KRISHNA INSTITUTE OF LAW

(Approved by BCI affiliated to CCSU, Meerut)

NH-24, Jindal Nagar, Ghaziabad-201002
Phone no- +9643031960, 9643028427

[Link].B. – 5th Sem

Subject – Contract-II

Contract of Indemnity [Section 124]

A contract by which one party promise to save the other from loss caused to
him by the conduct of the promisor himself ,or by the conduct of any other
person, is called a “contract of indemnity”.

Example- A contracts to indemnify B against the consequences of any

proceedings which C may take against B in respect of a certain sum of Rs. 200.
This is a contract of Indemnity.

Meaning of Indemnifier

The person who promises to make good the loss is called the ‘indemnifier’. In
the aforesaid example, A is the indemnifier.

Meaning of Indemnity-Holder

The person whose loss is to be made good is called ‘indemnity-holder’. In the

aforesaid example, B is the indemnity- holder.

Rights of Indemnity Holder [Section 125]

1. Right to Recover Damages Paid in a Suit [section 125(1)]: An

indemnity-holder has the right to recover from the indemnifier all
damages which he may be compelled to pay in any suit in respect of any
matter to which the contract of indemnity applies.
 2. Right to Recover Costs Incurred in Defending a Suit [section 125(2):
An indemnity-holder has the right to recover from the indemnifier all
costs which he may be compelled to pay in any such suit if, in bringing or
defending it, he did not contravene the orders of the promisor, and acted
as it would have been prudent for him to act in the absence of any
contract of indemnity, or if the promisor authorized him to bring or
defend the suit.

3. Right to Recover Sums Paid Under Compromise [section 125(3): An

indemnity-holder also has the right to recover from the indemnifier all
sums which he may have paid under the terms of any compromise of any
such suit, if the compromise was not contrary to the orders of the
promisor.

4. Right to sue for specific performance: The indemnity holder is entitled

to sue for specific performance if he has incurred absolute liability and
the contract covers such liability.

Commencement of Liability of Indemnifier

Indian Contract Act, 1872 does not provide the time of the commencement of
the indemnifier’s liability under the contract of indemnity. But different High
Courts in India have held the following rules in this regard:

1. Indemnifier is not liable until the indemnified has suffered the loss.

2. Indemnified can compel the indemnifier to make good his loss although he
has not discharged his liability. In the leading case of Gajanan Moreshwar vs.
Moreshwar Madan(1942), an observation was made by the judge that “ If the
indemnified has incurred a liability and the liability is absolute, he is entitled
to call upon the indemnifier to save him from the liability and pay it off”.

3. Thus, Contract of Indemnity is a special contract in which one party to a

contract (i.e. the indemnifier) promises to save the other (i.e. the
 indemnified) from loss caused to him by the conduct of the promisor
himself, or by the conduct of any other person. Section 124 and 125 of the
Indian Contract Act, 1872 are applicable to these types of contracts.

Essential Elements of Contract of Indemnity

1. Parties to a Contract: There must be two parties, namely, promisor or

indemnifier and the promisee or indemnified or indemnity-holder.

2. Protection of Loss: A contract of indemnity is entered into for the

purpose of protecting the promisee from the loss. The loss may be caused
due to the conduct of the promisor or any other person.

3. Express or Implied: The contract of indemnity may be express (i.e. made

by words spoken or written) or implied (i.e. inferred from the conduct of
the parties or circumstances of the particular case).

4. Essentials of a Valid Contract: A contract of indemnity is a special kind

of contract. The principles of the general law of contract contained in
Section 1 to 75 of the Indian Contract Act, 1872 are applicable to them.
Therefore, it must possess all the essentials of a valid contract.

5. Number of Contracts: In a contract of Indemnity, there is only one

contract that is between the Indemnifier and the Indemnified.

Contacts of guarantee [Section126]

A contract of guarantee is a contract to perform a promise or discharge the

liability of a third person in case of his default.

Example -X and his friend Y enter a shop and X says to z ‘; supply the goods
required by y and if he does not pay you, I will.” It is a contract of guarantee.

Parties to a Contract of Guarantee

There are three parties to a contract of Guarantee – Principle debtor, Creditor

andsurety

1. Meaning of principle Debtor [section 126]- the person in respect of

whose default the guarantee is given is called the “principal Debtor” .Y is
the principal debtor in the aforesaid example.

2. Meaning of Creditor [section 126]- the person to whom the guarantee is

given, is called the ‘creditor’. Z is the creditor in the aforesaid example.

3. Meaning of Surety [section 126]- the person who gives the guarantee is
called the ‘Surety’ X is the surety in the aforesaid examples.

Essential features of a contract of Guarantee

a. Tripartite Agreement – A contract of guarantee is a agreement between the

principal debtor ,creditor and surety .There are three contracts as under:

 Contract between creditor and the principal debtor out of which the
guaranteed debt arises.

 Contract between surety and the principal debtor by which the principal
debtor undertakes to indemnity the surety if surety is required to pay.

 Contract between surety and the creditor by which the surety guarantees
to pay the principal debtor’s debt if the principal debtor fails to pay.

b. Consent of three parties- There must be consent of all the three parties.

Example- X sells and delivers goods to Y. X afterwards requests Z to pay in

default of Y, Z agrees to do so .Z cannot become surety without the consent of
Y.

c. Existence of a liability- There must be an existing liability or a promise

whose performance is guaranteed. Such liability or promise must be
enforceable by law. Hence guarantee can be given only for liability or
promise which is enforceable by law.
d. Essential of a valid contract- All the essential of a valid contract must be
present in a contract of guarantee

Example - B request to sell and deliver to him goods on credit .A agrees to do

so, Provided C guarantee the payment of the price of the goods. C promises
to guarantee the payment in consideration of A’S promise to deliver the
goods. This is a sufficient consideration for C’s promise.

e. Guarantee not to be obtained by Misrepresentation [Section 142]- any

guarantee which has been obtained by means of misrepresentation made by
the creditor, or with his knowledge and assent, concerning a material part of
the transaction, is invalid.

f. Guarantee not to be Obtained by Concealment [Section 143]- Any

guarantee which the creditor has obtained by means of keeping silence as to
material circumstances

Example- A engages B as clerk to collect money for him .B fails to account

for some for his receipt, and A in consequence calls upon him to furnish
security for his duty accounting. C gives his guarantee for B’s duty
accounting .A does not acquaint C with B’s previous conduct .B after wards
makes a default . The guarantee is invalid.

Extent of Surety’s Liability

In the absence of a contract to the contrary, the liability of a surety is co-

extensive with that of the principal debtor .It means that the liability of as
surety is equal to that of the principal debtor unless otherwise agreed.

Example- A guarantee to B the payment of a bill of exchange by C, the accepter.

The bill is dishonored by C. A is liable not only for the amount of the bill, but
also for any interest and charges which may have become due on it.

However, the following points are worth nothing in this regard;

 (a) The liability of the surety may be made less than that of the principal
debtor by an express contract to that effect.

Example- X lends Rs. 10,000 to Y and Z gives guarantee for Rs. 4,000 only.
If Ymakes a default Z shall be liable only for Rs. 4000.

(b) The liability of the surety arises immediately when a default is made by the
principal debtor. The creditor can sue the surety without suing the
principal debtor.

(c) If there is a condition precedent for surety’s liability, the surety would be
liable only when the such condition is fulfilled .According to Section 144,
where a person gives a guarantee upon a contract that a creditor shall not
act upon if until another person has joined in it as co-surety, the guarantee
is not valid if that person does not join.

Kinds of Guarantee

Guarantee may be classified under the following two categories:

1. Specific Guarantee - A guarantee which extends to a single debt or

specific transaction is called a specific guarantee. The liability of the surety
comes to an end when the guarantee debt is duly discharge or the promise
is duly performed.

Example- X guarantees payment to Y of the price of the five bags of flour to

be delivered by Y to Z and to be paid for in a month. Y delivers five bags to
Z, Z pays for them. This is a contract of specific guarantee because X
intended to guarantee only for the payment of price of the first five bags of
flour to be delivered at one time.

2. Continuing Guarantee- a guarantee which extends to a series of

transactions is called a ‘continuing guarantee’. A surety’s liability continues
 until the revocation of the guarantee.

Example- On S’s recommendation, C employed P for the collection of rent

from his tenants. S promised to make good any default made by P. This is a
contract ofcontinuing guarantee.

Revocation of Continuing Guarantee

(a) By notice of Revocation [Section 130]- a continuing guarantee may at

any time be revoked by the surety as to the future transactions by notice to
the creditor. However, the surety remains liable for the past transactions
which have already taken place.

Example- X gives guarantee to the extent of Rs 60, 000 for the loans given
from time to time by Y to Z, Y gave a loan of Rs 20, 000 to Z. afterwards, X
gives notice of revocation. X is discharged from all liability to Y for any loan
granted after the revocation of guarantee but he is liable to Y for Rs. 20, 000
on default of Z.

(b) By death of surety [Section 131]- in the absence of any contract to the
contrary, the death of surety operates as a revocation of a continuing
guarantee as to the future transactions taking place after the death of
surety. However, the surety’s estate remains liable for the past transactions
which have already taken place before the death of surety.

(c) By modes of Discharging the Surety- a continuing guarantee is also

revoked in the same manner in which the surety is discharged such as :

 Novation [Section 62]

 Variance in terms of contract [Section 133]
 Release of discharge of principal debtor [Section 134]
 When the creditors enter into an arrangement with the principal
debtors [Section 135]
 Creditor’s act or omission impairing surety’s eventual remedy [Section
 139]
 Loss of security

RIGHTS OF A SURETY

After discharging the liability of the principal debtor, the surety gets various
rights.

1. Rights against the principal Debtors

(a) Right to subrogation [Section 140]- on payment of the guaranteed

debt or performance of the guaranteed duty; the surety acquires all the
rights which the creditor had against the principal debtor. Thus, the
surety steps into the shoes of creditor.

(b) Right to Indemnity [Section 145]- In every contract of guarantee

there is an implied promise by the principle debtor to Indemnity the
surety; and the surety is entitled to recover from the principle debtor
whatever sum he has rightfully paid under the guarantee, but not those
sums which he had paid wrongfully.

2. Rights against the creditor

Right to securities [Section 1471]- a surety is entitled to the benefit of

every security which the creditor has against the principal debtor at the
time when the contract of suretyship is entered into, whether the surety
knows of the existence of such security or not; and if the creditor loses, or,
without the consent of the surety, parts, with such security, the surety is
discharged to the extent of the value of the security.

Example - C advances to B his tenant, Rs 2, 000 on the guarantee of A. C

has also a further Security for Rs 2, 000 by a mortgage of B’s furniture. C
cancels the mortgage. B becomes insolvent, and C sues A on his guarantee.
A is discharged from liability to the amount of the value of the furniture.
3. Rights of Contribution against Co-sureties

when the same debt or duty is guaranteed by two or more persons, such
persons are called as ‘co-sureties’.

 Right to claim contribution- if a co-surety pays more than his

proportionate share of liability, he has a right to claim contribution
from the other co- surety or co-sureties.

 Right to share the security- if a co-surety obtains any security of

principal debtor, the other co-surety (or co-sureties) has (or have) a
right to share such security.

Liability of Co-sureties

1. Where there is no contract to the contrary- The co- sureties are liable
to contribute equally to the extent of default of principal debtor. (Section
146)

2. Where the co-sureties have agreed to guarantee different sums- The

co- sureties are liable to contribute equally subject to the maximum
amount guarantee by each .[Section147] They are not liable in proportion
to the amount guarantee by them.

Example - A, B and C are sureties to D for a sum of Rs 3, 000 lend to E, E

makes Default in payment. A, B and C are liable, as between themselves to
pay Rs 1, 000each

DISCHARGE OF SURETY

Meaning of Discharge of surety- A surety is said to be discharged when his

liability as surety comes to an end.

