SARANSH INDIAN REGULATORY FRAMEWORK

CHAPTER 1 - INDIAN REGULATORY FRAMEWORK

MEANING OF LAW

imposed by
the
duties Government for securing
welfare and

Law is a set of providing

obligations and justice
to society

SOURCES OF LAW

Precedents or
The Constitution
the Judicial
the statutes or
( basis and source Decisions of
of all laws )
laws made by
various Courts in some cases,
Parliament and
State Assemblies established
Customs
and Usages.

INDIA IS A PARLIAMENTARY DEMOCRACY

(i) Constitution of India foremost law that deals with the framework within which our
democratic system works

our laws are made for the people, by the people

provides and protects certain Fundamental rights of citizens

lays down Fundamental duties as well as the powers and duties of

Governments, both Central and State

The laws in India are interconnected with each other forming a

hybrid legal system

The people who wrote the Constitution decided to divide the law-
making power between the Central Government and the various
State Governments

Indian Constitution has three lists Viz., Central List, State List and
Joint List.

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PROCESS OF MAKING A LAW

When a law is
proposed in
parliament, it is After discussion and
called a Bill. debate, the law is
passed in Lok Sabha Thereafter, it has to be
passed in Rajya Sabha.

Finally, the law will be

notified by the It then has to obtain
Government in the the assent of the
publication called the President of India.
Official Gazette of India.

once a bill or law is passed and effective it is called an act of parliament

TYPES OF LAWS IN THE INDIAN LEGAL SYSTEM

TYPES OF LAWS

Principles
Civil Law Common
Criminal Law of Natural
Law
Justice

(I) CRIMINAL LAW

defines the crime, its
Indian Penal Code, 1860; nature, and punishments

Criminal law-
concerned with Code of Criminal
defines exhaustive
laws pertaining Procedure, 1973 (CrPC)
procedure for executing
to violations of
the punishments of the
the rule of law or
Criminal Offences- crimes.
public wrongs
Murder, rape, theft, fraud,
and punishment
cheating and assault,
of the same
etc

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(II) CIVIL LAW

Code of
Matters of Civil
Law primarily
disputes Procedure, further classified
focuses on
between 1908 (CPC) into Law of
dispute
individuals or Contract, Family
resolution
organisations Law, Property
rather than
punishment Law, and Law of
Tort

Civil offences- breach of contract, non-delivery

of goods, non-payment of dues to lender or
seller defamation, breach of contract, and
disputes between landlord and tenant, etc.

(III) COMMON LAW

A judgment
delivered by the
Supreme Court will
be binding upon the
courts within the doctrine of
A judicial territory of India Stare Decisis -
precedent or
“to stand by
a case law
that which is
decided.

reinforces the
obligation of courts to
follow the same
principle or judgement
established by previous
decisions while ruling a
case where the facts
are similar

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(IV) PRINCIPLES OF NATURAL JUSTICE

Rules of
Natural Justice
Natural justice, often A judgement can
known as Jus Natural override or alter a
deals with certain common law, but it
fundamental principles cannot override or
of justice going beyond change the statute
written law.

No one should be made

hear the other party
a judge in his own reasoned decision
or give the other party
cause, and it’s a Rule
a fair hearing
against Prejudice

A judgement can override or alter a common law but it cannot override or change the statute.
ENFORCING THE LAW

Most major Ministries are

The Government of A Ministry is composed of
headed by a Cabinet
India exercises its employed officials, known
Minister, who sits in the
executive authority as civil servants, and is
Union Council of Ministers,
through a few politically accountable
and is typically supported
Government Ministries through a minister.
by a team of junior
or Departments of
ministers called the
State.
Ministers of State.

(i) MINISTRY OF FINANCE

concerned with the economy of India

serving as the Treasury of India
concerns itself with taxation, financial
legislation, financial institutions, capital
markets, centre and state finances, and the
Union Budget
important functions is the presentation of the
Union Budget Nirmala Tai

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CONSTITUTION OF MINISTRY OF FINANCE

is the apex controlling of four Central

authority Civil Services, namely:

Indian Revenue Indian Audit and Indian Economic Indian Civil

Service Accounts Service Service and Accounts Service

DEPARTMENT OF MINISTRY OF FINANCE

Department
of Economic
Affairs

Department
Department of
of Public
Expenditure
Enterprise

Department of
Investment and Department
Public Asset of Revenue
Management

Department
of Financial
Services

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(ii) MINISTRY OF CORPORATE AFFAIRS

is an Indian Government Ministry.

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

(iii) MINISTRY OF HOME AFFAIRS (GRIHA MANTRALAYA)

is a ministry of the Government of India.

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

Central Translation
DEPARTMENT OF MINISTRY OF HOME AFFAIRS Bureau
Central Hindi
Training Institution

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

(iv) MINISTRY OF LAW AND JUSTICE

in the Government of India is a Cabinet management of the legal affairs

Ministry through Department of Legal
Affairs

deals with the

legislative activities through
The Department of Legal Affairs is the Legislative Department
concerned with advising the various
Ministries of the Central Government
while the Legislative Department is administration of justice in
concerned with drafting of principal India through the Department
legislation for the Central Government. of Justice

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(v) THE SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI)

The Securities and Exchange Board of India (SEBI)

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

(vi) RESERVE BANK OF INDIA (RBI)

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

(vii) INSOLVENCY AND BANKRUPTCY BOARD OF INDIA (IBBI)

It is the regulator for It was established on It covers Individuals,

overseeing insolvency 1st October 2016 and Companies, Limited
proceedings and given statutory Liability, Partnerships
entities like Insolvency powers through the and Partnership firms.
Professional Agencies Insolvency and The new code will
(IPA), Insolvency Bankruptcy Code, speed up the
Professionals (IP) and which was passed by resolution process for
Information Utilities Lok Sabha on 5th May stressed assets in the
(IU) in India. 2016. country.

It attempts to
It handles the cases
simplify the
using two tribunals
process of
like NCLT (National
insolvency and
Company Law
bankruptcy
Tribunal) and Debt
proceedings.
Recovery Tribunal

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FUNCTIONS OF JUDICIARY SYSTEM OF INDIA

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JUDICIARY
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Dispute Resolution between

citizens or between citizens
and the Government,

HIERARCHY OF COURTS
Supreme
Court

Hig h C o urts

D istr
ict C o urts

Me
tro p o rts
lit a n C o u

[ JURISDICTION: POWER TO CONTROL ]

(i) SUPREME COURT

1 2 3 4 5
Principal bench Presently, the An individual
Apex body of Chief Justice of of the Supreme number has can seek
the judiciary India is the Court consists of increased to 34
including the relief in the
highest 7 members Supreme
including the Chief Justice of
authority India due to the Court by
Chief Justice of rise in the
India filing a writ
number of cases
and workload petition
under Article 126 under Article 32

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(ii) HIGH COURT

has appellant,
There must be a High original jurisdiction,
Court in each state and Supervisory
jurisdiction

High Court

An individual
can seek remedies
Highest court of against violation of
appeal in each state fundamental rights in
and union territory High Court by filing a writ

Decision of High Court is Binding in the respective State and only persuasive in other states
(iii) DISTRICT COURT

Below the High Courts

The Courts of District Judge deal with Civil law
matters
Civil judge can try suits valuing not more than
Rupees 2 crore. ( Pecuniary Jurisdiction )
Courts get territorial Jurisdiction based on the
areas covered by them
Cases are decided based on the local limits within
which the parties reside or the property under
dispute is situated.

(iv) METROPOLITAN COURTS

Established in metropolitan cities in

consultation with the High Court where the
population is 10 lakh or more

Chief Metropolitan Magistrate has powers as

Chief Judicial Magistrate

Metropolitan Magistrate has powers as the

Court of a Magistrate of the first class.

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CHAPTER-2
INDIAN CONTRACT ACT, 1872
UNIT – 1:- NATURE OF CONTRACT

The Law of contract: Introduction

The law relating to contract is governed by the Indian Contract Act, 1872.

The First Part (Section 1-75) deals with the general

principles of the law of contract, and therefore
applies to all contracts irrespective of their nature.
The Second Part (Sections 124-238) deals with
certain special kinds of contracts, e.g., Indemnity
and guarantee, bailment, pledge, and agency.

1.1 WHAT IS A CONTRACT?

The following points emerge from the above definition of PROMISE:

1. when the person to whom the proposal is made

2. signifies his assent on that proposal which is made to him

3. the proposal becomes accepted

4. accepted proposal becomes promise

Agreement = Offer/Proposal + Acceptance + Consideration

Contract = Agreement + Enforceability by law

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Difference between Agreement and Contract

Basis of Differences Agreement Contract

Meaning Every promise and every set of promises, Agreement enforceable by law.
Forming the consideration for each other. (Agreement + Legal enforceability)
(Offer + Acceptance)
Scope It’s a wider term including both legal and It is used in a narrow sense with the specification that
Social agreement. contract is only legally enforceable agreement.
Legal Obligation It may not create legal obligation. An Necessarily creates a legal obligation. A contract
agreement does not always grant rights always grants certain rights to every party.
to the parties
Nature All agreements are not contracts. All contracts are agreements.

1.2 ESSENTIALS OF A VALID CONTRACT

As given by SECTION 10 of Indian Contract Act, Not given by Section 10 but are also considered
1872 essential
1 Agreement 1 Two Parties
2 Free Consent 2 Intention to Create Legal relationship
3 Competency of the Parties 3 Fulfilments of legal formalities
4 Lawful Consideration 4 Certainty of meaning
5 Legal Object 5 Possibility of performance
6 Not expressly declared to be void (as per Section
24 to 30 & 56)

Two Parties Intention to Fulfilments Certainty of Possibility of

• one party Create Legal of legal meaning performance
making the relationship formalities • must be • An agreement
offer and the certain and to do an act
other party • Social or • In case of
domestic types certain not vague or impossible in
accepting it indefinite itself cannot
• identity of the of agreements contracts some
are not other be enforced.
parties be enforceable in formalities
ascertainable court of law have to be
complied with
to make it
legally
enforceable.

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ESSENTIAL ELEMENTS OF A VALID CONTRACT ACCORDING TO SECTION 10

I. Offer and Acceptance or an agreement: An agreement is the first essential element of a valid contract.

According to Section 2(e) of the

Indian Contract Act, 1872, “Every
according to Section 2(b) “A
promise and every set of
proposal when accepted,
promises, forming consideration
becomes a PROMISE”.
for each other, is an
AGREEMENT” and

II. Free Consent: Two or more persons are said to consent when they agree upon the same thing in the same sense.
This can also be understood as identity of minds in understanding the terms viz consensus ad idem.

Further such consent must be free. Consent would be considered as free consent if it is not caused by coercion, undue
influence, fraud, misrepresentation or mistake.

III. Capacity of the parties: Capacity to contract means the legal ability of a person to enter into a valid contract.
Section 11 of the Indian Contract Act specifies that every person is competent to contract who

(a) is of the age of majority according to the law to which he is

subject and

(b) is of sound mind and

(c) is not otherwise disqualified from contracting by any law to

which he is subject.

IV. Consideration: It is referred to as ‘quid pro quo’ i.e. ‘something in return’.

V. Lawful Consideration and Object: The CONSIDERATION and OBJECT of the agreement must be LAWFUL.

VI. Not expressly declared to be void: The agreement entered into must not be which the law declares to be either
illegal or void. An illegal agreement is an agreement expressly or impliedly prohibited by law. A void agreement is
one without any legal effects.

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1.3 TYPES OF CONTRACTS

1. Valid • binding and enforceable

Contract: • It contains all the essential elements of a valid contract.

2. Void
• ceases to be enforceable by law
Contract:

• which is enforceable by law at the option of one or more parties

3. Voidable thereto,
Contract: • but not at the option of the other or others is a voidable contract”.

• It is a contract which the law forbids to be made.

4. Illegal • The court will not enforce such a contract but also the connected
contracts.
Contract: • All illegal agreements are void but all void agreements are not
necessarily illegal.

5. • Where a contract is good in substance but because of some technical

Unenforceab defect
le Contract: • i.e. absence in writing, barred by limitation etc.

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1. Express Contracts:

• A contract would be an express contract if the terms are expressed by words or in

writing.

2. Implied Contracts:

• Most often the implication is by action or conduct of parties or course of dealings

between them.
• Tacit Contracts: The word Tacit means silent.
• Tacit contracts are those that are inferred through the conduct of parties without
any words spoken or written.

3. Quasi-Contract:

• A quasi-contract is not an actual contract, but it resembles a contract.

• It is created by law under certain circumstances.
• The law creates and enforces legal rights and obligations when no real contract
exists.
• Example: Obligation of finder of lost goods to return them to the true owner

4. E-Contracts:

• When a contract is entered into by two or more parties using electronics means,
• such as e-mails is known as e-commerce contracts.
• These are known as EDI CONTRACTS or CYBER CONTRACTS or MOUSE CLICK
CONTRACTS.

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III. ON THE BASIS OF THE PERFORMANCE OF THE CONTRACT

III. ON THE BASIS OF THE PERFORMANCE OF

THE CONTRACT
1. Executed Contract:
When the act is done or 2. Executory Contract:
executed or the forbearance Such consideration is to be performed in future only
is brought on record.

(a) Unilateral Contract: (b) Bilateral Contract:

in which one party has performed in which the obligation is
his duty or obligation and the other outstanding on the part of both the
party’s obligation is outstanding. parties.

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1.4 PROPOSAL / OFFER [SECTION 2(a) OF THE INDIAN CONTRACT ACT, 1872]
Definition of Offer/Proposal:

“when one person signifies to another his willingness to do or to abstain from doing
anything with a view to obtaining the assent of that other to such act or abstinence, he is
said to make a proposal”.

Classification of offer

• offer made to public at large and

(a) General
• hence anyone can accept and do the desired act
offer:
• (Carlill Vs. Carbolic Smoke Ball Co.).
(b)
• When the offer is made to a specific or an
Special/specific
ascertained person,
offer:
• When two parties exchange identical offers in
(c) Cross offer: ignorance at the time of each other’s offer.
• There is No Binding Contract in such a case.

• When the offeree offers to qualified acceptance

of the offer
• subject to modifications and variations in the
(d) Counter terms of original offer.
offer:
• Counter-offer amounts to rejection of the original
offer.
• It is also called as Conditional Acceptance.
(e) Standing or
• An offer which is allowed to remain open for
continuing or
acceptance over a period of time.
open offer:

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Essential of a valid offer

3. It must be
1. It must be capable of 2. It must be certain,
communicated to the
creating legal relations: definite and not vague
offeree:

6. Offer should not

4. It must be made with
contain a term the non-
a view to obtaining the 5. It may be
compliance of which
assent of the other conditional:
would amount to
party:
acceptance:

9. Offer is Different
7. The offer may be
8. The offer may be from a mere statement
either specific or
express or implied: of intention, an
general:
invitation to offer

(i) A Prospectus by a company to the public to subscribe for its shares.

(ii) Display of goods for sale in shop windows.

(iii) Advertising auction sales and

(iv) Quotation of prices sent in reply to a query regarding price.

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1.5 ACCEPTANCE
Definition of Acceptance: In terms of Section 2(b) of the Act, the term ‘ACCEPTANCE’ is defined as follows:

“When the person to whom the proposal is made signifies his assent thereto, proposal is said to be
accepted.

The proposal, when accepted, becomes a promise”.

 Relationship between offer and acceptance: According to Sir William Anson “Acceptance is to offer what a
lighted match is to a train of gun powder”.

Legal Rules regarding a valid acceptance

(1) Acceptance can be given only by the person to whom offer is made:

•In case of a Specific Offer, it can be accepted only by the person to whom it is made
•In case of a General Offer, it can be accepted by Any Person who has the knowledge of the offer.

(2) Acceptance must be absolute and unqualified:

•acceptance is valid only when it is absolute and unqualified and

•is also expressed in some usual and reasonable manner

(3) The acceptance must be communicated:

•the acceptance must be communicated in some perceptible form.

(4) Acceptance must be in the prescribed mode:

•Where the mode of acceptance is prescribed in the proposal,

•it must be accepted in that manner.

(5) Time:

•Acceptance must be given within the specified time limit, if any, and
•if no time is stipulated, within the reasonable time and before the offer lapses.

(6) Mere silence is not acceptance:

•The acceptance of an offer cannot be implied from the silence of the offeree or his failure to
answer,
•unless the offeree has in any previous conduct indicated that his silence is the evidence of
acceptance.

(7) Acceptance by conduct/Implied Acceptance:

•This section provides the acceptance of the proposal by conduct

•as against other modes of acceptance i.e. verbal or written communication.

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1.6 COMMUNICATION OF OFFER AND ACCEPTANCE

 When the contracting parties are face-to-face, there is no problem of communication.
 The difficulty arises when the contracting parties are at a distance from one another, it is very much relevant
for us to know the exact time when the offer or acceptance is made or complete.

The Indian Contract Act, 1872 gives a lot of importance to “time” element in deciding when the offer and acceptance
is complete.

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Modes of revocation of offer

(iii) By non-
(vii) By
(i) By notice of fulfilment of (v) By counter
subsequent
revocation: condition offer
illegality.
precedent

(vi) By the non-

acceptance of
(ii) By lapse of (iv) By death or the offer
time: insanity: according to the
prescribed or
usual mode

Section Description
UNIT- 1

2 (a) Definition of Proposal / Offer

2 (b) Definition of Promise
2c Definition of Promisor and Promisee
2 (d) Definition of Consideration
2e Definition of Agreement
2 (h) Definition of Contract
2 (j) Definition of Void Contract
2 (i) Definition of Voidable contract
2 (g) Definition of Void agreement
3 Communication, acceptance and revocation of proposals
4 A Proposal is accepted from the date its acceptance is sent by the post
5 A proposal can be revoked at any time before the communication of its acceptance
6 Revocation how made
7 Acceptance must be absolute
8 Acceptance by performing conditions, or receiving consideration
9 Promises, express or implied
10 Essential elements of Valid Contract
11 Define requirements for competency of parties to the contract
23 What Consideration and objects are lawful, and what not

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CHAPTER-2 INDIAN CONTRACT ACT, 1872

UNIT – 2:- CONSIDERATION

Consideration

Meaning & Definitions Legal Rules regarding Rule of *NO Consideration Doctrine of privity of
Valid Consideration no Contract* Contract with exception

Consideration is an essential element of a valid contract without which no single promise will be
enforceable. It is a term used in the sense of quid pro quo, i.e., ’SOMETHING IN RETURN’.

2.1 WHAT IS CONSIDERATION?

“When at the desire of the promisor, the promisee or any other person has done or abstained from
doing, or does or abstains from doing or promises to do or abstain from doing something, such an act or
abstinence or promise is called consideration for the promise”.

(1) Consideration is
an act- Doing
Something.

(2) Consideration
(5) Consideration
is abstinence-
may be past,
Abstain From
present or future.
Doing Something.

(4) Consideration (3) Consideration

may move from must be at the
promisee or any desire of the
other person. promisor.

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2.2 LEGAL RULES REGARDING CONSIDERATION

(i) Consideration
must move at the
• at the desire or request of the promisor
desire of the
promisor:

(ii) Consideration • In India, consideration may proceed from the promisee or

may move from any other person who is not a party to the contract.
promisee or any • In other words, there can be a stranger to a consideration
other person: but not stranger to a contract.

(iii) Executed and • A consideration which consists in the performance of an

executory act is said to be executed.
consideration: • When it consists in a promise, it is said to be executory.
(iv) Consideration
• The consideration, if past, may be the motive but cannot
may be past,
be the real consideration of a subsequent promise.
present or future:
• Something in return need not be equal to something
given.
(v) Consideration • an agreement to which the consent is freely given is not
need not be void merely because the consideration is inadequate.
adequate: • But as an exception if it is shockingly less and the other
party alleges that his consent was not free than this
inadequate consideration can be taken as an evidence.

• consideration must not be performance of existing duty

(vi) Performance of
what one is legally • But where a person promises to do more that he is legally
bound to perform: bound to do, such a promise provided it is not opposed to
public policy, is a good consideration.

(vii) Consideration • Consideration must be real and must not be illusory.

must be real and • It must be something to which the law attaches some
not illusory: value.
(viii) Consideration
must not be
• Only presence of consideration is not sufficient it must be
unlawful, immoral,
lawful.
or opposed to
public policy.

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2.3 SUIT BY A THIRD PARTY TO A CONTRACT

Though under the Indian Contract Act, 1872, the consideration for an agreement may proceed from a third party, the third party
cannot sue on contract. Only a person who is party to a contract can sue on it.

The aforesaid rule, that stranger to a contract cannot sue is known as a “doctrine of Privity of contract”, is however,
subject to CERTAIN EXCEPTIONS.

(1) In the case of trust, a BENEFICIARY can enforce his right under the trust, though he was not a party
to the contract between the settler and the trustee.

(2) In the case of a family settlement, if the terms of the settlement are reduced into writing, the
members of family who originally had not been parties to the settlement may enforce the agreement.

(3) In the case of certain marriage contracts/arrangements, a provision may be made for the benefit of
a person, he may file the suit though he is not a party to the agreement.

(4) In the case of assignment of a contract, when the benefit under a contract has been assigned, the
assignee can enforce the contract but such assignment should not involve any personal skill.

(5) Acknowledgement or estoppel – where the promisor by his conduct acknowledges himself as an
agent of the third party, it would result into a binding obligation towards third party.

(6) In the case of covenant running with the land, the person who purchases land with notice that the
owner of land is bound by certain duties affecting land, the covenant affecting the land may be
enforced by the successor of the seller.

(7) Contracts entered into through an agent: The principal can enforce the contracts entered by his
agent where the agent has acted within the scope of his authority and in the name of the principal.

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2.4 VALIDITY OF AN AGREEMENT WITHOUT CONSIDERATION

The general rule is that an agreement made without consideration is void (Section 25). In every valid contract,
consideration is very important. A contract may only be enforceable when consideration is there. However, the Indian Contract
Act contains CERTAIN EXCEPTIONS to this rule. In the following cases, the agreement though made without
consideration, will be valid and enforceable.

1. Natural Love and Affection: Conditions to be fulfilled under section 25(1)

(i) It must be
(ii) Parties
made out of (iv) It must
must stand in
Natural Love (iii) It must be also be
Near
and affection in Writing. Registered
Relationship
between the under the law.
to each other.
parties.

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

3. Promise to pay time barred debt: Where a promise in writing signed by the person making it or by his authorised agent, is
made to pay a debt barred by limitation it is valid without consideration [Section 25(3)].

