and C were the joint owners of the truck and the possession of
the truck was with B. Now B sold the said truck to X. X without knowing this fact
purchased the truck from B.
The sale between B and X is perfectly valid because Section 28 of the Sales of Goods
Act provides that in case one of the several joint owners has the possession of the
goods by the permission of the co-owners and if the buyer buys them in good faith
without the knowledge of the fact that seller has no authority to sell, it will give rise to
a valid contract of sale.
6. According to Section 21 of the Sales of Goods Act, 1930, if the goods are not in a
deliverable state and the contract is for the sale of specific goods, the property does
not pass to the buyer unless:-
(i) The seller has done his act of putting the goods in a deliverable state and
(ii) The buyer has knowledge of it.

Sometimes the seller is required to do certain acts so as to put the goods in deliverable
state like packing, filling in containers etc. No property in goods passes unless such
act is done and buyer knows about it.
In the given case, X has agreed to purchase 300 tons of wheat from Y out of a larger
stock. X sent his men (agent) to put the wheat in the sacks. Out of 300 tones only 150
tons were put into the sacks. There was a sudden fire and the entire stock was gutted.
In this case, according to the provisions of law, for 150 tons of wheat, sale has taken
place. So, buyer X will be responsible to bear the loss. The loss of rest of the wheat will
be that of the seller Y.
The wheat which was put in the sacks fulfils both the conditions that are:-
(1) The wheat is put in a deliverable state in the sacks.

3.72 BUSINESS LAWS
(2) The buyer is presumed to have knowledge of it because the men who put the
wheat in the sacks are that of the buyer.
7. According to Section 24 of the Sales of Goods Act, 1930, in case of delivery of goods
on approval basis, the property in goods passes from seller to the buyer:-
(i) When the person to whom the goods are given either accepts them or does an
act which implies adopting the transaction.
(ii) When the person to whom the goods are given retains the goods without giving
his approval or giving notice of rejection beyond the time fixed for the return
of goods and in case no time is fixed after the lapse of reasonable time.
In the given case, seller has delivered 20 tables to the buyer on sale or return basis.
Buyer received the tables without examining them. Out of these 20 tables, he sold 5
tables to his customer. It implies that he has accepted 5 tables out of 20.
When the buyer received the complaint of some defect in the tables, he wanted to
return all the tables to the seller. According to the provisions of law he is entitled to
return only 15 tables to the seller and not those 5 tables which he has already sold to
his customer. These 5 tables are already accepted by him so the buyer becomes liable
under the doctrine of “Caveat Emptor”.
8. A delivered the horse to B on sale or return basis. It was decided between them that B
will try the horse for 8 days and in case he does not like it, he will return the horse to
the owner A. But on the third day the horse died without any fault of B. The time given
by the seller A to the buyer B has not expired yet. Therefore, the ownership of the
horse still belongs to the seller A. B will be considered as the owner of the horse only
when B does not return the horse to A within stipulated time of 8 days.
The suit filed by A for the recovery of price from B is invalid and he cannot recover the
price from B. [Section 24].
Had the horse died after the expiry of given time i.e. 8 days, then B would have been
held liable (if the horse was still with him) but not before that time period.

THE SALE OF GOODS ACT, 1930 3.73 a
UNIT – 4: UNPAID SELLER
LEARNING OUTCOMES

 The concept of Unpaid Seller
 The rights of Unpaid Seller
 Effect of sub-sale or pledge by the buyer
 Distinction between the right of lien and right of stoppage in transit
 Rights of parties in case of breach of contract
 Concept of sale by auction.
UNIT OVERVIEW
Rights of an unpaid seller
Against Goods Against the Buyer
Property in Goods has Property in Goods has Suit for Price

passed to the buyer not passed to the buyer
Suit for Damages

Lien With holding Delivery
Suit for interest

stoppage in transit Lien
Resale stoppage in transit
Resale

a 3.74 BUSINESS LAWS
4.1 UNPAID SELLER

A contract comprises of reciprocal promises. In a contract of sale, if seller is under an
obligation to deliver goods, buyer has to pay for it. In case buyer fails or refuses to pay, the
seller, as an unpaid seller, shall have certain rights.
According to Section 45(1) of the Sale of Goods Act, 1930, the seller of goods is deemed to
be an ‘Unpaid Seller’ when-
(a) The whole of the price has not been paid or tendered and the seller had an immediate
right of action for the price.
(b) When a bill of exchange or other negotiable instrument has been received as
conditional payment, and the condition on which it was received has not been fulfilled
by reason of the dishonour of the instrument or otherwise.
The term ‘seller‘ here includes any person who is in the position of a seller, as, for
instance, an agent of the seller to whom the bill of lading has been endorsed, or a
consignor or agent who has himself paid, or is directly responsible for, the price
[Section 45(2)].
Example 1: X sold certain goods to Y for ` 50,000. Y paid ` 40,000 but fails to pay the balance.
X is an unpaid seller.
Example 2: P sold some goods to R for ` 60,000 and received a cheque for a full price. On
presentment, the cheque was dishonoured by the bank. P is an unpaid seller.
4.2 RIGHTS OF AN UNPAID SELLER

Unpaid seller’s right (Section 46): Subject to the provisions of this Act and of any law for
the time being in force, notwithstanding that the property in the goods may have passed to
the buyer, the unpaid seller of goods, as such, has by implication of law-
(a) a lien on the goods for the price while he is in possession of them;
(b) in case of the insolvency of the buyer a right of stopping the goods in transit after he
has parted with the possession of them;
(c) a right of re-sale as limited by this Act. [Sub-section (1)]
Where the property in goods has not passed to the buyer, the unpaid seller has, in addition
to his other remedies, a right of withholding delivery similar to and co-extensive with his rights
of lien and stoppage in transit where the property has passed to the buyer. [Sub-section (2)]

An unpaid seller has been expressly given the rights against the goods as well as the buyer
personally which are discussed as under:
(a) Rights of an unpaid seller against the goods: The right of unpaid seller against
goods can be categorized under two headings.
Against the goods
Where the property in goods Where the property in goods

has passed to the buyers has not passed to the buyers
4.3 RIGHT OF UNPAID SELLER AGAINST THE GOODS

The unpaid seller has the following rights against the goods:
(1) Seller’s lien (Section 47)
Rights of lien: An unpaid seller has a right of lien on the goods for the price while he
is in possession, until the payment or tender of the price of such goods. It is the right
to retain the possession of the goods and refusal to deliver them to the buyer until the
price due in respect of them is paid or tendered.
The unpaid seller’s lien is a possessory lien i.e. the lien can be exercised as long as the
seller remains in possession of the goods.
Exercise of right of lien: This right can be exercised by him in the following cases
only:
(a) where goods have been sold without any stipulation of credit; (i.e., on cash sale)
(b) where goods have been sold on credit but the term of credit has expired; or
(c) where the buyer becomes insolvent.
Example 3: A sold certain goods to B for a price ` 50,000 and allowed him to pay the
price within one month. B becomes insolvent during this period of credit. A, the unpaid
seller, can exercise his right of lien.
Seller may exercise his right of lien even where he is in possession of the goods as
agent or bailee for the buyer.

The term insolvent refers to “a person is said to be insolvent who has ceased to pay
his debts in the ordinary course of business, or cannot pay his debts as they become
due, whether he has committed an act of insolvency or not”.
Part delivery (Section 48): Where an unpaid seller has made part delivery of the
goods, he may exercise his right of lien on the remainder, unless such part delivery has
been made under such circumstances as to show an agreement to waive the lien.
Termination of lien (Section 49): The unpaid seller loses his right of lien under the
following circumstances:
(i) When he delivers the goods to a carrier or other bailee for the purpose of
transmission to the buyer without reserving the right of disposal of the goods.
(ii) Where the buyer or his agent lawfully obtains possession of the goods.
(iii) Where seller has waived the right of lien.
(iv) By Estoppel i.e., where the seller so conducts himself that he leads third parties
to believe that the lien does not exist.
Exception: The unpaid seller of the goods, having a lien thereon, does not lose his lien
by reason only that he has obtained a decree for the price of the goods. (This means
even if the seller has taken a price for the goods under a court case, he can still exercise
his right to lien on those goods.)
Example 4: A, sold a car to B for ` 1,00,000 and delivered the same to the railways for
the purpose of transmission to the buyer. The railway receipt was taken in the name of
B and sent to B. Now A cannot exercise the right of lien.
(2) Right of stoppage in transit (Section 50 to 52):

Meaning of right of stoppage in transit (Section 50): The right of stoppage in transit
means the right of stopping the goods while they are in transit, to regain the
possession and to retain them till the full price is paid.
When the unpaid seller has parted with the goods to a carrier and the buyer has
become insolvent, he can exercise this right of asking the carrier to return the goods
back, or not to deliver the goods to the buyer.
This right is the extension of the right of lien because it entitles the seller to regain
possession even when the seller has parted with the possession of the goods.
However, the right of stoppage in transit is exercised only when the following
conditions are fulfilled:
(a) The seller must be unpaid.

(b) He must have parted with the possession of goods.

(c) The goods are in transit.
(d) The buyer has become insolvent.
(e) The right is subject to provisions of the Act. [Section 50]
Example 5: A of Mumbai sold certain goods to B of Delhi. He delivered the goods to
C, a common carrier for the purpose of transmission of these goods to B. Before the
goods could reach him, B became insolvent and A came to know about it. A can stop
the goods in transit by giving a notice of it to C.
Duration of transit (Section 51): The goods are deemed to be in course of transit
from the time when they are delivered to a carrier or other bailee for the purpose of
transmission to the buyer, until the buyer or his agent on that behalf takes delivery of
them from such carrier or other bailee.
When does the transit come to an end?
The right of stoppage in transit is lost when transit comes to an end. Transit comes to
an end in the following cases:
 When the buyer or other bailee obtains delivery.
 Buyer obtains delivery before the arrival of goods at destination. It is also called
interception by the buyer which can be with or without the consent of the
carrier.
 Where the carrier or other bailee acknowledges to the buyer or his agent that
he holds the goods as soon as the goods are loaded on the ship, unless the
seller has reserved the right of disposal of the goods.
 If the carrier wrongfully refuses to deliver the goods to the buyer.
 Where goods are delivered to the carrier hired by the buyer, the transit comes
to an end.
 Where the part delivery of the goods has been made to the buyer, the transit
will come to an end for the remaining goods which are yet in the course of
transmission.
 Where the goods are delivered to a ship chartered by the buyer, the transit comes
to an end. [section 51]
How stoppage in transit is effected (Section 52):
(1) The unpaid seller may exercise his right of stoppage in transit either by taking
actual possession of the goods, or by giving notice of his claim to the carrier or

other bailee in whose possession the goods are. Such notice may be given
either to the person in actual possession of the goods or to his principal. In the
latter case, the notice, to be effectual, shall be given at such time and in such
circumstances, that the principal, by the exercise of reasonable diligence, may
communicate it to his servant or agent in time to prevent a delivery to the
buyer.
(2) When notice of stoppage in transit is given by the seller to the carrier or other
bailee in possession of the goods, he shall re-deliver the goods to, or according
to the directions of, the seller. The expenses of such re-delivery shall be borne
by the seller.
Stoppage in transit
By taking actual
possession of goods
By giving notice to the
carrier not to deliver
the goods.
Distinction between Right of Lien and Right of Stoppage in Transit

(i) The essence of a right of lien is to retain possession whereas the right of stoppage in
transit is right to regain possession.
(ii) Seller should be in possession of goods under lien while in stoppage in transit (i) seller
should have parted with the possession (ii) possession should be with a carrier & (iii)
buyer has not acquired the possession.
(iii) Right of lien can be exercised even when the buyer is not insolvent but it is not the
case with right of stoppage in transit.
(iv) Right of stoppage in transit begins when the right of lien ends. Thus, the end of the
right of lien is the starting point of the right of stoppage in transit.
(v) Right of lien comes to an end as soon as the goods go out of the possession of the
seller but the right of stopping in transit comes to an end as soon as the goods are
delivered to the buyer.
Sometimes it is said that right of stopping the goods in transit is nothing but an
extension of right of lien.

Effects of sub-sale or pledge by buyer (Section 53): The right of lien or stoppage in transit
is not affected by the buyer selling or pledging the goods unless the seller has assented to it.
This is based on the principle that a second buyer cannot stand in a better position than his
seller. (The first buyer).
Example 6: A sold certain goods to B of Mumbai and the goods are handed over to railways
for transmission to B. In the mean time, B sold these goods to C for consideration. B becomes
insolvent. A can still exercise his right of stoppage in transit. Here we assume that seller did
not give his assent for sub sale, therefore he can still exercise his right of stoppage in transit.
The right of stoppage is defeated if the buyer has transferred the document of title or pledges
the goods to a sub-buyer in good faith and for consideration.
Exceptions where unpaid seller’s right of lien and stoppage in transit are defeated:
(a) When the seller has assented to the sale, mortgage or other disposition of the goods
made by the buyer.
Example 7: A entered into a contract to sell cartons in possession of a wharfinger to
B and agreed with B that the price will be paid to A from the sale proceeds recovered
from his customers. Now B sold goods to C and C duly paid to B. But anyhow B failed
to make the payment to A. A wanted to exercise his right of lien and ordered the
wharfinger not to make delivery to C. Held that the seller had assented to the resale of
the goods by the buyer to the sub-buyers. As a result, A’s right to lien is defeated
(Mount D. F. Ltd. vs Jay & Jay (Provisions) Co. Ltd).
(b) When a document of title to goods has been transferred to the buyer and the buyer
transfers the documents to a person who has bought goods in good faith and for value
i.e. for price, then, the proviso of sub-section (1) stipulates as follows:
(i) If the last-mentioned transfer is by way of sale, right of lien or stoppage in

transit is defeated, or
(ii) If the last mentioned transfer is by way of pledge, unpaid seller’s right of lien
or stoppage only be exercised, subject to the rights of the pledgee.
However, the pledgee may be required by the unpaid seller to use in the first instance,
other goods or securities of the pledger available to him to satisfy his claims. [Sub -
section (2)].
Effect of stoppage: The contract of sale is not rescinded when the seller exercises his right
of stoppage in transit. The contract still remains in force and the buyer can ask for delivery of
goods on payment of price.

Right of re-sale [Section 54]: The right of resale is a very valuable right given to an unpaid
seller. In the absence of this right, the unpaid seller’s other rights against the goods that is
lien and the stoppage in transit would not have been of much use because these rights only
entitled the unpaid seller to retain the goods until paid by the buyer.
The unpaid seller can exercise the right to re-sell the goods under the following conditions:
(i) Where the goods are of a perishable nature: In such a case, the buyer need not be
informed of the intention of resale.
(ii) Where he gives notice to the buyer of his intention to re-sell the goods: If after
the receipt of such notice the buyer fails within a reasonable time to pay or tender the
price, the seller may resell the goods.
It may be noted that in such cases, on the resale of the goods, the seller is also entitled
to:
(a) Recover the difference between the contract price and resale price, from the
original buyer, as damages.
(b) Retain the profit if the resale price is higher than the contract price.
It may also be noted that the seller can recover damages and retain the profits only
when the goods are resold after giving the notice of resale to the buyer. Thus, if the
goods are resold by the seller without giving any notice to the buyer, the seller cannot
recover the loss suffered on resale. Moreover, if there is any profit on resale, he must
return it to the original buyer, i.e. he cannot keep such surplus with him [Section 54(2)].
(iii) Where an unpaid seller who has exercised his right of lien or stoppage in transit
resells the goods: The subsequent buyer acquires the good title thereof as against
the original buyer, despite the fact that the notice of re-sale has not been given by the
seller to the original buyer.
(iv) A re-sale by the seller where a right of re-sale is expressly reserved in a contract
of sale: Sometimes, it is expressly agreed between the seller and the buyer that in
case the buyer makes default in payment of the price, the seller will resell the goods
to some other person. In such cases, the seller is said to have reserved his right of
resale, and he may resell the goods on buyer’s default.
It may be noted that in such cases, the seller is not required to give notice of resale.
He is entitled to recover damages from the original buyer even if no notice of resale is
given.

(v) Where the property in goods has not passed to the buyer: The unpaid seller has in
addition to his remedies a right of withholding delivery of the goods. This right is
similar to lien and is called “quasi-lien”. This is the additional right used in case of
agreement to sell.
4.4 RIGHTS OF UNPAID SELLER AGAINST THE BUYER

(SECTIONS 55-61)
Rights of unpaid seller against the buyer personally: An unpaid seller can enforce certain
rights against the goods as well as against the buyer personally. Rights of unpaid seller against
the buyer are otherwise known as seller’s remedies for breach of contract of sale. The rights
of the seller against the buyer personally are called rights in personam and are in addition to
his rights against the goods.
The right against the buyer are as follows:
1. Suit for price (Section 55)
(a) Where under a contract of sale, the property in the goods has passed to the
buyer and the buyer wrongfully neglects or refuses to pay for the goods
according to the terms of the contract, the seller may sue him for the price of
the goods. [Section 55(1)] (This is the case of contract of sale)
(b) Where under a contract of sale, the price is payable on a certain day irrespective
of delivery and the buyer wrongfully neglects or refuses to pay such price, the
seller may sue him for the price although the property in the goods has not
passed and the goods have not been appropriated to the contract. [Section
55(2)]. (This is the case of agreement to sell)
2. Suit for damages for non-acceptance (Section 56): Where the buyer wrongfully
neglects or refuses to accept and pay for the goods, the seller may sue him for
damages for non-acceptance. As regards measure of damages, Section 73 of the Indian
Contract Act, 1872 applies in this case.
3. Repudiation of contract before due date (Section 60): Where the buyer repudiates
the contract before the date of delivery, the seller may treat the contract as rescinded
and sue damages for the breach. This is known as the ‘rule of anticipatory breach of
contract’.
4. Suit for interest [Section 61]: Where there is specific agreement between the seller
and the buyer as to interest on the price of the goods from the date on which payment

becomes due, the seller may recover interest from the buyer. If, however, there is no
specific agreement to this effect, the seller may charge interest on the price when it
becomes due from such day as he may notify to the buyer.
In the absence of a contract to the contrary, the Court may award interest to the seller in a
suit by him at such rate as it thinks fit on the amount of the price from the date of the tender
of the goods or from the date on which the price was payable.
4.5 REMEDIES OF BUYER AGAINST THE SELLER

Breach of contract by seller
Breach of contract by seller, where he-
• Fails to deliver the goods at the time or in

manner prescribed
• Repudiates the contract
• Deliver non-conforming goods and buyer
rejects and revokes acceptance
If the seller commits a breach of contract, the buyer gets the following rights against the seller:
Rights of buyer
Damages for non-delivery

Suit for specific performance
Suit for breach of warranty
Suit for anticipatory breach
Suit for interest

1. Damages for non-delivery [Section 57]: Where the seller wrongfully neglects or
refuses to deliver the goods to the buyer, the buyer may sue the seller for damages
for non-delivery.
Example 8: A’ a shoe manufacturer, agreed to sell 100 pairs of shoes to ‘B’ at the rate
of ` 10,500 per pair. ‘A’ knew that ‘B’ wanted the shoes for the purpose of further
reselling them to ‘C’ at the rate of ` 11,000/- per pair. On the due date of delivery, ‘A’
failed to deliver the shoes to ‘B’. In consequence, ‘B’ could not perform his contract
with 'C’ for the supply of 100 pairs of shoes. In this case, 'B’ can recover damages from
‘A’ at the rate of ` 500/- per pair (the difference between the contract price and resale
price).
2. Suit for specific performance (Section 58): Where the seller commits of breach of
the contract of sale, the buyer can appeal to the court for specific performance. The
court can order for specific performance only when the goods are ascertained or
specific.
This remedy is allowed by the court subject to these conditions:
(a) The contract must be for the sale of specific and ascertained goods.
(b) The power of the court to order specific performance is subject to provisions of
Specific Relief Act of 1963.
(c) It empowers the court to order specific performance where damages would not
be an adequate remedy.
(d) It will be granted as remedy if goods are of special nature or are unique.
Example 9: ‘A’ agreed to sell a rare painting of Mughal period to ‘B’. But on the due
date of delivery, ‘A’ refused to sell the same. In this case, ‘B’ may file a suit against ‘A’
for obtaining an order from the Court to compel ‘A’ to perform the contract (i.e. to
deliver the painting to ‘B’ at the agreed price).
3. Suit for breach of warranty (Section 59): Where there is breach of warranty on the
part of the seller, or where the buyer elects to treat breach of condition as breach of
warranty, the buyer is not entitled to reject the goods only on the basis of such breach
of warranty. But he may –
(i) set up against the seller the breach of warranty in diminution or extinction of
the price; or
(ii) sue the seller for damages for breach of warranty.

4. Repudiation of contract before due date (Section 60): Where either party to a
contract of sale repudiates the contract before the date of delivery, the other may
either treat the contract as subsisting and wait till the date of delivery, or he may treat
the contract as rescinded and sue for damages for the breach.
5. Suit for interest:
(1) Nothing in this Act shall affect the right of the seller or the buyer to recover
interest or special damages, in any case where by law interest or special
damages may be recoverable, or to recover the money paid where the
consideration for the payment of it has failed.
(2) In the absence of a contract to the contrary, the court may award interest at
such rate as it thinks fit on the amount of the price to the buyer in a suit filed
by him for the refund of the price (in a case of a breach of the contract on the
part of the seller) from the date on which the payment was made.
Example 10: In case of a sale of cigarettes which turned out to be mildewed and unfit
for consumption, damages were awarded on the basis of the difference between the
contract price and the price released.
Example 11: In case of absence of transfer of title or registration, the purchaser cannot
claim damages for breach of conditions and warranties relating to sale.
4.6 AUCTION SALE (SECTION 64)

An ‘Auction Sale’ is a mode of selling property by inviting bids publicly and the property is
sold to the highest bidder. An auctioneer is an agent governed by the Law of Agency. When
he sells, he is only the agent of the seller. He may, however, sell his own property as the
principal and need not disclose the fact that he is so selling.
Legal Rules of Auction sale: Section 64 of the Sale of Goods Act, 1930 provides following
rules to regulate the sale by auction:
(a) Where goods are sold in lots: Where goods are put up for sale in lots, each lot is
prima facie deemed to be subject of a separate contract of sale.
(b) Completion of the contract of sale: The sale is complete when the auctioneer
announces its completion by the fall of hammer or in any other customary manner.
Until such announcement is made, any bidder may retract from his bid.

(c) Right to bid may be reserved: Right to bid may be reserved expressly by or on behalf
of the seller and where such a right is expressly reserved, but not otherwise, the seller
or any one person on his behalf may bid at the auction.
(d) Where the sale is not notified by the seller: Where the sale is not notified to be
subject to a right to bid on behalf of the seller, it shall not be lawful for the seller to
bid himself or to employ any person to bid at such sale, or for the auctioneer knowingly
to take any bid from the seller or any such person; and any sale contravening this rule
may be treated as fraudulent by the buyer.
(e) Reserved price: The sale may be notified to be subject to a reserve or upset price; and
(f) Pretended bidding: If the seller makes use of pretended bidding to raise the price,
the sale is voidable at the option of the buyer.
Example 12: P sold a car by auction. It was knocked down to Q who was only allowed to take
it away on giving a cheque for the price and signing an agreement that ownership should not
pass until the cheque was cleared. In the meanwhile till the cheque was cleared, Q sold the
car to R. It was held that the property was passed on the fall of the hammer and therefore R
had a good title to the car. Both sale and sub sale are valid in favour of Q and R respectively.
4.7 INCLUSION OF INCREASED OR DECREASED TAXES

IN CONTRACT OF SALE (SECTION 64A)
Where after a contract has been made but before it has been performed, tax revision takes
place. Where tax is being imposed, increased, decreased or remitted in respect of any goods
without any stipulations to the payment of tax, the parties would become entitled to read just
the price of the goods accordingly. Following taxes are applied on the sale or purchase of
goods:
 Any duty of customs or excise on goods,
 Any tax on the sale or purchase of goods
The buyer would have to pay the increased price where the tax increases and may derive the
benefit of reduction if taxes are curtailed. Thus, seller may add the increased taxes in the price.
The effect of provision can, however, is excluded by an agreement to the contrary. It is open
to the parties to stipulate anything regard to taxation.

SUMMARY
A seller is called an ‘unpaid seller’ when either he has not been paid the whole price or the
buyer has failed to meet at maturity the bill of exchange or any other negotiable instrument
which was accepted by the seller as conditional payment. In such a circumstance the buyer
may exercise lien on goods if he is in possession of them. If goods are in transit to the buyer,
he may stop the goods in transit and obtain the possession of the goods.
When the unpaid seller has exercised right of lien or stoppage in transit, he may sell the goods
after giving a notice to the buyer of his intent to resell. The new buyer shall have a good title
on good s as against the original buyer even if the notice of resale has not been given by the
seller to the original buyer.
If the seller neglects to deliver the goods the buyer may sue him for damages, or he may sue
the seller for specific performance if the property in goods had not been transferred to the
buyer. Where the buyer neglects to pay the price, the seller may sue him for the price as well
as exercise lien on goods. Where the buyer wrongfully neglects to accept and pay for the
goods, the seller may sue him for damages for non-acceptance.
Unpaid Seller
Meaning Buyer’s Rights for Breach

A seller of goods is deemed to be an unpaid of Contract of Sale
seller when-
a. Suit for damages for non-
➢ Whole of the price has not been paid or
delivery of goods.
tendered;
b. Suit for specific
➢ A BOE or other negotiable instrument has
performance.
been received as a conditional payment
c. Suit for breach of
and the condition on which it was received
warranty.
has not been fulfilled by reason of the
d. Suit for anticipatory
dishonour of the instrument or otherwise.
warranty.
e. Suit for interest.
Rights of an unpaid seller
Effect of Sub-Sale or Pledge by Buyer (Sec. 53)
1. Against the goods:
The unpaid seller’s right of lien or stoppage in
➢ Right of lien.
transit is to not affected by any sale or pledge of
➢ Right of stoppage in transit
the goods which the buyer may have made,
➢ Right of re-sale
unless
2. Against the buyer:
➢ Seller has assented to it.
➢ Suit for price
Or
➢ Suit for damages for non-
➢ A document of title to goods has been
acceptance
transferred to buyer, and the buyer transfers
➢ Repudiation of contract
the document to a person who bought it in
before due date
good faith and for consideration.
➢ Suit for interest on the price

Auction Sale
Meaning Rules of Auction Sale

Public sale where 1. Goods put up for sale in lots.
different intending 2. Completion of sale by the fall of hammer
buyers try to outbid or in some other customary manner.
each other & goods 3. A right to bid may be reserved expressly
are ultimately sold to by or on behalf of the seller.
the highest bidder. 4. The sale may be notified to be subject to a
reserve price.
5. Sale is voidable in case of pretended
bidding to raise the price.
TEST YOUR KNOWLEDGE

1. The unpaid seller has right of stoppage of goods in transit only where the buyer
(a) become insolvent.
(b) refuses to pay price.
(c) acts fraudulently.
(d) all of these.
2. An unpaid seller is having rights against
(a) goods only.
(b) the buyer only.
(c) both goods and buyer.
3. Under which of the circumstances unpaid seller loses his right of lien
(a) by estoppel.
(b) where seller waived the right of lien.
(c) where the buyer or his agent lawfully obtains possession of the goods.
(d) any of the above.

4. When the unpaid seller has parted with the goods to a carrier and the buyer has become
insolvent, he can exercise
(a) right of lien.
(b) right of stoppage in transit.
(c) right of resale.
5. The essence of a right of lien is to
(a) deliver the goods.
(b) retain the possession.
(c) regain the possession.

6. Which of the following right can be exercised by an unpaid seller against the buyer, who
is not insolvent
(a) right of lien.
(b) right of stoppage in transit.
(c) both (a) and (b).

7. Which of the following is a buyer’s right against the seller in case of breach of contract?
(a) suit for non-delivery.
(b) suit for specific performance.
(c) suit for damages for breach of warranty.

8. An auction sale is complete on the
(a) delivery of goods
(b) payment of price

(c) fall of hammer

9. Seller has right of resale where

(a) goods are perishable.
(b) seller has reserved such right.
(c) seller gives notice.
(d) all of these.
10. The aggrieved party can claim only damages in case of breach of warranty.
(a) true.
(b) false.
11. Under which circumstances, the right of stoppage can be exercised by an unpaid seller
(a) the buyer has become insolvent.
(b) the goods are in transit.
(c) the seller must be unpaid.
12. Under which circumstances the unpaid seller can exercise right of re-sale
(a) when the goods are of perishable nature.
(b) when he gives notice to the buyer.
(c) when he gives notice to the buyer of his intention to re-sale and the buyer does
not within a reasonable time pay the price.
(d) both (a) and (c)
13. Where the seller wrongfully neglects to deliver the goods to the buyer, then the buyer
(a) cannot sue the seller for damages for non-delivery.
(b) may sue the seller for damages for non-delivery.
14. Where the buyer is deprived to goods by their true owner, then the buyer
(a) may recover the price for breach of the condition as to title.
(b) cannot recover the price for breach of the condition as to title.

15. Where the buyer wrongfully neglects or refuses to accept and pay for the goods,
(a) the seller may sue buyer for damages for non-acceptance.
(b) the seller cannot sue buyer for damages for non-acceptance.
(c) the seller can sue buyers’ banker for damages.

16. In an auction sale, the property shall be sold to the
(a) Lowest bidder.

(b) Highest bidder.
(c) All bidders

17. In an auction sale, if the seller makes use of pretended bidding to raise the price, then
the sale is
(a) valid.
(b) void.
(c) voidable.
(d) illegal.
18. In which of the following cases, the unpaid seller loses his right of lien?
(a) delivery of goods to buyer.
(b) delivery of goods to carrier.
(c) tender of price by buyer.
(d) all of these.
19. The bidder at an auction sale can withdraw his bid
(a) any time during auction.
(b) before fall of hammer.
(c) before payment of price.

(d) none of these.
20. Where in an auction sale, the seller appoints more than one bidder, the sale is
(a) void.

(b) illegal.
(c) conditional.
(d) voidable.
21. Where in an auction sale notified with reserve price, the auctioneer mistakenly knocks
down the goods for less than the reserve price, then the auctioneer is
(a) bound by auction.

(b) not bound by auction.
(c) liable for damages.
(d) both (a) and (c)
1. When can an unpaid seller of goods exercise his right of lien over the goods under the
Sale of Goods Act? Can he exercise his right of lien even if the property in goods has
passed to the buyer? When such a right is terminated? Can he exercise his right even
after he has obtained a decree for the price of goods from the court?
2. Mr. D sold some goods to Mr. E for ` 5,00,000 on 15 days credit. Mr. D delivered the
goods. On due date, Mr. E refused to pay for it. State the position and rights of Mr. D as
per the Sale of Goods Act, 1930.
3. Ram sells 200 bales of cloth to Shyam and sends 100 bales by lorry and 100 bales by
Railway. Shyam receives delivery of 100 bales sent by lorry, but before he receives the
delivery of the bales sent by railway, he becomes bankrupt. Can Ram exercise right of
stopping the goods in transit?
4. Suraj sold his car to Sohan for ` 75,000. After inspection and satisfaction, Sohan paid `
25,000 and took possession of the car and promised to pay the remaining amount within
a month. Later on, Sohan refuses to give the remaining amount on the ground that the
car was not in a good condition. Advise Suraj as to what remedy is available to him
against Sohan.
5. A agrees to sell certain goods to B on a certain date on 10 days credit. The period of 10
days expired and goods were still in the possession of A. B has also not paid the price of
the goods. B becomes insolvent. A refuses to deliver the goods to exercise his right of lien
on the goods. Can he do so under the Sale of Goods Act, 1930?
6. A, who is an agent of a buyer, had obtained the goods from the Railway Authorities and
loaded the goods on his truck. In the meantime, the Railway Authorities received a notice
from B, the seller for stopping the goods in transit as the buyer has become insolvent.

Referring to the provisions of Sale of Goods Act, 1930, decide whether the Railway
Authorities can stop the goods in transit as instructed by the seller?
7. J sold a machine to K. K gave a cheque for the payment. The cheque was dishonoured.
But J handed over a delivery order to K. K sold the goods to R on the basis of the delivery
order. J wanted to exercise his right of lien on the goods. Can he do so under the
provisions of the Sale of Goods Act, 1930?
ANSWERS/HINTS
Answers to MCQ’S
1 (a) 2. (c) 3. (d) 4. (b) 5. (b) 6. (a)
7. (d) 8. (c) 9. (d) 10. (a) 11. (d) 12. (d)
13. (b) 14. (a) 15. (a) 16. (b) 17. (c) 18. (d)
19. (b) 20. (d) 21. (b)

1. A lien is a right to retain possession of goods until the payment of the price. It is
available to the unpaid seller of the goods who is in possession of them where-
(i) the goods have been sold without any stipulation as to credit;
(ii) the goods have been sold on credit, but the term of credit has expired;
(iii) the buyer becomes insolvent.
The unpaid seller can exercise ‘his right of lien even if the property in goods has passed
on to the buyer. He can exercise his right even if he is in possession of the goods as
agent or bailee for the buyer.
Termination of lien: An unpaid seller losses his right of lien thereon-
(i) When he delivers the goods to a carrier or other bailee for the purpose of
transmission to the buyer without reserving the right of disposal of the goods;
(ii) When the buyer or his agent lawfully obtains possession of the goods;
Yes, he can exercise his right of lien even after he has obtained a decree for the price
of goods from the court.

2. Position of Mr. D: Mr. D sold some goods to Mr. E for ` 5,00,000 on 15 days credit.
Mr. D delivered the goods. On due date Mr. E refused to pay for it. So, Mr. D is an
unpaid seller as according to Section 45(1) of the Sale of Goods Act, 1930 the seller of
goods is deemed to be an ‘Unpaid Seller’ when the whole of the price has not been
paid or tendered and the seller had an immediate right of action for the price .
Rights of Mr. D: As the goods have parted away from Mr. D and already delivered to
E, therefore, Mr. D cannot exercise the right against the goods, he can only exercise
his rights against the buyer i.e. Mr. E which are as under:
(i) Suit for price (Section 55): In the mentioned contract of sale, the price is
payable after 15 days and Mr. E refuses to pay such price, Mr. D may sue Mr. E
for the price.
(ii) Suit for damages for non-acceptance (Section 56): Mr. D may sue Mr. E for
damages for non-acceptance if Mr. E wrongfully neglects or refuses to accept
and pay for the goods. As regards measure of damages, Section 73 of the Indian
Contract Act, 1872 applies.
(iii) Suit for interest [Section 61]: If there is no specific agreement between Mr. D
and Mr. E as to interest on the price of the goods from the date on which
payment becomes due, Mr. D may charge interest on the price when it becomes
due from such day as he may notify to Mr. E.
3. Right of stoppage of goods in transit: The problem is based on Section 50 of the
Sale of Goods Act, 1930 dealing with the right of stoppage of the goods in transit
available to an unpaid seller. The section states that the right is exercisable by the seller
only if the following conditions are fulfilled.
(i) The seller must be unpaid
(ii) He must have parted with the possession of goods
(iii) The goods must be in transit
(iv) The buyer must have become insolvent
(v) The right is subject to the provisions of the Act.
Applying the provisions to the given case, Ram being still unpaid, can stop the 100
bales of cloth sent by railway as these goods are still in transit. He may recover the
price of other 100 bales sent by lorry by using his rights against the buyer.
4. As per the section 55 of the Sale of Goods Act, 1930 an unpaid seller has a right to
institute a suit for price against the buyer personally. The said Section lays down that

(i) Where under a contract of sale the property in the goods has passed to buyer
and the buyer wrongfully neglects or refuses to pay for the goods, the seller
may sue him for the price of the goods [Section 55(1)].
(ii) Where under a contract of sale the price is payable on a certain day irrespective
of delivery and the buyer wrongfully neglects or refuses to pay such price, the
seller may sue him for the price. It makes no difference even if the property in
the goods has not passed and the goods have not been appropriated to the
contract [Section 55(2)].
This problem is based on above provisions. Hence, Suraj will succeed against Sohan
for recovery of the remaining amount. Apart from this, Suraj is also entitled to:-
(1) Interest on the remaining amount
(2) Interest during the pendency of the suit.
(3) Costs of the proceedings.
5. Lien is the right of a person to retain possession of the goods belonging to another
until claim of the person in possession is satisfied. The unpaid seller has also right of
lien over the goods for the price of the goods sold.
Section 47(1) of the Sales of Goods Act, 1930 provides that the unpaid seller who is in
the possession of the goods is entitled to exercise right of lien in the following cases:-
1. Where the goods have been sold without any stipulation as to credit
2. Where the goods have been sold on credit but the term of credit has expired
3. Where the buyer has become insolvent even though the period of credit has
not yet expired.
In the given case, A has agreed to sell certain goods to B on a credit of 10 days. The
period of 10 days has expired. B has neither paid the price of goods nor taken the
possession of the goods. That means the goods are still physically in the possession of
A, the seller. In the meantime B, the buyer has become insolvent. In this case, A is
entitled to exercise the right of lien on the goods because the buyer has become
insolvent and the term of credit has expired without any payment of price by the buyer.
6. The right of stoppage of goods in transit means the right of stopping the goods after
the seller has parted with the goods. Thereafter the seller regains the possession of
the goods.
This right can be exercised by an unpaid seller when he has lost his right of lien over
the goods because the goods are delivered to a carrier for the purpose of taking the

goods to the buyer. This right is available to the unpaid seller only when the buyer has
become insolvent. The conditions necessary for exercising this right are:-
1 The buyer has not paid the total price to the seller
2 The seller has delivered the goods to a carrier thereby losing his right of lien
3 The buyer has become insolvent
4 The goods have not reached the buyer, they are in the course of transit. (Section
50, 51 and 52)
In the given case A, who is an agent of the buyer, had obtained the goods from the
railway authorities and loaded the goods on his truck. After this the railway authorities
received a notice from the seller B to stop the goods as the buyer had become
insolvent.
According to the Sale of Goods Act, 1930, the railway authorities cannot stop the goods
because the goods are not in transit. A who has loaded the goods on his truck is the
agent of the buyer. That means railway authorities have given the possession of the
goods to the buyer. The transit comes to an end when the buyer or his agent takes the
possession of the goods.
7. The right of lien and stoppage in transit are meant to protect the seller. These will not
be affected even when the buyer has made a transaction of his own goods which were
with the seller under lien. But under two exceptional cases these rights of the seller are
affected:-
(i) When the buyer has made the transaction with the consent of the seller
(ii) When the buyer has made the transaction on the basis of documents of title
such as bill of lading, railway receipt or a delivery order etc.
In the given case, J has sold the machine to K and K gave a cheque for the payment.
But the cheque was dishonoured that means J, the seller is an unpaid seller. So , he is
entitled to exercise the right of lien, but according to section 53(1) his right of lien is
defeated because he has given the document of title to the buyer and the buyer has
made a transaction of sale on the basis of this document. So, R who has purchased the
machine from K can demand the delivery of the machine.

CHAPTER 4
THE INDIAN PARTNERSHIP
ACT, 1932
UNIT -1: GENERAL NATURE OF PARTNERSHIP
LEARNING OUTCOMES

♦ The concept of partnerships and be clear about its essentials.
♦ The ‘principal - agent relationship’ among the partners.
♦ Points of difference between partnership and other various forms of
organization.
♦ Types of Partners
UNIT OVERVIEW
General Nature of Partnership
What is Distinction with

Type of
Partnership other forms of
Partners
organisation
Essential True test of Vs. Vs. Co- Vs.

elements partnership Joint Stock Vs. Club Vs. HUF
ownership Association
Company

4.2 BUSINESS LAWS
1.1 DEFINITION OF ‘PARTNERSHIP’, ‘PARTNER’,

‘FIRM’ AND ‘FIRM NAME’ (SECTION 4)
‘Partnership’ is the relation between persons who have agreed to
share the profits of a business carried on by all or any of them
acting for all.
Persons who have entered into partnership with one another are
called individually ‘partners’ and collectively ‘a firm’, and the
name under which their business is carried on is called the ‘firm
name’.
1.2 ELEMENTS OF PARTNERSHIP

The definition of the partnership contains the following five elements which must co-exist
before a partnership can come into existence.
Partnership is an The partnership must be Partnership is organised

association of two or a result of an agreement to carry on some
more persons. entered into by all business
persons concerned.
The agreement must be The business must be

to share the profits of carried on by all or any
the business. of them acting for all.
We shall now discuss the aforestated elements one by one.

1. ASSOCIATION OF TWO OR MORE PERSONS: Partnership is an association of 2 or
more persons. Again, only persons recognized by law can enter into an agreement of
partnership. Therefore, a firm, since it is not a person recognized in the eyes of law
cannot be a partner. Again, a minor cannot be a partner in a firm, but with the consent
of all the partners, may be admitted to the benefits of partnership.
The partnership Act is silent about the maximum number of partners but section 464
of the Companies Act, 2013 has now put a limit of 50 partners in any
association/partnership firm.
2. AGREEMENT: It may be observed that partnership must be the result of an agreement
between two or more persons. There must be an agreement entered into by all the

THE INDIAN PARTNERSHIP ACT, 1932 4.3
persons concerned. This element relates to voluntary contractual nature of partnership.

