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Business Laws

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 Foundation Course Paper 2 (Section A): Business Laws (60 Marks)

Sections Weightage Contents

I 25%-35% 1. The Indian Contract Act, 1872: An overview of Sections 1

to 75 covering the general nature of contract,
consideration, other essential elements of a valid contract,
performance of contract, breach of contract, Contingent and
Quasi Contract.
II 20%-25% 2. 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.
III
20%-25% 3 The Indian Partnership Act, 1932: General Nature of
. Partnership, Rights and duties of partners, Reconstitution of
firms, Registration and dissolution of a firm.
IV

5%-10% 4 The Limited Liability Partnership Act, 2008:

. Introduction- covering nature and scope, Essential
features, characteristics of LLP, Incorporation and differences
with other forms of organizations.

V 15%-20% 5. 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
 CA FOUNDATION
Business Laws
INDEX
Update (25.03.2023)

Sr. No. Chapter’s Name Page No

Ch. 1 THE INDIAN CONTRACT ACT, 1872 1.1–1.124

Ch. 2 THE SALE OF GOODS ACT,1930 2.1–2.69

Ch. 3 INDIAN PARTNERSHIP ACT, 1932 3.1–3.78

Ch. 4 THE LIMITED LIABILITY PARTNERSHIP 4.1–4.28

Ch. 5 THE COMPANIES ACT, 2013 5.1–5.50

 THE INDIAN CONTRACT ACT, 1872 | 1.1

CHAPTER – 1 “THE INDIAN CONTRACT ACT, 1872”

CHAPTER -1
“THE INDIAN CONTRACT ACT, 1872”

Unit 1 Nature of Contract

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.
1. 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.

2. 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:
(i) when the person to whom the proposal is made
(ii) signifies his assent on that proposal which is made to him
(iii) the proposal becomes accepted
(iv) 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
 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 = Accepted proposal/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 to be worthy 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: 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.
 THE INDIAN CONTRACT ACT, 1872 | 1.2

 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: 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.
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”.

Analysis of the above definition 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:
Mere expression of willingness does not constitute an offer.

Example: A willing to sell his good at certain price to B.

Example: A is willing to not to dance in a competition if B pays him certain sum of money.
3. 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: 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 : On the other hand, 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.
4. The willingness must be expressed with a view to obtain the assent of the other party to
whom the offer is made.
Example: Where ‘A’ tells ‘B’ that he desires to marry by the end of 2019, 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.

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.
 THE INDIAN CONTRACT ACT, 1872 | 1.3

Question 1
Mr. Ramesh promised to pay `50,000 to his wife Mrs. Lali so that she can spend the sum
on her 30th birthday. Mrs. Lali insisted her husband to make a written agreement if he
really loved her. Mr. Ramesh made a written agreement and the agreement was registered
under the law. Mr. Ramesh failed to pay the specified amount to his wife Mrs. Lali. Mrs. Lali
wants to file a suit against Mr. Ramesh and recover the promised amount. Referring to the
applicable provisions of the Contract Act, 1872, advise whether Mrs. Lali will succeed.
Answer
Rule: 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.
Discussion : In the given question, Mr. Ramesh promised to pay `50,000 to his wife so that she can spend
the same on her birthday. However, subsequently, Mr. Ramesh failed to fulfil the promise, for which Mrs.
Lali wants to file a suit against Mr. Ramesh.
Conclusion : Here, in the given circumstance wife will not be able to recover the amount as it was a social
agreement and the parties did not intend to create any legal relations.
Question 2
Ram invites Madhuri (a well-known film actress) to his daughter’s engagement and dinner
party. Madhuri accepts the invitation and promised to attend. Ram made special
arrangements for Madhuri at the party but she did not turn up. Ram enraged with
Madhuri’s behaviour, wanted to sue for the loss incurred in making special arrangements.
Ram is seeking your advice.
Answer
No. ‘Ram” cannot sue ‘Madhuri’ for his loss. Because the agreement was a kind of social nature and
lacked the intention to create legal relationship.
Question 3
Father promised to pay his son a sum of `one lakh if the son passed C.A. examination in the
first attempt. The son passed the examination in the first attempt, but father failed to pay
the amount as promised. Son files a suit for recovery of the amount. State along with
reasons whether son can recover the amount under the Indian Contract Act, 1872.
Answer
Problem asked in the question is based on the provisions of the Indian Contract Act, 1872 as
contained in section 10. According to the provisions there should be an intention to create legal
relationship between the parties. Agreements of a social nature or domestic nature do not
contemplate legal relationship and as such are not contracts, which can be enforced. This principle
has been laid down in the case of Balfour vs. Balfour (1912 2 KB. 571). Accordingly, applying the
above provisions and the case decision, in this case son cannot recover the amount of `1 lakh from
father for the reasons explained above.
1. 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. Thus, where 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.
2. 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.
 THE INDIAN CONTRACT ACT, 1872 | 1.4

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.
3. 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.
4. It may be conditional: An offer can be made subject to any terms and conditions by the offer
or.
Example: Offer or 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.
5. 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: 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.
6. 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)
7. Offer is Different from a mere statement of intention, an invitation to offer, a mere
communication of information, Casual Equity, A prospectus and Advertisement.
(i) 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: An advertisement for sale of goods by auction is an invitation to the offer. It
merely invites offers/bids made at the auction. Similarly, Red Herring Prospectus
issued by a company, is only an invitation to the public to make an offer to subscribe
to the securities of the company.
(ii) A statement of intention and announcement.
(iii) 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.
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.
 THE INDIAN CONTRACT ACT, 1872 | 1.5

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 did not answer the first question 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.

Similarly when goods are sold through auction, the auctioneer does not contract with
any one 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).

8. The offer may be express or implied: An offer may be made either by words or by
conduct.
Example: 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. 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.
Example: 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.

Difference between offer and invitation to make an offer:

In terms of Section 2(a) of the Act,
1. 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.
2. Thus where a party without expressing his final willingness proposes certain terms on
 THE INDIAN CONTRACT ACT, 1872 | 1.6

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) An invitation by a company to the public to subscribe for its shares.
(ii) Display of goods for sale in shop windows.
(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 offer is Where a party without
the final expression of willingness expressing his final willingness
by the offeror to be bound by the proposes certain terms on
offer should the other party which he is willing to negotiate
chooses to accept it. he does not make an offer, but
only invites the other party to
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 be negotiating on terms it is called
bound by it as soon as the other invitation to offer
accepts, he is making an offer.

Sequence An offer cannot be an act An invitation to offer is always

precedent to invitation to offer an act precedent to offer

Question 4
A shop-keeper displayed a pair of dress in the show-room and a price tag of `2,000
was attached to the dress. Ms. Lovely looked to the tag and rushed to the cash counter.
Then she asked the shop-keeper to receive the payment and pack up the dress. The shop-
keeper refused to hand-over the dress to Ms. Lovely in consideration of the price stated in
the price tag attached to the Ms. Lovely seeks your advice whether she can sue the shop-
keeper for the above cause under the Indian Contract Act, 1872.
Answer
Rule : The offer should be distinguished from an invitation to offer. An offer is definite and
capable of converting an intention in to 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. 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 INDIAN CONTRACT ACT, 1872 | 1.7

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.
Discussion & Conclusion : In this case, Ms. Lovely by selecting the dress and approaching the
shopkeeper for payment simply made an offer to buy the dress selected by her. If the shopkeeper
does not accept the price, the interested buyer cannot compel him to sell.
How to make an offer

Written
Words

Act Oral
Offer can be
Conduct
made by?
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.

(a) General offer:

 It is an offer made to public at large and hence anyone can accept and do the
desired act (Carlill v. 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 Company 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.
 THE INDIAN CONTRACT ACT, 1872 | 1.8

Case Law: Lalman Shukla v. Gauri Dutt

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.
(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 v. Jones]

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.
Example: ‘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: 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 can not 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: ‘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 may result in the termination of the offer of ’A’. Any if later on ‘B’
agrees to buy the plot for `10 lakhs, ’A’ may refuse.
Question 5

Examine what is the legal position, as to the following:

(i) M offered to sell his land to N for `28,000/-. N replied purporting to accept the offer
and enclosed a cheque for ` 8,000/-. He also promised to pay the balance
of `20,000/- in monthly instalments of `5,000/- each.
(ii) A offered to sell his house to B for `10000/-. B replied that he can accept the house for
only `8,000/-. A rejected B’s counter offer to buy the house for `8,000/-. B later
changed his mind and is now willing to buy the house for `10,000/-.
Answer
Rule : 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
 THE INDIAN CONTRACT ACT, 1872 | 1.9

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. With the above rules in mind, we may
note that the following is the solution to the given problems:

(i) It is not a valid acceptance and no contract can come into being. In fact this problem is
similar to the facts of Neale vs. Merret [1930] W.N 189, where M offered to sell his land to
N for `28,000/-. N replied purporting to accept the offer but enclosed a cheque for
`8,000/- only. He promised to pay the balance of `20,000 by monthly installments of
`5,000. It was held that N could not enforce his acceptance because it was not an
unqualified one.
(ii) This problem is similar to the facts of Union of India v. Bahulal (AIR 1968 Bombay 294)
case, wherein A offered to sell his house to B for `10,000/-, to which B replied that, “I can
pay `8,000 for it”. Consequently, the offer of ‘A’ is rejected by ‘B’ as the acceptance is not
unqualified. But when B later changes his mind and is prepared to pay `10,000/-, it
becomes a counter offer and it is up to A whether to accept it or not.
Question 6

Rahul goes to super market to buy a washing machine. He selects a branded washing
machine having a price tag of `15000 after a discount of `3000. Rahul reaches at cash
counter for making the payment, but cashier says, “Sorry sir, the discount was upto
yesterday. There is no discount from today. Hence you have to pay `18000.” Rahul got
angry and insists for `15000. State with reasons whether under Indian Contract Act, 1872,
Rahul can enforce the cashier to sale at discounted price i.e. `15000.

Answer

An invitation to offer is different from offer. Quotations, menu cards, price tags, advertisements in
newspaper for sale are not offer. These are merely invitations to public to make an 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.

In the instant case, Rahul reaches to super market and selects a washing machine with a
discounted price tag of `15000 but cashier denied to sale at discounted price by saying that
discount is closed from today and request to make full payment. But Rahul insists to sale at
discounted price.
On the basis of above provisions and facts, the price tag with washing machine was not offer. It is
merely an invitation to offer. Hence, it is the Rahul who is making the offer not the super market.
Cashier has right to reject the Rahul’s offer. Therefore, Rahul cannot enforce cashier to sale at
discounted price.

(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.
Note : such offer must be accepted within reasonable time and reasonable time is a
question of facts.
 THE INDIAN CONTRACT ACT, 1872 | 1.10

Modes of revocation of offer

(i) By notice of revocation
(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 PremJi.
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 fulfillment 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
Question 7
Define an offer. Explain the essentials of a valid offer. How an offer is different from an
invitation to offer?
Answer
1. Definition: The word Proposal and offer are used interchangeably and it is defined under
Section 2(a) of the Indian Contract Act, 1872 as 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.
2. Essentials: The following are important essentials of an offer: -
 Must be capable of creating legal relation.
 Must be certain, definite and not vague.
 Must be communicated.
 Must be made with a view to obtaining the assent of the other party
 May be conditional
 Offer should not contain a term the non compliance of which would amount to
acceptance
 May be general or specific
 May be expressed or implied
 A statement of price is not an offer
 THE INDIAN CONTRACT ACT, 1872 | 1.11

3. Offer and an Invitation to 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.

Question 8
Explain the modes of revocation of an offer as per the Indian Contract Act, 1872.
Answer
Modes of revocation of Offer
(i) By notice of revocation
(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.
(iii) By non-fulfillment of condition precedent: Where the acceptor fails to fulfill a condition
precedent to acceptance the proposal gets revoked.
(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
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
`200000. 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 assent
on that proposal. In other words if B grants his consent on A’s 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 INDIAN CONTRACT ACT, 1872 | 1.12

 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.
Example : 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
installments 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].
Example : A offers to sell his house to B for `1,00,000/-. B replied that, “I can pay `80,000
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 `1,00,000/-. 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: ‘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 `50000/-, 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.
 THE INDIAN CONTRACT ACT, 1872 | 1.13

(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,
(a) 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.
(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)
(c) 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].
(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: 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.
(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
 THE INDIAN CONTRACT ACT, 1872 | 1.14

reserve it for his uncle. By mistake the auctioneer sold the horse. F sued him for conversion
of his property. Held, F could not succeed as his nephew had not communicated the
acceptance to him.
Example: ’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.
For example, 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.
Question 9
Comment on the following statements:
(a) Acceptance must be absolute and unqualified.
(b) Acceptance must be in the prescribed mode.
Answer
(a) Acceptance must be absolute and unqualified: As per section 7 of the Indian
Contract Act, 1872 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.
Example: ‘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 `50000/-, 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.
(b) 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: 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.
 THE INDIAN CONTRACT ACT, 1872 | 1.15

Question 10
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?
What shall be the position if B communicates his acceptance after one week?
Answer
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.
Question 11
Define the term acceptance under the Indian Contract Act, 1872. Explain the legal rules
regarding a valid acceptance.
Answer
Definition of Acceptance: In terms of Section 2(b) of the Indian Contract Act, 1872 the term
acceptance is defined as “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 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. In case of a general offer, it
can be accepted by any person who has the knowledge of the offer.
(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.

(3) The acceptance must be communicated: To conclude a contract between the parties, the
acceptance must be communicated in some perceptible form. 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.
(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.
(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.
(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.
 THE INDIAN CONTRACT ACT, 1872 | 1.16

(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.
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.
1. 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”. This can
be explained by an example. 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.
2. 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.
i. 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.
 THE INDIAN CONTRACT ACT, 1872 | 1.17

ii. 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’.
iii. 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 and 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.
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, 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.
3. 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.
 THE INDIAN CONTRACT ACT, 1872 | 1.18

Question 12
Ramaswami proposed to sell his house to Ramanathan. Ramanathan sent his acceptance by
post. Next day, Ramanathan sends a telegram withdrawing his acceptance. Examine the
validity of the acceptance according to the Indian Contract Act, 1872 in the light of the
following:
(a) The telegram of revocation of acceptance was received by Ramaswami before the
letter of acceptance.
(b) The telegram of revocation and letter of acceptance both reached together.
Answer
Rule : The problem is related with the communication and time of acceptance and its revocation.
As per Section 4 of the Indian Contract Act, 1872, the communication of an acceptance is
complete as against the acceptor when it comes to the knowledge of the proposer.
An acceptance may be revoked at any time before the communication of the acceptance is
complete as against the acceptor, but not afterwards.
Conclusion : Referring to the above provisions:
(a) Yes, the revocation of acceptance by Ramanathan (the acceptor) is valid.
(b) If Ramaswami opens the telegram first (and this would be normally so in case of a rational
person) and reads it, the acceptance stands revoked. If he opens the letter first and reads it,
revocation of acceptance is not possible as the contract has already been concluded.
4. Communication of special conditions: Sometimes there are situations where there are
contracts with special conditions. These special conditions are conveyed tacitly (silently)
and the acceptance of these conditions are also conveyed by the offeree again tacitly or
without him even realizing it.
For instance 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 Air lines 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.
Yet another example is 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.
 THE INDIAN CONTRACT ACT, 1872 | 1.19

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 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].
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 in to 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
COMMUNICATION OF 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.
 THE INDIAN CONTRACT ACT, 1872 | 1.20

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.
For example 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 offer or desires.
Example: 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.
Question 13
Mr. Pratham applied for a job as principal of a school. The school management decided to
appoint him. One member of the school management committee privately informed Mr.
Pratham that he was appointed but official communication was not given from the school.
Later, the management of the school decided to appoint someone else as a principal. Mr.
Pratham filed a suit against the school for cancellation of his appointment and claimed
damages for loss of salary. State with reasons, will Mr. Pratham be successful in suit filed
against school under the Indian Contract Act, 1872?
Answer

As per the rules of acceptance, the acceptance should be communicated to offeror by offeree
himself or his authorized agent. Communication of acceptance by third person cannot be
concluded in valid acceptance.

In the instant case, Mr. Pratham applied for a job as principal of a school and one member of the
school management committee privately informed Mr. Pratham that he was appointed. Later, the
management of the school appointed someone else as a principal.
On the basis of above provisions and facts, communication of appointment of Mr. Pratham should
be made by school management committee or any authorised agent. The communication by third
person cannot be termed as communication of acceptance. Therefore, no valid contract was
formed between Mr. Pratham and school and Mr. Pratham cannot file a suit against the school for
cancellation of his appointment.
 THE INDIAN CONTRACT ACT, 1872 | 1.21

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.
Example: 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.

Question 14
Mr. B makes a proposal to Mr. S by post to sell his house for `10 lakhs and posted the letter
on 10th April 2020 and the letter reaches to Mr. S on 12th April 2020. He reads the letter
on 13th April 2020.

Mr. S sends his letter of acceptance on 16th April 2020 and the letter reaches Mr. B on 20th
April 2020. On 17th April Mr. S changed his mind and sends a telegram withdrawing his
acceptance. Telegram reaches to Mr. B on 19th April 2020.

Examine with reference to the Indian Contract Act, 1872:

(i) On which date, the offer made by Mr. B will complete?

(ii) Discuss the validity of acceptance.
(iii) What would be validity of acceptance if letter of revocation and letter of acceptance
reached together?
 THE INDIAN CONTRACT ACT, 1872 | 1.22

Answer

(i) According to Section 4 of the Indian Contract Act, 1872, “the communication of offer is
complete when it comes to the knowledge of the person to whom it is made”.

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. Further, mere receiving of
the letter is not sufficient, he must receive or read the message contained in the letter.
In the given question, Mr. B makes a proposal by post to Mr. S to sell his house. The letter
was posted on 10th April 2020 and the letter reaches to Mr. S on 12th April 2020 but he
reads the letter on 13th April 2020.
Thus, the offer made by Mr. B will complete on the day when Mr. S reads the letter, i.e. 13th
April 2020.
(ii) When communication of acceptance is complete: Where a proposal is accepted by a letter
sent by the post, in terms of Section 4 of the Act, 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.

Revocation of Acceptance: The acceptor 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.
In the given question, when Mr. S accepts Mr. B’s proposal and sends his acceptance by post
on 16th April 2020, the communication of acceptance as against Mr. B is complete on 16th
April 2020, when the letter is posted. As against Mr. S acceptance will be complete, when the
letter reaches Mr. B i.e. 20th April 2020. Whereas, acceptor, will be bound by his acceptance
only when the letter of acceptance has reached the proposer.
The telegram for revocation of acceptance reached Mr. B on 19th April 2020 i.e. before the
letter of acceptance of offer (20th April 2020). Hence, the revocation is absolute. Therefore,
acceptance to an offer is invalid.
(iii) It will not make any difference even if the telegram of revocation and letter of acceptance
would have reached on the same day, i.e. the revocation then also would have been absolute. As
per law, acceptance can be revoked anytime before the communication of acceptance is complete.
Since revocation was made before the communication of acceptance was complete and
communication can be considered as complete only when the letter of acceptance reaches the
proposer i.e. Mr. B.
 THE INDIAN CONTRACT ACT, 1872 | 1.23

UNIT 2: CONSIDERATION
 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.

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”.

Analysis of Definition of Consideration

(1) Consideration is an act- doing something.
Example- Ajay promises Bhuvan to guarantee 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: 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- Abhishek promises Bharti not to file a suit against him if he (Bharti) would pay
him (Abhishek) Rs. 1,00,000. Here abstinence on the part of Abhishek would constitute
consideration against Bharti’s payment of Rs. 1,00,000 in favor of Abhishek.
Example: 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.
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.
 THE INDIAN CONTRACT ACT, 1872 | 1.24

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.
Note : 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: 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: 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)]
Example : A cash sale of goods is an example of present consideration. The consideration is
immediately made against delivery of goods.
Question 1
Mr. Balwant, an old man, by a registered deed of gift, granted certain landed property to
Ms. Reema, his daughter. By the terms of the deed, it was stipulated that an annuity of
`20,000 should be paid every year to Mr. Sawant, who was the brother of Mr. Balwant. On
the same day Ms. Reema made a promise to Mr. Sawant and executed in his favour an
agreement to give effect to the stipulation. Ms. Reema failed to pay the stipulated sum. In
an action against her by Mr. Sawant, she contended that since Mr. Sawant had not furnished
any consideration, he has no right of action.
Examining the provisions of the Indian Contract Act, 1872, decide, whether the contention
of Ms. Reema is valid?
Answer

Rule : In India, consideration may proceed from the promise 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.
Discussion : In the given problem, Mr. Balwant has entered into a contract with Ms. Reema, but
Mr. Sawant has not given any consideration to Ms. Reema but the consideration did flow from
Mr. Balwant to Ms. Reema and such consideration from third party is sufficient to the enforce the
promise of Ms. Reema, the daughter, to pay an annuity to Mr. Sawant. Further the deed of gift and
 THE INDIAN CONTRACT ACT, 1872 | 1.25

the promise made by Ms. Reema to Mr. Sawant to pay the annuity were executed simultaneously
and therefore they should be regarded as one transaction and there was sufficient consideration
for it.
Conclusion: Thus, a stranger to the contract cannot enforce the contract but a stranger to the
consideration may enforce it. Hence, the contention of Ms. Reema is not valid.
Question 2
Mr. Sohanlal sold 10 acres of his agricultural land to Mr. Mohanlal on 25th September
2018 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, 2018, Mr. Sohanlal
died leaving behind his son and life. On 15th October, 2018 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
redressed. Discuss the above in light of provisions of Indian Contract Act, 1872 and
decide upon Mr. Chotelal's plan of action?
Answer
Rule : 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 fl ow 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.
Discussion : 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.”
Conclusion : 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.
(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.
 THE INDIAN CONTRACT ACT, 1872 | 1.26

Example: 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: ’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 present consideration and A can sue
B for recovering the promised money.
(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: X promises to sell a house worth `6 lacs for `1 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.
Question 3
“To form a valid contract, consideration must be adequate”. Comment.
Answer
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.
 THE INDIAN CONTRACT ACT, 1872 | 1.27

(vi) Performance of what one is legally bound to perform:

 Consideration must not be performance of existing duty.
 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 certain sum over and above the fee, in the event of success of the case would
be void, since it is without consideration.
 But where a person promises to do more that he is legally bound to do, 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: A man promises to discover treasure by magic. 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: 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.
Question 4
Define consideration. State the characteristics of a valid consideration.
Answer
Definition of Consideration- Section 2(d) of the Indian Contract Act, 1872
“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.”
The essential characteristics of a valid consideration are as follows:
(1) Consideration must move at the desire of the promisor (Durga Prasad v. Baldeo)
(2) It may proceed from the promisee or any other person on his behalf.
(3) It may be executed or executory.
(4) It may be past, present or future.
(5) Consideration need not be adequate
(6) Performance of what one is legally bound to perform
(7) Consideration must be real and not illusory
Question 5
Define consideration. What are the legal rules regarding consideration under the Indian
Contract Act, 1872?
 THE INDIAN CONTRACT ACT, 1872 | 1.28

Answer
Though under the India Consideration [Section 2(d) of the Indian Contract Act, 1872]: 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.
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.n 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: 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.
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. In
other words, there can be a stranger to a consideration but not stranger to a contract.
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.
iv. Consideration may be past, present or future: 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.
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.
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.
But where a person promises to do more that he is legally bound to do, 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.
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.
 THE INDIAN CONTRACT ACT, 1872 | 1.29

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.
Note : 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 : A husband, by a registered agreement promised to pay his earnings to his wife.
Held the agreement though without consideration, was valid.
Example : 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: P finds R’s purse and gives it to him. R promises to give P `10,000. This is a valid
contract.
Example : 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: A is indebted to C for `60,000 but the debt is barred by the Limitation Act. A signs
a written promise now to pay `50,000 in final settlement of the debt. This is a contract
without consideration, but enforceable.
Agency: According to Section 185 of the Indian Contract Act, 1872, no consideration is
necessary to create an agency.
 THE INDIAN CONTRACT ACT, 1872 | 1.30

4. 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.
5. 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 : 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.
6. 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)
Question 6
“No consideration, no contract” Comment.
Answer
No consideration, no contract: Every agreement, to be enforceable by law must be supported
by valid consideration. An agreement made without any consideration is void. A gratuitous
promise may form a subject of a moral obligation and may be binding in honour but it does not
cause a legal responsibility. No consideration, no contract is a general rule. However, Section 25 of
the Indian Contract Act, 1872 provides some exceptions to this rule, where an agreement
without consideration will be valid and binding. These exceptions are as follows:
(a) Agreement made on account of natural love and affection: Section 25 (1) provides that
if an agreement is (i) in writing (ii) registered under the law and (iii) made on account of
natural love and affection (iv) between the parties standing in a near relation to each other,
it will be enforceable at law even if there is no consideration. Thus, where A, for natural
love and affection, promises to give his son, B, `10,000 in writing and registers it. This is a
valid contract.
(b) Compensation for services voluntarily rendered: Section 25(2) provides that
something which the promisor was legally compelled to do; (iii) and the promisor was in
existence at the time when the act was done whether he was competent to contract or not
(iv) the promisor must agree now to compensate the promise. Thus when A finds B's
purse and gives it to him and B promises to give A `50, this is a valid contract.
(c) Promise to pay time-barred debts [Section 25 (3)]: Where there is an agreement, made
in writing and signed by the debtor or by his agent, to pay wholly or in part a time barred
debt, the agreement is valid and binding even though there is no consideration. If A owes B
`1,000 but the debt is lapsed due to time-bar and A further makes a written promise to
pay `500 on account of this debt, it constitutes a valid contract.
(d) Contract of agency (Section 185): No consideration is necessary to create an agency.
(e) Completed gift (Explanation 1 to Section 25): A completed gift needs no consideration.
Thus, if a person transfers some property by a duly written and registered deed as a gift he
cannot claim back the properly subsequently on the ground of lack of consideration.
 THE INDIAN CONTRACT ACT, 1872 | 1.31

Question 7
What do you understand by the term 'Consideration'? Are there any circumstances under
which a contract, under the provisions of the Indian Contract Act, 1872, without
consideration is valid? Explain.
Answer
Meaning of consideration: The expression ‘consideration’ in general means price paid for an
obligation. According to Section 2 (d) of the Indian Contract Act, 1872 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. Thus, on analyzing the above definition, the
following ingredients are essential in understanding the meaning of the term consideration:-
(i) An act i.e. doing something
(ii) An abstinence or forbearance i.e. abstaining or refraining from doing something, and
(iii) A return promise.
The general rule is that an agreement made without consideration is void. Sections 25 of the
Indian Contract Act, 1872, provides for exceptions to this rule where an agreement without
consideration is valid. These are:
(1) Natural Love & Affection [Section 25 (1)]
Where an agreement is expressed in writing and registered under the law for the time
being in force for the registration of documents and is made on account of natural love and
affection between the parties standing in near relation to each other, the agreement is
enforceable, even through, the consideration is absent.
(2) Compensation for past voluntary service [Section 25 (2)]
A promise to compensate, wholly or in part, a person who has already voluntarily done
something for the promisor, is enforceable even without consideration.
(3) Promise to pay time barred Debt [Section 25 (3)]
The agreement is valid provided it is made in writing and is signed by the debtor or by his agent
authorized in that behalf.
(4) Completed Gift – [Explanation 1 to Section 25]
As per explanation 1 to section 25, nothing in section 25 shall affect the validity as between donor and
donee, on any gift actually made. Thus, gifts do not require any consideration.
(5) Agency (Section 185)
No consideration is necessary to create an agency.
(6) Bailment (Section 148)
No consideration is required to effect the contract of bailment.
(7) Charity
If a promise undertakes the liability on the promise of the person to contribute to charity,
there the contract shall be valid.
 THE INDIAN CONTRACT ACT, 1872 | 1.32

Question 8
State the exceptions to the rule "An agreement without consideration is void".
Answer
The general rule is that an agreement made without consideration is void (Section 25 of the
Indian Contract Act, 1872). However, the Indian Contract Act contains certain exceptions to this
rule. In the following cases, the agreement though made even without consideration, will be valid
and enforceable.
1. Natural Love and Affection: Any written and registered agreement made on account of
love and affection between the parties standing in near relationship to each other.
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.
3. Promise to pay time barred debt: A promise in writing signed by the person making it or
by his authorized agent, made to pay a debt barred by limitation.
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 effect the contract of bailment (Section 148).
7. Charity: If a promisee undertakes the liability on the promise of the person to contribute to
charity, there the contract shall be valid.
Question 9

Mr. Ram Lal Birla was a big businessman of city Pune having two sons and one married
daughter. He decided to gift his one house to his daughter. For this purpose, he called his
lawyer at his house and made a written document for such gift. The lawyer advised him to
get the transfer document properly registered. When they both were going for registratio n
of document, they met with an accident and both of them died. Later, his daughter found
the document and claimed the house on the basis of that document. Explain, whether she
can get the house as gift under the Indian Contract Act, 1872?
Answer
Section 25 of Indian Contract Act, 1872 provides that an agreement made without consideration is
valid if it is expressed in writing and registered under the law for the time being in force for the
registration of documents and is made on account of natural love and affection between parties
standing in a near relation to each other.

In the instant case, the transfer of house made by Mr. Ram Lal Birla on account of natural love and
affection between the parties standing in near relation to each other is written but not registered.
Hence, this transfer is not enforceable and his daughter cannot get the house as gift under the
Indian Contract Act, 1872.
 THE INDIAN CONTRACT ACT, 1872 | 1.33

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: 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 :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, a female member can enforce a provision for
marriage expenses made on the partition of the Hindu Undivided Family.
Example : 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.
(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. For example, 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 : 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.
(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.
 THE INDIAN CONTRACT ACT, 1872 | 1.34

Question 10
“Only a person who is party to a contract can sue on it”. Explain this statement and
describe its exceptions, if any.
Answer
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 valid and is different from stranger to a
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.
(3) In the case of certain marriage contracts, a female member can enforce a provision for
marriage expenses made on the partition of the Hindu Undivided Family.
(4) In the case of assignment of a contract, when the benefit under a contract has been
assigned, the assignee can enforce the 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.
(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.
(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.
 THE INDIAN CONTRACT ACT, 1872 | 1.35

UNIT 3: OTHER ESSENTIAL ELEMENTS OF A CONTRACT

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.
Question 1
“All contracts are agreements, but all agreements are not contracts”. Comment.
Answer
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. duly
enforceable by law. If an agreement is incapable of creating a duly 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.
CAPACITY TO CONTRACT
Meaning: Capacity refers to the competence of the parties to make a contract. It is one of the
essential element to form a valid contract.
Who is competent to contract (Section 11)
“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”.
Analysis of Section 11
This section deals with personal capacity of three types of individuals only. Every person is
competent to contract who-
 THE INDIAN CONTRACT ACT, 1872 | 1.36

1. has attained the age of majority,

2. is of sound mind and
3. 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), “A, a minor borrowed
`20,000 from B and as a security for the same executed a mortgage in his favour. He became
a major a few months later and filed a suit for the declaration that the mortgage executed by
him during his minority was void and should be cancelled. It was held that a mortgage by a
minor was void and B was not entitled to repayment of money.
Note : It is especially provided in Section 10 that a person who is incompetent to contract
cannot make a contract within the meaning of the Act.
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: X, a minor makes a promissory note in the name 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 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.
Question 2
State with reason whether the following statement is correct or incorrect.
‘A promissory note duly executed in favour of minor is void’.

Answer
Incorrect: As per the Indian Contract Act,1872 ,minor is not competent to contract, but he can be a
beneficiary. In this case, the minor is a beneficiary. Hence the Promissory Note is not void and the
minor at his option can enforce it.
 THE INDIAN CONTRACT ACT, 1872 | 1.37

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 : 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 : 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.
 THE INDIAN CONTRACT ACT, 1872 | 1.38

7. No specific performance: A minor’s agreement being absolutely void, there can be no

question of the specific performance of such an agreement.
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 is not 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: 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: 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
purchaser, 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 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 : 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.
 THE INDIAN CONTRACT ACT, 1872 | 1.39

Question 3
Rahul, a minor, falsely representing his age, enters into an agreement with a shopkeeper
for a loan amount for purchasing a laptop. He gave his expensive watch as a security and
took a loan of `40,000. He was very happy to get `40,000 and quickly went to the market
and purchased a laptop worth `30,000. He happily spent the rest of the amount with his
friends on a pleasure trip.

Later on, Rahul realized that his watch was an expensive watch and he should not have
given like this to the shopkeeper. So, he went back to the shopkeeper and asked for his
watch back. Also, he refused to repay the loan amount. The shopkeeper disagrees to this
and files a case against minor for recovery of the loan amount. Can the shopkeeper succeed
in recovering the loan amount under the Indian Contract Act, 1872?

Answer
As per Section 11 of Indian Contract Act, 1872, a minor is not competent to enter into any
contract. Any agreement with minor is void-ab-initio means void from the very beginning. When a
person forms an agreement with minor, such an agreement is devoid of any legal consequences
for the person because minor cannot be enforced by law to perform his part of performance in an
agreement.
However, if minor obtains any property by fraudulently misrepresenting his age, he can be
ordered to restore the property or goods thus obtained. Although no action can be taken against
the minor, but if has any property (of other party) in his possession, court can order him to return
the same.
Hence, in the present case, Rahul is not liable to repay `40,000 that he has borrowed from the
shopkeeper, but he can be ordered by the court to return the laptop (which was in his possession)
to the shopkeeper.
Question 4
Mr. Shekhar wants to sell his car. For this purpose, he appoints Mr. Nadan, a minor as his
agent. Mr. Shekhar instructs Mr. Nadan that car should not be sold at price less than Rs.
1,00,000. Mr. Nadan ignores the instruction of Mr. Shekhar and sells the car to Mr. Masoom
for Rs. 80,000. Explain the legal position of contract under the Indian Contract Act, 1872
whether:

(i) Mr. Shekhar can recover the loss of Rs. 20,000 from Mr. Nadan?
(ii) Mr. Shekhar can recover his car from Mr. Masoom?
Answer

According to the provisions of Section 11 of the Indian Contract Act, 1872, a minor is disqualified
from contracting. A contract with minor is void-ab-initio but minor can act as an agent. But he will
not be liable to his principal for his acts.

In the instant case, Mr. Shekhar appoints Mr. Nadan, a minor as his agent to sale his car. Mr.
Shekhar clearly instructed to Mr. Nadan that the minimum sale price of the car should be Rs.
1,00,000 yet Mr. Nadan sold the car to Mr. Masoom for Rs. 80,000.
(i) Considering the facts, although the contract between Mr. Shekhar and Mr. Nadan is valid,
Mr. Nadan will not be liable to his principal for his acts. Hence, Mr. Shekhar cannot recover
the loss of Rs. 20,000.
 THE INDIAN CONTRACT ACT, 1872 | 1.40

(ii) Further, Mr. Masoom purchased the car from agent of Mr. Shekhar, he got good title. Hence,
Mr. Shekhar cannot recover his car from Mr. Masoom.
Question 5
Examine with reason that the given statement is correct or incorrect "Minor is liable to
pay for the necessaries supplied to him".
Answer
Minor is liable to pay for the necessaries supplied to him: This statement is incorrect. 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, 1872. A claim for necessaries
supplied to a minor is enforceable by law, only against minor’s estate, if he possesses. 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.
(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 1: A patient in a lunatic asylum, who is at intervals, of sound mind, may contract
during those intervals.
Example 2: 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 drunkness l asts.
 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
Soverigns and Ambassadors, Alien enemy, Corporations, Convicts, Insolvent etc.

FREE CONSENT
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.
 THE INDIAN CONTRACT ACT, 1872 | 1.41

 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.

Note : 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.

Note : When the consent is vitiated by mistake, the contract becomes void.
ELEMENTS VITIATING FREE CONSENT
(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.”

Analysis of Section 15
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. Following are the essential ingredients of coercion:
(i) Committing or threatening to commit any act forbidden by the India Penal Code; or
(ii) the unlawful detaining or threatening to detain any property to the prejudice of any
person whatever,
(iii) With the intention of causing any person to enter into an agreement.
(iv) It is to be noted that is immaterial whether the India Penal Code is or is not in force at the
place where the coercion is employed.
 THE INDIAN CONTRACT ACT, 1872 | 1.42

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) As to the consequences of the rescission of voidable contract, the party rescinding a
void contract should, if he has received any benefit, thereunder from the other party
to the contract, restore such benefit so far as may be applicable, to the person from whom
it was received.
(iii) A person to whom money has been paid or anything delivered under coercion must repay or
return it. (Section 71)
Example: 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. The threat of suicide amounts to coercion within Section
15.
Example : 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.
Question 6
Explain the term 'Coercion" and what are the effects of coercion under Indian Contract Act,
1872.
Answer
Coercion (Section 15 of the Indian Contract Act, 1872): “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.”
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) As to the consequences of the rescission of voidable contract, the party rescinding a void
contract should, if he has received any benefit, thereunder from the other party to the
contract, restore such benefit so far as may be applicable, to the person from whom it was
received.
(iii) A person to whom money has been paid or anything delivered under coercion must repay
or return it.
(II) Undue influence (Section 16)
Definition : 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
 THE INDIAN CONTRACT ACT, 1872 | 1.43

(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.
Example: 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.
Example: A, a man enfeebled by disease or age, is induced by B’s influence over him as his medical
attendant, to agree to pay B an unreasonable sum for his professional services. B employs undue
influence.
Example: 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: 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.
Analysis of Section 16
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: 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: 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: 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 temporaily or
permanently affected by the reason of mental or bodily distress, illness or of old
age.
Example: A doctor is deemed to be in a position to dominate the will of his patient
enfeebled by protracted illness.
 THE INDIAN CONTRACT ACT, 1872 | 1.44

(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: A youth of 18 years of age, spend thrift and a drunkard, borrowed `90,000
on a bond bearing compound interest at 2% per mensem (p.m.). It was held by the
court that the transaction is unconscionable, the rate of interest charged being so
exorbitant [Kirpa Ram vs. Sami-Ud-din Ad. Khan (1903)]
(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 : 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: The burden of proving the absence of the use of the dominant
position to obtain the unfair advantage will lie on the party who is in a position to
dominate the will of the other.

Power to set aside contract induced by undue influence- (Section 19A)

 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.
 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: 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.

Case study: A student was induced by his teacher to sell his brand new car to the latter 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 on what ground the
student can sue the teacher?
Yes, the student can sue his teacher on the ground of undue influence under the provisions of
Indian Contract Act, 1872. 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.
 THE INDIAN CONTRACT ACT, 1872 | 1.45

Difference between Coercion and Undue influence:

Basis of difference Coercion Undue Influence
Nature of action It involves the physical force or It involves moral or mental
threat. The aggrieved party is pressure.
compelled to make the contract
against its will.

Involvement of criminal It involves committing or No such illegal act is committed

action threatening to commit and act or a threat is given.
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 it exercised between parties to
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 the Where the consent is induced

option of the party whose by undue influence, the
consent has been obtained by contract is either voidable or
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 Section return the benefit in whole or
64, any benefit received has to in part or not to give any such
be restored back to the other directions.
party.
Question 7
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?
Answer
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”.
 THE INDIAN CONTRACT ACT, 1872 | 1.46

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.
Question 8
Explain the circumstances in which the person is deemed to be in a position to dominate
the will of the other person under the Indian Contract Act, 1872.
Answer
Position to dominate the will: 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.
(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.
(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.
(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.
Question 9
Discuss the essentials of Undue Influence as per the Indian Contract Act, 1872.
Answer
The essentials of Undue Influence as per the Indian Contract Act, 1872 are the following:
(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.
(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.
 THE INDIAN CONTRACT ACT, 1872 | 1.47

(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.
(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.
(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.
(4) Burden of proof: The burden of proving the absence of the use of the dominant position to
obtain the unfair advantage will lie on the party who is in a position to dominate the will of
the other.
(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.

Explanation to Section 17
Mere silence as to facts likely to affect the willingness of a person to enter into a contract is not
fraud, unless the circumstances of the case are such that, regard being had to them, it is the duty
of the person keeping silence to speak, or unless his silence is, in itself, equivalent to speech.
Example 1: A sells, 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 2: B is A’s daughter and has just come of age. Here, the relation between the parties
would make it A’s duty to tell B if the horse is unsound.
Example: 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.
Example A and B being traders, enter into a contract. A has private information of a change in
prices which would affect B’s willingness to proceed with the contract. A is not bound to inform B.

Analysis of Section 17
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.
(2) The representation must be related to a fact.
 THE INDIAN CONTRACT ACT, 1872 | 1.48

(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.
(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.

Mere silence is not fraud

 A party to the contract is under no obligation to disclose the whole truth to the other
party.
 ‘Caveat Emptor’ i.e. let the purchaser beware is the rule applicable to contracts.
 There is no duty to speak in such cases and silence does not amount to fraud.
 Similarly there is no duty to disclose facts which are within the knowledge of both the parties.
Example: H sold to W some pigs which were to his knowledge suffering from fever. The pigs were
sold‘with all faults’ and H did not disclose the fact of fever to W. Held there was no fraud. [Word
vs. Hobbs. (1878)].