Modes of Discharge of surety's Liability

1. By Revocation: According to Section 130 of the Indian Contract Act,

 a continuing guarantee may at any time be revoked by the surety, as to
future transactions, by notice to the creditor.

Illustrations – A, in consideration of B’s discounting, at, A’s request, bills of

exchange for C, guarantees to B, for twelve months, the due payment of all such
bills to the extent of 5,000 rupees. B discounts bills for C to the extent of 2,000
rupees. Afterwards, at the end of three months, A revokes the guarantee. This
revocation discharges A from all liability to B for any subsequent discount. But
A is liable to B for the 2,000 rupees, on default of C.

2. By Death: According to Section 131 of the Indian Contract Act, 1872 the
death of the surety operates, in the absence of any contract to the contrary, as a
revocation of a continuing guarantee, so far as regards future transactions.

3. By Variance in the terms of the contract:

Section 133 of the Indian Contract Act says that "any variance made without
the surety’s consent, in the terms of the contract between the principal debtor
and the creditor, discharges the surety as to transactions subsequent to the
variance. It means Surety is not liable for the altered contract.

Illustrations - A becomes surety to C for B’s conduct as manager in C’s bank.

Afterwards, B and C contract, without A’s consent, that B’s salary shall be
raised, and that he shall become liable for one-fourth of the losses on
overdrafts. B allows a customer to over-draw, and the bank loses a sum of
money. A is discharged from his suretyship by the variance made without his
consent and is not liable to make good this loss.

4. Discharge of surety by release or discharge of principal debtor (Section

134 of I.C.A):

The surety is discharged by any contract between the creditor and the
principal debtor, by which the principal debtor is released, or by any act or
omission of the creditor, the legal consequence of which is the discharge of the
principal debtor.

Illustrations - A gives a guarantee to C for goods to be supplied by C to B. C

supplies goods to B, and afterwards, B becomes embarrassed and contracts
with his creditors (including C) to assign to them his property in consideration
of their releasing him from their demands. Here B is released from his debt by
the contract with C, and A is discharged from his suretyship.

5. When Creditor Compounds with, gives time to, or agrees not to sue the
principal debtor (Section 135 I.C.A) :

A contract between the creditor and the principal debtor, by which the creditor
make a composition with, or promises to give time, or not to sue, the principal
debtor, discharges the surety, unless the surety assents to such contract.

6. Discharge of surety by creditor's act or omission impairing surety's

eventual remedy:

According to Section 139 of the Indian Contract Act, If the creditor does any act
which is inconsistent with the right of the surety, or omits to do any act which
his duty to the surety requires him to do, and the eventual remedy of the
surety himself against the principal debtor is thereby impaired, the surety is
discharged.

Illustrations - B contracts to build a ship for C for a given sum, to be paid by

instalments as the work reaches certain stages. A becomes surety to C for B’s
due performance of the contract. C, without the knowledge of A, prepays to B
the last two instalments. A is discharged by this prepayment.

7. By loss of Security by the Creditor (Section 141):

A surety is entitled to the benefit of every security which the creditor has
against the principal debtor at the time when the contract of suretyship
entered into, whether the surety knows of the existence of such security or not;
and if the creditor loses, or without the consent of the existence of such
security or not; and if the creditor loses, or without the consent of the surety,
parts with such security, the surety, the surety is discharged to the extent of
the value of the security.

Illustrations - C, advances to B, his tenant, 2,000 rupees on the guarantee of A.

C has also a further security for the 2,000 rupees by a mortgage of B’s
furniture. C, cancels the mortgage. B becomes insolvent and C sues A on his
guarantee. A is discharged from liability to the amount of the value of the
furniture.

8. By Invalidation of Contract:

According to Section 142 of The Indian Contract Act, any Guarantee obtained
by misrepresentation is invalid. Section 142 runs as follows:

Any guarantee which has been obtained by means of misrepresentation made

by the creditor, or with his knowledge and assent, concerning a material part
of the transaction, is invalid.

9. By Novation:

Novation means substitution of an existing contract with a new one. Section 62

says that If the parties to a contract agree to substitute a new contract for it, or
to rescind or alter it, the original contract need not be performed. The surety is
liable under the terms of old contract, but if by novation old contract gets
discharged then surety also automatically gets discharged.

Illustrations - A owes money to B under a contract. It is agreed between A, B

and C, that B shall thenceforth accept C as his debtor, instead of A. The old debt
of A to B is at an end, and a new debt from C to B has been contracted.

Bailment
According to section 148, a “bailment” is the delivery of goods by one person to
another for some purpose, upon a contract that they shall, when the purpose is
accomplishment be returned or otherwise disposed off according to the
directions of the person delivering them.

Example-

a. X who is going out of station delivers a horse to Y for proper care.

b. X lends a horse to Y for his riding only without charge.

Essential Features of bailment

(a) Agreement- There must be an agreement between the bailor and the
bailee. This agreement may be either express or implied. However, a
bailment may be implied by law also.

(b) Delivery of Goods- There must be delivery of goods. It means that the
possession of goods must be transferred. In this connection, the following
points may be pointed:

 The delivery must be voluntary.

 Delivery may be actual or constructive.

(c) Purpose: The delivery of goods must be for some intended purpose. For
example, wrong delivery of goods to Jaipur Golden roadways instead of
Patel roadways, does not create any bailment.

(d) Return of Specific goods: The goods which form the subject matter of a
bailment must be returned to the bailor or otherwise disposed off
according to the directions of the bailor, after the accomplishment of
purpose or after the expiry of period of the bailment.

Example - Delivery of old gold jewellery to a banker for safe custody

creates a bailment because same old gold jewellery in its original form is to
 be returned.

Types of Bailment

1. Bailment on the basis of Reward

 Gratuitous bailment - It is a contract of bailment where no

consideration passes between the bailor and the bailee.

Example - X lends a horse to Y for his riding without any charge.

 Non- gratuitous bailment - It is a contract of bailment where some

consideration passes between the bailor and the bailee.

Example - Y hires a horse from X.

2. Bailment on the Basis of Benefit

 Bailment for the exclusive benefit of the bailor - It is a contract of

bailment which is executed only for the benefit of the bailor and the
bailee does not derive any benefit from it.

Example - X who is going Out of station, delivers a horse to Y for

proper care.

 Bailment for the exclusive benefit of the bailee - It is a contract of

bailment which is executed only for the benefit of the bailee and the
bailor does not derive any benefit from it.

Example - X lends a horse to Y for his riding without any charge.

 Bailment for the mutual benefit - It is a contract of bailment which

is executed for the mutual benefit of the bailor and the bailee.

Example - Y hires a horse from X.

TERMINATION OF BAILMENT
1. Termination of every Contract of Bailment (whether Gratuitous or
not)- Every contract of bailment comes to end under the following
circumstances:

(a) On the Expiry of Fixed Period- A bailment is terminated on the

expiry offixed period if the goods are bailed for a fixed period.

(b) On fulfillment of the Purpose -A bailment is terminated on the

fulfillmentof the purpose if the goods are bailed for a specific purpose.

(c) Inconsistent Use of Goods- A bailment may be terminated if the bailee

does not use the goods according to the conditions of the bailment.

(d) Destruction of the Subject Matter of Bailment - A bailment is

terminated if the subject Matter of the bailment.

 is destroyed, or

 becomes incapable of being used for bailment because of some change

in the nature of goods.

2. Termination of Gratuitous Bailment- A contract of gratuitous bailment is

terminated in the following circumstancesalso.

 Before the Expiry of a Fixed Period- A gratuitous bailment may be

terminated by the bailor at any time even though the bailment was for
a fixed period. However, the bailor is required to indemnify the bailee
in case the loss due to premature termination exceeds the benefit
actually derived by the bailee.

 On Death of Bailor/Bailee- A gratuitous bailment is terminated by

the deathof either the bailor.

Bailor
A bailor is a person who temporarily gives the possession of goods or
property but not the ownership under the bailment. The temporary
possession of the goods or property is given by the bailor to another person
who is known as bailee.

A bailor transfers possession, but not ownership, of a good to another party,

known as the bailee, under an agreement known legally as bailment. While the
good is in the bailee’s possession, the bailor is still the rightful owner.

Rights of the bailor

1. Right to Claim Compensation Against the Unauthorized Use of Goods: –

If any of the third person, does some injury to the goods bailed or deprive
(stop) the bailee to use bailed goods, in such a case bailor has right to file the
suit against the wrong-doer and to get compensation from him.

2. Right to Claim Compensation: – In the case of bailment, bailor has the right
to claim the compensation if any damage is done to the goods bailed due the
bailee’s negligence or misconduct.

3. Right to Demand the Return of the Goods: – The bailor has the right to get
his goods back in a safe and good condition after the expiry of the bailment
time period or the achievement of the purpose for which the goods were
bailed.

4. Right to Enforce Bailee’s Performance: – The bailor deliver his goods to

the bailee for some specific purpose and in the case of the non-gratuitous
bailment, the bailor has the right to achieve that purpose or to get benefits
through the same.

Duties of the bailor

1. Duty to Disclose Faults: – In the case of a gratuitous bailment, the bailor is
expected to disclose all the defects to the bailee known by him and that can
arise while using the bailed goods. A non-gratuity carries a major
responsibility on the part of the bailor as in this case bailor will also be liable
even if he does not know about the defects.

2. Duty to Repay Bailee’s Expenses: – Bailor is bound to repay all the

expenses which were incurred by him for the work done on the goods
received in the bailment.

3. Duty to Indemnify the Bailee: – The bailor is obliged to make good for the
losses suffered by the bailee, or that because of the bailor, where the goods
were delivered without any reason or force the bailee to return the goods
before the expiry period of the bailment.

4. Duty to Claim Back the Goods: – In accordance with the terms of the
bailment, bailor is obliged to accept the goods returned by the bailee. If
bailor refuse to accept the returned goods without any reasonable ground
then in such a case, bailor will be responsible for all the damage done to the
goods and not the bailee.

5. Duty of the Bailor to Compensate for the Breach of Warranty: – In every

contract of bailment warrants, bailor’s title should be defect free. If bailee
suffers any losses due the bailor’s defective title then in such a case the
bailor will be responsible for the damages done to the bailee
for breach of warranty.

Bailee

A bailee is the person who temporarily gets the possession of the goods
and property but not the ownership. The bailee is also known as the
custodian, and he gets the possession of the goods or property by another
person who is known as the bailor.
The bailee’s relationship to the bailor, who hands over the property, is
established by a contractual agreement called a bailment.

Rights of bailee

1. Right to Compensation: – Bailee has the right to claim compensation from

the bailor in respect to any damages done to him by the act of the bailor.

2. Right to Expenses or Remuneration: – Bailor is bound to repay all the

expenses which were incurred by him for the work done on the goods
received in the bailment.

3. Right of Lien: – If the bailee charges are not paid by the bailor, he has the
right to retain the goods. So, the right to retain the property on which the
charges are due is called right to lien. The Supreme Court cited the following
passage from HALSBURY’S LAWS OF ENGLAND as to the nature of this right.

Duties of bailee

1. Duty to Take Reasonable Care: – It is the duty of the bailee to take

reasonable care of the bailed goods and he is bound to take as much care of
the goods as an ordinary prudent person of sound mind takes.

2. Duty to Unauthorized Use of Goods: – The bailee has to keep in mind or

fulfil all the conditions mention in the bailment agreement while using the
bailed goods. If he illegally use the goods, the bailment agreement will
become voidable at the option of the Bailor.

3. Duty to Not to Mix the Bailed Goods with his Personal Goods: – The
bailee must keep the bailed goods separated from his own personal goods.
He cannot mix the goods without the prior permission of the bailor.