Thus, the nature of the partnership is voluntary and contractual.
An agreement from which relationship of Partnership arises may be express. It may

also be implied from the act done by partners and from a consistent course of conduct
being followed, showing mutual understanding between them. It may be oral or in
writing.
3. BUSINESS: In this context, we will consider two propositions. First, there must exist a
business. For the purpose, the term ‘business’ includes every trade, occupation and
profession. The existence of business is essential. Secondly, the motive of the business
is the “acquisition of gains” which leads to the formation of partnership. Therefore,
there can be no partnership where there is no intention to carry on the business and
to share the profit thereof.
Existence of
business Acquisition of
gains
4. AGREEMENT TO SHARE PROFITS: The sharing of profits is an

essential feature of partnership. There can be no partnership
where only one of the partners is entitled to the whole of the
profits of the business. Partners must agree to share the profits
in any manner they choose.
But an agreement to share losses is not an essential element. It is open to one or more
partners to agree to share all the losses. However, in the event of losses, unless agreed
otherwise, these must be borne in the profit-sharing ratio.
Example 1: Co-owners who share amongst themselves the rent derived from a piece
of land are not partners, because there does not exist any business.
Example 2: No charitable institution or club may be floated in partnership [A joint
stock company may, however, be floated for non-economic purposes].
Example 3: X and Y buy certain bales of cotton which they agree to sell on their joint
account and to share the profits equally. In these circumstances, X and Y are partners
in respect of such cotton business.

4.4 BUSINESS LAWS
5. BUSINESS CARRIED ON BY ALL OR ANY OF THEM ACTING FOR ALL: The business
must be carried on by all the partners or by anyone or more of the partners acting for
all. This is the cardinal principle of the partnership Law. In other words, there should
be a binding contract of mutual agency between the partners.
An act of one partner in the course of the business of the firm is in fact an act of all
partners. Each partner carrying on the business is the principal as well as the agent for
all the other partners. He is an agent in so far as he can bind the other partners by his
acts and he is a principal to the extent that he is bound by the act of other partners.
It may be noted that the true test of partnership is mutual agency rather than sharing
of profits. If the element of mutual agency is absent, then there will be no partnership.
Example 4: A, B and C are partners in ABC Associates, a partnership firm. If A made
certain purchases for the purpose of business from Mr. K, then Mr. K can recover the
money from A, B or C as all partners are liable for any act done on behalf of firm.
In KD Kamath & Co.
The Supreme Court has held that the two essential conditions to be satisfied are that:
(1) there should be an agreement to share the profits as well as the losses of
business; and
(2) the business must be carried on by all or any of them acting for all, within the
meaning of the definition of ‘partnership’ under section 4.
The fact that the exclusive power and control, by agreement of the parties, is vested in
one partner or the further circumstance that only one partner can operate the bank
accounts or borrow on behalf of the firm are not destructive of the theory of
partnership provided the two essential conditions, mentioned earlier, are satisfied.
Note:- The ‘Partnership Agreement’ is also known as ‘Partnership Deed’.
1.3 TRUE TEST OF PARTNERSHIP

Mode of determining existence of partnership (Section 6): In determining whether a group
of persons is or is not a firm, or whether a person is or not a partner in a firm, regard shall be
had to the real relation between the parties, as shown by all relevant facts taken together.
For determining the existence of partnership, it must be proved.
1. There was an agreement between all the persons concerned;
2. The agreement was to share the profits of a business and

3. the business was carried on by all or any of them acting for all.

1. Agreement: Partnership is created by agreement and not by status (Section 5). The
relation of partnership arises from contract and not from status; and in particular, the
members of a Hindu Undivided family carrying on a family business as such, or a
Burmese Buddhist husband and wife carrying on business as such are not partners in
such business.
2. Sharing of Profit: The sharing of profits or of gross returns arising from property by
persons holding a joint or common interest in that property does not of itself make
such persons partners.
The receipt by a person of a share of the profits of a business, or of a payment

contingent upon the earning of profits or varying with the profits earned by a business,
does not of itself make him a partner with the persons carrying on the business; and
in particular, the receipt of such share or payment-
(a) by a lender of money to persons engaged or about to engage in any business,
(b) by a servant or agent as remuneration,
(c) by a widow or child of a deceased partner, as annuity, or
(d) by a previous owner or part owner of the business, as consideration for the sale
of the goodwill or share thereof, does not of itself make the receiver a partner
with the persons carrying on the business.
As discussed earlier, sharing of profit is an essential element to constitute a

partnership. But, it is only a prima facie evidence and not conclusive evidence, in that
regard. The sharing of profits or of gross returns accruing from property by persons
holding joint or common interest in the property would not by itself make such persons
partners. Although the right to participate in profits is a strong test of partnership, and
there may be cases where, upon a simple participation in profits, there is a partnership,
yet whether the relation does or does not exist must depend upon the whole contract
between the parties.
Where there is an express agreement between partners to share the profit of a business
and the business is being carried on by all or any of them acting for all, there will be
no difficulty in the light of provisions of Section 4, in determining the existence or
otherwise of partnership.

4.6 BUSINESS LAWS
But the task becomes difficult when either there is no specific agreement or the
agreement is such as does not specifically speak of partnership. In such a case for
testing the existence or otherwise of partnership relation, Section 6 has to be
referred.
According to Section 6, regard must be had to the real relation between the parties as
shown by all relevant facts taken together. The rule is easily stated and is clear but its
application is difficult. Cumulative effect of all relevant facts such as written or verbal
agreement, real intention and conduct of the parties, other surrounding circumstances
etc., are to be considered while deciding the relationship between the parties and
ascertaining the existence of partnership.
3. Agency: Existence of Mutual Agency which is the cardinal principle of partnership law,
is very much helpful in reaching a conclusion in this regard. Each partner carrying on
the business is the principal as well as an agent of other partners. So, the act of one
partner done on behalf of firm, binds all the partners. If the elements of mutual agency
relationship exist between the parties constituting a group formed with a view to earn
profits by running a business, a partnership may be deemed to exist.
Existence of Mutual Agency which is the cardinal principle of partnership law, is very
much helpful in reaching a conclusion in this regard. Each partner carrying on the
business is the principal as well as an agent of other partners. So, the act of one partner
done on behalf of firm, binds all the partners. If the elements of mutual agency
relationship exist between the parties constituting a group formed with a view to earn
profits by running a business, a partnership may be deemed to exist.
Santiranjan Das Gupta Vs. Dasyran Murzamull (Supreme Court)
In Santiranjan Das Gupta Vs. Dasyran Murzamull, following factors weighed upon the
Supreme Court to reach the conclusion that there is no partnership between the
parties:
(a) Parties have not retained any record of terms and conditions of partnership.
(b) Partnership business has maintained no accounts of its own, which would be
open to inspection by both parties.
(c) No account of the partnership was opened with any bank.
(d) No written intimation was conveyed to the Deputy Director of Procurement

with respect to the newly created partnership.

1.4 PARTNERSHIP DISTINGUISHED FROM OTHER

FORMS OF ORGANISATION
Partnership Vs. Joint Stock Company
Basis Partnership Joint Stock Company

Legal status A firm is not legal entity i.e. it has no A company is a separate legal entity
legal personality distinct from the distinct from its members (Salomon
personalities of its constituent v. Salomon).
members.
Agency In a firm, every partner is an agent In a company, a member is not an
of the other partners as well as of agent of the other members or of
the firm. the company, his actions do not
bind either.
Distribution of The profits of the firm must be There is no such compulsion to
profits distributed among the partners distribute its profits among its
according to the terms of the members. Some portion of the
partnership deed. profits, but generally not the entire
profit, become distributable among
the shareholders only when
dividends are declared.
Extent of In a partnership, the liability of the In a company limited by shares, the
liability partners is unlimited. This means liability of a shareholder is limited to
that each partner is liable for debts the amount, if any, unpaid on his
of a firm incurred in the course of shares, but in the case of a
the business of the firm and these guarantee company, the liability is
debts can be recovered from his limited to the amount for which he
private property, if the joint estate is has agreed to be liable. However,
insufficient to meet them wholly. there may be companies where the
liability of members is unlimited.
Property The firm’s property is that which is In a company, its property is
the “joint estate” of all the partners separate from that of its members
as distinguished from the ‘separate’ who can receive it back only in the
estate of any of them and it does form of dividends or refund of
not belong to a body distinct in law capital.
from its members.
Transfer of A share in a partnership cannot be In a company a shareholder may
shares transferred without the consent of transfer his shares, subject to the
all the partners. provisions contained in its Articles.

4.8 BUSINESS LAWS
In the case of public limited

companies whose shares are
quoted on the stock exchange, the
transfer is usually unrestricted.
Management In the absence of an express Members of a company are not
agreement to the contrary, all the entitled to take part in the
partners are entitled to participate management unless they are
in the management. appointed as directors, in which
case they may participate.
Members, however, enjoy the right
of attending general meeting and
voting where they can decide
certain questions such as election of
directors, appointment of auditors,
etc.
Registration Registration is not compulsory in A company cannot come into
the case of partnership. existence unless it is registered
under the Companies Act, 2013.
Winding up A partnership firm can be dissolved A company, being a legal person is
at any time if all the partners agree. either wind up by the National
Company Law Tribunal or its name
is struck of by the Registrar of
Companies.
Number of According to section 464 of the A private company may have as
membership Companies Act, 2013, the number many as 200 members but not less
of partners in any association shall than two and a public company may
not exceed 100. have any number of members but
However, the Rule given under the not less than seven. A private
Companies (Miscellaneous) Rules, Company can also be formed by
2014 restrict the present limit to 50. one person known as one person
Company.
Duration of Unless there is a contract to the A company enjoys a perpetual
existence contrary, death, retirement or succession.
insolvency of a partner results in the
dissolution of the firm.

Partnership Vs. Club
Basis of Partnership Club

Difference
Definition It is an association of persons A club is an association of persons

formed for earning profits from a formed with the object not of
business carried on by all or any earning profit, but of promoting
one of them acting for all. some beneficial purposes such as
improvement of health or
providing recreation for the
members, etc.
Relationship Persons forming a partnership are Persons forming a club are called
called partners and a partner is an members. A member of a club is
agent for other partners. not the agent of other members.
Interest in the Partner has interest in the property A member of a club has no interest
property of the firm. in the property of the club.
Dissolution A change in the partners of the firm A change in the membership of a

affect its existence. club does not affect its existence.
Partnership vs. Hindu Undivided Family
Basis of difference Partnership Joint Hindu family

Mode of creation Partnership is created necessarily The right in the joint family is
by an agreement. created by status means its
creation by birth in the family.
Death of a member Death of a partner ordinarily The death of a member in the
leads to the dissolution of Hindu undivided family does not
partnership. give rise to dissolution of the family
business.
Management All the partners are equally The right of management of joint
entitled to take part in the family business generally vests in
partnership business. the Karta, the governing male
member or female member of the
family. 1
1
Joint Hindu Family: The amendment in the Hindu Succession Act, 2005, entitled all adult members
– Hindu males and females to become coparceners in a HUF. They now enjoy equal rights of

4.10 BUSINESS LAWS
Authority to bind Every partner can, by his act, bind The Karta or the manager, has the
the firm. authority to contract for the family
business and the other members in
the family.
Liability In a partnership, the liability of a In a Hindu undivided family, only
partner is unlimited. the liability of the Karta is
unlimited, and the other
coparcener are liable only to the
extent of their share in the profits
of the family business.
Calling for A partner can bring a suit against On the separation of the joint
accounts on the firm for accounts, provided family, a member is not entitled to
closure he also seeks the dissolution of ask for account of the family
the firm. business.
Governing Law A partnership is governed by the A Joint Hindu Family business is
Indian Partnership Act, 1932. governed by the Hindu Law.
Minor’s capacity In a partnership, a minor cannot In Hindu undivided family business,
become a partner, though he can a minor becomes a member of the
be admitted to the benefits of ancestral business by the incidence
partnership, only with the of birth. He does not have to wait
consent of all the partners. for attaining majority.
Continuity A firm subject to a contract A Joint Hindu family has the
between the partners gets continuity till it is divided. The
dissolved by death or insolvency status of Joint Hindu family is not
of a partner. thereby affected by the death of a
member.
Number of In case of Partnership number of Members of HUF who carry on a
Members members should not exceed 50. business may be unlimited in
number.
Share in the In a partnership, each partner has In a HUF, no coparceners has a
business a defined share by virtue of an definite share. His interest is a
agreement between the partners. fluctuating one. It is capable of
being enlarged by deaths in the
family diminished by births in the
family.
inheritance due to this amendment. On 1st February 2016, Justice Najmi Waziri gave a landmark
judgement which allowed the eldest female coparceners of an HUF to become its Karta.

Partnership Vs. Co-Ownership or joint ownership i.e. the relation which subsists between
persons who own property jointly or in common.
Basis of Partnership Co-ownership

difference
Formation Partnership always arises out of a Co-ownership may arise either
contract, express or implied. from agreement or by the
operation of law, such as by
inheritance.
Implied agency A partner is the agent of the other A co-owner is not the agent of
partners. other co-owners.
Nature of There is community of interest Co-ownership does not necessarily
interest which means that profits and involve sharing of profits and
losses must have to be shared. losses.
Transfer of A share in the partnership is A co - owner may transfer his
interest transferred only by the consent of interest or rights in the property
other partners. without the consent of other co-
owners.
Partnership vs. Association
Basis of Partnership Association

difference
Meaning Partnership means and involves Association evolves out of social
setting up relation of agency cause and there is no necessarily
between two or more persons who motive to earn and share profits.
have entered into a business for The intention is not to enter in a
gains, with the intention to share business for gains.
the profits of such a business.
Examples Partnership to run a business and Members of charitable society or
earn profit thereon. religious association or an
improvement scheme or building
corporation or a mutual insurance
society or a trade protection
association.

4.12 BUSINESS LAWS
1.5 KINDS OF PARTNERSHIPS

The following chart illustrates the various kinds of partnership:
Kind of Partnership
With regard to the extent of

With regard to duration
the business
Partnership at Partnership for a Particular General

will fixed period partnership partnership
The various kinds of partnership are discussed below:

1. Partnership at will according to Section 7 of the Act, partnership at will is a
partnership when:
1. no fixed period has been agreed upon for the duration of the partnership; and
2. there is no provision made as to the determination of the partnership.
These two conditions must be satisfied before a partnership can be regarded as a
partnership at will. But, where there is an agreement between the partners either for
the duration of the partnership or for the determination of the partnership, the
partnership is not partnership at will.
Where a partnership entered into for a fixed term is continued after the expiry of such
term, it is to be treated as having become a partnership at will.
A partnership at will may be dissolved by any partner by giving notice in writing to all
the other partners of his intention to dissolve the same.
2. Partnership for a fixed period: Where a provision is made by a contract for the
duration of the partnership, the partnership is called ‘partnership for a fixed period’. It
is a partnership created for a particular period of time. Such a partnership comes to
an end on the expiry of the fixed period.

3. Particular partnership: A partnership may be organized for the prosecution of a single

adventure as well as for the conduct of a continuous business. Where a person
becomes a partner with another person in any particular adventure or undertaking the
partnership is called ‘particular partnership’.
A partnership, constituted for a single adventure or undertaking is, subject to any
agreement, dissolved by the completion of the adventure or undertaking.
4. General partnership: Where a partnership is constituted with respect to the business
in general, it is called a general partnership. A general partnership is different from a
particular partnership. In the case of a particular partnership, the liability of the
partners extends only to that particular adventure or undertaking, but it is not so in
the case of general partnership. General partnership is different from limited liability
partnership.
Partnership Deed
Partnership is the result of an agreement. No particular formalities are required for an
agreement of partnership. It may be in writing or formed verbally. But it is desirable to have
the partnership agreement in writing to avoid future disputes. The document in writing
containing the various terms and conditions as to the relationship of the partners to each
other is called the ‘partnership deed’. It should be drafted with care and be stamped
according to the provisions of the Stamp Act, 1899. Where the partnership comprises
immovable property, the instrument of partnership must be in writing, stamped and registered
under the Registration Act.
Partnership deed may contain the following information:-
1. Name of the partnership firm.
2. Names of all the partners.

3. Nature and place of the business of the firm.
4. Date of commencement of partnership.
5. Duration of the partnership firm.
6. Capital contribution of each partner.
7. Profit Sharing ratio of the partners.
8. Admission and Retirement of a partner.

9. Rates of interest on Capital, Drawings and loans.
10. Provisions for settlement of accounts in the case of dissolution of the firm.
11. Provisions for Salaries or commissions, payable to the partners, if any.

4.14 BUSINESS LAWS
12. Provisions for expulsion of a partner in case of gross breach of duty or fraud.
A partnership firm may add or delete any provision according to the needs of the firm.
1.6 TYPES OF PARTNERS

Based on the extent of liability, the different classes of partners are:
Types of Partners
Sleeping Partner Partner by

Active or Sub- Outgoing Incoming
Nominal or in Profits Holding
Ostensible partner Partner Partner
Dormant only out
Active or Actual or Ostensible partner:
Who has become a partner by

agreement, and
It is a person
Who actively participates in the

conduct of the partnership
He acts as an agent of other partners for all acts done in the ordinary course of business. In
the event of his retirement, he must give a public notice in order to absolve himself of liabilities
for acts of other partners done after his retirement.
Sleeping or Dormant Partner:
Who is a partner by agreement,

and
It is a person
Who does not actively take part
in the conduct of the partnership
business

They are called as ‘sleeping’ or ‘dormant’ partners. They share profits and losses and are liable
to the third parties for all acts of the firm. They are, however not required to give public notice
of their retirement from the firm.
Nominal Partner: A person who lends his name to the firm, without having any real interest
in it, is called a nominal partner.
He is not entitled to share the profits of the firm. Neither he invests in the firm nor takes part
in the conduct of the business. He is, however liable to third parties for all acts of the firm.
Lend his name to the Without having any Not entitled to share
firm real interest in firm the profits
Does not take part in

Liable to third parties
the conduct of the
for all acts of the firm
business
Partner in profits only: A partner who is entitled to share the profits only without being liable
for the losses is known as the partner for profits only and also liable to the third parties for all
acts of the profits only.
Liable to the third parties

Entitled to share the
Not liable for the losses for all acts of the profits
profits only
only
Incoming partners: A person who is admitted as a partner into an already existing firm with
the consent of all the existing partners is called as “incoming partner”. Such a partner is not
liable for any act of the firm done before his admission as a partner.
Example 5: Mr. A joined as a partner on 10th September, 2021 in a firm MNQ Associates which
was existing from 10th July, 2017. Mr. A will not be liable for any acts of the firm done before
his date of joining i.e. 10th September, 2021
Outgoing partner: A partner who leaves a firm in which the rest of the partners continue to
carry on business is called a retiring or outgoing partner. Such a partner remains liable to third
parties for all acts of the firm until public notice is given of his retirement.

4.16 BUSINESS LAWS
Partner by holding out (Section 28): Partnership by holding out is also known as partnership
by estoppel. Where a man holds himself out as a partner, or allows others to do it, he is then
stopped from denying the character he has assumed and upon the faith of which creditors
may be presumed to have acted.
to be represented as a
When a person represent Knowingly permits
partner in a firm (when in
himself, or himself,
fact he is not)
to anyone who on the

he is liable, like a partner faith of such
in the firm representation has given
credit to the firm.
A person may himself, by his words or conduct have induced others to believe that he is a
partner or he may have allowed others to represent him as a partner. The result in both the
cases is identical.
Example 6: X and Y are partners in a partnership firm. X introduced A, a manager, as his
partner to Z. A remained silent. Z, a trader believing A as partner supplied 100 T.V sets to the
firm on credit. After expiry of credit period, Z did not get amount of T.V sets sold to the
partnership firm. Z filed a suit against X and A for the recovery of price. Here, in the given
case, A, the Manager is also liable for the price because he becomes a partner by holding out
(Section 28, Indian Partnership Act, 1932).
It is only the person to whom the representation has been made and who has acted thereon
that has right to enforce liability arising out of ‘holding out’.
You must also note that for the purpose of fixing liability on a person who has, by
representation, led another to act, it is not necessary to show that he was actuated by a
fraudulent intention.
The rule given in Section 28 is also applicable to a former partner who has retired from the
firm without giving proper public notice of his retirement. In such cases a person who, even
subsequent to the retirement, give credit to the firm on the belief that he was a partner, will
be entitled to hold him liable.
Example 7: A partnership firm consisting of P, Q, R and S. S retires from the firm without
giving public notice and his name continues to be used on letterheads. Here, S is liable as a
partner by holding out to creditors who have lent on the faith of his being a partner.

SUMMARY
It is not quite easy to define the term ‘Partnership’. The definition given by Section 4 of the
Act brings out very clearly the fundamental principle that each partner, when carrying on the
business of the firm, is an agent as well as principal, and is probably the most business like
definition of the term. The definition contains three elements which must be present before a
group of persons can be held to be partners, namely; (a) agreement among all the partners;
(b) agreement to share the profits of the business; (c) the business must be carried on by all
or any of them, acting for all. These three elements may appear to overlap, but they are
nevertheless distinct.
The element of agreement in partnership distinguishes it from various other relations which
arise by operation of law and not from agreement, such as, joint-owners, Hindu Undivided
Family, etc.
GENERAL NATURE OF PARTNERSHIP
Essentials of Partnership Test of Partnership: Sec. 6

Definition: Sec. 4
1. An association of two or more persons; A group of persons
“The relationship
2. An agreement between two or more constitute a firm if the real
between persons
persons; relation between the parties
who have agreed to
3. Agreement to carry on some business; as shown by all relevant
share the profits of a
4. Agreement to share profits of business; facts taken together
business carried on
5. Business must be carried on by all or any showing that all essential
by all, or any of them
of them acting for all. elements of partnership are
acting for all.”
present.
Kinds of Partnership Firms
With regard to duration With regard to Extent of Business
Partnership at will Partnership for fixed Particular Partnership General

period Partnership
• No provision is made for • Partnership is formed for a
duration of partnership. • Partnership created for a particular period or for a Partnership which is
• Partnership may be particular period of time. specific venture. constituted with
dissolved by any partner by • Such partnership comes • Partnership is automatically
respect to business in
giving a notice to that to an end on the expiry of dissolved at the expiry of the
general.
effect to all the other the fixed period.** fixed term of on the
partners. completion of the venture.**
**Note: If the partners decide to continue then it becomes a ‘partnership at will’.

4.18 BUSINESS LAWS
Kinds of Partners
Sleeping Partner Nominal Partner Partner in Profits

Active
Partner Only
1. No active part in 1. Partner only in
business. name. 1. Entitled to share
1. Acts as an
2. Not entitle to profits only.
agent of 2. Liable like any other
share the profits.
other partner.
3. Liable as a real 2. Not liable for the
partners. 3. No public notice of partner. losses.
his retirement. 4. Public notice of his
2. Public 3. Liable to third
retirement.
notice of his 4. His insanity doesn’t parties for all acts
5. His insanity does
retirement. dissolve firm.
not dissolve firm. of profits only.
Incoming Partner Outgoing / Retiring

Sub Partner Partner by holding
Partners
1. Person who out
1. Retirement,
comes into a 1. Partner agrees to 1. When a person
expulsion, insolvency or
partnership firm share his share of represents himself
death.
already in existence profits in a partnership or knowingly
2. Rest of the partners
with the consent of firm with an outsider; permits himself,
continues to carry on
all existing partners. such an outsider is 2. To be
business.
2. No liability for called a sub-partner. represented as a
3. Remains liable to third
any acts of the firm 2. Neither has rights partner in a firm
parties for all acts of the
done before his against the firm nor is (when in fact he is
firm until public notice is
admission as a he liable for the debts not)
given of his retirement.
partner. of the firm. 3. He is liable, like a
partner in the firm.
TEST YOUR KNOWLEDGE

1. The term ‘Partnership’ has been defined under ____ of the Partnership Act, 1932:
(a) Section 3
(b) Section 4
(c) Section 5
(d) Section 6

2. A partnership for which no period or duration is fixed under the Indian Partnership Act
is known as:
(a) Unlimited partnership
(b) Co-ownership
(c) Particular partnership
(d) Partnership at will
3. The most important element in partnership is:
(a) Business
(b) Sharing of profits
(c) Agreement
(d) Business to be carried on by all or any of them acting for all.
4. A firm is the name of:
(a) The partners
(b) The minors in the firm
(c) The business under which the firm carries on business
(d) The collective name under which it carries on business
5. A partnership formed for the purpose of carrying on particular venture or undertaking is
known as:
(a) Limited partnership
(b) Special partnership
(c) Joint venture
(d) Particular partnership
6. In the absence of agreement to the contrary all partners are:
(a) Not entitled to share profits
(b) Entitled to share in capital ratio
(c) Entitled to share in proportion to their ages
(d) Entitled to share profits equally
7. A partnership at will is one:
(a) Which does not have any deed
(b) Which does not have any partner

4.20 BUSINESS LAWS
(c) Which does not provide for how long the business will continue
(d) Which cannot be dissolved.
8. What among the following is not an essential element of partnership:
(a) There must be an agreement entered into by all the persons concerned
(b) The agreement must be to share the profits of a business
(c) The business must start within six months from the date of agreement
(d) The business must be carried on by all or any one of them acting for all.
9. Partnership is a relationship, which arises from:
(a) Operation of law
(b) An agreement
(c) Status
(d) Almighty
10. Which is not a characteristics of partnership firms?
(a) Perpetual succession
(b) Unlimited liability of partners
(c) Mutual agency
(d) Sharing of profits of business
11. Select the odd one out of the available options for the entitlement of “Partners in profits only”:
(a) He is entitled to share the profits only.
(b) He is liable for the losses of the firm.
(c) He is not liable for the losses of the firm.
(d) He is liable to the third parties for all acts of the profits only.
12. Mr. Pawan is nominal partner in the partnership firm so he:
(a) is not entitled to share the profits.
(b) is entitled to share the profits.
(c) can take part in the conduct of business.
(d) Is not liable to third parties for all acts of the firm.
13. When partnership entered into for a fixed term is continued after the expiry of such term,
it is to be treated as having become a:
(a) Partnership for a fixed period.

(b) Particular partnership

(c) Partnership at will.
(d) General partnership.
14. Mr. Samarth retires from the partnership firm without giving public notice and his name
continues to be used on letterhead of the firm. Mr. Samarth is ________ in the case of
repayment of loan to creditors.
(a) liable as a partner.
(b) not liable as a partner.
(c) responsible.
(d) liable as a retiring partner.
15. The “dormant partner” of the firm is:
(a) not required to give notice of his retirement.
(b) required to give notice of his retirement
(c) not liable to the third parties for all act of the firm.
(d) does not share profits and losses.
1. Mr. XU and Mr. YU are partners in a partnership firm. Mr. XU introduced MU (an
employee) as his partner to ZU. MU remained silent. ZU, a trader believing MU as partner
supplied 50 Laptops to the firm on credit. After expiry of credit period, ZU did not get
amount of Laptop sold to the partnership firm. ZU filed a suit against XU and MU for the
recovery of price. Does MU is liable for such purpose?
2. Ms. Lucy while drafting partnership deed taken care of few important points. What are
those points? She want to know the list of information which must be part of partnership
deed drafted by her. Also, give list of information to be included in partnership deed?
ANSWERS/HINTS
Answers to MCQs
1. (b) 2. (d) 3. (d) 4. (d) 5. (d) 6. (d)
7. (c) 8. (c) 9. (b) 10. (a) 11. (b) 12. (a)
13. (c) 14. (a) 15. (a)

4.22 BUSINESS LAWS

1. As per Section 28 of Indian Partnership Act, 1932, Partnership by holding out is also
known as partnership by estoppel. Where a man holds himself out as a partner, or allows
others to do it, he is then stopped from denying the character he has assumed and upon
the faith of which creditors may be presumed to have acted. A person may himself, by
his words or conduct have induced others to believe that he is a partner or he may have
allowed others to represent him as a partner. The result in both the cases is identical.
In the given case, MU (the Manager) is also liable for the price because he becomes a
partner by holding out as per Section 28 of Indian Partnership Act, 1932.
2. Ms. Lucy while drafting partnership deed must take care of following important points:
• No particular formalities are required for an agreement of partnership.
• Partnership deed may be in writing or formed verbally. The document in writing
containing the various terms and conditions as to the relationship of the
partners to each other is called the ‘partnership deed’.
• Partnership deed should be drafted with care and be stamped according to the
provisions of the Stamp Act, 1899.
• If partnership comprises immovable property, the instrument of partnership
must be in writing, stamped and registered under the Registration Act.
List of information included in Partnership Deed while drafting Partnership Deed by Ms. Lucy:
• Name of the partnership firm.
• Names of all the partners.
• Nature and place of the business of the firm.
• Date of commencement of partnership.
• Duration of the partnership firm.
• Capital contribution of each partner.
• Profit Sharing ratio of the partners.
• Admission and Retirement of a partner.
• Rates of interest on Capital, Drawings and loans.
• Provisions for settlement of accounts in the case of dissolution of the firm.
• Provisions for Salaries or commissions, payable to the partners, if any.
• Provisions for expulsion of a partner in case of gross breach of duty or fraud.
Note: Ms. Lucy may add or delete any provision according to the needs of the
partnership firm.

UNIT – 2: RELATIONS OF PARTNERS
LEARNING OUTCOMES
♦ The legal provisions regulating relation of partners’ interest as well
as relations with the third parties.
♦ The scope of implied authority of a partner to bind the partnership
by his acts.
♦ About the various situations in which the constitution of a firm may
change and its effect on the rights and duties of the partners.
♦ How the share in a partnership is transferred and what shall be the
rights and obligations of such transferee.
UNIT OVERVIEW
Relation of partners
Relation
Mutual Implied Legal
of
rights authority Admission Liabilities to consequences of
partners
and of a by partners third parties partner coming
with third
duties partner in and going out
parties
Acts Extension and

beyond Restriction of Introduction
Implied partner's Implied Retirement Expulsion Death
of new
Authority Authority partner
Insolvency

4.24 BUSINESS LAWS
2.1 RELATION OF PARTNERS TO ONE ANOTHER

The Partnership Act contains various provisions regulating the relationship between partners.
1. GENERAL DUTIES OF PARTNERS (SECTION 9): The partners should carry business of
the firm to the greatest common advantages and later, they should render to any
partner or his legal representatives full information of all things affecting the firm. A
partner must observe the utmost good faith in his dealings with the other partners.
All the partners are bound to render accounts to each other but where some of the
accounts are kept by one of them, prima facie he would be the proper person to explain
and give full information about them.
Example 1: In a transaction between partners for the sale and purchase of a share in
the business, if one of them is better acquainted with the accounts than the other, it is
his duty to disclose all material facts.
2. DUTY TO INDEMNIFY FOR LOSS CAUSED BY FRAUD (SECTION 10): The partner,
committing fraud in the conduct of the business of the firm, must make good the loss
sustained by the firm by his misconduct and the amount so brought in the partnership
should be divided between the partners.
An act of a partner imputable to the firm or the principles of agency, which is a fraud
on his co-partners, entitles the co-partners as between themselves, to throw the whole
of the consequences upon him.
3. DETERMINATION OF RIGHTS AND DUTIES OF PARTNERS BY CONTRACT
BETWEEN THE PARTNERS (SECTION 11):
(1) Subject to the provisions of this Act, the mutual rights and duties of the partners
of a firm may be determined by contract between the partners, and such
contract may be express or may be implied by a course of dealing.
Such contract may be varied by consent of all the partners, and such consent
may be express or may be implied by a course of dealing.
(2) Agreements in restraint of trade- Notwithstanding anything contained in
section 27 of the Indian Contract Act, 1872, such contracts may provide that a
partner shall not carry on any business other than that of the firm while he is a
partner.
Partnership is a relation eminently depending on the consent of the parties, not only
for its existence, but for the terms of the agreement in all things consistent with its
essential nature and purpose; and an agreement to become partners in the first

instance, or to vary the terms at any time, need not be manifested in any particular
form.
4. THE CONDUCT OF THE BUSINESS (SECTION 12): Subject to contract between the
partners-
(a) every partner has a right to take part in the conduct of the business;
(b) every partner is bound to attend diligently to his duties in the conduct of the
business;
(c) any difference arising as to ordinary matters connected with the business may
be decided by majority of the partners, and every partner shall have the right
to express his opinion before the matter is decided, but no change may be
made in the nature of the business without the consent of all partners; and
(d) every partner has a right to have access to and to inspect and copy any of the
books of the firm.
(e) in the event of the death of a partner, his heirs or legal representatives or their
duly authorised agents shall have a right of access to and to inspect the copy
of any of the books of the firm.
(i) Right to take part in the conduct of the Business [Section 12(a)]: Every
partner has the right to take part in the business of the firm. This is because
partnership business is a business of the partners and their management
powers are generally co-extensive.
Example 2: Now suppose this management power of the particular partner is
interfered with and he has been wrongfully precluded from participating
therein. Can the Court interfere in these circumstances? The answer is in the
affirmative. The Court can, and will, by injunction, restrain other partners from
doing so. It may be noted in this connection that a partner who has been
wrongfully deprived of the right of participation in the management has also
other remedies, e.g., a suit for dissolution, a suit for accounts without seeking
dissolution, etc.
The above mentioned provisions of law will be applicable only if there is no
contract to the contrary between the partners. It is quite common to find a term
in partnership agreements, which gives only limited power of management to
a partner or a term that the management of the partnership will remain with
one or more of the partners to the exclusion of others. In such a case, the Court
will normally be unwilling to interpose with the management with such partner

4.26 BUSINESS LAWS
or partners, unless it is clearly made out that something was done illegally or in
breach of the trust reposed in such partners.
(ii) Right to be consulted [section 12(c)]: Where any difference arises between
the partners with regard to the business of the firm, it shall be determined by
the views of the majority of them, and every partner shall have the right to
express his opinion before the matter is decided. But no change in the nature
of the business of the firm can be made without the consent of all the partners.
This means that in routine matters, the opinion of the majority of the partners
will prevail. Of course, the majority must act in good faith and every partner
must be consulted as far as practicable.
It may be mentioned that the aforesaid majority rule will not apply where there
is a change in the nature of the firm itself. In such a case, the unanimous consent
of the partners is needed.
(iii) Right of access to books [Section 12(d)]: Every partner whether active or
sleeping is entitled to have access to any of the books of the firm and to inspect
and take out of copy thereof. The right must, however, be exercised bona fide.
(iv) Right of legal heirs/ representatives/ their duly authorised agents [Section
12(e)]: In the event of the death of a partner, his heirs or legal representatives
or their duly authorised agents shall have a right of access to and to inspect
and copy any of the books of the firm.
5. MUTUAL RIGHTS AND LIABILITIES (SECTION 13): Subject to contract between the
partners-
(a) a partner is not entitled to receive remuneration for taking part in the conduct
of the business;
(b) the partners are entitled to share equally in the profits earned, and shall
contribute equally to the losses sustained by the firm;
(c) where a partner is entitled to interest on the capital subscribed by him such interest
shall be payable only out of profits;
(d) a partner making, for the purposes of the business, any payment or advance
beyond the amount of capital he has agreed to subscribe, is entitled to interest
thereon at the rate of six percent per annum;
(e) the firm shall indemnify a partner in respect of payments made and liabilities
incurred by him-
(i) in the ordinary and proper conduct of the business, and

(ii) in doing such act, in an emergency, for the purposes of protecting the
firm from loss, as would be done by a person of ordinary prudence, in
his own case, under similar circumstances;
(f) a partner shall indemnify the firm for any loss caused to it by his wilful neglect
in the conduct of business of the firm.
(i) Right to remuneration [Section 13(a)]: No partner is entitled to receive any

remuneration in addition to his share in the profits of the firm for taking part
in the business of the firm. But this rule can always be varied by an express
agreement, or by a course of dealings, in which event the partner will be entitled
to remuneration. Thus, a partner can claim remuneration even in the absence
of a contract, when such remuneration is payable under the continued usage
of the firm. In other words, where it is customary to pay remuneration to a
partner for conducting the business of the firm, he can claim it even in the
absence of a contract for the payment of the same.
(ii) Right to share Profits [Section 13(b)]: Partners are entitled to share equally
in the profits earned and so contribute equally to the losses sustained by the
firm. The amount of a partner’s share must be ascertained by enquiring whether
there is any agreement in that behalf between the partners. If there is no
agreement then you should make a presumption of equality and the burden of
proving that the shares are unequal, will lie on the party alleging the same.
There is no connection between the proportion in which the partners shall share
the profits and the proportion in which they have contributed towards the
capital of the firm.
(iii) Interest on Capital [Section 13(c)]: The following elements must be there
before a partner can be entitled to interest on moneys brought by him in the
partnership business: (i) an express agreement to that effect, or practice of the
particular partnership or (ii) any trade custom to that effect; or (iii) a statutory
provision which entitles him to such interest.
(iv) Interest on advances [Section 13(d)]: Suppose a partner makes an advance
to the firm in addition to the amount of capital to be contributed by him, in
such a case, the partner is entitled to claim interest thereon @ 6% per annum.
While interest on capital account ceases to run on dissolution, the interest on
advances keep running even after dissolution and up to the date of payment.
(v) Right to be indemnified [Section 13(e)]: Every partner has the right to be
indemnified by the firm in respect of payments made and liabilities incurred by
him in the ordinary and proper conduct of the business of the firm as well as in

4.28 BUSINESS LAWS
the performance of an act in an emergency for protecting the firm from any
loss, if the payments, liability and act are such as a prudent man would make,
incur or perform in his own case, under similar circumstances.
(vi) Right to indemnify the firm [Section 13(f)]: A partner must indemnify the
firm for any loss caused to it by wilful neglect in the conduct of the business of
the firm.
2.2 PARTNERSHIP PROPERTY (SECTION 14)

1. THE PROPERTY OF THE FIRM (SECTION 14): The expression ‘property of the firm’,
also referred to as ‘partnership property’, ‘partnership assets’, ‘joint stock’, ‘common
stock’ or ‘joint estate’, denotes all property, rights and interests to which the firm, that
is, all partners collectively, may be entitled. The property which is deemed as belonging
to the firm, in the absence of any agreement between the partners showing contrary
intention, is comprised of the following items:
(i) all property, rights and interests which partners may have brought into the
common stock as their contribution to the common business;
(ii) all the property, rights and interest acquired or purchased by or for the firm, or
for the purposes and in the course of the business of the firm; and
(iii) Goodwill of the business.
The determination of the question whether a particular property is or is not ‘property’
of the firm ultimately depends on the real intention or agreement of the partners. Thus,
the mere fact that the property of a partner is being used for the purposes of the firm
shall not by itself make it partnership property, unless it is intended to be treated as
such. Partners may, by an agreement at any time, convert the property of any partner
or partners (and such conversion, if made in good faith, would be effectual between
the partners and against the creditors of the firm) or the separate property of any
partner into a partnership property.
Goodwill: Section 14 specifically lays down that the goodwill of a business is subject
to a contract between the partners, to be regarded as ‘property’ of the ‘firm’. But this
Section does not define the term Goodwill.
‘Goodwill’ is a concept which is very easy to understand but difficult to define. Goodwill
may be defined as the value of the reputation of a business house in respect of profits
expected in future over and above the normal level of profits earned by undertaking
belonging to the same class of business.