Example : A sells by auction to B, a horse which A knows to be unsound, A says nothing to B about
the unsoundness of horse. This is not fraud by A.
Silence is fraud:
1. Duty of person to speak: Where the circumstances of the case are such that it is the duty of
the person observing silence to speak. For example, in contracts of uberrimae fidei
(contracts of utmost good faith).

Following contracts come within this category:

(a) Fiduciary Relationship: Here, the person in whom confidence is reposed is under a duty
to act with utmost good faith and make full disclosure of all material facts concerning the
agreement, known to him.
Example: A broker was asked to buy shares for client. He sold his own shares without
disclosing this fact. The client was entitled to avoid the contract or affirm it with a right to
claim secret profit made by broker on the transaction since the relationship between the
broker and the client was relationship of utmost good faith. (Regier V. Campbell Staurt)
(b) Contracts of Insurance: In contracts of marine, fire and life insurance, there is an implied
condition that full disclosure of material facts shall be made, otherwise the insurer is
entitled to avoid the contract.
 THE INDIAN CONTRACT ACT, 1872 | 1.49

(c) Contracts of marriage: Every material fact must be disclosed by the parties to a contract
of marriage (Hazi Ahmed v. Abdul Gassi).
(d) Contracts of family settlement: These contracts also require full disclosure of material
facts within the knowledge of the parties.
(e) Share Allotment contracts: Persons issuing ‘Prospectus’ at the time of public issue of
shares/ debentures by a joint stock company have to disclose all material facts within their
knowledge.
2. Where the silence itself is equivalent to speech: For example, A says to B“If you do not
deny it, I shall assume that the horse is sound.” A says nothing. His silence amounts to
speech.
In case of fraudulent silence, contracts is not voidable if the party whose consent was so
obtained had the means of discovering the truth with ordinary diligence (Exception to
section 19)
Question 10
“Mere silence does not amount to fraud”. Discuss.
Answer
Mere silence not amounting to fraud: Mere silence as to facts likely to affect the willingness of
a person to enter into a contract is no fraud; but where it is the duty of a person to speak, or his
silence is equivalent to speech, silence amounts to fraud.
It is a rule of law that mere silence does not amount to fraud. A contracting party is not duty
bound to disclose the whole truth to the other party or to give him the whole information in his
possession affecting the subject matter of the contract.
The rule is contained in explanation to Section 17 of the Indian Contract Act, 1872 which clearly
states the position that mere silence as to facts likely to affect the willingness of a person to enter
into a contract is not fraud.
Exceptions to this rule:
(i) Where the circumstances of the case are such that, regard being had to them, it is the duty
of the person keeping silence to speak. Duty to speak arises when one contracting party
reposes trust and confidence in the other or where one party has to depend upon the
good sense of the other (e.g. Insurance Contract).
(ii) Where the silence is, in itself, equivalent to speech.
Question 11
P sells by auction to Q a horse which P knows to be unsound. The horse appears to be
sound but P knows about the unsoundness of the horse. Is this contract valid in the
following circumstances:
(a) If P says nothing about the unsoundness of the horse to Q.
(b) If P says nothing about it to Q who is P’s daughter who has just come of age.
(c) If Q says to P “If you do not deny it, I shall assume that the horse is sound.” P says
nothing.
Answer
Rule : According to section 17 of the Indian Contract Act, 1872, mere silence as to facts likely
to affect the willingness of a person to enter into a contract is not fraud, unless the
circumstances of the case are such that, regard being had to them, it is the duty of the person
keeping silence to speak, or unless his silence is, in itself, equivalent to speech.
 THE INDIAN CONTRACT ACT, 1872 | 1.50

Discussion & Conclusion : Hence, in the instant case,

a. This contract is valid since as per section 17 mere silence as to the facts likely to affect the
willingness of a person to enter into a contract is not fraud. Here, it is not the duty of the
seller to disclose defects.
b. This contract is not valid since as per section 17 it becomes P’s duty to tell Q about the
unsoundness of the horse because a fiduciary relationship exists between P and his daughter
Q. Here, P’s silence is equivalent to speech and hence amounts to fraud.
c. This contract is not valid since as per section 17, P’s silence is equivalent to speech and hence
amounts to fraud.
Question 12
Do the following statements amount to involvement of fraud?
(i) Where the vendor of a piece of land told a prospective purchaser that, in his
opinion, the land can support 2000 heads of sheep whereas, in truth, the land could
support only 1500 sheep.
(ii) X bought shares in a company on the faith of a prospectus which contained an
untrue statement that one Z was a director of the company. X had never heard of Z
and the untrue statement of Z being a director was immaterial from his point of
view. Can X claim damages on grounds of fraud?
Answer
(i) The problem is based on the facts of the case Bisset vs Wilkinson (1927). In the given
problem the vendor says that in his opinion the land could support 2000 heads of sheep.
This statement is only an opinion and not a representation and hence cannot amount to
fraud.
(ii) The problem is based on the facts of the case Smith vs Chadwick (1884). In the problem
though the prospectus contains an untrue statement that untrue statement was not the
one that induced X to purchase the shares. Hence X cannot claim damages.
Section 18 Misrepresentation-Misrepresentation means and includes
(1) the positive assertion, in a manner not warranted by the information of the person
making it, of that which is not true, though he believes it to be true;
(2) any breach of duty which, without an intent to deceive, gains an advantage to the
person committing it, or any one claiming under him; by misleading another to his
prejudice or to the prejudice of any one claiming under him;
(3) causing, however, innocently, a party to an agreement to make a mistake as to the
substance of the thing which is the subject of the agreement.

Analysis of 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.
 THE INDIAN CONTRACT ACT, 1872 | 1.51

Example: 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: ‘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 : 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 : 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.
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 true,
statement as untrue. although it is not true.
Rescission of the The injured party can repudiate The injured party is entitled to
contract and claim for the contract and claim damages. repudiate the contract or sue for
damages restitution but cannot claim the
damages.
Means to discover the The party using the fraudulent Party can always plead that the
truth act cannot secure or protect injured party had the means to
himself by saying that the discover the truth.
injured party had means to
discover the truth.

Question 13
Explain the concept of ‘misrepresentation’ in matters of contract.
Answer
Misrepresentation: According to Section 18 of the Indian Contract Act, 1872,
misrepresentation means and includes-
(1) the positive assertion, in a manner not warranted by the information of the person making
it, of that which is not true, though he believes it to be true;
(2) any breach of duty which, without an intent to deceive, gains an advantage to the person
committing it, or any one claiming under him; by misleading another to his prejudice or to
the prejudice of any one claiming under him;
(3) causing, however, innocently, a party to an agreement to make a mistake as to the
substance of the thing which is the subject of the agreement.
 THE INDIAN CONTRACT ACT, 1872 | 1.52

Question 14
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 a few days, the motorcycle did not work at all. Now Suraj wants to rescind the
contract. Decide giving reasons.
Answer
In the instant case, 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 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.
Legal effects of agreements without free consent - (Section 19)
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 so 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 representation made had been true.
Exception - If such consent was caused by misrepresentation or by silence, fraudulent within the
meaning of section 17, the contract is not voidable, if the party whose consent was so caused
had the means of discovering the truth with ordinary diligence.
Explanation to Section 19 - A fraud or misrepresentation which did not cause the consent to a
contract of the party on whom such fraud was practiced, or to whom such misrepresentation was
made, does not render a contract voidable.
Example: A, intending to deceive B, falsely represents that 500 maunds of indigo are made
annually at A’s factory, and thereby induces B to buy the factory. The contract is voidable at the
option of B. This is because 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.
Analysis of Section 19
It has already been considered that when consent to an agreement is caused by coercion, undue
influence, fraud or misrepresentation, though the agreement amounts to a contract, such a
contract is voidable at the option of the party those consent was so obtained. The party, however,
may insist that the contract should be performed and that he should be put in the same position in
which he would have been, if the representation made had been true.
But a person who had the means of discovering the truth with ordinary diligence cannot avoid a
contract on the ground that his consent was caused by misrepresentation or silence amounting to
fraud.
Example: A by a misrepresentation leads B to believe erroneously that 750 tons of sugar is
produced per annum at the factory of A. B examines the accounts of the factory, which should have
disclosed, if ordinary diligence had been exercised by B, that only 500 tons had been produced.
Thereafter B purchases the factory. In the circumstance, B cannot repudiate the contract on the
ground of A’s misrepresentation.
Where a party to a contract commits fraud or misrepresentation, but the other party is not, in fact,
misled by such fraud or misrepresentation, the contract cannot be avoided by the later.
(Explanation to Section 19). Thus, when a seller of specific goods deliberately conceals a fault in
order that the buyer may not discover it even if he inspects the goods but the buyer does not in
 THE INDIAN CONTRACT ACT, 1872 | 1.53

fact, make any inspection, the buyer cannot avoid the contract, as he is not in fact deceived by the
conduct of the seller.
Question 11
Mr. SAMANT owned a motor car. He approached Mr. CHHOTU and offered to sell his motor
car or `3,00,000. Mr. SAMANT told Mr. CHHOTU that the motor car is running 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.
Answer
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.
 THE INDIAN CONTRACT ACT, 1872 | 1.54

Mistake:
 Mistake may be defined as innocent or erroneous belief which leads the party to misunderstand the
others.
 Mistake may be either Bilateral or Unilateral.
(i) Bilateral mistake is when both the parties to a contract are under a mistake.
(ii) Unilateral mistake is when only one party to the contract is under a mistake.

Effect of mistake on validity of a contract:

Mistake is some unintentional act, omission or error, arising from unconsciousness, ignorance or
forgetfulness, imposition or misplaced confidence. It may be of two kinds-

Mistake

Mistake of Law Mistake of Fact

It is essential for the creation of a contract that both the parties should agree to the same thing in
the same sense. Thus, if two persons enter into a contract, each of them thinking about a different
subject matter, no contract will arise. As a result, a mistake may lead a contract towards voidness.
 THE INDIAN CONTRACT ACT, 1872 | 1.55

Its effect can be broadly studied as under:

(i) Mistake of Law: A mistake of law does not render a contract void as one cannot take
excuse of ignorance of the law of his own country. But if the mistake of law is caused
through the inducement of another, the contract may be avoided. Mistake of foreign law is
excusable and is treated like a mistake of fact. Contract may be avoided on such mistake.
(ii) Mistake of fact: Where the contracting parties misunderstood each other and are at cross
purposes, there is a bilateral or mutual mistake. Where both the parties to an agreement
are under a mistake as to a matter of fact essential to the agreement, the agreement is
void.
Example: A offers to sell his Ambassador Car to B, who believes that A has only Fiat Car, agrees to
buy the car. Here, the two parties are thinking about different subject matter so that there is no
real consent and the agreement is void.
Question 12
M purchased a wrist watch from N, both believed that it was made with gold plaque. Hence,
M paid a very high price for that. Later it was found that the wrist watch was not made so.
State the validity of the contract.
Answer
The contract is absolutely void as there is a mutual mistake of both parties. In case of bilateral
mistake of essential fact, the agreement is void ab-initio, as per Section 20 of the Indian Contract
Act, 1872.
Question 13
X buys from Y a painting which both believe to be the work of an old master and for which
X pays a high price. The painting turns out to be only a modern copy. Discuss the validity of
the contract?
Answer
The contract is absolutely void as there is a mutual mistake of both the parties as to the
substance or quality of the subject-matter going to be the very root of the contract. In case of
bilateral mistake of essential fact, the agreement is void ab initio, as per section 20 of the Indian
Contract Act, 1872.
LEGALITY OF OBJECT AND CONSIDERATION
Which considerations and objects are lawful, and those which are not

(Section 23):
The consideration or object of an agreement is lawful, unless-
1. It is forbidden by law; or
2. Is of such a nature that, if permitted, it would defeat the provisions of any law; or
3. Is fraudulent; or
4. Involves injury to the person or property of another; or
5. The court regards it as immoral; or
6. Opposed to public policy.
 THE INDIAN CONTRACT ACT, 1872 | 1.56

In each of these cases, the consideration or object of an agreement is said to be unlawful. Every
agreement of which the object or consideration is unlawful is void.

In the following examples, the agreement is void because the object is unlawful:
(1) 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.
(2) A promises to B to abandon a prosecution which he had instituted against B for robbery and
B promises in lieu thereof to restore the value of the property robbed. The agreement is void
as its object, namely, the stifling of prosecution, is unlawful.
Section 10 of the Indian Contract Act provides for the legality of consideration and objects thereto.
Section 23 of the Act also states that every agreement of which the object or consideration is
unlawful is void.
The following is an example of the agreement which is void because of unlawful consideration.
A promises to obtain for B an employment in the public service and B promises, in return, to pay
`1,00,000 to A. The agreement is void, as the consideration thereof is unlawful. Here A’s promise
to procure for B an employment in the public services is the consideration for B’s promise to pay
`1,00,000. The consideration, being opposed to public policy, is unlawful.
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: A licence to cut grass is given to X by the Forest Department under the Forest Act.
One of the terms of licence is that the licencee should not assign his interest under the
licence without the permission of the Forest Officer, and a fine is prescribed for a breach of
this condition. But the observance of the conditions of the licence is not obligatory under the
Forest Act. If A in breach of the condition, agrees to assign his interest under the licence to B,
that agreement will be valid. Here, the assignment is not prohibited by law, the condition
against assignment has been imposed only for administrative purpose or solely for the
protection of revenue.
Example : 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 defeats the provision of law: The words ‘defeat the
provisions of any law’ must be taken as limited to defeating the intention which the law
has expressed. The court looks at the real intention of the parties to an agreement. If
the intention of the parties is to defeat the provisions of law, the court will not enforce it.
Legislative enactment would be defeated by an agreement by a debtor not to plead
limitation, as the object is to defeat the provisions of the Limitation Act. The Hindu
Law is defeated by an agreement to give son in adoption in consideration of annual
allowance to the natural parents.
(iii) When it is fraudulent: Agreements which are entered into to promote fraud are void.
For example, an agreement for the sale of goods for the purpose of smuggling them out of
the country is void and the price of the goods so sold, cannot be recovered.
 THE INDIAN CONTRACT ACT, 1872 | 1.57

(iv) When consideration defeats any rule for the time being in force in India.
(v) When consideration involves injury to the person or property of another: 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: 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: 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 of 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.
(vi) When consideration is immoral: The following are the examples of agreements where the
object or consideration is unlawful, being immoral.
Example: A landlord cannot recover the rent of a house knowingly let to prostitute who
carries on her vocation there. Here, the object being immoral, the agreement to pay rent is
void.
Example: 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.
(vii) 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.
 In law, public policy covers certain specified topics, e.g., trading with an enemy, stifling of
prosecutions, champerty, maintenance, interference with the course of justice, marriage
brokerage, sales of public offices, etc. Agreements tending to create interest against duty,
agreements tending to create monopolies and agreements not to bid at an auction are also
opposed to public policy.
 An attempt to enlarge the scope of the doctrine is bound to result in the curtailment of individual
freedom of contract.

Agreements opposed to public policy

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.
 THE INDIAN CONTRACT ACT, 1872 | 1.58

Example : 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 :
(i) Maintenance is an agreement in which a person promises to maintain suit in which
he has no interest.
Example : 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.
(ii) 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.
Example : 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) Traffic relating to Public Offices: An agreement to traffic 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.
(i) 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.
(ii) An agreement to procure a public recognition like Padma Vibhushan for reward is
void.
Example: 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.
 THE INDIAN CONTRACT ACT, 1872 | 1.59

(5) Agreements tending to create monopolies: Agreements having for their object the
establishment of monopolies are opposed to public policy and therefore void.
Example: 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.
Similarly, as agreement to induce any executive officer of the State to act partially or
corruptly 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.
(i) An agreement by an agent to receive without his principal’s consent compensation
from another for the performance of his agency is invalid.
(ii) 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.
Example: A promises to superintend, on behalf of B, a legal manufacturer of indigo and an
illegal traffic in other articles. B promises to pay A salary of `20,000 per month. The
agreement is void, the object of A’s promise and the consideration for B’s promise being in
part unlawful.
Question 14

Mr. X a businessman has been fighting a long drawn litigation with Mr. Y an industrialist.
To support his legal campaign he enlists the services of Mr. C a Judicial officer stating that
the amount of `10 lakhs would be paid to him if he does not take up the brief of Mr. Y.

Mr. C agrees but, at the end of the litigation Mr. X refuses to pay to Mr. C. Decide whether
Mr. C can recover the amount promised by Mr. X under the provisions of the Indian
Contract Act, 1872?
 THE INDIAN CONTRACT ACT, 1872 | 1.60

Answer

The problem as asked in the question is based on Section 10 of the Indian Contract Act, 1872. This
Section says that 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. Further, Section 23 also states that every agreement of which the object is
unlawful is void.

Accordingly, one of the essential elements of a valid contract in the light of the said provision is
that 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.
The given instance is a case of interference with the course of justice and results as opposed to
public policy. This can also be called as an agreement in restraint of legal proceedings. This
agreement restricts one’s right to enforce his legal rights. Such an agreement has been expressly
declared to be void under section 28 of the Indian Contract Act, 1872. Hence, Mr. C in the given
case cannot recover the amount of `10 lakh promised by Mr. X because it is a void agreement and
cannot be enforced by law.

Question 14
Mr. S aged 58 years was employed in a Government Department. He was going to retire
after two years. Mr. D made a proposal to Mr. S to apply for voluntary retirement from his
post so that Mr. D can be appointed in his place. Mr. D offered a sum of `10 Lakhs as
consideration to Mr. S in order to induce him to retire.

Mr. S refused at first instance but when he evaluated the amount offered as consideration is
just double of his cumulative remuneration to be received during the tenure of two years of
employment, he agreed to receive the consideration and accepted the above agreement to
receive money to retire from his office.
Whether the above agreement is valid? Explain with reference to provision of Indian
Contract Act, 1872.
Answer
Section 10 of the Indian Contract Act, 1872 provides for the legality of consideration and objects
thereto. Section 23 of the said Act also states that every agreement of which the object or
consideration is unlawful is void.

The given problem talks about entering into an agreement for traffic relating to public office,
which is opposed to public policy. Public policy requires that there should be no money
consideration for the appointment to an office in which the public is interested. Such
consideration paid, being opposed to public policy, is unlawful.
In the given case, Mr. S, who was going to be retired after two years was proposed by Mr. D, to
apply for voluntary retirement from his post, in order that he can be appointed in his place. In lieu
of that Mr. D offered Mr. S a sum of `10 lakh as consideration. Mr. S refused initially but later
accepted the said offer to receive money to retire from his office.
Here, Mr. S’s promise of sale for Mr. D, an employment in the public services is the consideration
for Mr. D’s promise to pay `10 lakh. Therefore, in terms of the above provisions of the Indian
Contract Act, the said agreement is not valid. It is void, as the consideration being opposed to
public policy, is unlawful.
 THE INDIAN CONTRACT ACT, 1872 | 1.61

VOID AGREEMENTS
Expressly declared Void Agreements
1. Made by incompetent parties (Section 6. Agreement in restraint of
11) marriage (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 23) proceedings (Section 28)

4. Agreement the consideration or 9. Agreement the meaning of which

object of which is unlawful in parts is uncertain (Section 29)
(Section 24)
5. Agreements made without 10. Wagering Agreement (Section
consideration (Section 25) 30)

[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,
i. 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.
ii. 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.
iii. 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.
 THE INDIAN CONTRACT ACT, 1872 | 1.62

Example: 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: 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: Agreement among the sellers of a particular commodity not to sell the commodity
for less than a fixed price is not an agreement in restraint of trade.
 THE INDIAN CONTRACT ACT, 1872 | 1.63

Question 15
Rohan is running a grocery store in Delhi. He sells his grocery business, including goodwill
worth `1,00,000 to Rohit for a sum of `5,00,000. After the sale of goodwill, Rohit made an
agreement with Rohan. As per this agreement, Rohan is not to open another grocery store
(similar kind of business) in the whole of India for next ten years. However, Rohan opens
another store in the same city two months later. What are the rights available with Rohit
regarding the restriction imposed on Rohan with reference to Indian Contract Act, 1872?

Answer

Section 27 of the Indian Contract Act, 1872 provides that any agreement that restrains a person
from carrying on a lawful trade, profession or business is void agreement. However, there are
certain exceptions to this rule. One of the statutory exceptions includes sale of Goodwill. The
restraint as to sale of goodwill would be a valid restraint provided-

(i) Where the restraint is to refrain from carrying on a similar business

(ii) The restrain should be within the specified local limits
(iii) The restraint should be not to carry on the similar business after sale of goodwill to the
buyer for a price
(iv) The restriction should be reasonable. Reasonableness of restriction will depend upon
number of factors as considered by court.
In the given case, Rohan has sold the goodwill and there is restraint for not carrying on the same
business of grocery store. However the restriction imposed on Rohan is unreasonable as he cannot
carry similar business in whole of India for next 10 years. The restriction on restraint to similar
kind of trade should be reasonable to make it a valid agreement. Therefore, Rohit cannot take any
legal action against Rohan as the restriction is unreasonable as per Section 27 of Indian Contract
Act, 1872. Hence, the agreement made between Rohan and Rohit in restraint of trade is void
agreement.
(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(short) 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.
Question 16
State with reason(s) whether the following agreements are valid or void:

(i) A clause in a contract provided that no action should be brought upon in case of
breach.
(ii) Where two courts have jurisdiction to try a suit, an agreement between the parties
that the suit should be filed in one of those courts alone and not in the other.
 THE INDIAN CONTRACT ACT, 1872 | 1.64

(iii) X offers to sell his Maruti car to Y. Y believes that X has only Wagon R Car but agrees
to buy it.
(iv) X, a physician and surgeon, employs Y as an assistant on a salary of `75,000 per
month for a term of two years and Y agrees not to practice as a surgeon and physician
during these two years.
Answer

(i) The given agreement is void.

Reason: As per Section 28 of the Indian Contract Act, 1872, this clause is in restraint of legal
proceedings because it restricts both the parties from enforcing their legal rights.
Note: Alternatively, as per Section 23 of the Indian Contract Act, 1872, this clause in the
agreement defeats the provision of law and therefore, being unlawful, is treated as void.
(ii) The given agreement is valid.
Reason: 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. A
contract of this nature is void. However, in the given statement, no absolute restriction is
marked on parties on filing of suit. As per the agreement suit may be filed in one of the
courts having jurisdiction.
(iii) The said agreement is void.
Reason: This agreement is void as the two parties are thinking about different subject
matters so that there is no real consent and the agreement may be treated as void because
of mistake of fact as well as absence of consensus.
(iv) The said agreement is valid.
Reason: 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, as an exception, 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.

(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: 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.
Question 17
“An agreement, the meaning of which is not certain, is void”. Discuss.
Answer
Agreement the meaning of which is uncertain (Section 29 of the Indian Contract Act, 1872): 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.
 THE INDIAN CONTRACT ACT, 1872 | 1.65

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.
(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: 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
(i) There must be a promise to pay money or money’s worth.
(ii) Promise must be conditional on an event happening or not happening.
(iii) There must be uncertainty of event.
(iv) There must be two parties, each party must stand to win or lose.
(v) There must be common intention to bet at the timing of making such agreement.
(vi) Parties should have no interest in the event except for stake.
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.
 THE INDIAN CONTRACT ACT, 1872 | 1.66

(iv) Horse Race Transactions: A horse race competition where prize payable to the bet
winner is less than `500, is a wager.
Example: 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 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 `5,00,000 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 indemnify the It is a promise to pay money or
loss. money’s worth on the happening or
non happening of an uncertain event.
2. Consideration The crux of insurance contract is the There is no consideration
mutual consideration (premium and between the two parties. There is
compensation amount). just gambling for money.
3. Insurable Insured party has insurable There is no property in case of
Interest interest in the life or property wagering agreement.
sought to be insured.
There is betting on other’s
life and properties.
4. Contract of Except life insurance, the contract Loser has to pay the fixed amount
Indemnity of insurance indemnifies the on the happening of uncertain
insured person against loss. event.

5. Enforceability It is valid and enforceable It is void and unenforceable

agreement.
6. Premium Calculation of premium is based No such logical calculations are
on scientific and actuarial required in case of wagering
calculation of risks. agreement.

7. Public Welfare They are beneficial to the They have been regarded as against
society. the public welfare.
 THE INDIAN CONTRACT ACT, 1872 | 1.67

Question 18

What is a wagering agreement? Describe the transactions which resembles with wagering
transactions but are not void.

Answer

Wagering agreement (Section 30 of the Indian Contract Act, 1872): 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.
For example, 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.

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.

Question 19

Point out with reason whether the following agreements are valid or void:
(a) Kamala promises Ramesh to lend `500,000 in lieu of consideration that Ramesh
gets Kamala’s marriage dissolved and he himself marries her.
(b) Sohan agrees with Mohan to sell his black horse. Unknown to both the parties, the
horse was dead at the time of agreement.
(c) Ram sells the goodwill of his shop to Shyam for `4,00,000 and promises not to carry
on such business forever and anywhere in India.
(d) In an agreement between Prakash and Girish, there is a condition that they will not
institute legal proceedings against each other without consent.
(e) Ramamurthy, who is a citizen of India, enters into an agreement with an alien friend.
 THE INDIAN CONTRACT ACT, 1872 | 1.68

Answer
Validity of agreements
(a) Void Agreement: As per Section 23 of the Indian Contract Act, 1872, an agreement is void if
the object or consideration is against the public policy.
(b) Void Agreement: As per Section 20 of the Indian Contract Act, 1872 the contracts caused by
mistake of fact are void. There is mistake of fact as to the existence of subject-matter.
(c) Void Agreement: As per Section 27 of the Indian Contract Act, 1872 an agreement in
restraint of trade is void. However, a buyer can put such a condition on the seller of good
will, not to carry on same business. However, the conditions must be reasonable regarding
the duration and the place of the business.
(d) Void Agreement: An agreement in restraint of legal proceedings is void as per Section 28 of
the Indian Contract Act, 1872.
(e) Valid Agreement: An agreement with alien friend is valid, but an agreement with alien
enemy is void.
Question 20
Enumerate the differences between 'Wagering Agreements' and 'Contract of Insurance'
with reference to provision of the Indian Contract Act, 1872.
Answer

Distinction between Contract of Insurance and Wagering Agreement

Basis Contracts of Insurance Wagering Agreement
1. Meaning It is a contract to indemnify the It is a promise to pay money or
loss. money’s worth on the happening or
non happening of an uncertain event.

2. Consideration The crux of insurance contract is There is no consideration between

the mutual consideration the two parties. There is just
(premium and compensation gambling for money.
amount).
3. Insurable Insured party has insurable There is no property in case of
Interest interest in the life or property wagering agreement.
sought to be insured.
There is betting on other’s life
and properties.
4. Contract of Except life insurance, the contract Loser has to pay the fixed amount on
Indemnity of insurance the happening of uncertain event.
indemnifies the insured person
against loss.
5. Enforceability It is valid and enforceable It is void and unenforceable
agreement.
6. Premium Calculation of premium is based No such logical calculations are
on scientific and actuarial required in case of wagering
calculation of risks. agreement.

7. Public Welfare They are beneficial to the They have been regarded as against
society. the public welfare.
 THE INDIAN CONTRACT ACT, 1872 | 1.69

Difference between Agreement and Contract

Basis of differences Agreement Contract
Meaning Every promise and every set of Agreement enforceable by law.
promises, forming the (Agreement + Legal
consideration for each other. enforceability)
(Offer + Acceptance)

It’s a wider term including both It is used in a narrow sense

Scope legal and social agreement. with the specification that
contract is only legally
enforceable agreement.
It may not create legal
Legal obligation obligation. An agreement does Necessarily creates a legal
not always grant rights to the obligation. A contract always
parties grants certain rights to every
party.
All contracts are agreements.
Nature All agreement are not contracts.

ESSENTIAL ELEMENTS 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
3 Competency of the parties 3 Fulfillment of legal formalities
4 Lawful consideration 4 Certainty of meaning
5 Legal object 5 Possibility of performance
6 Not expressly declared to be void 6 -

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 others 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: 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.
 THE INDIAN CONTRACT ACT, 1872 | 1.70

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: 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: 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: 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: 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.

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: A agrees with B to discover treasure by magic. The agreement cannot be enforced
as it is not possible to be performed.
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.
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 INDIAN CONTRACT ACT, 1872 | 1.71

the terms viz consensus ad idem. Further such a consent must be free. Consent would be
considered as free consent if it is not caused by coercion, undue influence, fraud or,
misrepresentation or mistake. When consent to an agreement is caused by coercion, undue
influence, fraud or misrepresentation, the agreement is a contract voidable at the option of
the party whose consent was so caused.
Note : When consent is vitiated by mistake, the contract becomes void.
Example : A threatened to shoot B if he (B) does not lend him `2000 and B agreed to it. Here
the agreement is entered into under coercion and hence voidable at the option of B.
Example :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 Rs. 30000? “ and 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.

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 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.
Note : 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:- 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 and 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.
 THE INDIAN CONTRACT ACT, 1872 | 1.72

Example : ‘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 : 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: 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.
TYPES OF CONTRACT
Now let us discuss various types of contracts.
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: A ask B if he wants to buy his bike for Rs.10,000. 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: Mr. X agrees to write a book with a publisher. After few days, X dies in an
accident. Here the contract becomes void due to the impossibility of performance of the
contract.
Example: 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.
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.

Such a right might arise from the fact that the contract may have been brought about by one
of the parties by coercion, undue influence, fraud or misrepresentation and hence the other
party (aggrieved) has a right to treat it as a voidable contract.

Example: 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.
At this juncture it would be desirable to know the distinction between a Void Contract
and a Voidable Contract. The distinction lies in three aspects namely definition, nature and
rights. These are elaborated hereunder:
 THE INDIAN CONTRACT ACT, 1872 | 1.73

(a) Definition: A void contract cannot be enforced at all. A voidable contract is an

agreement which is enforceable only at the option of one of the parties but not at the
option of the other. Therefore ‘enforceability’ or otherwise, divides the two types of
contracts.
(b) Nature: By nature, a void contract is valid at the time when it is made but becomes
unenforceable and thus void on account of subsequent developments or events like
supervening impossibility, subsequent illegality etc., Repudiation of a voidable
contract also renders the contract void. Similarly a contingent contract might become
void when the occurrence of the event on which it is contingent becomes impossible.
On the other hand voidable contract would remain valid until it is rescinded by the
person who has the option to treat it as voidable. The right to treat it as voidable does
not invalidate the contract until such right is exercised. All contracts caused by coercion,
undue influence, fraud, misrepresentation are voidable. Generally, a contract caused by
mistake is void.
(c) Rights: As regards rights of the parties, in the case of a void contract there is no legal
remedy for the parties as the contract cannot be performed in any way. In the case of
voidable contract the aggrieved party has a right to rescind it within a reasonable time.
If it is so rescinded, it becomes void. If it is not rescinded, it is a valid contract.

Difference can be summarized as under:

Sr. Basis Void Contract Voidable Contract
No.
1 Meaning A Contract ceases to be An agreement which is
enforceable by law becomes enforceable by law at the option of
void when it ceases to be one or more of the parties
enforceable. thereto, but not at the option of
the other or others, is a
voidable contract.

2 Cause A contract becomes void due A contract becomes a voidable

to change in law or change contract if the consent of a party
in circumstances beyond the was not free.
contemplation of parties.

3. Enforceability A void contract cannot be It is enforceable only at the option

enforced at all. of aggrieved party and not at the
option of other party.

4. Performance A void contract cannot be If the aggrieved party does not,

of contract performed. within reasonable time,
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 does not The party whose consent was
grant any right to any party. not free has the right to rescind
the contract.
 THE INDIAN CONTRACT ACT, 1872 | 1.74

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.
Example: 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:
(a) Scope: All illegal agreements are void. However all void agreements are not illegal.
Despite this, there is similarity between illegal and void agreements that in both the
cases it is void ab- initio and cannot be enforced by law.
(b) Nature and character: Illegal agreements are void since the very beginning they are
invariably described as void ab initio. As already emphasized under the scope, a
contract by nature, which is valid, can subsequently change its character and can
become void.
(c) Effect on collateral transactions: In the case of illegal contract, even the collateral
transactions namely transactions which are to be complied with before or after or
concurrently along with main contract also become not enforceable. In contrast in the
case of voidable contracts the collateral transactions can be enforced despite the fact
that the main contract may have become voidable, to the extent the collateral
transactions are capable of being performed independently.
(d) Penalty or punishment: All illegal agreements are punishable under different laws
say like Indian Penal Code etc. Whereas parties to void agreements do not face such
penalties or punishments.
Differences can be summarized as:
Basis of Void agreement Illegal agreement
difference
Scope A void agreement is not necessarily An illegal agreement is always void.
illegal.
Nature Not forbidden under law. Are forbidden under law.
Punishment Parties are not liable for any Parties to illegal agreements are
punishment under the law. liable for punishment.
Collateral It’s not necessary that agreements Agreements collateral to illegal
Agreement collateral to void agreements may agreements are always void.
also 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 : A bought goods from B in 2015. But no payment was made till 2019. B cannot sue
A for the payment in 2019 as it has crossed three years.
 THE INDIAN CONTRACT ACT, 1872 | 1.75

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: A tells B on telephone that he offers to sell his house for `2 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 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.
Example: 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 : A drinks a coffee in restaurant. There is an implied contract that he should pay for
the price of coffee.
Question 16
A coolie in uniform picks up the luggage of R to be carried out of the railway station
without being asked by R and R allows him to do so. Examine whether the coolie is
entitled to receive money from R under the Indian Contact Act, 1872?
Answer
Implied Contracts: Implied contracts come into existence by implication. Most often the
implication is by law and or by action. Section 9 of the Indian Contract Act, 1872
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.
In the present case, it is an implied contract and R must pay for the services of the coolie.
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 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: 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
 THE INDIAN CONTRACT ACT, 1872 | 1.76

contract even in its remotest sense, as there is neither offer and acceptance nor consent.
These are said to be quasi-contracts.
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: 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: 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.
Types of executory contract
(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: M advertises payment of are ward of `5000 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: A promises to sell his plot to B for `1 lacs cash down, but B pays only
`25,000 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. Executory contracts are
also known as Bilateral contracts.
Question 21
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.
 THE INDIAN CONTRACT ACT, 1872 | 1.77

Answer
(i) It is an implied contract and A must pay for the services of the coolie.
Implied Contracts: Implied contracts come into existence by implication. Most often
the implication is by law and or by action. Section 9 of the Indian Contract Act, 1872
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) of the Act 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.
Question 22
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.
Answer

(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.
Question 22
“All contracts are agreements, but all agreements are not contracts”. Comment.
Answer

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
 THE INDIAN CONTRACT ACT, 1872 | 1.78

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.

Question 23

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 15 th March
but due to riots in between reached B 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

(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.
Question 24

Explain the type of contracts in the following agreements under the Indian Contract Act,
1872:

(i) 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.
(ii) A bought goods from B in 2015. But no payment was made till 2019.
(iii) G agrees to give tuitions to H, a pre-engineering student, from the next month and H
in consideration promises to pay G `5,000 per month.
 THE INDIAN CONTRACT ACT, 1872 | 1.79

Answer
(i) In the instant case, X is an aggrieved party and the contract is voidable at his option but not
at 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) B cannot sue A for the payment in 2019 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.
(iii) Where, G agrees to give tuitions to H, a pre-engineering student, from the next month and H
in consideration promises to pay G `5,000 per month, the contract is executory because it is
yet to be carried out.
 THE INDIAN CONTRACT ACT, 1872 | 1.80

UNIT 4:
PERFORMANCE OF CONTRACT

UNIT
Performance of
OVERVIEW
Contract

Time & Contracts

Liability of Performance
By Whom Joint Promisor Place of Appropriation which need Discharge of a
Performance of Reciprocal not be
& Promisee of Promise Promises of Payments Performed Contract

Agreement to
Rights of Joint
do Impossible
Promisees Acts

OBLIGATIONS OF PARTIES TO CONTRACTS-(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.
 Promises bind the representatives of the promisor in case of death of such promisor
before performance, unless a contrary intention appears from the contract.
Example: A promises to deliver goods to B on a certain day on payment of `1,00,000. A dies
before that day. A’s representatives are bound to deliver the goods to B, and B is bound to pay
`1,00,000 to A’s representatives.
Example: A promises to paint a picture for B by a certain day, at a certain price. A dies before
the day. The contract cannot be enforced either by A’s representatives or by B because it
involves use of personal skill. It is a contract of personal nature.
Analysis of Section 37
 A contract being an agreement enforceable by law, creates a legal obligation, which subsists
until discharged.
 Performance of the promise or promises remaining to be performed is the principal and most
usual mode of discharge.
 The basic rule is that the promisor must perform exactly what he has promised to perform.
The obligation to perform is absolute. Thus, it may be noted that it is necessary for a party
who wants to enforce the promise made to him, to perform his promise for himself or offer to
 THE INDIAN CONTRACT ACT, 1872 | 1.81

perform his promise. Only after that he can ask the other party to carry out his promise. This
is the principle which is enshrined in Section 37.
 Thus, it is the primary duty of each party to a contract to either perform or offer to perform
his promise. He is absolved from such a responsibility only when under a provision of law or
an act of the other party to the contract, the performance can be dispensed with or excused.
 Thus, from above it can be drawn that performance may be actual or offer to perform.
1. Actual Performance: Where a party to a contract has done what he had undertaken
to do or either of the parties have fulfilled their obligations under the contract within
the time and in the manner prescribed.
Example: 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.
2. 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: P promises to deliver certain goods to R. P takes the goods to the appointed
place during business hours but R refuses to take the delivery of goods. This is an
attempted performance as P the promisor has done what he was required to do under the
contract.
EFFECT OF REFUSAL TO ACCEPT OFFER OF PERFORMANCE
According to Section 38 of the Act - where a promisor has made an offer of performance to the
promisee, and the offer has not been accepted, then the promisor is not responsible for non performance,
nor does he thereby lose his rights under the contract.
Every such offer must fulfill certain conditions which are as follows, namely:
(i) it must be unconditional;
(ii) it must be made at a proper time and place, and under such circumstances that the
person to whom it is made may have a reasonable opportunity of ascertaining that the
person by whom it is made is able and willing there and then to do the whole of what he
is bound by his promise to do;
(iii) if the offer is an offer to deliver anything to the promisee, then the promisee must have
a reasonable opportunity of seeing that the thing offered is the thing which the
promisor is bound by his promise to deliver.
An offer to one of several joint promisees has the same legal consequences as an offer to all of
them.
Example: P promises to deliver certain goods to R. P takes the goods to the appointed place
during business hours but R refuses to take the delivery of goods. This is an attempted
performance as P the promisor has done what he was required to do under the contract.
Question 1
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.
 THE INDIAN CONTRACT ACT, 1872 | 1.82

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?

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?
Answer
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 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.