4. Duty of Not to Setup an Adverse Title: – Bailee only have temporary

possession of the goods and not ownership as he holds the goods on behalf
of the bailor, so he has to return the goods.
5. Duty to Return Goods: – It is the duty of the bailee to return the goods to
the bailor in safe and good condition after the expiry of the time period of
bailment or achievement of purpose for the goods were bailed. The goods
must be returned according to the directions given by the bailor. If he failed
to do so, he will be responsible for the losses done to bailor even without his
negligence.

LIEN

A lien is a claim or legal right against assets that are typically used as
collateral to satisfy a debt. A lien could be established by a creditor or a legal
judgement. A lien serves to guarantee an underlying obligation, such as the
repayment of a loan. If the underlying obligation is not satisfied, the creditor
may be able to seize the asset that is the subject of the lien. There are many
types of liens that are used to secure assets.

1. A lien is a claim or legal right against assets that are typically used as
collateral to satisfy a debt.

2. If the underlying obligation is not satisfied, the creditor may be able to seize
the asset that is the subject of the lien.

3. Various types of liens can be established including by a creditor, legal

judgement, or tax authority.

Types of liens

There are many types of liens and lien holders. Below are some of the most
common liens: –

1. Bank Lien: – A lien is often granted when an individual takes out a loan
from a bank to purchase an asset. For example, if an individual purchases a
vehicle, the seller would be paid using the borrowed funds from the bank.
 In return, the bank would be granted a lien on the vehicle. If the borrower
does not repay the loan, the bank may execute the lien, seize the vehicle,
and sell it to repay the loan. If the borrower does repay the loan in full, the
lien holder (the bank) then releases the lien, and the individual owns the
car free and clear of any liens.

2. Judgment Lien: – A judgment lien is a lien placed on assets by the courts,

which is usually as a result of a lawsuit. A judgement lien could help a
defendant get paid back in a case of nonpayment by liquidating the assets
of the accused.

3. Mechanic’s Lien: – A mechanic’s lien can be attached to real property if

the property owner fails to pay a contractor for services rendered. If the
debtor never pays, the contractor could go to court and get a judgement
against the non-paying party whereby property or assets can be auctioned
off to pay the lien holder. Many service providers have the option to place a
lien to secure payment, including construction companies and dry
cleaners.

4. Real Estate Lien: – A real estate lien is a legal right to seize and sell real
estate property if a contract is not fulfilled. Some real estate liens are
automatically put in place, such as the case of a mortgage lien. When a
party borrows money from a bank to purchase their home, the bank places
a lien on the house until the mortgage is paid off. However, some real
estate liens are due to non-payment to a creditor or financial institution
and as a result, are involuntary and nonconsensual liens.

5. Tax Liens: – There are also several statutory liens, meaning liens created
by law, as opposed to those created by a contract. These liens are very
common in the field of taxation, where laws often allow tax authorities to
put liens on the property of delinquent taxpayers.

Finder of Goods
Finder of Goods is the person who finds some goods which do not belong to
him.

Example: If X finds a purse or a diamond ring or a watch, which does not

belong to him, he will be called as finder of goods.

Rights of Finder of Goods

1. Right to Lien [Section 168]- The finder of goods has a right to retain the
goods found until he receives the compensation for trouble and expenses
voluntarily incurred by him—

 to preserve the goods and

 to find out the owners.

It may be noted that the finder of goods has no right to sue the owner for
suchcompensation.

2. Right to Sue for Reward [Section 168]- Where the owner has offered a
specific reward for the return of goods lost, the finder has a right to sue the
owner for such reward and to retain the goods until he receives it.

3. Right to Sell [Section 169]- A finder of goods has a right to sell the
goods found under the following circumstances:

 If the owner cannot with reasonable diligence be found; or

 If the owner when found, refuses to pay the lawful charges of the
finder;or

 If the goods are in danger of perishing

 If the lawful charge the finder in respect of goods found, amount to

two-third of its value.

Duties of a Finder of Goods [Section 171]

 1. Duty to take Reasonable Care- The finder of goods must take
reasonable care of the goods found like a person of ordinary prudence.
2. Duty not to use for personal purpose
3. Duty not to mix with his own goods
4. Duty to find the owner

PLEDGE

Contract of pledge is a subset of a contract of bailment. Here, the goods bailed

are kept as a security for a debt or a performance of a promise. Pledge is
defined in Section 172 of the Indian Contract Act,1872 as “The bailment of
goods as security for payment of a debt or performance of a promise is called
‘pledge’. The bailor is in this case called the ‘pawnor’. The bailee is called
‘pawnee’.” It is covered under Chapter IX (Section 172- Section 181) of the
Indian Contract Act, 1872.

Essential features of a contract of pledge

1. A valid contract - Similar to the contract of bailment, all the basic

essentials of a valid contract should be present in a contract of pledge.
Without these elements, the contract will be void and won’t be
enforceable in a court of law.

2. Delivery of possession - It is necessary that the possession of goods be

delivered from the pawnor to the pawnee. As mentioned in the definition,
pledge is a bailment and this is an essential element of bailment. The
delivery can be either actual or constructive. However, there might be
exceptions where the possession remains with the pawnor.

3. Ownership cannot be transferred - In the case of pledge, mere

possession of the goods is transferred to the pawnee. The pawnor of the
goods is still the owner. The pawnee has possession of the goods but has
limited interest in the goods.
 4. Security against debt - The goods must be pledged as security against an
outstanding debt of the pawnor. This outstanding debt can also be a
promise for specific performance.

5. Return of goods on repayment - Once the debtor the specific

performance against which goods are pledged as security is repaid or
completed, the goods must be returned to the pawnor in the manner
specified by him.

Duties of the pawnor and the pawnee

Duties of the pawnor:

1. To compensate expenses - The pawnor has the responsibility to

compensate the pawnee for all the ordinary and extraordinary expenses
made by the pawnee in order to ensure the well-being of the pledged
goods.

2. To repay the entire amount due along with interest - The pawnor has to
repay the amount which is due to the pawnee. This amount is the total of
the principal amount as well as any interest accrued on that amount
during the course of the contract.

3. To disclose all the faults in the goods - The pawnor before entering into a
contract has to disclose all the faults in the goods to the pawnee. If the
pawnee incurs any loss later due to those faults, the pawnor will be liable
for those.

Duties of the pawnee:

1. To take reasonable care of the goods - It is the pawnee’s

responsibility to take care of the goods that are pledged. The care
taken by the pawnee must be just, fair and reasonable. It should be as
 the pawnee took care of his personal belongings. If due to negligence of
the pawnee, the goods are damaged, he will be liable to compensate the
pawnor.

2. To use the goods only for authorised purpose - The pawnee can use
the goods pledged if only it is authorised by the pawnor. If the goods are
used for any purpose that is not authorised, the pawnee will have to
compensate the pawnor against the same.

3. To return the goods - As per the contract, once the amount against
which the goods are pledged is repaid, the goods must be returned to the
pawnor. This return must be as mentioned in the contract or as per the
pawnor’s directions.

4. To return any profits arised from the goods - If at any time during the
contract, the pawnee earns profit from the pledged goods, the same shall
be returned to the pawnor during the termination of the contract.

5. To keep the goods separate - It is the pawnee’s duty to keep the

pledged goods separate from his own goods. If he mixes the pledged
goods, all expenses to separate them will be borne by the pawnee. If
separating is not possible, the pawnee will be liable for all the damages.

Rights of the pawnor and the pawnee

Rights of the pawnor

To redeem the goods - As per Section 177 of the Act, ”If a time is stipulated for
the payment of the debt, or performance of the promise, for which the pledge
is made, and the pawnor makes default in payment of the debt or performance
of the promise at the stipulated time, he may redeem the goods pledged at any
subsequent time before the actual sale of them, but he must, in that case, pay,
in addition, any expenses which have arisen from his default.”
Rights of the pawnee:

1. To retain the goods - The pawnee has the right to retain the goods until
the amount owed by the pawnor is paid in full or the promise is
completely performed. This amount includes the expenses incurred by
the pawnee as well as any interest accrued on that amount.

2. To get compensation for extraordinary expenses - It is implied that

the pawnor will be liable to pay for all the necessary expenses needed for
the safekeeping of the goods.

3. To sell the goods - As mentioned in Section 176, “If the pawnor makes
default in payment of the debt, or performance; at the stipulated time or
the promise, in respect of which the goods were pledged, the pawnee may
bring a suit against the pawnor upon the debt or promise, and retain the
goods pledged as a collateral security; or he may sell the thing pledged, on
giving the pawnor reasonable notice of the sale

The sale of Goods Act, 1930

Meaning of contract sale

According to section 4(1) of the sale of goods Act, 1930, “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’. ‘Contract of sale’ is a generic term
which includes both a sale as well as an agreement to sell.

Essential elements of Contract of sale

(a) Seller and buyer There must be a seller as well as a buyer. ‘Buyer’ means a
person who buys or agree to buy goods [Section 2(1)]. ‘Seller’ means a
person who sells or agree to sell goods [Section 2(13)]. A person cannot be
a seller as well as a buyer as a person cannot buy his own goods.

(b) Goods There must be some goods ‘Goods’ means kind of movable property
 other than actionable claims and money and includes stock and shares,
growing crops, grass and things attached to or forming part of the land
which are agreed to be served before sale or under the contract of sale
[Section 2(7)]

(c) Transfer of property General property in goods means ownership of the

goods. Special property in goods means possession of goods. Thus there
must be either a transfer of ownership of goods or an agreement to
transfer the ownership of goods. The ownership may transfer either
immediately on completion of sale or sometime in future in agreement to
sell.

(d) Price- There must be price. Price here means the money consideration for
a sale of goods [Section 2(10)]. When the consideration is only goods. It
amounts to a ‘barter’ and not sale.

(e) Essential Elements of a Valid Contract- In addition to the aforesaid

specific essential elements, all the essential elements of a valid contract as a
specified under Section 10 of INDIAN contract Act, 1872.

Distinction Between Sale and Agreement to Sell

Basis of Distinction Sale Agreement to Sell

Transfer ofTransfer of owner shipTransfer of ownership of goods
ownership of goods takes place is to take place at a future time
Immediately or subject to fulfillment of some
condition
Executed contractIt is an executed contract It is an executor contract because
or executorbecause nothing remains something remains to be done
contract to be done.
Conveyance ofBuyer gets a right to Buyer does not get such right to
property enjoy the goods against enjoy the goods. It only creates
the whole worldjus in personam (Right against
includingseller. the person).

Transfer of risk Transfer of risk of loss of Transfer of risk of loss of goods

goods takes place does not take place because
immediately because ownership is not transferred. As
ownership is a result, in case of destruction of
transferred. As a result, goods, the loss shall be borne by
in case of destruction of the seller even though the goods
goods, the loss shall be are in the possession of the
borne by the buyer evenbuyer.
though the goods are in
the possession of the
seller.
Rights of sellerSeller can sue the buyer Seller can sue the buyer for
against for the price evendamages even though the goods
the buyer’s breach though the goods are inare in the possession of the
his possession buyer.
Rights of buyerBuyer can sue the seller Buyer can sue the seller for
against the seller’sfor damages and can sue damages only.
breach the third party who
bought those goods for
goods.
Effect of insolvency Buyer can claim the Buyer cannot claim the goods
of seller havinggoods from the official even when he has paid the price
possessionof goods receiver or assignee because the ownership has not
 because the ownership transferred to the buyer. The
of goods has transferred buyer who has paid the price
to the buyer. can only claim rate able
dividend.
Effect of insolvencySeller must deliver the Seller can refuse to deliver the
of the buyer beforegoods to the officialgoods unless he is paid full price
paying the price receiver or assignee of the goods because the
because the ownership ownership has not transferred
of goods has transferred to the buyer.
to the buyer. He can only
claim Rate able dividend
for the unpaid dividend
for the unpaid price.