4. Agency: According to Section 185 of the Indian Contract Act, 1872, no consideration is necessary to create an agency.

5. Completed gift: In case of completed gifts, the rule “No Consideration, No Contract” does not apply. Thus, gifts do not
require any consideration.

6. Bailment: No consideration is required to affect the contract of bailment. Section 148 of the Indian Contract Act, 1872, defines
bailment as the delivery of goods from one person to another for some purpose.

7. Charity: If a promisee undertakes the liability on the promise of the person to contribute to charity, there the contract shall be
valid. (Kadarnath v. Gorie Mohammad)

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CHAPTER-2
INDIAN CONTRACT ACT, 1872
UNIT – 3:- OTHER ESSENTIAL
ELEMENTS OF A CONTRACT
Section 10 of the Indian Contract Act, 1872 provides that an agreement in order to be a contract, must satisfy the
following conditions:

(1) the parties must be competent

to contract;
(2) it must be made by the free
consent of the parties;
(3) it must be made for a lawful
consideration and with a lawful
object;
(4) it should not have been
expressly declared as void by law.

3.1 CAPACITY TO CONTRACT

Who is competent to contract (Section 11)

Every person is competent to contract who-

(C) is not
(A) has attained disqualified from
(B) is of sound
the age of contracting by
mind and
majority, any law to which
he is subject

(A) Age of Majority: In India, the age of majority is regulated by the Indian Majority Act, 1875. Every person
domiciled in India shall attain the age of majority on the completion of 18 Years of age and not before.

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LAW RELATING TO MINOR’S AGREEMENT/POSITION OF MINOR

1. A contract made with or by a minor is void ab-initio: A minor is not competent to contract and any agreement
with or by a minor is void from the very beginning.

2. No ratification after attaining majority: A minor cannot ratify the agreement on attaining majority as the original
agreement is void ab initio and a void agreement can never be ratified.

3. Minor can be a beneficiary or can take benefit out of a contract: Though a minor is not competent to contract,
nothing in the Contract Act prevents the minor from making the other party bound to him.

4. A minor can always plead minority: Rule of estoppel cannot be applied against a minor. It means he can be
allowed to plea his minority in defence.

5. Liability for necessaries: A claim for necessaries supplied to a minor is enforceable by law. But a minor is not
liable for any price that he may promise and never for more than the value of the necessaries. There is no personal
liability of the minor, but only his property is liable.

Necessaries mean those things that are essentially needed by a minor.

They cannot include luxuries or costly or unnecessary articles.

Expenses on minor’s Education, On Funeral Ceremonies come within the scope of the word
‘necessaries’.

The whole question turns upon the minor’s status in life.

6. Contract by guardian - how far enforceable: Though a minor’s agreement is void, his guardian can, under certain
circumstances enter into a valid contract on minor’s behalf.

there will be
valid contract
which is for the which the
benefit of the minor can
which is within minor, enforce.
his competence
Where the and
guardian makes
a contract for
the minor,

7. No specific performance: A minor’s agreement being absolutely void, there can be no question of the specific
performance of such an agreement.

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8. No insolvency: A minor cannot be declared insolvent

9. Partnership: A minor being incompetent to contract cannot be a partner in a partnership firm, but under Section
30 of the Indian Partnership Act, he can be admitted to the benefits of partnership.

10. Minor can be an agent: A minor can act as an agent. But he will not be liable to his principal for his acts.

11. Minor cannot bind parent or guardian: In the absence of authority, express or implied, an infant is not capable
of binding his parent or guardian, even for necessaries. The parents will be held liable only when the child is acting
as an agent for parents.

12. Joint contract by minor and adult: In such a case, the adult will be liable on the contract and not the minor.

13. Surety for a minor: In a contract of guarantee when an adult stands surety for a minor then he (adult) is liable to
third party as there is direct contract between the surety and the third party.

14. Minor as Shareholder: A minor, being incompetent to contract cannot be a shareholder of the company. But, a
minor may, acting though his lawful guardian become a shareholder by transfer or transmission of fully paid shares
to him.

15. Liability for torts: A tort is a civil wrong. A minor is liable in tort unless the tort in reality is a breach of contract.

LAW RELATING TO MINOR’S AGREEMENT/POSITION OF MINOR (Quick Revision)

3. Minor can be a
1. A contract made 2. No ratification 4. A minor can
beneficiary or can
with or by a minor is after attaining always plead
take benefit out of a
void ab-initio majority minority
contract

6. Contract by
5. Liability for 7. No specific
guardian - how far 8. No insolvency
necessaries performance
enforceable

11. Minor cannot

10. Minor can be an 12. Joint contract by
9. Partnership bind parent or
agent minor and adult
guardian

13. Surety for a 14. Minor as

15. Liability for torts
minor Shareholder

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(B) Person of sound mind: According to Section 12 of Indian Contract Act, “a person is said to be of Sound Mind for
the purposes of making a contract if, at the time when he makes it is capable of understanding it and of forming a
rational judgement as to its effect upon his interests.”

A person who is usually of unsound

mind, but occasionally of sound
mind, may make a contract when
he is of sound mind.

A person who is usually of sound

mind, but occasionally of unsound
mind, may not make a contract
when he is of unsound mind.

Example: A patient in a lunatic asylum, who is at intervals, of sound mind, may contract during those intervals.

Position of
unsound mind
person making a
contract:

A contract by a
person who is
not of sound
mind is VOID.

(C) Contract by disqualified persons: Besides minors and persons of unsound mind, there are also other persons who
are disqualified from contracting, partially or wholly, so that the contracts by such person are VOID. Incompetency to
contract may arise from political status, corporate status, legal status, etc. The following persons fall in this category:

Foreign
Sovereigns
Alien enemy, Corporations, Convicts, Insolvent etc.
and
Ambassadors,

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3.2 FREE CONSENT

Definition of Consent according to Section 13:

“Two or more persons are said to consent when they agree upon

the same thing in the same sense.”

3.3 ELEMENTS VITIATING FREE CONSENT

(I) COERCION (Section 15)

“Coercion’ is the committing, or threatening to commit, any act forbidden by the Indian Penal Code or the unlawful
detaining, or threatening to detain any property, to the prejudice of any person whatever, with the intention of
causing any person to enter into an agreement.”

It is to be noted that the section does not require that coercion

must proceed from a party to the contract;

nor is it necessary that subject of the coercion must be

the other contracting party,
it may be directed against any third person whatever.

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Effects of coercion under section 19 of Indian Contract Act, 1872

(i) Contract induced by coercion is Voidable at the option of the party whose consent was so obtained.

(ii) As to the consequences of the rescission of voidable contract, the party rescinding a void contract
should, if he has received any benefit, thereunder from the other party to the contract, RESTORE such
benefit so far as may be applicable, to the person from whom it was received.

(iii) A person to whom money has been paid or anything delivered under coercion must Repay or Return it.
(Section 72)

Threat to commit suicide – Whether is it coercion?

But Section 15 declares

Suicide though forbidden
that committing or Hence, a threat to commit
by Indian Penal Code is not
threatening to commit any suicide will be regarded as
punishable, as a dead man
act forbidden by Indian coercion
cannot be punished.
Penal Code is coercion.

(II) UNDUE INFLUENCE (Section 16)

According to section 16 of the Indian Contract Act, 1872,

“A contract is said to be induced by ‘undue influence’ where the RELATIONS

subsisting between the parties are such that one of the parties is in a position to
dominate the will of the other and he uses that position to obtain an unfair
advantage over the other”.

Real and apparent

authority
Relation between
the parties
Fiduciary
relationship
Position to
dominate the will
Essential ingredients for
Mental distress
UNDUE INFLUENCE Object must be to
take undue
advantage
Unconscionable
bargains
Burden of proof

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Effect of undue influence- (Section 19A)

(i) When consent to an agreement is caused by undue influence, the agreement is a contract VOIDABLE at the option
of the party whose consent was so caused.

(ii) Any such contract may be set aside either absolutely or, if the party who was entitled to avoid it, has received
any benefit thereunder, upon such terms and conditions as to the Court may seem just.

(III) FRAUD (Section 17)

‘Fraud’ means and includes any of the Following Acts committed by a party to a contract,
or with his connivance, or by his agent, with an intent to deceive another party thereto or
his agent, or to induce him to enter into the contract:

1. the suggestion, as a fact, of that which is not true, by one who does not believe it to be true;
2. the Active Concealment of a fact by one having knowledge or belief of the fact;
3. a promise made without any intention of performing it;
4. any other act fitted to deceive;
5. any such act or omission as the law specially declares to be fraudulent.

ESSENTIAL ELEMENTS OF THE FRAUD

There Must Be A Representation or assertion and it must be false. However, silence may amount to fraud
or an active concealment may amount to fraud.

The representation must be related to a FACT.

The representation should be made before the conclusion of the contract with the intention to
induce the other party to act upon it.

The representation or statement should be made with knowledge of its falsity or without belief
in its truth or recklessly not caring whether it is true or false.

The other party must have been induced to act upon the representation or assertion.

The other party must have relied upon the representation and must have been deceived.

The other party acting on the representation must have consequently Suffered A Loss.

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Whether Silence is fraud or not?

As per explanation of section 17, silence is fraud in following situations:

(a) There is duty to speak.
(b) When silence is equal to speech

Effect of Fraud upon validity of a contract: When the consent to an agreement in caused by the fraud, the contract is VOIDABLE
at option of the party defrauded and he has the following remedies:

1. He can rescind the contract within a reasonable time.

2. He can sue for damages.
3. He can insist on the performance of the contract on the condition that he shall be put in the position in which he
would have been had the representation made been true.

(IV) MISREPRESENTATION (Section 18)

According to Section 18, there is misrepresentation:

(1) statement of FACT, which of false, would constitute misrepresentation if the maker believes it to be true but
which is not justified by the information he possesses;
(2) When there is a breach of duty by a person without any intention to deceive which brings an advantage to
him;
(3) When a party causes, even though done innocently, the other party to the agreement to make a mistake as to the
subject matter.

SILENCE, WHEN NOT FRAUD?

In the following cases, the contract is not voidable:
(i) If the party whose consent was caused by silence which amounting
to fraud, had the
means of discovering the truth with ordinary diligence.
(ii) A fraud which did not cause the consent of the party to agreement.

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Difference between Coercion and Undue Influence:

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Mistake: Mistake may be defined as innocent or erroneous belief which leads the party to misunderstand the
others. Mistake may be either mistake of law or mistake of fact.

Mistake of Law: Mistake of law is further classified as mistake of Indian law or mistake of foreign law.

(i) Mistake of Indian Law: A person cannot be allowed to get any relief on the ground that it had done a
particular act in ignorance of law.
(ii) Mistake of foreign law: Such a mistake is treated as mistake of fact and the agreement in such a case is
void.

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3.4 LEGALITY OF OBJECT AND CONSIDERATION

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3.5 VOID AGREEMENTS

Expressly declared Void Agreements

(1) Agreement in restraint of marriage (Section 26): Every agreement in restraint of marriage of any person other than a
minor is void.

(2) Agreement in restraint of trade (Section 27): An agreement by which any person is restrained from exercising a lawful
profession, trade or business of any kind, is to that extent void.
But this rule is subject to the following exceptions, namely, where a person sells the goodwill of a business and agrees
with the buyer to refrain from carrying on a similar business, within specified local limits, such an agreement is valid.

(3) Agreement in restraint of legal proceedings (Section 28): An agreement in restraint of legal proceeding is the one by
which any party thereto is restricted absolutely from enforcing his rights under a contract through a Court or which abridges the
usual period for starting legal proceedings. A contract of this nature is void.

(4) Agreement - the meaning of which is uncertain (Section 29): An agreement, the meaning of which is not certain, is void,
but where the meaning thereof is capable of being made certain, the agreement is valid.

(5) Wagering agreement (Section 30): An agreement by way of a wager is void. It is an agreement involving payment of a
sum of money upon the determination of an uncertain event.

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Essentials of a Wager

There must be
There must be a common
There must be
promise to pay intention to bet
uncertainty of
money or at the timing of
event.
money’s worth. making such
agreement.

Promise must be There must be

Parties should
conditional on two parties,
have no interest
an event each party must
in the event
happening or stand to win or
except for stake.
not happening. lose.

Transactions similar to Wager (Gambling)

(i) Lottery transactions: A lottery is a game of chance and not of skill or knowledge. Where the prime motive of participant is
gambling, the transaction amounts to a wager. Even if the lottery is sanctioned by the Government of India it is a
wagering transaction.

(ii) Crossword Puzzles and Competitions: Crossword puzzles in which prizes depend upon the correspondence of the
competitor’s solution with a previously prepared solution kept with the editor of a newspaper is a lottery and therefore, a
wagering transaction. wagers provided the prize money does not exceed Rs 1,000.

(iii) Speculative transactions: an agreement or a share market transaction where the parties intend to settle the difference
between the contract price and the market price of certain goods or shares on a specified day, is a gambling and hence void.

(iv) Horse Race Transactions: A horse race competition where prize payable to the bet winner is less than Rs 500, is a wager.

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Transactions resembling with wagering transaction but are not void

(i) Chit fund: Chit fund does not come within the scope of wager (Section 30). In case of a chit fund, a certain number of
persons decide to contribute a fixed sum for a specified period and at the end of a month, the amount so contributed is paid
to the lucky winner of the lucky draw.

(ii) Commercial transactions or share market transactions: In these transactions in which delivery of goods or shares is
intended to be given or taken, do not amount to wagers.

(iii) Games of skill and Athletic Competition: Crossword puzzles, picture competitions and athletic competitions where
prizes are awarded on the basis of skill and intelligence are the games of skill and hence such competition are valid.
According to the Prize Competition Act, 1955 prize competition in games of skill are not wagers provided the prize
money does not exceed Rs 1,000.

(iv) A contract of insurance: A contract of insurance is a type of contingent contract and is valid under law and these
contracts are different from wagering agreements.

Distinction between Contract of Insurance and Wagering Agreement

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UNIT- 3

12 What is Sound mind for the purpose of contracting

13 Definition of Consent
14 Definition of Free Consent
15 Definition of Coercion
16 Definition of Undue Influence
17 Definition of Fraud
18 Definition of Misrepresentation
19 Legal effects of agreements without free consent
19A Power to set aside contract induced by undue influence
20 Agreement void where both parties are under mistake of fact
21 Effect of mistakes as to law
22 Contract caused by mistake of one party as to matter of fact
24 Agreements void, if consideration and objects unlawful in part
25 Agreement made without consideration
26 Agreement in restraint of marriage
27 Agreements in restraint of trade
28 Agreement in restraint of legal proceedings
29 Agreement void for uncertainty
30 Wagering Agreement
56 Agreement to do impossible act

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CHAPTER-2
INDIAN CONTRACT ACT, 1872
UNIT – 4: PERFORMANCE OF A CONTRACT

4.1 PERFORMANCE OF CONTRACTS

Meaning: “Performance of Contract” means fulfilment of obligations to the contract. According to Section 37, the
parties to a contract must either perform, or offer to perform, their respective promises unless such performance is
dispensed with or excused under the provisions of the Contract Act or of any other law.

Types: On the basis of Section 37, “Performance of Contract” may be actual or attempted.

(a) Actual Performance: Where a party to a contract has done what he had undertaken to do or either of the
parties has fulfilled their obligations under the contract within the time and in the manner prescribed.

Example 1: X borrows Rs 5,00,000 from Y with a promise to be paid after 1 month. X repays the amount on the
due date. This is actual performance.

(b) Offer to perform or attempted performance or tender of performance: It may happen sometimes, when the
performance becomes due, the promisor offers to perform his obligation but the promisee refuses to accept the
performance.

Example 2: A promises to deliver certain goods to B. A takes the goods to the appointed place during business
hours but B refuses to take the delivery of goods. This is an attempted performance as A the promisor has done
what he was required to do under the contract.

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4.2 CONDITIONS TO BE SATISFIED FOR A VALID TENDER OR ATTEMPTED

PERFORMANCE

It must be unconditional

It must be made at proper

time and place
CONDITIONS FOR A VALID
TENDER OR ATTEMPTED
PERFORMANCE
Reasonable opportunity to
examine goods.

It must be for whole

obligation.

4.3 BY WHOM A CONTRACT MAY BE PERFORMED (SECTION 40, 41 AND 42)

The promise under a contract may be performed, as the circumstances may permit, by the promisor himself, or by
his agent or his legal representative.

1. Promisor himself:
If there is something in the contract to show that it was the intention of the parties, such promise must be
performed by the promisor.
This means contracts which involve the exercise of personal skill or diligence, or which are founded on personal
confidence between the parties must be performed by the promisor himself.

2. Agent: Where personal consideration is not the foundation of a contract, the promisor or his representative
may employ a competent person to perform it.

3. Legal Representatives: A contract which involves the use of personal skill or is founded on personal
consideration comes to an end on the death of the promisor.

4. Third persons: Effect of accepting performance from third person- Section 41: When a promisee accepts
performance of the promise from a third person, he cannot afterwards enforce it against the promisor. That is,
performance by a stranger, if accepted by the promisee, this results in discharging the promisor, although the
latter has neither authorised not ratified the act of the third party.

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5. Joint promisors (Section 42)

When two or more persons have made a joint promise, then unless a contrary intention appears by the contract,
all such persons must jointly fulfil the promise. If any of them dies, his legal representatives must, jointly with
the surviving promisors, fulfil the promise. If all of them die, the legal representatives of all of them must fulfil
the promise jointly. ( Liability is joint and several )

BY WHOM A CONTRACT MAY

BE PERFORMED

Promisor himself Agent Legal Third persons Joint promisors

Representatives

4.4 DISTINCTION BETWEEN SUCCESSION AND ASSIGNMENT

Distinction between two legal concepts, viz., succession and assignment may be noted carefully. When the benefits
of a contract are succeeded to by process of law, then both burden and benefits attaching to the contract, may
sometimes devolve on the legal heir.

In the matter of assignment, however the benefit of a contract can only be assigned but not the liabilities
thereunder.

4.5 LIABILITY OF JOINT PROMISOR & PROMISEE

Devolution of joint liabilities (Section 42) When two or more persons have made a joint promise, then, unless a
contrary intention appears by the contract, all such persons, during their joint lives, and, after the death of any of
them, his representative jointly with the survivor or survivors, and, after the death of last survivor, the
representatives of all jointly, must fulfil the promise.

Any one of joint promisors may be compelled to perform – Section 43

When two or more persons make a joint promise, the promisee may, in the absence of express agreement to the
contrary, compel any one or more of such joint promisors to perform the whole of the promise.

Each promisor may compel contribution – If one of the joint promisors is made to perform the whole contract, he
can call for a contribution from others.

Sharing of loss by default in contribution – If any one of two or more joint promisors makes default in such
contribution, the remaining joint promisors must bear the loss arising from such default in equal shares.

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Effect of release of one joint promisor- Section 44

The effect of release of one of the joint promisors is dealt with in Section 44 which is stated below:
Where two or more persons have made a joint promise, a release of one of such joint promisors by the promisee
does not discharge the other joint promisor or joint promisors, neither does it free the joint promisors so
released from responsibility to the other joint promisor or promisors.

4.7 PERFORMANCE OF RECIPROCAL PROMISE

The law on the subject is contained in Sections 51 to 58. The provisions thereof are summarized below:

(i) Promisor not bound to perform, unless reciprocal promise ready and willing to perform- Section 51

When a contract consists of reciprocal promises to be simultaneously performed, no promisor needs to perform
his promise unless the promisee is ready and willing to perform his reciprocal promise.

(ii) Order of performance of reciprocal promises- Section 52 When the order of performance of the reciprocal
promises is expressly fixed by the contract, they shall be performed in that order; and where the order is not
expressly fixed by the contract, they shall be performed in that order which the nature of the transaction
requires.

(iii) Liability of party preventing event on which the contract is to take effect – Section 53

When a contract contains reciprocal promises, and one party to the contract prevents the other from performing
his promise, the contract becomes voidable at the option of the party so prevented

(iv) Effect of default as to that promise which should be first performed, in contract consisting of reciprocal
promises (Section 54)

When a contract consists of reciprocal promises, such that one of them cannot be performed, or that its
performance cannot be claimed till the other has been performed.

(v) Effects of Failure to Perform at a Time Fixed in a Contract in which Time is Essential (Section 55)

“When a party to a contract promises to do certain thing at or before the specified time, and fails to do any
such thing at or before the specified time, the contract, or so much of it as has not been performed, becomes
voidable at the option of the promisee,

(vi) Agreement to do Impossible Act

The impossibility of performance may be of the two types, namely (a) initial impossibility, and (b) subsequent
impossibility.

(1) Initial Impossibility (Impossibility existing at the time of contract): When the parties agree upon doing of
something which is obviously impossible in itself the agreement would be VOID. Impossible in itself means
impossible in the nature of things. The fact of impossibility may be and may not be known to the parties.

(i) If known to the parties: It would be observed that an agreement constituted, quite known to the parties,
may be impossible of being performed and hence VOID.

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(ii) If unknown to the parties: Where both the promisor and the promisee are ignorant of the impossibility of
performance, the contract is VOID.

(iii) If known to the promisor only: Where at the time of entering into a contract, the promisor alone knows
about the impossibility of performance, or even if he does not know though he should have known it with
reasonable diligence, the promisee is entitled to claim compensation for any loss.

(2) Subsequent or Supervening impossibility (Becomes impossible after entering into contract): When
performance of promise become impossible or illegal by occurrence of an unexpected event or a change of
circumstances beyond the contemplation of parties, the contract becomes VOID e.g. change in law etc.

(vii) Reciprocal promise to do certain things that are LEGAL, and also some other things that are ILLEGAL-
Section 57-

Where persons reciprocally promise, first to do certain things which are legal and secondly, under specified
circumstances, to do certain other things which are illegal, the first set of promises is a valid contract, but the
second is a void agreement.

(viii) ‘Alternative promise’ one branch being illegal- Section 58

The law on this point is contained in Section 58 which says that “In the case of the alternative promise, one
branch of which is legal and the other illegal, the legal branch alone can be enforced”.

4.9 APPROPRIATION OF PAYMENTS

Sometimes, a debtor owes several debts to the same creditor and makes payment, which is not sufficient to
discharge all the debts. In such cases, the payment is appropriated (i.e. adjusted against the debts) as per
Section 59 to 61 of the Indian Contract Act.

(i) Application of payment where debt to be discharged is indicated (Section 59): Where a debtor, owing
several distinct debts to one person, makes a payment to him either with express intimation or under
circumstances implying that the payment is to be applied to the discharge of some particular debt, the
payment, if accepted, must be applied accordingly.

(ii) Application of payment where debt to be discharged is not indicated (Section 60): Where the debtor has
omitted to intimate and there are no other circumstances indicating to which debt the payment is to be applied
the creditor may apply it at his discretion to any lawful debt actually due. However he cannot apply the
payment to the disputed debt.