By whom a contract may be performed Section 40-42

Person by whom promise is to be performed-Section 40
 If it appears from the nature of the case that it was the intention of the parties to any contract
that any promise contained in it should be performed by the promisor himself, such promise
must be performed by the promisor.
 In other cases, the promisor or his representatives may employ a competent person to
perform it.
Example: A promises to pay B a sum of money. A may perform this promise, either by personally
paying the money to B, or by causing it to be paid to B by another; and if A dies before the time
appointed for payment, his representatives must perform the promise, or employ some proper
person to do so.
Example: A promises to paint a picture for B and this must be performed by the promisor himself.
Analysis of Section 40
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.
 THE INDIAN CONTRACT ACT, 1872 | 1.83

Example: 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: 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.
Example: 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: 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/-.
As per Section 41 of the Indian Contract Act, 1872, 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, accepted by the promisee, produces the result of discharging
the promisor, although the latter has neither authorised nor ratified the act of the third party.
Therefore, in the present instance, B can sue only for the balance amount i.e., `40,000/- and
not for the whole amount.
Question 2
X received certain goods from Y and promised to pay `60,000. Later on, X expressed his
inability to make payment. Z, who is known to X, pays `40,000 to Y on behalf of X.
however, X was not aware of the payment. Now Y is intending to sue X for the amount
of`60,000. Can Y do so? Advise.
 THE INDIAN CONTRACT ACT, 1872 | 1.84

Answer
As per section 41 of the Indian Contract Act, 1872, 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, accepted by the promisee, produces the result of discharging the
promisor, although the latter has neither authorised nor ratified the act of the third party.
Therefore, in the instant case, Y can sue X only for the balance amount i.e. `20,000 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 fulfill the promise.
 If any of them dies, his legal representatives must, jointly with the surviving promisors,
fulfill the promise.
 If all of them die, the legal representatives of all of them must fulfill the promise jointly.
Example: ‘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.
DISTINCTION BETWEEN SUCCESSION AND ASSIGNMENT
In the matter of succession,
 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,
 In the matter of assignment 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.
EFFECT OF A REFUSAL OF PARTY TO PERFORM PROMISE Section 39
According to Section 39, when a party to a contract has refused to perform, or disabled himself
from performing his promise in its entirety, the promisee may put an end to the contract, unless he
has signified, by words or conduct, his acquiescence in its continuance.
 THE INDIAN CONTRACT ACT, 1872 | 1.85

Example: A, singer, enters into a contract with B, the Manager of a theatre, to sing at his theatre
two nights in every week during next two months, and B engages to pay her `1,00,000 for each
night’s performance. On the sixth night, A willfully absents herself from the threatre. B is at liberty
to put an end to the contract.
Analysis of Section 39
From language of Section 39 it is clear that in the case under consideration, the following two
rights accrue to the aggrieved party, namely, (a) to terminate the contract; (b) to indicate by words
or by conduct that he is interested in its continuance.
In case the promisee decides to continue the contract, he would not be entitled to put an end to the
contract on this ground subsequently. In either case, the promisee would be able to claim damages
that he suffers as a result on the breach.
LIABILITY OF JOINT PROMISOR & PROMISEE
i. Devolution of joint liabilities (Section 42)
When two or more persons have made a joint promise, then, unless a contrary intention
appears by the contract, all such persons, during their joint lives and after the death of
any of them, his representative jointly with the survivor or survivors and after the
death of last survivor, the representatives of all jointly, must fulfil the promise.
Analysis of Section 42
If two or more persons have made a joint promise, ordinarily all of them during their life-time
must jointly fulfill 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 : 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.
ii. 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.
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.
 THE INDIAN CONTRACT ACT, 1872 | 1.86

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: 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: 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: 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 `2,000 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.
iii. 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: ‘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.
iv. 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: : 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.
Question 3
Ajay, Vijay and Sanjay are partners of software business and jointly promises to pay
`6,00,000 to Kartik. Over a period of time Vijay became insolvent, but his assets are
sufficient to pay one-fourth of his debts. Sanjay is compelled to pay the whole. Decide
whether Sanjay is required to pay whole amount himself to Kartik in discharging joint
promise under the Indian Contract Act, 1872.
Answer
Rule : As per section 43 of the Indian Contract Act, 1872, 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.
 THE INDIAN CONTRACT ACT, 1872 | 1.87

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.
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.
Conclusion : Therefore, in the instant case, Sanjay is entitled to receive `50,000 from Vijay’s
assets and `2,75,000 from Ajay.
Question 4
Q. 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.
Answer
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.
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
 THE INDIAN CONTRACT ACT, 1872 | 1.88

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: If the delivery of goods is offered say after sunset, 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.
(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: 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.
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 promise ready and willing to
perform - Section 51
When a contract consists of reciprocal promises to be simultaneously performed, no
promisor need to perform his promise unless the promisee is ready and willing to perform
his reciprocal promise.
Example: 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.
Analysis of Section 51
Simultaneous performance of reciprocal promises: Reciprocal promises may have to be
performed simultaneously, or one after the other. Where A promises to deliver rice and B
promises to pay the price on delivery, both the promises are to be performed
simultaneously, and both A and B must be ready and willing to perform their respective
promises. Such promises constitute concurrent conditions and the performance of one of the
promises is conditional on the performance of the other. If one of the promises is not
performed the other too need not be performed. If A, in the above-mentioned example, is
unwilling to deliver the rice on payment, A will be guilty of breach of promise and the breach
 THE INDIAN CONTRACT ACT, 1872 | 1.89

would relieve B of the obligation to perform his promise and would enable B to treat the
contract as at an end.
(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: 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.
Analysis of Section 52 - The order of performance may sometimes be indicated not
expressly, but by the nature of the transaction. For example, A and B contract that A shall
make over his stock-in-trade to B at a fixed price, and B promises to give security for the
payment of the price. A’s promise to make over his stock need not be performed, until the
security is given by , for the nature of the transaction requires that A should have the
security from B before he delivers his stock.
(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 1: 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 2: 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)
When a contract consists of reciprocal promises, such that one of them cannot be performed,
or that its performance cannot be claimed till the other has been performed, and the
promisor of the promise last mentioned fails to perform it, such promisor cannot claim
the performance of the reciprocal promise, and must make compensation to the other
party to the contract for any loss which such other party may sustain by the non-
performance of the contract.
Analysis of 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: 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.
 THE INDIAN CONTRACT ACT, 1872 | 1.90

Example: 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) 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: A and B agree that A will sell a house to B for `500,000 and also that if B uses it as
a gambling house, he will pay a further sum of `750,000. The first set of reciprocal promises,
i.e. to sell the house and to pay `500,000 for it, constitutes a valid contract. But the object of
the second, being unlawful, is void.
(vi) ‘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: 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.
Question 5

In light of provisions of the Indian Contract Act, 1872 answer the following:

(i) Mr. S and Mr. R made contract wherein Mr. S agreed to deliver paper cup manufacture
machine to Mr. R and to receive payment on delivery. On the delivery date, Mr. R
didn't pay the agreed price. Decide whether Mr. S is bound to fulfil his promise at the
time of delivery?
(ii) Mr. Y given loan to Mr. G of INR 30,00,000. Mr. G defaulted the loan on due date and
debt became time barred. After the time barred debt, Mr. G agreed to settle the full
amount to Mr. Y. Whether acceptance of time barred debt Contract is enforceable in
law?
(iii) A & B entered into a contract to supply unique item, alternate of which is not
available in the market. A refused to supply the agreed unique item to B. What
directions could be given by the court for breach of such contract?
Answer

(i) As per Section 51 of the Indian Contract Act, 1872, 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. Such promises
constitute concurrent conditions and the performance of one of the promise is conditional
on the performance of the other. If one of the promises is not performed, the other too need
not be performed.
Referring to the above provisions, in the given case, Mr. S is not bound to deliver goods to
Mr. R since payment was not made by him at the time of delivery of goods.
 THE INDIAN CONTRACT ACT, 1872 | 1.91

(ii) Promise to pay time-barred debts - Section 25 (3): Where there is an agreement, made in
writing and signed by the debtor or by his agent, to pay wholly or in part a time barred debt,
the agreement is valid and binding even though there is no consideration.
In the given case, the loan given by Mr. Y to Mr. G has become time barred. Thereafter, Mr. G
agreed to make payment of full amount to Mr. Y.
Referring to above provisions of the Indian Contract Act, 1872 contract entered between
parties post time barred debt is valid so, Mr. G is bound to pay the agreed amount to Mr. Y
provided the above mentioned conditions of section 25 (3) are fulfilled.
(iii) Where there is a breach of contract for supply of a unique item, mere monetary
damages may not be an adequate remedy for the other party. In such a case, the court
may give order for specific performance and direct the party in breach to carry out his
promise according to the terms of contract. Here, in this case, the court may direct A to
supply the item to B because the refusal to supply the agreed unique item cannot be
compensated through money.
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.
Analysis of Section 55
But ordinarily, from an examination of a contract, it is difficult to ascertain whether time is
intended to be of essence by the parties at the time of its formation. In every case, the intention is
to be gathered from the terms of the contract.
 In a mercantile contract, the general rule in this regard is that stipulations as to time,
except as to time for payment of money, are essential conditions, since punctuality is of
the utmost importance in the business world. Thus, on a sale of goods that are notoriously
subject to rapid fluctuation of market price, e.g. gold, silver, shares having a ready
market the time of delivery is of the essence of the contract.
 But in mortgage bond, the time fixed for the repayment of the mortgage money can by no
means be regarded as an essential condition; consequently, the mortgaged property can
be regained even after the due date.
 Similarly, in a contract to sell land any clause limiting the time of completion is not
strictly enforced. But even in a contract for the sale of land, time can be made the
essence of the contract by express words.
 THE INDIAN CONTRACT ACT, 1872 | 1.92

Contract cannot be avoided where time is not essential: Where time is not essential, the
contract cannot be avoided on the ground that the time for performance has expired, there the
promisee is only entitled to compensation from the promisor for any loss caused by the delay. But
it must be remembered that even where time is not essential it must be performed within a
reasonable time; otherwise it becomes voidable at the option of the promisee.
Effect of acceptance of performance out of time: Even where time is essential the promisee may
waive his right to repudiate the contract, when the promisor fails to perform the promise within
the stipulated time. In that case, he may accept performance at any time other than that agreed. In
such an event, he cannot claim compensation for any loss occasioned by the non-performance of
the promise at the time agreed, unless at the time of acceptance of the performance he has given a
notice to the promisor of his intention to claim compensation.
Agreement to do Impossible Act
Section 56 contemplates various circumstances under which agreement may be void, since it is
impossible to carry it out. The Section is reproduced below:
“An agreement to do an act impossible in itself is void”.
Contract to do act afterwards becoming impossible or unlawful: A contract to do an act which,
after the contract is made, becomes impossible, or, by reason of some event which the promisor
could not prevent, unlawful, becomes void when the act becomes impossible or unlawful.
Compensation for loss through non-performance of act known to be impossible or
unlawful: where one person has promised to do something which he knew, or, with reasonable
diligence, might have known, and which the promisee did not know, to be impossible or unlawful,
such promisor must make compensation to such promisee for any loss which such promisee
sustains through the non-performance of the promise.
Example : A agrees with B to discover treasure by magic. The agreement is void.
Analysis of Section 56
The impossibility of performance may be of the two types, namely
(a) initial impossibility, and
(b) subsequent impossibility.
(1) 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: ‘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.
(i) 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: 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.
(ii) If unknown to the parties: Where both the promisor and the promisee are
ignorant of the impossibility of performance, the contract is void.
Example : A contracted B to sell his brown horse for `50,000 both unaware that the
horse was dead a day before the agreement.
 THE INDIAN CONTRACT ACT, 1872 | 1.93

(iii) 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.
(2) 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: ‘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.
Question 6
Mr. X and Mr. Y entered into a contract on 1st August, 2018, by which. Mr. X had to supply
50 tons of sugar to Mr. Y at a certain price strictly within a period of 10 days of the
contract. Mr. Y also paid an amount of `50,000 towards advance as per the terms of the
above contract. The mode of transportation available between their places is roadway only.
Severe flood came on 2nd August, 2018 and the only road connecting their places was
damaged and could not be repaired within fifteen days. Mr. X offered to supply sugar on
20th August, 2018 for which Mr. Y did not agree. On 1st September, 2018, Mr. X claimed
compensation of `10,000 from Mr. Y for refusing to accept the supply of sugar, which was
not there within the purview of the contract. On the other hand, Mr. Y claimed for refund of
`50.000 which he had paid as advance in terms of the contract. Analyse the above
situation in terms of the provisions of the Indian Contract Act, 1872 and decide on Y's
contention.
Answer
Rule : 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.
Also, 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.
Discussion & Conclusion : In the given question, after Mr. X and Mr. Y have entered into the
contract to supply 50 tons of sugar, the event of flood occurred which made it impossible to
deliver the sugar within the stipulated time. Thus, the promise in question became void. Further,
Mr. X has to pay back the amount of `50,000 that he received from Mr. Y as an advance for the
supply of sugar within the stipulated time. Hence, the contention of Mr. Y is correct.
 THE INDIAN CONTRACT ACT, 1872 | 1.94

Question 7
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
(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.
Question 8
Explain what is meant by 'Supervening Impossibility' as per the Indian Contract Act, 1872
with the help of an example. What is the effect of such impossibility?

Answer

According to Section 56 of the Indian Contract Act, 1872, the impossibility of performance may be
of the two types, namely (a) initial impossibility, and (b) subsequent impossibility.

Subsequent impossibility is also known as Supervening impossibility i.e. 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.

Example: ‘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.

Effect of impossibility: The effect of such impossibility is that it makes the contract void, and the
parties are discharged from further performance of the contract.

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
 THE INDIAN CONTRACT ACT, 1872 | 1.95

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.
Note : If the debts are of equal standing, the payments shall be applied in discharge of each
proportionately.
Question 9
Mr. Sonumal a wealthy individual provided a loan of `80,000 to Mr. Datumal on
26.02.2019. The borrower Mr. Datumal asked for a further loan of ` 1,50,000. Mr.
Sonumal agreed but provided the loan in parts at different dates. He provided`1,00,000 on
28.02.2019 and remaining `50,000 on 03.03.2019.
On 10.03.2019 Mr. Datumal while paying off part `75,000 to Mr. Sonumal insisted that the
lender should adjusted `50,000 towards the loan taken on·03.03.2019 and balance as
against the loan on 26.02.2019.
Mr. Sonumal objected to this arrangement and asked the borrower to adjust in the order
of date of borrowal of funds.
Now you decide:
(i) Whether the contention of Mr. Datumal correct or otherwise as per the provisions of
the Indian Contract Act, 1872?
(ii) What would be the answer in case the borrower does not insist on such order of
adjustment of repayment?
(iii) What would the mode of adjustment/appropriation of such part payment in case
neither Mr. Sonumal nor Mr. Datumal insist any order of adjustment on their part?
Answer
Appropriation of Payments: In case where a debtor owes several debts to the same creditor and
makes payment which is not sufficient to discharge all the debts, the payment shall be
appropriated (i.e. adjusted against the debts) as per the provisions of Section 59 to 61 of the
Indian Contract Act, 1872.
(i) As per the provisions of 59 of the Act, 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.
Therefore, the contention of Mr. Datumal is correct and he can specify the manner of
appropriation of repayment of debt.
(ii) As per the provisions of 60 of the Act, where the debtor has omitted to intimate and there
are no other circumstances indicating to which debt the payment is to be applied, the
 THE INDIAN CONTRACT ACT, 1872 | 1.96

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.
Hence in case where Mr. Datumal fails to specify the manner of appropriation of debt on
part repayment, Mr. Sonumal the creditor, can appropriate the payment as per his choice.
(iii) As per the provisions of 61 of the Act, 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.
Hence in case where neither Mr. Datumal nor Mr. Sonumal specifies the manner of
appropriation of debt on part repayment, the appropriation can be made in proportion of
debts.
Question 10
Mr. Murari owes payment of 3 bills to Mr. Girdhari as on 31st March, 2020. (i) ` 12,120
which was due in May 2016. (ii) `5,650 which was due in August 2018 (iii) `9,680 which
was due in May 2019. Mr. Murari made payment on 1st April 2020 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.
Answer
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.
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.
 THE INDIAN CONTRACT ACT, 1872 | 1.97

 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: 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 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: 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.
 THE INDIAN CONTRACT ACT, 1872 | 1.98

(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”.
Analysis of Section 64
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: 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.”
Analysis of Section 65
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: 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 received under the contract, it is a security that the purchaser would fulfill his
contract and is ancillary to the contract for the sale of the land.
Question 11
Mr. JHUTH entered into an agreement with Mr. SUCH to purchase his (Mr. SUCH’s) motor
car forb `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
 THE INDIAN CONTRACT ACT, 1872 | 1.99

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.
Answer
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.
(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: If an apprentice refuses to learn, the teacher cannot be held liable for not teaching.
Example: 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.
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.
 THE INDIAN CONTRACT ACT, 1872 | 1.100

Example: 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: 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: 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: 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: A agrees with B to discover a treasure by magic. The agreement is void due to
initial impossibility.
Example: A and B contract to marry each other. Before the time fixed for the marriage, A
goes mad. The contract becomes void.
Example: 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: 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 action is taken by the
promisee within the specified period of limitation, he is deprived of remedy at law.
Example: 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
 THE INDIAN CONTRACT ACT, 1872 | 1.101

discharged from performing his part of the contract.

Example: 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: 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: 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.
Question 12
“The basic rule is that the promisor must perform exactly what he has promised to
perform.” Explain stating the obligation of parties to contracts.
Answer
Obligations of parties to contracts (Section 37 of the Indian Contract Act, 1872)
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.
Promises bind the representatives of the promisor in case of death of such promisor before
performance, unless a contrary intention appears from the contract.
Example 1: A promises to deliver goods to B on a certain day on payment of `1,00,000. A dies
before that day. A’s representatives are bound to deliver the goods to B, and B is bound to pay
`1,00,000 to A’s representatives.
Example 2: A promises to paint a picture for B by a certain day, at a certain price. A dies before
the day. The contract cannot be enforced either by A’s representatives or by B because it involves
use of personal skill.
Analysis of Section 37
A contract being an agreement enforceable by law, creates a legal obligation, which subsists until
discharged. Performance of the promise or promises remaining to be performed is the principal
and most usual mode of discharge.
The basic rule is that the promisor must perform exactly what he has promised to perform.
The obligation to perform is absolute. Thus, it may be noted that it is necessary for a party who
wants to enforce the promise made to him, to perform his promise for himself or offer to
perform his promise. Only after that he can ask the other party to carry out his promise. This is
 THE INDIAN CONTRACT ACT, 1872 | 1.102

the principle which is enshrined in Section 37. Thus, it is the primary duty of each party to a
contract to either perform or offer to perform his promise. He is absolved from such a
responsibility only when under a provision of law or an act of the other party to the contract,
the performance can be dispensed with or excused.
Thus, from above it can be drawn that performance may be actual or offer to perform.
Question 13

State the grounds upon which a contract may be discharged under the provisions of the
Indian Contract Act, 1872.

Answer

Discharge of a Contract:
A Contract may be discharged either by an act of parties or by an operation of law which may be
enumerated as follows:
(1) Discharge by performance which may be actual performance or 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.
(2) Discharge by mutual agreement: Section 62 of the Indian Contract Act, 1872 provides that
if the parties to a contract agree to substitute a new contract for it or to refund or remit or
alter it, the original contract need not to be performed. Novation, Rescission, Alteration and
Remission are also the same ground of this nature.
(3) Discharge by impossibility of performance: The impossibility may exist from its
initiation. Alternatively, it may be supervening impossibility which may take place owing to
(a) unforeseen change in law (b) The destruction of subject matter (c) The non-existence or
non-occurrence of particular state of things (d) the declaration of war (Section 56).
(4) Discharge by lapse of time: A contract should be performed within a specific period as
prescribed in the Law of Limitation Act, 1963. If it is not performed the party is deprived of
remedy at law.
(5) Discharge by operation of law: It may occur by death of the promisor, by insolvency etc.
(6) 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 (Section 64).
(7) A promise 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 he thinks fit. In other words, a contract may be discharged by
remission. (Section 63).
(8) When a promisee neglects or refuses to afford the promisor reasonable facilities for the
performance of the promise, the promisor is excused by such neglect or refusal (Section 67).
 THE INDIAN CONTRACT ACT, 1872 | 1.103

UNIT 5 : BREACH OF CONTRACT AND ITS REMEDIES

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
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: Where A contracts with B on 15th July, 2016 to supply 10 bales of cotton for a
specified sum on 14th August, 2016 and on 30th July informs B, that he will not be able to
supply the said cotton on 14th August, 2016, there is an express rejection of the contract.
Example: Where A agrees to sell his white horse to B for `50,000/- on 10th of August, 2016,
but he sells this horse to C on 1st of August, 2016, 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 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.
 THE INDIAN CONTRACT ACT, 1872 | 1.104

Question 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.
Answer
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.
Section 39 of the Indian Contract Act, 1872 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.
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: A agrees to deliver 100 bags of sugar to B on 1st February 2016. 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.
Question 2
Mr. Ramaswamy of Chennai placed an order with Mr. Shah of Ahmedabad for supply of Urid
Dhall on 10.11.2006 at a contracted price of `40 per kg. The order was for the supply of 10
tonnes within a month’s time viz. before 09.12.2006. On 04.12.2006 Mr. Shah wrote a letter
to Mr. Ramaswamy stating that the price of Urid Dhall was sky rocketing to `50 Per. Kg. and
he would not be able to supply as per original contract. The price of Urid Dhall rose to `53
on 09.12.06 Advise Mr. Ramaswamy citing the legal position.
 THE INDIAN CONTRACT ACT, 1872 | 1.105

Answer
The stated problem falls under the head ‘anticipatory breach of contract’ defined in Section 39 of
the Indian Contract Act, 1872.
The case law applicable here is Frost vs. Knight. As per details in the problem, price as contracted
`40 per kg on 10.11. 2006 rose to `50 per kg as on 4.12.2006 and finally to `53 per kg, on
09.12.2006.
The answer to the problem is that
1. Mr. Ramaswamy can repudiate the contract on 04.12.2006 and can claim damages of `10 per
kg viz. `1,00,000.
2. He could wait till 09.12.2006 and claim `1,30,000 i.e. `13 per kg.
3. If the Government, in the interim period i.e. between 04.12.2006 and 09.12. 2006 imposes a
ban on the movement of the commodity to arrest rise of prices, the contract becomes void
and Mr. Ramaswamy will not be able to recover any damages whatsoever.
Question 3
Mr. X was a Disk Jockey at a five star hotel bar. As per the contract, he is supposed to
perform every weekend (i.e. twice a week). Mr. X will be paid `1500 per day. However,
after a month, Mr. X willfully absents himself from the performance.

(i) Does the hotel have the right to end the contract?
(ii) If the hotel sends out a mail to X that they are interested to continue the contract and
X accepts, can the hotel rescind the contract after a month on this ground
subsequently?
(iii) In which of the cases – (termination of contract or continuance of contract) can the
hotel claim damages that it has suffered as a result of this breach?
Answer

By analyzing Section 39 of the Indian Contract Act 1872, it is understood that when a party to a
contract has refused to perform or disabled himself from performing his promise entirely, the
following two rights accrue to the aggrieved party (promisee)

(a) To terminate the contract

(b) To indicate by words or by conduct that he is interested in its continuance.

In either of the two cases, the promisee would be able to claim damages that he suffers. In the
given case,
(i) Yes, the hotel has the right to end the contract with Mr. X, the DJ.
(ii) The hotel has the right to continue the contract with X. But once this right is exercised, they
cannot subsequently rescind the contract on this ground subsequently.
In both the cases, the hotel (promisee) is entitled to claim damages that has been suffered as a
result of breach.
Question 4
“When a party to a contract has refused to perform, or disabled himself from performing
his promise in its entirety, the promisee may put an end to the contract”. Explain.
 THE INDIAN CONTRACT ACT, 1872 | 1.106

Answer

Effect of a Refusal of Party to Perform Promise

According to Section 39, when a party to a contract has refused to perform, or disabled himself
from performing his promise in its entirety, the promisee may put an end to the contract, un less
he has signified, by words or conduct, his acquiescence in its continuance.
From language of Section 39 it is clear that in the case under consideration, the following two
rights accrue to the aggrieved party, namely, (a) to terminate the contract; ( b) to indicate by
words or by conduct that he is interested in its continuance.
In case the promisee decides to continue the contract, he would not be entitled to put an end to
the contract on this ground subsequently. In either case, the promisee would be able to claim
damages that he suffers as a result on the breach.
Remedies for Breach of Contract
A. SUIT FOR DAMAGES
Compensation for loss or damage caused by breach of contract (Section 73)
 When a contract has been broken, the party who suffers by such a 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.
 Such compensation is not to be given for any remote and indirect loss or damage sustained
by reason of the breach.
 Compensation for failure to discharge obligation resembling those created by
contract: When an obligation resembling those created by contract has been incurred and
has not been discharged, any person injured by the failure to discharge it is entitled to
receive the same compensation from the party in default, as if such person had contracted to
discharge it and had broken his contract.
Explanation to Section 73
In estimating the loss or damage arising from a breach of contract, the means which existed of
remedying the inconvenience caused by the non-performance of the contract must be taken into
account.
Analysis of Section 73
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.
 THE INDIAN CONTRACT ACT, 1872 | 1.107

Remedy by way of Damages or Kind of Damages

Remedy by way of damages is the most common remedy available to the injured party. This
entitles the injured party to recover compensation for the loss suffered by it due to the breach of
contract, from the party who causes the breach. Section 73 to 75 of the Contract Act incorporate
the provisions in this regard. The damages which may be awarded to the injured party may be of
the following kinds:
(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:
Note : 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 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: 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 refuses 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: ‘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’.
Question 5
M Ltd., contract with Shanti Traders to make and deliver certain machinery to them by
30.6.2017 for `11.50 lakhs. Due to labour strike, M Ltd. could not manufacture and deliver
the machinery to Shanti Traders. Later, Shanti Traders procured the machinery from
another manufacturer for `12.75 lakhs. Due to this Shanti Traders was also prevented from
performing a contract which it had made with Zenith Traders at the time of their contract
with M Ltd. and were compelled to pay compensation for breach of contract. Advise Shanti
Traders the amount of compensation which it can claim from M Ltd., referring to the legal
provisions of the Indian Contract Act, 1872.
Answer
 THE INDIAN CONTRACT ACT, 1872 | 1.108

Rule: Section 73 of the Indian Contract Act, 1872 provides for consequences of breach of
contract. According to it, 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. Such compensation is not given for any remote and indirect loss or damage
sustained by reason of the breach. It is further provided in the explanation to the section that in
estimating the loss or damage from a breach of contract, the means which existed of
remedying the inconvenience caused by the non- performance of the contract must be taken
into account.
Discussion & Conclusion : Applying the above principle of law to the given case, M Ltd. is
obliged to compensate for the loss of `1.25 lakh (i.e. `12.75 minus `11.50 = `1.25 lakh) which
had naturally arisen due to default in performing the contract by the specified date.
Regarding the amount of compensation which Shanti Traders were compelled to make to Zenith
Traders, it depends upon the fact whether M Ltd., knew about the contract of Shanti Traders for
supply of the contracted machinery to Zenith Traders on the specified date. If so, M Ltd is also
obliged to reimburse the compensation which Shanti Traders had to pay to Zenith Traders for
breach of contract. Otherwise M Ltd is not liable.
Question 6
‘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. What would be 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
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 v. 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’.
 THE INDIAN CONTRACT ACT, 1872 | 1.109

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).
(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: 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 : 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.
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 INDIAN CONTRACT ACT, 1872 | 1.110

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.
 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: A contracts with B, that if A practices as a surgeon in Kolkata, he will pay B `50,000. A
practices as a surgeon at Kolkata, B is entitled to such compensation not exceeding `50,000 as the
court considers reasonable.
Example: 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 3: 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
exhorbitant, 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.
Question 7
What is the law relating to determination of compensation, on breach of contract, contained
in section 73 of the Indian Contract Act, 1872?
 THE INDIAN CONTRACT ACT, 1872 | 1.111

Answer
Compensation on Breach of Contract: Section 73 of the Indian Contract Act, 1872 provides 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. Such compensation
is not given for any remote and indirect loss or damage sustained by reason of the breach. The
explanation to the section further provides that in estimating the loss or damage from a breach of
contract, the means which existed of remedying the inconvenience caused by the non-
performance of the contract must be taken into account.
Question 8
“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.
Answer
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)

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.
B. 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: 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
 THE INDIAN CONTRACT ACT, 1872 | 1.112

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 from a wine merchant 12 bottles of a whiskey and 2 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.
(e) Whereacontractisdivisibleandthepartynotindefaulthasenjoyedthebenefitofpartpe
rformance.
(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 deductionfor bad work.
Example 1: 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 2: 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 installments of 50 each. A
delivered the first installment 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: 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
 THE INDIAN CONTRACT ACT, 1872 | 1.113

by an injunction.
Example : 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.
Question 9
What do you mean by Quantum Meruit and state the cases where the claim for Quantum
Meruit arises?
Answer
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 fulfill ed:
(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 meruit is
restitutory. It is but reasonable compensation awarded on implication of a contract to
remunerate.
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.
(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.
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: 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 `100 for each night’s
performance. On the sixth night, A willfully 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.
 THE INDIAN CONTRACT ACT, 1872 | 1.114

UNIT 6 : CONTINGENT AND QUASI 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 idemand in fact neither agreement nor promise and yet the 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’.
CONTINGENT 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: A contracts to pay B `1,00,000 if B’s house is burnt. This is a contingent contract.
Example : A makes a contract with B to buy his house for `5,00,000 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: A contracts to pay B `100,000 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: 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: ‘A’ promises to pay `50,000 to ‘B’ if it rains on first of the next month.
(b) The event referred to is 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 `200,000. 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.
 THE INDIAN CONTRACT ACT, 1872 | 1.115

Example 1: 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 2: If A promises to pay B `100,000 if A left 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 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: ‘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 fulfillment 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.
Question 1

PQR, a hospital in Delhi, recruits Dr. A, on contract basis for a period of 3 months. The
hospital management promises to pay Dr. A, a lumpsum amount of `1,00,000 if Dr. A test
positive for noval corona virus (Covid 19) during the contract period of 3 months.
Identify the type of contract and highlight the rule of enforcement. Also, what will happen if
Dr. A does not contract Covid 19.

Answer

Section 31 of the Indian Contract Act, 1872 provides that “A contract to do or not to do something,
if some event, collateral to such contract, does or does not happen” is a Contingent Contract.

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.

In the instant case, the contract between PQR hospital & Dr. A is a Contingent Contract because
the promisor, PQR hospital need to perform his obligation of paying Dr. A, the lumpsum amount of
`1,00,000, only if he contracts with Covid 19 within a span of 3 months.
In Case, if Dr. A does not contract Covid 19, then the contract stands void automatically.
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: Where a contract identifies
happening of a future contingent event, the contract cannot be enforced until and unless
the event ‘happens’. If the happening of the event becomes impossible, then the
contingent contract is void.
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: 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: Where a contingent
contract is made contingent on a non-happening of an event, it can be enforced only when
its happening becomes impossible.
 THE INDIAN CONTRACT ACT, 1872 | 1.116

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”.
Example: 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.
Example: 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: 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: 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: 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: ‘A’ agrees to pay ‘B’ `one lakh if sun rises in the west next morning. This is an
impossible event and hence void.
Example: X agrees to pay Y `1,00,000 if two straight lines should enclose a space. The
agreement is void.
 THE INDIAN CONTRACT ACT, 1872 | 1.117

Difference between a contingent contract and a wagering contract

Basis of Contingent contract Wagering contract

difference

Meaning A contingent contract is a A wagering agreement is a

contract to do or not to do promise to give money or money’s
something with reference to a worth with reference to an
collateral event happening or uncertain event happening or not
not happening. happening.

Reciprocal Contingent contract may not A wagering agreement consists of

promises contain reciprocal promises. reciprocal promises.

Uncertain event In a contingent contract, the In a wagering contract, the

event is collateral. uncertain event is the core
factor.
Nature of Contingent contract may not be A wagering agreement is
contract wagering in nature. essentially contingent in nature.

Interest of Contracting parties have The contracting parties have no

contracting interest in the subject matter in interest in the subject matter.
parties contingent contract.

Doctrine of Contingent contract is not A wagering contract is a game,

mutuality of lose based on doctrine of mutuality losing and gaining alone
and gain of lose and gain. matters.

Effect of contract Contingent contract is valid. A wagering agreement is void.

Question 2
Explain the meaning of ‘Contingent Contracts’ and state the rules relating to such contracts.
Answer
Essential characteristics of a contingent contract: A contract may be absolute or contingent.
A contract is said to be absolute when the promisor undertakes to perform the contract in all
events. A contingent contract, on the other hand "is a contract to do or not to do something, if
some event, collateral to such contract does or does not happened (Section 31). It is a contract
in which the performance becomes due only upon the happening of some event which may or
may not happen. For example, A contracts to pay B `10,000 if he is elected President of a
particular association. This is a contingent contract. The essential characteristics of a
contingent contract may be listed as follows:
(i) There must be a contract to do or not to do something,
(ii) The performance of the contract must depend upon the happening or non- happening of
some event.
(iii) The happening of the event is uncertain.
(iv) The event on which the performance is made to depend upon is an event collateral to the
contract i.e. it does not form part of the reciproc al promises which constitute the contract.
The event should neither be a performance promised, nor the consideration for the
promise.
 THE INDIAN CONTRACT ACT, 1872 | 1.118

(v) The contingent event should not be the mere will of the promisor. However, where the
event is within the promisor’s will, but not merely his will, it may be a contingent contract.
The rules regarding the contingent contract are as follows:
(1) Contingent contract dependent on the happening of an uncertain future cannot be
enforced until the event has happened. If the event becomes impossible, such contracts
become void. (Section 32).
(2) Where a contingent contract is to be performed if a particular event does not happening
performance can be enforced only when happening of that event becomes impossible
(Section 33).
(3) If a contract is contingent upon, how a person will act at an unspecified time the event
shall be considered to 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. (Section 34, 35).
(4) The contingent contracts to do or not to do anything if an impossible event happens, are
void whether or not the fact is known to the parties (Section 36).
Question 3
Explain the term Contingent Contract with reference to the Indian Contract Act, 1872 with
the help of an example. Also discuss the rules relating to enforcement of a contingent
contract.
Answer
Definition of ‘Contingent Contract’ (Section 31 of the Indian Contract Act, 1872): A contract to
do or not to do something, if some event, collateral to such contract, does or does not happen.

Example: A contracts to pay B `1,00,000 if B’s house is burnt. This is a contingent contract.
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: Where a contract

identifies happening of a future contingent event, the contract cannot be enforced until and
unless the event ‘happens’. If the happening of the event becomes impossible, then the
contingent contract is void.
(b) Enforcement of contracts contingent on an event not happening: Where a contingent
contract is made contingent on non-happening of an event, it can be enforced only when its
happening becomes impossible.
(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.
(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.
(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”.
 THE INDIAN CONTRACT ACT, 1872 | 1.119

(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.
Question 4
What is Contingent Contract? Discuss the essentials of Contingent Contract as per the Indian
Contract Act, 1872.
Answer
According to section 31 of the Indian Contract Act, 1872, contingent contract means a
contract to do or not to do something, if some event, collateral to such contract, does or
does not happen.
Example: Contracts of Insurance, indemnity and guarantee.
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.
(b) The event referred to, is 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.
(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.
(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.
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 contracts 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 rests upon the maxims, “No man must grow rich out of
another persons loss”.
Example: 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: A pays some money to B by mistake. It is really due to C. B must refund the money to A.
Example: 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.
 THE INDIAN CONTRACT ACT, 1872 | 1.120

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.
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: 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.
Question 5
X, a minor was studying in [Link]. in a college. On 1st July, 2019 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, 2019. 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.
Answer
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.
(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: 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.
 THE INDIAN CONTRACT ACT, 1872 | 1.121

Question 6
Y holds agricultural land in Gujarat on a lease granted by X, the owner. The land revenue
payable by X to the Government being in arrear, his land is advertised for sale by the
Government. Under the Revenue law, the consequence of such sale will be termination of
Y’s lease. Y, in order to prevent the sale and the consequent termination of his own lease,
pays the Government, the sum due from X. Referring to the provisions of the Indian
Contract Act, 1872 decide whether X is liable to make good to Y, the amount so paid ?
Answer
Yes, X is bound to make good to Y the amount so paid. Section 69 of the Indian Contract Act, 1872,
provides that “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. In the given case Y has
made the payment of lawful dues of X in which Y had an interest. Therefore, Y is entitled to get the
reimbursement from X.
Question 7
Q.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?
Answer
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.
(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
mean time 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.
[ShyamLal vs. State of U.P. A.I.R (1968) 130]
Example: 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’.
 THE INDIAN CONTRACT ACT, 1872 | 1.122

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: ‘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.
Question 8
X found a wallet in a restaurant. He enquired of all the customers present there but the
true owner could not be found. He handed over the same to the manager of the
restaurant to keep till the true owner is found. After a week he went back to the
restaurant to enquire about the wallet. The manager refused to return it back to X, saying
that it did not belong to him.
In the light of the Indian Contract Act, 1872, can X recover it from the Manager?
Answer
Responsibility of finder of goods (Section 71 of the Indian Contract Act, 1872): 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 the light of the above provisions, the manager must return the wallet to X, since X is entitled to
retain the wallet found against everybody except the true owner.
(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. [Shivprasadvs Sirish Chandra A.I.R. 1949 P.C. 297]
Example: 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 Khanjelekvs 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
 THE INDIAN CONTRACT ACT, 1872 | 1.123

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 The essentials for the Present

valid contract formation of a valid contract
Obligation are absent
Created by the consent of the
Imposed by law parties

Question 9
Explain the meaning of ‘Quasi-Contracts’. State the circumstances which are identified as
quasi contracts by the Indian Contract Act, 1872.
Answer
Quasi-Contracts: 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 some obligations as in the case of regular contracts. Quasi-contracts are
based on the principles of equity, justice and good conscience.
The salient features of quasi-contracts are:
(i) such a right is always a right to money and generally, though not always, to a liquidated
sum of money;
(ii) does not arise from any agreement between the parties concerned but the obligation is
imposed by law and;
(iii) the rights available are not against all the world but against a particular person or persons
only, so in this respect it resembles to a contractual right.
Circumstances Identified as Quasi-Contracts:
1. Claim for necessaries supplied to persons incapable of contracting: Any person
supplying necessaries of life to persons who are incapable of contracting is entitled to claim
the price from the other person’s property. Similarly, where money is paid to such persons
for purchase of necessaries, reimbursement can be claimed.
2. Payment by an interested person: A person who has paid a sum of money which another
person is obliged to pay, is entitled to be reimbursed by that other person provided that the
payment has been made by him to protect his own interest.
3. Obligation of person enjoying benefits of non-gratuitous 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.
4. Responsibility of finder of goods: A person who finds goods belonging to another
person and takes them into his custody is subject to same responsibility as if he were a
bailee.
5. Liability for money paid or thing delivered by mistake or by coercion : A person to
whom money has been paid or anything delivered by mistake or under coercion, must repay
or return it.
In all the above cases contractual liability arises without any agreement between the parties.
 THE INDIAN CONTRACT ACT, 1872 | 1.124

Question 10
Explain the-term ‘Quasi Contracts’ and state their characteristics.

Answer

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.

*************
 THE SALE OF GOODS ACT, 1930 | 2.1

CHAPTER – 2 “THE SALE OF GOODS ACT, 1930”

CHAPTER – 2
"THE SALE OF GOODS ACT,1930"
UNIT -1: FORMATION OF THE CONTRACT OF SALE
 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 places this freedom is severely restricted.
 Sale of Goods Act, 1930 is the Act to define and amend the law relating to the sale of goods.
It extends to the whole of India.
 It came into force on 1st July, 1930.
 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, shop or house etc.
 The general provisions of the Indian Contract Act, 1872 apply to a Contract of Sale of
Goods in so far as they are not inconsistent with the express provisions of the Sale of
Goods Act.
 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.
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:
1. “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 before sale or under the contract of
sale. [Section 2(7)]
 THE SALE OF GOODS ACT, 1930 | 2.2

 This is a wider definition than contained in the English law, which does not consider
‘stock’ and ‘shares’ as goods, though it includes a ship.
 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.
2. ‘Actionable claims’ are claims, which can be enforced only by an action or suit, e.g., debt.
Note : A debt is not a movable property or goods.
3. Classification of Goods
(i) EXISTING GOODS are such goods as are in existence at the time of the contract of
sale, i.e., those owned or possessed by the seller at the time of contract of sale
(Section 6).
The existing goods may be of following kinds:
(a) Specific goods: It means goods identified and agreed upon at the time a
contract of sale is made [Section 2(14)].
Example: Any specified and finally decided goods like a Samsung Galaxy S7 Edge,
Whirlpool washing machine of 7 kg etc.
Example: ‘A’ had five cars of different models. He agreed to sell his ‘fiat’ car to ‘B’ and ‘B’
agreed to purchase the same 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 : It means 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 from 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: 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 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. It may be noted that before
the ascertainment of the goods, the contract was for the sale of unascertained goods.
(c) Unascertained goods : It means 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: 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: 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.
 THE SALE OF GOODS ACT, 1930 | 2.3

Question 1
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 salt out of the lot of one hundred packets lying in
his shop.
(iii) T agrees to sell to S all the oranges which will be produced in his garden this year.
Answer
(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. 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 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.
(iii) 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.'
Question 2
Differentiate between Ascertained and Unascertained Goods with example.
Answer
(a) 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 from 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.
(b) Unascertained goods: The goods which are not specifically identified or ascertained at the
time of making of the contract are known as 'unascertained goods'. They are indicated or
defined only by description or sample.
(ii) Future Goods : It means goods to be manufactured or produced or
acquired by the seller after making the contract of sale [Section 2 (6)].
Note : A contract for the sale of future goods is always an agreement to sell. It is never
actual sale because a man cannot transfer what is not in existence.
Example: 1,000 quintals of potatoes to be grown on A’s field, is not illegal, though the
actual sale of future goods is not possible. This is an example of agreement to sell.
Example: 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.
Example: 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 which by the seller depends upon an
uncertain contingency (uncertain event) are called ‘contingent goods’ [Section
6(2)].
 THE SALE OF GOODS ACT, 1930 | 2.4

Note: 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: 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: 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 of goods 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:
(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. Where actual delivery is not
possible, there may be delivery of the means of getting possession of the goods.
(ii) Constructive delivery: When it is effected without any change in the custody or
actual possession of the thing as in the case of delivery by attornment
(acknowledgement) e.g., where a warehouseman holding the goods of A agrees to
hold them on behalf of B, at A’s request.
(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.
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)]. For
example, 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.
Question 3
What is meant by delivery of goods under the Sale of Goods Act, 1930? State various
modes of delivery.
Answer
Delivery of goods [section 2(2) of the Sale of Goods Act, 1930]: Delivery means voluntary
transfer of possession from one person to another. 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.
Modes of delivery: Following are the modes of delivery for transfer of possession:
(i) Actual delivery: When the goods are physically delivered to the buyer.
(ii) Constructive delivery: When it is effected without any change in the custody or actual
possession of the thing as in the case of delivery by attornment (acknowledgement) e.g.,
 THE SALE OF GOODS ACT, 1930 | 2.5

where a warehouseman holding the goods of A agrees to hold them on behalf of B, at A’s
request.
(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.
Question 4
Avyukt purchased 100 Kgs of wheat from Bhaskar at Rs. 30 per kg. Bhaskar says that wheat
is in his warehouse in the custody of Kishore, the warehouse keeper. Kishore confirmed
Avyukt that he can take the delivery of wheat from him and till then he is holding wheat on
Avyukt’s behalf. Before Avyukt picks the goods from warehouse, the whole wheat in the
warehouse has flowed in flood. Now Avyukt wants his price on the contention that no
delivery has been done by seller. Whether Avyukt is right with his views under the Sale of
Goods Act, 1930.
Answer
As per the provisions of the Sale of Goods Act, 1930 there are three modes of delivery, i) Actual
delivery, ii) Constructive delivery and iii) Symbolic delivery. When delivery is affected without
any change in the custody or actual possession of the things, it is called constructive delivery or
delivery by acknowledgement. Constructive delivery takes place when a person in possession of
goods belonging to seller acknowledges to the buyer that he is holding the goods on buyer’s
behalf.