Distinction between a sale and hire-purchase agreement

A ‘Sale’ can be distinguished from a hire-purchase agreement as under:

Basis of Distinction Sale Hire-Purchase agreement

Regulating law All contracts of sale are The Hire-purchase
governed by sale ofagreements are governed by
goods Act, 1930. Hire purchase Act, 1972.
Nature of Contract It is contract of sale. It is an agreement of hiring and
hence an agreement to sell.
Possession of goods Possession of goods needPossession of goods is
not necessarily be necessarily transferred
transferred immediately. immediately.
Transfer ofOwnership of goods is Ownership of goods is
ownership ofgoods transferred immediately transferred on the payment of
the last installment when the
option to purchase is
exercised.
Right to terminate The buyer has no right to The hirer has right to
terminate the contract ofterminate the agreement at
sale. any time before the ownership
is transferred.
Right to repossessThe seller has no right to The hire has right to terminate
the goods repossess the goods. He the agreement at any time
can sue for price. before the ownership is
transferred.
Transfer of goodsThe buyer can transfer a The hirer cannot transfer a
title tothird party good title to third party good title to third party
because ownership of because ownership of goods
goods has beenhas not been transferred.
transferred.
Compulsion as to beA contract of sale needThe hire-purchase agreement
inwriting not necessarily be inmust be in writing.
writing.

Meaning of Goods [Section 2(7)]

Goods means every kind of movable property other than actionable claims and
money, and includes the following:

(a) Stock and shares

(b) Growing crops, grass and thing attached to or forming part of the land
which are agreed to be served before sale or under the contract of sale.

Types of Goods [Section6]

1. Existing goods Existing goods mean the goods which are either owned or
possessed by the seller at the time of contract of sale. The existing goods
may be specific or ascertained or unascertained as follows:

 Specific goods [Section 2(14)]: These are the goods which are
identified and agreed upon at the time when a contract of sale is
made- for example, a specified TV, VCR, Car, Ring.

 Ascertained goods: Goods are said to be ascertained when out of a

mass of unascertained goods, the quantity extracted for is identified
and set aside for a given contract. Thus, when part of the goods lying
in bulk are identified and earmarked for sale, such goods are termed
as ascertained goods.

 Unascertained goods: these are the goods which are not identified
and agreed upon at the time when a contract of sale is made. E.g.
goods in stock or lying in lots.

Examples- X goes to a Maruti car showroom where 10 Maruti cars

have been displayed. X agrees to buy one Maruti car 800 and the
seller agrees to sell. Here, 10 cars will be classified as under:

 10 cars are unascertained goods before the identification of a

particularcar to be sold.

 9 cars are unascertained goods after the identified of 1

particular car to be sold. Such one particular car to be sold is an
ascertained goods.

 1 particular car identified and agreed upon at the time when the
contract of sale is made is specific goods and other 9 cars are
unascertained goods.

2. Future Goods [Section 2(6)]- Future goods means goods to be

 manufactured or produced or acquired by the seller after the making of
the contract of sale. There can be an agreement to sell only. There can be
no sale in respect of future goods because one cannot sell what he does
not possess.

Example- X agrees to y all the crops to be grown at his farm in Haryana

during the year 2,000 seasons for a sum of Rs 1, 00,000. This is an
agreement to sell future goods and not a sale.

3. Contingent Goods [Section 6(2)]- These are the goods the acquisition
of which by the seller depends upon a contingency which may or may
not happen.

Example- X agrees to sell to y all the crops to be grown at Z’s farm in

Haryana during the year 2,000 seasons for a sum of Rs 1, 00,000 if Z sells
the same to X. this is an agreement to sell contingent goods because the
availability of crops depends in its sale by Z.

CONDITIONS AND WARRANTIES

It is usual for both seller and buyer to make representations to each other at
the time of entering into a contract of sale. Representations which become a
part of contract of sale are termed as stipulations which may rank as condition
and warranty e.g. a mere commendation of his goods by the seller doesn’t
become a stipulation and gives no right of action to the buyer against the seller
as such representations are mere opinion on the part of the seller. But where
the seller assumes to assert a fact of which the buyer is ignorant, it will amount
to a stipulation forming an essential part of the contract of sale.

Meaning of Condition [Section 12(2)]

A condition is a stipulation-

 Which is essential to the main purpose of the contract, and

  The breach of which gives the aggrieved partly a right to terminate the
contract.

Example -X asked a car dealer to suggest him a car suitable for touring
purposes. The dealer suggested a ‘Buggati Car’. Accordingly, X purchased
it but found it unsuitable for touring purpose in this case, suitability of car
for touring purpose was a condition of contract, X was, therefore entitled
to reject.

Meaning of Warranty [Section 12(3)]

A warranty is a stipulation--

(a) Which is collateral to the main purpose of the contract, and

(b) The breach of which gives the aggrieved party a right to claim damages but
not a right to reject goods and to terminate the contract.

Example- X asked a car dealer to suggest him a good car and while
suggesting the car, the dealer said that it could run for 20 km per liter of
petrol. But the car could run only 15 km per liter of petrol in this case, the
statement made by the seller was a warranty X was, therefore not entitled to
reject the car but he was entitled to claim the damages.

IMPLIED CONDITION

1. Condition as to title [Section 14(a)]- There is an implied condition on

the part of the seller that (i) in the case of a sale, he has a right to sell the
goods, and (ii) in the case of an agreement to sell, he will have a right to
sell the goods at the time when the property is to pass.

Example- X purchased a car from y. after 6 months Z, the true owner of

car, demanded it from X, x had to return owner, x was entitled to recover
the full priceeven though several months had passed.

2. Sale by description [Section 15]- Where there is a contract of sale of

 goods by description, there is an implied condition that the goods shall
correspond with description. The main idea is that the goods supplied
must be same as were described by the seller.

Example- X Bought a reaping machine from y who described it to be one

year old and used only to cut 50 to 60 acres but x found that the machine
extremely old. X was entitled to reject the machine because machine did
not correspond with the description given by the seller.

3. Sale by sample [Section 17]- A contract of sale is a contract for sale by

sample when there is a term in the contract, express or implied, to that
effect. Such sale by sample is subject to the following three conditions:

 The goods must correspond with the sample in quality

 The buyer must have a reasonable opportunity of comparing the

bulk with the sample

 The goods must be free from any defect with renders them
unmerchantable.

Example- X Bought from y certain quantity of worsted coating equal to

sample. The coating was equal to sample but due to a latent defect, the
cloth was found to be unfit for making coats. The buyer was entitled to
reject the goods because the defect contained in the sample was not
apparent on reasonable examination of the sample. [Drummond & Sons v.
Vanlngen]

4. Sale by sample as well as by Description [Section 15]- if the sale is by

sample as well as by description, the goods must correspond with the
sample as well as the description.

5. Condition as to Quality or Fitness [Section 16 (1)]- there is no implied

condition as to quantity or fitness for any particular purpose of goods
supplied under a contract of sale
 6. Condition as to Merchantable Quality [Section 16(2)]- where the
goods are bought by description from a seller who deals in goods of that
description (whether he is the manufacture or producer or not), there is
an implied condition that the goods shall be of merchantable quality.

Example- X bought from a dealer a bottle of wine. While opening its cork
in the normal manner, the bottle broke off and injured X’s hands. X was
entitled to claim damages because the bottle was not of merchantable
quality.

7. Condition as to wholesomeness In case of eatables or provisions of

foodstuffs, there is an implied condition as to wholesomeness. Condition
as to wholesomeness means that the goods shall be fit for human
consumption.

Example- X bought milk from y’s dairy. The milk contained typhoid
terms. X’s wife consumed milk, became infected and died. Y was liable for
damages because the milk was not fit for human consumption.

8. Condition implied by Custom [Section 16(3)]- Condition as to quality

or fitness fora particular purpose may be annexed by the usage of trade.

Example - X sold certain drugs by auction to y. in case of sale by auction,

there was a trade custom to declare any sea damage in the goods. But he
goods were sold without such declaration. Such goods were found to be
sea damaged it was held y could reject the goods and claim the refund of
the price because the sale without such declaration meant that the goods
were free from sea damage. [ jones v. Boweden]

Implied Warranties [Section 14(b), 14(c), and 16(3)]

(a) Warranty as to quiet Possession [Section 14(b)]- there is an implied

warranty that the buyer shall have and enjoy quiet possession of the goods.
The reach of this warranty gives buyer a right to claim damages from the
 seller.

Example- X sold a second hand radio to y who spent Rs 100 on the repairs
of this radio this radio was seized by the police as it was a stolen one. Y
filed a suit against x for the recovery of damages for breach of warranty of
quite possession including the cost of repairs, it was held that y was
entitled to recover the same [Mason v. Burmingham]

(b) Warranty of Freedom from Encumbrances [Section 14(c)]- there is an

implied warranty that the goods free from any charge or encumbrance in
favor of any third person if the buyer is not aware of such charge or
encumbrance. The breach of this warranty gives a right to claim damages
from the seller.

Example - X borrowed Rs 500 from y and hypothecated his radio with y as

security. Later on X sold this radio to Z who bought in good faith. Here, Z
can claim damages from X because his possession is disturbed by y having a
charge.

(c) Warranty as to quality or fitness for a particular purpose which may

be annexed by the usage of trade [Section 16(3)]

(d) Warranty to disclose dangerous nature of goods in case of goods of

dangerous nature the seller must disclose or warm the buyer of the
probable danger. If the seller fails to do so, the buyer may make him liable
for breach of implied warranty.

Example- X purchased a tin of disinfectant powder which required to be

opened with special care X’s wife while opening the tin was injured as the
powder flew into her eyes. Held, the seller was liable for the injury
sustained by X’s wife because of breach of warranty.

THE DOCTRINE OF CAVEAT EMPTOR

‘Caveat Emptor’ means ‘let the buyer beware.’ The doctrine of caveat emptor
has been given in the first para of section 16 which reads as under:

“Subject to the provisions of this Act and any other law for the time being in
force, there is no implied warranty or condition as to the equality or fitness for
any particular purpose of goods supplied under a contract of sale”.

Example- Pigs were sold subject to all faults and the seller knew that the pigs
were suffering from swine-fever but he did not inform the buyer about this
defect. The seller was not liable for damages because there was no implied
warranty. [Ward v. Hobbs]

Exceptions to the Doctrine of Caveat Emptor

The doctrine of caveat emptor is subject to the following exceptions

In Case of Misrepresentation by the seller- Where the seller makes a

misrepresentation and the buyer relies on that representation. Exceptions to
the Doctrine of Caveat Emptor

(a) In Case of Misrepresentation by the Seller- where the seller knowingly

conceals a defect which would not be discovered on a reasonable
examination.

(b) In Case of Sale by Description [Section 15]- where the goods are sold by
description and the goods supplied by the seller do not correspond to the
description.

(c) In Case of sale by Sample [Section 17]- where the goods are sold by
sample and the goods supplied by the seller do not correspond with the
sample.

(d) In Case of Sale by Sample as well as Description [Section 15]- where

the goods are sold by sample as well as description and the goods supplied
do not correspond with sample as well as description.

(e) Fitness for a particular purpose [Section 16(1)]- where the seller or a
 manufacture is a dealer of the type of goods sole by him and the buyer has
disclosed the purpose for which goods are required and relied upon the
seller’s skill or judgment.

(f) Merchantable Quality [Section 16(2)]- where the goods are bought by
description from a seller who deals in goods of that description 9Whether
he is the manufacturer or producer or not), there is an implied condition
that the goods shall be of merchantable quality.

Delivery

Delivery means the voluntary transfer of possession from one person to

another.