When a partnership firm is dissolved every partner has a right, in the absence of any
agreement to the contrary, to have the goodwill of business sold for the benefit of all
the partners.
Goodwill is a part of the property of the firm. It can be sold separately or along with
the other properties of the firm. Any partner may upon the sale of the goodwill of a
firm, make an agreement with the buyer that such partner will not carry on any business
similar to that of the firm within a specified period or within specified local limits and
notwithstanding anything contained in Section 27 of the Indian Contract Act, 1872.
Such agreement shall be valid if the restrictions imposed are reasonable.
Property of a partner: Where the property is exclusively belonging to a person, it
does not become a property of the partnership merely because it is used for the
business of the partnership, such property will become property of the partnership if
there is an agreement.
2. APPLICATION OF THE PROPERTY OF THE FIRM (SECTION 15): Section 15 provides
that the property of the firm shall be held and used exclusively for the purpose of the
firm. In partnership, there is a community of interest which all the partners take in the
property of the firm. But that does not mean than during the subsistence of the
partnership, a particular partner has any proprietary interest in the assets of the firm.
Every partner of the firm has a right to get his share of profits till the firm subsists and
he has also a right to see that all the assets of the partnership are applied to and used
for the purpose of partnership business.
2.3 PERSONAL PROFIT EARNED BY PARTNERS

(SECTION 16)
According to section 16, subject to contract between the partners,-
(a) If a partner derives any profit for himself from any transaction of the firm, or from the
use of the property or business connection of the firm or the firm name, he shall
account for that profit and pay it to the firm;
(b) If a partner carries on any business of the same nature as and competing with that of
the firm, he shall account for and pay to the firm all profits made by him in that
business.
Example 3: A, B, C & D established partnership business for refining sugar. A, who was himself
a wholesale grocer, was entrusted with the work of selection and purchase of sugar. As a
wholesale grocer, A was well aware of the variations in the sugar market and had the suitable
sense of propriety as regards purchases of sugar. He had already in stock sugar purchased at

4.30 BUSINESS LAWS
a low price which he sold to the firm when it was in need of some, without informing the
partners that the sugar sold had belonged to him. It was held that A was bound to account to
the firm for the profit so made by him. This rule, however, is subject to a contract between
partners.
Example 4: A, B, C and D started a business in partnership for importing salt from foreign
ports and selling it at Chittagong. A struck certain transactions in salt on his own account,
which were found to be of the same nature as the business carried on by the partnership. It
was held that A was liable to account to the firm for profits of the business so made by him.
This rule is also subject to a contract between the partners.
2.4 RIGHTS AND DUTIES OF PARTNERS AFTER A

CHANGE IN THE FIRM (SECTION 17)
Before going into rights and duties, we should first know how a change may take place in the
constitution of the firm. It may occur in one of the four ways, namely,
Where a new partner or partners come in
Where some partner or partners go out, i.e., by death or

retirement
Where the partnership concerned carries on business

other than the business for which it was originally formed
Where the partnership business is carried out on after

the expiry of the term fixed for the purpose.
According to section 17, subject to contract between the partners-

(a) after a change in the firm: Where a change occurs in the constitution of a firm, the
mutual rights and duties of the partners in the reconstituted firm remain the same as
they were immediately before the change, as far as may be;
(b) after the expiry of the term of the firm: Where a firm constituted for a fixed term
continues to carry on business after the expiry of that term, the mutual rights and
duties of the partners remain the same as they were before the expiry, so far as they
may be consistent with the incidents of partnership at will; and

(c) where additional undertakings are carried out: where a firm constituted to carry out
one or more adventures or undertakings carries out other adventures or undertakings
are the same as those in respect of the original adventures or undertakings.
2.5 RELATION OF PARTNERS TO THIRD PARTIES

1. PARTNER TO BE AN AGENT OF THE FIRM (SECTION 18): You may recall that a
partnership is the relationship between the partners who have agreed to share the
profits of the business carried on by all or any of them acting for all (Section 4). This
definition suggests that any of the partners can be the agent of the others.
Section 18 clarifies this position by providing that, subject to the provisions of the Act,
a partner is the agent of the firm for the purpose of the business of the firm. The
partner indeed virtually embraces the character of both a principal and an agent. So
as far as he acts for himself and in his own interest in the common concern of the
partnership, he may properly be deemed a principal and so far as he acts for his
partners, he may properly be deemed as an agent.
The principal distinction between him and a mere agent is that he has a community of
interest with other partners in the whole property and business and liabilities of
partnership, whereas an agent as such has no interest in either.
The rule that a partner is the agent of the firm for the purpose of the business of the
firm cannot be applied to all transactions and dealings between the partners
themselves. It is applicable only to the act done by partners for the purpose of the
business of the firm.
2. IMPLIED AUTHORITY OF PARTNER AS AGENT OF THE FIRM (SECTION 19): Subject
to the provisions of section 22, the act of a partner which is done to carry on, in the
usual way, business of the kind carried on by the firm, binds the firm.
The authority of a partner to bind the firm conferred by this section is called his
“implied authority”.
(2) In the absence of any usage or custom of trade to the contrary, the implied
authority of a partner does not empower him to-
(a) Submit a dispute relating to the business of the firm to arbitration;
(b) open a banking account on behalf of the firm in his own name;
(c) compromise or relinquish any claim or portion of a claim by the firm;

(d) withdraw a suit or proceedings filed on behalf of the firm;
(e) admit any liability in a suit or proceedings against the firm;

4.32 BUSINESS LAWS
(f) acquire immovable property on behalf of the firm;

(g) transfer immovable property belonging to the firm; and
(h) enter into partnership on behalf of the firm.
MODE OF DOING ACT TO BIND FIRM (SECTION 22): In order to bind a firm, an act
or instrument done or executed by a partner or other person on behalf of the firm shall
be done or executed in the firm name, or in any other manner expressing or implying
an intention to bind the firm.
At the very outset, you should understand what is meant by “implied authority”. You
have just read that every partner is an agent of the firm for the purpose of the business
thereof. Consequently, as between the partners and the outside world (whatever may
be their private arrangements between themselves), each partner is agent of every
other in every matter connected with the partnership business; his acts bind the firm.
Sections 19(1) and 22 deal with the implied authority of a partner. The impact of
these Sections is that the act of a partner which is done to carry on, in the usual way,
business of the kind carried on by the firm binds the firm, provided that the act is done
in the firm name, or any manner expressing or implying an intention to bind the firm.
Such an authority of a partner to bind the firm is called his implied authority. It is
however subject to the following restrictions:
1. The act done must relate to the usual business of the firm, that is, the act done
by the partner must be within the scope of his authority and related to the
normal business of the firm.
2. The act is such as is done for normal conduct of business of the firm. The usual
way of carrying on the business will depend on the nature and circumstances
of each particular case [Section 19(1)].
3. The act to be done in the name of the firm or in any other manner expressing
or implying an intention to bind the firm (Section 22).
Thus, a partner has implied authority to bind the firm by all acts done by him
in all matters connected with the partnership business and which are done in
the usual way and are not in their nature beyond the scope of partnership. You
must remember that an implied authority of a partner may differ in different
kinds of business.
Example 5: X, a partner in a firm of solicitors, borrows money and executes a
promissory note in the name of firm without authority. The other partners are not liable
on the note, as it is not part of the ordinary business of a solicitor to draw, accept, or

endorse negotiable instruments; however, it may be usual for one partner of firm of
bankers to draw, accept or endorse a bill of exchange on behalf of the firm.
If partnership be of a general commercial nature,

(i) he may pledge or sell the partnership property;
(ii) he may buy goods on account of the partnership;
(iii) he may borrow money, contract debts and pay debts on account of the
partnership;
(iv) he may draw, make, sign, endorse, transfer, negotiate and procure to be
discounted, Promissory notes, bills of exchange, cheques and other negotiable
papers in the name and on account of the partnership.
Section 19(2) contains the acts which are beyond the implied authority of the partners.
3. EXTENSION AND RESTRICTION OF PARTNERS’ IMPLIED AUTHORITY (SECTION 20):
The implied authority of a partner may be extended or restricted by contract between
the partners. Under the following conditions, the restrictions imposed on the implied
authority of a partner by agreement shall be effective against a third party:
1. The third party knows about the restrictions, and
2. The third party does not know that he is dealing with a partner in a firm.
Example 6: A, a partner, borrows from B ` 1,000 in the name of the firm but in excess
of his authority, and utilizes the same in paying off the debts of the firm. Here, the fact
that the firm has contracted debts suggests that it is a trading firm, and as such it is
within the implied authority of A to borrow money for the business of the firm. This
implied authority, as you have noticed, may be restricted by an agreement between
him and other partners. Now if B, the lender, is unaware of this restriction imposed on
A, the firm will be liable to repay the money to B. On the contrary, B’s awareness as to
this restriction will absolve the firm of its liability to repay the amount to B.
It may be noted that the above-mentioned extension or restriction is only possible with
the consent of all the partners. Any one partner, or even a majority of the partners,
cannot restrict or extend the implied authority.
4. PARTNER’S AUTHORITY IN AN EMERGENCY (SECTION 21)
According to section 21, a partner has authority, in an emergency, to do all such acts
for the purpose of protecting the firm from loss as would be done by a person of
ordinary prudence, in his own case, acting under similar circumstances, and such acts
bind the firm.

4.34 BUSINESS LAWS
2.6 EFFECT OF ADMISSIONS BY A PARTNER

(SECTION 23)
Partners, as agents of each other can make binding admissions but only in relation to
partnership transaction and in the ordinary course of business. An admission or representation
by a partner will not however, bind the firm if his authority on the point is limited and the other
party knows of the restriction. The section speaks of admissions and representations being
evidenced against the firm. That is to say, they will affect the firm when tendered by third parties;
they may not have the same effect in case of disputes between the partners themselves.
Example 7: X and Y are partners in a firm dealing in spare parts of different brands of
motorcycle bikes. Z purchases a spare part for his Yamaha motorcycle after being told by X
that the spare part is suitable for his motorcycle. Y is ignorant about this transaction. The
spare part proves to be unsuitable for the motorcycle and it is damaged. X and Y both are
responsible to Z for his loss.
2.7 EFFECT OF NOTICE TO ACTING PARTNER

(SECTION 24)
The notice to a partner, who habitually acts in business of the firm, on matters relating to the
affairs of the firm, operates as a notice to the firm except in the case of a fraud on the firm
committed by or with the consent of that partner. Thus, the notice to one is equivalent to the
notice to the rest of the partners of the firm, just as a notice to an agent is notice to his
principal. This notice must be actual and not constructive. It must be received by a working
partner and not by a sleeping partner. It must further relate to the firm’s business. Only then
it would constitute a notice to the firm.
Example 8: P, Q, and R are partners in a business for purchase and sale of second hand goods.
R purchases a second hand car on behalf of the firm from S. In the course of dealings with S,
he comes to know that the car is a stolen one and it actually belongs to X. P and Q are ignorant
about it. All the partners are liable to X, the real owner.
The only exception would lie in the case of fraud, whether active or tacit.
Example 9: A, a partner who actively participates in the management of the business of the
firm, bought for his firm, certain goods, while he knew of a particular defect in the goods. His
knowledge as regards the defect, ordinarily, would be construed as the knowledge of the firm,
though the other partners in fact were not aware of the defect. But because A had, in league
with his seller, conspired to conceal the defect from the other partners, the rule would be
inoperative and the other partners would be entitled to reject the goods, upon detection by
them of the defect.

2.8 LIABILITY TO THIRD PARTIES (SECTION 25 TO 27)

The question of liability of partners to third parties may be considered under different heads.
These are as follows:
1. LIABILITY OF A PARTNER FOR ACTS OF THE FIRM (SECTION 25): The partners are
jointly and severally responsible to third parties for all acts which come under the scope
of their express or implied authority. This is because that all the acts done within the
scope of authority are the acts done towards the business of the firm.
The expression ‘act of firm’ connotes any act or omission by all the partners or by any
partner or agent of the firm, which gives rise to a right enforceable by or against the
firm. Again, in order to bring a case under Section 25, it is necessary that the act of the
firm, in respect of which liability is brought to be enforced against a party, must have
been done while he was a partner.
Example 10: Certain persons were found to have been partners in a firm when the acts
constituting an infringement of a trademark by the firm took place, it was held that
they were liable for damages arising out of the alleged infringement, it being
immaterial that the damages arose after the dissolution of the firm.
2. LIABILITY OF THE FIRM FOR WRONGFUL ACTS OF A PARTNER (SECTION 26): The
firm is liable to the same extent as the partner for any loss or injury caused to a third
party by the wrongful acts of a partner, if they are done by the partner while acting:
(a) in the ordinary course of the business of the firm
(b) with the authority of the partners.
If the act in question can be regarded as authorized and as falling within either of the
categories mentioned in Section 26, the fact that the method employed by the partner
in doing it was unauthorized or wrongful would not affect the question. Furthermore,
all the partners in a firm are liable to a third party for loss or injury caused to him by
the negligent act of a partner acting in the ordinary course of the business.
Example 11: One of the two partners in coal mine acted as a manager was guilty of
personal negligence in omitting to have the shaft of the mine properly fenced. As a
result thereof, an injury was caused to a workman. The other partner was also held
responsible for the same.
3. LIABILITY OF FIRM FOR MISAPPLICATION BY PARTNERS (SECTION 27):

It may be observed that the workings of the two clauses of Section 27 is designed to
bring out clearly an important point of distinction between the two categories of cases
of misapplication of money by partners.

4.36 BUSINESS LAWS
Clause (a) covers the case where a partner acts within his authority and due to his
authority as partner, he receives money or property belonging to a third party and
misapplies that money or property. For this provision to the attracted, it is not
necessary that the money should have actually come into the custody of the firm.
On the other hand, the provision of clause (b) would be attracted when such money or
property has come into the custody of the firm and it is misapplied by any of the
partners.
The firm would be liable in both the cases.
If receipt of money by one partner is not within the scope of his apparent authority,
his receipt cannot be regarded as a receipt by the firm and the other partners will not
be liable, unless the money received comes into their possession or under their control.
Example 12: A, B, and C are partners of a place for car parking. P stands his car in the
parking place but A sold out the car to a stranger. For this liability, the firm is liable for
the acts of A.
2.9 RIGHTS OF TRANSFEREE OF A PARTNER’S

INTEREST (SECTION 29)
A share in a partnership is transferable like any other property, but as the partnership
relationship is based on mutual confidence, the assignee of a partner’s interest by sale,
mortgage or otherwise cannot enjoy the same rights and privileges as the original
partner.
The rights of such a transferee are as follows:
(I) During the continuance of partnership, such transferee is not entitled:
(a) to interfere with the conduct of the business,

(b) to require accounts, or
(c) to inspect books of the firm.
He is only entitled to receive the share of the profits of the transferring partner
and he is bound to accept the profits as agreed to by the partners, i.e., he
cannot challenge the accounts.
(II) On the dissolution of the firm or on the retirement of the transferring partner,
the transferee will be entitled, against the remaining partners:
(a) to receive the share of the assets of the firm to which the transferring
partner was entitled, and

(b) for the purpose of ascertaining the share,

he is entitled to an account as from the date of the dissolution.
By virtue of Section 31, which we will discuss hereinafter, no person can be introduced
as a partner in a firm without the consent of all the partners. A partner cannot by
transferring his own interest, make anybody else a partner in his place, unless the other
partners agree to accept that person as a partner. At the same time, a partner is not
debarred from transferring his interest. A partner’s interest in the partnership can be
regarded as an existing interest and tangible property which can be assigned.
2.10 MINORS ADMITTED TO THE BENEFITS OF

PARTNERSHIP (SECTION 30)
You have observed that a minor cannot be bound by a contract because a minor’s contract is
void and not merely voidable. Therefore, a minor cannot become a partner in a firm because
partnership is founded on a contract. Though a minor cannot be a partner in a firm, he can
nonetheless be admitted to the benefits of partnership under Section 30 of the Act. In other
words, he can be validly given a share in the partnership profits. When this has been done
with the consent of all the partners then the rights and liabilities of such a partner will be
governed under Section 30 as follows:
(1) Rights:
(i) A minor partner has a right to his agreed share of the profits and of the firm.
(ii) He can have access to, inspect and copy the accounts of the firm.
(iii) He can sue the partners for accounts or for payment of his share but only when
severing his connection with the firm, and not otherwise.
(iv) On attaining majority, he may within 6 months elect to become a partner or not
to become a partner. If he elects to become a partner, then he is entitled to the
share to which he was entitled as a minor. If he does not, then his share is not
liable for any acts of the firm after the date of the public notice served to that
effect.
(2) Liabilities:
(i) Before attaining majority:

(a) The liability of the minor is confined only to the extent of his share in
the profits and the property of the firm.

4.38 BUSINESS LAWS
(b) Minor has no personal liability for the debts of the firm incurred during
his minority.
(c) Minor cannot be declared insolvent, but if the firm is declared insolvent
his share in the firm vests in the Official Receiver/Assignee (which
means minor can recover his share in the firm on proportionate basis
from official receiver/assignee)
(ii) After attaining majority:
Within 6 months of his attaining majority or on his obtaining knowledge that
he had been admitted to the benefits of partnership, whichever date is later,
the minor partner has to decide whether he shall remain a partner or leave the
firm.
Where he has elected not to become partner, he may give public notice that he
has elected not to become partner and such notice shall determine his position
with regard to the firm If he fails to give such notice he shall become a partner
in the firm on the expiry of the said six months.
(a) When he becomes partner: If the minor becomes a partner on his
own willingness or by his failure to give the public notice within
specified time, his rights and liabilities as given in Section 30(7) are as
follows:
(i) He becomes personally liable to third parties for all acts of the
firm done since he was admitted to the benefits of partnership.
(ii) His share in the property and the profits of the firm remains the
same to which he was entitled as a minor.
(b) When he elects not to become a partner:

(i) His rights and liabilities continue to be those of a minor up to
the date of giving public notice.
(ii) His share shall not be liable for any acts of the firm done after
the date of the notice.
(iii) He shall be entitled to sue the partners for his share of the
property and profits. It may be noted that such minor shall give
notice to the Registrar that he has or has not become a partner.

2.11 LEGAL CONSEQUENCES OF PARTNER COMING IN

AND GOING OUT (SECTION 31 – 35)
Any change in the relation of partners will result in reconstitution of the partnership firm.
Thus, on admission of a new partner or retirement of a partner or expulsion of the partner, or
on insolvency of a partner etc. a firm will be reconstituted:
(i) INTRODUCTION OF A PARTNER (SECTION 31):
As we have studied earlier, subject to a contract between partners and to the provisions
regarding minors in a firm, no new partners can be introduced into a firm without the
consent of all the existing partners.
Rights and liabilities of new partner: The liabilities of the new partner ordinarily
commence from the date when he is admitted as a partner, unless he agrees to be
liable for obligations incurred by the firm prior to the date. The new firm, including the
new partner who joins it, may agree to assume liability for the existing debts of the old
firm, and creditors may agree to accept the new firm as their debtor and discharge the
old partners. The creditor’s consent is necessary in every case to make the transaction
operative. Novation is the technical term in a contract for substituted liability, of
course, not confined only to case of partnership.
But a mere agreement amongst partners cannot operate as Novation. Thus, an
agreement between the partners and the incoming partner that he shall be liable for
existing debts will not ipso facto give creditors of the firm any right against him.
In case of partnership of two partners: This section does not apply to a partnership
of two partners which is automatically dissolved by the death of one of them.
(ii) RETIREMENT OF A PARTNER (SECTION 32):
(1) A partner may retire:
(a) with the consent of all the other partners;
(b) in accordance with an express agreement by the partners; or

(c) where the partnership is at will, by giving notice in writing to all the
other partners of his intention to retire.
(2) A retiring partner may be discharged from any liability to any third party for
acts of the firm done before his retirement by an agreement made by him with
such third party and the partners of the reconstituted firm, and such agreement
may be implied by a course of dealing between the third party and the
reconstituted firm after he had knowledge of the retirement.

4.40 BUSINESS LAWS
(3) Notwithstanding the retirement of a partner from a firm, he and the partners
continue to be liable as partners to third parties for any act done by any of
them which would have been an act of the firm if done before the retirement,
until public notice is given of the retirement:
Provided that a retired partner is not liable to any third party who deals with
the firm without knowing that he was a partner.
(4) Notices under sub-section (3) may be given by the retired partner or by any
partner of the reconstituted firm.
In Vishnu Chandra Vs. Chandrika Prasad [Supreme Court]
The Supreme Court in Vishnu Chandra Vs. Chandrika Prasad, held that the expression
‘if any partner wants to dissociate from the partnership business’, in a clause of the
partnership deed which was being construed, comprehends a situation where a partner
wants to retire from the partnership. The expression clearly indicated that in the event
of retirement, the partnership business will not come to an end.
Example 13: Mere retirement of a partner, who was the tenant of the premises in
which the partnership business was carried out, would not result in assignment of the
tenancy rights in favour of the remaining partners even though the retiring partner
ceases to have any right, title or interest in the business as such.
(iii) EXPULSION OF A PARTNER (SECTION 33):
(i) the power of expulsion must have existed in a contract between the partners;
(ii) the power has been exercised by a majority of the partners; and
(iii) it has been exercised in good faith.
If all these conditions are not present, the expulsion is not deemed to be in bona fide
interest of the business of the firm.
The test of good faith as required under Section 33(1) includes three things:
The explusion must be in the interest of the

partnership
The partner to be expelled is served with a

notice
He is given an opportunity of being heard.
If a partner is otherwise expelled, the expulsion is null and void.

It may be noted that under the Act, the expulsion of partners does not necessarily
result in dissolution of the firm. The invalid expulsion of a partner does not put an end
to the partnership even if the partnership is at will and it will be deemed to continue
as before.
Example 14: A, B and C are partners in a Partnership firm. They were carrying their
business successfully for the past several years. Spouses of A and B fought in ladies
club on their personal issue and A’s wife was hurt badly. A got angry on the incident
and he convinced C to expel B from their partnership firm. B was expelled from
partnership without any notice from A and C. Considering the provisions of Indian
Partnership Act, 1932 state whether they can expel a partner from the firm?
A partner may not be expelled from a firm by a majority of partners except in exercise,
in good faith, of powers conferred by contract between the partners. It is, thus,
essential that:
(i) the power of expulsion must have existed in a contract between the partners;
(ii) the power has been exercised by a majority of the partners; and
(iii) it has been exercised in good faith.
If all these conditions are not present, the expulsion is not deemed to be in bonafide
interest of the business of the firm.
Thus, according to the test of good faith as required under Section 33(1), expulsion of
Partner B is not valid.
In this context, you should also remember that provisions of Sections 32 (2), (3) and
(4) which we have just discussed, will be equally applicable to an expelled partner as if
he was a retired partner.
(iv) INSOLVENCY OF A PARTNER (SECTION 34):
(1) Where a partner in a firm is adjudicated as an insolvent he ceases to be a partner
on the date on which the order of adjudication is made, whether or not the firm
is hereby dissolved.
(2) Where under a contract between the partners the firm is not dissolved by the
adjudication of a partner as an insolvent, the estate of a partner so adjudicated
is not liable for any act of the firm and the firm is not liable for any act of the
insolvent, done after the date on which the order of adjudication is made.

4.42 BUSINESS LAWS
The estate of the insolvent

partner is not liable for the
act of the firm done after
the date of order of
adjudication
The firm is also not liable
He will be ceased to be a
for any act of the
partner from the very
insolvent partner after the
date on which the order
date of the order of
of adjudication is made.
adjudication
Ordinarily but not invariably,

the insolvency of a partner
results in dissolution of a firm;
The insolvent partner but the partners are
cannot be continued
Effects of competent to agree among
as a partner. Insolvency themselves that the
adjudication of a partner as
an insolvent will not give rise
to dissolution of the firm.
(v) LIABILITY OF ESTATE OF DECEASED PARTNER (SECTION 35):

Ordinarily, the effect of the death of a partner is the dissolution of the partnership, but
the rule in regard to the dissolution of the partnership, by death of partner is subject
to a contract between the parties and the partners are competent to agree that the
death of one will not have the effect of dissolving the partnership as regards the
surviving partners unless the firm consists of only two partners. In order that the estate
of the deceased partner may be absolved from liability for the future obligations of
the firm, it is not necessary to give any notice either to the public or the persons having
dealings with the firm.
Example 15: X was a partner in a firm. The firm ordered goods in X’s lifetime; but the
delivery of the goods was made after X’s death. In such a case, X’s estate would not be
liable for the debt; a creditor can have only a personal decree against the surviving
partners and a decree against the partnership assets in the hands of those partners. A
suit for goods sold and delivered would not lie against the representatives of the
deceased partner. This is because there was no debt due in respect of the goods in X’s
lifetime.

2.12 RIGHTS OF OUTGOING PARTNER TO CARRY ON

COMPETING BUSINESS (SECTION 36)
An outgoing partner may carry on business competing with that of the firm and he may
advertise such business, but subject to contract to the contrary, he may not,-
(a) use the firm name,

(b) represent himself as carrying on the business of the firm or
(c) solicit the custom of persons who were dealing with the firm before he ceased to be a
partner.
Agreement in restraint of trade- A partner may make an agreement with his partners that
on ceasing to be a partner he will not carry on any business similar to that of the firm within
a specified period or within specified local limits and, notwithstanding anything contained in
section 27 of the Indian Contract Act, 1872, such agreement shall be valid if the restrictions
imposed are reasonable.
2.13 RIGHT OF OUTGOING PARTNER IN CERTAIN

CASES TO SHARE SUBSEQUENT PROFITS
(SECTION 37)
According to section 37, Where any member of a firm has died or otherwise ceased to be
partner, and the surviving or continuing partners carry on the business of the firm with the
property of the firm without any final settlement of accounts as between them and the
outgoing partner or his estate, then, in the absence of a contract to the contrary, the outgoing
partner or his estate is entitled at the option of himself or his representatives to such share of
the profits made since he ceased to be a partner as may be attributable to the use of his share
of the property of the firm or to interest at the rate of six per cent per annum on the amount
of his share in the property of the firm:
Provided that whereby contract between the partners, an option is given to surviving or
continuing partners to purchase the interest of a deceased or outgoing partner, and that
option is duly exercised, the estate of the deceased partner, or the outgoing partner or his
estate, as the case may be, is not entitled to any further or other share of profits; but if any
partner assuming to act in exercise of the option does not in all material respects comply with
the terms thereof, he is liable to account under the foregoing provisions of this section.

4.44 BUSINESS LAWS
Example 16: A, B and C are partners in a manufacture of machinery. A is entitled to three-

eighths of the partnership property and profits. A becomes bankrupt whereas B and C
continue the business without paying out A’s share of the partnership assets or settling
accounts with his estate. A’s estate is entitled to three-eighths of the profits made in the
business, from the date of his bankruptcy until the final liquidation of the partnership affairs.
Example 17: A, B and C are partners. C retires after selling his share in the partnership firm. A
and B fail to pay the value of the share to C as agreed to. The value of the share of C on the
date of his retirement from the firm would be pure debt from the date on which he ceased to
be a partner as per the agreement entered between the parties. C is entitled to recover the
same with interest.
2.14 REVOCATION OF CONTINUING GUARANTEE BY

CHANGE IN FIRM (SECTION 38)
According to section 38, a continuing guarantee given to a firm or to third party in respect of
the transaction of a firm is, in the absence of an agreement to the contrary, revoked as to
future transactions from the date of any change in the constitution of the firm.
SUMMARY
The mutual rights and duties of partners are regulated by the contract between them. Such
contract need not always be expressed, it may be implied from the course of dealing between
the partners (Section 11). Section 12 gives rules regulating the conduct of the business by the
partners and Section 13 lay down rules of mutual rights and liabilities. Sections 14 to 17 also
contain particular rules which become useful and important while determining the relations
of partners to one - another. What is essential to note, however, is that all these rules are
subject to contract between the parties.
As regards third parties, a partner is the agent of the firm for all purposes within the scope of
the partnership concern. His rights, powers, duties and obligations are in many respects
governed by the same rules and principles which apply to the agent. Generally, he may pledge
or sell the partnership property; he may buy goods on account of the firm; he may borrow
money, contract debt and pay debts on account of the firm; he may draw, make, sign, endorse,
accept, transfer, negotiate and get discounted promissory notes, bills of exchange, cheques
and other negotiable papers in the name and account of the firm. The implied authority of
the partner to bind the firm is restricted to acts usually done in the business of the kind carried
on by the firm. He is also empowered under the Act to do certain acts in an emergency so as
to bind the firm. The firm, however, is bound only by those acts of a partner which were done
by him in his capacity as a partner.

A partner may in some circumstances become liable on equitable grounds for obligations
incurred by a co-partner in doing acts in excess of his authority, real or implied. He may also
become liable for an unauthorized act of his co-partner on the ground of estoppel.
PARTNERS RIGHTS/DUTIES/LIABILITIES
Rights of a Partner Acts within implied Acts beyond Duties of a Partner

1. Take part in the authority of implied authority 1. Carry on the
conduct of business. Partner of Partner business of the firm.
2. Express his 1. Purchase goods. 1. Submit a 2. To be just and
opinion. 2. Sell the goods. dispute to faithful to each other.
3. Access to and 3. Settle accounts. arbitration. 3. To render true
inspect and copy any 4. Receive payment 2. Opening a bank accounts and full
of the books. of firm. account. information.
4. Share profits & 5. Engage servants 3. Compromising 4. To attend diligently
property. for firm. or relinquishing any to his duties without any
5. Interest on 6. Engage a lawyer to claim. remuneration.
capital. defend an action 4. Withdrawal a 5. Not to carry on any
6. Interest on brought against the suit or proceeding. business other than that
advance. firm. 5. Admit any of the firm while he is a
7. To be 7. Borrow money for liability in a suit or partner, if restrained by
indemnified. firm’s business. proceeding. an agreement with
8. Not to be expelled 8. Pledge the goods 6. Acquire other partners.
unless majority of the firm as immovable 6. If a partner carries
partners agree and security for the property. on any business
provision to that repayment of 7. Transfer competing with that of
effect exists in borrowings made immovable the firm, he shall
agreement. for firm’s business. property. account for and pay to
9. Resist the 9. Draw, accept, and 8. Enter into the firm all profits made
introduction of a new endorse bill of partnership on by him in that business.
partner. exchange and other behalf of the firm. 7. To account for any
10. Right to retire. negotiable Note : The firm is secret profit, from the
11. Right of outgoing instruments in the not liable to third firm.
partner to carry on a name of the firm. party for the above 8. Not to assign his
competing business. restricted acts of a share.
12. Right of outgoing partner whether or 9. To contribute
partner to share not the person equally to the losses of
subsequent profits. dealing with the the firm.
13. Right to dissolve firm know about 10. To indemnify the
the firm. such restrictions. firm for loss caused by
his willful neglect or
fraud.

4.46 BUSINESS LAWS
MINOR AS A PARTNER: SEC. 30
♦ Cannot be partner but enter ♦ Right to have access, ♦ On attaining majority, he

into partnership with inspect and to take can decide, within 6
consent of all partners for copies of the books of months, whether he
the benefits only. accounts of the firm. would continue or not
♦ Agreement with or by a ♦ Not entitled to take and give public notice of
minor is void ab-initio. part in the day to day his decision. Otherwise,
♦ Right to receive his agreed affairs of the firm. he will be liable for debts
share of property and of the ♦ Right to bring a suit with retrospective effect.
profits of the firm. against the partners for ♦ His share in the property
♦ No personal liability. an account or payment and profits of the firm
of his share of property shall be liable if he
or profits of the firm. chooses to be a partner
♦ His share of profits shall
remain the same.
RECONSTITUTION OF FIRM
Introduction of a partner (Sec. 31) Retirement of a Partner (Sec. 32)
Admission of a new partner, either- Retirement of the partner, either-

 with the consent of all existing
partners, or  with the consent of all existing partners, or
 as per partnership deed.  as per partnership deed or
The liability of a new partner from the date  where the partnership is at will, by giving
of joining unless otherwise agreed. notice in writing to all the other partners.
Liability for the acts of the old firm only if: Liability of the retiring partner
 the new firm assumes the liabilities A retiring partner continues to be liable as
of the old firm, and
partner after the retirement until public notice is
 the creditors accept the new firm as
given of the retirement.
their debtor.
Note: A minor who, on attaining majority Discharge of retiring partner for acts of the
decides to become a partner is liable for all firm done before his retirement
acts of the firm done since he was admitted
to benefits of partnership. 1. By an agreement b/w third party and remaining
partners.
2. By an implied agreement to above effect. (E.g.
Dealing between such third party and the
reconstituted firm, after he (the third party) had
the knowledge of the retirement.)

Expulsion of a partner Insolvency of a partner (Sec. 34)

(Sec. 33) 1. The insolvent partner ceases to be a partner on
Three conditions: the date on which the order of adjudication is
(a) As per contract between the partners made.
& 2. The firm is dissolved unless otherwise
(b) Majority of the partners & specifically provided in deed.
(c) In good faith. 3. The estate of the insolvent is not liable for the
Otherwise acts of the firm done after the date of the order
Partner may claim re-instatement as a of adjudication.
partner, or 4. The firm is not liable for any act of the insolvent
may sue for the refund of his share of partner after the date of the order of
capital and profits in the firm. adjudication.
Rights and Liabilities 5. No public notice is required on insolvency of
Same as that of a retiring partner. partner.
Death of a Partner (Sec. 35) Rights of outgoing partner

To carry on competing business but he may not-
1. The firm is dissolved unless otherwise
(i) use the firm name;
specifically provided in deed.
(ii) represent himself as carrying on the business
2. The estate of the deceased partner is of firm, or
not liable for any act of the firm done (iii) solicit the customers who were dealing with the
after his death. firm before he ceased to be a partner. (Sec. 36)
If final settlement is pending, legal
3. No public notice is required of the
representatives of the deceased partner or the
death of a partner.
retiring partner are entitled to any of the following
two options:
General Notes
(a) Share of the profit earned after the death or
(a) Unless otherwise agreed by partners, retirement.
a continuing guarantee given to third (b) Claim interest at the rate of 6 per cent per
party by the firm is revoked as to the annum on the amount of his share in the property.
future transactions from the date of any (Sec. 37)
change in the constitution of the firm.
(Sec. 38)
(b) The rights and duties of the partners
of the reconstituted firm shall be the
same as they were before change of the
firm. (Sec. 17)

4.48 BUSINESS LAWS
TEST YOUR KNOWLEDGE

1. A partner can be expelled if:
(a) Such expulsion is in good faith
(b) The majority of the partner does not agree on such expulsion
(c) The expelled partner is given an opportunity to start a business competing with
that of the firm
(d) Compensation is paid
2. Which of the following is not the right of partner i.e., which he cannot claim as a matter
of right?
(a) Right to take part in business
(b) Right to have access to account books
(c) Right to share profits
(d) Right to receive remuneration.
3. Which of the following acts are not included in the implied authority of a partner?
(a) To buy or sell goods on accounts of partners.
(b) To borrow money for the purpose of firm.
(c) To enter into partnership on behalf of firm.
(d) To engage a lawyer to defend actions against firm.
4. The reconstitution of the firm takes place in case of
(a) Admission of a partner

(b) Retirement of a partner
(c) Expulsion or death of a partner
5. A new partner can be admitted in the firm with the consent of
(a) All the partners
(b) Simple majority of partners

(c) Special majority of partners

(d) New partner only.
6. A partner may be expelled from the firm on the fulfilment of the conditions that the
expulsion power is exercised.
(a) As given by express contract
(b) By majority of partners

(c) In absolute good faith
7. A minor is:
(a) A partner of a firm
(b) Representative of the firm
(c) Entitled to carry on the business of the firm

(d) Entitled to the benefits of the firm
8. If a partner commits fraud in the conduct of the business of the firm:
(a) He shall indemnify the firm for any loss caused to it by his fraud
(b) He is not liable to the firm.
(c) He is liable to the partners
(d) He is liable to the third parties
9. Partners are bound to carry on the business of the firm-
(a) To the greatest common advantage
(b) For the welfare of the society

(c) For the advantage of the family members
(d) For earning personal profits
10. The liability of a minor partner is limited to the extent of:

(a) His share in the firm
(b) His personal assets
(c) His share in the firm as well as his personal assets
(d) He is not liable

4.50 BUSINESS LAWS
11. The authority of a partner to bind the firm for his acts as contained in section 19 of the
Partnership Act is known as:
(a) Express authority

(b) Legal authority
(c) Implied authority
(d) Managerial authority

12. Which are the matters that require unanimous consent of all the partners:
(b) Transfer by a partner of his interest in the firm

(c) Fundamental change in the nature of the business
13. For admitting a minor into the benefits of the partnership, which of the following is
required?
(a) Consent of the minor’s guardian
(b) Consent of the Registrar of firms

(c) Consent of all the partners of the firm
14. The implied authority of a partner of the firm does empower him to:
(a) Open a bank account on behalf of the firm in his own name.
(b) Enter into partnership on behalf of the firm.
(c) Acquire immovable property on behalf of the firm.

(d) Act expressing or implying an intention to bind the firm.
15. In case of transfer of share in a partnership firm by one partner to any third party give
such third party entitlement:
(a) to interfere with the conduct of the business.
(b) to require accounts.
(c) to receive the share of the profits of the transferring partner as agreed by the
partners.
(d) to receive the share of the profits of the transferring partner whether or not
agreed by the partners.

1. State the modes by which a partner may transfer his interest in the firm in favour of
another person under the Indian Partnership Act, 1932. What are the rights of such a
transferee?
2. Whether a minor may be admitted in the business of a partnership firm? Explain the
rights of a minor in the partnership firm.
3. M/s XYZ & Associates, a partnership firm with X, Y, Z as senior partners were engaged
in the business of carpet manufacturing and exporting to foreign countries. On 25th
August, 2018, they inducted Mr. G, an expert in the field of carpet manufacturing as their
partner. On 10th January 2020, Mr. G was blamed for unauthorized activities and thus
expelled from the partnership by united approval of rest of the partners.
(i) Examine whether action by the partners was justified or not?
(ii) What should have the factors to be kept in mind prior expelling a partner from
the firm by other partners according to the provisions of the Indian Partnership
Act, 1932?
4. A, B and C are partners in a firm. As per terms of the partnership deed, A is entitled to
20 percent of the partnership property and profits. A retires from the firm and dies after
15 days. B and C continue business of the firm without settling accounts. Explain the
rights of A’s legal representatives against the firm under the Indian Partnership Act,
1932?
5. Master X was introduced to the benefits of partnership of M/s ABC & Co. with the consent
of all partners. After attaining majority, more than six months elapsed and he failed to
give a public notice as to whether he elected to become or not to become a partner in
the firm. Later on, Mr. L, a supplier of material to M/s ABC & Co., filed a suit against M/s
ABC & Co. for recovery of the debt due.
In the light of the Indian Partnership Act, 1932, explain:

(i) To what extent X will be liable if he failed to give public notice after attaining
majority?
(ii) Can Mr. L recover his debt from X?

6. Mr. A (transferor) transfer his share in a partnership firm to Mr. B (transferee). Mr. B is
not entitled for few rights and privileges as Mr. A (transferor) is entitled therefor. Discuss
in brief the points for which Mr. B is not entitled during continuance of partnership?

4.52 BUSINESS LAWS
ANSWERS/HINTS
Answers to MCQs
1. (a) 2. (d) 3. (c) 4. (d) 5. (a) 6. (d)
7. (d) 8. (a) 9. (a) 10. (a) 11. (c) 12. (d)
13. (c) 14. (d) 15. (c)

1. Section 29 of the Indian Partnership Act, 1932 provides that a share in a partnership is
transferable like any other property, but as the partnership relationship is based on
mutual confidence, the assignee of a partner’s interest by sale, mortgage or otherwise
cannot enjoy the same rights and privileges as the original partner.
The rights of such a transferee are as follows:

(1) During the continuance of partnership, such transferee is not entitled
(a) to interfere with the conduct of the business,
(b) to require accounts, or
(c) to inspect books of the firm.
He is only entitled to receive the share of the profits of the transferring partner
and he is bound to accept the profits as agreed to by the partners, i.e., he
(2) On the dissolution of the firm or on the retirement of the transferring partner,
the transferee will be entitled, against the remaining partners:
(a) to receive the share of the assets of the firm to which the transferring
partner was entitled, and
(b) for the purpose of ascertaining the share,
he is entitled to an account as from the date of the dissolution.
By virtue of Section 31, no person can be introduced as a partner in a firm
without the consent of all the partners. A partner cannot by transferring his own
interest, make anybody else a partner in his place, unless the other partners
agree to accept that person as a partner. At the same time, a partner is not
debarred from transferring his interest. A partner’s interest in the partnership

can be regarded as an existing interest and tangible property which can be

assigned.
2. A minor cannot be bound by a contract because a minor’s contract is void and not
merely voidable. Therefore, a minor cannot become a partner in a firm because
partnership is founded on a contract. Though a minor cannot be a partner in a firm, he
can nonetheless be admitted to the benefits of partnership under Section 30 of the
Act. In other words, he can be validly given a share in the partnership profits. When
this has been done and it can be done with the consent of all the partners then the
rights and liabilities of such a partner will be governed under Section 30 as follows:
Rights:
(i) A minor partner has a right to his agreed share of the profits and of the firm.
(ii) He can have access to, inspect and copy the accounts of the firm.
(iii) He can sue the partners for accounts or for payment of his share but only when
severing his connection with the firm, and not otherwise.
(iv) On attaining majority he may within 6 months elect to become a partner or not
to become a partner. If he elects to become a partner, then he is entitled to the
share to which he was entitled as a minor. If he does not, then his share is not
liable for any acts of the firm after the date of the public notice served to that
effect.
3. Expulsion of a Partner (Section 33 of the Indian Partnership Act, 1932):
A partner may not be expelled from a firm by a majority of partners except in exercise,
in good faith, of powers conferred by contract between the partners.
The test of good faith as required under Section 33(1) includes three things:
• The expulsion must be in the interest of the partnership.
• The partner to be expelled is served with a notice.
• He is given an opportunity of being heard.
If a partner is otherwise expelled, the expulsion is null and void.
(i) Action by the partners of M/s XYZ & Associates, a partnership firm to expel Mr.
G from the partnership was justified as he was expelled by united approval of
the partners exercised in good faith to protect the interest of the partnership
against the unauthorized activities charged against Mr. G. A proper notice and
opportunity of being heard has to be given to Mr. G.

4.54 BUSINESS LAWS
(ii) The following are the factors to be kept in mind prior expelling a partner from
the firm by other partners:
(a) the power of expulsion must have existed in a contract between the
partners;
(b) the power has been exercised by a majority of the partners; and
(c) it has been exercised in good faith.

