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CHAPTER – 1
THE INDIAN CONTRACT ACT, 1872
Unit : 1 – Nature of Contract

LAW : INDIAN CONTRACT ACT, 1872

Section 1 : Short Title

Section 2 : Interpretation Clause
Section 3 : Communication, acceptance and revocation of proposals
Section 4 : A proposal is accepted from the date its acceptance is sent by the post
Section 5 : A proposal can be revoke at any time before the communication of its
acceptance
Section 6 : Revocation how made
Section 7 : Acceptance must be absolute
Section 8 : Acceptance by performing conditions, or receiving consideration
Section 9 : Promises, express or implied
Section 10 : Defines the essential elements of a contract, Defines "Consideration”
Section 11 : Defines requirements for competency for competency of parties to the
contract
Section 12 : What is a sound mind for the purposes of contracting.
Section 13 : "Consent" defined
Section 14 : "Free Consent" defined
Section 15 : "Coercion" defined
Section 16 : Undue influence" defined
Section 17 : "Fraud" defined
Section 18 : Misrepresentation" defined
Section 19 : "Void ability of agreements without free consent"
Section 19 A : Power to set aside contract induced by undue influence
Section 20 : Agreement void where both parties are under mistake of fact
Section 21 : Effect of mistakes as to law
Section 22 : Contract caused by mistake of one party as to matter of fact
Section 23 : What consideration and objects are lawful, and what not
Section 24 : Agreements void, if consideration and objects unlawful in part
Section 25 : Agreements without consideration, void, unless it is in writing and registered,
or is a promise to compensate for something done
Section 26 : Agreement in restraint of marriage void
Section 27 : Agreement in restraint of trade void
Section 28 : Agreements in restraint of legal proceedings void

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Section 29 : Agreement void for uncertainty

Section 30 : Agreement by way of wager, void
Section 31 : "Contingent contract" defined
Section 32 : Enforcement of contracts contingent on an event happening.
Section 33 : Enforcement of contacts contingent on an event not happening
Section 34 : When event of which contract is contingent to be deemed impossible, if it is
the future conduct of a living person
Section 35 : When contracts become void, which are contingent on happening of specified
event within fixed time
Section 36 : Agreements contingent on impossible events, void
Section 37 : Obligation of parties to contracts
Section 38 : Effect of refusal to accept offer of performance
Section 39 : Effect of refusal of party to perform promise wholly
Section 40 : Person by whom promise is to be performed
Section 41 : Effect of accepting performance from third person
Section 42 : Devolution of joint liability
Section 43 : Any one of joint promisors may be compelled to perform
Section 44 : Effect of release of one joint promisor
Section 45 : Devolution of joint right
Section 46 : Time for performance of promise, where no application is to be made and no
time is specified
Section 47 : Time and place for performance of promise, where time is specified and no
application to be made
Section 48 : Application for performance on certain day to be at proper time and place
Section 49 : Place for performance of promise, where no application to be made and no place
fixed for performance
Section 50 : Performance in manner or at time prescribed or sanctioned by promisee
Section 51 : Promisor not bound to perform unless reciprocal promisee ready and willing to
perform
Section 52 : Order of performance of reciprocal promisee
Section 53 : Liability of party preventing event on which contract is to take effect
Section 54 : Effect of default as to that promise which should be first performed, in
contract consisting of reciprocal promises
Section 55 : Effect of failure to perform at fixed time, in contract in which time is
essential
Section 56 : Agreement to do impossible act
Section 57 : Reciprocal promise to do things legal and also other things illegal
Section 58 : Alternative promise, one breach being illegal

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Section 59 : Application of payment where debt to be discharged is indicated

Section 60 : Application of payment where debt to be discharged is not indicated
Section 61 : Application of payment neither party appropriates
Section 62 : Effect of novation, rescission and alteration of contract
Section 63 : Promisee may dispense with or remit performance of promise
Section 64 : Consequence of rescission of voidable contact
Section 65 : Obligation of person who has received advantage under void agreement, or
contract that becomes void
Section 66 : Mode of communicating or revoking rescission of voidable contract
Section 67 : Effect of neglect of promisee to afford promisor reasonable facilities for
performance
Section 68 : Claim for necessaries supplied to person incapable of contracting, or on his
account
Section 69 : Reimbursement of person paying money due by another, in payment of which he
is interested
Section 70 : Obligation of person enjoying benefit of non - gratuitous act
Section 71 : Responsibility of finder of goods
Section 72 : Liability of person to whom money is paid, or thing delivered, by mistake or
under coercion
Section 73 : Compensation for loss or damage caused by breach of contract
Section 74 : Compensation for breach of contract where penalty stipulated for
Section 75 : Party rightfully rescinding contract entitled to compensation.

SELF STUDY QUESTIONS

1. Comment on the following:
Offer is lighted match while acceptance is a train of gunpowder. (5 marks)
Ans. It is a cardinal rule as regards to acceptance that once the acceptance has been made to an
offer the contract is complete. According to "Sir William Anson" Acceptance is to offer what a
lighted match is to a train of gunpowder". The effect is that the acceptance produces
something which cannot be recalled or undone. But the man who led the train may remove it
before the match is applied. So an offer may lapse for want of acceptance, or be revoked
before acceptance. Acceptance converts the offer into promise and then it is too late to revoke
it. This means that as soon as a lighted match is brought in contact with a train of gunpowder,
the gun powder explodes. Offer is compared to gun powder and acceptance to a lighted match.
Gun powder (i.e. the offer) by itself is inert, it is the lighted match i.e. the acceptance Which
causes then gunpowder to explode. The meaning is that an offer by itself cannot create legal
relations between the parties, but as soon as it is accepted by the offeree, legal relationship is
established between the parties, Once an offer is accepted it becomes a promise and cannot be
revoked or withdrawn.

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2. When the revocation of a proposal may be made otherwise than by communication?

Ans. Revocation of proposal otherwise than by communication: A proposal may be revoked not only
by the communication of the notice of revocation by the proposer or by his authorised agent to
the other party but also;
(i) By lapse of time [Section 6(2)]: Proposer is not bound to keep his proposal open
indefinitely the reason being that it would amount to a promise without consideration, and
such a promise is unenforceable (Ramsgate victoria Hotel Co. V. Montefire 1866).
(ii) By non-fulfilment by the offeree of a condition precedent to acceptance [Section
6(3)]: A proposal is also revoked by the failure of the acceptor to fulfil condition
precedent to the acceptance. A condition precedent is a condition which prevents an
obligation to come into existence until the condition is satisfied. An offeror may impose
condition such as executing a certain document, or deposition of certain amount as earnest
money. Failure to satisfy any such condition shall make a proposal lapse.
(iii) By the death or insanity of the proposer: Death or insanity of the proposer, under the
Indian law, operates as the revocation of the proposal, only if the fact to the death or
insanity has come to the knowledge of the acceptor. If the acceptor accepts an offer in
ignorance of the death or insanity of the offeror, the acceptance is valid.
(iv) If a counter offer is made to it: The counter offer lapses the offer made by the
offeror.
(v) If an offer is not accepted according to the prescribed or usual mode, provided the
offeror gives notice to the offeree within a reasonable time that the acceptance is not
according to the prescribed or usual mode. If the offeror keeps quiet, he is deemed to
have accepted the acceptance [Section 7(2)].
An offer can, however, be revoked subject to the following rules:
(i) It can be revoked at any time before its acceptance is complete as against the offeror.
(ii) Revocation takes effect only when it is communicated to the offeree.
(iii) If the offeror has agreed to keep his offer open for a certain period, he can revoke it
before the expiration of the period only.
(a) if the offer has in the meantime not been accepted or
(b) if there is no consideration for keeping the offer open.

3. Comment on the following:

An acceptance must be made before the proposal lapses.
Ans. Under Section 5 of the Indian Contract Act, 1872, a proposal may be revoked at time, before
the communication of its acceptance is complete as against the proposer but not afterwards. An
acceptance may be revoked at any time before the communication of acceptance is complete as
against the acceptor but not afterwards. Therefore an acceptance must be made before the
offer lapses or is revoked.

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4. What are implied contracts? State the various implied contracts.

Ans. Under certain circumstances, a person may receive a benefit to which the law regards another
person as better entitled, or for which the law considers he should pay to the other person,
even though there is no contract between the parties. Such relationships are termed as "Quasi-
Contracts" or Implied Contracts. A quasi contract rests on the ground of equity that a person
shall not be allowed to enrich himself unjustly at the expense of another.
Sections 68 to 72 of the Indian Contract Act, 1872 have prescribed the following
relationships creating quasi-contractual relationship:
1. Supply of necessaries: Under 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 conditions in life, the person who has furnished such supplies is
entitled to be reimbursed from the property of such incapable person.
2. Payment by an interested person: It has been laid down in Section 69 of the Indian
Contract Act 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.
3. Obligation to pay for non-gratuitous Act: Section 70 of the Indian Contract Act states
that 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 make compensation in respect of or to restore, the things so done or
delivered.
4. Responsibility of finder of goods: Under Section 71 of the Act, a person who finds goods
belonging to another, and takes them into his custody, is subject to the same
responsibility as a bailee.
5. Case where money is paid by mistake or under coercion: Finally, Section 72 of the
Indian Contract Act provides that a person to whom money has been paid, or anything
delivered, by mistake or under coercion, must repay or return it. Thus, quasi-contractual
right is always a right to money and generally, though not always to a liquidated sum of
money. It does not arise from any agreement between the parties concerned, but is
imposed by the law. It is a right which is not available against whole world but against a
particular person or persons only. There is no contract between the parties in cases of
quasi contracts, yet they are put in the same position as if there were a contract between
them.

5. State the rules relating to acceptance of a Contract.

Ans. Rules Relating to Acceptance of a Contract: The Indian Contract Act, 1872 specifies the
following rules relating to the acceptance of a contract. It means that a valid contract can be
made only by adhering to the following rules relating to the acceptance of an offer. These are:
1. Acceptance must be absolute and unqualified: Acceptance shall be valid only when it is
absolute and unqualified and is expressed in some usual and reasonable manner, unless the
proposal prescribes the manner in which it is to be accepted.

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2. Acceptance must be communicated to the offeror: Acceptance must be brought to the

knowledge of the offeror. Unless the offeror knows about the acceptance, he can not be
bound by the acceptance given by the offeree. Mere silence is no acceptance.
3. Acceptance must be in the mode prescribed: Where the mode of acceptance has been
prescribed in the proposal, it must be accepted in the manner prescribed, otherwise it
shall not bind the offeror. However, the offeror may later on waive this condition and
bound himself from the acceptance not given in the prescribed mode.
4. Time: Acceptance must be given within the prescribed time and where no time is
prescribed, within the time which is reasonable and does not allow the offer to lapse.
5. Acceptance may be expressed i.e. words of mouth or in writing, or even implied i.e. by
conduct of the party concerned.
6. Acceptance must be made by the person to whom the offer is made: Acceptance given
by some other person or even on behalf of the person to whom the offer is made, is not
valid acceptance.
7. It cannot precede an offer. If it does, it is not a valid acceptance and does not result in a
contract.
8. It must show an intention on the part of the acceptor to fulfil the terms of offer.
9. It must be given before the offer lapses or before the offer is withdrawn.

6. When does an offer come to an end?

Ans. An offer may come to an end by revocation or lapse or rejection. According to Section 6 and 7
of the Indian Contract Act, 1872, an offer comes to an end in the following cases:
1. If the offerer revokes his offer before it has been accepted by the offeree, the offer
comes to an end.
2. The offer comes to an end of it is not accepted within the time fixed in the offer or
within a reasonable time as the case may be. What is a reasonable time is a question of
fact.
3. If there is a condition mentioned in the proposal, before the fulfilment of which the
acceptor can not accept the proposal, the offer will automatically be revoked of the
acceptor fails to fulfil that condition precedent.
4. If the fact of the death or insanity of the proposer comes to the knowledge of the
acceptor before acceptance, the offer of proposal is revoked. (Section 6)
5. Sometimes, the mode of acceptance is specifically prescribed in the offer. In such a case,
if the proposal is not accepted in the prescribed form or method, it stands revoked.
[Section 7(2)]
6. An offer comes to an end as soon as it is rejected by the offeree.
7. An offer lapses if it becomes illegal before it is accepted.

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7. Comment on the following:

All contracts are agreements, but all agreements are not contracts.
Ans. "All contracts are agreements, but all agreements are not contracts": An agreement comes
into existence when one party makes a proposal or offer to the other party and that other
party gives his acceptance to it. A contract is an agreement enforceable by law. It means that
to become a contract an agreement must give rise to a legal obligation i.e. duty enforceable by
law. If an agreement is incapable of creating a duty enforceable by law, it is not a contract.
There can be agreements which are not enforceable by law, such as social, moral or religious
agreements. The agreement is a wider term than the contract. All agreements need not
necessarily becomes 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. For example, A invites B to see
a football match and B agrees. But A could not manage to get the tickets for the match, now B
cannot enforce this promise against A i.e. no compensation can be claimed because this was a
social agreement where there was no intention to create a legal relationship.
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 for 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.

8. Explain the modes of revocation of an offer as per the Indian Contract Act, 1872.
Ans. The modes of revocation of an offer as per the Indian Contract Act, 1872 are:
(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.
(iii) By non-fulfilment of condition precedent where the acceptor fails to fulfil a condition
precedent to acceptance the proposal gets revoked. This principle is laid down in Section 6
of the Act. The offer or for instance may impose certain conditions such as executing a
certain document or depositing certain amount as earnest money.
(iv) By death or insanity
(v) By counter offer
(vi) By the non-acceptance of the offer according to the prescribed or usual mode
(vii) By subsequent illegality.

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9. Define the term acceptance under the Indian Contract Act, 1872. Explain the legal rules
regarding a valid acceptance.
Ans. Definition of Acceptance:
In terms of Section 2(b) of the Indian Contract 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 Rs. 2,00,000. Here, proposal is made to B.
2. The person to whom proposal is made i.e. B in the above example and if B signifies his
consent on that proposal. , then we can say that B has signified his consent on the proposal
made by A.
3. When B has signified his consent on that proposal, we can say that the proposal has been
accepted.
4. Accepted proposal becomes promise.
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. It the proposal prescribes the manner in which it must be accepted, then it
must be accepted accordingly.
M offered to sell his land to N for £280. N replied purporting to accept the offer but
enclosed a cheque for £ 80 only. He promised to pay the balance of £ 200 by monthly
instalments of £ 50 each. It was held that N could not enforce his acceptance because it
was not an unqualified one. [Neale vs. Merret [19301 W. N. 189].
A offers to sell his house to B for Rs. 1,00,000/-. B replied that, "I can pay Rs. 80,000 for
it. The offer of "A" is rejected by "B" as the acceptance is not unqualified. B however

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changes his mind and is prepared to pay Rs. 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 Rs. 2 lakhs?" If "B" replies
"I" shall purchase your car for Rs. 2 lakhs, if you buy my motorcycle for Rs. 50,000/-,
here "B" cannot be considered to have accepted the proposal. If on the other hand "B"
agrees to purchase the car from "A" as per his proposal subject to availability of valid
Registration Certificate / book for the car, then the acceptance is in place though the
offer contained no mention of R.C. book. This is because expecting a valid title for the car
is not a condition.
Therefore, the acceptance in this case is unconditional.
(3) The acceptance must be communicated: To conclude a contract between the parties, the
acceptance must be communicated in some perceptible form. Any conditional acceptance or
acceptance with varying or too deviant conditions is no acceptance. Such conditional
acceptance is a counter proposal and has to be accepted by the proposer, if the original
proposal has to materialize into a contract. Further when a proposal is accepted, the
offeree must have the knowledge of the offer made to him. If he does not have the
knowledge, there can be no acceptance. The acceptance must relate specifically to the
offer made. Then only it can materialize into a contract. The above points will be clearer
from the following examples: Brogden vs. Metropolitan Railway Co. (1877)
Facts: B a supplier, sent a draft agreement relating to the Supply of Coal to the Manager
of Railway Co. viz, Metropolitian Railway for his acceptance. The manager wrote the word
"Approved" on the same and put the draft agreement in the drawer of the table intending
to send it to the company's solicitors for a formal contract to be drawn up. By an over
sight the draft agreement remained in drawer. Held, that there was no contract as the
manager had not communicated his acceptance to the supplier, B.
Where an offer made by the intended offeree without the knowledge that an .offer has
been made to him cannot be deemed as an acceptance thereto. (Bhagwandas v. Girdharilal)
A mere variation in the language not involving any difference in substance would not make
the acceptance ineffective. [Hayworth vs. Knight [1864] 144 ER 120].
Example: A proposed B to marry him. B informed A s sister that she is ready to marry
him. But his sister didn't inform A about the acceptance of proposal.
There is no contract as acceptance was not communicated to A.
(4) Acceptance must be in the prescribed mode: Where the mode of acceptance is
prescribed in the proposal, it must be accepted in that manner. But if the proposer does
not insist on the proposal being accepted in the manner prescribed after it has been
accepted otherwise, i.e., not in the prescribed manner, the proposer is presumed to have
consented to the acceptance.
Example: if the offeror prescribes acceptance through messenger and offeree sends
acceptance by email, there is no acceptance of the offer if-the offer or informs the

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offeree that the acceptance is not according to the mode prescribed. But if the offer or
tails to do so, it will be presumed that he has accepted the acceptance and a valid
contract will arise.
(5) Time: Acceptance must be given within the specified time limit, if any, and if no time is
stipulated, acceptance must be given within the reasonable time and before the offer
lapses. What is reasonable time is nowhere defined in the law and thus, would depend on
facts and circumstances of the particular case.
Example: A offered to sell B 50 kgs of bananas at Rs. 500. B communicated the
acceptance after four days. Such is not a valid contract as bananas being perishable items
could not stay for a period of week. Four days is not a reasonable time in this case.
Example: A offers B to sell his house at Rs. 10,00,000. B accepted the offer and
communicated to A after 4 days. Held the contract is valid as four days can be considered
as reasonable time in case of sell of house.
(6) Mere silence is not acceptance: The acceptance of an offer cannot be implied from the
silence of the offeree or his failure to answer, unless the offeree has in any previous
conduct indicated that his silence is the evidence of acceptance.
Case Law: Felthouse vs. Bindley (1862)
Facts: (Uncle) offered to buy his nephew"s horse for £30 saying "if I hear no more about
it I shall consider the horse mine at £30." The nephew did not reply to F at all. He told his
auctioneer, B to keep the particular horse out of sale of his farm stock as he intended to
reserve it for his uncle. By mistake the auctioneer sold the horse. F sued 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.
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.
Example: When a cobbler sits with a brush and polish, a person giving his shoes for
polishing constitutes as acceptance by conduct.

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10. (i) Mr. Ramesh promised to pay Rs. 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.
(ii) 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 at 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 dress. Ms. Lovely seeks your advice whether she can sue
the shop-keeper for the above cause under the Indian Contract Act, 1872.
Ans. (i) 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.
In the given question, Mr. Ramesh promised to pay Rs. 50,000 to his wife so that she can
spend the same on her birthday. However, subsequently, Mr. Ramesh failed to fulfill the
promise, for which Mrs. Lali wants to file a suit against Mr. Ramesh. 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.
(ii) According to the facts of the case this case qualifies as a typical example covered within
the definition of a General offer that means an offer made to public at large and hence
anyone can accept and do the desired act. In this case, Ms. Lovely had accepted the
general offer by seeing the price tag and when she moved to purchase that she refused by
the shop-keeper who had himself previously made the general offer by putting the dress
on display with the price tag. Hence it can be concluded that Ms. Lovely can certainly sue
the shop-keeper.

11. Mr. B makes a proposal to Mr. S by post to sell his house for Rs. 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?

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Ans. (i) Offer made by Mr. B will be completed on 13 April, 2020. (when it comes to the knowledge
of Mr. S)
(ii) Here, acceptance is not valid as he revoked his acceptance by telegram before letter of
acceptance reaches Mr. B.
(iii) If letter of acceptance and letter of recavation reaches together than two situation may
arise.
(a) It will be decided on the basis of the letter which he reads first like if he reads
acceptance than acceptance than acceptance is valid and if revocation first than
acceptance is revoked.
(b) In absence of any such information revocation is absolute.

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CHAPTER – 1
THE INDIAN CONTRACT ACT, 1872
Unit : 2 – Consideration

SELF STUDY QUESTIONS

1. What is Consideration? Discuss briefly the legal requirements of valid consideration.
Ans. Meaning of Consideration: Consideration is an essential element of a valid contract. It is a
technical word meaning thereby quid pro quo i.e. something in return. A valuable consideration in
the sense of the 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. Thus, consideration must result in a benefit to one party and a detriment or loss to
the other party or a detriment to both.
Thus, if A agrees to sell his books to B for Rs. 100, B's promise to pay Rs. 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 Rs. 100.
Section 2(d) of the Indian Contract Act defines consideration as under: "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 to abstain from doing something, such act or
abstinence or promise is called a consideration for the promise."
For every valid contract consideration is very essential. But there are certain exceptions to this
rule which have been incorporated under Section 25 of the Indian Contract Act.
Legal requirements of valid consideration may be enumerated as under:
(i) Section 2(d) of the Indian Contract Act emphasises that consideration must move at the
desire of the promisor. Any act done at the desire or request of the third party or
voluntary acts would not constitute a valid consideration.
(ii) Consideration must be lawful and should not be forbidden by law.
(iii) Consideration must be real and not illusory. If it is physically impossible, vague or legally
impossible, the contract cannot be enforced.
(iv) Consideration must be of some value in the eyes of law. The Supreme Court has laid down
consideration shall be something which not only the parties regard but the law can also
regard as having some value.
(v) The consideration must not be the performance of existing duties e.g. (i) legal obligations
or (ii) contractual obligations.
(vi) The consideration need not be adequate. In other words, an inadequate consideration does
not render a contract void.
(vii) The consideration may be furnished by the promisee or any other person. So long as there
is consideration for a promise, it is immaterial who has furnished it.
(viii) The consideration must be either positive or negative (See definition).
(ix) Consideration may be forbearance to use.
(x) The consideration may be past, present or future.

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2. Comment on the following:

An agreement without consideration is void.
Ans. A contract without consideration is valid under the following cases : For an agreement to be
enforceable at law must be supported by a valid consideration. An agreement without
consideration is void and enforceable (General Rule). But Section 25. Specifies the cases where
an agreement made without consideration is valid. The exceptional cases are as follows:
1. Natural Love and Affection [Section 25(1)]: An agreement made without consideration
will be valid, if it is in writing and registered and is made on account of natural love and
affection between the parties standing in near relation to each other. (with reference to
Rajlukhee Devee Vs. Bhootnath).
2. Compensation for services rendered [Section 25 (2)]: An agreement will be valid without
consideration it if is a promise to compensate wholly or in part a person who has already
voluntarily done something for the promisor or something which the promisor was legally
compellable to do for, that a promise to make payment for the past voluntary services is
binding, there should be following factors:
(i) the services should have been rendered voluntarily.
(ii) These should have been rendered for the promisor.
(iii) the promisor must exist at the time of rendering services.
(iv) the promisor must have intended to compensate to the promisee.
3. Time-barred debt [Sec. 25 (3)]: A promise to pay a time-barred debt is also
enforceable, if it is in writing and signed by the promisor. The promise must be to pay
whole or part-time debt.
4. Completed gift: An agreement in respect of a gift that has been made and accepted.
5. Agency: An agreement containing agency may be without consideration.

3. Answer the following:

When consideration is deemed to be unlawful?
Ans. Unlawful Consideration: The legality of consideration and object thereto is provided under
Section 10 of the Indian Contract Act, 1872 As per Section 23, an agreement of which the
object or consideration is unlawful is void.
Following are the cases in which the consideration and object of an agreement is said to be
unlawful:
1. If it is forbidden by law.
2. If it is of such nature that if permitted it will defect the provision of any law.
3. If it is implies or involves injury to the person are property of another.
4. If it is fraudulent.
5. If the court regard it as immoral.
6. If it is opposed to public policy.
According to Section 24, where consideration and object of an agreement is unlawful in part the
whole agreement is void.

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4. Comment on the following (Give brief answers):

To form a valid contract consideration must be adequate.
Ans. The law provides that a contract should be supported by consideration. So long as consideration
exists, the Courts are not concerned as 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 a 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.

5. Briefly the following: No consideration, no contract".

Ans. No consideration, no contract: All contract, contain two parts: (i) the promise, and (2) the
consideration for such promise. A promise without consideration is purely gratuitous. Such
promise can not create a legal obligation, no matter that it is highly sacred end morally binding
(Abdul Aziz v. Mazum Ali -AIR 1914, 36 All 268). Thus, the rule of law is that no consideration,
no contract. Section 25 of the Indian Contract Act, 1872 embodies the rule that an agreement
without consideration is void. However, there are certain exceptions to the general rule:
(1) If an agreement is expressed in writing and registered and is made on account of natural
love and affection, it is a valid contract without consideration.
(2) A promise to compensate a person for something which has already been done voluntarily
for the promisor, is valid without consideration, and creates a contract.
(3) A promise by a debtor to pay a time-barred debt is valid provided that it is made in
writing and is signed by the debtor or by his authorised agent in this behalf.
(4) The rule 'no consideration, no contract' does not apply in case of a completed gift.
(5) No consideration is necessary to create an agency.

6. Explain the following (Give brief answers):

Unlawful consideration
Ans. Unlawful Consideration: One of the essential element of consideration is that it must be lawful.
An agreement becomes void, if it is based on unlawful consideration. The consideration of an
agreement becomes unlawful when:-
1. It is forbidden by law or
2. If it is fraudulent or
3. it defeats the provision of any law or
4. if it involves or implies injury to the person or property of another or
5. The court regards it as immoral or opposed to public policy.

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7. Briefly the following:

What is Consideration? Give its characteristics.
Ans. Consideration: It is the price of the promise i.e. something in return Section 2(d) of the Indian
Contract Act, 1872 defines it as when the desire of the promisor, the promises or any other
person abstained has done or from doing, or does or abstains for doing, or promises to do or
abstain from doing something such an act or abstinence or promise is called consideration for
the promise".
Characteristics
1. Consideration is the doing or not doing of something which the promisor desires to be
done or not done.
2. Consideration must be at the desire of the promisor.
3. Consideration may move from one person to any other person.
4. Consideration may be past, present or future.
5. Consideration need not be adequate but should be real.

8. State the exceptions to the rule "An agreement without consideration is void".
Ans. The general rule is that an agreement without consideration is void. However, there are 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: 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 without consideration.
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,
although it is without any consideration today.
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
and binding even though without consideration.
4. Agency: No consideration is necessary to create an agency.
5. Completed Gift: In case of gifts the rule no consideration, no contract is not applicable.
6. Bailment: No consideration required for this.
7. Charity: If one promises to undertake liability to contribute to charity, the contract shall
be valid even though without consideration.

9. Define consideration. What are the legal rules regarding consideration under the Indian
Contract Act, 1872?
Ans. Section 2(d) of the Indian Contract Act, 1872 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".
It is defined as "quid-pro-guff", i.e. "something in return". This something need not to be in
terms of money, as stated, it is some right, interest, profit or benefit accruing to one party or
some forbearance, detriment, loss or responsibility, given suffered or undertaken by the
other".
However, it must have some value in the eyes of law and must not be vague or illusory.

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Legal Rules Regarding Considerations:

1. Consideration must none at the desire of the promisor: An act done at the desire of a
third party is not a consideration.
2. Consideration may move from promisee or any other person: There can be a stranger to
consideration but not a stranger to a contract.
3. Executed and Executory Consideration: When consideration consists of an act it is
executed but when it consists of a promise it is executory.
4. Consideration may be past present or future.: The words "has done or abstained from
doing" are a recognition of the doctrine of past consideration.
5. Consideration need not be adequate: It need not be of any particular value, but it must
be something.
6. Performance of what one is legally bound to perform, cannot be treated as consideration.
7. Consideration must be real and not illusory.
8. Consideration must not be unlawful, immoral or opposed to public policy.

10. The general rule is that an agreement without consideration is void. Discuss the cases where
the agreement though made without consideration will be valid and enforceable as per Indian
Contract Act, 1872.
Ans. No consideration no contract: The general rule is that an agreement made without
consideration is void (Section 25 of Indian Contract Act, 1872). 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. In case of an agreement on account of natural love and affection: An agreement on
account of natural love and affection will be valid if it:
• Written
• Registered
• Based on Natural Love affection
• Parties stand in near relation with each other (e.g. husband and wife)
Example: A husband, by a registered agreement promised to pay his earnings to his wife.
Held the agreement though without consideration, was valid.
2. Agency: In case of contract of agency the consideration is not required.
3. Bailment: In case of contract of bailment the consideration is not required.
4. Completed gift: Completed gift means a gift actually handed over. Thus, gifts actually
made by a donor and accepted by the done are valid even without consideration.
Example: On A"s birthday, B gives him a gold chain as birthday gift in this case B cannot
demand back the chain on the ground that there was no consideration.
5. Charity: A mere promise for charity is void because it is without consideration. But if a
person promises to contribute for charity and the promisee undertakes liability i.e. incur
liability then the contract will be valid up to the extent of the subscription promised.
(Kadarnath V. Gone Mohammad)
Note: In case of charity, the promisee is liable to pay the amount of incurred liability but
upto promised amount.

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6. Compensation for Past Voluntary Service: When a person has already voluntarily done
something for the promisor then a promise to compensate either wholly or partly will be
binding when:
(a) The services should have been done voluntarily (but not involuntarily)
(b) The services should have been rendered for the promisor
(c) The promisor must be in existence at the time when services was rendered
(d) The promisor must have intended to compensate.
Example: P finds R"s purse and gives it to him. R promises to give P Rs. 1,000. This is a
valid contract.
7. In case of Promise to Pay time barred debt: Time barred debt or a debt based by
limitation refers to an amount which has remained unclaimed beyond a time period of 3
years.
A promise to pay time barred debt is valid if:
• It is in writing
&
• Signed by the person making promise or by his agent.
Example: A is indebted to C Rs. 6,000 but the debt is barred by the Limitation Act. A
signs a written promise now to pay Rs. 5,000 in final settlement of the debt. This is a
contract without consideration, but enforceable.

11. Mr. Sohanlal sold 10 acres of his agricultural land to Mr. Mohanlal on 25th September 2018 for
Rs. 25 Lakhs. The Property papers mentioned a condition, amongst other details, that whosoever
purchases the and 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 Oct 2018, Mr. Sohanlal died leaving behind his son and wife. On 15th Oct
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?
Ans. In India, consideration may proceed from the promisee or any other person who is not a party
to the contract.
According to the definition of consideration as given in Section 2(d), 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 contract. [Chinnaya
vs. Ramayya]
In the given case between defendant (Mr. Mohanlal) and plaintiff (Mr. Chotelal) the
consideration has been furnished on behalf of the plaintiff (Mr. Chotelal) by his father (Mr.
Sohanlal). Although, the plaintiff was a stranger to the consideration but since he was a party
to the contract he could enforce the promise of the promisor, since under Indian law,
consideration may be given by the promisee or anyone on his behalf vide Section 2(d) of Indian
Contract Act.
Thus, consideration furnished by Mr. Sohanlal to Mr. Mohanlal constitutes sufficient
consideration for the plaintiff (Mr. Chotelal) to sue the defendant on the promise. Held, Mr.
Chotelal was entitled to a decree for the right to use that 1 acre of land.

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CHAPTER – 1
THE INDIAN CONTRACT ACT, 1872
Unit : 3 – Other Essential Elements of Valid Contract

SELF STUDY QUESTIONS

1. Briefly answer the following:

Who are disqualified by law from entering into a valid contract?
Ans. Essential element to form a valid contract, as per Section 11 is stated as "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:
(a) has attained the age of majority,
(b) is of sound mind and
(c) is not disqualified from contracting by any law to which he is subject.

2. Briefly answer the following:

Law relating to minor's contracts.
Ans. Law relating to minor's contract:
(i) An agreement entered into by a minor is altogether void.
(ii) Minor can be a beneficiary: Though a minor is not competent to contract, there is
nothing in the Indian Contract Act, 1872, which prevents him from making the other party
bound to be minor.
(iii) Minor can always plead minority.
(iv) Ratification on attaining a majority is not allowed: As a minor's agreement is void, he
cannot validate it by ratification on attaining majority.
(v) Though a minor's agreement is void, his guardian can under certain circumstances enter
into a valid contract as minor's behalf.
(vi) Under section 68 (Indian contract Act, 1872), any person would be entitled to
reimbursement out of minor's estate, for necessaries supplied to him or to his family.

3. Briefly answer the following:

Explain Coercion and undue influence in a contract.
Ans. Coercion and Undue influence may be distinguished in the following manner:
(a) Coercion involves the physical force or threat. The aggrieved party is competent to make
the contract against its will. While undue influence involves moral or mental pressure. The
aggrieved party believes that he or she would make the contract.

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(b) Coercion involves committing or threatening of to commit any act forbidden by Indian
Penal Code, detaining or threatening to detain property of another person. But no such
illegal act is committed or a threat is given in case of undue influence.
(c) It is not necessary that in case of coercion that there must be some sort of relationship
between the parties. But some sort of relationship between the parties is absolutely
necessary in the case of undue influence.
(d) Coercion need not proceed from the promisor nor need it be the directed against the
promisor. Undue influence is always exercised between parties to the contract.
(e) The contract is voidable at the option of the party where consent has been obtained by
coercion. Where the consent is induced by undue influence, the contract is either voidable
or the court may set it aside or endorse it in a modified form.
(f) In case of coercion where the contract is rescinded by the aggrieved party, as per
Section 64, any benefit received has to be restored back to the other party. But in case
of the undue influence the court has the discretion to direct the aggrieved party to
return the benefit in whole or in part or not to give any such directions.

4. Examine with reason that the given statement is correct or incorrect "Minor is liable to pay for
the necessaries supplied to him"
Ans. 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 necessaries.
There is no personal liability on the minor, but only his property (estate) is liable.
Hence, the statement "minor is liable to pay for necessaries supplied to him.", is incorrect.

5. Define Fraud. Whether "mere silence will amount to fraud" as per the Indian Contract Act,
1872?
Ans. 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 interest 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. Active concealment of fact by one having knowledge or belief of the fact.
3. A promise made without any intention of performing it.
4. An act fitted to deceive.
5. Any act declared as fraudulent by law.
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 silent to speak, unless his silence is, in itself, equivalent to
speech.
A party under contract is under no obligation to disclose the whole truth to the other party.
"Caveat Emptor" i.e. let the buyer 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.

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6. "Mere silence is not fraud" but there are some circumstances where the "silence is fraud".
Explain the circumstances as per the provision of Indian Contract Act 1872?
Ans. Mere silence is not fraud:
Mere silence as to the 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, is equivalent to
speech. A party to the contract is under no obligation to disclose the whole truth to the other
party. 'Caveat Emptor' i.e. let the buyer 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.
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.
Following contracts come in 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, known to him.
(b) Contracts and Insurance: In such contracts, there is an implied condition that full
disclosure of all material facts shall be made, else contract is avoidable.
(c) Contracts of Marriage: Every material fact must be disclosed by the parties to a
contract of marriage.
(d) Contracts of family settlement: These contracts also require full disclosure of material
facts within the knowledge of the parties.
(e) Share Allotment Contracts: Person issuing “prospectus” at the time of public issue of
shares/debentures, have to disclose all material facts within their knowledge.
2. Where 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." B
says nothing his silence amounts to speech. In case of fraudulent silence, contract is not
voidable if the party whose consent was so obtained had means of discovering the truth
with ordinary diligence.

7. Discuss the essentials of Undue Influence as per the Indian Contract Act, 1872.
Ans. 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 essential ingredients of undue influence under the Indian Contract Act, 1872 are:
(i) Relation between the parties: A person can be influenced by the other when a near
relation between the two exists.

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(ii) Position to dominate the will: The relation between the parties are such that one of them
is in a position to dominate the will of the other.
(iii) 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.
(iv) 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.

8. Explain the term 'Coercion' and what are the effects of coercion under Indian Contract Act,
1872.
Ans. "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) The party receiving any benefit under the voidable contract must restore such benefit so
far as may be to the person from whom it was received.
(iii) A person to whom money has been paid or delivered under coercion must repay or return
it.
9. Define Misrepresentation and Fraud. Explain the difference between Fraud and
Misrepresentation as per the Indian Contract Act, 1872.
Ans. According to Section (17) of the Indian Contract Act, 1872:
"Fraud means and includes any of the following acts committed by a party to a contract or with
his connivance or by his agent, which an intention to deceive another party there to or his
agent, or to induce him to enters into a contract.
Following are some acts:
(a) The active concealment of the fact by one having knowledge or brief of the fact.
(b) A promise made without any intention of performing it.
(c) any other act filled to deceive.
(d) any such act which law declares to be fraudulent. etc.
Eg: A sells by auction to B, a house which A knows to be unsound, A says frothing to B. This is
not fraud by A.
Silence may sometimes be fraud or will not all depend upon facts and circumstances of case.
Misrepresentation:
According to Section (18) of the Indian Contract Act, 1872. Misrepresentation means
misstatement of material facts made believing it to be true without any intention of delivering
the other party.