Mode of delivery [Section 33]

(a) By doing anything which the parties agree shall be treated as delivery, or

(b) by doing anything which has the effect of putting the goods into the
buyer’s or his authorized agent’s possession.

Types of delivery

The delivery of goods may be of the following three types:

(a) Actual delivery. Delivery is said to be actual where the goods are
physically handed over to the buyer or his authorized agent.

Example, X sells to Y 100 bags of what lying in Z’s warehouse. X orders Z to

 deliver the wheat to Y, Z delivers to Y. in this case there is an actual delivery
of goods.

(b) Symbolic delivery. Delivery is said to be symbolic where some symbol of

the real possession or control over the goods is handed over to buyer.
Example, X’ sells to y 100 bags of wheat lying in Z’s warehouse and hands
over the key of Z’s warehouse to Y. in this case, there is symbolic delivery of
goods.

(c) Constructive Delivery. Delivery is said to be constructive where a person

who is in possession of the goods, acknowledges to hold the goods on
behalf of the buyer.

Example. X sells to Y 100 bags of wheat lying in Z’s warehouse. Y orders Z

to deliver the wheat to Y.Z agrees to hold the 100 bags of wheat on behalf of
Y and makes the necessary entry in his books. In this case, there is
constructive delivery of goods.

Rules as to Delivery [Sections 32 to 39]

(a) Payment and delivery to be Concurrent [Section 32]- unless otherwise

agreed, delivery of the goods and payment of the goods and payment of the
price are concurrent conditions.

(b) Mode of Delivery [Section33]- Delivery must have the effect of putting
the goods into the buyer’s or his authorized agent’s possession.

(c) Effect of part Delivery [Section 34]- A delivery of part of goods with an
intention of giving the delivery of the whole amounts to the delivery of the
whole for the purpose of transfer of ownership of goods, but a delivery of
part of goods with an intention of separating it from the whole lot does not
amount to the delivery of the whole of the goods.

(d) Buyer to Apply for Delivery [Section 35]- unless otherwise agreed, the
seller of the goods is not bound deliver them until the buyer applies for
 delivery.

(e) Delivery when the goods are in possession of a third party [Section
36(3)]- where the goods at the time of sale are in the possession of a third
person, there is no delivery by seller unless and until such third person
acknowledge to the buyer that he holds the goods on his behalf.

(f) Demand of Delivery to be treated as ineffectual [Section 36(4)]-

Demand or tender of delivery may be treated as ineffectual unless made at
a reasonable hour. What is a reasonable hour is a question of fact.

(g) Expenses of Delivery [Section 36(5)]- under otherwise agreed. The

expenses of putting the goods into a deliverable state shall be borne by the
seller.

(h) Delivery by Installments [Section 38]- unless otherwise agreed, the

buyerof goods is not bound to accept delivery by installments;

The question whether the aggrieved party can repudiate the whole
contract or not depends upon the terms of the contract and the
circumstances of each casewhere----

 The goods are to be delivered in installments;

 The installments are to be separately paid for;

 The seller makes no delivery or defective delivery in respect of one or

more installments or the buyer neglects or refuses to take delivery of
or pay for one or more installments.

UNPAID SELLER

According to section 45(1) of the Sale of Goods Act, 1930, a seller of goods is
called an “unpaid seller”, when:

1. The price has not been paid or tendered, or

 2. A bill of exchange or other negotiable instruments (like a cheque) that
was received as conditional payment has been dishonoured.

Section 45(2) expands the definition of a seller to include anyone in a position

of a seller (for example, the agent of the seller to whom the bill of lading is
endorsed, or a consignor or agent who has paid or is directly responsible for
the price).

Example: X sold some goods to Y for Rs 10,000. Y paid Rs 9,900 but failed to
pay the balance of Rs 100. X becomes an unpaid seller.

Rights of an Unpaid Seller

We can broadly classify the rights of an unpaid seller under the following
 two categories:

A. Rights Against Goods

Section 46 of the Sale of Goods Act addresses the rights of an unpaid seller
whose property in the goods has not yet been transferred to the buyer. The
unpaid seller has the following 3 + 1 = 4 rights:

1. What Is the Right of Lien

The right of lien means the right to keep possession of the goods until the
seller receives the due price.

Section 47 of the Sale of Goods Act provides that an unpaid seller (as agent or
bailee of the buyer) in possession of the goods has the right to keep possession
of the goods until payment or tender of the price in the following cases:

 Where the goods have been sold with no stipulation to credit, or

 Where the goods have been sold on credit, but the term of credit has
expired, or

 Where the buyer becomes insolvent.

Further, section 48 of the Sale of Goods Act provides that despite the partial
delivery of goods by the unpaid seller, section 48 authorizes him to exercise his
lien right on the rest.

Termination of Lien

The unpaid seller of the goods loses his right of lien in the following cases:

 When he delivers the goods to a carrier or other bailee for delivery to the
buyer without reserving the right of disposal of the goods, or
 When the buyer or his agent lawfully gets possession of the goods, or
 When the seller waives his right of lien, or
 When the buyer disposes of the goods by sale or in any other manner with
the consent of the seller, or
 Where a document of title to goods has been issued or lawfully transferred to
any person as buyer or owner of the goods, and the buyer then transfers the
document by sale to someone taking it in good faith and for consideration.

2. What Is Right to Stoppage of Goods in Transit

The unpaid seller delivered the goods to the carrier for transmission to the
buyer, and in the meantime, the buyer becomes insolvent, then the seller has
the right to stop and retain the goods in transit. Thus, the unpaid seller
resumes possession of the goods as long as it is in transit.

The unpaid seller can exercise the right of stoppage in transit only if he fulfils
the following conditions:

 The seller must have parted with the possession of goods, i.e., the goods must
not be in the seller’s possession.

 The goods must be in transit.

 The buyer must have become insolvent.

Duration of Transit

As per section 51 of the Sale of Goods Act, the goods are in transit when they
are delivered to a carrier or bailee for transmission to the buyer and until the
buyer or his agents, on his behalf, take the delivery of those goods.

The unpaid seller loses the right to stoppage in transit in the following cases:

 When the goods reach the destination, or

 If the buyer or his agent on his behalf receives the goods before they reach
their destination, or
 If the carrier or other bailee admits to the buyer or his agent that he has the
goods on his behalf and continues to possess them after the items arrive at
the designated destination, the transit is complete, or

 If the carrier or other bailee wrongfully refuses to deliver the goods to the
buyer or his agent on his behalf, or

 If they deliver part of the product to the buyer or his agent, the unpaid seller
may hold the rest of the shipment in transit if the portion transfer does not
enable the buyer to relinquish possession of the goods, or

 If the seller has consented to the sub-sale or other disposition with the buyer.

3. What Is the Right to Resale the Goods

As per section 46(1) of the Sale of Goods Act, under the following
circumstances, the unpaid seller may resell the goods, if the goods are:

 Of a perishable nature, or

 When the unpaid seller exercised his right to lien or stoppage in transit and
gave notice to the buyer of his intention to resale.

We must note here that in such cases, on reselling the goods, it also entitles the
seller to:

 Recover the difference between the contract price and the resale price from
the original buyer as damage.

 Keep the profit if the resale price is higher than the contract price. But if the
unpaid seller does not give any notice, that shall not entitle such unpaid
seller to recover such damages, and the buyer can claim the profit on the
resale.

4. Withholding the Delivery

As per section 46(2) of the Sale of Goods Act, where the property in goods has
not passed to the buyer, the unpaid seller has, besides other remedies, a right
to withhold the delivery.

B. Rights against the buyer Personally

(a) Suit for Price [Section 55(1)]- where under a contract of sale, the
property in the goods has passed to the buyer and the buyer wrongfully
neglects or refuses to pay for the goods according to the terms of the
contract, the seller may sue him for the price of goods.

Where under a contract of sale the price is payable on a certain day

irrespective of delivery and the buyer wrongfully neglects or refuses to pay
such price, the seller may sue him for the price although the property in
the goods has not passed and the goods have not been appropriated to the
contract.

(b) Suit for damages for non-acceptance [Section 56]- where the buyer
wrongfully neglects or refuses to accept the goods and pay for the goods,
the seller may sue him for damages for non-acceptance of goods.

(c) Suit for damages for repudiation of the Contract [Section 60]- Where
buyer repudiates the contract before the due date of delivery, the seller
may either treat the contract as subsisting and wait till the due date of
delivery or he may treat the contract as rescinded and sue for damages for
the breach.

(d) Suit for Interest [Section 61(2)] -in case of breach of contract on the part
ofthe buyer, while filing a suit for the price, the seller may sue the buyer for
interest from the date of the tender of the goods or from the date on which
the price was payable.

Remedies for Breach under Sale of Goods Act

1. Seller’s Remedies against Buyer

There are two types of remedies which the seller has against the buyer. They
are:

 Suit for Price: Section 55 of the Sale of Goods Act states two conditions.
The first is that when any goods are passed to the buyer under the contract
to a sale, and the buyer intentionally neglects payment or refuses to pay for
the goods according to the terms stated in the contract, the seller may sue
the buyer for the payment of the price of the goods.

 Damage for Non-Acceptance: Section 56 of the Act states that when the
buyer is intentionally and wrongfully refusing to accept the goods and pay
for the same, the seller may sue the buyer for non-acceptance of goods.

2. Buyer’s Remedies against the Seller

The buyer has three remedies against the seller for breach of contract under
the Sale of Goods Act. These are:

1. Damages for Non-Delivery: Section 57 of the Act states that if the seller
is intentionally or wrongfully neglecting the delivery of the goods to the
customer, the customer can sue the seller for damages for non-delivery. In
the case where the property in the goods has been passed to the buyer, and
the buyers have the right to immediate possession, he gets all the remedies
an owner of the goods will get against anyone whose activities are
inconsistent with his rights.

2. Remedy for Breach of Warranty: Section 59 of the Act states that when
there is a breach of warranty on the part of the seller, the buyer is not
entitled to reject the goods on that basis, but he may sue the seller breach
of warranty in diminution or extinction of the price. The seller may also
sue the buyer for breach of warranty in the diminution or extinction of the
price.
 3. Specific Performance: Section 57 of the Act states that subject to
provisions mentioned under Specific Relief Act, 1877, in a case of breach
of contract, the Court may, on an application by the plaintiff direct the
defendant that the contract should be performed specifically. The decree
passed by the court may be unconditional, or s to terms and conditions as
to price, amount of damages, etc.

3. Remedies available to both Seller and Buyer

The buyer and seller have two remedies while dealing with goods under the
Sale of Goods Act. These are:

1. Suit for Repudiation of Contract before the Date or Anticipatory

Breach: Section 60 of the Act states that if any party renounces the
contract before the delivery of the goods, the other party may wait till the
date of delivery of the goods or may treat the contract as annulled and
claim for damages.

2. Interest by way of Damages and Special Damages:Section 62 of the Act

states that the buyer or seller can recover special damages where by law
special damages or interest may be recoverable. There is a limitation to
this remedy. The parties should have contemplated that a particular loss
may occur if the contract is breached in any manner.

Contract of Agency

By a contract of agency, a person employs another person to do any act for him
or of to represent him in dealing with third persons so as to bind himself by the
acts of such another person.

The law of agency is based on the following general rules:

(1) Whatever the principal can do by himself, he may get the same done
through an agent, except when the act involved is of personal nature
 (2) What a person does by another, he does by himself. Thus, the acts of the
agent are the acts of the principal.

Meaning of an agent [Section 182]

An agent is a person employed to do any act for another or to represent

another in dealings with third persons. Thus, an agent establishes a contract
between such another person and third person.

CREATION OF AGENCY

The various modes to create the contract of agency are given below

1. Agency by express Authority [Section 186 and 187]

An agency by express authority arises when an express authority is given

to the agent by spoken or written words.