4. Section 37 of the Indian Partnership Act, 1932 provides that where a partner dies or
otherwise ceases to be a partner and there is no final settlement of account between
the legal representatives of the deceased partner or the firms with the property of the
firm, then, in the absence of a contract to the contrary, the legal representatives of the
deceased partner or the retired partner are entitled to claim either.
(1) Such shares of the profits earned after the death or retirement of the partner
which is attributable to the use of his share in the property of the firm; or
(2) Interest at the rate of 6 per cent annum on the amount of his share in the
property.
Based on the aforesaid provisions of Section 37 of the Indian Partnership Act, 1932, in
the given problem, A’s Legal representatives shall be entitled, at their option to:
(a) the 20% shares of profits (as per the partnership deed); or
(b) interest at the rate of 6 per cent per annum on the amount of A’s share in the
property.
5. As per the provisions of Section 30(5) of the Indian Partnership Act, 1932, at any time
within six months of his attaining majority, or of his obtaining knowledge that he had
been admitted to the benefits of partnership, whichever date is later, such person may
give public notice that he has elected to become or that he has elected not to become
a partner in the firm, and such notice shall determine his position as regards the firm.
However, if he fails to give such notice, he shall become a partner in the firm on the
expiry of the said six months.
If the minor becomes a partner by his failure to give the public notice within specified
time, his rights and liabilities as given in Section 30(7) are as follows:
(A) He becomes personally liable to third parties for all acts of the firm done since
he was admitted to the benefits of partnership.
(B) His share in the property and the profits of the firm remains the same to which
he was entitled as a minor.

(i) In the instant case, since, X has failed to give a public notice, he shall
become a partner in the M/s ABC & Co. and becomes personally liable
to Mr. L, a third party.
(ii) In the light of the provisions of Section 30(7) read with Section 30(5)
of the Indian Partnership Act, 1932, since X has failed to give public
notice that he has not elected to not to become a partner within six
months, he will be deemed to be a partner after the period of the above
six months and therefore, Mr. L can recover his debt from him also in
the same way as he can recover from any other partner.
6. As per Section 29 of Indian Partnership Act, 1932, a transfer by a partner of his interest
in the firm, either absolute or by mortgage, or by the creation by him of a charge on
such interest, does not entitle the transferee, during the continuance of the firm, to
interfere in the conduct of business, or to require accounts, or to inspect the books of
the firm, but entitles the transferee only to receive the share of profits of the
transferring partner, and the transferee shall accept the account of profits agreed to
by the partners.
In the given case during the continuance of partnership, such transferee Mr. B is not
entitled:
• to interfere with the conduct of the business.
• to require accounts.
• to inspect books of the firm.
However, Mr. B is only entitled to receive the share of the profits of the transferring
partner and he is bound to accept the profits as agreed to by the partners, i.e. he

4.56 BUSINESS LAWS
UNIT – 3: REGISTRATION AND DISSOLUTION OF A

FIRM
LEARNING OUTCOMES

♦ About mode of getting a firm registered with the authorities.
♦ The effect of registration of a firm upon the rights of partners’ inter-
se and the rights of the third parties.
♦ The effect of non-registration on rights of partners and the third
parties.
♦ The various circumstances when a firm is dissolved.
♦ The consequences and the effects of the dissolution upon rights and
liabilities of various parties.
UNIT OVERVIEW
Registration and dissolution of a firm
Mode of effecting Consequences of Dissolution of

Registration Non-registration firm
Dissolution without the intervention Dissolution by

of court (Section 40 to 43) court (Section 44)
Dissolution by
Dissolution on the
Dissolution by operation of Law Dissolution by
happening of certain
Agreement or compulsory notice (Section
contingencies (Section
(Section 40) dissolution 43)
42)
(Section 41)

3.1 REGISTRATION OF FIRMS

APPLICATION FOR REGISTRATION (SECTION 58): (1) The registration of a firm may be
effected at any time by sending by post or delivering to the Registrar of the area in which any
place of business of the firm is situated or proposed to be situated, a statement in the
prescribed form and accompanied by the prescribed fee, stating-
(a) The firm’s name
(b) The place or principal place of business of the firm,

(c) The names of any other places where the firm carries on business,
(d) the date when each partner joined the firm,
(e) the names in full and permanent addresses of the partners, and
(f) the duration of the firm.
The statement shall be signed by all the partners, or by their agents specially authorised in
this behalf.
(1) Each person signing the statement shall also verify it in the manner prescribed.
(2) A firm name shall not contain any of the following words, namely:-
Note: ‘Crown’, Emperor’, ‘Empress’, ‘Empire’, ‘Imperial’, ‘King’, ‘Queen’, ‘Royal’, or words
expressing or implying the sanction, approval or patronage of Government except
when the State Government signifies its consent to the use of such words as part of
the firm-name by order in writing.
REGISTRATION (SECTION 59): When the Registrar is satisfied that the provisions of Section
58 have been duly complied with, he shall record an entry of the statement in a Register called
the Register of Firms and shall file the statement. Then he shall issue a certificate of
Registration. However, registration is deemed to be completed as soon as an application in
the prescribed form with the prescribed fee and necessary details concerning the particulars
of partnership is delivered to the Registrar. The recording of an entry in the register of firms
is a routine duty of Registrar.
Registration may also be effected even after a suit has been filed by the firm but in that case
it is necessary to withdraw the suit first and get the firm registered and then file a fresh suit.
LATE REGISTRATION ON PAYMENT OF PENALTY (SECTION 59A-1): If the statement in
respect of any firm is not sent or delivered to the Registrar within the time specified in sub-
section (1A) of section 58, then the firm may be registered on payment, to the Registrar, of a
penalty of one hundred rupees per year of delay or a part thereof.

4.58 BUSINESS LAWS
3.2 CONSEQUENCES OF NON-REGISTRATION

(SECTION 69)
Under the English Law, the registration of firms is compulsory. Therefore, there is a penalty
for non-registration of firms. But the Indian Partnership Act does not make the registration of
firms compulsory nor does it impose any penalty for non-registration. However, under
Section 69, non-registration of partnership gives rise to a number of disabilities which we
shall presently discuss. Although registration of firms is not compulsory, yet the consequences
or disabilities of non-registration have a persuasive pressure for their registration. These
disabilities briefly are as follows:
(i) No suit in a civil court by firm or other co-partners against third party: The firm
or any other person on its behalf cannot bring an action against the third party for
breach of contract entered into by the firm, unless the firm is registered and the
persons suing are or have been shown in the register of firms as partners in the firm.
In other words, a registered firm can only file a suit against a third party and the
persons suing have been in the register of firms as partners in the firm.
(ii) No relief to partners for set-off of claim: If an action is brought against the firm by
a third party, then neither the firm nor the partner can claim any set-off, if the suit be
valued for more than ` 100 or pursue other proceedings to enforce the rights arising
from any contract.
(iii) Aggrieved partner cannot bring legal action against other partner or the firm: A
partner of an unregistered firm (or any other person on his behalf) is precluded from
bringing legal action against the firm or any person alleged to be or to have been a
partner in the firm. But, such a person may sue for dissolution of the firm or for
accounts and realization of his share in the firm’s property where the firm is dissolved.
(iv) Third party can sue the firm: In case of an unregistered firm, an action can be brought
against the firm by a third party.
Exceptions: Non-registration of a firm does not, however effect the following rights:
1. The right of third parties to sue the firm or any partner.
2. The right of partners to sue for the dissolution of the firm or for the settlement of the
accounts of a dissolved firm, or for realization of the property of a dissolved firm.
3. The power of an Official Assignees, Receiver of Court to release the property of the
insolvent partner and to bring an action.
4. The right to sue or claim a set-off if the value of suit does not exceed ` 100 in value.

5. The right to suit and proceeding instituted by legal representatives or heirs of the
deceased partner of a firm for accounts of the firm or to realise the property of the
firm.
Example 1: A & Co. is registered as a partnership firm in 2017 with A, B and C partners. In
2018, A dies. In 2019, B and C sue X in the name and on behalf of A & Co. without fresh
registration. Now the first question for our consideration is whether the suit is maintainable.
As regards the question whether in the case of a registered firm (whose business was carried
on after its dissolution by death of one of the partners), a suit can be filed by the remaining
partners in respect of any subsequent dealings or transactions without notifying to the
Registrar of Firms, the changes in the constitution of the firm, it was decided that the
remaining partners should sue in respect of such subsequent dealings or transactions even
though the firm was not registered again after such dissolution and no notice of the partner
was given to the Registrar.
The test applied in these cases was whether the plaintiff satisfied the only two requirements
of Section 69 (2) of the Act namely,
(i) the suit must be instituted by or on behalf of the firm which had been registered;
(ii) the person suing had been shown as partner in the register of firms. In view of this
position of law, the suit is in the case by B and C against X in the name and on behalf
of A & Co. is maintainable.
Now, in the above example, what difference would it make, if in 2019 B and C had taken
a new partner, D, and then filed a suit against X without fresh registration?
Where a new partner is introduced, the fact is to be notified to Registrar who shall make a
record of the notice in the entry relating to the firm in the Register of firms. Therefore, the
firm cannot sue as D’s (new partner’s) name has not been entered in the register of firms. It
was pointed out that in the second requirement, the phrase “person suing” means persons in
the sense of individuals whose names appear in the register as partners and who must be all
partners in the firm at the date of the suit.
3.3 DISSOLUTION OF FIRM (SECTIONS 39 - 47)

According to Section 39 of the Indian Partnership Act, 1932, the dissolution of partnership
between all partners of a firm is called the ‘dissolution of the firm’.
Thus, the dissolution of firm means the discontinuation of the legal relation existing between
all the partners of the firm. But when only one or more partners retires or becomes
incapacitated from acting as a partner due to death, insolvency or insanity, the partnership,
i.e. the relationship between such a partner and other is dissolved, but the rest may decide to

4.60 BUSINESS LAWS
continue. In such cases, there is in practice, no dissolution of the firm. The particular partner
goes out, but the remaining partners carry on the business of the firm, it is called dissolution
of partnership. In the case of dissolution of the firm, on the other hand, the whole firm is
dissolved. The partnership terminates as between each and every partner of the firm.
Dissolution of Firm Vs. Dissolution of Partnership
S. No. Basis of Difference Dissolution of Firm Dissolution of Partnership

1. Continuation of It involves discontinuation of It does not affect
business business in partnership. continuation of business. It
involves only reconstitution
of the firm.
2. Winding up It involves winding up of the It involves only
firm and requires realization reconstitution and requires
of assets and settlement of only revaluation of assets
liabilities. and liabilities of the firm.
3. Order of court A firm may be dissolved by the Dissolution of partnership is
order of the court. not ordered by the court.
4. Scope It necessarily involves It may or may not involve
dissolution of partnership. dissolution of firm.
5. Final closure of It involves final closure of It does not involve final
books books of the firm. closure of the books of the
firm.
Modes of Dissolution of a firm (Sections 40-44)

The dissolution of partnership firm may be in any of the following ways:
1. DISSOLUTION WITHOUT THE ORDER OF THE COURT OR VOLUNTARY
DISSOLUTION:
It consists of following four types:
(i) Dissolution by Agreement (Section 40):
Section 40 gives right to the partners to dissolve the partnership by agreement
with the consent of all the partners or in accordance with a contract between
the partners. ‘Contract between the partners’ means a contract already made.
(ii) Compulsory dissolution (Section 41):

A firm is compulsorily dissolved
 by the adjudication of all the partners or of all the partners but one as
insolvent; or

 by the happening of any event which makes it unlawful for the business
of the firm to be carried on or for the partners to carry it on in
partnership.
However, when more than one separate adventure or undertaking is carried on
by the firm, the illegality of one or more shall not of itself cause the dissolution
of the firm in respect of its lawful adventures and undertakings.
Example 2: A firm is carrying on the business of trading a particular chemical
and a law is passed which bans on the trading of such a particular chemical. The
business of the firm becomes unlawful and so the firm will have to be
compulsorily dissolved.
(iii) Dissolution on the happening of certain contingencies (Section 42):
Subject to contract between the partners, a firm can be dissolved on the
happening of any of the following contingencies-
Where the firm is constituted for a fixed term,

on the expiry of that term
Where the firm is constituted to carry out one or

more adventures or undertaking, then by
completion thereof
by the death of a partner, and
by the adjudication of a partner as an insolvent.
(iv) Dissolution by notice of partnership at will (Section 43):

(1) Where the partnership is at will, the firm may be dissolved by any
partner giving notice in writing to all the other partners of his intention
to dissolve the firm.
(2) In case date is mentioned in the Notice: The firm is dissolved as from
the date mentioned in the notice as the date of dissolution, or in case
no date is so mentioned, as from the date of the communication of the
notice.

4.62 BUSINESS LAWS
(2) DISSOLUTION BY THE COURT (SECTION 44):

Court may, at the suit of the partner, dissolve a firm on any of the following ground:
(a) Insanity/unsound mind: Where a partner (not a sleeping partner) has become
of unsound mind, the court may dissolve the firm on a suit of the other partners
or by the next friend of the insane partner. Temporary sickness is no ground for
dissolution of firm.
Example 3: A, B and C are partners in a firm. A has severe infection and got
typhoid. Due to this, he was not able to conduct business for few weeks. This
kind of illness cannot be treated as the ground for dissolution.
(b) Permanent incapacity: When a partner, other than the partner suing, has
become in any way permanently incapable of performing his duties as partner,
then the court may dissolve the firm. Such permanent incapacity may result
from physical disability or illness etc.
(c) Misconduct: Where a partner, other than the partner suing, is guilty of conduct
which is likely to affect prejudicially the carrying on of business, the court may
order for dissolution of the firm, by giving regard to the nature of business. It
is not necessary that misconduct must relate to the conduct of the business.
The important point is the adverse effect of misconduct on the business. In
each case nature of business will decide whether an act is misconduct or not.
(d) Persistent breach of agreement: Where a partner other than the partner suing,
wilfully or persistently commits breach of agreements relating to the
management of the affairs of the firm or the conduct of its business, or
otherwise so conduct himself in matters relating to the business that it is not
reasonably practicable for other partners to carry on the business in partnership
with him, then the court may dissolve the firm at the instance of any of the
partners. Following comes in to category of breach of contract:
 Embezzlement,
 Keeping erroneous accounts
 Holding more cash than allowed
 Refusal to show accounts despite repeated request etc.
Example 4: If one of the partners keeps erroneous accounts and omits to enter
receipts or if there is continued quarrels between the partners or there is such
a state of things that destroys the mutual confidence of partners, the court may
order for dissolution of the firm.

(e) Transfer of interest: Where a partner other than the partner suing, has
transferred the whole of his interest in the firm to a third party or has allowed
his share to be charged or sold by the court, in the recovery of arrears of land
revenue due by the partner, the court may dissolve the firm at the instance of
any other partner.
(f) Continuous/Perpetual losses: Where the business of the firm cannot be
carried on except at a loss in future also, the court may order for its dissolution.
(g) Just and equitable grounds: Where the court considers any other ground to
be just and equitable for the dissolution of the firm, it may dissolve a firm. The
following are the cases for the just and equitable grounds-
(i) Deadlock in the management.
(ii) Where the partners are not in talking terms between them.
(iii) Loss of substratum.
(iv) Gambling by a partner on a stock exchange.
Dissolution of Firm
Without the order of the By order of the Court

Court (Section 44)
[Section 40 to 43]
Insanity Misconduct Permanent Persistent Transfer of Continuous Just and

incapacity breach of Interest loss equitable
agreement ground
By mutual Compulsory On happening of certain By notice

agreement dissolution event (Section 43)
(Section 41) (Section 42)

4.64 BUSINESS LAWS
3.4 CONSEQUENCES OF DISSOLUTION

(SECTIONS 45 - 55)
Consequent to the dissolution of a partnership firm, the partners have certain rights and
liabilities, as are discussed:
(a) Liability for acts of partners done after dissolution (Section 45):
Section 45 has two fold objectives-
1. It seeks to protect third parties dealing with the firm who had no notice of prior
dissolution and
2. It also seeks to protect partners of a dissolved firm from liability towards third
parties.
Example 5: X and Y who carried on business in partnership for several years, executed
on December 1, a deed dissolving the partnership from the date, but failed to give a
public notice of the dissolution. On December 20, X borrowed in the firm’s name a
certain sum of money from R, who was ignorant of the dissolution. In such a case, Y
also would be liable for the amount because no public notice was given.
However, there are exceptions to the rule stated in above example i.e. even where
notice of dissolution has not been given, there will be no liability for subsequent acts
in the case of:
(a) the estate of a deceased partner,
(b) an insolvent partner, or

(c) a dormant partner, i.e., a partner who was not known as a partner to the person
dealing with the firm.
(b) Right of partners to have business wound up after dissolution (Section 46): On
the dissolution of a firm every partner or his representative is entitled, as against all
the other partners or their representative, to have the property of the firm applied in
payment of the debts and liabilities of the firm, and to have the surplus distributed
among the partners or their representatives according to their rights.
(c) Continuing authority of partners for purposes of winding up (Section 47): After
the dissolution of a firm the authority of each partner to bind the firm, and the other
mutual rights and obligations of the partners, continue notwithstanding the
dissolution, so far as may be necessary to wind up the affairs of the firm and to
complete transactions begun but unfinished at the time of the dissolution, but not
otherwise:

Provided that the firm is in no case bound by the acts of a partner who has been
adjudicated insolvent; but this proviso does not affect the liability of any person who
has after the adjudication represented himself or knowingly permitted himself to be
represented as a partner of the insolvent.
(d) Mode of Settlement of partnership accounts (Section 48): In settling the accounts
of a firm after dissolution, the following rules shall, subject to agreement by the
partners, be observed:-
(i) Losses, including deficiencies of capital, shall be paid first out of profits, next
out of capital, and, lastly, if necessary, by the partners individually in the
proportions in which they were entitled to share profits;
(ii) The assets of the firm, including any sums contributed by the partners to make
up deficiencies of capital, must be applied in the following manner and order:
(a) in paying the debts of the firm to third parties;
(b) in paying to each partner rateably what is due to him from capital;
(c) in paying to each partner rateably what is due to him on account of
capital; and
(d) the residue, if any, shall be divided among the partners in the
proportions in which they were entitled to share profits.
Example 6: X and Y were partners sharing profits and losses equally and X died. On
taking partnership accounts, it transpired that he contributed ` 6,60,000 to the capital
of the firm and Y only `40,000. The assets amounted to ` 2,00,000. In such situation,
the deficiency (` 6,60,000 + ` 40,000 – ` 2,00,000 i.e. ` 5,00,000) would have to be
shared equally by Y and X’s estate.
If in the above example, the agreement provided that on dissolution the surplus assets
would be divided between the partners according to their respective interests in the
capital and on the dissolution of the firm a deficiency of capital was found, then the
assets would be divided between the partners in proportion to their capital with the
result that X’s estate would be the main loser.
(e) Payment of firm debts and of separate debts (Section 49): Where there are joint
debts due from the firm and also separate debts due from any partner:
(i) the property of the firm shall be applied in the first instance in payment of the
debts of the firm, and if there is any surplus, then the share of each partner shall
be applied to the payment of his separate debts or paid to him;
(ii) the separate property of any partner shall be applied first in the payment of his
separate debts and surplus, if any, in the payment of debts of the firm.

4.66 BUSINESS LAWS
SUMMARY
Registration of a firm is effected by the Registrar of Firms by recording in the Register of
Firms an entry of the statement relating to registration furnished to him. The Act does not
make registration of the firm compulsory, yet the effect of the rules relating to the
consequences of non-registration is such as practically necessitates the registration of the
firm at one time or other. Certain disabilities have been imposed on partners of an
unregistered firm seeking to enforce certain claims in the Civil Courts. A firm which is not
registered is not able to enforce its claim against third parties in the Civil Courts; and any
partner who is not registered is not able to enforce his claim either against third parties or
against the fellow partners. An unregistered partner may, however, sue for the dissolution of
the firm or for accounts only if the firm is already dissolved.
Dissolution of a firm means the breaking up or extinction of the relationship which subsisted
between all the partners of the firm under various circumstances contemplated by Act. A
partnership can be dissolved only in accordance with the manner prescribed under the Act.
REGISTRATION OF FIRMS: SEC.58 & 59
Meaning: Getting Effects of Non- Rights not affected by non-

registered with the registration registration (Sec. 69)
Registrar of Firm. (Sec. 69) 1. Right of third parties to sue the firm
Procedure: Application in 1. No suit in a civil or any partner.
prescribed form with court by a 2. Power of an Official Assignee or
prescribed fees. partner against Receiver or the Court.
Contents of Application the firm or other 3. Right of the partners to sue for the
Form: co-partners. dissolution of the firm or for the
2. No suit in a civil accounts of a dissolved firm or for
Name of the firm.
court by the firm the realization of the property of a
Principal & other places of
dissolved firm.
business of the firm. against third
Date when each partner parties 4. Rights of the firm or partners of firm
joined the firm. having no place of business in India.
3. The firm or its
Names & addresses of the 5. Right to sue or claim a set-off if the
partners cannot
partners. value of the suit upto Rs. 100.
make a claim of
The duration of the firm.
Note: Registration of firm set-off or other 6. Rights of partners to sue for the
proceeding criminal proceedings against the
becomes effective from date
based upon a other partners of the firm and against
of filing the form.
contract the third parties.

DISSOLUTION : SEC. 39 – 44
Discontinuance of the jural relation between all the partners of the firm.
MODE OF DISSOLUTION
By Mutual By By Happening By Notice By a Decree of

Agreement Operation of certain of the Court
(Sec. 40) of law contingencies Dissolution (Sec. 44)
(Sec. 41) (Sec. 42) (Sec. 43)
 With  A partner becoming of

the  All but one Unless  Partnership unsound mind.
consent of the otherwise at will.  Permanent incapacity of
of all the partners are agreed,  Notice once a partner.
partners adjudicated  On the expiry given  Misconduct of a partner
 Or as insolvent. of fixed term cannot be affecting the business.
 As per  By the  On withdrawn  Wilful and persistent
contract happening completion of without breach of partnership
between of an event purpose consent of agreement by a partner
the which makes  On the death all partners.  Transfer of whole interest
partners partnership of a partner; or share by a partner.
unlawful.  On the  Improbability of business
insolvency of being carried on at loss.
a partner.  Just and Equitable.
Consequences of Dissolution
Continuing liability until public notice.

Rights to enforce winding up.
Extent of continuing authority of the partners after
dissolution.
Settlement of partnership accounts.
Personal profits earned after dissolution must be
accounted.

4.68 BUSINESS LAWS
TEST YOUR KNOWLEDGE

1. Registration of a firm is:
(a) Compulsory
(b) Optional
(c) Occasional
2. An unregistered firm cannot claim:
(a) Set on
(b) Set off
(c) Set on and set off
3. As per the accepted view, the registration of the firm is considered complete when
(a) Complete application for registration is filed with the Registrar.
(b) Registrar files the statement and makes entries in the Register of Firms.
(c) Registrar gives notice of registration to all partners.
(d) Court records the statement and certifies the entries in Register of Firms.
4. A partnership firm is compulsorily dissolved where
(a) All partners have become insolvent
(b) Firm’s business has become unlawful
(c) The fixed term has expired
(d) In cases (a) and (b) only
5. On which of the following grounds, a partner may apply to the court for dissolution of
the firm?
(a) Insanity of a partner
(b) Misconduct of a partner
(c) Perpetual losses in business

6. Which of the following do not constitute a ground for dissolution by Court?

(a) Misconduct by partner
(b) Transfer of interest by partner
(c) Just and equitable grounds
(d) Insolvency of a partner
7. Upon dissolution of firm, losses, including deficiencies of capital, shall be paid first-
(a) Out of Profits
(b) Out of Capital
(c) By the partners in their profit sharing ratio
(d) By the partners equally
8. Public notice in case of a firm is not required in case of:
(b) Retirement of a partner
(c) Expulsion of a partner
(d) Dissolution of the firm.
9. Which of the following do not constitute ground for dissolution by Court?
(a) Insanity of the partner
(b) Business carried on at a loss

(c) Wilful misconduct of a partner
(d) Expulsion of a partner
10. Dissolution of partnership between all the partners of a firm is called-
(a) Dissolution of partnership
(b) Dissolution of partners
(c) Dissolution of the firm

(d) Reconstitution of firm
11. A partnership firm has to be registered with:
(a) Director of firms
(b) Registrar of firms

4.70 BUSINESS LAWS
(c) Registrar of companies

(d) Competent Court
12. In settling the account after dissolution, the firm’s assets shall be first applied in-
(a) Losses including deficiencies of capital.
(b) Payment of partner’s loan.
(c) Payment of partner’s goodwill share.
(d) Distribution to partners in their profit sharing ratio.
13. X, Y and Z are partners in a firm. Due to differences amongst the partners, there is
deadlock in the management. X applies to the court for the dissolution of the firm. Will
he succeed?
(a) Yes, on just and equitable ground
(b) No, because it is not a valid ground for dissolution
(c) No, it will require consent of all the partners
(d) Yes, if the Registrar of Firm agrees.
14. A firm is compulsorily dissolved on the:

(a) Death of a partner
(b) Adjudication of a partner as an insolvent
(c) Expiry of a fixed period for which the firm was constituted
(d) Business of the firm becoming illegal due to happening of an event.
15. The partnership deed does not include:
(a) The nature of the business of the firm.

(b) The duration of the firm.
(c) The date when each partner joined the firm.
(d) The date when each partner exit the firm.
16. Mr. A, partner of ABC Associates give notice in writing to all other partners i.e. Mr. B and
Mr. C of his intention to dissolve the firm on 01.09.2020. Such notice was dated
30.08.2020. In the given case, the firm stands dissolved with effect from______________.
(a) 30.08.2020.
(b) 01.09.2020.

(c) Neither 30.08.2020 nor 01.09.2020 but as per the date mentioned in partnership
deed as last date of existence of the firm.
(d) Either 30.08.2020 or 01.09.2020 as mutually agreed by all three partners.

17. A firm may be dissolved with the consent of all the partners or in accordance with a
contract between the partners. Such dissolution is known as ________________.
(a) Dissolution by contract.

(b) Dissolution by agreement.
(c) Dissolution by will.
(d) Dissolution of Partnership.

18. The statement for the purpose of registration under Section 58(1) of Indian Partnership
Act, 1932 can be signed by:
(a) Any one partner of the Firm
(b) Legal heirs of all partners of the Firm
(c) All the partners or by their agents specially authorised in this behalf
(d) Agents of all partners of the Firm.
1. What is the procedure of registration of a partnership firm under the Indian Partnership
Act, 1932?
2. When does dissolution of a partnership firm take place under the provisions of the Indian
Partnership Act, 1932? Explain.
3. “Indian Partnership Act does not make the registration of firms compulsory nor does it
impose any penalty for non-registration.” In light of the given statement, discuss the
consequences of non-registration of the partnership firms In India?
ANSWERS/HINTS
Answer to MCQs
1. (b) 2. (b) 3. (b) 4. (d) 5. (d) 6. (d)
7. (a) 8. (a) 9. (d) 10. (c) 11. (b) 12. (a)
13. (a) 14. (d) 15. (d) 16. (b) 17. (b) 18. (c)

4.72 BUSINESS LAWS

1. APPLICATION FOR REGISTRATION (SECTION 58):
(1) The registration of a firm may be effected at any time by sending by post or
delivering to the Registrar of the area in which any place of business of the firm
is situated or proposed to be situated, a statement in the prescribed form and
accompanied by the prescribed fee, stating-
(a) The firm’s name
(b) The place or principal place of business of the firm,

(c) The names of any other places where the firm carries on business,
(d) the date when each partner joined the firm,
(e) the names in full and permanent addresses of the partners, and
(f) the duration of the firm.
The statement shall be signed by all the partners, or by their agents specially
authorised in this behalf.
(2) Each person signing the statement shall also verify it in the manner prescribed.
(3) A firm name shall not contain any of the following words, namely:-
‘Crown’, Emperor’, ‘Empress’, ‘Empire’, ‘Imperial’, ‘King’, ‘Queen’, ‘Royal’, or

words expressing or implying the sanction, approval or patronage of
Government except when the State Government signifies its consent to the use
of such words as part of the firm-name by order in writing.
2. Dissolution of Firm: The Dissolution of Firm means the discontinuation of the jural
relation existing between all the partners of the Firm. But when only one of the partners
retires or becomes in capacitated from acting as a partner due to death, insolvency or
insanity, the partnership, i.e., the relationship between such a partner and other is
dissolved, but the rest may decide to continue. In such cases, there is in practice, no
dissolution of the firm. The particular partner goes out, but the remaining partners
carry on the business of the Firm. In the case of dissolution of the firm, on the other
hand, the whole firm is dissolved. The partnership terminates as between each and
every partner of the firm.
Dissolution of a Firm may take place (Section 39 - 44)
(a) as a result of any agreement between all the partners (i.e., dissolution by
agreement);

(b) by the adjudication of all the partners, or of all the partners but one, as insolvent
(i.e., compulsory dissolution);
(c) by the business of the firm becoming unlawful (i.e., compulsory dissolution);
(d) subject to agreement between the parties, on the happening of certain
contingencies, such as: (i) effluence of time; (ii) completion of the venture for
which it was entered into; (iii) death of a partner; (iv) insolvency of a partner.
(e) by a partner giving notice of his intention to dissolve the firm, in case of
partnership at will and the firm being dissolved as from the date mentioned in
the notice, or if no date is mentioned, as from the date of the communication
of the notice; and
(f) by intervention of court in case of: (i) a partner becoming the unsound mind;
(ii) permanent incapacity of a partner to perform his duties as such; (iii)
Misconduct of a partner affecting the business; (iv) wilful or persistent breach
of agreement by a partner; (v) transfer or sale of the whole interest of a partner;
(vi) improbability of the business being carried on save at a loss; (vii) the court
being satisfied on other equitable grounds that the firm should be dissolved.
3. It is true to say that Indian Partnership Act, 1932 does not make the registration of
firms compulsory nor does it impose any penalty for non-registration.
Following are consequences of Non-registration of Partnership Firms in India:
The Indian Partnership Act, 1932 does not make the registration of firms compulsory
nor does it impose any penalty for non-registration. However, under Section 69, non-
registration of partnership gives rise to a number of disabilities which we shall
presently discuss. Although registration of firms is not compulsory, yet the
consequences or disabilities of non-registration have a persuasive pressure for their
registration. These disabilities briefly are as follows:
(i) No suit in a civil court by firm or other co-partners against third party: The
firm or any other person on its behalf cannot bring an action against the third
party for breach of contract entered into by the firm, unless the firm is
registered and the persons suing are or have been shown in the register of firms
as partners in the firm. In other words, a registered firm can only file a suit
against a third party and the persons suing have been in the register of firms
as partners in the firm
(ii) No relief to partners for set-off of claim: If an action is brought against the
firm by a third party, then neither the firm nor the partner can claim any set-

4.74 BUSINESS LAWS
off, if the suit be valued for more than ` 100 or pursue other proceedings to
enforce the rights arising from any contract.
(iii) Aggrieved partner cannot bring legal action against other partner or the
firm: A partner of an unregistered firm (or any other person on his behalf) is
precluded from bringing legal action against the firm or any person alleged to
be or to have been a partner in the firm. But, such a person may sue for
dissolution of the firm or for accounts and realization of his share in the firm’s
property where the firm is dissolved.
(iv) Third party can sue the firm: In case of an unregistered firm, an action can be
brought against the firm by a third party.

1.2

CHAPTER 5
THE LIMITED LIABILITY

PARTNERSHIP ACT, 2008
LEARNING OUTCOMES
After studying this chapter, you would be able to understand-

♦ The meaning of the term ‘Limited Liability Partnership’, its need,
scope and advantages
♦ About Incorporation of LLP
♦ Differences between ‘Limited Liability Partnership’ and other forms
of organisation
CHAPTER OVERVIEW
LLP
Introduction Incorporation Difference with

other forms of
Essential Characteristics
features organizations
of LLP

5.2 BUSINESS LAWS
INTRODUCTION
The Ministry of Law and Justice on 9th January 2007 notified the Limited Liability Partnership
Act, 2008.
The Parliament passed the Limited Liability Partnership Bill on 12th December, 2008 and the
President of India has assented the Bill on 7th January, 2009 and called as the Limited
Liability Partnership Act, 2008.
The LLP Act, 2008 is applicable to the whole of India.
This Act have been enacted to make provisions for the formation and regulation of Limited
Liability Partnerships and for matters connected there with or incidental thereto.
The LLP Act, 2008 has 81 sections and 4 schedules.
The First Schedule deals with mutual rights and duties of partners, as well limited liability
partnership and its partners where there is absence of a formal agreement with respect to
them.
The Second Schedule deals with conversion of a firm into LLP.

The Third Schedule deals with conversion of a private company into LLP.
The Fourth Schedule deals with conversion of unlisted public company into LLP.
The Ministry of Corporate Affairs and the Registrar of Companies (ROC) are entrusted with
the task of administrating the LLP Act, 2008. The Central Government has the authority to
frame the Rules with regard to the LLP Act, 2008, and can amend them by notifications in
the Official Gazette, from time to time.
It is also to be noted that the Indian Partnership Act, 1932 is not applicable to LLPs.
The Limited Liability Act, 2008 has been amended through the Limited Liability
Partnership (Amendment) Act, 2021 dated 13th August, 2021.
Need of new form of Limited Liability Partnership
The lawmakers envisaged the need for bringing out a new legislation for creation of the
Limited Liability Partnership to meet with the contemporary growth of the Indian economy.
A need has been felt for a new corporate form that would provide
an alternative to the traditional partnership with unlimited personal
liability on the one hand and the statute-based governance
structure of the limited liability company on the other hand. In
order to enable professional expertise and entrepreneurial
initiative and combine, organize and operate in flexible, innovative and efficient manner, the
LLP Act, 2008 was enacted.

THE LIMITED LIABILITY PARTNERSHIP ACT, 2008 5.3
Thus, LLP as a form of business organization is an alternative corporate business vehicle. It

provides the benefits of limited liability but allows its members the flexibility of organizing
their internal structure as a partnership based on a mutually arrived agreement. The LLP
form enables entrepreneurs, professionals and enterprises providing services of any kind or
engaged in scientific and technical disciplines, to form commercially efficient vehicles suited
to their requirements. Owing to flexibility in its structure and operation, the LLP is a suitable
vehicle for small enterprises and for investment by venture capital.
1. LIMITED LIABILITY PARTNERSHIP- MEANING

AND CONCEPT
Meaning: A LLP is a new form of legal business entity with limited liability.
It is an alternative corporate business vehicle that not only gives the
benefits of limited liability at low compliance cost but allows its partners
the flexibility of organising their internal structure as a traditional
partnership. The LLP is a separate legal entity and, while the LLP itself will
be liable for the full extent of its assets, the liability of the partners will be limited.
LLP as a separate legal entity and business organisation is an alternative corporate business
form that gives the benefits of limited liability of a company and the flexibility of a partnership.
Since LLP contains elements of both ‘a corporate structure’ as well as ‘a partnership firm
structure’ LLP is called a hybrid between a company and a partnership.
New form of
legal business
entity with
limited liability
Liability of the Alternative

partners will be corporate
LLP
limited business vehicle
LLP itself will be Allow the partners

liable for the full the flexibility of
extent of its organising their
assets internal structure

5.4 BUSINESS LAWS
Important Definitions
1. Body Corporate [(Section 2(1)(d)]: It means a company as defined in clause (20) of
section 2 of the Companies Act, 2013 and includes
(i) a limited liability partnership registered under this Act;

(ii) a limited liability partnership incorporated outside India; and
(iii) a company incorporated outside India,
but does not include

(i) a corporation sole;
(ii) a co-operative society registered under any law for the time being in force;
and
(iii) any other body corporate (not being a company as defined in clause (20) of
section 2 of the Companies Act, 2013 or a limited liability partnership as
defined in this Act), which the Central Government may, by notification in the
Official Gazette, specify in this behalf.
2. Business [Section 2(1)(e)]: “Business” includes every trade, profession, service and
occupation except any activity which the Central Government may, by notification,
exclude.
3. Designated Partner [Section 2(1)(j)]: “Designated partner” means any partner
designated as such pursuant to section 7.
4. Entity [Section 2(1)(k)]: “Entity” means any body corporate and includes, for the
purposes of sections 18, 46, 47, 48, 49, 50, 52 and 53, a firm setup under the Indian
Partnership Act, 1932.
5. Financial Year [Section 2(1)(l)]: “Financial year”, in relation to a LLP, means the
period from the 1st day of April of a year to the 31st day of March of the following
year.
However, in the case of a LLP incorporated after the 30th day of September of a year,
the financial year may end on the 31st day of March of the year next following that
year.
Example 1: If a LLP has been incorporated on 15th October, 2019, then its financial
year may be from 15th October, 2019 to 31st March, 2021.
The Income Tax department has prescribed uniform financial year from 1st April to
31st March of next year. In keeping with the Income tax law, the financial year for LLP
should always be from 1st April to 31st March each year.

6. Foreign LLP [section 2(1)(m)]: It means a LLP formed, incorporated or registered

outside India which establishes a place of business within India.
7. Limited liability partnership [Section 2(1)(n)]: Limited Liability Partnership means
a partnership formed and registered under this Act.
8. Limited Liability partnership agreement [Section 2(1)(o)]: It means any written
agreement between the partners of the LLP or between the LLP and its partners
which determines the mutual rights and duties of the partners and their rights and
duties in relation to that LLP.
9. Partner [Section 2(1)(q)]: Partner, in relation to a LLP, means any person who
becomes a partner in the LLP in accordance with the LLP agreement.
10. Small Limited Liability Partnership [Section 2(1)(ta)]: It means a limited liability
partnership—
(i) the contribution of which, does not exceed twenty-five lakh rupees or such
higher amount, not exceeding five crore rupees, as may be prescribed; and
(ii) the turnover of which, as per the Statement of Accounts and Solvency for the
immediately preceding financial year, does not exceed forty lakh rupees or
such higher amount, not exceeding fifty crore rupees, as may be prescribed;
or
(iii) which meets such other requirements as may be prescribed, and fulfils such
terms and conditions as may be prescribed.
Non-applicability of the Indian Partnership Act, 1932 (Section 4): Save as otherwise
provided, the provisions of the Indian Partnership Act, 1932 shall not apply to a LLP.
Partners (Section 5): Any individual or body corporate may be a partner in a LLP. However,
an individual shall not be capable of becoming a partner of a LLP, if—
(a) he has been found to be of unsound mind by a Court of competent jurisdiction and
the finding is in force;
(b) he is an undischarged insolvent; or
(c) he has applied to be adjudicated as an insolvent and his application is pending.
Minimum number of partners (Section 6):

(i) Every LLP shall have at least two partners.
(ii) If at any time the number of partners of a LLP is reduced below two and the LLP
carries on business for more than six months while the number is so reduced, the
person, who is the only partner of the LLP during the time that it so carries on

5.6 BUSINESS LAWS
business after those six months and has the knowledge of the fact that it is carrying
on business with him alone, shall be liable personally for the obligations of the LLP
incurred during that period.
Designated partners (Section 7):

(i) Every LLP shall have at least two designated partners who are individuals and at least
one of them shall be a resident in India.
(ii) If in LLP, all the partners are bodies corporate or in which one or more partners are
individuals and bodies corporate, at least two individuals who are partners of such
LLP or nominees of such bodies corporate shall act as designated partners.
(iii) Resident in India: For the purposes of this section, the term resident in India means a
person who has stayed in India for a period of not less than 120 days during the
financial year.
Example 2: There is an LLP by the name Indian Helicopters LLP having 5 partners
namely Mr. A (Non resident), Mr. B (Non Resident) Ms. C (resident), Ms. D (resident)
and Ms. E (resident). In this case, at least 2 should be named as Designated Partner
out of which 1 should be resident. Hence, if Mr. A and Mr. B are designated then it
will not serve the purpose. One of the designated partners should be there out of Ms.
C, Ms. D and Ms. E.
2. CHARACTERISTIC OF LLP
Perpetual Separate legal

Body Corporate Mutual Agency
Succession entity
Artificial Legal
LLP Agreement Common Seal Limited liability
person
Minimum and
Management of Business for
maximum number of Investigation
business profit only
partners
Compromise or E-filing of
Conversion into LLP Foreign LLPs
Arrangement documents

1. LLP is a body corporate: Section 2(1)(d) of the LLP Act, 2008 provides that a LLP is a
body corporate formed and incorporated under this Act and is a legal entity separate
from that of its partners and shall have perpetual succession. Therefore, any change
in the partners of a LLP shall not affect the existence, rights or liabilities of the LLP.
Section 3 of LLP Act provides that a LLP is a body corporate formed and incorporated
under this Act and is a legal entity separate from that of its partners.
2. Perpetual Succession: The LLP can continue its existence irrespective of changes in
partners. Death, insanity, retirement or insolvency of partners has no impact on the
existence of LLP. It is capable of entering into contracts and holding property in its
own name.
3. Separate Legal Entity: The LLP as a separate legal entity, is liable to the full extent of
its assets but liability of the partners is limited to their agreed contribution in the LLP.
In other words, creditors of LLP shall be the creditors of LLP alone.
4. Mutual Agency: No partner is liable on account of the independent or un-
authorized actions of other partners, thus individual partners are shielded from joint
liability created by another partner’s wrongful business decisions or misconduct. In
other words, all partners will be the agents of the LLP alone. No one partner can
bind the other partner by his acts.
5. LLP Agreement: Mutual rights and duties of the partners within a LLP are governed
by an agreement between the partners. The LLP Act, 2008 provides flexibility to
partner to devise the agreement as per their choice. In the absence of any such
agreement, the mutual rights and duties shall be governed by the provisions of the
LLP Act, 2008.
6. Artificial Legal Person: A LLP is an artificial legal person because it is created by a
legal process and is clothed with all rights of an individual. It can do everything
which any natural person can do, except of course that, it cannot be sent to jail,
cannot take an oath, cannot marry or get divorce nor can it practice a learned
profession like CA or Medicine. A LLP is invisible, intangible, immortal (it can be
dissolved by law alone) but not fictitious because it really exists.
7. Common Seal: A LLP being an artificial person can act through its partners and
designated partners. LLP may have a common seal, if it decides to have one [Section
14(c)]. Thus, it is not mandatory for a LLP to have a common seal. It shall remain
under the custody of some responsible official and it shall be affixed in the presence
of at least 2 designated partners of the LLP.