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Ex: A makes a 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 amount to misrepresentation.
Difference of fraud and misrepresentation is as follows:

Fraud Misrepresentation
(1) Intentional misstatement of facts. Innocent misstatement of facts.

(2) Intention to deceive is present. Intention to deceive is not present.

(3) Aggrieved party can avoid the contract Aggrieved party can avoid the contract
and claim damages as well. but no damages can be claimed.

10. 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 Rs. 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?
Ans. Provision: According to Indian Contract Act, 1872. All Agreements in restraint of any trade or
which are opposed to public policy are void and are such which are expressly declared by law to
be a void agreement. Analysis: In the given case, Mr. X has been fighting a long drawn litigation
with Mr. Y To support his legal campaign he enlists the services of Mr. C who is a judicial
officer stating that the amount of Rs. 10 lakhs would be paid to him if he does not take up the
brief of Mr. Y.
As this agreement is an agreement which is void and opposed to public policy hence, it cannot be
enforced.
Concession: As at the end X refuses to pay Mr. C the decided amount Mr. C cannot recover the
amount promised by Mr. X under the provision of Indian Contract Act, 1872 as it is a void
agreement b/w the two.

11. Mr. S aged 58 years was employed in a Govt. 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 Rs. 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.
(4 marks)

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Ans. According to the Provisions of Indian Contract Act, 1872

An agreement to trafficking in public office is opposed to public policy, as it interferes with the
appointment of a person best qualified for the service of the public. Public policy requires that
there should be no money consideration for the appointment to an office in which the public is
interested. The following are the examples of agreements that are void; since they are
tantamount to sale of public offices.
(1) An agreement to pay money to a public servant in order to induce him to retire from his
office so that another person may secure the appointment is void.
(2) An agreement to procure a public recognition like Padma Vibhushan for reward is void. In
the given case, Mr. D offered Rs. 10 lakh to Mr. S as consideration in order to induce him
to retire so that Mr. D can be appointed in his place.
The above agreement is opposed to public policy therefore void.

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CHAPTER – 1
THE INDIAN CONTRACT ACT, 1872
Unit : 4 – Performance of Contract

SELF STUDY QUESTIONS

1. Write short note on: Rescission

Ans. Rescission: Rescission is the electing to avoid a contract and treat as not binding when it is void
or voidable or terminable by a party. It means when a contract is broken by One party, the
other party may treat the contract as rescinded. In such a case is absolved of all his obligations
under the contract as rescinded. In such a case is absolved of all his obligations under the
contract and is entitled to compensation for any damages that he might have suffered.
Rescission may occur:
(i) By mutual consent of the parties, or
(ii) Where are party fails in the performance of his obligation, the other party may rescind
the contract without prejudice to his right to claim compensation for the breach of
contract, or
(iii) By the party whose consent has not been given freely.
Rescission may be total or partial. Total rescission is the discharge of the entire contract.
Partial rescission is the variation of the original contract by (a) rescinding some of the terms of
the contract or (b) substituting new terms for the ones which are rescinded, or adding new
terms without rescinding any of the terms of the original contract.

2. Write short note on:

Appropriation is a right primarily of the debtor and for his benefit.
Ans. When a debtor who owes several debts to the same creditor makes a payment which is
insufficient to satisfy the whole indebtedness, a problem arises as to how to appropriate the
given payment. Sections 59 to 61 of i.e. Indian Contract Act, 1872 lay down the following rules:
1. if the debtor expressly states that the payment made by him is to be applied to the
discharge of some particular debt, the creditor must act accordingly.
2. if there no express instructions, then the debtor's implied intention should be gathered
from the circumstances adhering the payment and the appropriation must be done
accordingly.
3. if there is no express or implied directions of the debtor then the creditor had an option
to apply the payment to any debt lawfully due from the debtor including times observed
debt (Clayton's case).
4. where the debtor as well as the creditor had not made the appropriation. Then the
payment is to be applied in discharge of the debts in order of time, whether or not they
are time barred. If the debts are of equal standing, the payment shall be applied in
discharge of each proportionateley.

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5. if payment has been made without expressingly stating whether it is interest or principal,
payment is to be applied towards interest first and then the balance to principal.
Thus, it is quite clear from the above that it is always not the case where appropriation is
a right primarily of the debtor and for his benefit. It depends upon circumstances of a
particular case.

3. Write short note on:

Reciprocal promises are to be performed simultaneously.
Ans. According to Section 51 of the Indian Contract Act, 1872 “when a contract consists of
reciprocal promises to be simultaneously performed, no promisor need perform his promise
unless the promisee is ready and willing to perform his reciprocal promise".
When the parties agree that the performance of the contract by each part is to be
simultaneous, it is necessary that in exchange for the performance of the contract by one party
the other party should also be in a position to give simultaneous performance, i.e. he should be
ready and willing to perform his reciprocal promise. In a contract of sale of goods, unless
otherwise agreed, the delivery of the goods and the 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 to pay the price in exchange
for possession of the goods. Readiness and willingness to perform the contract does not mean
that the buyer should have the hard cash in his person, or the seller should always continue to
have a ready stock of the goods after the making of the contract. It is enough that the buyer,
has made arrangement to make the payment, which can be done without undue delay, and the
seller on his part arranged for the goods which can be delivered soon after the payment is
made. It is of course, necessary that the person should have the ability to perform the
contract. If a person is merely mentally prepared or willing to perform the contract but does
not have the ability to do so, the other party need not perform the contract. Thus a person who
becomes insolvent does not have means of payment in exchange for the goods, he is deemed to
be not ready and willing to perform the contract.

4. Write short notes on the following:

State the rules of appropriation of payments, when :
(i) the order of discharge of debts is indicated;
(ii) the order is not indicated.
Ans. As a normal rule, the debtor while making payment of debts should indicate to the creditor the
order of payment or appropriation. This is needed in case several debts are payable by a debtor
to his creditor. However, the debtor might not indicate the order or payment for one reason or
the other. In such cases, the rules laid down in the Indian Contract Act, 1872 apply.
Section 59, lays down, "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 or applied to the discharge of some particular debt, the payment, if accepted,

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most be applied accordingly." Thus in the instance case, the debtor has indicated the order of
discharge of debts, the creditor has no other alternative except to appropriate the amount
received by him according to the order indicated by the debtor.
In the second case i.e. where the debtor does not indicate or has not indicated the order of
discharges of debts, Section 60 of the Act, makes the position clear. According to this Section
60, "Where the debtor has omitted to intimate and there are no other circumstances indicating
to which debt the payment is to applied, the creditor may apply the money received at his
discretion to any lawful debt actually due and payable to him from the debtor whether its
recovery is or is not barred by the law in force for the time being as to the limitation of suits."
Thus it is clear that in the second case, provisions of Section 60 shall apply and the creditor
shall be within his rights to appropriate the money against the debts if any barred by law of
limitation.
However, if there are several debts due on the same date and the debtor has not indicated the
order of payment, the creditor shall have to apply the money proportionately in discharge of
these debts.

5. Write short note on: Doctrine of Frustration

Ans. Doctrine of Frustration: Part 2 of Section 56 of the Indian Contract Act, 1872 lays down that
if the performance of a contract becomes impossible or unlawful after its making due to some
event which is beyond the control of the parties, such contract becomes void when such event
has accrued. This is known as doctrine of frustration. The performance may become impossible
legally or physically.
Following are the causes of frustration:
1. Destruction of subject matter of contract.
2. Death or personal incapacity of the party.
3. Cancellation of an expected event.
4. Subsequent legal changes.
5. Declaration of war.

6. Briefly explain the distinguish between Succession and Assignment.

Ans. Distinguish between Succession and Assignment: When the benefits of a contract are
succeeded to be 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. The liability of the son will be limited to the
extent of the property inherited by him. In the matter of assignment, however, the benefit of
a contract can only be assigned but not the liabilities thereunder. This is because then the
liability is assigned, a third party gets involved therein.

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On the other hand if a creditor assigns the benefits of a promise, he thereby entitles the
assignee to realise the debts from the debtor but where the benefits is coupled with a liability
or when a personal consideration has entered into the making of the contract then the benefit
cannot be assigned.

7. Briefly explain the distinguish between Novation and Alteration.

Ans. Novation and Alteration: The law pertaining to novation and alteration is contained in Sections
62 to 67 of the Indian Contract Act, 1872. 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
agreements 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.

8. What is "Supervening Impossibility"? What are its effects upon the contract?
Ans. An impossibility which makes the performance of a contract impossible or illegal, by occurrence
of, an unexpected event or a change of circumstances beyond the contemplation of parties, is
called Supervening Impossibility.
It may arise on account of more than one reasons, which may be enumerated as below:
(a) Accidental destruction of the subject-matter of the contract, such as loss of property by
the occurrence of accidental fire, death of an artist or incapacity of an artist by long
illness.
(b) Non-existence or non-occurrence of a particular state of things, e.g. postponement of the
music concert for which the hall was rented out.
(c) Incapacity to perform a contract of personal services-long illness.
(d) Change in law, e.g. acquisition of the property by the government.
(e) Outbreak of war, making the contracting parties as citizens of enemy countries.
Effects: Supervening Impossibility makes the contract void and the parties are released out of
their obligations. They need not perform their part of the promises which have not accrued till
the date of the impossibility.

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9. State in brief the grounds upon which a contract may be discharged.

Ans. Discharge of contracts: A contract is discharged when the obligation 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 (a) actual performance or (b) attempted performance.
Actual performance is said to have taken place; when each of the parties has done what he
has agreed to do under the a agreement. When the promisor offers to perform his
obligation, but the promisee refuses to accept the performance, it amounts to attempted
performance or tender of 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 refund or remit or
alter it, the original contract need not be performed. These principles come in the heads
of novation, rescission, alteration remission, accord and satisfaction, owing to the
occurrence of an event and waiver.
(iii) By impossibility of performance: The impossibility may exist from its initial stage. In
that case, it would be impossibility an initio. Alternatively, there may be supervening
impossibility which 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; (e)
the declaration of war (Section 56).
(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
within the specified period of limitation, the party is deprived of remedy at law. For
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 not recoverable.
(v) Discharge by operation of law: A contract may be discharged by operation of law which
includes by death of the promisor, merger of inferior right in the superior right by which
the inferior right vanishes, by complete loss of evidence, 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 a breach thereof. When on the
other hand, a person repudiates a contract before the stipulate 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).
(vii) Remission accord and satisfaction: A promise may dispense with or remit the
performance of the promise made to him or may accept any satisfaction of thinks fit. In
the first case, the contract will be discharged by remission and in the second by accord
and satisfaction.
(viii) Refusal to afford reasonable facilities: 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.

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10. Is it required that parties to the contract must perform the contract personally?
Ans. Who must perform the contract: Except the contracts which require personal skill and labour,
the promise under a contract may be performed by the following persons:
1. Promisor himself: 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. Contracts involving
personal skill or those depending upon personal trust and confidence must be performed
by the promisor himself (Sec. 40).
2. Agent: Where personal consideration is not the foundation of a contract, the promisor or
his representatives may employ a competent person to perform it (Section 40).
3. The Legal Representatives: Promises bind the representatives of the promisors in case
of the death of such promisors before performance, unless a contrary intention appears
from the contract. On the death, of the promisor, the promisee can compel his legal
representatives to perform the promise unless it involves the personal skill of the
promisor. However, the liability of the legal representative will not be personal but shall
be limited only to the extent of the value of the estate of the deceased promisor
inherited by him. (Section 37).
4. Third Persons: When the 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 (Section
41).
5. Joint Promisors: When two or more persons have made a joint promise, then unless a
contrary intention appears from the contract, all such persons must jointly fulfil the
promise. If any of them dies, his legal representatives must, jointly with the surviving
promisors, fulfil the promise. If all of them die, the legal representatives of all of them
must fulfil the promise jointly (Section 42).

11. Explain the rules under the law of contract as regards to time and place for the performance of
the promise.
Ans. Time and place for the performance of the promise: Section 46 to 50 of the Indian Contract
Act, 1872 are relevant regarding time and place for the performance of the promise which are
as follows:
1. It no time is specified, the promise must be performed within a reasonable time. The
expression 'reasonable' time is to interpreted having regard to the facts and
circumstances of a particular case (Section 46).
2. If a promise is to be performed on a specified date but hour is not mentioned, the
promisor may perform it at any time during the usual hours of business, on such day.
Moreover, the delivery must be made at the usual place of business (Section 47).

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3. Where no place is fixed, it is the duty of the promisor to ask the promisee to fix a
reasonable place for the performance of the promise. In all cases the promisor must apply
to the promisee; here no distinction is made between an obligation to pay money to the
promisee; here no distinction is made between an obligation to pay money and obligation to
deliver goods or discharge any other obligation [Section 49].
The foregoing rules regarding the time and place for the performance of promise apply,
only when the promisor undertakes to perform the promise without an application being
made by the promisee.
4. Where the promisor has not undertaken to perform the promise without an application by
the promisee, and the promise is to be performed on a certain day it is the duty of the
promisee to apply for performance at a proper place and within the usual hours of business
(Section 48).
Generally, the performance of any promise may be made in any manner, or at any time
which the promisee prescribes or sanctions.

12. State the circumstances under which an agreement may be void, since it is impossible to carry it
out.
Ans. Impossibility of Performance [Section 56 of the Indian Contract Act, 1872] : An
agreement may be void since it is impossible to carry It out. A contract to do an act, which
after the contract is made, becomes impossible, or, by reason of some event which are promisor
could not prevent, unlawful, becomes void when the act becomes impossible or unlawful under
the following cases:
(a) Impossibility existing at the time of contract:
(i) if known to the parties.
(ii) if unknown to the parties.
(iii) if known to the promisor only.
(b) Supervening impossibility (arising subsequent to the formation of a contract) like
destruction of subject matters, non-existence or non-occurrence of a particular state of
things or incapacity to perform a contract of personal services or change of law, or
outbreak of law or failure of the ultimate purpose.

13. What is meant buy Performance of a Contract? By whom the contract can be performed?
Ans. Performance of contract consists in doing or causing to be done, that which the promisor has
promised shall be done. Performance of contract is the completion of legal obligation which
arises out of the contract. Every party to the control is obliged to perform the contract
accordingly, unless it is discharged or exempted from the performance.
The parties to a contract must either perform or offer to perform, their respective promises,
unless such performance is disposed with or excused under the provisions of the law of
contract or any other law (Section 37 Indian Contract Act, 1872), In order that a party could
enforce the promises made to him, he should perform his promise or offer to perform then he

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can ask to the other party to perform his promise unless a contrary intention appears from the
contract. Either performance or readiness and willingness to perform the contract is the basic
requirement of this section.
By whom contract must be performed?
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.
(i) Promisor himself: If there is something in the contract to show that there was an
intention of the parties, that the performance should be made personally, such promise
must be performed by the promisor (Section 40). Such contracts involve personal skill or
diligence.
(ii) Agent: Where personal consideration is not required, the promisor or his representative
may employ a competent person to perform (Section 40).
(iii) Representatives: Except the contract which involve personal skill and diligence all
contracts may be performed by the legal representatives of the deceased promisors
unless a contrary intention appears from the contract (Section 37). But their liability
under a contract is limited to the value of the property they inherit from the deceased.
Where personal skill and diligence is the foundation of the performance such contracts
come to an end on the death of the promisor.
(iv) Third Persons: When a promisee accepts performance from a third person, he can not
afterwards enforce it against the promisor (Section 41).
(v) Joint Promisors: 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 representatives jointly with the survivor or survivors,
and after the death of lost survivor, the representatives of all jointly must fulfil the
promise (Section 42 of the Indian Contract Act).

14. When a contract may be discharged by Operation of Law?

Ans. A contract may be discharged by the operation of law in the following manner:
(i) By death: In contract involving personal skill and/or ability, the contract is terminated on
the death of the promisor. In other contracts the rights and liabilities of a deceased
person pass on to the legal representatives of the deceased person.
(ii) By merger: Merger takes place when an inferior right accruing to a party under a
contract mergers into a superior right accruing to the same party under the same or same
other contract.
(iii) By insolvency: When a person is adjudged insolvent he is discharged from all liabilities
incurred prior to his adjudication.
(iv) By unauthorised attraction of the terms of a written agreement: Where a party to a
contract makes any material alteration in the contract without the consent of the other
party, the other party can avoid the contract. A material alteration is one which changes,

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in a significant manner, the legal identity or character of the contract or the rights and
liabilities of the parties to the contract.
(v) By rights and liabilities becoming vested in the same person: Where the liabilities and
rights under a contract vest in the same person, for example, when a bill gets into the
hands of the acceptor, the other parties are discharged.

15. State the rules of appropriation of payments, when:

(i) the order of discharge of debts is indicated;
(ii) the order is not indicated.
Ans. As a normal rule, the debtor while making payment of debts should indicate to the creditor the
order of payment or appropriation. This is needed in case several debts are payable by a debtor
to his creditor. However, the debtor might not indicate the order or payment for one reason or
the other. In such cases, the rules laid down in the Indian Contract Act, 1872 apply.
Section 59, lays down, '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 or applied to the discharge of some particular debt, the payment, if accepted,
most be applied accordingly."
Thus in the instance case, the debtor has indicated the order of discharge of debts, the
creditor has no other alternative except to appropriate the amount received by him according
to the order indicated by the debtor.
In the second case i.e. where the debtor does not indicate or has not indicated the order of
discharges of debts, Section 60 of the Act, makes the position clear. According to this Section
60, 'Where the debtor has omitted to intimate and there are no other circumstances indicating
to which debt the payment is to applied, the creditor may apply the money received at his
discretion to any lawful debt actually due and payable to him from the debtor whether its
recovery is or is not barred by the law in force for the time being as to the limitation of suits."
Thus it is clear that in the second case, provisions of Section 60 shall apply and the creditor
shall be within his rights to appropriate the money against the debts if any barred by law of
limitation.
However, if there are several debts due on the same date and the debtor has not indicated the
order of payment, the creditor shall have to apply the money proportionately in discharge of
these debts.

16. State and explain the various modes whereby a contract may come to an end.
Ans. Various modes whereby a Contract comes to an end: A contract may be discharged either by
an act of the parties or by an operation of law as stated below:
1. Discharge by performance: When the parties to the contract fulfil their part of the
promise, the contract comes to an end.

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2. Discharge by mutual agreement: When the parties to the contract agree not to perform
the contract on the basis of the principles of recession, or narration or alteration or
remission, the original contract comes to an end.
3. Discharge by impossibility of performance: When the performance of the contract
becomes impossible owing to (1) an unforeseen change in law or (2) the destruction of the
subject matter essential to the performance of the contract, or (3) the non-existence or
non-occurrence of particular state of things such as personal incapacity like illness or
meeting with an accident or (4) out break of war and the party being declared as an alien
enemy.
4. Discharge of lapse of time: Where a contract is to be performed within a special time
and it is not performed within that time or period, the law of limitation applies and the
contract comes to an end e.g. creditor not taking any action against the debtor for the
recovery of the debt within a period of 3 years.
5. Discharge by operation of law: Where lay operates in the non-performance of a contract
say death of the promisor or insolvency or merger etc.
6. Discharge by breach of a contract: Where the party to the contract makes a default in
the performance of the contract.
7. Discharge by waiver on the part of either party.
8. Discharge by not providing reasonable facilities for performance by the party to the
contract.

17. Explain with examples the principles of Novation, Rescission, Alteration and Remission where
contracts need not be performed.
Ans. Novation, Rescission, Alteration and Remission:
(a) Novation (Section 62): Novation means the substitution of a new contract for the original
contract. Such a new contract may be either between me same parties or between
different parties. The consideration for the new contract is the discharge of the original
contract.
Example: A Owns B Rs. 10,000/-. A enters into an agreement with B. and gives B a
mortgage or his (A's) estate for Rs. 5,000/- in place of the debts of Rs. 10,000/-. This is
a new contract and extinguishes the old.
(b) Rescission (Section 62): Rescission means cancellation of the contract by any party or all
the parties to a contract.
Examples: X promises Y to sell and deliver 100 Bales of cotton on 1st October at his
godown and Y promises to pay for goos on 1st November. X does not supply the goods. Y
may rescind the contract.
(c) Alteration (Section 62): Alteration means a change in the terms of a contract with
mutual consent of the parties. Alteration discharges the original contract and creates a
new However, parties to the new contract must not change contract.

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Example: X promises to sell and deliver 100 bales of cotton on 1st October and Y Promises
to pay for goods on 1st November. Afterwards X and Y mutually decide that the goods
shall be delivered in five equal instalments at Z's godown. Here, original contract has been
discharged and a new contract has come into effect.
(d) Remission (Section 63): Remission means acceptance by the promisee of a lesser
fulfillment of the promise made. Accordingly to 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".
Example 1: A promises to paint a picture for B. B afterwards forbids him to do so. A is no
longer to perform the promise.
Example 2: A owes B Rs. 5,000/- A pays to B, and B accepts, in satisfaction of the whole
debts, Rs. 2,000/- paid at the time and place at which Rs. 5,000/- were payable. The whole
debt is charged.
Example 3: A owes B, under a contract a sum of money, the amount of which has not been
ascertained. A, without ascertained. A, without ascertaining the amount, gives to B, and B,
in satisfaction thereof, accepts the sum of Rs. 2,000/-. This is a discharge of whole debt,
whatever may be its amount.

18. X, Y and Z are partners in a firm. They jointly promised to pay Rs. 3,00,000 to D. Y become
insolvent and his private assets are sufficient to pay 1/5 of his share of debts. X is compelled
to pay the whole amount to D. Examining the provisions of the Indian Contract Act, 1872,
decide the extent to which X can recover the amount from Z.
Ans. According to Section 43 of 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 anyone
or more of such joint promisor to perform the whole of the promise.
Also, each of two or more joint promisor may compel every other joint promisor to contribute
equally with himself to the performance of the promise, unless a contrary intention appear from
the contract.
In other words, if one of the joint promisor is made to perform the whole contract, he can call
for a contribution from others.
It also say that if any one of two or more joint promisor makes default in such contribution, the
remaining joint promisor must bear the loss arising from such default in equal shares.
In the given case X, Y and Z jointly promised to pay Rs. 3,00,000 to D. Y could pay only Rs.
20,000 (i.e. 1/5 of Rs. 1,00,000), hence loss due to his default i.e. Rs. 80,000 will be borne
equally by X & Z. Now, since X is compelled to pay entire amount, he can call for contribution
from Z of his share i.e. Rs. 1,00,000.
Thus, the extent to which X can recover the amount from Z is Rs. 1,40,000.

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19. Mr. X and Mr. Y entered into a contract on 1 st 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 Rs. 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 Rs. 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 Rs. 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.
Ans. According to the facts of the case it can be clearly observed that the contract entered into by
the parties Mr. X and Mr. Y demonstrates a case under the applicability of the provisions of
Section 56 of Indian Contract Act, 1872 that States – “A contract to do an act which after the
contract is made becomes impossible by reason of some event which the promisor could not
prevent becomes void.”
In this case Mr. X has promised to supply 50 tons of sugar to Mr. Y for which Mr. Y has paid an
amount of Rs. 50,000 in advance according to the terms of the contract. But due to severe
flood the only mode of transportation available between their places is damaged which clearly
makes the execution of delivery of 50 tons of sugar to Mr. Y impossible within the stipulated
time. Now Mr. X claims compensation of Rs. 10,000 from Mr. Y for non-acceptance of delivery
after expiry of the stipulated time – period but since the contract has already gone void due to
impossibility of performance within the stipulated time - period there remains no legal room for
demanding compensation. But at the same time the contention of Mr. Y for refund of his
previously advanced sum of Rs. 50,000 stands valid as under the provisions of Indian Contract
Act, 1872 if a contract turns void due to any specific reason then all previously advanced sums
have to be refunded.

20. 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 Rs. 50,000 as full advance payment for the above creative
work. Mr. C clarified that the painting shall be completed in 10 sittings and shall take 3 months.
On reaching to the workshop for the 6th sitting, Mr. Rich was informed that Mr. C became
paralyzed and would not be able to paint for near future. Mr. C had a son Mr. K who was still
pursuing his studies and had not taken up his father's profession yet?
Discuss in light of 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?
Ans. A contract which involves the use of personal skill or is founded on personal consideration
comes to an end on the death/inability of the promisor. As regards any other contract the legal
representatives of the promisor are bound to perform unless contrary intention appears from
the contract.

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A contract is discharged by impossibility of performance. Impossibility may be created due to

several factors, one of which may be as a result of some personal in capacity like dangerous malady.
In the given case, the promisor (Mr. C) got paralyzed during the performance of contract, due to
which further performance of the contract becomes impossible and the contract becomes void.
(i) Mr. Rich, cannot ask Mr. K to complete the artistic work in lieu of his father Mr. C as legal
representative is not responsible to perform in case, of contracts involving personal skill.
(ii) Mr. Rich cannot ask Mr. K to refund the amount as the contract becomes void and
unenforceable due to impossibility of performance.
21. Mr. Sonumal a wealthy individual provided a loan of Rs. 80,000 to Mr. Datumal on 26.02.2019.
The borrower Mr. Datumal asked for a further loan of Rs. 1,50,000. Mr. Sonumal agreed but
provided the loan in parts at different dates. He provided Rs. 1,00,000 on 28.02.2019 and
remaining Rs. 50,000 on 03.03.2019.
On 10.03.2019 Mr. Datumal while paying off part Rs. 75,000 to Mr. Sonumal insisted that the
lender should adjusted Rs. 50,000 towards the loan taken on 03.03.2019 and balance as against
the loan on 26.02.2019.
Mr. Sonurnal objected to this arrangement and asked the borrower to adjust in the order of
data 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?
Ans. Sometimes, a debtor owes several to the same creditor and makes payment which in not
sufficient to discharge all the debts. In such cases, the payment is appropriated as per
provisions of Section 59 to 61 of the Indian Contract Act.
(i) Application of Payment where debt to be discharged is indicated: Where a debtor,
owing several distinct debts to one person, makes a payment to him either with express
intimation or that the payment is to applied in 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: Where the
debtor has omitted to intimate that payment is to be applied in discharge of which debt,
then creditor may apply it at his discretion to any lawful debt actually due to him from the
debtor (even where it is barred by law).
(iii) Application of Payment where neither party appropriates: Where neither party makes
any appropriation, the payment shall be applied in discharge of the debts in order of time,
whether or not they are barred by limitation. If the debts are of equal standing, the
payment shall be applied in discharge of each proportionately.
In the given case the debtor while making the part payment has indicated the debt in which the
adjustment is to be made accordingly:
(i) Contention of Mr. Datumal is correct as per provisions of the Act, to indicate the debt to
be adjusted.
(ii) If the borrower does not insist on any order of adjustment of repayment, then lender at
his discretion may adjust in any debt he wants.
(iii) In case neither of them appropriates, then repayment will be adjusted to the debt first in time.

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22. 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?
Ans. (i) According to Indian Contract Act, 1872
In the given case Mr. S and Mr. R made contract wherein Mr. S agreed to deliver paper
cup manufacturing machine to Mr. R and give payment on delivery. On the delivery date,
Mr. R didn't pay the agreed price. Thus Mr. S is free from his obligation and he is not
bound to deliver the manufacturing machine to Mr. R.
(ii) In this case Mr. Y given loan to Mr. G of INR 30,00,000. Mr. G defaulted the loan on the
due date and debt became time barred. After time barred debt, Mr. G agreed to settle
the full amount to Mr. Y.
Thus acceptance of a time barred debt is enforceable under section(25) of the Indian
Contract Act, 1872.
Which states that this agreement to pay a time barred debt is enforceable even without
consideration.
(iii) A & B entered into a contract to supply unique item the alternate of which is not available
in the market. A refused to supply the agreed unique item to B. Thus court can order A
for specific performance and can order him to make the good available it to B as it is a
unique item only available to him.
23. X, Y and Z jointly borrowed Rs. 90,000 from L. Decide each of the following in the light of The
Indian Contract Act, 1872 :
(i) Whether L can compel only Y to pay the entire loan of Rs. 90,000?
(ii) Whether L can compel only the legal representatives of Y to pay the loan of Rs. 90,000, if
Z, Y and Z died?
(iii) Whether Y and Z are released from their liability to L and X is released from his liability to Y and
Z for contribution, if L releases X from his liability and sues Y and Z for payment?
Ans. (i) If a promise is made by two or more persons (called joint promisors) then promisee may
compel anyone or more of the joint promisors to perform the whole contract. Liability
under a joint promise is both joint as well as several.
Thus, in this case L can compel only Y also to pay the whole amount of Rs. 90,000/-
(ii) If a promise is made by two or more persons (called joint promisor) and all of them die
then their liability well be borne by the legal representatives and all the legal heirs will be
jointly and severally liable for the same. Thus, in this case L can compel only Y to pay the
entire loan of Rs. 90,000.
(iii) If a promisee discharges/releases one of the several joint promisors, it does not
discharge other joint promisors and the joint promisor so discharged remains liable to the
other joint promisor.
Thus, in this case, X will not be released from his liability towards Y and Z even though he
is released by L from making contribution.

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CHAPTER – 1
THE INDIAN CONTRACT ACT, 1872
Unit : 5 – Breach of Contract and Its Remedies

SELF STUDY QUESTIONS

1. Write short note on the following:
Liquidated damages.
Ans. Liquidated damages: Sometimes the parties to a contract, at the time of making the contract
agree to the amount of compensation payable in the event of the breach of the contract. The
amount of compensation payable, which has been agreed may be either liquidated damages or
penalty. A liquidated damage is a fair and genuine covenanted pre-estimate of probable damage
for an anticipated breach of contract. If it appears at the time of entering into a contract, the
amount of damage likely to follow from a breach was uncertain and the parties, to avoid
uncertainty and the expense of proving damages in a court, agreed at the particular amount,
that sum would be described as liquidated damages.
Liquidated damages differ from penalty and the difference is maintained in English Law but in
India the courts do not observe such distinction and it is left to the courts to decide. This will
be evident from Section 74 of the Indian Contract Act. 1872.

2. Write short note on the following:

Quantum Meruit
Ans. Quantum Meruit: The phrase 'quantum meruit' literally means "as much as is earned" or
according to the quantity of work done." When a person has begun the work and before he could
complete it, the other party terminates the contract or does something which make it
impossible for the other party to complete the contract, he can claim for the work done under
the contract. He may also recover the value of the work done where the further performance
of the contract becomes impossible. The claim on quantum meruit must be brought by a party
who is not in default. However, in certain cases, the party in default may also sue for the work
done if the contract is divisible. Following are the cases in which a claim on quantum meruit may
arise:
(i) Where the work has been done and accepted under a contract which is subsequently
discovered to be void, in such a case, the person who has performed the part of the
contract is entitled to recover the amount for the work done and the party, who receives
and accepts the benefit under such contract, must make compensation to the other party
(Section 65).
(ii) Where, a person does some act or delivers something to another person with the intention
of receiving payments for the same (i.e. non-gratuitous act), in such a case, the other
person is bound to make payment if he accepts such services or goods, or enjoys their
benefit (Section 70).
(iii) The compensation for the work done may be recovered on the basis of quantum meruit.
Where the contract is divisible and a party performs part of the contract and refuses to
perform the remaining part, in such a case, the party in default may sue the other party
who has enjoyed the benefits of the part performance.

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3. Write short note on the following:

Anticipatory breach of contract
Ans. Anticipatory breach of contract: Section 39 of the Indian Contract Act, 1972 deals with what
is known in English Law as anticipatory breach of contract. A breach of contract may take place
before the time fixed after performance of the contract has arrived. Thus, if a promisor by his
own act disables himself from performing his promise or refuses to perform his part of the
contract, the other party is entitled to treat the contract as at an end and to sue him for
damages for breach of contract without waiting until the time fixed for performance and
without further performing his part of the contract. Where party to contract refuses to
perform his part of the contract before the actual time arrives, the law gives the promisee an
option whereby he may either-
(a) elect to rescind and may then although the time for the performance has not yet
received, treat the contract as at an end and at once sue for the damages, or
(b) he may elect not to rescind but to treat the contracts still operative and wait for the time
of performance and then hold the other party responsible for all the consequences of non-
performance.

4. Write short note on the following:

Vindictive and Nominal damages
Ans. Damages for the breach of a contract are given by way of compensation for loss suffered, and
not by way of punishment for wrong inflicted. Vindictive damages have no place in the law of
contract because they are punitive by nature. But in case of (a) breach of a promise to marry,
and (b) dishonour of a cheque by a banker wrongfully when he possesses sufficient funds to the
credit of the customer, the court may award vindictive damages.
Whereas is nominal damages where the injured party has not in fact suffered any loss by
reasons of the breach of a contract, the damages recoverable by him are nominal. These
damages merely acknowledge that the plaintiff has proved his case and won.

5. Write short note on the following:

Remedies available to an aggrieved party on the breach of contract.
Ans. Following are the remedies available to an aggrieved party on breach of contract.
(i) Suit for damages.
(ii) Recession of contract by the other party: 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.
(iii) Suit upon Quantum Meruit: The phrase 'quantum meruit' literally means "as much as is,
earned" or "according to the quantity of work done". When a person has begun the work
and before he could complete it, the other party terminates the contract or does
something, which make it impossible for the other party to complete the contract, he can
claim for the work done under the contract. He may also recover the value of the work
done where further performance of the contract becomes impossible. The claim of
quantum meruit must be brought by a party who is not in default.

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(iv) Suit for specific performance: Where damages are not an adequate remedy in the case
of breach of contract, the court may be at its discretion on a suit for specific
performance direct a party in breach, to carry out his promise according to the terms of
the contract.
(v) Suit for injunction: Where a party to a contract is negotiating the terms of a contract,
the court may be issuing an 'injunction order' restrain him from doing what he promised
not to do.

6. Distinguish between:
'Liquidated damages' and 'Penalty'.
Ans. Liquidated damages and penalty: Liquidated damages and penalty are applicable to determine
the extent of damages in case of breach of contract both in England and in India. Still there
exist some difference between these two which are as follows:
(i) Liquidated damages are the amount assessed on the basis of actual or probable loss by
both the parties payable in the event of breach. While in case of penalty it is not based on
actual or probable lose. Penalty is provided to prevent a party from committing a breach.
(ii) Liquidated damage is imposed by way of compensation but penalty is imposed by way of
punishment.
(iii) Courts in England usually allow 'liquidated damages' without any regard to the actual loss
sustained and treat penalty clause as invalid. But Section 74 of the Contract Act, 1872 in
India does nor recognise any difference between these two terms. Here the courts are
required to allow reasonable compensation so as to cover the actual loss sustained, not
exceeding the amount so mentioned in the contract.

7. What kinds of damages may be awarded in case of breach of the contract under the law of
contract?
Ans. 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. Sections 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 caused to him thereby, which naturally arose in the usual cause 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. [Section 73 of the Contract Act and the rule in Hadley vs.
Baxendale (1854) IEx. 341].
(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.
(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

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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 can not get heavy damages in the like circumstances, unless the damages
are alleged and proved as special damages. [Gibbons vs. West Minister Bank (1939) 2
K.B. 882].
(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 and
the injury is nominal.

8. Comment the following:

Remote and indirect losses are not recoverable.
Ans. Section 73 of the Indian Contract Act, (1872 deals with the compensation for loss or damages
caused by breach of contract: In this relation, the basic rule is that damages must not be too
remote. The remote damages and indirect losses are those which are either far away in time or
widely separated from usual course of things of contract. They are in the nature of distant
indirect losses. They are not reasonably foreseeable by a normally reasonable man. The
Supreme Court has ruled that remote or indirect loss or damages sustained by reason of the
breach will not entitle the party to any compensation (Karsands (v) Saran Engineering Co., AIR
1965 SC 1981). Thus, the person who has committed the breach is liable for reasonably
forseeable losses, those that a normally prudent person would have had reason to foresee as
probable consequences of future breach. A defaulting person is not liable for those damages
which are not reasonably foreseeable. Thus remote damages are not recoverable. Non fulfilment
of emotional expectations due to non-performance of a contract is a kind of remote damage
being widely separated from the usual things of the contract.