Example - X who owns a shop, appoints Y to manage his shop by executing

a power of attorney in Y’s favor. Here, the relationship of principal and
agent has been created between X and Y by an express authority.

2. Agency by implied Authority [Section 187]

An agency which has to be understood from the conduct and behavior of

the parties is called implied agency. It is to be inferred from the
circumstances of the case and things spoken or written,

Example- A owns a shop in shimla, living himself in Calcutta, and visiting

the shop occasionally. The shop is managed by B, and he is in the habit of
ordering goods from C in the name of A for the purposes of the shop and of
paying for them out of A’s funds with A’s knowledge. B has an implied
authority from A to order goods from C in the name of A for the purposes of
the shop.
 (a) Agency by Estoppel- Agency by estoppels arises where a person by his
words or conducts induces third persons to believe that a certain person
is his agent. The person who induces as such is estopped or prevented
from denying the truth of agency.

(b) Agency by holding out- Agency by holding out is almost similar to

agency by estoppels. Such agency arises when a person by his past
affirmative or positive conduct leads third person to believe that person
doing some acton his behalf is doing with authority.

(c) Agency by necessity- Agency by necessity arises under the following

twoconditions:

(1) There is an actual and definite necessity for acting on behalf of the
principal, and

(2) It is impossible to communicate with the principal and obtain his

consent.

(3) The act must have been done in the best interest of the principal.

Example- X consigned vegetables from Delhi to Mumbai by a truck. The

truck met with an accident. The vegetable being perishable were sold by
the transporter. This sale is binding on X. in this case, the transporter
became an agent by necessity.

3. Agency by ratification [Section 196]

Agency by ratification is said to arise when a person, on whose behalf the

acts are done without his knowledge or authority, expressly or impliedly
accepts such the acts. Thus, when the principal approves an act of the agent
who never had the authority to undertake such an act, it is called
Ratification

Mode of ratification [Section 197]- Ratification may be express or may be

implied by the conduct of the person on whose behalf the acts are done,

Example- A, without authority, buys goods for B. afterwards B sells them

to C in his own account; B’s conduct implies a ratification of the purchases
made for him by A.

Essentials of a valid Ratification [Section 198 to 200] The essentials of

validRatification are shown as under

(1) Full Knowledge [section 198]: No valid ratification can be made by a

personwhose knowledge of the facts of the case is materially defective.

Example- X instructed Y to arrange a house on a reasonable rent in

Mumbai. Y lets out his own house at a rent which is much higher than
the prevailing rentals in that area. X started living in the house. Later
on X came to know that the house belonged to Y. X’s ratification is not
binding upon himself.

(2) Whole Transaction [Section 199]: the ratification must be made for
the whole transaction and not for a part of transaction. When a person
ratifies a part of the unauthorized transaction, it is treated as the
ratification of whole transaction.

(3) No Damage to third party [Section 200]: An act which has the effect
of subjecting a third person to damages or of terminating any right or
interest ofa third person, cannot be ratified.

Example- X is in possession of a horse belonging to Y. Z without Y’s

authority demands on behalf of Y the delivery of that horse. X refuses
to deliver the horse to Z. Y Cannot ratify the demand made by Z so as to
make X liable for damages for his refusal to deliver.

(4) Act on behalf of another person: The acts done by an agent on behalf
of another person can only be ratified. Thus, the acts done by the agent
in hisown name cannot be ratified.
 (5) Existence of principal: the principal must be in existence at the time
when the act is done in his name.

(6) Contractual Capacity: The principal must have contractual capacity

both at thetime of contract and at the time of ratification.

Example- a minor on attaining majority cannot ratify the contracts

made on his behalf during his minority.

(7) Within Reasonable Time: the ratification must be done within a

reasonable time, otherwise it will not be binding.

(8) Lawful Acts: only those acts which are lawful can be ratified.

Example- X forges Y’s signature on a cheque and withdraws Rs 1,000

from Y’s bank account subsequently, Y ratifies the act of withdrawing
money. Such ratification is not valid because forgery is an offence.

(9) Acts within Principal’s power: only those acts which are within the
principal’s power can be ratified. Thus, an act which is beyond the
competence of a principal cannot be ratified.

(10) Communication: the ratification must be communicated to the third

party so as to be binding on the third party.

RIGHTS OF AN AGENT

The rights of an agent are shown as under

(a) Right of retainer [Section 217]- An agent has the right to retain, out of any
sum received on account of the principal in the business of the agency, all
money due to himself in respect of the following:

 Advance made by him;

 Expenses properly incurred by him in conducting such business;

  Such remuneration as may be payable to him for acting as an agent.

(b) Right to receive remuneration [Section 219 and 220] -the agent has the
right to receive agreed remuneration (if there is an agreement to that
effect) or usual remuneration as per the custom of the trade in which he has
been employed (if there is no agreement to that effect) required to do, i.e. to
introduce a customer to buy the principal’s property.

(c) Right of Lien [Section 221] -in the absence of any contract to contrary, an
agent is entitled to retain goods, paper and other property whether
movable or immovable, of the principal received by him, until the amount
due to him for commission, disbursement and services in respect of the
same has been paid or accounted for to him.

(d) Right to be indemnified against Consequences of lawful Acts [Section

222]- the employer of an agent is bound to identify him against the
consequences of all lawful acts done by such agent in exercise of the
authority conferred upon him.

Example - A employs B to beat C, and agree to indemnify him against all

consequences of the act. B thereupon beats C and has to pay damages to C
for so doing. A is not liable to indemnify B for these damages.

(e) Right to be indemnified against Consequences of acts done in good

Faith [Section 223]- Where one person employs another to do an act, and
the agent does the act in good faith, the employer is liable to indemnify the
agent against the consequences of that act, though it causes an injury to the
rights of third person.

(f) Right to receive Compensation for injury caused by Principal’s Neglect

[Section 225]-The principal must make compensation to his agent in
respect of injury caused to such agent by the principal’s neglect or want of
skill.
 Example-A employs B as a breach layer in building a house and puts up the
scaffolding himself. The scaffolding is unskilfully put up, and B is in
consequence hurt. A must make Compensation to B.

DUTIES OF AN AGENT

(a) Duty to Act according to the Directions or custom of trade [Section

211 ]- An agent is bound to conduct the business according to principal’s
directions or the custom of trade

Example - A, an agent who asked to insure the goods, failed to do so and

the goods were destroyed by fire. A was liable to compensate his principal
for the losssuffered by him.

(b) Duty to Act with reasonable Care and skill [Section 212]- An agent is
bound to conduct the business of the agency with reasonable care and skill.

(c) Duty to render Accounts [Section 213]- An agent is bound to render

proper accounts to his principal on demand.

(d) Duty to Communicate with principal [Section 214]- An agent is bound

to use all reasonable diligence to establish contact with his principal to
obtainhis instructions.

(e) Duty to Disclose all material Circumstances and to obtain Principal’s

consent in personal Dealings [Sections 215 & 216]- An agent is bound
to disclose all material circumstances which have come to his knowledge
on the Subject, to the principal and obtain his consent if he desires to deal
onhis own account in the business of agency.

Example - A directs B to sell A’s estate. B buys the estate for himself in the
name of C. It show that B has dishonestly concealed a material fact, or that
the sale hasbeen disadvantageous to him.

(f) Duty to pay sum Received for principal [Section 218]-The agent is
 bound to pay to his principal all sums received on his account. However, an
agent may retain, out of such sums all moneys due to himself in respect of
advantages made or expenses properly incurred by him in conducting such
business, and also such remuneration as may be payable to him for acting
as an agent.

(g) Duty to protect and preserve the interest [Section 209]-When an

agency is terminated by the principal on dying or becoming of unsound
mind, the agent is bound to take, on behalf of the representative of his late
principal, all reasonable steps for the protection and preservation of the
interests entrusted to him.

(h) Duty not to delegate Authority [Section 190]-An agent cannot lawfully
employ another to perform acts which he has expressly or impliedly
undertaken to perform personally unless custom of trade or the nature of
the agency so requires.

PERSONAL LIABILITY OF AN AGENCY

General Rule [Section 230]

In the absence of any contract to that effect, an agent cannot personally enforce
contract entered into by him on behalf of his principal, nor is he personally
boundby them.

When the agent becomes personally liable

The circumstances under which an agent becomes personally liable are shown
as under

(a) In case of foreign Principal [Section 230]- where the contract is made by
an agent for the sale or purchase of goods for a merchant residing abroad,
in the absence of any contract to the contrary, it is presumed that the agent
is personally liable for such contracts.
(b) In case of undisclosed Principal [Section 230]- where the contract is
made by an agent for an undisclosed principal, in the absence of any
contract to the contrary, it is presumed that the agent is personally liable.

(c) In case of incompetent Principal [Section 230]- where a contract is

made by an agent for a person who cannot be sued (e.g. minor, lunatic,
foreign ambassador), in the absence of any contract to the contrary, it is
presumedthat the agent is personally liable.

(d) In case of principal not in Existence- Where a contract is made by the

promoter for a company not yet incorporated, the promoters are
personally liable.

(e) In case of acts not ratified [Section 235]- A person untruly representing
himself to be the authorized agent of another, and thereby inducing a third
person to deal with him as such agent, is liable, if his alleged employer does
not ratify his acts, to make compensation to the other in respect of any loss
or damage which he has incurred by so dealing.

(f) In case of Acts in his own name- where a contract is made by an agent
without disclosing that he is contracting as an agent, the agent is personally
liable.

Example- X took a loan from Y by executing a hundi in Y’s favor. X did not
sign the hundi as agent of the firm nor did he disclose to Y the name of his
principal. The agent was held personally liable. [Trilok chand v.
Rameshwar lal]

(g) In case of express agreement- where there is a custom or usage of trade

making the agent personally liable, in the absence of any contract to the
contrary, the agent is personally liable.

(h) In case of custom or usage of trade- where there is a custom or usage of

trade making the agent personally liable, in the absence of any contract to
 the contrary, the agent is personally liable.

Example- X, a share broker purchased 100 shares @ Rs 100 per share and
sold the same shares @ Rs 90 per share on behalf of y who refused to give
the difference. X is personally liable because it is a custom that a share
broker is personally liable for the contracts entered into by him.

Undisclosed Principal

The principle of agency is a type of special contract entered into by two or

more people, wherein one person acts on behalf of the other.

In the contract law, the term “undisclosed principal” relates mainly to the
liability of an agent for the obligations incurred on behalf of the principal. He is
a person who acts through an agent for the purpose of any negotiation with the
third party without his identity being disclosed.

The third party does not know about the existence of the principal and deems
the agent as if he is acting for himself. The agent usually makes such
representation as per instructions of the principal or at times if he clearly
wishes to bind himself only.

Rights & Duties of an Undisclosed Principal

Generally speaking, there is no difference between an undisclosed principal

and one who is disclosed. If a contract is made on behalf an undisclosed
principal, he can sue and be sued in his own name as regards the contract.

According to section 231, if an agent makes a contract with a person who

neither knows nor has a reason to suspect, that he is an agent, his principal
may require the performance of the contract. The rule is, however not without
qualification which are as follows:

1. PROOF OF IDENTITY OF THE UNDISCLOSED PRINCIPAL: this involves a

consideration of the circumstances in which evidence may be introduced
 to proof the existence of and the identity of the undisclosed principal so as
to enable him to sue and be made liable. In hunter v. humble, the agent
described himself in the charter as “owner” of a ship.

2. DESCRIPTION USED BY THE AGENT IN CONTRACT: another view is the

description used by the agent in making and signing the contract. It may
show that he impliedly contracts that there is no principal. Thus, if the
agent contracts as “owner” or proprietor” such a contract may imply that
there is no principal, but if he contracts as “charterer” or “tenant” it may
not.