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

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4.10 CONTRACTS, WHICH NEED NOT BE PERFORMED – WITH THE CONSENT OF

BOTH THE PARTIES
(i) Effect of novation, rescission, and alteration of contract (Section 62)

“If the parties to a contract agree to substitute a new contract for it, or to rescind or alter it, the original
contract need not be performed”

Analysis of Section 62

(a) Effect of novation:

 old contract is discharged and consequently it need not be performed.

 either between the same parties or between different parties
 Novation can take place only by Mutual Agreement between the parties.

(b) Effect of rescission:

 In the case of rescission, only the old contract is cancelled and no new contract comes to exist in its
place.
 Both in novation and in rescission, the contract is discharged by Mutual Agreement.

(c) Effect of alteration of contract:

 where the parties to a contract agree to alter it, the original contract is rescinded,

(ii) Promisee may waive or remit performance of promise (Section 63):

“Every promisee may dispense with or remit, wholly or in part, the performance of the promise made to him,. In
other words, a contract may be discharged by remission.

(iii) Restoration of Benefit under a Voidable Contract (Section 64)

The party rescinding avoidable contract shall, if he has received any benefit thereunder from another party to
such contract, RESTORE such benefit, so far as may be, to the person from whom it was received”.

(iv) Obligations of Person who has Received Advantage under Void Agreement or contract that becomes void
(Section 65)

“When an agreement is discovered to be void or when a contract becomes void, any person who has received any
advantage under such agreement or contract is bound to RESTORE it, or to make compensation for it to the
person from whom he received it.”

The Act requires that a party must give back whatever he has received under the contract. The benefit to be
restored under this section must be benefit received under the contract (and not any other amount).

(v) Communication of rescission (Section 66):

rescission must be communicated to the other party in the Same Manner as a proposal is communicated under
Section 4 of the Contract Act.

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(vi) Effects of neglect of promisee to afford promisor reasonable facilities for performance (Section 67): If any
promisee neglects or refuses to afford the promisor reasonable facilities for the performance of his promise, the
promisor is excused by such neglect or refusal as to any non-performance caused thereby.

DISCHARGE OF A CONTRACT

(vii) Promisee may

(i) Discharge by (vi) Discharge by waive or remit
performance breach of contract performance of
promise

(viii) Effects of
(ii) Discharge by (v) Discharge by neglect of promisee
mutual agreement operation of law to afford promisor
reasonable facilities
for performance

(iii) Discharge by (iv) Discharge by (ix) Merger of

impossibility of lapse of time rights
performance

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UNIT- 4

37 Obligation of parties to contracts

38 Effect of Refusal to accept offer of performance
39 Effect of refusal of party to perform wholly
40 By Whom a contract may be performed
41 Effect of accepting performance from third person
42 Devolution of joint liabilities
43 Any one of joint promisors may be compelled to perform
44 Effect of release of one join promisor
45 Devolution of joint rights
Time for performance of promise, where no application is to be made
46
and no time is specified
Time and place for performance of promise, where time is specified and
47
no application to be made
48 Application for performance on certain day to be at proper time and place
Place for the performance of promise, where no application to be made
49
and no place fixed for performance
50 Performance in manner or at time prescribed or sanctioned by promisee
Promisor not bound to perform, unless reciprocal promise ready and
51
willing to perform
52 Order of performance of reciprocal promises
53 Liability of party preventing event on which the contract is to take effect.
Effect of default as to that promise which should be first performed, in contract
54
Consisting of reciprocal promises
55 Effect of failure to perform at a time fixed in a contract in which time is essential
56 Agreement to do impossible act
Reciprocal promise to do certain things that are legal, and also some other things
57
that are illegal
58 "Alternative promise" one branch being illegal
59 Application of payment where debt to be discharged is indicated
60 Application of payment where debt to be discharged is not indicated
61 Application of payment where neither party appropriates
62 Effect of novation, recession, and alteration of contract
63 Promisee may waive or remit performance of promise
64 Restoration of Benefit under a Voidable Contract
Obligation of person who has received advantage under Void agreement or contract
65
that becomes void
66 Communication of rescission
67 Effects of neglect of promisee to afford promisor reasonable facilities for performance

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CHAPTER-2

INDIAN CONTRACT ACT, 1872

UNIT – 5:- BREACH OF A

CONTRACT & ITS REMEDIES

Breach means failure of a party to perform his or her obligation under a contract. Breach of contract
may arise in two ways:

(1) Actual breach of contract

(2) Anticipatory breach of contract

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5.1 ANTICIPATORY BREACH OF CONTRACT

An anticipatory breach of contract is a breach of contract occurring before the time fixed for
performance has arrived. When the promisor refuses altogether to perform his promise and signifies his
unwillingness even BEFORE the time for performance has arrived, it is called Anticipatory Breach.

Anticipatory breach of a contract may take either of the following two ways:

(a) Expressly (b) Impliedly

by words by the conduct
spoken or of one of the
written, and parties.

Effect of Anticipatory Breach: The promisee is excused from performance or from further performance.
Further he gets an option:

(1) To either treat the contract as “rescinded and sue the other party for damages from breach of
contract immediately without waiting until the due date of performance; or

(2) He may elect not to rescind but to treat the contract as still operative, and wait for the time of
performance and then hold the other party responsible for the consequences of non-performance.
But in this case, he will keep the contract alive,

and the Guilty Party, if he (Guilty Party) so decides on re-consideration, may still perform his part
of the contract.

5.2 ACTUAL BREACH OF CONTRACT

In contrast to anticipatory breach, it is a case of refusal to perform the promise on the scheduled
date.

Actual breach of contract may be committed-

(a) At the time when the performance of the contract is due.

(b) During the performance of the contract: Actual breach of contract also occurs when during the
performance of the contract, one party fails or refuses to perform his obligation under it by express
or implied act.

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Remedies for Breach of Contract

5.3 SUIT FOR DAMAGES

The Act in Section 73, has laid down the rules as to how the amount of compensation is to be
determined. On the breach of the contract, the party who suffers from such a breach is entitled to
receive, from the party who has broken the contract, compensation for any loss or damage caused to
him by breach.

Compensation can be claimed for any loss or damage which naturally arises
in the usual course of events.

A compensation can also be claimed for any loss or damage which the party
knew when they entered into the contract, as likely to result from the breach.

That is to say, Special Damage can be claimed only on a previous notice.

But the party suffering from the breach is bound to take reasonable steps to
minimise the loss.

No compensation is payable for any remote or indirect loss.

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• which naturally arose in the usual course of things from

such breach, or
(i) Ordinary • which the parties know, when they made the contract,:
damages: • Such compensation is not to be given for any remote and
indirect loss

(ii) Special • Where a party to a contract receives a notice of special

damages: circumstances

(iii) • These damages may be awarded only in two cases –

Vindictive or • (a) for breach of promise to marry and
Exemplary • (b) for wrongful dishonour by a banker of his customer’s
cheque
damages
(iv) Nominal
damages: • where the plaintiff has proved that there has been a
breach of contract
Nominal • but he has not in fact suffered any real damage.
damages are • The amount may be a rupee or even 10 paise.
awarded
(v) • damages can be recovered from carrier even without
Damages for notice.
deterioration • The word ‘deterioration’ not only implies physical
caused by damages to the goods but
• it may also mean loss of special opportunity for sale.
delay:
• parties to a contract stipulate at the time of its
formation that
(vi) Pre- • on a breach of contract by any of them,
• a certain amount will be payable as damage.
fixed • the aggrieved party is entitled to receive from the party
damages: at fault
• a reasonable compensation not exceeding the amount so
named (Section 74).

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Distinction between liquidated damages and penalty

1. If the sum payable is so large as to be far in excess of the probable damage on breach, it is
certainly a Penalty.

2. Where a sum is expressed to be payable on a certain date and a further sum in the event of
default being made, the latter sum is a penalty because mere delay in payment is unlikely
to cause damage.

3. The essence of a penalty is payment of money stipulated as a terrorem of the offending

party. The essence of liquidated damages is a genuine pre-estimate of the damage.

4. English law makes a distinction between liquidated damages and penalty, but no such
distinction is followed in India. The courts in India must ascertain the actual loss and award
the same which amount must not, however exceed the sum so fixed in the contract. The
courts have not to bother about the distinction but to award reasonable compensation not
exceeding the sum so fixed.

Besides claiming damages as a remedy for the breach of contract, the following remedies are also
available:

(i) Rescission of (ii) Quantum (iii) Suit for (iv) Suit for
contract: Meruit: specific injunction:
performance:
• When a • i.e. as much as • Where damages • Where a party
contract is the party doing are not an to a contract is
broken by one the service has adequate negating the
party, deserved. remedy terms of a
• the other party • the court may contract,
may treat the direct party in • the court may,
contract as breach, restrain him
rescinded. • to carry out his from doing
promise what he
according to the promised not to
terms of the do.
contract.

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UNIT- 5

31 Definition of Contingent contract

32 Enforcement of contracts contingent on an event happening
33 Enforcement of contracts contingent on an event not happening
A contract would cease to be enforceable if it is contingent upon the
conduct of a living person
34
when that living person does something to make the "event" or "conduct" as
impossible of happening
35 Contingent on happening of specified event within the fixed time
36 Contingent on an impossible event
68 Claims for necessaries supplied to persons incapable of contracting
69 Payment by an interest person
70 Obligation of person enjoying benefits of non-gratuitous act
71 Responsibility of finder of goods
72 Money paid by mistake or under coercion
73 Compensation for loss or damage caused by breach of contract
74 Penalty and Liquidated damages
75 Party rightfully rescinding contract, entitled to compensation

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CHAPTER-2
INDIAN CONTRACT ACT, 1872
Unit – 6:- CONTINGENT & QUASI
CONTRACTS

Definition of ‘Contingent Contract’ (Section 31)

“A contract to do or not to do something, if some event, collateral to such

contract, does or does not happen”.
Contracts of Insurance, indemnity and guarantee fall under this category.

Meaning of collateral Event: Pollock and Mulla defined collateral event as “an event which is neither a
PERFORMANCE directly promised as part of the contract, nor the whole of the CONSIDERATION for a
promise”.

Essentials of a contingent contract

Essentials of a contingent contract

(a) The
performance of a
contingent (b) The event (c) The
contract would referred to as contingent event d) The event
depend upon the collateral to the should not be a must be uncertain
happening or non- contract mere ‘will’ of the
happening of promisor.
some event or
condition

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6.2 RULES RELATING TO ENFORCEMENT

(a) Enforcement of contracts contingent on an event happening:

Section 32 says that

“where a contingent contract is made to do or not to do anything if an uncertain future

event happens, it cannot be enforced by law unless and until that event has happened.

If the event becomes impossible, such contracts become void”.

(b) Enforcement of contracts contingent on an event not happening:

Section 33 says that

“Where a contingent contract is made to do or not do anything if an uncertain future

event does not happen, it can be enforced only when the happening of that event becomes
impossible and not before”.

(c) A contract would cease to be enforceable if it is contingent upon the conduct of a living person when
that living person does something to make the ‘event’ or ‘conduct’ as impossible of happening.

(d) Contingent on happening of specified event within the fixed time:

if a specified uncertain event happens within a fixed time, becomes void if, at the expiration of time
fixed, such event has not happened, or if, before the time fixed, such event becomes impossible.

(e) Contingent on specified event not happening within fixed time:

“Contingent contracts to do or not to do anything, if a specified uncertain event does not happen within
a fixed time, may be enforced by law when the time fixed has expired, and such event has not happened
or before the time fixed has expired, if it becomes certain that such event will not happen”.

Example 13: A promises to pay B a sum of money if a certain ship does not return within a year. The
contract may be enforced if the ship does not return within the year, or is burnt within the year.

(f) Contingent on an impossible event (Section 36): Contingent agreements to do or not to do anything,
if an impossible event happens are VOID, whether the impossibility of the event is known or not to the
parties to the agreement at the time when it is made.

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Difference between a contingent contract and a wagering contract

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6.3 QUASI CONTRACTS

Sometimes the law implies a promise imposing obligations on one party and conferring
right in favour of the other even when there is no offer, no acceptance, no genuine
consent, lawful consideration, etc. and in fact neither agreement nor promise.

 Such cases are not contract in the strict sense, but the Court recognises them as relations
resembling those of contracts and enforces them as if they were contracts.

A quasi or constructive contract rest upon the maxims, “No man must grow rich out of another
person’s loss”.

Under the provisions of the Indian Contract Act, the relationship of quasi contract is DEEMED TO have
come to exist in 5 different circumstances.

(a) Claim for • To establish his claim, the supplier must prove not
necessaries only that
supplied to • the goods were supplied to the person who was
persons minor or a lunatic but
incapable of
contracting • also that they were suitable to his actual
(Section 68): requirements at the time of the sale and delivery.

• A person who is interested in the payment of

(b) Payment by money which another is bound by law to pay,
an interested • and who therefore pays it, is entitled to be
person (Section reimbursed by the other.
69):

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(c) Obligation • It thus follows that for a suit to succeed, the

of person plaintiff must prove:
enjoying • (i) that he had done the act or had delivered the
benefits of non- thing lawfully;
gratuitous act • (ii) that he did not do so gratuitously; and
(Section 70): • (iii) that the other person enjoyed the benefit.

• Thus, a finder of lost goods has:

(d) • (i) to take proper care of the property as man of
Responsibility of ordinary prudence would take
finder of goods
(Section 71): • (ii) no right to appropriate the goods and
• (iii) to restore the goods if the owner is found.

• “A person to whom money has been paid or

(e) Money paid anything delivered by mistake or under coercion,
by mistake or • must repay or return it”.
under coercion
(Section 72): • Every kind of payment of money or delivery of
goods for every type of ‘mistake’ is recoverable.

Difference between quasi contracts and contracts

Features of Quasi Contracts:

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

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CHAPTER-2 INDIAN CONTRACT ACT, 1872

UNIT – 7:- CONTRACT OF INDEMNITY

AND GUARANTEE

7.1 CONTRACT OF INDEMNITY

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

Parties:

(a) The party who promises to indemnify/ save the other party from loss- “INDEMNIFIER”,
(b) The party who is saved against the loss- “INDEMNIFIED” or “Indemnity Holder”.

However, the above definition of indemnity restricts the scope of contracts of indemnity in as much as it
covers only the loss caused by:

i. the conduct of the Promisor Himself, or

ii. the conduct of Any Other Person.

Thus, loss occasioned by an accident not caused by any person, or an act of God/ natural event, is not
covered.

Mode of contract of indemnity: A contract of indemnity like any other contract may be express or
implied.

A contract of indemnity is A contract of indemnity is

said to be EXPRESS when a said to be IMPLIED when it is
person expressly promises to to be inferred from the
compensate the other from conduct of the parties or from
loss. the circumstances of the case.

A contract of indemnity is like any other contract and must fulfil all the essentials of a valid
contract.

When does the liability of an indemnifier commence?

liability of an indemnifier commences as soon as the liability of the indemnity-holder becomes

absolute and certain. This principle has been followed by the courts in several cases.

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7.2 CONTRACT OF GUARANTEE

“Contract of Guarantee”, “Surety”, “Principal Debtor” and “Creditor” [Section 126]

Contract of guarantee: A contract of guarantee is a contract to perform the promise made or discharge
the liability, of a third person in case of his default.

A contract of guarantee is a TRIPARTITE AGREEMENT between principal debtor, creditor and surety. There
are, in effect three contracts

A Principal Contract between the principal debtor and the creditor.

A Secondary Contract between the creditor and the surety.

An Implied Contract between the surety and the principal debtor whereby
principal debtor is under an obligation to indemnify the surety; if the surety
is made to pay or perform.

The right of surety is not affected by the fact that the creditor has refused to sue the principal debtor or
that he has not demanded the sum due from him.

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ESSENTIAL FEATURES OF A GUARANTEE

4. No 6. Joining of the other

1. Purpose 2. 3. Existence misrepresentation or 5. Writing not co-sureties (Section
Consideration of a liability concealment (section necessary 144)
142 and 143)

Where a person
gives a guarantee
misrepresentation upon a contract
If there is no consideration The liability made by the that the creditor
principal received by must be creditor, or without shall not act upon
debt, there the principal legally his knowledge and may be either it until another
can be no debtor is enforceable assent, concerning oral or written person has joined
valid sufficient and not time a material part of in it as co-surety,
guarantee consideration barred. the transaction, is the guarantee is
invalid not valid if that
other person does
not join

7.3 TYPES OF GUARANTEES

Guarantee may be classified under two categories:

A. Specific Guarantee- A guarantee which extends to a single debt/ specific transaction is called a
specific guarantee. The surety’s liability comes to an end when the guaranteed debt is duly discharged or
the promise is duly performed.

B. Continuing Guarantee [Section 129] - A guarantee which extends to a series of transaction is called a
continuing guarantee. A surety’s liability continues until the revocation of the guarantee.

The essence of continuing guarantee is that it applies not to a specific number of transactions but to any
number of transactions and makes the surety liable for the unpaid balance at the end of the guarantee.

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7.4 DISTINCTION BETWEEN A CONTRACT OF INDEMNITY AND A

CONTRACT OF GUARANTEE

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7.5 NATURE AND EXTENT OF SURETY’S LIABILITY [SECTION 128]

i. The liability of the surety is co-extensive with that of the principal debtor unless it is otherwise
provided by the contract. [Section 128]
ii. Liability of surety is of secondary nature as he is liable only on default of principal debtor.
iii. Where a debtor cannot be held liable on account of any defect in the document, the liability of
the surety also ceases.

7.6 LIABILITY OF TWO PERSONS, PRIMARILY LIABLE, NOT AFFECTED BY

ARRANGEMENT BETWEEN THEM THAT ONE SHALL BE SURETY ON OTHER’S
DEFAULT

7.7 DISCHARGE OF A SURETY

BY REVOCATION OF THE CONTRACT OF GUARANTEE

(a) Revocation of • The continuing guarantee may at any time be revoked by

continuing the surety as to future transactions by notice to the
guarantee by creditors.
Notice (Section • A specific guarantee can be revoked only if liability to
130): principal debtor has not accrued.

(b) Revocation of
continuing • the death of surety operates as a revocation of a
guarantee by continuing guarantee as to the future transactions
surety’s death
(Section 131):

• if a fresh contract is entered into either between the same

parties or between the other parties,
(c) By novation • the consideration being the mutual discharge of the old
[Section 62]: contract.

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BY CONDUCT OF THE CREDITOR

THE CONDUCT OF CREDITOR

(a) By variance in terms of contract

DISCHARGE OF SURETY BY

(Section 133) without surety’s consent

(b) By release or discharge of principal

debtor (Section 134) i. Composition:

(c) Discharge of surety when creditor

compounds with, gives time to, or agrees ii. Promise to give time
not to sue, principal debtor [Sector 135]

(d) Discharge of surety by creditor’s act or iii. Promise not to sue:

omission impairing surety’s eventual remedy
[Section 139]

BY THE INVALIDATION OF THE CONTRACT OF GUARANTEE

(a) Guarantee obtained by misrepresentation [Section 142]: Any guarantee which has been obtained by
means of misrepresentation made by the creditor, or with his knowledge and assent, concerning a
material part of the transaction, is invalid.

(b) Guarantee obtained by concealment [Section 143]: Any guarantee which the creditor has obtained by
means of keeping silence as to material circumstances is invalid.

(c) Guarantee on contract that creditor shall not act on it until co-surety joins (Section 144): Where a
person gives a guarantee upon a contract that the creditor shall not act upon it until another person has
joined in it as co-surety, the guarantee is not valid if that other person does not join.

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7.8 RIGHTS OF A SURETY

Rights
against co-
Rights sureties.
against the
Rights principal
against the debtor,
creditor,

RIGHT AGAINST THE PRINCIPAL DEBTOR

(a) Rights of subrogation (b) Implied promise to

[Section 140]: indemnify surety [Section
145]:
• It means that on payment of • In every contract of guarantee
the guaranteed debt, or there is an implied promise
performance, • by the principal debtor to
• the surety steps into the indemnify the surety.
shoes of the creditor.

Right against the Creditor

(a) Surety’s right to benefit (c) Right to share

of creditor’s securities (b) Right to set off: reduction:
[Section 141]:
• A surety is entitled to the • If the creditor sues the • The surety has right to
benefit of every security surety, for payment of claim proportionate
which the creditor has principal debtor’s reduction in his liability
• against the principal debtor liability, • if the principal debtor
at the time when the • the surety may have becomes insolvent.
contract of suretyship is the benefit of the set
entered into, off, if any,
• whether the surety knows • that the principal
of the existence of such debtor had against the
security or not; creditor

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Rights against co-sureties

“Co-sureties (meaning)- When the same debt or duty is guaranteed by two or more
persons, such persons are called co-sureties”

(a) Co-sureties liable to contribute equally (Section 146): Unless otherwise agreed, each surety is
liable to contribute equally for discharge of whole debt or part of the debt remains unpaid by debtor.

(b) Liability of co-sureties bound in different sums (Section 147): The principal of equal contribution
is, however, subject to the maximum limit fixed by a surety to his liability. Co-sureties who are bound
in different sums are liable to pay equally as far as the limits of their respective obligations permit.

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CHAPTER-2
INDIAN CONTRACT ACT, 1872
UNIT – 8:- BAILMENT AND
PLEDGE

8.1 WHAT IS BAILMENT?

As per Section 148 of the Act, bailment is the delivery of goods by one person to another
FOR SOME PURPOSE, upon a contract, that the goods shall, when the purpose is
accomplished, be returned or otherwise disposed of according to the directions of the
person delivering them.

Parties to bailment:

(a) Bailor: The person delivering the goods.

(b) Bailee: The person to whom the goods are delivered.

Example 1: Where ‘X’ delivers his car for repair to ‘Y’, ‘X’ is the bailor and ‘Y’ is the
bailee.

Example 2: X delivers a piece of cloth to Y, a tailor, to be stitched into a suit. It is

contract for bailment.

Example 3: Goods given to a friend for his own use, without any charge.

Example 4: X delivers goods to blue dart for carriage.

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Essential Elements:

(a) Contract: Bailment is based upon a contract. The contract may be express or implied.
No consideration is necessary to create a valid contract of bailment.

(b) Delivery of goods: It involves the delivery of goods from one person to another for some
purposes. Bailment is only for moveable goods and never for immovable goods or money.
The delivery of the possession of goods is of the following kinds:

i. Actual Delivery: When goods are physically handed over to the

bailee by the bailor. Eg: delivery of a car for repair to workshop

ii. Constructive Delivery:. Eg: Delivery of the key of car to a

workshop dealer for repair of the car.