5.8 BUSINESS LAWS
8. Limited Liability: Every partner of a LLP is, for the purpose of the business of LLP,
the agent of the LLP, but not of other partners. The liability of the partners will be
limited to their agreed contribution in the LLP. Such contribution may be of tangible
or intangible nature or both.
Example 3: The professionals like Engineering consultants, Legal Advisors and
Accounting Professional are afraid of entering into business due to unlimited liability.
Hence the LLP partnership Act provides an avenue for these professionals to Limited
Liability Partnership firms which restricts their liability to the agreed amount. This has
encouraged Professionals to form LLP.
9. Management of Business: The partners in the LLP are entitled to manage the
business of LLP. But only the designated partners are responsible for legal
compliances.
10. Minimum and Maximum number of Partners: Every LLP shall have least two
partners and shall also have at least 2 individuals as designated partners, of whom at
least one shall be resident in India. There is no maximum limit on the partners in LLP.
11. Business for Profit Only: The essential requirement for forming LLP
is carrying on a lawful business with a view to earn profit. Thus, LLP
cannot be formed for charitable or non-economic purpose.
12. Investigation: The Central Government shall have powers to investigate the affairs of
an LLP by appointment of competence authority for the purpose.
13. Compromise or Arrangement: Any compromise or agreements including merger

and amalgamation of LLPs shall be in accordance with the provisions of the LLP Act,
2008.
14. Conversion into LLP: A firm, private company or an unlisted public company would
be allowed to be converted into LLP in accordance with the provisions of LLP Act,
2008.
15. E-Filling of Documents: Every form or application of document required to be filed
or delivered under the act and rules made thereunder, shall be filed in computer
readable electronic form on its website www.mca.gov.in and authenticated by a
partner or designated partner of LLP by the use of electronic or digital signature.
16. Foreign LLPs: Section 2(1)(m) defines foreign limited liability partnership “as a
limited liability partnership formed, incorporated, or registered outside India which
established as place of business within India”. Foreign LLP can become a partner in
an Indian LLP.

Advantages of LLP form- LLP form is a form of business model which:
is organized and operates on the basis of an agreement
provides flexibility without imposing detailed legal and procedural

requirements.
Easy to form
All partners enjoy limited liability
Flexible capital structure
Easy to dissolve
3. INCORPORATION OF LLP
Incorporation document (Section 11): The most important document needed for
registration is the incorporation document.
(1) For a LLP to be incorporated:
(a) two or more persons associated for carrying on a lawful business with a view
to profit shall subscribe their names to an incorporation document;
(b) the incorporation document shall be filed in such manner and with such fees,
as may be prescribed with the Registrar of the State in which the registered
office of the LLP is to be situated; and
(c) Statement to be filed:
 there shall be filed along with the incorporation document, a
statement in the prescribed form,
 made by either an advocate, or a Company Secretary or a Chartered
Accountant or a Cost Accountant, who is engaged in the formation of
the LLP and
 by any one who subscribed his name to the incorporation document,
 that all the requirements of this Act and the rules made thereunder
have been complied with,

5.10 BUSINESS LAWS
 in respect of incorporation and matters precedent and incidental

thereto.
(2) The incorporation document shall—
(a) be in a form as may be prescribed;
(b) state the name of the LLP;
(c) state the proposed business of the LLP;
(d) state the address of the registered office of the LLP;
(e) state the name and address of each of the persons who are to be partners of
the LLP on incorporation;
(f) state the name and address of the persons who are to be designated partners
of the LLP on incorporation;
(g) contain such other information concerning the proposed LLP as may be
prescribed.
(3) If a person makes a statement as discussed above which he—
(a) knows to be false; or
(b) does not believe to be true, shall be punishable
 with imprisonment for a term which may extend to 2 years and
 with fine which shall not be less than ` 10,000 but which may extend to
` 5 Lakhs.
Incorporation by registration (Section 12):

(1) When the requirements imposed by clauses (b) and (c) of sub-section (1) of section
11 have been complied with, the Registrar shall retain the incorporation document
and, unless the requirement imposed by clause (a) of that sub-section has not been
complied with, he shall, within a period of 14 days—
(a) register the incorporation document; and
(b) give a certificate that the LLP is incorporated by the name specified therein.
(2) The Registrar may accept the statement delivered under clause (c) of sub-section (1)
of section 11 as sufficient evidence that the requirement imposed by clause (a) of
that sub-section has been complied with.
(3) The certificate issued under clause (b) of sub-section (1) shall be signed by the
Registrar and authenticated by his official seal.

(4) The certificate shall be conclusive evidence that the LLP is incorporated by the name
specified therein.
Registered office of LLP and change therein (Section 13):

(1) Every LLP shall have a registered office to which all communications and notices may
be addressed and where they shall be received.
(2) A document may be served on a LLP or a partner or designated partner thereof by
sending it by post under a certificate of posting or by registered post or by any other
manner, as may be prescribed, at the registered office and any other address specifically
declared by the LLP for the purpose in such form and manner as may be prescribed.
(3) A LLP may change the place of its registered office and file the notice of such change
with the Registrar in such form and manner and subject to such conditions as may be
prescribed and any such change shall take effect only upon such filing.
(4) If the LLP contravenes any provisions of this section, the LLP and its
every partner shall be liable to a penalty of ` 500 for each day during which the
default continues, subject to a maximum of ` 50,000 for the LLP and its every partner.
Effect of registration (Section 14):
Suing and being

sued;
doing and suffering acquiring, owning,

such other acts and holding and
On rgisteration a
things as bodies developing or
LLP shall, by its
corporate may disposing of property,
name, be capable
lawfully do and suffer. whether movable or
of
immovable, tangible
or intangible;
having a
common seal, if
it decides to
have one; and

5.12 BUSINESS LAWS
Name (Section 15):

(1) Every limited liability partnership shall have either the words “limited liability
partnership” or the acronym “LLP” as the last words of its name.
(2) No LLP shall be registered by a name which, in the opinion of the Central
Government is—
(a) undesirable; or
(b) identical or too nearly resembles to that of any other LLP or a company or a
registered trade mark of any other person under the Trade Marks Act, 1999.
Reservation of name (Section 16):

(1) A person may apply in such form and manner and accompanied by such fee as may
be prescribed to the Registrar for the reservation of a name set out in the application
as—
(a) the name of a proposed LLP; or
(b) the name to which a LLP proposes to change its name.

(2) Upon receipt of an application under sub-section (1) and on payment of the
prescribed fee, the Registrar may, if he is satisfied, subject to the rules prescribed by
the Central Government in the matter, that the name to be reserved is not one which
may be rejected on any ground referred to in sub-section (2) of section 15, reserve
the name for a period of 3 months from the date of intimation by the Registrar.
Change of name of LLP (Section 17):

(1) Notwithstanding anything contained in sections 15 and 16, if through inadvertence
or otherwise, a LLP, on its first registration or on its registration by a new body
corporate, its registered name, is registered by a name which is identical with or too
nearly resembles to —
(a) that of any other LLP or a company; or
(b) a registered trade mark of a proprietor under the Trade Marks Act, 1999, as is
likely to be mistaken for it,
then on an application of such LLP or proprietor referred to in clauses (a) and (b)
respectively or a company,
the Central Government may direct that such LLP to change its name or new name
within a period of 3 months from the date of issue of such direction.

It is further provided that an application of the proprietor of the registered trade

marks shall be maintainable within a period of 3 years from the date of incorporation
or registration or change of name of the LLP under this Act.
(2) Where a LLP changes its name or obtains a new name under sub-section (1), it shall
within a period of 15 days from the date of such change, give notice of the change to
Registrar along with the order of the Central Government, who shall carry out
necessary changes in the certificate of incorporation and within 30 days of such
change in the certificate of incorporation, such LLP shall change its name in the LLP
agreement.
(3) If the LLP is in default in complying with any direction given under sub-section (1),
the Central Government shall allot a new name to the LLP in such manner as may be
prescribed and the Registrar shall enter the new name in the register of LLP in place
of the old name and issue a fresh certificate of incorporation with new name, which
the LLP shall use thereafter.
Nothing contained in this sub-section shall prevent a LLP from subsequently
changing its name in accordance with the provisions of section 16.
4. DIFFERENCES WITH OTHER FORMS OF

ORGANISATION
Distinction between LLP and Partnership Firm: The points of distinction between a limited
liability partnership and partnership firm are tabulated as follows:
Basis LLP Partnership firm

1. Regulating Act The Limited Liability The Indian Partnership Act,
Partnership Act, 2008. 1932.
2. Body corporate It is a body corporate. It is not a body corporate.
3. Separate legal entity It is a legal entity separate It is a group of persons with
from its members. no separate legal entity.
4. Creation It is created by a legal process It is created by an agreement
called registration under the between the partners.
LLP Act, 2008.
5. Registration Registration is mandatory. Registration is voluntary. Only
LLP can sue and be sued in its the registered partnership
own name. firm can sue the third parties.
6. Perpetual succession The death, insanity, retirement The death, insanity, retirement
or insolvency of the partner(s) or insolvency of the partner(s)

5.14 BUSINESS LAWS
does not affect its existence may affect its existence. It has
of LLP. Partners may join or no perpetual succession.
leave but its existence
continues forever.
7. Name Name of the LLP to contain No guidelines. The partners
the word limited liability can have any name as per
partnership (LLP) as suffix. their choice.
8. Liability Liability of each partner is Liability of each partner is
limited to the extent to unlimited. It can be extended
agreed contribution except in upto the personal assets of
case of willful fraud. the partners.
9. Mutual agency Each partner can bind the LLP Each partner can bind the firm
by his own acts but not the as well as other partners by
other partners. his own acts.
10. Designated partners At least two designated There is no provision for such
partners and atleast one of partners under the
them shall be resident in Partnership Act, 1932.
India.
11. Common seal It may have its common seal There is no such concept in
as its official signatures. partnership.
12. Legal compliances Only designated partners are All partners are responsible
responsible for all the for all the compliances and
compliances and penalties penalties under the Act.
under this Act.
13. Annual filing of LLP is required to file: Partnership firm is not
documents (i) Annual statement of required to file any annual
accounts document with the registrar
(ii) Statement of solvency of firms.
(iii) Annual return with the
registration of LLP every
year.
14. Foreign partnership Foreign nationals can become Foreign nationals cannot
a partner in a LLP. become a partner in a
partnership firm.
15. Minor as partner Minor cannot be admitted to Minor can be admitted to the
the benefits of LLP. benefits of the partnership
with the prior consent of the
existing partners.

Distinction between LLP and Limited Liability Company
Basis LLP Limited Liability Company

1. Regulating Act The LLP Act, 2008. The Companies Act, 2013.
2. Members/Partners The persons who contribute The persons who invest the
to LLP are known as partners money in the shares are
of the LLP. known as members of the
company.
3. Internal governance The internal governance The internal governance
structure structure of a LLP is governed structure of a company is
by contract agreement regulated by statute (i.e.,
between the partners. Companies Act, 2013).
4. Name Name of the LLP to contain Name of the public company
the word “Limited Liability to contain the word “limited”
partnership” or “LLP” as suffix. and Pvt. Co. to contain the
word “Private limited” as
suffix.
5. No. of Minimum – 2 partners Private company:
members/partners Maximum – No such limit on Minimum – 2 members
the partners in the Act. The Maximum 200 members
partners of the LLP can be Public company:
individuals/or body corporate
Minimum – 7 members
through the nominees.
Maximum – No such limit on
the members.
Members can be
organizations, trusts, another
business form or individuals.
6. Liability of Liability of a partners is Liability of a member is
members/partners limited to the extent of limited to the amount unpaid
agreed contribution except in on the shares held by them.
case of willful fraud.
7. Management The business of the company The affairs of the company are
is managed by the partners managed by board of
including the designated directors elected by the
partners authorized in the shareholders.
agreement.
8. Minimum number of Minimum 2 designated Pvt. Co. – 2 directors
directors/designated partners. Public co. – 3 directors
partners

5.16 BUSINESS LAWS
SUMMARY
A LLP is a special type of partnership that can be used as business organizations owned by
certain type of professionals such as Company Secretaries, Chartered Accountants, Cost
Accountants, Lawyers, Engineers, Doctors, and Consultants etc., who are not allowed to use
corporation form of entity to limit their liability. LLP is generally set up for carrying on a
partnership consisting of partners carrying on practice in one or more eligible professions,
etc.
Since India has witnessed considerable growth in services sector and the quality of our
professionals have been acknowledged internationally. It was necessary that
entrepreneurship knowledge and risk capital combine to provide a further momentum to
our impressive economic growth. It is likely that in the years to come Indian professionals
would be providing accountancy, legal and various other professional/technical services to a
large number of entities across the globe. Such services would require multidisciplinary
combinations that would offer a menu of solutions to international clients. In view of all this,
the concept of LLP came into existence. LLP framework could be used for many enterprises,
such as:-
♦ Persons providing services of any kind
♦ Enterprises in new knowledge and technology based fields where the corporate form
is not suited.
♦ For professionals such as Chartered Accountants (CA), Cost and Management
Accountants (CMA), Company Secretaries (CS) and Advocates, etc.
♦ Venture capital funds where risk capital combines with knowledge and expertise.
♦ Professionals and enterprises engaged in any scientific, technical or artistic discipline,
for any activity relating to research production, design and provision of services.
♦ Small Sector Enterprises
♦ Producer Companies in Handloom, Handicrafts sector.
LLP has partners but no directors or shareholders. The major constituents of a LLP are its
partners who are the ultimate owners.

The LLP Act, 2008
Applicability Contents: 81 sections Non- Meaning and Concept

and 4 schedules Applicability of LLP
From 31st
March, 2009 First Schedule- mutual Non- 1. New form of legal
(Extends rights & duties of Applicability business entity with
whole of partners, of the Indian limited liability
India) Partnership 2. Alternative corporate
Second Schedule -
Act, 1932 to business vehicle
conversion of a firm into
LLPs. 3. Allows the partners
LLP,
the flexibility of
Third Schedule - organising their internal
conversion of a Pvt. Co. structure
into LLP, 4. LLP itself will be liable
for the full extent of its
Fourth Schedule-
assets
conversion of unlisted
5. Liability of the
public company into LLP.
partners will be limited
Important Definitions
Body Corporate Business Entity Foreign LLP Financial Year LLP

Designated
[Sec. 2(1)(d)] [Sec. [Sec. [Sec. [Sec. 2(1)(l)]: agreement
Partner
2(1)(e)] 2(1)(k)] 2(1)(m)] [Sec. 2(1)(o)]
[S 2(1)(j)]
A company & Includes: 1st April to 31st

LLP formed, Written
includes - LLP, every trade, Any body March.
Any incorporated agreement
foreign LLP, profession,
partner corporate or registered If LLP b/w partners
foreign service &
designated & outside India incorporated of LLP or
company, occupation
as such includes a which after 30th between the
Not include – Excludes: pursuant partnershi establishes a September, LLP and its
corporation sole; Any activity to section p firm for place of F.Y. may end partners.
co-operative notified by 7. business on 31st day of
specific
society & any CG. within India. March of next
purposes.
other notified by following that
CG. year.

5.18 BUSINESS LAWS
PARTNERS
Who may be (Sec. 5) : Minimum partners (Section 6)

1. Two partners.
Any individual or body corporate
2. If LLP carries on business for
may be a partner in a LLP. But
more than 6 months with only one
not, person of unsound mind,
undischarged insolvent; or who partner, he shall be liable
has applied to be adjudicated as personally for the obligations of
the LLP incurred during that
an insolvent.
period.
Important Concepts
Small LLP Incorporation of LLP

Designated partners (S.7)
[S.2(ta)]
Contribution upto 1. At least two 1. Subscription of Names by two or

Rs.25L; designated more persons,
& partners who are 2. Filing of Documents with ROC with
Turnover for individuals and at prescribed fees.
immediately least one of them 3. Compliance Statement made by
preceding F.Y. shall be a resident advocate/CS/CA/CWA & by any one of
upto Rs.40 L in India. subscribers.
or 2. Resident in 4. Documents containing - Name,
which fulfills India: a person Proposed business, Address of LLP;
prescribed terms who has stayed in Name and address of each of to be
and conditions. India for a period of partners & designated partners; Other
not less than 120 prescribed information.
days during the 5. Issue of Incorporation Certificate by
immediately ROC within 14 days
preceding one year.

Important Concepts
Name Change of Name Characteristics
1. Use of words If name of 1. Body Corporate

“limited liability registered LLP is 2. Perpetual Succession
partnership” or identical or too 3. Separate legal entity
“LLP” as the last nearly resembles 4. Mutual Agency
words of its name. to any other 5. LLP Agreement
2. No LLP registration partnership firm 6. Artificial Legal person
by a name which, in or LLP or 7. Common Seal
the opinion of the company or a 8. Limited liability
CG is— registered trade 9. Management of business
a) undesirable; or mark, CG may 10. Minimum and maximum number
b) identical or too direct such LLP of partners
nearly resembles to to change its 11. Business for profit only
any other partnership name within 3 12. Investigation
firm or LLP or months. (On 13. Compromise or Arrangement
company or a Application) 14. Conversion into LLP
registered trade 15. E-Filing of documents
mark. 16. Foreign LLPs
TEST YOUR KNOWLEDGE

1. Ministry of Corporate Affairs enforced the LLP Act, with effect from-
(a) 31st March, 2008
(b) 1st April 2008
(c) 31st March, 2009

(d) 1st April 2009
2. Whether partnership law applies to the LLP-
(a) Yes
(b) No

5.20 BUSINESS LAWS
3. State which of the statement is correct under the Limited Liability Partnership Act,
2008-
(a) All partners have unlimited liability

(b) All partners have limited liability
4. Which of the following cannot be converted into LLP?
(a) Partnership firm

(b) Private company
(c) Listed company
(d) unlisted company

5. The approved name of LLP shall be valid for a period of ___ from the date of approval:
(a) 1 Month
(b) 2 Months
(c) 3 months
(d) 6 months
6. Name of the Limited Liability Partnership shall be ended by:
(a) Limited
(b) Limited Liability partnership or LLP
(c) Private Limited
(d) OPC
7. Which one of the following statements about limited liability partnerships (LLPs) is
incorrect?
(a) An LLP has a legal personality separate from that of its members.
(b) The liability of each partner in an LLP is limited.
(c) Members of an LLP are taxed as partners.
(d) A listed company can convert to an LLP.

8. For the purpose of LLP, Resident in India means:
(a) Person who has stayed in India for a period of not less than 182 days during the
current year.
(b) Person who has stayed in India for a period of not less than 180 days during the
immediately preceding one year.
(c) Person who has stayed in India for a period of not less than 181 days during the
immediately preceding one year.
(d) Person who has stayed in India for a period of not less than 120 days during the
financial year.
1. Examine the concept of LLP.
2. Enumerate the various characteristics of the LLP.
3. What do you mean by Designated Partner? Whether it is mandatory to appoint

Designated partner in a LLP?
4. What are the effects of registration of LLP?
5. “LLP is an alternative corporate business form that gives the benefits of limited liability
of a company and the flexibility of a partnership”. Explain.
6. Explain the essential elements to incorporate a Limited Liability Partnership under the
LLP Act, 2008.
ANSWERS/HINTS
Answers to MCQs
1 (c) 2 (b) 3 (b) 4 (c) 5 (c) 6 (b)
7 (d) 8 (d)
Answer to the Descriptive Question

1. Meaning – A LLP is a new form of legal business entity with limited liability. It is an
alternative corporate business vehicle that gives the benefits of limited liability but
allows its partners the flexibility of organising their internal structure as a traditional

5.22 BUSINESS LAWS
partnership. The LLP is a separate legal entity and, while the LLP itself will be liable
for the full extent of its assets, the liability of the partners will be limited.
Concept of “limited liability partnership”

• The LLP can continue its existence irrespective of changes in partners. It is
capable of entering into contracts and holding property in its own name.
• The LLP is a separate legal entity, is liable to the full extent of its assets but
liability of the partners is limited to their agreed contribution in the LLP.
• Further, no partner is liable on account of the independent or un-authorized
actions of other partners, thus individual partners are shielded from joint
liability created by another partner’s wrongful business decisions or
misconduct.
• Mutual rights and duties of the partners within a LLP are governed by an
agreement between the partners or between the partners and the LLP as the
case may be. The LLP, however, is not relieved of the liability for its other
obligations as a separate entity.
• LLP is an alternative corporate business form that gives the benefits of limited
liability of a company and the flexibility of a partnership.
Since LLP contains elements of both ‘a corporate structure’ as well as ‘a partnership
firm structure’ LLP is called a hybrid between a company and a partnership.
2. LLP registered with the Registrar under the LLP Act, 2008 has the following
characteristics:
• Body Corporate
• Perpetual Succession
• Separate legal entity
• Mutual Agency
• LLP Agreement
• Artificial Legal person
• Common Seal
• Limited liability
• Management of business
• Minimum and maximum number of partners
• Business for profit only

• Investigation
• Compromise or Arrangement
• Conversion into LLP
• E-filing of documents
• Foreign
3. Designated Partner [Section 2(j)]: “Designated partner” means any partner
designated as such pursuant to section 7.
According to section 7 of the LLP Act, 2008:

(i) Every LLP shall have at least two designated partners who are individuals and
at least one of them shall be a resident in India.
(ii) If in LLP, all the partners are bodies corporate or in which one or more
partners are individuals and bodies corporate, at least two individuals who are
partners of such LLP or nominees of such bodies corporate shall act as
designated partners.
(iii) Resident in India: For the purposes of this section, the term “resident in India”
means a person who has stayed in India for a period of not less than 120 days
during the financial year.
4. Effect of registration (Section 14):
On registration, a LLP shall, by its name, be capable of—
(a) suing and being sued;

(b) acquiring, owning, holding and developing or disposing of property, whether
movable or immovable, tangible or intangible;
(c) having a common seal, if it decides to have one; and

(d) doing and suffering such other acts and things as bodies corporate may
lawfully do and suffer.
5. LLP is an alternative corporate business form that gives the benefits of limited
liability of a company and the flexibility of a partnership
Limited Liability: Every partner of a LLP is, for the purpose of the business of LLP,
the agent of the LLP, but not of other partners. The liability of the partners will be
limited to their agreed contribution in the LLP, while the LLP itself will be liable for
the full extent of its assets.

5.24 BUSINESS LAWS
Flexibility of a partnership: The LLP allows its members the flexibility of organizing
their internal structure as a partnership based on a mutually arrived agreement. The
LLP form enables entrepreneurs, professionals and enterprises providing services of
any kind or engaged in scientific and technical disciplines, to form commercially
efficient vehicles suited to their requirements. Owing to flexibility in its structure and
operation, the LLP is a suitable vehicle for small enterprises and for investment by
venture capital.
6. Essential elements to incorporate Limited Liability Partnership (LLP) - Under the
LLP Act, 2008, the following elements are very essential to form a LLP in India:
(i) To complete and submit incorporation document in the form prescribed with
the Registrar electronically;
(ii) To have at least two partners for incorporation of LLP [Individual or body
corporate];
(iii) To have registered office in India to which all communications will be made
and received;
(iv) To appoint minimum two individuals as designated partners who will be
responsible for number of duties including doing of all acts, matters and
things as are required to be done by the LLP. Atleast one of them should be
resident in India.
(v) A person or nominee of body corporate intending to be appointed as
designated partner of LLP should hold a Designated Partner Identification
Number (DPIN) allotted by Ministry of Corporate Affairs.
(vi) To execute a partnership agreement between the partners inter se or between
the LLP and its partners. In the absence of any agreement the provisions as
set out in First Schedule of LLP Act, 2008 will be applied.
(vii) LLP Name.

1.2

CHAPTER 6
THE COMPANIES ACT, 2013
LEARNING OUTCOMES
 Company form of Business Organisation and its features
 Corporate veil theory
 Classes of companies under the Companies Act
 Registration of companies
 Memorandum of Association and Articles of Association

a 6.2 BUSINESS LAWS
CHAPTER OVERVIEW
Separate Legal entity, Perpetual

Features Succession, Limited Liability, Artificial
Judicial Person
Company is different from its

Corporate Veil members
theory Veil can be lifted to disregard
Company (Incorported under the Companies Act, 2013
separate legal entity
Register Company with ROC
Incorporation of
Get certificate of incorporation
company
For easy filing follow SPICe
1. Nominal,
2.Issued,
Share Capital 3. Subscribed
4.Called up
5. Paid up capital
With Uniform
Rights
Shares Equity Shares and Preference shares
With differential
Defines object and scope of work of
Voting rights
company
MOA
Company can not go beyond the
scope defined.
Defines rules, regulations or bye-laws

of Company
AOA
Company has power to alter it AoA
through Special Resolution

THE COMPANIES ACT, 2013 6.3
a
INTRODUCTION
The Companies Act, 2013 was enacted to consolidate and amend the law relating to the
companies. The Companies Act, 2013 was preceded by the
Companies Act, 1956.
Due to changes in the national and international economic
environment and to facilitate expansion and growth of our
economy, the Central Government decided to replace the
Companies Act, 1956 with a new legislation. The Companies Act,
2013 contains 470 sections and seven schedules. The entire Act has
been divided into 29 chapters. A substantial part of this Act is in the
form of Companies Rules. The Companies Act, 2013 aims to improve corporate governance,
simplify regulations, strengthen the interests of minority investors and for the first time
legislates the role of whistle-blowers and provisions relating to class action suit. Thus, this
enactment seeks to make our corporate regulations more contemporary.
Applicability of the Companies Act, 2013:
The provisions of the Act shall apply to-
 Companies incorporated under this Act or under any previous company law.
 Insurance companies (except where the provisions of the said Act are inconsistent with
the provisions of the Insurance Act, 1938 or the IRDA Act, 1999)
 Banking companies (except where the provisions of the said Act are inconsistent with
the provisions of the Banking Regulation Act, 1949)
 Companies engaged in the generation or supply of electricity (except where the
provisions of the above Act are inconsistent with the provisions of the Electricity Act,
2003)
 Any other company governed by any special Act for the time being in force.
 Such body corporate which are incorporated by any Act for time being in force, and as
the Central Government may by notification specify in this behalf.
1. COMPANY: MEANING AND ITS FEATURES

Meaning: According to Chief Justice Marshall, “a corporation is an artificial
being, invisible, intangible, existing only in contemplation of law. Being a mere
creation of law, it possesses only those properties which the charter of its
creation confers upon it, either expressly or as accidental to its very existence.

a 6.4 BUSINESS LAWS
In the words of professor Haney, “A company is an incorporated association, which is an artificial

person created by law, having a separate entity, with a perpetual succession and a common seal.”
This definition sums up the meaning as well as the features of a company succinctly.
However, the Act defines the term company a bit differently. Section 2(20) of the Companies
Act, 2013 defines the term ‘company’. “Company means a company incorporated under this
Act or under any previous company law”. As we shall progress under the chapter, the meaning
of the term company will be understood by the students.
Features of a Company
Separate Legal Entity

•Legally separate from the members
Perpetual succession
•Change in members does not affect existence of Company
Limited Liability
•Liability of Company is different from liability of members
Artificial Juridicial Person

•Company can act through human agency only
•Company can contract, sue and be sued in its own name
We have seen the definition given to company from a layman’s point of view and legal point
of view. But the company form of organization has certain distinctive features that help us to
understand the realms of a company. Following are the main features:
I. Separate Legal Entity: There are distinctive features between different forms of
organisations and the most striking feature in the company form of organisation vis-
à-vis the other forms of business organisations is that it acquires a unique character of
being a separate legal entity. In other words, when a company is registered, it is clothed
with a legal personality. It comes to have almost the same rights and powers as a
human being. Its existence is distinct and separate from that of its members. A
company can own property, have bank account, raise loans, incur liabilities and enter
into contracts.
(a) It is at law, a person which is different from the subscribers to the memorandum
of association. It’s personality is distinct and separate from the personality of
those who compose it.

a
(b) Even members can contract with company, acquire right against it or incur
liability to it. For the debts of the company, only its creditors can sue it and not
its members.
A company is capable of owning, enjoying and disposing of property in its own
name. Although the capital and assets are contributed by the shareholders, the
company becomes the owner of its capital and assets. The shareholders are not
the private or joint owners of the company’s property.
A member does not even have an insurable interest in the property of the
company. The leading case on this point is of Macaura Vs. Northern Assurance
Co. Limited (1925):
Fact of the case
Macaura (M) was the holder of nearly all (except one) shares of a timber company. He
was also a major creditor of the company. M insured the company’s timber in his own
name. The timber was lost in a fire. M claimed insurance compensation. Held, the
insurance company was not liable to him as no shareholder has any right to any item
of property owned by the company, for he has no legal or equitable interest in them.
Hence in this case, since the timber was insured in the company’s name, M could not
claim the compensation from insurance company.
II Perpetual Succession: Members may die or change, but the company goes on till it is
wound up on the grounds specified by the Act. The shares of the company may change
hands infinitely but that does not affect the existence of the company. Since a
company is an artificial person created by law, law alone can bring an end to its life.
Its existence is not affected by the death or insolvency of its members.
Example 1: Many companies in India are in existence for over 100 years. This is
possible only due to the fact that the company has perpetual existence. There was a
company which has 7 members and all of them died in an aircraft. Despite this the
company still exists unlike partnership form of business.
III Limited Liability: The liability of a member depends upon the kind of company of
which he is a member. We know that company is a separate legal entity which is
distinct from its members.
(i) Thus, in the case of a limited liability company, the debts of the company in
totality do not become the debts of the shareholders. The liability of the
members of the company is limited to the extent of the nominal value of shares
held by them. In no case can the shareholders be asked to pay anything more
than the unpaid value of their shares.

a 6.6 BUSINESS LAWS
(ii) In the case of a company limited by guarantee, the members are liable only to
the extent of the amount guaranteed by them and that too only when the
company goes into liquidation.
(iii) However, if it is an unlimited company, the liability of its members is unlimited
as well.
IV Artificial Legal Person:

(1) A company is an artificial person as it is created by a process other than natural
birth. It is legal or judicial as it is created by law. It is a person since it is clothed
with all the rights of an individual.
(2) Further, the company being a separate legal entity can own property, have
banking account, raise loans, incur liabilities and enter into contracts. Even
members can contract with company, acquire right against it or incur liability
to it. It can sue and be sued in its own name. It can do everything which any
natural person can do except be sent to jail, take an oath, marry or practice a
learned profession. Hence, it is a legal person in its own sense.
(3) As the company is an artificial person, it can act only through some human
agency, viz., directors. The directors cannot control affairs of the company and
act as its agency, but they are not the “agents” of the members of the company.
The directors can either on their own or through the common seal (of the
company) can authenticate its formal acts.
(4) Thus, a company is called an artificial legal person.

V Common Seal: A company being an artificial person is not bestowed with a body of a
natural being. Therefore, it works through the agency of human beings. Common seal
is the official signature of a company, which is affixed by the officers and employees
of the company on its every document. The common seal is a seal used by a
corporation as the symbol of its incorporation.
The Companies (Amendment) Act, 2015 has made the common seal optional by
omitting the words “and a common seal” from Section 9 so as to provide an alternative
mode of authorization for companies who opt not to have a common seal. Rational
for this amendment is that common seal is seen as a relic of medieval times. Even in
the U.K., common seal has been made optional since 2006. This amendment provides
that the documents which need to be authenticated by a common seal will be required
to be so done, only if the company opts to have a common seal. In case a company
does not have a common seal, the authorization shall be made by two directors
or by a director and the Company Secretary, wherever the company has
appointed a Company Secretary.

a
2. CORPORATE VEIL THEORY

(i) Corporate Veil: Corporate Veil refers to a legal concept whereby the company is
identified separately from the members of the company.
The term Corporate Veil refers to the concept that members of a company are shielded from
liability connected to the company’s actions. If the company incurs any debts or contravenes
any laws, the corporate veil concept implies that members should not be liable for those
errors. In other words, they enjoy corporate insulation.
Thus, the shareholders are protected from the acts of the company.
The Salomon Vs. Salomon and Co Ltd. laid down the foundation of the concept of corporate
veil or independent corporate personality.
In Salomon vs. Salomon & Co. Ltd. the House of Lords laid down that a company is a person
distinct and separate from its members. In this case one Salomon incorporated a company
named “Salomon & Co. Ltd.”, with seven subscribers consisting of himself, his wife, four sons
and one daughter. This company took over the personal business assets of Salomon for £
38,782 and in turn, Salomon took 20,000 shares of £ 1 each, debentures worth £ 10,000 of the
company with charge on the company’s assets and the balance in cash. His wife, daughter and
four sons took up one £ 1 share each. Subsequently, the company went into liquidation due
to general trade depression. The unsecured creditors to the tune of £ 7,000 contended that
Salomon could not be treated as a secured creditor of the company, in respect of the
debentures held by him, as he was the managing director of one-man company, which was
not different from Salomon and the cloak of the company was a mere sham and fraud. It was
held by Lord Mac Naughten:
“The Company is at law a different person altogether from the subscribers to the memorandum,
and though it may be that after incorporation the business is precisely the same as it was before
and the same persons are managers, and the same hands receive the profits, the company is
not in law the agent of the subscribers or trustees for them. Nor are the subscribers, as members,
liable, in any shape or form, except to the extent and in the manner provided by the Act.”
Thus, this case clearly established that company has its own existence and as a result, a
shareholder cannot be held liable for the acts of the company even though he holds virtually
the entire share capital. The whole law of corporation is in fact based on this theory of separate
corporate entity.
Now, the question may arise whether this Veil of Corporate Personality can even be
lifted or pierced.
Before going into this question, one should first try to understand the meaning of the phrase
“lifting the veil”. It means looking behind the company as a legal person, i.e., disregarding the

a 6.8 BUSINESS LAWS
corporate entity and paying regard, instead, to the realities behind the legal facade. Where
the Courts ignore the company and concern themselves directly with the members or
managers, the corporate veil may be said to have been lifted. Only in appropriate
circumstances, the Courts are willing to lift the corporate veil and that too, when questions of
control are involved rather than merely a question of ownership.
(ii) Lifting of Corporate Veil: The following are the cases where company law disregards
the principle of corporate personality or the principle that the company is a legal entity
distinct and separate from its shareholders or members:
(1) To determine the character of the company i.e. to find out whether co -enemy or
friend: In the law relating to trading with the enemy where the test of control is
adopted. The leading case in this point is Daimler Co. Ltd. vs. Continental Tyre &
Rubber Co., if the public interest is not likely to be in jeopardy, the Court may not be
willing to crack the corporate shell. But it may rend the veil for ascertaining whether a
company is an enemy company. It is true that, unlike a natural person, a company does
not have mind or conscience; therefore, it cannot be a friend or foe. It may, however,
be characterised as an enemy company, if its affairs are under the control of people of
an enemy country. For this purpose, the Court may examine the character of the
persons who are really at the helm of affairs of the company.
(2) To protect revenue/tax: In certain matters concerning the law of taxes, duties and
stamps particularly where question of the controlling interest is in issue. [S. Berendsen
Ltd. vs. Commissioner of Inland Revenue]
(i) Where corporate entity is used to evade or circumvent tax, the Court can disregard
the corporate entity [Juggilal vs. Commissioner of Income Tax AIR (SC)].
(ii) In [Dinshaw Maneckjee Petit], it was held that the company was not a genuine
company at all but merely the assessee himself disguised under the legal entity of
a limited company. The assessee earned huge income by way of dividends and
interest. So, he opened some companies and purchased their shares in exchange
of his income by way of dividend and interest. This income was transferred back
to assessee by way of loan. The Court decided that the private companies were a
sham and the corporate veil was lifted to decide the real owner of the income.
(3) To avoid a legal obligation: Where it was found that the sole purpose for the
formation of the company was to use it as a device to reduce the amount to be paid
by way of bonus to workmen, the Supreme Court upheld the piercing of the veil to
look at the real transaction (The Workmen Employed in Associated Rubber
Industries Limited, Bhavnagar vs. The Associated Rubber Industries Ltd.,
Bhavnagar and another).

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Workmen of Associated Rubber Industry Ltd., v. Associated Rubber Industry Ltd.:

The facts of the case are that “A Limited” purchased shares of “B Limited” by investing
a sum of ` 4,50,000. The dividend in respect of these shares was shown in the profit
and loss account of the company, year after year. It was taken into account for the
purpose of calculating the bonus payable to workmen of the company. Sometime in
1968, the company transferred the shares of B Limited, to C Limited a subsidiary, wholly
owned by it. Thus, the dividend income did not find place in the Profit & Loss Account
of A Ltd., with the result that the surplus available for the purpose for payment of
bonus to the workmen got reduced.
Here a company created a subsidiary and transferred to it, its investment holdings in a bid
to reduce its liability to pay bonus to its workers. Thus, the Supreme Court brushed aside
the separate existence of the subsidiary company. The new company so formed had no
assets of its own except those transferred to it by the principal company, with no business
or income of its own except receiving dividends from shares transferred to it by the
principal company and serving no purpose except to reduce the gross profit of the
principal company so as to reduce the amount paid as bonus to workmen.
(4) Formation of subsidiaries to act as agents: A company may sometimes be regarded
as an agent or trustee of its members, or of another company, and may therefore be
deemed to have lost its individuality in favour of its principal. Here the principal will
be held liable for the acts of that company.
In the case of Merchandise Transport Limited vs. British Transport Commission

(1982), a transport company wanted to obtain licences for its vehicles but could not
do so if applied in its own name. It, therefore, formed a subsidiary company, and the
application for licence was made in the name of the subsidiary. The vehicles were to
be transferred to the subsidiary company. Held, the parent and the subsidiary were
one commercial unit and the application for licences was rejected.
(5) Company formed for fraud/improper conduct or to defeat law: Where the device of
incorporation is adopted for some illegal or improper purpose, e.g., to defeat or circumvent
law, to defraud creditors or to avoid legal obligations. [Gilford Motor Co. vs. Horne]
Corporate Veil will be lifted
Where companies Where the device

Where corporate
form other of incorporation is
Trading with entity is used to To avoid a legal
companies as their adopted for some
enemy evade or obligation
subsidiaries to act illegal or improper
circumvent tax
as their agent purpose

3. CLASSES OF COMPANIES UNDER THE ACT

The growth of the economy and increase in the complexity of business operation in the corporate
world has led to the emergence of different forms of corporate organizations. To regulate them,
the Companies Act, 2013 has broadly classified the companies into various classes.
A company may be incorporated as a one-person company, private company or a public
company, depending upon the number of members joining it. Again, it may either be an unlimited
company, or may be limited by shares or by guarantee or by both. On the basis of control,
companies can be classified as associate company, holding company and subsidiary company.
Some other forms of classification of companies are foreign company, government company,
small company, dormant company, nidhi company and company formed for charitable objects.
Companies may be classified into various classes on the following basis:

1. On the basis of liability:
(a) Company limited by shares: Section 2(22) of the Companies Act, 2013, defines that
when the liability of the members of a company is limited by its memorandum of
association to the amount (if any) unpaid on the shares held by them, it is known as a
company limited by shares.
It thus implies that for meeting the debts of the company, the shareholder may be
called upon to contribute only to the extent of the amount, which remains unpaid on
his shareholdings. His separate property cannot be encompassed to meet the
company’s debt.
It may be worthwhile to know that though a shareholder is a co-owner of the company,
he is not a co-owner of the company’s assets. The ownership of the assets remains
with the company, because of its nature as a legal person. The extent of the rights and
duties of a shareholder as co-owner is measured by his shareholdings.
(b) Company limited by guarantee: Section 2(21) of the Companies Act, 2013 defines it
as the company having the liability of its members limited by the memorandum to
such amount as the members may respectively undertake by the memorandum to
contribute to the assets of the company in the event of its being wound up.
Thus, the liability of the member of a guarantee company is limited upto a stipulated
sum mentioned in the memorandum. Members cannot be called upon to contribute
beyond that stipulated sum.
The common features between a ‘guarantee company’ and ‘the company having
share capital’ are legal personality and limited liability. In the latter case, the member’s
liability is limited by the amount remaining unpaid on the share, which each member
holds. Both of them have to state in their memorandum that the members’ liability is
limited.