3. PERSONALITY OF THE AGENT: Another qualification to the general rule as

to the right and duties of the undisclosed principal is the personality of the
agent. Where the personality of the agent was instruments to bringing
about the contract, the undisclosed principal even though identifiable may
be unable to sue the third party.

Undisclosed Principal and the Third Party

Before the undisclosed principal may enforce any right or be liable for any
obligation under a contract, apparently made between the agent and a third
party, two pre-conditions must be met:

1. The agent must have actual authority (express or implied)

2. The agent on entering the contract must have intended to act on behalf of
the undisclosed principal and not for his own benefit.

TERMINATION OF AGENCY

Termination of agency implies the end of the relationship of principal an agent.

Modes of Termination of Agency

The various mode in which the agency may be terminated have been as under

A. Termination of Agency by Act of the Parties

(a) By Mutual Agreement - An agency is terminated if the principal and

agentmutually agree to do so.

(b) By Revocation of Authority by the Principal - An agency is terminated

if the principal revokes the authority of his agent. It may be noted that the
principal may revoke the authority of his agent at any time before the
authority has beenexercised so as to bind the principal.

(c) By Renunciation of Agency by the Agent- The agency is terminated if

the agent himself renounces the business of agency.

B. Termination of Agency by Operation of Law

(a) On Completion of the Business of the Agency [Section 201]- An

agency is automatically terminated when the business of the agency is
completed.

Example- X appointed Y to sell his goods. Y sold those goods as per terms
of the agency. It was held that the agency is terminated on the completion
of sale and the agent has no authority to alter the terms of sale after its
completion.

(b) On Death/or on becoming of Unsound Mind of Principal/Agent [

201] - An agency is automatically terminated when the principal or agent
dies or becomes of unsound mind.

IRRVOCABLE AGENCY

The term ‘Irrevocable Agency' means an agency which cannot be revoked or

terminated by the principal.

Circumstances when the Agency is Irrevocable [Sections 202 and 204]

The Circumstances when the Agency is Irrevocable have been shown in Fig
14.8.

(a) Where the Agency is Coupled with Interest [Section 202] - An agency is
said to be coupled with interest when the object of creating the agency is to
secure some benefit to the agent in addition to his remuneration as agent.
It may be noted that an agency cannot be said to be agency coupled with
interest in the following cases:

 Where the interest of the agent arises after the creation of agency:

 Where the agency secures a benefit to the agent incidentally though

theagency was not created for this object.

(b) Where the Agent has partly exercised his Authority [Section 204] –
The principal cannot revoke the authority given to his agent after the
authority has been partly exercised, so far as regards such acts and
obligations as arise from acts already done in the agency. Thus, the
principal cannot revoke the agent's authority for the acts already done.

Example - A authorises B to buy 1,000 bales of cotton on account of A, and

to pay for it out of A's money remaining in B's hands. B buys 1,000 bales of
cotton in A's name, and so as not to render himself personally liable for the
price, A cannot revoke B's authority to pay for the cotton.

(c) Where the Agent has Incurred a Personal Liability - The principal
cannot revoke the agent's authority for the authorised acts in respect of
which the agent has already incurred a personal liability.

Example- A authorises B to buy 1,000 bales of cotton on account of A, and

to pay for it out of A's money remaining in B's hands. B buys, 1,000 bales of
cotton in his own name, so as to make himself personally liable for the
price. A cannot revoke B's authority so far as regards payment for the
cotton.
 Ostensible authority of an Agent

Ostensible authority (also referred to as apparent authority) is a category of

legal relationship between a principal and an agent. It looks at the authority of
the agent from the perspective of the third party. An agent is said to be acting
within the scope of its apparent or ostensible authority (and therefore able to
commit the principal) if:

 The principal in some way represents or holds out the agent as having an
authority which is wider than the agent's actual authority. The person
making the representation about the agent's authority must itself have
actual authority to make that representation, not just apparent authority.

 The agent commits the principal to a third party within the scope of that
wider, apparent authority.

 The third party makes a commitment or otherwise alters its position in

reliance on that representation of authority.

Where the agent acts within the scope of its apparent authority, the principal is
bound to the same extent as if the principal authorised the transaction
expressly.

A common example of an issue involving apparent authority is where an officer

of a company is given a title, status and facilities that give rise to a
misrepresentation about the scope of that officer's actual authority, without
safeguards being in place to prevent such a misrepresentation.

INDIAN PARTNERSHIP Act, 1932

Partnership is the relation between two or more persons who have agreed to
share the profits of a business carried on by all or any of them acting for all.

Essential Elements of Partnership

The aforesaid definition clearly indicates the essential elements of partnership
as given below:

(a) Two or more persons -there must be at least two persons to form a
partnership and all such persons must be competent to contract.

(b) Agreement -There must be an agreement to form a partnership. This

agreement may be express (whether written or oral) or implied. This
essential element is further clarified under Section 5. Section 5 provides
that the relation of partnership arises from contract and not from status.
Business- There must exist a business. According to section 2(b), the term
‘Business’ includes every trade, occupation and profession

(c) Sharing of profits- There must be sharing of profits. Unless otherwise

agreed. Sharing of profits implies sharing of losses as well. It may also be
noted that sharing of profits is a prima facie evidence and not a conclusive
evidence of partnership.

(d) Mutual agency- There must exist a mutual agency relationship among the
partners. “Mutual agency’ relationship means that each partner is both an
agent and a principal.

Partnership is not created by status

Partnership is the form of business organization, where two or more persons

can join together or jointly carrying on some business. It is an improvement
over the 'sole-trade business', where one single individual with his own
resources, skill and effort carries on his own business.

In a partnership, a number of persons could pool their resources and efforts

and could start a much larger business. In case of loss also, the burden gets
divided amongst various partners in a partnership.

According to Section 4 of the Indian Partnership Act, " The relation of

partnership arises from contract and not from status; and , particular, the
members of a Hindu undivided family carrying on a family business as such, or
a Burmese Buddhist husband and wife carrying on business as such, are not
partners in such business."

Partnership is the result of agreement. Agreement here means a contract. It

arises from an agreement between two or more people. It cannot arise from
status. The presence of agreement is a must. It indicates the voluntary
contractual relationship of partnership.

Kinds of partnership

The various types of partnership are based on two different criteria. With
regard to the duration of the term of partnership:

1. Partnership at will

when no fixed period is prescribed for the expiration of partnership then it is a

partnership at will. According to Section 7 two conditions need to be fulfilled:

 No agreement about the determination of the fixed period of

partnership

 No clause with respect to the determination of partnership.

Partnership for a fixed period

When the partners fixed the duration of the partnership firm then after the
expiration of the fixed period the partnership comes to an end. When the
partners decided to continue with the partnership even after the expiry of the
fixed period then it becomes a partnership at will.

2. Particular Partnership (Section 8)

When the partnership is created for completing any project or undertaking.

When such an undertaking or project have been completed then partnership
comes to an end. The partners have a choice to continue with the firm.
3. General Partnership

when the partnership is created for the purpose of carrying out the business.
There is no particular task that has to be completed. The task is general in
nature.

Rights of the Partners

1. Right to take part in the conduct of the firm’s business: Section

12(a) provides that every partner has the right to be involved in the
conduct of the firm’s business. All partners have the right to manage the
firm’s business.

2. Right to express opinion: Section 12(c) provides that all partners can
freely express their opinion in matters concerning the firm’s business.
However, before a decision is made based on an opinion of a partner, the
consent of other partners must be obtained.

3. Right to have access to books of the firm: Section 12(d) of the Act
provides that every partner has the right to look into the books of the
firm, whether the books concern the accounts of the firm or not.

4. Right to profit: As per Section 13(b), all partners must equally share
profits earned through the business.

5. Right to interest on capital: Section 13(c) provides that on an

agreement, the partners of a firm have the right to claim interest on the
firm’s profits from the capital.
 6. Right to interest on advances made by partner: In some cases the firm
may need extra money apart from the capital. In such cases, a partner
may make advances to the firm and he may also claim interest on such
advances.

7. Right to indemnity: Section 13(e) of the Act provides that a partner may
make some payments and incur liabilities while acting on behalf of the
firm. The firm shall indemnify a partner in respect of such payments and
liabilities, whether it was made in ordinary course of business or in
emergency.

Duties of partners

1. Duty of greatest common advantage: As per Section 9 of the Act, it is

incumbent upon the partners to carry on their business for the greatest
common advantage of the firm. The partners must act so that all the
partners benefit and secure the maximum profits. No partner should act
for their personal gain.

2. Duty of good faith: As per Section 9, the partners must act just to each
other. The relationship of partnership is on mutual trust and hence, there
must be good faith between them. A partnership is of fiduciary nature and
thus, at every stage of a partnership, the partners must act just and
faithful to one another.

3. Duty to render true accounts: Partners of a firm have a duty to render

true accounts as per Section 9. A partner of a firm must keep and render
true and complete accounts of the partnership firm’s business. He must
make it available to other partners or their representatives when
required.

4. Duty to render full information: As per Section 9, partners of a firm

have a duty to provide true and full information regarding the business.
Partners are agents of each other and hence, partners must communicate
 all information regarding the running of the business in a complete and
truthful manner to each other.

5. Duty to not carry another business: As per Section 11(2) of the Act, a
partner must not conduct a business other than that of the firm. Partners
can restrain one another from carrying on another business, provided
that such restraint is reasonable.

6. Duty to act diligently: As per Section 12(b), a firm’s partner must act
diligently in the business.

Procedure of Registration

Section 58 explains the procedure of the registration of a partnership firm.

1. Making an application to Registrar: Any of its partners can send an

application along with the prescribed fee and copy of partnership deed o
the registrar of the area in which any place of business is proposed to be
situated or is situated. Such a statement shall be signed by all of its
partners. Such a statement should contain:

2. Name of the firm

3. Principal place of business

4. Any other place where the business is carried on

5. Duration of partnership firm

6. Name and address of all partners of a firm

7. The date on which each partner joined the firm

8. Verification: Each partner who has signed the statements needs to be

verified.
 9. The name of the firm shall not contain any name resembling the name of
Crown, Emperor, king, Royal, Emperors’, or any other words implying or
expressing the sanction of the government.

Section 59 states that when the Registrar is satisfied that the conditions
of Section 58 are complied with then he shall record an entry of the statement
in a register called the Register of Firms, and shall file the statement.

Non-registration of partnership firm

In India, it is not compulsory to register the partnership and no penalty is

being imposed for non-registration but if we talk about English law it is
compulsory to register partnership firm and if it is not registered then the
penalty is imposed. Non-registration leads to a certain disability in accordance
with Section 69 of the Act.

Effect of non-registration (Section 69)

1. No suit can be initiated in civil court by the firm or other co-partners

against the third party

2. In case of breach of contract by the third party; the suit cannot be brought
in any civil suit. The suit must be filed by the one whose name is
registered as a partner in a register of the firm.

3. No partners can claim a relief of set-off.

4. Any action which is brought out by the third party against the firm having
a value of Rs 100 cannot be set off by the firm or any of its partners.

5. An aggrieved person cannot sue against firms or other partners

Generally, no action can be brought against the firm or the partners but there
is an exception to it. In a case when the firm is dissolved it can bring a suit for the
realization of his share in the firm’s property.
 Holding Out

It simply means that where a person,

1. Represents himself or
2. Allows partner to do it ,and
3. Upon the faith of this representation credits may have acted
Then, a person will be held liable on the ground of doctrine of holding out.

The term ‘Holding out’ means an action or omission which leads other people
to believe that the person possesses an authority which in fact he does
not. Hence according to this section, a person is estopped from denying the
representation he made earlier later on.