(c) Purpose: The goods are delivered For Some Purpose. The purpose may be express or
implied.

(d) Possession: In bailment, possession of goods changes.

Where a person is in custody For example, servant of a

without possession he does master who is in custody of
not become a bailee. goods of the master does not
become a bailee.

Similarly, depositing ornaments in a bank locker is not

bailment,

because ornaments are kept in a locker whose key are still

with the owner and not with the bank.

The ornaments are in possession of the owner though kept

in a locker at the bank.

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(e) Return of goods: Bailee is obliged to return the goods physically to the bailor. It should
be noted that exchange of goods should not be allowed.

Types of bailment

1. On the basis of benefit, bailment can be classified into three types:

a. For the • Example 5: The delivery of some

exclusive benefit valuables to a neighbour for
of Bailor: safe custody, without charge.

b. For the • Example 6: The lending of a

exclusive benefit bicycle to a friend for his use,
of Bailee: without charge.

c. For mutual • Example 7: Giving of a watch

benefit of Bailor for repair.
and Bailee:

2. On the basis of reward, bailment can be classified into two types:

a. Gratuitous Bailment: The word gratuitous means free of charge. So, a gratuitous
bailment is one when the provider of service does it gratuitously i.e. free of charge.
Such bailment would be either for the exclusive benefits of bailor or bailee.

b. Non-Gratuitous Bailment: Non gratuitous bailment means where both the parties
get some benefit i.e. bailment for the benefit of both bailor & bailee.

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8.2 DUTIES OF A BAILOR

(i) Bailor’s duty to disclose faults in goods bailed [Section 150]:

a. In case of Gratuitous Bailment: The bailor is bound to disclose to the bailee faults in the
goods bailed, of which the bailor is aware, he is responsible for damage arising to the
bailee directly from such faults.

Example 8: A lends a horse, which he knows to be vicious, to B. He does not disclose

the fact that the horse is vicious. The horse runs away. B is thrown and injured. A is
responsible to B for damage sustained.

b. In case of Non- Gratuitous Bailment: If the goods are bailed for hire, the bailor is
responsible for such damage, whether he was or was not aware of the existence of such
faults in the goods bailed.

(ii) Duty to pay Necessary Expenses [Section 158]:

a. In case of Gratuitous bailment: Where, by the conditions of the bailment, the goods are
to be kept or to be carried, or to have work done upon them by the bailee for the bailor,
and the bailee is to receive no remuneration (gratuitous bailment), the bailor shall repay
to the bailee the necessary expenses incurred by him and any extraordinary expenses
incurred by him for the purpose of the bailment.

b. In case of non-gratuitous bailment the bailor is liable to pay the extraordinary expenses
incurred by the bailee.

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(iii) Duty to indemnify the Bailee for premature termination [Section 159]

The bailor must compensate the bailee for the loss or damage suffered by the bailee that
is in excess of the benefit received, where he had lent the goods gratuitously and decides
to terminate the bailment before the expiry of the period of bailment.

(iv) Bailor’s responsibility to bailee [Section 164]:

a. Indemnify for any loss which the bailee may sustain by reason that the bailor was not
entitled to make the bailment, or to receive back the goods or to give directions, respecting
them (defective title in goods).

b. It is the duty of the bailor to receive back the goods when the bailee returns them after
the time of bailment has expired.

8.3 DUTIES OF A BAILEE

Not to Set
Up Adverse
Title

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8.4 RIGHTS OF A BAILOR

8.5 RIGHTS OF A BAILEE

1. Right to Deliver the Goods to any one of the joint bailors [Section 165]

2. Right to indemnity (Section 166)

3. Right to claim compensation in case of faulty goods (Section 150)

4. Right to claim necessary expenses (Section 158)

5. Right to Apply to Court to Decide the Title to the Goods [Section 167]

6. Right of particular lien for payment of services [Section 170]:

(Discussed in next pages)

7. Right of general lien (Sec. 171): (Discussed in next pages)

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8.7 TERMINATION OF BAILMENT

1. On expiry of stipulated period:

• If the goods were given for a stipulated period,
• bailment shall terminate after the expiry of such period.

2. On fulfilment of the purpose:

• If the goods were delivered for a specific purpose,
• a bailment shall terminate on the fulfilment of that purpose.

3. By Notice:
• (a) Where the bailee acts in a manner which is inconsistent with the
terms of the bailment, the bailor can always terminate the contract of
bailment.
• (b) A gratuitous bailment can be terminated by the bailor at any time
by giving a notice to the bailee.

4. By death:
• A gratuitous bailment terminates upon the death of either the bailor or
the bailee.

5. Destruction of the subject matter:

• A bailment is terminated if the subject matter of the bailment is
destroyed or there is a change is in the nature of goods.

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8.8 FINDER OF LOST GOODS

Right of finder of lost goods- may sue for specific reward offered [Section 168]:

 It is the duty of the finder of goods to find the true owner and surrender the goods
to him.
 However, the finder of goods has no right to sue the owner for compensation for
trouble and expense voluntarily incurred by him in finding the owner and preserving
the goods found.
 But he has a right to retain the goods against the owner until he receives such
compensation; and,
 where the owner has offered a specific reward on the lost goods, the finder may sue
the owner for such reward, and may retain the goods until then.

When finder of thing commonly on sale may sell it [Section 169]:

the finder may sell it—

(1) when the thing is in danger of Perishing or of losing the greater part of its value, or

(2) when the lawful charges of the finder in respect of the thing found amount to
two/thirds (2/3rd) of its value.

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8.9 RIGHT OF LIEN

RIGHT OF LIEN

Lien is the right of a person

 to retain the goods belonging to another

 until his claim is satisfied or
 some debt due to him is repaid.

Types of Lien: Lien may be of two types:

a. Particular b. General
Lien Lien

Particular Lien: It is a right to retain only the particular goods in respect of which the
claim is due. ( remuneration for services rendered on goods, until paid for )

General Lien: It is a right to retain the goods not only for demands arising out of the goods
retained but for a general balance of account in favour of certain persons (in the absence
of a contract to the contrary).

Section 171 provides this right is available to Bankers, factors, wharfingers, policy brokers
and attorneys of law.

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8.10 PLEDGE
“Pledge”, “pawnor” and “pawnee” defined [Section 172]: The bailment of goods as
security for payment of a debt or performance of a promise is called “pledge”. The bailor
is in this case called the “pawnor”. The bailee is called the “pawnee”.

ESSENTIALS OF CONTRACT OF PLEDGE: Since pledge is a special kind of bailment,

therefore all the essentials of bailment are also the essentials of the pledge. Apart from
that, the other essentials of the pledge are:

( upto that interest )

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8.12 DISTINCTION BETWEEN BAILMENT AND PLEDGE

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CHAPTER-2
INDIAN CONTRACT ACT, 1872
UNIT – 9: AGENCY

9.1 WHAT IS AGENCY?

Agent means a person employed to do any act for another or to represent another in dealing with the
third persons and

The principal means a person for whom such act is done or who is so represented.

Test of Agency "He Who acts through an agent is himself acting"

(a) Whether the person has the capacity to bind the

principal and make him answerable to the third party.

(b) Whether he can establish privity of contract

between the principal and third parties.

If the answer to these questions is in affirmative (Yes), then there is a relationship of agency.

9.2 APPOINTMENT AND AUTHORITY OF AGENTS

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

Who may be an agent:

According to Section 184 of the Act any person may become an agent i.e. even a minor or a person of
unsound mind may become an agent and the principal shall be bound by his acts.

Consideration not necessary: According to Section 185, no consideration is necessary to create an

agency.

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9.3 CREATION OF AGENCY

The authority may be express or implied:

1. Definitions of Express and Implied Authority [Section 187]

1. Express Authority: An authority is said to be express when it is given by words, spoken or written.

2. Implied Authority: An authority is said to be implied when it is to be inferred from the circumstances
of the case, conduct of the parties.

Implied Agency includes:-

a. Agency by Estoppel [Section 237]: Where the principal by his conduct or statement wilfully induces
another person to believe that a certain person is his agent, he is subsequently prevented or estopped
from denying the fact of agency.

b. Agency by Necessity: An agency of necessity arises due to some emergent circumstances. In

emergency a person is authorised to do what he cannot do in ordinary circumstances.

3. Agency by Operation of Law: When law treats one person as an agent of other. For example, a partner
is the agent of the firm for the purposes of the business of the firm.

4. Rights of person as to acts done for him without his authority, Effect of ratification [Section 196]: If
he ratifies them, the same effects will follow as if they had been performed by his authority.

Essentials of a valid Ratification

a. Ratification may be expressed or Implied [Section 197]: Ratification may be expressed or may be
implied in the conduct of the person on whose behalf the acts are done.

b. Knowledge requisite for valid ratification [Section 198]: No valid ratification can be made by a person
whose knowledge of the facts of the case is materially defective.

c. The whole transaction must be ratified [Section 199]: There can be ratification of an act in Entirely or
its rejection in entirely. The principal cannot ratify a part of the transaction which is beneficial to him.

d. Ratification cannot injure third person [Section 200]: When the interest of third parties is affected, the
principle of ratification does not apply.

e. Ratification within reasonable time: Ratification must be made within a reasonable period of time.

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

g. Act to be ratified must be valid: Act to be ratified should not be void or illegal, for e.g. payment of
dividend out of capital, forgery of signatures, any other criminal offence.

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9.4 EXTENT OF AGENT’S AUTHORITY

The agent’s authority is governed by two principles, namely

(a) in normal circumstances

(b) in emergency.

(a) Agent’s authority in normal circumstances [Section 188]: An agent having an authority to do an act
has authority to do every lawful thing which is necessary in order to do such act.

(b) Agent’s authority in an emergency [Section 189]: An agent has authority, in an emergency, to do all
such acts for the purpose of protecting his principal from loss as would be done by a person of ordinary
prudence, in his own case, under similar circumstances.

To constitute a valid agency in an emergency, following conditions must be satisfied.

(i) Agent should not be a in a position or have any opportunity to communicate with his principal.

(ii) There should have been actual and definite commercial necessity for the agent to act promptly.

(iii) the agent should have acted bonafide and for the benefit of the principal.

(iv) the agent should have adopted the most reasonable and practicable course under the circumstances,

(v) the agent must have been in possession of the goods belonging to his principal and which are the
subject of contract.

9.5 SUB-AGENTS
When agent cannot delegate [Section 190]: An agent cannot lawfully employ another to perform acts
which he has expressly or impliedly undertaken to perform personally, unless by the ordinary custom of
trade a sub-agent may, or from the nature of the agency, a sub-agent must, be employed.

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A contract of agency is of a Fiduciary Character. It is based on the confidence reposed by the principal in
the agent and that is why a DELEGATEE cannot further delegate.

Exception where an agent can appoint Sub-agent:

(1) The appointment of a sub agent would be valid if the terms of appointment
originally contemplated it.

(2) Sometimes customs of the trade may provide for appointment of sub
agents. In both these cases the sub agent would be treated as the agent of
the principal.

(3) Where in the course of the agent’s employment, unforeseen emergency

arise making it necessary for him to delegate the authority that was given to
him by the principal.

Representation of principal by sub-agent Properly Appointed [Section 192]: Where a sub-agent is properly
appointed,

(1) Principal is liable to third parties for the acts of

the sub-agent.

(2) Agents responsibility for sub agents: The agent

is responsible to the principal for the acts of the
sub-agent.
(3) Sub-agents not liable to principal: The sub-agent
is responsible for his acts to the agent, but not to
the principal, except in case of fraud or wilful wrong.

Agent’s responsibility for sub-agent Appointed without Authority [Section 193]: Where an agent, without
having authority to do so, has appointed a person to act as a sub-agent, agent will be responsible to
principal & third parties.

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9.6 SUBSTITUTED AGENT

Substituted Agent is a person appointed by the agent to act for the principal, in the business of agency,
with the knowledge and consent of the principal. Substituted agents are not sub agents. They are agents
of the principal.

Agent’s duty in naming such person [Section 195]: In selecting such agent for his principal, an agent is
bound to exercise the same amount of discretion as a man of ordinary prudence would exercise in his own
case; and, if he does this, he is not responsible to the principal for the acts or negligence of the agent so
selected.

9.7 DIFFERENCE BETWEEN A SUB-AGENT AND A SUBSTITUTED AGENT

Both a sub-agent and a substituted agent are appointed by the agent. But, however, the following are the
points of distinction between the two.

S.No. Sub Agent Substituted Agent

1. under the control and directions of Agent. under the instructions of the Principal.

2. The agent delegates to him a part of his own The agent does not delegate any part of

duties. his task to a substituted agent.

3. There is no Privity of contract between the Privity of contract is between a

principal and the subagent. principal and a substituted agent.

4. The sub-agent is responsible to the agent A substituted agent is responsible to the

alone. principal.

5. The agent is responsible to the principal for The agent is not responsible to the

the acts of the subagent. principal .

6. The sub-agent has no right of action against The substituted agent can sue the

the principal for remuneration due to him. principal for remuneration due to him.

7. Sub-agents may be improperly appointed. Substituted agents can never be

improperly appointed.

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9.8 DUTIES AND OBLIGATIONS OF AN AGENT

(i) Duty to follow • When the agent acts otherwise and any loss is sustained by the Principal,
instructions or • he must indemnify him, and, if any profit accrues, he must account for it.
customs:

• The agent is always bound to act with such skill as he possesses; and
(ii) Duty of • to make compensation to his principal in respect of the direct consequences of
reasonable care and his own neglect,
skill: • but not in respect of loss of damage which are indirectly or remotely caused by
such neglect,.

(iii) Duty to render • An agent is bound to render proper accounts to his principal on demand.
proper accounts • Rendering accounts does not mean showing the accounts but the accounts
[Section 213]: supported by vouchers.

(iv) Agent’s duty to

• It is the duty of an agent, in cases of difficulty,
communicate with • to use all reasonable diligence in communicating with his principal, and
principal [Section • in seeking to obtain his instructions.
214]:

• Agent should not deal on his own account without first obtaining the consent of
(v) Duty not to the principal,
• otherwise the principal may—
deal on his own • (a) repudiate the transaction, (Section 215)
account: • (b) claim from the agent any benefit which may have resulted to him from the
transaction. (S. 216)

(vi) Duty not to • relationship with the principal is of fiduciary nature

make secret profits:

(vii) Duty not to • an agent cannot lawfully employ to perform acts which he has undertaken to
perform personally,
delegate: • unless by the ordinary custom of trade a sub-agent may be employed.

(viii) Agent’s duty

to pay sums
• Subject to such deductions, the agent is bound to pay to his principal all sums
received for received on his account.
principal [Section
218]:

(ix) Duty not to use

any confidential
information
• not to use any confidential information received in the course of agency against
received in the the principal
course of agency
against the
principal.

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9.9 RIGHTS OF AN AGENT

(i) Right of retain out of sums received on principal’s account [Section 217]: This section empowers the
agent to retain, out of any sums received on account of the principal in the business of the agency for the
following payments:

(a) all moneys due to himself in respect of advances made

(b) in respect of expenses properly incurred by him in conducting such business

(c) such remuneration as may be payable to him for acting as agent. The right can be exercised on
any sums received on account of the principal in the business of agency.

(ii) Right to remuneration [Section 219]: The agent in the normal course is entitled for remuneration as
per the contract.

(iii) Agent’s lien on principal’s property [Section 221]: In the absence of any contract to the contrary, an
agent is entitled to retain the goods, papers and other property, whether movable or immovable,

The agent’s right to lien is lost in the following cases:

(b) When the

(a) When the agent waives his (c) The agent’s
possession of right. Waiver lien is subject to
the property is may arise out of a contract to
lost. agreement the contrary.
express or
implied.

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(iv) Right to indemnity:

a. Right of indemnification for lawful acts [Section 222]: The principal is bound to indemnify the agent
against all consequences of lawful acts done in exercise of his authority.

b. Right of indemnification against acts done in good faith [Section 223]: Where the agent acts in good
faith on the instruction of principal, agent is entitled for indemnification of any loss or damage from the
principal.

c. Non-liability of employer of agent to do a criminal act: According to section 224, where one person
employs another to do an act which is criminal, the employer is not liable to the agent, either upon an
express or an implied promise, to indemnify him against the consequences of that act.

(v) Right to compensation for injury caused by principal’s neglect [Section 225]: Section 225 provides
that the principal must compensate his agent in respect of injury caused to such agent due to principal’s
neglect or want of skill.

(i) Right of retain out of sums

received on principal’s account
[Section 217]

(ii) Right to remuneration

[Section 219]

(iii) Agent’s lien on a. Right of indemnification for

RIGHTS OF AN AGENT principal’s property [Section
221] lawful acts [Section 222]

b. Right of indemnification
(iv) Right to indemnity against acts done in good
faith [Section 223]

(v) Right to compensation for c. Non-liability of employer of

injury caused by principal’s agent to do a criminal act
neglect [Section 225]

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9.10 PRINCIPAL’S LIABILITY TO THIRD PARTIES

(i) Principal’s
liability for the Acts • Principal liable for the acts of agents which are within the
of the Agent [Section scope of his authority.
226]:
• can be separated from the part which is beyond his authority,
(ii) Principal’s so much only of what he does as is within his authority is
liability when agent binding as between him and his principal.
exceeds authority
[Section 227]: • cannot be separated from what is within it, the principal is not
bound to recognize the transaction.
(iii) Consequences of • Any notice given to or information obtained by the agent,, have
notice given to agent the same legal consequence as if it had been given to or
[Section 229]: obtained by the principal.
• Misrepresentations made, or frauds committed, by agents
acting in the course of their business for their principals, have
(iv) Principal’s the same effect on agreements made by such agents as if
liability for the such misrepresentations or frauds had been made, or
agent’s fraud, committed, by the principals;
misrepresentation or
torts [Section 238]: • but misrepresentations made, or frauds committed, by agents,
in matters which do not fall within their authority, do not
affect their principals.

9.11 PERSONAL LIABILITY OF AGENT TO THIRD PARTIES

Agent cannot personally enforce, nor be bound by, contracts on behalf of principal [Section 230]: . He
can neither sue nor be sued on contracts made by him on his principal’s behalf.

EXCEPTIONS:

(1) Where the contract is made by an agent for the sale or purchase of goods for a merchant resident
abroad/foreign principal:

(2) Where the agent does not disclose the name of his principal or undisclosed principal; (Principal
unnamed):

(3) Non-existent or incompetent principal: Where the principal, though disclosed, cannot be sued, the
agent is presumed to be personally liable.

(4) Pretended agent – if the agent pretends but is not an actual agent, and the principal does not rectify
the act but disowns it, the pretended agent will be himself liable (Section 235).

(5) When agent exceeds authority- When the agent exceeds his authority, misleads the third person in
believing that the agent he has the requisite authority.

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9.12 REVOCATION OF AUTHORITY

Termination of agency [Section 201]

a. Revocation: An agency may be terminated by the principal revoking the authority of the agent.
Principal may revoke the authority given to his agent at any time before the authority has been exercised
so as to bind the principal [Section 203].

The principal cannot revoke the authority of his agent after the authority has been partly exercised.

Compensation for revocation by principal [Section 205]: If there is premature revocation of agency
without sufficient cause, the principal must compensate the agent, for such revocation.

b. Renunciation by agent [Section 206]: An agent may renounce the business of agency in the same
manner in which the principal has the right of revocation.

c. Completion of business: An agency is automatically and by operation of law terminated when its
business is completed.

d. Death or insanity: An agency is determined automatically on the death or insanity of the principal or
the agent.

e. Principal’s insolvency: An agency ends on the principal being adjudicated insolvent.

f. On expiry of time: Where an agent has been appointed for a fixed term, the expiration of the term puts
an end to the agency.

When the agency is irrevocable?

When the agent is personally interested in the subject matter of agency the agency becomes irrevocable.

Effects of Termination [Section 208]

The termination of the authority of an agent does not, so far as regards the agent, take effect before it
becomes known to him, or, so far as regards third persons, before it becomes known to them.

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CHAPTER-3
THE SALE OF GOODS ACT, 1930
UNIT – 1: FORMATION OF
THE CONTRACT OF SALE
Sale of Goods before Sale of Goods Act, 1930

1.2 DEFINITIONS

Buyer • ‘Buyer’ means a person who buys or

agrees to buy goods [Section 2(1)].

Seller • ‘Seller’ means a person who sells or

agrees to sell goods [Section 2(13)].

(B) Goods [Section 2(7)]

“Goods” include both tangible goods and intangible goods like goodwill, copyrights, patents, trademarks
etc. Stock and shares, gas, steam, water, electricity and decree of the court are also considered to be
goods.

Classification of Goods

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EXISTING GOODS are such goods which are in existence at

the time of the contract of sale, i.e., those Owned or
Possessed or Acquired by the seller at the time of contract of
sale (Section 6).

(a) SPECIFIC (b) Ascertained (c) Unascertained

GOODS mean goods Goods are those goods are the goods
identified and goods which are which are NOT
agreed upon AT the identified in specifically
time a contract of accordance with the identified or
sale is made agreement AFTER ascertained at the
[Section 2(14)]. the contract of sale time of making of
is made. the contract.

FUTURE GOODS means goods to be The acquisition of goods which

Future Goods

Contigent Goods

Manufactured or Produced or depends upon an UNCERTAIN

Acquired by the seller AFTER CONTINGENCY (UNCERTAIN
making the contract of sale EVENT) are called ‘contingent
[Section 2(6)]. goods’ [Section 6(2)].
Contingent goods also operate as
A contract for the sale of future ‘an agreement to sell’ and not a
goods is always an agreement to ‘sale’.
sell.
It is never actual sale because a
person cannot transfer what is not
in existence.

Delivery - its forms and derivatives:

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Delivery means voluntary transfer of possession from one person to another [Section 2(2)].

(i) Actual delivery: When the goods are Physically Delivered to the buyer. This is the most common
method of delivery.

(ii) Constructive delivery: When transfer of goods is affected without any change in the custody or actual
possession of the thing as in the case of delivery by attornment (acknowledgement)

(iii) Symbolic delivery: When there is a delivery of a thing in token of a transfer of something else, i.e.,
like bill of lading or railway receipt or delivery orders or the key of a warehouse. Where actual delivery is
not possible, there may be delivery of the means of getting possession of the goods.

(D) “Document of title to goods” any other document used in the ordinary course of business as proof of
the possession or control of goods. [Section 2(4)] Example: Bill of lading, dock warrant, warehouse
keeper’s certificate, wharfinger’s certificate, railway receipt, warrant, an order of delivery of goods.