In the instant case, Kishore acknowledges Avyukt that he is holding wheat on Avyukt’s behalf.
Before picking the wheat from warehouse by Avyukt, whole wheat was flowed in flood.
On the basis of above provisions and facts, it is clear that possession of the wheat has been
transferred through constructive delivery. Hence, Avyukt is not right. He cannot claim the price
back.
(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  any other document used in the ordinary
delivery of goods course of business as proof of the
possession or control of goods or
authorizing or purporting to authorize,
either by endorsement or by delivery, the
possessor of the document to transfer or
receive goods thereby represented
 THE SALE OF GOODS ACT, 1930 | 2.6

Examples: 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.
Note: 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.
(E) Mercantile Agent [Section 2(9)]: It means an agent having in the customary course of
business 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.
Examples of such kind of agents are auctioneers, factors, 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 owner-ship-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 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: 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.
(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.
(I) Quality of goods includes their state or condition. [Section 2(12)]
 THE SALE OF GOODS ACT, 1930 | 2.7

SALE AND AGREEMENT TO SELL (SECTION 4)

1. Contract of sale
 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)]
 A contract for the sale of goods may be either sale or agreement to sell.
2. 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.”
3. 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, the contract 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 : X agrees with Y on 10th October, 2020 that he will sell his car to Y on 10th
November, 2020 for a sum of ` 3 lakhs. It is an agreement to sell.
4. 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:
(i) There must be at least two parties, the seller and the buyer.
(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. competency of parties, legality of object and consideration etc.
 THE SALE OF GOODS ACT, 1930 | 2.8

Question 5
State briefly the essential element of a contract of sale under the Sale of Goods Act, 1930.
Answer
Essentials of Contract of Sale: The following elements must co-exist so as to constitute a
contract of sale of goods under the Sale of Goods Act, 1930.
(i) There must be at least two parties
(ii) The subject matter of the contract must necessarily be goods
(iii) A price in money (not in kind) should be paid or promised.
(iv) A transfer of property in goods from seller to the buyer must take place.
(v) A contract of sale must be absolute or conditional [section 4(2)].
(vi) All other essential elements of a valid contract must be present in the contract of sale.
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
passes to the buyer the buyer on future date or on
immediately. fulfilment of some condition.

Nature of contract It is an executed contract. It is an executory contract. i.e.

i.e. contract for which contract for which consideration is
consideration has been paid. 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 for
because of the passing of the price, unless the price was
the property therein to the payable at a stated date.
buyer.

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

destruction of the goods is 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 Creates Jus in personam

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 The official assignee will not The official assignee will acquire
of seller be able to take over the goods control over the goods but the
but will recover the price price will not be recoverable.
from the buyer.
 THE SALE OF GOODS ACT, 1930 | 2.9

In case of insolvency The official assignee will have The official assignee will not have
of buyer control over the goods. any control over the goods
Question 6
Archika went to a jewellery shop and asked the shopkeeper to show the gold bangles with
white polish. The shopkeeper informed that he has gold bangles with lots of designs but not
in white polish rather if Archika select gold bangles in his shop, he will arrange white
polish on those gold bangles without any extra cost. Archika select a set of designer bangles
and pay for that. The shopkeeper requested Archika to come after two days for delivery of
those bangles so that white polish can be done on those bangles. When Archika comes after
two days to take delivery of bangles, she noticed that due to white polishing , the design of
bangles has been disturbed. Now, she wants to avoid the contract and asked the
shopkeeper to give her money back but shopkeeper has denied for the same.
(a) State with reasons whether Archika can recover the amount under the Sale of Goods
Act, 1930.
(b) What would be your answer if shopkeeper says that he can repair those bangles but
he will charge extra cost for same?
Answer
As per Section 4(3) of the Sale of Goods Act, 1930, 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, the contract is called an agreement to sell and as per Section 4(4), 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.
(a) On the basis of above provisions and facts given in the question, it can be said that there is
an agreement to sell between Archika and shopkeeper and not a sale. Even the payment was
made by Archika, the property in goods can be transferred only after the fulfilment of
conditions fixed between buyer and seller. As the white polish was done but original design
is disturbed due to polishing, bangles are not in original position. Hence, Archika has right
to avoid the agreement to sell and can recover the price paid.
(b) On the other hand, if shopkeeper offers to bring the bangles in original position by
repairing, he cannot charge extra cost from Archika. Even he has to bear some expenses for
repair; he cannot charge it from Archika.
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
 THE SALE OF GOODS ACT, 1930 | 2.10

(c) Such person has a right to terminate the agreement at any time before the
property so passes; None the less 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 installment.
contract.

Position of the party The position of the buyer is that The position of the hirer is that
of the owner of the goods. of a bailee till he pays the last
installment.

Termination of The buyer cannot terminate The hirer may, if he so likes,

contract the contract and is bound to pay terminate the contract by
the price of the goods. returning the goods to its
owner without any liability to
pay the remaining installments.

Burden of Risk of The seller takes the risk of any The owner takes no such risk,
insolvency of the loss resulting from the for if the hirer fails to pay an
buyer insolvency of the installment, the owner has
buyer. right to take back the goods.

Transfer of title The buyer can pass a good title The hirer cannot pass any title
to a even to a bona fide purchaser.
bona fide purchaser from him.

Resale The buyer in sale can resell The hire purchaser cannot
the goods resell unless he has paid all
the installments.

(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 to the bailor or are to
be disposed off according to the directions of the bailor. Provisions related to bailment
are regulated by the Indian Contract Act, 1872.
 THE SALE OF GOODS ACT, 1930 | 2.11

The difference between bailment and sale may be clearly understood by studying
the following:

Basis of difference Sale Bailment

Transfer of property The property in goods is There is only transfer of

transferred from the seller to possession of goods from the
the buyer. bailor to the bailee for any of the
reasons like safe custody, carriage
etc.

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 The consideration may be

price 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: Where gold is supplied to a goldsmith for preparing an ornament or when an
artist is asked to paint a picture.
Contract of sale how made
According to section 5(1), a contract of sale is made by an offer to buy or sell goods for a price and
the acceptance of such offer. The contract may provide for the immediate delivery of the goods or
immediate payment of the price or both, or for the delivery or payment by instalments, or that the
delivery or payment or both shall be postponed.
Further, as per sub-section (2) of section 5, subject to the provisions of any law for the time
being in force, a contract of sale may be made in writing or by word of mouth, or partly in
writing and partly by word of mouth or may be implied from the conduct of the parties.
Example : R agrees to deliver his old motorcycle valued at ` 25000 to S in exchange for a new
motorcycle and agrees to pay the difference in cash, it is a Contract of Sale.
Analysis:
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
(iii) There may be immediate payment of price, but it may be agreed that the delivery is to
be made at some future date
(iv) There may be immediate delivery of the goods and an immediate payment of price
(v) It may be agreed that the delivery or payment or both are to be made in installments
(vi) It may be agreed that the delivery or payment or both are to be made at some future
date.
 THE SALE OF GOODS ACT, 1930 | 2.12

Subject matter of Contract of Sale

Existing or future goods (section 6):
(1) The goods which form the subject of a contract of sale may be either existing goods, 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: 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) Where by a contract of sale the seller purports to effect a present sale of future goods, the
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,
 if the goods without the knowledge of the seller have, at the time when the
contract was made, perished or become so damaged as no longer to answer to their
description contract.
 the contract is void
Example: 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 as no longer to answer to their description in the agreement
before the risk passes to the buyer,
 the agreement is thereby avoided.
Question 7
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?
Answer
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.
 THE SALE OF GOODS ACT, 1930 | 2.13

ASCERTAINMENT OF PRICE (SECTION 9 & 10)

Ascertainment of price (Section 9):
(1) The price in a contract of sale may be fixed by the contract or may be left to be fixed in
manner thereby agreed or may be determined by the course of dealing between
the parties.
(2) Where the price is not determined in accordance with the foregoing provisions, the
buyer shall pay the seller a reasonable price.
Note : What is a reasonable price is a question of fact dependent on the circumstances of each
particular case.
Analysis:
‘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.
Question 8
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?
Answer
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.
Agreement to sell at valuation (Section 10):
(1) Where there is an agreement to sell goods on the terms that the price is to be fixed
by the valuation of third party and such third party cannot or does not make such
valuation, the agreements is thereby avoided:
Note : if the goods or any part thereof have been delivered to, and appropriated by, the
buyer, he shall pay a reasonable price therefore.
(2) Where such third party is prevented from making the valuation by the fault of the
seller or buyer, the party not in fault may maintain a suit for damages against the
party in default.
Analysis
Section 10 provides for the determination of price by a third party. 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. 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. However, a buyer who has received and appropriated the goods
must pay a reasonable price for them in any eventuality.
Example: 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.
 THE SALE OF GOODS ACT, 1930 | 2.14

UNIT – 2: CONDITIONS & WARRANTIES

STIPULATION AS TO TIME (SECTION 11)
Stipulations as to time: Unless a different intention appears from the terms of the contract,
stipulations as to time of payment are not deemed to be of the essence of a contract of sale.
Whether any other stipulation as to time is of the essence of the contract or not depends on the
terms of the contract.
Analysis:
As regard 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. Stipulations as to time of delivery are usually the essence of the contract.
INTRODUCTION - CONDITIONS ANDWARRANTIES
 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.
 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.
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)]
 “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: 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.
Example: 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
 THE SALE OF GOODS ACT, 1930 | 2.15

defeats the very purpose for which Ram purchases the car. Ram is therefore entitled to reject the
car and have refund of the price.
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,
suuered 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 essential to It is only collateral to the main

the main purpose of the purpose of the contract.
contract.

Right in case of The aggrieved party can The aggrieved party can claim
breach repudiate the contract only damages in case of breach of
or claim damages or warranty.
both in the case of breach
of condition.

Conversion of A breach of condition may A breach of warranty cannot be

stipulations be treated as a breach of treated as a breach of condition.
warranty.

Question 1
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. What remedy Ram is
having now under the Sale of Goods Act, 1930?
Answer
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)]
“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)]
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 Ram purchases
the car.
 THE SALE OF GOODS ACT, 1930 | 2.16

Ram is therefore entitled to reject the car and have refund of the price.
WHEN CONDITION TO BE TREATEDAS WARRANTY(SECTION 13)
 Where a contract of sale is subject to any condition to be fulfilled by the seller, the buyer may
waive the condition or elect to treat the breach of the condition as a breach of warranty and
not as a ground for treating the contract as repudiated. [Sub-section (1)]
 Where a contract of sale is not severable and the buyer has accepted the goods or part thereof,
the breach of any condition to be fulfilled by the seller can only be treated as a breach of
warranty and not as a ground for rejecting the goods and treating the contract as
repudiated, unless there is a term of the contract, express or implied, to that effect. [Sub-
section (2)]
 Nothing in this section shall affect the case of any condition or warranty fulfilment of
which is excused by law by reason of impossibility or otherwise. [Sub-section (3)]
Analysis:
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 for damages only.
In the following cases, a contract is not avoided even on account of a breach of a
condition(Breach of condition treated as breach of warranty):
(i) Where the buyer altogether waives the performance of the condition. A party may for
his own benefit, waive a stipulation.
(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.
Example: 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, 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. Acceptance means acceptance as envisaged in Section 72 of the
Indian Contract Act, 1872.
(iv) Where the fulfillment of any condition or warranty is excused by law by reason of
impossibility or otherwise.
Waiver of conditions
1. Voluntary Waiver
a. Waives performance of contract
b. Elect to treat condition as warranty
2. Compulsory Waiver
a. Non-serverability of contract
b. Fulfilment of conditions excused by law
 THE SALE OF GOODS ACT, 1930 | 2.17

EXPRESS AND IMPLIED CONDITIONS AND WARRANTIES (SECTION 14-17)

Condition and Warranty
 ‘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.
 Express conditions are those, which are agreed upon between the parties at the time
of contract and are expressly provided in the contract.
 The 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.
Implied Conditions: Following conditions are implied in a contract of sale of goods unless the
circumstances of the contract show a different intention.
1. 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 at the
time when the property is to pass. If the seller’s title turns out to be defective, the buyer
must return the goods to the true owner and recover the price from the seller.
Example: 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: 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 ou 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.
2. 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.
 THE SALE OF GOODS ACT, 1930 | 2.18

Example: A at Kolkata sells to B twelve bags of “waste silk” on its way from Murshidabad to
Kolkatta. 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: 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’. A sale has been deemed to be by the
description
(i) where the class or kind to which the goods belong has been specified, e.g., ‘Egyptian
cotton’, “java sugar”, “Shfleld crockery”, etc., and
(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.
3. 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,
Example: 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 any latent of 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.
Note : This condition is applicable only with regard to defects, which could not be
discovered by an ordinary examination of the goods. But if the defects are latent,
then the buyer can avoid the contract.
Example: 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.
Question 2
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.
Answer
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
 THE SALE OF GOODS ACT, 1930 | 2.19

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.
4. 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: 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. B can reject the goods.
5. 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.
 Even 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: ‘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: ‘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”.
 THE SALE OF GOODS ACT, 1930 | 2.20

Question 3
For the purpose of making uniform for the employees, Mr. Yadav bought dark blue
coloured cloth from Vivek, but did not disclose to the seller the purpose of said purchase.
When uniforms were prepared and used by the employees, the cloth was found unfit.
However, there was evidence that the cloth was fit for caps, boots and carriage lining.
Advise Mr. Yadav whether he is entitled to have any remedy under the sale of Goods Act,
1930?
Answer
Fitness of Cloth: As per the provision of Section 16(1) of the Sale of Goods Act, 1930, an
implied condition in a contract of sale that an article is fit for a particular purpose only arises
when the purpose for which the goods are supplied is known to the seller, the buyer relied on the
seller’s skills or judgement and seller deals in the goods in his usual course of business. In this
case, the cloth supplied is capable of being applied to a variety of purposes, the buyer should have
told the seller the specific purpose for which he required the goods. But he did not do so.
Therefore, the implied condition as to the fitness for the purpose does not apply. Hence, the
buyer will not succeed in getting any remedy from the seller under the Sale of Goods Act,
1930.
Question 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?
Answer
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.
6. 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:
 Goods should be bought by description.
 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 SALE OF GOODS ACT, 1930 | 2.21

 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 1: 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.
Example 2: 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.
7. 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: 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.
Question 5
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?
Explain the basic law on sale by sample under Sale of Goods Act 1930?
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?
Answer
(i) 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.
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.
 THE SALE OF GOODS ACT, 1930 | 2.22

(ii) Sale by Sample: (Section 17 of the Sale of Goods Act, 1930): As per the provisions of
Sub-Section (1) of section 17 of the Sale of Goods Act, 1930, a contract of sale is a
contract for sale by sample where there is a term in the contract, express or implied, to
that effect.
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) that the bulk shall correspond with the sample in quality;
(b) that the buyer shall have a reasonable opportunity of comparing the bulk with the
sample.
(c) that the goods shall be free from any defect, rendering them unmerchantable, which
would not be apparent on reasonable examination of the sample.
(iii) In the instant case, the buyer does not have any option available to him for grievance
redressal.
(iv) 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, the
seller will be held liable.
Question 6
Mr. Amit was shopping in a self-service Super market. He picked up a bottle of cold
drink from a shelf. While he was examining the bottle, it exploded in his hand and injured
him. He files a suit for damages against the owner of the market on the ground of breach
of condition.
Decide under the Sale of Goods Act, 1930, whether Mr. Amit would succeed in his claim?
Answer
The problem as given in the question is based on Section 16(2) of the Sale of Goods Act, 1930,
which states that 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. Though the term ‘merchantable quality’ is not
defined in the Act, it means that in the present case, the bottle must be properly sealed. In other
words, if the goods are purchased for self-use, they should be reasonably fit for the purpose for
which it is being used.
In the instant case, on an examination of the bottle of cold drink, it exploded and injured the
buyer. Applying the provision of Section 16(2), Mr. Amit would succeed in claim for damages
from the owner of the shop.
Question 7
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?
Answer
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.
 THE SALE OF GOODS ACT, 1930 | 2.23

Question 8
Mr. T was a retailer trader of fans of various kinds. Mr. M came to his shop and asked for an
exhaust fan for kitchen. Mr. T showed him different brands and Mr. M approved of a
particular brand and paid for it. Fan was delivered at Mr. M’s house; at the time of opening
the packet he found that it was a table fan. He informed Mr. T about the delivery of the
wrong fan. Mr. T refused to exchange the same, saying that the contract was complete after
the delivery of the fan and payment of price.

(i) Discuss whether Mr. T is right in refusing to exchange as per provisions of the Sale of
Goods Act, 1930?
(ii) What is the remedy available to Mr. M?
Answer
According to Section 15 of the Sale of Goods Act, 1930, where the goods are sold by sample as well
as by description, the implied condition is that the goods supplied shall correspond to both with
the sample and the description. In case, the goods do not correspond with the sample or with
description or vice versa or both, the buyer can repudiate the contract.

Further, as per Section 16(1) of the Sales 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 the judgment or
skill of the seller, it is the duty of the seller to supply such goods as are reasonably fit for that
purpose.
(i) In the given case, Mr. M had revealed Mr. T that he wanted the exhaust fan for the kitchen.
Since the table fan delivered by Mr. T was unfit for the purpose for which Mr. M wanted the
fan, therefore, T cannot refuse to exchange the fan.
(ii) When one party does not fulfill his obligation according to the agreed terms, the other party
may treat the contract as repudiated or can insist for performance as per the original
contract. Accordingly, the remedy available to Mr. M is that he can either rescind the
contract or claim refund of the price paid by him or he may require Mr. T to replace it with
the fan he wanted.
Question 9
Mr. Das, a general store owner went to purchase 200 kg of Basmati Rice of specific length
from a whole seller. He saw the samples of rice and agreed to buy the one for which the
price was quoted as ` 150 per kg. While examining the sample Mr. Das failed to notice that
the rice contained a mix of long and short grain of rice.
The whole seller supplied the required quantity exactly the same as shown in the sample.
However, when Mr. Das sold the rice to one of his regular customers she complained that
the rice contained two different qualities of rice and returned the rice.
With reference to the provisions of the Sales of Goods Act, 1930, discuss the options open to
Mr. Das for grievance redressal. What would be your answer in case Mr. Das specified his
exact requirement as to length of rice?
 THE SALE OF GOODS ACT, 1930 | 2.24

Answer
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.
In the instant case, Mr. Das on examination of the sample on which he agreed to buy, failed to
notice that it contained a mix of long and short grain of rice.

In the light of the provisions of Sub-Clause (b) of Sub-Section (2) of Section 17 of the Act, Mr. Das
will not be successful as he examined the sample of Basmati 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. It could have been discovered by Mr. Das, by an
ordinary examination of the goods that it contained a mix of long and short grains. This reflects
lack of due diligence on part of Mr. Das.
Therefore, Mr. Das, the buyer does not have any option available to him for grievance redressal.
In case Mr. Das specified his 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 in such case,
seller will be held liable.
Question 10
Mr. P was running a shop selling good quality washing machines. Mr. Q came to his shop
and asked 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, when the
machine was delivered at Mr. Q’s house, it was found that it was wrong machine and also
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?
Answer
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. In case the goods do not correspond to sample or description, the buyer has
the right to repudiate the contract.
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.
In the given case, 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.
Based on the above provision and facts of case, we understand that there is breach of implied
condition as to sample as well as description, therefore Mr. Q can either repudiate the contract or
claim the refund of the price paid by him or he may require Mr. P to replace the washing machine
with desired one.
 THE SALE OF GOODS ACT, 1930 | 2.25

Question 11

Prashant reaches a sweet shop and ask for 1 Kg of ‘Burfi’ if the sweets are fresh. Seller
replies’ “Sir, my all sweets are fresh and of good quality.” Prashant agrees to buy on the
condition that first he tastes one piece of ‘Burfi’ to check the quality. Seller gives him one
piece to taste. Prashant, on finding the quality is good, ask the seller to pack. On reaching
the house, Prashant finds that ‘Burfi’ is stale not fresh while the piece tasted was fresh.
Now, Prashant wants to avoid the contract and return the ‘Burfi’ to seller.

(a) State with reason whether Prashant can avoid the contract under the Sale of Goods
Act, 1930?
(b) Will your answer be different if Prashant does not taste the sweet?
Answer
By virtue of provisions of Section 17 of the Sale of Goods Act, 1930, in the case of a contract for
sale by sample there is an implied condition that the bulk shall correspond with the sample in
quality and the buyer shall have a reasonable opportunity of comparing the bulk with the sample.
According to Section 15, where there is a contract for the sale of goods by description, there is an
implied condition that the goods shall correspond with the description. If the goods do not
correspond with implied condition, the buyer can avoid the contract and reject the goods
purchased.

(a) In the instant case, the sale of sweet is sale by sample and the quality of bulk does not
correspond with quality of sample. Hence, Prashant can return the sweet and avoid the
contract.
(b) In the other case, the sale of sweet is the case of sale by description and the quality of goods
does not correspond with description made by seller. Hence, answer will be same. Prashant
can return the sweet and avoid the contract.
Question 12
Mr. T was a retail trader of fans of various kinds. Mr. M came to his shop and asked for an
exhaust fan for kitchen. Mr. T showed him different brands and Mr. M approved of a
particular brand and paid for it. Fan was delivered at Mr. M's house; at the time of opening
the packet he found that it was a table fan. He informed Mr. T about the delivery of the
wrong fan. Mr. T refused to exchange the same, saying that the contract was complete after
the delivery of the fan and payment of price.

(i) Discuss whether Mr. T is right in refusing to exchange as per provisions of Sale of
Goods Act, 1930?
(ii) What is the remedy available to Mr. M?
Answer

(i) According to Section 15 of the Sale of Goods Act, 1930, where the goods are sold by sample
as well as by description, the implied condition is that the goods supplied shall correspond
to both with the sample and the description. In case, the goods do not correspond with the
sample or with description or vice versa or both, the buyer can repudiate the contract.

Further, as per Section 16(l) of the Sales 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 the
judgment or skill of the seller, it is the duty of the seller to supply such goods as are
reasonably fit for that purpose.
 THE SALE OF GOODS ACT, 1930 | 2.26

In the given case, Mr. M had revealed Mr. T that he wanted the exhaust fan for the kitchen.
Since the table fan delivered by Mr. T was unfit for the purpose for which Mr. M wanted the
fan, therefore, T cannot refuse to exchange the fan.
(ii) When one party does not fulfill his obligation according to the agreed terms, the other party
may treat the contract as repudiated or can insist for performance as per the original
contract. Accordingly, the remedy available to Mr. M is that he can either rescind the
contract or claim refund of the price paid by him or he may require Mr. T to replace it with
the fan he wanted.
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).
 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: 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: A pledges his car with C for a loan of `15,000 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.
 THE SALE OF GOODS ACT, 1930 | 2.27

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.
Question 13
Discuss the various types of implied warranties as per the Sales of Goods Act, 1930?
Answer
Various types of implied warranties
1. Warranty as to undisturbed possession [Section 14(b) of the Sales of Goods Act,
1930]: 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.
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.
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.
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.
Question 14
Distinguish between a ‘Condition’ and a ‘Warranty’ in a contract of sale. When shall a
‘breach of condition’ be treated as ‘breach of warranty’ under the provisions of the Sale of
Goods Act, 1930? Explain.
Answer
Difference between Condition and Warranty
(i) A condition is a stipulation essential to the main purpose of the contract whereas a
warranty is a stipulation collateral to the main purpose of the contract.
(ii) Breach of condition gives rise to a right to treat the contract as repudiated whereas in case
of breach of warranty, the aggrieved party can claim damage only.
(iii) Breach of condition may be treated as breach of warranty whereas a breach of warranty
cannot be treated as breach of condition.
According to Section 13 of the Sale of Goods Act, 1930 a breach of condition may be treated
as breach of warranty in following circumstances:
(i) Where a contract of sale is subject to any condition to be fulfilled by the seller, the buyer
may waive the condition,
(ii) Where the buyer elects to treat the breach of condition as breach of a warranty.
(iii) Where the contract of sale is non-severable and the buyer has accepted the whole goods or
any part thereof.
(iv) Where the fulfillment of any condition or warranty is excused by law by reason of
impossibility or otherwise.
 THE SALE OF GOODS ACT, 1930 | 2.28

Question 15
What are the implied conditions in a contract of ‘Sale by sample’ under the Sale of Goods
Act, 1930? State also the implied warranties operatives under the said Act.

Answer

The following are implied conditions in a contract of sale by sample in accordance with
Section 17 of the Sale of Goods Act, 1930;

(a) that the bulk shall correspond with the sample in quality;
(b) that the buyer shall have a reasonable opportunity of comparing the bulk with the sample.
(c) that the goods shall be free from any defect, rendering them unmerchantable, which would
not be apparent on a reasonable examination of the sample.
Implied Warrants:
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.
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.
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 by the usage of trade.
4. Warranty to disclose dangerous nature of goods: Where a person sells goods, knowing
that the goods are inherently dangerous or they are likely to be dangerous to the buyer and
that the buyer is ignorant of the danger, he must warn the buyer of the probable danger,
otherwise he will be liable in damages.
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”.
 Following are the conditions to be satisfied:
- if the buyer had made known to the seller the purpose of his purchase, and
 THE SALE OF GOODS ACT, 1930 | 2.29

- the buyer relied on the seller’s skill and judgement, and

- seller’s business to supply goods of that description (Section 16).
Example: 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: 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: 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 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)].
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. 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].
 THE SALE OF GOODS ACT, 1930 | 2.30

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: 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.
Question 16
What is the Doctrine of "Caveat Emptor”? What are the exceptions to the Doctrine of
"Caveat Emptor”?
Answer
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.
Exceptions: Following are the exceptions to the doctrine of Caveat Emptor:
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) of the Sales of Goods Act, 1930].
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)].
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. 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].
 THE SALE OF GOODS ACT, 1930 | 2.31

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)].
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.
Question 17
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 return 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?
Answer
(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
 THE SALE OF GOODS ACT, 1930 | 2.32

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]
Question 18
“There is no implied warranty or condition as to quality or fitness for any particular
purpose of goods supplied under a contract of sale.” Discuss the significance and State
exceptions, if any.
Answer
The statement given in the question is the fundamental principle of law of sale of goods,
sometime expressed by the maxim ‘Caveat Emptor’ meaning thereby ‘Let the buyer be aware’. In
other words, it is no part of the seller’s duty in a contract of sale of goods t o give the buyer an
article suitable for a particular purpose, or of particular quality, unless the quality or fitness is
made an express terms of the contract. The person who buys goods must keep his eyes open, his
mind active and should be cautious while buying the goods. If he makes a bad choice, he must
suffer the consequences of lack of skill and judgement in the absence of any misrepresentation
or guarantee by the seller.
There are, however, certain exceptions to the rule which are stated as under:
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.
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.
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. 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. 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
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.
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.
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.
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.
 THE SALE OF GOODS ACT, 1930 | 2.33

UNIT - 3:
TRANSFER OF OWNERSHIP AND DELIVERY OF GOODS
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 lies only when the property has passed to the buyer.
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 byer depend on two
basic factors:
(i) 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.
(ii) 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:
 To the terms of the contract
 To the conduct of the parties and
 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 property • Goods sent on approval or “on sale or
return”

• Transfer of property in case of reservation

of right to disposal
 THE SALE OF GOODS ACT, 1930 | 2.34

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.
Example: 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 : 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.
Question 1
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?
Answer
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:–
 THE SALE OF GOODS ACT, 1930 | 2.35

(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, 150 tons 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.
(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.
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: 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. Goods must be ascertained
 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]
 The rules in respect of passing of property of unascertained goods are as
follows:
1. Sale of unascertained goods by description [Section 23(1)]: Where there is a contract for
the sale of unascertained or future goods by description and goods of that description and
in a deliverable state 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, the property in
the goods thereupon passes to the buyer. Such assent may be express or implied, and may
be given either before or after the appropriation is made.
2. Delivery 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: 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 : 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
 THE SALE OF GOODS ACT, 1930 | 2.36

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.
Analysis of section 23:
Sale of unascertained goods and Appropriation: 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
(iii) 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.
Question 2
What is appropriation of goods under the Sale of Goods Act, 1930? State the essentials
regarding appropriation of unascertained goods.
Answer
Appropriation of goods: 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 regarding appropriation of unascertained goods 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.
 THE SALE OF GOODS ACT, 1930 | 2.37

Question 3
State the various essential elements involved in the sale of unascertained goods and its
appropriation as per the Sale of Goods Act, 1930.
Answer
Sale of unascertained goods and Appropriation (Section 23 of the Sale of Goods Act,
1930): 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 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.
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: 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: ‘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: A sends to B a water motor on approval or return in March, 2016. B to return it
after trial in August, 2016. 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.
 THE SALE OF GOODS ACT, 1930 | 2.38

Question 4
Referring to the provisions of the Sale of Goods Act, 1930, state the circumstances under
which 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.
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.
Answer
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.
Question 5
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?
Answer
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.
 THE SALE OF GOODS ACT, 1930 | 2.39

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 tables are
already accepted by him so the buyer becomes liable under the doctrine of “Caveat Emptor”.
Question 6
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 files a suit against B for the recovery of price. Can he
recover the price?
Answer
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]
Question 7
Ms. R owns a two Wheeler which she handed over to her friend Ms. K on sale or return
basis. Even after a week, Ms. K neither returned the vehicle nor made payment for it. She
instead pledged the vehicle to Mr. A to obtain a loan. Ms. R now wants to claim the two
Wheeler from Mr. A. Will she succeed?

(i) Examine with reference to the provisions of the Sale of Goods Act, 1930, what
recourse is available to Ms. R?
(ii)Would your answer be different if it had been expressly provided that the vehicle
would remain the property of Ms. R until the price has been paid?
Answer
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:
 THE SALE OF GOODS ACT, 1930 | 2.40

(i) In the instant case, Ms. K, who had taken delivery of the two wheeler on Sale or Return basis
pledged the two wheeler to Mr. A, has attracted the third condition that she has done
something to the good which is equivalent to accepting the goods e.g. she pledges or sells
the goods. Therefore, the property therein (two wheeler) passes to Mr. A. Now in this
situation, Ms. R cannot claim back her two wheeler from Mr. A, but she can claim the price of
the two wheeler from Ms. K only.
(ii) 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., price is
paid for.
Hence, in this case, it is held that at the time of pledge, the ownership was not transferred to
Ms. K. Thus, the pledge was not valid and Ms. R could recover the two wheeler from Mr. A.

Question 8
Akansh purchased a Television set from Jethalal, the owner of Gada Electronics on the
condition that first three days he will check its quality and if satisfied he will pay for that
otherwise he will return the Television set. On the second day, the Television set was
spoiled due to an earthquake. Jethalal demands the price of Television set from Akansh.
Whether Akansh is liable to pay the price under the Sale of Goods Act,1930? If not, who will
ultimately bear the loss?

Answer

According to Section 24 of the Sale of Goods Act, 1930, "When the goods are delivered to the
buyer on approval or on sale or return or other similar terms the property passes to the buyer:

(i) when he signifies his approval or acceptance to the seller,

(ii) when he does any other act adopting the transaction, and
(iii) if he does not signify his approval or acceptance to the seller but retains goods beyond a
reasonable time".
Further, as per 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 as no
longer to answer to their description in the agreement before the risk passes to the buyer, the
agreement is thereby avoided.
According to above provisions and fact, the property is not passes to Akansh i.e. buyer as no
condition of Section 24 is satisfied. Hence, risk has not passed to buyer and the agreement is
thereby avoided. Akansh is not liable to pay the price. The loss finally should be borne by Seller,
Mr. Jethalal.
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: ‘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 SALE OF GOODS ACT, 1930 | 2.41

the ownership was not transferred to ‘B’. Thus, the pledge was not valid and ‘A’ could recover the
jewellery from ‘C’.
Reservation of right of disposal (Section 25)
 Where there is a contract for the sale of specific goods or where goods are
subsequently appropriated to the contract, the seller may, by the terms of the contract
or appropriation, reserve the right of disposal of the goods until certain conditions are
fulfilled.
 In such case, notwithstanding the delivery of the goods to a buyer, or to a carrier or other
bailee for the purpose of transmission to the buyer, the property in the goods does not
pass to the buyer until the conditions imposed by the seller are fulfilled. [Sub-section
(1)]
 Where goods are shipped, or delivered to a railway administration for carriage by
railway and by the bill of lading or railway receipts, as the case may be, the goods are
deliverable to the order of the seller or his agent, the seller is prima facie deemed to
reserve the right of disposal. [Sub-section (2)]
 Where the seller of goods draws on the buyer for the price and transmits to the buyer
the bill of exchange together with the bill of lading or, as the case may be, the railway
receipt, to secure acceptance or payment of the bill of exchange, the buyer is bound to
return the bill of lading or the railway receipt if he does not honour the bill of
exchange; 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)]
Analysis:
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.
Example: 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.
(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 passes to him.
 THE SALE OF GOODS ACT, 1930 | 2.42

It should be noted that Section 25 deals with “conditional appropriation” as

distinguished from ‘unconditional appropriation’ dealt with under Section 23 (2).
RISK PRIMA FACIE PASSES WITH PROPERTY (SECTIONS 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:
 Provided that, where delivery 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.
 Provided also that nothing in this section shall affect the duties or liabilities of either
seller or buyer as bailee of the goods of the other party.
Analysis:
The general rule is, “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.
Example: 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: 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.
As noted above, the risk (i.e., the liability to bear the loss in case property is destroyed, damaged
 THE SALE OF GOODS ACT, 1930 | 2.43

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.
Question 9
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?
Answer
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 and where there is contract for the sale of unascertained or
future goods by description, and goods of that description and in a deliverable state 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, the property in the goods thereupon passes to the
buyer. 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 good out of the bulk and he has sent his men for 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 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 goods has not been transferred at all and hence the loss of 100 bales
would be borne by Mr. V completely.
Question 10
"Risk Prima Facie passes with property." Elaborate in the context of the Sales of Goods Act,
1930.
Answer
Risk prima facie passes with property (Section 26 of the Sales of Goods Act, 1930)
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.
It is provided that, where delivery has been delayed because of 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.
 THE SALE OF GOODS ACT, 1930 | 2.44

Provided also that nothing in this section shall affect the duties or liabilities of either seller or
buyer as bailee of the goods of the other party.
TRANSFER OF TITLE BY NON-OWNERS (SECTIONS 27 – 30)
Sale by person not the owner (Section 27): Subject to the provisions of this Act and of any other
law for the time being in force,
 where goods are sold by a person who is not the owner thereof and who does not sell
them under the authority or with the consent of the owner, the buyer acquires no
better title to the goods than the seller had,
 unless the owner of the goods is by his conduct precluded from denying the seller’s
authority to sell.
 Provided that, where a mercantile agent is, with the consent of the owner, in possession
of the goods or of a document of title to the goods, any sale made by him, when acting in
the ordinary course of business of a mercantile agent, shall be as valid as if he were
expressly authorised by the owner of the goods to make the same; provided that the buyer
acts in good faith and has not at the time of the contract of sale notice that the seller has no
authority to sell.
Analysis:
In general the seller sells 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 to the buyer of goods a better title 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: 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: 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;
(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
(2) Sale by one of the joint owners (Section 28): If one of several joint owners of goods has
the sole possession of them by permission of the co-owners, the property in the goods
is transferred to any person who buys them of 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.
 THE SALE OF GOODS ACT, 1930 | 2.45

Example: 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 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 TV.
Question 11
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?
Answer
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.
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.
(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: 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: During ICL 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
 THE SALE OF GOODS ACT, 1930 | 2.46

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 [Section30(2)].
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: A took a car from B on this condition that A would pay a monthly installment of `
5,000 as hire charges with an option to purchase it by payment of ` 1,00,000 in 24
installments.
After the payment of few installments, 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: ‘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 not title to the
horse. In this case, ‘C’, by his own conduct, is prevented from denying ‘A’s authority to sell
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)].
(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/pledgee can convey a good title to the buyer [Section 176 of
the Indian Contract Act, 1872]
Question 12
“A non-owner can convey better title to the bonafide purchaser of goods for value.” Discuss
the cases when a person other than the owner can transfer title in goods as per the
provisions of the Sales of Goods Act, 1930?
Answer
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;
(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 of
 THE SALE OF GOODS ACT, 1930 | 2.47

the Sale of Goods Act, 1930).

(2) Sale by one of the joint owners (Section 28): If one of several joint owners of goods has
the sole possession of them by permission of the co-owners, the property in the goods is
transferred to any person who buys them of 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.
(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).
(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. [Section 30(1)]
(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)].
(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.
(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)].
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]
Question 13
J the owner of a 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 given reasons
whether J would succeed.
 THE SALE OF GOODS ACT, 1930 | 2.48

Answer
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 form 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. A, the buyer, therefore obtained a good title to the car. Hence, J in this case, cannot
recover the car from A.
Question 14
“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.
Answer
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) Effect of Estoppel (Section 27): Where the owner is stopped 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.
(ii) 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;
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).
(iii) 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)
(iv) 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
 THE SALE OF GOODS ACT, 1930 | 2.49

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).
(v) 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)]
(vi) 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)]
(vii) 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)]
(viii) Sale under the provisions of other Acts:
a. Sale by an official Receiver or liquidator of the company will give the purchaser a
valid title.
b. Purchase of goods from a finder of goods will get a valid title under circumstances.
c. Sale by a pawnee under default of pawnor will give valid title to the purchaser.
PERFORMANCE OF THE CONTRACT OF SALE (SECTIONS 31 – 44)
Definition of Delivery [section 2(2)]: Delivery means voluntary transfer of possession from one
person to another.
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.
 THE SALE OF GOODS ACT, 1930 | 2.50

Rules Regarding Delivery of goods (Section 33-41)

The Sale of good Act, 1930 prescribes the following rules of delivery of goods:

Part delivery Instalment Delivery to

deliveries carrier/wharfinge
r

Buyer to apply Delivery of Deterioration

for delivery wrong during
quantity transit

Buyer’s right
Expenses of
Place of delivery to examine
delivery
the goods

Goods in
Time for delivery possession 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: 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 if 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)]
 THE SALE OF GOODS ACT, 1930 | 2.51

(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]:
(a) 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)]
(b) 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)]
(c) 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)]
(d) 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: 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)
(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: P sold to Q a certain quantity of iron rods which was 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): The buyer is deemed to have accepted
the goods when he intimates to the seller that he has accepted them, or when the goods have
been delivered to him and he does any act in relation to them which is inconsistent with the
ownership of the seller, or when, after the lapse of a reasonable time, he retains the goods
without intimating to the seller that he has rejected them.
 THE SALE OF GOODS ACT, 1930 | 2.52

Analysis:
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.
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.
Question 15
Mr. G sold some goods to Mr. H for certain price by issue of an invoice, but payment in
respect of the same was not received on that day. The goods were packed and lying in the
godown of Mr. G. The goods were inspected by H's agent and were found to be in order.
Later on, the dues of the goods were settled in cash. Just after receiving cash, Mr. G asked
Mr. H that goods should be taken away from his godown to enable him to store other goods
purchased by him. After one day, since Mr. H did not take delivery of the goods, Mr. G kept
the goods out of the godown in an open space. Due to rain, some goods were damaged.
Referring to the provisions of the Sale of Goods Act, 1930, analyse the above situation and
decide who will be held responsible for the above damage. Will your answer be different, if
the dues were not settled in cash and are still pending?
Answer
1. According to section 44 of the Sales of Goods Act, 1932, 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.
The property in the goods or beneficial right in the goods passes to the buyer at appoint 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 there in 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.
In the given case, since Mr. G has already intimated Mr. H, that he wanted to store some
other goods and thus Mr. H should take the delivery of goods kept in the godown of Mr. G,
the loss of goods damaged should be borne by Mr. H.
2. If the price of the goods would not have settled in cash and some amount would have been
pending then Mr. G will be treated as an unpaid seller and he can enforce the following
 THE SALE OF GOODS ACT, 1930 | 2.53

rights against the goods as well as against the buyer personally:

(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) of the Sales of
Goods Act, 1930]
(b) Where under a contract of sale the price is payable on a day certain 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) of the Sales of Goods Act, 1930].
 THE SALE OF GOODS ACT, 1930 | 2.54

UNIT - 4: UNPAID SELLER

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.
Note : 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: 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: P sold some goods to R for ` 60,000 and received a cheque for a full price. On
presentment, the cheque was dishonored by the bank. P is an unpaid seller.
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)]
Note : 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.
1. Where the property in goods has passed to the buyer
2. Where the property in goods has not passed to the buyer
 THE SALE OF GOODS ACT, 1930 | 2.55

RIGHT OF UNPAID SELLER AGAINST THE GOODS

The unpaid seller has the following rights against the goods:
(1) Seller’s lien (Section 47): According to sub-section (1), subject to the provisions of this
Act, the unpaid seller of goods who is in possession of them is entitled to retain
possession of them until payment or tender of the price in the following cases,
namely:-
(a) where the goods have been sold without any stipulation as to credit, or
(b) where the goods have been sold on credit, but the term of credit has expired, or
(c) where the buyer becomes insolvent.
Note : the seller may exercise his right of lien notwithstanding that he in possession of
the goods as agent or bailee for the buyer.
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): According to sub-section (1), the unpaid seller of goods
loses his lien thereon-
(a) 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;
(b) when the buyer or his agent lawfully obtains possession of the goods;
(c) by waiver thereof.
Note : The unpaid seller of 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. [Sub-section (2)]
Analysis of section 47, 48 and 49
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: 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”.
 THE SALE OF GOODS ACT, 1930 | 2.56

Termination of lien: However, 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.
Example: 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.
Question 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?
Answer
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.
Question 2
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?
Answer
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.
 THE SALE OF GOODS ACT, 1930 | 2.57

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.
(2) Right of stoppage in transit (Section 50 to 52):
Right of stoppage in transit (Section 50): Subject to the provisions of this Act,
 when the buyer of goods becomes insolvent,
 the unpaid seller who has parted with the possession of the goods has the right of
stopping them in transit,
 that is to say, he may resume possession of the goods as long as they are in the
course of transit, and
 may retain them until paid or tendered price of the goods.
Example: 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):
(1) Goods are deemed to be in the 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 in that behalf takes delivery of them from such carrier or other bailee.
(2) If the buyer or his agent in that behalf obtains delivery of the goods before their
arrival at the appointed destination, the transit is at an end.
(3) If, after the arrival of the goods at the appointed destination, the carrier or other bailee
acknowledges to the buyer or his agent that he holds the goods on his behalf and
continues in possession of them as bailee for the buyer or his agent, the transit is at
an end and it is immaterial that a further destination for the goods may have been indicated
by the buyer.
(4) If the goods are rejected by the buyer and the carrier or other bailee continues in
possession of them, the transit is not deemed to be at an end, even if the seller has
refused to receive them back.
(5) When goods are delivered to a ship chartered by the buyer, it is a question depending on the
circumstances of the particular case, whether they are in the possession of the master as a
carrier or as agent of the buyer.
(6) Where the carrier or other bailee wrongfully refuses to deliver the goods to the
buyer or his agent in that behalf, the transit is deemed to be at an end.
 THE SALE OF GOODS ACT, 1930 | 2.58

(7) Where part delivery of the goods has been made to the buyer or his agent in that behalf,
the remainder of the goods may be stopped in transit, unless such part delivery has been
given in such circumstances as to show an agreement to give up possession of the whole
of the goods.
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.
Note : The expenses of such re-delivery shall be borne by the seller.
Analysis of section 50, 51 and 52
Meaning of right of stoppage in transit: 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: B at Delhi, orders goods of A, at Mumbai. A consigns and forwards the goods to B. On
arrival at Delhi, they are taken to B‘s warehouse and left there. B refuses to take these goods and
stop payment. The goods are in transit and the unpaid seller can take them back.
Duration of transit: 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 in 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.
 THE SALE OF GOODS ACT, 1930 | 2.59

 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, there 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: There are two modes of stoppage in transit-

Stoppage in transit

By taking actual
possession of goods
By giving notice to
the carrier not to
deliver the goods.