He does not acquire any claim over the firm , but he does become liable for
compensation to the third party whom he induced as a partner by holding
out and caused him suffer loss or injury due to such
representation. The purpose of this doctrine is to render a person liable as
partner on ground of estoppel. It fixes the liability of the person representing
him to be a partner of any firm.

Essentials of Doctrine of Liability of Holding Out

1. Representation

The person who is depicting himself as a partner of the firm should have been
made a voluntary representation of the same. He is called as the ‘partner by
estoppel.’
2. Knowledge of representation and acting on it in good faith

The person seeking to charge another with liability of holding out has to show
that he had knowledge of the representation and he acted in good faith on
such representation.

Where there is no knowledge of representation to the plaintiff or if the plaintiff

knows the truth and is not misled by such representation his right to sue the
person making such representation does not arise.

Exceptions to the doctrine of holding out on retirement without giving

public notice are as follows –

1. Deceased partner – The death of the partner constitutes sufficient notice in

itself. This was held in ‘Venkatasubbamma Vs. Subba Rao, AIR 1964 AR 462’
Thus, estate of a deceased partner is not liable for any act of the firm done
after his death even if his name in the title of the firm is being used in same
manner and style.

2. Insolvent partner – Insolvency of partner is also a sufficient notice. Thus,

an insolvent partner from the date of his insolvency is no more liable for any
act of the firm done after his insolvency regardless of the public notice.

3. Dormant partner/ Sleeping partner – A dormant partner is one who has

never taken an active part in the conduct of a firm as a partner. He is held
liable similar to the acting or apparent partner but once he retires, public
notice of his retirement is not necessary in order to terminate his liability.
But, notice of retirement of a dormant partner has to be given to the people
who had knowledge of the presence of that partner.

Rights of Outgoing Partner

A partner who leaves the partnership firm in which the remaining partners
continue the business is an outgoing partner. Such a partner has certain liabilities
and rights as prescribed by the Partnership Law. In this article, we will focus on
the rights of an outgoing partner.

1. Right of an Outgoing Partner to Carry on a Competing Business

Section 36 (1) of the Indian Partnership Act, 1932 (Partnership law), imposes
certain restrictions but allows an outgoing partner to carry on a business
and advertise it, which competes with the partnership firm. However, it restricts
him from:

 Using the name of the partnership firm

 Representing himself as a partner of the firm

 Soliciting the custom of persons who were dealing with the firm before he
ceased to be a partner.

2. Right of an Outgoing Partner to Share Subsequent Profits

According to Section 37, of the Partnership Law, if a member of the firm dies or
otherwise ceases to be a partner of the firm, and the remaining partners carry on
the business without any final settlement of accounts between them and the
outgoing partner, then the outgoing partner or his estate is entitled to share of
the profits made by the firm since he ceased to be a partner.

Limited Liability Partnerships (LLP)

Partners of typical partnership firms have unlimited liability towards their

collective debts and legal consequences. This means that their own assets are
liable for attachment for meeting the firm’s debts and liabilities. And limited
liability partnerships (LLP) solves this problem.

An LLP has all basic features of a regular partnership firm, except that of same
legal entity status and unlimited liability of partners. Consequently, limited
liability partnerships have legal existence and identity separate from that of its
partners. Furthermore, its partners have limited liabilities.
Features of an LLP

1. Separate legal entity

Unlike regular partnership firms, limited liability partnerships are treated as

separate legal entities. This means that LLPs can own assets and incur liabilities
in their own names. They can also enter into contracts and sue and be sued in
their own names.

2. Limited liability of partners

The liabilities of partners of an LLP are separate and limited. Their personal
assets will not liable to attachment in case the LLP is winding up or suffering
certain legal consequences of repayment of debt.

Partners’ liabilities, however, can become unlimited in cases of offenses like

fraud, the commission of an offense, or any other wrongful and illegal act.

3. Sharing of profits

All partners of limited liability partnerships share profits of business just as

partners of regular firms. They are, however, free to decide the ratio in which
they will share profits.

4. Partners of LLPs

Partners of a limited liability partnership can be either natural persons, i.e.

individuals, or even body corporates. Furthermore, an individual cannot be a
partner if he suffers from unsoundness of mind or he is insolvent.

IMPLIED AUTHORITY OF A PARTNER [SECTION 19]

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. The authority conferred on a
partner by mutual agreement is called ‘express authority’. The authority
conferred on a ‘implied authority’. Reading together Sec. 19(1) and Sec. 22
Implied authority covers those acts of partners which fulfill the following three
conditions:

(a) The act relate to the capacity of a partner to bind the firm;

(b) The act must have been done in the usual way of carrying on the business of
the firm;

(c) The act must be done in the firm’s name or in any other manner expressing
or implying an intention to bind the firm.

Acts within the implied Authority

An implied authority of a partner of a trading firm include the following acts

(a) To purchase goods of the kind that are used in the business of the firm

(b) To sell the goods of the firm

(c) To settle accounts with the persons dealing with the firm

(d) To receive payment of the debts due to the firm and issue receipts for the
same:

(e) To engage servants for the business of the firm;

(f) To engage a lawyer to defend an action brought against the firm;

DISSOLUTION OF FIRM [SECTIONS 39 to 47]

Meaning of dissolution- the term ‘dissolution’ stands for discontinuation.

Under the INDIAN partnership Act, 1932, the dissolution may be either of
partnership or of a firm.
Meaning of dissolution of Partnership- Dissolution of partnership refers to
the change in the existing relations of the partners. The firm continues its
business after being reconstituted. This may happen on admission, retirement
or death ofa partner or change in profit sharing ratio in the firm.

Example -X, Y and Z are partners in a firm. X retires. The partnership between
X, Y and Z comes to an end and new partnership between Y and Z comes into
existence. This new partnership between Y and Z shall be known as
‘reconstituted firm’. Thus on retirement of partner, the old partnership stands
dissolved, but the firm continues its business with the remaining partners Y
and Z

Meaning of Dissolution of Firm- Dissolution of a firm means the dissolution

of partnership between all the partners of a firm. In such a situation, the
business or the firm is discontinued, its assets are realized, the liabilities are
paid off and the surplus (if any) is distributed among the partners according to
their rights.

Modes of dissolution of a firm [Section 40 to 44]- The dissolution of a firm

may take place either without the order of the court or by an order of the court
the circumstances under which dissolution take place are shown below.

Dissolution without the order of the court of the court [Section 40 to 43]
dissolution of firm without the order of the court may take place are shown
below.

(a) Dissolution by mutual agreement [Section 40]- A firm may be dissolved

by mutual agreement among all the partners.

(b) Compulsory dissolution [Section 41]- A firm is compulsorily dissolved in

the following two circumstances:

(1) If all the partners, of all but one partners of the firm are declared
insolvent; [The reason is that there must be at least two persons to
 continue a firm and such persons must be competent to contract].

(2) If some event takes place which makes it lawful for the firm’s business
tobe carried on

Example- X a resident in INDIA and Y a resident in Pakistan, are partners

in a trading firm. War breaks out between INDIA and Pakistan. In such a
situation, on outbreak of war, it becomes unlawful for the business of the
firm to be carried on.

(c) Dissolution on the happening of certain contingencies [Section 42]-

unless otherwise agreed by partners, a firm is dissolved on the happening
of any of the following four contingencies:

(1) On the expiry of the fixed term for which the firm was constituted;

(2) On completion of the venture(s) for which the firm was constituted;

(3) On the death of a partner; and

(4) On the insolvency of a partner.

(d) Dissolution by notice [Section 43]- where the partnership is at will, the
firm may be dissolved by any partner giving notice in writing to all other
partners of his intention to dissolve the firm. The firm is dissolved from the
date of dissolution mentioned in the notice or if no date is mentioned, as
from the date of the communication of the notice.

Dissolution by an order of Court [Section 44]

This section deals with those grounds on which the court may, on the receipt of
petition by a partner, order for the dissolution of the firm. These grounds are:

(a) Insanity [Section 44(a)]- when a partner has become of unsound mind,
the court may allow dissolution of the firm on a suit by any partner of the
firm.
(b) Permanent incapacity [Section 44(b) ]-when a partner [i.e., an actual
partner and not a sleeping partner] has become permanently incapable of
performing his duties as a partner, any other partner may apply for
dissolution.

(c) Misconduct [Section 44(c)}- when a partner is guilty of misconduct which

is likely to adversely affect the carrying on of the business, the court may
allow dissolution.

(d) Persistent breach of agreement [Section 44(d)]- when a partner

willfully or persistently (i.e., frequently) commits breach of agreement in
matters relating to the business of the firm, any other partner may seek for
dissolution of the firm.

(e) Transfer of interest [Section 44(e)]- when a partner has transferred the
whole of his interest in the firm to a third party or allowed his share to be
charged on account of a decree passed by a court towards payment of
liabilities of that partner or allowed his share to be sold in the recovery of
arrears of land revenue, it would be sufficient to attract dissolution.

(f) Perpetual looses where the business of the firm cannot be carried onexcept
at a loss, the court may order dissolution of the firm.

(g) Any other just and equitable ground [Section 44(f)]- where the court is
satisfied that it is just and equitable to dissolve the firm it may allow
dissolution using its discretionary power to meet the ends of justice.

Distinguish between partnership and co ownership?

Factors Partnership Co ownership

 Co ownership can arise via
Partnership arises out of
Creation contract or operation of
contract
law

Co ownership may not

Nature of Partnership arises out of a
necessarily arise out of
Interest common interest
common interest

A partner doesn’t hold

A co-owner doesn’t seek
rights to transfer his/her
Transfers permission to transfer
part of share without prior
his/her share
consent of all the partners

A partner cannot claim A co owner can claim

Claim of
partition of the property or partition for the part of
Partition
shares property owned by them

Profit and The profit and loss sharing

A co ownership may not
Loss in a partnership is likely
arise out of profitability
Sharing but based on a contract

Difference between Partnership and company

A company is an artificial person created by law having separate legal entity,

perpetual Succession, limited liability and a common seal.

Basis if distinction Partnership Company

1. Legal entity A firm doesn’t enjoyIt has a separate legal existence.
separate legal existence.A company is separate from its
Partners are collectively members.
termed as a firm and
individually as partners.

2. Liability The liability of partners isLiability of its members is

unlimited limited to the extent of the
value of shares held by them.

3. Tenure It does not enjoy a long It enjoys perpetual status. Even

lease of life. Death, an atom bomb cannot destroy a
sickness, retirement of company it is wound up under
partners may affect its the due process of law Winding
existence so as to dissolveup may take years.
it.

4. Number ofMinimum number ofA public company must have a

members Partners is two. Maximumminimum 7 members to start
may be ten 9 in case of with. However, there is no limit
banking business oron the maximum number of
twenty in case of non-member of a company.
banking business.

5. Transfer ofA partner cannot transferA member may transfer his

interest his share without theshares as and when he likes.
consent of other partners. There is no restriction on
transfer of shares.

6. Agency Each partner represents There is no agency relationship

the other partners so as toamong members of a company
bind and be bound toas they do not bind each other
 others with their actions

7. Distribution ofProfits are distributableThere is no such compulsion

Profits among partners as per that profits must be distributed.
the partnership deed. Only when the dividends are
declared that the members get a
share of profits.

9. Property Property of the firm is theProperty of the company is not

joint property of all itsthe property of its members as
partners the company and members
have separate legal existence.

Ex-ship contracts

Under an 'ex-ship contract the seller has to delivery the goods to the buyer at
the port of destination. In such contracts the property in the goods does not
pass until actual delivery. The goods are at the seller's risk during the voyage.
It is therefore, for the seller to insure the goods to protect his interest. The
seller is to pay the freight, or otherwise release the ship owner's lien and to
furnish the buyer with a delivery order or an effectual direction to the ship
owner to deliver.