 The list is only illustrative and not exhaustive.

However, there is a difference between a ‘document showing title’ and ‘document of title’.

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A SHARE CERTIFICATE is a ‘document’ showing title but not a document of title.

(E) Mercantile Agent [Section 2(9)]: It means an agent has, as such agent, authority either to sell goods
or to consign goods for the purpose of sale or to buy goods or to raise money on the security of the goods.
Eg. Brokers and Auctioneers

(F) Property [Section 2(11)]: ‘Property’ here means ‘Ownership’ or general property. It means the general
property (right of ownership-in-goods) and not merely a special property.

The property in the goods means the general property i.e., all ownership right of the goods. Note that the
‘General Property’ in goods is to be distinguished from a ‘Special Property’.

Example 15: If A who owns certain goods pledges them to B, A has general property in the goods,
whereas B has special property or interest in the goods to the extent of the amount of advance he
has made. In case A fails to repay the amount borrowed on pledging the goods, then B may sell
his goods but not otherwise.

(G) Insolvent [Section 2(8)]: A person is said to be insolvent when he ceases to pay his debts in the
ordinary course of business, or cannot pay his debts as they become due, whether he has committed an
act of insolvency or not.

(H) Price [Section 2(10)]: Price means the Money Consideration for a sale of goods. It is the value of
goods expressed in monetary terms. It is the essential requirement to make a contract of sale of goods.

1.3 SALE AND AGREEMENT TO SELL (SECTION 4)

According to section 4(1),

“A contract of sale of goods is a contract whereby the seller transfers or agrees to transfer
the property in goods to the buyer for a price”.

Sale: In Sale, the property in goods is transferred Agreement to Sell: In an agreement to sell, the
from seller to the buyer IMMEDIATELY. ownership of the goods is not transferred
immediately. It is intending to transfer at a
future date upon the completion of certain
conditions thereon.

Thus, whether a contract of sale of goods is an absolute sale or an agreement to sell, depends on the fact
whether it contemplates immediate transfer from the seller to the buyer or the transfer is to take place
at a future date.

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The following elements must co-exist so as to constitute a contract of sale of goods under the Sale of
Goods Act, 1930:

At least 2 Movable Price in money

parties Property
can be partly in money
and partly in kind also

All other
Transfer of May be absolute essential
property or conditional elements of a
valid contract

1.4 DISTINCTION BETWEEN SALE AND AN AGREEMENT TO SELL

Basis of difference Sale Agreement to sell

Transfer of property Immediately. Future Date or on fulfilment of
some condition.

Nature of contract It is an Executed Contract It is an Executory Contract

Remedies for breach The seller can sue the buyer for the The aggrieved party can sue for
price. damages only.

Liability of parties liability of the buyer. liability of the seller.

Burden of risk Risk of loss is that of buyer Risk of loss is that of seller.

Nature of rights Creates Jus in rem means right Creates Jus in personam
against the whole world.
Right of resale The seller cannot resell the goods The seller may resell

In case of insolvency of The official assignee will not be The official assignee will acquire
Seller able to take over the goods. control over the goods.

1.5 SALE DISTINGUISHED FROM OTHER SIMILAR CONTRACTS

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(i) Sale and Hire Purchase:

Hire purchase agreements are governed by the Hire-purchase Act, 1972.

periodical ownership transfers right to terminate

instalments on payment of last the agreement
instalment

Basis of difference Sale Hire- Purchase

Time of passing immediately. upon payment of the last instalment.
property
Position of the party buyer is the owner of the goods. hirer is that of a bailee till he pays the
last instalment.
Termination of The buyer cannot terminate the The hirer may, if he so likes, terminate
contract contract the contract by returning the goods.

Burden of Risk of The seller takes the risk of any loss The owner takes no such risk.
insolvency of the resulting from the insolvency of the
buyer buyer
Transfer of title The buyer can pass a good title to a The hirer cannot pass any title even to a
bona fide purchaser. bona fide purchaser.

Resale The buyer in sale can resell. The hire purchaser cannot resell.

(ii) Sale and Bailment: A ‘bailment’ is the delivery of goods for some specific purpose under a contract
on the condition that the same goods are to be returned when the purpose is accomplished.

Basis of Sale Bailment

difference
Transfer of transfer of general property. transfer of special property.
property
Return of goods The return is not possible. The bailee must return the goods.

Consideration The consideration is the price in terms The consideration may be gratuitous or
of money. non-gratuitous.

1.7 SUBJECT MATTER OF CONTRACT OF SALE

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Goods perishing before making of contract (Section 7): the contract is VOID

Goods perishing before sale but after agreement to sell (Section 8): the agreement is VOID.

Perishing of future goods: contract shall become VOID.

1.8 ASCERTAINMENT OF PRICE (SECTION 9 & 10)

Ascertainment of price (Section 9):

By virtue of Section 9, the price in the contract of sale may be-

(1) Fixed by the contract, or

(2) Agreed to be fixed in a manner provided by the contract, e.g., by a valuer, or

(3) Determined by the course of dealings between the parties.

Agreement to sell at valuation (Section 10):

Section 10 provides for the determination of price by a third party.

1. Where there is an agreement to sell goods on the terms that price has to be fixed by the third party
and he either does not or cannot make such valuation, the agreement will be VOID.

2. In case the third party is prevented by the default of either party from fixing the price, the party at
fault will be liable to the damages to the other party who is not at fault.

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Section Description
UNIT- 1

2 (1) Definition of Buyer

2 (2) Definition of Delivery
2 (3) Definition of deliverable state
2 (4) Definition of document of title of goods
2 (6) Definition of Future goods
2 (7) Definition of Goods
2 (8) Definition of Insolvent
2 (9) Definition of Mercantile Agent
2 (10) Definition of Price
2 (11) Definition of Property
2 (12) Definition of Quality goods
2 (13) Definition of Seller
2 (14) Definition of Specific goods
4 Sale and Agreement to Sell
4 (2) A contract of sale may be absolute or conditional.
5 Contract of sale how made
6 Existing goods or Future goods
6 (2) Contingent goods
7 Goods Perishing before making of contract
8 Goods perishing before sale but after agreement to sell
9 Ascertainment of price
10 Agreement to sell at valuation

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CHAPTER-3
THE SALE OF GOODS ACT, 1930
UNIT – 2:- CONDITIONS &
WARRANTIES

2.2 INTRODUCTION - CONDITIONS AND WARRANTIES

At the time of selling the goods, a seller usually makes certain statements or representations with a
view to induce the intending buyer to purchase the goods. Such representations are generally about
the nature and quality of goods, and about their fitness for buyer’s purpose.

A representation which forms a part of the

contract of sale and affects the contract, is called
a Stipulation.

However, every stipulation is not of equal importance.

Some of these may be very vital while others may be of
somewhat lesser significance.

The more significant stipulations while the less significant

contained in a contract of sale of stipulation have been given the
goods have been called as name “Warranties”.
“Conditions”,

“A condition is a stipulation essential to the “A warranty is a stipulation collateral to the

main purpose of the contract, the breach of main purpose of the contract, the breach of
which gives rise to a right to treat the contract which gives rise to a claim for damages but not
as repudiated”. [Sub-section (2)] to a right to reject the goods and treat the
contract as repudiated”. [Sub-section (3)].

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Difference between conditions and warranties:

Point of differences Condition Warranty

Meaning
A condition is a stipulation essential to the A warranty is a stipulation
main purpose. collateral to the main purpose.

Right in case of The aggrieved party can repudiate the The aggrieved party can claim
breach contract. only damages .
Conversion of A breach of condition may be treated as a A breach of warranty cannot be
stipulations breach of warranty. treated as a breach of condition.

2.3 WHEN CONDITION IS TO BE TREATED AS WARRANTY (SECTION 13)

In the following cases, a contract is not avoided even on account of a breach of a condition:

(i) Where the buyer altogether waives the performance of the condition. A party may for his own benefit,
waive a stipulation. It should be a voluntary waiver by buyer.

(ii) Where the buyer elects to treat the breach of the conditions, as one of a warranty. That is to say, he
may claim only damages instead of repudiating the contract. Here, the buyer has not waived the
condition but decided to treat it as a warranty.

(iii) Where the contract is non-severable and the buyer has accepted either the whole goods or any part
thereof. For Eg. If basmati rice and lower quality rice mixed together, the contract becomes non severable.

(iv) Where the fulfilment of any condition or warranty is excused by law by reason of impossibility or
otherwise.

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

IMPLIED CONDITIONS

• means he should be the REAL OWNER

(i) Condition as to
title • In Case of Sale- Has the Right to Sell
• Agreement of Sale- Will have the Right to Sell

• goods shall correspond with the description.

(ii) Sale by • The Act, however, does not define ‘DESCRIPTION’.
description • Class or the Kind to which the good belong
• Certain Characterstics essential to their Identification

• Bulk shall correspond with the sample in quality

• Buyer shall have a reasonable opportunity
(iii) Sale by sample • Goods shall be free from any Latent Defect, rendering
them un-merchantable.

• Goods supplied shall correspond both

(iv) Sale by sample • with Sample &
as well as by • With Description
description

• Buyer should have made known to the seller the

Particular purpose.
(v) Condition as to • Buyer should rely on the skill and judgement of the seller.
quality or fitness • Seller must be deling with goods of such description
• Exception: if goods are bought by Trade name.

• Bought by Description
(vi) Condition as to • Seller should be a dealer in the goods of that description.
Merchantability

• Goods must be Healthy to consume

(vii) Condition as to
wholesomeness

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IMPLIED WARRANTIES

Implied Warranties: It is a warranty which the law implies into the contract of sale. In other words, it is
the stipulation which has not been included in the contract of sale in express words. But the law
presumes that the parties have incorporated it into their contract

1. Warranty as to undisturbed possession [Section 14(b)]: An implied warranty that the buyer shall have
and enjoy quiet possession of the goods. That is to say, if the buyer having got possession of the goods, is
later on disturbed in his possession, he is entitled to sue the seller for the breach of the warranty.

2. Warranty as to non-existence of encumbrances [Section 14(c)]: An implied warranty that the goods
shall be free from any charge or encumbrance in favour of any third party not declared or known to the
buyer before or at the time the contract is entered into.

3. Warranty as to quality or fitness by usage of trade [Section 16(3)]: An implied warranty as to quality
or fitness for a particular purpose may be annexed or attached by the usage of trade.

Regarding implied condition or warranty as to the quality or fitness for any particular purpose of goods
supplied, the rule is ‘let the buyer beware’ i.e., the seller is under no duty to reveal unflattering truths
about the goods sold, but this rule has certain exceptions.

4. Disclosure of dangerous nature of goods: Where the goods are dangerous in nature and the buyer is
ignorant of the danger, the seller must warn the buyer of the probable danger. If there is a breach of
warranty, the seller may be liable in damages.

2.5 CAVEAT EMPTOR

In case of sale of goods, the doctrine ‘Caveat Emptor’ means ‘let the buyer beware’. When sellers display
their goods in the open market, it is for the buyers to make a proper selection or choice of the goods. If
the goods turn out to be defective, he cannot hold the seller liable. The seller is in no way responsible for
the bad selection of the buyer. The seller is not bound to disclose the defects in the goods which he is
selling.

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Exceptions: The doctrine of Caveat Emptor is, however, subject to the following exceptions:

1. Fitness as to quality or use: Where the buyer makes known to the seller the particular purpose for
which the goods are required, so as to show that he relies on the seller’s skill or judgment and the
goods are of a description which is in the course of seller’s business to supply, it is the duty of the
seller to supply such goods as are reasonably fit for that purpose [Section 16 (1)].

Condition as to quality or fitness [Section 16(1)]

(a) The buyer should (c) The goods must be of

have made known to the (b) The buyer should a description dealt in by
seller the particular rely on the skill and the seller, whether he be
purpose for which goods judgement of the seller. a manufacturer or not.
are required.

if goods are of single purpose use, then no need to make known. if multiple purpose,
then he needs to make the particular purpose known to hold seller liable
2. Goods purchased under patent or brand name: In case where the goods are purchased under its
patent name or brand name, there is no implied condition that the goods shall be fit for any particular
purpose [Section 16(1)]. Here, the buyer is relying on the particular brand name. (No Exception)

3. Goods sold by description: Where the goods are sold by description there is an implied condition that
the goods shall correspond with the description [Section 15]. If it is not so, then seller is responsible.

4. Goods of Merchantable Quality: Where the goods are bought by description from a seller who deals
in goods of that description there is an implied condition that the goods shall be of merchantable
quality. The rule of Caveat Emptor is not applicable for latent defects.

5. Sale by sample: Where the goods are bought by sample, this rule of Caveat Emptor does not apply if
the bulk does not correspond with the sample [Section 17].

6. Goods by sample as well as description: Where the goods are bought by sample as well as
description, the rule of Caveat Emptor is not applicable in case the goods do not correspond with both
the sample and description or either of the condition [Section 15].

7. Trade Usage: An implied warranty or condition as to quality or fitness for a particular purpose may
be annexed by the usage of trade and if the seller deviates from that, this rule of Caveat Emptor is not
applicable [Section 16(3)].

8. Seller actively conceals a defect or is guilty of fraud: Where the seller sells the goods by making
some misrepresentation or fraud and the buyer relies on it or when the seller actively conceals some
defect in the goods so that the same could not be discovered by the buyer on a reasonable
examination, then the rule of Caveat Emptor will not apply.

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UNIT- 2
11 Stipulation as to time
12 Condition & warranty
12 (2) Definition of Condition
12 (3) Definition of Warranty
13 When condition to be treated as warranty
14 Condition as to title
14 (b) Warranty as to undisturbed possession
14 (c) Warranty as to non-existence of encumbrances
15 Sale by Description
16 Implied conditions as to quality or fitness
16 (1) Conditions as to quality or fitness
16 (2) Condition as to Merchantability
16 (3) Warranty as to quality or fitness by usage of trade
17 Sale by Sample

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CHAPTER-3
THE SALE OF GOODS ACT, 1930
UNIT – 3:- TRANSFER OF
OWNERSHIP AND DELIVERY
OF GOODS

INTRODUCTION
Sale of goods involves transfer of ownership of property from seller to buyer. It is essential to determine
the time at which the ownership passes from the seller to the buyer. The general rule is that risk prima
facie passes with the property.

3.1 PASSING OF PROPERTY (SECTIONS 18 – 26)

Passing of property implies passing of ownership. If the property has passed to the buyer, the risk in
the goods sold is that of buyer and not of seller, though the goods may still be in the seller’s possession.

The rules regarding transfer of property in goods depend on two basic factors:

(a) Identification of Goods: Section 18 provides that where there is a contract of sale for Unascertained
Goods, the property in goods cannot pass to the buyer unless and until the goods are ascertained. The
buyer can get the ownership right on the goods only when the goods are specific and ascertained.

(b) Intentions of parties: The property in goods is transferred to the buyer at such time as the parties to
the contract intend it to be transferred. [section 19(1)]

Section 19(2) further provides that for the purpose of ascertaining the intention of the parties regard
shall be:

i. To the terms of the contract

ii. To the conduct of the parties and
iii. To the circumstances of the case

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A. Property (Specific or ascertained goods) passes when intended to pass (Section 19):

Where there is a contract for the sale of specific or ascertained goods, the property in them is
transferred to the buyer at such time as the parties to the contract intend it to be transferred. [sub-
section (1)]

For the purpose of ascertaining the intention of the parties, regard shall be had to the terms of the
contract, the conduct of the parties and the circumstances of the case. [sub-section (2)]

Unless a different intention appears, the rules contained in Sections 20 to 24 are rules for ascertaining
the intention of the parties as to the time at which the property in the goods is to pass to the buyer.
[sub-section (3)]

Stages of goods while passing of property

Specific goods in a deliverable state

Specific goods to be put into a deliverable state

Specific goods in a deliverable state when seller has to

ascertain price.

1. Specific goods in a deliverable state (Section 20): Where there is an Unconditional Contract for the sale
of Specific Goods in a deliverable state, the property in the goods passes to the buyer when the contract
is made, and it is immaterial whether the time of payment of the price or the time of delivery of the
goods, or both, is postponed. Here, the condition is goods must be ready for delivery.

2. Specific goods to be put into a deliverable state (Section 21): Where there is a contract for the sale of
Specific Goods and the seller is bound to do something to the goods for the purpose of putting them into a
deliverable state, the property does not pass until such thing is done and the buyer has NOTICE thereof.

3. Specific goods in a deliverable state, when the seller has to do anything thereto in order to ascertain
price (Section 22): Where there is a contract for the sale of specific goods in a deliverable state, but the
seller is bound to weigh, measure, test or do some other act or thing with reference to the goods for the
purpose of ascertaining the price, the property does not pass until such act or thing is done and the buyer
has NOTICE thereof.

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B. Unascertained goods

Where there is a contract for the sale of unascertained goods, no property in the goods is transferred to
the buyer unless and until the goods are ascertained. [Section 18]

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

1. Sale of unascertained goods by description and Appropriation [Section 23(1)]: Appropriation of goods
involves selection of goods with the intention of using them in performance of the contract and with the
mutual consent of the seller and the buyer.

2. Delivery of the goods to the carrier [Section 23(2)]: Where, in pursuance of the contract, the seller
delivers the goods to the buyer or to a carrier or other bailee (whether named by the buyer or not) for the
purpose of transmission to the buyer, and does not reserve the right of disposal, he is deemed to have
unconditionally appropriated the goods to the contract.

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

When goods are delivered to the buyer on approval or “on sale or return” or other similar terms, the
property therein passes to the buyer-

(a) when he (Buyer) signifies his approval or acceptance to the seller or does any other act adopting
the transaction;

(b) if he does not signify his approval or acceptance to the seller but retains the goods without giving
notice of rejection, then, if a time has been fixed for the return of the goods, on the expiration of
such time, and, if no time has been fixed, on the expiration of a reasonable time; or

(c) he does something to the good which is equivalent to accepting the goods e.g. he pledges or sells
the goods.

Sale for cash only or Return

It may be noted that where the goods have been delivered by a person on “sale or return” on the terms
that the goods were to remain the property of the seller till they are paid for, the property therein does
not pass to the buyer until the terms are complied with, i.e., cash is paid for.

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D. Reservation of right of disposal (Section 25)

This section preserves the right of disposal of goods to secure that the price is paid before the property in
goods passes to the buyer.

Where there is contract of sale of specific goods or where the goods have been subsequently appropriated
to the contract, the seller may, by the terms of the contract or appropriation, as the case may be, reserve
the right to dispose of the goods, until certain conditions have been fulfilled.

3.2 RISK PRIMA FACIE PASSES WITH PROPERTY (SECTION 26)

According to section 26, “unless otherwise agreed, the goods remain at the seller’s risk until the
property therein is transferred to the buyer, but when the property therein is transferred to the
buyer, the goods are at the buyer’s risk whether delivery has been made or not”.

The aforesaid rule is, however, subject to Two Qualifications:

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

3.3 TRANSFER OF TITLE BY NON-OWNERS (SECTIONS 27 – 30)

Sale by person not the owner (Section 27): The general rule regarding the transfer of title is that the
seller cannot transfer a better title to the buyer for goods than he himself has. This rule is expressed in
the Latin maxim “Nemo dat quod non habet” which means that no one can give what he has not got.

If this rule is enforced rigidly then the innocent buyers may be put to loss in many cases. Therefore, to
protect the interests of innocent buyers, a number of exceptions have been provided to this rule.

Exceptions: In the following cases, a non-owner can convey better title to the bona fide purchaser of
goods for value.

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(1) Sale by a Mercantile Agent: A sale made by a mercantile agent of the goods for document of title to
goods would pass a good title to the buyer in the following circumstances; namely;

(a) If he was in possession of the goods or documents with the consent of the owner;
(b) If the sale was made by him when acting in the ordinary course of business as a mercantile
agent; and
(c) If the buyer had acted in good faith and has at the time of the contract of sale, no notice of
the fact that the seller had no authority to sell (Proviso to Section 27).

(2) Sale by one of the joint owners (Section 28): If one of several joint owners of goods has the sole
possession of goods by permission of the co-owners.

(3) Sale by a person in possession under voidable contract: A buyer would acquire a good title to the
goods sold to him by a seller who had obtained possession of the goods under a contract voidable on the
ground of coercion, fraud, misrepresentation or undue influence provided that the contract had not been
rescinded until the time of the sale (Section 29).

(4) Sale by one who has already sold the goods but continues in possession thereof: If a person has sold
goods but continues to be in possession of them or of the documents of title to them, he may sell them to
a third person, and if such person obtains the delivery thereof in good faith .

(5) Sale by buyer obtaining possession before the property in the goods has vested in him: Where a buyer
with the consent of the seller obtains possession of the goods before the property in them has passed to
him, he may sell, pledge or otherwise dispose of the goods to a third person, and if such person obtains
delivery of the goods in good faith and without notice of the lien or other right of the original seller in
respect of the goods, he would get a good title to them [Section 30(2)].

However, a person in possession of goods under a ‘hire-purchase’ agreement which gives him only an
option to buy is not covered within the section unless it amounts to a sale.

(6) Effect of Estoppel: Where the owner is estopped by the conduct from denying the seller’s authority to
sell, the transferee will get a good title as against the true owner.

(7) Sale by an unpaid seller: Where an unpaid seller who had exercised his right of lien or stoppage in
transit resells the goods, the buyer acquires a good title to the goods as against the original buyer.

(8) Sale under the provisions of other Acts:

i. Sale by an Official Receiver or Liquidator of the Company will give the purchaser a valid title.
ii. Purchase of goods from a finder of goods will get a valid title under circumstances
iii. A sale by pawnee can convey a good title to the buyer

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(3) Sale by a (4) Sale by one

(1) Sale by a (2) Sale by one of person in who has already
Mercantile Agent: the joint owners possession under sold the goods but
(Section 28) voidable contract continues in
possession thereof

(5) Sale by buyer

obtaining (8) Sale under the
possession before (6) Effect of (7) Sale by an provisions of other
the property in the Estoppel unpaid seller Acts
goods has vested in
him

Official Receiver or finder of goods pawnee

Liquidator

3.4 PERFORMANCE OF THE CONTRACT OF SALE (SECTIONS 31 – 44)

The performance of a contract of sale implies acceptance of the delivery of goods and payment
delivery of goods by the seller and of price for them by the buyer in accordance of
the terms of the contract.

Definition of Delivery [Section 2(2)]: Delivery means voluntary transfer of possession

Delivery of goods is of three types: (a) Actual Delivery (b) Symbolic delivery (c) Constructive Delivery

Rules Regarding Delivery of goods (Section 33-41)

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

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(i) Delivery (Section 33): Delivery of goods sold may be made by doing anything which the parties agree
shall be treated as delivery or which has the effect of putting the goods in the possession of the buyer or
of any person authorised to hold them on his behalf.