9. Explain briefly of the following:

What remedies are available to an aggrieved party on the breach of contract?
Ans. Remedies for breach of contracts: When a contract is broken, the injured party becomes
entitled to any one or more of the following relicts:
(a) Rescission of the contract: with the result that the injured party is freed from all his
obligations under the contract.
(b) Suit for damages: Damages are monetary compensation awarded to the injured party by
Court for loss or injury suffered by him. Section 73 of the Indian Contract Act, 1872 has
laid down the rules as to how the amount of compensation is to be determined. Damages
may be nominal or ordinary or special or exemplary damages or damages for deterioration
caused by delay.
(c) Suit upon Quantum Meruit: A right to sue on a quantum meruit (as much as earned) arises when a
contact performed by one party, has become discharged by the breach of contract by the other
party. It is based on implied promise arising from acceptance of benefit by the party.
(d) Suit for specific performance contract: 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 the party in breach, to carry out his promise according to the terms
of the contract,
(e) Suit for an injunction: Where a party to a contract is negotiating the terms of a
contract, the court may by issuing an 'injunction order' restrain him from doing what he
promised not to do.

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10. Comment the following:

Damages are "Compensatory" and "Not Penal".
Ans. Damages (ordinary or special) are given by way of compensation for loss suffered and not by way
of punishment for wrong inflicted. The fundamental basis of awarding damages is compensation
for pecuniary loss which naturally flows from the breach of contract. The object is to put the
injured party in the same position, so far as money can do it, as if he had not been injured.
Hence, vindictive or exemplary or exemplary damages have no place in the law of contract
because they are punitive by nature. But in case of breach of a promise to marry and dishonour
of a cheque by a banker wrongfully even when sufficient funds are there to the credit of
customers account, the court may award exemplary damages.

11. What is meant by Anticipatory Breach of a contract?

Ans. 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. The law in this regard has very well
summed up in Frost vs. Knight and Hochster vs. De La Tour.
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.
Where A contracts with B on 15th July, 1999 to supply 10 bales of cotton for a specified sum on
14th August, 1999 and on 30th July informs B, that he will not be able to supply the said cotton
on 14th August, 1999, there is an express rejection of the contract.
Where A agrees to sell his white horse to B for Rs. 5,000/- on 10th August, 1995, but he sells this
horse to C on 1st August, 1995, 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.

12. When a claim for Quantum Meruit arises?

Ans. A claim for quantum meruit shall arise under the following circumstances:
1. When the contract is discovered to be unenforceable (Section 65, Indian Contract Act.
1872) i.e. when the agreement is discovered to be void or becomes void, any person
receiving benefit under such an agreement or contract is bound to restore it.

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2. When one party abandons or refuses to perform the contract. Where there is a breach of
contract, the aggrieved party is entitled to claim reasonable compensation for what he has
done under the contract.
3. When a contact is divisible, and the party in default, has enjoyed the part performance,
the party in default may sue on quantum meruit.
4. When an undivisible contract for lump sum is performed but badly, the person who has
performed can claim the lump sum less deduction for bad workmanship.

13. 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?
Ans. Subsequent or Supervening or Post:
Contractual Impossibility:
(i) Subsequent or post: Contractual impossibility is one which arises after the formation of
contract has taken place.
(ii) Due to supervening impossibility, the contract becomes void and stands discharged.
(iii) If any benefit has accrued to any of the parties, then it must be restored
Illustration:
A sold to B a cargo of oil to be shipped by a particular ship. B paid Rs. 5 Iakhs as purchase
consideration. Before the time for shipping arrived the ship was damaged by wreck and loading
of cargo was impossible now.
(a) Here the contract between A & B becomes impossible of being performed and thus the
event can be called as Supervening Impossibility. Due to this the contract becomes void
and both parties are discharged from their liability. A has to refund Rs. 5 lakhs which was
taken from B under the contract.

14. M Ltd., contract with Shanti Traders to make and deliver certain machinery to them by
30.6.2017 for Rs. 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 Rs. 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.
Ans. When a contract has been broken, the party who suffers by such breach in 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 parties
know, when they made the contract to be likely to result from the breach of it.
Such compensation is not to be given for any remote or indirect loss or damage sustained by
reasons of the breach.
In the given case, Shanti Traders suffered a loss Rs. 1.25 lakhs (12.75 – 11.50) due to breach of
contract by M Ltd. This naturally arose in the usual course of things. Shanti Traders also had to
pay penalty to Zenith Trader for breach of contract, which should be considered as indirect
loss or remote loss for which M Ltd. cannot be held responsible.
Therefore, Shanti Traders can claim an amount of Rs. 1.25 lakh from M Ltd. and nothing beyond.

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CHAPTER – 1
THE INDIAN CONTRACT ACT, 1872
Unit : 6 – Contingent and Quasi Contracts

SELF STUDY QUESTIONS

1. Distinguish Between of the following:
Wagering agreement and Contingent contract.
Ans. Wagering agreement and Contingent contract: Agreement by way of wager are void, according
to Section 30. In a wagering agreement, two parties have opposite views regarding an uncertain
event, and they stipulate that upon the determination of the event in a certain way the parties
shall win or lose from each other, a certain sum of money and the parties have no other interest
in the event except winning or loosing a bet.
According to Section 31 of the Indian Contract Act, 1872 a contingent contract is a contract to
do or not to do something, if some event collateral to such contract, does or does not happen.
Contracts of Indemnity or of insurance are of this type. But however, there is difference
between the wagering agreements and contingent contract which may be enumerated as follows:
(i) A wagering agreement consists of reciprocal promises whereas a contingent, contract may
not contain reciprocal promises.
(ii) In a wagering agreement the uncertain event is the sole determining factor, while in a
contingent contract the event is only collateral.
(iii) A wagering agreement is essentially of a contingent nature whereas a contingent contract
may not be of a wagering nature.
(iv) A wagering agreement is void whereas a contingent contract is valid.
(v) In a wagering agreement, the parties have no other interest in the subject matter of the
agreement except the winning of losing of the amount of the wager. In other words, a
wagering agreement is a game of chance. This is not so in case of a contingent contract.

2. Distinguish between wagering agreement and contract of insurance.

Ans. Difference between a Contingent Contract/Contract of Insurance and a Wagering Contract:
Contract of Insurance:
S. Contingent Contracts Wagering Contracts
No.

1. It is a contract to do or not to do It is a promise to give money or money's

something if an event collateral to main worth on an uncertain event happening
contract happens or does not happen. or not happening.

2. It may not be wagering in nature. It is essentially contingent in nature.

3. It is valid. It is void.

4. It may not contain reciprocal promises. It does consists of reciprocal promise.

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3. Explain the term 'Quasi Contracts' and state their characteristics. Illustrate your answer by
giving examples.
Ans. 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.
Section 68 to 72 of [the Indian Contract Act deals with the following types of quasi-contracts]:
1. Claim for necessaries supplied to a person incapable of contracting (Sec. 68). If a
person incapable of entering into a contract or anyone whom he is legally bound to support,
is supplied with necessaries suited to his condition in life by another person the supplier is
entitled to recover the price from the property of the incapable person.
Example: (a) 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.
2. Reimbursement of person paying money due by another, in payment of which he is
interested. 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 (Sec. 69).
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 such sale will be the annulment of
B's lease. B, to prevent 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.
3. Obligation of person enjoying benefit of non-gratuitous act. Where a person lawfully
does anything for anther 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
make compensation to the former in respect of, or to restore, the thing so done or
delivered (Sec. 70).
Example: A, a tradesmen, leaves goods at B's house by mistake, B treats the goods as his
own. He is bound to pay A for them.
4. Responsibility of finder of goods. A person who finds goods belonging to another and
takes them into his custody, is subject to the same responsibility as a bailee (Sect. 71).

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5. Liability of persons to whom money is paid, or thing delivered by mistake or under

coercion. A person to whom money has been paid, or anything delivered by mistake or
under coercion, must repay or return it (Sec. 72).
Example: A and B jointly owe 100 rupees to C. A alone pays the amount to C and B, not
knowing this fact, pays 100 rupees over gain to C. C is bound to repay the amount to B.
6. Quantum meruit. In addition to the above types of quasi contracts expressly provided in
the Act, a claim can also be made on the basis of quantum meruit. Where a person has
rendered some service to another under the circumstances which ir dicate that it is to be
paid for though no remuneration was fixed, the law implies a promise to pay for the
amount of the work actually done. It means payment in proportion to the amount of work
done.

4. Comment on the following:

A contract of indemnity is a contingent contract.
Ans. A contract of indemnity is a contingent contract: The statement is correct in the sense that
a contract of indemnity is one by which one party promises to save the other from the loss
caused to him by the conduct of the promissor himself or by the conduct of any other person. A
contingent contract is a contract to do or not to something if some event collateral to such
contract does or does not happen. From the above definitions, it can be seen that both
contracts are conditional contracts. Their performance depends upon some contingency which is
uncertain. A contract of indemnity is really a part of the general class of contingent contracts.
It is entered into with the object of protecting the promisee against any anticipated loss. The
contingency upon which the whole contract of indemnity depends is the happening of loss.

5. State briefly the law relating to 'Quasi contract'.

Ans. Quasi contracts: Under certain circumstances, a person may receive a benefit to which the law
regards another person as better entitled, or for which the law considers he should pay to the
other person, even though there is no contract between the parties. Such relationships are
termed as "Quasi-Contracts". A quasi contract rests on the ground of equity that a person shall
not be allowed to enrich himself unjustly at the expense of another.
Sections 68 to 72 of the Indian Contract Act has prescribed the following relationships
creating quasi-contractual relations:
1. Supply of necessaries: Under 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 conditions in life, the person who has furnished such supplies is
entitled to be reimbursed from the property of such incapable person.
2. Payment by an interested person: It has been laid down in Section 69 of the Indian
Contract Act 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.
3. Obligation to pay for non-gratuitous Act: Section 70 of the Indian Contract Act states
that 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

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latter is bound to make compensation in respect of or to restore, the thing so done or

deliver.
4. Responsibility of finder of goods: Under Section 7 of the Act, a person who finds goods
belonging to another and takes them into his custody, is subject to the same responsibility
as a bailee.
5. Case where money is paid by mistake or under coercion: Finally, Section 72 of the
Indian Contract Act provides that a person to whom money has been paid, or anything
delivered by mistake or under coercion, must repay or return it. Thus, quasi contractual
right is always a right to money and generally though not always to a liquidated sum of
money. It does not arise from any agreement of the parties concerned, but is imposed by
the law. It is a right which is not available against all the world but against a particular
person or persons only. There is no contract between the parties in cases of quasi
contracts, yet they are put in the same position as if there were a contract between them.

6. Explain the meaning of 'Contingent Contracts' and state the rules relating to such contracts.
Ans. 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 ally
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 happen" (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 Rs. 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 reciprocal promises which constitute the
contract. The event should neither be a performance promised, nor the consideration for
the promise.
(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 event 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 happen, its
performance can be enforced only when happening of that event becomes impossible.
(Section 33).

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(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)

7. Explain briefly the following:

The duties and liabilities of a finder of goods are treated at par with bailee.
Ans. Duties and Liabilities of finder of goods: The duties and liabilities of a finder of goods are
treated at par with bailee. A person who finds goods belonging to another and takes them into
his custody, is subject to the same responsibility as a bailee. (Section 71 of the Indian Contract
Act, 1872). He is bound to take as much care of the goods as a man of ordinary prudence would,
under similar circumstances, take of his own goods of the same bulk quality and value. He must
also take all necessary measures to trace its true owner. if he does not take, he will be guilty of
wrongful conversion of the property. Till the owner is found out, the property in the goods will
vest in the finder and he can retain the goods as his own against the whole world except the
real owner. He can sell the goods in the following cases:
(a) where the owner cannot with reasonable diligence be found; or
(b) when found, he refuses to pay the lawful charges of the finder; or
(c) if the thing is in danger of perishing or losing greater part of its value.
(d) if the lawful charges amount to 2/3 of the value of the thing.

8. What is Contingent Contract? Discuss the essentials of Contingent Contract as per the Indian
Contract Act, 1872.
Ans. A Contingent Contract is 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.
The essential constituents of a contingent contract are:
(a) The performance of a contingent contract would depend upon the happening or non-
happening of some event or condition.
Example :
A promises to pay Rs. 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 non a consideration for a promise.
(c) The contingent event should not be a more 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 not a contingent contract.

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9. 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.
Ans. Contingent Contract:
Contingent contract is a contract:
(i) to do or not to do something
(ii) if some event, collateral to such contract,
(iii) does or does not happen.
e.g. contracts of Insurance, indemnity and guarantee fall under this category.
Illustration: X advances Rs. 25,000 to B based on promise made by S (Surety) to repay the
amount if X fails to repay it within a month.
Rules relating to enforcement of a contingent contract:
(i) Enforcement of contracts contingent on 'happening' of an event:
• If the event happens, then the contract becomes valid.
• If the event does not happen or becomes impossible, then contract becomes void.
(ii) Enforcement of contracts contingent on Not-happening of an event:
• If the event happens, then the contract becomes void.
• If the event does not happen or becomes impossible, then contract becomes valid.
(iii) A contract contingent upon future conduct of a living person: If the future conduct of
the living person fulfills that condition then contract becomes enforceable if the future
conduct renders the happening of such event impossible then contract becomes void.
(iv) Contingent on happening of specified event within the fixed time: If the event happens
within fixed tune, the contract becomes enforceable else become void.
(v) Contingent on specified event not happening within specified time: If the event happens
within specified time come out becomes void else valid and enforceable.
(vi) Contingent on an impossible event : If performance is based on an impossible event then
contract is void. Whether impossibility is known to the parties or not.

10. 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?
Ans. The finder of goods has no right to sue the owner for compensation for trouble and Expense
Voluntarily incurred by him to presume the goods and to find the true owner, but he may retain
the goods against the owner until he receives such compensation, until then the finder may
retain the goods with him.
In the given case X finds a wallet in a restaurant and hands it over to the manager as the true
owner could not be traced. After a week a demands the wallet back from the manager, which he
refuses to give, saying it did not belong to X.
Held, the manager must return the wallet to 'X' as he being the finder of lost goods was
entitled to retain the goods found against everybody except the true owner.
Thus, 'X' can recover the wallet from the manager.

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CHAPTER – 2
THE SALE OF GOODS ACT, 1930
Unit : 1 – Formation of the contract of sale

SALE OF GOODS ACT, 1930

Section 1 : Short title, extent and commencement.

Section 2 : Definitions.
Section 3 : Application of provisions of Act 9 of 1872.
Section 4 : Sale and agreement to sell.
Section 5 : Contract of Sale.
Section 6 : Existing or future goods.
Section 7 : Goods perishing before making of contract.
Section 8 : Goods perishing before sale but after agreement to sell.
Section 9 : Ascertainment of price.
Section 10 : Agreement to sell at valuation.
Section 11 : Stipulations as to time.
Section 12 : Condition and warranty.
Section 13 : When condition to be treated as warranty.
Section 14 : Implied undertaking as to title, etc.
Section 15 : Sale by description.
Section 16 : Implied condition as to quality.
Section 17 : Sale by Sample.
Section 18 : Goods must be ascertained.
Section 19 : Property passes when intended to pass.
Section 20 : Specific goods in a deliverable state.
Section 21 : Specific goods to be put into a deliverable state.
Section 22 : Specific goods in a deliverable state, when the seller has to do anything.
Section 23 : Sale of unascertained goods and appropriation.
Section 24 : Goods sent on approval.
Section 25 : Reservation of right of disposal.
Section 26 : Risk prima facie passes with property.
Section 27 : Sale by person not the owner.
Section 28 : Sale by joint owners.
Section 29 : Sale by person in possession under voidable contract.
Section 30 : Seller or buyer in possession after sale.
Section 31 : Duties of Seller and Buyer.
Section 32 : Payment and Delivery.
Section 33 : Delivery.

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Section 34 : Effect of part delivery.

Section 35 : Buyer to apply for delivery.
Section 36 : Rules as to delivery.
Section 37 : Delivery of wrong quantity.
Section 38 : Instalments deliveries.
Section 39 : Delivery to carrier.
Section 40 : Risk where goods are delivered at distant place.
Section 41 : Buyer's right of examining the goods.
Section 42 : Acceptance.
Section 43 : Buyer not bound to return rejected goods.
Section 44 : Liability of buyer for neglection or reflexing delivery of goods.
Section 45 : Unpaid seller.
Section 46 : Unpaid seller's rights.
Section 47 : Seller's lien.
Section 48 : Part delivery.
Section 49 : Termination of lien.
Section 50 : Right of stoppage in transit.
Section 51 : Duration of transit.
Section 52 : How stoppage in transit is effected.
Section 53 : Effect of subsale.
Section 54 : Sale not generally rescinded.
Section 55 : Suit for price.
Section 56 : Damages for non acceptance.
Section 57 : Damages for non delivery.
Section 58 : Specific performance.
Section 59 : Remedy for breach of warrant.
Section 60 : Repudiation of contract.
Section 61 : Interest by way of damages.
Section 62 : Exchange of implied terms.
Section 63 : Reasonable time.
Section 64 : Auction sale.
Section 65 : Repeal.
Section 66 : Savings.

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SELF STUDY QUESTIONS

1. Write short note on: (d) Contract of sale.

Ans. Contract of Sale: It is a contract whereby the seller transfer or agrees to transfer the
property in goods to the buyer for a price [Section 4(1), Sales of Goods Act, 1930).
The following elements must co-exist to constitute a contract of sale:
1. There must be atleast two parties.
2. The subject matter must necessarily be 'goods'.
3. A price in money (not in kind) should be paid or promised.
4. A transfer of property must take place.
5. The sale may be absolute or conditional.
6. Other essential elements of a valid contract must be present.
Also, the contract of sale includes both 'Sale' as well as 'agreement to sell'.

2. Write short note on: Formalities of a contract of sale.

Ans. Formalities of contract of Sale: Except where specifically required by any law, no particular
form is necessary to constitute a valid contract. The agreement may be express or may be
implied from the conduct of the parties. Section 5 of the Sale of Goods Act. 1930 lays down
the rule as to how a contract of sale may be made and has nothing to do with the transfer or
passing of the property in the goods.
A contract of sale may be made in any of the following modes:
1. There may be immediate delivery of the goods; or
2. There may be immediate payment of price, but may be agreed that the delivery is to be
made at same future date; or
3. There may be immediate delivery of the goods and an immediate payment of price; or
4. It may be agreed that the delivery or payment or both are to be made in instalments; or
5. It may be agreed that the delivery or payment or both are to be made at same future date.

3. Write short note on: Essentials of appropriation of goods.

Ans. Essentials of 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 are:
(a) The goods should conform to the description and quality stated in the contract.
(b) The goods must be in a deliverable state.
(c) 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.
(d) 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.
(e) The assents may be express or implied.
(f) The assent may be given either before or after appropriation.

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4. Write short note on: ‘Goods' in a Contract of Sale.

Ans. "Goods" in a Contract of Sale: In the Sales of Goods Act, 1930, 'Goods', means every kind of
movable property, i.e. property of every description (except immovable property), actionable
claims and money and includes stocks, shares, growing crepes, grass and things attached to or
forming part of the land e.g. growing trees, machinery fixed or embedded in earth), which were
agreed to be severed before sale or under the contract of sale. [Section 2(7)].
Goods can be of the following types:
1. Existing i.e. which are in existence at the time of sale.
2. Future goods i.e. which are in the process of manufacturing or production or acquisition by
the seller after the contract of sale.
3. Specific i.e. which have been identified at the time of sale.

5. Write short note on: Classification of goods in a contract of sale.

Ans. Goods forming subject matter of the contract of sale may be classified as under:
(i) Existing Goods
(a) Specific goods
(b) Unascertained goods
(c) Ascertained goods.
(ii) Future Goods
(iii) Contingent Goods
Existing Goods are those which are in actual existence at the time of contract of sale. The
seller is the owner of goods or he has the possession of such goods.
Existing goods may be of the following three types:
(i) Specific Goods: Goods which have either been identified and agreed by the parties at the
time of contract of sale.
(ii) Ascertained Goods are those identified only after the formation of a contract of sale.
When unascertained goods are identified and agreed upon by the parties, the goods are
called Ascertained goods.
(iii) Unascertained Goods are those not specifically identified at the time of contract of sale.
They are described by the description or sample only.
(iv) Future Goods are those which are not in existence at the time of contract. These goods
are to be acquired or produced by the seller after the contract of sale is made. It is an
agreement to sell and not sale.
(v) Contingent goods are like future goods. The acquisition of the goods by the seller depends
upon the uncertain contingencies which may or may not happen e.g. goods will be supplied if
ship arrives.

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6. Distinguish between A 'Sale' and a contract of 'Bailment'.

Ans. 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 bailer or are to be
disposed of according to the directions of the bailor whereas, 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.
The difference between bailment and sale may be clearly understood by studying the
following:
(a) In a sale the property in goods is transferred from the seller to the buyer. But in
bailment, there is only transfer of possession of goods from the bailor to the bailee for
any of the reasons like safe custody, carriage etc.
(b) In bailment, the bailee must return the goods to the bailor on the accomplishment of the
purpose for which the bailment was made. But there is no question of return of goods in a
contract of sale.
(c) In a sale the consideration is the price in terms of money where as the bailment may be
gratuitous or non-gratuitous.

7. Distinguish between Sale and Hire-purchase Agreements.

Ans. Sale and Hire Purchase Agreements:
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. [Section 4(1) Sale of Goods Act]. A contract of sale may be absolute or
conditional. [Section 4(2)].
A hire purchase agreement is a contract whereby the owner of the goods lets them on hire to
another person called hirer on payment of rent to be paid in instalments and upon an agreement
that when a certain number of such installments is paid, the ownership in goods will pass on to
the hirer. The hirer may return the goods at any time without any obligation to pay the balance
rent. It is not a contract of sale but only a bailment and the property in the goods remains in
the owner during the continuance of the bailment.

8. Distinguish between Existing goods and Contingents goods.

Ans. Existing Goods and Contingent Goods:
The two terms can be distinguished on the following basis:
1. Meaning: Goods which are physically in existence and which are in seller's ownership or
possession at the time of entering of contract of sale are called existing goods. While
goods the acquisition of which by seller depends upon an uncertain contingency are called
contingent goods. They are a type of future goods. Future goods are the goods to be
manufactured, produced or acquired after the making of contract.
2. Type: A contract for the sale of contingent goods is always an agreement to sell while
existing goods can be subject matter of sale as well as agreement of sell.
3. Classification: Existing goods may be classified as specific, ascertained or unascertained
goods while there cannot be any such classification of contingent goods.

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9. Briefly explain the distinguish between Future goods and Contingent goods.
Ans. Future Goods and Contingent Goods: Those goods which are yet to be manufactured or
produced or acquired by the seller after the making of the contract of sale, are called, "future
goods". Thus, future goods are not in existence at the time of the contract of sale or if they
are in existence they have not yet been acquired by the seller by that time. When a present
sale is made for some future goods, it is in fact not sale but an agreement to sell. (Section 2(6)
and 6(3) of the Sale of Goods Act, 1930).
According to Section 6(2) of the Sale of Goods Act, contingent goods are goods the acquisition
of the seller depends upon a contingency which may or may not happen. They are also a type of
future goods and therefore, a contract for sale of contingent goods operate as an agreement to
sell.
Contingent goods are different from future goods in the same that the procurement of
contingent goods is dependent upon an uncertain event, whereas the obtaining of future goods
does not depend upon any such uncertainty.

10. Point out any four major differences between a sale and an agreement to sell.
Ans. Difference between a sale and an agreement to sell: According to Section 4 of the Sale of
Goods Act, 1930, a contact of goods is a contract whereby the seller transfers or agrees to
transfer the property in the goods to the buyer for a price, whereas under an agreement to
sell, the transfer of the property in the goods is to take place at a future date.
• In a sale, the seller can sue the buyer for the price of the goods, but in an agreement to
sell, the aggrieved party can sue for damages only and not for price.
• In a sale, a subsequent loss or destruction of the goods is the liability of the buyer, but
the liability remains with the seller if it is agreement to sell.
• In sale, seller's breach gives the buyer to sue for damages and also remedy of recovery
the goods from third parties who bought them. But in an agreement to sell, buyer's
remedy is for a suit of damages.

11. Distinguish between sale and agreement to sell under the Sale of Goods Act.
Ans. Sale and Agreement to sell distinguished:
(a) A sale implies an agreement plus a conveyance of property. In an agreement to sell, there
is no conveyance, the conveyance takes place at a future date.
(b) In a sale, the property in the goods passes to the buyer and risk also passes to the buyer.
in agreement to sell, since property does not pass to the buyer, risk also does not pass to
the buyer.
(c) A sale is an executed contract. An agreement to sell is an executory contract.
(d) In a sale, the seller can sue the buyer for the price of the goods. In an agreement to sell,
the aggrieved party can sue for damages only and not for the price unless the price was
payable at a stated date.

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(e) In a sale, a subsequent loss or destruction of the goods is the liability of the buyer, but
the liability remains with the seller, where the transaction only amounts to an agreement
to sell.
(f) In an agreement to sell, the seller, being still the owner, may dispose of the good as the
likes and the buyer's remedy would be to file a suit for damages. In a sale however, the
seller's breach gives the buyer the-double remedy, a suit for damages against the seller,
and the remedy of recovering of goods from third parties who bought them.
(g) In a sale, in case of default by buyer, seller can sue the buyer for price even if goods are
in his possession and can resell the goods. In an agreement to sell, the seller's remedy in
case of default, is to sue for damages for breach and not the price even though the goods
are in the possession of the buyer.
(h) In case of sale, if the seller becomes insolvent, while the goods are still in his possession,
the buyer shall have a right to claim the goods from the official receiver or assignee: In
case of agreement to sell, when the seller becomes insolvent, the buyer's remedy is to
claim rateable dividend from the estate of the insolvent seller for the price paid and not
for the goods, since property in them still rests with the seller. If the buyer becomes
insolvent, the seller can refuse to deliver the goods to the official receiver or assignee
unless the price is paid to him, in the case of agreement to sell. In the case of sale, in the
absence of right of lien over the goods, the seller must deliver the goods to the official
receiver/assignee of the buyer and is entitled to rateable dividend only from the estate
of the insolvent buyer.

12. Differentiate between Ascertained and Unascertained Goods with example.

Ans. The basic point of distinction between ascertained and un-ascertained goods with example can
be discussed as under:
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.
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.
Un-ascertained goods are the goods which are not specifically identified or ascertained at the
time of making of the contract.
They are indicated or defined only by description or sample.
Example: 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 un-ascertained 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.

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13. What are the essentials of a contract of 'Sale'?

Ans. Essential of a Contract of Sale: Section 4(1), of the Sale of Goods Act, 1930, defines a
contract of sale, as a contract whereby the seller transfers or agrees to transfer the property
in goods to the buyer for a price.
From the above definition, the following essentials can be deduced:
1. There must be at least two parties one seller, two the buyer.
2. There must be an agreement between the two parties for sale or an agreement to sell.
3. The subject matter of the contract must necessarily by goods, may be existing goods or
future goods, ascertained goods or unascertained goods.
4. There should a price, which is to be paid in money.
5. A transfer of property in goods from seller to buyer must take place.
6. The contract may be absolute or even conditional.
7. All the essential characteristics of a valid contract must exist.

14. A contract of sale is not avoided even on account of breach of condition.

Ans. Contract of sale not avoided on breach of condition: Section 13 of the Sales of Goods Act,
1930 provides certain circumstances where under a condition is treated as a warranty and
hence the contract of sale is not avoided even on account of breach of a condition. In the
following cases this rule is applicable:
1. Where the buyer altogether waives the performance of the condition. A party may for his
own benefit waive a stipulation.
2. Where the buyer elects to treat the breach of the condition as one of a warranty. In such
a case he may only claim damages instead of repudiating the contract.
3. Where the contract is non-severable and the buyer has accepted either the whole goods
or any part thereof.
4. Where the fulfillment of any condition or warranty is excused by law by reason of
impossibility or otherwise.

15. The rule in sale of goods is "none can give or transfer what he does not himself possess". Are
there any exceptions to this rule? Discuss.
Ans. Exceptions to the Rule 'none can give or transfer what he does not himself has':
Section 27 of the Sale of Goods Act, states the above rule, i.e. 'None can give or transfer what
he does not himself has'. However, the rule subject to the following exceptions staled under
Sections 28-30 of the Act.
These are:
1. By estoppel: Where the owner is estoppel by the conduct from denying the seller's
authority to sell, the transferee will get a good title as against the true the owner and the
above rule shall not apply.
2. Sale by a mercantile agent: Sale by a mercantile agent to goods or document of title to
goods under the following conditions.

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(a) The agent has the possession of goods with the consent of the owner,
(b) He sells them in the ordinary course of business,
(c) The buyer buys is good faith.
3. Sale by one of the joint owners: When one of the several owners having the possession
of the goods sells them out and the buyer buys in good faith.
4. Sale by a person in possession under voidable contract: When the seller who has
obtained the possession of the goods under a voidable contract and has no rescinded the
contract till the time of such sale, sell such goods.
5. Sale by one who has already sold the goods but continues in possession thereof:
Under these circumstances, if the seller sells the goods and the buyer buys in good faith
without notice of the previous sale. Similarly, a pledge or other disposition of the goods or
documents of title by the seller in possession are equally valid.
6. Sale by buyer obtaining possession before the property in the goods has vested in him, if
sells, pledges or otherwise disposes such goods to a person who in good faith and without
notice of the lien or other right of the original seller in respect of the goods, devolves a
good title to such person.
7. Sale by an unpaid seller: An unpaid seller who had exercised his right of stoppage in
transit, sells such goods again, the buyer of such goods acquires a good title to the goods
as against the original buyer.
8. Sale under the provisions of the other Acts:
(a) Sale by, an official receiver or liquidator of the company.
(b) Purchase of goods from a finder of goods.
(c) Sale by a pawnee under default of pawnor.

16. Describe the conditions implied in a contract for sale of goods by-
(i) Description, and
(ii) Sample.
Ans. (i) Sale by description: Where there is a contract for sale of goods by description, there is
an implied condition that the goods shall correspond with the description. If the
description of the article is different in any respect, the other party is not bound to take
it.
The sale of goods by description may include:
1. Where the buyer has not seen the goods and relied on their description given by the
seller.
2. Where the buyer has seen the goods but he relies not on what he has seen but what
was stated to him and the deviation of the goods from the description is not
apparent.
3. The packing of the goods may some times be a part of the description.

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(ii) Sale by Sample: In the case of contract for sale by sample, there is an implied condition
that-
1. The bulk shall correspond with the same in quality.
2. The buyer shall have a reasonable opportunity of comparing the bulk with the sample.
3. The goods shall be free from any defect rendering them unmerchantable which
would not be apparent on a reasonable examination of the sample. This implied
condition applies only to latent defects, i.e., defects which are not discoverable on a
reasonable examination of the sample. The seller is not responsible for the defects
which are patent i.e. visible by examination of the goods. In such a case, there is no
breach of condition as to merchantability.
Section 15 of the Sale of Goods Act also provides that if the sale is by sample as
well as by description, the goods must correspond both with the sample and with the
description.

17. How the price of the goods may be ascertained in case of sale of goods?
Ans. Ascertainment of Price: The meaning of the price and the rule regarding ascertainment of the
price of the goods is contained in Sections 2(10), 9 and 10 of the Sale of Goods Act
respectively, as follows:
'Price means' the monetary consideration for sale of goods. The price may be fixed by the
contract or agreed to be fixed in a manner provided by the contract, e.g., by a valuer or
determined by the cause of dealings between the parties. When it can not be fixed in any of
the above ways, the buyer is bound to pay to the seller a reasonable price. What is a reasonable
price is a question of fact in each case (Section 9).
Section 10 provides for the determination of price by a third party. Where there is an
agreement of 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 others 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.

18. "Agreement to sell, differs from sale."

Ans. Sale and Agreement to sell differ to each other: According to Section 4(3) of the Sale of
Goods Act, when the property in the goods in transferred to the buyer immediately on making
of a contract, it is called a ‘sale’. On the other hand, when the property in the goods is to be
transferred on some future date or on the fulfilment of certain conditions, it is called an
'agreement to sell'. Section 4(4) further provides that 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.

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The main points of distinction between the two are as under:

Sale Agreement to sell

1. It implies an agreement plus a 1. Here there is no conveyance It takes

conveyance of property. place at a future date.
2. The property in the goods passes to the 2. Since property in the goods does not
buyer and along therewith the risk. pass to the buyer, the risk also does not
pass to him.

3. It is an executed contract. 3. It is an executory contract.

4. The seller can sue the buyer for the 4. The aggrieved party can sue for
price of the goods because of the damages only and not for the price,
passage of the property therein to the unless the price was payable at a stated
buyer. date.

5. A subsequent loss or destruction of the 5. Such loss or destruction is the liability

goods is the liability of the buyer. of the seller.
6. Breach on the part of the seller gives 6. The seller, being still the owner of the
the buyer double remedy; a suit for goods, may dispose of them as he likes,
damages against the seller and a an the buyer's remedy would be to file
proprietary remedy of recovering the a suit for damages only.
goods from third parties who bought
them.

19. In a sale of goods 'goods' sold must be of merchantable quality.

Ans. Goods Must be of merchantable Quality: It is one of the implied conditions that the goods
sold to a customer must be of merchantable quality. Section 16(2) the Sale of Goods Act
provides: 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 good are of merchantable quality. The expression "merchantable quality" though not
defined in the Act, nevertheless connotes goods of such a quality and in such condition that a
man of ordinary prudence would accept them as goods of that description. Goods should also be
such as are commercially saleable under the description by which they are known in the market
at their full value. If goods are of such a quality and in such a condition that a reasonable
person acting reasonably would accept them after having examined them thoroughly, they are of
merchantable quality.
Sub-section (2) of Section 16 further provides that where the buyer has examined the goods,
there is an implied condition as regards defects, which such examination ought to have revealed.
[Proviso to Section 16(2)].

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20. What is meant by delivery of good under the Sale of Goods Act, 1930? State various modes of
delivery.
Ans. Delivery means voluntary transfer of possession from one person to another. It may be made by
doing anything, which has the effect of putting the goods, in the possession of the buyer, or any
person authorized on his behalf.
Various modes of delivery are as follows:
(i) Actual delivery: Physical delivery of goods to buyer.
(ii) Constructive delivery: When it is effected without change in the custody or actual
possession.
(iii) Symbolic delivery: Where there is a delivery of a thing in token of a transfer of
something else.

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CHAPTER – 2
THE SALE OF GOODS ACT, 1930
Unit : 2 – Conditions and Warranties

SELF STUDY QUESTIONS

1. Write short notes on the following:

Implied warranties in a contract of sale.
Ans. Implied Warranties in a contract of sale:
(i) Warranty of quiet possession [Section 14(b)] Sale of Goods Act: In a contract of sale,
unless there is a contrary intention, there is an implied warranty that the buyer shall have
and enjoy quiet possession of the goods. If the buyer is in any way disturbed the
enjoyment of the goods in consequences of the seller's defective title to sell, he can claim
damages from the seller.
(ii) Warranty of freedom from encumbrances [Section 14(c)]: The buyer is entitled to a
warranty that the goods are not subject to any change or right in favour are not subject
to any change or right in any way disturbed by reason of the existence of any charge or
encumbrances on the goods in favour of any third party, he shall have a right to claim
damages for breach of this warranty.
(iii) Warranty as to quality or fitness by usage of trade [Section 16(4)]: An implied
warranty as to quality or fitness for a particular purpose may be annexed by the usage of
trade.
(iv) 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 for damages.

2. Distinguish between the following:

Condition and Warranty.
Ans. Condition and Warranty:
Condition Warranty

(1) A condition is essential to the main (1) It is only collateral to the main
purpose of the contract. purpose of the Contract.

(2) The aggrieved party can repudiate the (2) The aggrieved party can claim only
contract or claim damages or both in damages in case of breach of
the case of breach of condition. warranty.

(3) A breach of condition may be treated (3) A breach of warranty cannot be

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

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3. Answer the following:

When the doctrine of 'Caveat Emptor' does not apply to the sale of goods?
Ans. The term Caveat Emptor means let the buyer beware; i.e. it is the duty of the buyer to select
the goods of his requirement. The seller is in no way responsible for the bad selection of the
buyer and not bound to disclose the defects in the goods which is selling. If the goods turn out
to be defective, the buyer cannot hold the seller responsible. This is known as the doctrine of
'Caveat Emptor'. This doctrine is however, subject to the following exceptions:
1. Where the buyer makes it 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 judgement 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. Where the goods are sold by description there is an implied condition that the goods shall
correspond with the description. (Section 15).
3. 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.
But where the buyer has examined the goods this rule shall apply if the defects were such
which ought to have been revealed by an ordinary examination [Section 16(2)].
4. 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).
5. 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
(Section 15).
6. 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.
7. 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.