Where the 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.
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.
Question 3
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?
 THE SALE OF GOODS ACT, 1930 | 2.60

Answer
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 Sales 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.
Question 4
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. Ram being still unpaid, stops
the goods in transit. The official receiver, on Shyam’s insolvency claims the goods. Decide
the case with reference to the provisions of the Sale of Goods Act, 1930.
Answer
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.
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).
 THE SALE OF GOODS ACT, 1930 | 2.61

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.
Example: 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.
Exceptions:
(a) When the seller has assented to the sale, mortgage or other disposition of the goods
made by the buyer.
Example: 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.
Question 5
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?
Answer
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:-
1 When the buyer has made the transaction with the consent of the seller
2 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.
 THE SALE OF GOODS ACT, 1930 | 2.62

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”.
RIGHTSOFUNPAIDSELLERAGAINSTTHEBUYER(SECTIONS55-61)
Rights of unpaid seller against the buyer: 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 SALE OF GOODS ACT, 1930 | 2.63

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)]
(b) Where under a contract of sale the price is payable on a day certain
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)].
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.
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 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.
Question 6
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.
Answer
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:-
 THE SALE OF GOODS ACT, 1930 | 2.64

(1) Interest on the remaining amount

(2) Interest during the pendency of the suit.
(3) Costs of the proceedings.
Question 7
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.
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, 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.
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
Breach of contract by
seller, where he-
Repudiates the contract

Breach of contract by
seller, where he-
Deliver non-conforming goods and buyer rejects and revokes
acceptance
 THE SALE OF GOODS ACT, 1930 | 2.65

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: ‘A’ a shoe manufacturer, agreed to sell 100 pairs of shoes to ‘B’ at the rate of `1050
per pair. ‘A’ knew that ‘B’ wanted the shoes for the purpose of further reselling them to ‘C’ at
the rate of `1100/- 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 ` 50/- per pair (the diuerence
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: ‘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 bases 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.
 THE SALE OF GOODS ACT, 1930 | 2.66

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 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 1: 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 2: In case of absence of transfer of title or registration the purchaser cannot claim
damages for breach of conditions and warranties relating to sale.
Question 8
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.
Answer
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, 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 the 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.
Question 9
What are the rights of an unpaid seller against goods under the Sale of Goods Act, 1930?
Answer
Rights of an unpaid seller against the goods: As per the provisions of Section 46 of the Sale
of Goods Act, 1930, 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;
 THE SALE OF GOODS ACT, 1930 | 2.67

(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)]
These rights can be exercised by the unpaid seller in the following circumstances:
(ii) Right of lien (Section 47): According to sub-section (1), the unpaid seller of goods who is
in possession of them is entitled to retain possession of them until payment or tender of
the price in the following cases, namely:-
(a) where the goods have been sold without any stipulation as to credit;
(b) where the goods have been sold on credit, but the term of credit has expired;
(c) where the buyer becomes insolvent.
(iii) Right of stoppage in transit (Section 50): When the buyer of goods becomes insolvent,
the unpaid seller who has parted with the possession of the goods has the right of
stopping them in transit, that is to say, he may resume possession of the goods as long as
they are in the course of transit, and may retain them until paid or tendered price of the
goods.
(iv) Right to re-sell the goods (Section 54): The unpaid seller can exercise the right to re-sell
the goods under the following conditions:
1. Where the goods are of a perishable nature
2. Where he gives notice to the buyer of his intention to re-sell the goods
3. Where an unpaid seller who has exercised his right of lien or stoppage in transit
resells the goods
4. A re-sale by the seller where a right of re-sale is expressly reserved in a contract of
sale
5. Where the property in goods has not passed to the buyer
Question 10
What do you understand by the term “unpaid seller” under the Sale of Goods Act,
1930? When can an unpaid seller exercise the right of stoppage of goods in transit?
Answer
Unpaid Seller
According to Section 45 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.
(b) a bill of exchange or other negotiable instrument has been received as conditional
payment, and it has been dishonoured.
Right of stoppage of goods in transit
When the unpaid seller has parted with the goods to a carrier and the buyer has become
insolvent, he can exercise this right by asking the carrier to return the goods back, or not to
deliver the goods to the buyer.
However, the right of stoppage in transit is exercised only when the following conditions are
fulfilled:
 THE SALE OF GOODS ACT, 1930 | 2.68

(a) The seller must be unpaid.

(b) The seller must have parted with the possession of goods.
(c) The goods must be in the course of transit.
(d) The buyer must have become insolvent.
(e) The right is subject to provisions of the Act.
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.
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
and 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 to make bid: 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: 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.
Question 11
Rachit arranges an auction to sale an antic wall clock. Megha, being one of the bidders,
gives highest bid. For announcing the completion of sale, the auctioneer fall the hammer on
table but suddenly hammer brakes and damages the watch. Megha wants to avoid the
contract. Can she do so under the provisions of the Sale of Goods Act, 1930?

Answer
By virtue of provisions of Section 64 of the Sale of Goods Act, 1930, in case of auction sale, the sale
is complete when the auctioneer announces its completion by the fall of the hammer or in some
other customary manner.
 THE SALE OF GOODS ACT, 1930 | 2.69

In the instant case, Megha gives the highest bid in the auction for the sale of antic wall clock
arranged by Rachit. While announcing the completion of sale by fall of hammer on the table,
hammer brakes and damages the clock.
On the basis of above provisions, it can be concluded that the sale by auction cannot be completed
until hammer comes in its normal position after falling on table. Hence, in the given problem, sale
is not completed. Megha will not be liable for loss and can avoid the contract.
Question 12
What are the rules which regulate the Sale by Auction under the Sale of Goods Act, 1930?
Answer

Rules of Auction sale: Section 64 of the Sale of Goods Act, 1930 provides following rules to
regulate the sale by auction:

(i) 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.

(ii) 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 and until such
announcement is made, any bidder may retract from his bid.
(iii) 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.
(iv) 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 se ller 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.
(v) Reserved price: The reserved price is the lowest price at which a seller is willing to sell an
item. The auction sale may be notified to be subject to a reserve or upset price; and
(vi) Pretended bidding: If the seller makes use of pretended bidding to raise the price, the sale
is voidable at the option of the buyer.
INCLUSION OF INCREASED OR DECREASED TAXESIN 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.
**************
 “INDIAN PARTNERSHIP ACT, 1932” | 3.1

CHAPTER –3 “INDIAN PARTNERSHIP ACT, 1932”

CHAPTER - 3
"INDIAN PARTNERSHIP ACT, 1932"
UNIT – 1: GENERAL NATURE OF A PARTNERSHIP
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’.
ELEMENTS OF PARTNERSHIP
The definition of the partnership contains the following five elements which must coexist
before a partnership can come into existence.
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 100 partners in any
association/partnership firm, whereas the Companies Rules, 2014 put a limit of
50 partners.
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 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.
 “INDIAN PARTNERSHIP ACT, 1932” | 3.2

 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.
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.
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.
 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’.
 “INDIAN PARTNERSHIP ACT, 1932” | 3.3

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.
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
 “INDIAN PARTNERSHIP ACT, 1932” | 3.4

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.
Question 1
"Whether a group of persons is or is not a firm, or whether a person is or not a partner in a
firm." Explain the mode of determining existence of partnership as per the Indian
Partnership Act, 1932?
Answer
Mode of determining existence of partnership (Section 6 of the Indian Partnership Act,
1932): 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 are not
partners in such business.
2. Sharing of Profit: 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
 “INDIAN PARTNERSHIP ACT, 1932” | 3.5

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.
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.
Question 2
“Partner indeed virtually embraces the character of both a principal and an agent”.
Describe the said statement keeping in view of the provisions of the Indian Partnership
Act, 1932.
Answer
“Partner indeed virtually embraces the character of both a principal and an agent”:
Subject to the provisions of section 18 of the Indian Partnership Act, 1932, a partner is the
agent of the firm for the purposes of the business of the firm.
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 far as he acts for
himself and in his own interest in the common concern of the partnership, he may properly be
deemed as 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.
Question 3
What is the conclusive evidence of partnership? State the circumstances when partnership
is not considered between two or more parties.
Answer
Conclusive evidence of partnership: Existence of Mutual Agency which is the cardinal
principle of partnership law is very much helpful in reaching a conclusion with respect to
determination of existence of partnership. 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 element of mutual agency relationship exists between the parties constituting
a group formed with a view to earn profits by running a business, a partnership may be deemed
to exist.
 “INDIAN PARTNERSHIP ACT, 1932” | 3.6

Circumstances when partnership is not considered between two or more parties: Various
judicial pronouncements have laid to the following factors leading to no partnership between the
parties:
(i) Parties have not retained any record of terms and conditions of partnership.
(ii) Partnership business has maintained no accounts of its own, which would be open to
inspection by both parties
(iii) No account of the partnership was opened with any bank
(iv) No written intimation was conveyed to the Deputy Director of Procurement with respect
to the newly created partnership.
Question 4
"Business carried on by all or any of them acting for all." Discuss the statement under the
Indian Partnership Act, 1932.

Answer

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. 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. If the element of mutual agency
is absent, then there will be no partnership.
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.
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 A company is a separate legal entity
has no legal personality distinct distinct from its members (Salomon v.
from the personalities of its Salomon).
constituent members.
 “INDIAN PARTNERSHIP ACT, 1932” | 3.7

Agency In a firm, every partner is an In a company, a member is not an

agent of the other partners, as agent of the other members or of the
well as of the firm. company, his actions do not bind either.

Distribution of The profits of the firm must There is no such compulsion to

profits be distributed among the distribute its profits among its
partners according to the members. Some portion of the profits,
terms of the partnership deed. but generally not the entire profit,
become distributable among the
shareholders only when dividends are
declared.

Extent of In a partnership, the liability of In a company limited by shares, the

liability the partners is unlimited. This liability of a shareholder is limited to
means that each partner is the amount, if any, unpaid on his
liable for debts of a firm shares, but in the case of a guarantee
incurred in the course of the company, the liability is limited to the
business of the firm and these amount for which he has agreed to be
debts can be recovered from his liable. However, there may be
private property, if the joint companies where the liability of
estate is insufficient to meet members is unlimited.
them wholly.

Property The firm’s property is that In a company, its property is separate

which is the “joint estate” of from that of its members who can
all the partners as receive it back only in the form of
distinguished from the dividends or refund of capital.
‘separate’ estate of any of them
and it does not belong to a body
distinct in law from its
members.

Transfer of A share in a partnership In a company a shareholder may

shares cannot be transferred transfer his shares, subject to the
without the consent of all the provisions contained in its Articles. In
partners. 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 entitled to take part in the
the partners are entitled to management unless they are
participate in the appointed as directors, in which case
management. 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.
 “INDIAN PARTNERSHIP ACT, 1932” | 3.8

Registration Registration is not compulsory A company cannot come into

in the case of partnership. existence unless it is registered under
the Companies Act, 2013.

Winding up A partnership firm can be A company, being a legal person is

dissolved at any time if all the either wind up by the National
partners agree. 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 many
membership Companies Act, 2013, the as 200 members but not less than two
number of partners in any and a public company may have any
association shall not exceed number of members but not less than
100. seven. A private Company can also be
However, the Rule given under formed by one person known as one
the Companies person Company.
(Miscellaneous) Rules, 2014
restrict the present limit to 50.

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 formed with the object not of
a business carried on by all or earning profit, but of promoting
any 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 Persons forming a club are called

partnership are called members. A member of a club is not
partners and a partner is an the agent of other members.
agent for other partners.

Interest in the Partner has interest in the A member of a club has no interest
property property of the firm. in the property of the club.

Dissolution A change in the partners of A change in the membership of a

the firm affect its existence. club does not affect its existence.
 “INDIAN PARTNERSHIP ACT, 1932” | 3.9

Partnership vs. Hindu Undivided Family

Basis of Partnership Joint Hindu family

difference

Mode of creation Partnership is created The right in the joint family is created
necessarily by an agreement. by status means its creation by birth
in the family.

Death of a Death of a partner ordinarily The death of a member in the Hindu

member leads to the dissolution of undivided family does not give rise to
partnership. dissolution of the family business.

Management All the partners are equally The right of management of joint family
entitled to take part in the business generally vests in the Karta,
partnership business. the governing male member or
female member of the family.

Authority to bind Every partner can, by his act, The Karta or the manager, has the
bind the firm. authority to contract for the family
business and the other members in the
family.

Liability In a partnership, the liability of In a Hindu undivided family, only the

a partner is unlimited. 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 On the separation of the joint family, a
accounts on against the firm for member is not entitled to ask for
closure accounts, provided he also account of the family business.
seeks the dissolution of the
firm.

Governing Law A partnership is governed by A Joint Hindu Family business is

the Indian Partnership Act, governed by the Hindu Law.
1932.

Minor’s capacity In a partnership, a minor In Hindu undivided family business,

cannot become a partner, a minor becomes a member of the
though he can be admitted to ancestral business by the incidence
the benefits of partnership, of birth. He does not have to wait for
only with the consent of all the attaining majority.
partners.

Continuity A firm subject to a contract A Joint Hindu family has the

between the partners gets continuity till it is divided. The status
dissolved by death or of Joint Hindu family is not thereby
insolvency of a partner. affected by the death of a member.

Number of In case of Partnership number of Members of HUF who carry on a business

Members members should not exceed 50. may be unlimited in number.
 “INDIAN PARTNERSHIP ACT, 1932” | 3.10

Share in the In a partnership each partner In a HUF, no coparceners has a definite

business has a defined share by virtue share. His interest is a fluctuating one.
of an agreement between the It is capable of being enlarged by deaths
partners. in the family diminished by births in the
family.

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 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.
Question 5
Distinguish between Partnership vs. Hindu Undivided Family. Write any two points.
Answer
Partnership vs. Hindu Undivided Family

Basis of Partnership Joint Hindu family

difference

Mode of Partnership is created The right in the joint family is created

creation necessarily by an by status means its creation by birth in
agreement. the family.

Death of a Death of a partner The death of a member in the Hindu

member ordinarily leads to the undivided family does not give rise to
dissolution of partnership. dissolution of the family business.

Management All the partners are equally The right of management of joint family
entitled to take part in the business generally vests in the Karta,
partnership business. the governing male member or female
member of the family.

Authority to Every partner can, by his The Karta or the manager, has the
bind act, bind the firm. authority to contract for the family
business and the other members in the
family.

Liability In a partnership, the In a Hindu undivided family, only the

liability of a partner is liability of the Karta is unlimited, and
unlimited. the other co-partners are liable only to
the extent of their share in the profits of
the family business.

Calling for A partner can bring a suit On the separation of the joint family, a
Accounts on against the firm for member is not entitled to ask for
accounts, provided he also account of the family business.
closure
seeks the dissolution of the
firm.
 “INDIAN PARTNERSHIP ACT, 1932” | 3.11

Partnership Vs. Co-Ownership or joint ownership i.e. the relation which subsists
between persons who own property jointly or in common.

Basis of difference Partnership Co-ownership

Formation Partnership always arises Co-ownership may arise either from

out of a contract, express agreement or by the operation of law,
or implied. such as by inheritance.

Implied/Mutual A partner is the agent of A co-owner is not the agent of other co-
agency the other partners. owners.

Nature of interest There is community of Co-ownership does not necessarily

interest which means that involve sharing of profits and losses.
profits and losses must
have to be shared.

Transfer of interest A share in the partnership A co - owner may transfer his interest or
is transferred only by the rights in the property without the consent
consent of other partners. of other co-owners.

Partnership vs. Association

Basis of Partnership Association

difference

Meaning Partnership means and involves Association evolve out of social

setting up relation of agency cause where there is no necessarily
between two or more persons motive to earn and share profits.
who have entered into a business The intention is not to enter in a
for gains, with the intention to business for gains.
share 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.

KINDS OF PARTNERSHIPS
The following chart illustrates the various kinds of partnership:
 “INDIAN PARTNERSHIP ACT, 1932” | 3.12

Partnership

1. Partnership at will according to Section 7 of the Act, partnership at will is a

partnership when:
(i) no fixed period has been agreed upon for the duration of the partnership; and
(ii) 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.
 “INDIAN PARTNERSHIP ACT, 1932” | 3.13

Question 6
What is the conclusive evidence of partnership? State the circumstances when partnership
is not considered between two or more parties.
Answer
Conclusive evidence of partnership: Existence of Mutual Agency which is the cardinal
principle of partnership law is very much helpful in reaching a conclusion with respect to
determination of existence of partnership. 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 element of mutual agency relationship exists between the parties
constituting a group formed with a view to earn profits by running a business, a partnership
may be deemed to exist.
Circumstances when partnership is not considered between two or more parties: Various
judicial pronouncements have laid to the following factors leading to no partnership between
the parties:
(i) Parties have not retained any record of terms and conditions of partnership.
(ii) Partnership business has maintained no accounts of its own, which would be open to
inspection by both parties
(iii) No account of the partnership was opened with any bank
(iv) No written intimation was conveyed to the Deputy Director of Procurement with respect
to the newly created partnership.
Question 7
Explain the following kinds of partnership under the Indian Partnership Act, 1932:
(i) Partnership at will
(ii) Particular partnership
Answer
(i) Partnership at will: According to Section 7 of the Indian Partnership Act, 1932, 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.
(ii) 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.
 “INDIAN PARTNERSHIP ACT, 1932” | 3.14

Question 8
What do you mean by "Particular Partnership" under the Indian Partnership Act, 1932?
Answer
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.
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 form.
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.
12. Provisions for expulsion of a partner in case of gross breach of duty or fraud.
13. A partnership firm may add or delete any provision according to the needs of the firm.
Question 9
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?
 “INDIAN PARTNERSHIP ACT, 1932” | 3.15

Answer
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.
TYPES OF PARTNERS
Based on the extent of liability, the different classes of partners are:
 “INDIAN PARTNERSHIP ACT, 1932” | 3.16

1. Active or Actual or Ostensible partner:

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.
2. Sleeping or Dormant Partner:

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.
3. 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 invest 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.
 “INDIAN PARTNERSHIP ACT, 1932” | 3.17

Question 10
Who is a nominal partner under the Indian Partnership Act, 1932 ? What are his liabilities?

Answer

Nominal Partner: A person who lends his name to the firm, without having any real interest in it,
is called a nominal partner.

Liabilities: 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.

4. 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.
5. Incoming partners:
 A person who is admitted as a partners 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.
6. 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.
7. Partner by holding out (Section 28):

When a person Knowingly To be represented as a

represent himself, permits himself, partner in a firm (when
or in fact he is not)

He is liable, like a To anyone who

partner in the on the faith of
firm such
representation
has given credit
to the firm.

 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.
 “INDIAN PARTNERSHIP ACT, 1932” | 3.18

Example: 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: 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.
Question 11
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. Advice Z whether he can
recover the amount from X and A under the Indian Partnership Act, 1932.
Answer
In the given case, along with X, the Manager (A) is also liable for the price because he becomes a
partner by holding out (Section 28, Indian Partnership Act, 1932).
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.
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.
 “INDIAN PARTNERSHIP ACT, 1932” | 3.19

UNIT– 2: RELATIONS OF PARTNERS

RELATION OF PARTNERS TO ONE ANOTHER
The Partnership Act contains various provisions regulating the relationship between
partners.
1. GENERAL DUTIES OF PARTNERS (SECTION 9):
 Partners are bound to carry on the business of the firm to the greatest common
advantage,
 to be just and faithful to each other, and
 to render true accounts and full information of all things affecting the firm to any
partner or his legal representative.
Analysis of 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: 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): Every partner
shall indemnify the firm for any loss caused to it by his fraud in the conduct of the
business of the firm.
Analysis of 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.
 “INDIAN PARTNERSHIP ACT, 1932” | 3.20

Analysis of section 11:

Section 11(1) provides that, subject of the provisions of the 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. It further provides that
such contract may be varied by consent of all the partners.
Section 11(2) clearly provides that, notwithstanding anything contained in section 27
of the Indian Contract Act, the contract between the partners 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 and copy any of the
books of the firm.
Analysis of section 12
(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
coextensive.
Example: 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 or partners, unless it is clearly made out that
something was done illegally or in breach of the trust reposed in such partners.
 “INDIAN PARTNERSHIP ACT, 1932” | 3.21

(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; and
(f) a partner shall indemnify the firm for any loss caused to it by his willful neglect in
the conduct of business of the firm.
Analysis of section 13
(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.
 “INDIAN PARTNERSHIP ACT, 1932” | 3.22

 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:
a. an express agreement to that effect, or practice of the particular partnership or
b. any trade custom to that effect; or
c. 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 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) liability to indemnify the firm [Section 13 (f)]: A partner must indemnify the firm for
any loss caused to it by willful neglect in the conduct of the business of the firm.
PARTNERSHIP PROPERTY (SECTION 14)
THE PROPERTY OF THE FIRM (SECTION 14): Subject to contract between the partners, the
property of the firm includes all property and rights and interest in property originally brought
into the stock of the firm, or acquired, by purchase or otherwise, by or for the firm, or for the
purposes and in the course of the business of the firm, and includes also the goodwill of the
business.
Unless the contrary intention appears, property and rights and interests in property acquired
with money belonging to the firm are deemed to have been acquired for the firm.
 “INDIAN PARTNERSHIP ACT, 1932” | 3.23

Analysis of 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.
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.
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.
 “INDIAN PARTNERSHIP ACT, 1932” | 3.24

Question 1
What do you mean by Goodwill as per the provisions of Indian Partnership Act,1932?
Answer
Goodwill: The term “Goodwill” has not been defined under the Indian Partnership Act, 1932.
Section 14 of the Act lays down that goodwill of a business is to be regarded as a property of the
firm.
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.
APPLICATION OF THE PROPERTY OF THE FIRM (SECTION 15): Subject to contract
between the partners, the property of the firm shall be held and used by the partners
exclusively for the purposes of the business.
Analysis of 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.
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.
Analysis of section 16
Where 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 firm name, he must account for that profit and
pay it to the firm.
Example: 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 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.
Where a partner carries on a competing business, he must account for and pay to the firm all profits
made by him in that business.
 “INDIAN PARTNERSHIP ACT, 1932” | 3.25

Example: 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.
Question 2
Discuss the provisions regarding personal profits earned by a partner under the Indian
Partnership Act, 1932?
Answer
Personal Profit earned by Partners (Section 16 of the Indian Partnership Act, 1932)
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 and competing with that of the
firm, he shall account for and pay to the firm all profits made by him in that business.
Question 3

A, B and C are partners of a partnership firm carrying on the business of construction of

apartments. B who himself was a wholesale dealer of iron bars was entrusted with the
work of selection of iron bars after examining its quality. As a wholesaler, B is well aware of
the market conditions. Current market price of iron bar for construction is ` 350 per
Kilogram. B already had 1000 Kg of iron bars in stock which he had purchased before price
hike in the market for ` 200 per Kg. He supplied iron bars to the firm without the firm
realising the purchase cost. Is B liable to pay the firm the extra money he made, or he
doesn’t have to inform the firm as it is his own business and he has not taken any amount
more than the current prevailing market price of ` 350? Assume there is no contract
between the partners regarding the above.

Answer

According to section 16 of the Indian Partnership Act, 1932, subject to contract between
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.
In the given scenario, Mr. B had sold iron bar to the firm at the current prevailing market rate of `
350 per Kg though he had stock with him which he bought for ` 200 per Kg. Hence, he made an
extra profit of ` 150 per Kg. This is arising purely out of transactions with the firm. Hence, Mr. B is
accountable to the firm for the extra profit earned thereby.
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,
 “INDIAN PARTNERSHIP ACT, 1932” | 3.26

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 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.
RELATION OF PARTNERS TO THIRD PARTIES
1. PARTNER TO BE AGENT OF THE FIRM (SECTION 18): Subject to the provisions of this
Act, a partner is the agent of the firm for the purposes of the business of the firm.
Analysis of 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 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.
 “INDIAN PARTNERSHIP ACT, 1932” | 3.27

(i) The authority of a partner to bind the firm conferred by this section is called his
“implied authority”.
(ii) 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;
(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.
Analysis of section 19 and 22:
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:
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.
 “INDIAN PARTNERSHIP ACT, 1932” | 3.28

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.
EXTENSION AND RESTRICTION OF PARTNERS’ IMPLIED AUTHORITY (SECTION 20):
According to section 20, the partners in a firm may, by contract between the partners,
extend or restrict implied authority of any partners.
Notwithstanding any such restriction, any act done by a partner on behalf of the firm which falls
within his implied authority binds the firm, unless the person with whom he is dealing knows of
the restriction or does not know or believe that partner to be a partner.
Analysis of 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: 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.
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.
Question 4
What do you mean by “implied authority” of the partners in a firm? Point out the extent
of partner’s implied authority in case of emergency, referring to the provisions of the
Indian Partnership Act, 1932.
Answer
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.
 “INDIAN PARTNERSHIP ACT, 1932” | 3.29

(1) 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;
(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.
Question 5
Mahesh, Suresh and Dinesh are partners in a trading firm. Mahesh, without the knowledge
or consent of Suresh and Dinesh borrows himself Rs. 50,000 from Ramesh, a customer of
the firm, in the name of the firm. Mahesh, then buys some goods for his personal use with
that borrowed money. Can Mr. Ramesh hold Mr. Suresh & Mr. Dinesh liable for the loan?
Explain the relevant provisions of the Indian Partnership Act,1932.
Answer
Implied authority of a partner
Yes, as per sections 19 and 22 of the Indian Partnership Act,1932 unless otherwise provided in
the partnership deed, every partner has an implied authority to bind every other partner for
acts done in the name of the firm, provided the same falls within the ordinary course of business
and is done in a usual manner. Mahesh has a right to borrow the money of Rs. 50,000/- from
Ramesh on behalf of his firm in the usual manner. Since, Ramesh has no knowledge that the
amount was borrowed by Mahesh without the consent of the other two partners, Mr. Suresh and
Mr. Dinesh, he can hold both of them (Suresh and Dinesh) liable for the re-payment of the loan.
Question 6
A, B, and C are partners of a partnership firm ABC & Co. The firm is a dealer in office
furniture. A was in charge of purchase and sale, B was in charge of maintenance of accounts
of the firm and C was in charge of handling all legal matters. Recently through an
agreement among them, it was decided that A will be in charge of maintenance of accounts
and B will be in charge of purchase and sale. Being ignorant about such agreement, M, a
supplier supplied some furniture to A, who ultimately sold them to a third party. Referring
to the provisions of the Partnership Act, 1932, advise whether M can recover money from
the firm.

What will be your advice in case M was having knowledge about the agreement?
 “INDIAN PARTNERSHIP ACT, 1932” | 3.30

Answer
According to Section 20 of the Indian Partnership Act, 1932, the partners in a firm may, by
contract between the partners, extend or restrict implied authority of any partners.

Notwithstanding any such restriction, any act done by a partner on behalf of the firm which falls
within his implied authority binds the firm, unless the person with whom he is dealing knows of
the restriction or does not know or believe that partner to be a partner.
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 above the restrictions, and
2. The third party does not know that he is dealing with a partner in a firm.
Now, referring to the case given in the question, M supplied furniture to A, who ultimately sold
them to a third party and M was also ignorant about the agreement entered into by the partners
about the change in their role. M also is not aware that he is dealing with a partner in a firm.
Therefore, M on the basis of knowledge of implied authority of A, can recover money from the
firm.
But in the second situation, if M was having knowledge about the agreement, he cannot recover
money from the firm.
Question 7

Q. Define Implied Authority. In the absence of any usage or custom of trade to the contrary,
the implied authority of a partner does not empower him to do certain acts. State the acts
which are beyond the implied authority of a partner under the provisions of the Indian
Partnership Act, 1932?

Answer

According to Section 19 of the Indian Partnership Act, 1932, 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”.
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;
(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.
 “INDIAN PARTNERSHIP ACT, 1932” | 3.31

EFFECT OF ADMISSIONS BY A PARTNER (SECTION 23)

According to section 23, an admission (acknowledgement) or representation made by a
partner concerning the affairs of the firm is evidence against the firm, if it is made in the
ordinary course of business.
Analysis of 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: 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.
EFFECT OF NOTICE TO ACTING PARTNER (SECTION 24)
According to section 24, notice to a partner who habitually acts in the business of the firm of
any matter relating to the affairs of the firm operates as notice to the firm, except in the case
of a fraud on the firm committed by or with the consent of that partner.
Analysis of 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: 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: 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.
Question 8
What is the provision related to the effect of notice to an acting partner of the firm as per
the Indian Partnership Act, 1932?
 “INDIAN PARTNERSHIP ACT, 1932” | 3.32

Answer
Effect of notice to an acting partner of the firm
According to Section 24 of the Indian Partnership Act, 1932, notice to a partner who habitually
acts in the business of the firm of any matter relating to the affairs of the firm operates as 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 further relate to the firm’s business. Only then it would constitute a notice to the firm.
LIABILITY TO THIRD PARTIES (SECTION 25 TO27)
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): Every partner is
liable, jointly with all the other partners and also severally, for all acts of the firm done
while he is a partner.
Analysis of 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: 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):
Where, by the wrongful act or omission of a partner in the ordinary course of the business
of a firm, or with the authority of his partners, loss or injury is caused to any third party, or
any penalty is incurred, the firm is liable therefor to the same extent as the partner.
Analysis of section 26:
i. 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-
 in the ordinary course of the business of the firm
 with the authority of the partners.
ii. 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.
 “INDIAN PARTNERSHIP ACT, 1932” | 3.33

Example: 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): Where-
(i) a partner acting within his apparent authority receives money or property from
a third party and misapplies it, or
(ii) a firm in the course of its business receives money or property from a third
party, and the money or property is misapplied by any of the partners while it
is in the custody of the firm, the firm is liable to make good the loss.
Analysis of 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.
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: 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.
Question 9

Discuss the liability of a partner for the act of the firm and liability of firm for act of a
partner to third parties as per Indian Partnership Act, 1932.

Answer

Liability of a partner for acts of the firm (Section 25 of the Indian Partnership Act, 1932):
Every partner is liable, jointly with all the other partners and also severally, for all acts of the firm
done while he is a partner. 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.
Liability of the firm for wrongful acts of a partner and for misapplication by partners
(Sections 26 & 27 of the Indian Partnership Act, 1932): Where, -
 “INDIAN PARTNERSHIP ACT, 1932” | 3.34

by the wrongful act or omission of a partner in the ordinary course of the business of a firm, or
with the authority of his partners, loss or injury is caused to any third party, or any penalty is
incurred, the firm is liable therefor to the same extent as the partner.
a partner acting within his apparent authority receives money or property from a third party and
misapplies it, or a firm in the course of its business receives money or property from a third party,
and the money or property is misapplied by any of the partners while it is in the custody of the
firm, the firm is liable to make good the loss.
Question 10

Explain in detail the circumstances which lead to liability of firm for misapplication by
partners as per provisions of the Indian Partnership Act, 1932.

Answer

Liability of Firm for Misapplication by Partners (Section 27 of Indian Partnership Act,

1932): Where-
(a) a partner acting within his apparent authority receives money or property from a third
party and misapplies it, or

(b) a firm in the course of its business receives money or property from a third party, and the
money or property is misapplied by any of the partners while it is in the custody of the firm,
the firm is liable to make good the loss.
Analysis of section 27:
It may be observed that the workings of the two clauses of Section 27 are designed to bring out
clearly an important point of distinction between the two categories of cases of misapplication of
money by partners.
Clause (a) covers the case where a partner acts within his authority and due to his authority as a
partner, he receives money or property belonging to a third party and misapplies that money or
property. For this provision to be 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.
RIGHTS OF TRANSFEREE OF A PARTNER’S INTEREST (SECTION 29)
(1) 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.
(2) If the firm is dissolved or if the transferring partner ceases to be a partner, the transferee is
entitled as against the remaining partners to receive the share of the assets of the firm to which
the transferring partner is entitled, and, for the purpose of ascertain that share, to an account as
from the date of the dissolution.
 “INDIAN PARTNERSHIP ACT, 1932” | 3.35

Analysis of 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:
(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.
Note : 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.
(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, 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.
Question 11
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?
Answer
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 cannot challenge the accounts.
 “INDIAN PARTNERSHIP ACT, 1932” | 3.36

Question 12
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?
Answer
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 cannot challenge the
accounts.
(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.
Question 13

Mr. A (transferor) transfers his share in a partnership firm to Mr. B (transferee). Mr. B felt
that the book of accounts was displaying only a small amount as profit in spite of a huge
turnover. He wanted to inspect the book of accounts of the firm arguing that it is his
entitlement as a transferee. However, the other partners were of the opinion that Mr. B
cannot challenge the books of accounts. As an advisor, help them solve the issue applying
the necessary provisions from the Indian Partnership Act, 1932.

Answer

As per Section 29 of the Indian Partnership Act, 1932, during the continuance of the business, a
transferee is not entitled

- To interfere with the conduct of the business

- To require the accounts
- To inspect the books of the firm He is only entitled to his share of profit.
 “INDIAN PARTNERSHIP ACT, 1932” | 3.37

Keeping the above points, in the given case, since the partnership business is in continuance, Mr. B
is bound to accept the profits as agreed to by the partners. He cannot challenge the accounts. He is
only entitled to receive the share of profits of Mr. A (transferring partner).
Question 14
Mr. M is one of the four partners in M/s XY Enterprises. He owes a sum of ` 6 crore to his
friend Mr. Z which he is unable to pay on due time. So, he wants to sell his share in the firm
to Mr. Z for settling the amount.

In the light of the provisions of the Indian Partnership Act, 1932, discuss each of the
following:

(i) Can Mr. M validly transfer his interest in the firm by way of sale?
(ii) What would be the rights of the transferee (Mr. Z) in case Mr. M wants to retire from
the firm after a period of 6 months from the date of transfer?
Answer

According to Section 29 of the Indian Partnership Act, 1932,

(1) 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 t ransferee shall accept the account of profits agreed to
by the partners.
(2) If the firm is dissolved or if the transferring partner ceases to be a partner, the transferee is
entitled as against the remaining partners to receive the share of the assets of the firm to
which the transferring partner is entitled, and, for the purpose of ascertaining that share, to
an account as from the date of the dissolution.