(ii) Effect of part delivery: A delivery of part of goods, in progress of the delivery of the whole has the
same effect. (Section 34) ( except when intention is to serve it from the whole of the goods )

(iii) Buyer to apply for delivery: Apart from any express contract, the seller of goods is not bound to
deliver them until the buyer applies for delivery. (Section 35)

(iv) Place of delivery: Whether it is for the buyer to take possession of the goods or for the seller to send
them to the buyer is a question depending in each case on the contract, express or implied, between the
parties.

(v) Time of delivery: Where under the contract of sale, the seller is bound to send the goods to the buyer,
but no time for sending them is fixed, the seller is bound to send them within a REASONABLE TIME.

(vi) Goods in possession of a third party: Where the goods at the time of sale are in possession of a third
person, there is no delivery unless and until such third person acknowledges to the buyer that he holds
the goods on his behalf. ( Constructive Delivery )

(vii) Time for tender of delivery: Demand or tender of delivery may be treated as ineffectual unless made
at a reasonable hour. What is reasonable hour is a question of fact. [Section 36(4)].

(viii) Expenses for delivery: The expenses of and incidental to putting the goods into a deliverable state
must be borne by the seller in the absence of a contract to the contrary. [Section 36(5)].

(ix) Delivery of wrong quantity [Section 37]: Where the seller delivers to the buyer a quantity of goods
less than he contracted to sell, the buyer may reject them, but if the buyer accepts the goods so delivered
he shall pay for them at the contract rate. [Subsection (1)]

Where the seller delivers to the buyer a quantity of goods larger than he contracted to sell, the buyer may
accept the goods included in the contract and reject the rest, or he may reject the whole. If the buyer
accepts the whole of the goods so delivered, he shall pay for them at the contract rate. [Sub-section (2)]

(x) Instalment deliveries: Unless otherwise agreed, the buyer is not bound to accept delivery in
instalments.

(xi) Delivery to carrier: Subject to the terms of contract, the delivery of the goods to the carrier for
transmission to the buyer, is prima facie deemed to be delivery to the buyer. [Section 39(1)]

(xii) Deterioration during transit: Where goods are delivered at a distant place, the liability for
deterioration necessarily incidental to the course of transit will fall on the buyer, though the seller agrees
to deliver at his own risk. (Section 40)

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(xiii) Buyer’s right to examine the goods: Where goods are delivered to the buyer, who has not previously
examined them, he is entitled to a reasonable opportunity of examining them in order to ascertain
whether they are in conformity with the contract.

Rule related to Acceptance of Delivery of Goods (Section 42):

Acceptance is deemed to take place when the buyer-

(a) intimates to the seller that he had accepted the goods; or

(b) does any act to the goods, which is inconsistent with the ownership of the seller; or
(c) retains the goods after the lapse of a reasonable time, without intimating to the seller that
he has rejected them.

Buyer not bound to return rejected goods (Section 43): Unless otherwise agreed, where goods are delivered
to the buyer and he refuses to accept them, having the right so to do, he is not bound to return them to
the seller, but it is sufficient if he intimates to the seller that he refuses to accept them.

Liability of buyer for neglecting or refusing delivery of goods (Section 44): When the seller is ready and
willing to deliver the goods and requests the buyer to take delivery, and the buyer does not within a
reasonable time after such request take delivery of the goods, he is liable to the seller for any loss
occasioned by his neglect or refusal.
The seller can also repudiate the Contract

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UNIT- 3

18 Goods must be ascertained

19 Property passes when intended to pass
20 Specific goods in a deliverable state
21 Specific goods to be put into a deliverable state
Specific goods in a deliverable state, when the seller has to do anything therto
22 in order to ascertain price
23 (1) Sale of unascertained goods by description
23 (2) Delivery to the carrier
24 Goods sent on approval or " on sale or return"
25 Reservation of right of disposal
26 Risk Prima facie passes with property
27 Sale by person not the owner
28 Sale by one of the joint owners
29 Sale by person in possession under Voidable Contract
30 (1) Sale by one who has already sold the goods but continues in possession therof
Sale by buyer obtaining possession before the property in the goods has vested in
30 (2) him
31 Duties of seller and buyer
32 Payment and delivery are concurrent conditions
33 Delivery
34 Effect of part delivery
35 Buyer to apply for delivery
36 Rules as to delivery
36 (1) Place of delivery
36 (2) Time of delivery
36 (3) Goods in possession of a third party
36 (4) Time for tender of delivery
36 (5) Expenses for delivery
37 Delivery of wrong quantity
38 Instalment deliveries
39 Delivery to carrier
40 Deterioration during transit
41 Buyer's right to examine the goods
42 Rule related to acceptance of Delivery of goods
43 Buyer not bound to return rejected goods
44 Liability of buyer for neglecting or refusing delivery of goods

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HAPTER- 3
THE SALE OF GOODS ACT, 1930
UNIT – 4:- UNPAID SELLER

4.1 UNPAID SELLER

According to Section 45(1), the seller of goods is deemed to be an ‘Unpaid Seller’ when-

(a) The whole of the price has not been paid or tendered and the seller had an immediate right of
action for the price.

(b) When a bill of exchange or other negotiable instrument has been received as conditional payment,
and the condition on which it was received has not been fulfilled by reason of the DISHONOUR of the
instrument or otherwise.

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4.2 RIGHTS OF AN UNPAID SELLER

Unpaid seller’s right (Section 46): Subject to the provisions of this Act and of any law for the time being
in force, notwithstanding that the property in the goods may have passed to the buyer, the unpaid seller
of goods, as such, has by implication of law-

(a) a lien on the goods for the price while he is in possession of them;
(b) in case of the insolvency of the buyer a right of stopping the goods in transit after he has
parted with the possession of them;
(c) a right of re-sale as limited by this Act. [Sub-section (1)]

An unpaid seller has been expressly given the rights against the goods as well as the buyer personally
which are discussed as under:

(a) Rights of an unpaid seller against the goods: The right of unpaid seller against goods can be
categorized under two headings.

Against the goods

Where the property in goods where the property in goods

has passed to the buyer has not passed to the buyer

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4.3 RIGHT OF UNPAID SELLER AGAINST THE GOODS

The unpaid seller has the following rights against the goods:

(1) Seller’s lien (Section 47)

Rights of lien: The unpaid seller’s lien is a possessory lien i.e. the lien can be exercised as long as
the seller remains in possession of the goods.

Exercise of right of lien: This right can be exercised by him in the following cases only:

(a) where goods have been sold without any

stipulation of credit; (i.e., on cash sale)

(b) where goods have been sold on credit

but the term of credit has expired; or

(c) where the buyer becomes insolvent.

Seller may exercise his right of lien even where he is in possession of the goods as agent or bailee
for the buyer.

Part delivery (Section 48): Where an unpaid seller has made part delivery of the goods, he may exercise
his right of lien on the remainder.

Termination of lien (Section 49): The unpaid seller loses his right of lien under the following
circumstances:

a) When he delivers the goods to a carrier or other bailee for the purpose of transmission to the buyer
without reserving the right of disposal of the goods.
b) Where the buyer or his agent lawfully obtains possession of the goods.
c) Where seller has waived the right of lien.
d) By Estoppel i.e., where the seller so conducts himself that he leads third parties to believe that the
lien does not exist.

Exception: The unpaid seller of the goods, having a lien thereon, does not lose his lien by reason only that
he has obtained a decree for the price of the goods. (This means even if the seller has taken a price for
the goods under a court case, he can still exercise his right to lien on those goods.)

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(2) Right of stoppage in transit (Section 50 to 52):

Meaning of right of stoppage in transit (Section 50): The right of stoppage in transit means the right of
stopping the goods while they are in transit, to regain the possession and to retain them till the full price
is paid.

This right is the extension of the right of lien.

However, the right of stoppage in transit is exercised only when the following conditions are fulfilled:

(a) The seller must be Unpaid.

(b) He must have parted with the possession of goods.
(c) The goods are in transit.
(d) The buyer has become Insolvent.
(e) The right is subject to provisions of the Act. [Section 50]

When does the transit come to an end?

The right of stoppage in transit is lost when transit comes to an end. Transit comes to an end in the
following cases:

 When the buyer or other bailee obtains delivery.

 Buyer obtains delivery before the arrival of goods at destination.
 Where the carrier or other bailee acknowledges to the buyer.
 If the carrier wrongfully refuses to deliver the goods to the buyer.
 Where goods are delivered to the carrier hired by the buyer, the transit comes to an end.
 Where the part delivery of the goods has been made to the buyer, the transit will come to an
end for the remaining goods which are yet in the course of transmission.
 Where the goods are delivered to a ship chartered by the buyer, the transit comes to an end.

How stoppage in transit is affected (Section 52):

(1) The Unpaid Seller may exercise his right of stoppage in transit either by taking actual possession of
the goods, or by giving notice of his claim to the carrier or other bailee in whose possession the goods are.
Such notice may be given either to the person in actual possession of the goods or to his principal. In the
latter case, the notice, to be effectual, shall be given at such time and in such circumstances, that the
principal, by the exercise of reasonable diligence, may communicate it to his servant or agent in time to
prevent a delivery to the buyer.

(2) When notice of stoppage in transit is given by the seller to the carrier or other bailee in possession of
the goods, he shall re-deliver the goods to, or according to the directions of, the seller. The expenses of
such re-delivery shall be borne by the seller.

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Distinction between Right of Lien and Right of Stoppage in Transit

(i) The essence of a right of lien is to Retain possession whereas the right of stoppage in transit is
right to Regain possession.
(ii) Seller should be in possession of goods under lien while in stoppage in transit (i) seller should
have parted with the possession (ii) possession should be with a carrier & buyer has not acquired
the possession.
(iii)Right of lien can be exercised even when the buyer is not INSOLVENT but it is not the case with
right of stoppage in transit.
(iv) Right of stoppage in transit begins when the right of lien ends.
(v) Right of lien comes to an end as soon as the goods go out of the possession of the seller but the
right of stopping in transit comes to an end as soon as the goods are delivered to the buyer.

Exceptions where unpaid seller’s right of lien and stoppage in transit are defeated:

(a) When the seller has assented to the sale, mortgage or other disposition of the goods made by the
buyer.

(b) When a document of title to goods has been transferred to the buyer and the buyer transfers the
documents to a person who has bought goods in good faith and for value i.e. for price.

(3) Right of re-sale [Section 54]

The right of resale is a very valuable right given to an unpaid seller. In the absence of this right, the
unpaid seller’s other rights against the goods that is lien and the stoppage in transit would not have been
of much use.

The unpaid seller can exercise the right to re-sell the goods under the following conditions:

(i) Where the goods are of a perishable nature: In such a case, the buyer need not be informed of the
intention of resale.

(ii) Where he gives notice to the buyer of his intention to re-sell the goods: If after the receipt of such
notice the buyer fails within a reasonable time to pay or tender the price, the seller may resell the goods.
It may be noted that in such cases, on the resale of the goods, the seller is also entitled to:

(a) Recover the difference between the contract price and resale price, from the original buyer, as
damages.
(b) Retain the profit if the resale price is higher than the contract price.

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(iii) Where an unpaid seller who has exercised his right of lien or stoppage in transit resells the goods:
The subsequent buyer acquires the good title thereof as against the original buyer, despite the fact that
the notice of re-sale has not been given by the seller to the original buyer.

(iv) A re-sale by the seller where a right of re-sale is expressly reserved in a contract of sale: Sometimes,
it is expressly agreed between the seller and the buyer that in case the buyer makes default in payment
of the price, the seller will resell the goods to some other person. It may be noted that in such cases, the
seller is not required to give notice of resale.

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

4.4 RIGHTS OF UNPAID SELLER AGAINST THE BUYER (SECTIONS 55-61)

Rights of unpaid seller against the buyer personally: The rights of the seller against the buyer personally
are called rights in personam and are in addition to his rights against the goods.

1. Suit for price (Section 55)

(a) Where under a contract of sale, the property in the goods has passed to the buyer and the buyer
wrongfully neglects or refuses to pay for the goods according to the terms of the contract, the
seller may sue him for the price of the goods. [Section 55(1)] (This is the case of contract of
sale)
(b) Where under a contract of sale, the price is payable on a certain day irrespective of delivery and
the buyer wrongfully neglects or refuses to pay such price, the seller may sue him for the price
although the property in the goods has not passed and the goods have not been appropriated to
the contract. [Section 55(2)]. (This is the case of agreement to sell)

2. Suit for damages for non-acceptance (Section 56)

Where the buyer wrongfully neglects or refuses to accept and pay for the goods, the seller may sue him
for damages for non-acceptance.

3. Repudiation of contract before due date (Section 60)

Where the buyer repudiates the contract before the date of delivery, the seller may treat the contract as
rescinded and sue damages for the breach. This is known as the ‘rule of anticipatory breach of contract’.

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4. Suit for interest [Section 61]

Where there is specific agreement between the seller and the buyer as to interest on the price of the
goods from the date on which payment becomes due, the seller may recover interest from the buyer.

In the absence of a contract to the contrary, the Court may award interest to the seller in a suit by him
at such rate as it thinks fit.

4.5 REMEDIES OF BUYER AGAINST THE SELLER

If the seller commits a breach of contract, the buyer gets the following rights against the seller:

1. Damages for non-delivery [Section 57]: Where the seller wrongfully neglects or refuses to deliver the
goods to the buyer, the buyer may sue the seller for damages for non-delivery.

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2. Suit for Specific Performance (Section 58): Where the seller commits of breach of the contract of sale,
the buyer can appeal to the court for specific performance. The court can order for specific performance
only when the goods are ascertained or specific.

This remedy is allowed by the court subject to these conditions:

(a) The contract must be for the sale of specific and ascertained goods.

(b) The power of the court to order specific performance is subject to provisions of Specific Relief
Act of 1963.

(c) It empowers the court to order specific performance where damages would not be an adequate
remedy.

(d) It will be granted as remedy if goods are of special nature or are unique.

3. Suit for breach of warranty (Section 59): Where there is breach of warranty on the part of the seller,
or where the buyer elects to treat breach of condition as breach of warranty, the buyer is not entitled to
reject the goods only on the basis of such breach of warranty. But he may –

(i) sue the seller for the breach of warranty in diminution or extinction of the price; or

(ii) sue the seller for damages for breach of warranty.

4. Repudiation of contract before due date (Section 60): Where either party to a contract of sale
repudiates the contract before the date of delivery, the other may either treat the contract as subsisting
and wait till the date of delivery, or he may treat the contract as rescinded and sue for damages for the
breach.

5. Suit for interest:

1) Nothing in this Act shall affect the right of the seller or the buyer to recover interest or special
damages, in any case where by law interest or special damages may be recoverable, or to recover
the money paid where the consideration for the payment of it has failed.
2) In the absence of a contract to the contrary, the court may award interest at such rate as it
thinks fit on the amount of the price to the buyer in a suit filed by him for the refund of the price.

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4.6 AUCTION SALE (SECTION 64)

An ‘Auction Sale’ is a mode of selling property by inviting bids publicly and the property is sold to the
highest bidder. An auctioneer is an agent governed by the Law of Agency.

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

(a) Where goods are sold in lots: Where goods are put up for sale in lots, each lot is prima facie deemed
to be subject of a separate contract of sale.

(b) Completion of the contract of sale: The sale is complete when the auctioneer announces its
completion by the fall of hammer or in any other customary manner. Until such announcement is made,
any bidder may retract from his bid.

(c) Right to bid may be reserved: Right to bid may be reserved expressly by or on behalf of the seller and
where such a right is expressly reserved, but not otherwise, the seller or any one person on his behalf may
bid at the auction.

(d) Where the sale is not notified by the seller: Where the sale is not notified to be subject to a right to
bid on behalf of the seller, it shall not be lawful for the seller to bid himself or to employ any person to
bid at such sale.

(e) Reserved price: The sale may be notified to be subject to a reserve or upset price; and

(f) Pretended bidding: If the seller makes use of pretended bidding to raise the price, the sale is voidable
at the option of the buyer.

4.7 INCLUSION OF INCREASED OR DECREASED TAXES IN CONTRACT

OF SALE (SECTION 64A)
Where after a contract has been made but before it has been performed, tax revision takes place. Where
tax is being imposed, increased, decreased or remitted in respect of any goods without any stipulations to
the payment of tax, the parties would become entitled to read just the price of the goods accordingly.
Following taxes are applied on the sale or purchase of goods:

 Any duty of customs or excise on goods,

Open to Parties to Stipulate
 Any tax on the sale or purchase of goods

The buyer would have to pay the increased price where the tax increases and may derive the benefit of
reduction if taxes are curtailed.

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UNIT- 4
45 UNPAID SELLER
46 UNPAID SELLER'S RIGHT
47 SELLER'S LIEN
48 PART DELIVERY
49 TERMINATION OF LIEN
50 RIGHT TO STOPPAGE IN TRANSIT
51 DURATION OF TRANSIT
52 HOW STOPPAGE IN TRANSIT IS EFFECTED
53 EFFECTS OF SUB-SALE OR PLEDGE BY BUYER
54 RIGHT OF RE-SALE
55 SUIT FOR PRICE
56 SUIT FOR DAMAGE FOR NON-ACCEPTANCE
57 DAMAGES FOR NON-DELIVERY
58 SUIT FOR SPECIFIC PERFORMANCE
59 SUIT FOR BREACH OF WARRANTY
60 REPUDIATION OF CONTRACT BEFORE DUE DATE
61 SUIT FOR INTEREST
64 AUCTION SALE
64 (a) INCLUSION OF INCREASED OR DECREASED TAXES IN CONTRACT OF SALE

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CHAPTER-4
UNIT – 1: GENERAL
NATURE OF
PARTNERSHIP

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CHAPTER-4
UNIT – 1: GENERAL
NATURE OF
PARTNERSHIP

Definitions (Section 4)
‘‘Partnership’ is the relation between persons who have agreed
to share the profits of a business carried on by all or any of
them acting for all.

Persons who have the name under

entered into which their
partnership with and collectively ‘a business is carried
one another are Firm’, and on is called the
called individually ‘Firm Name’..
‘Partners’

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1.1 ELEMENTS OF PARTNERSHIP

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

• only persons recognized by law can

ASSOCIATION OF enter into an agreement of
TWO OR MORE partnership
PERSONS • a limit of 50 partners
(Section 464 of TCA, 2013)

• voluntary
• contractual
AGREEMENT • may be oral or in writing

• must exist a business

• acquisition of gains
BUSINESS

• an agreement to share losses is not

an essential element
AGREEMENT TO • Co-owners
SHARE PROFITS • Charitable Instituitions

BUSINESS CARRIED • the true test of partnership is

Mutual Agency
ON BY ALL OR ANY • Each partner carrying on the
OF THEM ACTING business is the principal as well as
FOR ALL the agent for all the other partners

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1.2 TRUE TEST OF PARTNERSHIP

Mode of determining existence of partnership (Section 6):

Regard shall be given to the real relation among the parties

- it is only a
prima facie
evidence and
Profit Sharing
not conclusive
evidence - Existence of
Mutual Agency

Mutual Agency
for Example: which is the
- by a lender of cardinal
money to principle of - partnership
arises from

Agreement
persons engaged partnership law
or about to contract
engage in any
business, - Each partner
carrying on the - not from
- by a servant business is the status
or agent as principal as well e.g. HUF
remuneration, as an agent of
- by a widow or other partners.
child of a
deceased
partner, as - So, the act of
annuity, or one partner
done on behalf
- by a previous of firm, binds
owner or part all the partners.
owner of the
business, as And act of other partners
consideration done on behalf of the firm
for the sale of binds the partner
the goodwill

conditions that conclude no partnership.

- no record of terms & conditions of partnership.
- not maintaining a separate account of a partnership firm.
- no account of the firm opened in any bank.
- no intimation is conveyed to the Deputy Director of Procurement
in writing for creation or partnership.

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Partnership Vs. Joint Stock Company

Basis Partnership Joint Stock Company

Legal Status Not Legal Entity Separate Legal Entity (Salomon v.

Salomon).

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

agent of the other members or of the
company;

Distribution of The profits of the firm must be No such compulsion.

profits distributed among the partners.

Extend of Unlimited 3 Types of Companies:

liability ✓ Limited by shares
✓ Limited by Guarantee
✓ Unlimited Company

Property The firm’s property is “JOINT ESTATE” In a company, its property is

of all the partners. separate from that of its members.

Transfer of A share in a partnership cannot be Pvt. Co. - Restricted

shares transferred without the consent of all Public Co. - Unrestricted
the partners.

Management all the partners are entitled to Only DIRECTORS.

participate

Registration Not Compulsory Compulsory

Winding up A partnership firm can be dissolved at wind up by the NCLT or ROC only.
any time if all the partners agree.

Number of Max limit to 50. OPC – 1

membership Pvt Co. – Upto 200
Public Co.- Unlimited

Duration of Death, Retirement or Insolvency of a Perpetual Succession.

existence partner results in the dissolution of the
firm.

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Partnership Vs. Club

Basis of Partnership Club

Difference

Definition Profit Earning Motive. No Profit Earning Motive, but promoting

Health or Recreation Etc.

Relationship Persons forming a partnership are Persons forming a club are called Members.
called partners.

Agency a partner is an agent for other A member of a club is not the agent of
partners. other members

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

Dissolution A change in the partners of the firm A change in the membership of a club does
affects its existence. not affect its existence.

Partnership Vs. Co-Ownership or joint ownership

Basis of Partnership Co-ownership

Difference

Formation Partnership always arises out of a either from agreement or by the

contract. operation of law.

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

Nature of Profit sharing is Must. Profit sharing is not Must.

interest

Transfer of Transferable only by the consent of Transferable without the consent

interest other partners. of other co-owners.

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Partnership Vs. Hindu Undivided Family

Basis of Partnership Joint Hindu family

Difference

Mode of creation Agreement. creation by birth in the family.

Death of a member leads to the Dissolution does not Leads to dissolution of HUF

Management All the partners. The Karta or the manager

Authority to bind Every partner can, bind the The Karta or the manager Only
firm.

Liability Unlimited. liability of the Karta- unlimited

the other coparceners are liable only to
the extent of their share.

Calling for A partner is entitled to ask A member is not entitled to ask for
accounts on for account account

closure

Governing Law Indian Partnership Act, Hindu Law.

1932.

Minor’s capacity Cannot be admitted. Minor becomes member by Birth.

Exception: Only for Benefits

Continuity dissolved by death or continued till it is Fully divided.

insolvency of a partner.