4. When can a 'Condition' be treated as a 'Warranty' under the Sale of Goods Act?
Ans. A stipulation in a contract of sale may be either a condition or a warranty. A condition is a
stipulation essential to the main purpose of the contract, the breach of which gives right to the
aggrieved party to terminate the contract while a warranty is a stipulation collateral to the
main purpose of the contract, the breach of which gives the aggrieved party a right to claim for
damages. But in some cases, a condition may be treated as warranty as given in Section 13 of
the Sale of Goods Act. The effect is that the buyer cannot repudiate the contract but has to
be satisfied with damages only. Such cases are discussed hereunder:

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1. Waiver by Buyer: Where a contract of sale is subject to any condition to be fulfilled by

the seller, the buyer may (a) waive the condition, or (b) elect 'to treat the breach of the
condition as a breach of warranty. The buyer has the option to accept the goods and claim
damages from the seller. If he once decides to waive the condition, he cannot afterwards
insist on its fulfillment.
Example: A agrees to buy from B, ten bags of wheat as per sample. B delivers the wheat,
but it was not according to the sample. A has a right to reject the goods, but he may
decide to accept the goods and treat this breach of condition as a breach of warranty.
2. Acceptance of goods by buyer: Where a contract of sale is not severable, i.e., it is
indivisible and the buyer has accepted the goods or part thereof, the breach of any
condition is to be treated as a breach of a warranty. In such a case it is not left at the
option of the buyer. But if the contract is divisible then even though the buyer has
accepted a part of the goods, he can still reject the remaining goods.
Now the question arises as to when the buyer can be said to have accepted the goods. In
this connection Section 42 provides that the buyer is deemed to have accepted the goods:
(a) when he intimates to the seller that he has accepted them or;
(b) when he does any act in relation to the goods which is inconsistent with the
ownership of seller or;
(c) when, after the lapse of a reasonable time, he retains the goods without intimating
to the seller that he has rejected them.
Example: A purchased 10 bags of rice from B according to the sample. When the goods
were delivered, A resold the rice to P. P rejected the goods on the ground that it was not
according to sample. Now A also wants to avoid the contract. Here A will not succeed
because by reselling the goods to P, A has accepted the goods. Now he is to treat this
breach of condition as a breach of warranty and be content with damages only.

5. Comment on the following:

A warranty is a stipulation collateral to the main purpose of the contract.
Ans. Stipulation in Warranty: In every contract of sale of goods there are certain stipulations made
with reference to goods which are the subject matter thereof. If the stipulation though not
essential to the main purpose of the contract is collateral to the main purpose of the contract -
that is to say - is a subsidiary promise - it is known as warranty. The effect of a breach of
warranty is to give the aggrieved party a right to claim the damages. In case of the breach of
warranty a buyer cannot repudiate the contract.

6. Answer the following:

What are the implied conditions in case of sale by sample?
Ans. Sale by sample (Section 17 of Sale of Goods Act)
A contract of sale is a contract for sale by sample where there is a term in the contract,
express or implied, to that affect. In the case of a contract for sale by sample there is an
implied condition:

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(i) that the bulk shall correspond with the sample in quality;
(ii) that the buyer shall have a reasonable opportunity of comparing the bulk with the sample;
(iii) that the goods shall be free from any defect, rendering than unmerchantable, which would
not be apparent on reasonable examination of the sample. This condition is applicable only
with regards to defects which could not be discovered by an ordinary examination of the
goods (Drummond and Sons vs. Van Inger).

7. Answer the following:

State the law relating to sale by description.
Ans. Implied conditions in a sale by description: The law relating to 'Sale by description' is
contained in Section 15 of the Sale of Goods Act, 1930.
1. Though the Act has not defined the term 'description', a sale is deemed to be made by
description:
(a) Where class or kind of goods has been specified e.g., Egyptian cotton.
(b) Where goods are described by its characteristics for identification e.g., dimensions
for steel.
2. In a sale by description, there is an implied condition that goods shall correspond with
description (by statement or representation as regards goods by its identity, place of
origin or mode of packing etc) alone made by the buyer, which is essential for deciding
either acceptance or rejection of goods by the buyer.
This implied condition goes to the root of the contract and the breach of its entitles the
buyer to reject whether he is able to inspect them or not.

8. Define the term 'warranty'. What are the kinds of implied warranties under the provisions of
Sale of Goods Act, 1930?
Ans. Definition of warranty: A stipulation in a contract of sale with reference to goods which are
the subject thereof may be a condition or a warranty. The warranty has been defined under
Section 12(3) of the Sale of Goods Act, 1930. 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.
Implied Warranties: The examination of Sections 14 and 16 of the Sale of Goods Act disclosed
the following implied warranties:
1. Warranty as to undisturbed possession: 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: 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. Disclosure of dangerous nature of goods: There is another implied warranty on the part
of the seller that in case the goods are inherently dangerous or they are likely to be
dangerous to the buyer and the buyer is ignorant of the danger, the seller must warn the
buyer of the probable danger. If there is breach of this warranty, the seller will be liable
in damages.

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9. Comment on the following:

"Breach of a condition in a sale of goods can be treated as a breach of warranty, but not
otherwise."
Ans. 'Breach of a condition in a sale of goods can be treated as a breach of warranty, but not
otherwise:
This statement is quite correct. Sections 12 and 13 of the Sale of Goods Act, throw light on
this statement. The definitions given of these two terms under the Act are quite meaningful to
support this statement.
"The condition in a contract of sale with reference to goods, 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." [Section 12(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." [Section 12(3)]
These definitions distinguish the nature of the two stipulations as well the effect of the
breach of the stipulations. Condition is an important stipulation than warranty and the law gives
a right to the aggrieved party to cancel the contract in case of a breach of this stipulation,
which right is not available in the case of breach of a warranty. On this basis the above
statement is supported.

10. What is meant by the doctrine of 'Caveat Emptor'? State the circumstances under which the
doctrine is not applicable.
Ans. Caveat Emptor: In the case of sale of goods, the doctrine applicable is "Caveat Emptor" which
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 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 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 judgement, the buyer cannot hold the seller
responsible. The rule of Caveat Emptor is laid down in the opening lines of 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 of fitness for any particular
purpose of goods supplied under a contract of sale”.
Exceptions: The doctrine of Caveat Emptor is, however, subject to the following exceptions;
1. 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 judgement and he 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)].
2. 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)].

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3. Where the goods are sold by description there is an implied condition that the goods shall
correspond with the description.
4. 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 been revealed by
ordinary examination [Section 16(2)].
5. 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. 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
[Section 15].
7. 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. Where the seller sells the goods by making some misrepresentation or fraud and the
buyer relies on it own 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 case the buyer has a right to avoid the
contract and claim damages.
9. If trade usage attached an implied warrants or a condition as regards quality of goods.
[Section 16(3)].

11. Explain the following (Give brief answer):

When a condition in a contract of sale may be treated as a warranty?
Ans. When a condition may be treated as a warranty (Section 13, Sale of Goods Act, 1930).
In the following case, a contract is not avoided even an account of a breach of a conditions.
These are:
(i) Where the buyer altogether waives the performance of the condition, a party may for his
own benefit, waive a stipulation or
(ii) Where the buyer elects to treat the breach of the condition as one of a warranty i.e. he
may only claim damages instead of repudiating the contract.
(iii) Where the contract is non-severable and the buyer has accepted either the whole goods
or any part thereof, unless there is an express or implied term in the contract to the
effect that it amounts to rejection of goods and repudiation of the contract.
(iv) Where the fulfilment of any condition or warranty is excused by law by reason of
impossibility or otherwise.

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12. Explain the following:

Give the exceptions to the 'doctrine of caveat emptor' in Sale of Goods Act.
Ans. Doctrine of Caveat Emptor ("Let the buyer beware"): It is no part of the seller's duty in a
contract of sale of goods to give to the buyer an article suitable for a particular purpose or of a
particular quality, unless such quality or fitness is made an express term of the contract. If the
buyer makes a bad choice, he is to suffer for this own judgement.
Exceptions: The doctrine has no application:
(i) If the seller has made a false representation relating to the goods and the buyer relies
upon it to his detriment.
(ii) When the seller has deliberately concealed a defect which is not apparent on the
reasonable examination of goods.
(iii) When the seller is a manufacturer or a dealer of the type of goods sold, and the buyer has
communicated to him as the purpose for which the goods are required, and he relies on the
skill or judgement of the seller. [Section 16(1), Sale of Goods Act, 1930].
The exception does not apply if the goods are bought under the patent or trade name.
(iv) The goods shall be of "merchantable quality", in case of goods sold by description.
(v) In the case of goods sold by sample, if the bulk does not correspond with the sample of if
the buyer is not provided a reasonable opportunity of inspecting the goods. [Section
17(2)].
(vi) If the trade usage attaches an implied warranty or a condition as regards quality of goods.
(Section 16(3)].
(vii) In the case of sale by sample as well as description, it the bulk does not correspond with
the description as well as sample. [Section 15].

13. Briefly answer of the following:

A contract of sale is not avoided even on account of breach of a condition.
Ans. The Sale of Goods Act, 1930 defines a condition as a stipulation essential to the main purpose
of the contract, the breach of which gives rise to a right to treat the contract as having been
repudiated. Thus it is clear from the definition, that the buyer gets the right to avoid the
contract in case of a breach of a condition on a contract of sale of goods. But the law does not
force the buyer to avoid the contract in case of breach of a condition. The buyer can treat the
breach of a condition, as a breach of a warranty. He also gets a right to waive the condition.
Further, where the contract is non-severable and the buyer has accepted either the whole
goods or any part thereof, then he cannot avoid the contract. Further, where the law excuses
the fulfilment of a condition or warranty, then the breach of a condition shall not allow the
buyer to repudiate the contract. Thus, a contract of sale can be avoided by the buyer in case of
breach of a condition and therefore, the statement as given in the question is not true.

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14. Briefly answer of the following:

What are the implied conditions in a Contract of Sale?
Ans. It is open to the parties to include in their contract any number of conditions and warranties.
But in addition to what the contract may provide, the law implies every sale of goods a number
of conditions. They are read with every contract of sale. They are known as implied conditions.
They are stated as under:
(i) Condition as to title (Section 14): It is an implied condition in every sale that the seller
has right to sell. That means the title of the seller is perfect.
(ii) Sale by description: Section 15 lays down the condition that where the sale is by
description the goods must correspond with description. If the goods does not correspond
with the description the sale may be set aside.
(iii) Sale by description as well as be sample (Section 15): Section 15 further provides that
"if the sale is by sample as well as by description, the delivery of goods should correspond
to description as well as sample.
(iv) Goods supplied must be fit for buyers purposes: If the buyer has disclosed the purpose
it should be fit for his purpose otherwise the contract may be set aside (Section 16(i)).
(v) Goods supplied should be of mercantile quality: It is an implied condition of sale that
goods must be of mercantable quality [Section 16(2)].
It is open to the parties to include any express condition in their contract. But an express
condition does not negative a condition implied by the Sale of Goods Act, 1930.

15. Define the terms 'Condition' and 'Warranty' as used in the Sale of Goods Act. Can a breach of
warranty be treated as a breach of condition and vice-versa?
Ans. "Condition" and "Warranty": Section 12(2) of the Sale of Goods Act, 1930, defines a condition
as a stipulation essential to the main purpose of the contract, the breach of which gives rise to
a right to a right to treat the contract as having repudiated.
Section 12(3) of the Act defines a warranty as a stipulation collateral to the main purpose of
the contract, the breach of which gives rise to a claim for damages but not a right to repudiate
the contract.
X buys a car from Y for touring purposes. The car is unfit for touring purpose. Here X can
repudiate the contract since "touring purpose" is a condition for buying the car.
On the other hand, the horn of the car is defective. X can not repudiate the contract, since
defective horn is only a warranty and horn can be repaired or replaced.
Whether a stipulation is a condition or a warranty depends in each case, on the construction of
contract. 'Conditions and Warrantees' may be either express or implied.
A warranty cannot be treated as a condition because it is a lesser importance to the concerned
parties. But a condition may be treated as a warranty under the following circumstances:
(1) The buyer altogether waives the performance of the condition.
(2) The buyer elects to treat the breach of the condition as breach of warranty and claims
damages only.

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(3) Where the contract is non-severable and the buyer has accepted either the whole goods
or any part thereof.
(4) Where the fulfilment of a condition or warranty is excused by law by reason of
impossibility of performance or otherwise.

16. Briefly answer the following:

What are the implied conditions in a Sale by Sample?
Ans. Implied conditions in a sale by sample:
A sale is by sample where there is a term in contract (express or implied) to that effect. The
effect is that where goods are sold by sample, there should not be any latent defect which
render the goods unmerchantable.
(a) The bulk must correspond with the sample in quality.
(b) The buyer shall have a reasonable opportunity of comparing the bulk with the sample; and
(c) The goods shall be free from any defects rendering them unmerchantable, which would
not be apparent on reasonable examination of the sample. (Section 17, Sale of Goods Act,
1930).

17. Briefly answer the following:

When shall a condition be treated as a warranty?
Ans. A condition shall be treated as a warranty in the following cases,.
1. Voluntary wavier of condition: Where a contract of sale is subject to any condition to be
fulfilled by the seller, the buyer may (a) waive the condition, or (b) elect to treat the
breach of the condition as a breach of warranty [Section 13(1)]. If the buyer once decides
to waive the condition, he cannot afterwards insist on its fulfilment.
2. Acceptance of goods by buyer: If the contract of sale is not severable and the buyer
has accepted the goods or part there of, the breach of any condition to be fulfilled by the
seller can only be treated as a breach of warranty, unless there is a term of the contract,
express or implied, to the contrary. [Section 13(2)].
The provisions of Section 13 of the Sale of Goods Act, 1930 do not affect the cases where the
fulfilment of any condition or warranty. is excused by law by reasons of impossibility or
otherwise. [Section 13(3)].

18. What is meant by the doctrine of 'Caveat emptor'? State the circumstances under which the
doctrine is not applicable
Ans. Caveat Emptor: This means "Let the buyer beware", i.e. in a contract of sale of goods the seller
is under no duty to reveal unflattering truths about the goods sold. Therefore, when a person
buys some goods, he must examine them thoroughly. If the goods turn out to be defective or do
not suit his purpose or if he depends upon his own skill or judgement and makes a bad selection,
he cannot blame anybody excepting himself.
The rule of caveat emptor is enunciate in t the opening words of Section 16 which runs thus:
"Subject to the provisions of this Act and of any other law for the time being in force, there is

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no implied warranty or condition as to the quality or fitness for any particular purpose of goods
supplied under a contract of sale”. Exceptions: The doctrine of caveat emptor has certain
important. The exceptions are given below:
1. Fitness for buyer's purpose: Where the buyer, expressly or by implication, makes known
to the seller the particular purpose for which he requires the goods and relies on the
seller's .skill or judgement and the goods are of a description which it is in the course of
the seller's business to supply, the seller must supply the goods which shall be fit for the
buyer's purpose [Sec. 16(1)].
2. Sale under a patent or trade name: In the case of a contract for the sale of a specified
article under its patent or other trade name, there is no implied condition that the goods_
shall be reasonably fit for any particular purpose [Proviso to Sec. 16(1)].
3. Merchantable quality: 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 he of merchantable quality. But if the buyer has
examined the goods, there is no implied condition as regards defects which such
examination ought to have revealed [Sec. 16(2)].
4. Usage of trade: An implied warranty or condition as to quality or fitness for a particular
purpose may be annexed by the usage of trade [Sec. 10(3)].
5. Consent by fraud: Where the consent of the buyer, in a contract of sale, is obtained by
the seller by fraud or where the seller knowingly conceals - defect which could not be
discovered on a reasonable examination (i.e. where there is'oa latent defect' in the
goods), the doctrine of caveat emptor does not apply.
6. Sale by sample (Section 17): when goods are bought by sample' the bulk must
correspond with the sample and the buyer must have reasonable opportunity of inspecting
the goods.

19. What is the Doctrine of "Caveat Emptor"? What are the exceptions to the Doctrine of "Caveat
Emptor"?
Ans. 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.
The exceptions to the Doctrine of Caveat Emptor are:
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 sellers' skill
or judgement 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)].

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2. Goods purchased under patent or brand name: In case where the goods are purchased
under the 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.
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.
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.

20. Discuss the various types of implied warranties as per the Sales of Goods Act 1930?
Ans. Implied Warranties: It is a warranty which the law implies into the contract of sale. It is a
stipulation which has not been included in express words, but the law presumes that the parties
have incorporated it into their contract.
Following types of implied warranties are provided by Sale of Goods Act, 1930:
(i) Warranty as to undisturbed possession: An implied warranty that the buyer shall have
and enjoy quiet possession of the goods. If the buyer is later on disturbed, he is entitled
to sue the seller for the breach of the warranty.
(ii) Warranty as to non-existence of encumbrances: 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 at the time of making the contract.
(iii) Warranty as to quality or fitness by usage of trade: An implied warranty as to quality
or fitness for a particular purpose may be annexed or attached by the usage of trade.
(iv) 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.

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21. Write any four exceptions to the doctrine of Caveat Emptor as per The Sale of Goods Act,
1930.
Ans. According to Section (16) of the Indian Contract Act, 1872:
"Subject to the provisions of this act or any other law for the time being in force there is no
implied warranty or condition as to quality or fitness for any particular purpose of goods
supplied under a contract of sale. But, there are certain exceptions to this rule of CAVEAT
EMPTOR.
1. Fitness as to Quality or use: When 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 sellers skill
or judgement 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 goods as all reasonably fit for that purpose
section 16(1).
2. Goods sold by description: When the goods are sold by description there is an implied
condition that the goods shall correspond with the description. It is not then the seller is
responsible.
3. Sate by sample: When the goods are bought by sample, the rule of 'CAVEAT EMPTOR'
does not apply if the bulk does not correspond with the sample.
4. Goods of merchantable quality: When the goods are brought by description from the
seller who deals in goods of that description there is an implied condition that the goods
should be of a merchantable quality. The rule of 'CAVEAT EMPTOR' is not applicable.

22. What are the differences between a 'Condition' and 'Warranty' in a contract of sale? Also
explain, when shall a 'breach of condition' be treated as 'breach of warranty' under provisions
of the Sale of Goods Act, 1930?
Ans.
Point of Differences Condition Warranty
Meaning A condition is a stipulation A warranty is a stipulation
essential to the main purpose collateral to the main purpose
of the contract. of the contract.
Right in case of breach The aggrieved party can The aggrieved party can claim
repudiate the contract or only damages in case of
claim damages or both in the breach of warranty.
case of breach of condition.
Conversion of stipulations A breach of condition may be A breach of warranty cannot
treated as a breach of be treated as a breach of
warranty. condition.
Section 13 of Sales of Goods Act, 1930 specifies cases where a breach of condition be treated
as a breach of warranty. As a result of which the buyer loses his right to rescind the contract
and can claim damages only.
In the following cases, a contract is not avoided even on account of a breach of a condition:

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(i) Where the buyer altogether waives the performance of the condition. A party may for his
own benefit, waive a stipulation. It should be a voluntary waiver by buyer.
(ii) Where the buyer elects to treat the breach of the conditions, as one of a warranty. That
is to say, he may claim only damages instead of repudiating the contract. Here, the buyer
has not waived the condition but decided to treat it as a warranty.
Example: A agrees to supply B 10 bags of first quality sugar @ Rs. 625 per bag but
supplies only second quality sugar, the price of which is Rs. 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 @ Rs. 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 fulfilment of any condition or warranty is excused by law by reason of
impossibility or otherwise.

23. 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?
Ans. Caveat emptor means "let the buyer beware", i.e. in sale of goods, the seller is under no duty to
reveal unflattering truths about the goods sold. Therefore, when a person buys some goods, he
must examine them thoroughly. If the goods turn out to be defective or do not suit his purpose,
or if he depends upon his skill and judgement and makes a bad selection, he cannot blame any
body except himself.
The rule is enunciated in the opening words of section 16 of the Sale of Goods Act, 1930, which
runs thus, “subject to provisions of this Act and 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.”

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The rule of caveat emptor does not apply in the following case:
Fitness for buyer's purpose:
Where the buyer, expressly or by implication, makes known to the seller the particular purpose
for which he requires the goods and relies on the seller's skill or judgement and the goods are
of a description which it is in the course of the seller's business to supply, the seller must
supply the goods which shall be reasonably fit for the buyer's purpose.
In the given case Mr. Das had clearly intimated the seller of his specific purpose and the goods
supplied by the seller were totally unfit for that purpose. The seller is bound to supply the
goods that are reasonably fit for the purpose.
Held, the contract is avoidable by Mr. Das and he holds full right to either get his money back
or to get right kind of wood as required for his purpose.

24. 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?
Ans. 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.
(c) the goods shall be free of any defect rendering them un-merchantable, which would not be
apparent on reasonable examination of the sample. This condition is applicable only with
regard to defects, which could not be discovered by an ordinary examination of the goods.
But if the defects are latent, then the buyer can avoid the contract.
In the given case;
Mrs. Geeta casually examined the sample and did not notice that sample contained mix of
long and short grains. Hence, Mrs. Geeta cannot avoid the contract and will not be
successful in the suit. However if the buyer had specified her exact requirements, then
seller must supply such goods which are reasonably fit for the given purpose.

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CHAPTER – 2
THE SALE OF GOODS ACT, 1930
Unit : 3 – Transfer of Ownership and Delivery of Goods

SELF STUDY QUESTIONS

1. Write short note of the following:

Documents of Title to Goods.
Ans. Documents of title to goods: A document of title to goods is one which enables its possessor
to deal with the goods described in it as if he were the owner. It is used in the ordinary course
of business as proof of the possession or control of goods. It authorises, either by
endorsement or by delivery, its possessor to transfer or receive goods represented by it [Sec.
2(4)]. It symbolises the goods and confers a right on the purchaser to receive the goods or to
further transfer such right to another person. This may be done by mere delivery or by proper
endorsement and delivery. But such document is not a negotiable instrument, for unlike 'a
holder in due course', the transferee of such a document does not acquire a title better than
the one held by transferor. Only bona fide holder of a document of title can enforce his right
there under.
Some instances of documents of title to goods are bill of lading, dock warrant, warehouse
keeper's or wharfingers' certificate, railway receipt and delivery order.

2. Write short note of the following:

Symbolic delivery.
Ans. Symbolic delivery: Delivery denotes a voluntary transfer of possession from one person to
another. The delivery may be actual (i.e., by an actual transfer of physical custody), or symbolic
(i.e., by causing a change in the possession of the goods without any change in their actual or
visible custody). If the goods are bulky or ponderous or not capable of being actually handed
over by the seller to the buyer, a symbol indicating the transfer of title of the goods may be
given which will tantamount to delivery. For example, A sells to B 100 quintals of wheat lying in
the possession of C, a warehouseman. A makes over to B, an order to C, called a delivery order,
to transfer the wheat to B and C accepts such an order by transferring the wheat in his books
to B. This would be construed as a symbolic delivery to B. In such a case complete access to the
goods is essential otherwise it will not be a symbolic delivery (Sanders vs. Maclean 1883).
Thus in symbolic delivery the goods remain where they are, but the means of obtaining
possession of goods is delivered. Other examples of symbolic delivery are bill of lading or
railway receipt.

3. Write short note of the following:

Kinds of Delivery of Goods.
Ans. Kinds of Delivery of Goods: Delivery means voluntary transfer of possession by 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

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authorised to hold them on his behalf. Delivery may be of three kinds which may be enumerated
as follows:
(i) Actual delivery: It is actual when the goods themselves are delivered to the buyer or the
key of a warehouse containing the goods is handed over to him.
(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 (acknowledgment) 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 cause of transit may be made by handing over documents of
title to goods, like bill of leading or railway receipt or delivery orders.

4. When may a non-owner of goods validly transfer the title of goods to another person, under the
Sale of Goods Act?
Ans. The general rule relating to the transfer of title on sale is that a person can not pass a better
title than what he himself has. This rule is expressed by the maxim "Nemo dat Quod non
habet", which means "no one can give what he has not got". Since the seller's title is defective
the subsequent transferee's title will also be defective.
This rule has been stated in Section 27 which runs thus "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".
Exceptions to this rule: Section 27 to 30 lay down the situations in which Nemo dat rule does
not apply. These are as follows:
(i) Title by estoppel (Section 27): Where the true owner by his conduct or by act or
omission causes the buyer to believe that the seller has the authority to sell the goods
and induces the buyer to buy them, he can not afterwards set up seller's want of title or
authority to sell as defenoe. He shall be estopped or precluded from denying the authority
of the seller to sell. The buyer in such a case gets a better title than that of the seller.
(ii) Sale by mercantile agent: Where the mercantile agent is, with the consent of the owner,
in possession of goods or of a document of title to the goods, any sale made by him shall
be valid as if he is the owner of the goods, provided he has acted in good faith and has
not, at the time of the contract of sale, noticed that the seller has not authority to sell.
(iii) Sale by a join owner (Section 28): If one of the 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 from such joint owner in good faith and has not
at the time of the contract of sale noticed that the seller has no authority to sell.
(iv) Sale by person in possession under voidable contract (Section 29): When the seller of
goods has obtained possession thereof under a voidable contract, but the contract has not
been rescinded at the time of the contract of sale, the buyer acquires a good title to the

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goods provided he buys them in good faith and without notice of the seller's defective
title.
(v) Seller in possession after sale [Section 30(1)]: Where a seller having sold the goods
continues to be in possession of the goods or documents of title to the goods, he may
resell the goods and the new buyer will get a good title over the goods provided he acts in
good faith, without notice of the prior sale, and obtains possession of the goods or
documents of title to the goods.
(vi) Buyer in possession after sale [Section 30(2)]: Where a person has bought or agreed to
buy certain goods whose possession has been given over to him, but the seller, still has
some lien or right over the goods, and the buyer sells the goods, the second buyer will get
a title free from seller's right of lien provided he acts in good faith and without notice of
any lien or other right of the original seller in respect of the goods [Martin vs. Whale
(1917)].
(vii) Resale by unpaid seller: Where an unpaid seller while after exercising his right resells
the goods, the buyer acquires a good title thereto as against the original buyer, not-
withstanding that no notice of resale has been given to the original buyer.
(viii) Sale by finder of lost goods: Under certain circumstances, a finder of goods may sell
them and convey a good title to the purchaser (Section 169 of Indian Contract Act).
(ix) Sale under order of the Court: A transferee under a Court sale gets a good title
notwithstanding he title or authority of his transferor.

5. Describe the rules relating to passing of property in the sale of goods.

Ans. 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 primary rules relating to the passing of property in the sale of goods are:
(1) No property in the goods is transferred to the buyer, unless and until the goods are
ascertained.
(2) Where there is a contract for sale of specific of ascertained goods, property passes to
the buyer at the time when parties intend to pass it. For the purpose of ascertaining
intention of the parties regard shall be had to the terms of contract, conduct of parties,
and circumstances of the case. Where the intention of the parties cannot be ascertained,
rules contained in Sections 20 to 24 shall apply.
For specific goods: Where there is an unconditional contract for the sale of specific goods in a
deliverable state, property in the goods passes to the buyer when the contract is made (Section
20). Deliverable state means such a state that the buyer would under the contract be bound to
take delivery of the goods. If the goods are not in a deliverable state, property does not pass
until such a thing is done to put the goods in a deliverable state. This 'something' may mean
packing the goods, testing, polishing, filling in casks etc. It should be noted that the property
shall not pass when the goods are made in deliverable state but shall pass only when the buyer

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has notice of it (Section 21). But where they are in deliverable state, but the seller is bound to
weight, measure, test or do some other act or thing for the purpose of ascertaining the price,
the property does not pass until such act or thing is done. When the seller has done his part the
property passes even if the buyer has to do something for his own satisfaction. (Section 22).
Unascertained goods: Until, goods are ascertained, there is merely an agreement to sell. The
ascertainment of goods and their unconditional appropriation to the contract are the two pre-
conditions for transfer of property from seller to buyer in case of unascertained goods. A
seller is deemed to have unconditionally appropriated, where he delivers the goods to the buyer
or to a carrier or other bailee for the purpose of transmission to the buyer. (Section 23).
Goods sent on approval or "on sate or return": 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. (Section 24).

6. What are the rules regarding delivery of goods?

Ans. Rules regarding delivery of goods: The Sale of Goods Act prescribes the following rules of
delivery of goods:
(i) Effect of Part delivery: A delivery of part of goods, taking place in the course of the
delivery of the whole, has the same effect for the purpose of passing the property in such
goods as delivery of the whole. But such part delivery, with the intention of severing it
from the whole will not operate as a delivery of the remainder, it will be construed as part
delivery only. (Section 34)
(ii) Buyer to apply for delivery: The seller of the goods is not obliged to deliver them until
the buyer has applied for delivery, unless otherwise agreed. (Section 35)
(iii) Place of delivery: If there is no contract to the contrary, goods must be delivered at the
place where they were at the time of sale, and the goods agreed to be sold are required to
he delivered at the spot at which they were lying at the time the agreement to sale
entered into, or if not then in existence, at the place where they would be manufactured
or produced. [Section 36(1)].
(iv) Time of delivery: When the time of sending the goods has not been fixed by the parties,
the seller must send them within a reasonable time. [Section 36(2)].
(v) 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. The issue or transfer of
any document of title to goods operates as delivery, symbolic in character, even if the
goods are in the custody of a third person without such attornment. [Section 36(3)].
(vi) 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)]

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(vii) Expenses for delivery: The expenses of and incidental to putting the goods into a
deliverable state must be born by the seller, in the absence of a contract to the contrary.
[Section 36(5)].
(viii) Delivery of wrong quantity: In case of tender of lesser quantity of goods, the buyer may
either accept the same and pay for it at the contract rate or reject it. [Section 37(1)]. In
case of excess delivery the buyer may accept or reject the delivery, if he accepts the
whole of the goods, he shall pay for them at the contract rate. [Section 37(2)]. In case
the seller makes a delivery of the goods contracted mixed with goods of a different
description, the buyer may accept the relevant goods and reject the rest or reject the
whole [Section 37(3)]. Mixing of goods with inferior quality does not amount to a mixing of
goods of different description. (Hamarain v. Firm Radha Krishan Naraindas AIR 1949 Nag.
178)
(ix) 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
there for may be determined by the parties by contract. (Section 38)
(x) 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)].
(xi) 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).
(xii) 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 hound, on request, to afford the buyer a reasonable
opportunity of examining the goods. (Section 41)

7. Explain the law relating to passing of risk in case of the sale of goods.
Ans. Passing of the risk in the property to the buyer of goods: 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." Section 26.
However, Section 26 also lays down in 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 be special agreement stipulate that 'risk' will pass
sometime after or before the 'property' has passed.

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8. Comment on the following:

Delivery of the goods and payment of the price are concurrent conditions.
Ans. The law in this regard is laid down in Section 32 of the Sale of Goods Act, 1930. The section
says that unless otherwise agreed the 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 goods.
The general rule is that the obligations of the seller to deliver and that of the buyer to pay are
implied concurrent conditions in the nature of mutual conditions precedent, and that neither can
enforce that contract against the other without showing performance or offering to perform or
averring readiness and willingness to perform his own promise.
This section lays down the rule as regards what are known as reciprocal promises to be
simultaneously performed. In such a case no promisor need perform his promise unless the
promisee is ready and willing to perform his reciprocal promise [Pandurang vs. Dadabhay
(1902) 26 Born. 643].

9. When the property in the goods passes to the buyer in case of the delivery of the goods to the
buyer on approval basis?
Ans. Goods Delivered on Approval Basis: (Passing of the property). According to Section 24 of the
Sale of Goods Act, 1930, the property in the goods passes to the buyer in case of the goods to
the buyer on approval basis in the following manner:
1. when he signifies his approval or acceptance to the seller, or
2. does any other act adopting the transaction, or
3. if without signifying his approval or acceptance the buyer retains the goods without giving
notice of rejection refection, then, if time fixed for the return of goods, on expiry of
such time, and if no time is fixed, on the expiration of reasonable time.

10. Comment on the following:

Risk prima facie passes with the property in the goods.
Ans. Section 26 of the Sale of Goods Act, 1930 lays down the general rule that "risk prima facie
passes with the property". In other words, risk always follows ownership and the owner has to
bear the burden or loss. Thus, whoever is the owner, carries the risk. The goods remain at the
seller's risk until the ownership therein is transferred to the buyer and the goods are at
buyer's risk when their ownership is transferred to him whether the delivery has been made to
him or not.
However, there are following exceptions to the general rule that risk prima facie passes with
the property:
1. If the parties have by a special agreement stipulated that the risk will pass sometime
after or before the ownership has passed.

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2. Where the delivery of the goods has been delayed due to the fault of either the seller or
the buyer, in such cases the goods are at the risk of that party who is responsible for
such fault as resulted in loss of any kind. The defaulting party will bear the loss.
3. Sometimes trade customs may put the ownership and risk separately in two parties.

11. When the ownership in the goods may be transferred by a person who is not having title over it?
Ans. The general rule of law is that 'no one can give that which he has not got'. However
under, the following cases the goods can be sold even by the persons who are not having
title over it.
1. Sale by a person not the owner or title by estoppel. (Section 27): Sale of Goods Act
i.e. where the true owner by his conduct, or by an act or omission, leads the buyer to
believe that the seller has the authority to sell and induces the buyer to buy the goods he
shall be estopped from denying the fact of want of authority of the seller. The buyer in
such a case gets a better title than that of the seller.
2. Sale by a mercantile agent (Proviso to Section 27): Provided the agent is in possession
of the goods or documents of title to the goods with the consent of the owner; the agent
sells the goods while acting in the ordinary course of business of a mercantile agent; the
buyer acts in good faith and the buyer has not at the time of the contract of sale notice
that the agent has no authority to sell.
3. Sale by one of several joint owners (Section 28): If one of the several joint owners,
who is in sole possession of the goods by permission of the other co-owners sells the
goods, a buyer in good faith of those goods gets a good title to the goods.
4. Sale by a person in possession under a voidable contract. (Section 29): Where the
seller of goods has obtained the possession under a voidable contract, but the contract
has not been rescinded at the time of the sale, the buyer acquires a good title to the
goods, provided he buys them in good faith and without notice of the seller's defect of
title.
5. Sale by seller in possession after sale [Section 30(1)].
6. By buyer in possession after sale [Section 30(2)].
7. By an unpaid seller [Section 54(3)].

12. What are the exceptions to the doctrine of "Nemo dat quad non-habet" (one cannot give better
title than what he has).
Ans. The general rule is that the owner of goods can sell the goods. No one can convey a better title
than he himself has. This rules protects the true owner as the buyer from a non-owner does not
acquire a better title than what the seller had.
But the following are the exceptions to the above rule provided in the Sale of Goods Act,
1930:
(a) 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:

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(i) If he was in possession of the goods or documents with the consent of the owner.
(ii) If the sale was made by him when acting in the ordinary course of business as a
mercantile agent, and
(iii) If the buyer had acted in good faith and has at the time of a contract of sale, no
notice of the fact that the seller had no authority to sell (Proviso to section 27).
(b) Sale can be made by co-owner (Section 28): If one of the several joint owners, who is
in possession of the goods by permission of the other co-owners, sells the goods, a buyer
in good faith of those goods gets a good title to the goods.
(c) Sale can be made by a person in possession under a voidable contract (Section 29):
When the seller of goods has obtained their possession under a voidable contract, but the
contract has not been rescinded at the time of the sale, the buyer acquires a good title to
the goods, provided he buys them in good faith and without notice of the seller's defects
of title.
(d) Sale can be made by seller in possession after sale [Section 30(1)]: Where a seller
having sold goods, continues to be in possession of the goods or documents of title to the
goods and sells them either himself or through a mercantile agent to a person who buys
them in good faith and without notice of the previous sale, the buyer gets a goods title.
(e) Sale can be made by buyer in possession [Section 30(2)]: When where a person, having
bought or agreed to buy the goods, obtains, with the consent of the seller, possession of
the goods or documents of title to the goods and sells them, the buyer who acts in good
faith and without notice of any lien or other rights of the seller in respect of the goods,
gets a good title.
(f) 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.
(g) Exceptions in Other Acts:
(i) Sale by a finder of lost goods under certain circumstances (Section 169 of the
Indian Contract Act).
(ii) Sale by a pawnee or pledgee under certain circumstances (Section 176 of the Indian
Contract Act).
(iii) Sale by an official receiver or official assignee or liquidator of a company.