In the light of facts of the question and provision of law:

(i) Yes, Mr. M can validly transfer his interest in the firm by way of sale.
(ii) On the retirement of the transferring partner (Mr. M), the transferee (Mr. Z) 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.
So, in this case on Mr. M’s retirement, Mr. Z would be entitled to receive the value of Mr. M’s share
to the extent of ` 6 crore in the firm’s assets.
Question 15

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?
 “INDIAN PARTNERSHIP ACT, 1932” | 3.38

Answer
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 cannot challenge the accounts.
MINORS ADMITTED TO THE BENEFITS OF PARTNERSHIP (SECTION 30)
(1) A person who is a minor according to the law to which he is subject may not be a partner
in a firm, but, with the consent of all the partners for the time being, he may be
admitted to the benefits of partnership.
(2) Such minor has right to such share of the property and of the profits of the firm as
may be agreed upon and he may have access to and inspect and copy any of the
accounts of the firm.
(3) Such minor’s share is liable for the acts of the firm, but the minor is not personally
liable for any such act.
(4) Such minor may not sue the partners for an account or payment of his share of the
property or profits of the firm, save when severing his connection with the firm,
and in such case the amount of his share shall be determined by a valuation made as far
as possible in accordance with the rules contained in Section 48:
Provided that all the partners acting together or any partner entitled to dissolve the firm
upon notice to other partners may elect in such suit to dissolve the firm, and thereupon the
Court shall proceed with the suit as one for dissolution and for settling accounts between
the partners, and the amount of the share of the minor shall be determined along with the
shares of the partners.
(5) At any time within 6 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(minor) 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:
Note : if he fails to give such notice, he shall become a partner in the firm on the
expiry of the said 6 months.
(6) Where any person has been admitted as a minor to the benefits of partnership in a firm,
the burden of proving the fact that such person had no knowledge of such admission
until a particular date after the expiry of 6 months of his attaining majority shall lie on
the persons asserting that fact.
 “INDIAN PARTNERSHIP ACT, 1932” | 3.39

(7) Where such person becomes a partner,-

(a) his right and liabilities as a minor continue up to the date on which he becomes
a partner, but he also becomes personally liable to third parties for all acts of
the firm done since he was admitted to the benefits of partnership, and
(b) his share in the property and profits of firm shall be the share to which he was
entitled as a minor.
(8) Where such person elects not to become a partner-
(a) his rights and liabilities shall continue to be those of a minor under this section
up to the date on which he gives public notice,
(b) his share shall not be liable for any acts of the firm done after the date of the
notice, and
(c) he shall be entitled to sue the partners for his share of the property and
profits in accordance with sub-section (4).
(9) Nothing in sub-sections (7) and (8) shall affect the provisions of section 28.
Analysis of 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 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:
(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.
(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.
(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.
 “INDIAN PARTNERSHIP ACT, 1932” | 3.40

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 as regards 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:
 He becomes personally liable to third parties for all acts of the firm done since he
was admitted to the benefits of partnership.
 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:
 His rights and liabilities continue to be those of a minor up to the date of giving
public notice.
 His share shall not be liable for any acts of the firm done after the date of the
notice.
 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.
Question 16
“Though a minor cannot be a partner in a firm, he can nonetheless be admitted to the
benefits of partnership."
(1) Referring to the previsions of the Indian Partnership Act, 1932, state the rights
which can be enjoyed by a minor partner.
(2) A. State the liabilities of a minor partner both:
(i) Before attaining majority and
(ii) After attaining majority.
OR
B. State the legal position of a minor partner after attaining majority:
(i) When he opts to become a partner of the same firm.
(ii) When he decide not to become a partner.
Answer
(1) Rights which can be enjoyed by a minor partner:
(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.
 “INDIAN PARTNERSHIP ACT, 1932” | 3.41

(2) A.
(i) Liabilities of a minor partner 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.
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.
(ii) Liabilities of a minor partner 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 as regards
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.
OR
B.
(i) 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) of the Indian Partnership Act, 1932, 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.
(ii) When he elects not to become a partner:
(a) His rights and liabilities continue to be those of a minor up to the date of giving public
notice.
(b) His share shall not be liable for any acts of the firm done after the date of the notice.
(c) 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.
Question 17
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?
 “INDIAN PARTNERSHIP ACT, 1932” | 3.42

Answer
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.
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):
(1) Subject to contract between the partners and to the provisions of section 30, no
person shall be introduced as a partner into a firm without the consent of all
the existing partners.
(2) Subject to the provisions of section 30, a person who is introduced as a partner
into a firm does not thereby become liable for any acts of the firm done before
he became a partner.
Analysis of 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.
 “INDIAN PARTNERSHIP ACT, 1932” | 3.43

 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.
(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:
Note : 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.
Analysis of section 32:
A partner is said to retire when he ceases to be a member of the firm without bringing to an end
the subsisting relations between the other members, or between the firm and third parties. The
term ‘does not cover the case where a partner withdraws from a firm by dissolving it, which
should properly be referred as a dissolution and not as a retirement. Retirement of a partner from
a firm does not dissolve it.
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: 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.
Liabilities of an outgoing partner: As we have already stated earlier, a retiring partner
continues to be liable to third party for acts of the firm after his retirement until public notice of
his retirement has been given either by himself or by any other partner. But the retired partner
 “INDIAN PARTNERSHIP ACT, 1932” | 3.44

will not be liable to any third party if the latter deals with the firm without knowing that the
former was partner.
The liability of a retired partner to the third parties continues until a public notice of his
retirement has been given. As regards the liability for acts of the firm done before his retirement,
the retiring partner remains liable for the same, unless there is an agreement made by him with
the third party concerned and the partners of the reconstituted firm. Such an agreement may be
implied by a course of dealings between the third party and the reconstituted firm after he had
knowledge of the retirement.
If the partnership is at will, the partner by giving notice in writing to all the other partners of his
intention to retire will be deemed to be relieved as a partner without giving a public notice to this
effect.
Question 18
Mr. M, Mr. N and Mr. P were partners in a firm, which was dealing in refrigerators. On 1st
October, 2018, Mr. P retired from partnership, but failed to give public notice of his
retirement. After his retirement, Mr. M, Mr. N and Mr. P visited a trade fair and
enquired about some refrigerators with latest techniques. Mr. X, who was exhibiting his
refrigerators with the new techniques was impressed with the interactions of Mr. P and
requested for the visiting card of the firm. The visiting card also included the name of Mr.
P as a partner even though he had already retired. Mr. X. supplied some refrigerators to the
firm and could not recover his dues from the firm. Now, Mr. X wants to recover the dues
not only from the firm, but also from Mr. P.
Analyse the above case in terms of the provisions of the Indian Partnership Act, 1932 and
decide whether Mr. P is liable in this situation.
Answer
A retiring partner continues to be liable to third party for acts of the firm after his retirement until
public notice of his retirement has been given either by himself or by any other partner. But the
retired partner will not be liable to any third party if the latter deals with the firm without
knowing that the former was partner.
Also, if the partnership is at will, the partner by giving notice in writing to all the other partners
of his intention to retire will be deemed to be relieved as a partner without giving a public notice
to this effect.
Also, as per section 28 of the Indian Partnership Act, 1932, 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.
In the light of the provisions of the Act and facts of the case, Mr. P is also liable to Mr. X.
(III) EXPULSION OF A PARTNER (SECTION 33):
(1) A partner may not be expelled from a firm by any majority of the partners, save in
the exercise in good faith of powers conferred by contract between the partners.
(2) the provisions of sub-section (2), (3) and (4) of section 32 shall apply to an expelled
partner as if he were a retired partner.
Analysis of 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.
 “INDIAN PARTNERSHIP ACT, 1932” | 3.45

Note : 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:

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: 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.
Question 19
X, Y and Z are partners in a Partnership Firm. They were carrying their business
successfully for the past several years. Spouses of X and Y fought in ladies club on their
personal issue and X's wife was hurt badly. X got angry on the incident and he convinced
Z to expel Y from their partnership firm. Y was expelled from partnership without any
notice from X and Z. Considering the provisions of the Indian Partnership Act, 1932, state
whether they can expel a partner from the firm. What are the criteria for test of good
faith in such circumstances?
 “INDIAN PARTNERSHIP ACT, 1932” | 3.46

Answer
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.
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.
Thus, according to the test of good faith as required under Section 33(1), expulsion of Partner Y is
not valid.
Question 20
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, 2016, they inducted Mr. G, an expert in the field of carpet manufacturing as their
partner. On 10th January 2018, 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?
Answer
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.
(ii) The following are the factors to be kept in mind prior expelling a partner from the firm
by other partners:
 “INDIAN PARTNERSHIP ACT, 1932” | 3.47

(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.
Question 21
Ram & Co., a firm consists of three partners A, B and C having one third share each in the
firm. According to A and B, the activities of C are not in the interest of the partnership and
thus want to expel C from the firm. Advise A and B whether they can do so quoting the
relevant provisions of the Indian Partnership Act, 1932.
Answer
It is not possible for the majority of partners to expel a partner from the firm without satisfying
the conditions as laid down in Section 33 of the Indian Partnership Act, 1932. The essential
conditions before expulsion can be done are:
(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.
The test of good faith includes:
(a) that the expulsion must be in the interest of the partnership;
(b) that the partner to be expelled is served with a notice; and
(c) that the partner has been given an opportunity of being heard.
Thus, in the given case A and B the majority partners can expel the partner only if the above
conditions are satisfied and procedure as stated above has been followed.
Question 22
X, Y and Z are partners in a Partnership Firm. They were carrying their business
successfully for the past several years. Due to expansion of business, they planned to hire
another partner Mr A. Now the firm has 4 partners X, Y, Z and A. The business was
continuing at normal pace. In one of formal business meeting, it was observed that Mr. Y
misbehaved with Mrs. A (wife of Mr. A). Mr. Y was badly drunk and also spoke rudely with
Mrs. A.
Mrs. A felt very embarrassed and told her husband Mr. A about the entire incident. Mr. A
got angry on the incident and started arguing and fighting with Mr. Y in the meeting place
itself. Next day, in the office Mr. A convinced X and Z that they should expel Y from their
partnership firm. Y was expelled from partnership without any notice from X, A and Z.
Considering the provisions of the Indian Partnership Act, 1932, state whether they can
expel a partner from the firm. What are the criteria for test of good faith in such
circumstances?
Answer
According to Section 33 of 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. It is, thus, essential that:
 “INDIAN PARTNERSHIP ACT, 1932” | 3.48

(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.
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.
According to the test of good faith as required under Section 33(1), expulsion of Partner Y is not
valid as he was not served any notice and also he was not given an opportunity of being heard.
Also the matter of fight between A and Y was on personal reasons, hence not satisfying the test of
good faith in the interest of partnership. Since the conditions given under above provisions are
not satisfied, the expulsion stands null and void.
INSOLVENCY OF A PARTNER (SECTION 34):
(1) Where a partner in a firm is adjudicated 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.
Analysis of section 34:
 When a partner in a firm is adjudicated an insolvent, he ceases to be a partner on the date
of the order of adjudication whether or not the firm is thereby dissolved.
 His estate (which thereupon vests in the official assignee) ceases to be liable for any act of
the firm done after the date of the order, and the firm also is not liable for any act of such a
partner after such date (whether or not under a contract between the partners the firm is
dissolved by such adjudication).
Effects of Insolvency of Partners
(1) The insolvent partner cannot be continued as a partner.
(2) He will be ceased to be a partner from the very date on which the order of
adjudication is made.
(3) The estate of the insolvent partner is not liable for the acts of the firm done after the
date of order of adjudication.
(4) The firm is also not liable for any act of the insolvent partner after the date of the
order of adjudication,
(5) Ordinarily but not invariably, the insolvency of a partner results in dissolution of a
firm; but the partners are competent to agree among themselves that the
adjudication of a partner as an insolvent will not give rise to dissolution of the firm
 “INDIAN PARTNERSHIP ACT, 1932” | 3.49

Question 23
State the legal consequences of the following as per the provisions of the Indian
Partnership Act, 1932:
(i) Retirement of a partner
(ii) Insolvency of a partner
Answer
Retirement of a partner Section 32
(2) 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.
(3) 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) 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:
(5) Provided that a retired partner is not liable to any third party who deals with the firm
without knowing that he was a partner.
(6) Notices under sub-section (3) may be given by the retired partner or by any partner of the
reconstituted firm.
Insolvency of a partner (Section 34)
(1) The insolvent partner cannot be continued as a partner.
(2) He will be ceased to be a partner from the very date on which the order of adjudication is
made.
(3) The estate of the insolvent partner is not liable for the acts of the firm done after the
date of order of adjudication.
(4) The firm is also not liable for any act of the insolvent partner after the date of the order
of adjudication,
(5) Ordinarily but not invariably, the insolvency of a partner results in dissolution of a firm;
but the partners are competent to agree among themselves that the adjudication of a
partner as an insolvent will not give rise to dissolution of the firm
(IV) LIABILITY OF ESTATE OF DECEASED PARTNER (SECTION 35): Where under a
contract between the partners, the firm is not dissolved by the death of a partner,
the estate of a deceased partner is not liable for any act of the firm done after his
death.
Analysis of 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
 “INDIAN PARTNERSHIP ACT, 1932” | 3.50

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: 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.
Question 24
Mr. A. Mr. B and Mr. C were partners in a partnership firm M/s ABC & Co., which is engaged
in the business of trading of branded furniture. The name of the partners was clearly
written along with the firm name in front of the head office of the firm as well as on letter-
head of the firm. On 1st October, 2018, Mr. C passed away. His name was neither removed
from the list of partners as stated in front of the head office nor from the letter-heads of the
firm. As per the terms of partnership, the firm continued its operations with Mr. A and
Mr. B as partners. The accounts of the firm were settled and the amount due to the legal
heirs of Mr. C was also determined on 10th October, 2018. But the same was not paid to
the legal heirs of Mr. C. On 16th October, 2018, Mr. X, a supplier supplied furniture worth `
20,00,000 to M/s ABC & Co. M/s ABC & Co. could not repay the amount due to heavy losses.
Mr. X wants to recover the amount not only from M/s ABC & Co., but also from the legal
heirs of Mr. C.
Analyses the above situation in terms of the provisions of the Indian Partnership Act, 1932
and decide whether the legal heirs of Mr. C can also be held liable for the dues towards
Mr. X.
Answer
Generally, 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.
In the light of the provisions of the Act and the facts of the question, Mr. X (creditor) can have only
a personal decree against the surviving partners (Mr. A and Mr. B) 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. Hence, the legal heirs of Mr. C cannot be
held liable for the dues towards Mr. X.
Question 25
Ram, Mohan and Gopal were partners in a firm. During the course of partnership, the
firm ordered Sunrise Ltd. to supply a machine to the firm. Before the machine was
delivered, Ram expired. The machine, however, was later delivered to the firm. Thereafter,
the remaining partners became insolvent and the firm failed to pay the price of machine
to Sunrise Ltd.
 “INDIAN PARTNERSHIP ACT, 1932” | 3.51

Explain with reasons:

(i) Whether Ram’s private estate is liable for the price of the machine purchased by the
firm?
(ii) Against whom can the creditor obtain a decree for the recovery of the price?
Answer
Partnership Liability: The problem in question is based on the provisions of the Indian
Partnership Act, 1932 contained in Section 35. The Section provides that where under a
contract between the partners the firm is not dissolved by the death of a partner, the estate of a
deceased partner is not liable for any act of the firm done after his death. Therefore,
considering the above provisions, the problem may be answered as follows:
(i) Ram’s estate in this case will not be liable for the price of the Machinery purchased.
(ii) The creditors in this case can have only a personal decree against the surviving partners
and decree against the partnership assets in the hands of those partners. However, since
the surviving partners are already insolvent, no suit for recovery of the debt would lie
against them. A suit for goods sold and delivered would not lie against the representative
of the deceased partner.
This is because there was not debt due in respect of the goods in Ram’s life time.
Question 26

Sohan, Rohan and Jay were partners in a firm. The firm is dealer in office furniture. They
have regular dealings with M/s AB and Co. for the supply of furniture for their business. On
30 th June 2020, one of the partners, Mr. Jay died in a road accident. The firm has ordered
M/s AB and Co. to supply the furniture for their business on 25th May 2020, when Jay was
also alive.

Now Sohan and Rohan continue the business in the firm’s name after Jay’s death. The firm
did not give any notice about Jay’s death to the public or the persons dealing with the firm.
M/s AB and Co. delivered the furniture to the firm on 25th July 2020. The fact about Jay’s
death was known to them at the time of delivery of goods. Afterwards the firm became
insolvent and failed to pay the price of furniture to M/s AB and Co. Now M/s AB and Co. has
filed a case against the firm for recovery of the price of furniture. With reference to the
provisions of Indian Partnership Act, 1932, explain whether Jay’s private estate is also
liable for the price of furnitur e purchased by the firm?

Answer

According to section 35 of the Indian Partnership Act, 1932, where under a contract between the
partners, the firm is not dissolved by the death of a partner, the estate of a deceased partner is not
liable for any act of the firm done after his death.
Further, 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.
In the light of the facts of the case and provisions of law, since the delivery of furniture was made
after Jay’s death, his estate would not be liable for the debt of the firm. 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 Jay’s lifetime. He was already dead when the delivery of
 “INDIAN PARTNERSHIP ACT, 1932” | 3.52

goods was made to the firm and also it is not necessary to give any notice either to the public or
the persons having dealings with the firm on a death of a partner. So, the estate of the deceased
partner may be absolved from liability for the future obligations of the firm.
Question 27

M, N and P were partners in a firm. The firm ordered JR Limited to supply the furniture. P
dies, and M and N continues the business in the firm’s name. the firm did not give any
notice about P’s death to the public or the persons dealing with the firm. The furniture was
delivered to the firm after P’s death, fact about his death was known to them at the time of
delivery. Afterwards the firm became insolvent and failed to pay the price of furniture to JR
Limited.

Explain with reasons:

(i) Whether P’s private estate is liable for the price of furniture purchased by the firm?
(ii) Whether does it make any difference if JR Limited supplied the furniture to the firm
believing that all the three partners are alive?
Answer

According to section 35 of the Indian Partnership Act, 1932, where under a contract between the
partners the firm is not dissolved by the death of a partner, the estate of a deceased partner is not
liable for any act of the firm done after his death.

Further, 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.
In the given question, JR Limited has supplied furniture to the partnership firm, after P’s death.
The firm did not give notice about P’s death to public or people dealing with the firm. Afterwards,
the firm became insolvent and could not pay JR Limited.
In the light of the facts of the case and provisions of law:
(i) Since the delivery of furniture was made after P’s death, his estate would not be liable for
the debt of the firm. 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 P’s lifetime.
(ii) It will not make any difference even if JR Limited supplied furniture to the firm believing
that all the three partners are alive, as it is not necessary to give any notice either to the
public or the persons having dealings with the firm, so the estate of the deceased partner
may be absolved from liability for the future obligations of the firm.
RIGHTSOFOUTGOINGPARTNERTOCARRYONCOMPETING BUSINESS (SECTION 36)
(1) 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.
 “INDIAN PARTNERSHIP ACT, 1932” | 3.53

(2) 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.
Analysis of section 36:
Although this provision has imposed some restrictions on an outgoing partner, it effectively
permits him to carry on a business competing with that of the firm. However, the partner may
agree with his partners that on his ceasing to be so, he will not carry on a business similar to that
of the firm within a specified period or within specified local limits. Such an agreement will not be
in restraint of trade if the restraint is reasonable [Section 36(2)]. A similar rule applies to such an
agreement of sale of the firm’s goodwill [Section 53(3)].
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 6 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.
Analysis of section 37:
Section 37 deals with rights of outgoing partners. It lays down a substantial law relating to a
liability of the surviving or continuing partner, who without a settlement of accounts with legal
representatives of the deceased partner utilizes the assets of partnership for continuing the
business.
Although the principle applicable to such cases is clear but at times some complicated questions
arise when disputes are raised between the outgoing partner or his estate on the one hand
and the continuing or surviving partners on the other in respect of subsequent business. Such
disputes are to be resolved keeping in view the facts of each case having regard to section 37.
Example: 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: 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.
 “INDIAN PARTNERSHIP ACT, 1932” | 3.54

Question 28
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. What are the
rights of A’s legal representatives against the firm under the Indian Partnership Act,
1932?
Answer
Retirement / Death of Partner: 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.
(i) 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
(ii) 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 shall be entitled, at his option to:
(i) the 20% shares of profits (as per the partnership deed); or
(ii) interest at the rate of 6 per cent per annum on the amount of A’s share in the
property.
Question 29
P, Q, R and S are the partners in M/S PQRS & Co., a partnership firm which deals in trading
of Washing Machines of various brands.

Due to the conflict of views between partners, P & Q decided to leave the partnership firm
and started competitive business on 31st July, 2019, in the name of M/S PQ & Co.
Meanwhile, R & S have continued using the property in the name of M/S PQRS & Co. in
which P & Q also has a share.

Based on the above facts, explain in detail the rights of outgoing partners as per the Indian
Partnership Act, 1932 and comment on the following:

(i) Rights of P & Q to start a competitive business.

(ii) Rights of P & Q regarding their share in property of M/S PQRS & Co.
Answer

(i) Rights of outgoing partner to carry on competing business (Section 36 of the Indian
Partnership Act, 1932)
(1) 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.
 “INDIAN PARTNERSHIP ACT, 1932” | 3.55

(2) Although this provision has imposed some restrictions on an outgoing partner, it
effectively permits him to carry on a business competing with that of the firm.
However, the partner may agree with his partners that on his ceasing to be so, he will
not carry on a business similar to that of the firm within a specified period or within
specified local limits. Such an agreement will not be in restraint of trade if the
restraint is reasonable [Section 36 (2)]
From the above, we can infer that P & Q can start competitive business in the name of M/S
PQ & Co after following above conditions in the absence of any agreement.
(ii) Right of outgoing partner in certain cases to share subsequent profits (Section 37 of
the Indian Partnership Act, 1932)
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.
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.
Analysis of section 38:
Mere changes in the constitution of the firm operates to revoke the guarantee as to all future
transactions. Such change may occur by the death, or retirement of partner, or by introduction of
a new partner.
Question 30
When the continuing guarantee can be revoked under the Indian Partnership Act, 1932?
Answer
Revocation of continuing guarantee (Section 38 of the Indian Partnership Act, 1932)
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. Such change may occur
by the death, or retirement of a partner, or by introduction of a new partner.
 “INDIAN PARTNERSHIP ACT, 1932” | 3.56

UNIT 3:
REGISTRATION AND DISSOLUTION OF A FIRM
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.
Note : The statement shall be signed by all the partners, or by their agents
specially authorized 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.
Analysis:
The registration of a partnership is optional and one partner cannot compel another partner to
join in the registration of the firm. It is not essential that the firm should be registered from the
very beginning. When the partners decide to get the firm registered as per the provisions of
Section 58 of the Indian Partnership Act, 1932, they have to file the statement in the prescribed
form.
When the Registrar is satisfied that the above mentioned provisions have been complied with, he
shall record an entry of this statement in the register (called the Register of Firms) and shall file
the statement.
Subsequent alterations in the name, place, constitution, etc., of the firm that may occur
during its continuance should also be registered.
REGISTRATION (SECTION 59): When the Registrar is satisfied that the provisions of section
58 (above mentioned provisions) 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.
Analysis
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.
 “INDIAN PARTNERSHIP ACT, 1932” | 3.57

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.
Question 1
What is the procedure of registration of a partnership firm under the Indian
Partnership Act, 1932?
Answer
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.
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
 “INDIAN PARTNERSHIP ACT, 1932” | 3.58

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 account s of the firm or to realize the property of the firm.
Example : A & Co. is registered as a partnership firm in 2015 with A, B and C partners. In 2016, A
dies. In 2017, 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.
Answer
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 2017 B and C had taken a
new partner, D, and then filed a suit against X without fresh registration?
 “INDIAN PARTNERSHIP ACT, 1932” | 3.59

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.
Question 2
What are the consequences of Non-Registration of a Partnership Firm? Discuss.
Answer
Consequences of Non-Registration of a Partnership Firm [Section 69 of the Indian
Partnership Act, 1932]: 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.
(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.
Question 3
“Indian Partnership Act does not make the registration of firms compulsory nor does it
impose any penalty for non-registration." Explain. Discuss the various disabilities or
disadvantages that a non-registered partnership firm can face in brief?
Answer
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, 1932 does not make the registration of
firms compulsory nor does it impose any penalty for non-registration. The registration of a
partnership is optional and one partner cannot compel another partner to join in the
registration of the firm. It is not essential that the firm should be registered from the very
beginning.
However, under Section 69, non-registration of partnership gives rise to a number of disabilities
which 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.
 “INDIAN PARTNERSHIP ACT, 1932” | 3.60

(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.
(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.
Question 4
P, X, Y and Z are partners in a registered firm A & Co. X died and P retired. Y and Z filed a
suit against W in the name and on behalf of firm without notifying to the Registrar of firms
about the changes in the constitution of the firm. Is the suit maintainable?
Answer
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.
(i) The test applied in these cases was whether the plaintiff satisfied the only two
requirements of Section 69 (2) of the Act namely,
(ii) the suit must be instituted by or on behalf of the firm which had been registered.
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’.
Analysis
 Thus, the dissolution of firm means the discontinuation of the jural 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 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.
 “INDIAN PARTNERSHIP ACT, 1932” | 3.61

Dissolution of Firm Vs. Dissolution of Partnership

S. No. Basis of Difference Dissolution of Firm Dissolution of Partnership

1. Continuation of It involves It does not affect continuation

business discontinuation of of business. It involves only
business in partnership. reconstitution of the firm.

2. Winding up It involves winding up of It involves only reconstitution

the firm and requires and requires only revaluation of
realization of assets and assets and liabilities of the firm.
settlement of liabilities.

3. Order of court A firm may be dissolved Dissolution of partnership is

by the order of the court. not ordered by the court.

4. Scope It necessarily involves It may or may not involve

dissolution of dissolution of firm.
partnership.

5. Final closure of It involves final closure of It does not involve final closure
books books of the firm. of the books.

Question 5
Distinguish between dissolution of firm and dissolution of partnership.
Answer
DISSOLUTION OF FIRM VS. DISSOLUTION OF PARTNERSHIP

S. Basis of Dissolution of Firm Dissolution of Partnership

No. Difference

1. Continuation It involves discontinuation of It does not affect continuation of

of business business in partnership. business. It involves only
reconstitution of the firm.

2. Winding up It involves winding up of the firm It involves only

and requires realization of assets reconstitution and requires only
and settlement of liabilities. revaluation of assets and liabilities
of the firm.

3. Order of court A firm may be dissolved by the Dissolution of partnership is not

order of the court. ordered by the court.

4. Scope It necessarily involves It may or may not involve

dissolution of partnership. dissolution of firm.

5. Final closure It involves final closure of books It does not involve final closure of
of books of the firm. the books.
 “INDIAN PARTNERSHIP ACT, 1932” | 3.62

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):
A firm may be dissolved with the consent of all the partners or in accordance with
a contract between the partners.
Analysis
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:
Note : 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: 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-
 “INDIAN PARTNERSHIP ACT, 1932” | 3.63

(iv) Dissolution by notice of partnership at will (Section 43):

(a) 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.
(b) If the date is mentioned, the firm is dissolved as from the date mentioned
in the notice as the date of dissolution, or if no date is so mentioned, as from
the date of the communication of the notice.
(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.
(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,
willfully 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: 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, 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.
 “INDIAN PARTNERSHIP ACT, 1932” | 3.64

(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.
Question 6
State any four grounds on which Court may dissolve a partnership firm in case any partner
files a suit for the same.
Answer
Dissolution by the Court (Section 44 of the Indian Partnership Act, 1932):
Court may, at the suit of the partner, dissolve a firm on any of the following ground:
(1) 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.
(2) 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.
(3) 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.
(4) 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.
(5) 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, the court may dissolve the firm
at the instance of any other partner.
(6) 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.

(7) 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-
 “INDIAN PARTNERSHIP ACT, 1932” | 3.65

(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.
Question 7
When does dissolution of a partnership firm take place under the provisions of the Indian
Partnership Act, 1932? Explain.
Answer
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) willful or persistent branches 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.
Question 8
MN partnership firm has two different lines of manufacturing business. One line of
business is the manufacturing of Ajinomoto, a popular seasoning & taste enhancer for food.
Another line of business is the manufacture of paper plates & cups. One fine day, a law is
passed by the Government banning Ajinomoto’ use in food and to stop its manufacturing
making it an unlawful business because it is injurious to health. Should the firm
compulsorily dissolve under the Indian Partnership Act, 1932? How will its other line of
business (paper plates & cups) be affected?
 “INDIAN PARTNERSHIP ACT, 1932” | 3.66

Answer
According to Section 41 of the Indian Partnership Act, 1932, a firm is compulsorily dissolved;
(a) by the adjudication of all the partners or of all the partners but one as insolvent, or
(b) 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, where 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.
Here, MN has to compulsorily dissolve due to happening of law which bans the usage of
ajinomoto. Else the business of the firm shall be treated as unlawful.
However, the illegality of ajinomoto business will in no way affect the legality or dissolution of the
other line of business (paper plates & cups). MN can continue with paper plates and cup
manufacture.
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):
(1) Notwithstanding the dissolution of a firm, the partners continue to be liable as
such to third parties for any act done by any of them which would have been an
act of the firm if done before the dissolution, until public notice is given of the
dissolution:
Provided that the estate of a partner who dies, or who is adjudicated an
insolvent, or of a partner who, not having been known to the person dealing with the
firm to be a partner, retires from the firm, is not liable under this section for acts
done after the date on which he ceases to be a partner.
(2) Notices under sub-section (1) may be given by any partner.
Analysis
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: 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:
i. the estate of a deceased partner,
ii. an insolvent partner, or
iii. a dormant partner, i.e., a partner, who was not known as a partner to the person
dealing with the firm.
 “INDIAN PARTNERSHIP ACT, 1932” | 3.67

(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:
Note : 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) 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.
Analysis of Section 48
It may be noted that prima facie, accounts between the partners shall be settled in the
manner prescribed by partnership agreement. The above-mentioned rules apply subject to
any agreement between partners. The rules laid down in Section 48, just specified, as to what
will be the mode of settlement of accounts in the usual course of business. But if the partners, by
their agreement, express any different intention as to the mode in which losses will have to be
borne eventually or the manner in which capital or advances will have to be paid to any
partner, such an intention must be given effect to. However, any such agreement cannot affect
the rights of the creditors of the firm.
The significance of the foregoing provisions is that if the assets of the firm are not sufficient to
pay off the liabilities of the firm including the amount due to each partner on account of capital,
each partner would individually be liable to contribute towards the losses, including
deficiencies of capital, in the proportion in which he is entitled to share profits.
Example: 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. 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.
 “INDIAN PARTNERSHIP ACT, 1932” | 3.68

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.
Question 9

Subject to agreement by partners, state the rules that should be observed by the partners
in settling the accounts of the firm after dissolution under the provisions of the Indian
Partnership Act, 1932.

Answer

Mode of Settlement of partnership accounts: As per Section 48 of the Indian Partnership Act,
1932, 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.
(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
Question 10
X, Y and Z are partners in a Partnership Firm. They were carrying their business
successfully for the past several years. Due to expansion of business, they planned to hire
another partner Mr A. Now the firm has 4 partners X, Y, Z and A. The business was
continuing at normal pace. In one of formal business meeting, it was observed that Mr. Y
misbehaved with Mrs. A (wife of Mr. A). Mr. Y was badly drunk and also spoke rudely with
Mrs. A.
 “INDIAN PARTNERSHIP ACT, 1932” | 3.69

Mrs. A felt very embarrassed and told her husband Mr. A about the entire incident. Mr. A
got angry on the incident and started arguing and fighting with Mr. Y in the meeting place
itself. Next day, in the office Mr. A convinced X and Z that they should expel Y from their
partnership firm. Y was expelled from partnership without any notice from X, A and Z.
Considering the provisions of the Indian Partnership Act, 1932, state whether they can
expel a partner from the firm. What are the criteria for test of good faith in such
circumstances?
Answer
According to Section 33 of 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. It is, thus, essential that:

(iv) the power of expulsion must have existed in a contract between the partners;
(v) the power has been exercised by a majority of the partners; and
(vi) 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.
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.
According to the test of good faith as required under Section 33(1), expulsion of Partner Y is not
valid as he was not served any notice and also he was not given an opportunity of being heard.
Also the matter of fight between A and Y was on personal reasons, hence not satisfying the test of
good faith in the interest of partnership. Since the conditions given under above provisions are
not satisfied, the expulsion stands null and void.
Question 11
A, B, and C are partners of a partnership firm ABC & Co. The firm is a dealer in office
furniture. A was in charge of purchase and sale, B was in charge of maintenance of accounts
of the firm and C was in charge of handling all legal matters. Recently through an
agreement among them, it was decided that A will be in charge of maintenance of accounts
and B will be in charge of purchase and sale. Being ignorant about such agreement, M, a
supplier supplied some furniture to A, who ultimately sold them to a third party. Referring
to the provisions of the Partnership Act, 1932, advise whether M can recover money from
the firm.

What will be your advice in case M was having knowledge about the agreement?
Answer
According to Section 20 of the Indian Partnership Act, 1932, the partners in a firm may, by
contract between the partners, extend or restrict implied authority of any partners.
 “INDIAN PARTNERSHIP ACT, 1932” | 3.70

Notwithstanding any such restriction, any act done by a partner on behalf of the firm which falls
within his implied authority binds the firm, unless the person with whom he is dealing knows of
the restriction or does not know or believe that partner to be a partner.
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:
3. The third party knows above the restrictions, and
4. The third party does not know that he is dealing with a partner in a firm.
Now, referring to the case given in the question, M supplied furniture to A, who ultimately sold
them to a third party and M was also ignorant about the agreement entered into by the partners
about the change in their role. M also is not aware that he is dealing with a partner in a firm.
Therefore, M on the basis of knowledge of implied authority of A, can recover money from the
firm.
But in the second situation, if M was having knowledge about the agreement, he cannot recover
money from the firm.
Question 12
What do you mean by "Particular Partnership" under the Indian Partnership Act, 1932?

Answer

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.

Question 13

Who is a nominal partner under the Indian Partnership Act, 1932 ? What are his liabilities?

Answer

Nominal Partner: A person who lends his name to the firm, without having any real interest in it,
is called a nominal partner.

Liabilities: 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.

Question 14

"Business carried on by all or any of them acting for all." Discuss the statement under the
Indian Partnership Act, 1932.
 “INDIAN PARTNERSHIP ACT, 1932” | 3.71

Answer

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. 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. If the element of mutual agency
is absent, then there will be no partner ship.
In KD Kamath & Co., the Supreme Court has held that the two essential conditions to be satisfied
are that:
(3) there should be an agreement to share the profits as well as the losses of business; and
(4) 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.

Question 15

Discuss the liability of a partner for the act of the firm and liability of firm for act of a
partner to third parties as per Indian Partnership Act, 1932.

Answer

Liability of a partner for acts of the firm (Section 25 of the Indian Partnership Act, 1932):
Every partner is liable, jointly with all the other partners and also severally, for all acts of the firm
done while he is a partner. 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.
Liability of the firm for wrongful acts of a partner and for misapplication by partners
(Sections 26 & 27 of the Indian Partnership Act, 1932): Where, -
by the wrongful act or omission of a partner in the ordinary course of the business of a firm, or
with the authority of his partners, loss or injury is caused to any third party, or any penalty is
incurred, the firm is liable therefor to the same extent as the partner.
a partner acting within his apparent authority receives money or property from a third party and
misapplies it, or a firm in the course of its business receives money or property from a third party,
and the money or property is misapplied by any of the partners while it is in the custody of the
firm, the firm is liable to make good the loss.
 “INDIAN PARTNERSHIP ACT, 1932” | 3.72

Question 16
P, Q, R and S are the partners in M/S PQRS & Co., a partnership firm which deals in trading
of Washing Machines of various brands.

Due to the conflict of views between partners, P & Q decided to leave the partnership firm
and started competitive business on 31st July, 2019, in the name of M/S PQ & Co.
Meanwhile, R & S have continued using the property in the name of M/S PQRS & Co. in
which P & Q also has a share.

Based on the above facts, explain in detail the rights of outgoing partners as per the Indian
Partnership Act, 1932 and comment on the following:

(iii) Rights of P & Q to start a competitive business.

(iv) Rights of P & Q regarding their share in property of M/S PQRS & Co.
Answer

(i) Rights of outgoing partner to carry on competing business (Section 36 of the Indian
Partnership Act, 1932)
(3) 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.
(4) Although this provision has imposed some restrictions on an outgoing partner, it
effectively permits him to carry on a business competing with that of the firm.
However, the partner may agree with his partners that on his ceasing to be so, he will
not carry on a business similar to that of the firm within a specified period or within
specified local limits. Such an agreement will not be in restraint of trade if the
restraint is reasonable [Section 36 (2)]
From the above, we can infer that P & Q can start competitive business in the name of M/S
PQ & Co after following above conditions in the absence of any agreement.
(ii) Right of outgoing partner in certain cases to share subsequent profits (Section 37 of
the Indian Partnership Act, 1932)
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.
 “INDIAN PARTNERSHIP ACT, 1932” | 3.73

Question 17
Explain in detail the circumstances which lead to liability of firm for misapplication by
partners as per provisions of the Indian Partnership Act, 1932.
Answer
Liability of Firm for Misapplication by Partners (Section 27 of Indian Partnership Act,
1932): Where-
(a) a partner acting within his apparent authority receives money or property from a third
party and misapplies it, or

(b) a firm in the course of its business receives money or property from a third party, and the
money or property is misapplied by any of the partners while it is in the custody of the firm,
the firm is liable to make good the loss.
Analysis of section 27:
It may be observed that the workings of the two clauses of Section 27 are designed to bring out
clearly an important point of distinction between the two categories of cases of misapplication of
money by partners.
Clause (a) covers the case where a partner acts within his authority and due to his authority as a
partner, he receives money or property belonging to a third party and misapplies that money or
property. For this provision to be 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.
Question 18

A, B and C are partners of a partnership firm carrying on the business of construction of

apartments. B who himself was a wholesale dealer of iron bars was entrusted with the
work of selection of iron bars after examining its quality. As a wholesaler, B is well aware of
the market conditions. Current market price of iron bar for construction is ` 350 per
Kilogram. B already had 1000 Kg of iron bars in stock which he had purchased before price
hike in the market for ` 200 per Kg. He supplied iron bars to the firm without the firm
realising the purchase cost. Is B liable to pay the firm the extra money he made, or he
doesn’t have to inform the firm as it is his own business and he has not taken any amount
more than the current prevailing market price of ` 350? Assume there is no contract
between the partners regarding the above.

Answer
According to section 16 of the Indian Partnership Act, 1932, subject to contract between
partners–

(c) 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;
(d) 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.
 “INDIAN PARTNERSHIP ACT, 1932” | 3.74

In the given scenario, Mr. B had sold iron bar to the firm at the current prevailing market rate of `
350 per Kg though he had stock with him which he bought for ` 200 per Kg. Hence, he made an
extra profit of ` 150 per Kg. This is arising purely out of transactions with the firm. Hence, Mr. B is
accountable to the firm for the extra profit earned thereby.

Question 19
Mr. A (transferor) transfers his share in a partnership firm to Mr. B (transferee). Mr. B felt
that the book of accounts was displaying only a small amount as profit inspite of a huge
turnover. He wanted to inspect the book of accounts of the firm arguing that it is his
entitlement as a transferee. However, the other partners were of the opinion that Mr. B
cannot challenge the books of accounts. As an advisor, help them solve the issue applying
the necessary provisions from the Indian Partnership Act, 1932.

Answer

As per Section 29 of the Indian Partnership Act, 1932, during the continuance of the business, a
transferee is not entitled

- To interfere with the conduct of the business

- To require the accounts
- To inspect the books of the firm He is only entitled to his share of profit.
Keeping the above points, in the given case, since the partnership business is in continuance, Mr. B
is bound to accept the profits as agreed to by the partners. He cannot challenge the accounts. He is
only entitled to receive the share of profits of Mr. A (transferring partner).
Question 20
MN partnership firm has two different lines of manufacturing business. One line of
business is the manufacturing of Ajinomoto, a popular seasoning & taste enhancer for food.
Another line of business is the manufacture of paper plates & cups. One fine day, a law is
passed by the Government banning Ajinomoto’ use in food and to stop its manufacturing
making it an unlawful business because it is injurious to health. Should the firm
compulsorily dissolve under the Indian Partnership Act, 1932? How will its other line of
business (paper plates & cups) be affected?

Answer

According to Section 41 of the Indian Partnership Act, 1932, a firm is compulsorily dissolved;

(c) by the adjudication of all the partners or of all the partners but one as insolvent, or
(d) 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, where 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.
Here, MN has to compulsorily dissolve due to happening of law which bans the usage of
ajinomoto. Else the business of the firm shall be treated as unlawful.
However, the illegality of ajinomoto business will in no way affect the legality or dissolution of the
other line of business (paper plates & cups). MN can continue with paper plates and cup
manufacture.
 “INDIAN PARTNERSHIP ACT, 1932” | 3.75

Question 21
Sohan, Rohan and Jay were partners in a firm. The firm is dealer in office furniture. They
have regular dealings with M/s AB and Co. for the supply of furniture for their business. On
30 th June 2020, one of the partners, Mr. Jay died in a road accident. The firm has ordered
M/s AB and Co. to supply the furniture for their business on 25th May 2020, when Jay was
also alive.

Now Sohan and Rohan continue the business in the firm’s name after Jay’s death. The firm
did not give any notice about Jay’s death to the public or the persons dealing with the firm.
M/s AB and Co. delivered the furniture to the firm on 25th July 2020. The fact about Jay’s
death was known to them at the time of delivery of goods. Afterwards the firm became
insolvent and failed to pay the price of furniture to M/s AB and Co. Now M/s AB and Co. has
filed a case against the firm for recovery of the price of furniture. With reference to the
provisions of Indian Partnership Act, 1932, explain whether Jay’s private estate is also
liable for the price of furnitur e purchased by the firm?

Answer
According to section 35 of the Indian Partnership Act, 1932, where under a contract between the
partners, the firm is not dissolved by the death of a partner, the estate of a deceased partner is not
liable for any act of the firm done after his death.
Further, 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.
In the light of the facts of the case and provisions of law, since the delivery of furniture was made
after Jay’s death, his estate would not be liable for the debt of the firm. 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 Jay’s lifetime. He was already dead when the delivery of
goods was made to the firm and also it is not necessary to give any notice either to the public or
the persons having dealings with the firm on a death of a partner. So, the estate of the deceased
partner may be absolved from liability for the future obligations of the firm.
Question 22

Q. Define Implied Authority. In the absence of any usage or custom of trade to the contrary,
the implied authority of a partner does not empower him to do certain acts. State the acts
which are beyond the implied authority of a partner under the provisions of the Indian
Partnership Act, 1932?

Answer

According to Section 19 of the Indian Partnership Act, 1932, 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”.
In the absence of any usage or custom of trade to the contrary, the implied authority of a partner
does not empower him to-
 “INDIAN PARTNERSHIP ACT, 1932” | 3.76

(i) submit a dispute relating to the business of the firm to arbitration;

(j) open a banking account on behalf of the firm in his own name;
(k) compromise or relinquish any claim or portion of a claim by the firm;
(l) withdraw a suit or proceedings filed on behalf of the firm;
(m) admit any liability in a suit or proceedings against the firm;
(n) acquire immovable property on behalf of the firm;
(o) transfer immovable property belonging to the firm; and
(p) enter into partnership on behalf of the firm.
Question 23

Q. Mr. M is one of the four partners in M/s XY Enterprises. He owes a sum of ` 6 crore to his
friend Mr. Z which he is unable to pay on due time. So, he wants to sell his share in the firm
to Mr. Z for settling the amount.

In the light of the provisions of the Indian Partnership Act, 1932, discuss each of the
following:

(iii) Can Mr. M validly transfer his interest in the firm by way of sale?
(iv) What would be the rights of the transferee (Mr. Z) in case Mr. M wants to retire from
the firm after a period of 6 months from the date of transfer?
Answer

According to Section 29 of the Indian Partnership Act, 1932,

(3) 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 t ransferee shall accept the account of profits agreed to
by the partners.
(4) If the firm is dissolved or if the transferring partner ceases to be a partner, the transferee is
entitled as against the remaining partners to receive the share of the assets of the firm to
which the transferring partner is entitled, and, for the purpose of ascertaining that share, to
an account as from the date of the dissolution.