Number of should not exceed 50. No Limit

Members

Share in the Defined Share as per Deed In a HUF, no coparceners has a definite
business share. His interest is a fluctuating one.

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Kinds of Partnership
With Regard of With Regard to the
Duration extent of Business

Partneship at will is Partnership General

When: for a Fixed Particular Partneship Partnership
Period

if continued
No Provision further then For a For a
No Fixed for it is treated Particular Particular
Period Determination as adventure Undertaking
partnership
at will

Partnership Deed

Features Contents
• No Particular Format • Name of the partnership firm.
• Names of all the partners.
• In Writing or Formed Verbally • Nature and place of the business.
• Date of commencement.
• Registration & Stamping is • Duration.
optional • Capital contribution.
• Profit Sharing ratio.
• if Partnership comprises of • Admission and Retirement of a
Immovable Property, then partner.
• must be in Writing, Stamped & • Rates of interest on Capital
registered. • Drawings and loans.
• Provisions for dissolution of the firm.
• Salaries or commissions, payable if
It is the document in writing, any.
containing the various terms • Provisions for expulsion of a partner.
and conditions of partnership as • A partnership firm may add or delete
to the relation between partners. any provision according to the needs.

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1.3 TYPES OF PARTNERS based on the extent of their liability

• Partner by agreetment
Active or • Actively Participates in firm
Ostensible • Must give a Public notice in case of Retirement
Partner

• Partner by agreetment
Sleeping • Does not Actively Participates in firm
or • Share Profit & Losses
Dormant • Liable to Third Parties
Partner • No Need to give a Public notice in case of Retirement

• Who Lends his name to the Firm

• Not having real interest in firm
Nominal • doesn't Invest in the firm
Partner • Not Entitled to Profit & Losses.
• Liable to third parties for all acts of the firm.

• Entitled to Share Profits

• Not Liable for Losses.
Partner in • Liable to Third parties.
Profit only

• When a person represents himself or allow others

• to be represented as a partner in a firm
Partner by • when in fact he is not
Holding • he is liable in the firm to anyone
Out • who on the faith of such representation has acted
upon.

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CHAPTER-4 - INDIAN PARNERSHIP ACT, 1932

UNIT – 2:- RELATIONS OF PARTNERS

2.1 RELATION OF PARTNERS TO ONE ANOTHER

1. GENERAL DUTIES OF PARTNERS (SECTION 9):
 to the greatest common advantages
 should render full information of all things affecting the firm.
 observe the utmost Good Faith in his dealings
 bound to render accounts to each other.

2. DUTY TO INDEMNIFY FOR LOSS CAUSED BY FRAUD (SECTION 10)

3. DETERMINATION OF RIGHTS AND DUTIES OF PARTNERS BY CONTRACT BETWEEN THE PARTNERS

(SECTION 11)

(1) mutual rights and duties may be determined by contract.

(2) Such contract may be varied by consent of all the partners.

4. THE CONDUCT OF THE BUSINESS (SECTION 12): Subject to contract between the partners-

Right to take part in the conduct of the Business [Section 12(a)]

 applicable only if there is no contract to the contrary

 If contract to the contrary, then court will not interfere, unless this right used in breach or trust

Right to be consulted [section 12(c)]:

 Routine Matters: decision by majority (Majority must act in good faith)

 Change in nature of firm: Unanimous consent partners is needed

Right of access to books [Section 12(d)]

 whether active or sleeping is entitled to have access

 The right must, however, be exercised bona fide.

access, inspect and make a copy of
Right of legal heirs/ representatives/ their duly authorised agents
 a right of access to and to inspect and copy any of the books of the firm

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5. MUTUAL RIGHTS AND LIABILITIES (SECTION 13): Subject to contract between the partners-

• No partner is entitled to receive any remuneration in

Right to addition to his share in the profits
remuneration • But this rule can always be varied by an express
[Section 13(a)]: agreement, or by a course of dealings

• If Agreement is there: as per the agreement

Right to share • If Agreement is not there: EQUALLY
Profits [Section • No connection between proportion of Capital and
13(b)] Profits

• an express agreement to that effect, or practice of

Interest on the particular partnership or
Capital [Section • any trade custom to that effect; or
13(c)]: Can be • a statutory provision which entitles him to such
given only if: interest.
(3 Cases) • interest shall be payable only out of profits

• entitled to claim interest thereon @ 6% per annum.

Interest on • While interest on capital account ceases to run on
advances dissolution,
[Section 13(d)]: • the interest on advances keep running even after
dissolution and up to the date of payment.

• Every partner has the right to be indemnified by the

Right to be firm in respect of payments made
indemnified • In ordinary course out of personal pocket.
[Section 13(e)]: • An act in an emrgency

Right to • For any Fraud or

indemnify the • Wilful Neglect
firm [Section
13(f)]

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2.2 PARTNERSHIP PROPERTY (SECTION 14)

THE PROPERTY OF THE FIRM (SECTION 14):

‘Partnership ‘Partnership ‘Joint ‘Common ‘Joint

Property’, Assets’, Stock’, Stock’ Estate’

The property which is deemed as belonging to the firm, in the absence of any agreement showing
contrary intention, is comprised of the following items:

(i) all property, rights and interests which partners may have brought into the common stock

as their contribution to the common business;

(ii) all the property, rights and interest acquired or purchased by or for the firm, or for the

purposes and in the course of the business of the firm; and

(iii) Goodwill of the business.

 The determination of the question whether a particular property is or is not ‘property’ of the firm
ultimately depends on the Real Intention or Agreement of the partners.

Goodwill is a part of the property of the firm.

 It can be sold separately.

 Any partner, make an agreement with the buyer
 that such partner will not carry on any business similar to that
 within a specified period or within specified local limits and
 notwithstanding anything contained in Section 27 of the Indian Contract Act, 1872.
 Such agreement shall be valid if the restrictions imposed are reasonable.

APPLICATION OF THE PROPERTY OF THE FIRM (SECTION 15):

 held and used exclusively for the purpose of the firm.

community of interests and no proprietary right of any partner during existence of the firm

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2.3 PERSONAL PROFIT EARNED BY PARTNERS (SECTION 16)

According to section 16, subject to contract between the partners,-

(a) he shall account for that profit and pay it to the firm;
(b) he shall pay to the firm all profits made by him in that business.

2.4 RIGHTS AND DUTIES OF PARTNERS AFTER A CHANGE IN THE FIRM

(SECTION 17)
Before going into rights and duties, we should first know how a change may take place in the constitution
of the firm. It may occur in one of the four ways, namely,

Old partner New Continued

New partner go out business after the
come in (Death or started by expiry of
Retirement) same Fixed Term
partners

(a) after a change in the firm:

mutual rights and duties of the partners in the reconstituted firm remain the same as they were
immediately before the change;

(b) after the expiry of the term of the firm:

mutual rights and duties of the partners in the reconstituted firm remain the same as they were
immediately before the change

(c) Where additional undertakings are carried out:

mutual rights and duties of the partners in the reconstituted firm remain the same as they were
immediately before the change

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2.5 RELATION OF PARTNERS TO THIRD PARTIES

1. PARTNER TO BE AN AGENT OF THE FIRM (SECTION 18)

2. IMPLIED AUTHORITY OF PARTNER AS AGENT OF THE FIRM (SECTION 19):

Sections 19(1) and 22 deal with the implied authority of a partner.

1. must be within the scope of his authority.
2. The act is such as is done for normal conduct of business of the firm.
3. The act to be done in the name of the firm or in any other manner expressing or implying
an intention to bind the firm (Section 22).

In the absence of any usage or custom of trade to the contrary, the implied authority of a partner does
not empower him to-

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

(b) open a banking account on behalf of the firm in his own name;

(c) compromise or relinquish any claim or portion of a claim by the firm;

(d) withdraw a suit or proceedings filed on behalf of the firm;

(e) admit any liability in a suit or proceedings against the firm;

(f) acquire immovable property on behalf of the firm;

(g) transfer immovable property belonging to the firm; and

(h) enter into partnership on behalf of the firm.

3. EXTENSION AND RESTRICTION OF PARTNERS’ IMPLIED AUTHORITY (SECTION 20):

It may be noted that the above-mentioned extension or restriction is only possible with the consent
of all the partners. Any one partner, or even a majority of the partners, cannot restrict or extend the
implied authority.

4. PARTNER’S AUTHORITY IN AN EMERGENCY (SECTION 21)

According to section 21, a partner has authority, in an emergency; to do all such acts for the purpose
of protecting the firm from loss as would be done by a person of ordinary prudence, in his own case,
acting under similar circumstances, and such acts bind the firm.

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2.7 EFFECT OF NOTICE TO ACTING PARTNER (SECTION 24)

 The notice to a partner, who habitually acts in business of the firm, operates as a notice to the
firm.
 Thus, the notice to one is equivalent to the notice to the rest of the partners of the firm, just as a
notice to an agent is notice to his principal.
 It must be received by a working partner and not by a sleeping partner.
 It must further relate to the firm’s business.

2.8 LIABILITY TO THIRD PARTIES (SECTION 25 TO 27)

The question of liability of partners to third parties may be considered under different heads. These are
as follows:

1. LIABILITY OF A PARTNER FOR ACTS OF THE FIRM (SECTION 25):

 The partners are jointly and severally responsible to third parties for all acts which come under
the scope of their express or implied authority.
 must have been done while he was a partner.

2. LIABILITY OF THE FIRM FOR WRONGFUL ACTS OF A PARTNER (SECTION 26): The firm is liable to the
same extent as the partner for any loss or injury caused to a third party by the wrongful acts of a
partner, if they are done by the partner while acting:
(a) in the ordinary course of the business of the firm
(b) with the authority of the partners.

The fact that the method employed by the partner in doing it was unauthorized or wrongful would not
affect the question.

3. LIABILITY OF FIRM FOR MISAPPLICATION BY PARTNERS (SECTION 27):

LIABILITY OF FIRM FOR MISAPPLICATION BY PARTNERS

Acts within his authority Not within his scope of

his apparent authority

After coming into the Before coming into the Firm & other partners
custody of the firm custody of the firm will not be liable

Firm & other partners will Firm & other partners will
be liable in both cases. be liable in both cases.

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2.9 RIGHTS OF TRANSFEREE OF A PARTNER’S INTEREST (SECTION 29)

A share in a partnership is transferable like any other property, but as the partnership relationship is
based on mutual confidence, the assignee of a partner’s interest by sale, mortgage or otherwise cannot
enjoy the same rights and privileges as the original partner.

The rights of such a transferee are as follows:

(I) During the continuance of partnership, such transferee is not entitled:

(a) to interfere with the conduct of the business,
(b) to require accounts, or
(c) to inspect books of the firm. He is only entitled to receive the share of the and he is
bound to accept the profits as agreed to by the partners, i.e., he cannot challenge the
accounts.

(II) On the dissolution of the firm or on the retirement of the transferring partner, the transferee will
be entitled, against the remaining partners:
(a) to receive the share of the assets of the firm to which the transferring partner was
entitled, and
(b) for the purpose of ascertaining the share, he is entitled to an account as from the date of
the dissolution.

2.10 MINORS ADMITTED TO THE BENEFITS OF PARTNERSHIP (SECTION

30)

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2.11 LEGAL CONSEQUENCES OF PARTNER COMING IN AND GOING

OUT (SECTION 31 – 35)

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CHAPTER-4 INDIAN PARTNERSHIP ACT, 1932

UNIT – 3:- REGISTRATION AND

DISSOLUTION OF A FIRM
3.1 REGISTRATION OF FIRMS

Meaning: Getting registered Effects of Non Rights not affected by nonregistration

with the Registrar of Firm. Registration (Sec. 69)
(Sec. 69)
Procedure: Application in 1. No suit in a civil 1. Right of third parties to sue the
prescribed form with court by a partner firm or any partner.
prescribed fees. against the firm or
other co-partners. 2. Power of an Official Assignee or
Contents of Application Receiver or the Court.
Form: 2. No suit in a civil
court by the firm 3. Right of the partners to sue for the
 Name of the firm against third dissolution of the firm or for the
 Principal & other parties accounts of a dissolved firm or for the
places of business of realization of the property of a
the firm. 3. The firm or its dissolved firm.
 Date when each partners cannot
partner joined the make a claim of 4. Rights of the firm or partners of
firm. set-off or other firm having no place of business in
proceeding based India.
 Names & addresses of
upon a contract.
the partners.
5. Right to sue or claim a set-off if
 The duration of the 4. third parties
the value of the suit up to Rs. 100.
firm. can sue the
firm.
6. Rights of partners to sue for the
Note: Registration of firm
criminal proceedings against the
becomes effective from date
other partners of the firm and against
of filing the form.
as soon as it's delivered to the registrar the third parties.

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3.3 DISSOLUTION OF FIRM (SECTIONS 39 - 47)

According to Section 39 of the Indian Partnership Act, 1932, the dissolution of partnership between all
partners of a firm is called the ‘dissolution of the FIRM’.

Thus, the dissolution of firm means the discontinuation of the legal relation existing between all the
partners of the firm. But when only one or more partners retires or becomes incapacitated from acting as
a partner due to death, insolvency or insanity, the partnership, i.e. the relationship between such a
partner and other is dissolved, but the rest may decide to continue. In such cases, there is in practice, no
dissolution of the firm. The particular partner goes out, but the remaining partners carry on the business
of the firm, it is called dissolution of PARTNERSHIP. In the case of dissolution of the firm, on the other
hand, the whole firm is dissolved. The partnership terminates as between each and every partner of the
firm.

Dissolution of Firm vs. Dissolution of Partnership

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

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

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

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

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

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

the order of the court. ordered by the court.

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

dissolution of partnership. dissolution of firm.

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

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Modes of Dissolution of a firm (Sections 40-44)

The dissolution of partnership firm may be in any of the following ways:

1. DISSOLUTION WITHOUT THE ORDER OF THE COURT OR VOLUNTARY DISSOLUTION: It consists of

following 4 types:

Dissolution Dissolution
Dissolution Compulsory on the by notice of
by dissolution happening of partnership
Agreement (Section 41): certain at will
(Section 40): contingencies (Section 43)
(Section 42)

(i) Dissolution by Agreement (Section 40):

Section 40 gives right to the partners to dissolve the partnership by agreement with the consent of
all the partners or in accordance with a contract between the partners. ‘Contract between the
partners’ means a contract already made.

(ii) Compulsory dissolution (Section 41):

A firm is compulsorily dissolved

 by the adjudication of all the partners or of all the partners but one as INSOLVENT; or
 by the happening of any event which makes it UNLAWFUL for the business of the firm to be
carried on or for the partners to carry it on in partnership.

(iii) Dissolution on the happening of certain contingencies (Section 42): Subject to contract between
the partners, a firm can be dissolved on the happening of any of the following contingencies-

Where the firm is

Where the firm is constituted to
constituted for a carry out one or By the
Fixed Term, on more adventures By the death of a adjudication of a
the expiry of that or undertaking, partner, and partner as an
term. then by insolvent.
completion
thereof

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

(1) Where the partnership is at will, the firm may be dissolved by any partner giving notice in
writing to all the other partners of his intention to dissolve the firm.
(2) In case date is mentioned in the Notice: The firm is dissolved as from the date mentioned
in the notice as the date of dissolution, or in case no date is so mentioned, as from the
date of the communication of the notice.

Breach of
Agreement:
Embezzlement,
Erroneous
accounts, holding
excess cash than
authorised to hold
Just and Equitable
grounds:
Deadlock in management,
partners are not in talking
terms, gambling on the
stock market, loss of
substratum

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Section Chapter 4 –Indian Partnership Act, 1932

UNIT- 1

5 Partnership not created by statute

6 Mode of determining existence of partnership
7 Partnership at will
28 Partner by holding out

UNIT- 2

9 General duties of Partners

10 Duty to indemnify for loss caused by fraud
Determination of Rights & Duties of Partners by Contract between the
11
Partners
12 The Conduct of the business
12 (a) Right to take part in the conduct of the business
12 (c) Right to be Consulted
12 (d) Right of access to books
12 (e) Right of legal heirs/ representative/ their duty authorised agents
13 Mutual Rights & Liabilities
13 (a) Right to remuneration
13 (b) Right to share profits
13 (c) Interest on Capital
13 (d) Interest on advances
13 (e) Right to be indemnified
13 (f) Right to indemnify the firm
14 The Property of Firm
15 Application of the Property of the firm
16 Personal Profits earned by partners
17 Rights & duties of partners after a change in the firm
18 Partner to be Agent of the firm
19 Implied Authority of partner as Agent of firm
20 Extension & Restriction of partners implied Authority
21 Partner's authority in an Emergency
22 Mode of doing Act to bind firm
23 Effect of Admissions by a Partner
24 Effect of Notice to Acting partner
25 Liability of a partner for acts of the firm
26 Liability of the firm for Wrongful Acts of a partner

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27 Liability of firm for Misapplication by partners

29 Right of Transferee of a Partner's Interest
30 Minors admitted to the benefits of partnership
31 Introduction of Partner
32 Retirement of Partner
33 Expulsion of Partner
34 Insolvency of Partner
35 LIABILITY OF ESTATE OF DECEASED PARTNER
36 Rights of Outgoing Partner to carry on Competing Business
37 Rights of Outgoing Partner in certain cases to share subsequent profits
38 Revocation of Continuing Guarantee by change in firm

UNIT- 3

39 Dissolution of Firm
40 Dissolution by Agreement
41 Compulsory dissolution
42 Dissolution on the happening of certain contingencies
43 Dissolution by notice of partnership at will
44 Dissolution by the Court
45 Liability for acts of partners done after dissolution
46 Right of partners to have business wound up after dissolution
47 Continuing authority of partners for purposes of winding up
48 Mode of Settlement of partnership accounts
49 Payment of firm debts and of separate debts
58 Application for Registration
59 Registration
59A- 1 Late Registration on payment of penalty
69 Consequences of non-registration

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SARANSH THE LIMITED LIABILITY PARTNERSHIP ACT, 2008

LIMITED LIABILITY PARTNERSHIPS-MEANING & CONCEPT

01 02 03 04 05
Liability of Allow the
partners will New form of Alternative partners the LLP itself will
be limited to legal business corporate flexibility of be liable for
the extent of entity with business organising the full extent
their capital limited liability vehicle their internal of its assets
contribution structure

IMPORTANT DEFINITIONS

Body Corporate Business

[(Section 2(1)(d)] [Section 2(1)(e)]

It means a company as defined in clause (20) of includes every trade, profession,

section 2 of the Companies Act, 2013 and service and occupation

except any activity which the

Central Government may, by
Includes: But does not Include:
notification, exclude.
•a limited liability •a corporation sole;
partnership registered
under this Act •a co-operative society
Designated Partner
registered under any
•a limited liability law for the time being in [Section 2(1)(j)]
partnership incorporated force; and
outside India; and
any partner designated as such
•any other body
•a company corporate which the pursuant to section 7.
incorporated outside Central Government
India, may, by notification in
the Official Gazette,
specify in this behalf.

Foreign LLP
[section 2(1)(m)]
LLP
formed

incorporated Establishes
a place of
business WITHIN INDIA

registered

OUTSIDE INDIA

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Limited liability
partnership
[Section 2(1)(n)]

LLP means: Limited Liability partnership agreement

a partnership formed and [Section 2(1)(o)]
registered under LLP Act, 2008.

any written agreement

between the
partners of the LLP or
which determines the
Partner
mutual rights and duties
[Section 2(1)(q)]
of the partners and
between the LLP and
Partner, in relation to a LLP its partners
their rights and duties in
means any person who
relation to that LLP.
becomes a partner in the LLP
in accordance with the LLP
agreement

Small limited liability partnership

[Section 2(1)(ta)]
SMALL LLP

the contribution of which, does not

the turnover of which, as per the
SMALL LLP

exceed 25 lakh rupees or such

higher amount, not exceeding 5 Statement of Accounts and Solvency for
crore rupees, as may be prescribed; the immediately preceding financial year,
and does not exceed 40 lakh rupees or such
higher amount, not exceeding 50 crore
rupees, as may be prescribed; or
SMALL LLP

which meets such other requirements

as may be prescribed and fulfils such
terms and conditions as may be
prescribed.

3. NON-APPLICABILITY OF THE INDIAN PARTNERSHIP ACT, 1932

Save as otherwise
provided, the shall not apply to a
provisions of the LLP.
Indian Partnership
Act, 1932

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4. PARTNERS (SECTION 5)

PARTNERS [SECTION 5]

Any individual or body corporate

may be a partner in a LLP.

However, an individual shall not be capable of becoming a partner of a LLP, if—

he has been found he is an he has applied to

to be of unsound undischarged be adjudicated as
mind by a Court of insolvent; or an insolvent and
competent his application is
jurisdiction and the pending.
finding is in force;

5. MINIMUM NUMBER OF PARTNERS (SECTION 6)

MINIMUM NUMBER OF PARTNERS [SECTION 6]

Every LLP shall have at least

two partners.

If at any time the number of partners of a LLP is reduced below two and the LLP
carries on business for more than six months while the number is so reduced

the person, who is the only partner of the LLP

during the time that it so carries on business
1 after those six months and

has the knowledge of the fact that it is

2 carrying on business with him alone,

shall be liable personally for the obligations

3 of the LLP incurred during that period.

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6. DESIGNATED PARTNERS (SECTION 7)

Designated partners (Section 7)

at least two in case of LLP,
who are individuals where all the partners are
at least one of them shall be a bodies corporate or
resident in India. in which one or more partners
Resident in India: A person are individuals and bodies
who has stayed in India for corporate,
a period of not less than at least two individuals who
120 during the F/Y. are partners of such LLP or
nominees of such bodies
corporate
shall act as designated
partners..

7. CHARACTERISTIC OF LLP

Body Corporate

Perpetual Succession

Separate Legal Entity

partners are not
agents of other Mutual Agency
partners but that of
LLP alone
LLP Agreement

intangible, invisible
and immortal Artificial Legal Person

Common Seal

Tangible / intangible Limited Liability

Management of
Business
Min. and Max. number
of Partners
Business for Profit Only

central government Investigation

Compromise or
Arrangement
firm, private company
and unlisted public Conversion into LLP
company

E-Filling of Documents
can become a
partner in Indian Foreign LLPs
LLP

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8. ADVANTAGES OF LLP FORM

•is organized and operates on the basis of an agreement

•provides flexibility without imposing detailed legal and
procedural requirements.
•Easy to form
•All partners enjoy limited liability
•Flexible capital structure
•Easy to dissolve

II. INCORPORATION OF LLP

1. Incorporation Document (Section 11)

Incorporation documents
Two or more persons associated for carrying on a lawful business with a view to profit shall
subscribe their names to an incorporation document;
The incorporation document shall be filed in such manner and with such fees, as may be
prescribed with the Registrar of the State in which the registered office of the LLP is to be
situated; and
Statement to be filed:
▪ There shall be filed along with the incorporation document, a statement in the prescribed form,
▪ Made by either an advocate, or a Company Secretary or a Chartered Accountant or a Cost
Accountant, who is engaged in the formation of the LLP and
▪ By any one who subscribed his name to the incorporation document,
▪ That all the requirements of this Act and the rules made thereunder have been complied with,
▪ In respect of incorporation and matters precedent and incidental thereto.