13. When the property in specific or ascertained goods passes to the buyer?
Ans. Transfer of property in specific or ascertained goods to the buyer [Sale of Goods Act,
1930]: Passing of property implies passing of ownership. When property is transferred to the
buyer, the risk of destruction or deterioration of the goods sold is that of the buyer and not of
the seller, though the goods may still be in the seller's possession.
(a) Where there is a contract for the sale of specific or ascertained goods, the property in
the goods is transferred to the buyer at such time as the parties to the contract intend it
to be transferred (Section 19).

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(b) In an unconditional contract of sale of specific goods in a deliverable state. The property
in the goods passes to the buyer when the contract is entered into. It is not affected by
the time of payment of price or the time of delivery of the goods of both (Section 20).
(c) Where there is a contract for sale of specific goods and the seller is bound to do
something to the goods for putting them in a deliverable state, the property does not pass
until such thing is done and the buyer has notice thereof (Section 21).
(d) Where there is a contract for sale of specific goods in a deliverable state, but the seller
is bound to weight, measure, test or do some other act or thing for ascertaining the price,
the property does not pass till such act or thing is done and the buyer has notice thereof
(Section 22).

14. State the rules of the Sale of Goods Act, relating to the delivery of goods:
(i) When it is given in instalments.
(ii) When it is in excess of Contracted quantity.
Ans. Rules of Sale of Goods Act, 1930 Relating to the Delivery of Goods:
(i) Where delivery of goods is given in instalments: Unless otherwise agreed upon, the
buyer of the goods is not bound to accept delivery by instalments. However, under a
contract, the goods sold may be delivered in instalments. In such a case each instalment
shall be treated separately and paid for.
In the following two cases, there will be a breach of such a contract:
1. Where the seller makes the delivery or makes defective delivery of one or more
instalments; or
2. Where the buyer neglects or refuses to take delivery of one or more instalments.
In each such breach, it will depend upon the terms of the contract and the circumstances
of the case whether:
(a) the whole contract is repudiated; or
(b) it is a severable breach giving rise to claim for compensation, but not a right to treat
the whole contract as repudiated. (Section 38)
(ii) Where delivery of goods is given in excess of contracted quantity: Section 37(2) of
the Act, Sale of Goods Act, 1930 deals with such a case.
Where the seller makes a delivery to the buyer or to his agent of the excess quantity of
goods than contracted for the buyer:
(a) may accept the agreed quantity and reject the rest; or
(b) he may reject the whole lot.
(c) he may accept the whole lot even, and in such a case has to pay for the whole
quantity at the contract rate.

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16. State the rules as to passing of the property, when goods are delivered on approval in a
Contract of Sale.
Ans. Section 24 of Sale of Goods Act, 1930 lays down rules as to passing of property when goods are
delivered on approval or "on return". In such cases property in goods passes either by
acceptance or by failure to return.
(i) By acceptance: The property in goods passes when buyer signifies his acceptance or
approval or otherwise adopts the transaction. Acceptance means acceptance of that part
of the contract which makes him the purchaser absolutely. That will be some act which
signifies that he intends to be the absolute purchaser. If he does some act which will be
right only if he were the absolute purchaser that signifies an acceptance or adoption with
in the statute where a person pawned the goods, he had no power of returning the goods
unless he repaid the amount advanced by the Pawnee. That is inconsistent with his free
power of returning the goods.
(ii) By failure to return (Section 24(2): The second circumstance in which the property in
goods passes to buyer, is when the latter fails to return the goods within reasonable time
or if a time has been fixed on the expiration of that time. Till the expiry of such time,
goods remains the property of the seller.
Where a horse was delivered to the defendant on terms that he should try it for eight days and
then return it if he did not like it. The horse died on third day without the fault of the
defendant. The seller could not recover the price from the defendant, the horse being still his
property when it perished (Elphick v. Barnes (1880) SCPD. 32).
On failure to return with in the specific time, the property passes to the buyer and the seller
may then sue for price. Where no time is fixed, the goods should be returned with in reasonable
time, or else they became they property of the buyer. What is reasonable time in a question
fact in each case.

17. Briefly answer the following :

Risk in the goods sold passes with the delivery of goods to the buyer.
Ans. Risk in the goods sold passes with the delivery of the goods to the buyer: Risk prima facie
passes with ownership and not delivery. Passing of the risk is not very much related to the
delivery of goods. Unless otherwise agreed upon. the goods remain at sellers risk until property
therein has passed to the buyer. After passing of the property to the buyer, the goods remain
at buyer's risk. Thus, risk is more related to the passing of the title than to delivery of the
goods. The goods may be in the possession of the buyer but the title upon them may be with the
seller. Thus, unless as agreed upon, the goods remain at seller's risk subject to the following
two qualifications:
1. Delivery of the goods has been delayed by the fault of the buyer or the seller. In this
case risk will be in the party to the default, and
2. Duties and liabilities of the seller or the buyer as bailee of goods for the other party
remain unaffected even where the risk has passed generally.
However, parties may by special agreement stipulate about passing of the risk.

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18. Briefly answer the following :

Transfer of property when goods are sold on approval.
Ans. Goods on Approval: Under Section 24 of the Sale of Goods Act, 1930 when goods are delivered
to the buyer on approval, the ownership in such goods passes to the buyer in any of the
following situations:
1. When the buyer signifies his approval or acceptance to the seller.
2. When the buyer does some act which amounts to adoption of the transaction, i.e. the
acceptance of the goods.
3. When the buyer fail to return the goods on the fixed time, namely, retains it beyond the
fixed time without notice of rejection.
4. When no time has been fixed for the return of goods and the buyer retains the goods
beyond reasonable time without giving notice of rejection. Reasonable time is a question of
fact and hence will depend on facts and circumstances of every case.

19. "Nemo dat quad non habeat" i.e. one cannot sell what he does not possess. Discuss this
statement and state the exceptions to this doctrine.
Ans. Stranger to a Contract
It is a general rule of law that only parties to a contract may sue and be sued on that contract.
This rule is known as the "doctrine of privity of contract". Privity of contract means
relationship subsisting between the parties who have entered into contractual obligations. It
implies a mutuality of will and creates a legal bond or tie between the parties. These are two
consequence of doctrine:
1. A person who is not a party to a contract cannot sue upon it even though the contract is
for the benefit and he provided consideration.
2. A contract cannot confer rights or impose obligation arising under it on any person other
than the parties to it.
The following are the exceptions to the general rule that a stranger to a contract cannot
sue:
1. A trust or charge: A person in whose favour a trust or other interest in some specific
immovable property has been created can enforce it even though he is not a party to the
contract. (Madhav Trading Co. vs. Union of India).
2. Marriage settlement, partition or other family arrangements: Where an arrangement is
made in connection with marriage, partition or other family arrangements and a provision
is made for the benefit of a person, he may sue although he is not a party to the
agreement.
3. Acknowledgment or estoppel: Where the promisor by his conduct, acknowledges or
otherwise constitutes himself as an agent of the third party, a binding obligation is
thereby incurred by him towards the third party.
4. Assignment of a contract: The assignee of rights and benefits under a contract not
involving personal skill can enforce the contract subject to the equities between the
original parties. (Kristian Lal Sadhu vs. Promila Bala).

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5. Contracts entered into through an agent: The principal can enforce the contracts
entered into by his agent provided the agent acts within the scope of his authority and in
the name of the principal.
6. Convenants running with the land: In case of transfer of immovable property, the
purchaser of land with notice that the owner of the land is bound by certain conditions or
convenants created by an agreement affecting the land shall be bound by them although
he was not a party to the original agreements which contained the conditions of
convenants. (Talk vs. Moxhay).

20. Explain of the following (Give brief answers):

Meaning of Constructive Delivery
Ans. Meaning of Constructive Delivery: Where a third person (e.g., a bailee) who is in possession of
the goods of the seller at the time of the sale acknowledges to the buyer that he holds the
goods on his behalf, there takes place a delivery by attornment or constructive delivery
[Section 36(3)]. Sale of Goods Act, 1930.
This may happen in the following cases:
(a) Where the seller in possession of the goods agrees to hold them on behalf of the buyer.
(b) Where the buyer is in possession of the goods and the seller agrees to the buyer's holding
the goods as owner.
(c) Where the third person in possession of the goods acknowledges to the buyer that he
holds them on his behalf.

21. What is meant by Constructive Delivery?

Ans. Constructive Delivery of goods
Delivery may be actual or constructive. In actual delivery actual transfer of physical custody
takes place while in case of constructive delivery, the change in the possession of goods is
caused without any change in their actual and visible custody. For example, A sells to B 100
quintals of wheat lying in the possession of C, a warehouseman. A makes delivery over to B, by an
order to C, called a delivery order, to transfer the wheat to B, and C accepts such an order by
transferring the wheat in his books to B. This would be considered as a constructive delivery to.
Thus, constructive delivery may takes place in any of the following manner:
(i) The seller in possession of the goods agrees to hold them on behalf of the buyer.
(ii) The buyer is in possession of the goods but the seller agrees to the buyer's holding the
goods as owner.
(iii) A third person is in possession of the goods but acknowledges to the buyer that he holds
them on his behalf.

22. What is appropriation of goods under the Sale of Goods Act, 1930? State the essentials
regarding appropriation of unascertained goods.
Ans. 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.

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The essentials regarding appropriation of unascertained goods are as follows:

(a) There is a contract for the sale of unascertained goods or future goods.
(b) The goods should confirm to the description and quality stated in the contract.
(c) The goods must be in a deliverable state.
(d) Goods must be unconditionally appropriated.
(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 the appropriation.

23. "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
Sales of Goods Act 1930'?
Ans. 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 as "Nemo dal quod Non habet" which means that no one can give
what he has not got.
In the following cases, a non-owner can convey better title to the bonafide 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 if sale is made with the
consent of the principal.
2. Sale by One of the Joint Owners: 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 from such joint owner in good faith.
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, etc. provided that the contract had
not been rescinded until the time of sale.
4. Sale by one who has already sold the goods but continues in possession thereof: If a
person has sold the goods but continues to be in possession of them or of the documents
of title to them, he may sell them to 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 property in goods had passed to the first buyer earlier.
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, he would get a good title to them.

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6. Effect of Estoppel: Where the owner is estoppel by the conduct from denying the sellers
authority to sell, transferee will get a good title as against the true owner.
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.
8. Sale under provisions of other Acts:
(i) Sale by an official receiver/ liquidator.
(ii) Purchase of goods from finder of lost goods.
(iii) A sale by pawnee can convey a good title to the buyer.

24. Explain any six circumstances in detail in which non-owner can convey better title to Bona fide
purchaser of goods for value as per The Sale of Goods Act, 1930.
Ans. Transfer of title (section 27-30) of the Indian Sale of Goods Act, 1930: Subjects to the
provisions of this act or to any other law for the time being in force, when the goods are sold by
a person who is not the owner and 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. In general
the rule regarding to transfer of title is that the seller cannot transfer to the buyer of a goods
a better title than he himself has. If the seller is not the owner of the goods the buyer will also
not become the owner.
The rule is explained in Latin maxim which says 'nemo dat quod non habet' which means no one
can give what he has not get.
But this rule has certain exceptions which says that non-owner can convey a better title to a
bona-fide purchaser of goods:-
(a) Sale by a mercantile agent: When the goods are sold by a mercantile agent for the
documents of title to goods would pass a good title to the buyer. In the following
circumstances namely:-
(i) He has the possession of goods with the consent of the owner.
(ii) If the sale was made by him while acting as an agent in the normal course of
business.
(iii) If the buyer has acted in good faith and has no notice of the fact that the seller has
no authority to sell.
(b) Sale by one of the joint owners: If one of the several joint owners of the goods has the
sole possession of them by the permission of the other co-owners, the property in the
goods is transferred to any person who buys them of such joint owner in good faith and
has no notice that has no authority to sell.
(c) Sale by a person in possession under a voidable contract: A buyer would acquire a
better title to the goods sold to him by a seller who had obtained possession of goods
under a contract voidable on the ground of coercion, fraud etc. provided that the contract
has not been rescinded until time of sale.

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(d) 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 the possession of them or of the documents
of title to goods, he may sell them to a third person who obtains the delivery there of in
good faith and without notice he would have a good title to them.
(e) Sale by an unpaid seller: When an unpaid seller who have exercised his right of lien or
stoppage in transit resells the goods the buyer acquire a better title to the goods as
against the original buyer.
(f) Sale under the provisions of other Act:
(i) Sale by an official liquidator of the company which give purchaser a valid title
(ii) Sale of goods by a finder of lost goods which take them under his custody
(iii) Sale by Pawnee will convey a better title to the buyer.

25. "Risk Prima Facie passes with property." Elaborate in the context of The Sales of Goods Act,
1930.
Ans. Risk Prima Facie passes with property (Section 26):
(a) The term risk means the liability to bear the loss, if goods are lost or damaged.
(b) The general rule is that, risk follows ownership i.e. if the goods are lost or damaged at any
point of time, the loss shall be borne by the owner of the goods.
(c) Price has been paid or delivery has been made or not, is immaterial with respect to passing
of risk.
(d) However, there are certain exceptions to the above rule:
(i) If the loss or damage of goods due to delay in delivery, then the person who is
responsible for such delay has to-bear the loss.
(ii) If a party holds the goods a bailee (whether buyer or seller), then that person has to
bear the risk in case of lost or damaged goods.
(iii) If risk is separated either by an agreement or by a trade custom, then the person
holding the risk has to bear the loss in case of lost or damage of goods.
In all these above cases, it is immaterial, whether property has passed to buyer or
not.

26. Mr. D sold some goods to Mr. E for Rs. 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.
Ans. 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 a 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 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.
Thus, in the given case, Mr. D can recover damages from Mr. E and can repudiate the contract
as well.

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27. 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?
Ans. According to the facts of this case it stands pretty much clear to the judgement of an
independent observer that the property in the goods sold by Mr. G had already passed to Mr. H
after the payment of dues and the examination of goods by the agent of Mr. H. Hence it can be
easily concluded that the liability for damage suffered by the goods would fall on the buyer i.e.
Mr. H and not Mr. G since the transfer of title of the goods had already taken place before the
damage occurred.

28. State the various essential elements involved in the sale of unascertained goods and its
appropriation as per the Sale of Goods Act, 1930.
Ans. The property in unascertained goods or future goods does not pass until the goods are
ascertained.
Such goods are defined only by description and not as goods identified and agreed upon when
the contract is made.
The following rules are applicable for ascertaining the intention of the parties in regard to
passing of property in respect of such goods.
The property in such goods passes to the buyer when the goods in a deliverable state are
unconditionally appropriated to the contract.
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 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.

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29. 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?
Ans. Goods sent on approval or on sale or return basis (Section 24) of the Sales of Goods Act, 1930.
When the goods are delivered to the buyer on approval or on sale or return basis 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 on
the expiration of such time, if no time has been fixed, then on the expiration of the
reasonable time.
(c) he does something to the goods which is equivalent to accepting the goods.
But sometimes, it may be noted that where goods have been delivered by a person on 'Sale or
return' on the terms that the goods well to remain the property of the sellers 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.
In the given case Mr. R owns a two wheeler which she handed over to her friend MSK on sale or
return basis. After a week MSK neither returned the vehicle nor made payment for it. She
instead pledge the vehicle to Mrs. A to obtain a loan.
(i) Thus, according to this case Mr. R has no right against Mr. A. He can only recover the
price of the two wheeler from Mr. K.
(ii) Yes, my answer will be different if it had been expressly provided that the vehicle would
remain the property of Mr. R until the price has been paid then it says that at the time of
pledge the ownership was not transferred to Mr. K. Thus, the pledge was not valid and R
can recover from the two wheeler from A as well.

30. 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?

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Ans. Legal Provision: According to Section 15 of Sales of Goods Act, 1930. 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.
Fact: Here in the given problem, Mr. M went to Mr. T's (retail trader) shop and asked for
exhaust fan and approved a particular brand and paid for it. The fan which was delivered at M's
house was a table fan. So, he asked Mr. T to exchange the same but Mr. T refused to do so.
Conclusion: Applying the above legal provision is the given problem we can conclude as follows:
(1) Mr. T is not right he can't refuse to exchange the fan as the goods are not according to
description. Buyer has asked for exhaust fan and seller has supplied table fan condition as
to description is breached.
(2) Remedy available to Mr. M – Mr. M can repudiate / rescind the contract, i.e. he can return
the table fan and ask for damages or both.

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CHAPTER – 2
THE SALE OF GOODS ACT, 1930
Unit : 4 – Unpaid Seller

SELF STUDY QUESTIONS

1. Distinguish between right of lien and right of stoppage in transit.

Ans.
Basis Right of Lien Right of Stoppage in Transit
Solvency The right can be exercised even when The right can be exercised only
the buyer is solvent buy refuses to pay when the buyer has become
the price. insolvent.
The goods must be in actual possession The goods must be in the
of the seller. possession of a carrier or other
bailee who is acting as an
independent person.

Purpose The purpose of the right is to retain The purpose of this right is to
possession of the goods. regain the possession of the
goods.

Mode of This right can be exercised by the This right can be exercised by the
exercising seller himself. seller through the carrier or the
right other bailee.

2. Write short note on:

Who in an 'unpaid seller'? Discuss briefly, his rights under the Sale of Goods Act.
Ans. Unpaid Seller: According to Section 45(a) of the Sale of Goods Act, 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) a bill of exchange or other negotiable instrument was given as payment, but the same has
been dishonoured, unless this payment was an absolute, and not a conditional payment.
Any person who is in a position of a seller, is also a seller, any may exercise the rights
conferred upon an 'unpaid seller' in above said circumstances. For instance, an agent of
the seller, to whom bill of lading has been endorsed, is in the position of seller and may
exercise rights of 'unpaid seller'.
Rights of an unpaid seller: An unpaid seller has been expressly given the rights against the
goods as well as the buyer personally which are discussed as follows:
A rights of an unpaid seller against the goods: The unpaid seller has the following rights
against the goods whether the property in the goods has passed to the buyer or not.

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1. Rights of lien (Sec. 47): He 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. The right of lien can
be exercised by him in the following cases only:
(a) Where gods have been sold without any stipulation of credit;
(b) Where goods have been sold on credit but the term of credit has expired; or
(c) Where the buyer becomes insolvent.
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.
2. Right of stoppage 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 of 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:
(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.
3. Right of re-sale: The unpaid seller can exercise the right to re-sell the goods under the
following conditions:
(i) When the goods are of a perishable nature. In such a case the buyer need not be
informed of the intention of resale.
(ii) When the gives notice to the buyer of his intention to re-sell the goods and the
buyer does not within a reasonable time pay or tender the price.

3. Write short note on:

Buyer's Rights Against the Seller.
Ans. Buyer's Rights Against the Seller:
(i) Buyer has right to examine the goods purchased by him. Where the goods are delivered to
the buyer which he has not previously examined, he is not deemed to have accepted them
unless and until he has a reasonable opportunity of examining them for the purpose of
ascertaining whether they are in conformity with the contract [Section 41(1)].
(ii) Unless otherwise agreed when the seller tenders delivery of goods to the buyer, he is
bound, on required to afford the buyer a reasonable opportunity of examining the goods

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for the purpose of ascertaining whether they are in conformity with the contract [Section
41(2)].
(iii) 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 (Section 43).
(iv) Where the seller delivers to the buyer a quantity of goods less than he contracted to sell,
the buyer may reject them [Section 37(i)].
(v) If the goods delivered are larger than he contracted, the buyer may accept the goods
included in the contract and reject the rest, or he may reject the whole.
(vi) If the goods ordered have been mixed with goods of different description the buyer may
accept the goods as contracted and reject the rest, or may reject the whole.
(vii) Besides, the buyer has all the rights against the seller in case if there is a violation of any
kind of stipulation or condition or warranty, the contract may be avoided on damages may
be claimed for the loss caused, if any.

4. Write short note on:

Describe the law relating to the "right of resale" available to an unpaid seller in the Sales of
Goods Act, 1930.
Ans. Right of resale: This right of resale available to an unpaid seller may be described as follows
(Section 54(2), Sale of Goods Act, 1930):
1. Where the goods are of a perishable nature, the unpaid seller may re-sell the goods
without any notice to the buyer.
2. When the unpaid seller has exercised his right of lien or stoppage in transit, he has to
give notice to the buyer of his intention to re-sell. Thereupon, the buyer may pay the price
within a reasonable time. If the buyer does not pay, the unpaid seller can re-sell the goods
and recover from the original buyer the damages for any loss occasioned by his breach of
contract. The original buyer shall not be entitled to any profit which may occur on re-sale.
If however, the unpaid seller re-sells the goods without notice to the buyer, the unpaid
seller shall not be entitled to recover damages and the buyer shall be entitled to the
profit, if any, occurring on the re-sale.
3. Where an unpaid seller who has exercised his right of lien or stoppage in transit resells
the goods, the buyer acquires the good title thereof as against the original buyer, despite
the fact that the notice of resale has not been given by the seller to the original buyer.
4. A re-sale by the seller where a right of re-sale is expressly reserved in a contract of sale
has the effect of rescinding the contract, but it does not prejudice any which the seller
may have for damage against the buyer.

5. Write short note on:

What are the remedies available to the buyer, when goods in wrong quantity are delivered to
him?

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Ans. Wrong quantity may be either short delivery 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 price. By accepting the lesser quantity the buyer is not
debarred from suing or damages on the ground of short delivery.
(a) Short delivery: When the seller delivers to the buyers 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 may pay for them at the contract price. By accepting the lesser quantity
the buyer is not debarred from suing for damages on the ground of short delivery.
(b) Excess delivery: Where the seller delivers to the buyer a quantity of goods larger than
contracted for the buyer has the option:
(i) to accept the contracted quantity and reject the excess or
(ii) to accept the whole and pay for them at the contract price or
(iii) to reject the whole quantity.
(c) Mixed delivery: Where the seller delivers to the buyer the goods he contracted to sell
mixed with the 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 the rest, or
reject the whole.
When the goods wrong quantity are delivered the buyer has the option to reject the whole
lot and if he does so it does not amount to cancellation of the contract. The seller has the
right to deliver the goods contracted for and the buyer shall be bound to accept the same.

6. Write short note on: Liability of an incoming partner.

Ans. An incoming partner is not liable for any act of the firm done prior to his admission as a partner.
This is because the old partner were not the agents of the new partners at the time when they
acted. By a mutual agreement, the new partners may agree with the old partners to be liable for
the past liabilities of the firm. However, the creditors of the firm cannot sue the new partners
for their past debts, because there is no privity of contract between the creditors and the new
partner. Similarly the acts of the old partner can not be ratified by the new partner because he
was not in existence as a principal at the time when acts were done. He is liable for the acts of
the old firm only if the new firm assumes the liabilities of the old firm and the creditors accept
the new firm as their debtor and discharge the old firm from his liability.

7. Write short note on:

Describe in brief the rights of the buyer against the seller in case of breach of contract of sale.
Ans. Buyer's rights against the seller in case of breach of contract: Sections 57 to 59 & 61 of
the Sale of Goods Act, 1930, proceed to deal with the remedies of a buyer in cases where the
seller commits a breach of the contract. They are as follows:
(i) 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. In this case the general rules as regards to the ascertainment of the damages
given under Section 73 of the Contract Act, 1872 and the rule in Hadley vs. B Baxendale
will be applicable.

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(ii) Suit for specific performance (Section 58): Where property has passed to the buyer,
he also can exercise another right, i.e. a right to sue for specific performance and its
limits regulated by the Specific Relief Act. In such cases the court may, in its discretion
grant a decree ordering the seller to deliver those specific or ascertained goods which
formed the subject matter of the contract. The remedy is discretionary and will only be
granted if the goods are of specific value or are unique, e.g., a rare book, a picture or a
piece of jewellery, and the damages are not an adequate remedy.
(iii) Remedy for breach of warranty (Section 59): Where there is a breach of warranty by
the seller, or where the buyer elects or is compelled to treat any breach of a condition on
the part of the seller as a breach of warranty, the buyer is not by reason only of such
breach of warranty entitled to reject of the goods; but he may:
(a) set up against the seller the breach of warranty in diminution or extinction of the
price; or
(b) sue the seller for damages for breach of warranty.
The measure of damage for breach of warranty is the estimated loss or damage arising
directly or naturally from the breach, which is prima facie the difference between the
value of the goods at the time of the delivery and the value they would have had if the
goods had answered to the warranty.
(iv) Suit for recovery of price (Section 61): The buyer has a right to recover the money
paid to the seller where the consideration for payment of it has failed. For example,
where the buyer is deprived of goods by their true owner, he may recover the price for
breach of the condition as to title.

8. Write short note on:

Discuss the remedies available to seller against the buyer in case of breach of contract of sale.
Ans. Remedies available to the seller against the buyer: Following remedies are available to the
seller against the buyer in case of the breach of contract of sale:
(i) Suit for price: Where the property in the goods has passed to the buyer or he was
wrongfully neglected or refused to pay for the goods according to the terms of the
contract, the seller may sue him for the price of goods. Further, where the price is
payable under the contract 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 even
if the property in the goods has not passed and the goods have not been appropriated to
the Contract. (Section 55).
For instance, there was a sale of some quantity of iron to be delivered between 3 rd May
and 30th June, if the buyer so required, the price to be paid on the latter date at all cost.
By 30th, only a portion of the iron had been delivered since the buyer did not require any
further delivery. In such situation, the seller would be able to recover the whole price
without showing that he had appropriated to the contract any specific iron to complete
the delivery of the remainder. Incidentally, the seller has a lien on the goods for the price
while he is in possession of them. The statement in a contract of sale that the seller would
have the right to resell after notice will not deprive him of his legal right to sue for the
price of the goods if he so desires.

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(ii) 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.
Some of the rights of an unpaid seller viz., lien stoppage in transit, and resale are
additional rights. These, however, do not compensate the seller for the breach of the
contract but simply protect him from additional loss; the breach of the contract, no doubt
remains and the seller is entitled to be compensated for the same. The above referred
remedies under Section 55 and 56 deal with the remedies available to a seller and may be
exercised by him (seller).
(a) If the property in the goods sold has already passed to the buyer the seller can
either sue for price or for damages for non-acceptance [Section 55(1) and 56].
(b) If the property in the goods sold has not passed the seller's only remedy is to sue
for damages for non-acceptance (Section 56), but the seller can even if the property
has not passed, bring an action for the price if it is "payable on a day certain" and
the buyer has failed to pay such price [Section 55(2)].
(c) When the seller is ready and wiling 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 change for the care and
custody of the goods. In this case the seller's right will not be affected where the
neglect or refusal of the buyer to take the delivery amounts to a repudiation of the
contract - (Section 44).
(d) The seller's right of re-sale is available subject to the provisions of Section 54(2)
and (4).
(e) How much damages will be awarded to the seller in case of the breach of contract of
sale by the buyer will be reassured according to the provisions of Section 73 and 74
of the Indian Contract Act, 1872.

9. Write short note on:

Who is an 'Unpaid Seller'? When can such a seller exercise his 'Right of Lien' against the
goods? Explain the rules for exercising the right of lien by an unpaid seller.
Ans. A seller be deemed to be an unpaid seller when:
1. the whole of the price has not been paid or tendered.
2. 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. (Section 45(1) Sale of Goods Act, 1930).
Thus the following conditions must be fulfilled before seller can be deemed to be an unpaid
seller:
1. He must be unpaid and the price must be due.
2. He must have an immediate right of action for the price.
3. A bill of exchange or other negotiable instrument was received but the same has been
dishonoured.

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Right of an unpaid seller : Right of Lien: (Section 46(1)(a), 47 to 49).

A lien is a right to retain possession of goods until payment of the price. It is available to the
unpaid seller who is in possession of the goods sold, where:
(a) The goods have been sold without any stipulation as to credit;
(b) The goods have been sold on credit, but the terms of credit has expired;
(c) The buyer becomes insolvent [Section 47(1)].
Rules regarding lien:
1. The seller may exercise his right of lien notwithstanding that he is in possession of the
goods as agent or bailee for the buyer [Section 47(2)]. If he loses the possession of the
goods, he loses the right of lien also.
2. The lien depends on actual possession and not on title. It is not affected even if the seller
has parted with the document capable of transferring title.
3. The possession of the goods by the seller must not expressly exclude the right of lien.
4. The lien can be exercised by the unpaid seller only for the price and not for any other
charges such as warehouse or dock charges.
5. Where an unpaid seller has made part delivery of the goods, he may exercise his right of
lien on the remainder. He may refuse to deliver such remainder of the goods till he is paid
for the goods already delivered and the goods are yet to be delivered.
Where, however, a part of the goods is delivered under such circumstances as to show an
agreement to waive the lien, the seller cannot retain the remainder [Section 481.
6. 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 [Section 49(2)].

10. Write short note on: Stoppage in transit.

Ans. Stoppage in Transit: (Section 50 Sale of Goods Act, 1930): It is a right of stopping the
goods while they are in transit, resuming possession of them and retaining possession until
payment of the price.
This right is exercised by the seller when:
(a) He is unpaid.
(b) He may have parted with the possession of goods.
(c) The goods must be in transit.
(d) The buyer must have become insolvent.
(e) The right is subject to provisions of the Act.
The unpaid seller may exercise this right either by taking actual possession of the goods or by
giving notice of is claim to the carrier, or other bailee in whose possession the goods are. The
right of stoppage in transit begins when the right of lien ends.

11. Write short note on:

State the provisions given under Sale of Goods Act relating to 'Auction Sale'.
Ans. Auction Sale: 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.
Under section 64 of the Sale of Goods Act, 1930 in the case of an auction:

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(a) Where goods are put for sale in lot, each lot is prima facie deemed to be subject matter
of a separate contract of sale.
(b) 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 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 to be subject to the right of the seller to bid, 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 person representing him.
Any sale contravening this rule may be treated as fraudulent by the buyer
(e) The sale may be notified to be subject to a reserve or upset price; and
(f) If the seller makes use of pretended bidding to raise the price, the sale if voidable at the
option of the buyer.

12. Write short note on: Unpaid seller's right to re-sale.

Ans. An unpaid seller's right to resale: (Section 54 Sale of Goods Act, 1930).
1. When the goods are of a perishable nature, the unpaid seller may re-sell the goods
without any notice to the buyer.
2. When the unpaid seller has exercised his right of lien or stoppage in transit, he has to give
notice to the buyer of his intention to resell. Then only he will be entitled to recover any
loss and keep all profits with him. Otherwise not. But so far as the new buyer's title is
concerned it will be good whether the seller gives or does not give notice to the first buyer.

13. When an unpaid seller's right of lien ends, his right to stop the goods in transit begins.
Ans. When an unpaid seller's right of lien ends, his right to stop the goods in transit begins:
Line is the right of an unpaid seller to retain the goods, which are under his actual possession,
until the price due in respect of them is paid or tendered. Lien being a possess& right, when the
goods are delivered to the carrier for the purpose of transmission to the buyer (the possession
being imparted by the unpaid seller), the right of lien comes to an end but so long the goods are
in transit, the seller still has a right to stop them in transit. The right of stoppage means the
right to stop further transit of goods to resume possession over the goods and to retain them
until the price is paid.
The right of stoppage in transit arises only when the seller has parted with the possession of
the goods and the buyer has become insolvent. This right is available only so long the goods are
in transit i.e., they are in possession of a third party, they are neither in the possession of the
seller nor that of the buyer. In this sense it is said that, right of stoppage in transit is an
extension of the right of lien. The point where the right to lien ends, right to stoppage in
transit beings.

14. Sub-sale by the buyer does not extinguish unpaid seller's right of lien.
Ans. Sub-sale and rights of unpaid seller: The unpaid seller's right of lien or stoppage in transit is
not affected by any further sale or other disposition of the goods by the buyer. (Section 53 of
the Sale of Goods Act).
However, there are two exception to the said rule:

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(a) When the seller was assented to the sale, mortgage or other disposition of the goods
made by the buyer. [Sub-Section (1)].
(b) When a document of title of 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 price,
then, the proviso of Sub-Section (1) of Section 53 prescribes 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 claim [Sub-Section (2)].

15. Right of lien and Right of stoppage of goods in transit available to an unpaid seller.
Ans. Right of Lien and Right of Stoppage in Transit:
1. The unpaid seller's right to stop the goods in transit arises only when the buyer is
insolvent but the right of lien can be exercised even when the buyer is able to pay but
does not pay.
2. The right of lien can be exercised on goods which are in actual or constructive possession
of the seller, while right of stoppage in transit can be exercised when the goods are in the
possession of a middleman between the seller who has parted with the possession of the
goods and the buyer who has not yet acquired the possession.
3. The right of lien comes to an end when the possession of the goods is surrendered by the
seller, but the right of stoppage in transit commences when the goods have left the
possession of the seller and continues until the buyer has acquired their possession.
4. The right of lien is to retain possession while the right of stoppage in transit is to regain
or resume possession.

16. What are the rights of an unpaid seller against goods under the Sale of Goods Act, 1930?
Ans. Rights of an unpaid seller against the goods under Sale of Goods Act, 1930 are:
(a) A lien or right of retention: An unpaid seller in possession of goods sold, may exercise his
lien on the goods, i.e. keep the goods in his possession and refuse to deliver them to the
buyer until the fulfilment or tender of the price. This right depends upon physical
possession i.e. it is a possessory lien. Lien is cost as soon as the seller parts with the goods.
(b) The Right of Stoppage in transit: The right of stoppage in transit is a right of stopping
the goods while they are in transit, resuming the possession of them and retaining
possession until payment of the price.
(c) Right of re-sale: The unpaid seller may re-sell:
(i) Where the goods are perishable.
(ii) Where such right is expressly resumed.
(iii) Where seller tenders notice to buyer of his intention to re-sell buyer still does not
tenders price within a reasonable time.
(d) Right to withhold delivery: If the property in the goods has passed, the unpaid seller has
right as described above. If however, the property has not passed, the unpaid seller has a
right of withholding delivery similar to and co-extensive with his rights of lien and
stoppage in transit.

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

18. Discuss the rights of an unpaid seller against the buyer under The Sales of Goods Act, 1930.
Ans. Rights of an unpaid seller against the buyer are as follows:
(i) Suit for price:
(a) The seller may sue the buyer for the price, if the buyer is unable to or neglects or
refuses to pay the price.
(b) This may happen in any of the following cases:
(i) When property in goods has passed to the buyer, but buyer has failed to pay
the price.
(ii) When price is payable on a certain day and the buyer fails to pay on that day.
In the above cases, seller may sue the buyer for the recovery of price, even
though property in goods has not passed and the goods have not been
appropriated to the contract.
(ii) Suit for damages for non-acceptance: If buyer refuses to accept and pay for goods, the
goods may_suffer damage due to delay, and seller may sue the buyer for that.
(iii) Repudiation of contract before due date: When buyer terminates the contract before
the date of delivery, seller may treat the contract as rescinded and sue for damages for
the breach. This is also known as 'anticipatory breach of contract'.
(iv) Suit for interest: Seller may also sue the buyer for the interest along with suit for the
recovery of price.
In the absence of any agreement between the parties, the rate of interest will be decided
by the court.

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CHAPTER – 3
INDIAN PARTNERSHIP ACT, 1932
Unit : 1 – General Nature of a Partnership

INDIAN PARTNERSHIP ACT, 1932

Section 1 : Short title
Section 2 : Definitions
Section 3 : Application of provision of Act, 9 of 1872
Section 4 : Definition of Partnership
Section 5 : Partnership not created by status
Section 6 : Mode of determining existence of partnership
Section 7 : Partnership at will
Section 8 : Particular Partnership
Section 9 : General Duties of Partners
Section 10 : Duty to indemnify for loss caused by fraud.
Section 11 : Determination of rights and liabilities
Section 12 : The conduct of the business
Section 13 : Mutual rights and liabilities
Section 14 : The property of the firm
Section 15 : Application of the property
Section 16 : Personal profits earned by Partners
Section 17 : Rights and duties of partners
Section 18 : Partner to be agent of the firm
Section 19 : Implied Authority of Partner
Section 20 : Extension and restriction of Partner's implied authority
Section 21 : Partner's Authority in an emergency
Section 22 : Mode of doing act to bind firm
Section 23 : Effect of admission by a partner
Section 24 : Effect of notice to acting partner
Section 25 : Liability of a partner for acts of the firm
Section 26 : Liability of the firm for wrongful acts by a partner
Section 27 : Liability of firm for misapplication by partners
Section 28 : Holding out
Section 29 : Rights of transferee of a partner's interest
Section 30 : Minors admitted to the benefits of partnership
Section 31 : Introduction of a partner
Section 32 : Retirement of a partner
Section 33 : Expulsion of a partner
Section 34 : Insolvency of a partner

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Section 35 : Rights of outgoing partner to carry on competing business

Section 36 : Same
Section 37 : Rights of outgoing partner in certain cases
Section 38 : Revocation of continuing guarantee by change in firm
Section 39 : Dissolution of a firm
Section 40 : Dissolution by agreement
Section 41 : Compulsory dissolution
Section 42 : Dissolution on the happening of certain events
Section 43 : Dissolution by notice of partnership at will
Section 44 : Dissolution by Court
Section 45 : Liability for acts of partners done after dissolution
Section 46 : Rights of partners to have business wound up after dissolution
Section 47 : Continuing authority of partners for purpose of winding up
Section 48 : Mode of settlements of accounts
Section 49 : Payment of firm debts and separate debts
Section 50 : Personal profits earned after dissolution
Section 51 : Return of premium
Section 52 : Rights where partnership contract is rescinded for fraud or misrepresentation
Section 53 : Rights to restraint from use of firm name
Section 54 : Agreements in restraint of trade
Section 55 : Sale of goodwill after dissolution
Section 56 : Power to exempt from application of this chapter
Section 57 : Appointment of registrars
Section 58 : Application for registration
Section 59 : Registration
Section 60 : Recording of alterations in firm name
Section 61 : Nothing of closing and opening of branches
Section 62 : Nothing of change in names and addresses of partners
Section 63 : Recording of changes in and dissolution of a firm
Section 64 : Rectifications of mistakes
Section 65 : Amendment of registers by order of Court
Section 66 : Inspection of Register
Section 67 : Grant of copies
Section 68 : Rules of evidence
Section 69 : Effect of non-registration
Section 70 : Reality for furnishing false particulars
Section 71 : Power to make rules
Section 72 : Mode of giving public notice
Section 73 : Repeals
Section 74 : Savings.