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However, the point of distinction between these two types of companies is that in the
former case the members may be called upon to discharge their liability only after
commencement of the winding up and only subject to certain conditions; but in the
latter case, they may be called upon to do so at any time, either during the company’s
life-time or during its winding up.
It is clear from the definition of the guarantee company that it does not raise its initial
working funds from its members. Therefore, such a company may be useful only where
no working funds are needed or where these funds can be held from other sources like
endowment, fees, charges, donations, etc.
In Narendra Kumar Agarwal vs. Saroj Maloo,
The Supreme Court has laid down that the right of a guarantee company to refuse to
accept the transfer by a member of his interest in the company is on a different footing
than that of a company limited by shares. The membership of a guarantee company
may carry privileges much different from those of ordinary shareholders.
(c) Unlimited company: Section 2(92) of the Companies Act, 2013 defines unlimited
company as a company not having any limit on the liability of its members. In such a
company, the liability of a member ceases when he ceases to be a member.
The liability of each member extends to the whole amount of the company’s debts and
liabilities but he will be entitled to claim contribution from other members. In case the
company has share capital, the Articles of Association must state the amount of share
capital and the amount of each share. So long as the company is a going concern the
liability on the shares is the only liability which can be enforced by the company. The
creditors can institute proceedings for winding up of the company for their claims. The
official liquidator may call the members for their contribution towards the liabilities
and debts of the company, which can be unlimited.
Unlimited Co.
No limit on the The liability ceases Liability is not Liability of each

liability of on when he ceases unlimited till the member extends to
members to be member time Company is amount of Company's
not wound up. debt and liabilities.
Member can be called to However, he can claim

contribute only in the contribution from other
event of winding up of members.
Company

2. On the basis of members:

(a) One person company: The Companies Act, 2013 introduced a new class of companies
which can be incorporated by a single person.
Section 2(62) of the Companies Act, 2013 defines one person company (OPC) as a company
which has only one person as a member.
One person company has been introduced to encourage entrepreneurship and

corporatization of business. OPC differs from sole proprietary concern in an
aspect that OPC is a separate legal entity with a limited liability of the member
whereas in the case of sole proprietary, the liability of owner is not restricted
and it extends to the owner’s entire assets constituting of official and personal.
The procedural requirements of an OPC are simplified through exemptions
provided under the Act in comparison to the other forms of companies.
According to section 3(1)(c) of the Companies Act, 2013, OPC is a private limited company
with the minimum paid up share capital as may be prescribed and having one member.
OPC (One Person Company) - significant points
⬥ Only one person as member.
⬥ Minimum paid up capital – no limit prescribed.
⬥ The memorandum of OPC shall indicate the name of the other person, who shall, in
the event of the subscriber’s death or his incapacity to contract, become the member
of the company.
⬥ The other person whose name is given in the memorandum shall give his prior written
consent in prescribed form and the same shall be filed with Registrar of companies at
the time of incorporation of the company along with its e-memorandum and e-articles.
⬥ Such other person may be given the right to withdraw his consent.
⬥ The member of OPC may at any time change the name of such other person by giving
notice to the company and the company shall intimate the same to the Registrar.
⬥ Any such change in the name of the person shall not be deemed to be an alteration of
the memorandum.
⬥ Only a natural person who is an Indian citizen whether resident in India or otherwise
and has stayed in India for a period of not less than 120 days during the immediately
preceding financial year
• shall be eligible to incorporate a OPC;
• shall be a nominee for the sole member of a OPC.

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⬥ No person shall be eligible to incorporate more than one OPC or become nominee in
more than one such company.
⬥ No minor shall become member or nominee of the OPC or can hold share with
beneficial interest.
⬥ Such Company cannot be incorporated or converted into a company under section 8
of the Act. Though it may be converted to private or public companies in certain cases.
⬥ Such Company cannot carry out Non-Banking Financial Investment activities including
investment in securities of any body corporate.
Here the member can be the sole member and director.
OPC
Encourage Procedural
One Private enterpreneurship requirements Separate
Limited
member Company in and are simplified Legal
Liability
Company nature corporatization through Entity
of business exemptions
(b) Private Company [Section 2(68)]: “Private company” means a company having a
minimum paid-up share capital as may be prescribed, and which by its articles,—
(i) restricts the right to transfer its shares;
(ii) except in case of One Person Company, limits the number of its members to
two hundred:
Provided that where two or more persons hold one or more shares in a company
jointly, they shall, for the purposes of this clause, be treated as a single member:
Provided further that—
(A) persons who are in the employment of the company; and
(B) persons who, having been formerly in the employment of the company, were
members of the company while in that employment and have continued to be
members after the employment ceased,
shall not be included in the number of members; and

(iii) prohibits any invitation to the public to subscribe for any securities of the
company;

Private company - significant points

⬥ No minimum paid-up capital requirement.
⬥ Minimum number of members – 2 (except if private company is an OPC, where it will be 1).
⬥ Maximum number of members – 200, excluding present employee-cum-members and

erstwhile employee-cum-members.
⬥ Right to transfer shares restricted.
⬥ Prohibition on invitation to subscribe to securities of the company.
⬥ Small company is a private company.
⬥ OPC can be formed only as a private company.
Small Company: Small company given under the Section 2(85) of the Companies Act, 2013
which means a company, other than a public company—
(i) paid-up share capital of which does not exceed fifty lakh rupees or such higher
amount as may be prescribed which shall not be more than ten crore rupees; and
(ii) turnover of which as per profit and loss account for the immediately preceding
financial year does not exceed two crore rupees or such higher amount as may be
prescribed which shall not be more than one hundred crore rupees:
Exceptions: This clause shall not apply to:
(A) a holding company or a subsidiary company;
(B) a company registered under section 8; or
(C) a company or body corporate governed by any special Act.
For the purposes of sub-clause (i) and sub-clause (ii) of clause (85) of section 2 of
the Act, paid up capital and turnover of the small company shall not exceed
rupees four crores and rupees forty crores respectively. [Companies (Specification
of definition details) Amendment Rules, 2022, w.e.f. 15 th September, 2022]
Small Company –significant points
⬥ A private company
⬥ Paid up capital – not more than ` 50 lakhs
Or
Turnover – not more than ` 2 crores.

⬥ Should not be – Section 8 company
– Holding or a Subsidiary company

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(c) Public company [Section 2(71)]: “Public company” means a company which—
(i) is not a private company; and
(ii) has a minimum paid-up share capital, as may be prescribed:
Provided that a company which is a subsidiary of a company, not being a private
company, shall be deemed to be public company for the purposes of this Act even
where such subsidiary company continues to be a private company in its articles;
Public company - significant points
⬥ Is not a private company (Articles do not have the restricting clauses).
⬥ Shares freely transferable.
⬥ No minimum paid up capital requirement.
⬥ Minimum number of members – 7.
⬥ Maximum numbers of members – No limit.
⬥ Subsidiary of a public company is deemed to be a public company.
According to section 3(1)(a), a company may be formed for any lawful purpose by seven or
more persons, where the company to be formed is to be a public company.
3. On the basis of control:
(a) Holding and subsidiary companies: ‘Holding and subsidiary’ companies are relative
terms.
A company is a holding company in relation to one or more other companies, means
a company of which such companies are subsidiary companies. [Section 2(46)]
For the purposes of this clause, the expression “company" includes any body corporate.
Whereas section 2(87) defines “subsidiary company” in relation to any other company
(that is to say the holding company), means a company in which the holding
company—
(i) controls the composition of the Board of Directors; or
(ii) exercises or controls more than one-half of the total voting power either at its
own or together with one or more of its subsidiary companies.
Provided that such class or classes of holding companies as may be prescribed shall
not have layers of subsidiaries beyond such numbers as may be prescribed.

For the purposes of this section —

(I) a company shall be deemed to be a subsidiary company of the holding
company even if the control referred to in sub-clause (i) or sub-clause (ii) is of
another subsidiary company of the holding company;
(II) the composition of a company’s Board of Directors shall be deemed to be
controlled by another company if that other company by exercise of some
power exercisable by it at its discretion can appoint or remove all or a majority
of the directors;
(III) the expression “company” includes any body corporate;

(IV) “layer” in relation to a holding company means its subsidiary or subsidiaries.
Example 2: A will be subsidiary of B, if B controls the composition of the Board of
Directors of A, i.e., if B can, without the consent or approval of any other person,
appoint or remove a majority of directors of A.
Example 3: A will be subsidiary of B, if B holds more than 50% of the share capital
of A.
Example 4: B is a subsidiary of A and C is a subsidiary of B. In such a case, C will be
the subsidiary of A. In the like manner, if D is a subsidiary of C, D will be subsidia ry of
B as well as of A and so on.
Status of private company, which is subsidiary to public company: In view of
Section 2(71) of the Companies Act, 2013 a Private company, which is subsidiary of a
public company shall be deemed to be public company for the purpose of this Act,
even where such subsidiary company continues to be a private company in its articles.
(b) Associate company [Section 2(6)]: In relation to another company, means a company
in which that other company has a significant influence, but which is not a subsidiary
company of the company having such influence and includes a joint venture company.
Explanation. — For the purpose of this clause —
(a) the expression “significant influence” means control of at least twenty per cent
of total voting power, or control of or participation in business decisions under
an agreement;
(b) the expression ”joint venture’’ means a joint arrangement whereby the parties
that have joint control of the arrangement have rights to the net assets of the
arrangement.

a
4. On the basis of access to capital:

(a) Listed company: As per the definition given in the section 2(52) of the Companies Act, 2013,
it is a company which has any of its securities listed on any recognised stock exchange.
Provided that such class of companies, which have listed or intend to list such class of
securities, as may be prescribed in consultation with the Securities and Exchange
Board, shall not be considered as listed companies.
Whereas the word securities as per the section 2(81) of the Companies Act, 2013 has
been assigned the same meaning as defined in clause (h) of section 2 of the Securities
Contracts (Regulation) Act, 1956.
Example 5: Scan Steel Rods Limited is a Public Limited Company whose shares are
listed in the Stock Exchange, Kolkata. Hence Scan Steel Rods Limited is a Listed
Company. The reason for calling it “Listed” is because the company and the Stock
Exchange have signed a Listing Agreement for trading of shares in the capital market.
(b) Unlisted company means company other than listed company.
5. Other companies:
(a) Government company [Section 2(45)]: Government Company means any company
in which not less than 51% of the paid-up share capital is held by-
(i) the Central Government, or
(ii) by any State Government or Governments, or
(iii) partly by the Central Government and partly by one or more State
Governments, and the section includes a company which is a subsidiary
company of such a Government company.
Explanation: For the purposes of this clause, the “paid up share capital” shall be construed
as “total voting power”, where shares with differential voting rights have been issued.
Government Company
At least 51% of the paid up share

capital held by
Partly by CG and partly by one or

The Central Government, or Any State Govt./s, or
more state Govt.

(b) Foreign Company [Section 2(42)]: It means any company or body corporate
incorporated outside India which—
(i) has a place of business in India whether by itself or through an agent, physically
or through electronic mode; and
(ii) conducts any business activity in India in any other manner.
(c) Formation of companies with charitable objects etc. (Section 8 comp any):
Section 8 of the Companies Act, 2013 deals with the formation of companies which are
formed to
• promote the charitable objects of commerce, art, science, sports, education,
research, social welfare, religion, charity, protection of environment etc.
• Such company intends to apply its profit in
• promoting its objects and
• prohibiting the payment of any dividend to its members.
Examples of section 8 companies are FICCI, ASSOCHAM, National Sports Club of India,
CII etc.
Power of Central government to issue the license–
(i) Section 8 allows the Central Government to register such person or association
of persons as a company with limited liability without the addition of words
‘Limited’ or ‘Private limited’ to its name, by issuing licence on such conditions
as it deems fit.
(ii) The registrar shall on application register such person or association of persons
as a company under this section.
(iii) On registration the company shall enjoy same privileges and obligations as of
a limited company.
Revocation of license: The Central Government may by order revoke the licence of
the company where the company contravenes any of the requirements or the
conditions of this sections subject to which a licence is issued or where the affairs of
the company are conducted fraudulently, or violative of the objects of the company or
prejudicial to public interest, and on revocation the Registrar shall put ‘Limited’ or
‘Private Limited’ against the company’s name in the register. But before such
revocation, the Central Government must give it a written notice of its intention to
revoke the licence and opportunity to be heard in the matter.
Order of the Central Government: Where a licence is revoked then the Central
Government may, in the public interest order that the company registered under this

a
section should be amalgamated with another company registered under this section
having similar objects, to form a single company with such constitution, properties,
powers, rights, interest, authorities and privileges and with such liabilities, duties and
obligations as may be specified in the order, or the company be wound up.
Penalty/punishment in contravention: If a company makes any default in complying
with any of the requirements laid down in this section, the company shall, without
prejudice to any other action under the provisions of this section, be punishable with
fine which shall not be less than ten lakh rupees but which may extend to one crore
rupees and the directors and every officer of the company who is in default shall be
punishable with fine which shall not be less than twenty-five thousand rupees but
which may extend to twenty-five lakh rupees.
Provided that when it is proved that the affairs of the company were conducted
fraudulently, every officer in default shall be liable for action under section 447.
Section 8 Company- Significant points
⬥ Formed for the promotion of commerce, art, science, religion, charity,
protection of environment, sports, etc.
⬥ Requirement of minimum share capital does not apply.
⬥ Uses its profits for the promotion of the objective for which it is formed.
⬥ Does not declare dividend to members.
⬥ Operates under a special licence from Central Government.
⬥ Need not use the word Ltd./ Pvt. Ltd. in its name and adopt a more suitable
name such as club, chambers of commerce etc.
⬥ Licence revoked if conditions contravened.
⬥ On revocation, Central Government may direct it to
– Converts its status and change its name
– Wind – up
– Amalgamate with another company having similar object.
⬥ Can call its general meeting by giving a clear 14 days’ notice instead of 21 days.
⬥ Requirement of minimum number of directors, independent directors etc. does
not apply.
⬥ Need not constitute Nomination and Remuneration Committee and
Shareholders Relationship Committee.
⬥ A partnership firm can be a member of Section 8 company.

Formation
•To promote Charitable objects
Application of profits
•To promote its objects
•No payment of dividends out of profits
Type of Co.
•Limited Liability
•Without the addition of words "Ltd" or "Pvt Ltd."
How status is granted

•The CG can grant such status
•However, CG has delegated the power to grant licence to ROC
Revocation of licence
•CG may revoke licence
•If conditions of section 8 are contravened, or
•affairs of the company are conducted fraudulently, or prejudicial to public
interest
Effect of revocation of licence

•Co has to use words "Ltd." or "Pvt Ltd."
(d) Dormant company (Section 455): Where a company is formed and registered under
this Act for a future project or to hold an asset or intellectual property and has no
significant accounting transaction, such a company or an inactive company may make
an application to the Registrar in such manner as may be prescribed for obtaining the
status of a dormant company.
“Inactive company” means a company which has not been carrying on any business
or operation, or has not made any significant accounting transaction during the last
two financial years, or has not filed financial statements and annual returns during the
last two financial years.
“Significant accounting transaction” means any transaction other than—

(i) payment of fees by a company to the Registrar;
(ii) payments made by it to fulfil the requirements of this Act or any other law;
(iii) allotment of shares to fulfil the requirements of this Act; and
(iv) payments for maintenance of its office and records.
(e) Meaning of Nidhi Companies [Section 406(1) of the Companies Act, 2013]: In this
section, “Nidhi” or “Mutual Benefit Society” means a company which the Central

a
Government may, by notification in the Official Gazette, declare to be a Nidhi or Mutual

Benefit Society, as the case may be. Nidhi Companies are created mainly for cultivating
the habit of thrift and savings amongst its members.
(f) Public Financial Institutions (PFI): By virtue of Section 2(72) of the Companies Act,
2013, the following institutions are to be regarded as public financial institutions:
(i) the Life Insurance Corporation of India, established under the Life Insurance
Corporation Act, 1956;
(ii) the Infrastructure Development Finance Company Limited,
(iii) specified company referred to in the Unit Trust of India (Transfer of Undertaking
and Repeal) Act, 2002;
(iv) institutions notified by the Central Government under section 4A(2) of the
Companies Act, 1956 so repealed under section 465 of this Act;
(v) such other institution as may be notified by the Central Government in
consultation with the Reserve Bank of India:
Conditions for an institution to be notified as PFI: No institution shall be so notified

unless—
(A) it has been established or constituted by or under any Central or State Act other
than this Act or the previous Companies Law; or
(B) not less than fifty-one per cent of the paid-up share capital is held or controlled
by the Central Government or by any State Government or Governments or
partly by the Central Government and partly by one or more State
Governments.
Conditons for an institution to be notified as

PFI
At least 51% of the paid-up share capital

Established or constituted by or under is held/controlled by the CG or by any
any Central or State Act State Govt./s or partly by the CG and
partly by one or more State Govts.

4. MODE OF REGISTRATION/INCORPORATION OF
COMPANY
PROMOTERS: The Companies Act, 2013 defines the term “Promoter” under section 2(69)
which means a person—
(a) who has been named as such in a prospectus or is identified by the company in the
annual return referred to in section 92; or
(b) who has control over the affairs of the company, directly or indirectly whether as a
shareholder, director or otherwise; or
(c) in accordance with whose advice, directions, or instructions the Board of Directors of
the company is accustomed to act.
In simple terms we can say,
✓ Persons who form the company are known as promoters.
✓ It is they who conceive the idea of forming the company.
✓ They take all necessary steps for its registration.
✓ It should, however, be noted that persons acting only in a professional capacity e.g.,
the solicitor, banker, accountant etc. are not regarded as promoters.
FORMATION OF COMPANY: Section 3 of the Companies Act, 2013 deals with the basic
requirement with respect to the constitution of the company.
In the case of a public company, any 7 or more persons can form a company for any lawful
purpose by subscribing their names to memorandum and complying with the requirements
of this Act in respect of registration.
In the same way, 2 or more persons can form a private company and one person can form
one person company.
Public Co. • 7 or more persons
Private Co. • 2 or more persons
One Person Co. • One person
INCORPORATION OF COMPANY: Section 7 of the Companies Act, 2013 provides for the
procedure to be followed for incorporation of a company.

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(1) Filing of the documents and information with the registrar: For the registration of
the company following documents and information are required to be filed with the
registrar within whose jurisdiction the registered office of the company is proposed to
be situated-
⬥ the memorandum and articles of the company duly signed by all the
subscribers to the memorandum.
⬥ a declaration by person who is engaged in the formation of the company
(an advocate, a chartered accountant, cost accountant or company secretary in
practice), and by a person named in the articles (director, manager or
secretary of the company), that all the requirements of this Act and the rules
made thereunder in respect of registration and matters precedent or incidental
thereto have been complied with.
⬥ a declaration from each of the subscribers to the memorandum and from
persons named as the first directors, if any, in the articles stating that-
➢ he is not convicted of any offence in connection with the promotion,
formation or management of any company, or
➢ he has not been found guilty of any fraud or misfeasance or of any
breach of duty to any company under this Act or any previous company
law during the last five years,
➢ and that all the documents filed with the Registrar for registration of the
company contain information that is correct and complete and true to
the best of his knowledge and belief;
⬥ the address for correspondence till its registered office is established;
⬥ the particulars (names, including surnames or family names, residential
address, nationality) of every subscriber to the memorandum along with proof
of identity, and in the case of a subscriber being a body corporate, such
particulars as may be prescribed.
⬥ the particulars (names, including surnames or family names, the Director
Identification Number, residential address, nationality) of the persons
mentioned in the articles as the subscribers to the Memorandum and such
other particulars including proof of identity as may be prescribed; and
⬥ the particulars of the interests of the persons mentioned in the articles as
the first directors of the company in other firms or bodies corporate along with
their consent to act as directors of the company in such form and manner as
may be prescribed.

Particulars provided in this provision shall be of the individual subscriber and not of
the professional engaged in the incorporation of the company [The Companies
(Incorporation) Rules, 2014].
(2) Issue of certificate of incorporation on registration: The Registrar on the basis of
documents and information filed, shall register all the documents and information in
the register and issue a certificate of incorporation in the prescribed form to the effect
that the proposed company is incorporated under this Act.
(3) Allotment of Corporate Identity Number (CIN): On and from the date mentioned in
the certificate of incorporation, the Registrar shall allot to the company a corporate
identity number, which shall be a distinct identity for the company and which shall also
be included in the certificate.
(4) Maintenance of copies of all documents and information: The company shall
maintain and preserve at its registered office copies of all documents and information
as originally filed, till its dissolution under this Act.
(5) Furnishing of false or incorrect information or suppression of material fact at the
time of incorporation (i.e. at the time of Incorporation): If any person furnishes
any false or incorrect particulars of any information or suppresses any material
information, of which he is aware in any of the documents filed with the Registrar in
relation to the registration of a company, he shall be liable for action for fraud under
section 447.
(6) Company already incorporated by furnishing any false or incorrect information
or representation or by suppressing any material fact (i.e. post Incorporation):
Where, at any time after the incorporation of a company, it is proved that the company
has been got incorporated by furnishing any false or incorrect information or
representation or by suppressing any material fact or information in any of the
documents or declaration filed or made for incorporating such company, or by any
fraudulent action, the promoters, the persons named as the first directors of the
company and the persons making declaration under this section shall each be liable
for action for fraud under section 447.
(7) Order of the Tribunal: Where a company has been got incorporated by furnishing
false or incorrect information or representation or by suppressing any material fact or
information in any of the documents or declaration filed or made for incorporating
such company or by any fraudulent action, the Tribunal may, on an application made
to it, on being satisfied that the situation so warrants,—
(a) pass such orders, as it may think fit, for regulation of the management of the
company including changes, if any, in its memorandum and articles, in public
interest or in the interest of the company and its members and creditors; or

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(b) direct that liability of the members shall be unlimited; or

(c) direct removal of the name of the company from the register of companies; or
(d) pass an order for the winding up of the company; or
(e) pass such other orders as it may deem fit:
Provided that before making any order,—
⬥ the company shall be given a reasonable opportunity of being heard in the
matter; and
⬥ the Tribunal shall take into consideration the transactions entered into by the
company, including the obligations, if any, contracted or payment of any
liability.
Simplified Proforma for Incorporating Company Electronically (SPICe)
The Ministry of Corporate Affairs has taken various initiatives for ease of business. In a step
towards easy setting up of business, MCA has simplified the process of filing of forms for
incorporation of a company through Simplified Proforma for incorporating company
electronically.
EFFECT OF REGISTRATION: Section 9 of the Companies Act, 2013 provides for the effect of
registration of a company.
According to Section 9, from the date of incorporation (mentioned in the certificate of

incorporation), the subscribers to the memorandum and all other persons, who may from time
to time become members of the company, shall be a body corporate by the name contained
in the memorandum. Such a registered company shall be capable of exercising all the
functions of an incorporated company under this Act and having perpetual succession with
power to acquire, hold and dispose of property, both movable and immovable, tangible and
intangible, to contract and to sue and be sued, by the said name.
From the date of incorporation mentioned in the certificate, the company becomes a legal
person separate from the incorporators; and there comes into existence a binding contract
between the company and its members as evidenced by the Memorandum and Articles of
Association [Hari Nagar Sugar Mills Ltd. vs. S.S. Jhunjhunwala]. It has perpetual existence
until it is dissolved by liquidation or struck out of the register. A shareholder who buys shares,
does not buy any interest in the property of the company but in certain cases a writ petition
will be maintainable by a company or its shareholders.
A legal personality emerges from the moment of registration of a company and from that
moment the persons subscribing to the Memorandum of Association and other persons
joining as members are regarded as a body corporate or a corporation in aggregate and the

legal person begins to function as an entity. A company on registration acquires a separate

existence and the law recognises it as a legal person separate and distinct from its members
[State Trading Corporation of India vs. Commercial Tax Officer].
It may be noted that under the provisions of the Act, a company may purchase shares of
another company and thus become a controlling company. However, merely because a
company purchases all shares of another company it will not serve as a means of putting an
end to the corporate character of another company and each company is a separate juristic
entity [Spencer & Co. Ltd. Madras vs. CWT Madras].
As has been stated above, the law recognizes such a company as a juristic person separate
and distinct from its members. The mere fact that the entire share capital has been contributed
by the Central Government and all its shares are held by the President of India and other
officers of the Central Government does not make any difference in the position of registered
company and it does not make a company an agent either of the President or the Central
Government [Heavy Electrical Union vs. State of Bihar].
EFFECT OF MEMORANDUM AND ARTICLES: As per Section 10 of the Companies Act, 2013,
where the memorandum and articles when registered, shall bind the company and the
members thereof to the same extent as if they respectively had been signed by the company
and by each member, and an agreement to observe all the provisions of the memorandum
and of the articles. All monies payable by any member to the company under the
memorandum or articles shall be a debt due from him to the company.
5. CLASSIFICATION OF CAPITAL
The term Capital has a variety of meanings. It means one thing to economists; another to
accountants and still another to businessmen and lawyers. In relation to a company limited
by shares, the word capital means share-capital, i.e., the capital or figure in terms of so many
rupees divided into shares of fixed amount. In other words, the contributions of persons to
the common stock of the company form the capital of the company. The proportion of the
capital to which each member is entitled, is his share. A share is not a sum of money; it is
rather an interest measured by a sum of money and made up of various rights contained in
the contract.
In the domain of Company Law, the term ‘capital’ is used in the following senses:
(a) Nominal or authorised or registered capital: This form of capital has been defined
in section 2(8) of the Companies Act, 2013. “Authorised capital” or “Nominal capital”
means such capital as is authorised by the memorandum of a company to be the
maximum amount of share capital of the company. Thus, it is the sum stated in the
memorandum as the capital of the company with which it is to be registered being the

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maximum amount which it is authorised to raise by issuing shares, and upon which it
pays the stamp duty. It is usually fixed at the amount, which, it is estimated, the
company will need, including the working capital and reserve capital, if any.
(b) Issued capital: Section 2(50) of the Companies Act, 2013 defines “issued capital” which
means such capital as the company issues from time to time for subscription. It is that
part of authorised capital which is offered by the company for subscription and
includes the shares allotted for consideration other than cash.
Schedule III to the Companies Act, 2013, makes it obligatory for a company to disclose
its issued capital in the balance sheet.
(c) Subscribed capital: Section 2(86) of the Companies Act, 2013 defines “subscribed
capital” as such part of the capital which is for the time being subscribed by the
members of a company.
It is the nominal amount of shares taken up by the public. Where any notice,
advertisement or other official communication or any business letter, bill head or letter
paper of a company states the authorised capital, the subscribed and paid-up capital
must also be stated in equally conspicuous characters. A default in this regard will
make the company and every officer who is in default liable to pay penalty extending
` 10,000 and ` 5,000 respectively. [Section 60].
(d) Called-up capital: Section 2(15) of the Companies Act, 2013 defines “called-up capital”
as such part of the capital, which has been called for payment. It is the total amount
called up on the shares issued.
(e) Paid-up capital is the total amount paid or credited as paid up on shares issued. It is
equal to called up capital less calls in arrears.
6. SHARES
(I) Nature of shares: Section 2(84) of the Companies Act, 2013
defines the term ‘share’ which means a share in the share capital of
a company and includes stock. A share thus represents such
proportion of the interest of the shareholders as the amount paid
up thereon bears to the total capital payable to the company. It is a
measure of the interest in the company’s assets to which a person
holding a share is entitled.
Share is an interest in the company: Farwell Justice, in Borland Trustees vs. Steel Bors. &
Co. Ltd. observed that “a share is not a sum of money but is an interest measured by a sum
of money and made up of various rights contained in the contract, including the right to a

sum of money of a more or less amount”. You should note that the shareholders are not, in
the eyes of law, part owners of the undertaking. The undertaking is somewhat different from
the totality of the shareholders. The rights and obligations attaching to a share are those
prescribed by the memorandum and the articles of a company. It must, however, be
remembered that a shareholder has not only contractual rights against the company, but also
certain other rights which accrue to him according to the provisions of the Companies Act.
Share Capital
Preference Share
Equity Share Capital
Capital
With uniform voting With differential voting

rights rights
Shares are a movable property: According to section 44 of the Companies Act, 2013, the
shares or debentures or other interests of any member in a company shall be movable
property transferable in the manner provided by the articles of the company.
Shares shall be numbered: Section 45 provides, every share in a company having a share
capital, shall be distinguished by its distinctive number. This implies that every share shall be
numbered.
However, this shall not apply to a share held by a person whose name is entered as holder of
beneficial interest in such share in the records of a depository.
(II) Kinds of share capital:- Section 43 of the Companies Act, 2013 provides the kinds of
share capital. According to the provision the share capital of a company limited by
shares shall be of two kinds, namely:—
(i) Equity share capital —

(1) with voting rights; or
(2) with differential rights as to dividend, voting or otherwise in accordance with
prescribed rules;
Example 6: It is to be noted that, Tata Motors in 2008 introduced equity shares with
differential voting rights called ‘A’ equity shares in its rights issue. In the issue, every
10 ‘A’ equity shares carried only one voting right but would get 5 percentage points
more dividend than that declared on each of the ordinary shares. Since ‘A’ equity share
did not carry the similar voting rights, it was being traded at discount to other common

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shares having full voting. Other companies which have issued equity shares with
differential voting rights (popularly called DVRs) are Future Retail, Jain Irrigation
among others.
(ii) Preference share capital:
However, this Act shall not affect the rights of the preference shareholders who are
entitled to participate in the proceeds of winding up before the commencement of this
Act.
According to explanation to section 43:
1. ‘‘Equity share capital’’, with reference to any company limited by shares,

means all share capital which is not preference share capital;
2. ‘‘Preference share capital’’, with reference to any company limited by shares,
means that part of the issued share capital of the company which carries or
would carry a preferential right with respect to—
(a) payment of dividend, either as a fixed amount or an amount
calculated at a fixed rate, which may either be free of or subject to
income-tax; and
(b) repayment, in the case of a winding up or repayment of capital, of the
amount of the share capital paid-up or deemed to have been paid-up,
whether or not, there is a preferential right to the payment of any fixed
premium or premium on any fixed scale, specified in the memorandum
or articles of the company;
Exception: In case of private company - Section 43 shall not apply where
memorandum or articles of association of the private company so provides.
7. MEMORANDUM OF ASSOCIATION
The Memorandum of Association of company is in fact its charter; it defines its constitution
and the scope of the powers of the company with which it has been established under the
Act. It is the very foundation on which the whole edifice of the company is built.
Object of registering a memorandum of association:
⬥ It contains the object for which the company is formed and therefore identifies the
possible scope of its operations beyond which its actions cannot go.
⬥ It enables shareholders, creditors and all those who deal with company to know what
its powers are and what activities it can engage in.

A memorandum is a public document under Section 399 of the Companies Act, 2013.
Consequently, every person entering into a contract with the company is presumed to
have the knowledge of the conditions contained therein.
⬥ The shareholders must know the purposes for which his money can be used by the
company and what risks he is taking in making the investment.
A company cannot depart from the provisions contained in the memorandum however
imperative may be the necessity for the departure. It cannot enter into a contract or engage
in any trade or business, which is beyond the power confessed on it by the memorandum. If
it does so, it would be ultra vires the company and void.
As per Section 4, Memorandum of a company shall be drawn up in such form as is given
in Tables A, B, C, D and E in Schedule I of the Companies Act, 2013.
Table A is a form for memorandum of association of a company limited by shares.
Table B is a form for memorandum of association of a company limited by guarantee and
not having a share capital.
Table C is a form for memorandum of association of a company limited by guarantee and

having a share capital.
Table D is a form for memorandum of association of an unlimited company.
Table E is a form for memorandum of association of an unlimited company and having

share capital.
The memorandum and articles of a company must be as closed to model forms, as possible,
depending upon the circumstances.
Content of the memorandum: The memorandum of a company shall state—
(a) the name of the company (Name Clause) with the last word “Limited” in the case of a
public limited company, or the last words “Private Limited” in the case of a private
limited company. This clause is not applicable on the companies formed under section
8 of the Act.
The name including phrase ‘Electoral Trust’ may be allowed for Registration of
companies to be formed under section 8 of the Act, in accordance with the Electoral
Trusts Scheme, 2013 notified by the Central Board of Direct Taxes (CBDT). For the
Companies under section 8 of the Act, the name shall include the words foundation,
Forum, Association, Federation, Chambers, Confederation, council, Electoral trust and
the like etc. [The Companies (Incorporation) Rules, 2014].

a
As per MCA notification dated 5th June, 2015, a Government company’s name must
end with the word “Limited”. In the case of One Person Company, the words “One
Person Company”, should be included below its name.
(b) the State in which the registered office of the company (Registered Office clause) is
to be situated;
(c) the objects for which the company is proposed to be incorporated and any matter
considered necessary in furtherance thereof (Object clause);
If any company has changed its activities which are not reflected in its name, it shall
change its name in line with its activities within a period of six months from the change
of activities after complying with all the provisions as applicable to change of name.
(d) the liability of members of the company (Liability clause), whether limited or
unlimited, and also state,—
• in the case of a company limited by shares, that the liability of its members
is limited to the amount unpaid, if any, on the shares held by them; and
• in the case of a company limited by guarantee, the amount up to which each
member undertakes to contribute—
➢ to the assets of the company in the event of its being wound-up
while he is a member or within one year after he ceases to be a member
for payment of the debts and liabilities of the company or of such debts
and liabilities as may have been contracted before he ceases to be a
member, as the case may be; and
➢ to the costs, charges and expenses of winding-up and for adjustment of
the rights of the contributories among themselves;
(e) the amount of authorized capital (Capital Clause) divided into share of fixed amounts
and the number of shares with the subscribers to the memorandum have agreed to
take, indicated opposite their names, which shall not be less than one share. A
company not having share capital need not have this clause.
(f) the detail of the subscribers to be formed into a company. The Memorandum shall
conclude with the association clause. Every subscriber to the Memorandum shall take
atleast one share, and shall write against his name, the number of shares taken by him.
In the case of OPC, the name of the person who, in the event of death of the subscriber, shall
become the member of the company.
The memorandum must be printed, divided into paragraphs, numbered consecutively, and
signed by at least seven persons (two in the case of a private company and one in the case of

One Person Company) in the presence of at least one witness, who will attest the signatures.
The particulars about the signatories to the memorandum as well as the witness, as to their
address, description, occupation etc., must also be entered.
It is to be noted that a company being a legal person can through its agent, subscribe
to the memorandum. However, a minor cannot be a signatory to the memorandum as
he is not competent to contract. The guardian of a minor, who subscribes to the
memorandum on his behalf, will be deemed to have subscribed in his personal capacity.
The above clauses of the Memorandum are called compulsory clauses, or “Conditions”. In
addition to these a memorandum may contain other provisions, for example rights attached
to various classes of shares.
The Memorandum of Association of a company cannot contain anything contrary to the
provisions of the Companies Act. If it does, the same shall be devoid of any legal effect.
Similarly, all other documents of the company must comply with the provisions of the
Memorandum.
8. DOCTRINE OF ULTRA VIRES

Doctrine of ultra vires: The meaning of the term ultra vires is simply “beyond (their) powers”.
The legal phrase “ultra vires” is applicable only to acts done in excess of the legal powers of
the doers. This presupposes that the powers in their nature are limited.
It is a fundamental rule of Company Law that the objects of a company as stated in its
memorandum can be departed from only to the extent permitted by the Act, thus far and no
further. In consequence, any act done or a contract made by the company which travels
beyond the powers not only of the directors but also of the company is wholly void and
inoperative in law and is therefore not binding on the company. On this account, a company
can be restrained from employing its fund for purposes other than those sanctioned by the
memorandum. Likewise, it can be restrained from carrying on a trade different from the one
it is authorised to carry on.
The impact of the doctrine of ultra vires is that a company can neither be sued on an ultra
vires transaction, nor can it sue on it. Since the memorandum is a “public document”, it is
open to public inspection. Therefore, when one deals with a company one is deemed to know
about the powers of the company. If in spite of this you enter into a transaction which is ultra
vires the company, you cannot enforce it against the company.
Example 7: If you have supplied goods or performed service on such a contract or lent money,
you cannot obtain payment or recover the money lent. But if the money advanced to the
company has not been expended, the lender may stop the company from parting with it by

a
means of an injunction; this is because the company does not become the owner of the
money, which is ultra vires the company. As the lender remains the owner, he can take back
the property in specie. If the ultra vires loan has been utilised in meeting lawful debt of the
company, then the lender steps into the shoes of the debtor paid off and consequently he
would be entitled to recover his loan to that extent from the company.
An act which is ultra vires the company being void, cannot be ratified by the shareholders of
the company. Sometimes, act which is ultra vires can be regularised by ratifying it subsequently.
For instance, if the act is ultra vires the power of the directors, the shareholders can ratify it; if
it is ultra vires the articles of the company, the company can alter the articles; if the act is within
the power of the company but is done irregularly, shareholder can validate it.
The leading case through which this doctrine was enunciated is that of Ashbury Railway
Carriage and Iron Company Limited v. Riche-(1875).
The facts of the case are:
The main objects of a company were:
(a) To make, sell or lend on hire, railway carriages and wagons;
(b) To carry on the business of mechanical engineers and general contractors.
(c) To purchase, lease, sell and work mines.
(d) To purchase and sell as merchants or agents, coal, timber, metals etc.
The directors of the company entered into a contract with Riche, for financing the construction
of a railway line in Belgium, and the company further ratified this act of the directors by
passing a special resolution. The company however, repudiated the contract as being ultra-
vires. And Riche brought an action for damages for breach of contract. His contention was
that the contract was well within the meaning of the word general contractors and hence
within its powers. Moreover, it had been ratified by a majority of shareholders. However, it
was held by the Court that the contract was null and void. It said that the terms general
contractors was associated with mechanical engineers, i.e. it had to be read in connection with
the company’s main business. If, the term general contractor’s was not so interpreted, it would
authorize the making of contracts of any kind and every description, for example, marine and
fire insurance.
An ultra vires contract can never be made binding on the company. It cannot become
“Intravires” by reasons of estoppel, acquiescence, Iapse of time, delay or ratification.