The incorporation document shall—

▪ be in a form as may be prescribed;
▪ state the name of the LLP;
▪ state the proposed business of the LLP;
▪ state the address of the registered office of the LLP;
▪ state the name and address of each of the persons who are to be partners of the LLP on
incorporation;
▪state the name and address of the persons who are to be designated partners of the LLP on
incorporation;
▪contain such other information concerning the proposed LLP as may be prescribed.

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If a person makes a statement as discussed above which

he—
▪ knows to be false; or
▪ does not believe to be true, shall be punishable
➢with imprisonment for a term which may extend to 2
years and
➢with fine which shall not be less than ` 10,000 but which
may extend to ` 5 Lakhs.

2. Incorporation by registration (Section 12)

The certificate issued shall be signed by

The Registrar shall retain the incorporation the Registrar and authenticated by his

document and shall, within a period of 14 days— official seal.

▪ register the incorporation document; and

▪ give a certificate that the LLP is incorporated The certificate shall be conclusive
by the name specified therein. evidence that the LLP is incorporated by
the name specified therein

3. Registered office of LLP and change therein (Section 13)

all communications and notices may be addressed and

Registered office
shall be received.

by post under a certificate of posting or

by registered post or
Manner of sending
by any other manner

change the place of its registered office and

file the notice of such change
with the Registrar in such form and manner and
Change in Registered office
subject to such conditions as may be prescribed and
any such change shall take effect only upon such filing.

LLP and its every partner

shall be liable to a penalty of Rs. 500 for each day
Default during which the default continues,
subject to a maximum of Rs. 50,000

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4. Effect of registration (Section 14):

Suing and being

sued;

doing and suffering acquiring, owning,

such other acts and holding and developing
things as bodies or disposing of property,
corporate may whether movable or
lawfully do and suffer On registration, a LLP shall, by immovable, tangible or
its name, be capable of intangible;

change of name:
if the central government finds the name to be
undesirable or similar to others:
having a i) direct to change its name. LLP shall change it
common seal, if and send the notice with the CG order to the
it is decided to Registrar within 15 days. After change in
Certificate of incorporation by registrar, the LLP
have one and shall change the name in LLP Agreement
ii) if default by LLP, then CG will allot the name,
Registrar will enter into Registrar and change in
Certificate of Incorporation. then LLP to use that
5. Name (Section 15) name.

Every limited liability partnership shall have either the words as the last words of its name.

limited liability partnership” or

the acronym “LLP”

No LLP shall be registered by a name which, in the opinion of the Central Government is—

undesirable; or
identical or too nearly resembles to that of any other limited liability partnership or a
company or a registered trade mark of any other person under the Trade Marks Act,
1999.

6. Reservation of name (Section 16)

A person may apply in such form and manner and name of a proposed LLP; or
accompanied by such fee as may be prescribed to name to which a LLP
the Registrar for the reservation of a name set out proposes to change its
in the application as— name.

that the name to be reserved is

not one which may be rejected on
Registrar may, if he is satisfied, subject to the rules
any ground
prescribed by the Central Government in the
reserve the name for a period of 3
matter
months from the date of
intimation by the Registrar.

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III. DIFFERENCES WITH OTHER FORMS OF ORGANISATION

1. LLP Vs. Partnership firm

Basis LLP Partnership firm

The Limited Liability Partnership Act,

Regulating Act The Indian Partnership Act, 1932.
2008.

Body corporate It is a body corporate. It is not a body corporate.

Separate legal It is a legal entity separate from its It is a group of persons with no
entity members. separate legal entity.

It is created by a legal process called It is created by an agreement between

Creation
registration under the LLP Act, 2008. the partners.

Registration is voluntary. Only the

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

Perpetual
It has perpetual succession. It has no perpetual succession.
succession

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

Liability of each partner limited to the

Liability extent to agreed contribution except Liability of each partner is unlimited.
in case of willful fraud.

Each partner can bind the LLP by his Each partner can bind the firm as well
Mutual agency
own acts but not the other partners. as other partners by his own acts.

At least two designated partners and

Designated There is no provision for such partners
atleast one of them shall be resident
partners under the Partnership Act, 1932.
in India.

It may have its common seal as its There is no such concept in

Common seal
official signatures. partnership.

Only designated partners are All partners are responsible for all the
Legal
responsible for all the compliances compliances and penalties under the
compliances
and penalties under this Act. Act.

LLP is required to file:(i) Annual

statement of accounts(ii) Partnership firm is not required to file
Annual filing of
Statement of solvency(iii) Annual any annual document with the
documents
return with the registration of LLP registrar of firms.
every year.

Minor can be admitted to the benefits

Minor cannot be admitted to the
Minor as partner of the partnership with the prior
benefits of LLP.
consent of the existing partners.

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2. LLP Vs. Limited Liability Company

Basis LLP Limited Liability Company

Regulating Act The LLP Act, 2008. The Companies Act, 2013.

The persons who invest the

The persons who contribute to LLP
Members/Partners money in the shares are known
are known as partners of the LLP.
as members of the company.

The internal governance

The internal governance structure
Internal governance structure of a company is
of a LLP is governed by contract
structure regulated by statute (i.e.,
agreement between the partners.
Companies Act, 2013).

Name of the public company to

Name of the LLP to contain the
contain the word “limited” and
Name word “Limited Liability partnership”
Pvt. Co. to contain the word
or “LLP” as suffix.
“Private limited” as suffix.

Private company:
Minimum – 2 members
Minimum – 2 members Maximum 200 members
Maximum – No such limit on the Public company:
No. of members in the Act. Minimum – 7 members
members/partners The members of the LLP can be Maximum – No such limit on the
individuals/or body corporate members.
through the nominees. Members can be organizations,
trusts, another business form or
individuals.

Liability of a partners is limited to Liability of a member is limited to

Liability of
the extent of agreed contribution the amount unpaid on the shares
members/partners
in case of intention is fraud. held by them.

The business of the company

The affairs of the company are
managed by the partners
Management managed by board of directors
including the designated partners
elected by the shareholders.
authorized in the agreement.

Minimum number of
Pvt. Co. – 2 directors
directors/designated Minimum 2 designated partners.
Public co. – 3 directors
partners

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CHAPTER-7
NEGOTIABLE
INSTRUMENTS ACT, 1881
1. MEANING OF NEGOTIABLE INSTRUMENTS
Negotiable Instruments is An Instrument (the word instrument means a document) which is
Freely Transferable (by customs of trade) from one person to another by mere delivery or by
indorsement and delivery. The property in such an instrument passes to a bonafide transferee for value.

The Act does not define the term ‘Negotiable Instruments’. However, Section 13 of the Act provides for
only three kinds of negotiable instruments namely bills of EXCHANGE, PROMISSORY NOTES and CHEQUES,
payable either to order or bearer.

It is to be noted that Hundies, Treasury Bills, Bearer Debentures, Railway Receipts, Delivery
Orders, Bill Of Lading etc. are also considered as negotiable instruments either by mercantile custom
or usage.

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Essential Characteristics of Negotiable Instruments

1. It is necessarily in writing.

2. It should be signed.

3. It is freely transferable from one person to another.

4. Holder’s title is free from defects.

5. It can be transferred any number of times till its satisfaction.

6. Every negotiable instrument must contain an unconditional promise or order to pay money.

The promise or order to pay must consist of money only.

7. The sum payable, the time of payment, the payee, must be certain.

8. The instrument should be delivered. Mere drawing of instrument does not create liability.

2. PROMISSORY NOTE
Meaning

According to section 4 of the NI Act, 1881, “A PROMISSORY NOTE' is an instrument in writing (not being a
bank-note or a currency-note) containing an Unconditional Undertaking signed by the maker, to pay a
certain sum of money only to, or to the order of, a certain person, or to the bearer of the instrument.”

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Parties to promissory note

1. Maker: The person who makes the promise to pay is called the Maker.
He is the debtor and must sign the instrument.

2. Payee: Payee is the person to whom the amount on the note is payable.

Essential Characteristics of a Promissory Note

a. In writing- An oral promise to pay is not sufficient.

b. There must be an express promise to pay. Mere acknowledgment of debt is insufficient.

c. The promise to pay should be DEFINITE and UNCONDITIONAL.

d. A promissory note must be signed by the maker otherwise it is incomplete and ineffective.

e. Promise to pay money only.

f. Promise to pay a certain sum.

g. The MAKER and PAYEE must be certain, definite and different persons.

h. Stamping: A promissory note must be properly stamped in accordance with the provisions of the Indian
Stamp Act and such stamp must be duly cancelled by maker's signatures or initials on such stamp or
otherwise.

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3. BILLS OF EXCHANGE

A “Bill Of Exchange” is an instrument in writing containing An Unconditional Order, signed by the maker,
directing a certain person to pay a certain sum of money only to, or to the order of, a certain person or to
the bearer of the instrument.

Parties to the bill of exchange

a. Drawer: The maker of a bill of exchange.

b. Drawee: The person directed by the drawer to pay is called the 'drawee'. On acceptance of the bill, he
is called an acceptor and is liable for the payment of the bill. His liability is primary and unconditional.

c. Payee: The person named in the instrument, to whom or to whose order the money is, by the
instrument, directed to be paid.

Essential characteristics of bill of exchange

(a) It must be in Writing.

(b) Must contain an express Order To Pay.

(c) The order to pay must be Definite and Unconditional.

(d) The drawer must Sign the instrument.

(e) Drawer, drawee, and payee must be certain. ( Two Distinct persons: Drawer and Payee can be the same person )

(f) The sum must be Certain.

(g) The order must be to Pay Money only.

(h) It must be Stamped.

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S.no Basis Promissory Note Bill of Exchange

1. Definition "A Promissory Note" is an “A bill of exchange” is an

instrument in writing containing instrument in writing containing
an unconditional undertaking an unconditional order,

2. Nature of In a promissory note, there is a In a bill of exchange, there is an

Instrument Promise to pay money. Order for making payment.

3. Parties In a promissory note, there are In a bill of exchange, there are

only 2 Parties namely: 3 Parties which are as under:
i. the maker and i. the drawer
ii. the payee ii. the drawee
iii. the payee

4. Acceptance A promissory note does not require A bills of exchange needs

any acceptance, as it is signed by acceptance from the drawee.
the person who is liable to pay.

5. Payable to A promissory note cannot be On the other hand, a bill of

bearer made payable to bearer. exchange can be drawn payable to
Bank of India Act, 1934 bearer. However, it cannot be
Only the RBI or The Central payable to bearer on demand.
Government can issue PN
payable to bearer

4. CHEQUE [SECTION 6]
A “CHEQUE” is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise
than on demand and it includes the electronic image of a truncated cheque and a cheque in the
electronic form.

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Payable on demand means- It should be payable whenever the holder chooses to present it to the drawee
(the banker). The expression “Banker” includes any person acting as a banker and any post office saving
bank [Section 3]

Explanation I: For the purposes of this section, the expressions-

(a) Cheque in the electronic form-means a cheque drawn in electronic form by using any computer
resource, and signed in a secure system with a digital signature (with/without biometric signature)
and asymmetric crypto system or electronic signature, as the case may be;

(b) “A Truncated Cheque” means a cheque which is truncated during a clearing cycle, either by the
clearing house or by the bank whether paying or receiving payment, immediately on generation of an
electronic image for transmission, substituting the further physical movement of the cheque in writing.

Parties to Cheque

1. Drawer: The person who draws a cheque i.e., makes the cheque (Debtor). His liability is primary and
conditional.

2. Drawee: The specific bank on whom cheque is drawn. He makes the payment of the cheque. In case of
cheque, drawee is always banker.

“drawee in case of need”— When in the bill or in any indorsement thereon, the name of any person is
given in addition to the drawee to be resorted to in case of need such person is called a “drawee in case
of need”.

3. Payee: The person named in the instrument (i.e., the person in whose favour cheque is issued), to
whom or to whose order the money is, by the instrument, directed to be paid, is called the payee.

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Essential Characteristics of a cheque

According to the definition of cheque under section 6, a cheque is a species of bill of exchange. Thus, it
should fulfil:

5. CLASSIFICATION OF NEGOTIABLE INSTRUMENTS

“Bearer instrument” and “order instrument” [Section 13]

Bearer Instrument: It is an instrument where the name of the payee is blank or where the name of payee
is specified with the words “or bearer” or where the last indorsement is blank. Such instrument can be
negotiated by mere delivery.

Order Instrument: It is an instrument which is payable to a person or Payable to a person or his order or
Payable to order of a person or where the last indorsement is in full, such instrument can be negotiated
by indorsement and delivery.

“Inland instrument” and “Foreign instrument” [Sections 11 & 12]

“Inland instrument”: A promissory note, bill of exchange or cheque drawn or made in India and made
payable in, OR drawn upon any person resident in India shall be deemed to be an inland instrument.

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“Foreign instrument”: A foreign instrument is one which is not an inland instrument.

In other words, can be understood as follows:

Liability of maker/ drawer of foreign bill

In the absence of a contract to the contrary, the liability of the maker or drawer of a foreign promissory
note or bill of exchange or cheque is regulated in all essential matters by the law of the place where he
made the instrument, and the respective liabilities of the acceptor and indorser by the law of the place
where the instrument is made payable (Section 134).

Example 12: A bill of exchange is drawn by A in Berkley where the rate of interest is 15% and accepted
by B payable in Washington where the rate of interest is 6%. The bill is indorsed in India and is
dishonoured. An action on the bill is brought against B in India. He is liable to pay interest at the rate of
6% only. But if A is charged as drawer, he is liable to pay interest at 15%.

Inchoate and Ambiguous Instruments

Inchoate Instrument: It means an instrument that is INCOMPLETE in certain respects. The drawer/
maker/ acceptor/ indorser of a negotiable instrument may Sign And Deliver the instrument to another
person in his capacity leaving the instrument, either wholly blank or having written on it the word
incomplete. The principle of this rule of an inchoate instrument is based on the principle of estoppel.

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Liability on drawing inchoate instrument: The person signing and delivering the inchoate instrument is
liable both to a holder and holder in due course. However, there is a difference in their respective rights:

The holder of such an The holder in due

instrument cannot course can, however,
recover the amount in Recover Any Amount
excess of the amount on such instrument
intended to be paid provided it is covered
by the signor. by the stamp affixed
on the instrument.

Ambiguous Instrument: Section 17 of the Act, reads as:

“Where an instrument may be construed either as a promissory note or bill of exchange, the
holder may at his election treat it as either, and the instrument shall be thenceforward treated
accordingly.“

6. NEGOTIATION (TRANSFER) OF NEGOTIABLE INSTRUMENTS

One of the essential characteristics of a negotiable instrument is that it is Freely Transferable from one
person to another. Negotiable instruments may be negotiated either by delivery when these are payable
to bearer or by indorsement and delivery when these are payable to order.

Modes of Negotiation

(i) A promissory note, bill of exchange or cheque payable to bearer is negotiable by the delivery thereof.

(ii) A promissory note, bill of exchange or cheque payable to order is negotiable by the holder by
indorsement and delivery thereof.

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Importance of Delivery in Negotiation [Section 46]

Delivery of an instrument is essential whether the instrument is payable to bearer or order for effecting
the negotiation. The delivery must be voluntary, and the object of delivery should be to pass the property
in the instrument to the person to whom it is delivered. The delivery can be, actual or constructive.

Actual delivery takes place when the instrument changes hand physically. Constructive Delivery takes
place when the instrument is delivered to the agent, clerk or servant of the endorsee on his behalf or
when the indorser, after indorsement, holds the instrument as an agent of the endorsee.

7. DISHONOUR OF CHEQUES FOR INSUFFICIENCY OF FUNDS IN THE

ACCOUNTS [SECTION 138 TO 142]
DISHONOR OF CHEQUE FOR INSUFFICIENCY, ETC., OF FUNDS IN THE ACCOUNTS [SECTION 138]

Where any cheque drawn by a person on an account maintained by him with a banker—

• for payment of any amount of money

• to another person from that account

• for the discharge, in whole or in part, of any debt or other liability,

• is returned by the bank unpaid,

• either because of the—

▪ amount of money standing to the credit of that account is insufficient to honor the cheque, or
▪ that it exceeds the amount arranged to be paid from that account by an agreement made
with that bank, Criminal Offence

such person shall be deemed to have committed an offence and shall, be punished with imprisonment for
a term which may extend to 2 years, or with fine which may extend to twice the amount of the cheque,
or with both.

[A cheque given as gift or donation, or as a security or in discharge of a mere moral obligation, or for an
illegal consideration, would be outside the purview of this section]

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When section 138 shall be not apply: unless the below given conditions are complied with—

(a) Cheque presented within validity period: The cheque has been presented to the bank
within a period of 3 months from the date on which it is drawn or within the period of
its validity, whichever is earlier.

(b) Demand for the payment through the notice: the payee or the holder in due course
of the cheque, as the case may be, makes a demand for the payment of the said
amount of money by giving a notice, in writing, to the drawer of the cheque, within 30
days of the receipt of information by him from the bank regarding the return of the
cheque as unpaid, and

(c) Failure of drawer to make payment: the drawer of such cheque fails to make the
payment of the said amount of money to the payee or, as the case may be, to the
holder in due course of the cheque, within 15 days of the receipt of the said notice.

Explanation: For the purpose of this section, “debt or other liability” means a legally enforceable debt.

Therefore we may conclude that compliant can be filed after 45 days of dishonour of the cheque i.e., 30
days of notice period +15 days of the receipt of the said notice.

A Post-Dated Cheque is deemed to have been drawn on the date it bears and the three months period for
the purposes of section 138 is to be counted from that date.

DEFENCE WHICH MAY NOT BE ALLOWED IN ANY PROSECUTION UNDER SECTION 138 [SECTION 140]

It shall not be a defence in a prosecution of an offence under section 138 that the drawer had no reason
to believe when he issued the cheque that the cheque may be dishonoured on presentment for the
reasons stated in that section.

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8. PRESENTMENT OF INSTRUMENTS
Presentment for acceptance [Section 61]

A bill of exchange payable after sight must [if no time or place is specified therein for
presentment] be presented to the drawee thereof for acceptance [if he can, after
reasonable search, be found] by a person entitled to demand acceptance, within a
reasonable time after it is drawn, and in business hours on a business day.

In default of such presentment, no party thereto is liable thereon to the person making such default. If
the drawee cannot, after reasonable search, be found, the bill is dishonoured.

Drawee's time for deliberation [Section 63]

The holder must, if so required by the drawee of a bill of exchange presented to him for acceptance, allow
the drawee 48 hours (exclusive of public holidays) to consider whether he will accept it.

Hours for presentment (Section 65)

Presentment for payment must be made during the usual hours of business, and, if at a banker's within
banking hours.

Presentment for payment of instrument payable after date or sight (Section 66)

A promissory note or bill of exchange, made payable at a specified period after date or sight thereof,
must be presented for payment at maturity.

Presentment for payment of promissory note payable by instalments (Section 67)

A promissory note payable by instalments must be presented for payment on the 3rd day after the date
fixed for payment of each instalment; and non-payment on such presentment has the same effect as
non-payment of a note at maturity.

Presentment for payment of instrument payable at specified place and not elsewhere (Section 68)

A promissory note, bill of exchange or cheque made, drawn or accepted payable at a specified place and
not elsewhere must, in order to charge any party thereto, be presented for payment at that place.

Presentment where no exclusive place specified (Section 70)

A promissory note or bill of exchange, not made payable as mentioned in sections 68 and 69, must be
presented for payment at the place of business (if any) or at the usual residence, of the maker, drawee
or acceptor thereof, as the case may be.

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Presentment when maker, etc., has no known place of business or residence (Section 71)

Such presentment may be made to him in person wherever he can be found.

Presentment by or to agent, representative of deceased, or assignee of insolvent (Section 75)

Presentment for acceptance or payment may be made to the duly authorised agent of the drawee, maker
or acceptor, as the case may be, or, where the drawee, maker or acceptor has died, to his legal
representative, or, where he has been declared an insolvent, to his assignee.

Excuse for delay in presentment for acceptance or payment (Section 75A)

Delay in presentment for acceptance or payment is excused if the delay is caused by circumstances
beyond the control of the holder, and not imputable to his default, misconduct or negligence. When the
cause of the delay ceases to operate, presentment must be made within a reasonable time.

When presentment unnecessary (Section 76)

No presentment for payment is necessary, and the instrument is dishonoured at the due date for
presentment, in any of the following cases:

(a) (i) If the maker, drawee or acceptor intentionally prevents the presentment of the instrument, or

(ii) if the instrument being payable at his place of business, he closes such place on a business day
during the usual business hours, or

(iii) if the instrument being payable at some other specified place, neither he nor any person
authorised to pay it attends at such place during the usual business hours, or

(iv) if the instrument not being payable at any specified place, he cannot after due search be found;

(b) as against any party sought to be charged therewith, if he has engaged to pay notwithstanding non-
presentment;

(c) as against any party if, after maturity, with knowledge that the instrument has not been
presented—

• he makes a part payment on account of the amount due on the instrument,

• or promises to pay the amount due thereon in whole or in part,
• or otherwise waives his right to take advantage of any default in presentment for payment;

(d) as against the drawer, if the drawer could not suffer damage from the want of such presentment.

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9. RULES OF COMPENSATION
Rules as to compensation (Section 117)

The compensation payable in case of dishonour of promissory note, bill of exchange or cheque, by any
party liable to the holder or any endorsee, shall be determined by the following rules:

(a) the holder is entitled to the amount due upon the instrument, together with the expenses properly
incurred in presenting, noting and protesting it;

(b) when the person charged resides at a place different from that at which the instrument was
payable, the holder is entitled to receive such sum at the current rate of exchange between the two
places;

(c) an indorser who, being liable, has paid the amount due on the same is entitled to the amount so paid
with interest at 18% per annum from the date of payment until tender or realisation thereof, together
with all expenses caused by the dishonour and payment;

(d) the party entitled to compensation may draw a bill upon the party liable to compensate him,
payable at sight or on demand, for the amount due to him, together with all expenses properly incurred
by him.

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