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SELF STUDY QUESTIONS

1. Write short note on:

Sub-partnership.
Ans. Sub-partnership: This is a partnership within a main partnership. Where one of the members
of a firm, agrees to share the profits received by him with a stranger, there arises what is
called a 'sub-partnership' between such third person and the partner. Such a third party is in
no sense a partner in the original firm and has no right of recourse against the it. Also, such
partners are not counted for the limits of partners in a firm. His rights and liabilities are only
referable to the contract with the main partner. A sub-partner is a transferee within the
meaning of Section 29 of the Partnership Act (Venkataraman (v) Venkataram (1944).

2. Write short note on: Partnership at will.

Ans. Partnership at will: The definition of partnership at will has been given under Section 7 of the
Partnership Act, 1932. It lays down that where no provision is male by contract between the
partners for the duration of their partnership, or for the determination of their partnership,
the partnership if "Partnership at will”. Accordingly a partnership is deemed to be a partnership
at will when:
(i) No fixed period has been agreed upon for the duration of partnership, and
(ii) There is no provision made as to the determination of the partnership in any other way.
Such partnership has no fixed date of termination therefore, death or retirement of a
partner does not affect the existence of such partnership.
Section 43(1) provides that ‘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’.
The firm is dissolved from the date of notice or date of communication of the notice.
However, if the freedom to dissolve the firm at will is curtailed by agreement, say, if the
agreement provides that the partnership can be dissolved by a mutual consent of all the
partners only, it will not constitute a 'partnership at will’.

3. Write short note on: Doctrine of “Holding Out”.

Ans. Doctrine of "Holding Out": The doctrine of 'holding out' is based on the principle of 'estoppel'
which says that where a person by his words or conduct has wilfully led another person to
believe that certain set of circumstances or facts exists, and that other person has acted on
that belief, then he is estopped from denying the truth of such statements subsequently. The
doctrine of holding out also requires certain type of affirmative or positive act on the part of
the person being represented.
Thus if a person either by his conduct or statement leads another person to believe that a
certain person is his agent, then he is estopped from saying that such a person is not his agent.
The idea here is to protect the interests of persons who acted in good faith.
The doctrine of 'holding out' is applicable in the case of partnership also. Section 28 of the
Indian Partnership Act imposes liability on such person who is not partner but knowingly by
statement, whether oral or written or by conduct makes another person that he is a partner and
the another person, in good faith and believing on such statement or conduct enters into a
contract or transaction with the firm.

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4. Write short note on: Particular partnership.

Ans. Particular partnership: According to Section 8 of the Indian Partnership Act, 1932, a person
may became a partner with another person in particular adventures or undertakings. Thus,
where persons enter into an agreement constituting a partnership limited to joint trading
adventure, and goods are purchased, ostensibly by an individual adventurer but truly and
substantially for the purpose of the joint adventure, the adventurers are liable as partners, but
there is no such responsibility for goods purchased before the partnership agreement upon the
credit of an individual adventurer, though they are afterwards borough into stock as his
contribution to the joint adventure. It need hardly be stated that all the requisites of a
partnership must be present before a transaction between two persons limited to a single
adventure is held to be a partnership. In this case even a single adventure may constitute a
business, as defined under Section 2(b) for the purpose a partnership business.
Where an adventure becomes illegal, such partnership must be dissolved. [Section 42(b)].

5. Write short note on. Partnership at will.

Ans. Partnership at will: The definition of partnership at will has been given under Section 7 of the
Partnership Act, 1932. It lays down that where no provision is made by contract between the
partners for the duration of their partnership, or for the determination of their partnership,
the partnership if "Partnership at will". Accordingly a partnership is deemed to be a partnership
at will when:
(i) No fixed period has been agreed upon for the duration of partnership, and
(ii) There is no provision made as to the determination of the partnership in any other way.
Such partnership has no fixed date of termination therefore, death or retirement of a
partner does not affect the existence of such partnership.
Section 43(1) provides that "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”
The firm is dissolved from the date of notice or date of communication of the notice.
However, if the freedom to dissolve the firm at will is curtailed by agreement, say, if the
agreement provides that the partnership can be dissolved by a mutual consent of all the
partners only, it will not constitute a 'partnership at will'.

6. Write short note on: Actual partner and sub-partner.

Ans. Actual partner and sub-partner: A person who becomes a partner, by an agreement and is
actively engaged in the conduct of the business of the partnership is known as the actual
partner. He is the agent of the other partner in the ordinary course of the business of the
firm. He binds himself and the other partners, so far as third parties are concerned, for all the
acts which he does in the ordinary course of the business and in the name of the firm. Whereas
when a partner agrees to share his profits derived from the firm with a third person, that third
person is known as a sub-partner. A sub-partner is in no way connected with the firm and cannot
represent himself as a partner of the firm. He has no rights against the firm nor is he liable for
the acts of the firm.

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7. Write short note on: Partner by estoppel.

Ans. Partner by estoppel: Under Section 28 of the Indian Partnership Act, 1932, when a person
represents himself or knowingly permits himself to be represented as a partner in a firm (when
in fact he is not) he is liable, like a partner in the firm to any one who on the faith of such
representation has given credit to the firm.
It may be noted that where a retiring partner does not give a public notice of his retirement
and the continuing partners still use his name as a partner on letter-heads and bills etc., he will
be personally liable, on the ground of holding out, to third parties who give credit to the firm on
the faith that he is still a partner.

8. Briefly explain the difference between Partnership and a Firm.

Ans. Difference between Partnership and a Firm: Section 4 of the Indian Partnership Act states
“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’. Thus, a firm is collection of partners while partnership merely an abstract legal relation
between the partners. The two apparently seem to be one and the same, but are different in
the following sense:
1. Partnership is a relationship which subsists between persons but a firm is a short of
entity. So the same relation of partnership exists in all the partnership firms.
2. Partnership is an invisible tie which binds the partners together and the firm is the visible
form of those partners who are thus bound together.

9. Briefly explain the difference between Partnership and Joint Stock Company.
Ans. Partnership and Joint Stock Company:
(a) Personality: A firm is not legal entity whereas a company is a juridical person distinct
from its members.
(b) Agency: In the case of a firm, every partner is an agent of other partners as well as of
the firm but in case of company, members are not agents of the company.
(c) Profits: Profits of a firm is distributed among the partners according to deed of
partnership. But in the case of company, distribution of profit is optional as the company
may or may not declare dividends.
(d) Liability: In firm, the liability of partners is unlimited but in a company, liability is always
limited to the amount of shares or guarantee.
(e) Property: Property of firm is joint estate of all the partners whereas in a company,
property belongs to company and not of shareholders.
(f) Transfer of share: In the case of partnership transfer of a partner's right is not
possible without the consent of all the partners, though his interest can be assigned to a
third party who has a right to share in profits but has no other rights, but in the case of a
public company, share are transferable and quoted on stock exchange.
(g) Management: In partnership management is by partners, but in a company, but in a
company, Board of Directors do the management, shareholders only attend in general
meetings to vote.
(h) Number of members in partnership is minimum two and maximum 100 (in banking it is 10)
but the case of a private company the minimum is two and maximum 200 excluding past
and present employees. And in the case of a public company, it is 7 and no restriction on
the maximum.

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10. Briefly explain the difference between Partnership and Co-ownership.

Ans. Partnership and Co-ownership:
1. Mode of creation: Partnership is the result of an agreement. Co-ownership may or may
not arise from agreement; and it may also a rise by status.
2. Business: Necessary for partnership. Co-ownership can exist without business.
3. Nature of Interest: Partnership involves community of interest whereas co-ownership
may not necessarily involve any such interest.
4. Transfer of interest: A partner cannot transfer his share to a stranger without the
consent of the other partners. A co-owner can.
5. Number of Members: In partnership, the number of partners cannot exceed the
statutory limit. In co-ownership there is no limit on maximum number.
6. Authority of Members: A partner is the agent of his co-partners. A co-owner is not the
agent of the other co-owners.
7. Partition of Property: A partner can not sue for the partition of partnership property in
specific but he can sue his co-partners for the dissolution of the firm and accounts. A co-
owner can sue for the partition of the property.
8. Lien for expenses: A partner has a lien on the partnership property for expenses
incurred by him on such property on behalf of the firm; a co-owner has no such lien.

11. Briefly explain the difference between Partnership and Club.

Ans. A partnership and a Club: The two can be distinguished as below:
1. Definition/Meaning: A club is an association of persons formed with the object not to
earn profit, but to promote some beneficial purposes such as improvement of health or
providing recreation for the member etc. A partnership on the other hand is an
association of persons also, but formed for earning profits from a business carried on by
all or any one of them acting for all. These persons share the profit so earned as per their
agreement.
2. Relationship: Persons forming a club are called members, while persons forming a
partnership are called partners. Members of a club are not an agent for the other
member's while a partner is an agent for other partners.
3. Interest in the property: A member of a club has no interest in the property of the club
in the manner a partner has in the property of the firm.
4. Dissolution: A member leaving a club shall not affect the existence of the club, while
retirement of a partner from the firm does effect the existence of the firm.

12. Briefly explain the difference between Partnership and an Association.

Ans. Distinction between a Partnership and an Association: The two terms can be distinguished on
the following basis:
(i) Meaning: Partnership means and involves setting up relation of agency between two or
more persons who have entered into a business for gains, with the intention to share the
profits of such a business.
An association is a body of persons who have come together for mutual benefit such as
resident's association of a particular area or for rendering service to the society such as
a charitable or religious society say a dispensary or a temple etc.

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(ii) Sharing of profits: A partnership is set up to share the profits of a business, while an
association is not set up for sharing the profits. The intention of the association is not to
carry on a business by the members of the association for earning profits.
(iii) Mutual Agency Trust: A partnership is based on mutual trust and is carried on by mutual
agency, which is not so in the case of an association.
(iv) Dissolution: Retirement or death of a particular may dissolve a firm but retirement or
death of a member of an association does not dissolved the association.

13. Briefly explain the difference between Partnership and Hindu undivided family.
Ans. Following are the differences between Partnership and Joint Hindu Family:
1. Creation: The relation of partnership is created necessarily by an agreement, whereas
Joint Hindu Family is established by law. A person becomes a member of a Joint Hindu
Family by birth.
2. Death: Death of a partner brings about dissolution of partnership. But the death of a
member of a Joint Hindu Family does not give rise to dissolution of the family business.
3. Management: In a Joint Hindu Family, only karta has the right to manage the business. In
partnership, all the partners have the right to take the part in the management of the
firm.
4. Liability: The liability of partners in a partnership concern is unlimited, joint and several.
The liability of members of a Joint Hindu Family except the Karta is limited only to the
extent of their share in the business of the family.
5. Calling for accounts: On the partition of joint Hindu Family a member is not entitled to
ask for the accounts of the family business. But a partner can bring a suit against the firm
for accounts on the acquisition of the firm.
6. Governing Law: A partnership is governed by the Indian Partnership Act, 1932, while
Joint Hindu Family is governed by Hindu Law.
7. Minor's Position: A minor can be a member of a Hindu Joint Family, but a minor can not be
a partner in a firm. However, he can be admitted to the benefits of partnership with the
consent of all the partners.

14. Briefly explain the difference between Sleeping partner and nominal partner.
Ans. Sleeping Partner and Nominal Partner: A sleeping partner is one who is neither an active
partner nor known to outsides. In reality he is a partner in the firm. He contributes his share of
capital and gets his share of profits, but he does not take active part in the conduct of the
business of the firm. He is liable to the third parties for all the acts of the firm, whether his
existence is known to the third parties at the time of making the contract.
A Nominal Partner is one who has no real interest in the business of the firm. He is not entitled
to share the profits and also dose not contribute any capital. He also does not take part in the
conduct of the business off the firm. He lends his name only and his name is used in the firm
like an actual partner and is liable for all acts of the firm.

15. Sharing in the profits is not conclusive evidence in the creation of partnership.
Ans. Evidence of Partnership: Partnership, generally, is an agreement (contract) between two or
more competent persons to carry on some business and distribute/share the profits of such
business.

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Section 6 of the -Indian Partnership Act prescribes the test to determine the existence of
partnership. To determine whether a group of persons is a firm and its members are partners or
not. their real relation must be determined on the basis of relevant facts. [Moore v. Daris (1879)
11 Ch. D. 261]. The parties to a partnership contract do not become simply on the basis that they
have been described, in the deed, as partners. [Abdulla v. Alladia (1927) 8 Lahore, 310].
Sharing in the profits of the firm is a prima facie evidence of establishment of partnership but it
is not a conclusive proof. As per the provision of Section 4 of the Indian Partnership Act, sharing
of profits is not the sole determining fact. Other tests are also required to be applied. [Cox v.
Hicman]. A person may, in many ways share in the profits of a business without being a partner. A
creditor sharing in the profits does not ipso facto become a partner. Explanation II of Section 6
of the Indian Partnership Act also makes it clear that a creditor is not a partner. Similarly a
servant, an agent, widow or child of the deceased partner, may receive a share in the profits. But
they do not become partner. Thus, the real thing to be seen in such cases is whether they are
participating in the business of the firm in the capacity of partners and represent each other in
the said capacity. [Malomach & Co. v. Court of Wards (1872) LR 2 CP 419].

16. Law of partnership is an extension of law of agency.

Ans. Law of partnership is an extension of law of agency: The concluding portion of the definition
of partnership as given in Section 4 of the Act is very important for this quotation as it says
that the business may be carried on “by all or any of them for all". Thus, it is clear that the Act
does require that the business should be carried on by all or it may be carried on by any of
them on behalf of all of them. This clearly establishes the implied agency, the partner who is
conducting the affairs of the business is considered as agent of the remaining partners. The
relationship between partners is governed by the law of agency.
Section 18 of the Partnership Act provided, "Subject to the provisions of this Act, a partner is
the agent of the firm for the purposes of the business of the fire".
In carrying on the business of the firm, partners act as agents as well as principals. While the
relation between the partners inter se is that of principals, they are agents of one another in
relation to third parties for purposes of business of the firm.
Every partner has a two-fold character, he is an agent of the other partners (because other
partners are bound by his acts) and also he himself is the principal (because he is bound by the
acts of other partners). The liability of one partner for the acts of his co-partners is in truth
the liability of a principal for the acts of his co-partners is in truth the liability of a principal
for the acts of his agent. This concept of mutual agency is, in fact, the true test of the
existence of partnership. This relationship of principal and agent distinguishes a partnership
business from co-ownership. Joint Hindu family business as well as an agreement to share
profits of the business.
From the above we can conclude that the law of partnership is an extension of the law of
principal and agent.

17. Who may be partner of a firm?

Ans. Section 4 of the Indian Partnership Act, defines partnership. This definition lays stress on an
agreement between persons. These persons should be those, who are competent to contract as
per provisions of S. No. 11 of the Indian Contract Act i.e. these persons must have capacity to
contract, meaning by they are capable of entering into a valid contract.
Section 11 defines capacity to contract as follows:

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"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. "Those who do not have capacity to contract can not be a partner.
However, a minor under Section 30 of the Indian Partnership Act can be admitted to the
benefits of the partnership firm with the consent of all the partners.
Thus to be a partner, a person must be (1) a major, (2) of sound mind, and (3) should not be
disqualified from contracting by an law.

18. True test of partnership is mutual agency.

Ans. According to Section 4 of the Indian Partnership Act, 1932, three elements of the firm appear
from the definition of the partnership. They are – (i) there must be an agreement entered into
by all the persons concerned (ii) the agreement must be to share the profits of a business; and
(iii) the business must be carried on by all or any of the person concerned, acting for all, All
these elements must be present before a group of persons can be held to be partners.
The third element shows that the business must be carried on by the partners or some of them
acting for all. This element very clearly brings out the fundamental principle that partners when
carrying on the business of the firm are agents as well as principals; an implied agency flows
from their relationship with the result that every partner who conducts the business of the
firm is in doing so deemed in law to be the agent of all the partners. The essence of a
partnership is that each of the partners is the agent of the essence of a partnership is that
each of the partners is the agent of the others for the purpose of carrying on the partnership
business. This test is known as the test of mutual agency and is the most distinctive test of
partnership. Failure by one partner to take part in the management of the business does not
have the result that he is not carrying on business as an partner.
Thus sharing the profits of a business though an essential element, would not be in itself
sufficient to constitute partnership, Besides sharing the profits of a business it is also
necessary to show that the business was conducted on his behalf. Therefore, the true test of
partnership is mutual agency rather than sharing profits. If this element is lacking there will
be no partnership.

19. Explain Partnership by holding out.

Ans. Partnership by holding out (Section 28 Indian Partnership Act, 1932): When a person
represent himself or knowingly permits himself to be represented as a partner in a firm when in
fact he is not, he is liable like a partner in the firm to anyone who on the faith of such
representation has given credit to the firm. In the case of partnership by holding out some
affirmative conduct by the principal is necessary.

20. The true test of partnership is "mutual" agency between the partners.
Ans. The true test of partnership is mutual agency rather than sharing of profits. If this element of
mutual agency is absent then there will be no partnership. The prima facie evidence of
partnership is mutual agency. Every 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. Section 4 of the Indian Partnership Act, 1932 says 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. Thus an implied agency flows from their relationship as partners with the result that every
person who conducts the business of the firm is in doing so, deemed in law to be the agent of all
the partners. (Section 18).

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21. Partnership is an association of persons, who have agreed to share the profits of a business
carried on by all or any one of them acting for all.
Ans. This statement deals with the definition of partnership as laid down by Section 4 of the Indian
Partnership Act, 1932. The definition lays down the essential elements which must be fulfilled
for making a partnership. Accordingly,
1. There must be an agreement between the persons associating to form a firm.
2. The agreement must be to carry on a business i.e. there must be a business.
3. The agreement must be to share the profits of the business, equally or in agreed
proportion.
However, sharing of profits is only a prima facie test of partnership since there may be
persons who share profits and yet may not be termed as partners e.g. a widow of a
deceased partner or a loan creditor getting a share of profits over and above the interest
charged by him.
4. The business must be carried in by all or it may be carried by one of them on behalf of all.
This element establishes a relationship of mutual agency between the persons known to be
partners of the business firm. It is the agency relationship which binds all the partners to
each other. Partnership is primarily an extension of the law of agency.

22. True test of partnership is the existence of mutual agency among the partners and not the
sharing of profits.
Ans. True Test of Partnership: In order to determine whether there exists a partnership among
the partners, the definition given in Section 4 of the Indian Partnership Act, 1932 is used as a
test, i.e. one must look to the agreement between them. If the agreement is to share the
profits of a business, and the business is carried on by all or any of them acting for all, there is
partnership, otherwise not. In determining whether a group of persons is or is not a firm or
whether a person is or is 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.
The difficulty arises when there is no specific agreement constituting partnership among the
partners, or the agreement is such as does not specifically speak of partnership. In such a case
one has to determine the real relation between the partners as shown by all relevant facts
taken together (Section 6) such as written or verbal agreement, real intimation and conduct of
the partners, other surrounding circumstances, etc.
The sharing of profits is prima facie a powerful evidence of partnership but the fact that there
is sharing of profit between some persons will not automatically make them partners.
Therefore, 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. Thus there is no
partnership on the basis of sharing of profits only.
The true test of partnership as laid down in the leading case of Cox vs. Hickman is mutual
agency. Each partner carrying on the business is the principal as well as agent of other partners,
so the out of one partner done on behalf of the 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, it can be said that there is partnership.

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23. Partner by Holding out.

Ans. Partner by Holding out: Section 28 of the Indian Partnership Act, 1932 provides for the
meaning of the term, ‘Partner by Holding Out’. It states:
1. Any one who by words spoken or written or by conduct represents himself, or knowingly
permits himself to be represented, to a partner in a firm, is liable as a partner in that
firm, to any one who has on the faith of any such representation given credit to the firm,
whether the person representing himself or represented to be a partner does or does not
know that representation has reached the person so giving credit.
2. Where after a partner's death the business is continued in the old firm 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 firm done
after his death.
Thus, holding out means holding responsible a person who is not a partner in the real sense
in a firm, but has represented himself as a partner, or has knowingly permitted himself to
be represented, is to be treated to a partner of the firm to any one, who on the faith of
such representation has given credit to the firm. He shall also be liable to such creditors
for payment.
The representation referred above may be express or implied. It may be written or may
be even by conduct. Form of representation is immaterial for such purpose.

24. What is the conclusive evidence of partnership? State the circumstances when partnership is
not considered between two or more parties.
Ans. The business must be carried on by all the partners or by anyone or more of the partner acting
for all. This is the cardinal principle of the partnership law. An act of one partner in the course
of the business of the firm is in fact an act of all 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.
Sharing of profits is an essential element to constitute a partnership, but it is only a prima
facie evidence and not conclusive evidence. Conclusive evidence of existence of partnership is
only mutual agency.
The receipt of profit share by one person of a business, does not itself make him a partner with
the persons carrying on the business. Such carrying on the business. Such cases are:
1. By a servant or agent as remuneration,
2. By a widow or child of a deceased partner, as annuity.
3. By a lender of money to persons engaged or about to engage in any business.
4. By a previous owner or part owner of the business.

25. “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?
Ans. Mode of Determining Existence of Partnership: In determining whether a group of persons is
or is not a firm, or whether a person is or is 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.

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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.
2. Sharing of Profits: Sharing of profit is an essential element to constitute a partnership.
But, it is only a prima-facie evidence and not conclusive evidence. Although the right to
participate in profits is a strong test of partnership, yet the relationship is there or not,
depends upon the whole contract between the parties.
3. Agency: Existence of mutual agency is the cardinal principal of partnership law, and is
very much helpful in reaching a conclusion in this regard. Each partner carrying on the
business is the principal as well as agent of other partners. So, the act of one partner
done on behalf of the firm, binds all the partner.
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.
26. What do you mean by 'Partnership at will' as per the Indian Partnership Act, 1932?
Ans. Partnership at will (Section 7) of the Indian Partnership Act, 1932 which says that partnership
at will is a partnership when:
(a) no fixed period has been agreed upon the duration
(b) there is no provision made as to the determination of partnership.

27. What do you mean by "Particular Partnership" under the Indian Partnership Act, 1932?
Ans. 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.

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

29. “Business carried on by all or any of them acting for all.” Discuss the statement under the
Indian Partnership Act, 1932?
Ans. Mutual 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.

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CHAPTER – 3
INDIAN PARTNERSHIP ACT, 1932
Unit : 2 – Relations of Partners
1. What are the Relation of Partners to one another?
Ans. • It arises through an agreement which provides for the rights and duties of partners.
• If articles are silent, rights and duties are governed by the Act.

2. Write short note on Goodwill.

Ans. • Goodwill is defined as the value of the reputation of a business house in respect of profits
expected in future over and above the normal profits.
• It is a partnership property.
• In case of dissolution of firm, every partner has a right according to the deed in the
absentee of any agreement, to have a share in the goodwill on it being sold.
• It can be sold separately or along with other properties of the firm.

3. Which condition Applies in Case of Personal Profit Earned by Partners.

Ans. As per Section 16:
If a partner derives any profits for himself from any business transaction of the firm or from
use of the property of the firm or carries on a competing business, he must account for and pay
all the profits made him to the firm.

4. Describe the Partner's authority in an Emergency.

Ans. As per Section 21:
Subject to provisions of section 20, each partner binds the firm by all acts done in the case of
emergency, with a view to protect the firm from any loss provided, As he has acted as a man of
ordinary prudence.

5. Describe the Liability to third parties.

Ans. As per Sections 25 to 27:
Section 25: Contractual liability:
Every partner is liable jointly and severally for all acts or omissions binding the firm while he is
a partner.

6. What do you mean by Insolvency of partner?

Ans. As per Section 34:
• Such a partner cases to be a partner on the date of the order of adjudication.
• His estate cases to be liable for any actor the firm done after that date of order.
• Firm is also not liable for any act of such a partner after such date.

7. State with reason whether the following statement is Correct or Incorrect.

A partner in a firm has right to receive interest on advances given by him to the firm @ 12%
per annum.

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Ans. Incorrect: Section 13 (d) of the Indian Partnership Act, 1932 allows a partner to receive
interest on advances given by him to the firm, but the rate of interest on such advances is 6%
per annum and not 12% per annum.

8. Write short note on the following: Liability of an incoming partner.

Ans. An incoming partner is not liable for any act of the firm done prior to his admission as a
partner. This is because the old partners were not the agents of the new partners at the time
when they acted. By a mutual agreement, the new partners may agree with the old partners to
be liable for the past liabilities of the firm. However, the creditors of the firm cannot sue the
new partners for their past debts because there is no privity of contract between the creditors
and the new partner. Similarly, the acts of the old partner can not be ratified by the new
partner because he was not in existence as a principal at the time when acts were done. He is
liable for the acts of the old firm only if the new firm assumes the liabilities of the old firm
and the creditors accept the new firm as their debtor and discharge the old firm from his
liability.

9. Write short note on the following:

Right to remuneration of a partner.
Ans. Right to remuneration of partner:
The general rule is: [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 the varied by an express agreement, or by a cause 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 contained usage of the
firm. Similarly, a partner on whom the whole conduct of the business has been cast by reason of
the other partner’s wilful neglect of the business to which the latter ought to attend, can claim
compensation for the undue labor and trouble being imposed upon him. (Krishnamachriar vs.
Sankara saha 91920).

10. Write short note on the following:

Minor in partnership.
Ans. Minor in Partnership: A minor cannot become a partner, as he is not competent to contract.
But if all the partners agree, he can be admitted to the benefits of partnership. Such minor has
a right to his agreed share of the profits; he cannot take part in management, and he can have
access to inspect and copy the accounts of a firm but not to book of the firm. On attaining
majority, he has to elect whether he wants to continue as a partner or not within a period of 6
months of his attaining majority. 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 of his own
willingness, his position is as follows:
(a) His rights and liabilities as a minor will continue upto the date on which he becomes a
partner.
(b) He becomes personally liable to third parties for all acts of the firm done since he was
admitted to benefits of partnership.
(c) His share in the property and profits of the firm remains the same as to which he was
entitled as a minor.

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11. Write short note on the following:

Explain the duties of a Partner in Partnership.
Ans. Duties of Partner [Indian Partnership Act, 1932]:
1. To work for the greatest common advantage. [Section 9]
2. To be just and faithful [Section 9]
3. To render true accounts. [Section 9]
4. To give full information. [Section 9]
5. To indemnity for frauds [Section 10]
6. To indemnity for wilful neglect. [Section 13 (f)]
7. To share losses. [Section 13 (b)]
8. To attend diligently without remuneration. [Sections 12 (b) and 13 (a)]
9. To hold and use property of the firm exclusively for the purpose of business. [Section 15]
10. To account for private profits from transactions of firm etc. and from completing
business [Section 16]
11. To act within authority.
12. Not to assign his rights [Section 29]
13. To be liable jointly and severally. [Section 25]

12. Answer of the following: When can a partner be expelled?

Ans. According to the provisions of Section 33 of Indian Partnership Act a partner can not be
expelled from a firm by any majority of the partners. As such the law as a central rule gives no
power to partners to expel a partner. This rule is subject to certain exceptions.
Exceptions:
(i) Where it is provided in the Partnership Act.
(ii) Where it is by an order of the Court, for misconduct etc.
(iii) Where it is warranted by dissolution of the firm.
However, the expulsion is subject to the following conditions;
(a) The right to expel a partner is available by an express agreement, between the partners.
(b) The power must have been exercised by a majority of partners in good faith.
(c) The expelled partner was given reasonable notice and opportunity to explain his position
and to remove the cause of his expulsion. (Carmichael vs. Evans 1904).
The position of the expelled partner is same as that of a retiring partner.

13. Comment on the following:

A partner is an agent of the firm as well as of all the other partners.
Ans. A partner is an agent of the firm as well as of all the other partners: The concluding
portion of the definition of partnership as given in Section 4 of the Partnership Act says that
the business may be carried on by all or any of them acting for all. This clearly establishes the
implied agency, the partner who is conducting the affairs of business is considered as the agent
of the remaining partners.

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In carrying on the business of the firm, partners act as agents as well as principles. White the
relation between the partners interest is that of principals, they are agents of one another in
relation to third parties for the purpose of the business of the firm.
Section 19(1) of the Partnership Act provides 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.” From
this it is clear that every partner has the implied authority to bind the firm provided they
relate to the business of the firm and are done by him in the name of the firm and in the usual
course of the business of the firm.
In partnership every partner has a two-fold character, he is an agent of the other partners
(because other partners are bound by his acts) and also he himself is the principal (because he
is bound by the acts of other partners). The liability of one partner for the acts of his co-
partners is in fact the liability of a principal for the acts of his agent. This concept of mutual
agency is, in fact, the true test of existence of partnership.

14. Discuss the rights of a partner in a firm.

Ans. The mutual rights and duties of the partners of a firm may be determined by contract between
the partners, and such contract may be expressed or implied by a course of dealing. In the
absence of any express agreement among partners, their rights and duties are governed by the
Partnership Act.
Rights of the partners in partnership firm are discussed hereunder:
(i) Participation in management [Section 12(a)]: Every partner has a right to take part in
the conduct of the business.
(ii) Right to be consulted: Any difference arising in connection with the business may be
decided by a majority of the partners and every partner has a right to express his opinion
before the matter is decided.
(iii) Access to books [Section 12 (d)]: A partner has a right to have access to and inspect
and copy any of the books of the firm.
(iv) Sharing of profits [Section 13 (b)]: Partners are entitled to share equally in the profit
earned.
(v) Interest on capital [Section 13 (c)]: A partner is entitled to interest on advance made
by him over and above his capital at the rate of 6% per annum. However, where the
partnership agreement provides for the payment of interest at a certain rate such
interest shall be payable only out of profits if any, earned by the firm.
(vi) Making use of Partnership property [Section 15]: Every partner is entitled to use the
property of the firm exclusively for the purpose of the business of the firm.
(vii) Indemnification [Section 13 (c)]: A partner is entitled to be indemnified by the firm in
respect of payments made and liabilities incurred by him under certain circumstances.
(viii) Agent of the firm [Sections 18 and 19]: Because of the agency relationship every
partner has implied authority to bind the firm by his own act in the conduct of the
business of the firm.

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(ix) Dissolution of the firm [Section 43, 44 and 46]: A partner is entitled to dissolve the
firm under certain conditions. A partner has a right to have the business wound up after
dissolution.
(x) Authority in emergency [Section 21]: A partner has authority in an emergency to do all
such acts as required for the purpose of protecting the firm from loss.
(xi) Retirement [Section 32]: Every partner has a right to retire from the partnership firm
subject to the nature of partnership.
(xii) Not to be expelled [Section 33 (1)]: Every partner has a right to continuance in the
partnership. No partner can be expelled except in good faith.
(xiii) No new partner to be introduced [Section 31 (1)]: Every partner has a right to prevent
admission of a new partner to the firm.
(xiv) Carrying on competing business [Section 36]: Unless otherwise agreed, an outgoing
partner may carry on a business competing with that of the firm and may advertise such
business. But he can not use the name and representation of the firm.
(xv) Sharing profits by outgoing partner [Section 37]: An outgoing partner can claim
subsequent profits or interest at the rate of 6% p.a. If final accounts have not been
settled.
(xvi) Share in the partnership property: On the dissolution of the firm every partner or his
representative has a right to have the property applied in the payment of debts and
liabilities of the firm and to have surplus distributed among the partners.

15. Point out the circumstances where a partner cannot exercise his implied authority.
Ans. Limitation on Implied Powers of Partners: A partner is deemed to be an agent of the firm so
far as the business of the firm is concerned (Section 18 of the Indian Partnership Act). In view
of this, acts of a partner which are done for the purpose of running the business in usual way,
bind the firm and the authority of a partner to do such acts is known as implied authority
[Higins v. Beucamp (1914) All E.R. 937]. This implied authority is available to every partner of
the firm and need not be reduced to writing in the deed of partnership.
The exercise of implied authority must be in accordance with the provisions of Section 19.
Section 19 points out that implied authority can be exercised only in relation to those acts
which have a direct relation with the business of the firm. Further, the manner in which the
authority is exercised must be similar to that which is required for the business to be carried
on by the firm.
Further, Sections 19(2) and 20 of the Indian Partnership Act impose certain limitations on
the implied authority of a partner. In view of these provisions, a partner cannot exercise his
implied authority in relation to the following acts:
1. Reference of firm’s disputes to arbitration
2. Opening bank account for the firm in his own name
3. To compromise fully or partly in a suit or to abandon any claim.
4. To withdrawn proceedings, or part thereof, instituted in the Court on the part of the firm
5. To admit any liability in a proceedings against the firm
6. To acquire immovable property for the firm

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7. To transfer immovable property of the firm

8. To participate in any partnership for the firm
A partner can do any of the above acts provided he is expressly authorised to do that or the
usage or custom of the trade permits them. For example, a partner may open a bank account on
behalf of the firm in his own name if he is expressly authorised to do so by all the partners of
the firm.
Section 20 provides that the implied authority of partner may be decreased or increased
through contract. But if such restrictions are imposed on the implied authority of a partner by
mutual agreement they will not be binding on third parties dealing with the firm unless they
have knowledge of the restrictions.

16. Answer the following: When is the firm liable for the acts of a partner.
Ans. Liability of the firm: Apart from the liability of the partners in the firm sometimes a firm may
also be held liable in the following ways:
(i) where, by the wrongful act or omission of a partner acting 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 therefore to the extent as the
partner (Section 26).
(ii) where a partner acting within his apparent authority receives money or property from a
third party and misapplies it, or [Section 27 (1)].
(iii) where a firm in the cause 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 loos [Section 27(2)].

17. What are the rights and duties of a minor in relation to partnership business?
Ans. Rights and Duties of a minor in relation to partnership:
A minor in real terms is not a partner in a partnership firm. His minority is a disqualification for
him to become a partner, since an agreement with a minor is void ab-initio. But Section 30 of
the Indian Partnership Act provides that though a minor cannot be a partner in a firm, he with
the consent of all the carriers for the time being, may be admitted to the benefits of
partnership by an agreement executed by his guardian on his behalf with the other partners.
Section 30 states that rules, which govern the rights and liabilities of a minor admitted to the
benefits of partnership.
These are:
1. A minor has a right to his agreed share of the profits and share of the property of the
firm.
2. He has a right to have access to inspect and copy the accounts of the firm.
3. He can sue the partners for accounts or for payment of his share. But he can exercise
this right only when he severs his connection with the firm and not otherwise. The amount
of his share in such a case shall be determined as upon a dissolution.
4. The minor is not liable personally to third parties for the debts of the firm, but his
liability is limited only upon his share in the partnership assets and profits.

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5. The minor is not entitled to take part in the conduct of the business as he has no
representative capacity to bind the firm.
6. On attaining majority or on knowing that he had been admitted to the benefits of
partnership, whichever date be later, the minor must decide within six months whether he
would or would not like to become a partner in the firm. He has to give public notice of his
decision. If he does not give public notice, to this effect, he is treated to be a partner in
the firm.
7. When a minor elects to remain as a partner, or fails to give public notice of not remaining
as a partner in the firm, he comes personally liable to the third parties for all the debts
and obligations of the firm with retrospective effect i.e. from the date of his being
admitted to the benefits of partnership.
8. Where the minor elects not to be a partner in the firm, his rights and liabilities continue
to be those a minor upto to the date of his giving public notice and shall not be liable for
any acts of the firm done after the date of the public notice.
9. If after attaining majority but before electing to become a partner the minor represents
or knowingly permits himself to be represented as a partner in the firm, he will be
personally liable to the person who has on the faith of such representation granted credit
to the firm on the ground of 'holding out'.