In the light of facts of the question and provision of law:

(i) Yes, Mr. M can validly transfer his interest in the firm by way of sale.
(ii) On the retirement of the transferring partner (Mr. M), the transferee (Mr. Z) 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.
So, in this case on Mr. M’s retirement, Mr. Z would be entitled to receive the value of Mr. M’s share
to the extent of ` 6 crore in the firm’s assets.
 “INDIAN PARTNERSHIP ACT, 1932” | 3.77

Question 23

Subject to agreement by partners, state the rules that should be observed by the partners
in settling the accounts of the firm after dissolution under the provisions of the Indian
Partnership Act, 1932.

Answer
Mode of Settlement of partnership accounts: As per Section 48 of the Indian Partnership Act,
1932, in settling the accounts of a firm after dissolution, the following rules shall, subject to
agreement by the partners, be observed:-

(iii) 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;
(iv) 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.
Question 24
Q. M, N and P were partners in a firm. The firm ordered JR Limited to supply the furniture.
P dies, and M and N continues the business in the firm’s name. the firm did not give any
notice about P’s death to the public or the persons dealing with the firm. The furniture was
delivered to the firm after P’s death, fact about his death was known to them at the time of
delivery. Afterwards the firm became insolvent and failed to pay the price of furniture to JR
Limited.

Explain with reasons:

(iii) Whether P’s private estate is liable for the price of furniture purchased by the firm?
(iv) Whether does it make any difference if JR Limited supplied the furniture to the firm
believing that all the three partners are alive?
Answer

According to section 35 of the Indian Partnership Act, 1932, where under a contract between the
partners the firm is not dissolved by the death of a partner, the estate of a deceased partner is not
liable for any act of the firm done after his death.

Further, 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.
In the given question, JR Limited has supplied furniture to the partnership firm, after P’s death.
The firm did not give notice about P’s death to public or people dealing with the firm. Afterwards,
the firm became insolvent and could not pay JR Limited.
 “INDIAN PARTNERSHIP ACT, 1932” | 3.78

In the light of the facts of the case and provisions of law:

(iii) Since the delivery of furniture was made after P’s death, his estate would not be liable for
the debt of the firm. 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 P’s lifetime.
(iv) It will not make any difference even if JR Limited supplied furniture to the firm believing
that all the three partners are alive, as it is not necessary to give any notice either to the
public or the persons having dealings with the firm, so the estate of the deceased partner
may be absolved from liability for the future obligations of the firm.
Question 25

Q. 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?

Answer

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 cannot challenge the accounts.
 " THE LIMITED LIABILITY PARTNERSHIP "| 4.1

CHAPTER – 4 “THE LIMITED LIABILITY PARTNERSHIP”

CHAPTER - 4
" THE LIMITED LIABILITY PARTNERSHIP "
INTRODUCTION
 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.
1. 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.
2. The Second Schedule deals with conversion of a firm into LLP.
3. The Third Schedule deals with conversion of a private company into LLP.
4. 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. Need of new
form of Limited Liability Partnership
 The lawmakers envisage the needs for bringing out the 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 to combine, organize and operate
in flexible, innovative and efficient manner.
 The Limited Liability Partnership (LLP) is viewed as 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.
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 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.
 " THE LIMITED LIABILITY PARTNERSHIP "| 4.2

Question 1
"LLP is an alternative corporate business form that gives the benefits of limited liability of a
company and the flexibility of a partnership". Explain.

Answer
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 (Section 26 of the LLP Act, 2008). 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.
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.
Definitions
1. Body Corporate [(Section 2(d)]: It means a company as defined in clause (20) of section
2 of the Companies Act, 2013 and includes—
(i) a LLP registered under this Act;
(ii) a LLP incorporated outside India; and
(iii) a company incorporated outside India, but does not include—
a. a corporation sole;
b. a co-operative society registered under any law for the time being in force; and
c. 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
Oflcial Gazette, specify in this behalf.
2. Business [Section 2(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(j)]: “Designated partner” means any partner desigJnated as
such pursuant to section 7.
4. Entity [Section 2(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.
 " THE LIMITED LIABILITY PARTNERSHIP "| 4.3
5. Financial Year [Section 2(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.
Note : 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.
6. Foreign LLP [section 2(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(n)]: Limited Liability Partnership means a
partnership formed and registered under this Act.
8. Limited Liability partnership agreement [Section 2(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(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(ta)]: It means a limited liability
partnership—
 the contribution of which, does not exceed 25,00,000 rupees or such higher
amount, not exceeding 5 crore rupees, as may be prescribed; and
 the turnover of which, as per the Statement of Accounts and Solvency for the
immediately preceding financial year, does not exceed 40,00,000 rupees or such
higher amount, not exceeding 50 crore rupees, as may be prescribed; or
 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 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):

1. Every LLP shall have at least two designated partners who are individuals and at least one of them
shall be a resident in India.
(i) 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.
Example: A LLP by the name SMY LLP has three partners namely 1. SI Limited, 2. MIS Limited, 3. YI Private Limited.
This will not be considered for registration because the requirement for LLP is to have 2 individual members as
partners apart from the body corporates. Accordingly, the said SMY LLP must consist of at least five partners, namely
the three body corporates and 2 individual members to constitute the LLP and the two individuals need to be treated
as designated partners.
 " THE LIMITED LIABILITY PARTNERSHIP "| 4.4

(ii) 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: 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. Subject to the provisions of sub-section (1),

(i) if the incorporation document
(a) specifies who are to be designated partners, such persons shall be designated
partners on incorporation; or
(b) states that each of the partners from time to time of limited liability partnership is to
be designated partner, every partner shall be a designated partner;
(ii) any partner may become a designated partner by and in accordance with the
limited liability partnership agreement and a partner may cease to be a designated
partner in accordance with limited liability partnership agreement.
3. An individual shall not become a designated partner in any limited liability
partnership unless he has given his prior consent to act as such to the limited liability
partnership in such form and manner as may be prescribed.
4. Every limited liability partnership shall file with the Registrar the particulars of every
individual who has given his consent to act as designated partner in such form and manner
as may be prescribed within thirty days of his appointment.
5. An individual eligible to be a designated partner shall satisfy such conditions and requirements
as may be prescribed.
6. Every designated partner of a limited liability partnership shall obtain a Designated Partners
Identification Number (DPIN) from the Central Government and the provisions of sections 153
to 159 (both inclusive) of the Companies Act, 2013 shall apply mutatis mutandis for the said
purpose.
Question 2

What do you mean by Designated Partner? Whether it is mandatory to appoint Designated

partner in a LLP?

Answer

1. Designated Partner [Section 2(j) of the LLP Act, 2008]: “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.
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 182 days during the immediately preceding one year.
 " THE LIMITED LIABILITY PARTNERSHIP "| 4.5
2. Subject to the provisions of sub-section (1),
(i) if the incorporation document
(c) specifies who are to be designated partners, such persons shall be designated
partners on incorporation; or
(d) states that each of the partners from time to time of limited liability partnership is to
be designated partner, every partner shall be a designated partner;
(ii) any partner may become a designated partner by and in accordance with the
limited liability partnership agreement and a partner may cease to be a
designated partner in accordance with limited liability partnership agreement.
3. An individual shall not become a designated partner in any limited liability
partnership unless he has given his prior consent to act as such to the limited liability
partnership in such form and manner as may be prescribed.
4. Every limited liability partnership shall file with the Registrar the particulars of every
individual who has given his consent to act as designated partner in such form and
manner as may be prescribed within thirty days of his appointment.

Characteristics/Features of a LLP
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.
Note : 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 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. In other words, creditors
of LLP shall be the creditors of LLP alone.
4. Mutual Agency: 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. 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 i.e.
Schedule I
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.
 " THE LIMITED LIABILITY PARTNERSHIP "| 4.6

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.
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 (Section 26). 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 : 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 [Link] 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.
Question 3
What is the meaning of the Limited Liability Partnership? State the various characteristics
of it?

Answer
Meaning of Limited Liability Partnership (LLP): 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 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.
 " THE LIMITED LIABILITY PARTNERSHIP "| 4.7

Characteristic/Salient Features of LLP

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 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. In other
words, creditors of LLP shall be the creditors of LLP alone.
4. Mutual Agency: 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. 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.
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 (Section 26). 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.
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.
 " THE LIMITED LIABILITY PARTNERSHIP "| 4.8
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 [Link] 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:

INCORPORATION OF LLP
Incorporation document (Section 11):
(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 anyone who subscribed his name to the incorporation document,
 that all the requirements of this Act and the rules made thereunder have been
complied with,
 " THE LIMITED LIABILITY PARTNERSHIP "| 4.9
 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 name and address of each of the persons who are to be partners of the LLP on
incorporation;
(e) State the address of the registered office of the LLP
(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—
(i) register the incorporation document; and
(ii) 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.
Question 4

What are the essential elements to form a LLP in India as per the LLP Act, 2008?
Answer
Essential elements to incorporate 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. At least 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 MCA.
(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.
 " THE LIMITED LIABILITY PARTNERSHIP "| 4.10
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 any default is made in complying with the requirements of this section, the limited
liability partnership and its every partner shall be liable to a penalty of 500 rupees for
each day during which the default continues, subject to a maximum of 50000 rupees for
the limited liability partnership and its every partner.

Effect of registration (Section 14):

On registration, a LLP shall, by its name, be capable of-

 suing and being sued

 acquiring, owning, holding and developing or disposing of property, whether movable or
immovable tangible or intangible;
 doing and suuering such other acts and things as bodies corporate may lawfully do and suuer.
 Having a common seal, if it to decide to have one
Question 5
What are the effects of registration of LLP?

Answer

Effect of registration (Section 14 of Limited Liability Partnership Act, 2008):

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.

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 limited liability partnership
or a company or a registered trade mark of any other person under the Trade
Marks Act, 1999.
 " THE LIMITED LIABILITY PARTNERSHIP "| 4.11
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 limited liability partnership, on its first registration or on its registration by a new body
corporate, its registered name;">name, is registered by a name which is identical with or too
nearly resembles to—
(a) that of any other limited liability partnership 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 limited liability partnership or proprietor
referred to in clauses (a) and (b) respectively or a company, the Central Government may
direct that such limited liability partnership to change its name or new name within a period
of three months from the date of issue of such direction:
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 limited
liability partnership under this Act.
(2) Where a limited liability partnership 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 limited liability partnership shall change its name in the limited liability
partnership agreement.
(3) If the limited liability partnership is in default in complying with any direction given under sub-
section (1), the Central Government shall allot a new name to the limited liability partnership in
such manner as may be prescribed and the Registrar shall enter the new name in the register of
limited liability partnerships in place of the old name and issue a fresh certificate of incorporation
with new name, which the limited liability partnership shall use thereafter:
Provided that nothing contained in this sub-section shall prevent a limited liability partnership from
subsequently changing its name in accordance with the provisions of section 16.
Steps to incorporate LLP-

1. Name Reservation :
 The first step to incorporate Limited Liability Partnership (LLP) is reservation of name
of LLP.
 Applicant has to file e-Form 1, for ascertaining availability and reservation of the name of a
LLP business.
2. Incorporate LLP
 After reserving a name, user has to file e- Form 2 for incorporating a new Limited Liability
Partnership (LLP).
 e-Form 2 contains the details of-
 LLP proposed to be incorporated,
 partners’/ designated partners’ details and
 consent of the partners/designated partners to act as partners/ designated
partners.
 " THE LIMITED LIABILITY PARTNERSHIP "| 4.12
3. LLP Agreement
 Execution of LLP Agreement is mandatory as per Section 23 of the Act.
 LLP Agreement is required to be filed with the registrar in e-Form 3 within 30 days of
incorporation of LLP.
Question 7

Explain the essential elements to incorporate a Limited Liability Partnership and the steps involved
therein under the LLP Act, 2008.
Answer

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.
Steps to incorporate LLP:
1. Name reservation:
 The first step to incorporate Limited Liability Partnership (LLP) is reservation of name
of LLP.
 Applicant has to file e-Form 1, for ascertaining availability and reservation of the name
of a LLP business.
2. Incorporate LLP:
 After reserving a name, user has to file e- Form 2 for incorporating a new Limited
Liability Partnership (LLP).
 e-Form 2 contains the details of LLP proposed to be incorporated, partners’/
designated partners’ details and consent of the partners/designated partners to act as
partners/ designated partners.
3. LLP Agreement
 Execution of LLP Agreement is mandatory as per Section 23 of the Act.
 LLP Agreement is required to be filed with the registrar in e-Form 3 within 30 days of
incorporation of LLP.
 " THE LIMITED LIABILITY PARTNERSHIP "| 4.13
PARTNERS AND THEIR RELATIONS

Eligibility to be partners (Section 22): On the incorporation of a LLP, the persons who subscribed their
names to the incorporation document shall be its partners and any other person may become a
partner of the LLP by and in accordance with the LLP agreement.
Relationship of partners (Section 23):

(1) Save as otherwise provided by this Act, the mutual rights and duties of the partners of a
LLP, and the mutual rights and duties of a LLP and its partners, shall be governed by the
LLP agreement between the partners, or between the LLP and its partners.
(2) The LLP agreement and any changes, if any, made therein shall be filed with the
Registrar in such form, manner and accompanied by such fees as may be prescribed.
(3) An agreement in writing made before the incorporation of a LLP between the persons who
subscribe their names to the incorporation document may impose obligations on the LLP,
provided such agreement is ratified by all the partners after the incorporation of the LLP.
(4) In the absence of agreement as to any matter, the mutual rights and duties of the
partners and the mutual rights and duties of the LLP and the partners shall be
determined by the provisions relating to that matter as are set-out in the First Schedule.
Cessation of partnership interest (Section 24):

(1) A person may cease to be a partner of a LLP in accordance with an agreement with the
other partners or, in the absence of agreement with the other partners as to cessation of
being a partner, by giving a notice in writing of not less than 30 days to the other
partners of his intention to resign as partner.
(2) A person shall cease to be a partner of a LLP—
(a) on his death or dissolution of the LLP; or
(b) if he is declared to be of unsound mind by a competent court; or
(c) if he has applied to be adjudged as an insolvent or declared as an insolvent.
(3) Where a person has ceased to be a partner of a LLP (hereinafter referred to as “former
partner”), the former partner is to be regarded (in relation to any person dealing with the
LLP) as still being a partner of the LLP unless—
(a) the person has notice that the former partner has ceased to be a partner of the LLP; or
(b) notice that the former partner has ceased to be a partner of the LLP has been
delivered to the Registrar.
(4) The cessation of a partner from the LLP does not by itself discharge the partner from any
obligation to the LLP or to the other partners or to any other person which he incurred while being
a partner.
(5) Where a partner of a LLP ceases to be a partner, unless otherwise provided in the LLP
agreement, the former partner or a person entitled to his share in consequence of the death or
insolvency of the former partner, shall be entitled to receive from the LLP—
(a) an amount equal to the capital contribution of the former partner actually made to the
LLP; and
(b) his right to share in the accumulated profits of the LLP, after the deduction of
accumulated losses of the LLP, determined as at the date the former partner ceased to
be a partner.
(6) A former partner or a person entitled to his share in consequence of the death or insolvency
of the former partner shall not have any right to interfere in the management of the LLP.
 " THE LIMITED LIABILITY PARTNERSHIP "| 4.14
Question 8
Who are the individuals which shall not be capable of becoming a partner of a Limited
Liability Partnership?

Answer

Partners (Section 5 of Limited Liability Partnership Act, 2008): 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.

Registration of changes in partners (Section 25):

(1) Every partner shall inform the LLP of any change in his name or address within a
period of 15 days of such change.
(2) A LLP shall—
(a) where a person becomes or ceases to be a partner, file a notice with the Registrar
within 30 days from the date he becomes or ceases to be a partner; and
(b) where there is any change in the name or address of a partner, file a notice with the
Registrar within 30 days of such change.
(3) A notice filed with the Registrar under sub-section (2)—
(a) shall be in such form and accompanied by such fees as may be prescribed;
(b) shall be signed by the designated partner of the LLP and authenticated in a manner
as may be prescribed; and
(c) if it relates to an incoming partner, shall contain a statement by such partner that
he consents to becoming a partner, signed by him and authenticated in the manner
as may be prescribed.
(4) If the limited liability partnership contravenes the provisions of sub- section (2), the limited
liability partnership and its every designated partner shall be liable to a penalty of 10,000
rupees.
(5) If the contravention referred to in sub- section (1) is made by any partner of the limited
liability partnership, such partner shall be liable to a penalty of 10,000 rupees.
(6) Any person who ceases to be a partner of a LLP may himself file with the Registrar the
notice referred to in sub-section (3) if he has reasonable cause to believe that the LLP
may not file the notice with the Registrar and in case of any such notice filed by a partner,
the Registrar shall obtain a confirmation to this effect from the LLP unless the LLP has also
filed such notice.
Note : where no confirmation is given by the LLP within 15 days, the registrar shall
register the notice made by a person ceasing to be a partner under this section.
 " THE LIMITED LIABILITY PARTNERSHIP "| 4.15

EXTENT AND LIMITATION OF LIABILITY OF LLP AND PARTNER

Partner as agent (Section 26): Every partner of a LLP is, for the purpose of the business of the LLP,
the agent of the LLP, but not of other partners.

Extent of liability of LLP (Section 27):

(1) A LLP is not bound by anything done by a partner in dealing with a person if—
(a) the partner in fact has no authority to act for the LLP in doing a particular act; and
(b) the person knows that he has no authority or does not know or believe him to be a partner of
the LLP.
(2) The LLP is liable if a partner of a LLP is liable to any person as a result of a wrongful act
or omission on his part in the course of the business of the LLP or with its authority.
(3) An obligation of the LLP whether arising in contract or otherwise, shall be solely the
obligation of the LLP.
(4) The liabilities of the LLP shall be met out of the property of the LLP.
Question 9
Discuss the conditions under which LLP will be liable and not liable for the acts of the partner.
Answer

Conditions under which LLP will be liable [Section 27(2) of the LLP Act, 2008]
The LLP is liable if a partner of a LLP is liable to any person as a result of a wrongful act or omission on his part in the
course of the business of the LLP or with its authority.
Conditions under which LLP will not be liable [Section 27(1) of the LLP Act, 2008]
A LLP is not bound by anything done by a partner in dealing with a person if—
(a) the partner in fact has no authority to act for the LLP in doing a particular act; and
(b) the person knows that he has no authority or does not know or believe him to be a partner of
the LLP.

Extent of liability of partner (Section 28):

(1) A partner is not personally liable, directly or indirectly for an obligation referred to in sub-
section (3) of section 27 solely by reason of being a partner of the LLP.

(2) The provisions of sub-section (3) of section 27 and sub-section (1) of this section shall not
affect the personal liability of a partner for his own wrongful act or omission, but a
partner shall not be personally liable for the wrongful act or omission of any other
partner of the LLP.

Holding out (Section 29)(same as to Partnership)

(1) Any person,
 who by words spoken or written or by conduct,
 represents himself, or knowingly permits himself to be represented to be a
partner in a LLP
 is liable to any person
 who has on the faith of any such representation
 given credit to the LLP, whether the person representing himself or represented to be
a partner does or does not know that the representation has reached the person so
giving credit.
 " THE LIMITED LIABILITY PARTNERSHIP "| 4.16

However,
• where any credit is received by the LLP as a result of such representation,
• the LLP shall,
• without prejudice to the liability of the person so representing himself or represented
to be a partner,
• be liable to the extent of credit received by it or any financial benefit derived
thereon.
(2) Where after a partner’s death the business is continued in the same LLP name, the continued use of
that name or of the deceased partner’s name as a part thereof shall not of itself make his legal
representative or his estate liable for any act of the LLP done after his death.

Unlimited liability in case of fraud (Section 30):

(1) In case of fraud:

• In the event of an act carried out by a LLP, or any of its partners,
• with intent to defraud creditors of the LLP or any other person, or for any fraudulent
purpose,
• the liability of the LLP and partners who acted with intent to defraud creditors or
for any fraudulent purpose
• shall be unlimited for all or any of the debts or other liabilities of the LLP.
Note : in case any such act is carried out by a partner, the LLP is liable to the same extent as the partner unless it is
established by the LLP that such act was without the knowledge or the authority of the LLP.
(2) Where any business is carried on with such intent or for such purpose as mentioned in sub-
section (1), every person who was knowingly a party to the carrying on of the business in the
manner aforesaid shall be punishable with
 imprisonment for a term which may extend to 5 years and
 with fine which shall not be less than ` 50,000 but which may extend to ` 5 Lakhs.
(3) Where a LLP or any partner or designated partner or employee of such LLP has conducted the
affairs of the LLP in a fraudulent manner, then without prejudice to any criminal proceedings
which may arise under any law for the time being in force, the LLP and any such partner or designated
partner or employee shall be liable to pay compensation to any person who has suffered any loss
or damage by reason of such conduct.
Note : such LLP shall not be liable if any such partner or designated partner or employee
has acted fraudulently without knowledge of the LLP.

Whistle blowing (Section 31):

(1) The Court or Tribunal may reduce or waive any penalty leviable against any partner or
employee of a LLP, if it is satisfied that—
• such partner or employee of a LLP has provided useful information during investigation of
such LLP; or
• when any information given by any partner or employee (whether or not during
investigation) leads to LLP or any partner or employee of such LLP being convicted
under this Act or any other Act.
(2) No partner or employee of any LLP may be discharged, demoted, suspended,
threatened, harassed or in any other manner discriminated against the terms and
conditions of his LLP or employment merely because of his providing information or
causing information to be provided pursuant to sub-section (1).
 " THE LIMITED LIABILITY PARTNERSHIP "| 4.17

FINANCIAL DISCLOSURES
Maintenance of books of account, other records and audit, etc. (Section 34):

(1) Proper Books of account:

• The LLP shall maintain such proper books of account as may be prescribed
• relating to its affairs for each year of its existence
• on cash basis or accrual basis and
• according to double entry system of accounting and
• shall maintain the same at its registered office
• for such period as may be prescribed.
(2) Statement of Account and Solvency:
• Every LLP shall,
• within a period of 6 months from the end of each financial year,
• prepare a Statement of Account and Solvency
• for the said financial year as at the last day of the said financial year
• in such form as may be prescribed, and
• such statement shall be signed by the designated partners of the LLP.
(3) Every LLP shall file within the prescribed time, the Statement of Account and
Solvency prepared pursuant to sub-section (2) with the Registrar every year in
such form and manner and accompanied by such fees as may be prescribed.
(4) The accounts of LLP shall be audited in accordance with such rules as may be prescribed.
However, the Central Government may, by notification in the Official Gazette, exempt any
class or classes of LLP from the requirements of this sub-section.
(5) Any limited liability partnership which fails to comply with the provisions of sub-
section (3), such limited liability partnership and its designated partners shall be
liable to a penalty of 100 rupees for each day during which such failure continues,
subject to a maximum of 1,00,000 rupees for the limited liability partnership and
50,000 rupees for every designated partner.
(6) Any limited liability partnership which fails to comply with the provisions of sub-
section (1), sub-section (2) and sub-section (4), such limited liability partnership
shall be punishable with fine which shall not be less than 25,000 rupees, but may
extend to 5,00,000 rupees and every designated partner of such limited liability
partnership shall be punishable with fine which shall not be less than 10,000 rupees,
but may extend to 1,00,000 rupees.

34A. Accounting and auditing standards.

The Central Government may, in consultation with the National Financial
Reporting Authority constituted under section 132 of the Companies Act, 2013,—
(a) prescribe the standards of accounting; and
(b) prescribe the standards of auditing, as recommended by the Institute of Chartered
Accountants of India constituted under section 3 of the Chartered Accountants
Act, 1949, for a class or classes of limited liability partnerships.

Annual return (Section 35):

(1) Every LLP shall file an annual return duly authenticated with the Registrar
within 60 days of closure of its financial year in such form and manner and
accompanied by such fee as may be prescribed.
 " THE LIMITED LIABILITY PARTNERSHIP "| 4.18

(2) If any limited liability partnership fails to file its annual return under sub- section (1)
before the expiry of the period specified therein, such limited liability partnership
and its designated partners shall be liable to a penalty of 100 rupees for each day
during which such failure continues, subject to a maximum of 1,00,000 for the
limited liability partnership and 50,000 rupees for designated partners.

Example : Suppose, the financial year of a LLP closes on 31st March, 2020 then the LLP has to file an
annual return with the Registrar latest by 30th May, 2020.
The LLP contra-distinct from Partnership Act, 1932 has prescribed the filing of Annual Return in
accordance with Companies Act, 2013. This is a new feature of the LLPs.

CONVERSION INTO LLP

Conversion from firm into LLP (Section 55): A firm may convert into a LLP in
accordance with the provisions of this Chapter and the Second Schedule.

Conversion from private company into LLP (Section 56): A private company may
convert into a LLP in accordance with the provisions of this Chapter and the Third
Schedule.

Conversion from unlisted public company into LLP (Section 57): An unlisted public
company may convert into a LLP in accordance with the provisions of this Chapter and
the Fourth Schedule.

Registration and effect of conversion (Section 58):

1. Registration:
(i) The Registrar, on satisfying that a firm, private company or an unlisted
public company, as the case may be, has complied with the provisions of
the various Schedules, provisions of this Act and the rules made
thereunder, register the documents issue a certificate of registration in
such form as the Registrar may determine stating that the LLP is, on and from
the date specified in the certificate, registered under this Act.
(ii) The LLP shall, within 15 days of the date of registration, inform the concerned
Registrar of Firms or Registrar of Companies, as the case may be, with which it
was registered under the provisions of the Indian Partnership Act, 1932 or the
Companies Act, 1956 (Now Companies Act, 2013) as the case may be, about the
conversion and of the particulars of the LLP in such form and manner as may be
prescribed.
(iii) Upon such conversion, the partners of the firm, the shareholders of
private company or unlisted public company, as the case may be, the LLP
to which such firm or such company has converted, and the partners of
the LLP shall be bound by the provisions of the various Schedules, as the
case may be, applicable to them.
(iv) Upon such conversion, on and from the date of certificate of registration, the
effects of the conversion shall be such as specified in the various schedules, as
the case may be.
2. Effect of Registration: Notwithstanding anything contained in any other law for the
time being in force, on and from the date of registration specified in the
certificate of registration issued under the various Schedule, as the case may be,—
 " THE LIMITED LIABILITY PARTNERSHIP "| 4.19

(a) there shall be a LLP by the name specified in the certificate of registration
registered under this Act;
(b) all tangible (movable or immovable) and intangible property vested in the firm or
the company, as the case may be, all assets, interests, rights, privileges, liabilities,
obligations relating to the firm or the company, as the case may be, and the whole
of the undertaking of the firm or the company, as the case may be, shall be
transferred to and shall vest in the limited liability partnership without further
assurance, act or deed; and
(c) the firm or the company, as the case may be, shall be deemed to be
dissolved and removed from the records of the Registrar of Firms or
Registrar of Companies, as the case may be.

FOREIGN LLP
Foreign limited liability partnerships (Section 59): The Central Government may make rules for
provisions in relation to establishment of place of business by foreign LLP within India and carrying on
their business therein by applying or incorporating, with such modifications, as appear appropriate,
the provisions of the Companies Act, 1956 or such regulatory mechanism with such composition as
may be prescribed.

WINDING UP AND DISSOLUTION

Winding up and dissolution (Section 63): The winding up of a LLP may be either
voluntary or by the Tribunal and LLP, so wound up may be dissolved.

Circumstances in which LLP may be wound up by Tribunal (Section 64): A LLP may be
wound up by the Tribunal:
(a) if the LLP decides that LLP be wound up by the Tribunal;
(b) if, for a period of more than six months, the number of partners of the LLP is reduced
below two;
(c) if the LLP is unable to pay its debts;
(d) if the LLP has acted against the interests of the sovereignty and integrity of India, the
security of the State or public order;
(e) if the LLP has made a default in filing with the Registrar the Statement of
Account and Solvency or annual return for any 5 consecutive financial years;
or
(f) if the Tribunal is of the opinion that it is just and equitable that the LLP be wound up.
Rules for winding up and dissolution (Section 65): The Central Government may make
rules for the provisions in relation to winding up and dissolution of LLP.

Question 10
Explain the circumstances in which LLP may be wound up by Tribunal under the LLP Act,
2008.

Answer
Circumstances in which LLP may be wound up by Tribunal (Section 64 of the LLP
Act, 2008): A LLP may be wound up by the Tribunal:

(a) if the LLP decides that LLP be wound up by the Tribunal ;

(b) if, for a period of more than six months, the number of partners of the LLP is
reduced below two;
 " THE LIMITED LIABILITY PARTNERSHIP "| 4.20

(c) if the LLP is unable to pay its debts;

(d) if the LLP has acted against the interests of the sovereignty and integrity of
India, the security of the State or public order;
(e) if the LLP has made a default in filing with the Registrar the Statement of
Account and Solvency or annual return for any five consecutive financial
years; or
(f) if the Tribunal is of the opinion that it is just and equitable that the LLP be wound up.

MISCELLANEOUS
Business transactions of partner with LLP (Section 66): A partner may lend money
to and transact other business with the LLP and has the same rights and obligations
with respect to the loan or other transactions as a person who is not a partner.

Application of the provisions of the Companies Act (Section 67):

(1) The Central Government may, by notification in the Official Gazette, direct that any
of the provisions of the Companies Act, 1956 specified in the notification—
• shall apply to any LLP; or
• shall apply to any LLP with such exception, modification and adaptation, as
may be specified, in the notification.

(2) A copy of every notification proposed to be issued under sub-section (1)

• shall be laid in draft before each House of Parliament, while it is in session,
• for a total period of 30 days which may be comprised in one session or in two
or more successive sessions, and
• if, before the expiry of the session immediately following the session or the
successive sessions aforesaid, both Houses agree in disapproving the issue of
the notification or both Houses agree in making any modification in the
notification,
• the notification shall not be issued or, as the case may be,
• shall be issued only in such modified form as may be agreed upon by both the
Houses.

67A. Establishment of Special Courts.

(1) The Central Government may, for the purpose of providing speedy trial of
offences under this Act, by notification, establish or designate as many Special
Courts as may be necessary for such area or areas, as may be specified in the
notification.
(2) The Special Court shall consist of—
(a) a single Judge holding office as Sessions Judge or Additional Sessions Judge, in
case of offences punishable under this Act with imprisonment of 3 years or
more; and
(b) a Metropolitan Magistrate or a Judicial Magistrate of the first class, in the case
of other offences, who shall be appointed by the Central Government with the
concurrence of the Chief Justice of the High Court:
Provided that until Special Courts are designated or established under sub- section (1), the
Courts designated as Special Courts in terms of section 435 of the Companies Act, 2013 shall
be deemed to be Special Courts for the purpose of trial of offences punishable under this Act:
Provided further that notwithstanding anything contained in the Code of Criminal Procedure,
1973, any offence committed under this Act, which is triable by a Special Court shall, until a
 " THE LIMITED LIABILITY PARTNERSHIP "| 4.21

Special Court is established under this Act or the Companies Act, 2013, be tried by a Court of
Sessions or the Court of Metropolitan Magistrate or a Judicial Magistrate of the first class, as
the case may be, exercising jurisdiction over the area.]
67B. Procedure and powers of Special Court.
(1) Notwithstanding anything contained in the Code of Criminal Procedure, 1973, all
offences specified under sub- section (1) of section 67A shall be triable only by the
Special Court established or designated for the area in which the registered office of the
limited liability partnership is situated in relation to which the offence is committed or
where there are more than one Special Courts for such area, by such one of them as may
be specified in this behalf by the High Court concerned.
(2) While trying an offence under this Act, a Special Court may also try an offence other than
an offence under this Act with which the accused may, under the Code of Criminal
Procedure, 1973 be charged at the same trial.
(3) Notwithstanding anything contained in the Code of Criminal Procedure, 1973, the
Special Court may, if it thinks fit, try in a summary way any offence under this Act which
is punishable with imprisonment for a term not exceeding 3 years:
Provided that in the case of any conviction in a summary trial, no sentence of
imprisonment for a term exceeding one year shall be passed:
Provided further that, when at the commencement of or in the course of a summary trial, it
appears to the Special Court that the nature of the case is such that the sentence of
imprisonment for a term exceeding one year may have to be passed or that it is, for any other
reason, undesirable to try the case summarily, the Special Court shall, after hearing the
parties, record an order to that effect and thereafter recall any witnesses who may have been
examined and proceed to hear or re- hear the case in accordance with the procedure for the
regular trial.
67C. Appeal and revision.
The High Court may exercise, so far as may be applicable, all the powers conferred by
Chapters XXIX and XXX of the Code of Criminal Procedure, 1973 on a High Court, as if a Special
Court within the local limits of the jurisdiction of the High Court were a Court of Sessions
trying cases within the local limits of the jurisdiction of the High Court.]

Electronic filing of documents (Section 68):

(1) Any document required to be filed, recorded or registered under this Act may be
filed, recorded or registered in such manner and subject to such conditions as may
be prescribed.
(2) A copy of or an extract from any document electronically filed with or submitted to
the Registrar which is supplied or issued by the Registrar and certified through
affixing digital signature as per the Information Technology Act, 2000 to be a true
copy of or extract from such document shall, in any proceedings, be admissible in
evidence as of equal validity with the original document.
(3) Any information supplied by the Registrar that is certified by the Registrar through
affixing digital signature to be a true extract from any document filed with or
submitted to the Registrar shall, in any proceedings, be admissible in evidence and
be presumed, unless evidence to the contrary is adduced, to be a true extract from
such document.
 " THE LIMITED LIABILITY PARTNERSHIP "| 4.22

68A. Registration offices.

(1) For the purpose of exercising such powers and discharging such functions as are conferred on
the Central Government by or under this Act or under rules made thereunder and for the
purpose of registration of limited liability partnerships under this Act, the Central
Government shall, by notification, establish such number of registration offices at such places
as it thinks fit, specifying their jurisdiction.
(2) The Central Government may appoint such Registrars, Additional Registrars, Joint Registrars,
Deputy Registrars and Assistant Registrars as it considers necessary, for the registration of
limited liability partnerships and discharge of various functions under this Act.
(3) The powers and duties of the Registrars referred to in sub-section (2) and the terms and
conditions of their service shall be such as may be prescribed.
(4) The Central Government may direct the Registrar to prepare a seal or seals for the
authentication of documents required for, or connected with the registration of limited
liability partnerships.

Payment of additional fee (Section 69): Any document or return required to be registered or
filed under this Act with Registrar, if, is not registered or filed in time provided therein, may be
registered or filed after that time, on payment of such additional fee as may be prescribed in
addition to any fee as is payable for filing of such document or return:
Provided that such document or return shall be filed after the due date of filing, without prejudice
to any other action or liability under this Act:
Provided further that a different fee or additional fee may be prescribed for different classes of
limited liability partnerships or for different documents or returns required to be filed under this
Act or rules made thereunder.

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 lega It is a legal entity separate It is a group of persons with

entity from its members. no separate legal entity.

4. Creation It is created by a legal It is created by an agreement

process called registration between the partners.
under the LLP Act, 2008.

5. Registration Registration is mandatory. Registration is voluntary. Only

LLP can sue and be sued in the registered partnership
its own name. firm can sue the third parties.
 " THE LIMITED LIABILITY PARTNERSHIP "| 4.23

6. Perpetual The death, insanity, The death, insanity,

succession retirement or insolvency of retirement or insolvency of
the partner(s) does not affect the partner(s) may affect its
its existence of LLP. Members existence. It has no perpetual
may join or leave but its succession.
existence continues forever.
7. Name Name of the LLP to contain No guidelines. The partners can
the word limited liability have any name as per their
partnership (LLP) as suffix. choice.

8. Liability Liability of each partner Liability of each partner is

limited to the extent to unlimited. It can be extended
agreed contribution except in upto the personal assets of the
case of willful fraud. partners.
9. Mutual agency Each partner can bind the Each partner can bind the firm
LLP by his own acts but not as well as other partners by
the other partners. his own acts.

10. Designated At least two designated There is no provision for such

partners partners and at least one of partners under the partnership
them shall be resident in Act, 1932.
India.
11. Common seal It may have its common seal There is no such concept in case
as its official signatures. of 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 LLP is required to file: Partnership firm is not
(i) Annual statement of required to file any annual
accounts document with the registrar of
(ii) Statement of solvency firms.
(iii) Annual return with
the registration of LLP
every year.
14. Foreign Foreign nationals can Foreign nationals cannot
partnership become 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.
 " THE LIMITED LIABILITY PARTNERSHIP "| 4.24

Question 11
Differentiate between a LLP and partnership firm?

Answer

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 It is a legal entity separate from It is a group of persons with no

entity its members. 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. LLP Registration is voluntary. Only

can sue and be sued in its own the registered partnership firm
name. can sue the third parties.

6. Perpetual The death, insanity, retirement The death, insanity, retirement

succession or insolvency of the partner(s) or insolvency of the partner(s)
does not affect its existence of may affect its existence. It has no
LLP. Members may join or perpetual succession.
leave but its existence
continues forever.
7. Name Name of the LLP to contain the No guidelines. The partners can
word limited liability have any name as per their
partnership (LLP) as suffix. choice.

8. Liability Liability of each partner limited Liability of each partner is

to the extent to agreed unlimited. It can be extended
contribution except in case of upto the personal assets of the
willful fraud. 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 his
other partners. own acts.

10. Designated At least two designated There is no provision for such

partners partners and at least one of partners under the partnership
them shall be resident in India. Act, 1932.

11. Common seal It may have its common seal as There is no such concept in case
its official signatures. of 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.
 " THE LIMITED LIABILITY PARTNERSHIP "| 4.25

13. Annual filing LLP is required to file: Partnership firm is not required
(iv) Annual statement of to file any annual document with
accounts the registrar of firms.
(v) Statement of solvency
(vi) Annual return with
the registration of LLP
every year.
14. Foreign Foreign nationals can become a Foreign nationals cannot become
partnership partner in a LLP. 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 to The persons who invest the
LLP are known as partners of money in the shares are known as
the LLP. members of the company.

3. Internal governance The internal governance The internal governance structure

structure structure of a LLP is governed of a company is regulated by
by contract/agreement statute (i.e., Companies Act,
between the partners. 2013).
4. Name Name of the LLP to contain Name of the public company to
the word “Limited Liability contain the word “limited” and
partnership” or “LLP” as Pvt. Co. to contain the word
suffix. “Private limited” as suffix.

5. No. of members  Minimum – 2 members i. Private company:

/partners  Maximum – No such limit  Minimum – 2 members
on the members in the  Maximum–200 members
Act. ii. Public company:
 Minimum – 7 members
 Maximum – No such limit
on the members.

6. Members The members of the LLP can Members can be organizations,

be individuals/ or body trusts, another business form or
corporate through the individuals.
nominees.
7. Liability of Liability of a partners is Liability of a member is limited to
members/partner limited to the extent of the amount unpaid on the
agreed contribution in case of shares held by them.
intention is fraud.
 " THE LIMITED LIABILITY PARTNERSHIP "| 4.26

8. Management The business of the company The affairs of the company are
managed by the partners managed by board of directors
including the designated elected by the shareholders.
partners authorized in the
agreement.
9. Minimum number of Minimum 2 designated Pvt. Co. – 2 directors
directors/ partners. Public co. – 3 directors
designated
partners

Question 12

What do you mean by Designated Partner? Whether it is mandatory to appoint

Designated partner in a LLP?

Answer

Designated Partner [Section 2(j) of the LLP Act, 2008]: “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.
Question 13

A and B were friends. Now they have plans of setting up a supermarket in their locality.
They are confused as to whether to register as a traditional partnership or as a Limited
Liability Partnership. As an advisor, enumerate the differences between the two forms of
business highlighting the compliances and other legal formalities.

Answer

Comparison between an LLP and partnership can be analysed on the below tabulated parameters.

Basis LLP Partnership firm

1. Regulating Act The Limited Liability The Indian Partnership Act, 1932.
Partnership Act, 2008.
2. Body corporate It is a body corporate. It is not a body corporate,
3. Separate legal It is a legal entity separate from It is a group of persons with no
entity its members. separate legal entity.
 " THE LIMITED LIABILITY PARTNERSHIP "| 4.27

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. LLP Registration is voluntary. Only the
can sue and be sued in its own registered partnership firm can
name. sue the third parties.

6. Perpetual The death, insanity, retirement The death, insanity, retirement or

succession or insolvency of the partner(s) insolvency of the partner(s) may
does not affect its existence of affect its existence. It has no
LLP. Members may join or leave perpetual succession.
but its existence continues
forever.

7. Name Name of the LLP to contain the No guidelines. The partners can
word limited liability partners have any name as per their choice.
(LLP) as suffix.

8. Liability Liability of each partner limited Liability of each partner is

to the extent to agreed unlimited. It can be extended upto
contribution except in case of the personal assets of the
willful fraud. partners.
9. Mutual agency Each partner can bind the LLP Each partner can bind the firm as
by his own acts but not the well as other partners by his own
other partners. acts.
10. Designated At least two designated There is no provision for such
partners partners and at least one of partners under the Partnership
them shall be resident in India. Act, 1932.