The whole position regarding the doctrine of ultra vires can be summed up as:
(i) When an act is performed, which though legal in itself, is not authorized by the object
clause of the memorandum, or by the statute, it is said to be ultravires the company,
and hence null and void.
(ii) An act which is ultravires, the company cannot be ratified even by the unanimous
consent of all the shareholders.
(iii) An act which is ultravires the directors, but intravires the company can be ratified by
the members of the company through a resolution passed at a general meeting.
(iv) If an act is ultravires the Articles, it can be ratified by altering the Articles by a Special
Resolution at a general meeting.
However, the disadvantages of this doctrine outweigh its main advantage, namely to
provide protection to the shareholders and creditors. Although it may be useful to
members in restraining the activities of the directors, it is only a nuisance in so far as it
prevents the company from changing its activities in a direction which is agreed by all.
Again, the purpose of doctrine of ultravires has been defeated as now the object clause can
be easily altered, by passing just a special resolution of the shareholders.
9. ARTICLES OF ASSOCIATION
The articles of association of a company are its rules and regulations, which are framed to
manage its internal affairs. Just as the memorandum contains the fundamental conditions
upon which the company is allowed to be incorporated, so also the articles are the internal
regulations of the company (Guiness vs. Land Corporation of Ireland). These general
functions of the articles have been aptly summed up by Lord Cairns in Ashbury Carriage Co.
vs. Riches as follows: “The articles play a part subsidiary to memorandum of association. They
accept the memorandum as the charter of incorporation, and so accepting it the articles
proceed to define the duties, the rights and powers of the governing body as between
themselves and the company and the mode and form in which the business of the company
is to be carried on, and the mode and form in which changes in the internal regulation of the
company may from time to time be made.”
The document containing the articles of association of a company (the Magna Carta) is a
business document; hence it has to be construed strictly. It regulates domestic management
of a company and creates certain rights and obligations between the members and the
company [S.S. Rajkumar vs. Perfect Castings (P) Ltd.].
The articles of association are in fact the bye-laws of the company according to which director
and other officers are required to perform their functions as regards the management of the

a
company, its accounts and audit. It is important therefore that the auditor should study them
and, while doing so he should note the provisions therein in respect of relevant matters.
Section 5 of the Companies Act, 2013 seeks to provide the contents and model of articles
of association. The section lays the following law-
(1) Contains regulations: The articles of a company shall contain the regulations for
management of the company.
(2) Inclusion of matters: The articles shall also contain such matters, as are prescribed
under the rules. However, a company may also include such additional matters in its
articles as may be considered necessary for its management.
(3) Contain provisions for entrenchment: The articles may contain provisions for
entrenchment (to protect something) to the effect that specified provisions of the
articles may be altered only if conditions or procedures as that are more restrictive
than those applicable in the case of a special resolution, are met or complied with.
(4) Manner of inclusion of the entrenchment provision: The provisions for
entrenchment shall only be made either on formation of a company, or by an
amendment in the articles agreed to by all the members of the company in the case
of a private company and by a special resolution in the case of a public company.
(5) Notice to the registrar of the entrenchment provision: Where the articles contain
provisions for entrenchment, whether made on formation or by amendment, the
company shall give notice to the Registrar of such provisions in such form and manner
as may be prescribed.
(6) Forms of articles: The articles of a company shall be in respective forms specified in
Tables, F, G, H, I and J in Schedule I as may be applicable to such company.
(7) Model articles: A company may adopt all or any of the regulations contained in the
model articles applicable to such company.
(8) Company registered after the commencement of this Act: In case of any company,
which is registered after the commencement of this Act, in so far as the registered
articles of such company do not exclude or modify the regulations contained in the
model articles applicable to such company, those regulations shall, so far as applicable,
be the regulations of that company in the same manner and to the extent as if they
were contained in the duly registered articles of the company.
The following are the key differences between the Memorandum of Association vs.
Articles of Association:
1. Objectives: Memorandum of Association defines and delimits the objectives of the
company whereas the Articles of association lays down the rules and regulations for

the internal management of the company. Articles determine how the objectives of
the company are to be achieved.
2. Relationship: Memorandum defines the relationship of the company with the outside
world and Articles define the relationship between the company and its members.
3. Alteration: Memorandum of association can be altered only under certain
circumstances and in the manner provided for in the Act. In most cases permission of
the Regional Director, or the Tribunal is required. The articles can be altered simply by
passing a special resolution.
4. Ultra Vires: Acts done by the company beyond the scope of the memorandum are
ultra-vires and void. These cannot be ratified even by the unanimous consent of all the
shareholders. The acts ultra-vires the articles can be ratified by a special resolution of
the shareholders, provided they are not beyond the provisions of the memorandum.
10. DOCTRINE OF INDOOR MANAGEMENT

Doctrine of Constructive Notice: Section 399 of the Companies Act, 2013 provides that any
person can inspect by electronic means any document kept by the Registrar, or make a record
of the same, or get a copy or extracts of any document, including certificate of incorporation
of any company, on payment of prescribed fees.
The memorandum and articles of association of a company when registered with Registrar of
Companies, become public documents, and they are available for inspection to any person,
on the payment of a nominal fees. In other words, Section 399 confers the right of inspection
to all. It is therefore, the duty of every person dealing with a company to inspect its documents
and make sure that his contract is in conformity with their provisions but whether a person
reads them or not, it will be presumed that he knows the contents of the documents. This
kind of presumed/implied notice is called constructive notice.
By constructive notice is meant:
(i) Whether a person reads the documents or not, he is presumed to have knowledge of
the contents of the documents. He is not only presumed to have read the documents
but also understood them in their true perspective, and
(ii) Every person dealing with the company not only has the constructive notice of the
memorandum and articles, but also of all the other related documents, such as Special
Resolutions etc., which are required to be registered with the Registrar.
Thus, if a person enters into a contract which is beyond the powers of the company as defined
in the memorandum, or outside the authority of directors as per memorandum or articles, he
cannot acquire any rights under the contract against the company.

a
Doctrine of Indoor Management: The Doctrine of Indoor Management is the exception to

the doctrine of constructive notice. The aforesaid doctrine of constructive notice does in no
sense mean that outsiders are deemed to have notice of the internal affairs of the
company. For instance, if an act is authorised by the articles or memorandum, an outsider is
entitled to assume that all the detailed formalities for doing that act have been observed. This
can be explained with the help of a landmark case The Royal British Bank vs. Turquand.
This is the doctrine of indoor management popularly known as Turquand Rule.
FACTS of the Royal British Bank vs. Turquand
Mr. Turquand was the official manager (liquidator) of the insolvent Cameron’s Coalbrook
Steam, Coal and Swansea and Loughor Railway Company. It was incorporated under the Joint
Stock Companies Act, 1844. The company had given a bond for £ 2,000 to the Royal British
Bank, which secured the company’s drawings on its current account. The bond was under the
company’s seal, signed by two directors and the secretary. When the company was sued, it
alleged that under its registered deed of settlement (the articles of association), directors only
had power to borrow up to an amount authorized by a company resolution. A resolution had
been passed but not specifying how much the directors could borrow.
Held, it was decided that the bond was valid, so the Royal British Bank could enforce the
terms. He said the bank was deemed to be aware that the directors could borrow only up to
the amount resolutions allowed. Articles of association were registered with Companies
House, so there was constructive notice. But the bank could not be deemed to know which
ordinary resolutions passed, because these were not registrable. The bond was valid because
there was no requirement to look into the company’s internal workings. This is the indoor
management rule, that the company’s indoor affairs are the company’s problem.
Exceptions to the doctrine of Indoor Management: Thus, you will notice that the
aforementioned rule of Indoor Management is important to persons dealing with a company
through its directors or other persons. They are entitled to assume that the acts of the
directors or other officers of the company are validly performed, if they are within the scope
of their apparent authority. So long as an act is valid under the articles, if done in a particular
manner, an outsider dealing with the company is entitled to assume that it has been done in
the manner required.
The above-mentioned doctrine of Indoor Management or Turquand Rule has limitations of its
own. That is to say, it is inapplicable to the following cases, namely:
(a) Actual or constructive knowledge of irregularity: The rule does not protect any
person when the person dealing with the company has notice, whether actual or
constructive, of the irregularity.

In Howard vs. Patent Ivory Manufacturing Co. where the directors could not defend
the issue of debentures to themselves because they should have known that the extent
to which they were lending money to the company required the assent of the general
meeting which they had not obtained.
Likewise, in Morris v Kansseen, a director could not defend an allotment of shares to
him as he participated in the meeting, which made the allotment. His appointment as
a director also fell through because none of the directors appointed him was validly in
office.
(b) Suspicion of Irregularity: The doctrine in no way, rewards those who behave
negligently. Where the person dealing with the company is put upon an inquiry, for
example, where the transaction is unusual or not in the ordinary course of business, it
is the duty of the outsider to make the necessary enquiry.
The protection of the “Turquand Rule” is also not available where the circumstances
surrounding the contract are suspicious and therefore invite inquiry. Suspicion should
arise, for example, from the fact that an officer is purporting to act in matter, which is
apparently outside the scope of his authority. Where, for example, as in the case of
Anand Bihari Lal vs. Dinshaw & Co. the plaintiff accepted a transfer of a company’s
property from its accountant, the transfer was held void. The plaintiff could not have
supposed, in absence of a power of attorney that the accountant had authority to
effect transfer of the company’s property.
Similarly, in the case of Haughton & Co. v. Nothard, Lowe & Wills Ltd. where a
person holding directorship in two companies agreed to apply the money of one
company in payment of the debt to other, the court said that it was something so
unusual “that the plaintiff were put upon inquiry to ascertain whether the persons
making the contract had any authority in fact to make it.” Any other rule would “place
limited companies without any sufficient reasons for so doing, at the mercy of any
servant or agent who should purport to contract on their behalf.”
(c) Forgery: The doctrine of indoor management applies only to irregularities which might
otherwise affect a transaction but it cannot apply to forgery which must be regarded
as nullity.
Forgery may in circumstances exclude the ‘Turquand Rule’. The only clear illustration
is found in the Ruben v Great Fingall Consolidated. In this case the plaintiff was the
transferee of a share certificate issued under the seal of the defendant’s company. The
company’s secretary, who had affixed the seal of the company and forged the signature
of the two directors, issued the certificate.

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The plaintiff contended that whether the signature were genuine or forged was apart
of the internal management, and therefore, the company should be estopped from
denying genuineness of the document. But it was held, that the rule has never been
extended to cover such a complete forgery.
SUMMARY
Company
⬥ An artificial person created under the Companies Act, 2013 with distinct characteristics
of separate legal entity and perpetual succession.
⬥ The capital of the company is divided into transferable shares and shareholders called
as members because their name is entered into the Register of members.
⬥ The member of the company generally has limited liability upto the extent of unpaid
nominal value of shares held by him.
Corporate veil theory
⬥ Saloman vs. Saloman & Co. Ltd. laid that company is a juristic person different and
separate from its members.
⬥ Under certain situations the courts may lift the corporate veil/ veil of incorporation and
thus disregard the separate legal entity of the company. This is called lifting the
corporate veil.
Incorporation of company
⬥ A company is said to come into existence only after its registration and issue of
Certificate of Incorporation.
⬥ The company to be incorporated must be validly constituted and be an association for

a lawful purpose. After all the formalities are compiled and the Registrar is satisfied,
the company is registered under the Act.
⬥ On registration the Registrar shall issue a Certificate of Incorporation to the company.

⬥ To provide an integrated process of incorporation, the MCA has introduced SPICe for
simplifying the filing of forms.
Effect of registration
⬥ From the date of incorporation the company becomes a legal person by the name
contained in the Memorandum and capable of exercising all the functions of an
incorporated company.

⬥ The issue of Certificate of Incorporation is considered as conclusive evidence as to

compliance of all the legal formalities in respect of registration of company.
Capital
⬥ Nominal or authorized share capital: Authorized by memorandum to be the
maximum amount of share capital
⬥ Issued share capital: That part of authorized capital which us offered by the company
for subscription.
⬥ Subscribed share capital: Such part of the capital which us for the time being
subscribed by the members of a company.
⬥ Called up capital: Such part of the capital that has been called for payment.
⬥ Paid up capital: It is the total amount paid or credited as paid up on shares issued.
Paid up capital= Called up capital – calls in arrears.
Share Capital
⬥ Equity share capital: with reference to any company limited by shares, means all share
capital which is not preference share capital.
⬥ Preference share capital: with reference to any company limited by shares, means
that part of the issued share capital of the company which carries or would carry a
preferential right with respect to— payment of dividend and repayment.
Memorandum of Association
⬥ It is known as charter of the company.
⬥ It is fundamental document of a company containing the fundamental conditions upon
which a company is to be incorporated.
⬥ It lays object and scope of activities and limitations on the power of a company beyond
which the company cannot go.
⬥ Any act done or contracts made by a company which are beyond the express or implied
scope of its memorandum, are said to be null and void. This is termed as doctrine of
ultra vires.
⬥ The conditions and the provisions of the memorandum can be altered to the extent
and in the manner provided by the Act which allows alterations by special resolution
and confirmation by Central Government/Registrar of Companies.
Article of Association
⬥ Document containing rules, regulations or bye-laws of a company.
⬥ It lays down the form in which the business of the company is to be carried on.

a
⬥ It also lays down the powers of directors and officers of the company and thus forming
the basis of a contract between the company and the members and between the
members Inter se (among themselves).
⬥ Every company have an absolute power to alter its Articles of Association by a special
resolution subject to the provisions of the Act and conditions of the memorandum of
the company.
Doctrine of Constructive Notice
⬥ As memorandum and article is a public document so it is considered that every person
dealing with the company is deemed to have notice of the contents of memorandum
and articles of the company.
⬥ It is presumed that person have not only read these documents but have also
understood their proper meaning.
Doctrine of Indoor Management/ Turquand Rule
⬥ This is an exception to doctrine of Constructive Notice.
⬥ This protects the outsiders against the company, who acts in good faith.
⬥ It says that person who deals with the company are not bound to enquire into the
regularity of the internal procedure of the company. They assume that everything is
done in accordance with the procedure laid down in the article of the company and
thus not affecting adversely the rights of the dealing parties in any way by irregularity
of the internal procedure.
COMPANIES ACT, 2013
Company – Definition, Characteristics & Corporate Veil
Section 2(20) Characteristics Corporate Veil

Company means a company 1. Separate Legal Means the company is
incorporated under this Act or Entity identified separately from the
under any previous company law. 2.Perpetual members of the company.
Chief Justice Marshall Succession Lifting Of Corporate Veil
A company is an artificial being, 3.Limited Liability Means ignoring legal entity of
invisible, intangible and existing of members the company. Following are the
only in the contemplation of law. 4.Common Seal - circumstances-
Professor Haney official signature a) Trading with Enemy
Company is an incorporated of co. b) Protection of Revenue
association, which is an artificial 5.Artificial Legal c) To avoid a legal obligation
person created by law, having a Person d) Formation of subsidiaries to
separate entity, with a perpetual act as agent
succession and a common seal. e)Prevention of Fraud or
Improper Conduct

Classes of Company
Mode of Registration / Incorporation of Company
Formation of Formation of OPC

Promoter
Company
[Sec. 2(69)]
Only one person as member.
2. Minimum paid up capital – no limit prescribed.
3. MOA shall indicate the name of nominee
4. Prior written consent of nominee shall be filed with ROC.
5. Such nominee may withdraw his consent
6. Member of OPC may at any time change the name of nominee by
giving notice to the company and the company to the ROC.
7. Such change shall not be deemed to be an alteration of the MOA.
8. Only a natural person who is an Indian citizen and resident
in India (person who has stayed in India for a period of not less than
120 days during the immediately preceding financial year) can be a
member or nominee.
9. One person can be a member or nominee of one OPC at any point
of time.
10. No minor shall become member or nominee of the OPC or can
hold share with beneficial interest.
11. OPC cannot be converted into a company u/s 8. But may be
converted to private or public companies.
12. OPC cannot carry out Non-Banking Financial Investment
activities.

a
Share & Share Capital Company
Classification Kinds of share capital

Shares [Section 2(84)]
(i) Equity share capital —
(a) Authorized capital- Capital Share- means a share
with voting rights; or
authorized by MOA to be in the share capital of
with differential rights as to dividend,
maximum capital of company. a company and
voting or otherwise in accordance with
(b) Issued capital: Capital includes stock.
prescribed rules;
issued for subscription; Numbering of
(ii) ‘‘Preference share capital’’, part of the
(c) Subscribed capital- Capital shares- Every share in
issued share capital of the company which
subscribed by members of a company having a
carries or would carry a preferential right
company share capital shall be
with respect to—
(d) Called up capital- Capital distinguished by its
payment of dividend, either as a fixed
called for payment. distinctive number.
amount or an amount calculated at a
(e) Paid up share capital- Shares are a
fixed rate, which may either be free of
Aggregate amount of money movable property
or subject to income-tax; and
credited as paid on shares transferable in the
repayment, in the case of a winding
issued not including any other manner provided by
up or repayment of capital, of the
amount received in respect of the articles of the
amount of the share capital paid-up or
such shares. company.
deemed to have been paid-up.
Memorandum of Association
MOA of a company as originally framed or as altered from time to time in pursuance of any previous
company law or of this Act
Object of registering Doctrine of Ultravires

Contents of MOA
MOA
Ultra means ‘beyond’ Vires means
1. It contains objects of 1. Name Clause ‘powers’
Co.
2.Registered Office 1. When an act beyond object clause of MOA
2. It shows co.’s powers. Clause is ultravires the company and null and void.
3. Every person dealing 3. Object Clause 2. Ultravires act cannot be ratified even by
with company is
4. Liability Clause unanimous consent of all the shareholders.
presumed to have
knowledge of MOA. 5.Capital Clause 3. Act ultravires the directors, but Intravires
(Authorised Capital) Company, shareholders may ratify it.
Shareholders know
for what his money is 6.Nomination Clause 4. Act ultravires the AOA, can be ratified by
used (OPC)
altering AOA.

Articles of Association
Document Doctrine of Constructive Doctrine of Indoor

containing- Notice Management
1. MOA & AOA are public 1. Exception to doctrine of Constructive

1. Rules, regulations
documents open & Notice.
or bye-laws of a
company accessible to all. 2. Protects outsiders against company,
2. Any person dealing with acted in good faith.
2. Form in which
business to be Co. is presumed to have 3. Persons dealing with Company are
carried on. read MOA & AOA presumed to have read the registered
irrespective- of whether he documents and to see that the
3. Powers of reads it or not. proposed dealing is not inconsistent
directors & officers
3. Not only read these therewith, but they need not enquire
of the company
documents but have also into the regularity of internal
understood their proper proceedings as required by MOA &
meaning. AOA
TEST YOUR KNOWLEDGE

1. Maximum number of members under a private company as provided under the
Companies Act, 2013.
(a) 50
(b) 150
(c) 200
(d) No limit
2. Document that regulates the management of internal affairs of a company are-

(a) Memorandum of Association
(b) Prospectus
(c) Articles of Association

(d) Certificate of incorporation

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3. Under the Companies Act, 2013, “Significant influence” constitutes how much % of total
share capital or of business decisions under an agreement?
(a) At least 2%
(b) At least 2.5%
(c) At least 10%
(d) At least 20%

4. A Private Company which is subsidiary of a Public Company is treated as-
(a) Public Company
(b) Private Company

(c) Holding Company
(d) Dormant Company
5. Which one of the following is not the content of the Memorandum of Association?
(a) Name clause
(b) Registered office clause
(c) Objects clause
(d) Board of Directors clause.
6. An Act is said to be ultra vires a company when it is beyond the powers.
(a) Of the Company
(b) Of the Directors
(c) Of the Directors but not the company
(d) Conferred on the company by the Articles of Association.

7. Turquand Rule is related to:
(a) Doctrine of ultra vires
(b) Doctrine of constructive notice

(c) Doctrine of indoor management
(d) Doctrine of subrogation
8. The minimum number of members in a private company and public company are
(a) Three and Seven respectively
(b) Two and seven respectively

(c) Two and nine respectively

9. Only a natural person who is an Indian citizen and who has stayed in India for a period
of at least _____ days during the immediately preceding financial year shall be eligible to
incorporate an OPC.
(a) 180 days

(b) 181 days
(c) 120 days
(d) 183 days
10. XYZ Limited is having 15% share capital held by X Limited and 50% held by Central
Government and 10% held by State Government and 25% held by other people then that
company will be _________ .
(a) Government Company
(b) Private Company
(c) Public Company
(d) Dormant company
11. The Doctrine of indoor management is a protection that is available to:
(a) Shareholders
(b) Outsiders who deal with the company
(c) Board of Directors
(d) Creditors
12. The doctrine which advocates the fact that company cannot act beyond the scope of its
memorandum of association is:
(a) Doctrine of constructive notice
(b) Doctrine of indoor management
(c) Doctrine of ultra vires
(d) Doctrine of intra vires

a
1. What is meant by a Guarantee Company? State the similarities and dissimilarities
between a Guarantee Company and a Company having Share Capital.
2. Can a non-profit organization be registered as a company under the Companies Act,
2013? If so, what procedure does it have to adopt?
3. Briefly explain the doctrine of “ultravires” under the Companies Act, 2013. What are the
consequences of ultravires acts of the company?
4. Explain clearly the doctrine of ‘Indoor Management’ as applicable in cases of companies

registered under the Companies Act, 2013. Explain the circumstances in which an
outsider dealing with the company cannot claim any relief on the ground of ‘Indoor
Management’.
5. A, an assessee, had large income in the form of dividend and interest. In order to reduce
his tax liability, he formed four private limited company and transferred his investments
to them in exchange of their shares. The income earned by the companies was taken
back by him as pretended loan. Can A be regarded as separate from the private limited
company he formed?
6. Sound Syndicate Ltd., a public company, its articles of association empowers the
managing agents to borrow both short and long term loans on behalf of the company,
Mr. Liddle, the director of the company, approached Easy Finance Ltd., a non banking
finance company for a loan of ` 25,00,000 in name of the company.
The Lender agreed and provided the above said loan. Later on, Sound Syndicate Ltd.
refused to repay the money borrowed on the pretext that no resolution authorizing such
loan have been actually passed by the company and the lender should have enquired
about the same prior providing such loan hence company not liable to pay such loan.
Analyse the above situation in terms of the provisions of Doctrine of Indoor Management
under the Companies Act, 2013 and examine whether the contention of Sound Syndicate
Ltd. is correct or not?
7. Naveen incorporated a “One Person Company” making his sister Navita as the nominee.
Navita is leaving India permanently due to her marriage abroad. Due to this fact, she is
withdrawing her consent of nomination in the said One Person Company. Taking into
considerations the provisions of the Companies Act, 2013 answer the questions given
below.
(a) If Navita is leaving India permanently, is it mandatory for her to withdraw her
nomination in the said One Person Company?

(b) If Navita maintained the status of Resident of India after her marriage, then can
she continue her nomination in the said One Person Company?
8. Examine the following whether they are correct or incorrect along with reasons:
(a) A company being an artificial person cannot own property and cannot sue or be
sued.
(b) A private limited company must have a minimum of two members, while a public
limited company must have at least seven members.
ANSWERS/HINTS
Answers to MCQs
1. (c) 2. (c) 3. (d) 4. (a) 5. (d) 6. (a)
7. (c) 8. (b) 9. (c) 10. (a) 11. (b) 12. (c)

1. Company limited by guarantee: Section 2(21) of the Companies Act, 2013 defines it
as the company having the liability of its members limited by the memorandum to
such amount as the members may respectively undertake by the memorandum to
contribute to the assets of the company in the event of its being wound up. Thus, the
liability of the member of a guarantee company is limited upto a stipulated sum
mentioned in the memorandum. Members cannot be called upon to contribute beyond
that stipulated sum.
Similarities and dis-similarities between the Guarantee Company and the
Company having share capital:
The common features between a ‘guarantee company’ and ‘share company’ are legal
personality and limited liability. In the latter case, the member’s liability is limited by
the amount remaining unpaid on the share, which each member holds. Both of them
have to state in their memorandum that the members’ liability is limited.
However, the point of distinction between these two types of companies is that in the
former case the members may be called upon to discharge their liability only after
commencement of the winding up and only subject to certain conditions; but in the
latter case, they may be called upon to do so at any time, either during the company’s
life-time or during its winding up.

a
2. Yes, a non-profit organization be registered as a company under the Companies Act,

2013 by following the provisions of section 8 of the Companies Act, 2013. Section 8 of
the Companies Act, 2013 deals with the formation of companies which are formed to
• promote the charitable objects of commerce, art, science, sports, education,
research, social welfare, religion, charity, protection of environment etc.
• Such company intends to apply its profit in
• promoting its objects and
• prohibiting the payment of any dividend to its members.
The Central Government has the power to issue license for registering a section 8
company.
(i) Section 8 allows the Central Government to register such person or association
of persons as a company with limited liability without the addition of words
‘Limited’ or ‘Private limited’ to its name, by issuing licence on such conditions
as it deems fit.
(ii) The registrar shall on application register such person or association of persons
as a company under this section.
(iii) On registration the company shall enjoy same privileges and obligations as of
a limited company.
3. Doctrine of ultra vires: The meaning of the term ultra vires is simply “beyond (their)
powers”. The legal phrase “ultra vires” is applicable only to acts done in excess of the
legal powers of the doers. This presupposes that the powers are in their nature limited.
To an ordinary citizen, the law permits whatever does the law not expressly forbid.
It is a fundamental rule of Company Law that the objects of a company as stated in its
memorandum can be departed from only to the extent permitted by the Act - thus far
and no further [Ashbury Railway Company Ltd. vs. Riche]. In consequence, any act
done or a contract made by the company which travels beyond the powers not only of
the directors but also of the company is wholly void and inoperative in law and is
therefore not binding on the company. On this account, a company can be restrained
from employing its fund for purposes other than those sanctioned by the
memorandum. Likewise, it can be restrained from carrying on a trade different from
the one it is authorised to carry on.
The impact of the doctrine of ultra vires is that a company can neither be sued on an
ultra vires transaction, nor can it sue on it. Since the memorandum is a “public
document”, it is open to public inspection. Therefore, when one deals with a company
one is deemed to know about the powers of the company. If in spite of this you enter

into a transaction which is ultra vires the company, you cannot enforce it against the
company. For example, if you have supplied goods or performed service on such a
contract or lent money, you cannot obtain payment or recover the money lent. But if
the money advanced to the company has not been expended, the lender may stop the
company from parting with it by means of an injunction; this is because the company
does not become the owner of the money, which is ultra vires the company. As the
lender remains the owner, he can take back the property in specie. If the ultra vires
loan has been utilised in meeting lawful debt of the company then the lender steps
into the shoes of the debtor paid off and consequently he would be entitled to recover
his loan to that extent from the company.
An act which is ultra vires the company being void, cannot be ratified by the
shareholders of the company. Sometimes, act which is ultra vires can be regularised by
ratifying it subsequently. For instance, if the act is ultra vires the power of the directors,
the shareholders can ratify it; if it is ultra vires the articles of the company, the company
can alter the articles; if the act is within the power of the company but is done
irregularly, shareholder can validate it.
4. Doctrine of Indoor Management (the Companies Act, 2013): According to the
“doctrine of indoor management” the outsiders, dealing with the company though are
supposed to have satisfied themselves regarding the competence of the company to
enter into the proposed contracts are also entitled to assume that as far as the internal
compliance to procedures and regulations by the company is concerned, everything
has been done properly. They are bound to examine the registered documents of the
company and ensure that the proposed dealing is not inconsistent therewith, but they
are not bound to do more. They are fully entitled to presume regularity and compliance
by the company with the internal procedures as required by the Memorandum and the
Articles. This doctrine is a limitation of the doctrine of “constructive notice” and
popularly known as the rule laid down in the celebrated case of Royal British Bank v.
Turquand. Thus, the doctrine of indoor management aims to protect outsiders against
the company.
The above mentioned doctrine of Indoor Management or Turquand Rule has

limitations of its own. That is to say, it is inapplicable to the following cases, namely:
(a) Actual or constructive knowledge of irregularity: The rule does not protect
any person when the person dealing with the company has notice, whether
actual or constructive, of the irregularity.
In Howard vs. Patent Ivory Manufacturing Co. where the directors could not
defend the issue of debentures to themselves because they should have known

a
that the extent to which they were lending money to the company required the
assent of the general meeting which they had not obtained.
Likewise, in Morris v Kansseen, a director could not defend an allotment of

shares to him as he participated in the meeting, which made the allotment. His
appointment as a director also fell through because none of the directors
appointed him was validly in office.
(b) Suspicion of Irregularity: The doctrine in no way, rewards those who behave
negligently. Where the person dealing with the company is put upon an inquiry,
for example, where the transaction is unusual or not in the ordinary course of
business, it is the duty of the outsider to make the necessary enquiry.
The protection of the “Turquand Rule” is also not available where the
circumstances surrounding the contract are suspicious and therefore invite
inquiry. Suspicion should arise, for example, from the fact that an officer is
purporting to act in matter, which is apparently outside the scope of his
authority. Where, for example, as in the case of Anand Bihari Lal vs. Dinshaw
& Co. the plaintiff accepted a transfer of a company’s property from its
accountant, the transfer was held void. The plaintiff could not have supposed,
in absence of a power of attorney that the accountant had authority to effect
transfer of the company’s property.
Similarly, in the case of Haughton & Co. v. Nothard, Lowe & Wills Ltd. where
a person holding directorship in two companies agreed to apply the money of
one company in payment of the debt to other, the court said that it was
something so unusual “that the plaintiff were put upon inquiry to ascertain
whether the persons making the contract had any authority in fact to make it.”
Any other rule would “place limited companies without any sufficient reasons
for so doing, at the mercy of any servant or agent who should purport to
contract on their behalf.”
(c) Forgery: The doctrine of indoor management applies only to irregularities

which might otherwise affect a transaction but it cannot apply to forgery which
must be regarded as nullity.
Forgery may in circumstances exclude the ‘Turquand Rule’. The only clear
illustration is found in the Ruben v Great Fingall Consolidated. In this case
the plaintiff was the transferee of a share certificate issued under the seal of the

defendant’s company. The company’s secretary, who had affixed the seal of the
company and forged the signature of the two directors, issued the certificate.
The plaintiff contended that whether the signature were genuine or forged was
apart of the internal management, and therefore, the company should be
estopped from denying genuineness of the document. But it was held, that the
rule has never been extended to cover such a complete forgery.
5. The House of Lords in Salomon Vs Salomon & Co. Ltd. laid down that a company is a
person distinct and separate from its members, and therefore, has an independent
separate legal existence from its members who have constituted the company. But
under certain circumstances the separate entity of the company may be ignored by the
courts. When that happens, the courts ignore the corporate entity of the company and
look behind the corporate façade and hold the persons in control of the management
of its affairs liable for the acts of the company. Where a company is incorporated and
formed by certain persons only for the purpose of evading taxes, the courts have
discretion to disregard the corporate entity and tax the income in the hands of the
appropriate assesse.
In Dinshaw Maneckjee Petit case it was held that the company was not a genuine
company at all but merely the assessee himself disguised that the legal entity of a
limited company. The assessee earned huge income by way of dividends and interest.
So, he opened some companies and purchased their shares in exchange of his income
by way of dividend and interest. This income was transferred back to assessee by way
of loan. The court decided that the private companies were a sham and the corporate
veil was lifted to decide the real owner of the income.
In the instant case, the four private limited companies were formed by A, the assesse,
purely and simply as a means of avoiding tax and the companies were nothing more
than the façade of the assesse himself. Therefore, the whole idea of Mr. A was simply
to split his income into four parts with a view to evade tax. No other business was done
by the company.
Hence, A cannot be regarded as separate from the private limited companies he formed.
6. Doctrine of Indoor Management
According to this doctrine, persons dealing with the company need not inquire whether
internal proceedings relating to the contract are followed correctly, once they are satisfied
that the transaction is in accordance with the memorandum and articles of association.

a
Stakeholders need not enquire whether the necessary meeting was convened and held
properly or whether necessary resolution was passed properly. They are entitled to
take it for granted that the company had gone through all these proceedings in a
regular manner.
The doctrine helps protect external members from the company and states that the
people are entitled to presume that internal proceedings are as per documents
submitted with the Registrar of Companies.
Thus,
1. What happens internal to a company is not a matter of public knowledge. An
outsider can only presume the intentions of a company, but do not know the
information he/she is not privy to.
2. If not for the doctrine, the company could escape creditors by denying the
authority of officials to act on its behalf.
In the given question, Easy Finance Ltd. being external to the company, need not
enquire whether the necessary resolution was passed properly. Even if the company
claim that no resolution authorizing the loan was passed, the company is bound to pay
the loan to Easy Finance Ltd.
7. (A) Yes, it is mandatory for Navita to withdraw her nomination in the said OPC as
she is leaving India permanently as only a natural person who is an Indian
citizen and resident in India shall be a nominee in OPC.
(B) Yes, Navita can continue her nomination in the said OPC, if she maintained the
status of Resident of India after her marriage by staying in India for a period of
not less than 120 days during the immediately preceding financial year.
8. (a) A company being an artificial person cannot own property and cannot sue
or be sued
Incorrect: A company is an artificial person as it is created by a process other
than natural birth. It is legal or judicial as it is created by law. It is a person
since it is clothed with all the rights of an individual.
Further, the company being a separate legal entity can own property, have
banking account, raise loans, incur liabilities and enter into contracts. Even
members can contract with company, acquire right against it or incur liability
to it. It can sue and be sued in its own name. It can do everything which any
natural person can do except be sent to jail, take an oath, marry or practice a
learned profession. Hence, it is a legal person in its own sense.

(b) A private limited company must have a minimum of two members, while
a public limited company must have at least seven members.
Correct: Section 3 of the Companies Act, 2013 deals with the basic requirement
with respect to the constitution of the company. In the case of a public
company, any 7 or more persons can form a company for any lawful purpose
by subscribing their names to memorandum and complying with the
requirements of this Act in respect of registration. In exactly the same way, 2 or
more persons can form a private company.

1.2

CHAPTER 7
THE NEGOTIABLE
INSTRUMENTS ACT, 1881
LEARNING OUTCOMES
♦ The meaning, characteristics and elements of different kinds of

negotiable instruments
♦ Classification and various ways of negotiation, Know about
provisions related to Presentment of Instruments and Rules of
Compensation
CHAPTER OVERVIEW
Chapter covers following headings
Notes, Bills &

Cheques-Types, Modes of Presentment of Rules of
Classification and its Negotiation Instruments Compensation
characterstics

7.2 BUSINESS LAWS
INTRODUCTION
The law relating to negotiable instruments is the law of the commercial world which was
enacted to facilitate the activities in trade and commerce making provision for giving
sanctity to the instruments of credit which could be deemed to be convertible into money
and easily passable from one person to another. In the absence of such instruments, the
trade and commerce activities were likely to be adversely affected as it was not practicable
for the trading community to carry with it the bulk of the currency in force. The source of
Indian law relating to such instruments is admittedly the English Common Law.
The main objective of the Act is to legalise the system by which instruments contemplated
by it could pass from hand to hand by negotiation like any other goods.
The Law in India relating to negotiable instruments is contained in the Negotiable

Instruments Act, 1881. This is an Act to define and amend the law relating to promissory
notes, bills of exchange and cheques. The Act applies to the whole of India, but nothing
herein contained affects the Reserve Bank of India Act, 1934, (section 21 which provides the
Bank to have the right to transact Government business in India), or affects any local usage
relating to any instrument in an oriental language.
Provided that such usages may be excluded by any words in the body of the instrument,
which indicate an intention that the legal relations of the parties thereto shall be governed
by this Act; and it shall come into force on the first day of March, 1882.
The provisions of this Act are also applicable to Hundis, unless there is a local usage to the
contrary. Other native instruments like Treasury Bills, Bearer Debentures, Railway Receipts,
Delivery Orders, Bill of Lading etc. are also considered as negotiable instruments either by
mercantile custom or under other enactments.
Recent developments: The Act was amended several times. Following are the significant
amendments made in the Negotiable Instruments Act, 1881 (N.I. Act):
♦ The Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002;
♦ The Negotiable Instruments (Amendment) Act, 2015, and
♦ The Negotiable Instruments (Amendment) Act, 2018.

THE NEGOTIABLE INSTRUMENTS ACT, 1881 7.3
1. MEANING OF NEGOTIABLE INSTRUMENTS

Negotiable Instruments is an instrument (the word instrument means a document) which is
freely transferable (by customs of trade) from one person to another by mere delivery or by
indorsement and delivery. The property in such an instrument pass to a bonafide transferee
for value.
The Act does not define the term ‘Negotiable Instruments’. However, Section 13 of the Act
provides for only three kinds of negotiable instruments namely bills of exchange,
promissory notes and cheques, payable either to order or bearer.
It is to be noted that Hundies, Treasury Bills, Bearer Debentures, Railway Receipts, Delivery
Orders, Bill of Lading etc. are also considered as negotiable instruments either by mercantile
custom or usage.
Type of Negotiable
Promissory Note
Instrument
Bill of Exchange
Cheque
(1) A negotiable instrument is payable to order when:

a. It is expressed to be so payable
b. When it is expressed to be payable to a specified person and does not contain
words prohibiting its transfer. (i.e. it is transferrable by indorsement and
delivery)
(2) A negotiable instrument is payable to bearer when:
a. When it is expressed to be so payable e.g. pay bearer

b. When the only or last indorsement (indorsement means signing of the
instrument) on the instrument is an indorsement in blank i.e., the person who
possesses it can demand payment. For example,. A cheque made payable to
specified person and that cheque is endorsed by signing on the back of the
cheque by that specified person.

7.4 BUSINESS LAWS
Essential Characteristics of Negotiable Instruments

1. It is necessarily in writing.
2. It should be signed.
3. It is freely transferable from one person to another.
4. Holder’s title is free from defects.

5. It can be transferred any number of times till its satisfaction.
6. Every negotiable instrument must contain an unconditional promise or order to pay
money. The promise or order to pay must consist of money only.
7. The sum payable, the time of payment, the payee, must be certain.
8. The instrument should be delivered. Mere drawing of instrument does not create
liability.
Characterstics
certainity of
can be
title free unconditional sum payable,
transferrred
written signed transferable from promise/order time of delivered
number of
defects to pay payment and
times
the payee
2. PROMISSORY NOTE
Meaning
According to section 4 of the NI Act, 1881, “A 'promissory note' is an instrument in writing
(not being a bank-note or a currency-note) containing an unconditional undertaking signed
by the maker, to pay a certain sum of money only to, or to the order of, a certain person, or
to the bearer of the instrument.”

Specimen of Promissory note
` 10,000 Lucknow
April 10, 2022
Three months after date, I promise to pay Shri Ramesh (Payee) or to his order the
sum of Rupees Ten Thousand, for value received.
Stamp
Sd/-
Ram
To,
Shri Ramesh,
B-20, Green Park,
Mumbai.
(Maker)
Parties to promissory note

1. Maker: The person who makes the promise to pay is called the Maker. He is the
debtor and must sign the instrument.
2. Payee: Payee is the person to whom the amount on the note is payable.
Essential Characteristics of a Promissory Note

a. In writing- An oral promise to pay is not sufficient.
b. There must be an express promise to pay. Mere acknowledgment of debt is
insufficient.
Example 1: I acknowledge myself to be indebted to B in ` 1,000, to be paid on
demand, for value received. (Valid promissory note as the promise to pay is definite)
Example 2: “Mr. B, I.O.U ` 1,000.” – Invalid promissory note as there is no promise to

pay. It is just an acknowledgement of debt.

7.6 BUSINESS LAWS
c. The promise to pay should be definite and unconditional. Therefore, instruments

payable on performance or non-performance of a particular act or on the happening
or non-happening of an event, are not promissory notes. However, the promise to
pay may be subject to a condition, which according to the ordinary experience of
mankind, is bound to happen.
Example 3: I promise to pay B ` 500 seven days after my marriage with C. (the
promissory note is invalid as marriage with C may or may not happen.)
Example 4: I promise to pay B ` 500 on D’s death- as the death of D is certain,
promise in unconditional. Thus, the promissory note is valid.
Example 5: I promise to pay B ` 500 on D’s death, provided D leaves me enough to
pay that sum. Invalid promissory note as promise is dependent on D’s leaving behind
money which is not certain.
d. A promissory note must be signed by the maker otherwise it is incomplete and
ineffective.
e. Promise to pay money only.
Example 6: I promise to pay B ` 500 and to deliver to him my black horse on 1st
January next. It is not a valid promissory note, as the promisor needs to deliver its
black horse which is not money.
f. Promise to pay a certain sum.
Example 7: “I promise to pay B ` 500 and all other sums which shall be due to him.”-
Promissory note invalid as the amount payable is not certain.
But sometimes, the language of a promissory note is such that the amount payable
can be easily ascertained. In such cases, the promissory note will be valid.
Example 8: “I promise to pay B ` 500 alongwith simple interest at the rate of 12% per
annum.
g. The maker and payee must be certain, definite and different persons. A
promissory note cannot be made payable to the bearer [Section 31 of the Bank of
India Act, 1934 (RBI Act)]. Only the Reserve Bank or the Central Government can
make or issue a promissory note 'payable to bearer'.
h. Stamping: A promissory note must be properly stamped in accordance with the

provisions of the Indian Stamp Act and such stamp must be duly cancelled by
maker's signatures or initials on such stamp or otherwise.

3. BILLS OF EXCHANGE
A “bill of exchange” is an instrument in writing containing an unconditional order, signed by the
maker, directing a certain person to pay a certain sum of money only to, or to the order of, a
certain person or to the bearer of the instrument.
Specimen of Bill of Exchange
Mr. A (Drawer)
48, MP Nagar, Bhopal (M.P.)
April 10, 2022
` 10,000/-
Four months after date, pay to Mr. B (Payee) a sum of Rupees Ten Thousand, for value
received.
To,
Mr. C (Drawee)
576, Arera Colony, Bhopal (M.P.) Signature
Mr. A
Parties to the bill of exchange

a. Drawer: The maker of a bill of exchange.
b. Drawee: The person directed by the drawer to pay is called the 'drawee'. He is the
person on whom the bill is drawn. On acceptance of the bill, he is called an acceptor
and is liable for the payment of the bill. His liability is primary and unconditional.
c. Payee: The person named in the instrument, to whom or to whose order the money
is, by the instrument, directed to be paid.
Essential characteristics of bill of exchange

(a) It must be in writing.
(b) Must contain an express order to pay.

(c) The order to pay must be definite and unconditional.
(d) The drawer must sign the instrument.

7.8 BUSINESS LAWS
(e) Drawer, drawee, and payee must be certain. All these three parties may not
necessarily be three different persons. One can play the role of two. But there must
be two distinct persons in any case. As per Section 31 of RBI Act, 1934, a bill of
exchange cannot be made payable to bearer on demand.
Example 9: “On demand pay to the bearer the sum of rupees five hundred, for value
received.” It is invalid BOE.
However, a bill of exchange payable on demand, in which name of the payee is

mentioned, is valid.
Example 10: “On demand pay to A or order the sum of rupees five hundred for value
received.” It is valid BOE.
(f) The sum must be certain.

(g) The order must be to pay money only.
(h) It must be stamped.
Process of bill of exchange
Mr. Sam
(Drawer)
Drawer receives Sold goods to

payment and Mrs. Reeta
transaction is (Drawee) and
completed draws a BoE
On maturity drawer
presents the The BoE is delivered
instrument to to Reeta and is
drawee for accepted by her
payment unconditionally.