18. Answer the following:

Explain the rights of an outgoing partner.
Ans. Rights of an Outgoing partner: Under Sections 36 and 37 of the Partnership Act, an outgoing
partner enjoys the following rights:
1. An outgoing partner may carry on business competing with that of the firm and he may
advertise such business but subject to a contract to the contrary, he cannot use the name
of the firm or represent himself as carrying on the business of the firm or solicit
customers of the firm he has left. [Section 36 (1)]. 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 a specified local limit.
2. On the retirement of a partner he has the right to receive his share of the property of
the firm, including goodwill.
3. An out going partner, where the continuing partners carry on the business of the firm with
the property of the firm without any final settlement of account, with him, is entitled to
claim from the firm such shares of the profits made by the firm, since he ceased to be a
partner as attributable to the use of his shares of the property of the firm. In the
alternative, he can claim interest at the rate of 6% per annum on the amount of his share
in firm’s property (Section 37).
4. If by a contract between the partners, an option has been given to the surviving partners
to purchase the interest of the out going partner and the option is duly exercised, the out
going partner will not be entitled to any further share or the profits.

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19. Comment on the following:

Implied authority of a partner can be extended or restricted.
Ans. Implied authority of partner can be extended or restricted: Section 20 of the Indian
Partnership Act authorises the partners of a firm to extend or restrict the implied authority
but only by a contract between them. In spite of such restriction if a partner does, on firm's
behalf, any act which falls within his implied authority, the firm will be bound unless the person
with whom he is dealing is aware of the restriction or does not know or believe the partner to
be a partner. Thus, a third party is not affected by such a limitation of a partner's implied
authority unless he has actual notice of it. To fake an example, A is a partner of a firm. He
borrows from B Rs. 1,000 in the name of the firm but in excess of his authority and utilises 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 may be restricted by a 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 pay the money to B : On the contrary, if B is aware of this
restriction, the firm will be absolved of its liability to reply the amount to B.
One important point in this connection is that the restriction or extension of implied authority
must be done with the consent of all the partners. Any one partner, or even a majority of the
partners, cannot restrict or extend the implied authority.

20. What are the rights of transferee of a Partner's Share?

Ans. Rights of transferee of a Partner's Share: No person can be introduced as a partner in a
firm without the consent of all the partners. Therefore, a partner cannot by transferring his
own interest make anyone else a partner in his stead with his co-partners if they do not agree.
According to Section 29 of the Partnership Act, 1932, 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 a transferee are:
1. During the continuance of partnership: He is 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. (a) On dissolution of the firm or on retirement of the transferring partner he is
entitled 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 to an account as from the date of
dissolution.
The Supreme Court has held that the assignee will enjoy only the rights to receive the share of
the profits of the assignor and account of profits agreed to by other partners [Narayanappa
Vs. Krishnappa (1966) 2 M.L.J. S.C. 60].

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21. Comment on the following:

"The relationship of arises from an agreement and not from status."
Ans. A partnership is the result of a contract and cannot arise by status is sufficiently emphasised
by Section 4 of the Indian Partnership Act itself by use of word "partnership is the relation
between the persons who have agreed to share the profits of a business". It is clear from the
definition that the partnership is of contractual nature. It springs from an agreement. The
same point is further stressed by the opening words of Section 5 that the relation partnership
arises from contract and not from status.
Unlike in the case of sole proprietorship and joint Hindu Family business, the legal heirs do not
automatically become partners on the death of a partner. A fresh agreement will have to be
made.
Thus from the above it is clear that partnership always arises out of a contract and not from
status.

22. Answer in brief the following:

What is meant by the term, 'property of a partnership firm'?
Ans. Normally, the partners by an agreement are free to determine as to what shall be the property
of the firm and what shall be treated as a separate property of one or more of the partners.
But when there is no such agreement and in order to know whether a certain property is the
property of the firm or not it has to be ascertained from the source from which the property
has been acquired the purpose for which it was acquired, and the manner in which it has been
dealt with. According to Section 14 of the Partnership Act, when there is no contract to the
contrary, the property of the firm includes:
(i) All properties, rights and interests originally bring to the stock of the firm.
(ii) The property acquired by purchase or otherwise by or for the firm.
(iii) The property acquired with the money belonging to the firm.
(iv) The goodwill of the business of the firm.
However, if a partner’s property is used for the purchase of the business of the firm, it does
not automatically because the property of the firm. It can become to property of the firm if
the partners have an intention to manage it so. For example, a piece of land which has bought in
the name of one partner but is paid for any the firm shall be deemed to be the property of the
firm unless there is an intention to the contrary.

23. Comment on the following:

Notice to an acting partner is the notice to the firm.
Ans. Notice to an acting partner: Section 24 of the Partnership Act. 1932 lays down that the
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. The rule embodied in this section is an
instance of the application of the general principals of agency to partnership. Accordingly, the
notice to one is equivalent to the notice to the rest of the partners of the firm, just as a notice
to the rest of the partners of the firm, just as a notice and not to an agent is notice to his
principal. This notice must be actual and not constructive. It must be received by a working

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partner and not by a dormant or sleeping partner. It must further relate to the firm's business.
Only then it would constitute a notice to the firm. Notice to a clerk or agent of the firm
operates as notice to the firm.
But the provisions of this section would not lie in the case of fraud, whether active or tacit.
Thus the knowledge of a partner as to a particular defect in the goods which he is buying for
the firm will be knowledge of the firm, although the other partners are, in fact, not aware of
the defect. The only exception is in the case of fraud. If, therefore, the purchasing partner, in
collusion with seller, has conspired to conceal the existence of the defect from the other
partners, the rule will not operate and the other partners would be entitled on the defect being
discovered by them, to reject the goods.

24. Answer the following:

What are the rights and duties of a partner after a change in the constitution of the firm?
Ans. Rights and duties of a partners after a change in the constitution of the firm (Section
17): A change in the constitution of the firm may be in one of the four ways, namely:
(i) Where a new partner or partners come in;
(ii) Where one partner or partners go out;
(iii) Where the partnership concerned carries on business other than the business of the firm;
(iv) Where the partnership business is carried on after the expiry of the term fixed for the
purpose.
This section lays down the following provisions as regards to rights and duties after the
change in the constitution of the firm:
(a) Change in the constitution of 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) Business continued after expiration of the term: 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) In case of additional undertaking: Where a firm constituted to carry out one or more
adventures or undertakings carries out other adventures or undertakings the mutual
rights and duties of the partners in respect of the other adventures or undertakings are
the same as those in respect of the original adventures or undertakings. But the above
provisions are however subject to the contract between the partners.

25. Comment on the following;

"The power to expel partner must be exercised in good faith".
Ans. The power to expel partner must be exercised in good faith: A partner may not be expelled
from a firm by a majority of partners except in exercise, in good faith, of powers conferred by
the contract between the partners. It is thus, essential that:
(i) the power of emulsion 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.

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If all these considerations 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:
(a) that the expulsion must be in the interest of the partnership.
(b) that the partner to be expelled is served with a notice.
(c) that he is given opportunity of being heard. If a partner is otherwise expelled, the
expulsion is null and void. The only remedy, when a partner misconducts in the business of
the firm is to seek judicial dissolution.
The provisions of Section 32 regarding retirement of a partner are also apply to an expelled
partner as if he was a retired partner [Section 22(2)].

26. What are the mutual duties of partners in a partnership firm to regulate the relations between
the partners?
Ans. Duties of Partners: Following duties should be observed by the partners to regulate the
relations between the partners:
(i) To observe good faith: A partnership contract is a contract of absolute good faith and
therefore Section 3 of the Partnership Act, 1932 lays down that partners are bound (a) to
carry on the business of the firm too the greatest common advantage: (b) to be just and
faithful to each other and (c) to render to any partner or his legal representative a time
account and full information of all things affecting the firm.
(ii) To attend to his duties diligently [Sections 12(b) and 13(a)]: Every partner is bound to
attend diligently to his duties in conducting the business of the firm. He has no right to
receive any remuneration for taking part in the conduct of the business.
(iii) To indemnify for fraud (Section 10): A partner shall be held liable to make good any loss
caused to the firm by his in the conduct of the business. It is an absolute provision and is
not subject to the term of the contract between the partners. A clause in the deed of
partnership exempting a particular partner from liability to the firm for loss caused by his
fraud shall be invalid and unenforceable.
(iv) To indemnify for willful Neglect [Section 13 (f)]: Every partner is liable to the firm for
any loss caused to it by his wilful neglect in the conduct of the business. The partners can
contract themselves out of this liability except in case of fraud.
(v) To share losses [Section 13(b)]: Each partner is liable to contribute for firm’s losses
equally in the absence of any contract to the contrary.
(vi) To hold and use property for the firm (Section 13): The property of the firm is the
property of all the partners, and therefore, each partner should hold and use property of
the firm exclusively for the purposes of the firm.
(vii) To account for private profits [Section 16 (a)]: A partner shall be liable to account for
and pay to the firm any private profits derived from the transactions of the firm or from
the use of the property or goodwill of the firm.
(viii) To account for the profits of a competing business [Section 16 (b)]: If a partner
carries on business of the same nature as and competing with that of the firm, then he
must account for and pay to the firm all profits made by him in the business. The firm will
not be liable for any loss.
(ix) To act within authority: A partner is bound to act within the scope of his actual or
apparent authority. In case, he exceeds his authority and the other partners do not ratify

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his unauthorized acts, he will be liable to the other partners for the loss that they may
suffer on account of his such acts.
(x) Not to assign his rights (Section 29): A partner cannot assign his rights or interest in a
partnership firm to an outsider, so as to make the outsider a partner in the firm's
business without the consent of other partners. In case such an assignment has been made
the assignee cannot during the continuance o t e firm, interface in the conduct of the
business, or require accounts or inspect the books of the firm. The transferee will he only
entitled to receive the share of profits of the transferring partner, and the transferee
shall accept the accounts of profits agreed to by the partners.
(xi) To the liable jointly and severally (Section 25): Every partner is liable, jointly with all
the other partners and also severally for all the acts of the firm done while he is a
partner. A retire partner continues to be liable for the debts of the firm incurred till he
gives public notice of his retirement.
(xii) Duties after a change in the firm (Section 17): Rights and duties of the partners of a
firm, unless otherwise agreed upon shall remain the same as they were in the beginning
even after a change in the constitution of the firm or on the expiry of the term of the
firm or even when the firm has taken up additional ventures after the complete of the
work for which the firm was constituted.

27. Explain clearly the meaning of implied authority of a partner in a partnership firm. State the
matters for which a partner does not have implied authority.
Ans. Meaning of Implied Authority of a Partner: The authority of a partner means the capacity of
a partner to bind the firm by his act. This authority may be express or implied. Where the
authority to a partner to act is expressly conferred by an agreement, it is called express
authority. But where there is no partnership agreement or where the agreement is silent, 'the
act of a partner which is done to carry on, in the usual way, business of the kind carried on by
the firm, bind the firm'. [Section 19(1) Indian Partnership Act, 1932].
The authority of a partner to bind the firm by his acts is called implied authority. It is
subject to the following conditions:
1. The act done by the partner must relate to the normal business of the firm.
2. The act must be such as is done within the scope of the business of the firm in the usual
way.
3. The act must be done in the name of the firm, or in any other manner expressing or
implying an intention to bind the firm (Section 22).
Matters for which no Implied Authority is available to a Partner:
1. To submit a dispute relating to the business of the firm to arbitration.
2. To open a bank account on behalf of the firm in his own name.
3. Compromise or relinquish any claim or portion of a claim by the firm.
4. Withdraw a suit or proceeding filed on behalf of the firm.
5. Admit any liability in a audit or proceeding against the firm.
6. Acquire immovable property on behalf of the firm.
7. Transfer immovable property helot in to the firm, or
8. Enter into partnership on behalf on the firm (Section 19(2)).

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28. Answer the following:

Describe the position of a minor, who has been admitted to the benefits of partnership, on
attaining majority.
Ans. Position of a Minor in Partnership: Under Section 11 of the Indian Contract Act, 1872, a
minor's agreement is void. In view of this a minor and a major cannot enter into an agreement of
partnership. Thus, a person who is minor may not be a partner in a firm but under Section 30 of
the Indian Partnership Act, 1932, he may be admitted to the benefits of partnership with the
consent of all the partners for the time being.
Section 30 of the Indian Partnership Act provides that the minor who has been admitted to the
benefits of partnership, has to decide whether he shall remain a partner or shall leave the firm
and this decision is to be taken by him within six months of his attaining majority, or his
obtaining knowledge that he had been admitted to the benefits of partnership, whichever date
is later. If he decides to sever his connection with the firm, he must give a public notice of his
such intention. If he does not give such public notice, it must be presumed that he has opted to
become a partner in the firm.
If the minor becomes a partner of his own willingness or by his failure to give the public notice
within specified time, his rights and liabilities are as follows:
1. he becomes personally liable to third parties for all acts of the firm done from the date
when he was admitted to the benefits of the firm.
2. his share in the property and the profits of the firm remains the same to which he was
entitled as a minor.
If the minor decides to sever his connection with the firm, his rights and liabilities shall
be as follows:
(i) His rights and liabilities continue to those of a minor up to the date of giving public notice.
(ii) His share shall not be liable for any acts of the firm done after the date of the notice.
(iii) He shall be entitled to sue the partners for his share of the property and profits.

29. Explain the following:

Explain the position of a person who had been admitted to the benefits of partnership as a
minor, after attaining majority.
Ans. Position of a minor in partnership after attaining majority: Partnership is a relation resulting
from a contract, and a minor's agreement is altogether void. A minor, being incompetent to
contract, cannot become a partner. But he can be admitted to the benefits of an already
existing partnership, if all the partners agree to admit him. Such a minor is not personally liable
nor his separate property and profits will be liable.
Within six months of his attaining majority or when he comes to know of his being so admitted,
whichever date is later, he has to elect whether he wants to continue his relation and become a
full fledged partner or sever his connection with the firm. He may give a public notice of his
election to continue or discontinue, but if he fails to give any public notice within this period, he
will be deemed to have elected to become a partner in the firm. A minor who thus becomes a
partner, will become personally liable for all debts and obligations of the firm incurred since the
date of his admission to the benefits of the partnership.

30. Briefly answer of the following:

Transferee of a partner's interest cannot exercise the rights of the transferring partner.

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Ans. Section 29 the Indian Partnership Act, 1932, states the rights of transferee of a partner's
share. A share in a partnership is transferable like any other property, but as the partnership
relation is based upon 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 Supreme
Court in Narayanappa v. Krishnappa has held that the assignee will enjoy only the rights to
receive the share of the profits of the assignor and account of profits agreed to by other
partners.
The rights of such a transferee are:
1. During the continuance of partnership, such transferee is not entitled to:
(a) interfere with the conduct of the business;
(b) require accounts or
(c) 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 to an account as from the date of the
dissolution.
Thus, transferee of a partner’s interest cannot exercise the rights of the transferring partner.

31. Discuss the rights of a Partner in a Partnership Firm.

Ans. Discuss the rights of a Partner in a Partnership Firm: Where there is no specific agreement
or where the agreement is silent on a certain, the relations of partners to one another as
regards their rights are governed by the provisions of the Indian Partnership Act, 1932 as
contained in Sections 9 to 17.
These are:
1. Right to take part in business: Subject to any contract between the partners, every
partner has right to take part in conduct of the business of the firm. [Section 12 (a)]
2. Right to be consulted: Every partner has an inherent right to be consulted in all matters
affecting the business of the partnership before any decision is taken by the partners.
Where there is any difference of opinion among the partners as to ordinary matters
connected with the business, it may be settled, subject to contract between the partners,
by a majority of the partners. [Section 12 (C)]
3. Right of access to account: Subject to contract between the partners, every partner has a
right to have access to and inspect and copy any of the books of the firm. [Section 12 (d)].
4. Right to share in profit: In the absence of any agreement, the partners are entitled to
share equally in the profits earned and are liable to contribute equally to the losses
sustained by the firm. [Section 13 (b)]
5. Right to interest on capital: The partnership may contain a clause as to the right of the
partners to claim interest on capital at a certain rate. Such interest, subject to contract
between the partners, is payable only out of profits, if any, earned by the firm. [Section 13 (c)]

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6. Right to interest on advances: Where a partners makes, for the purposes of the
business of the firm any advance beyond the amount of capital, he is entitled to interest
on each advance at the rate of 6 percent per annum. [Section 13 (d)]
7. Right to be indemnified: Where a partner incurs any liability in the ordinary course of
the partnership business, or in an emergency, for the purpose of protecting the firm from
loss, the firm must indemnify such partner. [Sections 13 (e) and 21]
8. Right to the use of partnership property: Subject to contract between the partners,
the property of the firm must be held and used by the partners exclusively for the
purposes of the business of the firm. No partner has s right to treat it as his individual
property. [Section 15]
9. Right of partner as agent of the firm: Every partner for the purposes of the business
of the firm is the agent of the firm. And subject to the provisions of the Indian
Partnership Act, 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. [Sections 18 and 19]
10. No new partner to be introduced: Every partner has a right to prevent the introduction
of new partner unless the consents to that or unless there is an expression them in the
contract permitted such introduction [Section 31 (1)]
11. No liability before joining: A person who is introduced as a partner into the firm is not
liable for any act of the firm done before he became a partner [Section 31 (2)]
12. Right to retire: A partner has a right to retire with the consent of all the other
partners, or in accordance with an expression agreement between the partners, or where
the partnership is at will, by giving notice to all the other partners of his intention to
retire. [Section 32 (1)].
13. Right not to be expelled: A partner has a right not to be expelled from the firm by any
majority of the partners, save in the exercise; in good faith of powers conferred by the
contract between the partners. [Section 33 (1)]
14. An outgoing partner can claim subsequent profits or interest @6% per annum till final
accounts are settled.

32. Briefly answer of the following:

What are the liabilities of an outgoing Partners?
Ans. An outgoing partner or 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 not be liable to any third party if the letter
deals with the firm without knowing that the former was a partner. [Sections 32 (3) and (4)
Indian Partnership Act, 1932].
The liability of a retired/outgoing partner to the third parties continues until a public notice of
his retirement has been given. Regarding his liability for the acts of the firm done before his
retirement, he 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 course of dealings between the third party and the reconstituted firm after he had
knowledge of the retirement. [Section 32(2)]

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33. Briefly answer of the following:

What are the legal provisions relating to expulsion of a partner under the Indian Partnership
Act ?
Ans. According to Section 33 of the Indian Partnership Act, 1932 a partner may be expelled from
partnership subject to the following three conditions:
(i) the power of expulsion of a partner should be conferred by the contract between the
partners.
(ii) the power should be exercised by a majority of the partners.
(iii) the power should be exercised in good faith.
If all these Conditions are not present, the expulsion is not deemed to be in the bonafide
interest of the business of the firm.
The test of good faith is:
(a) that the must be in the interest the partnership.
(b) that the partner to be expelled is served with a notice.
(c) that he is given an opportunity of being herd.
Irregular expulsion: Where the expulsion of a partner takes place without the satisfaction of
the conditions given above, the expulsion is irregular. The expelled partner may in such a case
either (i) claim reimbursement as a partner or (ii) sue for the refund of his share of capital and
profits in the firm. An irregular expulsion is wholly ineffectual and inoperative. The expelled
partner, in such a case, does not cease to be a partner.
Regular expulsion: Where a partner is expelled subject to the satisfaction of the conditions as
above, his expulsion would be regular.
The rights and liabilities of an expelled partner are the same as those of a retiring partner.
[Section 33 (2)].

34. Answer the following:

What constitutes Partnership property or Proper of the firm?
Ans. Partnership property consists of the following:
1. All property and rights and interests in property originally brought into the stock of the
firm or acquired by purchase or otherwise, by or for the firm, or for the purpose and in
the course of the business of the firm; and includes also the goodwill of the business.
(Section 14).
2. The property and rights and interests on property acquired with many belonging to the
firm and dewed to have been acquired for the firm. (Section 14).
3. The property of the firm held and used by the partners exclusively for the purpose of the
firm's business. (Section 15 Indian Partnership Act, 1832).

35. Explain clearly the meaning of the term "Authority of a partner''. State the acts which fall
within the 'Implied Authority' of a partner.
Ans. Meaning: The Authority of a partner means the capacity of a partner to bind the firm by his
acts. This authority may be express or implied. Where the authority to a partner to act is
expressly conferred by an agreement, it is called express authority.
But where there is no partnership agreement or where the agreement is silent, the authority
conferred on a partner by the provision is silent, the authority conferred on a partner by the
provisions of Section 19 of the Indian Partnership Act is called implied authority.

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Implied authority covers those acts of partners which fulfill the following conditions:
1. The act doe by the partner must relate to the normal business of the firm. [Section 19(i)]
2. The act must be such as is done within the scope of the business of the firm in the usual
way.
3. The act must be done in the name of the firm, or in any other manner expressing or
implying an intention to bind the firm. (Section 22).
Acts falling within the implied authority of a partner: In a trading firm, i.e., a firm which
depends for its existence on the buying and selling of goods, the implied authority of a partner
has been held to include.
1. Purchasing goods on behalf of the firm, in which the firm deals or which are employed in
the firm's business.
2. Selling goods of the firm.
3. Receiving payment of the debt due to the firm and giving receipts for them.
4. Settling accounts with the persons dealing with the firm.
5. Engaging servants for the partnership business.
6. Borrowing money on the credit of the firm.
7. Drawing, accepting, indorsing bills and other negotiable instruments in the name of the
firm.
8. Pledging any goods of the firm for the purpose of borrowing money.
9. Employing a solicitor to defend an action against the firm for goods supplied.

36. Briefly answer the following:

What is the position of a minor in a partnership firm before his attaining the age of majority.
Ans. The position of a minor in a partnership before attaining the age of majority (Indian
Partnership Act, 1932):
Rights:
1. A minor has a right to such share of the property and of profits of the firm as may have
been agreed upon.
2. He has a right to have access to and inspect and copy any of the accounts, but not books
of the firm. [Section 30(3))].
3. When he is not given his due share of profit, he has a right to file a suit for his share of
the property of the firm. But he can do so only if he wants to sever his connection with
the firm. [Section 30(4)].
Liabilities:
1. The liability of a minor partner is confined only to the extent of his share in the profits
and property of the firm. Over and above this, he either personally liable nor his private
estate liable. [Section 30(3)].
2. A minor cannot be declared insolvent, but if the firm is declared insolvent his share in the
firm vests in the Officials Receiver or Official Assignee.

37. Briefly answer the following:

The liability of a retired partner to third parties continuing after his retirement.
Ans. Goods forming subject matter of the contract of sale may be classified as under:
I. Existing Goods

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(a) Specific goods

(b) Unascertained goods.
(c) Ascertained goods.
II. Future Goods
III. Contingent Goods.
Existing Goods are those goods which are in actual existence at the time of contract of sale.
The seller is the owner of goods or he has the possession of such goods.
Existing goods may be of the following three types:
(i) Specific goods: Goods which have either been identified and agreed by the parties at the
time of contract of sale.
(ii) Unascertained goods: are those not specifically identified at the time of contract of sale.
They are described by the description or sample only.
(iii) Ascertained goods: are those identified only after the formation of a contract of sale.
When unascertained goods are identified and agreed upon by the parties, the goods are
called Ascertained goods.
(iv) Future goods: are those in existence at the time of contract of sale. These goods are to
be acquired or produced by the seller after the contract of sale is made. It is an
agreement to sell and not sale.
(v) Contingent goods are like future goods. The acquisition of the goods by the seller depends
upon the uncertain contingencies which may or may not happen. e.g. goods will be supplied
if ship arrives.

38. "Though a minor cannot be a partner in a firm, he can nonetheless be admitted to the benefits
of partnership."
(I) Referring to the provisions of the Indian Partnership Act, 1932, state the rights which
can be enjoyed by a minor partner.
(II) 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.
Ans. (I) The rights enjoyed by a minor partner are:
(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 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.
(II) The liabilities of a minor partner:
(i) Before attaining majority:

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(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.
OR
(II) The legal position of a minor partner after attaining majority:
(i) When he opts to become a partner of the same firm. 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:
(1) He becomes personally liable to third parties for all acts of the firm done since
he was admitted to the benefits of partnership.
(2) 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 does not become a partner:
(1) His rights and liabilities continue to be those of a minor upto the date of giving
public notice.
(2) His share shall not be liable for any acts of the firm done after the date of the
notice.
(iii) He shall be entitled to sue the partners for his share of the property and profits. It
may be noted that such minor shall give notice to the registrar that he has or has
not become a partner.

39. What is the provision related to the effect of notice to an acting partner of the firm as per
Indian Partnership Act 1932?
Ans. 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 partner’s of the firm, just as a notice to an agent is notice to his
principal. The notice must be actual and not constructive. It must be received by working
partner and not by sleeping partner. It must further relate to the firm’s business. Only then it
would constitute a notice to the firm.

40. Discuss the provisions regarding personal profits earned by a partner under the Indian
Partnership Act 1932?
Ans. According to the Indian Partnership Act, 1932, subject to contract between the partner:
(a) If a partner derives any profit for himself from any transaction of the firm, or from the
sue 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.

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(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.

41. When the continuing guarantee can be revoked under the Indian Partnership Act, 1932?
Ans. 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.
In other words, 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 a partner,
or by introduction of a new partner.

42. What do you mean by Goodwill as per the provisions of Indian Partnership Act, 1932?
Ans. Section 14, specifically sates that the goodwill of a business is subject to a contract between
the partners, to be regarded as "property" of the "firm". It 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. Goodwill
is a part of the property of the firm.

43. With reference to the provisions of Indian Partnership Act, 932 explain the various effects of
insolvency of a partner.
Ans. As per the provisions of Indian Partnership Act, 1932, effects of Insolvency of a partner will
be as follows:
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, the insolvency of a partner, would result in dissolution of firm but remaining
partners may agree to carry it on.

44. Comment on 'the right to expel partner must be exercised in good faith' under the Indian
Partnership Act, 1932.
Ans. Expulsion of a partner (Section 33):
A partner may not be expelled from a firm by any majority of partners save in exercise in good
faith of powers conferred by a contract between the parties.
The following are the conditions:
(a) the powers of expulsion must have existed in a contract between the partners.
(b) the power must have been exercised by a majority of the partners.
(c) It have been exercised in good faith.
The test of good faith as required under is as follows:
(a) The expulsion must be in the interest of the partnership
(b) The partner to be expelled is served with a notice
(c) He is given an opportunity of being heard

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45. Explain in detail the circumstances which lead to liability of firm for misapplication by partners
as per provisions of the Indian Partnership Act, 1932.
Ans. Liability of firm for Misapplication by Partners (Section 27) of the Indian Partnership Act,
1932: 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 such cases of
misapplication of money by partners.
Clause (a):- Covers the case where a partner act within his authority and due to his authority as
partner, he receives money or property belonging to a third party and misapplies that money all
property. For this provision to the attracted, it is not necessary that the money should have
actually came 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 other partners will not be liable, unless the
money received comes into their possession all 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.

46. 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.
Ans. Liability to Third Party (Section 25-27 of Indian Partnership Act 1932): 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 question of liability of partners to third parties may be considered under different heads.
These are follows:
1. Contractual liability/Liability of a partner for acts of the firm:
• Every partner is liable jointly with other partners and also severally for the acts of
the firm done while he is a partner.
• 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.
Example:-Thus, where 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 for tort or wrongful Act: A firm is liable for the loss or injury caused to a third
party by the wrongful acts of a partner if they are done by partner while acting (a) in the
ordinary course of the business of the firm (b) with the authority of the partners.
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 held responsible for the same.
3. Liability for misappropriation by a partner: A firm is liable:

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(a) When a partner, acting within his apparent authority and receives money or other
property from a third person and misapplies it or
(b) Where a firm, in the course of its business, received money or property from a third
person and the same is misapplied by a partner while it is in the custody of the firm.
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.
Note:- If receipt of money by one partner is not within the scope of his apparent
authority, his receipt cannot 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.

47. 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?
Ans. Authority conferred on a partner under the provisions of Indian Partnership Act, 1932 is known
as Implied authority of a partner. It is the authority conferred to act in a general way with
respect to business of partnership firm and of a partner acts this way he binds all the other
partner by his acts.
However, there are certain acts which are beyond the implied authority of a partner. They are
as follows:
(i) Submit a dispute relating to the business of the firm to arbitration.
(ii) Open a bank account in name his own name on behalf of the firm.
(iii) Compromise or relinquish any claim or portion of any claim by the firm.
(iv) Withdraw a suit or proceeding filed on behalf of the firm.
(v) Admit any liability in a suit or proceedings against the firm.
(vi) Acquire immovable property on behalf of the firm.
(vii) Transfer immovable property belonging to the firm.
(viii) Enter into partnership on behalf of the firm.

48. 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?
Ans. A partner may not be expelled from a firm by any majority of the partners, except in exercise
of good faith of power conferred by contract between the partners. 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 includes three things:
(a) The expulsion must be in the interest of the partnership.
(b) The partner to be expelled is served with a notice.
(c) He is given an opportunity of being heard.
If a partner is otherwise expelled, the expulsion is null and void.
Having regard to above we can say that expulsion of partner ‘Y’ by X & Z is not in accordance
with the provision of Indian Contract Act and thus not valid.

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49. Mr. A, Mr. 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 Rs. 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.
Analyse 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.
Ans. According to the facts of this case the situation existent clearly indicates the application of
Section 37 of the Indian Partnership Act, 1932 according to which 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 without any final settlement of the accounts as between them and the
outgoing partner of 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 percent per annum on the amount
of his share in the property of the firm.
In this case since there has been no decisive settlement of accounts between the heirs of Mr. C
and Mr. A & Mr. B so it’s pretty clear that the interest of the heirs of Mr. C is still existent in
the profits and property of the firm and Mr. X wants to recover the amount not only from M/s
ABC & Co. but also from the legal heirs of Mr. C he is justified in claiming such a recovery and
his claim is legal and just according to the provisions of Section 37.

50. Mr. M, Mr. N and Mr. P were partners in a firm, which was dealing in refrigerators. On 1 st
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.
Ans. According to the facts of this case it can be easily concluded that the contention of Mr. X for
recovery of his dues from all the partners including Mr. P is quite justified and legal on ground
of the provision under Section 32 of the Indian Partnership Act that states 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. In this case no such notice has been given by Mr. P of his
retirement and so he cannot escape the liability incurred by the firm in its business dealing with
Mr. X.

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51. 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?
Ans. A minor who is admitted to the benefits of a partnership firm during his minority, must within
six months of his attaining the age of majority or when he comes to know of his being so
admitted (whichever date is later) he has to elect whether he wants to become a partner, or
sever his connection with the firm. He may give public notice of his election to continue or
repudiate but if he fails to give any public notice within the period stated above, he will be
deemed to have elected to become a partner in the firm. Since, then he will be liable as other
partner to the third parties for all acts of the firm done since he was admitted to the benefits
of partnership.
In the given case.
(i) X will be liable to all third parties if he failed to give public notice after attaining
majority.
(ii) Yes, Mr. L a supplier to the firm, can recover his debt from x.

52. 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.
Ans. (i) Right of an outgoing partners to carry on a competing business (Section 36)
An outgoing partner may carry on a competing business with that of the firm and he may
advertise such business but subject to the following conditions:
(a) He may not use the firm name.
(b) He may not represent himself as a partner in the business of the firm.
(c) He may not solicit the custom of persons who well dealing with the firm before he
ceased to be a partner. A partner may make an agreement with his partner 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 a specified local limits shall be valid.
(ii) Right of an outgoing partner in shall of profits (Section 37): When a partner ceases to
be a partner in a firm and the 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

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the outgoing partner then the outgoing partner shall be liable to such profits made since
he ceases to be a partner in a firm from the use of him property in the firm or 6%
interest on the property of the firm whichever is higher.
Thus in the given case P Q R & S all the partner or in P Q R S & Co. due to conflict P & Q
left the firm and started a new firm in the name of P & Q Co. meanwhile R & S continued
the same business in the same name of P Q R S & Co. Thus,
(i) P & Q has the following rights to start a competitive business as stated above in
Section (36)
(ii) P & Q will have a shall in the property of P Q R S & Co., according to the terms and
conditions of Section (27) of the Indian Partnership Act, 1932 which are property
stated and explained above the following paragraph of this page.

53. 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?
Ans. (i) Liability of estate of deceased partner (Sec. 35 of Indian Partnership Act, 1932).
Ordinarily, the effect of the death of a partner is the dissolution of the partnership, but
the rule in regard to the dissolution of the partnership, by death of partner is subject to
a contract between the parties and the partners are competent to agree that the death
of one will not have the effect of dissolving the partnership as regards the surviving
partners unless the firm consists of only two partners. In order that the estate of the
deceased partner may be absolved from liability for the future obligations of the firm, it
is not necessary to give any notice either to the public or the persons having dealings with
the firm.
Fact of the Case:
Only order was placed during the life time of Mr. P but no delivery of furniture was made
during his lifetime.
Applying the above Provision:
Since as there was no debt due in respect of goods in P’s lifetime so his estate will not be
held liable for the payment of price of furniture to J.R. Limited.
Further death of partner do not require any public notice.
(ii) It will not make any difference even if JR Limited supplied the furniture to the firm
believing that all the three partners are alive since after the death of any partner his
estate is not liable for any act done by firm after his death.
And death of partner do not require public notice also.

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54. 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 Rs. 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?
Ans. According to the provisions of Sale of Goods Act, 1930,
(a) In a contract of Sale of Goods by sample; there is an implied condition that:
- Seller must provide a reasonable opportunity to the buyer for inspecting the bulk.
- The bulk must correspond to the sample in terms of quality.
- The goods must be from latent or hidden defects which renders them un-
merchantable.
If any of the above condition is not satisfied, then the buyers entitled to reject the
goods.
(b) If goods are bought under description, then the goods must correspond with the
description. Otherwise buyer can, reject the goods.
Conclusion:
(i) In this case, Mr. Das does not have any option for grievance redressal as per provisions of
the Act.
(ii) In this case, Mr. Das specified her exact requirement as to the length of the rice.
Therefore, she can reject the rice as they are not in accordance with the description
made by her.

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CHAPTER – 3
INDIAN PARTNERSHIP ACT, 1932
Unit : 3 – Registration and Dissolution of Firm

Self Study Questions

1. What are the Condition Apply on Dissolution of Firm?

Ans. As per Section 39-47

• It takes place when relationship between all the partners of the firm is so broken so
as to close the business of the firm.
• As a result, firm's assets are sold and its liabilities are paid off.

2. Distinguish between 'Dissolution of firm' and 'Dissolution of partnership'.

Ans. Dissolution of firm Vs. Dissolution of Partnership:

S.No. Dissolution Firm Dissolution of Partnership

1 It necessarily involves of dissolution It may or may not involve dissolution

partnership of firm.

2 Involves final closure of books of Does not involve final closure of the
firm. books

3 Firm may be dissolved by order of Dissolution of partnership is not

Court. ordered by Court.

4 It involves winding up of the firm. It involves reconstitution of the firm.

3. Comment on —
A retiring partner is required to give a public notice under the Partnership Law.
Ans. A retiring partner is required to give a public notice under the partnership law: The law
imposes a duty on the retiring partner to give public notice of his retirement. Public notice
of this kind raises a presumption that those dealing with the firm including past and present
customers have come to known that a particular partner has retired.
Sec 32(4) provides that notice of retirement can be given either by the retired partner
himself or by any partner of the continuing firm or by the firm itself. In the case of a
registered firm, the notice must be given to three places, namely, the Registrar of Firms,
the Official Gazette and at least one vernacular newspaper circulating in the district where
the firm has its place or principal place of business. Where the firm is not registered, it is
enough that the matter is announced in at least one vernacular newspaper circulating in the
district where the firm has its place or principal place of business.
If the retiring partner fails to give such a notice then he continues to be liable for the acts
of the acts of the firm even after his retirement and similarly, the firm will be bound by
the acts of the retired partner done after retirement. This is based on the principle of

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holding out.
A retired partner will not be liable to any third party who deals with the firm without
knowing that he was a partner. It is for this reason that no public notice need be given when
a dormant of sleeping partner retires.