11. Common seal It may have its common seal as There is no such concept in
its official signatures. partnership

12. Legal Only designated partners are All partners are responsible for all
compliances responsible for all the the compliances and penalties
compliances and penalties under the Act.
under this Act.
13. Annual filing of LLP is required to file: Partnership firm is not required to
documents (i) Annual statement of file any annual document with the
accounts registrar of firms.
(ii) Statement of solvency
(iii) Annual return with the
registration of LLP every
year.
 " THE LIMITED LIABILITY PARTNERSHIP "| 4.28

14. Foreign Foreign nationals can become a Foreign nationals cannot become
partnership partner in a LLP. a partner in a partnership firm.

15. Minor as Minor cannot be admitted to Minor can be admitted to the

partner the benefits of LLP. benefits of the partnership with
the prior consent of the existing
partners.
 “THE COMPANIES ACT, 2013” | 5.1

CHAPTER –5 “THE COMPANIES ACT, 2013”

CHAPTER - 5
" THE COMPANIES ACT, 2013"
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. 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.
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.
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.
 “THE COMPANIES ACT, 2013” | 5.2

Features of a Company
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 organizations and the most
striking feature in the company form of organization vis-à-vis the other organizations 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 is different altogether from the subscribers to the memorandum
of association. Its personality is distinct and separate from the personality of those
who compose it.
(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.
(c) 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 v. 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.
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.
 “THE COMPANIES ACT, 2013” | 5.3

Example : 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.
Question 1
ABC Pvt. Ltd., is a Private Company having five members only. All the members of the
company were going by car to Mumbai in relation to some business. An accident took place
and all of them died. Answer with reasons, under the Companies Act, 2013 whether
existence of the company has also come to the end?
Answer
Death of all members of a Private Limited Company, Under the Companies Act, 2013: The
most distinguishing feature of a company is its being a separate entity from the shareholders and
promoters who form it. This lends stability and perpetuity to the company form of business
organization. In short, a company is brought into existence by a process of law and can be
terminated or wound up or brought to an end only by a process of law. Its life is not impacted by
the death, insolvency or retirement of any or all shareholder(s) or director(s).
The provision for transferability or transmission of the shares helps to preserve the perpetual
existence of a company by allowing the constitution and identity of shareholders to change.
In the present case, ABC Pvt. Ltd. does not cease to exist even by the death of all its shareholders. The legal
process will be for the successors of the deceased shareholders to get the shares registered in their names
by way of the process which is called “transmission of shares”. The company will cease to exist only when it
is wound up by a due process of law.
Therefore, even with the death of all members (i.e. 5), ABC (Pvt.) Ltd. does not cease to exist.
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.
(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
 “THE COMPANIES ACT, 2013” | 5.4

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.
Question 2
Five persons are the only members of a private company Flower Fans Limited. All of them
go in a boat on a pleasure trip into an open sea. The boat capsizes and all the 5 die being
drowned.

(a) Is the private company Flower Fans Limited no longer in existence?

(b) Further is it correct to say that a company being an artificial person cannot own
property and cannot sue or be sued? Explain with reference to the provisions of
Companies Act, 2013.
Answer

(a) Perpetual Succession – A company on incorporation becomes a separate legal entity. It is an

artificial legal person and have perpetual succession which means even if all the members of a
company die, the company still continues to exist. It has permanent existence.

In the instant case, five persons who were the only members of private company and they have
died being drowned in the sea. The existence of a company is independent of the lives of its
members. It has a perpetual succession. In this problem, the company will continue as a legal
entity. The company's existence is in no way affected by the death of all its members.
(b) The statement given is 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
 “THE COMPANIES ACT, 2013” | 5.5

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.

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.
(II) 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 corporate
entity and paying regard, instead, to the realities behind the legal facade.
 “THE COMPANIES ACT, 2013” | 5.6

 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.

Cases for 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 (tax payer) 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).
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
 “THE COMPANIES ACT, 2013” | 5.7

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]
Question 3
There are cases where company law disregards the principle of corporate personality or
the principle that the company is a legal entity distinct from its shareholders or members.
Elucidate.
Answer
Corporate Veil refers to a legal concept whereby the company is identified separately from the
members of the company.
However, this veil can be lifted which means looking behind the company as a legal person, i.e.,
disregarding the 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.
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:
 Trading with enemy: If the public interest is likely to be in jeopardy, the Court may be
willing to crack the corporate shell
 Where corporate entity is used to evade or circumvent tax, the corporate veil may be
lifted
 Where companies form other companies as their subsidiaries to act as their agent
 Company is formed to circumvent welfare of employees
 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.
 “THE COMPANIES ACT, 2013” | 5.8

Question 4
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?
Answer
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.
Question 5
Some of the creditors of Pharmaceutical Appliances Ltd. have complained that the company
was formed by the promoters only to defraud the creditors and circumvent the compliance
of legal provisions of the Companies Act, 2013. In this context they seek your advice as to
the meaning of corporate veil and when the promoters can be made personally liable for
the debts of the company.
Answer
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.
However, under certain exceptional circumstances the courts lift or pierce the corporate veil by ignoring
the separate entity of the company and the promoters and other persons who have managed and controlled
the affairs of the company. Thus, when the corporate veil is lifted by the courts, the promoters and
persons exercising control over the affairs of the company are held personally liable for the acts and debts
of the company.
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:
 “THE COMPANIES ACT, 2013” | 5.9

(i) To determine the character of the company i.e. to find out whether co-enemy or friend
(ii) To protect revenue/tax
(iii) To avoid a legal obligation
(iv) Formation of subsidiaries to act as agents
(v) Company formed for fraud/improper conduct or to defeat law
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 exactly the same way, 2 or more persons can form a private company and
 one person where company to be formed is one person company.
INCORPORATION OF COMPANY: Section 7 of the Companies Act, 2013 provides for the
procedure to be followed for incorporation of a company.
(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.
 “THE COMPANIES ACT, 2013” | 5.10

 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.
Note : 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
 “THE COMPANIES ACT, 2013” | 5.11

 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 pass such orders, as it may think fit-
(a) 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
(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.
“Tribunal” means the National Company Law Tribunal (NCLT) constituted under section 408 of
the Companies Act, 2013. The NCLT is a quasi-judicial body in India that adjudicates issues
relating to companies in India. The NCLT was established under the Companies Act 2013 and was
constituted on 1st June 2016.
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.
1. 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.
2. 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.
 “THE COMPANIES ACT, 2013” | 5.12

3. 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.
4. It has perpetual existence until it is dissolved by liquidation or struck out of the
register.
5. 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.
6. 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.
7. 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.
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.
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:
I. 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.
 “THE COMPANIES ACT, 2013” | 5.13

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.
However, the point of distinction between these two types of companies is that
1. 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.
2. 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.
 “THE COMPANIES ACT, 2013” | 5.14

II. On the basis of members:

1. 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 has at least
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.
 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.
Note : 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.
 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.
 “THE COMPANIES ACT, 2013” | 5.15

 Such Company cannot carry out Non-Banking Financial Investment activities

including investment in securities of anybody corporate.
 OPC cannot convert voluntarily into any kind of company unless two years have
expired from the date of incorporation, except-
i. where the paid up share capital is increased beyond fifty lakh rupees, or
ii. its average annual turnover during the relevant period exceeds two crore rupees.
(Now Omitted)
 If One Person Company or any officer of such company contravenes the provisions, they
shall be punishable with fine which may extend to ten thousand rupees(now five thousands
rupees) and with a further fine which may extend to one thousand rupees (now five
hundred rupees) for every day after the first during which such contravention continues.
 Here the member can be the sole member and director.
Question 6
Define OPC (One Person Company) and state the rules regarding its membership. Can it be
converted into a non-profit company under Section 8 or a private company?
Answer
One Person Company (OPC) [Section 2(62) of the Companies Act, 2013]: The Act defines
one person company (OPC) as a company which has only one person as a member.
Rules regarding its membership:
 Only one person as member.
 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.
 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.
 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.
 “THE COMPANIES ACT, 2013” | 5.16

 OPC 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. OPC cannot
convert voluntarily into any kind of company unless two years have expired from the date
of incorporation, except where the paid up share capital is increased beyond fifty lakh
rupees or its average annual turnover during the relevant period exceeds two crore
rupees.(Now Omitted)
Question 7
Mr. Anil formed a One Person Company (OPC) on 16th April, 2018 for manufacturing electric
cars. The turnover of the OPC for the financial year ended 31st March, 2019 was about ` 2.25
Crores. His friend Sunil wanted to invest in his OPC, so they decided to convert it voluntarily
into a private limited company. Can Anil do so?
Answer
Yes
Question 8
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?
Answer
(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 182 days
during the immediately preceding financial year.
2. 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,—
a. restricts the right to transfer its shares;
b. except in case of One Person Company, limits the number of its members to 200 :
Note : 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:
Note :
(i) persons who are in the employment of the company; and
(ii) 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
c. prohibits any invitation to the public to subscribe for any securities of the
company;
 “THE COMPANIES ACT, 2013” | 5.17

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 50,00,000 rupees or such higher amount
as may be prescribed which shall not be more than 10 crore rupees( earlier 5 crore); and
(ii) turnover of which as per its last profit and loss account does not exceed 2 crore rupees or
such higher amount as may be prescribed which shall not be more than 100 crore
rupees(earlier 20 crore):
Exceptions: This section 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 purpose 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 two crores and
rupees twenty crores respectively. [(Specification of Definitions Details) Amendment Rule,
2021, w.e.f. 1-4-2021.]
Question 9

MNP Private Ltd. is a company registered under the Companies Act, 2013 with a, Paid Up
Share Capital of ` 45 lakh and turnover of ` 30 crores. Explain the meaning of the "Small
Company" and examine the following in accordance with the provisions of the Companies
Act, 2013:
(i) Whether the MNP Private Ltd. can avail the status of small company?
(ii) What will be your answer if the turnover of the company is ` 15 crore?

Answer

Small Company: According to Section 2(85) of the Companies Act, 2013, Small Company means a
company, other than a public company,—
(1) paid-up share capital of which does not exceed 2 crore rupees or such higher amount as
may be prescribed which shall not be more than 10 crore rupees; and
(2) turnover of which as per its last profit and loss account does not exceed 20 crore rupees or
such higher amount as may be prescribed which shall not be more than 100 crore rupees.
 “THE COMPANIES ACT, 2013” | 5.18

(3) Nothing in this clause shall 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.
(i) In the present case, MNP Private Ltd., a company registered under the Companies Act, 2013
with a paid up share capital of ` 45 lakh and having turnover of ` 30 crore. Since only one
criteria of share capital of ` 2 Crore is met, but the second criteria of turnover of ` 20 crores
is not met and the provisions require both the criteria to be met in order to avail the status
of a small company, MNP Ltd. cannot avail the status of small company.
(ii) If the turnover of the company is ` 15 crore, then both the criteria will be fulfilled and MNP
Ltd. can avail the status of small company.
3. Public company [Section 2(71)]: “Public company” means a company which—
(a) is not a private company; and
(b) 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.
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.
Question 10
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.
Answer
(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
 “THE COMPANIES ACT, 2013” | 5.19

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.
Question 11
Flora Fauna Limited was registered as a public company. There are 230 members in the
company as noted below:

(a) Directors and their relatives 190

(b) Employees 15

(c) Ex-Employees (Shares were allotted when they were employees) 10

(d) 5 couples holding shares jointly in the name of husband and wife (5*2) 10

(e) Others 5

The Board of Directors of the company propose to convert it into a private company. Also
advise whether reduction in the number of members is necessary.
Answer
According to section 2(68) of the Companies Act, 2013, "Private company" means acompany
having a minimum paid-up share capital as may be prescribed, and which by its articles, except
in case of One Person Company, limits the number of its members to two hundred.
However, 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.
It is further provided 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.
In the instant case, Flora Fauna Limited may be converted into a private company only if the total
members of the company are limited to 200.
 “THE COMPANIES ACT, 2013” | 5.20

Total Number of members

(i) Directors and their relatives 190

(ii) 5 Couples (5*1) 5

(iii) Others 5

Total 200

Therefore, there is no need for reduction in the number of members since existing
number of members are 200 which does not exceed maximum limit of 200.
III. On the basis of control:
(a) Holding and subsidiary companies: ‘Holding and subsidiary’ companies are relative
terms.
1. Holding Company : 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)]
Note : For the purposes of this clause, the expression ”company" includes any body
corporate.
2. Subsidiary Company : 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:
Note : 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 —
 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;
 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;
 the expression “company” includes any body corporate;
 “layer” in relation to a holding company means its subsidiary or subsidiaries.
Example 1: 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 2: A will be subsidiary of B, if B holds more than 50% of the share capital of A.
Example 3: 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 subsidiary of B as well as of A and so on.
 “THE COMPANIES ACT, 2013” | 5.21

Question 12
Popular Products Ltd. is company incorporated in India, having a total Share Capital of ` 20
Crores. The Share capital comprises of 12 Lakh equity shares of ` 100 each and 8 Lakhs
Preference Shares of ` 100 each. Delight Products Ltd. and Happy Products Ltd. hold
2,50,000 and 3,50,000 shares respectively in Popular Products Ltd. Another company
Cheerful Products Ltd. holds 2,50,000 shares in Popular Products Ltd. Jovial Ltd. is the
holding company for all above three companies namely Delight Products Ltd; Happy
Products Ltd.; Cheerful Products Ltd. Can Jovial Ltd. be termed as subsidiary company of
Popular products. Ltd., if it. Controls composition of directors of Popular Products Ltd.
State the related provision in the favour of your answer.
Answer
In the present case, the total share capital of Popular Products Ltd. is ` 20 crores comprised of 12
Lakh equity shares and 8 Lakhs preference shares.
Delight Products Ltd., Happy Products Ltd. and Cheerful Products Ltd together hold 8,50,000 shares
(2,50,000+3,50,000+2,50,000) in Popular Products Ltd. Jovial Ltd. is the holding company of all above three
companies. So, Jovial Ltd. along with its subsidiaries hold 8,50,000 shares in Popular Products Ltd. which
amounts to less than one-half of its total share capital i.e. total voting power. Hence, Jovial Ltd. by virtue of
shareholding/total voting power is not a holding company of Popular Products Ltd.
Secondly, it is given that Jovial Ltd. controls the composition of directors of Popular Products
Ltd., hence, Jovial Ltd. is a holding company of Popular Products Ltd. and not a subsidiary
company. [Section 2(87) of the Companies Act, 2013]
Question 13
Jagannath Oils Limited is a public company and having 220 members of which 25 members
were employee in the company during the period 1st April, 2006 to 28th June 2016. They
were allotted shares in Jagannath Oils Limited first time on 1st July, 2007 which were sold
by them 1st August, 2016. After some time, on 1st December, 2016, each of those 25
members acquired shares in Jagannath Oils Limited which they are holding till date. Now
company wants to convert itself into a private company. State with reasons:

(I) Whether Jagannath Oils Limited is required to reduce the number of members.
(II) Would your answer be different if above 25 members were the employee in
Jagannath Oils Limited for the period from 1st April, 2006 to 28th June, 2017?
Answer
According to Section 2(68) of Companies Act, 2013, “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
 “THE COMPANIES ACT, 2013” | 5.22

(iii) prohibits any invitation to the public to subscribe for any securities of the company.
(I) Following the provisions of Section 2(68), 25 members were employees of the company but
not during present membership which was started from 1st December 2016 i.e. after the
date on which these 25 members were ceased to the employee in Jagannath Oils Limited.
Hence, they will be considered as members for the purpose of the limit of 200 members.
The company is required to reduce the number of members before converting it into a
private company.
(II) On the other hand, if those 25 members were ceased to be employee on 28th June 2017,
they were employee at the time of getting present membership. Hence, they will not be
counted as members for the purpose of the limit of 200 members and the total number of
members for the purpose of this sub-section will be 195. Therefore, Jagannath Oils Limited
is not required to reduce the number of members before converting it into a private
company.
Question 14

The paid-up capital of Ram Private Limited is ` 10 Crores in the form of 7,00,000 Equity
Shares of ` 100 each and 3,00,000 Preference Shares of ` 100 each. Lakhan Private Limited
is holding 3,00,000 Equity Shares and 3,00,000 Preference Shares in Ram Private Limited.
State with reason, Whether Ram Private Limited is subsidiary of Lakhan Private Limited?

Answer

According to Section 2(87) of Companies Act, 2013 “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:
For the purposes of this section —
(i) 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;
(ii) the expression “company” includes anybody corporate;
It is to be noted that Preference share capital will also be considered if preference shareholders
have same voting rights as equity shareholders.
In the instant case, Ram Private Limited is having paid-up capital of `10 Crores in the form of
7,00,000 Equity Shares of `100 each and 3,00,000 Preference Shares of `100 each. Lakhan Private
Limited is holding 3,00,000 Equity Shares and 3,00,000 Preference Shares in Ram Private Limited.
As in the given problem it is not clear that whether Preference Shares are having voting rights or
not, it can be taken that there is no voting right with these shares. On the basis of provisions o f
Section 2(87) and facts of the given problem, Lakhan Private Limited is holding 3,00,000 Equity
Shares of total equity paid up share capital of Ram Private Limited. Therefore, as Lakhan Private
Limited does not exercises or controls more than one-half of the total voting power in Ram
Private Limited, Ram Private Limited is not subsidiary of Lakhan Private Limited.
 “THE COMPANIES ACT, 2013” | 5.23

(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 20 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.
The term “Total Share Capital”, means the aggregate of the -
(a) Paid-up equity share capital; and
(b) Convertible preference share capital.
This is a new definition inserted in the 2013 Act.
 Vide General Circular no. 24/2014 dated 25th of June 2014, the Ministry of Corporate
Affairs has clarified that the shares held by a company in another company in a
‘fiduciary capacity’ shall not be counted for the purpose of determining the
relationship of ‘associate company’ under section 2(6) of the Companies Act, 2013.
Example : A Ltd. is a Public Company and holds 23% of share capital in B Ltd. and 15%
share capital of C Ltd. By virtue of the shareholding pattern, B Ltd. will be known as the
Associate Company of A Ltd. (as the holding is more than 20%) , whereas C Ltd. will not be
Associate as the require 20% is not there and hence no significant influence.
Question 15

Manicar Limited has allotted equity shares with voting rights to Nanicar Limited worth ` 10
Crores and issued Non-Convertible Debentures worth ` 30 Crores during the Financial Year
2017-18. After that total Paid-up Equity Share Capital of the company is ` 100 Crores and
Non-Convertible Debentures stands at ` 150 Crores.

Define the Meaning of Associate Company and comment on whether Manicar Limited and
Nanicar Limited would be called Associate Company as per the provisions of the Companies
Act, 2013?
Answer
As per Section 2(6) of the Companies Act, 2013, an Associate Company 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. The term “significant influence” means control of at least 20% of total share capital, or
control of business decisions under an agreement.

The term “Total Share Capital”, means the aggregate of the -

(a) Paid-up equity share capital; and
(b) Convertible preference share capital.
 “THE COMPANIES ACT, 2013” | 5.24

In the given case, as Manicar Ltd. has allotted equity shares with voting rights to Nanicar Limited
of Rs. 10 crores, which is less than requisite control of 20% of total share capital (i.e. 100 crore) to
have a significant influence of Nanicar Ltd. Since the said requirement is not complied, therefore
Manicar Ltd. and Nanicar Ltd. are not associate companies as per the Companies Act, 2013.
Further holding/allotment of non-convertible debentures has no relevance for ascertaining
significant influence. Hence the issue of non-convertible debentures will not make both the
companies Associate Company.
Question 16
Explain the classification of the companies on the basis of control as per the Companies Act,
2013.
Answer

In line with the Companies Act, 2013, following are the classification of the Companies 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 anybody corporate;
(IV) “layer” in relation to a holding company means its subsidiary or subsidiaries.

(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 —
(i) 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;
 “THE COMPANIES ACT, 2013” | 5.25

(ii) 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.
The term “Total Share Capital”, means the aggregate of the –
(1) Paid-up equity share capital; and
(2) Convertible preference share capital.
IV. 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.
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 : 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.
V. 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 (now total voting power)
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.
Question 17
SK Infrastructure Limited has a paid-up share capital divided into 6,00,000 equity shares of
INR 100 each. 2,00,000 equity shares of the company are held by Central Government and
1,20,000 equity shares are held by Government of Maharashtra. Explain with reference to
relevant provisions of the Companies Act, 2013, whether SK Infrastructure Limited can be
treated as Government Company.
Answer
Government Company [Section 2(45) of the Companies Act, 2013]: 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.
 “THE COMPANIES ACT, 2013” | 5.26

In the instant case, paid up share capital of SK Infrastructure Limited is 6,00,000 equity shares of `
100 each. 200,000 equity shares are held by Central government and 1,20,000 equity shares are
held by Government of Maharashtra. The holding of equity shares by both government is 3,20,000
which is more than 51% of total paid up equity shares.
Hence, SK Infrastructure Limited is a Government company.

(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
Question 18

Mike Limited company incorporated in India having Liaison office at Singapore. Explain in
detail meaning of Foreign Company and analysis., on whether Mike Limited would be called
as Foreign Company as it established a Liaison office at Singapore as per the provisions of
the Companies Act, 2013?
Answer
Foreign Company [Section 2(42) of the Companies Act, 2013]: 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.
Since Mike Limited is a company incorporated in India, hence, it cannot be called as a foreign
company. Even though, Liaison was officially established at Singapore, it would not be called as a
foreign company as per the provisions of the Companies Act, 2013.
(c) Formation of companies with charitable objects etc. (Section 8 company):
1. 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.
2. 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.
 “THE COMPANIES ACT, 2013” | 5.27

(iii) On registration the company shall enjoy same privileges and obligations as of a
limited company.
3. 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.
4. Order of the Central Government: Where a licence is revoked there
 the Central Government may, in the public interest order that the company
registered under this 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.
5. Penalty/punishment in contravention: If a company makes any default in complying with
any of the requirements laid down in this section,
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
10,00,000 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 25,000
rupees but which may extend to 25,00,000 rupees.
Note: where it is proved that the affairs of the company were conducted fraudulently, every officer
in default shall be liable for action under section 447 which deals with Fraud.
Section 8 Company- Significant points
 Formed for the promotion of commerce, art, science, religion, charity, protection
environment, sports, etc.
 Requirement of minimum share capital does not apply.
 Uses its profits for the promotion of the objective for which 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
 “THE COMPANIES ACT, 2013” | 5.28

– 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.
1. Formation
 To promote Charitable objects
2. Application of profits
 To promote its objectives
 No payment of dividends out of profits
3. Type of Co.
 Limited Liability
 Without the addition of words “Ltd.” or “Pvt Ltd.”
4. How status is granted
 The CG can grant such status
 However, CG has delegated the power to grant licence to ROC
5. 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.
6. Effect of revocation of licence
 Co. has to use words “Ltd.” or “Pvt Ltd.”
Question 19
What do you mean by "Companies with charitable purpose" (section 8) under the
Companies Act, 2013? Mention the conditions of the issue and revocation of the licence
of such company by the government.
Answer
Formation of companies with charitable purpose etc. (Section 8 company):
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 COMPANIES ACT, 2013” | 5.29

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.
Question 20
A company registered under section 8 of the Companies Act, 2013, earned huge profit
during the financial year ended on 31st March, 2018 due to some favourable policies
declared by the Government of India and implemented by the company. Considering the
development, some members of the company wanted the company to distribute dividends
to the members of the company. They approached you to advise them about the maximum
amount of dividend that can be declared by the company as per the provisions of the
Companies Act, 2013. Examine the relevant provisions of the Companies Act, 2013 and
advise the members accordingly.
Answer
A company that is registered under section 8 of the Companies Act, 2013, is prohibited from the
payment of any dividend to its members.
The company in question is a section 8 company and hence it cannot declare dividend. Thus, the
contention of members is incorrect.
Question 21
Can a non-profit organization be registered as a company under the Companies Act,
2013? If so, what procedure does it have to adopt?
Answer
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 COMPANIES ACT, 2013” | 5.30

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.
Question 22
Alfa school started imparting education on 1.4.2010, with the sole objective of providing
education to children of weaker society either free of cost or at a very nominal fee
depending upon the financial condition of their parents. However, on 30th March 2018, it
came to the knowledge of the Central Government that the said school was operating by
violating th e objects of its objective clause due to which it was granted the status of a
section 8 company under the Companies Act, 2013. Describe what powers can be exercised
by the Central Government against the Alfa School, in such a case?
Answer
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, education, sports etc. Such company
intends to apply its profit in promoting its objects. Section 8 companies are registered by the
Registrar only when a license is issued by the Central Government to them. Since, Alfa School was
a Section 8 company and it had started violating the objects of its objective clause, hence in such a
situation the following powers can be exercised by the Central Government:
(i) 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.
(ii) Where a licence is revoked, the Central Government may, by order, if it is satisfied that it is
essential in the public interest, direct that the company be wound up under this Act or
amalgamated with another company registered under this section.
However, no such order shall be made unless the company is given a reasonable
opportunity of being heard.
(iii) Where a licence is revoked and where the Central Government is satisfied that it is essential
in the public interest that the company registered under this section should be
amalgamated with another company registered under this section and having similar
objects, then, notwithstanding anything to the contrary contained in this Act, the Central
Government may, by order, provide for such amalgamation 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.
 “THE COMPANIES ACT, 2013” | 5.31

Question 23
State Cricket Club was formed as a Limited Liability Company under Section 8 of the
Companies Act, 2013 with the object of promoting cricket by arranging introductory
cricket courses at district level and friendly matches. The club has been earning surplus. Of
late, the affairs of the company are conducted fraudulently and dividend was paid to its
members. Mr. Cool, a member decided make a complaint with Regulatory Authority to curb
the fraudulent activities by cancelling the licence given to the company.
(i) Is there any provision under the Companies Act, 2013 to revoke the licence? If so,
state the provisions.
(ii) Whether the Company may be wound up?
(iii) Whether the State Cricket Club can be merged with M/s. Cool Net Private Limited, a
company engaged in the business of networking?
Answer

(i) According to Section 8(6) of the Companies Act, 2013, the Central Government may by
order revoke the licence of the company where the company contravenes any of the
requirements or the conditions of section 8 subject to which a licence is issued or where the
affairs of the company are conducted fraudulently, or in violation 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.
Hence, in the instant case, the Central Government can revoke the license given to State
Cricket Club as section 8 company, as the affairs of the company are conducted fraudulently
and dividend was paid to its members which is in contravention to the conditions given
under section 8.
(ii) Where a licence is revoked, the Central Government may, by order, if it is satisfied that it is
essential in the public interest, direct that the company be wound up under this Act or
amalgamated with another company registered under this section.
However, no such order shall be made unless the company is given a reasonable
opportunity of being heard. [Section 8(7)] Hence, the stated company may be wound up.

(iii) A company registered under this section shall amalgamate only with another company
registered under this section and having similar objects. [Section 8(10)]
In the instant case, State Cricket Club cannot be merged with Cool Net Private Limited as the
objects of both the companies are different and not similar.
Question 24

A group of individuals intend to form a club namely 'Budding Pilots Flying Club' as limited
liability company to impart class room teaching and aircraft flight training to trainee pilots.
It was decided to form a limited liability company for charitable purpose under Section 8 of
the Companies Act, 2013 for a period of ten years and thereafter the club will be dissolved
and the surplus of assets over the liabilities, if any, will be distributed amongst the
members as a usual procedure allowed under the Companies Act, 2013.
 “THE COMPANIES ACT, 2013” | 5.32

Examine the feasibility of the proposal and advise the promoters considering the
provisions of the Companies Act, 2013.

Answer

According to section 8(1) of the Companies Act, 2013, where it is proved to the satisfaction of the
Central Government that a person or an association of persons proposed to be registered under
this Act as a limited company—

(a) has in its objects the promotion of commerce, art, science, sports, education, research, social
welfare, religion, charity, protection of environment or any such other object;
(b) intends to apply its profits, if any, or other income in promoting its objects; and
(c) intends to prohibit the payment of any dividend to its members;
the Central Government may, by issue of licence, allow that person or association of persons to be
registered as a limited liability company.
In the instant case, the decision of the group of individuals to form a limited liability company for
charitable purpose under section 8 for a period of ten years and thereafter to dissolve the club
and to distribute the surplus of assets over the liabilities, if any, amongst the members will not
hold good, since there is a restriction as pointed out in point (b) above regarding application of
its profits or other income only in promoting its objects. Further, there is restriction in the
application of the surplus assets of such a company in the event of winding up or dissolution of
the company as provided in sub-section (9) of Section 8 of the Companies Act, 2013. Therefore,
the proposal is not feasible.

Question 25
A company registered under section 8 of the Companies Act, 2013, earned huge profit
during the financial year ended on 31st March, 2018 due to some favorable policies
declared by the Government of India and implemented by the company. Considering the
development, some members of the company wanted the company to distribute dividends
to the members of the company. They approached you to advise them about the maximum
amount of dividend that can be declared by the company as per the provisions of the
Companies Act, 2013. Examine the relevant provisions of the Companies Act, 2013 and
advise the members accordingly.
Answer

A company that is registered under section 8 of the Companies Act, 2013, is prohibited
from the payment of any dividend to its members.
The company in question is a section 8 company and hence it cannot declare dividend. Thus, the
contention of members is incorrect.

(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.
 “THE COMPANIES ACT, 2013” | 5.33

“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 fulfill the requirements of this Act or any other law;
(iii) allotment of shares to fulfill the requirements of this Act; and
(iv) payments for maintenance of its office and records.
(e) Nidhi Companies: In this section, “Nidhi” or “Mutual Benefit Society” means a company
which the Central Government may, by notification in the Official Gazette, declare to be a
Nidhi or Mutual Benefit Society, as the case may be.
 Company which has been incorporated as a Nidhi
 with the object of cultivating the habit of thrift (cost cutting) and savings amongst its
members,
 receiving deposits from, and lending to, its members only, for their mutual benefit and
which complies with such rules as are prescribed by the Central Government for regulation of
such class of companies. [Section 406 of the Companies Act, 2013]
(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; 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.
MEMORANDUM OF ASSOCIATION
1. 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.
 “THE COMPANIES ACT, 2013” | 5.34

2. 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.
3. 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 having
no share capital.
 Table E is a form for memorandum of association of an unlimited company and
having share capital.
Note : The memorandum and articles of a company must be as closed to model forms, as
possible, depending upon the circumstances.
4. 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].
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;
 “THE COMPANIES ACT, 2013” | 5.35

(b) the objects for which the company is proposed to be incorporated and any matter
considered necessary in furtherance thereof (Object clause);
Note : 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.
(c) 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;
(d) 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.
(e) the desire of the subscribers to be formed into a company. The Memorandum shall conclude
with the association clause. Every subscriber to the Memorandum shall take at least
one share, and shall write against his name, the number of shares taken by him.
Note : 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.
5. Formalities for preparing MOA :
 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.
6. 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.
7. 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 COMPANIES ACT, 2013” | 5.36

8. 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.
Question 26
"The Memorandum of Association is a charter of a company". Discuss. Also explain in brief
the contents of Memorandum of Association.
Answer
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.
Contents 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.
(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);
(d) the liability of members of the company (Liability clause), whether limited or unlimited
(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 desire of the subscribers to be formed into a company. The Memorandum shall
conclude with the association clause. Every subscriber to the Memorandum shall take at
least one share, and shall write against his name, the number of shares taken by him.
 “THE COMPANIES ACT, 2013” | 5.37

ARTICLES OF ASSOCIATION
1. The articles of association of a company are its rules and regulations, which are
framed to manage its internal affairs.
2. 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).
3. 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.”
4. 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.].
5. 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 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.
6. Section 5 of the Companies Act, 2013 seeks to provide the contents and model of
articles of association. The section lays the following law-
A. Contains regulations: The articles of a company shall contain the regulations for
management of the company.
B. 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.
C. Contain provisions for entrenchment:
i. 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.
ii. 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.
iii. 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.
 “THE COMPANIES ACT, 2013” | 5.38

Example: Mr. Tarun promoted an education start up and got it registered as a private
limited company. Initially he and his family are holding all shares in the company. In
the article of association of company it is written that Mr. Tarun will remain director
of the company for lifetime. But he has a fear that tomorrow if 75% or more shares in
the company are held by non family members then by passing a special resolution
article may be changed and he may be removed from the post of director.
Therefore, it was also written in the article that he can be removed from the post of
director only if 95% votes are cast in favour of the resolution. This is entrenchment.
D. 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.
Table –F : Articles of association of a company limited by shares
Table – G: Articles of association of a company limited by guarantee and having a
share capital
Table – H : Articles of association of a company limited by guarantee and not having
share capital
Table – I: Articles of association of an unlimited company and having a share capital
Table – J : Articles of association of an unlimited company and not having share
capital
E. Model articles: A company may adopt all or any of the regulations contained in the
model articles applicable to such company.
F. 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.
Question 27
Yadav Dairy Products Private limited has registered its articles along with memorandum at
the time of registration of company in December, 2014. Now directors of the company are
of the view that provisions of articles regarding forfeiture of shares should not be changed
except by a resolution of 90% majority. While as per section 14 of the Companies Act, 2013
articles may be changed by passing a special resolution only. Hence, one of the directors is
of the view that they cannot make a provision against the Companies Act, 2013. You are
required to advise the company on this matter.
Answer
As per section 5 of the Companies Act, 2013 the article may contain provisions for entrenchment
to the effect that specified provisions of the articles may be altered only if more restrictive
conditions than a special resolution, are met.
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.
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 prescribed
manner.
 “THE COMPANIES ACT, 2013” | 5.39

In the present case, Yadav Dairy Products Private Limited is a private company and wants to
protect provisions of articles regarding forfeiture of shares. It means it wants to make
entrenchment of articles, which is allowed. But the company will have to pass a resolution taking
permission of all the members and it should also give notice to Register of Companies regarding
entrenchment of articles.
Distinction between MOA & AOA
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.
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.
DOCTRINE OF ULTRA VIRES
1. 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.
2. 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.
3. The impact of the doctrine of ultra vires is that
i. 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.
 “THE COMPANIES ACT, 2013” | 5.40

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.
ii. 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. 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 share- holders. 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.
5. 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.
6. 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.
 “THE COMPANIES ACT, 2013” | 5.41

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 ultra vires the company, and hence null
and void.
(ii) An act which is ultra vires, the company cannot be ratified even by the unanimous consent of
all the shareholders.
(iii) An act which is ultra vires the directors, but intra vires the company can be ratified by the
members of the company through a resolution passed at a general meeting.
(iv) If an act is ultra vires the Articles, it can be ratified by altering the Articles by a Special
Resolution at a general meeting.
Question 28
Ravi Private Limited has borrowed ` 5 crores from Mudra Finance Ltd. This debt is ultra
vires to the company. Examine, whether the company is liable to pay this debt? State the
remedy if any available to Mudra Finance Ltd.?
Answer
As per the facts given, Ravi Private Limited borrowed ` 5 crore from Mudra Finance Ltd. This debt
is ultra vires to the company, which signifies that Ravi Private Limited has borrowed the amount
beyond the expressed limit prescribed in its memorandum. This act of the company can be said to
be null and void.
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.
So is being the act void in nature, there being no existence of the contract between the Ravi
Private Ltd. and Mudra Finance Ltd. Therefore, the company Ravi Private Ltd. is liable to pay this
debt amount upto the limit prescribed in the memorandum.
Remedy available to the Mudra Finance Ltd.: 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, a company which
deals with the other, is deemed to know about the powers of the company.
So, Mudra Finance Ltd. can claim for the amount within the expressed limit prescribed in its
memorandum.
Question 29
Briefly explain the doctrine of “ultravires” under the Companies Act, 2013. What are the
consequences of ultravires acts of the company?
Answer
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
 “THE COMPANIES ACT, 2013” | 5.42

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.
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.
DOCTRINE OF CONSTUCTIVE NOTICE & 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.
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.
 “THE COMPANIES ACT, 2013” | 5.43

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.
 “THE COMPANIES ACT, 2013” | 5.44

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.
Question 29
State the limitations of the doctrine of indoor management under the Companies Act,
2013.
Answer
The doctrine of Indoor Management has limitations of its own. That is to say, it is inapplicable to
the following cases, namely:
(i) 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.
(ii) 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.
(iii) 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.
Question 30
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.
 “THE COMPANIES ACT, 2013” | 5.45

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?
Answer
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.
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.
Question 31
Mr. X had purchased some goods from M/s ABC Limited on credit. A credit period of
one month was allowed to Mr. X. Before the due date Mr. X went to the company and
wanted to repay the amount due from him. He found only Mr. Z there, who was the
factory supervisor of the company. Mr. Z told Mr. X that the accountant and the cashier
were on leave, he is in-charge of receiving money and he may pay the amount to him.
Mr. Z issued a money receipt under his signature. After two months M/s ABC Limited
issued a notice to Mr. X for non-payment of the dues within the stipulated period. Mr. X
informed the company that he had already cleared the dues and he is no more
responsible for the same. He also contended that Mr. Z is an employee of the company
to whom he had made the payment and being an outsider, he trusted the words of
Mr. Z as duty distribution is a job of the internal management of the company.
Analyse the situation and decide whether Mr. X is free from his liability.
Answer
Doctrine of Indoor Management: The Doctrine of Indoor Management is the exception to the
doctrine of constructive notice. The doctrine of constructive notice does not 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.
 “THE COMPANIES ACT, 2013” | 5.46

The doctrine 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.
In the given question, Mr. X has made payment to Mr. Z and he (Mr. Z) gave to receipt of the
same to Mr. X. Thus, it will be rightful on part of Mr. X to assume that Mr. Z was also authorised to
receive money on behalf of the company. Hence, Mr. X will be free from liability for payment of
goods purchased from M/s ABC Limited, as he has paid amount due to an employee of the
company.
Question 32
The persons (not being members) dealing with the company are always protected by the
doctrine of indoor management. Explain. Also, explain when doctrine of Constructive
Notice will apply.

Answer

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.
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 to 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.
The doctrine of indoor management is opposite to the doctrine of constructive notice. Whereas
the doctrine of constructive notice protects a company against outsiders, the doctrine of indoor
management protects outsiders against the actions of a company. This doctrine also is a safeguard
against the possibility of abusing the doctrine of constructive notice.
Exceptions to Doctrine of Indoor Management (Applicability of doctrine of constructive
notice)
(i) Knowledge of irregularity: In case an ‘outsider’ has actual knowledge of irregularity
within the company, the benefit under the rule of indoor management would no longer be
available. In fact, he/she may well be considered part of the irregularity.
(ii) Negligence: If, with a minimum of effort, the irregularities within a company could be
discovered, the benefit of the rule of indoor management would not apply. The protection of
the rule is also not available where the circumstances surrounding the contract are so
suspicious as to invite inquiry, and the outsider dealing with the company does not make
proper inquiry.
(iii) Forgery: The rule does not apply where a person relies upon a document that turns out to
be forged since nothing can validate forgery. A company can never be held bound for
forgeries committed by its officers.
 “THE COMPANIES ACT, 2013” | 5.47

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
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.
 “THE COMPANIES ACT, 2013” | 5.48

SHARES
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.
1. 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.
2. 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.
3. 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.
Exception : 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.
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:—

Equity Share
Capital Capital

With uniform With differential

voting rights voting rights

Equity share capital —

(1) with voting rights; or

(2) with differential rights as to dividend, voting or otherwise in accordance with
prescribed rules;
 “THE COMPANIES ACT, 2013” | 5.49

Example: 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 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;
Capital shall be deemed to be preference capital, despite that it is entitled to either or both of
the following rights, namely:—
(a) that in respect of dividends, in addition to the preferential rights to the amounts specified
as above, it has a right to participate, whether fully or to a limited extent, with capital not
entitled to the preferential right aforesaid;
(b) that in respect of capital, in addition to the preferential right to the repayment, on a
winding up, of the amounts specified above, it has a right to participate, whether fully or to a
limited extent, with capital not entitled to that preferential right in any surplus which may
remain after the entire capital has been repaid.
Exception: In case of private company - Section 43 shall not apply where memorandum or
articles of association of the private company so provides.
“2A. Companies not to be considered as listed companies.- For the purposes of the proviso
to clause (52) of section 2 of the Act, the following classes of companies shall not be considered
as listed companies, namely:-
(a) Public companies which have not listed their equity shares on a recognized stock
exchange but have listed their –

(i) non-convertible debt securities issued on private placement basis in terms of SEBI
(Issue and Listing of Debt Securities) Regulations, 2008; or
 “THE COMPANIES ACT, 2013” | 5.50

(ii) non-convertible redeemable preference shares issued on private placement basis in

terms of SEBI (Issue and Listing of Non-Convertible Redeemable Preference Shares)
Regulations, 2013; or

(iii) both categories of (i) and (ii) above.

(b) Private companies which have listed their non-convertible debt securities on private
placement basis on a recognized stock exchange in terms of SEBI (Issue and Listing of
Debt Securities) Regulations, 2008;

(c) Public companies which have not listed their equity shares on a recognized stock
exchange but whose equity shares are listed on a stock exchange in a jurisdiction as
specified in sub- section (3) of section 23 of the Act.”

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