In above image, firstly the seller sold goods to the buyer/customer and then draws a bill of
exchange on him. The Bill of exchange is delivered by the buyer who accepts it without any
condition. On maturity of bill of exchange, the buyer will pay the amount due to the payee.
(The payee may be the drawer himself or a third party.)
Difference between promissory note and bill of exchange

S.no Basis Promissory Note Bill of Exchange
1. Definition "A Promissory Note" is an “A bill of exchange” is an

instrument in writing (not instrument in writing containing
being a banknote or a an unconditional order, signed
currency-note) containing an by the maker, directing a certain
unconditional undertaking person to pay a certain sum of
signed by the maker, to pay a money only to, or to the order
certain sum of money only to, of a certain person or to the
or to the order of, a certain bearer of the instrument.
person, or to the bearer of the
instrument.
2. Nature of In a promissory note, there is a In a bill of exchange, there is an

Instrument promise to pay money. order for making payment.
3. Parties In a promissory note, there are In a bill of exchange, there are 3

only 2 parties namely: parties which are as under:
i. the maker and i. the drawer
ii. the payee ii. the drawee
iii. the payee
4. Acceptance A promissory note does not A bills of exchange needs

require any acceptance, as it is acceptance from the drawee.
signed by the person who is
liable to pay.
5. Payable to A promissory note cannot be On the other hand, a bill of

bearer made payable to bearer. exchange can be drawn payable
to bearer. However, it cannot be
payable to bearer on demand.

7.10 BUSINESS LAWS
4. CHEQUE [SECTION 6]
A “cheque” is a bill of exchange drawn on a specified banker and not expressed to be
payable otherwise than on demand and it includes the electronic image of a truncated
cheque and a cheque in the electronic form.
Bill of Specified
exchange banker
Drawn Payable on
Cheque
on demand
Payable on demand means- It should be payable whenever the holder chooses to present
it to the drawee (the banker).
The expression “Banker” includes any person acting as a banker and any post office saving
bank [Section 3]
Explanation I: For the purposes of this section, the expressions-
(a) Cheque in the electronic form-means a cheque drawn in electronic form by using
any computer resource, and signed in a secure system with a digital signature
(with/without biometric signature) and asymmetric crypto system or electronic
signature, as the case may be;
Note- For the purposes of this section, the expressions "asymmetric crypto system",
"computer resource", "digital signature", "electronic form" and "electronic signature"
shall have the same meanings respectively assigned to them in the Information
Technology Act, 2000.
(b) “a truncated cheque” means a cheque which is truncated during a clearing cycle,
either by the clearing house or by the bank whether paying or receiving payment,
immediately on generation of an electronic image for transmission, substituting the
further physical movement of the cheque in writing.
Explanation II: For the purposes of this section, the expression “clearing house” means the
clearing house managed by the Reserve Bank of India or a clearing house recognized as
such by the Reserve Bank of India.
Explanation III: For the purposes of this section, the expressions “asymmetric crypto system”,
“computer resource”, “digital signature”, “electronic form” and “electronic signature” shall
have the same meanings respectively assigned to them in the Information Technology
Act, 2000.

A combined reading of sections 5 and 6 tells us that a bill of exchange is a negotiable

instrument in writing containing an instruction to a third party to pay a stated sum of money
at a designated future date or on demand. Whereas a cheque is also a bill of exchange but is
drawn on a banker and payable on demand.
Specimen of Cheque
Date:....................
Pay ........................................................................................................................................................
a sum of Rupees.................................................................................................. `
A/C No. 12345678910
ABC Bank
622, Vijay Nagar, Indore (M. P.)
Signature
01212 1125864 000053 38
Parties to Cheque
1. Drawer: The person who draws a cheque i.e., makes the cheque (Debtor). His liability
is primary and conditional.
2. Drawee: The specific bank on whom cheque is drawn. He makes the payment of the
cheque. In case of cheque, drawee is always banker.
“drawee in case of need”— When in the bill or in any indorsement thereon, the name of
any person is given in addition to the drawee to be resorted to in case of need such person
is called a “drawee in case of need”.
3. Payee: The person named in the instrument (i.e., the person in whose favour cheque
is issued), to whom or to whose order the money is, by the instrument, directed to be paid,
is called the payee. The payee may be the drawer himself or a third party.
Cheque
Person who is a Person who is directed to person in whose favour

maker pay issued
Drawer Drawee Payee

7.12 BUSINESS LAWS
Essential Characteristics of a cheque

According to the definition of cheque under section 6, a cheque is a species of bill of
exchange. Thus, it should fulfil:
a. all the essential characteristics of a bill of exchange
b. Must be drawn on a specified banker. Note: These two additional features distinguish
a cheque from bill. Thus, all cheques are bills
c. It must be payable on demand. while all bills are not cheques.
5. CLASSIFICATION OF NEGOTIABLE INSTRUMENTS

“Bearer instrument” and “order instrument” [Section 13]
Bearer Instrument: It is an instrument where the name of the payee is blank or where the
name of payee is specified with the words “or bearer” or where the last indorsement is
blank. Such instrument can be negotiated by mere delivery.
Order Instrument: It is an instrument which is payable to a person or Payable to a person or
his order or Payable to order of a person or where the last indorsement is in full, such
instrument can be negotiated by indorsement and delivery.
Bearer Instrument Order Instrument

name of the payee is payable to a person, or
blank or Payable to a person /
name of payee is his order, or
specified with the words Payable to order of a
“or bearer” or person, or
the last indorsement is the last indorsement is
blank in full,
negotiated by mere negotiated by
delivery indorsement and
delivery
“Inland instrument” and “Foreign instrument” [Sections 11 & 12]

“Inland instrument”: A promissory note, bill of exchange or cheque drawn or made in India
and made payable in, or drawn upon any person resident in India shall be deemed to be an
inland instrument.

Example 11: (i) A promissory note made in Kolkata and payable in Mumbai.
(ii) A bill drawn in Varanasi on a person resident in Jodhpur (although it is stated to be
payable in Singapore)
(iii) A, a resident of Agra, drew (i.e., made) a bill of exchange in Agra on B, a merchant in
New York. And B accepted the bill of exchange as payable in Delhi. It is an inland bill of
exchange. In this case, the bill of exchange was drawn in India and also payable in India.
(iv) A, resident of Mumbai, drew a bill of exchange in Mumbai on B, a merchant in Mathura.
And B accepted the bill of exchange as payable in London. It is also an inland bill of
exchange. In this case, the bill of exchange was drawn in India on a person resident in India.
It is immaterial that the amount is payable in London.
An inland instrument remains inland even if it has been endorsed in a foreign country.
(v) If the bills of exchange mentioned in above two examples, are endorsed in France, they
will remain inland bills.
Place where Instrument is Residence of Person on Nature of Instrument

drawn and made payable whom Instrument is drawn
+ Payable in India OR are Inland Instruments
P/N, BOE, C drawn/made in
+ drawn upon a person
India
resident in India.
“Foreign instrument”: A foreign instrument is one which is not an inland instrument.

In other words, can be understood as follows:
Place where bill is Residence of Person on whom drawn and place Nature of
drawn where made payable Instrument
on a person resident in or outside India + made
payable in India
P/N, BOE, C
on a person residing outside India + payable are foreign
drawn/made
outside India. bills.
outside India
on a person residing in India + payable outside
India
Liability of maker/ drawer of foreign bill

In the absence of a contract to the country, the liability of the maker or drawer of a foreign
promissory note or bill of exchange or cheque is regulated in all essential matters by the law
of the place where he made the instrument, and the respective liabilities of the acceptor and
indorser by the law of the place where the instrument is made payable (Section 134).

7.14 BUSINESS LAWS
Example 12: A bill of exchange is drawn by A in Berkley where the rate of interest is 15%
and accepted by B payable in Washington where the rate of interest is 6%. The bill is
indorsed in India and is dishonoured. An action on the bill is brought against B in India. He
is liable to pay interest at the rate of 6% only. But if A is charged as drawer, he is liable to
pay interest at 15%.
Inland instrument-when B.o.E/ P/N, Foreign instrument-when

Cheque B.o.E/ P/N, Cheque, IS NOT
drawn /made in India Drawn in India
made payable in/drawn upon Made in India

person resident in India
Made payable in
India
Inchoate and Ambiguous Instruments

Inchoate Instrument: It means an instrument that is incomplete in certain respects. The
drawer/ maker/ acceptor/ indorser of a negotiable instrument may sign and deliver the
instrument to another person in his capacity leaving the instrument, either wholly blank or
having written on it the word incomplete. Such an instrument is called an inchoate
instrument and this gives a power to its holder to make it complete by writing any amount
either within limits specified therein or within the limits specified by the stamp’s affixed on
it. The principle of this rule of an inchoate instrument is based on the principle of
estoppel.
Liability on drawing inchoate instrument: The person signing and delivering the inchoate
instrument is liable both to a holder and holder in due course. However, there is a difference
in their respective rights:
The holder of such an instrument cannot recover the amount in excess of the amount
intended to be paid by the signor.
The holder in due course can, however, recover any amount on such instrument provided it
is covered by the stamp affixed on the instrument.
Section 20 of the Act reads as “Where one person signs and delivers to another a paper
stamped in accordance with the law relating to negotiable instruments then in force in India,
and either wholly blank or having written thereon an incomplete negotiable instrument, he

thereby gives prima facie authority to the holder thereof to make or complete, as the case
may be, upon it a negotiable instrument, for any amount specified therein and not
exceeding the amount covered by the stamp. The person so signing shall be liable upon
such instrument, in the capacity in which he signed the same, to any holder in due course
for such amount. Provided that no person other than a holder in due course shall recover
from the person delivering the instrument anything in excess of the amount intended by
him to be paid thereunder”.
Example 13: A person signed a blank acceptance on a bill of exchange and kept it in his
drawer. The bill was stolen by X and he filled it up for ` 20,000 and negotiated it to an
innocent person for value. It was held that the signer to the blank acceptance was not liable to
the holder in due course because he never delivered the instrument intending it to be used as
a negotiable instrument. Further, as a condition of liability, the signer as a maker, drawer,
indorser or acceptor must deliver the instrument to another. In the absence of delivery, the
signer is not liable. Furthermore, the paper so signed and delivered must be stamped in
accordance with the law prevalent at the time of signing and on delivering otherwise the
signer is not estopped from showing that the instrument was filled without his authority.
Ambiguous Instrument: Section 17 of the Act, reads as: “Where an instrument may be
construed either as a promissory note or bill of exchange, the holder may at his election
treat it as either, and the instrument shall be thenceforward treated accordingly.“
Thus, an instrument which is vague and cannot be clearly identified either as a bill of
exchange, or as a promissory note, is an ambiguous instrument. In other words, such an
instrument may be construed either as promissory note, or as a bill of exchange. Section 17
provides that the holder may, at his discretion, treat it as either and the instrument shall
thereafter be treated accordingly. Thus, after exercising his option, the holder cannot
change that it is the other kind of instrument.
6. NEGOTIATION (TRANSFER) OF NEGOTIABLE

INSTRUMENTS
One of the essential characteristics of a negotiable instrument is that it is freely transferable
from one person to another. The rights in a negotiable instrument can be transferred from
one person to another by negotiation.
According to Section 14 of the N.I. Act, when a negotiable instrument is transferred to any
person with a view to constitute the person holder thereof, the instrument is deemed to
have been negotiated. Thus, there is a transfer of ownership of the instrument. Negotiable
instruments may be negotiated either by delivery when these are payable to bearer or by
indorsement and delivery when these are payable to order.

7.16 BUSINESS LAWS
Modes of Negotiation
in case where p/n, BoE Actual

or cheque payable to by delivery
bearer
Modes of Constructive
negotiation
in case where p/n,
indorsement +
BoE or cheque
delivery
payable to order
(i) A promissory note, bill of exchange or cheque payable to bearer is negotiable by the
delivery thereof.
(ii) A promissory note, bill of exchange or cheque payable to order is negotiable by the
holder by indorsement and delivery thereof.
Example 14: X drew a cheque for Rs. 50,000 payable to Y and delivered it to him. Y
indorsed the cheque in favour of Z but kept it in his table drawer. Subsequently, Y
died, and cheque was found by Z in Y’s table drawer. In this case, Z does not become
the holder of the cheque as the negotiation was not completed by delivery of the
cheque to him.
Negotiation by delivery [Section 47]

Subject to the provisions of section 58 [Instrument obtained by unlawful means or for
unlawful consideration], a promissory note, bill of exchange or cheque payable to bearer is
negotiable by delivery thereof.
Exception: A promissory note, bill of exchange or cheque delivered on condition that it is not to
take effect except in a certain event is not negotiable (except in the hands of a holder for value
without notice of the condition) unless such event happens.
Example 15
(1) A, the holder of a negotiable instrument payable to bearer, delivers it to B’s agent to
keep for B. The instrument has been negotiated.
(2) A, the holder of a negotiable instrument payable to bearer, which is in the hands of
A’s banker, who is at the time the banker of B, directs the banker to transfer the
instrument to B’s credit in the banker’s account with B. The banker does so, and
accordingly now possesses the instrument as B’s agent. The instrument has been
negotiated, and B has become the holder of it.

Negotiation by indorsement [Section 48]

Subject to the provisions of section 58, a promissory note, bill of exchange or cheque
payable to order, is negotiable by the holder by indorsement and delivery thereof.
Importance of Delivery in Negotiation [Section 46]

Delivery of an instrument is essential whether the instrument is payable to bearer or order
for effecting the negotiation. The delivery must be voluntary, and the object of delivery
should be to pass the property in the instrument to the person to whom it is delivered. The
delivery can be, actual or constructive. Actual delivery takes place when the instrument
changes hand physically. Constructive delivery takes place when the instrument is delivered
to the agent, clerk or servant of the indorsee on his behalf or when the indorser, after
indorsement, holds the instrument as an agent of the indorsee.
Section 46 also lays down that when an instrument is conditionally or for a special purpose
only, the property in it does not pass to the transferee, even though it is indorsed to him,
unless the instrument is negotiated to a holder in due course.
The contract on a negotiable instrument until delivery remains incomplete and revocable.
The delivery is essential not only at the time of negotiation but also at the time of making or
drawing of negotiable instrument. The rights in the instrument are not transferred to the
indorsee unless after the indorsement the same has been delivered. If a person makes the
indorsement of instrument but before the same could be delivered to the indorsee the
indorser dies, the legal representatives of the deceased person cannot negotiate the same
by mere delivery thereof. (Section 57) 1
Delivery when effective between the parties

Negotiation of instruments between How delivery is to be made
the parties
As between parties standing in Delivery to be effectual must be made by
immediate relation the party making, accepting, or endorsing
the instrument, or by a person authorized
by him in that behalf.
1
According to section 57, the legal representative of a deceased person cannot negotiate by delivery
only, a promissory note, bill of exchange or cheque payable to order and indorsed by the deceased
but not delivered.
A legal representative is not an agent of the deceased. Therefore, a legal representative cannot
complete the instrument if the instrument was executed by the deceased but could not be delivered
because of his death.

7.18 BUSINESS LAWS
As between such parties and any It may be shown that the instrument was
holder of the instrument other than a delivered conditionally or for a special
holder in due course purpose only, and not for the purpose of
transferring absolutely the property
therein.
7. DISHONOUR OF CHEQUES FOR INSUFFICIENCY

OF FUNDS IN THE ACCOUNTS [SECTION 138
TO 142]
DISHONOR OF CHEQUE FOR INSUFFICIENCY, ETC., OF FUNDS IN
THE ACCOUNTS [SECTION 138]
Where any cheque drawn by a person on an account maintained by him with a banker—
• for payment of any amount of money
• to another person from that account
• for the discharge, in whole or in part, of any debt or other liability, [A cheque given
as gift or donation, or as a security or in discharge of a mere moral obligation, or for
an illegal consideration, would be outside the purview of this section]
• is returned by the bank unpaid,
• either because of the—
o amount of money standing to the credit of that account is insufficient to
honor the cheque, or
o that it exceeds the amount arranged to be paid from that account by an
agreement made with that bank,
such person shall be deemed to have committed an offence and shall, be punished with
imprisonment for a term which may extend to two years, or with fine which may extend to
twice the amount of the cheque, or with both.
When section 138 shall be not apply: unless the below given conditions are complied
with—
(a) Cheque presented within validity period: The cheque has been presented to the bank
within a period of three months from the date on which it is drawn or within the period of
its validity, whichever is earlier.
(b) Demand for the payment through the notice: the payee or the holder in due course

of the cheque, as the case may be, makes a demand for the payment of the said amount of
money by giving a notice, in writing, to the drawer of the cheque, within 30 days of the
receipt of information by him from the bank regarding the return of the cheque as unpaid,
and
(c) Failure of drawer to make payment: the drawer of such cheque fails to make the
payment of the said amount of money to the payee or, as the case may be, to the holder in
due course of the cheque, within fifteen days of the receipt of the said notice.
Explanation: For the purpose of this section, “debt or other liability” means a legally
enforceable debt or other liability.
Therefore we may conclude that compliant can be filed after 45 days of dishonor of the
cheque i.e., 30 days of notice period +15 days of the receipt of the said notice.
Example 16 X issued a post-dated cheque to Y on the account of discharge of its liability.
Further, X instructed to the bank to stop the payment due to unavailability of the adequate
amount in the account. Here, in this instance section 138 of the Act is attracted as when a
cheque is dishonoured on account of stop payment instructions sent by the drawer to his
banker in respect of a post- dated cheque irrespective of insufficiency of funds in the
account. A post-dated cheque is deemed to have been drawn on the date it bears and the
three months period for the purposes of section 138 is to be counted from that date. So, X
will be liable for dishonour of cheque. Once a cheque is issued by the drawer, a presumption
under section 139 must follow.
Penalty: According to Section 138 of the Act, the dishonour of cheque is a criminal offence
and is punishable with imprisonment up to 2 years or fine up to twice the amount of cheque
or both.
PRESUMPTION IN FAVOR OF HOLDER [SECTION 139]

When a cheque is dishonoured, it shall be presumed, unless the contrary is proved, that the
holder of a cheque received the cheque of the nature referred to in section 138 for the
discharge, in whole or in part, or any debt or other liability.
Presumption prescribed here is a “rebuttable presumption” as the provisions clearly provides
that the person issuing the cheque is at liberty to prove to the contrary. The effect of this
presumption is to place the evidential burden on the accused.
DEFENCE WHICH MAY NOT BE ALLOWED IN ANY PROSECUTION UNDER SECTION
138 [SECTION 140]
It shall not be a defence in a prosecution of an offence under section 138 that the drawer
had no reason to believe when he issued the cheque that the cheque may be dishonoured
on presentment for the reasons stated in that section.

7.20 BUSINESS LAWS
8. PRESENTMENT OF INSTRUMENTS
Presentment for acceptance [Section 61]
A bill of exchange payable after sight must [if no time or place is specified therein for
presentment] be presented to the drawee thereof for acceptance [if he can, after reasonable
search, be found] by a person entitled to demand acceptance, within a reasonable time after
it is drawn, and in business hours on a business day.
In default of such presentment, no party thereto is liable thereon to the person making such
default. If the drawee cannot, after reasonable search, be found, the bill is dishonoured.
If the bill is directed to the drawee at a particular place, it must be presented at that place,
and if at the due date for presentment he cannot, after reasonable search, be found there,
the bill is dishonoured.
Where authorised by agreement or usage, a presentment through the post office by means
of a registered letter is sufficient.
Presentment of promissory note for sight [Section 62]
A promissory note, payable at a certain period after sight, must be presented to the maker
thereof for sight (if he can after reasonable search be found) by a person entitled to demand
payment, within a reasonable time after it is made and in business hours on a business day.
In default of such presentment, no party thereto is liable thereon to the person making such
default.
Drawee's time for deliberation [Section 63]
The holder must, if so required by the drawee of a bill of exchange presented to him for
acceptance, allow the drawee 48 hours (exclusive of public holidays) to consider whether he
will accept it.
Presentment for payment [Section 64]
Promissory notes, bill of exchange and cheques must be presented for payment to the
maker, acceptor or drawee thereof respectively, by or on behalf of the holder as hereinafter
provided.
In default of such presentment, the other parties thereto are not liable thereon to such
holder.
Where authorised by agreement or usage, a presentment through the post office by means
of a registered letter is sufficient.

Exception: Where a promissory note is payable on demand and is not payable at a specified
place, no presentment is necessary in order to charge the maker thereof.
Notwithstanding anything contained in section 6, where an electronic image of a truncated
cheque is presented for payment, the drawee bank is entitled to demand any further
information regarding the truncated cheque from the bank holding the truncated cheque in
case of any reasonable suspicion about the genuineness of the apparent tenor of
instrument, and if the suspicion is that of any fraud, forgery, tampering or destruction of the
instrument, it is entitled to further demand the presentment of the truncated cheque itself
for verification:
Provided that the truncated cheque so demanded by the drawee bank shall be retained by
it, if the payment is made accordingly.
Hours for presentment (Section 65)
Presentment for payment must be made during the usual hours of business, and, if at a
banker's within banking hours.
Presentment for payment of instrument payable after date or sight (Section 66)
A promissory note or bill of exchange, made payable at a specified period after date or sight
thereof, must be presented for payment at maturity.
Presentment for payment of promissory note payable by instalments
(Section 67)
A promissory note payable by instalments must be presented for payment on the third day
after the date fixed for payment of each instalment; and non-payment on such presentment
has the same effect as non-payment of a note at maturity.
Presentment for payment of instrument payable at specified place and not
elsewhere (Section 68)
A promissory note, bill of exchange or cheque made, drawn or accepted payable at a
specified place and not elsewhere must, in order to charge any party thereto, be presented
for payment at that place.
Instrument payable at specified place (Section 69)
A promissory note or bill of exchange made, drawn or accepted payable at a specified place
must, in order to charge the maker or drawer thereof, be presented for payment at that
place.
Presentment where no exclusive place specified (Section 70)
A promissory note or bill of exchange, not made payable as mentioned in sections 68 and
69, must be presented for payment at the place of business (if any) or at the usual residence,
of the maker, drawee or acceptor thereof, as the case may be.

7.22 BUSINESS LAWS
Presentment when maker, etc., has no known place of business or residence

(Section 71)
If the maker, drawee or acceptor of a negotiable instrument has no known place of business
or fixed residence, and no place is specified in the instrument for presentment for
acceptance or payment, such presentment may be made to him in person wherever he can
be found.
Presentment of cheque to charge drawer (Section 72)
Subject to the provisions of section 84, a cheque must, in order to charge the drawer, be
presented at the bank upon which it is drawn before the relation between the drawer and
his banker has been altered to the prejudice of the drawer.
Presentment of cheque to charge any other person (Section 73)
A cheque must, in order to charge any person except the drawer, be presented within a
reasonable time after delivery thereof by such person.
Presentment of instrument payable on demand (Section 74)
Subject to the provisions of section 31, a negotiable instrument payable on demand must be
presented for payment within a reasonable time after it is received by the holder.
Presentment by or to agent, representative of deceased, or assignee of
insolvent (Section 75)
Presentment for acceptance or payment may be made to the duly authorised agent of the
drawee, maker or acceptor, as the case may be, or, where the drawee, maker or acceptor has
died, to his legal representative, or, where he has been declared an insolvent, to his
assignee.
Excuse for delay in presentment for acceptance or payment (Section 75A)
Delay in presentment for acceptance or payment is excused if the delay is caused by
circumstances beyond the control of the holder, and not imputable to his default,
misconduct or negligence. When the cause of the delay ceases to operate, presentment
must be made within a reasonable time.
When presentment unnecessary (Section 76)
No presentment for payment is necessary, and the instrument is dishonoured at the due
date for presentment, in any of the following cases:
(a) (i) If the maker, drawee or acceptor intentionally prevents the presentment of
the instrument, or
(ii) if the instrument being payable at his place of business, he closes such place
on a business day during the usual business hours, or

(iii) if the instrument being payable at some other specified place, neither he nor
any person authorised to pay it attends at such place during the usual
business hours, or
(iv) if the instrument not being payable at any specified place, he cannot after due
search be found;
(b) as against any party sought to be charged therewith, if he has engaged to pay
notwithstanding non-presentment;
(c) as against any party if, after maturity, with knowledge that the instrument has not
been presented—
o he makes a part payment on account of the amount due on the instrument,
o or promises to pay the amount due thereon in whole or in part,
o or otherwise waives his right to take advantage of any default in presentment
for payment;
(d) as against the drawer, if the drawer could not suffer damage from the want of such
presentment.
Liability of banker for negligently dealing with bill presented for payment
(Section 77)
When a bill of exchange, accepted payable at a specified bank, has been duly presented
there for payment and dishonoured, if the banker so negligently or improperly keeps, deals
with or delivers back such bill as to cause loss to the holder, he must compensate the holder
for such loss.
9. RULES OF COMPENSATION
Rules as to compensation (Section 117)
The compensation payable in case of dishonour of promissory note, bill of exchange or
cheque, by any party liable to the holder or any endorsee, shall be determined by the
following rules:
(a) the holder is entitled to the amount due upon the instrument, together with the
expenses properly incurred in presenting, noting and protesting it;
(b) when the person charged resides at a place different from that at which the
instrument was payable, the holder is entitled to receive such sum at the current rate
of exchange between the two places;
(c) an endorser who, being liable, has paid the amount due on the same is entitled to
the amount so paid with interest at 18% per annum from the date of payment until

7.24 BUSINESS LAWS
tender or realisation thereof, together with all expenses caused by the dishonour and
payment;
(d) when the person charged and such endorser reside at different places, the endorser
is entitled to receive such sum at the current rate of exchange between the two
places;
(e) the party entitled to compensation may draw a bill upon the party liable to
compensate him, payable at sight or on demand, for the amount due to him,
together with all expenses properly incurred by him. Such bill must be accompanied
by the instrument dishonoured and the protest thereof (if any). If such bill is
dishonoured, the party dishonouring the same is liable to make compensation
thereof in the same manner as in the case of the original bill.
SUMMARY
♦ A promissory note is an unconditional undertaking, written and signed by the maker
to pay a certain sum of money only to or to the order of a certain person. It does not
include a bank note or currency note.
♦ A bill of exchange is an unconditional written order signed by the drawer, directing a
certain person to pay a certain sum of money to the specified person or to his order
or to the bearer of the bill.
♦ A cheque is a bill of exchange drawn on a specified banker and payable only on
demand and it includes the electronic image of a truncated cheque and a cheque in
the electronic form.
♦ A bearer instrument is one which is expressed to be payable to its bearer or which
has last indorsement in blank.
♦ An instrument payable to order is the one which is expressed to be payable to a
particular person.
♦ A negotiable instrument drawn or made in India and made payable in, or drawn upon
any person resident in India shall be deemed to be inland instrument.
♦ Any instrument which is not an inland instrument is a foreign instrument.
♦ When the nature of an instrument is not clear, it is termed as ambiguous instrument.
There such an instrument may be treated as either promissory or as a bill of
exchange.
♦ Inchoate instrument is an instrument that is signed and duly stamped but otherwise
wholly or partially blank.
♦ Negotiation means transfer of a negotiable instrument by one person to another in
order to make the transferee the holder of the instrument.

♦ Negotiation may be made by delivery or by indorsement and delivery.

♦ A bank under certain conditions may refuse payment of cheque or is bound to dishonor
cheque and when the cheque is dishonored for insufficiency of funds in the account of a
customer, it is treated as offence.
The Negotiable Instruments Act, 1881
Meaning of NI (Sec.13) Characteristics of NI: 1. in writing, 2. Signed, 3. Freely

P/N, BOE, Cheque - transferable, 4. Title free from defects, 5. Can be
payable either to order; or transferred any number of times, 6. Unconditional
to bearer promise or order to pay money, 7. Certainty of sum
payable, time of payment & payee, 8. Delivery
Negotiable Instruments
Promissory Note [Sec. 4] Bill of Exchange [Sec. 5]

Cheque [Sec. 6]
Meaning A ‘bill of exchange’ is an

An instrument in writing (not instrument in writing containing an A Cheque is a bill of
being a bank note or a currency unconditional order signed by the exchange drawn on a
note) containing an maker directing a certain person to specified banker and not
unconditional undertaking pay a certain sum of money only to expressed to be payable
signed by the maker to pay a a certain person; or the order of a otherwise than on demand
certain sum of money only to a certain person; or the bearer of (i.e., it is always payable on
certain person; or the order of a instrument. demand) and it includes
certain person; or the bearer of Note: BOE cannot be made – ‘the electronic image of
the instrument. payable to bearer on demand. truncated cheque’; and ‘a
cheque in electronic form’
Characteristics Characteristics Characteristics

(a) In Writing, (b) Express Promise (a) In Writing, (b) Express Order to (a) All the essentials of a
to pay, (c) Definite and pay, (c) Definite and unconditional BOE
unconditional promise, (d) order, (d) Signed by drawer, (e) (b) Drawn on a specified
Signed by maker, (e) Promise to Order to pay money only, (f) banker.
pay money only, (f) Promise to Certain sum, (g) Drawer, Drawee & (c) Payable on demand.
pay a certain sum, (g) Payee must A cheque does not require:
Payee must be certain, (h)
be certain, (h) Stamped (a) Stamping; or (b)
Stamped
acceptance;

7.26 BUSINESS LAWS
Classification of Negotiable Instruments
Bearer Order Inland Foreign Inchoate Ambiguous

Instrument Instrument Instrument Instrument Instrument Instrument
Expressed to Payable to a Drawn in India Which is Incomplete Which either

be payable to particular + (Payable in not an Instrument be treated as
bearer or the person or India or Drawn Inland in certain P/N or BOE.
order and on any person Instrument. respects. (Once holder
last
which does resident in exercises his
endorsement not restrict its India) option, he is
is in blank further bound by it)
transfer.
Presentment for acceptance Presentment of Promissory

(Only for BOE) Note for sight
BOE payable Must be presented within a P/N payable Must be presented

after sight reasonable time & in business at a certain within a
must hours on a business day. (Note: period after reasonable time &
48 hours, excluding public sight in business hours
holidays, are given to drawee for on a business day.
acceptance)
In default of no party liable If Drawee not In default of no party liable
such thereto found after such thereto
presentment reasonable presentment
search, BOE is
If BOE is must be dishonored.
directed to presented at
drawee at a that place
particular
place

When Presentment
Rules regarding presentment for payment (P/N, BOE, CH)
Unnecessary
To whom Maker (P/N), Acceptor (BOE),

1. Maker, drawee or
Drawee (CH)
acceptor prevents the
If default in no party liable thereto presentment,
presentment
Exception If P/N is payable on demand and is 2. Payable at business place
not payable at a specified place, no & that’s closed on business
presentment is necessary. day during usual business
Time During usual business hours hours,
If instrument must be presented for payment at 3. Payable at specified place
payable after date maturity & liable party doesn’t attend
or sight place,
P/N payable by must be presented for payment on
4. Not payable at specified
instalments 3rd day after date fixed for payment
place & liable party not
of each instalment
found after due search,
instrument payable Must be presented for payment at
at specified place that place. 5. Liable party engaged to
where no exclusive must be presented for payment at pay notwithstanding non-
place specified the place of business (if any) or at presentment,
the usual residence 6. Liable party makes part
no known place of presentment may be made to him in payment,
business or person wherever he can be found
7. Liable party waives off his
residence
right to take advantage.
Instrument payable Must be presented for payment
on demand within a reasonable time after it is 8. If drawer could not suffer
received by the holder. damage from want of such
Note: Delay in presentment for acceptance or payment is
presentment.
excused if the delay is caused by circumstances beyond the
control of the holder
Rules as to Compensation (Sec.117) Dishonour of Cheques for Insufficiency of

Funds in the Accounts [Section 138 to 142]
In case of dishonour of NI, holder can

claim: Debt - Cheque was issued to discharge a legally
1. Amount due on NI enforceable debt
2. Expenses incurred in presenting, noting Reason for dishonour - insufficiency of funds
& protesting. Presentment of cheque - Within 3 months
3. Interest 18% p.a. from due date of Demand made from drawer - Within 30 days of
payment to date of realisation. dishonour
Note: In case of foreign currency, current Default by drawer to pay - within 15 days of
rate of exchange. demand made

7.28 BUSINESS LAWS
TEST YOUR KNOWLEDGE

1. A negotiable instrument is an instrument which is freely transferable from one person
to another by:
(a) Simple delivery
(b) Indorsement and delivery
(c) Indorsement
(d) Registered post
2. An instrument which is vague and cannot be clearly identified either as a bill of
exchange, or as a promissory note, is called as:
(a) bearer instrument
(b) Ambiguous instrument
(c) Order instrument
(d) Inland instrument
3. As per Negotiable Instruments Act, 1881, Negotiable Instruments means:
(a) Promissory Note
(b) Bills of Exchange
(c) Cheque
(d) All the above
4. How many parties in Bills of exchange:
(a) 2
(b) 3
(c) 4
(d) 5
5. On which of the followings, even not defined in Negotiable Instruments Act 1881,
provisions of Act are applicable:
(a) Hundies
(b) Treasury Bills
(c) Bearer Debentures

6. Which is not the essential characteristic of Bill of exchange:

(a) Must be in writing
(b) Must contain an express promise to pay
(c) Instrument must be signed
(d) Must be stamped
7. Which is not an Inland Instrument:
(a) P/N made in India + payable in India + drawn upon person resident in India
(b) P/N made in India + payable in India + drawn upon person resident outside India
(c) P/N made in India + payable outside India + drawn upon person resident in India
(d) P/N made in India + payable outside India + drawn upon person resident
outside India
8. Negotiable Instrument which can be treated either P/N or BOE, is known as:
(a) Inland Instrument
(b) Inchoate Instrument
(c) Ambiguous Instrument
(d) Foreign Instrument
9. Order Instrument can be negotiated by:
(a) By delivery only
(b) By endorsement only
(c) By endorsement & delivery
(d) None of above

10. Where any cheque drawn by a person is dishonoured due to insufficiency of funds, such
person shall be punished with:
(a) imprisonment for a term which may extend to two years,
(b) with fine which may extend to twice the amount of the cheque,
(c) imprisonment for a term which may extend to two years, or with fine which
may extend to twice the amount of the cheque, or with both,
(d) No punishment

7.30 BUSINESS LAWS
1. M drew a cheque amounting to ` 2 lakh payable to N and subsequently delivered to
him. After receipt of cheque N indorsed the same to C but kept it in his safe locker.
After sometime, N died, and P found the cheque in N’s safe locker. Does this amount to
Indorsement under the Negotiable Instruments Act, 1881?
2. M owes money to N. Therefore, he makes a promissory note for the amount in favor of
N, for safety of transmission he cuts the note in half and posts one half to N. He then
changes his mind and calls upon N to return the half of the note which he had sent. N
requires M to send the other half of the promissory note. Decide how rights of the
parties are to be adjusted.
3. Bholenath drew a cheque in favour of Surendar. After having issued the cheque;
Bholenath requested Surendar not to present the cheque for payment and gave a stop
payment request to the bank in respect of the cheque issued to Surendar. Decide, under
the provisions of the Negotiable Instruments Act, 1881 whether the said acts of
Bholenath constitute an offence?
4. Rama executes a promissory note in the following form, 'I promise to pay a sum of
`10,000 after three months'. Decide whether the promissory note is a valid promissory
note.
ANSWERS/HINTS
Answers to MCQs
1. (b) 2. (b) 3. (d) 4. (b) 5. (d) 6. (b)
7. (d) 8. (c) 9. (c) 10. (c)

1. No, P does not become the holder of the cheque as the negotiation was not
completed by delivery of the cheque to him. (Section 48, the Negotiable Instruments
Act, 1881)
2. The question arising in this problem is whether the making of promissory note is
complete when one half of the note was delivered to N. Under Section 46 of the N.I.
Act, 1881, the making of a Promissory Note (P/N) is completed by delivery, actual or
constructive. Delivery refers to the whole of the instrument and not merely a part of
it. Delivery of half instrument cannot be treated as constructive delivery of the whole.
So, the claim of N to have the other half of the P/N sent to him is not maintainable.

M is justified in demanding the return of the first half sent by him. He can change his
mind and refuse to send the other half of the P/N.
3. As per the facts stated in the question, Bholenath (drawer) after having issued the
cheque, informs Surendar (drawee) not to present the cheque for payment and as
well gave a stop payment request to the bank in respect of the cheque issued to
Surendar.
Section 138 of the Negotiable Instruments Act, 1881, is a penal provision in the sense
that once a cheque is drawn on an account maintained by the drawer with his banker
for payment of any amount of money to another person out of that account for the
discharge in whole or in part of any debt or liability, is informed by the bank unpaid
either because of insufficiency of funds to honour the cheques or the amount
exceeding the arrangement made with the bank, such a person shall be deemed to
have committed an offence.
Once a cheque is issued by the drawer, a presumption under Section 139 of the
Negotiable Instruments Act, 1881 follows and merely because the drawer issues a
notice thereafter to the drawee or to the bank for stoppage of payment, it will not
preclude an action under Section 138.
Also, Section 140 of the Negotiable Instruments Act, 1881, specifies absolute liability
of the drawer of the cheque for commission of an offence under the section 138 of
the Act. Section 140 states that it shall not be a defence in a prosecution for an
offence under section 138 that the drawer had no reason to believe when he issued
the cheque that the cheque may be dishonoured on presentment for the reasons
stated in that section.
Accordingly, the act of Bholenath, i.e., his request of stop payment constitutes an
offence under the provisions of the Negotiable Instruments Act, 1881.
4. The promissory note is an unconditional promise in writing. In the above question
the amount is certain but the date and name of payee is missing, thus making it a
bearer instrument. As per Reserve Bank of India Act, 1934, a promissory note cannot
be made payable to bearer - whether on demand or after certain days. Hence, the
instrument is illegal as per Reserve Bank of India Act, 1934 and cannot be legally
enforced.

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© The Institute of Chartered Accountants of India

© THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

Basic draft of this publication was prepared by CA. Vandana D Nagpal.

Edition : April, 2023

Committee/Department : Board of Studies (Academic)

ISBN No. : 978-81-962488-5-7

Published by : The Publication & CDS Directorate on behalf of

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

PAPER – 2: BUSINESS LAWS (100 MARKS)

1. Indian Regulatory Framework- Major Regulatory Bodies such as Ministry of Finance,

© The Institute of Chartered Accountants of India

CHAPTER – 1: INDIAN REGULATORY FRAMEWORK .......................................................1.1

Chapter Overview ........................................................................................................................... 1.2

1. Introduction ..................................................................................................................................... 1.2

2. What Is Law? .................................................................................................................................... 1.3

3. Sources of Law ............................................................................................................................... 1.3

4. The Process of Making A Law ..................................................................................................... 1.4

5. Enforcing The Law ......................................................................................................................... 1.6

6. Structure of The Indian Judicial System ................................................................................. 1.11

Test Your Knowledge .................................................................................................................. 1.12

CHAPTER – 2: THE INDIAN CONTRACT ACT 1872 ...........................................................2.1

Unit– I: Nature of Contracts .............................................................................................2.1

Unit Overview .................................................................................................................................. 2.2

1.1 What is Contract ? .......................................................................................................................... 2.4

1.2 Essentials of Valid Contract ......................................................................................................... 2.5

1.3 Types of Contracts ......................................................................................................................... 2.9

1.5 Acceptance ..................................................................................................................................... 2.22

1.6 Communication of Offer and Acceptance ............................................................................. 2.26

1.7 Communication of Performance .............................................................................................. 2.30

1.8 Revocation of Offer and Acceptance ...................................................................................... 2.31

Summary ......................................................................................................................................... 2.33

Test Your Knowledge .................................................................................................................. 2.38

© The Institute of Chartered Accountants of India

Unit– 2:Consideration .................................................................................................... 2.46

Unit Overview ................................................................................................................................ 2.46

2.1 What is Consideration? ............................................................................................................... 2.47

2.2 Legal Rules Regarding Consideration .................................................................................... 2.48

2.3 Suit by a Third Party to a Contract .......................................................................................... 2.50

2.4 Validity of an Agreement without Consideration................................................................ 2.52

Summary ......................................................................................................................................... 2.54

Test Your Knowledge .................................................................................................................. 2.55

Unit– 3:Other Essential Elements of a Contract ............................................................ 2.58

Unit Overview ................................................................................................................................ 2.58

3.1 Capacity to Contract.................................................................................................................... 2.59

3.2 Free Consent.................................................................................................................................. 2.64

3.3 Elements Vitiating Free Consent .............................................................................................. 2.65

3.4 Legality of Object and Consideration ..................................................................................... 2.73

3.5 Void Agreements.......................................................................................................................... 2.77

Summary ......................................................................................................................................... 2.82

Test Your Knowledge .................................................................................................................. 2.86

Unit– 4:Performance of Contract .................................................................................. 2.95

Unit Overview ................................................................................................................................ 2.95

4.1 Performance of Contract ............................................................................................................ 2.96

4.4 Distinction Between Succession and Assignment ............................................................... 2.98

4.5 Liability of Joint Promisor & Promisee .................................................................................. 2.99

4.6 Time and Place for Performance of the Promise ...............................................................2.101

4.7 Performance of Reciprocal Promise ......................................................................................2.102