4. State briefly the consequences of non-registration of a Partnership firm.

Ans. Consequences of Non-Registration of the Firm: Partnership is the result of an agreement
between two or more persons. It need not necessarily be registered. Registration is optional
and there is no penalty for non-registration of the firm. Yet
Section 69 of the Partnership Act imposes certain limitations on an unregistered firm, and
these impediments compel a firm to get itself registered. Following consequences will result
from the non- registration of the firm:

(i) No suit by Partners: A partner of an unregistered firm can not sue the firm or any of
his present or past co-partners for the enforcement of any right arising from a
contract conferred by the partnership act.
(ii) No suit by a Firm: A firm can not sue a third party for the enforcement of any right
arising from a contract (Puranmal Ganga Ram Vs. Central Bank of India. 1993).
(iii) No right of set off: An unregistered firm or any partner thereof cannot claim a set
off in a proceeding instituted against the firm by a third party of enforce a right
arising from a contract. This right of set-off, however, is not affected if the claim of
set-off is for less than Rs. 100 in value.
Exceptions: Non-registration of a firm does not, however, affect the following rights,
namely:
(a) The right of third parties to sue the firm or any partner.
(b) The right of partners to sue for the dissolution of the firm or for the form or for the
accounts of a dissolved firm or for the realisation of the property of a dissolved firm.
(c) An Official Receiver or Assignee of a Court acting for an insolvent partner of an
unregistered firm may bring a suit for the realisation of the property of an insolvent
partner.
(d) The right of firm or partners of firm having no place of business in India.
(e) The right to sue or claim a set-off if the value of suit does not exceed Rs. 100.
(f) Non-registration will not affect the enforcement of rights arising otherwise than out
of a contract, e.g., for an injunction against wrongful infringement of a trade mark,
trade name or patent of the firm.
(g) A partner can bring a suit for damages for misconduct against another partner.

5. Comment on following:
Dissolution of a partnership is different from the dissolution of a firm.

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Ans. Dissolution of partnership is different from the dissolution of a firm: According to Indian
Partnership Act there is a firm distinction between dissolution of firm and dissolution of
partnership. Dissolution of the firm may not necessarily mean dissolution of a partnership
as in the case of dissolution of a partnership the firm may continue with some of the
remaining partners. According to Section 39, the dissolution of partnership between all the
partners of a firm is called the "dissolution of the firm". The words "between all the
partners" as stated in this Section are very Important. This means that the firm is said to
be dissolved only when each and every member of the firm ceases to carry on the business
in partnership. Thus, where one or more partners cease to be partners in the firm while
other remain, as In the case of retirement or expulsion of a partner, the partnership is
dissolved but the firm may not he dissolved, the remaining partners may continue to carry
on the business of the firm.
The follows that the dissolution of a firm necessarily involves the dissolution of partnership
whereas dissolution of partnership does not necessarily involve the dissolution of a firm.

6. Answer the following

When shall a retired partner be discharged from his liabilities for the acts of the firm
before retirement?
Ans. Liability of a retiring partner: The retiring partner remains liable to the creditors for the
acts of the firm done before and up to the date of his retirement. The retiring partner is
also liable to third parties for all transactions of the firm begun but unfinished at the time
of his retirement. On retirement of a partner, his co-partners may agree to release him
from such debts as were existing up to the date of his retirement. But even then the
retiring partner continues to be liable to creditors. A retiring partner can be released only
if (a) the remaining partners agree to release him and a due notice about his retirement is
given; (b) the creditor has expressly or impliedly agreed to release the retiring partner and
to accept the reconstituted firm as his debtor.
Example: A, B and C are partners and D is their creditor. B retires. A and C agrees to
release B from the liability. D also agrees with B and the reconstituted firm of A and C to
release B. B is discharged from

liability to D. The law imposes a duty on the retiring partner to give public notice of his
retirement. If the retiring partner fails to give such a notice then he continues to be liable
for the acts of the firm even after his retirement and similarly, the firm will be bound by
the acts of the retired partner done after retirement. This is based on the principle of
holding out.
A retired partner will not be liable to any third party who deals with the firm without
knowing that he was a partner. It is for this reason that no public notice need be given when
a dormant or sleeping partner retires.

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7. Comment on the following:

Non-registration of partnership creates disabilities.
Ans. Non-registration of partnership: The Indian Partnership Act does not make the registration
of firm compulsory nor does it impose any penalty for non-registration. Section 69 of the
Partnership Act, however, gives rise to certain disabilities on the ground of non-registration
which are as follows:
1. The firm or any other person on its behalf cannot bring an action against the third
party for the broach of contract entered into by the firm, unless the firm is
registered and the persons suing are or have boon shown in the register of firms as
partners in the firm.
2. If an action is brought against the firm by a third party, then neither the firm not
the partner can claim any set-off, if the suit be valued for more than Rs. 100 or
pursue other proceedings to enforce the rights arising from any conduct.
3. A partner of an unregistered firm is precluded from bringing legal action against the
firm or any person alleged to be or to have been a banner in the firm. But such a
person may sue for dissolution of the firm or for accounts and realisation of his share
in the firm's property where the firm is dissolved.
Non-registration of a firm does not affect the right of third parties against the firm
or its partners or the power of an official assignee, Receiver of Court under the
Presidency Towns Insolvency Act, 1920 to realise the property of an insolvent
partner.

8. Answer the following:

What is the procedure of giving public notice of any matter in respect of Partnership Firms?
Ans. Procedure of public notice: In every case where the public notice of any matter in respect
of partnership firms is required to the given under the partnership Act, 1932, it must be
given by publication in the official gazette and in at least one vernacular newspaper
circulating in the district where the firm of which it relates has its place or principal place
of business.
In the case of registered firm, apart from the aforesaid notification, a notice is also
required to be served on the Registrar of firms under Section 63 where the matters relate
to (a) the retirement or explulsion of a partner, or (b) dissolution of the firm, or (c) the
election, on attaining majority, to be or not to be a partner, by a person who as a minor was
admitted to the benefit of partnership.
If notice of retirement is published only in local newspaper but not given to Registrar of
firms and in Government Gazette, it is not sufficient to absolve retiring partner from
liability to third parties.

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9. Define 'Partnership' and state the procedure for its registration.

Ans. Partnership is the relation between persons who have agreed to share the profits of a
business carried on by all or any one of them acting for all. (Section 4).
The above definition of the Partnership given by the Indian Partnership Act, lays down three
important elements:
(i) It must be a result of an agreement between two or more persons;
(ii) The agreement must be to share the profits of the business; and
(iii) The business must be carried on by all or any of them acting for all.

All the above elements must co-exist before a partnership can come into existence. Thus
existence of an agreement, a business, sharing of profits and mutual agency form a core
part of the existence of a partnership.
Procedure for Registration: The firm has to file a statement in the prescribed form either
in person by post with the prescribed fee, with the Registrar of the Firms of the area in
which the firm is situated or is to be situated.
The Statement is to state the following particulars:
(i) The firm’s name.
(ii) The principal place of business.
(iii) The name of its other places of business.
(iv) The date of joining of each partner.
(v) The names in full and the permanent addresses of the partners, and
(vi) The duration of the firm.
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. The registration shall be completed only when the firm
receives a certification of Registration. However,
registration is deemed to be complete as soon as the application in the prescribed form and
with the
prescribed fee with necessary details concerning the particulars of the partnership is
delivered to the Registrar. The recording of an entry in the Register of firms is a routing
duty of Registrar.

10. Explain the meaning of ‘dissolution of a partnership firm’. When a dissolution of a firm
takes place?
Ans. Dissolution of a 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 incapacitated
from acting as a partner due to death, insolvency or insanity, the partnership, i.e. the
relationship between such a partner and others 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

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of dissolution of firm, on the other hand, the whole firm is dissolved. The partnership
terminates as between each and every partner of the firm.
Section 39 of the Indian Partnership Act, defines it as follows:
“The dissolution of partnership between all the partners of a firm is called the dissolution of
the firm”.
Thus, the business is stopped and the relations between all the partners
come to an end. When a dissolution of a firm takes place?
Dissolution of a firm may take place in the following manner (Sections 39-44):
1. As a result of any agreement between all the partners, this is called dissolution by
agreement.
2. By the adjudication of all the partners, or of all the partners but one, as insolvent,
this is known as compulsory dissolution.
3. By the business of the firm becoming unlawful, this is known as compulsory dissolution.
4. As per the agreement, upon happening of any of the following contingencies:
(a) efflux of time;
(b) completion of the venture for which it was entered into;
(c) death of a partner;
(d) insolvency of partner;
In case of death of a partner, the number of the partners if do not exceed two, the
firm is to be dissolved. In case the number of partners is more than two, the firm may
continue even after the death of one partner, provided other partners agree to do so.

5. 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 as from the date of
the communication of the notice; and
6. By intervention of court in case of:
(i) a partner becoming of unsound mind;
(ii) permanent incapacity of a partner;
(iii) misconduct of a partner affecting the business;
(iv) willful persistence breach of agreement by a partner;
(v) transfer or sale of the whole interest of 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.
11. What will be the consequences in relations of partners of a partnership firm resulting from:
(i) Insolvency of partner, and
(ii) Death of a partner?

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Ans. Consequences of Insolvency and death of a partner:

(i) Insolvency of a partner (Section 34): When a partner in a firm is adjudicated and
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).
(ii) Death of a 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 (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 a 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 consists of only two partners [Commissioner of Income Tax v.
G.S Mill, AIR (1966) S.C. 24].
Section 35 deals with the situation where the firm continues its business without
dissolution and lays down that, in such a case, the estate of a deceased partner is not to be
held liable for any act of the firm done after his death. Proviso to Section 45 lays down and
incidental rule applicable to a case where the death of a partner has caused dissolution of
the firm.
In order that the estate of a 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 person having dealings with the firm.

12. State the matters for which a partner of partnership firm required to give ‘Public Notice’
under the provision of the Indian Partnership Act, 1932. State also the consequences for
not giving a public notice where it is required to be given under the Partnership Act.
Ans. Public Notice: As per the requirements of Section 72 of the Indian Partnership Act, 1932 a
public notice has to be given:
1. On the retirement or expulsion of a partner from a registered firm.
2. On the dissolution of a registered firm.
3. On the election to become or not to become a partner in a registered firm by a minor
on his attaining majority.

Consequences of not giving public notice as required above:

1. If a minor admitted to the benefits of partnership under Section 30 fails to give
public notice 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,
that he has elected to become or not to become a partner in the firm, he shall become

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a partner in the firm on the expiry of the said 6 months and is liable as a partner of
the firm.
2. If a retiring partner does not give a public notice of the retirement from the firm
under Section 32, he and the other partners shall 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.
3. If in case of expulsion of a partner from the firm a public notice is not given, the
expelled partner and the other partners shall continue to be liable to third parties
dealing with the firm as in the case of a retired partner. (Section 33).
4. If a public notice is not given on dissolution of a registered firm, the partners shall to
be liable to third persons of any act done by any of them which would have been an act
of the firm if done before the dissolution which would have been an act of the firm if
done before the dissolution (Section 45). When public notice is given of the
dissolution of a firm, no partner shall have authority to bind the firm except for
certain specific purposes as given in Section 47. According to this section, after the
dissolution of a firm, the authority of each partner to bind the firm and their mutual
rights and obligations of the partners shall continue:
(i) so far as may be necessary wind up the affairs of the firm; and
(ii) to complete transactions begun but unfinished at the time of the dissolution.

13. Explain briefly of the following:

Dissolution of partnership may or may not involve dissolution of firm.
Ans. Dissolution of partnership may or may not involve dissolution of firm: The Indian
Partnership Act, 1932 makes a distinction between the dissolution of partnership and
dissolution of firm. Section 39 of the Act provides that the dissolution of partnership
between all the partners of a firm is called the dissolution of partnership between all the
partners of a firm is called the dissolution of the firm. Dissolution of partnership involves
change in the relation of partners but it does not end the partnership. For example, where
X, Y and Z were partners in a firm and X died or retired, the partnership firm would come
to an end. If Y and Z agree to continue the business, the partnership between X, Y and Z
would come to an end, although the firm of Y and Z continue in the firm. So the dissolution
of a partnership may or may not include the dissolution of the firm, but the dissolution of
the firm necessarily means the dissolution of the partnership as well. On the dissolution of
partnership, the business may be carried on by the remaining constituted firm but on the
dissolution of firm, all business must be stopped, the assets of the firm realised and
distributed among the partners.

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14. Is registration of a partnership firm necessary? Discuss the effects of non-registration of

a firm.
Ans. The registration of a firm is not compulsory. But an unregistered firm suffers from certain
disabilities and so registration is necessary.
The effects of non-registration as provided in Section 69 of the Indian Partnership Act, 1932 are:
(a) In an unregistered firm, a partner cannot file a suit against the firm on any other
partner for enforcing his right conferred in the Act or arising from a contract.
(b) No suit can be filed on behalf of an unregistered firm against any third party for the
purpose of enforcing a right arising from a contract.
(c) An unregistered firm or any partner thereof cannot claim setoff in a suit instituted
against the firm by a third party to enforce a right arising from a contract.

But the non-registration of a firm does not attract the following rights:
(i) The right of a third party to sue the firm or any other partner.
(ii) The right of a partner to sue for dissolution of firm or for accounts of a dissolved
firm or any right or power to realise the property of a dissolved firm.
(iii) The power of official assignee or receiver to realise the property of an insolvent
partner.
(iv) The rights of firms having no place of business in India.
(v) A suit for set off not exceeding Rs. 100 in amount which is of a nature cognisable by
Small Causes Court.

15. Answer briefly of the following:

Mode of effecting registration of a partnership firm
Ans. Mode of Effecting Registration of a Partnership Firm: The registration of a partnership
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 firm is situated or proposed to be situated, a statement
in the prescribed form. It is not essential that the firm should be registered from the very
beginning. When the partners so decide they may go for registration of the firm. However,
the application is to be made by them in the prescribed form as per the provisions of
Section 58 of the Indian Partnership Act, 1832.
The statement must be accompanied by the prescribed fee and must contain the following
matters:
1. The firm's name.
2. The principal place of business.
3. The names of its other places of business.
4. The date of joining the firm by each partner.
5. The name in full and the permanent addresses of the partners.
6. The duration of the firm.

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The aforesaid statement in signed by all the partners or by their agents specially authorised
in this behalf. Each partner so signing it shall also verify it in the manner prescribed.
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 like, alterations in the name, place of business, constitution of the
firm etc. may also be registered.

16. You want to form a partnership firm. Would you like to get it registered? If so, why? Also
state the procedure you have to follow for getting the firm registered?
Ans. Yes, the firm should be registered under the Indian Partnership act, 1932 since its non-
registration has the following consequences; (Section 69).
1. A person suing as a partner of an unregistered firm cannot sue the firm or any
partners of the firm to enforce a right arising from a contract or conferred by the
Partnership Act.
2. An unregistered firm cannot sue a third party to enforce a right arising from a contract.
3. An unregistered firm or any partner thereof cannot claim a set-off in a proceeding
instituted against the firm by a third party to enforce a right arising from a contract.
Non-registration, however, does not affect the right of a firm or of its partners having no
place of business in India. It also does not affect the right to any suit or claim of set-off
not exceeding Rs. 100.
Procedure; (Section 58 and 59):
The registration of a firm may be effected at any time by filing an application in the form
of a statement, giving the necessary information with the Registrar of Firms of the area.
The application shall be accompanied by the prescribed fee. It shall state:
(a) The name of the firm;
(b) The place or principal place of business of the firm;
(c) The names of other places where the firm carried on business.
(d) The date when each partner joined the firm;
(e) The names in full and permanent address of the partners;
(f) The duration of the firm.
The statement shall be signed by all the partners or by their agents specially authorized in
this behalf. [Section 58(1)]. It shall also be verified by them in the prescribed manner.
[Section 58(2)].
When the Registrar is satisfied that the above provisions have been duly complied with, he
shall record an entry of the statement in the Register of Firms and file the
statement.(Section 59). He shall then issue under his hand a certificate of registration.
Registration is effective from the date when the Registrar files the statement and makes
entries in the Register of Firms and 1 not from the date of presentation of the statement
to him.

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17. Explain the following (Give brief answers):

Dissolution of a Partnership Firm by the intervention of the Court.

Ans. Dissolution of a firm by the intervention of the Court: A firm can be dissolved by the
intervention of the Court on the following grounds:

(i) A partner becoming of 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 breaches 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.

18. What are the consequences of Non-Registration of a Partnership Firm? Discuss.

Ans. Under the English law, the registration of firms is compulsory. 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 89, non registration of partnership gives rise to a
number of disabilities. Thus, the consequences of non-registration have a persuasive
pressure for their registration. These disabilities are as follows:
1. No suit in a civil court by firm or other co-partners against third party: The firm or
any other partner on its behalf cannot bring an action against third party for breach
of contract entered into by the firm, unless the firm is registered and the person
suing are or have been shown in the register of firms as partners in the firm.
2. No relief to partners for set-off of claim: In an action against the firm by a third
party, neither the firm nor the partner can claim any set off, if the suit be valued for
more than Rs. 100.
3. Aggrieved partner cannot bring legal action against other partner or the firm: A
partner of an unregistered firm 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 firm).
4. Third party can sue the firm: In case of an unregistered firm, an action can be
brought against the firm by a third party.

19. State any four grounds on which Court may dissolve a partnership firm in case any partner
files a suit for the same.
Ans. The four grounds as mentioned under Section 44 on which the Court can dissolve a partnership
firm are :
(a) Insanity/ Unsound mind : Where a partner (not a sleeping partner) has b Come 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.

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(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.
(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
(d) Persistent breach of agreement : Where a partner other than the partner suing,
wilfully or persistently commits breach of agreements relating to the management of
the affairs or 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.

20. “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?
Ans. Under the English Law, the registration of firms is compulsory. But the Indian Partnership
Act does not make the registration of firm's compulsory nor does it impose any penalty for
non-registration.
However, section 69, of the Act gives rise to a number of disabilities which will attach to an
unregistered partnership firm. Although registration of firms is not compulsory, yet the
consequences or disabilities of non-registration have a persuasive pressure for their
registration. These disabilities are as follows:
(i) No suit in a civil court by firm or other co-partner against third party: The firm or
any other person on its_ behalf cannot bring an action against the third party for
breach of contract, unless the firm is registered.
(ii) No relief to partner for set off of claim: Neither the firm, nor the partner can claim
any set off if the suit be valued for more than Rs. 100.
(iii) Aggrieved partner cannot bring legal action against the other partner of the firm: A
partner of an unregistered firm 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.

21. Dissolution of a firm is different from dissolution Partnership". Discuss. (4 marks)

Ans. As per the Indian Partnership Act, 1932, the dissolution of partnership between all partners
of a firm is called the "dissolution of the firm." The particular partner goes out, but the
remaining partner carry on the business of the firm, it is called dissolution of partnership.

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Dissolution of Firm Vs. Dissolution of Partnership

S. Basic of Difference Dissolution of Firm Dissolution of Partnership

No.
1. Continuation of business It involves discontinuation It does not affect continuation of
of business in partnership. business.
It involves only reconstitution of
the firm.
2. Winding up It involves winding up of the It involves only reconstitution and
firm and requires realization requires only revaluation of assets
of assets and settlement of and liabilities of the firm
liabilities
3. Order of court A firm may be dissolved by Dissolution of partnership is not
the 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 of books It involves final closure of It does not involve final closure of
books of the firm. the books.

22. Referring to the Provisions of the Indian Partnership Act 1932, answer the following:
(i) What are the consequences of Non-Registration of Partnership firm?
(ii) What are the rights which won't be affected by Non-Registration of
Partnership firm?
Ans. (i) Consequences of Non Registration of a partnership (Section 69)
According to the Indian Partnership Act, 1932 the registration of partnership firm is
optional but it has to face various disabilities:-
(a) No suit in a civil court by a firm or other co-partners against third party:- The
firm or any person on its behalf cannot take any leg al action against the third
party for a breach of a contract entered into by the firm until and unless the
firm is registered.
(b) 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 Rs. 100 or pursue other proceedings to
enforce the rights arising from any contract.
(ii) Non-registration of a partnership firm, however effect the following rights:-
(a) The right of a third party to sue the firm or
(b) The right of partners to sue feel the dissolution of the firm or for the
settlements of the accounts of a dissolved firm.
(c) The power of an official assignee to release the property of the insolvent
partner and to bring an action;
(d) The right to sue or claim a-Set-off of if the value of the suit does not exceed Rs.
100 in value.

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23. Subject to agreement by partners, state the rules that should be observed by the partners
in setting the accounts of the firm after dissolution under the provisions of The Indian
Partnership Act, 1932.
Ans. Subject to Contract between the partners, after distribution of the firm, its accounts must
be settled as follows.
(i) Payment of Losses: Losses including deficiencies of capital are to be paid first out of
profits then out of capital and lastly by partners individually in the proportion in which
they have contributed capital.
(ii) Application of Assets: The assets of the firm, including any sums contributed by the
partners to make up the deficiencies of capital, must be applied in the following
manner and order:
(i) In payment of debt to third parties
(ii) In payment of each partner's advances
(iii) In payment of each partner's Surplus Capital i.e. which is in excess of capital ratio.
(iv) Remaining divided amongst partners in profit sharing ratio.

24. 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 Aug. 2016,
they inducted Mr. G an expert in the field of carpet manufacturing as their partner. On 10 th
Jan. 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?
Ans. 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 done in bonafide
interest of the business of the firm.
If a partner is otherwise expelled, the expulsion is null
and void. Thus, action taken by partner in expelling
partner G is valid.

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CHAPTER – 5
THE COMPANIES ACT, 2013

SELF STUDY NOTES

1. 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?
Ans. Section 2(62) of the Companies Act, 2013 defines one person company (OPC) as a company
which has only one person as a member.
Rules Regarding its Membership:
1. Only a natural person who is an Indian citizen and resident in India shall be eligible to
incorporate a OPC/shall be a nominee for the sole member of a OPC.
2. No minor shall become member or nominee of the OPC or can hold share with beneficial
interest.
3. No person s all be eligible to incorporate more than one OPC or become nominee in more
than one such company.
4. OPC is a private company in nature.
5. OPC cannot be incorporated or converted into a company under section 8 of the Act i.e. a
non-profit company.
6. OPC may be converted to private or public companies in certain cases.
7. Such companies cannot carry out Non-Banking Financial Investment activities including
investment in securities of any body corporate.

2. State the limitations of the doctrine of indoor management under the Companies Act, 2013.
Ans. Doctrine of indoor management also known as the case of Royal British Bank Vs. Turquand i.e.
Turquand's rule is an exception to doctrine of constructive notice. The doctrine says that
outsider can in no way be asked to be responsible or to enquire into the internal management of
the company. They can safely presume that company must have done all what it was supposed to
do at its internal level.

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.
Ans. The cases on the basis of which the principle of Corporate Personality of a company can be
disregarded under the Companies Act, 2013 are :
1. To determine the character of the company i.e.to find out whether company is an
enemy or friend : In the law relating to trading with the enemy where the list of control
is adopted.
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.

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3. To avoid a legal obligation : Where it was found that the sole purpose for the formation
of the Company was to use it device to reduce the amount to be paid by way of bonus to
workmen.
4. Formation of subsidiaries 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.
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.

4. 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.
Ans. 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 profits in
• promoting its objects and
• prohibiting the payment of any dividend to its members.
Examples of section 8 companies are ASSOCHAM, FICCI, NATIONIA SPORTS CLUB of
INDIA, etc.
Powers of Central Government to issue licence :
(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 an application register such person or association as a company
under this section.
(iii) On registration the company shall enjoy same privileges and obligation as of a limited
company.
Revocation of license:
The Central Government may by order revoke the license of the company where the company
contravenes any of the requirements or the conditions of this section 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.
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.
On revocation of the licence, the Registrar shall put 'limited' or 'private limited’ against the
name of the company in its register.

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5. "The Memorandum of Association is a charter of a company". Discuss. Also explain in brief the
contents of Memorandum of Association.
Ans. 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.
It defines the scope of the companies activities and its relations with the outside world. It is
the charter of the company. It contains the objects to pursue which the company is formed. It
lays down the scope of operations beyond which company cannot go.
Contents of Memorandum:
(a) Name Clause: The name of the company must end with the words "limited" in case of
public co., or "private limited" in case of private co.
(b) Registered office clause: It mentions the State in which the registered office of the
company is situated.
(c) Object Clause: The object for which the company is proposed to be incorporated and any
matter considered necessary in furtherance therefore, is stated in this clause.
(d) Liability Clause: The liability of members of the company, whether limited or unlimited
and also states how the liability is limited.
(e) Capital Clause: It states the amount of authorized capital divided into share of fixed
amounts and agreed to take. A company not having share capital need not have this clause.
(f) Association Clause: It states the desire of the subscribers to be formed into a company.
The Memorandum shall conclude the association clause. Every subscriber to the
memorandum shall take atleast one share, and shall write against his name, the number of
shares taken by him.

6. What are the significant points of Section 8 Company which are not applicable for other
companies? Briefly explain with reference to provisions of the Companies Act, 2013.
Ans. Formation of companies with Charitable Objects:
(Section 8) of the company deals with the formation of a company with a charitable objects.
1. Licence may be granted by Central Government. If the following conditions are satisfied:
(a) Company's object is to promote Art, Commerce Science, Religion, Charity or any
other useful object.
(b) Company applies its income in promoting such objects.
(c) Company prohibits payment of any dividend to its members.
2. It is not required to use the words ltd or private ltd. at the end of its name even though it
is a limited company.
3. It shall enjoy all privileges and be subject to all obligations of ltd. company.
4. A firm may become its member.
5. Company can alter its object clause in MOA or AOA only by obtaining previous approval of
Central Government in writing.

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6. It can convert itself into company of any kind only after complying the prescribed
conditions.
Conditions for Revoking Licence by Central Government:
(a) If company contravenes any of the condition subject to which licence was issued.
(b) If affairs are conducted fraudulently.
(c) If affairs are against public interest.
On Revocation Central Government may also Direct the Company to:
(a) to wound up.
(b) to amalgamate with another company registered u/s 8 if it is in the public interest.
On Revocation of Licence by Central Government :
(a) Words Ltd. or private Ltd. shall be inserted at the end of the company's name.
(b) Company shall cease enjoy exemptions granted by Central Government u/s 8.
Before revocation Central Government shall give an opportunity of being heard to the company.

7. 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?
Ans. Foreign Company Section 2(42) of the Companies Act, 2013:
Foreign company means any company or body corporate incorporated outside India, which:
(a) has a place of business in India, whether by itself or through agent physically or through
electronic mode and;
(b) conduct any business activity in India in any manner. Thus, the companies doing business
through electronic mode are also termed as foreign company and need to company with
specified provision.
According to the given case, Mike Limited Company incorporated in India having liaison office at
Singapore.
Thus, as it is Incorporated in India it is an Indian Company and not a foreign company.

8. Explain Doctrine of 'Indoor Management' under the Companies Act, 2013. Also state the
circumstances where the outsider cannot claim relief on the ground of 'Indoor Management.
Ans. 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. Turguand. The is the
doctrine of indoor management popularly known as Turquand Rule.
Facts of The Royal British Band vs. Turquand

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Mr. Turquand was the official manager (liquidator) of the insolvent Cameron's Coal Brook
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

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apparently outside the scope of his authority. Where, for example, as in the case of
Anand Bihari Lal vs. Dinshaw & Co. the plaintiff accepted a transfer of a company’s
property from its accountant, the transfer was held void. The plaintiff could not have
supposed, in absence of a power of attorney that the accountant had authority to effect
transfer of the company’s property.
Similarly, in the case of Haughton & Co. v. Nothard, Lowe & Wills Ltd. where a person
holding directorship in two companies agreed to apply the money of one company in
payment of the debt to other, the court said that it was something so unusual "that the
plaintiff were put upon inquiry to ascertain whether the persons making the contract had
any authority in fact to make it." Any other rule would "place limited companies without
any sufficient reasons for so doing, at the mercy of any servant or agent who should
purport to contract on their behalf."
(c) Forgery: The doctrine of indoor management applies only to irregularities which might
otherwise affect a transaction but it cannot apply to forgery which must be regarded as
nullity.
Forgery may in circumstances exclude the ‘Turquand Rule'. The only clear illustration is
found in the Ruben v Great Fingall Consolidated. In this case the plaintiff was the
transferee of a share certificate issued under the seal of the defendant's company. The
company's secretary, who had a fixed 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 a part of
the internal management, and therefore, the company should be stopped from denying
genuineness of the document. But it was held, that the rule has never been extended to
cover such a complete forgery.

9. Explain the classification of the companies on the basis of control as per The Companies Act,
2013.
Ans. Classification of companies on the basis of control:
(a) Holding and Subsidiary Company:
(i) 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.
(ii) Subsidiary Company or Subsidiary: In relation to the other company, (i.e to say the
holding company), means a company in which the holding company.
• control the composition of the Board of Directors or
• 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.
(b) Associate Companies: Associate Company in relation to another company, means a company
(other than subsidiary) in which other company has significant influence and includes a
joint venture company.

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10. Ravi Private Limited has borrowed Rs. 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.?
Ans. 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. This is known as "Doctrine of ultra-vires".
The impact of the doctrine of ultra-vires is that a company can neither be sued on an ultra-
vires transaction, nor can sue on it. If you enter into a transaction which is ultra-vires the
company, you cannot enforce it against the company.
If you have lent money to the company on such a transaction, you cannot recover it from the
company. But, if the money has not been expended, then lender may bring an injunction order on
the Co. to stop it from parting from it. This is because company does not becomes owner of it.
However, if the money has been used, then lender slips into the shoes of the debtor paid - off
and consequently can recover his loan to that extent. In the given case, the transaction is ultra-
vires and hence the company Ravi Private Limited is not liable to pay the debt. Mudra Finance
Ltd. may being injunction order on Ravi Pvt. Ltd. to stop it from parting with the funds.

11. A company registered under Section 8 of the Companies Act, 2013, earned huge profits during
the financial year ended on 31" 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.
Ans. According to the facts of this case there exists a situation in which certain members of a
Section 8 company have approached a person for seeking relevant and informed advice on the
amount of dividend that can be distributed amongst them from the pool of profits made over a
financial year by a company registered under Section 8.
The first and foremost thing in this case that such members need to be educated about is the
definition and objects of a Section 8 company which clearly states that "a Section 8 company is
formed to promote the charitable object of commerce, art, science, sports education,
research, social welfare, religion, charity, protection of environment, etc, and a section 8
company intends to apply its profit in - (1) promoting its objects (2) - prohibiting the payment
of any dividend to its members.
Now when it is clearly evident that a section 8 company is not statutorily bound to pay dividends
to its members unlike a public or private company then automatically the demand of the
members for dividend stands invalid and cannot be enforced on the company.

12. 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

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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. 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.
Ans. In this case according to the facts provided it is clearly observable that the situation points
towards the applicability of the Doctrine of Indoor Management in relevance to the affairs of
the company M/s ABC Limited. According to the terms of the Doctrine of Indoor Management
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. Here in this case if we view the
facts from the perspective of applicability of the Doctrine.

13. 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 Rs.
25,00,000 in name of the company.
The Lender agreed and provided the above said loan. Later on Sound Syndicate Ltd. refused to
repay the money borrowed on the pretext that no resolution authorizing such loan have been
actually passed by the company and the lender should have enquired about the same prior
providing such loan hence company not liable to pay such loan.
Analyse the above situation in terms of the provisions of Doctrine of Indoor Management under
the Companies Act, 2013 and examine whether the contention of Sound Syndicate Ltd. is
correct or not?
Ans. As per the doctrine of Indoor Management, outsiders are entitled to assume that all the
detailed formalities for doing an act authorised by the articles, have been observed. Outsider,
is not at all required to inquire into the internal affair of the company. In case of The Royal
British Bank Vs. Turquand, this doctrine was clearly explained. The bond signed by the director
and secretary on behalf of the company, was held to be valid and bank was not required to
inquire whether any ordinary resolution was passed or not. This is the Indoor Management rule,
that the company’s indoor affair are company’s problem.
In the given case, the articles of the company, authorise the director to borrow on behalf of
the company. Mr. Liddle a director borrowed money but, later on company denied its liability to
repay on the pretext that no resolution was so passed and lender should have enquired about
the same prior to providing the loan.
Held, the contention of Sound Syndicate Ltd. is not correct, as the outsider is not obligated to
enquire into the internal affair of the company.

14. Popular Products Ltd. is company incorporated in India, having a total Share Capital of Rs. 20
Crores. The Share capital comprises of 12 Lakh equity shares of Rs. 100 each and 8 Lakhs
Preference Shares of Rs. 100 each. Delight Products Ltd. And Happy products Ltd hold

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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.
Ans. Holding and Subsidiary companies are relative terms. A subsidiary company in relation to any
other company means a company in which the holding company –
(i) Controls the composition of the Board of Director; or
(ii) Exercises or controls more than one-half of the total share capital either at its own or
together with one or more of its subsidiary companies.
In the given case Jovial Ltd. is controlling the composition of the Board of Director of Popular
Products Ltd. and hence it can be called as Holding Co. of Popular Products Ltd. and Popular
Products Ltd., its subsidiary.

15. Mr. Anil formed a One Person Company (OPC) on 16t" April, 2018 for manufacturing electric
cars. The turnover of the OPC for the financial year ended 31st March, 2019 was about Rs. 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?
Ans. As per Companies Act, 2013 a 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 10 cr. rupees or its average annual turnover during the relevant period
exceeds two crore rupees.
In the given case Mr. Anil formed OPC on 16th April, 2018 and turnover for first financial year
ending is about Rs. 2.25 crore. He wants to voluntarily convert it into a private limited company.
Held, Mr. Anil can do so as the threshold limit of turnover is crossed, thus the OPC can be
converted into Private Limited Company even before expiry of two years from incorporation.

16. 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?
Ans. The facts of the given case are similar to that of "Dinshaw Maneckjee Petit", it was held that
the company was not a genuine company at all but merely the assessee himself disguised under
the legal entity of a limited company. The assessee earned huge income by way of dividends and
interest. So he opened some companies and purchased their shares in exchange of his income by
way of dividend and interest. This income was transferred back to assessee by way of loan. The
Court decided that the private companies were a share and the corporate veil was lifted to
decide the real owner of the income.
Thus, A cannot be regarded as separate from the private limited company he formed.
17. ABC Limited has allotted equity shares with voting rights to XYZ Limited worth Rs. 15 Crores
and issued Non-Convertible Debentures worth Rs. 40 Crores during the Financial Year 2019-20.
After that total Paid-up Equity Share Capital of the company is Rs. 100 Crores and Non-
Convertible Debentures Stands at Rs. 120 Crores.
Define the Meaning of Associate Company and comment on whether ABC Limited and XYZ
Limited would be called Associate. Company as per the provisions of the Companies Act, 2013?

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Ans. Associate Company:

Section 2(6) of the Companies Act, 2013:
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.
Significant influence means control of atleast 20% of the total share capital of a business
decisions under an agreement.
In the given case, ABC Ltd. is not an associate company. We will ignore the non-convertible
portion and we will see the convertible portion which is also not stated thus we will do (15/100)
× 100 = 15% Thus not touching 20% hence, it is not an associate company.

18. 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.
Ans. Legal Provision – As per Section 2(45) of 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.
Facts: Here in the given problem out of 6 Lac equity shares of SK Infrastructure Ltd. 3,20,000
(2,00,000 + 1.20,000) shares are with the Central Govt. and Govt. of Maharashtra which is more
than 51% of the paid up share capital of SK Infrastructure Ltd.
Conclusion: Applying the above legal provision we can say, SK Infrastructure Ltd. is a
Government Company.

19. Y incorporated a "One Person Company (OPC)" making his sister Z as nominee. Z is leaving India
permanently due to her marriage abroad. Due to this fact, she is withdrawing her consent of
nomination in the said OPC. Taking into considerations the provisions of The Companies Act,
2013 answer the questions given below:
(i) Is it mandatory for Z to withdraw her nomination in the said OPC, if she is leaving India
permanently?
(ii) Can Z continue her nomination in the said OPC, if she maintained the status of Resident of
India after her marriage?
Ans. As per the provisions Of Companies Act, 2013, "Only a person Resident in India is allowed to
become and carry on as a nominee of OPC. "If a person stays in India for a period of not less
than 120 days during the immediately preceding financial year, then he becomes resident India.
In the given case we can conclude as follows:
(i) Since, in this case 'Z' leaving India permanently she will no more hold a residential status.
Thus, it is mandatory for ‘Z’ to withdraw her nomination in the OPC.
(ii) In case, since 'Z' is able to maintain her residential status in India even after her
marriage. Thus, Z can carry on her nomination in the said OPC.

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